ex10ten.htm


     

     

     

    
      

      

    

    
 

    


    


    


    


    


    


    LOAN
AND SECURITY AGREEMENT

    


    BETWEEN

    


    ISRAEL
DISCOUNT BANK OF NEW YORK

    


    AND

    


    FREUNDLICH
SUPPLY COMPANY, INC.

    


    


    


     

    
      	
               March

            	
                6

            	,
2008 


    

     

    


    


    


    


    


     

     

     

     

     

     

    
 

    


    


    


    


    


    


    


    


    


    


    


    


    


    


    



    
      
         


      

      
         


        
          

        

      

      
         


      

    


     

    This LOAN
AND SECURITY AGREEMENT (“Agreement”) is
entered into as of March __, 2008, and is by and among
FREUNDLICH SUPPLY COMPANY,
INC., as borrower, PRECISION AEROSPACE COMPONENTS,
INC., as guarantor, and ISRAEL DISCOUNT BANK OF NEW
YORK, as lender.

    


    Section
1                      DEFINITIONS.

     

    Section
1.1               All
terms used herein which are defined in Article 1 or Article 9 of the Uniform
Commercial Code ("UCC"), as amended from time to time, shall have the meanings
given therein, unless otherwise defined in this Agreement and all references to
the plural herein shall also mean the singular.

     

    Section
1.2                “Acceptance
Margin” shall mean three and three quarter percent (3.75%) or three hundred and
seventy five basis points (375 bps).

     

    Section
1.3                “Acceptance
Rate” shall mean annual interest rate applicable to Bankers Acceptances which
shall be the sum of: (a) the rate set forth in Column II of the Bank’s
internally prepared Discount Rate for Acceptance Financing (as determined and
updated from time to time by the Bank) for the selected Term; plus (b) the
Acceptance Margin.

     

    Section
1.4                 “Account
Debtor” shall mean each debtor or obligor in any way obligated on or in
connection with any Account.

     

    Section
1.5                “Accounts”
shall mean all of the Borrower’s present and future accounts, contract rights,
general intangibles, chattel paper (whether tangible or electronic), documents
and instruments (including promissory notes), as such terms are defined in the
UCC, including, without limitation, all obligations for the payment of money
arising out of the Borrower’s sale, lease or other disposition of goods or other
property or rendering of services.

     

    Section
1.6                 “Advance”
shall mean any increase in the Total Outstandings under the Loan, whether such
increase is through a Bank Acceptance, Credit Advance or an L/C
Advance.

     

    Section
1.7                
“Advance Request” shall mean a request by the Borrower for an Advance in
connection with the Loan.

     

    Section
1.8                 “Advance
Request Notice” shall mean that certain notice prepared and issued by the
Borrower to the Bank in the form annexed hereto as Exhibit B, or such
other form as designated or acceptable to the Bank.

     

    Section
1.9                 “Agreement”
shall mean this Loan and Security Agreement.

     

    Section
1.10              “BA
Term Limitation” shall mean a total of one hundred and eighty days from the date
of the initial Advance in connection with a Bankers Acceptance.  The
BA Term Limitation may not be increased or extended.

     

    Section
1.11               “Bank”
shall mean Israel Discount Bank of New York, a banking corporation organized and
existing under the laws of the State of New York, and its subsidiaries,
affiliates and successors and assigns.

     

    Section
1.12               “Bankers
Acceptance” shall mean an Advance for the purpose of paying the Borrower’s
Obligations as the applicant of a Letter of Credit drawing.

     

     

     

    
      
        
        

      

      
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    Section
1.13                 “Bankers
Acceptance Obligations” shall mean the aggregate amount of all outstanding
Bankers Acceptances, inclusive of principal, interest and other fees or
charges.

     

    Section
1.14                
“Borrower” shall mean Freundlich Supply Company, Inc., a corporation organized
and existing under the laws of the State of Delaware, having offices at 2200
Arthur Kill Road, Staten Island, New York 10309 and assigned tax identification
number 20-5199557.

     

    Section
1.15                
“Borrowing Base” shall mean, without duplication, an amount consisting of the
sum of up to: (i) seventy five percent (75%) of Eligible Accounts, plus (ii) fifty
percent (50%) of Eligible Inventory Amount; minus
Reserves.

     

    Section
1.16                  “Business
Day” means any day other than a Saturday, Sunday or other day on which
commercial banks are authorized to close under the laws of, or are in fact
closed in, New York.

     

    Section
1.17                
 “Capitals Funds” shall mean shareholder equity plus subordinated
debt, in form satisfactory to the Bank, less intangibles,
investments in other companies and loans to officers and
affiliates.

     

    Section
1.18                  “Checking
Account” shall collectively mean the Borrower’s demand deposit accounts opened
and maintained by the Borrower with the Bank, as set forth in further detail on
Schedule
1.18.

     

    Section
1.19                   “Closing
Date” shall mean the first date all of the conditions precedent described in
this Agreement are satisfied or waived in writing by the Bank.

     

    Section
1.20                  
“Closing Fee” shall have the meaning set forth in Section 3, and in the amount
set forth in Schedule
1.35.

     

    Section
1.21                   “Closing
Legal Fee” shall have the meaning set forth in Section 3, and in the amount set
forth in Schedule
1.35.

     

    Section
1.22                   “Collateral”
shall have the meaning set forth in Section 4.1 hereof.

     

    Section
1.23                    “Coverage
Amount” shall be the minimum amount of insurance required, as specified in Schedule
5.1.

     

    Section
1.24                   
“Credit Advance” shall mean an Advance in which the Bank delivered to the
Borrower or at the Borrower’s direction immediately available funds in the
Currency pursuant to Section 2.

     

    Section
1.25                    “Credit
Advance Obligations” shall mean the aggregate amount of all outstanding Credit
Advances, inclusive of principal, interest and other fees and
charges.

     

    Section
1.26                    “Currency”
means United States Dollars, the currency of the United States of
America.

     

    Section
1.27                     “Default”
shall mean any event or condition which constitutes an Event of Default or which
upon notice, lapse of time or both would, unless cured or waived, become an
Event of Default.

     

    Section
1.28                     “Default
Rate” shall mean the rate of interest per annum applicable to the principal
amount of the Total Borrowings upon the occurrence of an Event of Default and
shall, be for each Bank Acceptance and Credit Advance, the Rate then in effect
plus five percent (Rate + 5%) per annum.  The Default Rate immediately
shall become effective upon the occurrence of an Event of Default, but in no
event shall the Default Rate be in excess of the maximum rate of interest
allowed by law to be charged.  In the event that the Default Rate,
based upon the formula set forth above, exceeds the maximum rate of interest
allowed to be charged by law, the Default Rate shall be adjusted and reduced to
the maximum rate allowed to be charged by law.

     

     

    
      
        
        

      

      
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    Section
1.29                      “Delinquent
Account” shall mean an Account that remains uncollected for more than one
hundred and twenty (120) days from its due date.

     

    Section
1.30                      “EBITDA”
shall mean without duplication on a consolidated basis for such period: (a) net
income (excluding (i) income of persons in which the Borrower has an ownership
interest (other than cash distributions from such persons), (ii) after tax gains
attributable to fixed asset dispositions and (iii) any other after tax
extraordinary or non-cash gains); plus (b) any
provision for (or less any benefit from) income or franchise taxes included in
determining net income; plus (c) interest
expense deducted in determining net income; plus (d) amortization
and depreciation expense deducted in determining net income; plus (e) non-cash
compensation expense required by GAAP to be deducted in determining net income,
all determined on a consolidated basis for Borrower and its
subsidiaries.

     

    Section
1.31                       “Eligible
Accounts” shall mean, at any time of determination thereof, each Account created
in the ordinary course of the Borrower’s business arising out of the Borrower’s
sale of goods or rendition of services, which are and at all times shall
continue to be acceptable to the Bank in all respects.  To be eligible
an Account (i) must be invoiced to, and represent a bona fide amount due to the
Borrower from, the Account Debtor, as the purchaser of goods or services, in
each case originated in the ordinary course of the Borrower’s business and (ii)
is not ineligible for inclusion in the calculation of the Borrowing Base
pursuant to any of clauses (a) through (w) below. Without limiting the
generality of the foregoing, to qualify as an Eligible Account, an Account shall
(x) indicate no other party other than the Borrower as payee or remittance
party, (y) be subject to a binding unconditional agreement between the Borrower
and such Account Debtor, and (z) be due and payable on a date
certain.  Unless otherwise approved from time to time by the Bank, no
Account shall be an Eligible Account if, without duplication (and unless
otherwise agreed to in writing by the Bank):

     

    (a)                      it
is a Delinquent Account;

     

    (b)                      it
is a Government Account, unless the Borrower assigns its right to payment
of such Account exclusively to the Bank pursuant to the Assignment of Claims Act
of 1940, as amended, and has caused all other assignments, as applicable, of
such Account to be released and terminated, or otherwise has complied with other
applicable statutes or ordinances;

     

    (c)                      it
is due from an Account Debtor as to which twenty-five percent (25%) or more of
the aggregate dollar amount of all outstanding Accounts Receivable owing from
such Account Debtor are Delinquent Accounts (“Cross-Age Accounts”);

     

    (d)                      it
is owed by an Account Debtor or any affiliate of such Account Debtor to which
the Borrower is indebted;

     

    (e)                      it
is owed by any Affiliate, employee, officer, director, agent or stockholder of
the Borrower;

     

    (f)                     
it is not subject to the Bank’s first priority perfected security
interest;

     

    (g)                   
 it is subject to any lien other than (i) the Bank’s lien; and (ii) which
arises by operation of law, and not by grant, and which is not subordinate to
the Bank’s lien;

     

    (h)                    
it has been written off of the Borrower’s books, reserved against, discounted or
otherwise designated as uncollectible;

     

     

    
      
        
        

      

      
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    (i)                      the
total amount of Accounts owing by an individual Account Debtor exceeding the
Permitted Account Debtor Sublimit, in which case the Eligible Accounts allocable
to such Account Debtor shall be reduced to the Permitted Account Debtor
Sublimit;

     

    (j)                     
it is owed by an Account Debtor for which any Accounts have, at any time, been
deemed ineligible under clause (h) above;

     

    (k)                      any
covenant, representation, or warranty contained in this Agreement or in any
other Loan Document with respect to such Account has been breached in any
material respect;

     

    (l)                      it:
(i) does not arise from the sale of goods or performance of services in the
ordinary course of the Borrower’s business, (ii) is not evidenced by an Invoice
or other documentation satisfactory to the Bank that was sent to or acknowledged
by the Account Debtor, (iii) represents a progress billing, (iv) is contingent
upon the Borrower’s completion of any further performance, (v) represents a sale
on a bill-and-hold, guaranteed sale, sale-and-return, sale on approval,
consignment, cash-on-delivery or any other repurchase or return basis or (vi)
relates to payments of interest;

     

    (m)                      
the services or goods giving rise to such Account have not been performed or
delivered by the Borrower;

     

    (n)                      
it is owed by an Account Debtor which has (i) applied for, suffered, or
consented to the appointment of any receiver, custodian, trustee, or liquidator
of its assets, (ii) has had possession of all or a material part of its property
taken by any receiver, custodian, trustee or liquidator, (iii) filed, or had
filed against it, any request or petition for liquidation, reorganization,
arrangement, adjustment of debts, adjudication as bankrupt, winding-up, or
voluntary or involuntary case under any state or federal bankruptcy laws (other
than post-petition accounts payable of an Account Debtor that is a
debtor-in-possession under the Bankruptcy Code and reasonably acceptable to
Lender), (iv) has admitted in writing its inability, or is generally unable to,
pay its debts as they become due, (v) become insolvent, or (vi) ceased operation
of its business and such fact has been made known to Borrower;

     

    (o)                      it
is owed by any Account Debtor which has sold all or a substantially all of its
assets;

     

    (p)                      
it is owed by an Account Debtor which (i) does not maintain an office for
business within the U.S.; (ii) is not organized under applicable law of the
U.S., any state of the U.S., unless, in either case, such Account is backed by a
letter of credit or credit insurance reasonably acceptable to Lender; or (iii)
causes the Bank, in good faith and sole discretion, to determine or suspect that
such Account Debtor is, operates or transacts with, or for the benefit of, any
sanctioned individual, institution or country, as designated by the United
States government;

     

    (q)                      it
is owed in any currency other than the Currency;

     

    (r)                      it
is subject to any counterclaim, deduction, defense, setoff or dispute, but only
to the extent of any such counterclaim, deduction, defense, setoff or
dispute;

     

    (s)                      it
is evidenced by any promissory note, chattel paper, or instrument;

     

    (t)                      it
is subject to a partial or total refund, but only to the extent and amount of
such refund;

     

    (u)                      it
is subject to any agreement between the Borrower and the Account Debtor for a
reduction of such Account, other than discounts and adjustments given in the
ordinary course of the Borrower’s business, or any Account which was partially
paid and the Borrower has created a new receivable for the unpaid portion of
such Account or any portion of such Account classified by the Borrower as
chargeback;

     

     

    
      
        
        

      

      
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    (v)                      the
Account is owed by an Account Debtor located in any state denying creditors
access to its courts in the absence of a Notice of Business Activities Report or
other similar filing, unless Borrower is incorporated under the laws of such
state or has either qualified as a foreign corporation authorized to transact
business is such state or has filed a Notice of Business Activities Report or
similar filing with the applicable state agency for the then current year;
and

     

    (w)                      it
is not otherwise acceptable to the Bank in the Bank’s commercially reasonable
discretion.

     

    Section
1.32                     “Eligible
Inventory Amount” shall mean the lesser of: (a) Five Million Dollars
($5,000,000.00); or (b) the Borrower’s Inventory determined at the lower cost of
market value; plus (ii) face amount
of Letters of Credit issued by Lender for the account of Borrower for Inventory
which has been purchased from Borrower’s supplier and not yet delivered; (iii)
minus work in
progress that is categorized as Inventory; and (iv) minus slow moving
inventory, as determined by the Bank in its reasonable
discretion.  The Bank reserves the right to make reasonable
modifications and adjustments to the Eligible Inventory Amount from time to time
in its sole discretion based on the most recent
account, field and/or Collateral examinations obtained or received by the
Bank.

     

    Section
1.33                    
“Equipment” shall mean all equipment, machinery, computers and computer
hardware, vehicles, tools, dies, jigs, furniture, trade fixtures and fixtures;
all attachments, accessions and property now or hereafter affixed thereto or
used in connection therewith, substitutions and replacements thereof, wherever
located, whether now owned or hereafter acquired by the Borrower.

     

    Section
1.34                      “Events
of Default” shall have the meaning set forth in Section 9.

     

    Section
1.35                      “Exam
Fees” shall have the meaning set forth in Section 3, and in the amount set forth
in Schedule
1.35.

     

    Section
1.36                     “Fee”
or “Fees” individually and collectively shall mean each of the fees and charges
set forth on Schedule
1.35.

     

    Section
1.37                    “GAAP”
shall mean generally accepted accounting principles in the United States of
America set forth in the opinions and pronouncements of the Accounting
Principles Board and the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board,
consistently applied.

     

    Section
1.38                    “Government
Account” shall mean an account due from an Account Debtor which is a national,
federal, state or municipal government, including, without limitation, any
instrumentality, division, agency, body or department thereof.

     

    Section
1.39                    “Guarantor”
collectively shall mean Precision Aerospace Components, Inc., a Delaware
corporation having an address at having offices at 2200 Arthur Kill Road, Staten
Island, New York 10309.

     

    Section
1.40                    “Guaranty”
collectively shall mean the Obligations of each Guarantor under this Agreement,
as further specified in Section 7 of this Agreement.

     

    Section
1.41                    “Guaranty
Obligation” shall mean the Guaranty of each Guarantor of the payment of the
Obligations.

     

     

    
      
        
        

      

      
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    Section
1.42                     “Instruction
Agreement” shall mean that certain Instruction Agreement in the form annexed
hereto as Exhibit
E.

     

    Section
1.43                     “Inventory”
shall have the meaning set forth in the UCC.

     

    Section
1.44                     “Invoice”
shall mean an invoice, bill or similar document issued substantially
contemporaneously with, but in no event prior to, the delivery of goods and/or
rendering of services by the Borrower to an Account Debtor.

     

    Section
1.45                      “L/C
Advance” shall mean an Advance requested by the Borrower for the purpose of
issuing a Letter of Credit.

     

    Section
1.46                      “L/C
Credit Extension” means, with respect to any Letter of Credit, the issuance or
extension of the expiry date thereof, or the increase of the amount
thereof.

     

    Section
1.47                      “L/C
Fees” shall mean the fees as set forth on Schedule
1.47.

     

    Section
1.48                     “L/C
Obligations” shall mean, as at any date of determination, the aggregate undrawn
amount of all outstanding Letters of Credit.  For all purposes of this
Agreement, if on any date of determination a Letter of Credit has expired by its
terms but an amount may still be drawn thereunder, such Letter of Credit shall
be deemed to be “outstanding” in the amount so remaining available to be
drawn.

     

    Section
1.49                     “L/C
Sublimit” shall mean an amount equal to Five Hundred Thousand dollars
($500,000).  The L/C Sublimit is part of, and not in addition to, the
Maximum Credit available under the Loan.

     

    Section
1.50                    
“Late Payment Premium” shall have the meaning set forth in Section
3.

     

    Section
1.51                     “Lender”
shall mean the Bank.

     

    Section
1.52                    “Letters
of Credit” shall mean individually an irrevocable standby and/or documentary
letter of credit and collectively all irrevocable standby and/or documentary
letters of credit issued by the Bank at the request and benefit of the
Borrower.

     

    Section
1.53                    “LIBOR”
shall mean the London interbank offered rate of interest, as determined by the
Bank two business days before the beginning of each interest period, or as
otherwise determined from time to time by the Bank.  If LIBOR cannot
be reasonably determined by the Bank, due to circumstances affecting the London
interbank market, the LIBOR rate utilized by the Bank which is then in effect
shall be continued until the Bank shall determine that adequate and reasonable
means exist for ascertaining LIBOR.  LIBOR shall be set forth and
determined from the Bank’s internal LIBOR rate sheet.

     

    Section
1.54                    
“LIBOR Advance” shall mean a Credit Advance under which the Borrower elects the
LIBOR Advance Rate.

     

    Section
1.55                     “LIBOR
Advance Rate” shall mean the annual rate of interest applicable to each LIBOR
Advance, depending upon the Term selected, and shall be the sum of the
applicable LIBOR rate for the selected Term plus the LIBOR Margin.

     

    Section
1.56                     “LIBOR
Margin” shall mean three and three quarter percent (3.75%) or three hundred and
seventy five basis points (375 bps).

     

    Section
1.57                   
 “Line Fee” shall have the meaning set forth in Section 3, and in the
amount set forth in Schedule
1.35.

     

     

     

    
      
        
        

      

      
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    Section
1.58                     “Loan”
shall mean the subject revolving credit facility, as further described in
Section 2.

     

    Section
1.59                     “Loan
Account” shall have the meaning set forth in Section 2.16 (Loan Account; Bank’s
Records).

     

    Section
1.60                     “Loan
Documents” shall mean each and every loan agreement, credit agreement, including
this Agreement, promissory note, security agreement, pledge agreement, financing
statement, assignment, mortgage, guaranty, opinion letters and agreements and
any other document heretofore, now or hereafter executed by any of the Obligors
and/or the Bank, together with all modifications, extensions and/or renewals
thereof in connection with the extension of credit, including but not limited to
this Agreement, and each and every other document executed by the Obligors in
connection with the Loans and the Obligations, all as amended, restated,
extended, renewed, supplemented, modified or replaced from time to
time.

     

    Section
1.61                      “Loan
Term” shall mean the period from the Closing Date through to the Maturity Date,
except upon the occurrence of an Event of Default, in which case the period
shall be shortened to, in the Bank’s sole and absolute discretion, the earlier
of the occurrence of the Event of Default or declaration of default by the
Bank.

    


    Section
1.62                       “Material
Adverse Change”  shall mean any event or condition that (a) has a
material adverse effect on the business, assets, properties, performance,
operations or condition (financial or otherwise) of the Obligors, (b) materially
impairs the ability of the Obligors taken as a whole to perform their
obligations under any of the Loan Documents related to the line of credit
herein, or (c) materially and adversely affects the lien granted to the Bank
under any security document or materially impairs the validity or enforceability
of, or materially impairs the rights, remedies or benefits available to the Bank
under any Loan Document.

     

    Section
1.63                       “Maturity
Date” shall mean January 31, 2009, unless accelerated as a result of the
occurrence of an Event of Default.

     

    Section
1.64                       “Maximum
Credit” shall mean the lesser of (i) Three Million Dollars ($3,000,000.00), or
(ii) the Borrowing Base.

     

    Section
1.65                      “Note”
shall mean the Revolving Credit Note in the principal amount of Three Million
Dollars ($3,000,000.00) dated as of the date hereof, in the form attached as
Exhibit A, as
amended, extended, renewed or modified from time to time.

     

    Section
1.66                     “Obligation”
or “Obligations” collectively shall mean all indebtedness, obligations and
liabilities of the Obligors, collectively and individually, to the Bank of every
kind and description, direct or indirect, secured or unsecured, joint or
several, absolute or contingent, due or to become due, whether for payment or
performance, now existing or hereafter arising, whether presently contemplated
or not, regardless of how the same arise, including, but not limited to, the
Loan(s) (including modifications, renewals or extensions of such Loan(s)) and
all indebtedness including any arising from any interest rate hedging
transactions, liabilities or obligations owing from the Obligors, collectively
and individually, to others which the Lender may have obtained by purchase,
negotiation, discount, assignment or otherwise; and all interest, taxes, fees,
charges, expenses and attorney’s fees (whether or not such attorney is a
regularly salaried employee of the Lender, any parent corporation or any
subsidiary or affiliate thereof, whether now existing or hereafter created)
chargeable to the Obligors or incurred by the Lender under the Loan Documents,
this Agreement, or any other document or instrument delivered in connection with
the Loan(s) or related to the extension of credit.

     

     

     

    
      
        
        

      

      
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    Section
1.67                     “Obligor”
or “Obligors” collectively shall mean each and every Borrower and
Guarantor.

     

    Section
1.68                    “Overadvance”
shall mean the amount by which the Total Outstandings exceed the Maximum Credit
on any given date.

     

    Section
1.69                    “Permitted
Account Debtor Sublimit” shall mean the amount equal to twenty five percent
(25%) of the aggregate of all Accounts that otherwise would be deemed Eligible
Accounts pursuant to the definition of “Eligible Accounts”, excluding subsection
(i) thereof.

     

    Section
1.70                   
“Permitted Liens” shall mean with respect to the property of any person, (a)
deposits or pledges of cash to secure obligations under workmen’s compensation,
social security or similar laws, or under unemployment insurance; (b) deposits
or pledges of cash to secure bids, tenders, contracts (other than contracts for
the payment of money or the deferred purchase price of property or services),
leases, statutory obligations, surety and appeal bonds and other obligations of
like nature arising in the ordinary the Borrower of business; (c) carrier’s,
warehousemen’s, mechanic’s, workmen’s, materialmen’s or other like liens arising
in the ordinary course of the Borrower’s business with respect to obligations
which are not due, or which are being properly contested pursuant to appropriate
proceedings and for which adequate reserves have been established; (d) liens for
taxes or other governmental charges not at the time delinquent or thereafter
payable without penalty or which are being properly contested pursuant to
appropriate proceedings and for which adequate reserves have been established;
(e) judgment liens the existence of which would not constitute an Event of
Default under this Agreement; and (f) any lien on any equipment securing any
indebtedness incurred in connection with the purchase of such equipment
permitted under this Agreement.  All Permitted Liens are set forth on
Schedule
1.70.

     

    Section
1.71                      “Prime
Advance” shall mean a Credit Advance under which the Borrower elects the Prime
Advance Rate.

     

    Section
1.72                      “Prime
Advance Rate” shall mean the annual rate of interest applicable to each Prime
Advance and shall be the sum of the Prime Rate plus the Prime
Margin.

     

    Section
1.73                     
“Prime Margin” shall mean one percent (1%).

     

    Section
1.74                      “Prime
Rate” shall mean for any day a fluctuating rate per annum equal to the rate of
interest in effect for such day as publicly announced from time to time by the
Bank as its “prime rate”.  The “prime rate” is a rate set by the Bank
based upon various factors including the Bank’s costs and desired return,
general economic conditions and other factors, and is used as a reference point
for pricing some loans, which may be priced at, above, or below such announced
rate.  Any change in such rate announced by the Bank shall take effect
at the opening of business on the day specified in the public announcement of
such change.

     

    Section
1.75                       “Rate”
collectively shall mean the annual rate of interest applicable to all
outstanding principal due and owing under the Loan (Total Borrowings) and shall
be calculated on the basis of a 360-day year and actual number of days elapsed
during the interest period (but in no event shall be in excess of the maximum
rate permitted by applicable law).  In the event that the Rate exceeds
the maximum rate allowed by law, the Rate shall be reduced to be the maximum
rate of interest per annum allowed by law).  The Rate applicable to
the Credit Advances shall be elected by the Borrower at the time of each Advance
Requests and shall be either of the following: (a) LIBOR Advance Rate; or (b)
the Prime Advance Rate.  The Rate applicable to Bank Acceptances shall
be the Bank Acceptance Rate.  Upon the occurrence of an Event of
Default, the Rate shall immediately become the Default Rate.

     

    Section
1.76                       “Rate
Type” shall mean either the LIBOR Advance Rate or the Prime Advance
Rate.

     

     

    
      
        
        

      

      
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    Section
1.77                       “Records”
shall have the meaning set forth in Section 4.l.

     

    Section
1.78                      “Refinanced
Creditor” shall mean Greater Bay Business Funding, a division of Greater Bay
Bank, N.A., 3006 Northup Way #103, Bellevue, Washington 98004, and its
successors and/or assigns, as their interests may appear.

     

    Section
1.79                      “Reserves”
shall mean all Obligations then chargeable to any account of Borrower, as
well as Obligations which may, in Bank’s sole and absolute discretion, be
chargeable to Borrower thereafter, by reason of or in connection with any of the
following: Accounts which are not Eligible Accounts; Inventory which is not
Eligible Inventory; disputed items; deductions; allowances; credits; bill and
hold sales; consignment sales; acceptances; Letters of Credit; offsets asserted
by or granted to Account Debtors; sales calling for payment in currencies other
than the Currency; to adjust for audit and or examination of Borrower’s accounts
or for any documentation correction; and such additional reserves as the Bank in
its discretion, reasonably exercised, deems appropriate, including, but not
limited to, to adjust for any condition or prospect of Borrower or Borrower’s
industry.  The Reserves shall include the full amount in dispute
pursuant to Section 2.16.

     

    Section
1.80                      “Responsible
Officer” shall mean the chief executive officer, president, chief financial
officer, treasurer or assistant treasurer of the Borrower.  Any
document delivered hereunder that is signed by a Responsible Officer of the
Borrower shall be conclusively presumed to have been authorized by all necessary
corporate and/or other action on the part of the Borrower and such Responsible
Officer shall be conclusively presumed to have acted on behalf of the
Borrower.

     

    Section
1.81                        “Subordinated
Creditor” means Nightwind Corp.

     

    Section
1.82                        “Subordinated
Loan” means that certain loan by Subordinated Creditor to the Borrower, which is
being subordinated to the Loan pursuant to the terms and conditions of the
Subordination Agreement, in the form annexed hereto as Exhibit F or such other
form as may be acceptable to the Bank in its sole discretion.

     

    Section
1.83                         “Subordination
Agreement” means that certain Subordination Agreement, in the form annexed
hereto as Exhibit F or such other form as may be acceptable to the Bank in its
sole discretion.

     

    Section
1.84                       “Term”
shall mean the following time periods or terms elected by the Borrower: (a) for
LIBOR Advances, a term of (i) one, (ii) three or (iii) six months; and (b) for
Bank Acceptances, a term of (i) one to thirty (1-30) days, (ii) thirty-one to
sixty (31-60) days, (iii) sixty-one to ninety (61-90) days, (iv) ninety-one to
one hundred and twenty (91-120) days, (v) one hundred and twenty-one to one
hundred and fifty (121-150) days, or (vi) one hundred and fifty-one to one
hundred and eighty (151-180) days.  In the event that the Borrower
does not select a Term, the Bank shall apply the shortest Term available for
such Advance.  The selection of any Term beyond the Maturity Date
shall have no effect on extending, altering or adjusting the Maturity
Date.  No Term may be selected which would result in the Term expiring
after the Maturity Date.

     

    Section
1.85                     “Total
Borrowings” shall mean the sum of the aggregate amount of (a) Credit Advance
Obligations, plus (b) all Bank
Acceptance Obligations, plus (c) all drawn
Letters of Credit for which the Bank has not received payment.

     

    Section
1.86                     “Total
Outstandings” means the sum of Total Borrowings plus L/C
Obligations.

     

    Section
1.87                     “Unused
Line Fee” shall have the meaning set forth in Section 3, and as set forth in
Schedule
1.35.

     

     

     

    
      
        
        

      

      
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    Section
1.88                         “U.S.”
shall mean the United States of America.

     

                   
Section 2       LOAN.

     

    Section
2.1                            Background.  The
Borrower is a stocking distributor of aerospace quality, internally threaded
fasteners.  The Borrower has requested that the Lender extend credit
to the Borrower a Loan in the form of a revolving commercial credit facility
having an available principal amount up to a limit of the Maximum
Credit.  The Obligations shall be evidenced by the Loan Documents,
including the Note, in the form attached hereto as Exhibit
A.

     

    Section
2.2                             Purpose.  The Loan
and other financial accommodations extended by the Bank to the Borrower shall be
for permitted general corporate and business purposes, including working
capital.

     

    Section
2.3                            Advances.  Subject
to the Borrower’s compliance of the terms and conditions set forth in this
Agreement and the Loan Documents, the Bank shall, upon receipt of the Borrower’s
Advance Requests, each of which shall be irrevocable, binding and in the form of
an Advance Request Notice annexed as Exhibit B, make
Advances provided that the Total Outstandings do not exceed the Maximum
Credit.  The Borrower may repay and re-borrow amounts under the Loan,
provided that such Advances occur during the Loan Term and the Borrower is
otherwise in compliance with the terms and conditions of the Loan
Documents.

     

    Section
2.4                            Interest Elections; Interest
Periods.  In connection with each Credit Advance, the Borrower
shall specify the Rate Type.  For each Bank Acceptance and LIBOR
Advance, the Borrower shall also select a Term.  In the event that the
Borrower does not select a Term, the Term shall be the shortest Term available
for such Advance.  Provided that the Borrower is otherwise in
compliance with the terms of this Agreement, any LIBOR Advance may be extended
by the Borrower by selecting a new Term upon the expiration of the Term then
applicable to such LIBOR Advance, provided that such new Term does not continue
beyond the Maturity Date.  For Bank Acceptances, the Borrower may
extend the Term of such Advances provided that the total Term of such Banker
Acceptance does not exceed one hundred and eighty (180) days from the date of
the original Advance.

     

    Section
2.5                            Advance Request
Procedures.  Advance Requests shall be made as
follows:

     

                            
(a)   The Borrower shall provide irrevocable notice to the Bank,
which may be in the manner permitted under the Instruction
Agreement.  The Bank shall be entitled to rely upon such telephonic
notice and the Borrower agrees to indemnify the Bank against any and all claims,
liabilities, losses and expenses ensuing from such reliance in accordance with
the terms of the Instruction Agreement;

     

                            
 (b)  Each Advance Request must be received by the Bank no later
than: (i) for Bankers Acceptances, no later than 1:00 p.m. on the Business Day
on which the presented Letter of Credit is presented and/or is to be paid by the
Bank; (ii) for Credit Advances, 1:00 p.m. on the Business Day before the
requested date of any Advance; and (iii) for Letters of Credit, 1:00 p.m. two
Business Days before the requested date for issuance of the Letter of
Credit;

     

                             
(c)  Each telephonic notice by the Borrower pursuant to this section
must be confirmed promptly (no later than 2:00 p.m. on the same day of such
telephone notice) by delivering to the Bank the written Advance Request Notice
(along with the Letter of Credit application, for L/C Advances) appropriately
completed and signed by a Responsible Officer of the Borrower;

     

                             
(d)  Each Advance Request shall be in a principal amount of: (i) for
Bankers Acceptances, the amount of the presented Letter of Credit plus any L/C
Fees; (ii) for Credit Advances, One Hundred Thousand Dollars ($100,000) or a
whole multiple of Ten Thousand Dollars ($10,000) in excess thereof; and (iii)
for L/C Advances, in an initial face amount of not less than One Thousand
Dollars ($1,000).

     

     

     

    
      
        
        

      

      
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(e) Each Advance Request Notice shall specify: (i) the requested date of
the Advance (which shall be a Business Day); (ii) the principal amount of
Advance to be borrowed; (iii) the nature of the Advance (i.e., Bankers Acceptance,
Credit Advance or L/C Advance); (iv) for Credit Advances, the Rate Type; (v) for
Bankers Acceptances or LIBOR Advances, the Term; and (vi) for Bankers
Acceptances, identifying information related to the Letter of Credit, including
the amount, the beneficiary, the Letter of Credit number, if applicable, and
such other information requested by the Bank.

     

    Section
2.6                     Funding of Bankers
Acceptances.  For Bankers Acceptances, following the: (a)
receipt of an Advance Request Notice, (b) the proper presentment of a Letter of
Credit by the stated beneficiary to the Bank, (c) the determination by the Bank
that the presented Letter of Credit is payable by the Bank and further provided
that (d) the Total Outstandings do not exceed the Maximum Credit, the Bank shall
pay the amount of the presented Letter of Credit, including any related charges
and fees which amount shall become a Bankers Acceptance, and shall increase the
Total Borrowings under the Loan for such Advances.  Notwithstanding
the foregoing, the Bank may pay a properly presented Letter of Credit and such
amount shall become a valid Obligation of the Borrower as a Bankers Acceptance
in the full amount of such Advance (w) with or without the Borrower’s consent,
(x) with or without the Bank having received an Advance Request Notice, (y) even
if such Advance results in an Overadvance and/or (z) even if such Advance causes
the Total Outstandings or Total Borrowings to exceed the Maximum
Credit.  Barring the selection of a Term by the Borrower, the Term
shall be the shortest Term available for Bankers Acceptances.

     

    Section
2.7                     Funding of Credit
Advances.  For Credit Advances, following receipt of an Advance
Request Notice, and provided that (a) the sum of the Total Outstandings plus the
amount of the Advance Request does not exceed the Maximum Credit, and (b) the
Borrower is otherwise in compliance with the Loan Documents, the Bank shall make
available to the Borrower: (x) immediately available funds in the amount in the
Currency, pursuant to the information described in the Advance Request Notice by
crediting the Checking Account of the Borrower; or (y) by remitting such amount
in accordance with other instructions (which shall be reasonably acceptable to
the Bank) set forth and provided by the Borrower to the Bank in the Advance
Request Notice (which remittance shall be subject to the Bank’s fee schedule
then in effect, as may be amended from time to time, for such
services).  The amount of the Credit Advances, including any related
charges and fees, shall increase the Total Borrowings under the
Loan.  For LIBOR Advances, barring a selection of a Term by the
Borrower, the Term shall be the shortest Term available for LIBOR
Advances.  Notwithstanding any provision to the contrary in this
Agreement, the Borrower may not request a LIBOR Advance which, if made, would
result in an aggregate of more than ten (10) outstanding LIBOR Advances being
outstanding hereunder at any one time.  For purposes of the foregoing,
LIBOR Advances having Terms commencing or ending on different days shall be
considered separate LIBOR Advances.

     

    Section
2.8                     Letters of
Credit.  Subject to the terms and conditions set forth herein,
the Bank may (a) from time to time on any Business Day from the Closing Date
until the Maturity Date, issue Letters of Credit at the request and for the
account of the Borrower, and to amend Letters of Credit previously issued by it,
in accordance with the requirements of this section set forth below, and (b)
honor drawings under the Letters of Credit which, unless paid by the Borrower
from available funds in its Checking Account, shall become a Bankers Acceptances
thereby increasing the Total Borrowings and reducing the L/C Advances by an
amount equal to the drawing under the Letter of Credit and L/C Fees; provided that after
giving effect to any proposed L/C Advance (i.e.. adding the amount of
the proposed L/C Advance to the Total Outstandings), (y) the L/C Obligations do
not exceed the L/C Sublimit, and (z) the Total Outstandings shall not exceed the
Maximum Credit.  Each request by the Borrower for an L/C Credit
Extension shall be deemed to be a representation by the Borrower that such L/C
Credit Extension requested complies with the conditions set forth in the
preceding sentence.  Within the foregoing limits, and subject to the
terms and conditions hereof, the Borrower’s ability to obtain Letters of Credit
shall be fully revolving, and the Borrower may, during the foregoing period,
obtain Letters of Credit to replace Letters of Credit that have expired or that
have been drawn upon and reimbursed, except in the following circumstances which
apply to all L/C Advances and L/C Credit Extensions:

     

     

     

    
      
        
        

      

      
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    (a)                      the
expiry date of such requested Letter of Credit would occur more than twelve
months after the date of issuance;

     

    (b)                      the
expiry date of such requested Letter of Credit would occur on or after the
Maturity Date;

     

    (c)                      any
order, judgment or decree of any governmental authority or arbitrator shall, by
its terms, purport to enjoin or restrain the Bank from issuing the requested
Letter of Credit, or any law applicable to the Bank or any request or directive
(whether or not having the force of law) from any governmental authority with
jurisdiction over the Bank shall prohibit, or request that the Bank refrain
from, the issuance of letters of credit generally or such Letter of Credit in
particular or shall impose upon the Bank with respect to such Letter of Credit
any restriction, reserve or capital requirement (for which the Bank is not
otherwise compensated hereunder) not in effect on the Closing Date, or shall
impose upon the Bank any unreimbursed loss, cost or expense which was not
applicable on the Closing Date and which the Bank in good faith deems
material;

     

    (d)                      the
issuance of such Letter of Credit would violate one or more policies of the
Bank;

     

    (e)                      unless
otherwise agreed to by the Bank, such Letter of Credit is in an initial face
amount less than One Thousand Dollars ($1,000);

     

    (f)                      such
Letter of Credit is to be denominated in a currency other than the
Currency;

     

    (g)                      an
Event of Default exists hereunder;  or

     

    (h)                      the
beneficiary of such Letter of Credit does not accept the proposed amendment to
such Letter of Credit, in the event of an L/C Credit Extension.

     

    Section
2.9                                       Information; Initial Letter of
Credit Applications.  In the case of a request for the initial
issuance of a Letter of Credit, in addition to the information contained in the
Advance Request Notice, the Letter of Credit application shall specify in form
and detail satisfactory to the Bank the following information:

     

    (a)                    
 the proposed issuance date of the requested Letter of Credit (which shall
be a Business Day);

     

    (b)                      the
amount of the Letter of Credit;

     

    (c)                      the
expiry date thereof (which shall be prior to the Maturity Date);

     

    (d)                      the
name and address of the beneficiary;

     

    (e)                      the
documents to be presented by such beneficiary in case of any drawing
thereunder;

     

    (f)                      the
full text of any certificate to be presented by such beneficiary in case of any
drawing thereunder; and

     

     

     

    
      
        
        

      

      
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    (g)                      such
other matters as the Bank may require.

     

    Section
2.10                     Information; Amendments to Letters
of Credit.  In the case of a request for an amendment of any
outstanding Letter of Credit, such Letter of Credit Application shall specify in
form and detail satisfactory to the Bank the following information:

     

    (a)                     
a detailed description of the Letter of Credit to be amended;

     

    (b)                      the
proposed date of amendment (which shall be a Business Day);

     

    (c)                      the
nature of the proposed amendment;

     

    (d)                      such
other matters as the Bank may reasonably require.

     

    Section
2.11                    Initial Issuances and Amendments to
Letters of Credit.  Provided that the Borrower has satisfied
the terms and conditions of this Agreement, the Bank will issue a Letter of
Credit for the account of the Borrower or enter into the applicable amendment,
as the case may be, in each case in accordance with the Bank’s usual and
customary business practices.

     

    Section
2.12                    Conditions Precedent to All Requests
to Increase Total Outstandings.  The request by the Borrower to
increase the Total Outstandings shall, unless otherwise waived by the Bank in
advance and in writing, constitute a representation by the Borrower that (a) no
Default or Event of Default shall have occurred and be continuing; and (b) all
representations and warranties made by any Obligor contained herein or in any
Loan Document shall be true and correct in all material respects with the same
effect as though such representations and warranties had been made on and as of
the date of such request (unless earlier corrected upon written notice to the
Bank in accordance with the terms hereof).

     

    Section
2.13                     Break Funding
Payments.  In the event of (a) the payment of any principal of
any LIBOR Advance other than on the last day of the Term applicable thereto
(including as a result of the acceleration of the Obligations upon the
occurrence of an Event of Default or at the Maturity Date, or (b) the requested
and permitted conversion of any LIBOR Advance to a Prime Advance other than on
the last day of the Term applicable to such LIBOR Advance, then, in such event,
the Borrower shall compensate the Bank for the loss, costs and expense
attributable to such event.  Such loss, cost or expense to the Bank
shall be deemed to include an amount determined by the Bank to be the excess, if
any, of (i) the amount of interest which would have accrued on the principal
amount of the LIBOR Advance at the applicable LIBOR Advance Rate had such event
not occurred for the period from the date of such event to the last day of the
applicable Term for such LIBOR Advance, over (ii) the amount of interest which
would accrue on such period for dollar deposits of a comparable amount and
period from other banks in the eurodollar market.  A certificate of
any bank setting forth any amount or amounts that the Bank is entitled to
receive pursuant to this section shall be delivered to the Borrower and shall be
conclusive absent manifest error.  The Borrower shall pay the Bank the
amount shown as due on any such certificate within ten (10) days after
receipt.

     

    Section
2.14                     Limitations;
Overadances.  Notwithstanding anything in this Agreement to the
contrary, the Bank shall be under no obligation to make any advances which would
result in the Total Outstandings exceeding the Maximum Credit or following the
occurrence of an Event of Default.  Without limiting the Bank’s right
to demand payment of the Obligations, or any portion thereof, in accordance with
any other terms of this Agreement, or any supplement hereto, in the event that
the Total Outstandings exceed the Maximum Credit, the Borrower nonetheless shall
remain liable for all Obligations, including resulting Overadvances which amount
shall be immediately due and payable, plus interest at the Rate or, upon the
occurrence of an Event of Default, the Default Rate.

     

     

    
      
        
        

      

      
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    Section
2.15                     Payment from Checking
Account.  At the Bank’s option, all principal, interest, fees,
commissions, costs, expenses or other charges with respect to the Loan
Documents, this Agreement or any supplements thereof (all of which shall be
cumulative and not exclusive) and any and all loans and advances made by the
Bank to the Borrower may be charged directly to the Borrower’s Checking Account
maintained with the Bank at any time on or after the date any such amount is due
and payable in accordance with the terms of this Agreement and the other Loan
Documents (including upon maturity or acceleration thereof in accordance
herewith and therewith).

     

    Section
2.16                    
Loan Account; Bank’s
Records.  The Total Borrowings shall be charged to a loan
account in the Borrower’s name on the Bank’s bookkeeping system (the “Loan
Account”).  The Bank shall render to the Borrower monthly statements
of the Borrower’s Loan Account which shall be considered correct and deemed
accepted by, and conclusively binding upon the Borrower absent manifest error as
an account stated, or upon receipt by the Bank of the Borrower’s written protest
or written objection to the statement of the Loan Account within sixty (60) days
from the Bank’s issuance of such statement.  Upon receipt of such
written protest or written objection, without affecting the Obligors’
Obligations to the Bank, the Bank shall until the disputed amount is resolved,
reduce the amount eligible to be borrowed by the amount in dispute.

     

    Section
3       INTEREST, FEES AND
PAYMENTS.

     

    Section
3.1                       Rate.  The annual
interest accruing on Credit Advances shall be payable at the Rate, which shall
be determined by the Borrower’s selection of the Rate Type at the time of each
Advance and, in with regard to LIBOR Advances, Term.  The annual
interest accruing on Bankers Acceptances shall be payable at the Rate, which
shall be determined by the Borrower’s selection of the Term.  At the
time of execution of this Agreement, the Borrower shall execute the Note
attached hereto as Exhibit
A.

     

    Section
3.2                        Interest on the
Loan.  Subject to the provisions of Section 3.6 (Default Rate Interest), the
Borrower shall pay interest on the Loan in accordance with the terms of the Note
and this Section:

     

    (a)                Interest
on the principal amount of each outstanding Credit Advance and Bankers
Acceptance shall accrue from day to day from the date of the Advance, be
prorated on the basis of a 360-day year for the actual number of days in the
month that such amounts are outstanding and be payable in arrears on the first
day of the month immediately following the end of the preceding month for which
the interest is being paid.

     

    (b)              
The Borrower shall pay interest on the principal amount of the Total Borrowings,
which shall be the aggregation of all interest accruing at the Rate and
applicable to each Advance under the Loan.

     

    Section
3.3                     Interest Rate Types; Terms;
Elections.  Provided that the Borrower is in compliance with
the terms and conditions of this Agreement and the Loan Documents and no Event
of Default exists (which shall be subject to any written notice requirements
and/or right to cure), the Borrower shall, as applicable, be permitted to select
the Rate Type and Term as follows:

     

    (a)              
Bankers
Acceptances.  Bankers Acceptances shall bear interest at the
Acceptance Rate based upon the Term selected.  Provided that no Event
of Default exists and the Obligors are otherwise in compliance with the terms of
the Loan Documents, the Borrower may, at the expiration of any selected Term,
select another Term, provided that the aggregate Term, including all extensions
from the date of the initial Advance, shall not exceed the BA Term
Limitation.  Upon the expiration of a Term or in the event that the
total length of the Term, including all permitted extensions, is equal to (or
exceeds) the BA Term Limitation, such Bankers Acceptance must be paid in full,
which payment may be made from the Borrower’s funds, available funds in the
Checking Account or through a Credit Advance in accordance with the terms and
conditions of this Agreement, provided that the Borrower is in compliance with
this Agreement and the Loan Documents and the Total Outstandings do not exceed
the Maximum Credit.  In the event that the Bankers Acceptance is equal
to or exceeds the BA Term Limitation and the Borrower has not paid the Bankers
Acceptance from available funds or through a Credit Advance, the Bank may pay
the Bankers Acceptance in full through an Advance under the Loan (with a Rate
Type and, as applicable, Term to be selected by the Bank, in its discretion) (w)
with or without the Borrower’s consent, (x) with or without the Bank having
received an Advance Request Notice, (y) even if such Advance results in an
Overadvance and/or (z) even if such Advance causes the Total Outstandings or
Total Borrowings to exceed the Maximum Credit.

     

     

     

    
      
        
        

      

      
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    (b)               Prime
Advances.  Prime Advances shall bear interest at the Prime
Advance Rate until the earlier of the Maturity Date or the date on which each
such Credit Advance is paid in full.  Prime Advances do not have a
Term selection requirement.  For any Prime Advance, provided that no
Event of Default exists and the Obligors are otherwise in compliance with the
terms of the Loan Documents, the Borrower may, at any time, select another Rate
Type and, if applicable, a permitted Term available for such Rate
Type.

     

    (c)              LIBOR
Advances.  LIBOR Advances shall bear interest at the LIBOR
Advance Rate based upon and for the Term selected until the earlier of the
Maturity Date or the date on which each such Credit Advance is paid in
full.  Provided that no Event of Default exists and the Obligors are
otherwise in compliance with the terms of the Loan Documents, the Borrower may,
at the expiration of any selected Term, select another Rate Type and, if
applicable, a permitted Term available for such Rate Type.  If the
Term expires without selection of a new Term, the Term shall be the shortest
permitted Term available for LIBOR Advances.  It is understood by all
parties to the Agreement that the continuation, through a new Terms, or
conversion of any LIBOR Advance to a Prime Advance does not and shall not
constitute a payment or repayment and is solely a mechanism for determining the
Rate applicable to such Advance.

     

    Section
3.4                     Repayment of
Loans.  The Borrower unconditionally promises to pay the Bank
the full amount of the Total Outstandings applicable to the Loan on the Maturity
Date.  The entries made in the Loan Account maintained by the Bank
shall be prima facie evidence of the
existence and amounts of the Obligations recorded therein; provided that any
failure by the Bank to maintain such accounts or any error therein shall not
affect the Obligations of the Obligors to repay the Loan and the Obligations in
accordance with the terms of this Agreement and the Loan Documents.

     

    Section
3.5                     Late Payment
Premium.  If any portion of any payments of interest or
principal is paid more than ten (10) days after the date that such payment is
due, Borrower shall pay to the Bank a late payment premium (“Late Payment
Premium”), which shall be in an amount equal to the lesser of five percent (5%)
of the amount of such payment or the maximum amount permitted under applicable
law in order to defray the expenses incurred by the Bank in handling and
processing such delinquent payment and to compensate the Bank for the loss of
the use of such delinquent payment.  Any such amounts due under this
section shall be secured by a security interest in the Collateral pursuant to
Section 4 (Security
Interests).  The acceptance by the Bank of a late payment or
the Late Payment Premium shall not constitute a waiver of any Default or Event
of Default then existing or arising thereafter pursuant to any Loan
Document.  The Bank’s failure to collect a Late Payment Premium at any
time shall not constitute a waiver of the Bank’s right thereafter, at any time
and from time to time (including without limitation, upon acceleration of the
Note or upon payment in full of the Loan), to collect such previously
uncollected Late Payment Premiums or to collect subsequently accruing Late
Payment Premiums.

     

    Section
3.6                     Default Rate
Interest.  Upon the occurrence of an Event of Default (and
subject to any written notice requirements and/or right to cure) or upon the
termination of this Agreement, interest on all outstanding unpaid Obligations
shall accrue at a rate equal to five percent (5%) per annum in excess of the
pre-default Rate from the date of such Event of Default, termination or
non-renewal to the date of payment in full of all Obligations.  All
interest accruing hereunder shall thereafter be payable on
demand.  Any such amounts due under this section shall be secured by a
security interest in the Collateral pursuant to Section 4 (Security
Interests).

     

     

     

    
      
        
        

      

      
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    Section
3.7                    Calculation;
Payment.  Interest shall be calculated as set forth above and
shall be included and set forth in each monthly statement issued in connection
with the Borrower’s Loan Account.  Provided that sufficient funds are
available on deposit, the Bank shall have the right, at the Bank’s option, to
charge all interest to any of the Borrower’s accounts, including the Checking
Account, maintained with the Bank on the first day of each month, or such other
day as the Bank may charge thereafter, and such interest shall be deemed to be
paid by the first amounts subsequently credited thereto, or as otherwise
determined in the Bank’s sole discretion.  Any such amounts due under
this section shall be secured by a security interest in the Collateral pursuant
to Section 4 (Security
Interests).

     

    Section
3.8                   
Limitation.  In no
event shall charges constituting of interest, payable by the Borrower under this
Agreement, exceed the rate permitted under any applicable law or regulation, and
if any part or provision of this Agreement is in contravention of any such law
or regulation, such part or provision shall be deemed amended and the Rate
reduced to the maximum allowed by law for any such interest period.

     

    Section
3.9                    
Unused Line of Credit
Fee.  So long as no Event of Default exists, the Borrower shall
pay to the Bank on a monthly basis during the period from the Closing Date to
the Maturity Date, an unused line of credit fee (“Unused Line Fee”) in an amount
set forth on Schedule
1.35.

     

    Section
3.10                  
Closing Fee; Closing Legal
Fee.  No later than the Closing Date the Borrower shall pay to
the Bank: (a) a closing fee of (“Closing Fee”); and (ii) legal fees (whether
in-house or outside counsel) and costs of incurred in connection with the
negotiation, documentation, execution and delivery of the loan documentation
with regard to this line of credit (the “Closing Legal Fee”) in the amounts set
forth on Schedule
1.35.

     

    Section
3.11                  
Exam
Fees.  The Borrower agrees to pay to the Bank: (a) monthly fees
in connection with the Bank’s monitoring of the Collateral; and (b) all fees and
costs incurred by the Bank in connection with periodic examinations of the
Borrower’s books and records and inspections of the Collateral pursuant to
Sections 4 and 6 (collectively, “Exam Fees”), which amounts shall, absent an
Event of Default, be in the amounts set forth in Schedule
1.35.

     

    Section
3.12                   
Line
Fees.  In connection with the administration of the Loan, the
Borrower shall pay to the Bank an annual line fee (“Line Fee”) in the amount set
forth in Schedule
1.35.

     

    Section
3.13                  
Letter of Credit and
Collection Fees.  For each Letter of Credit issued and
associated services provided by the Bank in connection therewith, the Borrower
shall pay to the Bank the L/C Fees set forth in Schedule
1.47.  Upon the Maturity Date, or the occurrence and
continuation of a Default or Event of Default, or on any date that this
Agreement is terminated, the Obligors shall cause cash, in the Currency, to be
deposited and maintained with the Bank, as additional cash collateral, in an
amount equal to one hundred  percent (100%) of the L/C Obligations and
the Borrower irrevocably authorizes the Bank to place a hold on any amounts in
the Checking Accounts to cover such additional cash collateral
required.  The Borrower may not withdraw any amounts described above
except upon the payment and performance in full of all Obligations and
termination of this Agreement.

     

    Section
3.14                   Place for Remittance of Payments;
Promissory Notes.  All payments shall be payable at the Bank’s
office specified above or at such other place as the Bank may hereafter
designate from time to time and, at the Bank’s option and upon the Bank’s
request, the Borrower shall execute and deliver to the Bank one or more
promissory notes in form and substance satisfactory to the Bank to further
evidence such Advances.

     

     

     

    
      
         

      

      
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    Section
3.15                Other Fees.  The
fees described above relate directly to the administration of the Loan and are
intended to supplement, and not limit, the various fees related to the Bank’s
other financial services and products, which are reflected on schedules that may
be updated and amended from time to time as determined by the
Bank.  Further, the described fees do not include those additional and
other fees, costs and charges that shall be due and owing upon an Event of
Default., such as (without limitation to other such fees, costs and charges)
legal fees.  The Bank shall have the right, at the Bank’s option, to
charge any of the Borrower’s accounts, including the Checking Account,
maintained with the Bank on or after its due date for any of the fees or charges
described in this Section 3.

     

    Section
4    SECURITY
INTEREST.

     

    Section
4.1                 Collateral.  As
security for the prompt performance, observance and payment in full of all
Obligations, the Borrower hereby grants to the Bank a continuing security
interest in, a lien upon and a right of setoff against, and the Borrower hereby
assign, transfer, pledge and set over to the Bank the following (which together
with any of the Borrower’s other property in which the Bank may at any time have
a security interest or lien, whether pursuant to this Agreement or any
supplement hereto, or otherwise, are herein collectively referred to as the
“Collateral”): All of the Borrower’s right, title and interest in and to all
personal property, tangible and intangible, wherever located or situated and
whether now owned, presently existing or hereafter acquired or created,
including, but not limited to all: (a) Accounts;  (b) Equipment; (c)
Inventory; (d) financial assets and investment property; (e) moneys, securities
and other property and the proceeds thereof, now or hereafter held or received
by, or in transit to, the Bank from or for the Borrower, whether for
safekeeping, pledge, custody, transmission, collection or otherwise, and all of
the Borrower’s deposits (general or special), balances, sums and credits with or
in the control of the Bank at any time existing; (f) rights, remedies, security
and liens, in, to and in respect of the Accounts and other Collateral,
including, without limitation, rights of stoppage in transit, replevin,
repossession and reclamation and other rights and remedies of an unpaid vendor,
lienor or secured party, guaranties or other contracts of suretyship with
respect to the Accounts and other Collateral, deposits or other security for the
obligation of any Account Debtor, and credit and other insurance; (g) goods
relating to, or which by sale have resulted in, Accounts including, without
limitation, all goods described in invoices, documents, contracts or instruments
with respect to, or otherwise representing or evidencing, any Accounts or other
Collateral, including without limitation, all returned, reclaimed or repossessed
goods; (h) Deposit Accounts (whether or not maintained with the Bank); (i)
books, records (whether paper, computer or electronic), data, tapes, discs,
other media, ledger cards, computer and software programs, files, access codes,
records and procedure manuals relating thereto, together with all computer or
other data processing equipment on which any of the foregoing is stored, and
other property and general intangibles evidencing or relating to the Accounts,
Equipment, Inventory and any other Collateral or any Account Debtor, together
with the file cabinets or containers in which the foregoing are stored
(“Records”); (j) general intangibles of every kind and description, including
without limitation, trade names and trademarks, and the goodwill of the business
symbolized thereby, patents, copyrights, licenses and federal, state and local
tax refund claims of all kinds; (k) letter of credit rights; (l) commercial tort
claims; and (m) supporting obligations and products and proceeds of the
foregoing, in any form, including, without limitation, insurance proceeds and
any claims against third parties for loss or damage to or destruction of any or
all of the foregoing.

     

    Section
4.2               
Records.  The
Borrower shall keep and maintain, at the Borrower’s cost and expense,
satisfactory and complete books and records of all Accounts, all payments
received or credits granted thereon, and all other dealings
therewith.  At such times as the Bank may request, the Borrower shall
deliver to the Bank copies of all documents evidencing the sale and delivery of
goods or the performance of services which created any Accounts, including but
not limited to all original contracts, orders, invoices, bills of lading,
warehouse receipts, delivery tickets and shipping receipts, and after the
occurrence and during the continuance of any Event of Default, the Borrower
shall at such times as the Bank may request deliver to the Bank the originals of
all such documents, together with schedules describing the Accounts and/or
written confirmatory assignments to the Bank of each Account, in form and
substance satisfactory to the Bank and duly executed by the Borrower, together
with such other information as the Bank may request.  In no event
shall the making or the failure to make or the content of any schedule or
assignment or the Borrower’s failure to comply with the provisions hereof be
deemed or construed as a waiver, limitation or modification of the Bank’s
security interest in, lien upon and assignment of the Collateral or the
Borrower’s representations, warranties or covenants under this Agreement or any
supplement hereto.

     

     

     

    
      
         

      

      
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    Section
4.3                 Further Acts.  To
insure the attachment, perfection and first priority of, and the Bank’s ability
to enforce, the Bank’s security interest in the Collateral, the Borrower agrees,
in each case at the Borrower’s own expense, to take the following actions with
respect to the following Collateral:

     

    (a)                      If
the Borrower shall at any time hold or acquire any instruments, promissory
notes, documents (common to a business using an outside distribution center) or
tangible chattel paper, the Borrower shall forthwith endorse, assign and deliver
the same to the Bank, accompanied by such instruments of transfer or assignment
duly executed in blank as the Bank may from time to time specify.  The
Borrower will not create any tangible chattel paper without placing a legend on
the chattel paper acceptable to the Bank indicating that the Bank have a
security interest in the chattel paper.

     

    (b)                      For
each deposit account that the Borrower at any time open or maintain, the
Borrower shall, at the Bank’s request and option, pursuant to an agreement in
form and substance satisfactory to the Bank, either (a) cause the depositary
bank to agree to comply at any time with instructions from the Bank to such
depositary bank directing the disposition of funds from time to time credited to
such deposit account, without the Borrower’s further
consent.  Notwithstanding anything to the contrary contained in the
foregoing or in any such agreement with any depositary bank, the Bank agrees
that the Bank shall not give any instructions to any such depositary bank
concerning the disposition of funds in any such account, or instructing any such
depositary bank to cease complying with instructions that the Borrower may
provide regarding the disposition of funds in any such account, unless an Event
of Default shall have occurred and remain continuing hereunder or an event which
would result in a Material Adverse Change.  The provisions of this
Section shall not apply to (i) any deposit account for which the Borrower, the
depositary bank and the Bank have entered into a cash collateral agreement
specially negotiated among the Borrower, the depositary bank and the Bank for
the specific purpose set forth therein, (ii) deposit accounts for which the Bank
is the depositary and (iii) deposit accounts specially and exclusively used for
payroll, payroll taxes and other employee wage and benefit payments to or for
the benefit of the Borrower’s salaried employees.

     

    (c)                      If
the Borrower shall at any time hold or acquire any certificated securities, the
Borrower shall forthwith endorse, assign and deliver the same to the Bank,
accompanied by such instruments of transfer or assignment duly executed in blank
as the Bank may from time to time specify. If any securities now or hereafter
acquired by the Borrower are uncertificated and are issued to the Borrower or
the Borrower’s nominee directly by the issuer thereof, the Borrower shall
immediately notify the Bank thereof and, at the Bank’s request and option,
pursuant to an agreement in form and substance satisfactory to the Bank, cause
the issuer to agree to comply with instructions from the Bank as to such
securities, without the Borrower’s further consent or the consent of such
nominee. Notwithstanding anything to the contrary contained in the foregoing or
in any such agreement with such issuer, the Bank agrees that the Bank shall not
give any instructions as to any such securities unless an Event of Default shall
have occurred and remain continuing hereunder or an event which would result in
a Material Adverse Change.  If any securities, whether certificated or
uncertificated, for unsecured assets or other investment property now or
hereafter acquired by the Borrower are held by the Borrower or the Borrower’s
nominee through a securities intermediary or commodity intermediary, the
Borrower shall immediately notify the Bank thereof and, at the Bank’s request
and option, pursuant to an agreement in form and substance satisfactory to the
Bank, cause such securities intermediary or (as the case may be) commodity
intermediary to agree to comply with entitlement orders or other instructions
from the Bank to such securities intermediary as to such securities, financial
assets or other investment property, or (as the case may be) to apply any value
distributed on account of any commodity contract as directed by the Bank to such
commodity intermediary, in each case without the Borrower’s further consent or
the consent of such nominee.  Notwithstanding anything to the contrary
contained in the foregoing or in any such agreement with any such securities
intermediary or (as the case may be) commodity intermediary, the Bank agrees
that the Bank shall not give any entitlement orders or other instructions to any
such securities intermediary or (as the case may be) commodity intermediary
unless an Event of Default shall have occurred and remain continuing hereunder
or an event which would result in a Material Adverse
Change.   The provisions of this paragraph shall not apply to any
financial assets credited to a securities account for which the Bank and/or its
affiliate are the securities intermediary.

     

     

     

    
      
         

      

      
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    (d)                    
If any goods are at any time in the possession of a bailee, the Borrower shall
promptly notify the Bank thereof and, if requested by the Bank, shall promptly
obtain an acknowledgment from the bailee, in form and substance satisfactory to
the Bank, that the bailee holds such Collateral for the Bank’s benefit (but not
as an agent of the Bank) and shall act upon the Bank’s instructions, without the
Borrower’s further consent.

     

    (e)                      If
the Borrower at any time holds or acquires an interest in any electronic chattel
paper or any “transferable record,” as that term is defined in Section 201 of
the federal Electronic Signatures in Global and National Commerce Act, or in
Section 16 of the Uniform Electronic Transactions Act as in effect in any
relevant jurisdiction, the Borrower shall promptly notify the Bank thereof and,
at  the Bank’s request, shall take such action as the Bank may
reasonably request to vest in  the Bank’s control, under the UCC, of
such electronic chattel paper or control under Section 201 of the federal
Electronic Signatures in Global and National Commerce Act or, as the case may
be, Section 16 of the Uniform Electronic Transactions Act, as so in effect in
such jurisdiction, of such transferable record.

     

    (f)                      If
the Borrower is at any time a beneficiary under a letter of credit now or
hereafter issued in the Borrower’s favor, the Borrower shall promptly notify the
Bank thereof and, at the Bank’s request and option following the occurrence and
continuation of a Default, the Borrower shall, pursuant to an agreement in form
and substance satisfactory to the Bank, either arrange for the issuer and any
confirmer of such letter of credit to consent to an assignment to the Bank of
the proceeds of any drawing under the letter of credit; or  arrange
for the Bank to become the transferee beneficiary of the letter of credit, with
the Bank agreeing, in each case, that the proceeds of any drawing under the
letter to credit are to be applied in reduction of the Obligations, or to be
held as Collateral, as the Bank in its sole discretion shall deem
appropriate.

     

    (g)                      If
the Borrower shall at any time hold or acquire a commercial tort claim, the
Borrower shall immediately notify the Bank in a writing signed by the Borrower
of the details thereof and grant to the Bank in such writing a security interest
therein and in the proceeds thereof, all upon the terms of this Agreement, with
such writing to be in form and substance satisfactory to the Bank.

     

    Section
5    CLOSING AND CONDITIONS
PRECEDENT.

     

    Section
5.1               
Closing and Execution of Loan
Documents.  Closing under this Agreement is subject to the
following conditions precedent (all instruments, documents and agreements to be
in form and substance satisfactory to the Bank and the Bank’s
counsel):

     

    (a)                      Delivery of
Documents.  The Borrower shall have delivered, or caused to be
delivered, to the Bank the following:

     

    (i)                                this
Agreement, the Note and each of the other Loan Documents all properly executed
by Responsible Officers of the Obligors;

     

     

    
      
         

      

      
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    (ii)                                certified
copies of (A) resolutions of the Borrower’s board of director’s (or equivalent
governing body) authorizing the execution, delivery and performance of this
Agreement, the Note to be issued hereunder and each of the other Loan Documents
required to be delivered by any Section hereof, (B) the Borrower’s articles of
incorporation and by-laws and (C) the Borrower’s certification of good standing
issued by the Secretary of State of the jurisdiction of its incorporation which
shall be dated no earlier than sixty (60) days from the Closing
Date;

     

    (iii)                                an
incumbency certificate identifying all persons authorized to sign on the
Borrower’s behalf, with specimen signatures;

     

    (iv)                                such
financial statements, reports, certifications and other operational information
as the Bank may reasonably require, satisfactory in all respects to the Bank,
including but not limited to the most recent: (A) quarterly accounts receivable
aging report, (B) quarterly inventory report, (C) internally prepared quarterly
financial statement, (D) audited financial statement for the prior year and (E)
field examination report;

     

    (v)                                payment
by the Borrower of all fees including, without limitation, associated with the
Loan;

     

    (vi)                                a
fully executed pay-off letter, confirming that the repayment in full of, and the
termination of any commitments to make extensions of credit under, all of the
outstanding indebtedness owing to the Refinanced Lender, including satisfactory
language that upon payment of the amount listed therein that the Refinanced
Lender shall terminate or grant necessary authority to terminate and release all
of its financings statements, mortgages, assignments of leases and rents,
security interests in all assets and other instruments in order to release all
of the assets of the Borrower, including the Collateral;

     

    (vii)                             
subordination agreement in the form attached hereto as Exhibit F providing
for the subordination of the outstanding loan by the Borrower to the referenced
subordinating creditor;

     

    (viii)                            
searches and certificates required under Section 4; and

     

    (ix)                               
such other documents reasonably required by the Bank.

     

    (b)                      As
of the Closing Date, no Default or Event of Default under the Loan Documents,
which includes this Agreement, shall have occurred or be
continuing.

     

    (c)                      The
Bank shall have received and be satisfied in all respects with the field
examination of the Borrower’s books and records.

     

    (d)                      A
financing statement and any necessary assignments of Government Accounts having
been filed and acknowledged by the U.S. within a reasonable period of time
following the Closing Date.

     

    (e)                      The
warranties and representations contained in Section 6 as well as any other
Section of this Agreement shall be true and correct in all respects on the
Closing Date with the same effect as though made on and as of that
date.  The Borrower shall not have taken any action or permitted any
condition to exist which would have been prohibited by any Section of this
Agreement.

     

     

     

    
      
         

      

      
        21

        
          

        

      

      
         

      

    

     

     

    (f)                     
The Borrower shall have performed and complied with all agreements, covenants
and conditions contained herein including, without limitation, the provisions of
Section 6 hereof, which are required to be performed or complied with by the
Borrower before or at the Closing Date.

     

    (g)                    
The Bank shall have completed and be satisfied in all respects with a due
diligence investigation of the Borrower’s business.

     

    (h)                   
 In accordance with the language in Section 6 applicable to insurance, the
Bank shall have received evidence of insurance coverage for the Borrower’s
inventory, which shall be in an amount of no less than the Coverage Amount, and
shall be issued from an acceptable insurer and in form, scope and substance
satisfactory to the Bank and either (i) the Bank shall be named as the loss
payee or sole beneficiary under such policy, or (ii) the Borrower shall have
provided the Bank with evidence that no less than the Coverage Amount of the
proceeds of such policy shall have been collaterally assigned to the Bank
pursuant to the insurer’s standard form of collateral assignment.  The
Borrower consents to the Bank contacting the insurer to confirm, in its
discretion, the foregoing.

     

    (i)                      
The Bank shall not have become aware prior to the Closing Date of any material
adverse condition or Material Adverse Change in or affecting the Borrower’s
business, operations, property or condition (financial or
otherwise).

     

    (j)                     
 Except for financing statements described and identified in connection
with Permitted Liens, no financing statement or assignments pursuant to the
Assignment of Claims Act of 1940, as amended, covering any of the Collateral or
any proceeds thereof is on file in any public office.

     

    Section
5.2               
The making of Advances under this Agreement in any form following the Closing
Date is subject to the following conditions precedent (all instruments,
documents and agreements to be in form and substance satisfactory to Lender and
its counsel) following the Closing Date:

    


    (a)                      This
Agreement and each of the other Loan Documents shall be effective;

    


    (b)                      No
event or condition shall have occurred or become known to the Borrower since the
Closing Date, or would result from the making of any requested Advance, which
could have a material adverse effect;

    


    (c)                      No
Default or Event of Default then exists or after giving effect to the making of
the Advance would exist;

    


    (d)                      Each
Advance is within and complies with the terms and conditions of this Agreement
including; and

    


    (e)                      Each
representation and warranty set forth in Section 6 and any other Loan Document
in effect at such time (as amended or modified from time to time) is then true
and correct in all material respects as if made on and as of such date except to
the extent such representations and warranties are made only as of a specific
earlier date.

    


    Section
6     REPRESENTATIONS, WARRANTIES AND
COVENANTS.

     

    Section
6.1              
The Borrower represents, warrants and covenants to the Bank the following (which
shall survive the execution and delivery of this Agreement), the truth and
accuracy of which, or compliance with, being a continuing condition of the
making of the Loan hereunder by the Bank or under any supplement
hereto:

     

     

     

    
      
         

      

      
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    (a)                      Perfection
Certificate.  The Borrower have delivered to the Bank a
certificate signed by the Borrower and entitled "Perfection Certificate" (the
"Perfection Certificate") annexed hereto as Exhibit C.  The Borrower represent
and warrant to the Bank as follows:  the Borrower’s exact legal name
is that indicated on the Perfection Certificate and on the first and signature
pages hereof;  the Borrower is  an organization of the type
and organized in the jurisdiction set forth in the Perfection
Certificate;  the Perfection Certificate accurately sets forth the
Borrower’s organizational identification number or accurately states that the
Borrower have none;  the Perfection Certificate accurately sets forth
the Borrower’s place of business or, if more than one, the Borrower’s chief
executive office as well as the Borrower’s mailing address if
different;  the Perfection Certificate accurately sets forth the
location of all Collateral; and  all other information set forth in
the Perfection Certificate pertaining to the Borrower is accurate and
complete.  The Borrower shall promptly notify the Bank in writing if
any of the information set forth in the Perfection Certificate has changed and
the nature of such change.

     

    (b)             Name; Address;
Organization.  Without the prior written notice to and consent
from the Bank, the Borrower will not: (i) change the Borrower’s name, the
Borrower’s place of business or, if more than one, chief executive office; (ii)
change the Borrower’s mailing address or organizational identification number if
it has one; and (iii) the Borrower will not change the Borrower’s type of
organization, jurisdiction of organization or other legal
structure.  If the Borrower does not have an organizational
identification number and later obtains one, the Borrower shall forthwith notify
the Bank of such organizational identification number.

     

    (c)             Collateral.  The
Borrower is the owner of the Collateral, which shall be free from any lien
following funding and payment of such indebtedness secured by prior liens on the
Closing Date, security interest or other encumbrance, except for the security
interest created by this Agreement, set forth in the Perfection Certificate or
any Permitted Lien set forth on Schedule 1.70; none
of the Collateral constitutes, or is the proceeds of, "farm products" as defined
under the UCC; none of the Account
Debtors or other persons obligated on any of the Collateral is a governmental
authority subject to the Federal Assignment of Claims Act or like federal, state
or local statute or rule in respect of such Collateral; the Borrower hold no
commercial tort claim, except as indicated in the Perfection Certificate; the
Borrower have at all times operated the Borrower’s business in compliance with
all applicable provisions of the federal Fair Labor Standards Act, as amended,
and with all applicable provisions of federal, state and local statutes and
ordinances dealing with the control, shipment, storage or disposal of hazardous
materials or substances; and  all other information set forth in the
Perfection Certificate pertaining to the Collateral is accurate and
complete.  The Borrower shall, upon the Bank’s request, cause the
holder of any security interest (except for any Permitted Liens) other than the
Bank to terminate same or enter into a subordination agreement acceptable to the
Bank.

     

    (d)             Access to Collateral;
Records.  The Borrower agrees that so long as any Obligations
to the Bank remain outstanding the Bank or the Borrower’s representatives shall
have free access to and right of inspection of the Collateral and have full
access to and the right to examine and make copies of the Borrower’s Records, to
confirm and verify all Accounts, to perform general examinations and to do
whatever else the Bank deems necessary to protect the Bank’s
interests.  The Borrower further agrees that the Bank may at any time
after the occurrence and during the continuation of an Event of Default or an
event which would result in a Material Adverse Change remove from the Borrower’s
premises or require the Borrower or any accountants and auditors employed by the
Borrower to deliver any Records and the Bank may, without cost or expense to the
Bank, be provided with access to the Borrower’s personnel, supplies, computer
equipment and space at the Borrower’s places.

     

     

     

     

    
      
         

      

      
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    (e)             Collateral
Location.  The Collateral, to the extent not delivered to the
Bank pursuant to Section 4.3, will be kept at those locations listed on the
Perfection Certificate and the Borrower will not, except in the ordinary course
of business, remove the Collateral from such locations, without providing at
least thirty (30) days’ prior written notice to the Bank; except for the
security interest herein granted, the Borrower shall be the
owner of the
Collateral free from any lien, security interest or other encumbrance, except
for the security interest created by this Agreement or as set forth in the
Perfection Certificate or any Permitted Lien, and the Borrower shall defend the
same against all claims and demands of all persons at any time claiming the same
or any interests therein adverse to the Bank;  the Borrower shall not
pledge, mortgage or create, or suffer to exist a security interest in the
Collateral in favor of any person other than the Bank;  the Borrower will keep
the Collateral in good order and repair, ordinary wear and tear excepted, and
will not use the same in violation of law or any policy of insurance thereon;
the Borrower will pay promptly when due all taxes, assessments, governmental
charges and levies upon the Collateral or incurred in connection with the use or
operation of such Collateral or incurred in connection with this Agreement; the
Borrower will continue to operate the Borrower’s business in material compliance
with all applicable provisions of the federal Fair Labor Standards Act, as
amended, and with all applicable provisions of federal, state and local statutes
and ordinances dealing with the control, shipment, storage or disposal of
hazardous materials or substances;  the Borrower will not sell or
otherwise dispose, or offer to sell or otherwise dispose, of the Collateral or
any interest therein, except for (i) sales of inventory in the ordinary course
of the Borrower’s business and (ii) sales of Borrower’s obsolete or
worn-out  equipment or equipment that has been fully depreciated and
which in any such case is no longer needed or useful in the conduct of the
Borrower’s business; the Borrower will permit the Bank’s representatives, upon
reasonable notice (and at any time following the occurrence of an Event of
Default or the Maturity Date) to inspect the tangible Collateral and to review
and make copies of the Borrower’s Records pertaining to the Collateral, all at
the Borrower’s expense, which shall be deemed part of the Obligations;
and  the Borrower agrees, upon the Bank’s demand after (i) an Event of
Default shall have occurred and remain continuing hereunder, or (ii) an event
which would result in a Material Adverse Change in the Collateral, to deliver to
the Bank additional Collateral satisfactory to the Bank and/or to make such
payment on account of the Obligations as will be satisfactory to the Bank, in
the event the market value of any of the Collateral declines and/or any change
occurs in the marketability thereof and/or any of the Collateral shall, for any
reason, be deemed unsatisfactory to the Bank.

     

    (f)              Location of
Records.  The Borrower’s Records and chief executive office are
maintained at the address referred to in the Perfection
Certificate.  The Borrower shall not change such location without
providing prior written notice to and receiving written consent from the Bank
prior to making
any such change.  The Borrower further agrees to execute any
additional documents and consent to the filing of financing statements or other
documents or notices which the Bank may require.

     

    (g)            Maintenance of
Records.  The Borrower shall maintain the Borrower’s Records,
which shall include but not be limited to shipping forms, invoices and other
related documents in a form satisfactory and the books, records and accounts, in
accordance with generally accepted accounting principles consistently
applied.

     

    (h)           Financial
Reporting.  The Borrower agrees to furnish the Bank the
following financial information:

     

    (1)             audited financial statements for
the Guarantor and its subsidiaries, including the Borrower, on a consolidated
basis on an annual basis audited by independent public accountants. Such
statements shall be without material exception or qualification. All such
statements and information shall fairly present in all material respects the
Guarantor’s and Borrower’s financial condition as of the dates and the results
of the Guarantor’s and Borrower’s operations for the periods, for which the same
are furnished and shall be delivered to the Bank as soon as available and in any
event within: (a) one hundred and twenty (120) days after the Guarantor’s and
Borrower’s fiscal year end; and internally prepared statements observed by
independent public accountants (b) sixty (60) days following the end of each
fiscal quarter ;

     

     

     

    
      
         

      

      
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    (2)             within
twenty (20) days after each month quarter end, monthly accounts receivable
reports with agings;

     

    (3)              within
ten (10) days after each month end, a current Borrowing Base and Certificate in
the form attached hereto as Exhibit D, executed
by a Responsible Person denoting Eligible Accounts and Eligible Inventory Amount
along with an accounts receivable aging;

     

    (4)             copies
of the Borrower’s annual tax return within sixty (60) days of
filing;and

     

    (5)             at
any time or from time to time with such other information regarding the
Borrower’s business affairs and financial condition as the Bank may reasonably
request, including, without limitation, balance sheets, statements of profit and
loss, financial statements, cash flow and other projections, earnings forecasts,
schedules, agings and reports.  The Borrower hereby irrevocably
authorizes and directs (and agrees to indemnify such parties for their reliance
upon this section) all accountants, auditors or other third parties to deliver
to the Bank, at the Borrower’s expense, copies of the Borrower’s financial
statements, papers related thereto, and other accounting records of any nature
in their possession and to disclose to the Bank any information they may have
regarding the Borrower’s business affairs and financial
conditions.   Any documents, schedules, invoices or other papers
delivered to the Bank may, in the Bank’s sole discretion, be destroyed or
otherwise disposed of by the Bank in accordance with its record retention
policies or practices.

     

    (i)                      Eligible
Accounts.  Each of the Eligible Accounts represents a valid and
legally enforceable indebtedness based upon an actual and bona fide sale and
delivery of goods or rendition of services in the ordinary course of the
Borrower’s business which has been finally accepted by the Account Debtor and
for which the Account Debtor is unconditionally liable to make payment of the
amount stated in each invoice, document or instrument evidencing the Eligible
Account in accordance with the terms thereof, without offset, defense or
counterclaim and will be paid in full at maturity.  All statements
made and all unpaid balances appearing in the invoices, documents and
instruments evidencing each Eligible Account are true and correct and are in all
respects what they purport to be and all signatures and endorsements that appear
thereon are genuine and all signatories and endorsers have full capacity to
contract and each Account Debtor is solvent and financially able to pay in full
the Eligible Account when it matures.  None of the transactions
underlying or giving rise to any Account shall violate any state or federal laws
or regulations, and all documents relating to the Accounts shall be legally
sufficient under such laws or regulations and shall be legally enforceable in
accordance with their terms and all recording, filing and other requirements of
giving public notice under any applicable law have been duly complied
with.

     

    (j)                      Insurance.  The
Borrower shall at all times maintain, with financially sound and reputable
insurers, casualty and hazard insurance with respect to the Collateral for not
less than its full market value and against all risks to which it may be
exposed.  All such insurance policies shall be in such form,
substance, amounts and coverage as may be satisfactory to the Bank and shall
provide for ten (10) days minimum prior cancellation notice in writing to the
Bank.  At any time after the occurrence and during the continuance of
an Event of Default hereunder or an event which would result in a Material
Adverse Change, the Bank may act as attorney for the Borrower in obtaining,
adjusting, settling, amending and canceling such insurance.  The
Borrower shall promptly (a) obtain endorsements to all existing and future
insurance policies with respect to the Collateral specifying that the proceeds
of such insurance shall be payable to the Bank and the Borrower as the
Borrower’s interests may appear and further specifying that the Bank shall be
paid regardless of any act, omission or breach of warranty by the Borrower, (b)
deliver to the Bank an original executed copy of the certificate of the
insurance carrier with respect to such endorsement and, at the Bank’s request,
the original or a certified duplicate copy of the underlying insurance policy,
and (c) deliver to the Bank such other evidence which is satisfactory to the
Bank of compliance with the provisions hereof.

     

     

     

    
      
         

      

      
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    (k)                      Notification of Loss, Damages or
Claims.  The Borrower shall promptly notify the Bank in writing
of the details of any loss, damage, investigation, action, suit, proceeding or
claim relating to the Collateral resulting in a loss or damage to the Collateral
or seeking damages in excess of $250,000.00 or which would result in any
Material Adverse Change in the Borrower’s business, properties, assets, goodwill
or condition, financial or otherwise.

     

    (l)                      Application of Insurance
Proceeds.  At the Bank’s option, the Bank may apply any
insurance monies received at any time to the cost of repairs to or replacement
of the Collateral and/or to payment of any of the Obligations, whether or not
due, in any order and in such manner as the Bank, in the Bank’s sole discretion,
may determine, provided that, in the case of any insurance monies received in
connection with any one casualty event that do not exceed $250,000.00 and
further provided that an Event of Default does not exist, the Bank shall return
any such insurance moneys to the Borrower and the Borrower will use such moneys
to repair or replace the Collateral that was the subject of such casualty
event.

     

    (m)                      Periodic Collateral
Examinations. The Borrower shall deliver to the Bank each year, or
upon the Bank’s request, at any time and from time to time, if an Event of
Default shall have occurred and remain continuing hereunder or a Material
Adverse Change shall
have occurred, an examination report of the Collateral from an independent
examiner selected by the Bank and paid by the Borrower, provided that nothing
contained in the foregoing shall limit the Bank’s rights to obtain an appraisal
of the value of the Collateral the Bank’s own cost and expense from time to time
and at any time.

     

    Section
6.2                 Equipment; Maintenance; Use;
Prohibitions.  The Borrower shall, at the Borrower’s own
expense, keep the Equipment in first class order, repair, running and marketable
condition ordinary wear and tear excepted.  The Borrower shall (a)
use, store and maintain the Equipment with all reasonable care and caution, and
(b) use the Equipment for lawful purposes only and in conformity with applicable
laws, ordinances and regulations.  The Equipment is and shall be used
in the Borrower’s business and not for personal, family, household or farming
use.  The Equipment is now and shall remain personal property and the
Borrower shall not permit any of the Equipment to be or become a part of or
affixed to real property without (a) prior written notice to the Bank
and  the Bank’s written consent and (b) first making all arrangements,
and delivering or causing to be delivered to the Bank, such agreements and other
documentation requested by the Bank for the protection and preservation of the
Bank’s security interests and liens, in form and satisfactory to the Bank,
including, without limitation, waivers and subordination agreements by any
landlords or mortgagees of statutory and non-statutory liens and rights of
distraint.  The Borrower assumes all responsibility and liability
arising from or relating to the use, sale or other disposition of the
Equipment.

     

    Section
6.3                  Payment of Taxes, Assessments,
Charges.  The Borrower shall duly pay and discharge all taxes,
assessments, contributions and governmental charges upon or against the Borrower
or the Borrower’s properties or assets prior to the date on which penalties
attach thereto unless such taxes, assessments, contributions or charges are
being properly contested pursuant to appropriate proceedings and for which
adequate reserves have been established.  The Borrower shall be liable
for any tax or penalty imposed upon any transaction under this Agreement or any
supplement hereto or giving rise to the Accounts or any other Collateral or
which the Bank may be required to withhold or pay for any reason and the
Borrower agrees to indemnify and hold the Bank harmless with respect thereto,
and to repay to the Bank on demand the amount thereof, and until paid by the
Borrower such amount shall be added to and deemed part of the Obligations owed
to the Bank by the Borrower.

     

     

     

     

    
      
         

      

      
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    Section
6.4                  Investigations, Actions, Proceedings
and Claims.  Except as otherwise disclosed to the Bank in
writing, there is no present investigation by any governmental agency pending or
threatened against the Borrower and there is no action, suit, proceeding or
claim pending or threatened against the Borrower or the Borrower’s assets or
goodwill, or affecting any transactions contemplated by this Agreement, or any
supplement hereto, or any agreements, instruments or documents delivered in
connection herewith or therewith before any court, tribunal, arbitrator, or
governmental or administrative body or agency which if adversely determined with
respect to the Borrower would result in any Material Adverse Change in the
Borrower’s business, properties, assets, goodwill, or condition, financial or
otherwise.

     

    Section
6.5                 Authorization; Compliance with
Laws.  The execution, delivery and performance of this
Agreement, any supplement hereto, or any agreements, instruments and documents
executed and delivered in connection herewith, are within the Borrower’s powers,
have been duly authorized, are not in contravention of law or the terms of the
Borrower’s Charter, By-Laws, Certificate of Formation, Operating Agreement, or
other incorporation/organizational papers, or of any indenture, agreement or
undertaking to which the Borrower are a party or by which the Borrower are
bound.

     

    Section
6.6                Determination that LIBOR Rate
Lending Unlawful.  If the Bank shall determine (which
determination shall, upon notice to the Obligors be conclusive and binding on
the Obligors) that the introduction of or any change in or in the interpretation
of any law, rule, regulation or guideline (whether or not having the force of
law) makes it unlawful, or any central bank or other governmental authority
assets that it is unlawful, for the Bank to make, continue or maintain any LIBOR
Loan as, or to convert any loan into, a LIBOR Loan of a certain duration, (a)
the Bank promptly shall given written notice of such circumstance to the
Borrower (which notice may be withdrawn whenever such circumstances no longer
exist), (b) the obligations of the Bank to make, continue, maintain or convert
into any such LIBOR Loans shall, upon such determination, be suspended until the
Bank shall notify the Borrower that the circumstances causing such suspension no
longer exist, and (c) upon such notice, all LIBOR Advances shall automatically
convert into Prime Advances at the end of the then current Term for each such
Advance or sooner, if required by law or as determined by the Bank, in its
discretion.

     

    Section
6.7                Further Acts.  The
Borrower shall, at the Borrower’s expense, duly execute and deliver, or shall
cause to be duly executed and delivered, such further agreements, instruments
and documents, including, without limitation, additional security agreements,
mortgages, deeds of trust, deeds to secure debt, collateral assignments, Uniform
Commercial Code financing statements or amendments or continuations thereof,
landlord's or mortgagee's waivers of liens and consents to the exercise by the
Bank of all the Bank’s rights and remedies hereunder, under any supplement
hereto or applicable law with respect to the Collateral, and do or cause to be
done such further acts as may be necessary or proper in the Bank’s opinion to
evidence, perfect, maintain and enforce the Bank’s security interest and the
priority thereof in the Collateral and to otherwise effectuate the provisions or
purposes of this Agreement or any supplement hereto.  Where permitted
by law, the Borrower hereby authorizes the Bank to execute and file one or more
financing statements and amendments thereto signed only by the
Bank.

     

    Section
6.8               Minimum Capital
Funds.  The Borrower agrees that so long as any Obligations to
the Bank remain outstanding to maintain minimum Capital Funds of not less than
Two Million Two Hundred Thousand Dollars ($2,200,000.00).

     

    Section
6.9               Omitted.

     

     

     

    
      
         

      

      
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    Section
6.10            Leverage
Ratio.  The Borrower agrees that, so long as any Obligations to
the Bank remain outstanding, total unsubordinated liabilities divided by
tangible capital funds (defined as net worth plus subordinated debt minus
intangible assets) shall at no time exceed 2.0:1

     

    Section
6.11             Additional Indebtedness; Investments
or Loans to Affiliates.  The Borrower agrees that so long as
any Obligations to the Bank remain outstanding that the Borrower shall not,
without the Bank’s prior written consent (which consent will not be unreasonably
withheld), incur additional indebtedness other than (i) for the purchase of
equipment in the normal course of the Borrower’s business, (ii) invest or extend
loans in or to affiliated companies, subsidiaries, and/or officers, directors or
shareholders or (iii) other than for the business operations of the
Guarantor.  The Borrower represents and warrants that, other than the
Obligations contemplated by this Agreement, the outstanding indebtedness owing
by the Borrower and its affiliated companies and subsidiaries is set forth on
Schedule
6.11.

     

    Section
6.12             Net Loss.  The
Borrower agrees that so long as any Obligations to the Bank remain outstanding
that the Borrower shall not incur a net loss (on a combined basis) in any fiscal
year determined for Borrower and its subsidiaries on a consolidated
basis.

     

    Section
6.13              Other
Investments.  The Borrower agrees that so long as any
Obligations to the Bank remain outstanding that the Borrower shall not, without
the Bank’s prior written consent, make, or allow to remain outstanding any
investment (whether such investment shall be of character of investment in
shares of stock, evidences of indebtedness or other securities or otherwise) in,
or any loans or advances to, any individual or entity.

     

    Section
6.14            
Checking
Accounts.  The Borrower agrees that so long as any Obligations
to the Bank remain outstanding that  the Borrower shall (i) maintain
with the Bank the Checking Account, and (ii) not maintain any bank accounts at
financial institutions (other than with the Bank) without the Bank’s prior
written approval and, in the case where the Bank grants such prior written
approval, subject to such financial institution entering into a Deposit Account
Control Agreement in form and substance satisfactory to the Bank in its sole
absolute discretion.

     

    Section
6.15              Dividends;
Distributions. The Borrower agrees that, so long as any Obligations
to the Bank remain outstanding, commencing with fiscal year 2008 the Borrower
shall not pay, declare, make or become obligated to make any dividend or
distribution to any of the Borrower’s subsidiaries, parent or shareholders,
except that the Borrower may: (i) continue to repay the quarterly installments
of $75,000.00 to Subordinated Creditor in connection with the Subordinated Loan
and (ii) payment of the Guarantor’s presently existing convertible debt and
Guarantor’s income taxes plus such other payments that are no greater than
$50,000 per item and $500,000 per fiscal year in the aggregate, provided that
with regard to the payments described in subsections as noted on Schedule 6.11 (i) and
(ii): (x) no uncured or Event of Default exists; (y) the Borrower is in
compliance with the minimum capital funds requirement set forth in Section
6.8;

     

    Section
6.16            
Prohibited
Transactions.  The Borrower agrees that so long as any of the
Obligations to the Bank remain outstanding that the Borrower shall not without
the Bank’s prior written consent, which consent shall not be unreasonably
withheld, (i) acquire all or a material portion of the shares, interests,
participations or other equivalents (however designated) of capital stock of a
corporation, or any and all other ownership interests in an entity (other than a
corporation) in any one transaction or series of related transactions or enter
into any sale and leaseback transaction, or (ii) merge or consolidate with any
other entity or commence a dissolution or liquidation.

     

    Section
6.17            No Material Adverse
Change.  The Borrower represents and warrants that there has
been no Material Adverse Change with respect to the business, operations,
performance, assets, properties, condition (financial or otherwise) or prospects
of the business of Borrower.  Both before and after making the Loan
hereunder, the Borrower will be solvent, able to pay the Borrower’s debts as
they mature, the Borrower will have capital sufficient to carry on the
Borrower’s business and all businesses in which the Borrower is engaged, and
both as of and subsequent to the Closing Date, the fair present saleable value
of the Borrower’s assets, calculated on a going concern basis, is in excess of
the amount of the Borrower’s liabilities.

     

     

     

    
      
         

      

      
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    Section
6.18            Regulations T, U and
X.  The Borrower is not engaged principally, or as one of the
Borrower’s important activities, in the business of extending credit for the
purpose of purchasing or carrying any margin stock.  No part of the
proceeds of the Loan will be used, directly or indirectly, whether immediately,
incidentally or ultimately (a) to purchase or carry any margin stock or to
extend credit to others for the purpose, in each case, violative of or
inconsistent with any of the provisions of any regulation of the Board of
Governors of the Federal Reserve System, including, with out limitation,
Regulations T, U and X.

     

    Section
6.19            The
Borrower is not, nor will the Borrower during the term of
this  Agreement be, (a) an “investment company”, within the meaning of
the Investment Company Act of 1940, as amended, or (b) subject to regulation
under the Public Utility Holding Company Act of 1935, the Federal Power Act or
any foreign, federal or local stature or any other applicable law of the United
States of America or any other jurisdiction, in each case limiting its ability
to incur indebtedness for money borrowed as contemplated hereby or by any other
Loan Document.

     

    Section
6.20             The
Borrower represents that neither the Borrower nor any shareholder of the
Borrower is (i) a person whose property or interest in property is blocked or
subject to blocking pursuant to section 1 of Executive Order 13224 of September
23, 2001 Blocking Property and
Prohibiting Transactions With Persons Who Commit, Threaten to Commit or Support
Terrorism (66 Fed. Reg. 49079 (2001), (ii) engaged in any dealings or
transactions prohibited by section 2 of such executive order, or is otherwise
associated with any such person in any manner violative of section 2 of such
executive order, or (iii) a person on the list of Specially Designated Nationals
and Blocked Persons or subject to the limitations or prohibitions under any
other U.S. Department of Treasury’s Office of Foreign Assets Control regulation
or executive order.

     

    Section
6.21              The
Borrower is not involved in any activity, directly or indirectly, which would
constitute a violation of applicable laws concerning money laundering, the
funding of terrorism or similar activities.  No part of the proceeds
of the Loan will be used to fund activities which would constitute a violation
of the United States Bank Secrecy Act, the United States Money Laundering
Control Act of 1986, the United States International Money Laundering Abatement
and Anti-terrorist Financing Act of 2001.

     

    Section
7    GUARANTY.

     

    Section
7.1                 Guaranty.  Each
Guarantor hereby, jointly and severally, irrevocably, absolutely and unconditionally guarantees
to the Bank, its successors, endorsees, transferees and assigns the prompt and
complete payment by the Borrower, as and when due and payable (whether at stated
Maturity or by required prepayment, acceleration, demand or otherwise), of all
Obligations and agrees to pay on demand any and all expenses (including counsel
fees and expenses, whether incurred by outside counsel or the equivalent market
rate of counsel that are employees of the Bank) which may be paid or incurred by
any Bank in connection with the administration of the Loan, collecting any or
all of the Obligations and/or enforcing any rights under any of the Loan
Documents or under the Obligations.

     

    Section
7.2                 Guarantor’s Guaranty Obligations
Unconditional.

     

    (a) Each
Guarantor hereby guarantees that the Obligations will be paid strictly in
accordance with the terms of the Loan Documents, regardless of any law now or
hereafter in effect in any jurisdiction affecting any such terms or, the rights
of the Bank with respect thereto. The Obligations and liabilities of each
Guarantor under this Guaranty shall be to the extent permitted by applicable law
absolute and unconditional irrespective of: (i) any lack of validity or
enforceability of any of the Obligations, any Loan Documents, or any agreement
or instrument relating thereto; (ii) any change in the time, manner or place of
payment of, or in any other term in respect of, all or any of the Obligations,
or any other amendment or waiver of or consent to any departure from any Loan
Documents or any other documents or instruments executed in connection with or
related to the Obligations; (iii) any exchange or release of, or non-perfection
of any Lien on or in, any Collateral, or any release or amendment or waiver of
or consent to any departure from any other Guaranty, for all or any of the
Obligations; or (iv) any other circumstances which might otherwise constitute a
defense (other than indefeasible payment in full) available to, or a discharge
of, Borrower or any other Guarantor in respect of the Obligations of any
Guarantor in respect of this Guaranty.

     

     

     

    
      
         

      

      
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    (b)                 This
Guaranty is a continuing guaranty and shall remain in full force and effect
until: (i) the payment in full of all the Obligations and the termination of the
Agreement; and (ii) the payment of the other expenses to be paid by the
Guarantors pursuant hereto. This Guaranty shall continue to be effective or
shall be reinstated, as the case may be, if, at any time, any payment, or any
part thereof, of any of the Obligations is rescinded or must otherwise be
returned by the Bank upon the insolvency, bankruptcy, dissolution, liquidation
or reorganization of Borrower and/or any Guarantor or otherwise, all as though
such payment had not been made, but in no event shall the Guaranty continue
beyond the later of four years from the last of any payments made pursuant to
subsections (i) or (ii) set forth immediately above.

     

    (c)                 The
Obligations and liabilities of each Guarantor under this Guaranty shall not be
conditioned or contingent upon the pursuit by the Bank or any other person at
any time of any right or remedy against Borrower or any other Obligors which may
be or become liable in respect of all or any part of the Obligations or against
any Collateral, security, Guaranty or right of setoff with respect
thereto.

     

    (d)                 Each
Guarantor hereby consents that, without the necessity of any reservation of
rights against any Guarantor and without notice to or further assent by any
Guarantor, any demand for payment of any of the Obligations made by the Bank may
be rescinded by the Bank and any of the Obligations continued after such
rescission.

     

    Section
7.3              
Waivers.    To
the extent permitted by applicable law, each Guarantor hereby waives: (a)
promptness and diligence; (b) notice of or proof of reliance by the Bank upon
this Guaranty or acceptance of this Guaranty; (c) notice of the incurrence of
any Obligation by Borrower or the renewal, extension or accrual of any
Obligation; (d) notice of any actions taken by the Bank, Borrower, any Obligor
or any other party under any Loan Document, or any other
agreement or instrument relating to the Obligations; (e) all other notices,
demands and protests, and all other formalities of every kind other than such as
are provided for in the Loan Documents in connection with the enforcement of the
Obligations or of the Guaranty Obligations of any Guarantor, the omission of or
delay or which, but for the provisions of this Section, might constitute grounds
for relieving any Guarantor of its obligations hereunder; and (f) any
requirement that the Bank protect, secure, perfect or insure any lien on any
Collateral or property subject thereto or exhaust any right or take any action
against Borrower, any Obligor, any other person or party or any
Collateral.

     

    Section
7.4              
Subrogation;
Subordination.   Each Guarantor agrees that it defers any
rights which it may acquire by way of subrogation under this Guaranty, whether
acquired by any payment made hereunder, by any setoff or application of funds of
such Guarantor by the Bank or otherwise until the Obligations have been paid in
full.  Further, each Guarantor agrees and acknowledges that any right
to payment, and any liens securing such payments, that such Guarantor has or
shall have against the Borrower and any other Guarantor shall be , at all times,
subordinate in all aspects, including extent, validity and priority, to the
rights of the Bank.

     

    Section
8    SPECIFIC POWERS.

     

    Section
8.1                The
Borrower hereby constitutes the Bank and any agent or designee of the Bank, as
the Borrower’s attorney-in-fact, at the Borrower’s own cost and expense, to
exercise at any time all or any of the following powers (provided that, in the
case of the powers described in clauses (b), (d) and (e), such powers may only
be exercised after the occurrence and during the continuance of an Event of
Default following notice to cure or an event which would result in a Material
Adverse Change) which, being coupled with an interest, shall be irrevocable
until all Obligations have been paid in full: (a) to receive, take, endorse,
assign, deliver, accept and deposit, in the Bank’s or the Borrower’s name, any
and all checks, notes, drafts, remittances and other instruments and documents
relating to the Collateral; (b) to receive, open and dispose of all mail
addressed to the Borrower and to notify postal authorities to change the address
for delivery thereof to such address as the Bank may designate; (c) to transmit
to Account Debtors notice of the Bank’s interest therein and to request from
such Account Debtors at any time, in the Bank’s or the Borrower’s name or that
of the Bank’s designee, information concerning the Accounts and the amounts
owing thereon; (d) to notify Account Debtors to make payment directly to the
Bank; (e) to take or bring, in the Bank’s or the Borrower’s name, all steps,
actions, suits or proceedings deemed by the Bank necessary or desirable to
effect collection of the Collateral; and (f) to execute in the Borrower’s name
and on the Borrower’s behalf and file any UCC financing statements or amendments
thereto, including without limitation UCC financing statements with broader
collateral description than that provided in this Agreement, including a
description of Collateral as “all assets” or words of similar
meaning.  The Borrower also ratifies the Borrower’s authorization to
the Bank to have filed one or more financing statements or amendments thereto if
filed prior to the date of this Agreement.  The Borrower hereby
releases the Bank and the Bank’s officers, employees, agents, professionals and
designees, from any liability arising from any act or acts under this Agreement
or in furtherance thereof, whether of omission or commission, and whether based
upon any error of judgment or mistake of law or fact, except in the case of the
Bank’s gross negligence or willful misconduct.

     

     

    
      
         

      

      
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    Section
9    EVENTS
OF DEFAULT AND REMEDIES.

     

    Section
9.1               All
Obligations shall be, at the Bank’s option, immediately due and payable without
notice or demand (notwithstanding any deferred or installment payments allowed,
if any, by any instrument evidencing or relating to the Obligations) and any
provision of this Agreement or any supplement hereto, as to future loans and
advances by the Bank shall, at the Bank’s option, terminate forthwith, upon the
termination or non-renewal of this Agreement or upon the occurrence and
continuation following written notice thereof by the Bank to the Borrower of any
one or more of the following ("Events of Default"):

     

    (a)                      if
the Borrower shall (i) fail to pay to the Bank when due any amounts owing to the
Bank under any Obligation, and in the case of any amount other than an amount of
principal or interest in respect of any Advance and any such amounts remain
unpaid for more than ten (10) days from the due date, (ii) shall breach any of
the terms, covenants, conditions or provisions of this Agreement, any supplement
hereto or any other Loan Document and such failure shall continue for more than
ten (10) days, or (iii) shall breach any of the terms, covenants, conditions or
provisions of any document evidencing or governing any indebtedness between any
other third person or entity and the Borrower and as a result of such breach,
such third party shall and has or shall be entitled to accelerate such
indebtedness and Borrower has not cured such events, or (iv) Borrower shall
breach any of the terms, covenants, conditions or provisions of any other
agreement between any other third person or entity and the Borrower and as a
result of such breach, such third party shall or shall be entitled to terminate
such agreement and the termination of such agreement would result in a Material
Adverse Change;

     

    (b)                    
 the occurrence and continuation of an Overadvance for more than ten (10)
days following the Bank’s written notice to Borrower of such
Overadvance;

     

    (c)                      if
any representation, warranty, or statement of fact made to the Bank at any time
by the Borrower or on the Borrower’s behalf is false or misleading in any
material respect;

     

    (d)                      if
(i) the Borrower or Guarantor shall become insolvent, fail to meet the their
debts as they mature, call a meeting of creditors or have a creditors' committee
appointed, make an assignment for the benefit of creditors, commence or have
commenced against the Borrower or them any action or proceeding for relief under
any bankruptcy law (and, in the case of any such action or proceeding commenced
against the Borrower such action or proceeding shall not be dismissed within 60
days), or (ii) a lien or encumbrance of any type or nature attaches to the
assets of the Borrower or the Collateral and is not released or removed within
fifteen (15) days; or (iii) a judgment is rendered against the Borrower or
Guarantor in excess of $250,000.00 that is not fully covered by insurance or
which is not satisfied and paid within thirty (30) days after entry thereof or
the execution or other enforcement thereof stayed, or (iv) the Borrower suspends
or discontinues doing business for any reason, or if a receiver, custodian or
trustee of any kind is appointed for the Borrower or any of the Borrower’s or
assets or properties;

     

     

     

     

     

    
      
         

      

      
        31

        
          

        

      

      
         

      

    

     

     

    (e)                      if
there shall be a Material Adverse Change from the date hereof; or

     

    (f)                      
if at any time the Bank shall, in the Bank’s commercially reasonable discretion,
consider the Obligations insecure or any part of the Collateral unsafe, insecure
or insufficient and the Borrower shall, on the Bank’s demand, be unable to
furnish other Collateral or make payment on account, satisfactory to the
Bank.

     

    Section
9.2               Upon
the occurrence and continuation of any Event of Default and at any time
thereafter during the continuance of such Event of Default, the Bank shall have
the right (in addition to any other rights the Bank may have under this
Agreement, any supplement hereto or otherwise available under applicable law)
without notice to the Borrower, at any time and from time to time, in the Bank’s
discretion, with or without judicial process or the aid or assistance or others
and without cost to the Bank to appropriate, set off and apply to the payment of
any or all of the Obligations, any or all Collateral, in such manner as the Bank
shall in the Bank’s sole discretion determine; to enforce payment of any
Collateral; to settle, compromise or release in whole or in part, any amounts
owing on the Collateral; to prosecute any action, suit or proceeding with
respect to the Collateral; to extend the time of payment of any and all
Collateral; to make allowances and adjustments with respect thereto; to issue
credits in the Bank’s or the Borrower’s name; to sell, assign and deliver the
Collateral (or any part thereof) at public or private sale, at broker's board,
for cash, upon credit or otherwise, at the Bank’s sole option and discretion,
and the Bank may bid or become purchaser at any such sale, if public, free from
any right of redemption which is hereby expressly waived; and, with respect to
the Inventory or Equipment, to enter upon any premises on or in which any of the
Inventory or Equipment may be located and, without resistance or interference by
the Borrower, take possession of the Inventory and the Equipment; to complete
processing, manufacturing and repair of all or any portion of the Inventory; to
sell, foreclose or otherwise dispose of any part or all of the Inventory and the
Equipment on or in any of the Borrower’s premises or premises of any other
party; to require the Borrower, at the Borrower’s expense, to assemble and make
available to the Bank any part or all of the Inventory and the Equipment at any
place and time designated by the Bank; and to remove any or all of the Inventory
and the Equipment from any premises on or in which the same may be located, for
the purpose of effecting the sale, foreclosure or other disposition thereof or
for any other purpose.

     

    Section
9.3                In
the event the Bank seeks to take possession of all or any portion of the
Collateral by judicial process, the Borrower irrevocably waive: (a) the posting
of any bond, surety or security with respect thereto which might otherwise be
required, (b) any demand for possession prior to the commencement of any suit or
action to recover the Collateral, and (c) any requirement that the Bank retain
possession and not dispose of any Collateral until after trial or final
judgment.

     

    Section
9.4                 If
notice of the intended disposition of Collateral is required by law, the
Borrower agrees that the giving of seven (7) days notice by the Bank (unless a
shorter period of time is permitted under the UCC), sent by ordinary mail,
postage prepaid, to the Borrower’s address set forth herein, designating the
place and time of any public sale or of the time after which any private sale or
other intended disposition of the Collateral is to be made, shall be deemed to
be reasonable notice thereof and the Borrower waive any other notice with
respect thereto.

     

     

     

     

     

     

    
      
         

      

      
        32

        
          

        

      

      
         

      

    

     

     

     

     

    Section
9.5               
The Bank shall have no obligation to clean-up or otherwise prepare the
Collateral for sale.

     

    Section
9.6               
The Bank may sell the Collateral without giving any warranties as to the
Collateral.  The Bank may disclaim any warranties of title or the
like.

     

    Section
9.7                To
the extent that applicable law imposes duties on the Bank to exercise remedies
in a commercially reasonable manner, the Borrower acknowledges and agrees that
it is not commercially unreasonable for the Bank (a) to fail to incur expenses
reasonably deemed significant by the Bank to prepare Collateral for disposition
or otherwise to complete raw material or work in process into finished goods or
other finished products for disposition, (b) to fail to obtain third party
consents for access to Collateral to be disposed of, or to obtain or, if not
required by other law, to fail to obtain governmental or third party consents
for the collection or disposition of Collateral to be collected or disposed of,
(c) to fail to exercise collection remedies against Account Debtors or other
persons obligated on Collateral or to remove liens or encumbrances on or any
adverse claims against Collateral, (d) to exercise collection remedies against
Account Debtors and other persons obligated on Collateral directly or through
the use of collection agencies and other collection specialists, (e) to
advertise dispositions of Collateral through publications or media of general
circulation, whether or not the Collateral is of a specialized nature, (f) to
contact other persons, whether or not in the same business as the undersigned,
for expressions of interest in acquiring all or any portion of the Collateral,
(g) to hire one or more professional auctioneers to assist in the disposition of
Collateral, whether or not the Collateral is of a specialized nature, (h) to
dispose of Collateral by utilizing Internet sites that provide for the auction
of assets of the types included in the Collateral or that have the reasonable
capability of doing so, or that match buyers and sellers of assets, (i) to
dispose of assets in wholesale rather than retail markets, (j) to disclaim
disposition warranties, (k) to purchase insurance or credit enhancements to
insure the Bank against risks of loss, collection or disposition of Collateral
or to provide the Bank a guaranteed return from the collection or disposition of
Collateral, or (l) to the extent deemed appropriate by the Bank, to obtain the
services of other brokers, investment bankers, consultants and other
professionals to assist the Bank in the collection or disposition of any of the
Collateral. The
Borrower acknowledges that the purpose of this Section is to provide
non-exhaustive indications of what actions or omissions by the Bank would not be
commercially unreasonable in the Bank’s exercise of remedies against the
Collateral and that other actions or omissions by the Bank shall not be deemed
commercially unreasonable solely on account of not being indicated in this
Section. Without limitation upon the foregoing, nothing contained in this
Section shall be construed to grant any rights to the Borrower or to impose any
duties on the Bank that would not have been granted or imposed by this Agreement
or by applicable law in the absence of this Section.

     

    Section
9.8               The
Bank shall not be required to marshal any present or future collateral security
(including but not limited to the Collateral) for, or other assurances of
payment of, the Obligations or any of them or to resort to such collateral
security or other assurances of payment in any particular order, and all of its
rights hereunder and in respect of such collateral security and other assurances
of payment shall be cumulative and in addition to all other rights, however
existing or arising. To the extent that the Borrower lawfully may, the Borrower
hereby agrees that the Borrower will not invoke any law relating to the
marshaling of collateral which might cause delay in or impede the enforcement of
the Bank’s rights under this Agreement or under any other instrument creating or
evidencing any of the Obligations or under which any of the Obligations is
outstanding or by which any of the Obligations is secured or payment thereof is
otherwise assured, and, to the extent that the Borrower lawfully may, the
Borrower hereby irrevocably waives the benefits of all such laws.

     

    Section
9.9                 The
net cash proceeds resulting from the exercise of any of the foregoing rights or
remedies shall be applied by the Bank to the payment of the Obligations in such
order as the Bank may elect, and the Borrower shall remain liable to the Bank
for any deficiency.  Without limiting the generality of the foregoing,
if the Bank enters into any credit transaction, directly or indirectly, in
connection with the disposition of any Collateral, the Bank shall have the
option, at any time, in the Bank’s sole discretion, to reduce the Obligations by
the principal amount of such credit transaction or to defer the reduction
thereof until actual receipt by the Bank of cash or other immediately available
funds in connection therewith.

     

     

     

     

    
      
         

      

      
        33

        
          

        

      

      
         

      

    

     

     

    Section
9.10                
The enumeration of the foregoing rights and remedies is not intended to be
exclusive, and such rights and remedies are in addition to and not by way of
limitation of any other rights or remedies the Bank may have under the UCC or
other applicable law.  The Bank shall have the right, in the Bank’s
sole discretion, to determine which rights and remedies, and in which order any
of the same, are to be exercised, and to determine which Collateral is to be
proceeded against and in which order, and the exercise of any right or remedy
shall not preclude the exercise of any others, all of which shall be
cumulative.

     

    Section
9.11                  No
act (other than a waiver in writing), failure or delay by the Bank shall
constitute a waiver of any of the Bank’s rights and remedies.  No
single or partial waiver by the Bank of any provision of this Agreement or any
supplement hereto, or breach or default thereunder, or of any right or remedy
which the Bank may have shall operate as a waiver of any other provision,
breach, default, right or remedy or of the same provision, breach, default,
right or remedy on a future occasion.

     

    Section
9.12                   Upon
the occurrence and continuation of an Event of Default and following issuance by
the Bank of a written notice with right to cure, all or any one or more of the
rights, powers, privileges and other remedies available to the Bank against the
Obligors under this Agreement or any of the other Loan Documents executed and
delivered by, or applicable to, the Obligors or at law, equity or otherwise may
be exercised by the Bank at any time and from time to time, whether or not the
Bank shall have commenced any foreclosure proceeding or other action for the
enforcement of its rights and remedies under any of the Loan documents with
respect to the Collateral.  Any such actions taken by the Bank may be
pursued independently, singly, successively, together or otherwise, at such time
and in such order as the Bank may determine in its sole and absolute discretion,
to the fullest extent permitted by law, without impairing or otherwise affecting
the other rights and remedies of the Bank permitted by law, equity or contract
or as set forth herein or in the other Loan Documents.  Without
limiting the generality of the foregoing, the Obligors agree that if an Event of
Default exists (a) the Bank is not subject to any “one action” or “election of
remedies” law or rule, and (b) all liens and other rights, remedies or
privileges provided to the Bank shall remain in full force and effect until the
Bank has exhausted all of its remedies resulting in the satisfaction and payment
in full of all Obligations.

     

    Section
9.13                    The
Borrower waives presentment, notice of dishonor, protest and notice of protest
of all instruments included in or evidencing any of the Obligations or the
Collateral and any and all notices or demands whatsoever (except as expressly
provided herein).  The Bank may, at all times, proceed directly
against the Borrower to enforce payment of the Obligations and shall not be
required to take any action of any kind to preserve, collect or protect the
Bank’s or the Borrower’s rights in the Collateral.

     

    Section
10    EFFECTIVE DATE; TERMINATION;
COSTS.

     

    Section
10.1                    
This Agreement shall become effective upon acceptance by the Bank and shall
continue in full force and effect until Maturity Date.  The Bank shall
have the right to terminate this Agreement immediately at any time upon the
occurrence of an Event of Default.  No termination of this Agreement,
however, shall relieve or discharge the Borrower of the Borrower’s duties,
Obligations and covenants hereunder until all Obligations have been paid in
full, and the Bank’s continuing security interest in the Collateral shall remain
in effect until such time that the Obligations have been fully
discharged.

     

    Section
10.2                      This
Agreement, any supplement hereto, and any agreements, instruments or documents
delivered or to be delivered in connection herewith represent the Borrower’s
entire agreement and understanding concerning the subject matter hereof and
thereof, and supersede all other prior and contemporaneous agreements,
understandings, negotiations and discussions, representations, warranties,
commitments, offers, contracts, whether oral or written.

     

     

     

    
      
         

      

      
        34

        
          

        

      

      
         

      

    

     

     

     

    Section
10.3                       
No provision hereof shall be modified or amended orally or by the Bank’s conduct
but only by a written instrument expressly referring hereto signed by both
parties.

     

    Section
10.4                       Upon
the Bank’s request, the Borrower shall pay to the Bank, or reimburse the Bank
for, all sums, costs and expenses which the Bank may pay or incur in connection
with or related to the negotiation, preparation, consummation, administration
and enforcement of this Agreement, any supplement hereto, and all other
agreements, instruments and documents in connection herewith and therewith, and
the transactions contemplated hereunder and thereunder, together with any
amendments, supplements, consents or modifications which may be hereafter made
or entered into in respect hereof or thereof, and all efforts made to defend,
protect or enforce the security interest granted herein or therein or in
enforcing payment of the Obligations, including without limitation, appraisal
fees, filing fees and taxes, title insurance premiums, recording taxes, expenses
for searches, expenses heretofore incurred by the Bank and from time to time
hereafter during the Bank’s periodic field examinations of the Collateral and
the Borrower’s operations, wire transfer fees, check dishonor fees, the fees and
disbursements of counsel to the Bank, all fees and expenses for the service and
filing of papers, premiums on bonds and undertakings, fees of marshals,
sheriffs, custodians, auctioneers and others, travel expenses and all the Bank’s
costs and collection charges, all of which shall be part of the Obligations and
shall accrue interest after demand thereof at a rate equal to the highest rate
then payable on any of the Obligations.

     

    Section
11      NOTICES.

     

    Section
11.1                       All
notices, requests and demands to or upon the respective parties hereto shall be
given either by hand delivery, facsimile or by Federal Express, UPS, DHL,
Express Mail or any other recognized overnight delivery service, and in any such
case shall be deemed to have been given and received (i) in the case of any
notice given by hand delivery or overnight delivery service, upon delivery
thereof during normal business hours to the Borrower (or, if after normal
business hours of the Borrower, on the next business day) and (ii) in the case
of an notice given by facsimile, upon transmission thereof confirmed by
electronic confirmation from the sending facsimile machine during normal
business hours of the Borrower (or, if after normal business hours of the
Borrower, on the next business day).  All notices, requests and
demands are to be given or made to the respective parties at the address (or to
such other addresses as either party may designate by notice in accordance with
the provisions of this section) set forth herein.

     

    Section
12     WAIVER OF JURY TRIAL; JURISDICTION;
CHOICE OF LAW.

     

    Section
12.1                     JURY WAIVER.  THE
BORROWER AND THE BANK EACH HEREBY WAIVE ALL RIGHTS TO A TRIAL BY JURY IN ANY
ACTION OR PROCEEDING OF ANY KIND ARISING OUT OF OR RELATING TO THIS AGREEMENT,
AND SUPPLEMENT HERETO, THE OBLIGATIONS, THE COLLATERAL OR ANY SUCH OTHER
TRANSACTION.

     

    Section
12.2                     Waiver of Setoff and
Counterclaims.  The Borrower hereby waives its rights to object
to setoff and to interpose counterclaims in the event of any litigation with
respect to any matter connected with this Agreement, any supplement hereto, the
Obligations, the Collateral or any other transaction between the
parties.

     

    Section
12.3                     Consent to Non-Exclusive
Jurisdiction.  The Borrower hereby irrevocably consents and
submits to the non-exclusive jurisdiction of the Supreme Court of the State of
New York, New York County and the United States District Court for the Southern
District of New York in connection with any action or proceeding of any kind
arising out of or relating to this Agreement, any supplement hereto, the
Obligations, the Collateral or any such other banking transaction involving the
Obligors and the Bank.

     

    Section
12.4                      Service.  With
respect to any such action, proceeding or claim the Borrower consents to accept
service of process and any legal summons, complaint or other process to be
served upon the Borrower and consent that same may be served by mailing a copy
by certified mail directed to the Borrower at the Borrower’s address set forth
below.  Such mailing shall be deemed personal service upon the
Borrower effective on delivery thereof and shall be legal and binding upon the
Borrower in any such action, proceeding or claim.  Within thirty (30)
days after such mailing, the Borrower shall appear, answer, or otherwise move in
respect of such summons, complaint or other process.  If the Borrower
fails to appear or answer within the thirty (30) day period, the Borrower shall
be deemed in default and judgment may be entered by the Bank against the
Borrower for the amount of the claim and other relief requested
therein.

     

     

     

     

    
      
         

      

      
        35

        
          

        

      

      
         

      

    

     

     

    Section
12.5                     Applicable
Law.  This Agreement and all transactions thereunder shall be
deemed to be consummated in the State of New York and shall be governed by and
interpreted in accordance with the internal laws of that State.  If
any part or provision of this Agreement is invalid or in contravention of any
applicable law or regulation, such part or provision shall be severable without
affecting the validity of any other part or provision of this
Agreement.

     

    Section
13   MISCELLANEOUS.

     

    Section
13.1                    This
Agreement may be executed in several counterparts, each of which shall
constitute an original, but all of which taken together shall constitute one and
the same Agreement.

     

    Section
13.2                    Delivery
of an executed counterpart of a signature page to this Agreement by facsimile
shall be effective as delivery of an executed counterpart of this
Agreement.

     

    Section
13.3                  
The USA Patriot Act of 2001 (Public Law 107-56) and federal regulations issued
with respect thereto require all financial institutions to obtain, verify and
record certain information that identifies individuals or business entities
which open an “account” with such financial
institution.  Consequently, the Bank, may from time-to-time request,
and Borrower shall provide to the Bank, Borrower’s name, address, tax
identification number and/or such other identification information as shall be
necessary for the Bank to comply with federal law.  An “account” for
this purpose may include, without limitation, a deposit account, cash management
service, a transaction or asset account, a credit account, a loan or other
extension of credit, and/or other financial services product.

     

    [signatures
on the following page]

     


    
      
         


      

      
        36

        
          

        

      

      
         


      

    


    


     

    IN
WITNESS WHEREOF, the parties have duly executed this Agreement on the day and
year first written above.

     

    BORROWER:

     

    FREUNDLICH
SUPPLY COMPANY, INC.

    


    


    By:
________________________________________

                                                                                                          
Andrew
Prince, President and Chief Executive Officer

    


    GUARANTOR:

    


    PRECISION AEROSPACE COMPONENTS,
INC.

    


    


    By:
________________________________________

                                                                                                         
Andrew
Prince, President and Chief Executive Officer

    


    


    


    Accepted
on this _____ day of _______________, 2008

    


    ISRAEL
DISCOUNT BANK OF NEW YORK

    


    


    


    By:  _____________________________________

    Name:  Leon
Terrano

    Title:    Senior
Vice President

    


    


    


    By:  _____________________________________

    Name:

    Title:


    
      
         


      

      
        37

        
          

        

      

      
         


      

    


    SCHEDULE
1.18

    


    SCHEDULE
OF CHECKING ACCOUNTS

    


    


    


    


    
      	
              Description
      of Account

            	
              Account
      No.

            
	
              Signature
      Bank – Lockbox Account

            	
              1500852638

            
	
              Signature
      Bank – Checking

            	
              1500852611

            
	
              Wachovia
      – Payroll

            	
              2000012549667

            


    

    


    


    



    
      
         


      

      
        38

        
          

        

      

      
         


      

    


    SCHEDULE
1.35

    


    SCHEDULE
OF LOAN FEES1

    


    


    


    


    
      	
              Description
      of Fee, Charge or Premium

            	
              Amount

            
	 
      	 
      
	
              Closing
      Fee

            	
              $0.00

            
	
              Closing
      Legal Fee

            	
              $0.00

            
	
              Field
      Exam Fee (Daily) (to be paid directly to field examiner)

            	
              Actual
      Fees

            
	
              Exam
      Fee (Monthly Collateral monitoring fee)

            	
              $500.00

            
	
              Late
      Payment Premium

            	
              5%
      of Late Payment Amount

            
	
              Line
      Fee

            	
              $5,000.00

            
	
              Unused
      Line Fee

            	
              $0.00

            
	 
      	 
      


    

    


    

      

    

      
      1           As noted in Section 3, this Schedule of
Fees is applicable to the subject Loan and supplements all other schedules of
fees and charges, as may be amended and updated by the Bank from time to time,
for financial services and products offered by Bank.  The Schedule
does not include additional fees that may become due and payable upon a Default
or Event of Default.

    


    
      
         


      

      
        39

        
          

        

      

      
         


      

    


    SCHEDULE
1.47

    


    SCHEDULE
OF LETTER OF CREDIT AND COLLECTION CHARGES2

    


    


    

      

    

      
      2           As noted in Section 3, this Schedule of
Fees may be amended and updated by the Bank from time to time.  This
Schedule does not include additional fees that may become due and payable upon a
Default or Event of Default.

    


    
      
         


      

      
        40

        
          

        

      

      
         


      

    


     SCHEDULE
1.70

    


    SCHEDULE
OF PERMITTED LIENS

    


    


    Full UCC
Filing on assets of Borrower by Subordinated Creditor


    
      
         


      

      
        41

        
          

        

      

      
         


      

    


    SCHEDULE
5.1

    


    SCHEDULE
OF COVERAGE AMOUNT

    


    


    No less
than $3,000,000.00


    
      
         


      

      
        42

        
          

        

      

      
         


      

    


    SCHEDULE
6.11

    


    SCHEDULE
OF OTHER INDEBTEDNESS

    


    


    
      	
              1.

            	
              $750,000
      Note Payable to Subordinated Creditor, which had an outstanding principal
      balance of $375,000.00 as of March 1,
2008

            


    

    


    
      	
              2.

            	
              $1,000,000
      Unsecured Convertible Note Payable by Guarantor to Barron
      Partners

            


    

    


    



    
      
         


      

      
        43

        
          

        

      

      
         


      

    


    EXHIBIT
A

    

    


    PROMISSORY
NOTE

    


    
      	
              $3,000,000.00

            	
                               March
      __ , 2008

            


    

    


    FOR VALUE
RECEIVED, the undersigned promises to pay to the order of ISRAEL DISCOUNT BANK OF NEW
YORK (“Bank”) at its principal office, located at 511 Fifth Avenue, New
York, NY 10017, the principal sum of THREE MILLION ($3,000,000.00), or, if less,
the aggregate unpaid principal amount of all advances (including, but not
limited to
those  arising  out  of  letters  of  credit
issued by the Bank, acceptances and other indebtedness, each an “Advance” and
collectively, the “Advances”) made by the Bank, in its sole discretion, to the
undersigned from time to time, as set forth on the Bank’s computer system on the
Loan Enquiry Page(s) (“Loan Enquiry Page(s)”) on the maturity date of each such
Advance either as shown on the Loan Enquiry Page(s) or by acceleration, or on
demand. The undersigned shall also pay to the Bank interest, fees and costs as
set forth in that certain Loan and Security Agreement (“Agreement”) executed by
and between the Borrower and the Bank contemporaneously herewith.

    


    Each
Advance hereunder shall bear interest on the unpaid principal amount thereof for
the interest period applicable thereto at the interest rate (“Rate”) (as set
forth and defined in the Agreement).

    


    The
undersigned shall provide the Bank with prior notification of each Advance
requested hereunder in accordance with the terms of Section 2 of the
Agreement.  All requests for Advances shall be irrevocable and shall
be in accordance with the terms and conditions set forth in the
Agreement.

    


    The Bank
may act without liability upon the basis of telephonic notice believed by the
Bank in good faith to be from the undersigned.  The undersigned shall
immediately confirm to the Bank, in writing, each telephonic
notice.  All Advances are made in accordance with the Agreement and
the Bank, in accordance with the conditions of the Agreement and without notice
to the undersigned, may decline to make any Advance requested by the
undersigned.  The undersigned hereby expressly authorizes the Bank to
record in its computer system the amount and date of each Advance, the
applicable rate of interest, the applicable Term for each Advance, the maturity
date, and each payment of principal and interest thereon.  In the
event of any discrepancy between any such notation by the Bank and any records
of the undersigned, the records of the Bank shall be controlling and
conclusive.

    


    Interest
shall be calculated on the basis of a 360-day year for the actual number of days
elapsed (but in no event in excess of the maximum rate permitted by
law).  Interest on Advances hereunder shall be payable in accordance
with the terms of the Agreement.

    


     In
accordance with the terms of the Agreement, the undersigned authorizes the Bank
to charge any of the undersigned’s deposit accounts for payments of principal,
interest or other amounts due and owing.  Any payment of principal or
interest payable hereunder, which is not paid when due, shall be subject to a
Late Payment Premium (as described in the Agreement) and shall bear interest
from the date due until paid in full at a rate per annum equal to five percent
(5%) above the interest rate in effect with respect
thereto.  Additional amounts may be due in accordance with the
Agreement.

    


    Subject
to the terms and conditions of the Agreement, the undersigned may borrow, repay
in whole or in part, and re-borrow on a revolving basis up to the maximum amount
of this Note.

     

     

     

     

    
      
         

      

      
        44

        
          

        

      

      
         

      

    

     

    
 

    Any
Advance may be prepaid in full or in part, on any Business Day, upon five (5)
days prior written notice to the Bank of such prepayment, subject to a
prepayment premium equal to the amount of interest which the Bank would have
earned on the principal amount so prepaid at the then current Rate from the date
of such prepayment to the last day of the then current Interest Period for such
Advance.  The Bank shall not be obligated to accept any prepayment of
an Advance unless it is accompanied by the prepayment premium.

     

    


    If any
amount payable on any Obligations (as defined in the Agreement) of the
undersigned to the Bank shall not be paid when due, then this Note and the
principal of and accrued interest on each Advance evidenced hereby shall, unless
the Bank shall otherwise elect, become forthwith due and payable in full,
without protest, presentment, notice or demand, all of which are expressly
waived by the undersigned.

    


    As
security for the payment of all the Obligations, the undersigned has granted to
the Bank a security interest in, and a general lien upon and/or right of set-off
of, the Collateral, as further described in the Agreement.

    


    The Bank,
at its discretion, whether any Obligations be due may, in its name or in the
name of the undersigned or otherwise, demand, sue for, collect or receive any
money or property at any time payable or receivable on account of or in exchange
for, or make any compromise or settlement deemed desirable with respect to, any
of the Collateral, but shall be under no obligation so to do, or the Bank may
extend the time of payment, arrange for payment in installments, or otherwise
modify the terms of, or release, any of the Collateral, without thereby
incurring responsibility to, or discharging or otherwise affect­ing any
liability of, the undersigned.  The Bank shall not be required to take
any steps necessary to preserve any rights of prior parties to any of the
Collateral.  Upon default hereunder or in connection with any of the
Obligations (whether such default be that of the undersigned or of any other
party obligated thereon), the Bank shall have the rights and remedies provided
by law; and the Bank may sell or cause to be sold in such places as it may
determine, in its sole discretion, in one or more sales or parcels, at such
price as the Bank may deem best, and for cash or on credit or for future
delivery, without assumption of any credit risk, all or any of the Collateral,
at any brokers’ board or at public or private sale, without demand of
performance or notice of intention to sell or of time or place of sale (except
such notice as is required by applicable statute and cannot be waived), and the
Bank or anyone else may be the pur­chaser of any or all of the Collateral so
sold and thereafter hold the same, absolutely free from any claim or right of
whatsoever kind, including any equity of redemption, of the undersigned, any
such demand, notice or right and equity being hereby waived and
released.  The undersigned will pay to the Bank all reasonable out of
pocket expenses (including reasonable expense for legal services of every kind)
of, or incidental to, the enforcement of any of the provisions hereof or of any
of the Obligations, or any actual or attempted sale, or any exchange,
enforcement, collection, compromise or settlement of any of the Collateral or
receipt of the proceeds thereof, and for the care of the Collateral and
defending or asserting the rights and claims of the Bank in respect thereof, by
litigation or otherwise, including expense of insurance, and all such expenses
shall be indebtedness within the terms of this Note.  The Bank, at any
time, at its option, may apply the net cash receipts from the Collateral to the
payment of principal of and/or interest on any of the Obligations, whether or
not then due, making proper rebate of interest or
discount.  Notwithstanding that the Bank, whether in its own behalf
and/or in behalf of another and/or of others, may continue to hold Collateral
and regardless of the value thereof, the under­signed shall be and remain
liable for the payment in full, principal and interest, of any balance of the
Obligations and expenses at any time unpaid.

     

    


    The
undersigned represents and warrants that:  it is a corporation duly
organized and validly existing under the laws of the state of its incorporation
and is duly qualified to do business and is in good standing in every state
where the failure to qualify would materially and adversely affect the financial
condition of the undersigned, and the execution, issuance and delivery of this
Note by the undersigned are within its corporate powers and have been duly
authorized by all necessary corporate action, and this Note is valid, binding
and enforceable in accordance with its terms, and is not in violation of law or
of the terms of the undersigned's Articles or Certificate of Incorporation or
By-Laws and does not result in the breach of or constitute a default under any
indenture, agreement or undertaking to which the undersigned is a party or by
which it or its property may be bound or affected.

     

     

    
      
         

      

      
        45

        
          

        

      

      
         

      

    

     

     

    
 

    Upon the
occurrence of any of the following specified events of default (each an “Event
of Default) set forth in the Agreement; THEN, in any such event, and at any time
thereafter, unless and to the extent that the Bank shall otherwise elect, if any
Event of Default shall then be continuing, the principal and the accrued
interest in respect of each Advance under this Note shall become immediately due
and payable, without presentment, demand, protest or other notice of any kind,
all of which are expressly waived by the undersigned.

    


    Notwithstanding
anything to the contrary contained elsewhere in this Note, if any change after
the date hereof in law, rule, regulation, guideline or order or in the
interpretation thereof by any governmental authority charged with the
administration thereof, shall make it unlawful for the Bank to make or maintain
any Advance based upon LIBOR, then, by written notice to the undersigned, the
Bank may require that such Advance be converted to an Advance based on the Prime
Rate, whereupon such Advance shall be automatically converted as of the date of
such notice to the undersigned.

     

    


    In the
event that any change in applicable law or regulation, or in the interpretation
thereof by any governmental authority charged with the administration thereof,
shall impose on or deem applicable to the Bank any reserve requirements against
this Note or impose upon the Bank any other costs or assessments (the
“Additional Costs”), the undersigned shall pay to the Bank, on demand (which
demand shall be in writing and which will set forth a calculation of such
Additional Costs), an amount sufficient to compensate the Bank for the
Additional Cost resulting from the maintenance or imposition of such reserves,
costs or assessments.  The calculation of amount of the Additional
Costs shall, absent manifest error, be presumed correct.

    


    Any
consents, agreements, instructions or requests pertaining to any matter in
connection with this Note, signed by any one of the undersigned, shall be
binding upon all of the undersigned. This Note shall not be assigned by the
undersigned without the Bank’s prior written consent.

    


    THE
UNDERSIGNED IN ANY LITIGATION (WHETHER OR NOT ARISING OUT OF OR RELATING TO THIS
NOTE OR ANY OTHER OBLIGATIONS OR LIABILITY OF THE UNDERSIGNED TO THE BANK) IN
WHICH THE BANK AND THE UNDERSIGNED SHALL BE ADVERSE PARTIES, WAIVES TRIAL BY
JURY AND THE RIGHT TO INTERPOSE ANY DEFENSE, SET-OFF OR COUNTERCLAIM OF ANY
NATURE OR DESCRIPTION.  THE UNDERSIGNED AGREES TO PAY ON DEMAND ALL OF
THE BANK'S ACTUAL COSTS AND EXPENSES, INCLUDING REASONABLE COUNSEL FEES, IN
CONNECTION WITH COLLECTION OF ANY AMOUNTS DUE TO THE BANK AND ENFORCEMENT OF ITS
RIGHTS UNDER THIS NOTE.

    


    The
undersigned agrees that the action, proceeding or claim against it arising out
of, or relating in any way to, this Note may be brought and enforced in the
courts of the State of New York or of the United States of America for the
Southern District of New York, and hereby irrevocably submits to each such
jurisdiction, which jurisdiction shall be non-exclusive.  With respect
to any such action, proceeding or claim, the undersigned consents to accept
service of process pursuant to the terms of the Agreement.

    


    No
modification or waiver of any provision of this note and no consent by the Bank
to any departure therefrom by the undersigned shall be effective unless such
modification or waiver shall be in writing and signed by a duly authorized
officer of the Bank, and the same shall then be effective only for the period
and on the conditions and for the specific instances specified in such writing.
No failure or delay by the Bank in exercising any right, power or privilege
hereunder shall operate as a waiver thereof; nor shall any single or partial
exercise of any right, power or privilege hereunder preclude any other or
further exercise thereof or the exercise of any other rights, power or
privilege.

     

     

     

    
      
         

      

      
        46

        
          

        

      

      
         

      

    

    
 

    The
rights, remedies, and benefits herein expressly specified are cumulative and not
exclusive of any rights, remedies or benefits which the Bank may otherwise
have.  The undersigned hereby waives demand, presentment, notice of
dishonor and protest of all instruments included in or evidencing the Note and
any Obligations and any and all other notices.

    


    The
undersigned acknowledges that this Note is an instrument for the payment of
money only within the meaning of Section 3213 of the New York Civil Practice Law
& Rules.

    


    In the
event any one or more of the provisions in this Note should be invalid, illegal
or unenforceable in any respect, the validity, legality and enforceability of
the remaining provisions contained herein shall not in any way be affected or
impaired thereby.

    


    This Note
and the provisions hereof are to be binding upon the respective heirs, estate,
administrators, executors, assigns or successors of the undersigned; and they
are to be construed according to and governed by the internal laws of the State
of New York.

     

    


    FREUNDLICH SUPPLY COMPANY,
INC.                                                                                                                     Attest:

     

    


    By:  ______________________________                                                                                                                     _____________________________

    Name: Andrew
Prince                                                                                                                         Name:

    Title: President and Chief Executive
Officer                                                                                                               Title:
Corporate Secretary

    


    


    


    CORPORATE
ACKNOWLEDGMENT

    (FREUNDLICH
SUPPLY COMPANY, INC.)

    
 

    
      
        	
                STATE
      OF NEW YORK

              	
                )

              
	 	 )ss.


      

    

    
      	
              COUNTY
      OF

            	
              )

            


    

    


    


    I certify
that on the date set forth below, the duly appointed corporate officer of the
referenced corporation personally came before me, a notary public, and
acknowledged under oath, to my satisfaction, that s/he is an officer of the
referenced corporation, and that as such, being authorized to do so, executed
the foregoing instrument for the purposes therein contained by signing on behalf
of the corporation and that this document was signed and delivered by the
corporation as its voluntary and authorized act.

    


    Signed
and sworn to before me on

    this
______ day of March, 2008.

    


    


    ____________________________

    Notary
Public

    Name:

    My
Commission Expires
________                                                                                                (seal)


    
      
         


      

      
        47

        
          

        

      

      
         


      

    


    EXHIBIT
B

    FORM OF ADVANCE REQUEST
NOTICE

    


    Date:  ___________,
_____

    
      	
              To:

            	
              Israel
      Discount Bank of New York

            


    

    


    
      	
               
      

            	
              Ladies
      and Gentlemen:

            


    

    


    Reference
is made to that certain Loan and Security Agreement (as amended, restated,
extended, supplemented or otherwise modified in writing from time to time, the
“Agreement;”
the terms defined therein being used herein as therein defined), among
FREUNDLICH SUPPLY COMPANY, INC., a New York corporation (the “Borrower”) and Israel
Discount Bank of New York, as lender (“Bank”).  The undersigned hereby
requests (select one):

      

    
    

     

    
      	 [ 
      ]	 Advance of
      Funds (Prime Advance)


    

     

    
      	
               
      [  ]

            	
                Advance
      of Funds (LIBOR Advance)

            


    

    


    
      	
                 

            	
              (Select
      term:   [  ] 1 month,  [  ] 3
      months or  [  ] 6
months)

            


    

    


    
      	
               
      [  ]

            	
                Extension
      of Prior LIBOR Advance: Amount $__________ Current Term
      Exp. Date ___ / ___ / ___

            


    

    


    
      	
               
      

            	
              (Select
      extension term:  [  ] 1 month,  [ 
      ] 3 months or [  ] 6
months)

            


    

    


    
      	
               
      [  ]

            	
                Bankers
      Acceptance for Letter of Credit No.__________________ dated issued ____
      /____ /_____

            


    

    


    
      	
               
      

            	
              Beneficiary________________
      Original Amount ____________ Amount of Draw
  ___________

            


    

    


    
      	
               
      

            	
              (Select
      term:  [  ] 1-30 days, [  ] 31-60
      days, [  ] 61-90 days,  [  ] 91-120
      days,  [  ] 121-150 days or  [  ]
      121-150 days)

            


    

    


    


    
      	
               
      [  ]

            	
                Bankers
      Acceptance Extension: Amount $____________ Bankers
      Acceptance Issue Date ___ / ___ /
___

            


    

    


    
      	
               
      

            	
              (Select
      term:  [  ] 1-30 days, [  ] 31-60
      days, [  ] 61-90 days, [  ] 91-120
      days, [  ] 121-150 days or [  ] 121-150
      days)

            


    

    


     

    
      	 [ 
      ]	  Issuance
      of a Letter of Credit (Please attached the necessary forms, including the
      Letter of Credit Application)


    

     

     


    


    Please
take the requested action on ___________ (a
Business Day), in the amount of $________________.  The
undersigned certifies that the requested Advance will not cause the Total
Outstandings to exceed the Maximum Amount available under the Loan (as those
terms are defined in the Agreement).  The Borrower further certifies
that it is in compliance with the Agreement and no Event of Default
exists.

    


     

    
    

     

    
      	 	 FREUNDLICH
      SUPPLY COMPANY, INC.	 
	 	 	 
	 	 By: 
      __________________________________________	 
	 	 Name: 
      ________________________________________	 
	 	 Title: 
      _________________________________________	 


    

     

     

                                                                


    
      
         


      

      
        48

        
          

        

      

      
         


      

    


    


    EXHIBIT
C

     

    PERFECTION
CERTIFICATE

     

    


     

    FREUNDLICH SUPPLY COMPANY, INC.
("Obligor"), by and through the below named officer, hereby certifies, with
reference to the attached Loan Agreement (the "Loan Agreement") with Israel
Discount Bank of New York ("Bank"), as follows:
All capitalized terms not otherwise defined herein shall have the meaning set
forth in the Loan and Security Agreement.

     

    
      	
              1.

            	
              Name.

            	
              The
      exact legal name of the Obligor as that name appears on its Articles / Certificate of
      Incorporation  is as
follows:

            


    

     

    FREUNDLICH
SUPPLY COMPANY, INC.

     

    2.                               Other
Identifying Factors.

     

    


     

    (a)                                           The
following is the mailing address of the Obligor:

     

    2200
Arthur Kill Road, Staten Island, New York 10309

     

    
      	
              (b)

            	
              If
      different from its mailing address, the Obligor's place of business or, if
      more than one, its chief executive office is located at the following
      address:

            


    

     

    Address                                County                                State

     

    Not applicable

     

    


     

    (c)                                           The
following is the type of organization of the Obligor:

     

    Corporation

     

    (d)                                           The
following is the jurisdiction of the Obligor's organization:

     

    Delaware

     

    
      	
              (e)

            	
              The
      following are the Obligor's federal taxpayer identification number and
      state issued organizational identification number [state “None" if the
      state does not issue such a
number]:

            


    

     

    20-5199557

     

    3.                                Other
Names, Etc.

     

     

     

    
      
         

      

      
        49

        
          

        

      

      
         

      

    

     

     

     

    
      	
              (a)

            	
              The
      following is a list of all other names (including trade names used by the
      Obligor), or any other business or organization to which the Obligor
      became the successor by merger, consolidation, acquisition, change in
      form, nature or jurisdiction of organization or otherwise, now or at any
      time during the past five years:

            


    

     

    None

     

    4.                                Other
Current Locations.

     

    
      	
              (a)

            	
              The
      following are all other locations in the United States of America in which
      the Obligor maintains any books or records relating to any of the
      Collateral consisting of accounts, instruments, chattel paper, general
      intangibles or mobile goods:

            


    

     

    Address                                County                                State

     

    None

     

    
      	
              (b)

            	
              The
      following are all other places of business of the Obligor in the United
      States of America:

            


    

     

    Address                                County                                State

     

    None

     

    
      	
              (c)

            	
              The
      following are all other locations in the United States of America where
      any of the Collateral consisting of inventory or equipment is
      located:

            


    

     

    Address                                County                                State

     

    None

     

    
      	
              (d)

            	
              The
      following are the names and addresses of all persons or entities other
      than the Obligor, such as lessees, consignees, warehousemen or purchasers
      of chattel paper, which have possession or are intended to have possession
      of any of the Collateral consisting of instruments, chattel paper,
      inventory or equipment:

            


    

     

    Name                                Mailing
Address                                                      County                      State

     

    None

     

    5.                                Prior
Locations.

     

    
      	
              (a)

            	
              Set
      forth below is the information required by §4(a) or (b) with respect to
      each location or place of business previously maintained by the Obligor at
      any time during the past five years in a state in which the Obligor has
      previously maintained a location or place of business at any time during
      the past four months:

            


    

     

    Address                                County                                State

     

    None

     

    
      	
              (b)

            	
              Set
      forth below is the information required by §4(c) or (d) with respect to
      each other location at which, or other person or entity with which, any of
      the Collateral consisting of inventory or equipment has been previously
      held at any time during the past twelve
months:

            


    

     

    Address                                County                                State

     

    None

     

     

     

    
      
         

      

      
        50

        
          

        

      

      
         

      

    

     

     

    6.                                Existing
Liens, If Any.

    


    


    Collateral                                           Secured Party (name and
address)

                                                                                                                

                                                                                                                Greater
Bay Business Funding, a division of Greater Bank, N.A., which shall be released
simultaneously with funding under this facility

    


    7.                                Commercial
Tort Claims, If Any.  (brief description of claim
and party)

     

                                                                        
None

    


    


     

    IN WITNESS WHEREOF, we have hereunto
signed this Certificate on March _____, 2008.

     

     

                                                                                                           
FREUNDLICH SUPPLY COMPANY, INC.

     

    


     

    By:  ______________________________

    Andrew Prince, President and Chief
Executive Officer


    
      
         


      

      
        51

        
          

        

      

      
         


      

    


    EXHIBIT
D

    


    BORROWING BASE
CERTIFICATE

    


    Calculated
as of ___________  _____, 200__

    


    The
undersigned DOES HEREBY CERTIFY, pursuant to that certain Loan and Security
Agreement (as such agreement may be amended, restated, supplemented or otherwise
modified from time to time, the “Agreement”;
capitalized terms used herein and not otherwise defined herein shall have the
meanings assigned to such terms in the Agreement), among FREUNDLICH SUPPLY
COMPANY, INC. (the “Borrower”) and ISRAEL
DISCOUNT BANK OF NEW YORK (the “Bank”), as
follows:

     

    (a)           attached
as Schedule 1
(or such other form as the Bank agrees to accept in connection with this
Agreement) hereto is a true and correct calculation of the Borrowing Base as of
the date set forth above; and

     

    (b)           the
Borrower has no reason to believe that the sum of the Total Outstandings as of
the date hereof would exceed the Borrowing Base if such Borrowing Base was
computed as of the date of this certificate; and

     

    (c)           as
of the date hereof, the Borrower has no knowledge of an Event of Default and
that no event that, with the giving of notice or lapse of time or both, will
constitute an Event of Default, has occurred and is continuing; and

     

    (d)          
the representations and warranties contained in the Agreement and in the other
Loan Documents are true and correct in all material respects on and as of the
date hereof with the same effect as if made on and as of the date
hereof;

     

    (e)           as
of the date hereof, the Borrower has no knowledge of a material adverse change
with respect to the business, operations, performance, assets, properties,
condition (financial or otherwise) or prospects (other than general economic
conditions).

     

    


     

    IN
WITNESS WHEREOF, the undersigned has caused this Certificate to be executed this
______________ day of ____, 20___.

     

    


    


     

                                                                                                  
FREUNDLICH SUPPLY COMPANY, INC.

     

    


     

    By:  ______________________________

    Name:

    Title:


    
      
         


      

      
        52

        
          

        

      

      
         


      

    


    SCHEDULE
1

    BORROWING
BASE CERTIFICATE

    


    TO:                      Israel
Discount Bank of New York

    


    
      FROM:                      FREUNDLICH
SUPPLY COMPANY, INC. ("Borrower")

    

    
      This
Collateral report as of  is submitted
pursuant to that certain Loan and Security Agreement between Borrower and Israel
Discount Bank of New York , the “Agreement”.

    

    


    1.           Total
Eligible Receivables & Reconciliation:                                                                                                                                           
Amount

    


    a.  Accounts Receivable (A/R)
from prior aging dated
____________                                                                                            
$__________

    
 

    b.  Add A/R created since
date of Prior Aging (Sales for
the
month)                                                                                          
+   $__________

    


    c.  Deduct reductions in A/R
since Prior Aging:

    i.           Collections                                                                                                                                                 
-    $__________

    ii.           Credit
Memos                                                                                                                                           
-    $__________

    iii.          Discounts
and
Allowances                                                                                                                     -   
$__________

    iv.          Other
Adjustments                                                                                                                                  
-    $__________

    


    d.   Total Current
Receivables (Current A/R aging
attached)                                                                                                                $

                                                                                                                                                                                                                                               
===========


    e.  Less Ineligible
Receivable                                                      

     Delinquent Accounts (> 90 days
from due date
)                                                                                             
-  $___________

    Cross-Aged                                                                                                                                                              
-  $___________

    Affiliates                                                                                                                                                                    -  $___________

    Foreign
A/R's                                                                                                                                                           
-  $___________

    Bill & Hold/ Pre-Billing (goods not
get
delivered)                                                                                             
-  $___________

    Concentration over
25%                                                                                                                                        
-  $___________

    Contras-$

                                  
All other
(chargebacks/disputes/insolvents/etc.)                                                                                               - 
$___________

    COD / Return of
Goods                                                                                                                                           - 
$___________

    Add:           
Unapplied Credits (add back credits <90 days, capped at O/S
>90)                                                           
+ $___________

    Less:          Credits
in Prior (subtract credits in >90 days, capped at O/S
<90)                                                               
- $___________

    


    
      	
               
      

            	
              f.  Total
      Ineligible
      Receivables                                                                                                                                                                   -
      $__________

            


    

    


    g.  Total Eligible
Receivables ( 1d less 1f
)                                                                                                                                               
$

                                                                                                                                                                                                                                                
==========


    


    2.           Eligible
Inventory:                                                                                                                                                                                                Amount

    


    Total Inventory (at the lower of cost
or market
value)                                                                                                         
$___________

    Add
back:    Pre-Billed Inventory (Cost
Value)                                                                                                  
+ $___________

    Add:            
Inventory under L/C not yet paid+$

    


    a.  Total
Inventory                                                                                                                                                                                          $

                                                                                                                                                                                                                                               
==========


    b.  Less Ineligible
Inventory

     

     

     

     

    
      
         

      

      
        53

        
          

        

      

      
         

      

    

     

    
 

    WIP                                                                                                                                                           
- $____________

                                                   
Slow Moving,
Obsolete                                                                                                                         
- $____________

    Outside the
U.S.                                                                                                                                      
- $____________

    Supplies, other
ineligibles                                                                                                                     
- $____________

    Inventory Reserve  
                                                                                                                               +
$____________

    


    c.  Total Ineligible
Inventory                                                                                                                                                                      - 
 $____________

    


    d.  Total Eligible Inventory
(2a less
2c)                                                                                                                                                        $

                                                                                                                                                                                                                                                  
============

    


    3.           Availability:

    


    a. 75% of line
1g.                                                                                                                                                                    
- $____________

    b. 50% of line 2d (capped at
$2,500,000)                                                                                                                             
+$____________

    


    c. Total Availability (3a plus
3b)                                                                                                                                                                  
$

                                                                                                                                                                                                                                                 
============

        (capped at
Maximum Credit of $3,000,000)

    


    4.           Debt:

    


    a. Outstanding Revolving Loan
Balance                                                                                                                             +$___________

    b. Outstanding Letters of
Credit                                                                                                                                          
+$___________

    c. Outstanding Standby Letters of
Credit                                                                                                                          
+$___________

    


    d. Total Debt (4a plus 4b plus
4c)                                                                                                                                                                 $

    (capped at Maximum Credit of
$3,000,000)                                                                                                                                                   
============

                                                                                                                                                                                                                                                



    5.           Net Availability (3c minus
4d)                                                                                                                                                                        $

                                                                                                                                                                                                                                                 
============


    The
Borrower, by and through its officer signing on its behalf below, certifies
that:

    1.  The
information set forth above as well as all representations and warranties of
Borrower to Lender set forth herein or in any of the Documents (as defined in
the Agreements) remain accurate and complete in all respects;

     

    2.  There
does not now exist an Event of Default (as defined in the Agreement) or an event
or condition which, with the giving of notice of passage of time, or both, would
be or become an Event of Default.

    


    FREUNDLICH
SUPPLY COMPANY, INC.

    


    


    By:                                                      

    Name:

    Title:                                                                                                                                                                 Dated:


    
      
         


      

      
        54

        
          

        

      

      
         


      

    


    EXHIBIT
E

    


    AGREEMENT REGARDING
INSTRUCTIONS GIVEN BY TELEPHONE,  FACSIMILE, EMAIL, TELEX AND
CABLE

    


    


    Israel
Discount Bank of New York

    511 Fifth
Avenue

    New York,
NY 10017

    


    


    From time to time in the course of its
business and banking relations, the undersigned borrower (“Borrower”), through
its officers and agents, may transmit to Israel Discount Bank of New York (“IDB
Bank”) instructions by telephone, facsimile, email, telex or cable
(collectively, the “Instructions”) regarding the Loan being extended
contemporaneously herewith, related loans and/or deposit accounts including,
without limitation, (a) IDB Bank’s acceptance or renewal of the time or savings
deposits of the undersigned; (b) the withdrawal or transfer of funds from
deposit accounts of the Borrower; (c) obtaining advances under the Loan or
additional loans; and (d) requesting issuance of letters of credit, including
amendments or waivers of discrepancies of such letters of
credit.  With regard to all such Instructions, the Borrower agrees,
pursuant to this instructions agreement (“Instructions Agreement”) as
follows:

    


    1.           IDB
Bank is under no obligation to accept such Instructions and, by accepting any
such Instructions in any instance, IDB Bank is under no obligation to accept
subsequent Instructions.

     

    


    2.           IDB
Bank is under no obligation to verify Instructions and IDB Bank may act upon
Instructions it believes to be given by anyone authorized to give
Instructions.

    


    3.           If
after receiving Instructions, IDB Bank determines in its sole judgment that (i)
IDB Bank cannot for any reason comply with or fulfill the Instructions, in whole
or in part; or (ii) the request is unclear or additional details or information
is required in order for IDB Bank to comply with the Instructions in whole or in
part, then IDB Bank may, in its sole discretion: (A) comply with or fulfill the
Instructions in part only or not at all; (B) delay in complying with or
fulfilling the Instructions in whole or in part until additional details or
information are received by IDB Bank; (C) take such other action as in IDB
Bank’s sole discretion it may deem advisable in order to give effect to the
Instructions as IDB Bank understands them.

    


    4.           Notwithstanding
any oral acceptance by any of IDB Bank’s employees of any Instructions, IDB Bank
may nevertheless, for any reason, including but not limited to commercial or
policy considerations or changes, reject such Instructions, in whole or in part,
whereupon IDB Bank shall be entitled, in its sole discretion, to comply with or
fulfill such Instructions in part only or not at all.

    


    5.           IDB
Bank shall not be liable for any damages (including special, consequential or
indirect damages) caused by any action taken or omitted to be taken by IDB Bank
in accordance with the terms of this Instructions Agreement, regardless of the
fact that such action or inaction arises from a misunderstanding, incorrect
transmission or multiple transmission of the same Instructions, IDB Bank’s
receipt of forged or fraudulent Instructions, or from improper identification of
the person giving the Instructions on the Borrower’s behalf.  Further,
IDB Bank shall not be liable for any damages caused by the manner of taking such
action, except for IDB Bank’s willful misconduct.

    


    6.           The
Borrower will indemnify and hold IDB Bank harmless from and against all loss or
damage to IDB Bank and any claims and actions against IDB Bank arising out of or
in connection with any Instructions given pursuant to this Instructions
Agreement, or any actions taken by IDB Bank or which IDB Bank refrains from
taking in connection therewith, and all costs and expenses, including without
limitation, attorney’s fees, incurred by IDB Bank in respect
thereof.

    


    7.           If
the undersigned comprises more than one person or entity, each of the
undersigned shall be jointly and severally liable hereunder.  This
Instructions Agreement shall be binding upon and shall inure to the benefit of
the Borrower and its successors and assigns, and IDB Bank and its successors and
assigns.

     

     

     

    
      
         

      

      
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     8.           The
Borrower acknowledges by signing below that the procedures utilized and
implemented in connection with this Instructions Agreement for accepting the
Instructions are reasonable and acceptable security procedures for the types of
activities contemplated.

    


    9.           This
Instructions Agreement shall be interpreted and all the rights and obligations
arising hereunder shall be determined, in accordance with the laws of the State
of New York, United States of America and the parties agree that in any
litigation in which they shall be adverse parties, to WAIVE TRIAL BY JURY and
that the exclusive location for jurisdiction and venue for the resolution of any
disputes arising hereunder shall be either the State or Federal Court located in
New York, NY.

    


    


    
      	
               
      

            	
              Date:  March
      ____, 2008

            


    

    


     

    FREUNDLICH
SUPPLY COMPANY, INC.

     

    


     

    


    By:                                                                           

    Andrew Prince, President and Chief
Executive Officer


    
      
         


      

      
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    EXHIBIT
F

     

    SUBORDINATION
AGREEMENT

     

    


    THIS
SUBORDINATION AGREEMENT (this “Agreement”) made this
_____ day of March, 2008 between FREUNDLICH SUPPLY COMPANY, INC., a New York
corporation (“Debtor”), and
NIGHTWIND CORP., and its successors and assigns (“Creditor” or “Creditors”), a
corporation organized and existing under the laws of the State of
__________________________ and having offices at
_____________________________________________________________________________.

    


    In order
to induce ISRAEL DISCOUNT BANK OF NEW YORK (hereinafter called the “Bank”), from time to
time, to extend credit to Debtor, and in consideration of advances, loans,
discounts, extensions of credit or renewals, heretofore or hereafter made to or
in reliance upon the obligations of, Debtor by the Bank, and of the acquisition
by the Bank, heretofore or hereafter, of notes or other instruments for payment
of money and any security agreements relative thereto, or conditional contracts
of sale, chattel mortgages, leases or other liens or security agreements
heretofore or hereafter made by Debtor, or an interest or participation therein
as the Bank may have deemed or may deem advisable and for other good and
valuable consideration, the parties do hereby agree, jointly and severally, as
follows:

    


    1.           That
all claims and demands and all interest accrued or that may hereafter accrue
thereon (except those representing bona fide claims for current and future
salaries due Creditors as an officer or employee of Debtor) which Creditors now
has or may hereafter have or acquire against Debtor (including the Subordinated
Loan described below) (the same being hereafter called “Claims”) are hereby
subordinated to any obligations (as hereinafter defined) owed to the Bank and
such Claims shall not be payable, and that no payment on account thereof, nor
any security therefore, shall be received, accepted or retained by Creditors,
unless and until Debtor has paid and satisfied in full all of its obligations
and liabilities to the Bank of every kind and description, whether or not
represented by negotiable instruments or other writings, whether direct or
indirect, absolute or contingent, due or not due, secured or unsecured,
original, renewed or extended, now in existence or hereafter incurred,
originally contracted with the Bank alone or with another or others, and
assigned or transferred to or otherwise acquired by the Bank, or in which the
Bank may acquire a participation, and whether contracted by Debtor alone or
jointly and/or severally with another or others (all of which are hereafter
referred to as “Obligations”).  Debtor
agrees not to make payment of, or give any security for, said Claims to
Creditors.  Notwithstanding the foregoing, until
a default occurs under any of the Obligations or until written notice from the
Bank to Debtor, Debtor may pay and Creditor may receive, accept and retain,
the quarterly
installments of $75,000.00 owing to Creditor in connection with that certain
subordinated loan by Creditor to the Debtor (“Subordinated Loan”), provided that: (i) no
Default or Event of Default exists under the Loan and Security Agreement between
the Debtor and the Bank; (ii) the Borrower is in compliance with the minimum
capital funds requirement set forth in Section 6.8 of the Loan and Security
Agreement; and (iii) Creditor has entered into this Subordination
Agreement.

    


    2.           Should
any payment or distribution or collateral security or proceeds of any collateral
security be received or collected by Creditors for or on account of said Claims,
prior to the satisfaction of all of said Obligations, Creditors will forthwith
deliver same to the Bank in precisely the form received (except for such
Creditor's endorsement where necessary), for application on account of said
Obligations, and Creditors agree that until so delivered, same shall be deemed
received by each Creditor as an agent for the Bank and shall be held in trust by
Creditors as the property of the Bank. In the event of the failure of any
Creditor to endorse any instrument for the payment of money so received by such
Creditor, payable to such Creditor’s order, the Bank, or any officer or employee
thereof, is hereby irrevocably constituted and appointed attorney in fact for
Creditors with full power to make any such endorsement and with full power of
substitution.

     

     

     

    
      
         

      

      
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    3.           Creditors
represent and warrant to the Bank that each Creditor is solvent and has granted
no security interest in, and has made no prior transfer or assignment of, said
Claims, and the Creditors will grant no security interest therein and will not
transfer or assign said Claims (except to the Bank) unless and until Debtor has
paid and satisfied said Obligations.

    


    4.           Creditors
and Debtor represent to Bank that Debtor now owes each Creditor the principal
sum of Three Hundred and
Seventy Five Thousand Dollars ($375,000.00), without counterclaim,
defense or offset and that said indebtedness is not represented by any
negotiable instruments or other writings, except such negotiable instruments or
other writings, if any, as have been endorsed and/or assigned and delivered by
Creditor to the Bank simultaneously with the execution of this
agreement.  Creditors and Debtor further agree that at no time
hereafter will any part of said indebtedness be represented by any negotiable
instruments or other writings, except such negotiable instruments or other
writings, if any, as the Bank shall request to be executed and delivered to it
for the purpose of evidencing said indebtedness or any part thereof, and in that
case negotiable instruments or other writings shall either be payable to the
Bank or delivered to the Bank or, if payable to any Creditor, shall be endorsed
and/or assigned by such Creditor and delivered to the Bank.  In the
event of the failure of Creditors to endorse said negotiable instruments or
other writings, if payable to such Creditor or to Creditor's order, the Bank, or
any officer or employee thereof, is hereby irrevocably constituted and appointed
attorney in fact for Creditors with full power to make such
endorsement.

    


    5.           Creditors
waive any and all notice of the acceptance of this Agreement and of the creation
or accrual of any said Obligations, or of any renewals or extensions thereof
from time to time, or of the reliance of the Bank on this Agreement, and
consents that the liability of Debtor or of any other party for or upon said
Obligations may, from time to time, in whole or in part, be renewed, extended,
modified, accelerated, compromised, settled or released by the Bank, and that
any collateral security and liens for said Obligations may, from time to time,
in whole or in part, be renewed, extended, modified, accelerated, compromised,
settled or released by the Bank, and that any collateral security and liens for
said Obligations may, from time to time, in whole or in part, be exchanged,
sold, released or surrendered by the Bank, and that any deposit balance or
balances to the credit of Debtor with the Bank may, from time to time, in whole
or in part, be surrendered or released by the Bank, all as the Bank may deem
advisable, and all without impairing the subordination contained in this
Agreement.

    


    6.           Creditors
and Debtor agree that if, after the satisfaction of all of said Obligations and
prior to the termination of this Agreement as hereinafter provided, Debtor
thereafter becomes liable to the Bank on account of any new Obligations, the
Bank may presume that Claims have not been paid nor reduced, nor has any
Creditor received any security therefore, and this Agreement of subordination
and security agreement shall thereupon become effective with respect to any
Claims then in existence or thereafter created, without the necessity of any
further act, agreement or writing by or between Creditors or Debtor or the Bank,
the intent being that this be a continuing agreement of subordination and
security agreement.  Additionally, should Creditors have received any
payment or security on account and before the termination of this Agreement as
hereinafter provided, Creditors will notify the Bank, in writing, of the receipt
thereof.  In the event that Creditors fail if a default occurs with
respect to the payment or performance of any of the terms of such new
Obligations, Creditors will immediately pay to the Bank an amount equivalent to
any such payment or the value of such security received.

     

     

    
      
         

      

      
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    7.           This
Agreement shall continue in full force and effect notwithstanding the death or
incapacity of Creditors and shall be binding upon each Creditor and such
Creditor’s estate and the personal representatives, heirs and successors and
assigns of each Creditor, and the Bank may continue to act in reliance upon this
Agreement until actual receipt by the Bank of written notice from such Creditor,
or, in the event of Creditor’s death, from the legal representative or
representatives of such deceased Creditor, of the termination of this
Agreement.  Creditor or Creditor’s estate shall nevertheless remain
bound hereunder with respect to such obligations and any renewals, extensions or
liabilities arising out of same and this Agreement shall continue in full force
and effect and the Bank shall have all of the rights herein provided for as if
no such termination had occurred.

    


    8.           Debtor
hereby agrees that it will render to the Bank, upon demand, from time to time, a
statement of the account of each Creditor with Debtor; that the Bank shall have
access, from time to time, to its books and records in order that the Bank may
make full and free examination of the state of the accounts of each Creditor
with Debtor, (with the right to make copies thereof); and that Debtor will duly
comply with and perform each and every term of this Agree­ment on its part
required to be performed.  Debtor and Creditors agree that their books
and records will appropriately show that said Claims are subject to this
Agreement of subordination and security agreement.

    


    9.           In
the event of a breach by either Debtor or a Creditor in the performance of any
of the terms of this Agreement, all of said Obligations to the Bank shall,
without notice or demand, become immediately due and payable.  Upon
the happening of any such event and at any time thereafter, the Bank shall have,
in addition to all other rights and remedies, the remedies of a secured party
under the Uniform Commercial Code.

    


    10.           It
is understood and further agreed by all of the parties hereto and by the Bank
that this Agreement shall supersede and take the place of any and all prior
agreements of subordination and/or assignment relating to said Claims executed
by Debtor and Creditors in favor of the Bank.

    


    11.           Creditors
and Debtor, in any litigation (whether or not arising out of or relating to said
Claims or any of the matters contained in this Agreement) in which the Bank and
Creditors and/or Debtor shall be adverse parties, WAIVE TRIAL BY JURY and
Creditors and Debtor in addition, waive the right to interpose any defense based
upon any Statute of Limitations or any claim of laches and any set-off or
counterclaim of any nature or description.  Creditors and Debtor agree
that whenever any attorney is used to collect or enforce Claims, or to enforce,
declare or adjudicate any rights of Obligations under this agreement, whether by
suit or by any other means whatsoever, an attorney’s fee of 15% of the principal
and interest then due on Claims shall be payable by each of Creditors or Debtor
against whom this agreement, or any Obligation or right hereunder, is sought to
be enforced, declared or adjudicated.

     

     

     

     

    
      
         

      

      
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    12.           The
term “Debtor” or the terms “Creditor” or “Creditors” as used throughout this
instrument shall include the individual or individuals, association, partnership
or corporation named herein as Debtor or Creditors and (a) any successor
individual or individuals, associa­tion, partnership or corporation to which
all or substantially all of the business or assets of either of them shall have
been transferred; (b) in case of a partnership Debtor or Creditors, any general
or limited partnership which shall have been created by reason of, or continued
after dissolution, the admission of any new partner or partners therein, or the
death, resignation, or other withdrawal of any partner, and (c) in the case of a
corporate Debtor or Creditors, any other corporation into or with which either
Debtor or Creditors shall have been merged, consolidated, reorganized or
absorbed.

    


    13.           No
waiver shall be deemed to be made by the Bank of any of its rights hereunder
unless same shall be in writing, and each waiver, if any, shall be a waiver only
with respect to the specific instance involved, and no such waiver shall be
deemed to establish a course of conduct.

    


    14.           This
Agreement may not be changed orally and no executory agreement shall be
effective to change or modify or to discharge, in whole or in part, this
Agreement unless such executory agreement is in writing and is signed by the
Bank.

    


    15.           Any
notice to the Bank shall be deemed effective only if sent to and received by the
Bank at its address at 511 Fifth Avenue, New York, NY 10017.  Any
notice to Creditors or Debtor shall be deemed sufficient if sent to Creditor or
Debtor to the last known address of Creditors or Debtor, as the case may be,
appearing on the records of the Bank.

    


    16.           Any
provision hereof which may prove unenforceable under any law shall not affect
the validity of any other provision hereof.

    


    17.           This
Agreement shall be binding upon the undersigned and the legal representatives,
successors and assigns of the undersigned and shall be governed by and construed
in accordance with the laws of the State of New York.

    


    IN
WITNESS WHEREOF, each of the undersigned has caused these presents to be
properly executed in one or more counterparts the day and year first above
written, intending and declaring this to be a duly sealed
instrument.

    


    


    DEBTOR:                                                                                                                                                                                                     CREDITOR:

    


    FREUNDLICH
SUPPLY COMPANY,
INC.                                                                                                                                          NIGHTWIND
CORP.

    


    


    By:
_________________________________________                                                                                                                By________________________

    Andrew
Prince, President and Chief Executive
Officer                                                                                                                        Name:

                  Title:

    


     

     

    
      
         

      

      
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    ACCEPTED:

    


    ISRAEL
DISCOUNT BANK OF NEW YORK

    


    


    By:
_________________________________

    Leon Terrano, Senior Vice
President

    


    


    By:
_________________________________

    Name:

    Title:

     

     

     

     

     

     

     

     

     

     

     

     

     

    
 

    
      
         


      

      
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    ACKNOWLEDGMENT
OF DEBTOR

    (Freundlich
Supply Company, Inc.)

    


    STATE
OF NEW
YORK                                                      )

    ) ss.:

    COUNTY
OF                                
_______________   )

    


    On the ______ day of
___________________, 2008, before me, the undersigned, personally appeared
_________________________________, personally known to me or proved to me on the
basis of satisfactory evidence to be the individual(s) whose name(s) is (are)
subscribed to the within instrument and acknowledged to me that he/she/they
executed the same in his/her/their capacity(ies), and that by his/her/their
signature(s) on the instrument, the individual(s), or the person(s) on behalf of
which the individual(s) acted, executed the instrument.

    


    


    


    _____________________________

    Name:

    Address:

    Notary
Public, State of ____________

    My
Commission Expires ____ / _____ / ____

    


    


    


    ACKNOWLEDGMENT
OF CREDITOR

    (Nightwind
Corp.)

    


    STATE
OF NEW
YORK                                                      )

    ) ss.:

    COUNTY
OF                                
_______________   )

    


    On the ______ day of
___________________, 2008, before me, the undersigned, personally appeared
_________________________________, personally known to me or proved to me on the
basis of satisfactory evidence to be the individual(s) whose name(s) is (are)
subscribed to the within instrument and acknowledged to me that he/she/they
executed the same in his/her/their capacity(ies), and that by his/her/their
signature(s) on the instrument, the individual(s), or the person(s) on behalf of
which the individual(s) acted, executed the instrument.

    


    


    


    _____________________________

    Name:

    Address:

    Notary
Public, State of ____________

    My
Commission Expires ____ / _____ / ____

    


    



    
      
         


      

      
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