ex4-1.htm


     

     

     
      
        

      

    

    
       

       

      Exhibit
        4.1

      

 

    

    LOAN
      AGREEMENT

    


    


    This
      Loan
      Agreement is made and entered into as of the ____day of      December     ,
      2007, by and between FAAC
      INCORPORATED, a Michigan corporation (the “Borrower”), and KEYBANK NATIONAL ASSOCIATION,
      a national banking association (hereafter the “Bank”).

    


    W
      I T N E S S E T H:

    


    WHEREAS,
      the Borrower has requested and the Bank has agreed to provide a credit facility
      to Borrower; and

    


    WHEREAS,
      the Bank and the Borrower desire to evidence the credit facility in accordance
      with the terms, conditions and covenants as hereinafter set forth;

    


    NOW,
      THEREFORE, in consideration for the mutual promises and covenants described
      below, and for other good and valuable consideration, the receipt and
      sufficiency of which is hereby acknowledged, the parties agree as
      follows:

    


    
      	
              1.  

            	
              Definitions.  As
                used in this Agreement, the terms listed below are defined as
                follows:

            


    

    


    1.1           
      The term “Adjusted Tangible Capital” means Tangible Capital less investments in,
      advances to, promissory notes and any receivables from any affiliate or other
      Related Party of  Borrower.

    


    1.2           
      The term “Bank Affiliate” means any entity which is a subsidiary or
      affiliate

    of
      the
      Bank, including without limitation Key Equipment Finance.

    


    1.3           
      The term "Borrower" means FAAC Incorporated, a Michigan
      corporation.

     

    1.4           
      The term “Borrowing Base Formula” means the lesser of the note amount of
      $7,500,000 or the formula used to calculate the amount of available credit
      for
      Borrower under the Loan.  The available credit under the Borrowing
      Base Formula shall be calculated as follows:  85% of Eligible Accounts
      Receivable plus
      50% of Unbilled Accounts Receivable up to $1,500,000, plus 40% of Eligible
      Inventory, less
      Borrower’s obligations under outstanding Letters of Credit.  The
      collateral and credit used to calculate the Borrowing Base Formula are described
      in the Borrowing Base & Compliance Certificate which attached as Exhibit
      1.

     

    1.5           
      The term “Collateral” means all of the personal property and interests now or
      hereafter pledged as security for the Indebtedness.

     

    1.6           
      The term “C.P.A.” means a firm of independent certified public accountants
      selected by Borrower and reasonably acceptable to the Bank.

     

    


    
      
        
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    1.7           
      The term “Domestic U.S. Assets” means all tangible personal property physically
      located within the United States and any of its territories as well as all
      intangible personal property interests, wherever located, payable or to be
      performed within the United States or otherwise subject to the laws and the
      jurisdiction of the United States.

     

    1.8           
      The term “Domestic Related Party” means each Related Party which is an entity
      organized and existing under the laws of the United States.

     

    1.9           
      The term “EBITDA” means the net earnings of Borrower plus the aggregate amounts
      deducted in determining such net income in respect of interest expenses, taxes,
      depreciation and amortization; but not, however, giving effect to extraordinary
      losses or gains in calculating net income.

     

    1.10           The
      term “Eligible Accounts Receivable” shall mean all accounts receivable of
      Borrower outstanding less than 90 days, but not including any accounts
      receivable from any Related Parties or from any foreign companies or
      entities.

     

    1.11           The
      term “Eligible Inventory” shall mean the cost of Borrower’s inventory (but not
      including work in process).

     

    1.12           The
      term “Environmental Laws” means any federal, state or local law or ordinance
      regulating or in any way relating to Hazardous Materials, including without
      limitation, the Comprehensive Environmental Response Compensation and Liability
      Act (“CERCLA”).

     

    1.13           The
      term “Event of Default” means the occurrence and continuance of any one or more
      of the events set forth in Section 7 of this Loan Agreement.

     

    1.14           The
      term “GAAP” means generally accepted accounting principles.

     

                  
      1.15           The term
“Guarantor” means any person or entity, now or hereafter providing an unlimited
      or limited guaranty of all or a portion of the Indebtedness.

     

    1.16           The
      term “Hazardous Materials” means any hazardous substance, pollutant, contaminant
      or chemical of any kind or nature as defined under or included in any federal,
      state or local environmental law or ordinance including but not limited to
      the
      Comprehensive Environmental Response Compensation and Liability Act
      (“CERCLA”).

     

    1.17           The
      term “Indebtedness” means: (A) all repayment and other obligations of the
      Borrower under the credit facility included in this Loan Agreement and any
      modifications, amendments, renewals, or extensions thereof; and (B) all other
      obligations of the Borrower to the Bank in connection with any other loans
      or
      agreements whatsoever between or including both the Borrower and the Bank,
      whether now existing or hereafter arising; and (C) all obligations of the
      Borrower to any Bank Affiliate.

     

    


    
      
        
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1.18           The
      term “Junior Liens” means liens on the assets of any Domestic Related Party,
      which lien is expressly subordinated to any liens in favor of the Bank and
      which
      secures only Subordinated Debt.

     

    1.19           The
      term “Letters of Credit” means any Letter of Credit issued by the Bank on behalf
      of Borrower or any Related Party.  Borrower acknowledges that during
      the term of this Loan, the aggregate amount outstanding for letters of credit
      shall not exceed $800,000.

     

    1.20          
      The term “Permitted Liens” means purchase money security interests in equipment
      or other capital assets purchased by Borrower where the total aggregate
      indebtedness to vendors secured by such liens does not exceed Five Hundred
      Thousand Dollars ($500,000) at any time outstanding.

     

    1.21           The
      term “Prime Rate” means the “prime rate” of the Bank as announced at its offices
      in Cleveland, Ohio.

     

    1.22          
      The term “Related Loan Documents” means all documents, including this Loan
      Agreement, evidencing, securing, or in any way related to any of the
      Indebtedness, whether such documents have been, are now or are hereafter
      executed and/or delivered together with any renewals, amendments or
      modifications thereof, including without limitation all such documents executed
      and delivered in accordance with the terms and conditions of or in any way
      related to this Loan Agreement.

     

    1.23         
      The term “Related Party” means any person (including corporations, limited
      liability companies and partnerships), that is an owner of Borrower, or
      affiliate of  Borrower, including without limitation those companies
      identified in attached Exhibit 2.

     

    1.24          The
      term “Subordinated Debt” means indebtedness and liabilities of Borrower, which
      have been subordinated by written agreement to indebtedness owed by Borrower
      to
      the Bank in form and substance reasonably acceptable to the Bank.

     

    1.25          The
      term “Tangible Capital” means Tangible Net Worth plus Subordinated
      Debt.

     

    1.26          The
      term “Tangible Net Worth” means Borrower’s total assets excluding all intangible
      assets (i.e. goodwill, trademarks, patents, copyrights, organizational expenses
      and other similar intangible items, but including leaseholds and leasehold
      improvements) less Total Debt.

     

    1.27          The
      term “Total Debt” means all of Borrower’s liabilities including Subordinated
      Debt.

     

    1.28          The
      term “Total Funded Debt” means the sum without duplication for Borrower and/or
      any of its subsidiaries of (i) all indebtedness for borrowed money, whether
      maturing in less than or more than one year plus (ii) all
      bonds,
      notes, debentures, or similar debt instruments plus (iii) all
      capitalized lease obligations plus (iv) the
      present
      value of all basic rental obligations under any synthetic lease.

    


    
      
        
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          1.29          The
      term “Total Senior Liabilities” means total liabilities less Subordinated
      Debt.

     

    1.30          The
      term “Unbilled Accounts Receivable” means Borrower’s cost of all work in process
      of Borrower.

     

    2.           
      Loans.  Upon
      the terms and conditions set forth herein, the Bank has extended to the Borrower
      the following credit facilities:

    


    2.1           
      Revolving Line of
      Credit Loan.

    


    2.1.1                      
      Purpose.  In
      order to provide funds for the Borrower’s working capital needs, the Bank has
      agreed to make available a revolving line of credit loan to Borrower in the
      original principal amount of up to Seven Million Five Hundred Thousand Dollars
      ($7,500,000) (the “Revolving Line of Credit Loan”).   Borrower
      and the Bank expressly acknowledge and agree that the Revolving Line of Credit
      Loan incorporates the currently outstanding balances under the existing
      revolving credit facility of up to Five Million Dollars ($5,000,000) together
      with the Working Capital Line of Credit Loan of up to One Million Dollars
      ($1,000,000), and that both such facilities are herewith
      extinguished.

     

    2.1.2                      
      Repayment of
      Advances.  The Revolving Line of Credit Loan shall be evidenced
      by a promissory note of even date herewith in the original principal amount
      of
      up to Seven Million Five Hundred Thousand Dollars ($7,500,000) (the “Revolving
      Line of Credit Note”).   Interest shall accrue on the Revolving
      Line of Credit Note at one-quarter of one percent (0.25%) in excess of the
      Prime
      Rate.  Commencing on the 31st
      day of
      January, 2008, and on the same day of each quarter thereafter, Borrower shall
      make payments of interest only; provided, however, that the entire unpaid
      principal balance together with all accrued interest shall be due and payable
      in
      full on December 31, 2009.

     

    
      	
              2.1.3

            	
              Disbursements.  The
                obligation of the Bank to disburse any advances under the Revolving
                Line
                of Credit Note shall be subject to each of the following conditions
                as
                determined by the Bank in its sole and absolute discretion:
                

            


    

     

    
      	
               

            	
              A.

            	
              As
                of the date of the making of such advance, no Event of Default shall
                then
                exist; 

            


    

     

    
      	
               

            	
              B.

            	
              The
                Borrower and any Guarantor shall have performed or be in compliance
                with
                all agreements and conditions con­tained in this Agreement and any
                other Related Loan Documents. 

            


    

     

    
      	
               

            	
              C.

            	
              The
                representations and warranties contained in Section 4 and covenants
                in
                Section 5 of this Agreement shall be true in all material respects
                as of
                the date of making such advance; 

            


    

     

    


    
      
        
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              D.

            	
              Immediately
                after the advance, all outstanding balances under the Revolving Line
                of
                Credit Note shall not exceed the amount authorized under the Borrowing
                Base Formula, and in any event, the outstanding balance shall not
                be
                greater than the note amount. 

            


    

     

    E.           
      No material adverse change shall have occurred and be continuing in the
      condition of the Borrower or Borrower’s financial affairs or
      business.

    


    F.           
      The proposed purpose of the advance is reasonably acceptable to the
      Bank;

    


    G.           
      The Borrower has the ability to repay the advance and all other Indebtedness
      of
      the Borrower to the Bank.

    


    
      	
              2.1.4

            	
              Fees.  Commencing
                on December 31, 2008 and on the same day of each year thereafter,
                Borrower
                shall pay the Bank a fee for the unused portion of the credit
                facility  in the amount of 37 basis points (0.37%) of the amount
                of such unused portion. 

            


    

    


     3.  Security
      and Support for
      Indebtedness.  As security and support for all of the
      Indebtedness, the Borrower has provided and will continue to provide the Bank
      with a security interest in all of the following assets of
      Borrower:

    


    3.1  Borrower’s
      Business
      Assets.  A first priority security interest in all
      personal  property of Borrower, whether now owned or hereafter
      acquired, and wherever located including, without limitation: all inventory,
      machinery, fixtures and equipment accounts, accounts receivable, contract
      rights, documents, chattel paper, instruments, and general intangibles, together
      with all replacements thereof, attachments, accessories, parts, equipment,
      tools
      and proceeds of any and all of the foregoing property (including without
      limitation all insurance proceeds).   The foregoing security
      interest will be evidenced by a security agreement given by Borrower to the
      Bank
      dated as of even date herewith.

    


    
      	
               

            	
              3.2
                Guaranties.   As
                further support for the Indebtedness, the joint and several unlimited
                guaranties of Arotech and all of the other Related Parties.  The
                guaranty of each Domestic Related Party shall be secured by a first
                priority security interest in all Domestic U.S. Assets of such Domestic
                Related Party. 

            


    

     

    4.           
      Representations
      and
      Warranties of Borrower.  The Borrower hereby represents and
      warrants to the Bank as follows:

    


    
      	
              4.1

            	
              Organization
                and Good
                Standing.   Borrower is duly organized, validly
                existing and in good standing under the laws of the State of Michigan,
                and
                has all requisite power and authority to own properties and conduct
                business in the manner which such business is presently conducting.
                

            


    

     

     

    


    
      
        
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              4.2

            	
              Capacity
                Authorization, Enforceability.


            


    

     

    4.2.1                      
      Borrower has full power and authority to execute and deliver the Related Loan
      Documents, and to perform all of the terms and provisions thereof. The execution
      and delivery and performance by the Borrower of the Related Loan Documents
      has
      been duly authorized by all necessary organizational or other action and does
      not and will not: (a) violate its Articles of Incorporation or any provision
      of
      any agreement to which it is a party or is subject; or (b) result in a breach
      of
      or constitute a default under, any indenture, loan, credit agreement or other
      instrument to which it is a party or by which it is bound. Borrower is not
      in
      default in the payment, performance, observance or fulfillment of any other
      material obligation, covenant or condition of any loan, credit agreement or
      other contract or agreement.

     

    4.2.2                      
      The persons who execute the Related Loan Documents for Borrower are duly and
      properly in office and are fully authorized to execute the same.

     

    4.2.3                      
      The Related Loan Documents have been duly executed and delivered by the Borrower
      and each Guarantor, where indicated, and constitute legal, valid and binding
      obligations of the Borrower and Guarantor, fully enforceable against the
      Borrower and each Guarantor in accordance with their respective terms except
      (a)
      as such enforceability may be limited by bankruptcy, insolvency, reorganization
      or similar laws affecting creditors’ rights generally, (b) as such
      enforceability may be limited by the application of general principles of equity
      and similar principles, including, without limitation, concepts of materiality,
      reasonableness, unconscionability, good faith and fair dealing, (c) that waivers
      of jury trial may be limited under public policy, and (d) that the remedy of
      specific performance and injunctive and other forms of equitable relief may
      be
      subject to equitable defenses and to the discretion of the court before which
      any proceeding therefor may be brought.

     

    4.2.4                      
      The borrowings hereunder by the Borrower, the assignments and grant of security
      given by the Borrower, and the execution, delivery and performance by the
      Borrower of the Related Loan Documents is given for full and valuable
      consideration to Borrower and serves a lawful purpose.

     

    
      	
              4.3

            	
              Financial
                Statements
                and Business Condition.  The Borrower represents and
                warrants to the Bank that all of the financial statements heretofore
                provided to the Bank fairly and accurately represent the financial
                condition of the Borrower as of the date thereof.
                

            


    

     

    
      	
              4.4

            	
              Tax
                Returns.  The Borrower has filed all tax returns required
                to have been filed (or extensions permitted by law have been
                obtained).  The Borrower has paid all material taxes, including
                interest and penalties, known to be due and payable by it, and has
                no
                knowledge of any proposed material tax assessments or tax liabilities
                which have not been adequately provided for.  No material income
                tax liability has been asserted by the Internal Revenue Service against
                the Borrower for taxes in excess of those already paid.
                

            


    

     

    

      
        
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              4.5

            	
              Outstanding
                Indebtedness.  Except as identified in the financial
                statements provided to the Bank, the Borrower has no material outstanding
                indebtedness for money borrowed or any obligations incurred as a
                lessee of
                goods or services under leases that, in accordance with SFAS 13 or
                GAAP,
                should be reflected on Borrower's balance sheet.
                

            


    

     

    
      	
              4.6

            	
              Litigation.  There
                are no actions, suits or proceed­ings pending or, to the best of the
                knowledge of Borrower, threatened against the Borrower, and the Borrower
                is not in default with respect to any order, writ, injunction or
                decrees
                applica­ble to the Borrower. 

            


    

     

    
      	
              4.7

            	
              Full
                Disclosure.  To the best of Borrower's knowledge after
                due investigation, no information, financial statement, exhibit or
                written
                report furnished to the Bank by or on behalf of the Borrower in connection
                with the negotia­tion with this Agreement and the transactions
                contemplated hereby contains any material misrepresentation of fact
                or
                omits to state a material fact necessary to make the state­ments
                contained therein not misleading.  There is no fact or
                circumstance known to the Borrower which has, or as to which the
                Borrower
                knows will have, in the presently foreseeable future, a material
                adverse
                effect on the earnings, affairs, or financial condition of the Borrower,
                or of the material properties of the Borrower, which fact or circumstance
                has not been set forth herein or in any financial statements, certificate,
                report, opinion or other statement heretofore made or furnished by
                or on
                behalf of the Borrower to the Bank in connection with the transactions
                described herein. 

            


    

     

    
      	
              4.8

            	
              Sole
                Ownership of
                Collateral.  The Borrower is the sole owner of the
                Collateral pledged by Borrower pursuant to this Loan Agreement and
                except
                for the Permitted Liens, no other persons have any interest whatsoever
                in
                the Collateral. 

            


    

     

    4.9           
      ERISA.  To
      the best of Borrower's knowledge after due investigation, the Borrower has
      not
      incurred any "accumulated funding deficiency" within the meaning of the
      Employment Retirement Income Security Act of 1974 as amended ("ERISA") with
      respect to any employment benefit plan or other plan maintained by the Borrower
      which is covered by Title IV of ERISA.  The Borrower has not incurred
      any material liability to the Pension Benefit Guaranty Corporation, and no
      reportable event (as defined in Title IV of ERISA) has occurred (or which with
      notice or lapse of time or both will occur) with respect to any such
      plan.

     

    5.           
      Covenants.

    


    5.1           
      Affirmative
      Covenants.  So long as any portion of the Indebtedness
      remains unpaid or the Bank is committed to make loans to the Borrower
      hereunder, and unless the  Bank otherwise consents in writing in
      advance, the Borrower shall abide by each of the following covenants and
      agreements:

    


                  5.1.1
      Access to
      Records/Inspection.  The Borrower shall keep accurate records
      and books of account reflecting all of its financial transactions, in which
      complete entries shall be made in accordance with GAAP consistently
      applied.  Such books and records shall be available to the Bank for
      its inspection during regular business hours and upon reasonable advance
      notice.  Borrower shall permit

    


    


    
      
        
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employees or agents of the Bank at any
      reasonable time to inspect any and all Collateral.  If Borrower now or
      at any time hereafter maintains any records, including without limitation
      computer generated records and computer software programs for the generation
      of
      such records, in the possession of the third party, upon request of the Bank,
      Borrower shall notify such party to permit the Bank free access to such records
      at reasonable times and upon reasonable advance notice, and to provide the
      Bank
      with copies of any records it may request, all at Borrower’s expense.

     

    5.1.2  Change
      in Name or
      Location.  The Borrower shall notify the Bank in writing at
      least thirty (30) days in advance of any changes in location of the principal
      place of business or of any proposed change of the corporate name by
      Borrower.

     

               
       5.1.3  Compliance with
      Laws and
      Regulations.  The Borrower shall at all  times
      promptly comply with any and all federal, state and local laws, ordinances,
      regulations, rules or requirements of any kind or nature, and shall keep the
      Collateral free of any lien imposed pursuant to such laws; provided, however,
      that the foregoing covenant shall be deemed in compliance when the Borrower
      shall in good faith contest the interpretation or enforcement of any of the
      foregoing, and the Bank believes in its sole and absolute discretion that
      compliance  with such enforcement will not have a material adverse
      affect on the financial condition of the Borrower.  If requested by
      the Bank, Borrower shall provide the Bank with additional collateral security
      reasonably acceptable to the Bank pending resolution to the
      dispute.

     

    5.1.4  Deposit
      Accounts.  The Borrower shall maintain all primary deposit
      accounts with the Bank.

     

    5.1.5   Fees
      and
      Expenses.  The Borrower hereby agrees to promptly pay all
      reasonable costs and expenses of the Bank’s counsel in connection with the
      negotiation, preparation and execution of all Related Loan Documents, and to
      promptly pay all other reasonable costs and expenses incurred in connection
      with
      perfection of all security instruments evidenced thereby, all appraisals,
      recording fees and any other reasonable out-of-pocket costs and expenses now
      and
      hereafter incurred by the Bank in connection with these credit facilities
      together with any amendments thereto.

     

    5.1.6  First
      Lien on
      Collateral.  The Borrower warrants and represents that except
      for the Permitted Liens, the liens on the Collateral granted to the Bank as
      provided in this Agreement constitute a first lien on all of the Collateral,
      and
      Borrower shall at any time requested, immediately execute and deliver to the
      Bank for the benefit of the Bank all security agreements, financing statements,
      assignments and other documents or instruments, and all supplements and
      amendments thereto, and continuation statements thereof, and take such other
      actions as the Bank deems reasonably necessary in order to maintain the same
      priority liens on all of the Collateral given by the Borrower as
      security.

     

    5.1.7  Maintenance
      of Existence and
      Qualification.  Borrower shall at all times maintain its legal
      standing within the State of Michigan, and its qualification to

    


    
      
        
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    transact
      business in good standing in all jurisdictions where the nature of its assets
      owned or leased or the conduct of its business operations requires such
      qualification.

     

    5.1.8  Maintenance
      of
      Insurance.  The Borrower shall at all times maintain insurance
      covering such risks as is customarily carried by businesses similarly situated
      and in such amounts, and with such companies and including such cancellation
      notice provisions as are commercially reasonable and customary and otherwise
      reasonably acceptable to the Bank.  All insurance coverages with
      respect to property of the Borrower which constitutes Collateral for the loans
      evidenced hereunder shall name the Bank, as loss payee, as its interest appears
      or as the Bank shall otherwise designate.  The Borrower shall promptly
      provide the Bank with such evidence of insurance coverage as the Bank shall
      request from time to time.

     

    5.1.9  Notice
      of
      Default.  The Borrower shall promptly, upon becoming aware,
      notify the Bank in writing of the occurrence of any Event of Default, specifying
      in connection with such notification all actions proposed to be taken to remedy
      such circumstance.

     

    5.1.10  Notice
      of Material
      Litigation.  The Borrower shall promptly, upon becoming aware
      of the existence thereof, notify the Bank in writing of the institution of
      any
      material litigation or legal proceeding involving the Borrower.  For
      purposes of this Section 5.1.10 only, the term "material" shall mean an amount
      greater than Fifty Thousand Dollars ($50,000).

     

    5.1.11  Notice
      of Loss of Property
      by Fire, Theft or Other Destruction.  The Borrower shall
      promptly, upon becoming aware of the existence thereof, notify the Bank in
      writing of any loss to the Collateral by fire or any other manner of
      destruction.

     

    5.1.12  Payment
      of Taxes, Charges
      and Lien.  Borrower shall pay and discharge when due all of its
      indebtedness and obligations, including without limitation all assessments,
      taxes, governmental charges, levies, and liens, of every kind or nature, imposed
      upon Borrower or its properties, income or profits, prior to the date on which
      penalties would attach, and all lawful claims that, if unpaid, might become
      a
      lien or charge upon any of Borrower’s properties, income or profits; provided,
      however, Borrower will not be required to pay and discharge any such assessment,
      tax, charge, levy, lien or claim so long as:

     

    (a) the
      legality of the same shall be contested in good faith by appropriate
      proceedings; and

     

    (b) Borrower
      shall have established on its books adequate reserve with respect to such
      contested assessment, tax, charge, levy, lien or claim in accordance with
      GAAP.  Borrower, upon demand of the Bank, will furnish to the Bank
      evidence of payment of the assessments, taxes, charges, levies, liens,
      and

     

    


     

    


    
      
        
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    claims
      and will authorize the appropriate governmental official to deliver to the
      Bank
      at any time a written statement regarding same; and

     

    (c) If
      deemed
      necessary or desirable by the Bank in its sole and absolute discretion, Borrower
      has provided a bond or other security deemed reasonably acceptable by the Bank
      to satisfy such contested matter.

     

    5.1.13  Use
      of  Loan
      Proceeds.  The Borrower has used and shall continue to use all
      proceeds from the credit facility described in this Loan Agreement solely for
      the specific purposes relating to the facility as described in Section 2
      above.

     

    5.1.14  Total
      Senior Liabilities to
      Adjusted Tangible Capital Ratio.  Borrower shall maintain a
      ratio of Total Senior Liabilities to Adjusted Tangible Capital  of not
      more than 2.50:1.00, tested at the end of each fiscal quarter.

     

    5.1.15  Total
      Funded Debt to EBITDA
      Ratio.  Borrower shall maintain a ratio of Total Funded Debt to
      EBITDA of not greater than 1.75:1.00 tested for the period of the previous
      four
      fiscal quarters as of the end of each fiscal quarter.

     

    Unless
      otherwise specifically defined above, all of the terms set forth relating to
      financial information and financial covenants of the Borrower shall have their
      customary meaning and application in accordance with GAAP, consistently
      applied.

    


    5.2           
      Negative
      Covenants.  So long as any portion of the Indebtedness remains
      unpaid or the Bank is committed to make loans hereunder, and unless the Bank
      otherwise consents in writing in advance, the Borrower shall not violate any
      of
      the following covenants:

    


    5.2.1  Limitation
      on
      Indebtedness.  The Borrower shall not borrow or otherwise incur
      indebtedness except for trade debt incurred in the normal course of business
      and
      indebtedness to Lender contemplated by this Agreement, create, incur or assume
      indebtedness for borrowed money, including capital leases, sell, transfer,
      mortgage, assign, pledge, lease, grant as security interest in, or encumber
      any
      of Borrower’s assets (except as allowed as Permitted Liens) or sell with any
      recourse any of Borrower’s accounts, except to Bank.  In addition,
      Borrower shall not endorse, guaranty, or become surety for the obligations
      of
      any person, corporation or other entity, except that the Borrower may endorse
      checks or other instruments for deposit or collection in the ordinary course
      of
      business.

    


    5.2.2  Mergers,
      Sales, Transfers or
      Other Disposition of Assets.  Borrower shall
      not:  (A) dissolve or otherwise dispose of all or substantially all of
      its assets, or acquire all or substantially all of the assets or outstanding
      capital stock of any other business entity; or (B) consolidate with or merge
      into another legal entity or permit one or more such entities to consolidate
      with or merge with it unless Borrower is the surviving entity; or (C) effectuate
      any change in its capitalization; or (D) sell or

    


    


    
      
        
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    otherwise
      dispose of any material assets except when done so in the ordinary course of
      business.

    


    5.2.3  No
      Liens.  Except for the Permitted Liens, Borrower shall not
      hereafter create, incur or permit to exist any lien with respect to any part
      or
      portion of the Collateral except for the liens of the Bank created in accordance
      with this Agreement and any liens for taxes not yet due and
      payable.

    


    5.2.4  No
      Loans, Guarantees or
      Investment. The Borrower shall not make loans or advances to or endorse,
      guarantee or become surety for obligations of any person, corporation or other
      entity, except that Borrower may endorse checks or other instruments for deposit
      or collection in the ordinary course of business. In addition, Borrower is
      prohibited from investing in any outside businesses or affiliates.

    


    5.2.5  Limitation
      on
      Distributions.  Any distributions from Borrower to any person
      shall not exceed the amount required to satisfy such person’s federal income tax
      liability and inter-company transfers between the Borrower and related entities
      for services rendered and consistent with prior practice.

    


    6.           
      Financial Reporting
      and Review Requirements.  So long as any portion of the
      Indebtedness remains unpaid or the Bank is committed to lend under the Loan
      Agreement, and unless the Bank otherwise consents in writing, the Borrower
      shall
      furnish (for which purpose the filing by the Borrower’s parent corporation of
      financial and other reports on the Securities and Exchange Commissions’ EDGAR
      system shall be deemed compliance with this obligation to furnish) to the Bank
      the following:

    


    6.1           
      Annual Internal
      Financial Statements.  Within 120 days after the end of each
      fiscal year, Borrower shall furnish to the Bank company prepared financial
      statements of Borrower for the preceding period, certified by an officer of
      Borrower prepared in accordance with GAAP and otherwise in a form and including
      such information as is reasonably acceptable to the Bank.

    


    6.2           
      Annual Audited
      Financial Statements.  Within 120 days after the end of each
      fiscal year, Borrower shall furnish to the Bank financial statements of Arotech
      Corporation (“Arotech”) (including Borrower and all Related Parties) for the
      preceding period audited by the CPA prepared in accordance with GAAP and
      otherwise in a form and including such information as is reasonably acceptable
      to the Bank.  The audited financial statements shall be made on a
      consolidating and consolidated basis.

    


    6.3           
      Quarterly Internal
      Financial Statements.  Within 50 days after the end of each
      calendar quarter, Borrower shall furnish to the Bank company prepared financial
      statements of Borrower for the preceding period, certified by an officer of
      the
      Borrower prepared in accordance with GAAP and otherwise in a form and including
      such information as is reasonably acceptable to the Bank.

    


    
      
        
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    6.4           
      Quarterly Guarantor
      Financial Statements.  Within 50 days after the end of each
      calendar quarter, Borrower shall furnish to the Bank company prepared financial
      statements of Arotech for the preceding period, certified by an officer of
      Arotech, prepared in accordance with GAAP and otherwise in a form and including
      such information as is reasonably acceptable to the Bank.  Such
      financial statements shall be made on a consolidating and consolidated
      basis.

    


    6.5           
      Borrowing Base
      Certificate.  Within 15 days after the end of each month,
      Borrower shall provide the Bank with a completed Borrowing Base Certificate
      certified by an officer of Borrower in the form attached as Exhibit 1 or other
      form approved by the Bank.

    


    6.6           
      Monthly Accounts
      Receivable Aging.  Within 15 days after the end of each month,
      Borrower shall furnish to the Bank an accounts receivable aging report for
      Borrower in a form and containing such information as the Bank may reasonably
      request.

    


    6.7           
      Annual Business
      Plan.  Within 90 days after the end of each fiscal year,
      Borrower shall provide the Bank with a business plan in a form and including
      such information as is reasonably acceptable to the Bank.

    


    6.8           
      Other
      Reports.  The Borrower shall promptly deliver or cause to be
      delivered to the Bank such information which is not otherwise required to be
      furnished under the Related Loan Documents respecting business, affairs, assets
      and liabilities of the Borrower, and such lists of properties and accounts,
      reports, opinions and certifica­tions and documents, as the Bank from time
      to time may reasonably request.  Unless otherwise designated in
      writing by the Bank, all of the foregoing financial information shall be
      delivered to the Bank at the address set forth in Section 8 below.

    


    7.           
      Event of
      Default.

    


    7.1           
      Nature of
      Default.  An Event of Default shall exist when any one or more
      of

    the
      following shall occur and be continuing:

    


    7.1.1                      
      Obligations to
      Bank.  The Borrower or any Guarantor shall:  (a) fail
      to make any payment when due of principal, interest, fees or other amounts
      required under any of the Indebtedness; or (b) be in default under or otherwise
      fail to perform or observe any other covenant, agreement or provision contained
      in this Loan Agreement or any of the other Related Loan Documents; or (c) be
      in
      default under or otherwise fail to perform or observe any covenant, obligation,
      term or provision contained in any material agreement or other document between
      or including both the Bank and the Borrower or any Guarantor, whether now
      existing or hereafter arising.

     

    7.1.2                      
      Obligations to Other
      Persons.  If the Borrower or any Guarantor shall  be
      in default or otherwise shall fail to perform or observe any covenant,
      obligation, agreement or provision contained in any material agreement to which
      the Borrower or any Guarantor is a party, which default shall continue beyond
      any applicable grace period.

    


    
      
        
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    7.1.3                      
      Warranties and
      Representations.  Any warranty, representation or any other
      statement made by or on behalf of or with respect to the Borrower including
      but
      not limited to those set forth in this Loan Agreement and any of the other
      Related Loan Documents shall prove to be false, misleading or incorrect in
      any
      material respect, or shall fail to state a fact necessary in order to make
      the
      statements made not misleading.

     

    7.1.4                      
      Enforceability of
      Liens.  Any lien granted to the Bank by the Borrower in
      accordance with this Loan Agreement shall become or purport to be invalid or
      unenforceable or shall not or purport not to be a lien against any material
      portion of the Collateral in the priority required under this Loan
      Agreement.

     

    7.1.5                      
      Dissolution,
      Bankruptcy, Etc.  In addition to and not exclusive of any of
      the default language contained in any of the other Related Loan Documents,
      if
      the Borrower or any Guarantor shall make an assignment for the benefit of
      creditors or file a petition in bankruptcy, have an order for relief entered,
      petition or apply to any tribunal for the appointment of a receiver or a trustee
      or a substantial part of any of the Borrower's or Guarantor’s assets, or if the
      Borrower or any Guarantor shall be insolvent (insolvency being hereby defined
      as
      Borrower's or Guarantor’s inability to pay Borrower's or Guarantor’s debts as
      they become due) or commence any proceeding under any insolvency, reorganization
      or similar law for the relief of debtors, whether now or hereafter in effect;
      or
      if there shall have been filed any such petition or application, or any such
      proceeding shall have been commenced against the Borrower or any Guarantor
      which
      has not been dismissed within 45 days after commencement; or the Borrower or
      any
      Guarantor by any act or omission shall indicate consent to, approval or
      acquiescence in any such petition, application or proceeding or the appointment
      of a receiver or trustee, or shall suffer any such receivership or trusteeship;
      or upon entry of a judgment against the Borrower or any Guarantor in the amount
      of One Hundred Thousand Dollars ($100,000.00) or more and for which judgment
      there has been no timely appeal filed together with an appeal bond; or the
      placement or issuance of any levy, writ of attachment, writ of garnishment,
      writ
      of execution or similar process against the Borrower or any Guarantor, or any
      of
      the property of the Borrower or any Guarantor.

     

    7.2           
      Remedies upon
      Default.

    


    7.2.1                      
      Acceleration and
      Exercise of Remedies.  Upon the occurrence and continuation for
      a period of seven (7) business days after notice of any Event of Default, then
      the unpaid balances of all Indebtedness, shall become immediately due and
      payable in full, without demand or notice of any kind, the same being hereby
      expressly waived by the Borrower, and the Bank may thereafter pursue any and
      all
      available rights and remedies as provided under applicable law including but
      not
      limited to the right to enforce any and all rights and remedies contained in
      each and every one of the Related Loan Documents and/or any other agreements
      between or including the Bank and the Borrower.  The Borrower and the
      Bank expressly agree and acknowledge that upon default, the rights and remedies
      of the Bank, whether

    


    


    
      
        
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    existing
      under any of the Related Loan Documents and/or any other agreements between
      or
      including the Bank and the Borrower, shall be deemed cumulative and not
      exclusive, and the exercise of any right or remedy by the Bank shall not
      constitute a cure or waiver of the default or invalidate any act done by the
      Bank, nor prejudice the Bank in the exercise of any of its other rights and
      remedies whatsoever.  Borrower expressly acknowledges and agrees to
      pay all costs and expenses of collection or enforcement of the Borrower's
      obligations under the Related Loan Documents, including but not limited to
      reasonable attorneys' fees.

     

    7.2.2                      
      Waivers.  The
      acceptance by the Bank at any time and from time to time of partial payment
      of
      any of the obligations of the Borrower hereunder shall not be deemed to be
      a
      waiver of any Event of Default then existing.  No waiver by the Bank
      of any Event of Default shall be deemed to be a waiver of any other then
      existing or subsequent Event of Default.  No delay or omission by the
      Bank in exercising any right under the Related Loan Documents shall impair
      such
      right or be construed as a waiver thereof or an acquiescence therein, nor shall
      any single or partial exercise of any right preclude other or further exercise
      thereof, or the exercise of any other right under the Related Loan Documents
      or
      otherwise.  Any waiver, consent or approval of any kind or character
      on the part of the Bank of any provision of this Agreement or of any of the
      other Related Loan Documents shall be in writing and shall be effective only
      to
      the extent specifically set forth in such writing.

     

    7.2.3                      
      Indemnification
      of
      Bank.  The Borrower hereby agrees to indemnify the Bank and
      hold it harmless from and against any and all liabilities, obligations, losses,
      damages, judgments, suits, claims, costs and expenses of any kind or nature
      whatsoever, which may be imposed upon, incurred by, or asserted against the
      Bank
      in any way relating to or arising out of the Related Loan Documents or any
      of
      the transactions contemplated therein to the extent that any such indemnified
      liability results, directly or indirectly, from any claim made or actions,
      suits
      or proceedings commenced by or on behalf of any person other than the Bank;
      provided, that the Bank shall not have the right to be indemnified hereunder
      for
      its own gross negligence or willful misconduct or that of any of its authorized
      representatives, agents or employees.

     

    7.3           
      WAIVER OF
      JURY.  THE BORROWER AND EACH GUARANTOR AND THE BANK ACKNOWLEDGE
      THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE
      WAIVED.  NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS
      AGREEMENT, THE RELATED LOAN DOCUMENTS OR ANY OTHER AGREEMENT BETWEEN OR
      INCLUDING THE BANK AND THE BORROWER, AFTER BEING PROVIDED THE OPPORTUNITY TO
      CONSULT WITH COUNSEL OF CHOICE, BORROWER AND EACH GUARANTOR HEREBY KNOWINGLY
      AND
      VOLUNTARILY WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION AS
      TO
      ANY AND ALL ISSUES ARISING FROM OR OUT OF THIS AGREEMENT, THE OTHER RELATED
      LOAN
      DOCUMENTS AND/OR ANY OTHER AGREEMENTS BETWEEN OR INCLUDING BOTH THE BANK AND
      THE
      BORROWER AND EACH GUARANTOR, 

     

     

    
      


      
        
          
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    INCLUDING
      WITHOUT LIMITATION ANY ISSUE RELATED TO THE PERFORMANCE OR ENFORCEMENT OF ANY
      OR
      ALL OF THE SAME.

    


    8.           
      Miscellaneous.

    


    8.1           
      Notices.  All
      notices and other communications with respect to this Agreement shall be in
      writing and shall be delivered by hand, sent by telex or telecopy, or mailed
      by
      first class mail, postage prepaid, addressed as indicated below:

    


    If
      to the
      Borrower:                                                                           
FAAC INCORPORATED

    1229
      Oak Valley Drive

    Ann
      Arbor,
      Michigan   48108

          Attn.  Tom
      Paup

    FAX
      No: (734) 761-5368

    


    If
      to the
      Bank:                                                                           
KeyBank National Association

    17199
      North Laurel Park Drive, Suite 105

    Livonia,
      Michigan   48152

    ATTN:  Jason
      Graves

    FAX
      No:

    


    With
      a
      copy
      to:                                                                
Arotech Corporation

    1229
      Oak Valley Drive

    Ann
      Arbor,
      Michigan  48108

    Attn.  Yaakov
      Har-Oz

    FAX
      No:
      011-932-2-990-6688

    


    With
      a
      copy
      to:                                                                
Bruce N. Elliott

    Conlin,
      McKenney & Philbrick, P.C.

    350
      S.
      Main Street, Suite 400

    Ann
      Arbor, Michigan  48104

    FAX
      No.
      (734) 761-9001

    


    The
      address of the Borrower or the Bank for any purpose of any notice may be changed
      at any time and from time to time in the manner provided for
      herein.  A notice shall be deemed to have been given when dispatched,
      if by telex or telecopy, or if by mail on the day it is deposited in the United
      States mail, postage prepaid, and properly addressed.

    


    8.2           
      Survival.  All
      representations, warranties, covenants and agreements with respect to the
      Borrower in the Loan Agreement or in any Related Loan Documents or in any
      certificate or other instrument delivered by the Borrower to the Bank shall
      be
      considered to have been relied upon by the Bank and shall survive the delivery
      to the Bank of the Related Loan Documents.

     

     

    
      


      
        
          
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    8.3           
      Governing
      Law.  This Agreement, and the Related Loan Documents, have been
      negotiated and delivered in, and shall be governed by and construed in
      accordance with the material laws of the State of Michigan.

     

    8.4           
      Conflict in Document
      Terms.  In the event there is any conflict between any of the
      terms, conditions, representa­tions, warranties or any other matters in the
      other Related Loan Documents and this Agreement, such conflict shall be resolved
      in favor of the language set forth in this Agreement; provided, however, that,
      (i) such resolution shall in no way act to reduce, diminish or negate any of
      the
      liabilities or obligations of the Borrower or any Guarantor under any of the
      terms, conditions and covenants contained in any of the Related Loan Documents;
      and (ii) such resolution shall in no way act to reduce, diminish or impair
      any
      of the security interests, rights, or remedies granted to the Bank under any
      of
      the Related Loan Documents.

     

    8.5           
      Amendment.  This
      Agreement may not be amended or modified except by written instrument signed
      by
      the parties hereto.

     

    8.6           
      Entire Agreement
      and
      Severability.  This Loan Agree­ment together with the other
      Related Loan Documents constitutes the entire agreement of the parties as to
      the
      subject matter contained herein.  Wherever possible, each provision of
      this Agreement shall be interpreted in such manner as to be effective and valid
      under applicable law, and should any portion of this Agreement be declared
      invalid for any reason, such declaration shall have no effect on the remaining
      portions of this Agreement.

     

    8.7           
      Headings.  Section
      headings in this Agreement are included for convenience of reference only and
      should not constitute a part of this Agreement for any other
      purpose.

     

    8.8           
      Signature in
      Counterparts.  This Agreement may be executed in one or more
      counterparts, each of which shall be deemed to be an original, but all of which
      together shall constitute one and the same instrument.

     

    8.9           
      Binding
      Agreement.  The terms, conditions and covenants contained in
      this Agreement shall be binding upon and inure to the benefit of the successors
      and assigns of the Borrower and the Bank.

     

    
      


      
        
          
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    8.10           Additional
      Documents/Actions.  At the request of the Bank, the Borrower
      and/or any Guarantor shall promptly execute and deliver any additional documents
      or take such other actions deemed reasonably necessary or desirable by the
      Bank
      and its counsel relating to the credit facilities described in this Agreement,
      including without limitation, documents or actions relating to authentication
      of
      the signatures of all Guarantors on this Agreement or any other Related Loan
      Documents.

     

    


     

    


     

    


     

    


     

    IN
      WITNESS WHEREOF, this Loan Agreement
      has been executed as of the day and year first above written.

     

    KEYBANK
      NATIONAL
      ASSOCIATION                                                                                                                                
FAAC INCORPORATED

    a
      national banking
      association                                                                                                           
a Michigan corporation

    


    
      	
              By:_______________________________

            	
              By:
                _______________________________ 

            


    

                                               Its:__________________________Its:  ___________________________

    


    


    


    GUARANTORS:                                                                           
      GUARANTORS:

    


    Arotech
      Corporation                                                                           
Electric Fuel Battery Corporation

    


    By:______________________________                                                                                                                     
      By:_______________________________

    


    Its:___________________________                                                                                                           
      Its:___________________________

    


    Armour
      of America,
      Incorporated                                                                                                           
MDT Armor Corporation

    


    By:______________________________                                                                                                                     
      By:______________________________

    


    Its:___________________________                                                                                                           
      Its:___________________________

    


    Electric
      Fuel (E.F.L.)
      Ltd.                                                                                     
Epsilor Electronic Industries, Ltd.

    


    By:_____________________________                                                                                                                     
      By:_____________________________

    


    Its:__________________________                                                                                                           
      Its:___________________________

    


    


    
      


      
        
          
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    EXHIBIT
      2

    


    


    Arotech
      Corporation

    Electric
      Fuel Battery Corporation

    Armour
      of
      America, Incorporated

    MDT
      Armor
      Corporation

    Electric
      Fuel (E.F.L.) Ltd.

    Epsilor
      Electronic Industries, Ltd.