exv10w1



 



EXHIBIT 10.1










CREDIT AND SECURITY AGREEMENT



BY AND BETWEEN



WINLAND ELECTRONICS, INC.



AND



M&I MARSHALL & ILSLEY BANK



Dated as of: June 30, 2003











 






 





CREDIT AND SECURITY AGREEMENT



Dated as of June 30, 2003



WINLAND ELECTRONICS, INC., a Minnesota corporation (the “Borrower”), and M&I
MARSHALL & ILSLEY BANK, a Wisconsin banking corporation (the “Lender”), hereby
agree as follows:


ARTICLE I



Definitions



     Section 1.1. Definitions. For all purposes of this Agreement, except as
otherwise expressly provided or unless the context otherwise requires:



		
	 	     (a)     the terms defined in this Article have the meanings assigned to
them in this Article, and include the plural as well as the
singular; and




		
	 	     (b)     all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with GAAP.



     “Accounts” means all of the Borrower’s accounts, as such term is defined
in the UCC, including without limitation the aggregate unpaid obligations of
customers and other account debtors to the Borrower arising out of the sale or
lease of goods or rendition of services by the Borrower on an open account or
deferred payment basis.


     “Advance” has the meaning given in Section 2.1.


     “Affiliate” or “Affiliates” means any Person controlled by, controlling or
under common control with the Borrower, including (without limitation) any
Subsidiary of the Borrower. For purposes of this definition, “control,” when
used with respect to any specified Person, means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise.


     “Agreement” means this Credit and Security Agreement, as amended,
supplemented or restated from time to time.


     “Banking Day” means a day other than a Saturday, Sunday or other day on
which banks are generally not open for business in Minneapolis, Minnesota.


 






 


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



		
	 	     (a)     the Maximum Line; or




		
	 	     (b)     the sum of (i) 75% of Eligible Accounts, plus (ii) the lesser
of (A) 50% of Eligible Inventory, or (B) $1,250,000, plus (iii) the
lesser of (A) 25% of the net book value of Eligible Equipment, or
(B) $250,000.



     “Capital Expenditures” for a period means any expenditure of money for the
purchase of any capital asset, including the acquisition of such assets by
capital lease.


     “Collateral” means all of the Borrower’s Equipment, General Intangibles,
Inventory, Receivables and Investment Property, together with (i) all
substitutions and replacements for and products of any of the foregoing; (ii)
proceeds of any and all of the foregoing; (iii) in the case of all tangible
goods, all accessions; (iv) all accessories, attachments, parts, equipment and
repairs now or hereafter attached or affixed to or used in connection with any
tangible goods; (v) all warehouse receipts, bills of lading and other documents
of title now or hereafter covering such goods; and (vi) all sums on deposit in
the Special Account.


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


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


     “Debt” of the Borrower means, without duplication, all obligations of the
Borrower or any Subsidiary on a consolidated basis: (a) in respect of borrowed
money; (b) secured by a mortgage, pledge, security interest, lien or charge on
the assets of the Borrower or a Subsidiary, whether or not the obligation
secured has been assumed by the Borrower and/or its Subsidiaries; (c) any
obligation for the deferred purchase price of any property or services
evidenced by a note, payment contract (other than an account payable arising in
the ordinary course of business) or other instrument; (d) any obligation as
lessee under a capitalized lease; and (e) all guaranties in respect of the
foregoing, excluding endorsements of negotiable instruments in the ordinary
course of business.


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


     “Default Period” means any period of time beginning on the first day an
Event of Default has occurred and ending on the date that such Event of Default
has been cured or waived.


     “Default Rate” means, with respect to the Advances, an annual rate equal
to two percent (2.0%) over the applicable Floating Rate, which rate shall
change when and as such Floating Rate changes.


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


     “Eligible Accounts” means all unpaid Accounts, net of any credits, except
the following shall not in any event be deemed Eligible Accounts:



		
	 	(i)     That portion of Accounts unpaid 90 days or more after the
invoice date;
	 
	 	(ii)     That portion of Accounts that is disputed or subject to a
claim of offset or a contra account;
	 
	 	(iii)     That portion of Accounts not yet earned by the final delivery
of goods or rendition of services, as applicable, by the Borrower
to the customer;
	 
	 	(iv)     Accounts owed by any unit of government, whether foreign or
domestic (provided, however, that there shall be included in
Eligible Accounts that portion of Accounts owed by such units of
government for which the Borrower has provided evidence
satisfactory to the Lender that (A) the Lender has a first priority
perfected security interest and (B) such Accounts may be enforced
by the Lender directly against such unit of government under all
applicable laws);
	 
	 	(v)     Accounts owed by an account debtor located outside the United
States;
	 
	 	(vi)     Accounts owed by an account debtor that is insolvent, the
subject of bankruptcy proceedings or has gone out of business;
	 
	 	(vii)     Accounts owed by a director, Subsidiary, Affiliate, officer
or employee of the Borrower; provided, however, that Accounts owed
by an Affiliate or a director shall not be deemed ineligible under
this clause (vii) to the extent such Accounts arise from
arms-length transactions in the ordinary course of business;
	 
	 	(viii)     Accounts not subject to a duly perfected security interest
in the Lender’s favor or which are subject to any lien, security
interest or claim in favor of any Person other than the Lender
including without limitation any payment or performance bond;
	 
	 	(ix)     That portion of Accounts that has been restructured, extended,
amended or modified;
	 
	 	(x)     That portion of Accounts that constitutes advertising, finance
charges, or service charges;
	 
	 	(xi)     That portion of Accounts owed by an account debtor, regardless
of whether otherwise eligible, which exceeds 25% (or such lower
percentage as Lender may designate upon a determination by Lender
that the quality of any Account has been diminished) of all
Accounts owed by all account debtors.



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	 	(xii)     Accounts owed by an account debtor, regardless of whether
otherwise eligible, if 10% or more of the total amount due under
Accounts from such debtor is ineligible under clauses (i), (ii)or
(ix) above; and
	 
	 	(xiii)     Accounts, or portions thereof, otherwise deemed ineligible
by the Lender in its reasonable discretion.



     “Eligible Equipment” means all Equipment of the Borrower which is subject
to a duly perfected security interest in the Lender’s favor and which is not
subject to any other lien, security interest or claim in favor of any Person
other than the Lender.


     “Eligible Inventory” means all inventory of the Borrower, at the lower of
cost or market value as determined in accordance with generally accepted
accounting principles, provided, however, that the following shall not in any
event be deemed Eligible Inventory:



		
	 	(i)     Inventory, that is: in-transit; not subject to a perfected,
first priority security interest in favor of the Lender; covered
by any negotiable or non-negotiable warehouse receipt, bill of
lading or other document of title; on consignment to or from any
other person or subject to any bailment;
	 
	 	(ii)     Supplies, packaging or parts inventory;
	 
	 	(iii)     Work-in-process inventory;
	 
	 	(iv)     Inventory that is damaged, obsolete or not currently saleable
in the normal course of the Borrower’s operations;
	 
	 	(v)     Inventory that the Borrower has returned, has attempted to
return, is in the process of returning or intends to return to the
vendor thereof;
	 
	 	(vi)     Inventory that is subject to a security interest in favor of
any person other than the Lender; and
	 
	 	(vii)     Inventory otherwise deemed ineligible by the Lender in its
reasonable discretion.



         “Environmental Laws” has the meaning specified in Section 5.12.


         “Equipment” means all of the Borrower’s equipment, as such term is defined
in the UCC, whether now owned or hereafter acquired, including but not limited
to all present and future machinery, vehicles, furniture, fixtures,
manufacturing equipment, shop equipment, office and recordkeeping equipment,
parts, tools, supplies, and including specifically (without limitation) the
goods described in any equipment schedule or list herewith or hereafter
furnished to the Lender by the Borrower.


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     “Event of Default” has the meaning specified in Section 8.1.


     “Floating Rate” means an annual rate equal to the rate of interest
publicly announced from time to time by the Lender as its “prime rate” or, if
the Lender ceases to announce a rate so designated, any similar successor rate
designated by the Lender.


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


     “GAAP” means generally accepted accounting principles, applied on a basis
consistent with the accounting practices applied in the financial statements
described in Section 5.5.


     “General Intangibles” means all of the Borrower’s general intangibles, as
such term is defined in the UCC, whether now owned or hereafter acquired,
including (without limitation) all present and future payment intangibles,
software, license rights, letter-of-credit rights, patents, patent
applications, copyrights, trademarks, trade names, trade secrets, customer or
supplier lists and contracts, manuals, operating instructions, permits,
franchises, the right to use the Borrower’s name, and the goodwill of the
Borrower’s business.


     “Hazardous Substance” has the meaning given in Section 5.12.


     “Interest Expense” means, as of any date, the Borrower’s total gross
interest expense during the immediately preceding 12-month period (excluding
interest income), and shall in any event include, without limitation, (i)
interest expensed (whether or not paid) on all Debt, (ii) the amortization of
debt discounts, (iii) the amortization of all fees payable in connection with
the incurrence of Debt to the extent included in interest expense, and (iv) the
portion of any capitalized lease obligation allocable to interest expense.


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


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


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


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


     “Letter of Credit” has the meaning specified in Section 2.2.


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     “Leverage Ratio” as of a given date means the ratio of (1) all liabilities
of the Borrower as shown in the liabilities section of the Borrower’s balance
sheet to (2) the Borrower’s total net worth, as shown in the stockholder’s
equity section of the Borrower’s balance sheet.


     “Loan Documents” means this Agreement, the Note, and the Security
Documents.


     “Material Adverse Change” means the occurrence of any event relating to
the business, operations, property, assets or financial condition of the
Borrower which is reasonably likely to materially and adversely impact the
ability of the Borrower to pay the Obligations in accordance with the Loan
Documents.


     “Maturity Date” means June 28, 2004.


     “Maximum Line” means $2,500,000.00, unless said amount is reduced pursuant
to Section 2.14, in which event it means the amount to which said amount is
reduced.


     “Net Income” means the net income of the Borrower, after taxes, as
determined in accordance with GAAP.


     “Note” means the Borrower’s promissory note, payable to the order of the
Lender in substantially the form of Exhibit A hereto and any note or notes
issued in substitution therefor, as the same may hereafter be amended,
supplemented or restated from time to time.


     “Obligations” means the Note and each and every other debt, liability and
obligation of every type and description which the Borrower may now or at any
time hereafter owe to the Lender, whether such debt, liability or obligation
now exists or is hereafter created or incurred, whether it arises in a
transaction involving the Lender alone or in a transaction involving other
creditors of the Borrower, and whether it is direct or indirect, due or to
become due, absolute or contingent, primary or secondary, liquidated or
unliquidated, or sole, joint, several or joint and several, and including
specifically, but not limited to, the Obligation of Reimbursement and all
indebtedness of the Borrower arising under this Agreement, the Note, any L/C
Application completed by the Borrower, or any other loan or credit agreement or
guaranty between the Borrower and the Lender, whether now in effect or
hereafter entered into.


     “Obligation of Reimbursement” has the meaning given in Section 2.3(a).


     “Permitted Lien” has the meaning given in Section 7.1.


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


     “Plan” means an employee benefit plan or other plan maintained for the
Borrower’s employees and covered by Title IV of ERISA, other than
“multiemployer plans” as defined in Section 3(37) of ERISA.


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     “Premises” means all premises where the Borrower conducts its business and
has any rights of possession, including (without limitation) the premises
described in Exhibit D attached hereto.


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


     “Reportable Event” shall have the meaning assigned to that term in Title
IV of ERISA.


     “Security Documents” means this Agreement and any other document delivered
to the Lender from time to time to secure the Obligations, as the same may
hereafter be amended, supplemented or restated from time to time.


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


     “Special Account” means a specified cash collateral account maintained by
a financial institution acceptable to the Lender in connection with Letters of
Credit, as contemplated by Section 2.4.


     “Subsidiary” means any corporation or limited liability company of which
more than 50% of the outstanding shares of capital stock or membership
interests having general voting power under ordinary circumstances to elect a
majority of the board of directors or board of governors of such entity,
irrespective of whether or not at the time ownership interests of any other
class or classes shall have or might have voting power by reason of the
happening of any contingency, is at the time directly or indirectly owned by
the Borrower, by the Borrower and one or more other Subsidiaries, or by one or
more other Subsidiaries.


     “Tangible Net Worth” means the difference between (i) the tangible assets
of the Borrower, which, in accordance with GAAP are tangible assets, after
deducting adequate reserves in each case where, in accordance with GAAP, a
reserve is proper and (ii) all Debt of the Borrower; provided, however, that
notwithstanding the foregoing in no event shall there be included as such
tangible assets patents, trademarks, tradenames, copyrights, licenses,
goodwill,


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receivables from Affiliates, directors, officers or employees,
deferred charges or any securities or
Debt of the Borrower or any other securities unless the same are readily
marketable in the United States of America or entitled to be used as a credit
against federal income tax liabilities, and any other assets designated from
time to time by the Lender, in its sole discretion.


     “Termination Date” means the earliest of (i) the Maturity Date, (ii) the
date the Borrower terminates the Credit Facility, or (iii) the date the Lender
demands payment of the Obligations after an Event of Default pursuant to
Section 8.2.


     “UCC” means the Uniform Commercial Code as in effect from time to time in
the state designated in Section 9.14 as the state whose laws shall govern this
Agreement, or in any other state whose laws are held to govern this Agreement
or any portion hereof.


     Section 1.2. Cross References. All references in this Agreement to
Articles, Sections and subsections, shall be to Articles, Sections and
subsections of this Agreement unless otherwise explicitly specified.


ARTICLE II



Amount and Terms of the Credit Facility



     Section 2.1. Advances. The Lender agrees, on the terms and subject to the
conditions herein set forth, to make advances to the Borrower from time to time
from the date all of the conditions set forth in Section 4.1 are satisfied (the
“Funding Date”) to the Termination Date, on the terms and subject to the
conditions herein set forth (the “Advances”). The Lender shall have no
obligation to make an Advance if, after giving effect to such requested
Advance, the sum of the outstanding and unpaid Advances under this Section 2.1
or otherwise would exceed the Borrowing Base less the L/C Amount. The
Borrower’s obligation to pay the Advances shall be evidenced by the Note and
shall be secured by the Collateral as provided in Article III. Within the
limits set forth in this Section 2.1, the Borrower may borrow, prepay pursuant
to Section 2.12 and reborrow. The Borrower agrees to comply with the following
procedures in requesting Advances under this Section 2.1:



		
	 	     (a)     The Borrower shall make each request for an Advance to the
Lender before 2:00 p.m. (Minneapolis time) of the day of the
requested Advance. Requests may be made in writing or by
telephone, specifying the date of the requested Advance and the
amount thereof. Each request shall be by (i) any officer of the
Borrower; or (ii) any person designated as the Borrower’s agent by
any officer of the Borrower in a writing delivered to the Lender;
or (iii) any person whom the Lender reasonably believes to be an
officer of the Borrower or such a designated agent.



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	 	     (b)   Upon fulfillment of the applicable conditions set forth in
Article IV, the Lender shall disburse the proceeds of the requested
Advance by crediting the
same to the Borrower’s demand deposit account maintained with the
Lender unless the Lender and the Borrower shall agree in writing to
another manner of disbursement. Upon the Lender’s request, the
Borrower shall promptly confirm each telephonic request for an
Advance by executing and delivering an appropriate confirmation
certificate to the Lender. The Borrower shall repay all Advances
even if the Lender does not receive such confirmation and, so long
as the Lender reasonably believed such person to be authorized to
request an Advance, even if the person requesting an Advance was
not in fact authorized to do so. Any request for an Advance,
whether written or telephonic, shall be deemed to be a
representation by the Borrower that the conditions set forth in
Section 4.2 have been satisfied as of the time of the request.



     Section 2.2. Letters of Credit.



		
	 	(i)     Subject to the Borrower’s request and the Lender’s
approval, the Lender agrees, on the terms and subject to the
conditions herein set forth, to issue, from the Funding Date
to the Termination Date, one or more irrevocable standby or
documentary letters of credit (each, a “Letter of Credit”)
for the Borrower’s account. The Lender shall have no
obligation to issue any Letter of Credit if the face amount
of the Letter of Credit to be issued would exceed (1) the
Borrowing Base less (2) the sum of (A) all outstanding and
unpaid Advances and (B) the L/C Amount.




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




		
	 	(b)     No Letter of Credit shall be issued with an expiry date later
than the Maturity Date in effect as of the date of issuance.
	 
	 	(c)     Any request to cause the Lender to issue a Letter of Credit
under this Section 2.2 shall be deemed to be a representation by
the Borrower that the conditions set forth in Section 4.2 have been
satisfied as of the date of the request.



     Section 2.3. Payment of Amounts Drawn Under Letters of Credit; Obligation
of Reimbursement.


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     The Borrower acknowledges that the Borrower, as applicant, will be liable
to the Lender for reimbursement of any and all draws under Letters of Credit
and for all other amounts
required to be paid under the applicable L/C
Application. Accordingly, the Borrower agrees to pay to the Lender any and all
amounts required to be paid under the applicable L/C Application,
when and as required to be paid thereby, and the amounts designated below, when
and as designated:



		
	 	(a)     The Borrower hereby agrees to pay the Lender on the day a draft
is honored under any Letter of Credit a sum equal to all amounts
drawn under such Letter of Credit plus any and all reasonable
charges and expenses that the Lender may pay or incur relative to
such draw and the applicable L/C Application, plus interest on all
such amounts, charges and expenses as set forth below (the
Borrower’s obligation to pay all such amounts is herein referred to
as the “Obligation of Reimbursement”).
	 
	 	(b)     Whenever a draft is submitted under a Letter of Credit, the
Lender shall make an Advance in the amount of the Obligation of
Reimbursement and shall apply the proceeds of such Advance thereto.
Such Advance shall be repayable in accordance with and be treated
in all other respects as an Advance hereunder.
	 
	 	(c)     If a draft is submitted under a Letter of Credit when the
Borrower is unable, because a Default Period then exists or for any
other reason, to obtain an Advance to pay the Obligation of
Reimbursement, the Borrower shall pay to the Lender on demand and
in immediately available funds, the amount of the Obligation of
Reimbursement together with interest, accrued from the date of the
draft until payment in full at the Default Rate. Notwithstanding
the Borrower’s inability to obtain an Advance for any reason, the
Lender is irrevocably authorized, in its sole discretion, to make
an Advance in an amount sufficient to discharge the Obligation of
Reimbursement and all accrued but unpaid interest thereon.
	 
	 	(d)     The Borrower’s obligation to pay any Advance made under this
Section 2.3, shall be evidenced by the Note and shall bear interest
as provided in Section 2.6.



     Section 2.4. Special Account. If the Credit Facility is terminated for
any reason whatsoever while any Letter of Credit is outstanding, the Borrower
shall thereupon pay the Lender in immediately available funds for deposit in
the Special Account an amount equal to the L/C Amount. The Special Account
shall be an interest bearing account maintained for the Lender by any financial
institution acceptable to the Lender. Any interest earned on amounts deposited
in the Special Account shall be credited to the Special Account. Amounts on
deposit in the Special Account may be applied by the Lender at any time or from
time to time to the Obligation of Reimbursement (and, following a Default, to
the Obligations) in the Lender’s sole discretion, and shall not be subject to
withdrawal by the Borrower so long as the Lender maintains a security interest
therein. Upon expiration or return of any Letter of Credit, the Lender agrees
to transfer to the Borrower from funds held in the Special Account an amount


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equal to the undrawn amount of such Letter of Credit, so long as no Default or
Event of Default then exists. The Lender agrees to transfer any balance in the
Special Account to the Borrower at
such time as the Lender is required to release its security interest in
the Special Account under applicable law.


     Section 2.5. Obligations Absolute. The Borrower’s obligations arising
under Section 2.3 shall be absolute, unconditional and irrevocable, and shall
be paid strictly in accordance with the terms of Section 2.3, under all
circumstances whatsoever, including (without limitation) the following
circumstances:



		
	 	(a)     any lack of validity or enforceability of any Letter of Credit
or any other agreement or instrument relating to any Letter of
Credit (collectively the “Related Documents”);
	 
	 	(b)     the existence of any claim, setoff, defense or other right
which the Borrower may have at any time, against any beneficiary or
any transferee of any Letter of Credit (or any persons or entities
for whom any such beneficiary or any such transferee may be
acting), or other person or entity, whether in connection with this
Agreement, the transactions contemplated herein or in the Related
Documents or any unrelated transactions;
	 
	 	(c)     any statement or any other document presented under any Letter
of Credit proving to be forged, fraudulent, invalid or insufficient
in any respect or any statement therein being untrue or inaccurate
in any respect whatsoever.



     Section 2.6. Interest; Default Interest; Participations; Usury. Interest
accruing on the Note shall be due and payable in arrears on the first day of
each month.



		
	 	(a)     Note. Except as set forth in Sections 2.6(b), 2.6(c) and
2.6(d), the outstanding principal balance of the Note shall bear
interest at the Floating Rate.
	 
	 	(b)     Default Interest Rate. At any time following the occurrence
and during the continuance of an Event of Default, in the Lender’s
sole discretion and without waiving any of its other rights and
remedies, the principal of the Advances outstanding from time to
time shall bear interest at the Default Rate, effective for any
periods designated by the Lender from time to time during the
existence of such Event of Default.
	 
	 	(c)     Participations. If any Person shall acquire a participation in
the Advances under this Agreement, the Borrower shall be obligated
to the Lender to pay the full amount of all interest calculated
under this Agreement, along with all other fees, charges and other
amounts due under this Agreement, regardless if such Person elects
to accept interest with respect to its participation at a lower
rate than the Floating Rate or otherwise elects to accept less than
its prorata share of such fees, charges and other amounts due under
this Agreement.



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	 	(d)     Usury. In any event, no rate shall be put into effect which
would result in a rate greater than the highest rate permitted by
law.



     Section 2.7. Fees.



		
	 	(a)     Letter of Credit Fees. The Borrower agrees to pay the Lender a
fee with respect to each standby Letter of Credit, if any, accruing
on a daily basis and computed at an annual rate equal to 2.0%
multiplied by the aggregate amount that may be drawn on such Letter
of Credit assuming compliance with all conditions for drawing
thereunder, from and including the date of issuance of such Letter
of Credit until such date as such Letter of Credit shall be paid in
full, terminate by its terms or be returned to the Lender, due and
payable monthly in arrears on the first day of each month and on
the Termination Date; provided, however that during Default
Periods, in the Lender’s sole discretion and without waiving any of
its other rights and remedies, such fee shall increase by two
percent (2.0%) over the otherwise applicable rate. The foregoing
fee shall be in addition to any and all fees, commissions and
charges of the Lender with respect to or in connection with such
Letter of Credit.
	 
	 	(b)     Letter of Credit Administrative Fees. The Borrower agrees to
pay the Lender, on written demand, the administrative fees charged
by the Lender in connection with the honoring of drafts under any
Letter of Credit, amendments thereto, transfers thereof and all
other activity with respect to the Letters of Credit at the
then-current rates published by the Lender for such services
rendered on behalf of customers of the Lender generally.
	 
	 	(c)     Unused Line Fee. The Borrower agrees to pay to the Lender at
the end of each calendar quarter, in arrears, a line fee equal to
one-fourth of one percent (0.25%) per annum, on the daily average
amount by which the Maximum Line exceeds the sum of (1) the
outstanding principal balance of the Note and (2) the L/C Amount.



     Section 2.8. Computation of Interest and Fees; When Interest Due and
Payable. Interest accruing on the outstanding principal balance of the
Advances and fees hereunder outstanding from time to time shall be computed on
the basis of actual number of days elapsed in a year of 360 days. Interest
shall be payable in arrears on the first day of each month and on the
Termination Date.


     Section 2.9. Capital Adequacy; Increased Costs and Reduced Return. If any
Related Lender determines at any time that its Return has been reduced as a
result of any Rule Change, such Related Lender may require the Borrower to pay
it the amount necessary to restore its Return to what it would have been had
there been no Rule Change. For purposes of this Section 2.9:


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	 	(a)     “Capital Adequacy Rule” means any law, rule, regulation,
guideline, directive, requirement or request regarding capital
adequacy, or the interpretation or administration thereof by any
governmental or regulatory authority, central bank or comparable
agency, whether or not having the force of law, that applies to
any Related Lender. Such rules include rules requiring financial
institutions to maintain total capital in amounts based upon
percentages of outstanding loans, binding loan commitments and
letters of credit.
	 
	 	(b)     “L/C Rule” means any law, rule, regulation, guideline,
directive, requirement or request regarding letters of credit, or
the interpretation or administration thereof by any governmental or
regulatory authority, central bank or comparable agency, whether or
not having the force of law, that applies to any Related Lender.
Such rules include rules imposing taxes, duties or other similar
charges, or mandating reserves, special deposits or similar
requirements against assets of, deposits with or for the account
of, or credit extended by any Related Lender, on letters of credit.
	 
	 	(c)     “Return”, for any period, means the return as determined by
such Related Lender on the Advances and Letters of Credit based
upon its total capital requirements and a reasonable attribution
formula that takes account of the Capital Adequacy Rules then in
effect and costs of issuing or maintaining any Letter of Credit.
Return may be calculated for each calendar quarter and for the
shorter period between the end of a calendar quarter and the date
of termination in whole of this Agreement.
	 
	 	(d)     “Rule Change” means any change in any Capital Adequacy Rule or
L/C Rule occurring after the date of this Agreement, but the term
does not include any changes in applicable requirements that as of
the date hereof are scheduled to take place under the existing
Capital Adequacy Rules or L/C Rules or any increases in the capital
that any Related Lender is required to maintain to the extent that
the increases are required due to a regulatory authority’s
assessment of the financial condition of such Related Lender.
	 
	 	(e)     “Related Lender” includes (but is not limited to) the Lender,
any parent corporation of the Lender and any assignee of any
interest of the Lender hereunder and any participant in the loans
made hereunder.



Certificates of any Related Lender sent to the Borrower from time to time
claiming compensation under this Section 2.9, stating the reason therefor and
setting forth in reasonable detail the calculation of the additional amount or
amounts to be paid to the Related Lender hereunder to restore its Return shall
be conclusive absent manifest error. In determining such amounts, the Related
Lender may use any reasonable averaging and attribution methods.


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     Section 2.10. Voluntary Prepayment; Reduction of the Maximum Line;
Termination of the Credit Facility by the Borrower. The Borrower may prepay
the Advances in whole at any time or from time to time in part without penalty.
The Borrower may terminate the Credit Facility or reduce the Maximum Line at
any time. If the Borrower reduces the Maximum Line to zero, all Obligations
shall be immediately due and payable. Upon termination of the Credit
Facility and payment and performance of all Obligations, the Lender shall
release or terminate the Security Interest and the Security Documents to which
the Borrower is entitled by law.


     Section 2.11. Mandatory Prepayment. Without notice or demand, if the sum
of the outstanding principal balance of the Advances plus the L/C Amount shall
at any time exceed the Borrowing Base, the Borrower shall (i) first,
immediately prepay the Advances to the extent necessary to eliminate such
excess; and (ii) if prepayment in full of the Advances is insufficient to
eliminate such excess, pay to the Lender in immediately available funds for
deposit in the Special Account an amount equal to the remaining excess. Any
payment received by the Lender under this Section 2.11 shall be applied, first
to the outstanding principal balance of the Advances and second, to any other
Obligations, in such order and in such amounts as the Lender, in its
discretion, may from time to time determine. Any prepayment under Section 2.10
shall be applied first to the outstanding principal balance of the Advances and
second, to any other Obligations, in such order and in such amounts as the
Lender, in its discretion, may from time to time determine.


     Section 2.12. Payment. All payments to the Lender shall be made in
immediately available funds and shall be applied to the Obligations upon
receipt by the Lender. The Lender may hold all payments not constituting
immediately available funds for three (3) additional days before applying them
to the Obligations. Notwithstanding anything in Section 2.1, the Borrower
hereby authorizes the Lender, in its discretion at any time or from time to
time without the Borrower’s request and even if the conditions set forth in
Section 4.2 would not be satisfied, to make an Advance in an amount equal to
the portion of the Obligations from time to time due and payable.


     Section 2.13. Payment on Non-Banking Days. Whenever any payment to be
made hereunder shall be stated to be due on a day which is not a Banking Day,
such payment may be made on the next succeeding Banking Day, and such extension
of time shall in such case be included in the computation of interest on the
Advances or the fees hereunder, as the case may be.


     Section 2.14. Use of Proceeds. The Borrower shall use the proceeds of the
Advances, and each Letter of Credit, if any, for ordinary working capital
purposes and for the purpose of paying all amounts owed by the Borrower to
Wells Fargo Bank Minnesota, National Association.


     Section 2.15. Liability Records. The Lender may maintain from time to
time, at its discretion, liability records as to the Obligations. All entries
made on any such record shall be presumed correct until the Borrower
establishes the contrary. Upon the Lender’s demand, the


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Borrower will admit and certify in writing the exact principal balance of the
Obligations that the Borrower then asserts to be outstanding. Any billing statement or accounting
rendered by the Lender shall be conclusive and fully binding on the Borrower
unless the Borrower gives the Lender specific written notice of exception
within 30 days after receipt.


ARTICLE III



Security Interest; Occupancy; Setoff



     Section 3.1. Grant of Security Interest. The Borrower hereby pledges,
assigns and grants to the Lender a security interest (collectively referred to
as the “Security Interest”) in the Collateral, as security for the payment and
performance of the Obligations.


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


     Section 3.3. Assignment of Insurance. As additional security for the
payment and performance of the Obligations, the Borrower hereby assigns to the
Lender any and all monies (including, without limitation, proceeds of insurance
and refunds of unearned premiums) due or to become due under, and all other
rights of the Borrower with respect to, any and all policies of insurance now
or at any time hereafter covering the Collateral or any evidence thereof or any
business records or valuable papers pertaining thereto, and the Borrower hereby
directs the issuer of any such policy to pay all such monies directly to the
Lender. At any time, whether or not a Default Period then exists, the Lender
may (but need not), in the Lender’s name or in the Borrower’s name, execute and
deliver proof of claim, receive all such monies, endorse checks and other
instruments representing payment of such monies, and adjust, litigate,
compromise or release any claim against the issuer of any such policy.


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     Section 3.4. Occupancy.



		
	 	(a)     The Borrower hereby irrevocably grants to the Lender the right
to take possession of the Premises at any time during a Default
Period.




		
	 	(b)     The Lender may use the Premises only to hold, process,
manufacture, sell, use, store, liquidate, realize upon or otherwise
dispose of goods that are Collateral
and for other purposes that the Lender may in good faith deem to be
related or incidental purposes.




		
	 	(c)     The Lender’s right to hold the Premises shall cease and
terminate upon the earlier of (i) payment in full and discharge of
all Obligations and termination of the Commitment, and (ii) final
sale or disposition of all goods constituting Collateral and
delivery of all such goods to purchasers.




		
	 	(d) The Lender shall not be obligated to pay or account for any
rent or other compensation for the possession, occupancy or use of
any of the Premises; provided, however, that if the Lender does pay
or account for any rent or other compensation for the possession,
occupancy or use of any of the Premises, the Borrower shall
reimburse the Lender promptly for the full amount thereof. In
addition, the Borrower will pay, or reimburse the Lender for, all
taxes, fees, duties, imposts, charges and expenses at any time
incurred by or imposed upon the Lender by reason of the execution,
delivery, existence, recordation, performance or enforcement of
this Agreement or the provisions of this Section 3.4.



     Section 3.5. License. The Borrower hereby grants to the Lender a
non-exclusive, worldwide and royalty-free license to use or otherwise exploit
all trademarks, franchises, trade names, copyrights and patents of the Borrower
for the purpose of selling, leasing or otherwise disposing of any or all
Collateral during any Default Period.


     Section 3.6. Financing Statement. The Borrower hereby authorizes the
Lender to file one or more financing statements or continuation statements in
respect thereof, and amendments thereto, relating to and in order to perfect
the security interests granted hereby, without the signature of the Borrower
where permitted by law. A photocopy or other reproduction of this Security
Agreement or any financing statement covering the Collateral or any part
thereof shall be sufficient as a financing statement where permitted by law.
For this purpose, the following information is set forth:


     Name and address of Debtor:


     Winland
 Electronics, Inc.

     1950 Excel Drive

     Mankato, MN 56001


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     Federal
Tax Identification No. 41-0992135

     Organizational I.D. No. 2E-472


     Name and address of Secured Party:


     M&I
Marshall & Ilsley Bank

     770 North Water Street

     Milwaukee, WI 53202

     Federal Tax Identification No. 39-0452805


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


ARTICLE IV



Conditions of Lending



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



		
	 	(a) This Agreement, properly executed by the Borrower.
	 
	 	(b) The Note, properly executed by the Borrower.
	 
	 	(c) A true and correct copy of any and all leases pursuant to which
the Borrower is leasing the Premises, together with a landlord’s
disclaimer and consent with respect to each such lease that is
described on Schedule 4.1(c) hereto.
	 
	 	(d) Current searches of appropriate filing offices showing that (i)
no judgments or state or federal tax liens have been filed and
remain in effect against the Borrower, (ii) no financing statements
or assignments of patents, trademarks or copyrights have been filed
and remain in effect against the Borrower except those financing
statements and assignments of patents, trademarks or copyrights



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	 	relating to Permitted Liens or to liens held by Persons who have
agreed in writing that upon receipt of proceeds of the Advances,
they will deliver UCC releases and/or terminations and releases of
such assignments of patents, trademarks or copyrights satisfactory
to the Lender, and (iii) the Lender has duly filed all financing
statements necessary to perfect the Security Interest, to the
extent the Security Interest is capable of being perfected by
filing.
	 
	 	(e)     A certificate of the Borrower’s Secretary or Assistant
Secretary certifying as to (i) the resolutions of the Borrower’s
directors and, if required, shareholders,
authorizing the execution, delivery and performance of the Loan
Documents, (ii) the Borrower’s articles of incorporation, with all
amendments, and bylaws, and (iii) the signatures of the Borrower’s
officers and any other agents authorized to execute and deliver the
Loan Documents and other instruments, agreements and certificates,
including Advance requests, on the Borrower’s behalf.
	 
	 	(f)     A current certificate issued by the Secretary of State of
Minnesota, certifying that the Borrower is in good standing and is
otherwise in compliance with all applicable organizational
requirements of the State of Minnesota.
	 
	 	(g)     Evidence that the Borrower is duly licensed or qualified to
transact business in all jurisdictions where the character of the
property owned or leased or the nature of the business transacted
by it makes such licensing or qualification necessary.
	 
	 	(h)     An opinion of counsel to the Borrower, addressed to the Lender.
	 
	 	(i)     Certificates of the insurance required hereunder, with all
hazard insurance containing a lender’s loss payable endorsement in
the Lender’s favor and with all liability insurance naming the
Lender as an additional insured.
	 
	 	(j)     Payment of the fees and commissions due through the date of the
initial Advance or Letter of Credit under Section 2.7 and expenses
incurred by the Lender through such date and required to be paid by
the Borrower under Section 9.7, including all legal expenses
incurred through the date of this Agreement.
	 
	 	(k)     Such other documents as the Lender in its sole, reasonable
discretion may require.



     Section 4.2. Conditions Precedent to All Advances and Letters of Credit.
The Lender’s obligation to make each Advance or to cause the Issuer to issue
any Letter of Credit shall be subject to the further conditions precedent that
on such date:



		
	 	(a)     the representations and warranties contained in Article V are
correct on and as of the date of such Advance or issuance of Letter
of Credit as though made on and as of such date, except to the
extent that such representations and warranties relate solely to an
earlier date; and



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	 	(b) no event has occurred and is continuing, or would result from
such Advance or the issuance of such Letter of Credit, as the case
may be, which constitutes a Default or an Event of Default.



ARTICLE V



Representations and Warranties



     The Borrower represents and warrants to the Lender as follows:


     Section 5.1. Corporate Existence and Power; Name; Chief Executive Office;
Inventory and Equipment Locations; Tax Identification Number. The Borrower is
a corporation, duly organized, validly existing and in good standing under the
laws of the State of Minnesota and is duly licensed or qualified to transact
business in all jurisdictions where the character of the property owned or
leased or the nature of the business transacted by it makes such licensing or
qualification necessary. The Borrower has all requisite power and authority,
corporate or otherwise, to conduct its business, to own its properties and to
execute and deliver, and to perform all of its obligations under, the Loan
Documents. During its existence, the Borrower has done business solely under
the names set forth in Schedule 5.1 hereto. The Borrower’s chief executive
office and principal place of business is located at the address set forth in
Schedule 5.1 hereto, and all of the Borrower’s records relating to its business
or the Collateral are kept at that location. All Inventory and Equipment is
located at that location or at one of the other locations set forth in Schedule
5.1 hereto. The Borrower’s tax identification numbers and organizational
identification number are correctly set forth in Section 3.6 hereto.


     Section 5.2. Authorization of Borrowing; No Conflict as to Law or
Agreements. The execution, delivery and performance by the Borrower of the
Loan Documents and the borrowings from time to time hereunder have been duly
authorized by all necessary corporate action and do not and will not (i)
require any consent or approval of the Borrower’s shareholders; (ii) require
any authorization, consent or approval by, or registration, declaration or
filing with, or notice to, any governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, or any third party,
except such authorization, consent, approval, registration, declaration, filing
or notice as has been obtained, accomplished or given prior to the date hereof;
(iii) violate any provision of any law, rule or regulation (including, without
limitation, Regulation X of the Board of Governors of the Federal Reserve
System) or of any order, writ, injunction or decree presently in effect having
applicability to the Borrower or of the Borrower’s articles of organization or
operating agreement; (iv) result in a breach of or constitute a default under
any indenture or loan or credit agreement or any other material agreement,
lease or instrument to which the Borrower is a party or by which it or its
properties may be bound or affected; or (v) result in, or require, the creation
or imposition of any mortgage,


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deed of trust, pledge, lien, security interest
or other charge or encumbrance of any nature (other than the Security Interest)
upon or with respect to any of the properties now owned or hereafter acquired
by the Borrower.


     Section 5.3. Legal Agreements. This Agreement constitutes and, upon due
execution by the Borrower, the other Loan Documents will constitute the legal,
valid and binding obligations of the Borrower, enforceable against the Borrower
in accordance with their respective terms.


     Section 5.4. Subsidiaries. The Borrower has no Subsidiaries.


     Section 5.5. Financial Condition; No Adverse Change. The Borrower has
heretofore furnished to the Lender its balance sheet dated as of March 31, 2003
in the form filed with the SEC, and statements of operations and cash flow for
the period then ended. Such balance sheet and statements fairly present
Borrower’s financial condition on the date thereof. Since the date of such
balance sheet and statements, there has been no material adverse change in the
operations or the financial condition of the Borrower.


     Section 5.6. Litigation. Except as set forth on Schedule 5.6 hereto,
there are no actions, suits or proceedings pending or, to the Borrower’s
knowledge, threatened against or affecting the Borrower or the properties of
the Borrower before any court or governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, which, if determined
adversely to the Borrower, would have a material adverse effect on the
financial condition, properties or operations of the Borrower.


     Section 5.7. Regulation U. The Borrower is not engaged in the business of
extending credit for the purpose of purchasing or carrying margin stock (within
the meaning of Regulation U of the Board of Governors of the Federal Reserve
System), and no part of the proceeds of any Advance will be used to purchase or
carry any margin stock or to extend credit to others for the purpose of
purchasing or carrying any margin stock.


     Section 5.8. Taxes. The Borrower has paid or caused to be paid to the
proper authorities when due all federal, state and local taxes required to be
withheld by the Borrower. The Borrower has filed all federal, state and local
tax returns which are required to be filed, and the Borrower has paid or caused
to be paid to the respective taxing authorities all taxes as shown on said
returns or on any assessment received by the Borrower to the extent such taxes
have become due.


     Section 5.9. Titles and Liens. The Borrower has good and absolute title
to all Collateral described in the collateral reports provided to the Lender
and all other Collateral, properties and assets reflected in the latest
financial statements referred to in Section 5.5 and all proceeds thereof, free
and clear of all mortgages, security interests, liens and encumbrances, except
for Permitted Liens. No financing statement naming the Borrower as debtor is
on file in any office except to perfect only Permitted Liens.


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     Section 5.10. Plans. Except as set forth in Schedule 5.10 hereto, the
Borrower does not maintain and has not maintained any Plan. The Borrower has
not received any notice and has no knowledge that it is not in compliance in
all material respects with any of the requirements of ERISA. No Reportable
Event or other fact or circumstance which may have an adverse effect on any
Plan’s tax qualified status exists in connection with any Plan. The Borrower
has no:



		
	 	(a)     Accumulated funding deficiency within the meaning of ERISA; or
	 
	 	(b)     Liability, or knows of any fact or circumstances which could
result in any liability, to the Pension Benefit Guaranty
Corporation, the Internal Revenue
Service, the Department of Labor or any participant in connection
with any Plan (other than accrued benefits which or which may
become payable to participants or beneficiaries of any such Plan).



     Section 5.11. Default. The Borrower is in compliance with all provisions
of all agreements, instruments, decrees and orders to which it is a party or by
which it or its property is bound or affected, the breach or default of which
could have a material adverse effect on the Borrower’s financial condition,
properties or operations.


     Section 5.12. Environmental Matters.



		
	 	(a)     Definitions. As used in this Agreement, the following terms
shall have the following meanings:




		
	 	(i)     “Environmental Law” means any federal, state, local or
other governmental statute, regulation, law or ordinance
dealing with the protection of human health and the
environment.
	 
	 	(ii)     “Hazardous Substances” means pollutants, contaminants,
hazardous substances, hazardous wastes, petroleum and
fractions thereof, and all other chemicals, wastes,
substances and materials listed in, regulated by or
identified in any Environmental Law.




		
	 	(b)     To the Borrower’s best knowledge, there are not present in, on
or under the Premises any Hazardous Substances in such form or
quantity as to create any liability or obligation for either the
Borrower or the Lender under common law of any jurisdiction or
under any Environmental Law, and no Hazardous Substances have ever
been stored, buried, spilled, leaked, discharged, emitted or
released in, on or under the Premises in such a way as to create
any such liability.




		
	 	(c)     The Borrower has not disposed of Hazardous Substances in such a
manner as to create any liability under any Environmental Law.



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	 	(d)     To the Borrower’s best knowledge, there are not any requests,
claims, notices, investigations, demands, administrative
proceedings, hearings or litigation, relating in any way to the
Premises or the Borrower, alleging liability under, violation of,
or noncompliance with any Environmental Law or any license, permit
or other authorization issued pursuant thereto. To the Borrower’s
best knowledge, no such matter is threatened or impending.
	 
	 	(e)     The Borrower’s businesses are being conducted in accordance
with all Environmental Laws and all licenses, permits and other
authorizations required pursuant to any Environmental Law and
necessary for the lawful and efficient operation of such businesses
are in the Borrower’s possession and are in full force and effect.
No permit required under any Environmental Law is scheduled to
expire within 12 months and there is no threat that any such permit
will be withdrawn, terminated, limited or materially changed.
	 
	 	(f)     To the Borrower’s best knowledge, the Premises are not and
never have been listed on the National Priorities List, the
Comprehensive Environmental Response, Compensation and Liability
Information System or any similar federal, state or local list,
schedule, log, inventory or database.
	 
	 	(g)     The Borrower has delivered to Lender all environmental
assessments, audits, reports, permits, licenses and other documents
describing or relating in any way to the Premises or Borrower’s
businesses and in its possession; and the Borrower is not aware of
any other material environmental assessments, audits, reports,
permits, licenses and other documents describing or relating in any
way to the Premises or Borrower’s businesses.



     Section 5.13. Submissions to Lender. All financial and other information
provided to the Lender by or on behalf of the Borrower in connection with the
Borrower’s request for the credit facilities contemplated hereby is true and
correct in all material respects and, as to any projections, valuations or
proforma financial statements, present a good faith opinion as to such
projections, valuations and proforma condition and results.


     Section 5.14. Financing Statements. The Borrower has approved and
authorized the Lender to file financing statements sufficient when filed to
perfect the Security Interest and the other security interests created by the
Security Documents. When such financing statements are filed in the offices
noted therein, the Lender will have a valid and perfected security interest in
all Collateral and all other collateral described in the Security Documents
which is capable of being perfected by filing financing statements. None of
the Collateral or other collateral covered by the Security Documents is or will
become a fixture on real estate, unless a sufficient fixture filing is in
effect with respect thereto.


     Section 5.15. Rights to Payment. Each right to payment and each
instrument, document, chattel paper and other agreement constituting or
evidencing Collateral or other collateral covered by the Security Documents is
(or, in the case of all future Collateral or such other collateral, will be
when arising or issued) the valid, genuine and legally enforceable obligation,
subject to no defense, setoff or counterclaim, of the account debtor or other
obligor named therein or in the Borrower’s records pertaining thereto as being
obligated to pay such obligation.


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ARTICLE VI



Borrower’s Affirmative Covenants



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


     Section 6.1. Reporting Requirements. The Borrower will deliver, or cause
to be delivered, to the Lender each of the following, which shall be in form
and detail acceptable to the Lender:



		
	 	(a)     as soon as available, and in any event within 90 days after the
end of each fiscal year of the Borrower, the Borrower’s audited
financial statements with the unqualified opinion of independent
certified public accountants selected by the Borrower and
reasonably acceptable to the Lender, which annual financial
statements shall include the Borrower’s balance sheet as at the end
of such fiscal year and the related statements of the Borrower’s
income, retained earnings and cash flows for the fiscal year then
ended, prepared, if the Lender so requests, on a consolidating and
consolidated basis to include the Borrower and any Subsidiaries,
all in reasonable detail and prepared in accordance with GAAP,
together with (i) copies of all management letters prepared by such
accountants; (ii) a report signed by such accountants stating that
in making the investigations necessary for said opinion they
obtained no knowledge, except as specifically stated, of any
Default or Event of Default hereunder and setting forth all
relevant facts in reasonable detail to evidence, and the
computations as to, whether or not the Borrower is in compliance
with the requirements set forth in Sections 6.12 and 6.13; and
(iii) a certificate of the Borrower’s chief financial officer
stating that such financial statements have been prepared in
accordance with GAAP and whether or not such officer has knowledge
of the occurrence of any Default or Event of Default hereunder and,
if so, stating in reasonable detail the facts with respect thereto;
	 
	 	(b)     as soon as available and in any event within 30 days after the
end of each month, an unaudited/internal balance sheet, statements
of cash flow and statements of income and retained earnings of the
Borrower as at the end of and for such month and for the year to
date period then ended, prepared, if the Lender so requests, on a
consolidating and consolidated basis to include the Borrower and
any Subsidiaries, in reasonable detail and stating in comparative
form the figures for the corresponding date and periods in the
previous year and the projections



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	 	relating to the current year, all prepared in accordance with GAAP, subject to year-end audit
adjustments; and accompanied by a borrowing base certificate
substantially in the form of Exhibit C hereto;

	 
	 	(c)     as soon as available and in any event within 30 days after the
beginning of each fiscal year of the Borrower, the projected
balance sheets, cash flow statements and income statements for each
month of such year, each in reasonable detail, representing the
Borrower’s good faith projections and identical to the projections
used by the Borrower for internal planning purposes, together with
a schedule of capital expenditures and such other supporting
schedules and information as the Lender may in its reasonable
discretion require;
	 
	 	(d)     as soon as available and in any event within 30 days after the
end of each calendar quarter, a compliance certificate of the
Borrower’s chief financial officer, substantially in the form of
Exhibit B hereto stating all relevant facts in reasonable detail to
evidence, and the computations as to, whether or not the Borrower
is in compliance with the requirements set forth in Sections 6.12
and 6.13;
	 
	 	(e)     immediately after the commencement thereof, notice in writing
of all litigation and of all proceedings before any governmental or
regulatory agency affecting the Borrower which seek a monetary
recovery against the Borrower in excess of $100,000;
	 
	 	(f)     as promptly as practicable (but in any event not later than
five business days) after an officer of the Borrower obtains
knowledge of the occurrence of any event which constitutes a
Default or Event of Default hereunder, notice of such occurrence,
together with a detailed statement by a responsible officer of the
Borrower of the steps being taken by the Borrower to cure the
effect of such breach, default or event;
	 
	 	(g)     promptly upon knowledge thereof, notice of any disputes or
claims by the Borrower’s customers exceeding $50,000 individually
or $100,000 in the aggregate outstanding at any given time during
any fiscal year;
	 
	 	(h)     promptly upon knowledge thereof, notice of any loss of or
material damage to any Collateral or other collateral covered by
the Security Documents or of any substantial adverse change in any
Collateral or such other collateral or the prospect of payment
thereof;
	 
	 	(i)     promptly upon their distribution, copies of all financial
statements, reports and proxy statements which the Borrower shall
have sent to its stockholders; and



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	 	(j)     promptly upon knowledge thereof, notice of the Borrower’s
violation of any law, rule or regulation, the non-compliance with
which could materially and adversely affect the Borrower’s business
or its financial condition.



     Section 6.2. Books and Records; Inspection and Examination. The Borrower
will keep accurate books of record and account for itself pertaining to the
Collateral and pertaining to the Borrower’s business and financial condition in
which true and complete entries will be made in accordance with GAAP and, upon
the Lender’s request, will permit any officer, employee, attorney or accountant
for the Lender to audit, review, make extracts from or copy any and all
corporate and financial books and records of the Borrower at all times during
ordinary business hours, and to discuss the Borrower’s affairs with any of its
directors, officers, accountants or attorneys. The Borrower will permit the
Lender, or its employees, accountants, attorneys or agents, to examine and
inspect any Collateral, other collateral covered by the Security Documents or
any other property of the Borrower at any time during ordinary business hours.
The Borrower shall reimburse the Lender for all costs and expenses
incurred in connection with all such examinations and inspections occurring
during any Default Period.


     Section 6.3. Account Verification. The Lender may at any time during a
Default Period send or require the Borrower to send requests for verification
of accounts or notices of assignment to account debtors and other obligors.
The Lender may also at any time and from time to time telephone account debtors
and other obligors to verify accounts.


     Section 6.4. Compliance with Laws.



		
	 	(a)     The Borrower will (i) comply with the requirements of
applicable laws and regulations, the non-compliance with which
would materially and adversely affect its business or its financial
condition and (ii) use and keep the Collateral, and require that
others use and keep the Collateral, only for lawful purposes,
without violation of any federal, state or local law, statute or
ordinance.
	 
	 	(b)     Without limiting the foregoing undertakings, the Borrower
specifically agrees that it will comply with all applicable
Environmental Laws and obtain and comply with all permits, licenses
and similar approvals required by any Environmental Laws, and will
not generate, use, transport, treat, store or dispose of any
Hazardous Substances in such a manner as to create any liability or
obligation under the common law of any jurisdiction or any
Environmental Law.



     Section 6.5. Payment of Taxes and Other Claims. The Borrower will pay or
discharge, when due, (a) all taxes, assessments and governmental charges levied
or imposed upon it or upon its income or profits, upon any properties belonging
to it (including, without limitation, the Collateral) or upon or against the
creation, perfection or continuance of the Security Interest, prior to the date
on which penalties attach thereto, (b) all federal, state and local taxes
required to be withheld by it, and (c) all lawful claims for labor, materials
and supplies which, if unpaid, might by law become a lien or charge upon any
properties of the Borrower; provided, that the


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Borrower shall not be required
to pay any such tax, assessment, charge or claim whose amount, applicability or
validity is being contested in good faith by appropriate proceedings and for
which proper reserves have been made.


     Section 6.6. Maintenance of Properties.



		
	 	(a)     The Borrower will keep and maintain the Collateral, the other
collateral covered by the Security Documents and all of its other
properties necessary or useful in its business in good condition,
repair and working order (normal wear and tear excepted) and will
from time to time replace or repair any worn, defective or broken
parts; provided, however, that nothing in this Section 6.6 shall
prevent the Borrower from discontinuing the operation and
maintenance of any of its properties if such discontinuance is, in
the Borrower’s judgment, desirable in the conduct of the Borrower’s
business and not disadvantageous in any material respect to the
Lender.
	 
	 	(b)     The Borrower will defend the Collateral against all claims or
demands of all persons (other than the Lender and Permitted Liens)
claiming the Collateral or any interest therein.
	 
	 	(c)     The Borrower will keep all Collateral and other collateral
covered by the Security Documents free and clear of all security
interests, liens and encumbrances except Permitted Liens.



     Section 6.7. Insurance. The Borrower will obtain and at all times
maintain insurance with insurers believed by the Borrower to be responsible and
reputable, in such amounts and against such risks as is usually carried by
companies engaged in similar business and owning similar properties in the same
general areas in which the Borrower operates. Without limiting the generality
of the foregoing, the Borrower will at all times keep all tangible Collateral
insured against risks of fire (including so-called extended coverage), theft,
collision (for Collateral consisting of motor vehicles) and such other risks
and in such amounts as the Lender may reasonably request, with any loss payable
to the Lender to the extent of its interest, and all policies of such insurance
shall contain a lender’s loss payable endorsement for the Lender’s benefit
acceptable to the Lender. All policies of liability insurance required
hereunder shall name the Lender as an additional insured.


     Section 6.8. Preservation of Existence. The Borrower will preserve and
maintain its existence and all of its rights, privileges and franchises
necessary or desirable in the normal conduct of its business.


     Section 6.9. Delivery of Instruments, etc. Upon request by the Lender,
the Borrower will promptly deliver to the Lender in pledge the originals of all
instruments, documents and chattel papers constituting Collateral, duly
endorsed or assigned by the Borrower.


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     Section 6.10. Performance by the Lender. If the Borrower at any time
fails to perform or observe any of the foregoing covenants contained in this
Article VI or elsewhere herein, and if such failure shall continue for a period
of ten calendar days after the Lender gives the Borrower written notice thereof
(or in the case of the agreements contained in Sections 6.5 and 6.7,
immediately upon the occurrence of such failure, without notice or lapse of
time), the Lender may, but need not, perform or observe such covenant on behalf
and in the name, place and stead of the Borrower (or, at the Lender’s option,
in the Lender’s name) and may, but need not, take any and all other actions
which the Lender may reasonably deem necessary to cure or correct such failure
(including, without limitation, the payment of taxes, the satisfaction of
security interests, liens or encumbrances, the performance of obligations owed
to account debtors or other obligors, the procurement and maintenance of
insurance, the execution of assignments, security agreements and financing
statements, and the endorsement of instruments); and the Borrower shall
thereupon pay to the Lender on demand the amount of all monies expended and all
costs and expenses (including reasonable attorneys’ fees and legal expenses)
incurred by the Lender in connection with or as a result of the performance or
observance of such agreements or the taking of such action by the Lender,
together with interest thereon from the date expended or incurred at the
Floating Rate. To facilitate the Lender’s performance or observance of such
covenants of the Borrower, the Borrower hereby irrevocably appoints the Lender, or the
Lender’s delegate, acting alone, as the Borrower’s attorney in fact (which
appointment is coupled with an interest) with the right (but not the duty) from
time to time to create, prepare, complete, execute, deliver, endorse or file in
the name and on behalf of the Borrower any and all instruments, documents,
assignments, security agreements, financing statements, applications for
insurance and other agreements and writings required to be obtained, executed,
delivered or endorsed by the Borrower under this Section 6.10.


     Section 6.11. Maintenance of Accounts. The Borrower will maintain its
operating accounts at the Lender.


     Section 6.12. Minimum Tangible Net Worth. The Borrower will maintain its
Tangible Net Worth, on a consolidated basis with all Subsidiaries, as of the
end of each fiscal quarter, at not less than the sum of (a) the Borrower’s
actual Tangible Net Worth as of the most recent fiscal year end, plus (b) 60%
of the Borrower’s year-to-date Net Income (after taxes), excluding losses, for
the then-current fiscal year.


     Section 6.13. Maximum Leverage Ratio. The Borrower will maintain its
Leverage Ratio, on a consolidated basis with all Subsidiaries, as of the end of
each fiscal quarter, at not more than 1.50 to 1.0.


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ARTICLE VII



Negative Covenants



     So long as the Obligations shall remain unpaid, or the Credit Facility
shall remain outstanding, the Borrower agrees that, without the Lender’s prior
written consent:


     Section 7.1. Liens. The Borrower will not create, incur or suffer to
exist any mortgage, deed of trust, pledge, lien, security interest, assignment
or transfer upon or of any of its assets, now owned or hereafter acquired, to
secure any indebtedness; excluding, however, from the operation of the
foregoing, the following (collectively, “Permitted Liens”):



		
	 	(a)     covenants, restrictions, easements and minor irregularities in
title which do not materially interfere with the Borrower’s
business or operations as presently conducted;




		
	 	(b)     liens for taxes not yet due or which are being contested in
good faith by appropriate proceeding promptly initiated and
diligently conducted in accordance with Section 6.5 hereof;




		
	 	(c)     liens incidental to the normal conduct of the business or the
ownership of properties and assets of the Borrower (including liens
in connection with worker’s compensation, unemployment insurance,
old age pensions, other social security
benefits or obligations and other like laws but excluding liens in
connection with the incurrence of indebtedness) and liens to secure
statutory obligations, surety, penalty or appeal bonds or other
like liens of general nature incurred in the ordinary course of
business and not in connection with the incurrence of indebtedness
and which do not in the aggregate materially impair (1) the use of
such property or assets in the operation of the business of the
Borrower, or (2) in Lender’s judgment, the Security Interest;




		
	 	(d)     mortgages, deeds of trust, pledges, liens, security interests
and assignments in existence on the date hereof and listed in
Schedule 7.1 hereto, securing indebtedness for borrowed money
permitted under Section 7.2;




		
	 	(e)     the Security Interest and liens and security interests created
by the Security Documents; and




		
	 	(f)     purchase money security interests relating to the acquisition
of machinery and equipment of the Borrower not exceeding the lesser
of cost or fair market value thereof and so long as no Default
Period is then in existence and none would exist immediately after
such acquisition.



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     Section 7.2. Indebtedness. The Borrower will not incur, create, assume or
permit to exist any indebtedness or liability on account of deposits or
advances or any indebtedness for borrowed money or letters of credit issued on
the Borrower’s behalf, or any other indebtedness or liability evidenced by
notes, bonds, debentures or similar obligations, except:



		
	 	(a)     indebtedness arising hereunder;




		
	 	(b)     indebtedness of the Borrower in existence on the date hereof
and listed in Schedule 7.2 hereto;




		
	 	(c)     indebtedness of the Borrower which is unsecured;




		
	 	(d)     indebtedness relating to liens permitted in accordance with
Section 7.1; provided, however, that the sum of any indebtedness
relating to liens permitted under Section 7.1 (f) and indebtedness
permitted under Section 7.2(c) shall not exceed $250,000.00 at any
one time in the aggregate; and




		
	 	(e)     indebtedness consisting of capital lease obligations in an
outstanding amount not to exceed $250,000 at any one time in the
aggregate.



     Section 7.3. Guaranties. The Borrower will not assume, guarantee, endorse
or otherwise become directly or contingently liable in connection with any
obligations of any other Person, except:



		
	 	(a)     the endorsement of negotiable instruments by the Borrower for
deposit or collection or similar transactions in the ordinary
course of business; and
	 
	 	(b)     guaranties, endorsements and other direct or contingent
liabilities in connection with the obligations of other Persons, in
existence on the date hereof and listed in Schedule 7.2 hereto.



     Section 7.4. Investments and Subsidiaries.



		
	 	(a)     The Borrower will not purchase or hold beneficially any stock
or other securities or evidences of indebtedness of, make or permit
to exist any loans or advances to, or make any investment or
acquire any interest whatsoever in, any other Person, including
specifically but without limitation any partnership or joint
venture.




		
	 	(b)     The Borrower will not create or permit to exist any Subsidiary.



     Section 7.5. Dividends. The Borrower will not declare or pay any
dividends on any class of its stock or make any payment on account of the
purchase, redemption or other retirement of any such stock or make any
distribution in respect thereof, either directly or indirectly; provided,
however, that dividends paid in stock of the Borrower shall not be restricted
pursuant to this Section 7.5.


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     Section 7.6. Sale or Transfer of Assets; Suspension of Business
Operations. The Borrower will not sell, lease, assign, transfer or otherwise
dispose of (i) the stock of any Subsidiary, (ii) all or a substantial part of
its assets, or (iii) any Collateral or any interest therein (whether in one
transaction or in a series of transactions) to any other Person, other than the
sale of Inventory in the ordinary course of business and the sale of worn out
or obsolete equipment, and will not liquidate, dissolve or suspend business
operations. The Borrower will not in any manner transfer any property without
prior or present receipt of full and adequate consideration.


     Section 7.7. Consolidation and Merger; Asset Acquisitions. The Borrower
will not consolidate with or merge into any Person, or permit any other Person
to merge into it, or acquire (in a transaction analogous in purpose or effect
to a consolidation or merger) all or substantially all the assets of any other
Person.


     Section 7.8. Sale and Leaseback. The Borrower will not enter into any
arrangement, directly or indirectly, with any other Person whereby the Borrower
shall sell or transfer any real or personal property, whether now owned or
hereafter acquired, and then or thereafter rent or lease as lessee such
property or any part thereof or any other property which the Borrower intends
to use for substantially the same purpose or purposes as the property being
sold or transferred.


     Section 7.9. Restrictions on Nature of Business. The Borrower will not
engage in any line of business materially different from that presently engaged
in by the Borrower and will not purchase, lease or otherwise acquire assets not
related to its business.


     Section 7.10. Capital Expenditures. The Borrower will not incur or
contract to incur Capital Expenditures of more than $250,000.00 in the
aggregate during any fiscal year.


     Section 7.11. Accounting. The Borrower will not adopt any material change
in accounting principles other than as required by GAAP. The Borrower will not
adopt, permit or consent to any change in its fiscal year.


     Section 7.12. Defined Benefit Pension Plans. The Borrower will not adopt,
create, assume or become a party to any defined benefit pension Plan, unless
disclosed to the Lender pursuant to Section 5.10.


     Section 7.13. Place of Business; Name. The Borrower will not transfer its
chief executive office or principal place of business, or move, relocate, close
or sell any business location. The Borrower will not permit any tangible
Collateral or any records pertaining to the Collateral to be located in any
state or area in which, in the event of such location, a financing statement
covering such Collateral would be required to be, but has not in fact been,
filed in order to perfect the Security Interest. The Borrower will not change
its name.


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     Section 7.14. Corporate Status. The Borrower shall not change or rescind
its status as a Minnesota corporation.


ARTICLE VIII



Events of Default, Rights and Remedies



     Section 8.1. Events of Default. “Event of Default”, wherever used herein,
means any one of the following events:



		
	 	(a)     Default in the payment of the Obligations when they become due
and payable;




		
	 	(b)     Failure to pay when due any amount specified in Section 2.3
relating to the Borrower’s Obligation of Reimbursement, or failure
to pay when due or upon termination of the Credit Facility any
amounts required to be paid for deposit in the Special Account
under Section 2.4 or;




		
	 	(c)     Default in the payment of any fees, commissions, costs or
expenses required to be paid by the Borrower under this Agreement;




		
	 	(d)     Default in the performance, or breach, of any covenant or
agreement of the Borrower contained in this Agreement or any of the
other Loan Documents, and the continuance of such default for a
period of fifteen (15) days following notice from the Lender;




		
	 	(e)     The Borrower shall be or become insolvent, or admit in writing
its inability to pay its debts as they mature, or make an
assignment for the benefit of creditors; or the Borrower shall
apply for or consent to the appointment of any receiver, trustee,
or similar officer for it or for all or any substantial part of its
property; or such receiver, trustee or similar officer shall be
appointed without the application or consent of the Borrower; or
the Borrower shall institute (by petition, application, answer,
consent or otherwise) any bankruptcy, insolvency, reorganization,
arrangement, readjustment of debt, dissolution, liquidation or
similar proceeding relating to it under the laws of any
jurisdiction; or any such proceeding (other than a proceeding
described in Section 8.1(f) below) shall be instituted (by
petition, application or otherwise) against the Borrower; or any
judgment, writ, warrant of attachment or execution or similar
process shall be issued or levied against a substantial part of the
property of the Borrower;




		
	 	(f)     A petition shall be filed by or against the Borrower under the
United States Bankruptcy Code naming the Borrower as debtor and, if
filed against the Borrower, shall remain undismissed for sixty (60)
days;



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	 	(g)     Any representation or warranty made by the Borrower in this
Agreement, or by the Borrower (or any of its officers) in any
agreement, certificate, instrument or financial statement or other
statement contemplated by or made or delivered pursuant to or in
connection with this Agreement shall prove to have been incorrect
in any material respect when deemed to be effective;




		
	 	(h)     The rendering against the Borrower of a final judgment, decree
or order for the payment of money in excess of $100,000 and the
continuance of such judgment, decree or order unsatisfied and in
effect for any period of 30 consecutive days without a stay of
execution;




		
	 	(i)     A default under any bond, debenture, note or other evidence of
indebtedness of the Borrower in excess of $100,000 owed to any
Person other than the Lender, or under any indenture or other
instrument under which any such evidence of indebtedness has been
issued or by which it is governed, or under any lease of any of the
Premises, and the expiration of the applicable period of grace, if
any, specified in such evidence of indebtedness, indenture, other
instrument or lease;




		
	 	(j)     Any Reportable Event, which the Lender determines in good faith
might constitute grounds for the termination of any Plan or for the
appointment by the appropriate United States District Court of a
trustee to administer any Plan, shall have occurred and be
continuing 30 days after written notice to such effect shall have
been given to the Borrower by the Lender; or a trustee shall have
been appointed by an appropriate United States District Court to
administer any Plan; or the Pension Benefit Guaranty Corporation
shall have instituted proceedings to terminate any Plan or to
appoint a trustee to administer any Plan; or the Borrower shall
have filed for a distress termination of any Plan under Title IV of
ERISA; or the Borrower shall have failed to make any quarterly
contribution required with respect to any Plan under Section 412(m)
of the Internal Revenue Code of 1986, as amended, which the Lender
determines in good faith may by itself, or in
combination with any such failures that the Lender may determine
are likely to occur in the future, result in the imposition of a
lien on the Borrower’s assets in favor of the Plan;




		
	 	(k)     A default shall occur under any Security Document or under any
other security agreement, mortgage, deed of trust, assignment or
other instrument or agreement securing any obligations of the
Borrower hereunder or under any note, and the continuance of such
default for a period of fifteen (15) days following notice from the
Lender;




		
	 	(l)     The Borrower shall liquidate, dissolve, terminate or suspend
its business operations or otherwise fail to operate its business
in the ordinary course, or sell all or substantially all of its
assets, without the Lender’s prior written consent;



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	 	(m)     Any Material Adverse Change shall have occurred.



     Section 8.2. Rights and Remedies. During any Default Period, the Lender
may exercise any or all of the following rights and remedies:



		
	 	(a)     the Lender may, by notice to the Borrower, declare the
Commitment to be terminated, whereupon the same shall forthwith
terminate;




		
	 	(b)     the Lender may, by notice to the Borrower, declare the
Obligations to be forthwith due and payable, whereupon all
Obligations shall become and be forthwith due and payable, without
presentment, notice of dishonor, protest or further notice of any
kind, all of which the Borrower hereby expressly waives;




		
	 	(c)     the Lender may, without notice to the Borrower and without
further action, offset and apply any and all money owing by the
Lender to the Borrower to the payment of the Obligations;




		
	 	(d)     the Lender may make demand upon the Borrower and, forthwith
upon such demand, the Borrower will pay to the Lender in
immediately available funds for deposit in the Special Account
pursuant to Section 2.14 an amount equal to the aggregate maximum
amount available to be drawn under all Letters of Credit then
outstanding, assuming compliance with all conditions for drawing
thereunder;




		
	 	(e)     the Lender may exercise and enforce any and all rights and
remedies available upon default to a secured party under the UCC,
including, without limitation, the right to take possession of
Collateral, or any evidence thereof, proceeding without judicial
process or by judicial process (without a prior hearing or notice
thereof, which the Borrower hereby expressly waives) and the right
to sell, lease or otherwise dispose of any or all of the
Collateral, and, in connection therewith, the Borrower will on
demand assemble the Collateral and make it available to the Lender
at a place to be designated by the Lender which is reasonably
convenient to both parties;
	 
	 	(f)     the Lender may exercise and enforce its rights and remedies
under the Loan Documents; and




		
	 	(g)     the Lender may exercise any other rights and remedies available
to it by law or agreement.



Notwithstanding the foregoing, upon the occurrence of an Event of Default
described in subsections (e) or (f) of Section 8.1, the Obligations shall be
immediately due and payable automatically without presentment, demand, protest
or notice of any kind.


     Section 8.3. Certain Notices. If notice to the Borrower of any intended
disposition of Collateral or any other intended action is required by law in a
particular instance, such notice shall be deemed commercially reasonable if
given (in the manner specified in Section 9.3) at least ten calendar days
before the date of intended disposition or other action.


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ARTICLE IX



Miscellaneous



     Section 9.1. No Waiver; Cumulative Remedies. No failure or delay by the
Lender in exercising any right, power or remedy under the Loan Documents shall
operate as a waiver thereof; nor shall any single or partial exercise of any
such right, power or remedy preclude any other or further exercise thereof or
the exercise of any other right, power or remedy under the Loan Documents. The
remedies provided in the Loan Documents are cumulative and not exclusive of any
remedies provided by law.


     Section 9.2. Amendments, Etc. No amendment, modification, termination or
waiver of any provision of any Loan Document or consent to any departure by the
Borrower therefrom or any release of a Security Interest shall be effective
unless the same shall be in writing and signed by the Lender, and then such
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given. No notice to or demand on the Borrower in
any case shall entitle the Borrower to any other or further notice or demand in
similar or other circumstances.


     Section 9.3. Addresses for Notices, Etc. Except as otherwise expressly
provided herein, all notices, requests, demands and other communications
provided for under the Loan Documents shall be in writing and shall be (a)
personally delivered, (b) sent by first class United States mail, (c) sent by
overnight courier of national reputation, or (d) transmitted by telecopy, in
each case addressed or telecopied to the party to whom notice is being given at
its address or telecopier number as set forth below:



		
	 	If to the Borrower:

Winland Electronics, Inc.

1950 Excel Drive

Mankato, MN 56002

Telecopier: (507) 387-2488

Attention: Jennifer A. Thompson



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	 	If to the Lender:




		
	 	M&I Marshall & Ilsley Bank

651 Nicollet Mall

Minneapolis, Minnesota 55402-1611

Telecopier: 612/904-8012

Attention: Douglas Pudvah



or, as to each party, at such other address or telecopier number as may
hereafter be designated by such party in a written notice to the other party
complying as to delivery with the terms of this Section. All such notices,
requests, demands and other communications shall be deemed to have been given
on (a) the date received if personally delivered, (b) when deposited in the
mail if delivered by mail, (c) the date sent if sent by overnight courier, or
(d) the date of transmission if delivered by telecopy, except that notices or
requests to the Lender pursuant to any of the provisions of Article II shall
not be effective until received by the Lender.


     Section 9.4. Further Documents. The Borrower will from time to time
execute and deliver or endorse any and all instruments, documents, conveyances,
assignments, security agreements, financing statements and other agreements and
writings that the Lender may reasonably request in order to secure, protect,
perfect or enforce the Security Interest or the Lender’s rights under the Loan
Documents (but any failure to request or assure that the Borrower executes,
delivers or endorses any such item shall not affect or impair the validity,
sufficiency or enforceability of the Loan Documents and the Security Interest,
regardless of whether any such item was or was not executed, delivered or
endorsed in a similar context or on a prior occasion).


     Section 9.5. Collateral. This Agreement does not contemplate a sale of
accounts, contract rights or chattel paper, and, as provided by law, the
Borrower is entitled to any surplus and shall remain liable for any deficiency.
The Lender’s duty of care with respect to Collateral in its possession (as
imposed by law) shall be deemed fulfilled if it exercises reasonable care in
physically keeping such Collateral, or in the case of Collateral in the custody
or possession of a bailee or other third person, exercises reasonable care in
the selection of the bailee or other third person, and the Lender need not
otherwise preserve, protect, insure or care for any Collateral. The Lender
shall not be obligated to preserve any rights the Borrower may have against
prior parties, to realize on the Collateral at all or in any particular manner
or order or to apply any cash proceeds of the Collateral in any particular
order of application.


     Section 9.6. Costs and Expenses. The Borrower agrees to pay on demand all
costs and expenses, including (without limitation) attorneys’ fees, incurred by
the Lender in connection with the Obligations, this Agreement, the Loan Documents, any Letters of
Credit, and any other document or agreement related hereto or thereto, and the
transactions contemplated hereby, including without limitation all such costs,
expenses and fees incurred in connection with the negotiation, preparation,
execution, amendment, administration, performance, collection and enforcement
of the Obligations and all such documents and agreements and the creation,
perfection, protection, satisfaction, foreclosure or enforcement of the
Security Interest.


Credit and Security Agreement



-35-






 


     Section 9.7. Indemnity. In addition to the payment of expenses pursuant
to Section 9.6, the Borrower agrees to indemnify, defend and hold harmless the
Lender, and any of its participants, parent corporations, subsidiary
corporations, affiliated corporations, successor corporations, and all present
and future officers, directors, employees, attorneys and agents of the
foregoing (the “Indemnitees”) from and against any of the following
(collectively, “Indemnified Liabilities”):



		
	 	(i)     any and all transfer taxes, documentary taxes, assessments or
charges made by any governmental authority by reason of the
execution and delivery of the Loan Documents or the making of the
Advances, other than taxes imposed on the overall net income of the
Lender;




		
	 	(ii)     any claims, loss or damage to which any Indemnitee may be
subjected if any representation or warranty contained in Section
5.12 proves to be incorrect in any respect or as a result of any
violation of the covenant contained in Section 6.4(b); and




		
	 	(iii)     any and all other liabilities, losses, damages, penalties,
judgments, suits, claims, costs and expenses of any kind or nature
whatsoever (including, without limitation, the reasonable fees and
disbursements of counsel) in connection with the foregoing and any
other investigative, administrative or judicial proceedings,
whether or not such Indemnitee shall be designated a party thereto,
which may be imposed on, incurred by or asserted against any such
Indemnitee, in any manner related to or arising out of or in
connection with the making of the Advances and the Loan Documents
or the use or intended use of the proceeds of the Advances.



If any investigative, judicial or administrative proceeding arising from any of
the foregoing is brought against any Indemnitee, upon such Indemnitee’s
request, the Borrower, or counsel designated by the Borrower and satisfactory
to the Indemnitee, will resist and defend such action, suit or proceeding to
the extent and in the manner directed by the Indemnitee, at the Borrower’s sole
cost and expense. Each Indemnitee will use its best efforts to cooperate in
the defense of any such action, suit or proceeding. If the foregoing
undertaking to indemnify, defend and hold harmless may be held to be
unenforceable because it violates any law or public policy, the Borrower shall
nevertheless make the maximum contribution to the payment and satisfaction of
each of the Indemnified Liabilities which is permissible under applicable law.
The Borrower’s obligation under this Section 9.7 shall survive the termination
of this Agreement and the discharge of the Borrower’s other obligations
hereunder.




     Section 9.8. Participants. The Lender and its participants, if any, are
not partners or joint venturers, and the Lender shall not have any liability or
responsibility for any obligation, act or omission of any of its participants.
All rights and powers specifically conferred upon the Lender may be transferred
or delegated to any of the Lender’s participants, successors or assigns.


Credit and Security Agreement



-36-






 


     Section 9.9. Execution in Counterparts; Facsimile. This Agreement and
other Loan Documents may be executed in any number of counterparts, and, except
for the Note, may be transmitted by facsimile, each of which when so executed
and delivered shall be deemed to be an original and all of which counterparts,
taken together, shall constitute but one and the same instrument.


     Section 9.10. Binding Effect; Assignment; Complete Agreement; Exchanging
Information. The Loan Documents shall be binding upon and inure to the benefit
of the Borrower and the Lender and their respective successors and assigns,
except that the Borrower shall not have the right to assign its rights
thereunder or any interest therein without the Lender’s prior written consent.
This Agreement, together with the Loan Documents, comprises the complete and
integrated agreement of the parties on the subject matter hereof and supersedes
all prior agreements, written or oral, on the subject matter hereof.


     Section 9.11. Severability of Provisions. Any provision of this Agreement
which is prohibited or unenforceable shall be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions
hereof.


     Section 9.12. Headings. Article and Section headings in this Agreement
are included herein for convenience of reference only and shall not constitute
a part of this Agreement for any other purpose.


     Section 9.13. Governing Law; Jurisdiction, Venue; Waiver of Jury Trial.
The Loan Documents shall be governed by and construed in accordance with the
substantive laws (other than conflict laws) of the State of Minnesota. The
parties hereto hereby (i) consent to the personal jurisdiction of the state and
federal courts located in the State of Minnesota in connection with any
controversy related to this Agreement; (ii) waive any argument that venue in
any such forum is not convenient, (iii) agree that any litigation initiated by
the Lender or the Borrower in connection with this Agreement or the other Loan
Documents shall be venued in either the District Court of Hennepin County,
Minnesota, or the United States District Court, District of Minnesota, Second
Division; and (iv) agree that a final judgment in any such suit, action or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on the judgment or in any other manner provided by law. THE PARTIES WAIVE
ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED ON OR PERTAINING
TO THIS AGREEMENT.


Credit and Security Agreement



-37-






 


IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
first above written.



	 	 	 	 	 
	M&I Marshall & Ilsley Bank	 	
WINLAND ELECTRONICS, INC.
	 	 	 
	By /s/ John W. Howard	 	
By /s/ Lorin E. Krueger
	 	
	 	 	


	 	Its Sr. Vice President	 	 	
Its: President and Chief Executive Officer
	 	 	 
	By /s/ Doug Pudvah	 	 
	 	
	 	 	 
	 	Its Vice President	 	 



Credit and Security Agreement



-38-






 



Table of Exhibits and Schedules




	 	 	 
	Exhibit A	 	
Form of Note
	 	 	 
	Exhibit B	 	
Compliance Certificate
	 	 	 
	Exhibit C	 	
Borrowing Base Certificate
	 	 	 
	Exhibit D	 	
Premises




	 	 	 
	Schedule 5.1	 	
Trade Names, Chief Executive Office,
Principal Place of Business, and Locations
of Collateral




	 	 	 
	Schedule 5.6	 	
Litigation
	 	 	 
	Schedule 5.10	 	
Plans
	 	 	 
	Schedule 7.1	 	
Permitted Liens
	 	 	 
	Schedule 7.2	 	
Permitted Indebtedness and Guaranties



 






 



Exhibit A to Credit and Security Agreement


NOTE




	 	 	 
	$2,500,000	 	
Minneapolis, Minnesota
	 	 	
June        , 2003



     For value received, the undersigned, WINLAND ELECTRONICS, INC., a
Minnesota corporation (the “Borrower”), hereby promises to pay on the
Termination Date under the Credit Agreement (defined below), to the order of
M&I MARSHALL & ILSLEY BANK, a Wisconsin banking corporation (the “Lender”), at
its office in Minneapolis, Minnesota, or at any other place designated at any
time by the holder hereof, in lawful money of the United States of America and
in immediately available funds, the principal sum of Two Million Five Hundred
Thousand and 00/100 Dollars ($2,500,000) or, if less, the aggregate unpaid
principal amount of all Advances made by the Lender to the Borrower under the
Credit Agreement (defined below) together with interest on the principal amount
hereunder remaining unpaid from time to time, computed on the basis of the
actual number of days elapsed and a 360-day year, from the date hereof until
this Note is fully paid at the rate from time to time in effect under the
Credit and Security Agreement of even date herewith (as the same may hereafter
be amended, supplemented or restated from time to time, the “Credit Agreement”)
by and between the Lender and the Borrower. The principal hereof and interest
accruing thereon shall be due and payable as provided in the Credit Agreement.
This Note may be prepaid only in accordance with the Credit Agreement.


     This Note is issued pursuant, and is subject, to the Credit Agreement,
which provides, among other things, for acceleration hereof. This Note is the
Note referred to in the Credit Agreement. This Note is secured, among other
things, pursuant to the Credit Agreement and the Security Documents as therein
defined, and may now or hereafter be secured by one or more other security
agreements, mortgages, deeds of trust, assignments or other instruments or
agreements.


     The Borrower hereby agrees to pay all costs of collection, including
attorneys’ fees and legal expenses in the event this Note is not paid when due,
whether or not legal proceedings are commenced.


     Presentment or other demand for payment, notice of dishonor and protest
are expressly waived.



	 	 	 	 	 	 
	 	 	
WINLAND ELECTRONICS, INC.
	 	 	 
	  	 	
By
	 	 	 	 	


	 	 	 	 	


	 	 	 	 	
Its:	 
	 	 	 	 	 	




A-1






 



Exhibit B to Credit and Security Agreement


Compliance Certificate




		
	To:	
 

M&I Marshall & Ilsley Bank
	 
	Date:	           , 200     
	 	      
	Subject:	WINLAND ELECTRONICS, INC. (the “Borrower”).
	 
	 	Financial Statements



     In accordance with our Credit and Security Agreement dated as of June      ,
2003 (the “Credit Agreement”), attached are the financial statements of the
Borrower as of and for      , 200     (the “Reporting Date”) and the
year-to-date period then ended (the “Current Financials”). All terms used in
this certificate have the meanings given in the Credit Agreement.


     The undersigned certifies that the Current Financials have been prepared
in accordance with GAAP, subject to year-end audit adjustments, and fairly
present the Borrower’s financial condition and the results of its operations as
of the date thereof.


     Events of Default. (Check one):



	o	 	The undersigned does not have knowledge of the occurrence of a Default or
Event of Default under the Credit Agreement.
	 
	o      The undersigned has knowledge of the occurrence of a Default or Event of
Default under the Credit Agreement and attached hereto is a statement of the
facts with respect thereto.




     The undersigned hereby certifies to the Lender as follows:



	o      The Reporting Date does not mark the end of one of the Borrower’s fiscal
quarters, hence the undersigned is completing none of the paragraphs below.
	 
	o	 	The Reporting Date marks the end of one of the Borrower’s fiscal quarters,
hence the undersigned is completing all paragraphs below.



     Financial Covenants. The undersigned further hereby certifies as follows:


     1.     Minimum Tangible Net Worth. Pursuant to Section 6.12 of the Credit
Agreement, as of the Reporting Date, the Borrower’s Tangible Net Worth was
$     which o satisfies o does not satisfy the requirement that the
Tangible Net Worth be no less than


B-1






 



 the sum of (a) Borrower’s actual Tangible Net Worth as of the fiscal year
ending December 31, 20                    , plus (b) 60% of the Borrower’s year-to-date Net
Income (after taxes), excluding losses, for the year including the Reporting
Date, on the Reporting Date.



	 	 	 	 	 	 
	(1) Book Net Worth:
	 	$	
	 
	(2) Less: Patents/Trademarks:
	 	$	
	 
	 	Other Intangibles:
	 	$	
	 
	(3) Tangible Net Worth:
	 	$	
	 
	 
	(4) Prior FYE TNW:

	 	$	
	 
	(5) YTD Net Income (excl. losses)
	 	$	
	 
	 
	 	 	X 60%	 
	(6) Product of line (5) x 60%
	 	$	
	 
	 
	(7) Required Tangible Net Worth
	 	$	
	 
	 	(Sum of line (4) and line (6))
	 	 	 	 



     2.     Maximum Leverage Ratio. Pursuant to Section 6.13 of the Credit
Agreement, as of the Reporting Date, the Borrower’s Leverage Ratio was      to
1.00 which osatisfies odoes not satisfy the requirement that such ratio be no
more than 1.50 to 1.00 on the Reporting Date.



	 	 	 	 	 
	Total Liabilities:
	 	$	
	 
	÷ Book Net Worth:
	 	$	
	 
	Leverage Ratio:
	 	______ to 1.00



     3.     Capital Expenditures. Pursuant to Section 7.10 of the Credit
Agreement, for the year-to-date period ending on the Reporting Date, the
Borrower has expended or contracted to expend during the fiscal year ending
     , 200     , for Capital Expenditures, $     in the
aggregate, which osatisfies odoes not satisfy the requirement that such
expenditures not exceed $250,000.00 in the aggregate during such fiscal year.



	 	 	 	 	 
	YTD CapEx (prior quarter-end):
	 	$	
	 
	CapEx during this quarter:
	 	$	
	 
	Total YTD CapEx:
	 	$	
	 




	 	 	 	 	 	 
	 	 	
WINLAND ELECTRONICS, INC.
	 	 	 
	  	 	
By
	 	 	 	 	


	 	 	 	 	


	 	 	 	 	
Its:	 
	 	 	 	 	 	




B-2






 



Exhibit C to Credit and Security Agreement


Borrowing Base Certificate




	 	 	 	 	 	 	 
	 	 	 	 	Total
	 	 	 	 	

	Accounts
Receivable Balance (As of      )
	 	$	
	 
	 
	Less:
	Over 90 days past invoice date
Cross-Age (> 10% past due, contra, 25%
concentration)

Other ineligible	 	 	 	 
	 
	Total Ineligible A/R
	 	$	
	 
	Eligible Accounts Receivable
	 	$	
	 
	Available A/R at 75%
	 	$	
	 
	 
	Inventory
Value (As of      )
	 	$	
	 
	Less:
	WIP Inventory

Other ineligible	 	 	 	 
	 
	Total Ineligible Inventory
	 	$	
	 
	Eligible Inventory
	 	$	
	 
	Available Inventory at 50% (capped at $1,250,000)
	 	$	
	 
	 
	Equipment
Value (As of      )
	 	$	
	 
	Less:
	encumbered Equipment	 	 	 	 
	 
	Total Ineligible Equipment
	 	$	
	 
	Eligible Equipment
	 	$	
	 
	Available Equipment at 25% (capped at $250,000)
	 	$	
	 
	 
	Borrowing Base Availability (before Cap)
	 	$	
	 
	 	Capped at $2,500,000

	 	 	 	 
	Borrowing Base Availability (after Cap)
	 	$	
	 
	 
	Less:
	Letters of Credit	 	 	 	 
	Less:
	Outstanding Advances	 	 	 	 
	 
	Net Availability
	 	$	
	 



C-1






 



Exhibit D to Credit and Security Agreement


Premises



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


     1950 Excel Drive in the City of Mankato, County of Blue Earth, State of
Minnesota.


D-1






 


Schedule 5.1 to Credit and Security Agreement


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


Trade Names



None.


Chief Executive Office/Principal Place of Business



The Chief Executive Office/Principal Place of Business/Location of Collateral
is located on the property situated at 1950 Excel Drive in the City of Mankato,
County of Blue Earth, State of Minnesota.


 






 


Schedule 5.4 to Credit and Security Agreement


Subsidiaries



None.


 






 


Schedule 5.6 to Credit and Security Agreement


Litigation



None.


 






 


Schedule 5.10 to Credit and Security Agreement


Plans



The Company has the following plans:


     Winland Electronics, Inc. 401(k) Plan


     Winland Electronics, Inc. Flexible Benefit Plan


 






 


Schedule 7.1 to Credit and Security Agreement


Permitted Liens



Mortgages on 1950 Excel Drive, City of Mankato, County of Blue Earth, State of
Minnesota in favor of City of Mankato pursuant to the following agreements:



		
	 	Mortgage Loan Agreement dated October 6, 1999 between the Company and
City of Mankato




		
	 	Agreement for Loan of Minnesota Investment Fund dated October 6, 1999
between the Company and City of Mankato




		
	 	Agreement for Loan of Small Cities Development Program Funds dated
December 14, 1999 between the Company and City of Mankato




		
	 	Promissory Notes dated October 6, 1994 ($500,000), October 6, 1999
($150,000) and December 14, 1999 (1,321,913.59)



UCC Financing Statements on file with the Minnesota Secretary of State:



	 	 	 	 	 	 	 	 	 	 	 
	Filing	 	 	 	 	 	 	 	 	 	Amendment/
	Date	 	File No.	 	Secured Party	 	Collateral	 	Continuation
	
	 	
	 	
	 	
	 	

	12/12/97	 	 	
1995992	 	 	GCI Capital Inc.
	 	Equipment Lease
Schedule No.
21280-02 (Fuji and
accessories)
	 	Amendment filed
02/01/99 (name
change);
Continuation filed
07/31/02
	 	 	 	 	 	 	 	 		 	 
	11/08/00	 	 	
2273039	 	 	Wells Fargo Equipment
Finance Inc.
	 	Equipment Lease No.
29709-101 (Fuji
Surface Mount
Device and Ultraprint Stencil
Printer)	 	 
	 	 	 	 	 	 	 	 	 	 	 
	03/11/02	 	 	
20023341289	 	 	Arrow Electronics Inc.
	 	Products owned and
stored by Secured
Party pursuant to
In-Plant Store
Agreement dated
04/01/02	 	 
	 	 	 	 	 	 	 	 	 	 	 
	06/17/02	 	 	
20024404312	 	 	Citicorp Vendor
Finance Inc.
	 	Equipment Lease No.
200089795
(Teradyne)	 	 



 






 



Schedule 7.2 to Credit and Security Agreement


Permitted Indebtedness and Guaranties



Indebtedness



See liens set forth in Schedule 7.1 relating to mortgage and equipment finance
leases.


Guaranties



None.


 






 


NOTE




	 	 	 
	$2,500,000	 	
Minneapolis, Minnesota
	 	 	 
	 	 	
June 30, 2003



     For value received, the undersigned, WINLAND ELECTRONICS, INC., a
Minnesota corporation (the “Borrower”), hereby promises to pay on the
Termination Date under the Credit Agreement (defined below), to the order of
M&I MARSHALL & ILSLEY BANK, a Wisconsin banking corporation (the “Lender”), at
its office in Minneapolis, Minnesota, or at any other place designated at any
time by the holder hereof, in lawful money of the United States of America and
in immediately available funds, the principal sum of Two Million Five Hundred
Thousand and 00/100 Dollars ($2,500,000) or, if less, the aggregate unpaid
principal amount of all Advances made by the Lender to the Borrower under the
Credit Agreement (defined below) together with interest on the principal amount
hereunder remaining unpaid from time to time, computed on the basis of the
actual number of days elapsed and a 360-day year, from the date hereof until
this Note is fully paid at the rate from time to time in effect under the
Credit and Security Agreement of even date herewith (as the same may hereafter
be amended, supplemented or restated from time to time, the “Credit Agreement”)
by and between the Lender and the Borrower. The principal hereof and interest
accruing thereon shall be due and payable as provided in the Credit Agreement.
This Note may be prepaid only in accordance with the Credit Agreement.


     This Note is issued pursuant, and is subject, to the Credit Agreement,
which provides, among other things, for acceleration hereof. This Note is the
Note referred to in the Credit Agreement. This Note is secured, among other
things, pursuant to the Credit Agreement and the Security Documents as therein
defined, and may now or hereafter be secured by one or more other security
agreements, mortgages, deeds of trust, assignments or other instruments or
agreements.


     The Borrower hereby agrees to pay all costs of collection, including
attorneys’ fees and legal expenses in the event this Note is not paid when due,
whether or not legal proceedings are commenced.


     Presentment or other demand for payment, notice of dishonor and protest
are expressly waived.



	 	 	 
	 	
WINLAND ELECTRONICS, INC.
	 	 	 
	 	By	
 /s/ Lorin E. Krueger
	 	 	 
	 	 	
Its: President and Chief Executive Officer