exv10w2



 







Exhibit 10.2









June 28, 2006




Via E Mail




Mr. Robert A. Zummo

Chairman and CEO

Valentec Systems, Inc.

2629 York Avenue

Minden, LA 71055



Re: Proposed Credit Facility for Valentec Systems, Inc.



Dear Bob:



We are pleased to outline the terms of a senior credit facility in the aggregate principal amount
of $10,000,000 (the “Credit Facility”) proposed by Rockland Credit Finance, LLC (“Lender”). The
Credit Facility will be provided to Valentec Systems, Inc. (“Borrower”) and will be used to expand
Borrower’s current factoring facility with Lender and for Borrower’s on going working capital
requirements.



We would like to emphasize that this letter is a commitment on the part of Lender subject to the
completion of amendments to the current Agreement between the parties.




	 	 	 
	Borrower:

	 	Valentec Systems, Inc. and subsidiaries.
	 
	 	 
	Lender:

	 	Rockland Credit Finance, LLC
	 
	 	 
	Total Facility:

	 	A two-year secured Credit Facility in the
aggregate not to exceed $10,000,000. Lender
will consider increases in the Total Facility
up to $15,000,000 within the collateral
formulas provide below without additional
origination fees during the term of this
Facility.
	 
	 	 
	Revolver:

	 	Lender will make available to Borrower a
secured Revolving Factoring Facility (the
“Revolver”) of up to an aggregate amount of
$10,000,000 based upon an advance rate of up to
90% of the net amount of “eligible” billed
accounts receivable and up to 70% of the net
amount of “eligible” unbilled receivables. The
Revolver will have a term of two (2) years
commencing on the initial funding date of the
Credit Facility (“Closing Date”). Eligible
billed and unbilled accounts are those that
meet Lender’s customary eligibility and reserve
requirements. The facility will include a
sub-limit of $7,000,000 for advances against
unbilled receivables.






 









 







Mr. Robert A. Zummo

June 28, 2006, Page 2 of 9





	 	 	 
	Letters of Credit
Guarantees:

	 	As part of the Credit Facility, Lender
will make available to Borrower guarantees, in
an aggregate amount not to exceed $3,000,000 of
the Borrower’s obligations to banks that issue
Letters of Credit; provided that such Letters
of Credit, including the amount and terms, are
acceptable to Lender. The outstanding face
amount of all guaranteed Letters of Credit will
be reserved against availability under the
Revolver.
	 
	 	 
	Security:

	 	All of Borrower’s obligations to Lender under
the Credit Facility will be secured by a first
priority, senior, valid and perfected security
interest in and lien upon essentially all of
Borrower’s now owned and all hereafter acquired
real and personal property, all insurance,
other proceeds, all books and records relating
to any of the foregoing (“the Collateral”).
Liens on the Collateral in favor of persons
other than Lender will be prohibited.
	 
	 	 
	Guarantee:

	 	Lender will require a Validity Guarantee from
Robert A. Zummo (CEO) and The Chief Financial
Officer of the Borrower or their respective
successors.
	 
	 	 
	Key Man Life
Insurance:

	 	The Borrower will arrange a term Key Man Life
Insurance Policy on Robert A. Zummo of
$3,000,000 which shall be assigned to Lender to
be applied first to the Revolving Factoring
Facility and then to any other debt of the
Borrower, with any remainder to be returned to
the Borrower within 90 days. Should Mr. Zummo
cease to be employed by the Borrower, at
Lender’s sole discretion, after receipt of a
similar policy on covering the new CEO, the
policy will be returned.






Rockland Credit Finance, LLC Confidential Financing Proposal to Valentec Systems, Inc.




 









 







Mr. Robert A. Zummo

June 28, 2006, Page 3 of 9





	 	 	 
	Terms of the Credit Facility Interest Rates:
	 
	 	 
	Revolver:

	 	Borrower will pay interest and fees as follows:
On funds employed (interest) the sum of Prime Rate
as issued by The Wall Street Journal + 2% or 10%
(whichever is the greater) together with (Fees) of: a)
0.0167% per day on the face value of each billed
invoice, and b) 0.022% per day on the total amount of
unbilled receivables as evidenced by Borrower’s
Unbilled Receivables Report. The Fees will be
calculated in the case of a) billed invoices from the
date funds are taken down by Borrower to the date of
receipt of cleared funds from collection of those
invoices; and in the case of b) unbilled receivables,
from the date of each unbilled receivable report is
received until the date the subsequent unbilled
receivable report is received.

	 
	 	 
	 

	 	Interest and Fees will be payable in arrears commencing
the first day of the period following the initial
funding under the Credit Facility, and would be
calculated daily on the basis of a 360-day year for the
actual number of days elapsed.
	 
	 	 
	Collections:

	 	All of Borrower’s customers will be directed to make
all payments to a lock box depository account at a bank
acceptable to Lender for forwarding to a Lender
depository account at the same bank. Such funds shall
be applied to Borrower’s obligations. For the purpose
of calculating interest, all proceeds received by
Lender will be credited to Borrower’s loan account on
the third business day after Lender’s receipt of
immediately available federal funds.
	 
	 	 
	Fees:
	 	 
	 
	 	 
	Closing:

	 	There will be no closing fee.
	 
	 	 
	Commitment:

	 	If Borrower requests a commitment letter and Lender in
its sole discretion issues a commitment letter,
Borrower will pay a non-refundable Commitment Fee of
$20,000 upon issuance of Lender’s commitment. Upon the
closing of the Credit Facility, the Commitment Fee
shall be applied to the account to offset interest and
fees arising in the normal course of business.
	 
	 	 
	Unused
Facility:

	 	There will be no unused facility fee.





Rockland Credit Finance, LLC Confidential Financing Proposal to Valentec Systems, Inc.





 









 







Mr. Robert A. Zummo

June 28, 2006, Page 4 of 9





	 	 	 
	Letter of Credit:

	 	Borrower will pay a Letter of Credit Guaranty Fee for
the period(s) such guarantees are outstanding in an
amount equal to 3.0% per annum of the average undrawn
face amount of all such Letters of Credit guaranteed by
Lender. The fee shall be payable monthly in arrears. In
addition, Borrower will pay all ordinary and customary
expenses due to banks for any Letters of Credit issued
for Borrower’s account.
	 
	 	 
	Collateral
Management:

	 	There will be no collateral management fee.
	 
	 	 
	Audit:

	 	$1,000 per audit day per auditor, plus reasonable
out-of-pocket expenses.
	 
	 	 
	Other:

	 	Borrower will pay all exchanges on checks, charges for
returned items and all other bank charges as well as
Lender’s standard wire transfer fee for each wire
transfer.
	 
	 	 
	Prepayments:

	 	Borrower may prepay the entire Credit Facility in full
at any time provided that with such payout Borrower
pays, as liquidated damages, a termination fee on the
total committed Credit Facility equal to 1.5% in the
first year and .75% in the second year and any
subsequent renewal periods. For the avoidance of any
doubt, based on an initial Credit Facility amount of
$10,000,000, the prepayment termination fee in year one
would be only $150,000. In year two and thereafter it
would be only $75,000. Again, for the avoidance of
doubt, if the Credit Facility increased in the first
year to $15,000,000, then the prepayment termination
fee during the remainder of the first year would be
$225,000; in year two and thereafter it would be
$112,500.
	 
	 	 
	Participants:

	 	Lender retains the right to sell or assign
participations in the Credit Facility to one or more
other lenders, or to add one or more co-lenders to the
Credit Facility. Borrower will be advised of such
participants and / or co-lenders in advance and
Borrower will cooperate with Lender in supplying
information and participating in meetings in order to
facilitate participant / co-lender involvement.
	 
	 	 
	Representations,

Warrants
and Covenants:

	 	Standard representations and warranties and negative,
affirmative, financial and other covenants appropriate
to the transaction, including, but not limited to the
following:





Rockland Credit Finance, LLC Confidential Financing Proposal to Valentec Systems, Inc.





 









 







Mr. Robert A. Zummo

June 28, 2006, Page 5 of 9





	 	 	 
	 

	 	No other debt except for trade debt and retiring
current note obligations incurred in the normal course
of business and other obligations first consented to by
Lender, which shall not be unreasonably withheld.

	 
	 

	 	No mergers, acquisitions, divestitures, change of
business or creation of a new subsidiary without
Lender’s prior written consent, which shall not be
unreasonably withheld.

	 
	 	 
	 

	 	No repurchase or redemption of any outstanding stock
without Lender’s written consent, which shall not be
unreasonably withheld.
	 
	 	 
	 

	 	Maintenance of insurance satisfactory to Lender.

	 
	 	 
	 

	 	Prohibitions of other liens on assets or asset sales
without Lender’s written consent.

	 
	 	 
	 

	 	Prohibition of changes in management, ownership or
control of Borrower without Lender’s prior written
consent, which shall not be unreasonably withheld. No
changes in Senior management without Lenders subsequent
notification. In particular, for the avoidance of any
doubt, the departure of Robert A. Zummo from the
position of CEO would be an event of default requiring
all amounts then outstanding under the Credit Facility
to become immediately due and payable in full.
	 
	 	 
	 

	 	Maintenance of all necessary licenses and permits.
	 
	 	 
	Financial
Reporting:

	 	Monthly financial statements including Balance Sheet,
Income Statement and Cash Flow Statements, 10-Q
certified by Borrower’s Chief Financial Officer and
10-K annual financial statements certified by
independent certified public accountants. Annual
business and financial plan, including monthly Income
Statement, Balance Sheet and Cash Flow Statement for
the succeeding 12 months in form satisfactory to
Lender, at least 90 days prior to fiscal year end.
	 
	 	 
	Collateral

Reporting:

	 	Information concerning billed and unbilled accounts
receivable, inventory, machinery and equipment as
Lender may require. All other business and financial
information, as well as access to Borrower’s
properties, books and records, as Lender may require.





Rockland Credit Finance, LLC Confidential Financing Proposal to Valentec Systems, Inc.





 









 







Mr. Robert A. Zummo

June 28, 2006, Page 6 of 9





	 	 	 
	Conditions
precedent:

	 	On or before the Closing Date, the following conditions
precedent would have to have been satisfied in a manner
satisfactory to Lender.







	 	1.	 	No material adverse
change, as determined by
Lender, in the condition
or operations, financial
or otherwise, of
Borrower shall have
occurred during the
period commencing on the
date of this letter and
ending on the Closing
Date (“Interim Period”).
	 
	 	2.	 	There shall not have
been instituted or
threatened, during the
Interim Period, any
material, as determined
by Lender, litigation or
proceeding in any court
or administrative forum
to which Borrower is or
is threatened to be a
party.
	 
	 	3.	 	On the Closing Date, all
of the assets supporting
Lender’s advances under
the Loan Agreements with
Borrower shall be
sufficient in value and
provide Borrower with
sufficient working
capital to enable it to
profitably operate its
business. Borrower will
have not less than
$250,000 in excess
availability at the
Closing Date.
	 
	 	4.	 	All financing statements
and mortgages relating
to the collateral shall
have been filed or
recorded. Lender shall
have obtained title
insurance commitments
issued by insurers
acceptable to Lender
containing only such
exceptions as are
acceptable to Lender and
containing such
endorsements as may be
required by Lender.
	 
	 	5.	 	Borrower shall have
executed, or caused to
be delivered to Lender,
all in form and
substance acceptable to
Lender and its counsel,
all instruments,
documents, agreements,
assignments, mortgages,
waivers, security
agreements, financing
statements, guarantees,
certificates, opinions,
endorsements and
assurances (the “Loan
Agreements”) as Lender
and its counsel might
reasonably request in
connection with the
funding of the secured
transaction proposed by
this letter.






Rockland Credit Finance, LLC Confidential Financing Proposal to Valentec Systems, Inc.




 









 







Mr. Robert A. Zummo

June 28, 2006, Page 7 of 9





	 	 	 
	Expenses:

	 	By acceptance of this proposal letter, Borrower agrees
to pay on demand all reasonable costs, fees and
expenses incurred or to be incurred by Lender in
connection with the examination, review, documentation,
syndication and/or closing of the Credit Facility,
including but not limited to, per diem charges of
Lender’s internal auditors, fees and expenses
of outside counsel; consultant, appraiser and auditor
fees and expenses; and all other out-of-pocket expenses
relating to any of the foregoing, including, without
limitation, title commitment and insurance fees, lien
and corporate search and filing fees.

	 
	 

	 	
The obligations of Borrower described in this section
are independent of all other obligations of Borrower
hereunder and under the Loan Agreements, shall survive
the expiration of this proposal, and shall be payable
whether or not the secured financing transaction
contemplated by this letter shall close unless
termination and failure to close is a unilateral
decision by the Lender.
	 
	 	 
	Deposit:

	 	Rockland is charging Borrower’s factoring reserve
$50,000 upon delivery of this proposal letter as a Good
Faith Deposit (‘Deposit”). The Deposit will be returned
at such time as: (i) the financing transaction being
considered has been closed and Rockland has provided
the financing; (ii) the legal expenses of Rockland’s
outside counsel have been paid by Borrower; and (iii)
all of Rockland’s other reimbursable internal and
out-of-pocket expenses incurred in connection with the
financing have been reimbursed. If Borrower chooses not
to close the financing with Lender the Deposit will be
retained as compensation to Lender for time and effort
spent in preparing and obtaining approval for the
Credit Facility outlined herein.
	 
	 	 
	Prior Agreement:

	 	This proposal does not amend or supersede any of the
conditions existing in the Master Factoring Agreement
between the parties dated August 30, 2005. Once
accepted by both parties and with final approval of the
closing documents, the terms and conditions in the
closing documents will replace the Master Factoring
Agreement and associated amendments mentioned above in
its entirety.





This letter has been issued in reliance upon the accuracy of all information furnished to Lender by
or on behalf of Borrower.




Rockland Credit Finance, LLC Confidential Financing Proposal to Valentec Systems, Inc.




 









 







Mr. Robert A. Zummo

June 28, 2006, Page 8 of 9





In the event that any law or regulation affecting Lender’s entering into the secured financing
transaction contemplated hereby shall impose upon Lender any material obligation, fee, liability,
loss, costs, expense or damage which is not contemplated by this letter, the proposal evidenced by
this letter may be terminated by Lender.



This letter is delivered to Borrower on the condition that neither it nor its substance shall be
disclosed to any third party except those who are in a confidential relationship to Borrower or
where required by law. No disclosure may be made to any other financial institution.



Please note that this proposal is available for acceptance only through our close of business on
Thursday June 29, 2006. The terms of this proposal may be modified only in writing by a letter
signed by us. Borrower’s acceptance indicated by signing and returning the enclosed copy of this
letter on or before June 29, 2006 will allow us to initiate the transaction’s approval process.




Rockland Credit Finance, LLC Confidential Financing Proposal to Valentec Systems, Inc.





 









 








Mr. Robert A. Zummo

June 28, 2006, Page 9 of 9



Bob, we sincerely appreciate the opportunity to structure a financing package to meet your needs,
and we are looking forward to continuing our fine working relationship with you and your fine staff
at Valentec. If you have any questions about the terms and conditions of this financing proposal
please call me at once.




Very truly yours,

Rockland Credit Finance LLC




	 	 	 	 	 	 
	 

	 	By:
	 	/s/ John Fox
	 

	 	 	 	 
	 

	 	 	 	John Fox





Accepted:

Valentec Systems, Inc.




	 	 	 	 	 
	By:

	 	/s/ Robert A. Zummo	 	 
	 

	 	 	 	 
	 

	 	Robert A. Zummo, President	 	 
	 
	 	 	 	 
	Date:
	 	 	 	 
	 

	 	 	 	 





Rockland Credit Finance, LLC Confidential Financing Proposal to Valentec Systems, Inc.