Document:

Exhibit

10.1

October

30, 2002

 

 

CREDIT

AND SECURITY AGREEMENT

BY

AND BETWEEN

DIGITAL

ANGEL CORPORATION

AND

WELLS

FARGO BUSINESS CREDIT, INC.

October 30, 2002

 

 

 

Table of Contents

 

	

  ARTICLE

  I DEFINITIONS

  
	

  Section 1.1

  	

  Definitions

  
	

  Section

  1.2

  	

  Other

  Definitional Terms; Rules of Interpretation

  
	

   

  	

   

  
	

  ARTICLE

  II AMOUNT AND TERMS OF THE CREDIT FACILITY

  
	

  Section 2.1

  	

  Revolving Advances

  
	

  Section

  2.2

  	

  Procedures

  for Requesting Advances

  
	

  Section

  2.3

  	

  Increased

  Costs; Capital Adequacy; Funding Exceptions

  
	

  Section 2.4

  	

  Letters of Credit

  
	

  Section 2.5

  	

  Special Account

  
	

  Section

  2.6

  	

  Payment

  of Amounts Drawn Under Letters of Credit; Obligation of Reimbursement

  
	

  Section 2.7

  	

  Obligations

  Absolute

  
	

  Section

  2.8

  	

  Interest;

  Margin; Minimum Interest Charge; Default Interest; Participations; Clearance

  Days; 360 Day Year; Usury

  
	

  Section

  2.9

  	

  Fees

  
	

  Section

  2.10

  	

  Time

  for Interest Payments; Payment on Non-Banking Days; Computation of Interest

  and Fees

  
	

  Section

  2.11

  	

  Lockbox;

  Collateral Account; Application of Payments

  
	

  Section

  2.12

  	

  Voluntary

  Prepayment; Reduction of the Maximum Line; Termination of the Credit Facility

  by the Borrower

  
	

  Section 2.13

  	

  Mandatory

  Prepayment

  
	

  Section

  2.14

  	

  Revolving

  Advances to Pay Obligations

  
	

  Section 2.15

  	

  Use of Proceeds

  
	

  Section 2.16

  	

  Liability Records

  
	

   

  	

   

  
	

  ARTICLE

  III SECURITY INTEREST; OCCUPANCY; SETOFF

  
	

  Section 3.1

  	

  Grant of

  Security Interest

  
	

  Section

  3.2

  	

  Notification

  of Account Debtors and Other Obligors

  
	

  Section 3.3

  	

  Assignment of

  Insurance

  
	

  Section 3.4

  	

  Occupancy

  
	

  Section 3.5

  	

  License

  
	

  Section 3.6

  	

  Financing Statement

  
	

  Section 3.7

  	

  Setoff

  
	

  Section 3.8

  	

  Collateral

  
	

   

  	

   

  
	

  ARTICLE IV CONDITIONS

  OF LENDING

  
	

  Section

  4.1

  	

  Conditions

  Precedent to the Initial Revolving Advance and Letter of Credit

  
	

  Section

  4.2

  	

  Conditions

  Precedent to All Advances and Letters of Credit

  

 

 

 

	

  ARTICLE V REPRESENTATIONS

  AND WARRANTIES

  
	

  Section

  5.1

  	

  Existence

  and Power; Name; Chief Executive Office; Inventory and Equipment Locations;

  Federal Employer Identification Number

  
	

  Section 5.2

  	

  Capitalization

  
	

  Section

  5.3

  	

  Authorization

  of Borrowing; No Conflict as to Law or Agreements

  
	

  Section 5.4

  	

  Legal Agreements

  
	

  Section 5.5

  	

  Subsidiaries

  
	

  Section

  5.6

  	

  Financial

  Condition; No Adverse Change

  
	

  Section 5.7

  	

  Litigation

  
	

  Section 5.8

  	

  Regulation U

  
	

  Section 5.9

  	

  Taxes

  
	

  Section 5.10

  	

  Titles and Liens

  
	

  Section

  5.11

  	

  Intellectual

  Property Rights

  
	

  Section 5.12

  	

  Plans

  
	

  Section 5.13

  	

  Default

  
	

  Section 5.14

  	

  Environmental

  Matters

  
	

  Section 5.15

  	

  Submissions to

  Lender

  
	

  Section 5.16

  	

  Financing

  Statements

  
	

  Section 5.17

  	

  Rights to Payment

  
	

   

  	

   

  
	

  ARTICLE

  VI COVENANTS

  
	

  Section 6.1

  	

  Reporting

  Requirements

  
	

  Section 6.2

  	

  Financial Covenants

  
	

  Section

  6.3

  	

  Permitted

  Liens; Financing Statements

  
	

  Section 6.4

  	

  Indebtedness

  
	

  Section 6.5

  	

  Guaranties

  
	

  Section

  6.6

  	

  Investments

  and Subsidiaries

  
	

  Section 6.7

  	

  Dividends

  and Distributions

  
	

  Section 6.8

  	

  Salaries

  
	

  Section

  6.9

  	

  Books

  and Records; Inspection and Examination

  
	

  Section 6.10

  	

  Account

  Verification

  
	

  Section 6.11

  	

  Compliance with

  Laws

  
	

  Section

  6.12

  	

  Payment

  of Taxes and Other Claims

  
	

  Section 6.13

  	

  Maintenance

  of Properties

  
	

  Section 6.14

  	

  Insurance

  
	

  Section 6.15

  	

  Preservation

  of Existence

  
	

  Section

  6.16

  	

  Delivery

  of Instruments, etc

  
	

  Section

  6.17

  	

  Sale

  or Transfer of Assets; Suspension of Business Operations

  
	

  Section

  6.18

  	

  Consolidation

  and Merger; Asset Acquisitions

  
	

  Section 6.19

  	

  Sale and Leaseback

  
	

  Section

  6.20

  	

  Restrictions

  on Nature of Business

  
	

  Section 6.21

  	

  Accounting

  
	

  Section 6.22

  	

  Discounts, etc

  
	

  Section 6.23

  	

  Plans

  
	

  Section 6.24

  	

  Place of

  Business; Name

  
	

  Section

  6.25

  	

  Constituent

  Documents; S Corporation Status

  
	

  Section 6.26

  	

  Performance

  by the Lender

  

 

 

 

	

  ARTICLE

  VII EVENTS OF DEFAULT, RIGHTS AND REMEDIES

  
	

  Section 7.1

  	

  Events of Default

  
	

  Section 7.2

  	

  Rights and Remedies

  
	

  Section 7.3

  	

  Certain Notices

  
	

   

  	

   

  
	

  ARTICLE VIII MISCELLANEOUS

  
	

  Section

  8.1

  	

  No

  Waiver; Cumulative Remedies; Compliance with Laws

  
	

  Section 8.2

  	

  Amendments, Etc

  
	

  Section

  8.3

  	

  Addresses

  for Notices; Requests for Accounting

  
	

  Section 8.4

  	

  Further Documents

  
	

  Section 8.5

  	

  Costs and Expenses

  
	

  Section 8.6

  	

  Indemnity

  
	

  Section 8.7

  	

  Participants

  
	

  Section

  8.8

  	

  Execution

  in Counterparts; Telefacsimile Execution

  
	

  Section

  8.9

  	

  Retention

  of Borrower’s Records

  
	

  Section

  8.10

  	

  Binding

  Effect; Assignment; Complete Agreement; Exchanging Information

  
	

  Section

  8.11

  	

  Severability

  of Provisions

  
	

  Section 8.12

  	

  Headings

  
	

  Section

  8.13

  	

  Governing

  Law; Jurisdiction, Venue; Waiver of Jury Trial

  
	

   

  	

   

  

 

 

 

CREDIT AND SECURITY

AGREEMENT

Dated as of October 30, 2002

DIGITAL ANGEL CORPORATION, a Delaware corporation (the

“Borrower”), and WELLS FARGO BUSINESS CREDIT, INC., a Minnesota 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, the following terms shall have the meanings assigned to them in this

Section or in the Section referenced after such term:

“Accounts” means all of the Borrower’s accounts, as

such term is defined in the UCC, including 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) 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, loans and obligations receivable, chattel papers, bonds, notes and

other debt instruments, tax refunds and rights to payment in the nature of

general intangibles.

“Advance” means a Revolving Advance.

“Affiliate” or “Affiliates” means any Person

controlled by, controlling or under common control with the Borrower, including

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.

“Availability” means the difference of (i) the

Borrowing Base and (ii) the sum of (A) the outstanding principal

balance of the Revolving Note and (B) the L/C Amount.

“Banking Day” means a day on which the Federal Reserve

Bank of New York is open for business.

 

“Base Rate” means the rate of interest publicly announced

from time to time by Wells Fargo Bank National Association at its principal

office in San Francisco as its “prime rate”, with the understanding that the

“prime rate” is one of Wells Fargo’s base rates (not necessarily the lowest of

such rates) and serves as the basis upon which effective rates of interest are

calculated for loans making reference thereto.

“Book Net Worth” means the

aggregate of the common and preferred stockholders’ equity in the Borrower,

determined in accordance with GAAP.

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

(a)           the Maximum Line; or

(b)           subject to change from time to time

in the Lender’s sole discretion, the sum of:

(i)            the lesser of (A) 80% of

Eligible Accounts, or (B) $5,000,000; plus

(ii)           the lesser of (A) 80% of Eligible

Foreign Accounts, or (B) $1,000,000.

“Capital Expenditures” means for a period, any

expenditure of money during such period for

the lease, purchase or other acquisition of any capital asset, or for the lease

of any other asset whether payable currently or in the future.

 “Change of Control” means the occurrence of any of

the following events:

(a)           any Person or “group” (as such term

is used in Sections 13(d) and 14(d) of the Securities Exchange Act of

1934) is or becomes the “beneficial owner” (as defined in Rules 13d-3 and

13d-5 under the Securities Exchange Act of 1934, except that a Person will be

deemed to have “beneficial ownership” of all securities that such Person has

the right to acquire, whether such right is exercisable immediately or only

after the passage of time), directly or indirectly, of more than 25% percent of

the voting power of all classes of voting stock of the Borrower.

(b)           During any

consecutive two-year period, individuals who at the beginning of such period

constituted the board of Directors of the Borrower (together with any new

Directors whose election to such board of Directors, or whose nomination for

election by the owners of the Borrower, was approved by a vote of 66-2/3% of

the Directors then still in office who were either Directors at the beginning

of such period or whose election or nomination for election was previously so

approved) cease for any reason to constitute a majority of the board of

Directors of the Borrower then in office.

(c)           Randolph K. Geissler shall cease to actively manage the

Borrower’s day-to-day business activities.

 

2

 

“Collateral” means all of the Borrower’s Accounts,

chattel paper, deposit accounts, documents, Equipment, General Intangibles, goods,

instruments, Inventory, Investment Property, letter-of-credit rights, letters

of credit, all sums on deposit in any Collateral Account, and any items in any

Lockbox; together with (i) all substitutions and replacements for and

products of any of the foregoing; (ii) in the case of all goods, all

accessions; (iii) all accessories, attachments, parts, equipment and

repairs now or hereafter attached or affixed to or used in connection with any

goods; (iv) all warehouse receipts, bills of lading and other documents of

title now or hereafter covering such goods; (v) all collateral subject to

the Lien of any Security Document; (vi) any money, or other assets of the

Borrower that now or hereafter come into the possession, custody, or control of

the Lender; (vii) all sums on deposit in the Special Account; and

(viii) proceeds of any and all of the foregoing.

“Collateral Account” means the “Lender Account” as

defined in the Lockbox and Collection Account Agreement.

“Commitment” means the Lender’s commitment to make

Advances to, and to cause the Issuer to issue Letters of Credit for the account

of, the Borrower pursuant to Article II.

“Constituent Documents” means with respect to any

Person, as applicable, such Person’s certificate of incorporation, articles of

incorporation, by-laws, certificate of formation, articles of organization,

limited liability company agreement, management agreement, operating agreement,

shareholder agreement, partnership agreement or similar document or agreement

governing such Person’s existence, organization or management or concerning

disposition of ownership interests of such Person or voting rights among such

Person’s owners.

“Credit Facility” means the credit facility being made

available to the Borrower by the Lender under Article II.

“Debt” means of a Person as of a given date, all items

of indebtedness or liability which in accordance with GAAP would be included in

determining total liabilities as shown on the liabilities side of a balance

sheet for such Person and shall also include the aggregate payments required to

be made by such Person at any time under any lease that is considered a

capitalized lease under GAAP.

“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 of any month during which a Default or Event of Default has

occurred and ending on the date the Lender notifies the Borrower in writing

that such Default or Event of Default has been cured or waived.

“Default Rate” means an annual interest rate equal to

three percent (3%) over the Floating Rate, which interest rate shall change

when and as the Floating Rate changes.

 

3

 

“Director” means a director if the Borrower is a

corporation, a governor if the Borrower is a limited liability company, or a

partner if the Borrower is a partnership.

“ERISA” means the Employee Retirement Income Security

Act of 1974.

“ERISA Affiliate” means any trade or business (whether

or not incorporated) that is a member of a group which includes the Borrower

and which is treated as a single employer under Section 414 of the IRC.

“Earnings Before Taxes” means from operations but

including extraordinary losses.

“Eligible Accounts” means all unpaid Accounts arising

from the sale or lease of goods or the performance of services, of the

Borrower’s Animal Applications Division, net of any credits, but excluding any

such Accounts having any of the following characteristics:

(i)            That portion of Accounts which is

unpaid more than 60 days past the stated due date or more than 120 days past

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, including progress billings, and that portion

of Accounts for which an invoice has not been sent to the applicable account

debtor;

(iv)          Accounts constituting

(i) proceeds of copyrightable material unless such copyrightable material

shall have been registered with the United States Copyright Office, or

(ii) proceeds of patentable inventions unless such patentable inventions

have been registered with the United States Patent and Trademark Office;

(v)           Ninety (90) days after the Funding

Date, 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);

(vi)          Accounts owed by an account debtor

located outside the United States which are not (A) backed by a bank

letter of credit naming the Lender as beneficiary or assigned to the Lender, in

the Lender’s possession or control, and with respect to which a control

agreement concerning the letter-of-credit rights is in effect, and acceptable

to the Lender in all respects, in its sole discretion, or 

 

4

 

(B) covered by a foreign receivables insurance

policy acceptable to the Lender in its sole discretion (“Foreign Eligible

Accounts”);

(vii)         Accounts owed by an account debtor that

is insolvent, the subject of bankruptcy proceedings or has gone out of

business;

(viii)        Accounts owed by an Owner, Subsidiary,

Affiliate, Officer or employee of the Borrower;

(ix)           Accounts not subject to a duly

perfected security interest in the Lender’s favor or which are subject to any

Lien in favor of any Person other than the Lender;

(x)            That portion of Accounts that has

been restructured, extended, amended or modified;

(xi)           That portion of Accounts that

constitutes advertising, finance charges, service charges or sales or excise

taxes;

(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 (x) above;

(xiii)         Accounts constituting credit balances

greater than 90 days; and

(xiv)        Accounts, or portions thereof, otherwise

deemed ineligible by the Lender in its sole discretion.

“Eligible Foreign Accounts” means Accounts due and

owing by an Account debtor located outside the United States; but excluding any

Accounts having any of the following characteristics:

(i)            (A)

That portion of Accounts (other than dated Accounts) unpaid 120 days or

more after the invoice date, (B) that portion of dated Accounts unpaid

more than 60 days after the stated due date, and (C) that portion of

Accounts that do not provide for payment in full within 180 days after the

shipment 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)          That

portion of Accounts for which an invoice has not been sent to the applicable

account debtor;

(v)           Accounts

owed by any unit of government;

 

5

 

(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 an Owner, Subsidiary, Affiliate, Officer or employee of the Borrower;

(viii)        Accounts

not subject to a duly perfected security interest in the Lender’s favor or

which are subject to any Lien in favor of any Person other than the Lender;

(ix)           That

portion of Accounts that has been restructured, extended, amended or modified;

(x)            That

portion of Accounts that constitutes advertising, finance charges, service

charges or sales or excise taxes;

(xi)           That

portion of Accounts owed by any one Account debtor that would permit Revolving

Advances supported by such Account debtor’s Accounts to exceed $300,000 at any

one time;

(xii)          Accounts

denominated in any currency other than United States dollars, Canadian dollars,

Japanese yen, United Kingdom pounds sterling or Euros;

(xiii)         Accounts

with respect to which the Borrower has not instructed the Account debtor to pay

the Account to the Collateral Account;

(xiv)        Accounts

owed by debtors located in countries not acceptable to the Lender in its sole

discretion;

(xv)         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

(xvi)        Accounts

otherwise deemed unacceptable to the Lender in its sole discretion.

“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.

“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 the

goods described in any equipment schedule or list herewith or hereafter

furnished to the Lender by the Borrower.

“Event of Default” has the meaning specified in

Section 7.1.

“Financial Covenants” means the covenants set forth in

Section 6.2.

 

6

 

“Floating Rate” means an annual interest rate equal to

the sum of the Base Rate plus three percent

(3%), which interest rate shall change when and as the Base Rate

changes.

“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 5.6.

“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 all present and future Intellectual Property

Rights, 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 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.

“IRC” means the Internal Revenue Code of 1986.

“Infringe” means when used with respect to

Intellectual Property Rights means any infringement or other violation of

Intellectual Property Rights.

“Intellectual Property Rights” means all actual or

prospective rights arising in connection with any intellectual property or

other proprietary rights, including all rights arising in connection with

copyrights, patents, service marks, trade dress, trade secrets, trademarks,

trade names or mask works.

“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.

“Issuer” means the issuer of any Letter of Credit.

“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.

 

7

 

“L/C Application” means an application and agreement for

letters of credit in a form acceptable to the Issuer and the Lender.

“Letter of Credit” has the meaning specified in

Section 2.4.

“Licensed Intellectual Property” has the meaning given

in Section 5.11(c).

“Lien” means any security interest, mortgage, deed of

trust, pledge, lien, charge, encumbrance, title retention agreement or

analogous instrument or device, including the interest of each lessor under any

capitalized lease and the interest of any bondsman under any payment or

performance bond, in, of or on any assets or properties of a Person, whether

now owned or hereafter acquired and whether arising by agreement or operation

of law.

“Loan Documents” means this Agreement, the Note, the

Security Documents and any L/C Application.

“Lockbox” means as defined in the Lockbox and

Collection Account Agreement.

“Lockbox and Collection Account Agreement” means the

Lockbox and Collection Account Agreement by and among the Borrower, Wells Fargo Bank Minnesota,

Regulus West, LLC and the Lender, of even date herewith.

 “Material Adverse Effect” means any of the following:

(i)            a material adverse effect on the

business, operations, results of operations, prospects, assets, liabilities or

financial condition of the Borrower;

(ii)           a material adverse effect on the

ability of the Borrower to perform its obligations under the Loan Documents;

(iii)          a material adverse effect on the

ability of the Lender to enforce the Obligations or to realize the intended

benefits of the Security Documents, including a material adverse effect on the

validity or enforceability of any Loan Document , or on the status, existence,

perfection, priority (subject to Permitted Liens) or enforceability of any Lien

securing payment or performance of the Obligations; or

(iv)          any claim against the Borrower or threat of litigation which if

determined adversely to the Borrower would cause the Borrower to be liable to

pay an amount exceeding $300,000 or would be an event described in

clauses (i), (ii) and (iii) above.

“Maturity Date” means October 30, 2005.

“Maximum Line” means $5,000,000 unless said amount is

reduced pursuant to Section 2.13, in which event it means such lower

amount.

 

8

 

“Minimum

Interest Charge” has the meaning given in Section 2.8(b).

“Multiemployer Plan” means a multiemployer plan (as

defined in Section 4001(a)(3) of ERISA) to which the Borrower or any ERISA

Affiliate contributes or is obligated to contribute.

“Net Income” means fiscal year-to-date after-tax net

income from continuing operations as determined in accordance with GAAP.

“Note” means the Revolving Note.

“Obligation of Reimbursement” has the meaning given in

Section 2.6(a).

“Obligations” means the Note, the Obligation of

Reimbursement 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 all indebtedness of the Borrower arising under

any Credit Document or guaranty between the Borrower and the Lender, whether

now in effect or hereafter entered into.

“Officer” means with respect to the Borrower, an

officer if the Borrower is a corporation, a manager if the Borrower is a

limited liability company, or a partner if the Borrower is a partnership.

“Owned Intellectual Property” has the meaning given in

Section 5.11(a).

“Owner” means with respect to the Borrower, each

Person having legal or beneficial title to an ownership interest in the

Borrower or a right to acquire such an interest.

“Patent and Trademark

Security Agreement” means the Patent and Trademark Security Agreement by the

Borrower in favor of the Lender of even date herewith.

“Pension Plan” means a pension plan (as defined in

Section 3(2) of ERISA) maintained for employees of the Borrower or any

ERISA Affiliate and covered by Title IV of ERISA.

“Permitted Lien” has the meaning given in

Section 6.3(a).

“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.

 

9

 

“Plan” means an employee benefit plan (as defined in

Section 3(3) of ERISA) maintained for employees of the Borrower or any

ERISA Affiliate.

“Premises” means all premises where the Borrower

conducts its business and has any rights of possession, including the premises

legally described in Exhibit C attached hereto.

“Reportable Event” means a reportable event (as

defined in Section 4043 of ERISA), other than an event for which the

30-day notice requirement under ERISA has been waived in regulations issued by

the Pension Benefit Guaranty Corporation.

“Revolving Advance” has the meaning given in

Section 2.1.

“Revolving Note” means the Borrower’s revolving

promissory note, payable to the order of the Lender in substantially the form

of Exhibit A hereto.

“Security Documents” means this Agreement, the Lockbox

and Collection Account Agreement, the

Patent and Trademark Security Agreement  and any other document

delivered to the Lender from time to time to secure the Obligations.

“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 2.5.

“Subsidiary” means any corporation of which more than

50% of the outstanding shares of capital stock having general voting power

under ordinary circumstances to elect a majority of the board of Directors of

such corporation, irrespective of whether or not at the time stock 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.

“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 7.2.

“UCC” means the Uniform Commercial Code as in effect

in the state designated in Section 8.14 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.

“Wells Fargo Bank Minnesota” means Wells Fargo Bank Minnesota,

National Association.

Section 1.2    Other

Definitional Terms; Rules of Interpretation.    The words

“hereof”, “herein” and “hereunder” and words of similar import when used in

this Agreement shall refer to this Agreement as a whole and not to any

particular provision of this Agreement. 

All accounting 

 

10

 

terms not otherwise defined herein have the meanings

assigned to them in accordance with GAAP. 

All terms defined in the UCC and not otherwise defined herein have the

meanings assigned to them in the UCC. 

References to Articles, Sections, subsections, Exhibits, Schedules and

the like, are to Articles, Sections and subsections of, or Exhibits or

Schedules attached to, this Agreement unless otherwise expressly provided.  The words “include”, “includes” and

“including” shall be deemed to be followed by the phrase “without

limitation”.  Unless the context in

which used herein otherwise clearly requires, “or” has the inclusive meaning

represented by the phrase “and/or”. 

Defined terms include in the singular number the plural and in the

plural number the singular.  Reference

to any agreement (including the Loan Documents), document or instrument means

such agreement, document or instrument as amended or modified and in effect

from time to time in accordance with the terms thereof (and, if applicable, in

accordance with the terms hereof and the other Loan Documents), except where

otherwise explicitly provided, and reference to any promissory note includes

any promissory note which is an extension or renewal thereof or a substitute or

replacement therefor.  Reference to any

law, rule, regulation, order, decree, requirement, policy, guideline, directive

or interpretation means as amended, modified, codified, replaced or reenacted,

in whole or in part, and in effect on the determination date, including rules

and regulations promulgated thereunder.

ARTICLE II

AMOUNT AND TERMS OF THE

CREDIT FACILITY

Section 2.1    Revolving

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

(the “Revolving Advances”).  The Lender

shall have no obligation to make a Revolving Advance to the extent the amount

of the requested Revolving Advance exceeds Availability.  The Borrower’s obligation to pay the

Revolving Advances shall be evidenced by the Revolving Note and shall be secured

by the Collateral.  Within the limits

set forth in this Section 2.1, the Borrower may borrow, prepay pursuant to

Section 2.12 and reborrow.

Section 2.2    Procedures

for Requesting Advances.    The

Borrower shall comply with the following procedures in requesting Revolving

Advances:

(a)           Time for Requests. 

The Borrower shall request each Advance not later than 11:00 a.m.,

Minneapolis, Minnesota time on the Banking Day which is the date the Advance is

to be made.  Each such request shall be

effective upon receipt by the Lender, shall be in writing or by telephone or

telecopy transmission, to be confirmed in writing by the Borrower if so

requested by the Lender, shall be by (i) an Officer of the Borrower; or

(ii) a person designated as the Borrower’s agent by an Officer of the

Borrower in a writing delivered to the Lender; or (iii) a person whom the

Lender reasonably believes to be an Officer of the Borrower or such a

designated agent.  The Borrower shall repay

all Advances even if the Lender does not receive such confirmation and 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.

 

11

 

(b)           Disbursement. 

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 Wells Fargo Bank Minnesota unless the Lender and the Borrower

shall agree in writing to another manner of disbursement.

Section 2.3    Increased

Costs; Capital Adequacy; Funding Exceptions.

(a)           Increased Costs; Capital Adequacy.  If the Lender determines at any

time that its Return has been reduced as a result of any Rule Change, such

Lender may so notify the Borrower and require the Borrower, beginning fifteen

(15) days after such notice, 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 2.3:

(i)            “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, including

rules requiring financial institutions to maintain total capital in amounts

based upon percentages of outstanding loans, binding loan commitments and

letters of credit.

(ii)           “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, including those that

impose taxes, duties or other similar charges, or mandate 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.

(iii)          “Related Lender” includes (but is not limited to) the Lender, any parent

of the Lender, any assignee of any interest of the Lender hereunder and any

participant in the Credit Facility.

(iv)          “Return”, for any period, means the

percentage determined by dividing (i) the sum of interest and ongoing fees

earned by the Lender under this Agreement during such period, by (ii) the

average capital such Lender is required to maintain during such period as a

result of its being a party to this Agreement, as determined by such Lender

based upon its total capital requirements and a reasonable attribution formula

that takes account of the Capital Adequacy Rules and L/C Rules then in effect,

costs of issuing or maintaining any Advance or Letter of Credit and amounts

received or receivable under this Agreement or the Notes with respect to any

Advance or 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.

 

12

 

(v)           “Rule Change”

means any change in any Capital Adequacy Rule, or L/C Rule occurring after the

date of this Agreement, or any change in the interpretation or administration

thereof by any governmental or regulatory authority, but the term does not

include any changes that at the Funding Date are scheduled to take place under

the existing Capital Adequacy Rules or L/C Rules or any increases in the

capital that the Lender is required to maintain to the extent that the

increases are required due to a regulatory authority’s assessment of that

Lender’s financial condition.

The initial notice sent by the Lender shall be sent as

promptly as practicable after such Lender learns that its Return has been reduced,

shall include a demand for payment of the amount necessary to restore such

Lender’s Return for the quarter in which the notice is sent, and shall state in

reasonable detail the cause for the reduction in its Return and its calculation

of the amount of such reduction. 

Thereafter, such Lender may send a new notice during each calendar

quarter setting forth the calculation of the reduced Return for that quarter

and including a demand for payment of the amount necessary to restore its

Return for that quarter.  The Lender’s

calculation in any such notice shall be conclusive and binding absent

demonstrable error.

Section 2.4    Letters of Credit.

(a)           The Lender agrees, on the terms and

subject to the conditions herein set forth, to cause an Issuer 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 by guaranteeing payment of the Borrower’s obligations or being a

co-applicant.  The Lender shall have no

obligation to cause an Issuer to issue any Letter of Credit if the face amount

of the Letter of Credit to be issued would exceed the lesser of:

(i)            $5,000,000 less the L/C Amount, or

(ii)           Availability.

Each Letter of Credit, if any, shall be issued

pursuant to a separate L/C Application entered into between the Borrower and

the Lender for the benefit of the Issuer, completed in a manner satisfactory to

the Lender and the Issuer.  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 Termination Date in effect as of the date of

issuance.

(c)           Any request to cause an Issuer to

issue a Letter of Credit 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.

 

13

 

Section 2.5    Special Account.   

If the Credit Facility is terminated for any reason 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.  The

Lender may apply amounts on deposit in the Special Account at any time or from

time to time to the Obligations in the Lender’s sole discretion.  The Borrower may not withdraw any amounts on

deposit in the Special Account as long as the Lender maintains a security

interest therein.  The Lender agrees to

transfer any balance in the Special Account to the Borrower when the Lender is

required to release its security interest in the Special Account under

applicable law.

Section 2.6    Payment

of Amounts Drawn Under Letters of Credit; Obligation of Reimbursement.   

The Borrower acknowledges that the Lender, as co-applicant, will be

liable to the Issuer 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

shall 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 shall pay to 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 Issuer or 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 Borrower authorizes the Lender to make a Revolving

Advance in the amount of the Obligation of Reimbursement and to apply the

proceeds of such Revolving Advance thereto. 

Such Revolving Advance shall be repayable in accordance with and be

treated in all other respects as a Revolving Advance hereunder.

(c)           If a draft is submitted under a

Letter of Credit when the Borrower is unable, because a Default Period exists

or for any other reason, to obtain a Revolving 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 a Revolving Advance

for any reason, the Lender is irrevocably authorized, in its sole discretion,

to make a Revolving 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

Revolving Advance made under this Section 2.6, shall be evidenced by the

Revolving Note and shall bear interest as provided in Section 2.8.

 

14

 

Section 2.7    Obligations

Absolute.    The Borrower’s obligations arising under

Section 2.6 shall be absolute, unconditional and irrevocable, and shall be

paid strictly in accordance with the terms of Section 2.6, 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)           any amendment or waiver of or any

consent to departure from all or any of the Related Documents;

(c)           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;

(d)           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;

(e)           payment by or on behalf of the Issuer

under any Letter of Credit against presentation of a draft or certificate which

does not strictly comply with the terms of such Letter of Credit; or

(f)            any other circumstance or happening

whatsoever, whether or not similar to any of the foregoing.

Section 2.8    Interest;

Margin; Minimum Interest Charge; Default Interest; Participations; Clearance

Days; 360 Day Year; Usury.

(a)           Revolving Note.  Except

as set forth in Subsections (d) and (g), the outstanding principal balance of

the Revolving Note shall bear interest at the Floating Rate.

(b)           Minimum Interest

Charge. 

Notwithstanding the interest payable pursuant to Subsection (a),

the Borrower shall pay to the Lender interest of not less than $120,000 per

Loan Year (the “Minimum Interest Charge”) during the term of this Agreement,

and the Borrower shall pay any deficiency between the Minimum Interest Charge

and the amount of interest otherwise calculated under Subsection (a) on

the first day of each month following each anniversary of the Funding Date and

on the Termination Date.  As used in

this subsection (b), “Loan Year” means each one-year period ending on an anniversary

of the Funding Date.

(c)           Default Interest Rate. 

At any time during any Default Period, in the Lender’s sole

discretion and without waiving any of its other rights and remedies, the 

 

15

 

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 that Default Period.

(d)           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, 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.

Section 2.9    Fees.

(a)           Origination Fee.  The

Borrower shall pay the Lender a fully earned and non-refundable origination fee

of $50,000, due and payable upon the execution of this Agreement.

(b)           Audit Fees.  The

Borrower shall pay the Lender, on demand, audit fees in connection with any

audits or inspections conducted by the Lender of any Collateral or the

Borrower’s operations or business at the rates established from time to time by

the Lender as its audit fees (which fees are currently $800  per day per auditor), together with all actual out-of-pocket costs

and expenses incurred in conducting any such audit or inspection.

(c)           Termination and Line Reduction Fees. 

If the Credit Facility is terminated (i) by the

Lender during a Default Period that begins before a Maturity Date, (ii) by

the Borrower as of a date other than a Maturity Date, or if the Borrower

reduces the Maximum Line, the Borrower shall pay to the Lender a fee in an

amount equal to a percentage of the

Maximum Line (or the reduction of the Maximum Line, as the case may be) as

follows:  (A) three percent (3%) if

the termination or reduction occurs on or before the first anniversary of the

Funding Date; (B) two percent (2%) if the termination or reduction occurs

after the first anniversary of the Funding Date but on or before the second anniversary

of the Funding Date; and (C) one percent (1%) if the termination or

reduction occurs after the second anniversary of the Funding Date, in the case

of a reduction, by the amount of the reduction expressed as a percentage of the

Maximum Line immediately before the reduction.

 

16

 

(d)           Waiver of

Termination Fees.  The Borrower will not be

required to pay the termination fees otherwise due under subsection (c) if such

termination is made because of refinancing by an affiliate of the Lender.

(e)           Unused Line Fee.  For the purposes of this Section 2.9, “Unused Amount” means the

Maximum Line reduced by outstanding Revolving Advances.  The Borrower agrees to pay to the Lender an

unused line fee at the rate of one-half of one percent (0.5%) per annum on the

average daily Unused Amount from the date of this Agreement to and including

the Termination Date, due and payable monthly in arrears on the first day of

the month and on the Termination Date.

(f)            Eligible

Foreign Accounts Program Fee.  The Borrower agrees to pay to the Lender an Eligible Foreign

Accounts Program  Fee

at the rate of $10,000 per annum which is equal to one percent (1%) of the

maximum amount of the Eligible Foreign Accounts.  The Eligible Foreign Accounts Program Fee shall be payable on the

Funding Date and on each anniversary of the Funding Date.

(g)           Other Fees.  The

Lender may from time to time, upon five (5) days prior notice to the Borrower

during a Default Period, charge additional fees for Revolving Advances made in

excess of the Borrowing Base, for late delivery of reports, in lieu of imposing

interest at the Default Rate, and for other reasons.  The Borrower’s request for a Revolving Advance at any time after

such notice is given and such five (5) day period has elapsed shall constitute

the Borrower’s agreement to pay the fees described in such notice.

Section 2.10   

Time for Interest Payments; Payment on Non-Banking Days; Computation

of Interest and Fees.

(a)           Time For Interest Payments.  Interest shall be due and payable in arrears on the last day of

each month and on the Termination Date.

(b)           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.

(c)           Computation of Interest and Fees.  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.

Section 2.11   

Lockbox; Collateral Account; Application of Payments.

(a)           Lockbox and Collateral Account.

(i)            The Borrower shall instruct all

account debtors to pay all Accounts directly to the Lockbox.  If, notwithstanding such instructions, the

Borrower receives any payments on Accounts, the Borrower shall deposit such payments

 

17

 

into the Collateral Account.  Until so deposited, the Borrower shall hold all such payments in

trust for and as the property of the Lender and shall not commingle such

payments with any of its other funds or property.  All deposits in the Collateral Account shall constitute proceeds

of Collateral and shall not constitute payment of the Obligations.

(ii)           All items deposited in the Collateral

Account shall be subject to final payment. 

If any such item is returned uncollected, the Borrower will immediately

pay the Lender, or, for items deposited in the Collateral Account, the bank

maintaining such account, the amount of that item, or such bank at its

discretion may charge any uncollected item to the Borrower’s commercial account

or other account.  The Borrower shall be

liable as an endorser on all items deposited in the Collateral Account, whether

or not in fact endorsed by the Borrower.

(b)           Application of Payments.

(i)            The Borrower may, from time to time,

in accordance with the Lockbox and Collection Account Agreement, cause funds in

the Collateral Account to be transferred to the Lender’s general account for

payment of the Obligations.  Except as

provided in the preceding sentence, amounts deposited in the Collateral Account

shall not be subject to withdrawal by the Borrower, except after full payment

and discharge of all Obligations.

(ii)           All payments to the Lender shall be

made in immediately available funds and shall be applied to the Obligations

upon receipt by the Lender.  Funds

received from the Collateral Account shall be deemed to be immediately

available.  The Lender may hold all

payments not constituting immediately available funds for three (3) additional

days before applying them to the Obligations.

Section 2.12   

Voluntary Prepayment; Reduction of the Maximum Line; Termination of

the Credit Facility by the Borrower.    Except as

otherwise provided herein, the Borrower may prepay the Advances in whole at any

time or from time to time in part.  The

Borrower may terminate the Credit Facility or reduce the Maximum Line at any

time if it (i) gives the Lender at least 30 days’ prior written notice and

(ii) pays the Lender termination or Maximum Line reduction fees in

accordance with Section 2.9(c). 

Any reduction in the Maximum Line must be in an amount of not less than

$100,000 or an integral multiple thereof. 

If the Borrower reduces the Maximum Line to zero, all Obligations shall

be immediately due and payable.  Subject

to termination of the Credit Facility and payment and performance of all

Obligations, the Lender shall, at the Borrower’s expense, release or terminate

the Security Interest and the Security Documents to which the Borrower is

entitled by law.

Section 2.13   

Mandatory Prepayment.    Without

notice or demand, if the sum of the outstanding principal balance of the

Revolving Advances plus the L/C Amount shall at any time exceed the Borrowing

Base, the Borrower shall (i) first, immediately prepay the Revolving

Advances to the extent necessary to eliminate such excess; and (ii) if

prepayment in full of the

 

18

 

Revolving 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 2.13 or under Section 2.12 may be applied to the

Obligations, in such order and in such amounts as the Lender, in its

discretion, may from time to time determine.

Section 2.14   

Revolving Advances to Pay Obligations.   

Notwithstanding anything in Section 2.1, the Lender may, 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,

make a Revolving Advance in an amount equal to the portion of the Obligations

from time to time due and payable.

Section 2.15    Use of Proceeds.   

The Borrower shall use the proceeds of Advances and each Letter of

Credit for ordinary working capital purposes.

Section 2.16   

Liability Records.    The Lender

may maintain from time to time, at its discretion, 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

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 lien and security interest (collectively

referred to as the “Security Interest”) in the Collateral, as security for the

payment and performance of the Obligations. 

Upon request by the Lender, the Borrower will grant the Lender a

security interest in all commercial tort claims it may have against any Person.

Section 3.2    Notification

of Account Debtors and Other Obligors.  The Lender

may at any time (whether or not a Default Period then exists) 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

 

19

 

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 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.

Section 3.4    Occupancy.

(a)           The Borrower hereby irrevocably

grants to the Lender the right to take exclusive 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 Credit Facility, 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.   

Without limiting the generality of any other Security Document, the

Borrower hereby grants to the Lender a non-exclusive, worldwide and

royalty-free license to use or otherwise exploit all Intellectual Property

Rights of the Borrower for the purpose of: 

(a) completing the manufacture of any in-process materials during any

Default Period so that such materials become saleable Inventory, all in

accordance with the same quality standards previously adopted by the Borrower

for its own manufacturing and subject to the Borrower’s

 

20

 

 reasonable

exercise of quality control; and (b) selling, leasing or otherwise

disposing of any or all Collateral during any Default Period.

Section 3.6    Financing

Statement.    The Borrower authorizes the Lender to file

from time to time where permitted by law, such financing statements against

collateral described as “all personal property” as the Lender deems necessary

or useful to perfect the Security Interest. 

A carbon, photographic or other reproduction of this Agreement or of any

financing statements signed by the Borrower is sufficient as a financing

statement and may be filed as a financing statement in any state to perfect the

security interests granted hereby.  For

this purpose, the following information is set forth:

Name and address of Debtor:

Digital Angel Corporation

490 Villaume Avenue

St. Paul, MN 55075-2443

Federal Employer Identification No. 52-1233960

Name and address of Secured Party:

Wells Fargo Business Credit, Inc.
MAC N9312-040

Sixth and Marquette

Minneapolis, Minnesota  55479

Federal Employer Identification No. 

41-1237652

Section 3.7    Setoff.   

The Lender may at any time or from time to time, 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, 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.

Section 3.8    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.  The Lender has no

obligation to clean-up or otherwise prepare the Collateral for sale.  The Borrower waives any right it may have to

require the Lender to pursue any third person for any of the Obligations.

 

21

 

ARTICLE

IV

CONDITIONS OF LENDING

Section 4.1    Conditions

Precedent to the Initial Revolving Advance and Letter of Credit. 

The Lender’s obligation to make the initial Advance hereunder or to

cause any Letters of Credit to be issued 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.

(d)           A true and correct copy of any and

all mortgages pursuant to which the Borrower has mortgaged the Premises,

together with a mortgagee’s disclaimer and consent with respect to each such

mortgage.

(e)           The Lockbox and Collection Account

Agreement, properly executed by the Borrower and Wells Fargo Bank Minnesota.

(f)            The Patent and Trademark Security

Agreement, properly executed by the Borrower.

(g)           Current searches of appropriate

filing offices showing that (i) no Liens have been filed and remain in

effect against the Borrower except Permitted Liens or Liens held by Persons who

have agreed in writing that upon receipt of proceeds of the initial Advances,

they will satisfy, release or terminate such Liens in a manner satisfactory to

the Lender, and (ii) 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.

(h)           A certificate of the Borrower’s

Secretary or Assistant Secretary certifying that attached to such certificate

are (i) the resolutions of the Borrower’s Directors and, if required,

Owners, authorizing the execution, delivery and performance of the Loan

Documents, (ii) true, correct and complete copies of the Borrower’s

Constituent Documents, and (iii) examples of the signatures of the

Borrower’s Officers or agents authorized to execute and deliver the Loan

Documents and other instruments, agreements and certificates, including Advance

requests, on the Borrower’s behalf.

(i)            A current certificate issued by the

Secretary of State of Delaware certifying that the Borrower is in compliance

with all applicable organizational requirements of the State of Delaware.

 

22

 

(j)            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.

(k)           A certificate of an Officer of the

Borrower confirming, in his personal capacity, the representations and

warranties set forth in Article V.

(l)            An opinion of counsel to the

Borrower, addressed to the Lender.

(m)          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.

(n)           Payment of the fees and commissions

due under Section 2.9 through the date of the initial Advance or Letter of

Credit and expenses incurred by the Lender through such date and required to be

paid by the Borrower under Section 8.6, including all legal expenses

incurred through the date of this Agreement.

(o)           Evidence that after making the initial Revolving

Advance, satisfying all trade payables older than 60 days from invoice date,

book overdrafts and closing costs, Availability shall be not less than

$1,000,000.

(p)           Such other documents as the Lender in

its sole discretion may require.

Section 4.2    Conditions

Precedent to All Advances and Letters of Credit.   

The Lender’s obligation to make each Advance and to cause each Letter of

Credit to be issued shall be subject to the further conditions precedent that:

(a)           the representations and warranties

contained in Article V are correct on and as of the date of such Advance

or issuance of a 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

(b)           no event has occurred and is

continuing, or would result from such Advance or issuance of a Letter of Credit

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    Existence

and Power; Name; Chief Executive Office; Inventory and Equipment Locations;

Federal Employer Identification Number.    The

Borrower is a corporation, duly organized, validly existing and in good standing

under the laws of the State of Delaware 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

 

23

 

qualification necessary.  The Borrower has all requisite power and authority 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 and all of the Borrower’s records relating

to its business or the Collateral are kept at that location.  The Borrower’s chief executive office and

principal place of business is located at the address set forth in

Schedule 5.1.  All Inventory and

Equipment is located at that location or at one of the other locations listed

in Schedule 5.1.  The Borrower’s

federal employer identification number is correctly set forth in

Section 3.6.

Section 5.2    Capitalization.   

Schedule 5.2 constitutes a correct and complete list of all

ownership interests of the Borrower and rights to acquire ownership interests

including the record holder, number of interests and percentage interests on a

fully diluted basis, and an organizational chart showing the ownership

structure of all Subsidiaries of the Borrower.

Section 5.3    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 Owners; (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 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 Constituent

Documents; (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 Lien (other than the Security Interest) upon or with respect

to any of the properties now owned or hereafter acquired by the Borrower.

Section 5.4    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 5.5   Subsidiaries.   

Except as set forth in Schedule 5.5 hereto, the Borrower has no

Subsidiaries.

Section 5.6    Financial

Condition; No Adverse Change.    The

Borrower has furnished to the Lender its audited financial statements for its

fiscal year ended December 31, 2001 and unaudited financial statements for

the fiscal-year-to-date period ended August 31, 2002, and those statements

fairly present the Borrower’s financial condition on the dates thereof and the

results of its operations and cash flows for the periods then ended and were

prepared in accordance with generally accepted accounting principles.  Since the date of the most recent financial

statements, there has been no change in

the Borrower’s business, properties or condition (financial or otherwise) which

has had a Material Adverse Effect.

 

24

 

Section 5.7    Litigation.   

There are no actions, suits or proceedings pending or, to the Borrower’s

knowledge, threatened against or affecting the Borrower or any of its

Affiliates or the properties of the Borrower or any of its Affiliates before

any court or governmental department, commission, board, bureau, agency or

instrumentality, domestic or foreign, which, if determined adversely to the

Borrower or any of its Affiliates, would have a Material Adverse Effect.

Section 5.8    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 5.9    Taxes.   

The Borrower and its Affiliates have paid or caused to be paid to the

proper authorities when due all federal, state and local taxes required to be

withheld by each of them.  The Borrower

and its Affiliates have filed all federal, state and local tax returns which to

the knowledge of the Officers of the Borrower or any Affiliate, as the case may

be, are required to be filed, and the Borrower and its Affiliates have paid or

caused to be paid to the respective taxing authorities all taxes as shown on

said returns or on any assessment received by any of them to the extent such

taxes have become due.

Section 5.10    Titles and Liens.    The Borrower has good and absolute title to all Collateral free

and clear of all Liens other than Permitted Liens.  No financing statement naming the Borrower as debtor is on file

in any office except to perfect only Permitted Liens.

Section 5.11   

Intellectual Property Rights.

(a)           Owned Intellectual Property.  Schedule 5.11

is a complete list of all patents, applications for patents, trademarks,

applications for trademarks, service marks, applications for service marks,

mask works, trade dress and copyrights for which the Borrower is the registered

owner (the “Owned Intellectual Property”).  Except as disclosed on

Schedule 5.11, (i) the Borrower owns the Owned Intellectual Property

free and clear of all restrictions (including covenants not to sue a third

party), court orders, injunctions, decrees, writs or Liens, whether by written

agreement or otherwise, (ii) no Person other than the Borrower owns or has

been granted any right in the Owned Intellectual Property, (iii) all Owned

Intellectual Property is valid, subsisting and enforceable and (iv) the

Borrower has taken all commercially reasonable action necessary to maintain and

protect the Owned Intellectual Property.

(b)           Agreements with Employees and Contractors.  The Borrower has entered into a legally

enforceable agreement with each of its employees and subcontractors obligating

each such Person to assign to the Borrower, without any additional

compensation, any Intellectual Property Rights created, discovered or invented

by such Person in the course of such Person’s employment or engagement with the

Borrower (except to the extent prohibited by law), and further requiring such

Person to cooperate with the Borrower, without any additional compensation, in

connection with securing and enforcing any Intellectual Property Rights

therein; provided, however, that the foregoing

 

25

 

shall not apply with respect to employees and

subcontractors whose job descriptions are of the type such that no such

assignments are reasonably foreseeable.

(c)           Intellectual Property Rights Licensed from Others.  Schedule 5.11 is a complete list of all

agreements under which the Borrower has licensed Intellectual Property Rights

from another Person (“Licensed Intellectual Property”) other than readily

available, non-negotiated licenses of computer software and other intellectual

property used solely for performing accounting, word processing and similar

administrative tasks (“Off-the-shelf Software”) and a summary of any ongoing

payments the Borrower is obligated to make with respect thereto.  Except

as disclosed on Schedule 5.11 and in written agreements copies of which

have been given to the Lender, the Borrower’s licenses to use the Licensed

Intellectual Property are free and clear of all restrictions, Liens, court

orders, injunctions, decrees, or writs, whether by written agreement or

otherwise.  Except as disclosed on

Schedule 5.11, the Borrower is not obligated or under any liability

whatsoever to make any payments of a material nature by way of royalties, fees

or otherwise to any owner of, licensor of, or other claimant to, any

Intellectual Property Rights.

(d)           Other Intellectual Property Needed for Business.  Except for Off-the-shelf Software and as

disclosed on Schedule 5.11, the Owned Intellectual Property and the

Licensed Intellectual Property constitute all Intellectual Property Rights used

or necessary to conduct the Borrower’s business as it is presently conducted or

as the Borrower reasonably foresees conducting it.

(e)           Infringement. 

Except as disclosed on Schedule 5.11, the Borrower has no knowledge

of, and has not received any written claim or notice alleging, any Infringement

of another Person’s Intellectual Property Rights (including any written claim

that the Borrower must license or refrain from using the Intellectual Property

Rights of any third party) nor, to the Borrower’s knowledge, is there any

threatened claim or any reasonable basis for any such claim.

Section 5.12    Plans.   

Except as disclosed to the Lender in writing prior to the date hereof,

neither the Borrower nor any ERISA Affiliate (i) maintains or has

maintained any Pension Plan, (ii) contributes or has contributed to any

Multiemployer Plan or (iii) provides or has provided post-retirement

medical or insurance benefits with respect to employees or former employees

(other than benefits required under Section 601 of ERISA,

Section 4980B of the IRC or applicable state law).  Neither the Borrower nor any ERISA Affiliate

has received any notice or has any knowledge to the effect that it is not in

full compliance with any of the requirements of ERISA, the IRC or applicable

state law with respect to any Plan.  No

Reportable Event exists in connection with any Pension Plan.  Each Plan which is intended to qualify under

the IRC is so qualified, and no fact or circumstance exists which may have an

adverse effect on the Plan’s tax–qualified status.  Neither the Borrower nor any ERISA Affiliate

has (i) any accumulated funding deficiency (as defined in Section 302

of ERISA and Section 412 of the IRC) under any Plan, whether or not

waived, (ii) any liability under Section 4201 or 4243 of ERISA for

any withdrawal, partial withdrawal, reorganization or other event under any

Multiemployer Plan or (iii) any liability or knowledge of any facts or

circumstances which could result in any liability to the Pension Benefit

Guaranty Corporation, the Internal Revenue Service, the Department of

 

26

 

Labor or any participant in connection with any Plan

(other than routine claims for benefits under the Plan).

Section 5.13    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.

Section 5.14   

Environmental Matters.

(a)           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 material 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 material liability.

(b)           To the Borrower’s best knowledge, the

Borrower has not disposed of Hazardous Substances in such a manner as to create

any material liability under any Environmental Law.

(c)           To the Borrower’s best knowledge,

there are not and there never have been any requests, claims, notices,

investigations, demands, administrative proceedings, hearings or litigation,

relating in any way to the Premises or the Borrower, alleging material

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.

(d)           To the Borrower’s best knowledge, the

Borrower’s businesses are and have in the past always been 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.

(e)           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.

(f)            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.

Section 5.15   

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 (i) true and correct in all material respects,

(ii) does not omit any material fact necessary to make such information

not misleading and, (iii) as to

 

27

 

projections, valuations or proforma financial

statements, present a good faith opinion as to such projections, valuations and

proforma condition and results.

Section 5.16   

Financing Statements.    The

Borrower has provided to the Lender signed financing statements and has

authorized the filing of 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 which is capable of being

perfected by filing financing statements. 

None of the Collateral is or will become a fixture on real estate,

unless a sufficient fixture filing is in effect with respect thereto.

Section 5.17    Rights to Payment.   

Each right to payment and each instrument, document, chattel paper and

other agreement constituting or evidencing Collateral is (or, in the case of

all future 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.

ARTICLE

VI

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)           Annual Financial Statements.  As soon as available, and in any event within 90 days after

the end of each fiscal year of the Borrower, the Borrower will deliver, or

cause to be delivered, to the Lender, the Borrower’s audited financial

statements with the unqualified opinion of independent certified public

accountants selected by the Borrower and 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

any Affiliates, 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

and all relevant facts in reasonable detail to evidence, and the computations

as to, whether or not the Borrower is in compliance with the Financial

Covenants; 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

 

28

 

such officer has knowledge of the occurrence of any

Default or Event of Default and, if so, stating in reasonable detail the facts

with respect thereto.

(b)           Monthly Financial Statements.  As soon as available and in any event within 20 days after

the end of each month, the Borrower will deliver to the Lender an

unaudited/internal balance sheet 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 any Affiliates, in reasonable detail and stating

in comparative form the figures for the corresponding date and periods in the

previous year, all prepared in accordance with GAAP, subject to year-end audit

adjustments; and accompanied by a certificate of the Borrower’s chief financial

Officer, substantially in the form of Exhibit B hereto stating

(i) that such financial statements have been prepared in accordance with

GAAP, subject to year-end audit adjustments, (ii) whether or not such

officer has knowledge of the occurrence of any Default or Event of Default not

theretofore reported and remedied and, if so, stating in reasonable detail the

facts with respect thereto, and (iii) all relevant facts in reasonable

detail to evidence, and the computations as to, whether or not the Borrower is

in compliance with the Financial Covenants.

(c)           Collateral Reports. 

Within 15 days after the end of each month or more frequently if the

Lender so requires, the Borrower will deliver to the Lender agings of the

Borrower’s accounts receivable and its accounts payable, an inventory

certification report, and a calculation of the Borrower’s Accounts, Eligible

Accounts, Inventory and Eligible Inventory as at the end of such month or

shorter time period.

(d)           Projections.  At

least 30 days before the beginning of each fiscal year of the Borrower, the

Borrower will deliver to the Lender the projected balance sheets and income

statements for each month of such year, each in reasonable detail, representing

the Borrower’s good faith projections and certified by the Borrower’s chief

financial Officer as being the most accurate projections available and

identical to the projections used by the Borrower for internal planning

purposes, together with a statement of underlying assumptions and such

supporting schedules and information as the Lender may in its discretion

require.

(e)           Litigation. 

Immediately after the commencement thereof, the Borrower will deliver to

the Lender notice in writing of all litigation and of all proceedings before

any governmental or regulatory agency affecting the Borrower (i) of the

type described in Section 5.14(c) or (ii) which seek a monetary

recovery against the Borrower in excess of $50,000.

(f)            Defaults.  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

Default or Event of Default, the Borrower will deliver to the Lender 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

thereof.

 

29

 

(g)           Plans.  As soon

as possible, and in any event within 30 days after the Borrower knows or

has reason to know that any Reportable Event with respect to any Pension Plan

has occurred, the Borrower will deliver to the Lender a statement of the

Borrower’s chief financial Officer setting forth details as to such Reportable

Event and the action which the Borrower proposes to take with respect thereto,

together with a copy of the notice of such Reportable Event to the Pension

Benefit Guaranty Corporation.  As soon as

possible, and in any event within 10 days after the Borrower fails to make any

quarterly contribution required with respect to any Pension Plan under

Section 412(m) of the IRC, the Borrower will deliver to the Lender a

statement of the Borrower’s chief financial Officer setting forth details as to

such failure and the action which the Borrower proposes to take with respect

thereto, together with a copy of any notice of such failure required to be

provided to the Pension Benefit Guaranty Corporation.  As soon as possible, and in any event with 10 days after the

Borrower knows or has reason to know that it has or is reasonably expected to

have any liability under Section 4201 or 4243 of ERISA for any withdrawal,

partial withdrawal, reorganization or other event under any Multiemployer Plan,

the Borrower will deliver to the Lender a statement of the Borrower’s chief

financial Officer setting forth details as to such liability and the action

which Borrower proposes to take with respect thereto.

(h)           Disputes.  Promptly

upon knowledge thereof, the Borrower will deliver to the Lender notice of

(i) any disputes or claims by the Borrower’s customers  exceeding $5,000 individually or $50,000 in the aggregate during any

fiscal year; (ii) credit memos; (iii) any goods returned to or

recovered by the Borrower.

(i)            Officers and Directors. 

Promptly upon knowledge thereof, the Borrower will deliver to the Lender

notice any change in the persons constituting the Borrower’s Officers and

Directors.

(j)            Collateral. 

Promptly upon knowledge thereof, the Borrower will deliver to the Lender

notice of any loss of or material damage to any Collateral or of any

substantial adverse change in any Collateral or the prospect of payment

thereof.

(k)           Commercial Tort Claims. 

Promptly upon knowledge thereof, the Borrower will deliver to the Lender

notice of any commercial tort claims it may bring against any person, including

the name and address of each defendant, a summary of the facts, an estimate of

the Borrower’s damages, copies of any complaint or demand letter submitted by

the Borrower, and such other information as the Lender may request.

(l)            Intellectual Property.

(i)            The Borrower will give the Lender 30

days prior written notice of its intent to acquire or to grant material

Intellectual Property Rights and upon request shall provide the Lender with

copies of all proposed documents and agreements concerning such rights.

(ii)           Promptly upon knowledge thereof, the

Borrower will deliver to the Lender notice of (A) any Infringement of its

Intellectual Property Rights by 

 

30

 

others, (B) claims that the Borrower is

Infringing another Person’s Intellectual Property Rights and (C) any

threatened cancellation, termination or material limitation of its Intellectual

Property Rights.

(iii)          Promptly upon receipt, the Borrower

will give the Lender copies of all registrations and filings with respect to

its Intellectual Property Rights.

(m)          Reports to Owners. 

Promptly upon their distribution, the Borrower will deliver to the

Lender copies of all financial statements, reports and proxy statements which

the Borrower shall have sent to its Owners.

(n)           SEC Filings. 

Promptly after the sending or filing thereof, the Borrower will deliver

to the Lender copies of all regular and periodic reports which the Borrower

shall file with the Securities and Exchange Commission or any national

securities exchange.

(o)           Tax Returns.  As soon as possible, and in any event by not

later five days after they are due, copies of the state and federal tax returns

and all schedules thereto and an updated personal financial statement of each

owner of the Borrower.

(p)           Violations of Law. 

Promptly upon knowledge thereof, the Borrower will deliver to the Lender

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.

(q)           Other Reports. 

From time to time, with reasonable promptness, the Borrower will deliver

to the Lender any and all receivables schedules, collection reports, deposit

records, equipment schedules, copies of invoices to account debtors, shipment

documents and delivery receipts for goods sold, and such other material,

reports, records or information as the Lender may request.

Section 6.2    Financial

Covenants.

(a)           Minimum Book Net Worth. 

The Borrower will maintain, during each period described below, its Book

Net Worth, determined as at the end of each month, at an amount not less than the amount set forth opposite such period:

	

  Period

  	

   

  	

  Minimum Book Net Worth

  
	

  October 2002

  	

   

  	

  $120,913,000

  
	

  November 2002

  	

   

  	

  $120,476,000

  
	

  December 2002

  	

   

  	

  $121,298,000

  
	

  January 2003

  	

   

  	

  $120,681,000

  
	

  February 2003

  	

   

  	

  $120,283,000

  
	

  March 2003

  	

   

  	

  $120,082,000

  
	

  April 2003

  	

   

  	

  $120,569,000

  
	

  May 2003

  	

   

  	

  $120,524,000

  
	

  June 2003

  	

   

  	

  $120,046,000

  
	

  July 2003

  	

   

  	

  $119,911,000

  
	

  August 2003

  	

   

  	

  $120,124,000

  
	

  September 2003

  	

   

  	

  $120,954,000

  
	

  October 2003

  	

   

  	

  $121,299,000

  
	

  November 2003

  	

   

  	

  $121,441,000

  
	

  December 2003

  	

   

  	

  $123,212,000

  

 

31

 

(b)           Minimum Earnings Before Taxes.  The Borrower will achieve during each period described below,

Earnings Before Taxes, of not less than

the amount set forth opposite such period:

 

	

  Period

  	

   

  	

  Minimum Earnings Before Taxes

  
	

  October 2002

  	

   

  	

  $(25,942,000)

  
	

  November 2002

  	

   

  	

  $(26,379,000)

  
	

  December 2002

  	

   

  	

  $(26,557,000)

  
	

  January 2003

  	

   

  	

  $(617,000)

  
	

  February 2003

  	

   

  	

  $(1,014,000)

  
	

  March 2003

  	

   

  	

  $(1,215,000)

  
	

  April 2003

  	

   

  	

  $(728,000)

  
	

  May 2003

  	

   

  	

  $(773,000)

  
	

  June 2003

  	

   

  	

  $(1,251,000)

  
	

  July 2003

  	

   

  	

  $(1,387,000)

  
	

  August 2003

  	

   

  	

  $(1,172,000)

  
	

  September 2003

  	

   

  	

  $(344,000)

  
	

  October 2003

  	

   

  	

  $2,000

  
	

  November 2003

  	

   

  	

  $143,000

  
	

  December 2003

  	

   

  	

  $1,915,000

  

 

(c)           Capital Expenditures. 

The Borrower will not incur or contract to incur Capital Expenditures of

more than (i) $2,200,000 in the aggregate during fiscal year 2002 and  $1,200,000 in the aggregate during fiscal

year 2003.

Section 6.3    Permitted

Liens; Financing Statements.

(a)           The Borrower will not create, incur

or suffer to exist any Lien 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”):

(i)            in the case of any of the Borrower’s

property which is not Collateral, covenants, restrictions, rights, easements

and minor irregularities in title which do not materially interfere with the

Borrower’s business or operations as presently conducted;

(ii)           Liens in existence on the date hereof

and listed in Schedule 6.3 hereto, securing indebtedness for borrowed

money permitted under Section 6.4;

 

32

 

(iii)          the Security Interest and Liens

created by the Security Documents; and

(iv)          purchase money Liens 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.

(b)           The Borrower will not amend any

financing statements in favor of the Lender except as permitted by law.

Section 6.4    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 6.4 hereto; and

(c)           indebtedness relating to Permitted

Liens.

Section 6.5    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 6.4

hereto.

Section 6.6    Investments

and Subsidiaries.    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

any partnership or joint venture, except:

(a)           investments in direct obligations of

the United States of America or any agency or instrumentality thereof whose

obligations constitute full faith and credit obligations of the United States

of America having a maturity of one year or less, commercial paper issued by

U.S. corporations rated “A–1” or “A–2” by Standard & Poors

Corporation or “P–1” or “P–2” by Moody’s Investors Service or

certificates of deposit or bankers’ acceptances having a maturity of one year

or less issued by members of the Federal Reserve System having deposits in

excess of $100,000,000 (which certificates of deposit or bankers’ acceptances

are fully insured by the Federal Deposit Insurance Corporation);

 

33

 

(b)           travel advances or loans to the

Borrower’s Officers and employees not exceeding at any one time an aggregate of

$30,000;

(c)           advances in the form of progress

payments, prepaid rent not exceeding three months or security deposits; and

(d)           current investments in the

Subsidiaries in existence on the date hereof and listed in Schedule 5.5 hereto.

Section 6.7   Dividends

and Distributions.    The  Borrower will not declare or pay any dividends (other than

dividends payable solely in stock of the Borrower) on any class of its stock or

make any payment on account of the purchase, redemption or other retirement of

any shares of such stock or make any distribution in respect thereof, either

directly or indirectly.

Section 6.8    Salaries.   

The Borrower will not pay excessive or unreasonable salaries, bonuses,

commissions, consultant fees or other compensation; or increase the salary,

bonus, commissions, consultant fees or other compensation of any Director,

Officer or consultant, or any member of their families, by more than 15% in any

one year, either individually or for all such persons in the aggregate, or pay

any such increase from any source other than profits earned in the year of

payment.

Section 6.9    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 and such other matters as the Lender may from time to time request 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 company

and financial books and records of the Borrower at all times during ordinary

business hours, to send and discuss with account debtors and other obligors

requests for verification of amounts owed to the Borrower, and to discuss the

Borrower’s affairs with any of its Directors, Officers, employees or

agents.  The Borrower hereby irrevocably

authorizes all accountants and third parties to disclose and deliver to Lender,

at the Borrower’s expense, all financial information, books and records, work

papers, management reports and other information in their possession regarding

the Borrower.  The Borrower will permit

the Lender, or its employees, accountants, attorneys or agents, to examine and

inspect any Collateral or any other property of the Borrower at any time during

ordinary business hours.

Section 6.10   

Account Verification.    The Lender

may at any time and from time to time 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 6.11   

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

 

34

 

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 material liability or obligation under the

common law of any jurisdiction or any Environmental Law.

Section 6.12   

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 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 upon

any properties of the Borrower; provided, that the 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 6.13   

Maintenance of Properties.

(a)           The Borrower will keep and maintain

the Collateral 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 6.14 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.  The

Borrower will take all commercially reasonable steps necessary to protect and

maintain its Intellectual Property Rights.

(b)           The Borrower will defend the

Collateral against all Liens, claims or demands of all Persons (other than the

Lender) claiming the Collateral or any interest therein.  The Borrower will keep all Collateral free

and clear of all Liens except Permitted Liens. 

The Borrower will take all commercially reasonable steps necessary to

prosecute any Person Infringing its Intellectual Property Rights and to defend

itself against any Person accusing it of Infringing any Person’s Intellectual

Property Rights.

Section 6.14    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 may from time to time be required by the

Lender, but in all events 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 maintain business interruption insurance including coverage for force

majeure and  keep all tangible Collateral

 

35

 

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. 

All policies of liability insurance required hereunder shall name the

Lender as an additional insured.

Section 6.15   

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 and shall conduct its business in an orderly, efficient and regular

manner.

Section 6.16   

Delivery of Instruments, etc.    Upon

request by the Lender, the Borrower will promptly deliver to the Lender in

pledge all instruments, documents and chattel paper constituting Collateral,

duly endorsed or assigned by the Borrower.

Section 6.17   

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 will not

liquidate, dissolve or suspend business operations.  The Borrower will not transfer any part of its ownership interest

in any Intellectual Property Rights and will not permit any agreement under

which it has licensed Licensed Intellectual Property to lapse, except that the

Borrower may transfer such rights or permit such agreements to lapse if it

shall have reasonably determined that the applicable Intellectual Property

Rights are no longer useful in its business. 

If the Borrower transfers any Intellectual Property Rights for value,

the Borrower will pay over the proceeds to the Lender for application to the

Obligations.  The Borrower will not

license any other Person to use any of the Borrower’s Intellectual Property

Rights, except that the Borrower may grant licenses in the ordinary course of

its business in connection with sales of Inventory or provision of services to

its customers.

Section 6.18   

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 6.19   

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 6.20   

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.

 

36

 

Section 6.21    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 6.22    Discounts, etc.   

After notice from the Lender, the Borrower will not grant any discount,

credit or allowance to any customer of the Borrower or accept any return of

goods sold.  The Borrower will not at

any time modify, amend, subordinate, cancel or terminate the obligation of any

account debtor or other obligor of the Borrower.

Section 6.23    Plans.   

Unless disclosed to the Lender pursuant to Section 5.12, neither

the Borrower nor any ERISA Affiliate will (i) adopt, create, assume or

become a party to any Pension Plan, (ii) incur any obligation to

contribute to any Multiemployer Plan, (iii) incur any obligation to provide

post-retirement medical or insurance benefits with respect to employees or

former employees (other than benefits required by law) or (iv) amend any

Plan in a manner that would materially increase its funding obligations.

Section 6.24   

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 or jurisdiction of organization.

Section 6.25   

Constituent Documents; S Corporation Status.   

The Borrower will not amend its Constituent Documents.

Section 6.26   

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 6.12 and 6.14, 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 the payment of taxes, the

satisfaction of Liens, 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 Default 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

 

37

 

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 6.26.

ARTICLE VII

EVENTS OF DEFAULT,

RIGHTS AND REMEDIES

Section 7.1    Events of Default.   

“Event of Default”, wherever used herein, means any one of the following

events:

(a)           Default in the payment of any

Obligations when they become due and payable;

(b)           Default in the performance, or

breach, of any covenant or agreement of the Borrower contained in this

Agreement;

(c)           A Change of Control shall occur;

(d)           Any Financial Covenant shall become

inapplicable due to the lapse of time and the failure to amend any such

covenant to cover future periods;

(e)           The Borrower shall be or become

insolvent, or admit in writing its or his inability to pay its or his 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 him or for all or any substantial part of

its or his 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 or him under the

laws of any jurisdiction; or any such proceeding 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;

(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

an arbitration award, final judgment, decree or order for the payment of money

in excess of $50,000 and the continuance of such arbitration award, judgment,

decree or order unsatisfied and in effect for any period of 30 consecutive days

without a stay of execution;

 

38

 

(i)            A default under any bond, debenture,

note or other evidence of material indebtedness of the Borrower 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 material lease or other contract, and the expiration of

the applicable period of grace, if any, specified in such evidence of

indebtedness, indenture, other instrument, lease or contract;

(j)            Any Reportable Event, which the

Lender determines in good faith might constitute grounds for the termination of

any Pension Plan or for the appointment by the appropriate United States

District Court of a trustee to administer any Pension 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

Pension Plan; or the Pension Benefit Guaranty Corporation shall have instituted

proceedings to terminate any Pension Plan or to appoint a trustee to administer

any Pension Plan; or the Borrower or any ERISA Affiliate shall have filed for a

distress termination of any Pension Plan under Title IV of ERISA; or the

Borrower or any ERISA Affiliate shall have failed to make any quarterly contribution

required with respect to any Pension Plan under Section 412(m) of the IRC,

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 Pension Plan; or any withdrawal, partial withdrawal, reorganization or

other event occurs with respect to a Multiemployer Plan which results or could

reasonably be expected to result in a material liability of the Borrower to the

Multiemployer Plan under Title IV of ERISA.

(k)           An event of default shall occur under

any Security Document;

(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 or attempt to sell all or

substantially all of its assets, without the Lender’s prior written consent;

(m)          Default in the payment of any amount

owed by the Borrower to the Lender other than any indebtedness arising

hereunder;

(n)           Any event or circumstance with

respect to the Borrower shall occur such that the Lender shall believe in good

faith that the prospect of payment of all or any part of the Obligations or the

performance by the Borrower under the Loan Documents is impaired or any

material adverse change in the business or financial condition of the Borrower

shall occur; or

(o)           Any breach, default or event of

default by or attributable to any Affiliate under any agreement between such

Affiliate and the Lender shall occur.

Section 7.2    Rights

and Remedies.    During any Default Period, the Lender may

exercise any or all of the following rights and remedies:

 

39

 

(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, apply any and all money owing by the

Lender to the Borrower to the payment of the Obligations;

(d)           the Lender may exercise and enforce

any and all rights and remedies available upon default to a secured party under

the UCC, including 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 (with or without giving any warranties as to the Collateral, title

to the Collateral or similar warranties), 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;

(e)           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 2.13 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;

(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 7.1, the Obligations shall be immediately due and payable

automatically without presentment, demand, protest or notice of any kind.  If the Lender sells any of the Collateral on

credit, the Obligations will be reduced only to the extent of payments actually

received.  If the purchaser fails to pay

for the Collateral, the Lender may resell the Collateral and shall apply any

proceeds actually received to the Obligations.

Section 7.3    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 8.3) at least ten calendar days before the date of

intended disposition or other action.

 

40

 

ARTICLE

VIII

MISCELLANEOUS

Section 8.1    No

Waiver; Cumulative Remedies; Compliance with Laws.   

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.  The Lender

may comply with any applicable state or federal law requirements in connection

with a disposition of the Collateral and such compliance will not be considered

adversely to affect the commercial reasonableness of any sale of the

Collateral.

Section 8.2    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 8.3    Addresses

for Notices; Requests for Accounting.    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 next to its signature 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.  All requests under Section 9-210 of the

UCC (i) shall be made in a writing signed by a person authorized under

Section 2.2(b), (ii) shall be personally delivered, sent by registered

or certified mail, return receipt requested, or by overnight courier of

national reputation (iii) shall be deemed to be sent when received by the

Lender and (iv) shall otherwise comply with the requirements of

Section 9-210.  The Borrower

requests that the Lender respond to all such requests which on their face

appear to come from an authorized individual and releases the Lender from any

liability for so responding.  The

Borrower shall pay Lender the maximum amount allowed by law for responding to

such requests.

Section 8.4    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, control agreements and other agreements and writings that

the 

 

41

 

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 8.5    Costs and Expenses.   

The Borrower shall pay on demand all costs and expenses, including

reasonable attorneys’ fees, incurred by the Lender in connection with the

Obligations, this Agreement, the Loan Documents, any Letter of Credit and any

other document or agreement related hereto or thereto, and the transactions

contemplated hereby, including 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.

Section 8.6    Indemnity.   

In addition to the payment of expenses pursuant to Section 8.5 the

Borrower shall 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;

(ii)           any claims, loss or damage to which

any Indemnitee may be subjected if any representation or warranty contained in

Section 5.14 proves to be incorrect in any respect or as a result of any

violation of the covenant contained in Section 6.12(b); and

(iii)          any and all other liabilities, losses,

damages, penalties, judgments, suits, claims, costs and expenses of any kind or

nature whatsoever (including 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 costs 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

 

42

 

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 8.6 shall survive the termination of this Agreement and the

discharge of the Borrower’s other obligations hereunder.

Section 8.7    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.

Section 8.8    Execution

in Counterparts; Telefacsimile Execution.    This

Agreement and other Loan Documents may be executed in any number of

counterparts, 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. 

Delivery of an executed counterpart of this Agreement by telefacsimile

shall be equally as effective as delivery of an original executed counterpart

of this Agreement.  Any party delivering

an executed counterpart of this Agreement by telefacsimile also shall deliver

an original executed counterpart of this Agreement but the failure to deliver

an original executed counterpart shall not affect the validity, enforceability,

and binding effect of this Agreement.

Section 8.9    Retention

of Borrower’s Records.    The Lender

shall have no obligation to maintain any electronic records or any documents,

schedules, invoices, agings, or other papers delivered to the Lender by the

Borrower or in connection with the Loan Documents for more than four months

after receipt by the Lender.

Section 8.10   

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.  To the extent

permitted by law, the Borrower waives and will not assert against any assignee

any claims, defenses or set-offs which the Borrower could assert against the

Lender.  This Agreement shall also bind

all Persons who become a party to this Agreement as a borrower.  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.  Without

limiting the Lender’s right to share information regarding the Borrower and its

Affiliates with the Lender’s participants, accountants, lawyers and other

advisors, the Lender, Wells Fargo & Company, and all direct and

indirect subsidiaries of Wells Fargo & Company, may exchange any and

all information they may have in their possession regarding the Borrower and

its Affiliates, and the Borrower waives any right of confidentiality it may

have with respect to such exchange of such information.

Section 8.11   

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.

 

43

 

Section 8.12    Headings.   

Article, Section and subsection 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 8.13   

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 may be venued in either the State or

Federal courts located in Hennepin County, Minnesota; 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 OR ANY OTHER LOAN DOCUMENT.

 

44

 

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.

	

   

  	

   

  	

   

  	

   

  
	

   

  	

   

  	

  DIGITAL ANGEL CORPORATION

  
	

  490 Villaume Avenue

  	

   

  	

   

  	

   

  
	

  St. Paul, MN 55075-2443

  	

  By

  	

   

  	

   

  
	

  Telecopier:  (651) 455-0217

  	

   

  	

  Randolph K. Geissler

  	

   

  
	

  Attention:  James P. Santelli

  	

  Its  

  	

  Chief Executive Officer

  	

   

  
	

  email: 

  jsantelli@digitalangelcorp.com

  	

   

  	

   

  	

   

  
	

   

  	

   

  	

   

  	

   

  
	

   

  	

   

  	

   

  	

   

  
	

  Wells Fargo Business

  Credit, Inc

  	

  WELLS FARGO BUSINESS

  CREDIT, INC.

  
	

   

  	

   

  	

   

  	

   

  
	

  MAC  N9312-040

  	

  By

  	

   

  	

   

  
	

  Sixth and Marquette

  	

   

  	

  Michael L. Guillou

  	

   

  
	

  Minneapolis, MN 55479

  	

  Its  

  	

  Assistant Vice

  President

  	

   

  
	

  Telecopier:  (612) 673-8589

  	

   

  	

   

  	

   

  
	

  Attention:  Michael L. Guillou

  	

   

  	

   

  	

   

  
	

  e-mail:

  michael.l.guillou@welsfargo.com

  	

   

  	

   

  	

   

  
	

   

  	

   

  	

   

  	

   

  
	

   

  	

   

  	

   

  	

   

  
					

 

45

 

Table of Exhibits and

Schedules

	

   

  	

   

  	

   

  
	

  Exhibit A

  	

   

  	

  Form of Revolving Note

  
	

   

  	

   

  	

   

  
	

  Exhibit B

  	

   

  	

  Compliance Certificate

  
	

   

  	

   

  	

   

  
	

  Exhibit C

  	

   

  	

  Premises

  
	

   

  	

   

  	

   

  
	

  Schedule 5.1

  	

   

  	

  Trade Names, Chief

  Executive Office, Principal Place of Business, and Locations of Collateral

  
	

   

  	

   

  	

   

  
	

  Schedule 5.2

  	

   

  	

  Capitalization and

  Organizational Chart

  
	

   

  	

   

  	

   

  
	

  Schedule 5.5

  	

   

  	

  Subsidiaries

  
	

   

  	

   

  	

   

  
	

  Schedule 5.11

  	

   

  	

  Intellectual Property

  Disclosures

  
	

   

  	

   

  	

   

  
	

  Schedule 6.3

  	

   

  	

  Permitted Liens

  
	

   

  	

   

  	

   

  
	

  Schedule 6.4

  	

   

  	

  Permitted Indebtedness

  and Guaranties

  

 

 

Exhibit A

to Credit and Security Agreement

REVOLVING NOTE

 

	

  $5,000,000

  	

   

  	

  Minneapolis, Minnesota

  
	

   

  	

   

  	

  October 30,2002

  

 

For value received, the undersigned, DIGITAL ANGEL

CORPORATION a Delaware corporation (the “Borrower”), hereby promises to pay on

the Termination Date under the Credit Agreement (defined below), to the order

of WELLS FARGO BUSINESS CREDIT, INC., a Minnesota corporation (the “Lender”),

at its main 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 FIVE MILLION

DOLLARS ($5,000,000) or, if less, the aggregate unpaid principal amount of all

Revolving 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 (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 Revolving 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 shall pay all costs of collection,

including reasonable attorneys’ fees and legal expenses if 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.

 

	

   

  	

  DIGITAL ANGEL

  CORPORATION

  
	

   

  	

   

  	

   

  
	

   

  	

  By

  	

   

  
	

   

  	

   

  	

  James P.

  Santelli

  
	

   

  	

  Its

  	

  Vice President

  of Finance

  

 

 

Exhibit B to Credit and Security

Agreement

Compliance Certificate

	

  To:

  	

  Digital Angel

  Corporation

  
	

   

  	

  Wells Fargo

  Business Credit, Inc.

  
	

   

  	

   

  	

   

  	

   

  
	

  Date:

  	

    

  	

  ,

  	

  200

  	

   

  
	

   

  	

   

  	

   

  	

   

  
	

  Subject:

  	

   

  
	

   

  	

  Financial

  Statements

  	

   

  	

   

  
						

 

In accordance with our Credit and Security Agreement

dated as of October 30, 2002 (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.

I certify 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 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 except

as previously reported in writing to the Lender.

o                                    The undersigned has knowledge of the occurrence of a

Default or Event of Default under the Credit Agreement not previously reported

in writing to the Lender and attached hereto is a statement of the facts with

respect to thereto.  The Borrower

acknowledges that pursuant to Section 2.10(d) of the Credit Agreement, the

Lender may impose the Default Rate at any time during the resulting Default

Period.

Financial Covenants.  I further

hereby certify as follows:

1.                                      Minimum

Book Net Worth.  The Borrower will maintain, during each

period described below, its Book Net Worth, determined as at the end of each

month, at an amount not less than the

amount set forth opposite such period:

	

  Period

  	

   

  	

  Minimum Book Net Worth

  
	

  October 2002

  	

   

  	

  $120,913,000

  
	

  November 2002

  	

   

  	

  $120,476,000

  
	

  December 2002

  	

   

  	

  $121,298,000

  
	

  January 2003

  	

   

  	

  $120,681,000

  
	

  February 2003

  	

   

  	

  $120,283,000

  
	

  March 2003

  	

   

  	

  $120,082,000

  
	

  April 2003

  	

   

  	

  $120,569,000

  
	

  May 2003

  	

   

  	

  $120,524,000

  
	

  June 2003

  	

   

  	

  $120,046,000

  
	

  July 2003

  	

   

  	

  $119,911,000

  
	

  August 2003

  	

   

  	

  $120,124,000

  
	

  September 2003

  	

   

  	

  $120,954,000

  
	

  October 2003

  	

   

  	

  $121,299,000

  
	

  November 2003

  	

   

  	

  $121,441,000

  
	

   December 2003

  	

   

  	

  $123,212,000

  

 

 

 

2.                                      Minimum Earnings Before Taxes.  The Borrower will achieve during each period described below,

Earnings Before Taxes, of not less than

the amount set forth opposite such period.

	

  Period

  	

   

  	

  Minimum Earnings Before Taxes

  
	

  October 2002

  	

   

  	

  $(25,942,000)

  
	

  November 2002

  	

   

  	

  $(26,379,000)

  
	

  December 2002

  	

   

  	

  $(26,557,000)

  
	

  January 2003

  	

   

  	

  $(617,000)

  
	

  February 2003

  	

   

  	

  $(1,014,000)

  
	

  March 2003

  	

   

  	

  $(1,215,000)

  
	

  April 2003

  	

   

  	

  $(728,000)

  
	

  May 2003

  	

   

  	

  $(773,000)

  
	

  June 2003

  	

   

  	

  $(1,251,000)

  
	

  July 2003

  	

   

  	

  $(1,387,000)

  
	

  August 2003

  	

   

  	

  $(1,172,000)

  
	

  September 2003

  	

   

  	

  $(344,000)

  
	

  October 2003

  	

   

  	

  $2,000

  
	

  November 2003

  	

   

  	

  $143,000

  
	

  December 2003

  	

   

  	

  $1,915,000

  

 

3.                                       Capital Expenditures.  Pursuant to Section 6.2 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 ended

December 31, 200__, for Capital Expenditures, 

which o satisfies o does

not satisfy the requirement that such expenditures not exceed $2,200,000 in the

aggregate during fiscal year 2002 and $1,200,000 during fiscal year 2003.

4.                                       Salaries.  As of the Reporting Date, the Borrower o is o is not in compliance with

Section 6.8 of the Credit Agreement concerning salaries.

 

2

 

Attached hereto are all relevant facts in reasonable

detail to evidence, and the computations of the financial covenants referred to

above.  These computations were made in

accordance with GAAP.

	

  DIGITAL ANGEL

  CORPORATION

  
	

   

  	

   

  
	

  By

  	

   

  
	

   

  	

  Its Chief

  Financial Officer

  

 

3

 

Exhibit C to Credit and Security

Agreement

Premises

The Premises referred to in the Credit and Security

Agreement are legally described as follows:

1.   490

Villaume Avenue, South St. Paul, MN 55075

                [Need

legal description  to be completed by

Borrower]

2.   1451

Research Park Drive, Riverside, CA 92507

                [Need

legal description  to be completed by

Borrower]

3.   8050

Southern Maryland Blvd., Owings, MD 20736

                [Need

legal description  to be completed by

Borrower]

 

 

 

Schedule 5.1 to Credit and

Security Agreement

Trade

Names, Chief Executive Office, Principal Place of Business,

and Locations of Collateral

Trade

Names

Animal

Applications Division

Digital Angel

Systems Division

GPS &

Communications Division

Physicians Call Center

Division

Chief

Executive Office/Principal Place of Business

490 Villaume

Avenue

South St. Paul, MN

55075

 

Other Inventory and Equipment Locations

                                                                1451

Research Park Drive

                                                                Riverside,

CA 92507

 

                                                                8050

Southern Maryland Blvd.

                                                                Owings,

MD 20736

 

                                                                Tom

Cribb Road

                                                                Thamesmead

                                                                London

SE28 OBH

                                                                United

Kingdom

 

 

 

Schedule 5.2

to Credit and Security Agreement

Capitalization

and Organizational Chart

	

  Holder

  	

   

  	

  Type of

  Rights/Stock

  	

   

  	

  No.  of shares (after 

  exercise of all rights

  to acquire shares)

  	

   

  	

  Percent

  interest on a

  fully diluted basis

  	

   

  
	

   

  	

   

  	

   

  	

   

  	

   

  	

   

  	

   

  	

   

  
	

   

  	

   

  	

   

  	

   

  	

   

  	

   

  	

   

  	

   

  

 

Attach organizational chart showing the ownership

structure of all Subsidiaries of the Borrower.

[_to be completed by Borrower_]

 

 

 

Schedule 5.5  to Credit and Security Agreement

Subsidiaries

None

 

 

Schedule 5.11

to Credit and Security Agreement

Intellectual Property Disclosures

See attached

 

 

Schedule 6.3

to Credit and Security Agreement

Permitted

Liens

	

  Creditor

  	

   

  	

  Collateral

  	

   

  	

  Jurisdiction

  	

   

  	

  Filing

  Date

  	

   

  	

  Filing No.

  	

   

  
	

  None

  	

   

  	

   

  	

   

  	

   

  	

   

  	

   

  	

   

  	

   

  	

   

  

 

 

 

Schedule 6.4 to Credit and

Security Agreement

Permitted

Indebtedness and Guaranties

Indebtedness

	

  Creditor

  	

   

  	

  Principal

  Amount

  	

   

  	

  Maturity

  Date

  	

   

  	

  Monthly

  Payment

  	

   

  	

  Collateral

  	

   

  
	

   

  	

   

  	

   

  	

   

  	

   

  	

   

  	

   

  	

   

  	

   

  	

   

  

 

Guaranties

	

  Primary Obligor

  	

   

  	

  Amount and

  Description of

  Obligation Guaranteed

  	

   

  	

  Beneficiary

  of Guaranty

  	

   

  
	

   

  	

   

  	

   

  	

   

  	

  Principal

  Capital ManagementEXHIBIT

10.2

REVOLVING NOTE

	

  $5,000,000

  	

   

  	

  Minneapolis, Minnesota

  
	

   

  	

   

  	

  October 30, 2002

  

 

For value received, the undersigned, DIGITAL ANGEL

CORPORATION a Delaware corporation (the “Borrower”), hereby promises to pay on

the Termination Date under the Credit Agreement (defined below), to the order

of WELLS FARGO BUSINESS CREDIT, INC., a Minnesota corporation (the “Lender”),

at its main 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 FIVE MILLION

DOLLARS ($5,000,000) or, if less, the aggregate unpaid principal amount of all

Revolving 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 (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 Revolving 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 shall pay all costs of collection,

including reasonable attorneys’ fees and legal expenses if 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.

	

   

  	

  DIGITAL ANGEL

  CORPORATION

  
	

   

  	

   

  	

   

  
	

   

  	

  By

  	

   

  
	

   

  	

   

  	

  Randolph

  K. Geissler

  
	

   

  	

  Its:

  	

  Chief Executive Officer

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