Document:

Exhibit 10.5

 

 

SECOND AMENDED AND RESTATED CREDIT

AND SECURITY AGREEMENT

BY AND BETWEEN

NORTECH SYSTEMS INCORPORATED

AND

WELLS FARGO BANK,

NATIONAL ASSOCIATION

August 6,
2009

 

 

 

TABLE OF CONTENTS

 

	
   

  	
   

  	
  Page

  
	
   

  	
   

  
	
  ARTICLE
  I. DEFINITIONS

  	
  1

  
	
  Section 1.1

  	
  Definitions

  	
  1

  
	
  Section 1.2

  	
  Other
  Definitional Terms; Rules of Interpretation

  	
  12

  
	
   

  	
   

  	
   

  
	
  ARTICLE
  II. AMOUNT AND TERMS OF THE CREDIT FACILITY

  	
  13

  
	
  Section 2.1

  	
  Revolving
  Advances

  	
  13

  
	
  Section 2.2

  	
  Procedures
  for Requesting Advances

  	
  13

  
	
  Section 2.3

  	
  Increased
  Costs; Capital Adequacy; Funding Exceptions

  	
  14

  
	
  Section 2.4

  	
  Letters
  of Credit

  	
  15

  
	
  Section 2.5

  	
  Special
  Account

  	
  16

  
	
  Section 2.6

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

  	
  16

  
	
  Section 2.7

  	
  Obligations
  Absolute

  	
  17

  
	
  Section 2.8

  	
  Term
  Advances

  	
  18

  
	
  Section 2.9

  	
  Payments
  and Interest on Term Notes

  	
  18

  
	
  Section 2.10

  	
  Interest;
  Default Interest; Participations; Usury

  	
  18

  
	
  Section 2.11

  	
  Fees

  	
  18

  
	
  Section 2.12

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

  	
  19

  
	
  Section 2.13

  	
  Voluntary
  Prepayment; Reduction of the Maximum Line; Termination of the Credit Facility
  by the Borrower

  	
  20

  
	
  Section 2.14

  	
  Mandatory
  Prepayment

  	
  21

  
	
  Section 2.15

  	
  Revolving
  Advances to Pay Obligations

  	
  20

  
	
  Section 2.16

  	
  Use of
  Proceeds

  	
  20

  
	
  Section 2.17

  	
  Liability
  Records

  	
  20

  
	
  Section 2.18

  	
  Collateral
  Account and Sweep of Funds

  	
  21

  
	
   

  	
   

  	
   

  
	
  ARTICLE
  III. SECURITY INTEREST; OCCUPANCY; SETOFF

  	
  21

  
	
  Section 3.1

  	
  Grant
  of Security Interest

  	
  21

  
	
  Section 3.2

  	
  Notification
  of Account Debtors and Other Obligors

  	
  21

  
	
  Section 3.3

  	
  Assignment
  of Insurance

  	
  22

  
	
  Section 3.4

  	
  Occupancy

  	
  22

  
	
  Section 3.5

  	
  License

  	
  23

  
	
  Section 3.6

  	
  Financing
  Statement

  	
  23

  
	
  Section 3.7

  	
  Setoff

  	
  23

  
	
  Section 3.8

  	
  Collateral

  	
  24

  
	
   

  	
   

  	
   

  
	
  ARTICLE
  IV. CONDITIONS OF LENDING

  	
  24

  
	
  Section 4.1

  	
  Conditions
  Precedent to the Initial Revolving Advance and Letter of Credit

  	
  24

  

 

 

	
  Section 4.2

  	
  Conditions
  Precedent to All Advances and Letters of Credit

  	
  26

  
	
   

  	
   

  	
   

  
	
  ARTICLE
  V. REPRESENTATIONS AND WARRANTIES

  	
  26

  
	
  Section 5.1

  	
  Existence
  and Power; Name; Chief Executive Office; Inventory and Equipment Locations;
  Federal Employer Identification Number

  	
  26

  
	
  Section 5.2

  	
  Capitalization

  	
  27

  
	
  Section 5.3

  	
  Authorization
  of Borrowing; No Conflict as to Law or Agreements

  	
  27

  
	
  Section 5.4

  	
  Legal
  Agreements

  	
  27

  
	
  Section 5.5

  	
  Subsidiaries

  	
  27

  
	
  Section 5.6

  	
  Financial
  Condition; No Adverse Change

  	
  27

  
	
  Section 5.7

  	
  Litigation

  	
  27

  
	
  Section 5.8

  	
  Regulation U

  	
  28

  
	
  Section 5.9

  	
  Taxes

  	
  28

  
	
  Section 5.10

  	
  Titles
  and Liens

  	
  28

  
	
  Section 5.11

  	
  Intellectual
  Property Rights

  	
  28

  
	
  Section 5.12

  	
  Plans

  	
  29

  
	
  Section 5.13

  	
  Default

  	
  29

  
	
  Section 5.14

  	
  Environmental
  Matters

  	
  29

  
	
  Section 5.15

  	
  Submissions
  to Lender

  	
  30

  
	
  Section 5.16

  	
  Financing
  Statements

  	
  30

  
	
  Section 5.17

  	
  Rights
  to Payment

  	
  31

  
	
  Section 5.18

  	
  Financial
  Solvency

  	
  31

  
	
   

  	
   

  	
   

  
	
  ARTICLE
  VI. COVENANTS

  	
  31

  
	
  Section 6.1

  	
  Reporting
  Requirements

  	
  32

  
	
  Section 6.2

  	
  Financial
  Covenants

  	
  36

  
	
  Section 6.3

  	
  Permitted
  Liens; Financing Statements

  	
  36

  
	
  Section 6.4

  	
  Indebtedness

  	
  36

  
	
  Section 6.5

  	
  Guaranties

  	
  37

  
	
  Section 6.6

  	
  Investments
  and Subsidiaries

  	
  37

  
	
  Section 6.7

  	
  Dividends
  and Distributions

  	
  37

  
	
  Section 6.8

  	
  Salaries

  	
  37

  
	
  Section 6.9

  	
  Grant
  of Security Interest Upon Request

  	
  38

  
	
  Section 6.10

  	
  Books
  and Records; Inspection and Examination

  	
  38

  
	
  Section 6.11

  	
  Account
  Verification

  	
  38

  
	
  Section 6.12

  	
  Compliance
  with Laws

  	
  38

  
	
  Section 6.13

  	
  Payment
  of Taxes and Other Claims

  	
  39

  
	
  Section 6.14

  	
  Maintenance
  of Properties

  	
  39

  
	
  Section 6.15

  	
  Insurance

  	
  39

  
	
  Section 6.16

  	
  Preservation
  of Existence

  	
  40

  
	
  Section 6.17

  	
  Delivery
  of Instruments, etc

  	
  40

  
	
  Section 6.18

  	
  Sale or
  Transfer of Assets; Suspension of Business Operations

  	
  40

  
	
  Section 6.19

  	
  Consolidation
  and Merger; Asset Acquisitions

  	
  40

  
	
  Section 6.20

  	
  Sale
  and Leaseback

  	
  40

  
	
  Section 6.21

  	
  Restrictions
  on Nature of Business

  	
  41

  

 

ii

 

	
  Section 6.22

  	
  Accounting

  	
  41

  
	
  Section 6.23

  	
  Discounts,
  etc

  	
  41

  
	
  Section 6.24

  	
  Plans

  	
  41

  
	
  Section 6.25

  	
  Place
  of Business; Name

  	
  41

  
	
  Section 6.26

  	
  Constituent
  Documents

  	
  41

  
	
  Section 6.27

  	
  Change
  in Senior Management

  	
  41

  
	
  Section 6.28

  	
  Performance
  by the Lender

  	
  41

  
	
  Section 6.29

  	
  Depository
  Accounts

  	
  42

  
	
   

  	
   

  	
   

  
	
  ARTICLE
  VII. EVENTS OF DEFAULT, RIGHTS AND REMEDIES

  	
  42

  
	
  Section 7.1

  	
  Events
  of Default

  	
  42

  
	
  Section 7.2

  	
  Rights
  and Remedies

  	
  44

  
	
  Section 7.3

  	
  Certain
  Notices

  	
  45

  
	
   

  	
   

  	
   

  
	
  ARTICLE
  VIII. MISCELLANEOUS

  	
  45

  
	
  Section 8.1

  	
  No
  Waiver; Cumulative Remedies; Compliance with Laws

  	
  45

  
	
  Section 8.2

  	
  Amendments,
  Etc

  	
  46

  
	
  Section 8.3

  	
  Addresses
  for Notices; Requests for Accounting

  	
  46

  
	
  Section 8.4

  	
  Arbitration

  	
  46

  
	
  Section 8.5

  	
  Further
  Documents

  	
  48

  
	
  Section 8.6

  	
  Costs
  and Expenses

  	
  49

  
	
  Section 8.7

  	
  Indemnity

  	
  49

  
	
  Section 8.8

  	
  Participants

  	
  50

  
	
  Section 8.9

  	
  Execution
  in Counterparts; Telefacsimile Execution

  	
  50

  
	
  Section 8.10

  	
  Retention
  of Borrower’s Records

  	
  50

  
	
  Section 8.11

  	
  Binding
  Effect; Assignment; Complete Agreement; Exchanging Information

  	
  50

  
	
  Section 8.12

  	
  Severability
  of Provisions

  	
  50

  
	
  Section 8.13

  	
  Headings

  	
  51

  
	
  Section 8.14

  	
  Amendment
  and Restatement of Existing Credit Agreement

  	
  51

  
	
  Section 8.15

  	
  Governing
  Law; Jurisdiction, Venue; Waiver of Jury Trial

  	
  51

  
	
  Section 8.16

  	
  No
  Waiver under Existing Credit Agreement

  	
  51

  
	
  Section 8.17

  	
  Release

  	
  51

  

 

iii

 

SECOND
AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT

 

Dated
as of August 6, 2009

 

This Second Amended and Restated Credit and Security
Agreement (“Agreement”) is entered into
between NORTECH SYSTEMS INCORPORATED, a
Minnesota corporation (the “Borrower”), WELLS FARGO BANK, NATIONAL ASSOCIATION, a national banking
association (the “Lender”).

 

RECITALS

 

A.            The Borrower and Lender previously entered into that
certain Amended and Restated Credit and Security Agreement dated as of December 30,
2002 (the “Existing Credit Agreement”);
pursuant to which Borrower has executed and delivered the Existing Notes (as defined in Article I).

 

B.            The Borrower and Lender desire to completely amend,
restate and replace the Existing Credit Agreement pursuant to the terms and
conditions set forth herein.

 

NOW THEREFORE, the parties agree that the Existing
Credit Agreement is amended and restated in its entirety by this Agreement on
the following terms and conditions.

 

ARTICLE I.

DEFINITIONS

 

Section 1.1            Definitions. For all purposes of this Agreement,
except as otherwise expressly provided, the following terms 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 or a Term Advance.

 

 

“Affiliate” or “Affiliates” means Nortech Medical Services, Inc., a
Minnesota corporation, Myron Kunin and any other 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 Second Amended and Restated 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 LIBOR” means the rate
per annum for United States dollar deposits quoted by Lender for the purpose of
calculating effective rates of interest for loans making reference to the Daily
Three Month LIBOR Rate, as the Inter-Bank Market Offered Rate in effect from
time to time for delivery of funds for three (3) months in amounts
approximately equal to the principal amount of such loans.  Borrower understands and agrees that Lender
may base its quotation of the Inter-Bank Market Offered Rate upon such offers
or other market indicators of the Inter-Bank Market as Lender in its discretion
deems appropriate, including but not limited to, the rate offered for U.S.
dollar deposits on the London Inter-Bank Market.

 

“Book Net Worth”
means the aggregate of the common and preferred stockholders’ equity in any
Person, determined in accordance with GAAP.

 

“Borrowing Base”
means, at any time, an amount equal to the lesser of:

 

(a)           the
Maximum Line; or

 

(b)           subject to
change in the Lender’s sole discretion, the sum of:

 

(i)                                     80% of Eligible Accounts; plus

 

(ii)                                  the lesser of: (1) $4,000,000 or (2) 30% of
Eligible Inventory; provided, however, that portion of Eligible Inventory consisting of
raw material shall not exceed the lesser of $3,000,000 or 20% of such raw
material Inventory; less

 

(c)           the
Borrowing Base Reserve, less

 

(d)           Obligations
that Borrower owes to Lender that have not been advanced on the Revolving Note,
less

 

2

 

(e)           Obligations
that are not otherwise described in this Section 1.1, including
Obligations that Lender in its sole discretion finds on the date of
determination to be equal to Lender’s net credit exposure with respect to any
swap (or other interest rate hedge), derivative, foreign exchange, deposit,
treasury management, purchasing card or similar transaction or arrangement
extended to the Borrower by Lender.

 

“Borrowing Base Reserve” means, as of any date of
determination, an amount or a percent of a specified category or item that
Lender establishes in its sole discretion from time to time to reduce
availability under the Borrowing Base (a) to reflect events, conditions,
contingencies or risks which affect the assets, business or prospects of
Borrower, or the Collateral or its value, or the enforceability, perfection or
priority of Lender’s Security Interest in the Collateral, or (b) to
reflect Lender’s judgment that any collateral report or financial information
relating to Borrower and furnished to Lender may be incomplete, inaccurate or
misleading in any material respect.

 

“Business Day”
means any day except a Saturday, Sunday or any other day on which commercial
banks in Minnesota are authorized or required by law to close.

 

“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 35% percent of the voting power of all classes of voting  stock of the Borrower, excluding Myron
Kunin.

 

(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)           Michael Degen ceases to actively manage the
Borrower’s day-to-day business activities.

 

“Collateral”
means all of the Borrower’s Accounts, chattel paper, deposit accounts,
documents, Equipment, General Intangibles, goods, instruments, Inventory,
Investment Property, 

 

3

 

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.

 

“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.

 

“Daily Three Month LIBOR”
means, for any day, the rate of interest equal to LIBOR then in effect for
delivery for a three (3) month period. 
When interest is determined in relation to Daily Three Month LIBOR, each
change in the interest rate shall become effective each Business Day that
Lender determines that Daily Three Month LIBOR has changed.

 

“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.

 

4

 

“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.

 

“Eligible Accounts”
means all unpaid Accounts arising from the sale or lease of goods or the
performance of services, net of any unapplied credits or deposits from Account
debtors, but excluding any such Accounts having any of the following
characteristics:

 

	
  (i)

  	
   

  	
  That portion of
  Accounts unpaid 90 days or more after the invoice date;

  
	
   

  	
   

  	
   

  
	
  (ii)

  	
   

  	
  That portion of
  Accounts that is disputed or subject to a claim of offset or a contra
  account;

  
	
   

  	
   

  	
   

  
	
  (iii)

  	
   

  	
  That portion of
  Accounts not yet earned by the final delivery of goods or rendition of
  services, as applicable, by the Borrower to the customer, including progress
  billings, and that portion of Accounts for which an invoice has not been sent
  to the applicable account debtor;

  
	
   

  	
   

  	
   

  
	
  (iv)

  	
   

  	
  That portion of
  Accounts owed by account debtors located in the states of New Jersey,
  Indiana, or West Virginia (or any other state that requires a creditor to
  file a business activity report or similar document in order to bring suit or
  otherwise enforce its remedies against such account debtor in the courts or
  through any judicial process of such state), unless the Borrower has
  qualified to do business in such state, or has filed a notice of business
  activities report with the applicable division of taxation, the department of
  revenue, or with such other state offices, as appropriate, for the
  then-current year, or is exempt from such filing requirement;

  
	
   

  	
   

  	
   

  
	
  (v)

  	
   

  	
  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;

  
	
   

  	
   

  	
   

  
	
  (vi)

  	
   

  	
  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);

  
	
   

  	
   

  	
   

  
	
  (vii)

  	
   

  	
  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

  

 

5

 

	
   

  	
   

  	
  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 (B) covered
  by a foreign receivables insurance policy acceptable to the Lender in its
  sole discretion;

  
	
   

  	
   

  	
   

  
	
  (viii)

  	
   

  	
  Accounts owed by
  an account debtor that is insolvent, the subject of bankruptcy proceedings or
  has gone out of business;

  
	
   

  	
   

  	
   

  
	
  (ix)

  	
   

  	
  Accounts owed by
  an Owner, Subsidiary, Affiliate, Officer or employee of the Borrower;

  
	
   

  	
   

  	
   

  
	
  (x)

  	
   

  	
  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;

  
	
   

  	
   

  	
   

  
	
  (xi)

  	
   

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

  
	
   

  	
   

  	
   

  
	
  (xii)

  	
   

  	
  That portion of
  Accounts that constitutes advertising, finance charges, service charges or
  sales or excise taxes;

  
	
   

  	
   

  	
   

  
	
  (xiii)

  	
   

  	
  Accounts owed by an Account debtor, regardless of whether otherwise
  eligible, to the extent that the aggregate balance of such Accounts exceeds
  15% of the aggregate amount of all Accounts;

  
	
   

  	
   

  	
   

  
	
  (xiv)

  	
   

  	
  Accounts owed by an Account debtor, regardless of whether otherwise
  eligible, if 15% (or 25% with respect to Accounts owing by General Electric
  Company and its affiliates, Semitool, Inc. and Northrop Grumman
  Corporation) or more of the total amount due under Accounts from such debtor
  is ineligible under clauses (i), (ii) or (xi) above;

  
	
   

  	
   

  	
   

  
	
  (xv)

  	
   

  	
  Accounts owed by an account debtor, regardless of whether otherwise
  eligible Accounts denominated in any currency other than United States
  Dollars; and

  
	
   

  	
   

  	
   

  
	
  (xvi)

  	
   

  	
  Accounts,
  or portions thereof, otherwise deemed ineligible by the Lender in its sole
  discretion.

  

 

“Eligible Inventory”
means all Inventory of the Borrower, at the lower of cost or market value as
determined in accordance with GAAP; but excluding any Inventory having any of
the following characteristics:

 

	
  (i)

  	
   

  	
  Inventory that
  is: in-transit; located at any warehouse, job site or other premises not
  approved by the Lender in writing; located outside of the states, or
  localities, as applicable, in which the Lender has filed financing statements
  to perfect a first priority security interest in such Inventory; covered by
  any negotiable or non-negotiable warehouse receipt, bill of lading or other
  document of title; on consignment from any Person; on consignment to any
  Person or subject to any 

  

 

6

 

	
   

  	
   

  	
  bailment unless
  such consignee or bailee has executed an agreement with the Lender;

  
	
   

  	
   

  	
   

  
	
  (ii)

  	
   

  	
  Supplies,
  packaging, parts or sample Inventory;

  
	
   

  	
   

  	
   

  
	
  (iii)

  	
   

  	
  Work-in-process
  Inventory;

  
	
   

  	
   

  	
   

  
	
  (iv)

  	
   

  	
  Inventory that
  is damaged, obsolete, slow moving (twelve-months or greater) or not currently
  saleable in the normal course of the Borrower’s operations;

  
	
   

  	
   

  	
   

  
	
  (v)

  	
   

  	
  Inventory that
  the Borrower has returned, has attempted to return, is in the process of
  returning or intends to return to the vendor thereof;

  
	
   

  	
   

  	
   

  
	
  (vi)

  	
   

  	
  Inventory that
  is perishable or live;

  
	
   

  	
   

  	
   

  
	
  (vii)

  	
   

  	
  Inventory
  purchased or manufactured by the Borrower pursuant to a license unless the
  applicable licensor has agreed in writing to permit the Lender to exercise
  its rights and remedies against such Inventory;

  
	
   

  	
   

  	
   

  
	
  (viii)

  	
   

  	
  Inventory that
  is subject to a Lien in favor of any Person other than the Lender;

  
	
   

  	
   

  	
   

  
	
  (ix)

  	
   

  	
  All Inventory at
  any location other than the premises owned or leased by the Borrower in
  Bemidji, Blue Earth, Fairmont and Merrifield, Minnesota and Augusta,
  Wisconsin;

  
	
   

  	
   

  	
   

  
	
  (x)

  	
   

  	
  Inventory stored
  at any location: (a) holding less than 10% of the aggregate value of
  Borrower’s Inventory, or (b) with an aggregate value of $500,000, or
  less; and

  
	
   

  	
   

  	
   

  
	
  (xi)

  	
   

  	
  Inventory
  otherwise deemed ineligible by 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.

 

“Existing Notes”
means the Revolving Note and the Real Estate Term Note.

 

“Financial Covenants”
means the covenants set forth in Section 6.2.

 

7

 

“Floating Rate”
means the Daily Three Month LIBOR plus five percent (5.0%) for amounts owing
under the Notes.

 

“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.

 

“Guarantor(s)”
means any Person now or hereafter guarantying the Obligations.

 

“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” when
used with respect to Intellectual Property Rights means any infringement or
other violation of Intellectual Property Rights.

 

“Intangible Assets”
means as to any Person all intangible assets as determined in accordance with
GAAP and including Intellectual Property Rights, goodwill, accounts due from
Affiliates, Directors, Officers or employees, deposits, deferred charges or
treasury stock or any securities or Debt of such Person or any other securities
unless the same are readily marketable in the US or entitled to be used as a
credit against federal income tax liabilities, non-compete agreements and any
other assets designated from time to time by the Lender, in its sole
discretion.

 

“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.

 

“Interest Expense”
means for a fiscal year-to-date period, a Person’s total gross interest expense
during such period (excluding interest income), and shall in any event include (i) interest
expensed (whether or not paid) on all Debt, (ii) the amortization of debt
discounts, (iii) the amortization of all fees payable in connection with
the incurrence of Debt to the extent included in interest expense, and (iv) the
portion of any capitalized lease obligation allocable to interest expense.

 

8

 

“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.

 

“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.

 

“LIBOR” means
the rate per annum (rounded upward, if necessary, to the nearest whole 1/8th of 1%) and
determined pursuant to the following formula:

 

	
   

  	
  LIBOR Rate =  

  	
  Base LIBOR

  	
   

  	
   

  
	
   

  	
  100% - LIBOR Reserve
  Percentage

  	
   

  

 

“LIBOR Reserve Percentage”
means the reserve percentage prescribed by the Board of Governors of the
Federal Reserve System (or any successor) for “Eurocurrency Liabilities” (as
defined in Regulation D of the Federal Reserve Board, as amended), adjusted by
Wells Fargo for expected changes in such reserve percentage during the
applicable Interest Period.

 

“Licensed Intellectual
Property” has the meaning given in Section 5.11(b).

 

“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 Notes, the Security Documents, any L/C Application
and any other agreement, document or instrument delivered by the Borrower, or
any guarantor or Affiliate to the Lender.

 

“Material Adverse Effect”
means any of the following:

 

9

 

(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 of any rights against any guarantor, 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 any Affiliate or threat of litigation
which if determined adversely would cause the Borrower to be liable to pay an
amount exceeding $200,000 or would be an event described in clauses (i), (ii) and
(iii) above.

 

“Maturity Date”
means June 30, 2010 for the Revolving Note and May 31, 2012 for the
Real Estate Term Note.

 

“Maximum Line”
means $12,000,000 unless said amount is reduced pursuant to Section 2.13,
in which event it means such lower amount.

 

“Mortgages”
means (i) that Mortgage, Security Agreement, Fixture Financing Statement and
Assignment of Leases and Rents dated January 31, 2002; and (ii) that
certain combination Mortgage, Security Agreement, Fixture Financing Statement
and Assignment of Leases and Rents dated February 2, 2007, each as
executed by the Borrower, as mortgagor, in favor of the Lender, as mortgagee,
granting the Lender a first priority mortgage lien and assignment of leases and
rents in the Borrower’s facilities located in Bemidji, Fairmont and Merrifield,
Minnesota, and Eau Claire County, Wisconsin, respectively.

 

“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 for any period, the after-tax net income from continuing operations, less
extraordinary losses or losses from discontinued operations, as determined in
accordance with GAAP.

 

“Net Loss” means
for any period, the pre-tax net loss from continuing operations, including
extraordinary losses or losses from discontinued operations, as determined in
accordance with GAAP.

 

“Note”
means the Revolving Note, or the Real Estate Term Note, and “Notes” means the Revolving Note, and the Real Estate Term
Note.

 

10

 

“Obligation of
Reimbursement” has the meaning given in Section 2.6(a).

 

“Obligations”
means each 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 Loan 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.

 

“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.

 

“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.

 

“Real Estate Term Note”
means that certain Amended and Restated Real Estate Term Note dated February 2,
2007 made payable by the Borrower to the order of the Lender in the original
principal amount of $3,348,750.00, and any note or notes issued in substitution
therefor.

 

“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.

 

11

 

“Revolving Note”
means that certain Amended and Restated Revolving Note of even date herewith
made payable by the Borrower to the order of Lender in the original principal
amount of $12,000,000.00, and any note or notes issued in substitution
therefor.

 

“Security Documents”
means this Agreement, the Mortgages, any Subordination 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.

 

“Subordination Agreement”
means individually and collectively, each Debt Subordination Agreement now or
hereafter executed by any Person in the Lender’s favor, acknowledged by the
Borrower, and accepted by the Lender from time to time.

 

“Subordinated Debt”
means any indebtedness that has been subordinated to the Obligations pursuant
to a Subordination Agreement.

 

“Subsidiary”
means any corporation of which more than 50% of the outstanding voting equity
interests or equity interests having general voting power under ordinary
circumstances to elect a majority of the board of directors, board of governors
or similar governing body of such entity, irrespective of whether or not at the
time interest 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.

 

“Term Advance”
has the meaning specified in Section 2.8.

 

“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 8.15
as the state whose laws shall govern this Agreement, or in any other state
whose laws are held to govern this Agreement or any portion hereof.

 

Section 1.2            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 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 

 

12

 

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 2.13
and re-borrow.

 

The Borrower acknowledges that the amount of principal
and accrued but unpaid interest outstanding under the Revolving Note as of the
date hereof is $6,274,597.48 and that such existing indebtedness shall continue
to be evidenced by the Revolving Note. 
The Borrower further acknowledges that the aggregate face amount of all
outstanding Letters of Credit as of the date hereof is $0.

 

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 2:00 p.m.,
Minneapolis, Minnesota time on the Banking Day 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 

 

13

 

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.

 

(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 the Lender 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 

 

14

 

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.

 

(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)                                     $1,000,000 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.

 

15

 

(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.

 

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

 

16

 

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 2.10.

 

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                                   Term Advances.

 

(a)                                  The Borrower acknowledges that Lender previously made a
single advance to the Borrower on each of January 31, 2002 and February 2,
2007 (the “Term Advances”), the
first in the amount of $2,500,000.00 and the second in the amount of
$1,668,194.51.  The Borrower’s obligation
to pay the Term Advances is evidenced by the Real Estate Term Note and is
secured by the Collateral as provided in Article III and as described in
any Security Documents, including but not limited to the Mortgages.  The 

 

17

 

Borrower
acknowledges that, as of the date hereof, the outstanding principal balance of
the Real Estate Term Note is $  2,772,020.73.

 

Section 2.9                                   Payments and Interest on Term
Notes. The
outstanding principal balance of the Term Notes shall continue to accrue
interest and be due and payable as specifically set forth in the Term Notes and
on the Termination Date, the entire unpaid principal balance of the Term Notes,
and all unpaid interest accrued thereon, shall in any event be due and payable.  At the option of the Lender, it may on any
date that principal and interest is due on the Notes automatically deduct the
amount of such payments, or cause the same to be automatically deducted, from
the Borrower’s deposit accounts maintained with the Lender its Affiliates.

 

(a)                                  If the Lender at any time obtains an appraisal of any the
real property subject to the Mortgages as permitted under Section 6.10(d) herein,
and the appraisal shows the aggregate outstanding principal balance of the Real
Estate Term Note to exceed seventy-five percent (75%) of the “as is” market
value as vacant of such facilities, then the Borrower, upon demand by the
Lender, shall immediately prepay the Real Estate Term Note in the amount of
such excess, together with any applicable prepayment fee.

 

Section 2.10                            Interest; Default Interest;
Participations; Usury.

 

(a)                                  Revolving Note and Real Estate Term Note
Interest Rates.  Except as provided in Subsections  2.10 (b) and (d) below, the principal amount of
each Advance evidenced by the Revolving Note and the Real Estate Term Note
shall bear interest at the Floating Rate.

 

(b)                                 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
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.

 

(c)                                  Participations. If any Person shall acquire a participation in the Advances
under this Agreement, the Borrower shall be obligated to the Lender to pay the
full amount of all interest calculated under this Section, 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.

 

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

 

Section 2.11                            Fees.

 

(a)                                  Letter of Credit Fees.  Borrower shall pay
to Bank (i) fees upon the issuance of each Letter of Credit equal to four
and one-half of one percent (4.50%) per 

 

18

 

annum
(computed on the basis of a 360-day year, actual days elapsed) of the face
amount thereof, and (ii) fees upon the payment or negotiation of each
drawing under any Letter of Credit and fees upon the occurrence of any other
activity with respect to any Letter of Credit (including without limitation,
the transfer, amendment or cancellation of any Letter of Credit) determined in
accordance with Bank’s standard fees and charges then in effect for such
activity.

 

(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 $125 per hour 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 (A) as of a date
other than a Maturity Date or (B) as of a Maturity Date but without the
Lender having received written notice of such termination at least 90 days
before such Maturity Date, or if the Borrower reduces the Maximum Line, the
Borrower shall pay to the Lender a fee in an amount equal to one percent (1.0%)
of the Maximum Line (or the reduction of the Maximum Line, as the case may be).

 

(d)                                 Waiver of Termination Fees.  The Borrower will
not be required to pay the termination fees otherwise due under subsection (d) if
such termination is made because of refinancing by an affiliate of the Lender.

 

(e)                                  Unused Line Fee. The Borrower agrees to pay to the Lender an unused line fee
at the rate of 0.50% 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.  For the purposes of this Section 2.11(e),
“Unused Amount” means the Maximum
Line reduced by the sum of (1) outstanding Revolving Advances and (2) the
L/C Amount.

 

(f)                                    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 2.12                            Time for Interest Payments;
Payment on Non-Banking Days; Computation of Interest and Fees.

 

(a)                                  Time For Interest Payments. Interest accruing on Advances shall be due and payable in
arrears on the last day of each month and on the Termination Date.

 

19

 

(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 2.13                            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 2.11(c).  Any reduction in the Maximum Line must be in
an amount of not less than $500,000 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 2.14                            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 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 2.14
or under Section 2.13 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 2.15                            Revolving Advances to Pay
Obligations.
Notwithstanding anything in Section 2.1 to the contrary, 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 2.16                            Use of Proceeds. The Borrower shall use the proceeds of
Advances and each Letter of Credit for ordinary working capital purposes.

 

Section 2.17                            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 

 

20

 

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.

 

Section 2.18                            Collateral
Account and Sweep of Funds.

 

(a)                                  Implementation of Collateral Account.  At the request of
Lender, the Borrower shall execute and deliver documentation necessary to
establish a bank account to be operated and maintained in Borrower’s name
exclusively for the benefit of the Lender (the “Collateral Account”). 
The Borrower understands that it shall have no right to make or
countermand withdrawals from the Collateral Account.  Amounts in the Collateral Account shall not
bear interest and Borrower shall take all necessary steps to grant the Lender a
first perfected security interest in all of the funds on deposit in the
Collateral Account from time to time and all proceeds thereof, to secure the
Obligations.

 

(b)                                 Use of Collateral Account.  Upon the creation of
the Collateral Account at Lender’s request, all amounts collected through the
Borrower’s lockbox arrangement shall be deposited into the Collateral
Account.  In addition, any funds received
directly by the Borrower, whether as payments on Accounts, or otherwise, shall
be deposited into the Collateral Account. 
All deposits in the Collateral Account shall constitute proceeds of
Collateral and shall not constitute payment of the Obligations.  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 may charge any uncollected
item to the Borrower’s commercial 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.

 

(c)                                  Sweep of Funds.  The Lender shall
from time to time, in accordance with an agreement between the parties, cause
funds in the Collateral Account to be transferred to the Lender’s general
account for payment of the Obligations. 
Amounts deposited in the Collateral Account shall not be subject to
withdrawal by the Borrower, except after payment in full and discharge of all
of the Obligations.

 

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 

 

21

 

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

 

Section 3.3                                   Assignment of Insurance. As additional security for the payment
and performance of the Obligations, the Borrower hereby assigns to the Lender
any and all monies (including 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. 
In addition to and without limiting the Lender’s rights under the Mortgages,
the Borrower agrees to and grants each of the following rights to the Lender.

 

(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,

 

22

 

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 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:

  	
   

  	
  Nortech Systems,
  Incorporated

  1120 Wayzata
  Blvd. East, Suite 201

  Wayzata, MN
  55391

  Federal Employer
  Identification No. 41-1681094

  

 

	
  Name and address of Secured Party:

  	
   

  	
  Ann Spry

  Wells Fargo Bank, N.A.

  MAC  N9305-198 90

  South 7th Street, 19th Floor

  Minneapolis, MN 55402

  

 

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.

 

23

 

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.

 

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
Revolving 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 Notes, properly executed by the Borrower.

 

(c)                                  A true and correct copy of any and all leases pursuant to
which the Borrower is leasing any of 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)                                  A true and correct copy of any and all agreements pursuant to
which the Borrower’s property is in the possession of any Person other than the
Borrower, together with, in the case of any goods held by such Person for
resale, (i) a consignee’s acknowledgment and waiver of Liens, (ii) UCC
financing statements sufficient to protect the Borrower’s and the Lender’s
interests in such goods, and (iii) UCC searches showing that no other
secured party has filed a financing statement against such Person and covering
property similar to the Borrower’s other than the Borrower, or if there exists
any such secured party, evidence that each such secured party has received
notice from the Borrower and the Lender sufficient to protect the Borrower’s
and the Lender’s interests in the Borrower’s goods from any claim by such
secured party.

 

24

 

(f)                                    An acknowledgment and waiver of Liens from each warehouse in
which the Borrower is storing Inventory.

 

(g)                                 A true and correct copy of any and all agreements pursuant to
which the Borrower’s property is in the possession of any Person other than the
Borrower, together with, (i) an acknowledgment and waiver of Liens from
each subcontractor who has possession of the Borrower’s goods from time to
time, (ii) UCC financing statements sufficient to protect the Borrower’s
and the Lender’s interests in such goods, and (iii) UCC searches showing
that no other secured party has filed a financing statement covering such
Person’s property other than the Borrower, or if there exists any such secured
party, evidence that each such secured party has received notice from the
Borrower and the Lender sufficient to protect the Borrower’s and the Lender’s
interests in the Borrower’s goods from any claim by such secured party.

 

(h)                                 An opinion of Borrower’s outside counsel, addressed to
Lender.

 

(i)                                     Support Agreement executed by each of Michael J. Degen and
Richard G. Wasielewski in his personal capacity in favor of the Lender.

 

(j)                                     Bank agency or control agreements, properly executed by the
Borrower and each bank at which the Borrower maintains deposit accounts.

 

(k)                                  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.

 

(l)                                     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.

 

(m)                               A current certificate issued by the Secretary of State of
Minnesota, certifying that the Borrower is in compliance with all applicable
organizational requirements of the State of Minnesota.

 

(n)                                 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.

 

25

 

(o)                                 A certificate of an Officer of the Borrower confirming, in his
personal capacity, the representations and warranties set forth in Article V.

 

(p)                                 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.

 

(q)                                 Payment of the fees and commissions due under Section 2.11
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.

 

(r)                                    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 Minnesota, and is duly licensed
or qualified to transact business in all jurisdictions where the character of
the property owned or leased or the nature of the business transacted by it
makes such licensing or qualification necessary. The Borrower has all requisite
power and authority 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.

 

26

 

Section 5.2                                   Capitalization. Schedule 5.2
constitutes a correct and complete list of all Persons holding ownership
interests and rights to acquire ownership interests which if fully exercised
would cause such Person to hold more than five percent (5%) of all ownership
interests of the Borrower 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, 2008 and unaudited financial statements for
the fiscal-year-to-date period ended June 30, 2009, 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.

 

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.

 

27

 

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 and the “Mortgaged Property”
(as such term is defined in the Mortgage) free and clear of all Liens other
than Permitted Liens and “Permitted Encumbrances”
(as such term is defined in the Mortgage). 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)                                 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 

 

28

 

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.

 

(c)                                  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.

 

(d)                                 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 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 on the Borrower’s
financial condition, properties or operations 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 

 

29

 

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)                                  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
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 

 

30

 

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.

 

Section 5.18                            Financial Solvency. Both before and after giving effect to
all of the transactions contemplated in the Loan Documents, none of the
Borrower or its Affiliates:

 

(a)                                  was or will be insolvent, as that term is used and defined in
Section 101(32) of the United States Bankruptcy Code and Section 2 of
the Uniform Fraudulent Transfer Act;

 

(b)                                 has unreasonably small capital or is engaged or about to
engage in a business or a transaction for which any remaining assets of the
Borrower or such Affiliate are unreasonably small;

 

(c)                                  by executing, delivering or performing its obligations under
the Loan Documents or other documents to which it is a party or by taking any
action with respect thereto, intends to, nor believes that it will, incur debts
beyond its ability to pay them as they mature;

 

(d)                                 by executing, delivering or performing its obligations under
the Loan Documents or other documents to which it is a party or by taking any
action with respect thereto, intends to hinder, delay or defraud either its
present or future creditors; and

 

(e)                                  at this time contemplates filing a petition in bankruptcy or
for an arrangement or reorganization or similar proceeding under any law any
jurisdiction, nor, to the best knowledge of the Borrower, is the subject of any
actual, pending or threatened bankruptcy, insolvency or similar proceedings
under any law of any jurisdiction.

 

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:

 

31

 

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 120 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 10-K report filed with
the Securities and Exchange Commission and prepared by the Borrower and
certified by independent certified public accountants selected by the Borrower
and acceptable to the Lender, for the fiscal year then ended, 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 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)                                 Quarterly
Financial Statements.  As soon as available
and in any event within 45 days after the end of each fiscal quarter of the
Borrower, the Borrower will deliver or cause to be delivered to the Lender, the
Borrower’s 10-Q report filed with the Securities and Exchange Commission and
prepared by the Borrower and reviewed by independent certified public
accountants selected by the Borrower and acceptable to the Lender, for the
fiscal quarter then ended, all in reasonable detail and prepared in accordance
with GAAP, together with and accompanied by a certificate of the Borrower’s
chief financial Officer, substantially in the form of Exhibit A 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)                                  Monthly Financial Statements. As soon as available and in any event within 30 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, or other authorized Officer of the Borrower,

 

32

 

substantially
in the form of Exhibit A
hereto stating (i) that such financial statements have been prepared in
accordance with GAAP, subject to year-end audit adjustments, and (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.

 

(d)                                 Collateral Reports. Within 30 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 Borrowing Base Certificate in the form
attached hereto as Exhibit B,
as at the end of each month or shorter time period.

 

(e)                                  Listing of Account Debtors. The Borrower will deliver to the Lender a listing of the
names and addresses of account debtors as of the end of each fiscal year whose
accounts will be due within 60 days after the end of each fiscal year.

 

(f)                                    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 $100,000.

 

(g)                                 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.

 

(h)                                 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

 

33

 

Borrower’s
chief financial Officer setting forth details as to such liability and the
action which Borrower proposes to take with respect thereto.

 

(i)                                     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
$50,000 individually or $100,000 in the aggregate during any fiscal year; (ii) credit
memos; (iii) any goods returned to or recovered by the Borrower.

 

(j)                                     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.

 

(k)                                  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.

 

(l)                                     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.

 

(m)         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 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.

 

(n)                                 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.

 

(o)                                 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.

 

34

 

(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.

 

(r)                                    Projections.  No later than December 15th of each fiscal year,
the Borrower will deliver to the Lender the projected balance sheets, income
statements, statements of cash flow and projected Availability for each month
of the succeeding fiscal year, each in reasonable detail.  Such items will be certified by the Officer
who is 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 and be delivered with a statement of underlying
assumptions and such supporting schedules and information as the Lender may in
its discretion require.

 

Section 6.2                                   Financial Covenants. 
Notwithstanding anything to the contrary contained herein, the parties
agree that effective as of June 30, 2009, the following financial
covenants shall be applicable:

 

(a)                                  Maximum Net Loss. The Borrower shall not incur a Net Loss, determined on a consolidated
basis as at the end of each fiscal period set forth below, in excess of the
amount set forth opposite such fiscal period:

 

	
  Measurement Date

  	
   

  	
  Maximum Net Loss

  
	
  June 30,
  2009

  	
   

  	
  <$5,800,000>

  
	
  July 31,
  2009

  	
   

  	
  <$6,100,000>

  
	
  August 31,
  2009

  	
   

  	
  <$6,300,000>

  
	
  September 30,
  2009

  	
   

  	
  <$6,600,000>

  
	
  October 31,
  2009

  	
   

  	
  <$6,500,000>

  
	
  November 30,
  2009

  	
   

  	
  <$6,400,000>

  
	
  December 31,
  2009

  	
   

  	
  <$6,400,000>

  
	
  January 31,
  2010

  	
   

  	
  <$500,000>

  
	
  February 29,
  2010

  	
   

  	
  <$500,000>

  

 

(b)                                 Capital Expenditures. Borrower will not incur or contract to incur Capital
Expenditures of more than $1,200,000 for the fiscal year ending December 31,
2009; and $150,000 in the aggregate as at the end of each fiscal quarter
thereafter without the Lender’s written approval for capital items, including
without limitation for new building and building expansion projects, new
business acquisition and or major unplanned equipment projects; provided, however, that
Borrower may incur no more than

 

35

 

$600,000
(of the $1,200,000 aggregate limit) for the roof replacement project at the
Blue Earth, Minnesota facility during the fiscal year ending December 31,
2009, in accordance with the provisions of that certain Letter of Credit and
Reimbursement Agreement dated June 28, 2006 (as amended the “Reimbursement Agreement”).

 

Section 6.3                                   Permitted Liens; Financing
Statements.

 

(a)                                  The Borrower will not, and shall cause each of its
Subsidiaries not to, 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;

 

(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, and shall cause
each of its Subsidiaries not to, 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)                                  after the date hereof, additional indebtedness of the
Borrower, inclusive of indebtedness relating to Permitted Liens, not to exceed
$300,000.

 

36

 

Section 6.5            Guaranties. The Borrower will not, and shall cause
each of its Subsidiaries not to, 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, and shall cause
each of its Subsidiaries not to, 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);

 

(b)           travel
advances or loans to the Borrower’s or any Subsidiary’s Officers and employees
not exceeding at any one time an aggregate of $50,000;

 

(c)           advances
in the form of progress payments, prepaid rent not exceeding two (2) months
or security deposits; and

 

(d)           current
investments in the Subsidiaries in existence on the date hereof and listed in Schedule 5.5 hereto and loan advances
or capital contributions to Nortech Medical Services in an amount not to exceed
$20,000 per month to fund such Subsidiaries’ actual operating expenses.

 

Section 6.7            Dividends and Distributions.  Except as set forth in this Section 6.7,
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 other securities or evidence
of its indebtedness 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,

 

37

 

commissions,
consultant fees or other compensation of any Director, Officer or consultant,
or any member of their families, 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            Grant of Security Interest Upon
Request. Borrower
acknowledges and agrees that upon request by the Lender, it shall cause its
wholly-owned subsidiary, Manufacturing Assembly Solutions of Monterrey, Inc.,
a Mexican corporation, to grant the Lender a security interest in all of its
assets and execute any and all documents necessary to evidence and perfect the
same.

 

Section 6.10         Books and Records; Inspection and
Examination.

 

(a)           The
Borrower will, and will cause each of its Subsidiaries to, keep accurate books
of record and account for itself pertaining to the Collateral and pertaining to
the 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 such company and financial books and records 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 or
any Subsidiary, and to discuss the Borrower’s and any Subsidiary’s affairs with
any of its Directors, Officers, employees or agents.

 

(b)           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 or any Subsidiary.

 

(c)           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 or
any Subsidiary at any time during ordinary business hours.

 

(d)           Lender may
obtain at Borrower’s expense, an appraisal or appraisals of the Collateral
and/or Mortgaged Property by an appraiser acceptable to the Lender in its sole
discretion.

 

Section 6.11         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 6.12         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

 

38

 

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 6.13         Payment of Taxes and Other Claims. The Borrower will, and shall cause each
of its Subsidiaries to, 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 or any Subsidiary; provided,
that the Borrower or applicable Subsidiary 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 6.14         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 6.15         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

 

39

 

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 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 6.16         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 6.17         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 6.18         Sale or Transfer of Assets;
Suspension of Business Operations. The Borrower will not, and shall cause each of its
Subsidiaries not to, 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 6.19         Consolidation and Merger; Asset
Acquisitions. The
Borrower will not, and will not permit any of its Subsidiaries to, 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 6.20         Sale and Leaseback. The Borrower will not, and will not
permit any of its Subsidiaries to, enter into any arrangement, directly or
indirectly, with any other Person whereby the Borrower or any Subsidiary 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 or any Subsidiary intends
to use for substantially the same purpose or purposes as the property being
sold or transferred.

 

40

 

Section 6.21         Restrictions on Nature of
Business. The
Borrower will not engage in any line of business materially different from that
presently engaged in by the Borrower and will not purchase, lease or otherwise
acquire assets not related to its business.

 

Section 6.22         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 6.23         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 6.24         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 6.25         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 6.26         Constituent Documents. The Borrower will not amend its
Constituent Documents.

 

Section 6.27         Change in Senior Management.  The Borrower represents and
warrants to Lender that the current chief executive officer for the Borrower is
Michael J. Degen and the Borrower agrees that it will not make any change in
such senior management position or terminate any such senior manager without
the prior written consent of the Lender.

 

Section 6.28         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 Section 6.13 and 6.15, 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

 

41

 

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 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 6.28.

 

Section 6.29         Depository Accounts. 
The Borrower agrees to maintain its depository accounts with the Lender
or any financial institution  affiliated
with the Lender.

 

Section 6.30         Turnaround Consultant. 
At the Lender’s request, Borrower shall (at its own expense) retain a
turnaround consultant acceptable to the Lender in its sole discretion to assist
the Borrower in its financial and/or operational restructuring.

 

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 or any other Loan Document;

 

(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, any Subsidiary of the Borrower or any Guarantor 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 or any Guarantor 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

 

42

 

the
Borrower or such Guarantor, as the case may be; or the Borrower or any
Guarantor 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 such Guarantor; 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 or any Guarantor;

 

(f)            A
petition shall be filed by or against the Borrower, any Subsidiary of the
Borrower, or any Guarantor under the United States Bankruptcy Code naming the
Borrower or such Guarantor as debtor;

 

(g)           Any
representation or warranty made by the Borrower in this Agreement, by any
Guarantor in any guaranty delivered to the Lender, or by the Borrower (or any
of its Officers) or any Guarantor 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 or any such guaranty 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 $200,000 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;

 

(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

 

43

 

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 or other Loan 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
Guarantor or person signing a support agreement in favor of the Lender shall
repudiate, purport to revoke or fail to perform his obligations under his
guaranty or support agreement in favor of the Lender, any individual Guarantor
shall die or any other Guarantor shall cease to exist;

 

(o)           The
Borrower shall take or participate in any action which would be prohibited
under or violate the provisions of the Intercreditor Agreement, any
Subordination Agreement or make any payment on the Subordinated Indebtedness
(as defined in the Subordination Agreement) that any Person was not entitled to
receive under the provisions of the Subordination Agreement;

 

(p)           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

 

(q)           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:

 

(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;

 

44

 

(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 2.14 an amount equal to the aggregate
maximum amount available to be drawn under all Letters of Credit then
outstanding, assuming compliance with all conditions for drawing thereunder;

 

(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.

 

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

 

45

 

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                                   Arbitration.

 

(a)                                  Arbitration.  The parties hereto agree, upon demand by any
party, to submit to binding arbitration all claims, disputes and controversies
between or among them (and their respective employees, officers, directors,
attorneys, and other agents), whether in tort, contract or otherwise arising
out of or relating to in any way (i) the loan and related Loan Documents
which are the subject of this Agreement and its negotiation, execution,
collateralization, administration, repayment, modification, extension,
substitution, formation, inducement, enforcement, default or termination; or (ii) requests
for additional credit.

 

46

 

(b)                                 Governing Rules.  Any arbitration
proceeding will (i) proceed in a location in Minnesota selected by the
American Arbitration Association (“AAA”);
(ii) be governed by the Federal Arbitration Act (Title 9 of the United
States Code), notwithstanding any conflicting choice of law provision in any of
the documents between the parties; and (iii) be conducted by the AAA, or
such other administrator as the parties shall mutually agree upon, in
accordance with the AAA’s commercial dispute resolution procedures, unless the
claim or counterclaim is at least $1,000,000.00 exclusive of claimed interest,
arbitration fees and costs in which case the arbitration shall be conducted in
accordance with the AAA’s optional procedures for large, complex commercial
disputes (the commercial dispute resolution procedures or the optional
procedures for large, complex commercial disputes to be referred to, as
applicable, as the “Rules”).  If there is any inconsistency between the
terms hereof and the Rules, the terms and procedures set forth herein shall
control.  Any party who fails or refuses
to submit to arbitration following a demand by any other party shall bear all
costs and expenses incurred by such other party in compelling arbitration of
any dispute.  Nothing contained herein shall
be deemed to be a waiver by any party that is a bank of the protections
afforded to it under 12 U.S.C. §91 or any similar applicable state law.

 

(c)                                  No Waiver of Provisional Remedies, Self-Help
and Foreclosure.  The arbitration requirement does not limit
the right of any party to (i) foreclose against real or personal property
collateral; (ii) exercise self-help remedies relating to collateral or
proceeds of collateral such as setoff or repossession; or (iii) obtain
provisional or ancillary remedies such as replevin, injunctive relief,
attachment or the appointment of a receiver, before during or after the
pendency of any arbitration proceeding. 
This exclusion does not constitute a waiver of the right or obligation
of any party to submit any dispute to arbitration or reference hereunder,
including those arising from the exercise of the actions detailed in sections
(i), (ii) and (iii) of this paragraph.

 

(d)                                 Arbitrator Qualifications and Powers.  Any arbitration
proceeding in which the amount in controversy is $5,000,000.00 or less will be
decided by a single arbitrator selected according to the Rules, and who shall
not render an award of greater than $5,000,000.00.  Any dispute in which the amount in
controversy exceeds $5,000,000.00 shall be decided by majority vote of a panel
of three arbitrators; provided however, that all three arbitrators must
actively participate in all hearings and deliberations.  The arbitrator will be a neutral attorney
licensed in the State of Minnesota or a neutral retired judge of the state or
federal judiciary of the State of Minnesota, in either case with a minimum of
ten years experience in the substantive law applicable to the subject matter of
the dispute to be arbitrated.  The arbitrator
will determine whether or not an issue is arbitratable and will give effect to
the statutes of limitation in determining any claim.  In any arbitration proceeding the arbitrator
will decide (by documents only or with a hearing at the arbitrator’s
discretion) any pre-hearing motions which are similar to motions to dismiss for
failure to state a claim or motions for summary adjudication.  The arbitrator shall resolve all disputes in
accordance with the substantive law of Minnesota and may grant any remedy or
relief that a court of such state could order or grant within

 

47

 

the scope
hereof and such ancillary relief as is necessary to make effective any
award.  The arbitrator shall also have
the power to award recovery of all costs and fees, to impose sanctions and to
take such other action as the arbitrator deems necessary to the same extent a
judge could pursuant to the Federal Rules of Civil Procedure, the
Minnesota Rules of Civil Procedure or other applicable law.  Judgment upon the award rendered by the
arbitrator may be entered in any court having jurisdiction.  The institution and maintenance of an action
for judicial relief or pursuit of a provisional or ancillary remedy shall not
constitute a waiver of the right of any party, including the plaintiff, to
submit the controversy or claim to arbitration if any other party contests such
action for judicial relief.

 

(e)                                  Discovery.  In any arbitration proceeding discovery will
be permitted in accordance with the Rules. 
All discovery shall be expressly limited to matters directly relevant to
the dispute being arbitrated and must be completed no later than 20 days before
the hearing date and within 180 days of the filing of the dispute with the
AAA.  Any requests for an extension of
the discovery periods, or any discovery disputes, will be subject to final
determination by the arbitrator upon a showing that the request for discovery
is essential for the party’s presentation and that no alternative means for
obtaining information is available.

 

(f)                                    Class Proceedings and Consolidations.  The resolution of
any dispute arising pursuant to the terms of this Agreement shall be determined
by a separate arbitration proceeding and such dispute shall not be consolidated
with other disputes or included in any class proceeding.

 

(g)                                 Payment Of Arbitration Costs And Fees.  The arbitrator shall
award all costs and expenses of the arbitration proceeding.

 

(h)                                 Miscellaneous.  To the maximum extent practicable, the AAA,
the arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the dispute with the
AAA.  No arbitrator or other party to an
arbitration proceeding may disclose the existence, content or results thereof,
except for disclosures of information by a party required in the ordinary
course of its business or by applicable law or regulation.  If more than one agreement for arbitration by
or between the parties potentially applies to a dispute, the arbitration
provision most directly related to the Loan Documents or the subject matter of
the dispute shall control.  This
arbitration provision shall survive termination, amendment or expiration of any
of the Loan Documents or any relationship between the parties.

 

Section 8.5                                   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 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,

 

48

 

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 8.6                                   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 8.7                                   Indemnity. In addition to the payment of expenses
pursuant to Section 8.6, 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

 

49

 

and hold harmless may be
held to be unenforceable because it violates any law or public policy, the
Borrower shall nevertheless make the maximum contribution to the payment and satisfaction
of each of the Indemnified Liabilities which is permissible under applicable
law. The Borrower’s obligation under this Section 8.7 shall survive the
termination of this Agreement and the discharge of the Borrower’s other
obligations hereunder.

 

Section 8.8                                   Participants. The Lender and its participants, if
any, are not partners or joint venturers, and the Lender shall not have any
liability or responsibility for any obligation, act or omission of any of its
participants. All rights and powers specifically conferred upon the Lender may
be transferred or delegated to any of the Lender’s participants, successors or
assigns.

 

Section 8.9                                   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 8.10                            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 8.11                            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 8.12                            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.

 

50

 

Section 8.13                            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 8.14                            Amendment and Restatement of
Existing Credit Agreement.  This Agreement completely
amends, restates and replaces the Existing Credit Agreement, which is no longer
of any force or effect.

 

Section 8.15                            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 compelling arbitration,
enforcing an arbitration award related to this Agreement; or the Lender’s
exercise of any of its rights under Subsection 8.4(c), above; (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
and permitted by this Agreement or the other Loan Documents may be venued in
either the State or Federal courts located in Hennepin County, Minnesota; (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. 
Notwithstanding the foregoing, nothing shall prevent or prohibit the
Lender from bringing any action or seeking jurisdiction against the Borrower in
any other court or venue as may be required by applicable 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.

 

Section 8.16                            No Waiver under Existing Credit
Agreement.  The execution of this Agreement and any
documents related hereto shall not be deemed to be a waiver of any Default or
Event of Default under the Existing Credit Agreement or breach, default or
event of default under any Security Document or other document held by the
Lender, whether or not known to the Lender and whether or not existing on the
date of this Agreement.

 

Section 8.17                            Release. 
The Borrower hereby absolutely and unconditionally releases and forever
discharges the Lender, and any and all participants, parent corporations,
subsidiary corporations, affiliated corporations, insurers, indemnitors,
successors and assigns thereof, together with all of the present and former
directors, officers, agents and employees of any of the foregoing, from any and
all claims, demands or causes of action of any kind, nature or description,
whether arising in law or equity or upon contract or tort or under any state or
federal law or otherwise, which the Borrower has had, now has or has made claim
to have against any such person for or by reason of any act, omission, matter,
cause or thing whatsoever arising from the beginning of time to and including
the date of this Agreement, whether such claims, demands and causes of action
are matured or unmatured or known or unknown.

 

[Signature
Page Follows]

 

51

 

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.

 

	
  Nortech Systems
  Incorporated

  	
  NORTECH SYSTEMS
  INCORPORATED

  
	
  1120 Wayzata Boulevard
  East

  	
  By

  	
  /s/ Richard G.
  Wasielewski

  
	
  Suite 201

  	
   

  	
  Richard G. Wasielewski

  
	
  Wayzata, MN 55391

  	
   

  	
  Its Chief Financial
  Officer

  
	
  Telecopier:
  952-449-0442

  	
   

  
	
  Attention: Michael J.
  Degen

  	
   

  
	
  e-mail:
  mdegen@nortechsys.com

  	
   

  
	
   

  	
   

  
	
  Wells Fargo Bank, N.A.

  	
  WELLS FARGO BANK,

  
	
  MAC N9305-198

  	
  NATIONAL ASSOCIATION

  
	
  90 South Seventh
  Street, 19th Floor

  	
  By

  	
  /s/ Ann Spry

  
	
  Minneapolis, MN 55402

  	
   

  	
  Ann Spry

  
	
  Telecopier: (612)
  316-1853

  	
   

  	
  Its Vice President

  
	
  Attention: Ann Spry

  	
   

  
	
  e-mail:
  ann.m.spry@wellsfargo.com

  	
   

  

 

 

[Signature
Page to Second Amended and Restated 

Credit and Security Agreement dated August 6, 2009]

 

 

Table
of Exhibits and Schedules

 

	
  Exhibit A

  	
  Compliance
  Certificate

  
	
  Exhibit B

  	
  Borrowing Base
  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 Second Amended and Restated Credit and Security Agreement

 

Compliance
Certificate

 

	
  To:

  	
  Anny Spry

  
	
   

  	
  Wells Fargo Bank, N.A.

  
	
  Date:

  	
                           ,
  200     

  
	
  Subject:

  	
  Nortech Systems Incorporated Financial Statements

  

 

In accordance with our Second Amended and Restated
Credit and Security Agreement dated as of August 6, 2009, and as amended
from time to time (as amended, the “Credit
Agreement”), attached are the financial statements of Nortech Systems
Incorporated (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.

 

As of each quarterly reporting period, 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(b) 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.                                       Maximum
Net Loss. Pursuant to Section 6.2(a) of the Credit
Agreement, as of the Reporting Date, Borrower’s fiscal year-to-date Net Loss,
determined on a consolidated basis, was
                                        
which o
satisfies o does not satisfy the requirement that such
Net Loss be no more than the applicable amount set forth in the table below on
the Reporting Date.

 

	
  June 30, 2009

  	
   

  	
  <$5,800,000>

  	
   

  
	
  July 31, 2009

  	
   

  	
  <$6,100,000>

  	
   

  
	
  August 31, 2009

  	
   

  	
  <$6,300,000>

  	
   

  
	
  September 30, 2009

  	
   

  	
  <$6,600,000>

  	
   

  
	
  October 31, 2009

  	
   

  	
  <$6,500,000>

  	
   

  
	
  November 30, 2009

  	
   

  	
  <$6,400,000>

  	
   

  
	
  December 31, 2009

  	
   

  	
  <$6,400,000>

  	
   

  
	
  January 31, 2010

  	
   

  	
  <$500,000>

  	
   

  
	
  February 29, 2010

  	
   

  	
  <$500,000>

  	
   

  

 

 

2.                                       Capital
Expenditures.  Pursuant to
Section 6.2(b) of the Credit Agreement:

 

(a)                                  For the year to date period
for fiscal year 2009,  the fiscal quarter
to date period ending on the Reporting Date, Borrower has expended or
contracted to expend during such fiscal year to date for Capital Expenditures
$                      
in the aggregate, which  o
satisfies o does not satisfy the requirement that such
expenditures not exceed $1,200,000 for the fiscal year ending December 31,
2009.  As of the Reporting Date, Borrower
has expended or contracted to expend
$                      
in accordance with the Reimbursement Agreement for Capital Expenditures related
to the roof project at the Blue Earth, Minnesota Facility, which o
satisfies o does not satisfy the requirement that
Borrower expend no more than $600,000 (of the $1,200,000 aggregate limit)
during fiscal year 2009 to complete such project.

 

(b)                                 Borrower has expended or
contracted to expend during such fiscal quarter ending
              ,
    , 200    for Capital Expenditures
$                      
in the aggregate, which  o
satisfies o does not satisfy the requirement that such
expenditures not exceed $150,000 in the aggregate for any one fiscal quarter
after December 31, 2009.

 

Attached to 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.

 

 

	
   

  	
  NORTECH SYSTEMS INCORPORATED

  
	
   

  	
   

  
	
   

  	
  By

  	
   

  
	
   

  	
   

  	
  Name:

  	
   

  
	
   

  	
   

  	
  Its Chief Financial
  Officer

  

 

A-2

 

Exhibit B
to Second Amended and Restated Credit and Security Agreement

 

BORROWING
BASE CERTIFICATE

 

As
of:                   

 

NORTECH SYSTEMS, INC. (the “Borrower”) certifies that the following computation of the
Borrowing Base was performed in accordance with the borrowing definitions set
forth in the Credit Agreement between Wells Fargo Bank, N.A. and the Borrower
dated August 6, 2009, as amended from time to time:

 

	
  Total Accounts
  Receivable

  	
   

  	
  $

  	
   

  	
   

  	
   

  	
   

  
	
  Less:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  1)       Greater than 90 days past invoice date

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2)       Disputed Accounts, Contra Accounts or Accounts subject to a
  claim of offset

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  3)       Progress Billings

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  4)       Accounts owed by Account debtors, where Borrower is not
  qualified to do business

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  5)       Proceeds of unregistered intellectual property

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  6)       Government Accounts

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  7)       Foreign Accounts

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  8)       Accounts owing by bankrupt or insolvent account debtor

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  9)       Related Party Accounts

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  10)     Accounts not subject to a perfect security interest in favor
  of Lender

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  11)     Restructured or modified Accounts

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  12)     Accounts constituting advertising, finance charges

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  13)     Accounts to the extent they exceed 15% of total Accounts

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  14)     25% Cross Age — GE, Semitool, Northrop
  Grumman  15% Cross-Age
  — All other Accounts

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  15)     Accounts dominated in currency other than
  U.S. $ 

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  16)     Unapplied Credits

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  17)     Customer Deposits

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Eligible Accounts
  Receivable

  	
   

  	
  $

  	
   

  	
   

  	
   

  	
   

  
	
  80% of Eligible Accounts
  Receivable

  	
   

  	
   

  	
   

  	
  (A) $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total Raw Materials
  Inventory:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Bemidji, Blue Earth,
  Fairmont, Merrifield and Augusta

  	
   

  	
  $

  	
   

  	
   

  	
   

  	
   

  
	
  Less: Ineligible Raw
  Materials Inventory

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Eligible Raw Materials
  Inventory

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  20% of Eligible Raw
  Materials Inventory

  	
   

  	
  (B)$

  	
   

  	
   

  	
   

  	
   

  
	
  (Not to exceed $3,000,000)

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total Finished Goods
  Inventory:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Bemidji, Blue Earth,
  Fairmont, Merrifield and Augusta

  	
   

  	
  $

  	
   

  	
   

  	
   

  	
   

  
	
  Less: Ineligible Finished
  Goods Inventory

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Eligible Finished Goods
  Inventory

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  30% Less of Eligible
  Finished Goods Inventory

  	
   

  	
  (C)$

  	
   

  	
   

  	
   

  	
   

  
										

 

 

	
  The LESSOR of (B) +
  (C), or $4,000,000

  	
   

  	
   

  	
   

  	
  (D)$

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  TOTAL BORROWING BASE (The
  lessor of (A) + (D), or $12,000,000)

  	
   

  	
   

  	
   

  	
  $

  	
   

  	
   

  
	
  LESS: Borrowing Base
  Reserve, if any

  	
   

  	
   

  	
   

  	
  $

  	
   

  	
   

  
	
  LESS: Reserve for Purchasing
  Card Credit Limit

  	
   

  	
   

  	
   

  	
  $

  	
   

  	
   

  
	
  LESS: Reserve for Swap
  Exposure

  	
   

  	
   

  	
   

  	
  $

  	
   

  	
   

  
	
  LESS: Total Letters of
  Credit Outstanding

  	
   

  	
   

  	
   

  	
  $

  	
   

  	
   

  
	
  LESS: Total Line of Credit
  Advances Outstanding

  	
   

  	
   

  	
   

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  TOTAL EXCESS/DEFICIT

  	
   

  	
   

  	
   

  	
  $

  	
   

  	
   

  
								

 

	
  NORTECH
  SYSTEMS, INC.

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  Date:

  	
   

  
	
   

  	
  Its:

  	
   

  	
   

  	
   

  
						

 

B-2

 

Exhibit C
to Second Amended and Restated Credit and Security Agreement

 

Premises

 

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

 

1)                                      WAYZATA: 
1120 Wayzata Blvd, Suite 200 & 201, Wayzata, MN  55391

 

2)                                      AUGUSTA: 
A parcel of land located in Eau Claire County, State of Wisconsin,
described as follows: Lot 1 of Eau Claire County certified survey map number
1358 filed March 14, 1997, in volume 7 of Certified Survey Maps, pages 137-139
in the office of the Register of Deeds for Eau Claire County Wisconsin.

 

3)                                      BEMIDJI: 
That part of Government Lot 2, also with that part of the Northwest
Quarter of the Southeast Quarter, Section 36, Township 147, Range 34,
described as follows:

Commencing at a cast iron monument known as B-12 on the Northerly
right-of-way line of Trunk Highway No. 2, said monument being the most
Northerly point of the plat of Minnesota Department of Transportation
right-of-way Plat No. 04-5, according to the recorded plat thereof,
assuming said Northerly right-of-way line bears North 68 degrees 32 minutes 14
seconds West along said Northerly right-of-way line 1023.92 feet to the point
of beginning; thence continuing North 68 degrees 32 minutes 14 seconds West
along said Northerly right-of-way line1167.81 feet; thence North 74 degrees 29
minutes 01 seconds East 701.36 feet; thence South 68 degrees 32 minutes 14
seconds East, parallel to said Northerly right-of-way line 462.30 feet to a
point on a 100.00 feet radius curve, the center of circle of said curve bears
South 54 degrees 10 minutes 06 seconds East from said point, said point also
being on the right-of-way line of a road; thence Southeasterly along said curve
and said right-of-way line 194.28 feet; central angle 111 degrees 18 minutes 46
seconds; thence South 14 degrees 21 minutes 08 seconds West along the
prolongation of a radial line of said curve 300.00 feet to the point of
beginning.

 

Beltrami County, Minnesota

 

Abstract Property

 

5)                                      FAIRMONT: 
Parcel A:  Lot Two (2), Block One
(1), of the Hodgman Business Addition to the City of Fairmont, according to the
map or plat thereof on file and of record in the office of the County Recorder
in and for Martin County, Minnesota. Parcel B: 
Lot Two (2), Block One (1), of the First Northeast Addition to the City
of Fairmont, according to the plat thereof on file and of record in the Office
of the Register of Deeds in and for Martin County, Minnesota, and that portion
of Lot Three (3), Block One (1), First Northeast Addition aforesaid described
as follows:

 

Commencing at the Southwest corner of the
aforementioned Lot Three (3) in Block One (1) of the First Northeast
Addition to the City of Fairmont, Minnesota, thence 

 

C-1

 

East along the South line of said Lot Three (3) for
a distance of 163.35 feet, thence deflecting 90 degrees 21 minutes left for a
distance of 30.00 feet, thence deflecting 89 degrees 39 minutes left for a
distance of 163.35 feet to a point on the West line of said Lot Three (3),
thence South along said West line of Lot Three (3) for a distance of 30.00
feet to the point of beginning.

 

Parcel C:  Lots Four (4) and Five (5), Block Two
(2), First Northeast Addition to the City of Fairmont, as per map or plat
thereof on file and of record in the Office of the County Recorder in and for
Martin County, Minnesota.

 

Abstract Property

 

6)                                      MERRIFIELD:  That part of Govt. Lot 6, Sec. 36, Twp. 135,
Rge. 28, described as follows:  Beginning
at the Northeast corner of said Govt. Lot 6; thence South 00 degrees 59 minutes
20 seconds West, assumed bearing, 579.89 feet along the East line  of said Govt. Lot 6; thence North 82 degrees
38 minutes 21 seconds West 114.59 feet; thence South 81 degrees 39 minutes 36
seconds West 374.51 feet to the Easterly line of a 66 foot easement; thence
North 70 degrees 11 minutes 23 seconds West 19.60 feet along said Easterly line
of the 66 foot road easement; thence Northeasterly 44.66 feet along a
tangential curve, concave to the Northeast, central angle 64 degrees 10 minutes
00 seconds and radius 39.88 feet continuing along said Easterly line of the 66
foot road easement; thence North 06 degrees 01 minutes 23 seconds West, along
tangential of the last described curve, 24.02 feet continuing along said
Easterly line of the 66 foot road easement; thence North 00 degrees 59 minutes
20 seconds East 565 feet, more or less, to the North line of said Govt. Lot 6;
thence Easterly 600 feet, more or less, along the North line of said Govt. Lot
6 to the point of beginning.  AND that
part of Govt. Lot 6, Sect. 36, Twp. 135, Rge. 28, described as follows:  Commencing at the Northeast corner of said
Govt. Lot 6; thence South 00 degrees 59 minutes 20 seconds West, assumed
bearing, 579.89 feet along the East line of said Govt. Lot 6; thence North 82
degrees 38 minutes 21 seconds West 114.59 feet; thence South 81 degrees 39
minutes 36 seconds West 374.51 feet to the Easterly line of a 66 foot road
easement; thence Northwesterly 44.66 feet along a tangential curve concave to
the Northeast, central angle 64 degrees 10 minutes 00 seconds, radius 39.88
feet, continuing along said Easterly line of the 66 foot wide road easement;
thence North 6 degrees 01 minutes 23 seconds West, along the tangent to the
last described curve, 24.02 feet continuing along said Easterly line of the 66
foot road easement; thence South 83 degrees 58 minutes 37 seconds West 66.00
feet along the North line of said 66 foot road easement; thence North 00
degrees 59 minutes 20 seconds East 33.25 feet to the point of beginning of the
tract to be described; thence South 83 degrees 58 minutes 37 seconds West 725
feet, more or less, to the West line of said Govt. Lot 6; thence Northerly 591
feet, more or less, along said West line of Govt. Lot 6 to the Northwest corner
of said Govt. Lot 6; thence Easterly 716 feet, more or less, along the North
line of said Govt. Lot 6 to the line bearing North 00 degrees 59 minutes 20 

 

C-2

 

seconds East from the point of beginning; thence South
00 degrees 59 minutes 20 seconds West 523 feet, more or less, to the point of
beginning.

 

Crow Wing Count,
Minnesota

 

Abstract Property

 

7)                  BLUE EARTH, MINNESOTA:  Commencing at the Southwest corner of the
Southwest Quarter of Section 7 in Township 102 North, Range 27, West of
the 5th Principal Meridian in the County of Faribault
and State of Minnesota; thence North along the West line of the Southwest
Quarter of said Section 7, a distance of 680 feet; thence East parallel
with the South line of the Southwest Quarter of said Section 7, a distance
of 765 feet; thence South parallel with the West line of the Southwest Quarter
of said Section 7, a distance of 680 feet; thence West along the South
line of the Southwest Quarter of said Section 7, a distance of 765 feet to
the point of beginning;

 

Except a tract of land
in the Southwest Quarter of Section 7, Township 102 North, Range 27 West
in the City of Blue Earth, Faribault County, Minnesota, described as
follows:  Commencing at the Southwest
corner of said Section 7; thence North 89 degrees 04 minutes 19 seconds
East, (assumed bearing) along the south line of the Southwest Quarter of said Section 7,
a distance of 765.00 feet; thence North 00 degrees 00 minutes 00 seconds East,
parallel with the West line of the Southwest Quarter of said Section 7, a
distance of 78.10 feet to the northerly right-of-way line of County State Aid
Highway No. 16 and the point of beginning; thence continuing North 00
degrees 00 minutes 00 seconds East, a distance of 60.00 feet; thence South 89 degrees
04 minutes 19 seconds West, a distance of 20.00 feet; thence South 00 degrees
00 minutes 00 seconds West, a distance of 59.71 feet to said north highway
right-of-way line; thence North 89 degrees 54 minutes 45 seconds East, along
said highway right-of-way line, a distance of 20.00 feet to the point of
beginning.

 

Together with an easement over that part
of the West Half of the Southwest Quarter of said Section 7, excepting the
tract described above, that lies between a line running parallel to but 10 feet
North of the North right of way line of U.S. Trunk Highway No. 16 and the
North right of way line of said Trunk Highway No. 16 as now located.

 

Faribault County, Minnesota.

 

C-3

 

Schedule 5.1 to
Credit and Security Agreement

 

Trade
Names, Chief Executive Office, Principal Place of Business,

and Locations of Collateral

 

Trade
Names

Intercon
One

 

Chief
Executive Office/Principal Place of Business

 

1120
Wayzata Boulevard East, Suite 201, Wayzata, MN 55391

 

Other
Inventory and Equipment Locations

 

1)                                      750 Industrial Drive, Augusta, WI  54722

2)                                      1007 East 10th Street, Fairmont, MN  55603

3)                                      926 East 10th Street, Fairmont, MN  55603

4)                                      1030 Fairview Avenue, Fairmont, MN  55603

5)                                      12136 Crystal Lake Road, Merrifield, MN
56465

6)                                      1120 Wayzata Blvd, Ste 200 &
201, Wayzata, MN 55391

7)                                      4050 Norris Court NW, Bemidji, MN 56601

8)                                      1930 West First Street, Blue Earth,
Minnesota 56013

 

 

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

  	
   

  
	
  Publicly Held

  	
   

  	
  Common Stock

  	
   

  	
  2,738,955

  	
   

  	
  n/a

  	
   

  
	
  Publicly Held

  	
   

  	
  Preferred Stock

  	
   

  	
  250,000

  	
   

  	
  n/a

  	
   

  

 

Attach organizational chart showing the ownership
structure of all Subsidiaries of the Borrower.

 

 

 

Schedule 5.5  to Credit and Security Agreement

 

Subsidiaries

 

1.             Nortech Medical Services, Inc.
(Inactive)

 

2.             Manufacturing Assembly Solutions of
Monterrey, Inc.

 

 

Schedule 5.11 to
Credit and Security Agreement

 

Intellectual
Property Disclosures

 

None

 

 

Schedule 6.3 to
Credit and Security Agreement

 

Permitted
Liens

 

	
   

  	
   

  	
  Original

  	
   

  	
  Original

  Filing

  	
   

  	
  Lapse

  	
   

  	
   

  
	
  Secured
  Party

  	
   

  	
  Filing
  #

  	
   

  	
  Date

  	
   

  	
  Date

  	
   

  	
  Collateral/Comments

  
	
  Northwest Minnesota Foundation

  	
   

  	
  20023439564

  	
   

  	
  3/18/2002

  	
   

  	
  3/18/2012

  	
   

  	
  All Assets (Terminated on 2/1/2007)

  
	
  Wells Fargo Equipment Finance, Inc.

  	
   

  	
  200412663289

  	
   

  	
  7/26/2004

  	
   

  	
  7/26/2009

  	
   

  	
  Specific Equipment Located in Merrifield, Bemidji, Fairmont and
  Augusta

  
	
  Great America Leasing Corporation

  	
   

  	
  200412663289

  	
   

  	
  7/27/2004

  	
   

  	
  7/27/2009

  	
   

  	
  Specific Equipment

  
	
  Demag Plastics Group

  	
   

  	
  200412721907

  	
   

  	
  7/30/2004

  	
   

  	
  7/30/2009

  	
   

  	
  PMSI (Terminated on 2/1/07)

  
	
  Great America Leasing Corporation

  	
   

  	
  200515247574

  	
   

  	
  2/16/2005

  	
   

  	
  2/16/2010

  	
   

  	
  Lease Filing - Mailing Equipment

  
	
  Wells Fargo Equipment Finance, Inc.

  	
   

  	
  200517515660

  	
   

  	
  8/4/2005

  	
   

  	
  8/4/2010

  	
   

  	
  Specific Equipment Located in Merrifield, Bemidji, Fairmont and
  Augusta

  
	
  Wells Fargo Equipment Finance, Inc.

  	
   

  	
  200611340371

  	
   

  	
  4/6/2006

  	
   

  	
  4/6/2011

  	
   

  	
  Specific Equipment Located in Merrifield, Bemidji and Fairmont

  
	
  Arrow Electronics, Inc.

  	
   

  	
  200612304176

  	
   

  	
  6/12/2006

  	
   

  	
  6/12/2011

  	
   

  	
  Consignment Inventory and Products Sold to Debtor Pursuant to Consigned
  Inventory Agreement dated 4/11/06.

  
	
  Arrow Electronics, Inc.

  	
   

  	
  200614885330

  	
   

  	
  12/29/2006

  	
   

  	
  12/29/2011

  	
   

  	
  Consignment Inventory and Products Sold to Debtor Pursuant to Consigned
  Inventory Agreement dated 12/6/06.

  
	
  Bell Microproducts Inc.

  	
   

  	
  200715644660

  	
   

  	
  2/22/2007

  	
   

  	
  2/22/2012

  	
   

  	
  Consignment inventory including all proceeds, products and accessories
  and anything it is assembled or added to.

  
	
  Banc of America Leasing & Capital LLC

  	
   

  	
  20071666830

  	
   

  	
  5/7/2007

  	
   

  	
  5/7/2012

  	
   

  	
  Lease Filing- Specific Equipment manufactured by Mydata
  Automation, Inc.

  
	
  Marlin Leasing Corp

  	
   

  	
  200716427337

  	
   

  	
  4/19/2007

  	
   

  	
  4/19/2012

  	
   

  	
  Lease Filing - Copier Equipment

  
	
  Arrow Electronics, Inc.

  	
   

  	
  200718099911

  	
   

  	
  9/5/2007

  	
   

  	
  9/5/2012

  	
   

  	
  Consignment Inventory and Products Sold to Debtor Pursuant to Consigned
  Inventory Agreement dated 5/8/07.

  
	
  Wells Fargo Equipment Finance/Providence Capital

  	
   

  	
  200718990862

  	
   

  	
  11/16/2007

  	
   

  	
  11/16/2012

  	
   

  	
  Specific Equpment - Stirling Stone & Tile

  
	
  Arrow Electronics, Inc.

  	
   

  	
  200810873217

  	
   

  	
  3/7/2008

  	
   

  	
  3/7/2013

  	
   

  	
  Consignment Inventory and Products Sold to Debtor Pursuant to Consigned
  Inventory Agreement dated 2/9/07.

  
	
  Wells Fargo Equipment Finance, Inc.

  	
   

  	
  200814387268

  	
   

  	
  12/30/2008

  	
   

  	
  12/30/2013

  	
   

  	
  Specific Equipment Located in Fairmont,  Augusta and Merrifield

  
	
  Wells Fargo Equipment Finance, Inc.

  	
   

  	
  200915015295

  	
   

  	
  2/18/2009

  	
   

  	
  2/18/2014

  	
   

  	
  Specific Equipment Located in Garner, IA

  
	
  E.O. Johnson Co. Inc.

  	
   

  	
  200915138100

  	
   

  	
  2/27/2009

  	
   

  	
  2/27/2014

  	
   

  	
  Office Equipment

  

 

 

Schedule 6.4 to
Credit and Security Agreement

 

Permitted
Indebtedness and Guaranties

 

Indebtedness

 

	
  Creditor

  	
   

  	
  Principal

  Amount

  	
   

  	
  Maturity

  Date

  	
   

  	
  Monthly

  Payment

  	
   

  	
  Collateral

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  None

  

 

Guaranties

 

	
  Primary Obligor

  	
   

  	
  Amount and Description of

  Obligation Guaranteed

  	
   

  	
  Beneficiary of Guaranty

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  NoneExhibit 4.1

 

Common Stock Purchase Warrant

 

BIOSANTE PHARMACEUTICALS, INC.

 

	
  Warrant Shares:

  	
   

  	
  Initial Exercise
  Date: August 13, 2009

  
	
   

  	
   

  	
  ISSUE DATE: August 13, 2009

  

 

THIS COMMON STOCK PURCHASE WARRANT (the “Warrant”)
certifies that, for value received,                            (the “Holder”) is entitled, upon the
terms and subject to the limitations on exercise and the conditions hereinafter
set forth, at any time on or after August 13, 2009 (the “Initial Exercise
Date”) and on or prior to the close of business on August 12, 2014 (the “Termination
Date”) but not thereafter, to subscribe for and purchase from BioSante
Pharmaceuticals, Inc., a Delaware corporation (the “Company”), up to              shares (the “Warrant Shares”) of Common
Stock.

 

Section 1.                                            Definitions.  Capitalized terms used and not otherwise
defined herein shall have the meanings set forth in that certain Securities
Purchase Agreement (the “Purchase Agreement”), dated August 13, 2009, among the Company and the purchasers
signatory thereto.

 

Section
2.                                            Exercise.

 

a)                                      Exercise of Warrant. 
Exercise of the purchase rights represented by this Warrant may be made,
in whole or in part, at any time or times on or after the Initial Exercise Date
and on or before the Termination Date by delivery to the Company (or such other
office or agency of the Company as it may designate by notice in writing to the
registered Holder at the address of the Holder appearing on the books of the
Company) of a duly executed facsimile copy of the Notice of Exercise Form annexed
hereto; and, within three (3) Trading Days of the date said Notice of Exercise
is delivered to the Company, the Company shall have received payment of the
aggregate Exercise Price of the shares thereby purchased by wire transfer or
cashier’s check drawn on a United States bank or, if available, pursuant to the
cashless exercise procedure specified in Section 2(c) below.  Notwithstanding anything herein to the
contrary, the Holder shall not be required to physically surrender this Warrant
to the Company until the Holder has purchased all of the Warrant Shares
available hereunder and the Warrant has been exercised in full, in which case,
the Holder shall surrender this Warrant to the Company for cancellation within
three (3) Trading Days of the date the final Notice of Exercise is delivered to
the Company.  Partial exercises of this
Warrant resulting in purchases of a portion of the total number of Warrant
Shares available hereunder shall have the effect of lowering the outstanding
number of Warrant Shares purchasable hereunder in an amount equal to the
applicable number of Warrant Shares purchased. 
The Holder and the Company shall maintain records showing the number of
Warrant Shares purchased and the date of such purchases.  The Company shall deliver any objection to
any Notice of Exercise Form within 1 Business Day of receipt of such
notice.  The Holder
and any assignee, by acceptance of this Warrant, acknowledge and agree that, by
reason of 

 

1

 

the provisions of this paragraph,
following the purchase of a portion of the Warrant Shares hereunder, the number
of Warrant Shares available for purchase hereunder at any given time may be
less than the amount stated on the face hereof.

 

b)                                     Exercise Price. 
The exercise price per share of the Common Stock under this Warrant
shall be $2.50, subject to adjustment hereunder
(the “Exercise Price”).

 

c)                                      Cashless Exercise. 
If at the time of exercise hereof there is no effective registration
statement registering, or the prospectus contained therein is not available for
the issuance of the Warrant Shares to the Holder (it being understood that the
Company is under no obligation to file, have declared effective or maintain the
effectiveness of such a registration statement or current prospectus and shall
have no liability to the Holder in the event that there is no effective
registration statement or current prospectus) and all of the Warrant Shares are
not then registered for resale by Holder into the market at market prices from
time to time on an effective registration statement for use on a continuous
basis (or the prospectus contained therein is not available for use), then this
Warrant may also be exercised, in whole or in part, at such time by means of a “cashless
exercise” in which the Holder shall be entitled to receive a certificate for
the number of Warrant Shares equal to the quotient obtained by dividing [(A-B)
(X)] by (A), where:

 

(A) = the VWAP on the Trading Day immediately
preceding the date on which Holder elects to exercise this Warrant by means of
a “cashless exercise,” as set forth in the applicable Notice of Exercise;

 

(B) = the Exercise Price of this Warrant, as adjusted
hereunder; and

 

(X) = the number of Warrant Shares that would be
issuable upon exercise of this Warrant in accordance with the terms of this
Warrant if such exercise were by means of a cash exercise rather than a
cashless exercise.

 

“VWAP” means, for any
date, the price determined by the first of the following clauses that applies: (a)
if the Common Stock is then listed or quoted on a Trading Market, the daily
volume weighted average price of the Common Stock for such date (or the nearest
preceding date) on the Trading Market on which the Common Stock is then listed
or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m.
(New York City time) to 4:02 p.m. (New York City time), (b)  if the OTC Bulletin Board is not a Trading
Market, the volume weighted average price of the Common Stock for such date (or
the nearest preceding date) on the OTC Bulletin Board, (c) if the Common Stock
is not then listed or quoted for trading on the OTC Bulletin Board and if
prices for the Common Stock are then reported in the “Pink Sheets” published by
Pink OTC Markets, Inc. (or a similar organization or agency succeeding to its
functions of reporting prices), the most recent bid price per share of the
Common Stock so reported, or (d) in all other cases, the fair market value of a
share of Common Stock as determined by an independent appraiser selected in
good faith by the Company and reasonably acceptable to the Holders of a
majority in interest of the Securities then outstanding, the fees and expenses
of which shall be paid by the Company.

 

2

 

d)                                     Mechanics of Exercise.

 

i.                  Delivery of Certificates Upon Exercise. 
Certificates for shares purchased hereunder shall be transmitted by the
Transfer Agent to the Holder by crediting the account of the Holder’s prime
broker with the Depository Trust Company through its Deposit Withdrawal Agent
Commission (“DWAC”) system if the Company is then a participant in such
system and either (A) there is an effective Registration Statement permitting
the issuance of the Warrant Shares to or resale of the Warrant Shares by Holder
or (B) this Warrant is being exercised via cashless exercise, and otherwise by
physical delivery to the address specified by the Holder in the Notice of
Exercise by the date that is three (3) Trading Days after the latest of (A) the
delivery to the Company of the Notice of Exercise Form, (B) surrender of this
Warrant (if required) and (C) payment of the aggregate Exercise Price as set
forth above (including by cashless exercise, if permitted) (such date, the “Warrant
Share Delivery Date”).  This Warrant
shall be deemed to have been exercised on the first date on which all of the
foregoing have been delivered to the Company. 
The Warrant Shares shall be deemed to have been issued, and Holder or
any other person so designated to be named therein shall be deemed to have
become a holder of record of such shares for all purposes, as of the date the
Warrant has been properly exercised, with payment to the Company of the
Exercise Price (or by cashless exercise, if permitted) and all taxes required to
be paid by the Holder, if any, pursuant to Section 2(d)(vi) prior to the
issuance of such shares, having been paid.

 

ii.               Delivery of New Warrants Upon Exercise. 
If this Warrant shall have been exercised in part, the Company shall, at
the request of a Holder and upon surrender of this Warrant certificate, at the
time of delivery of the certificate or certificates representing Warrant
Shares, deliver to Holder a new Warrant evidencing the rights of Holder to
purchase the unpurchased Warrant Shares called for by this Warrant, which new
Warrant shall in all other respects be identical with this Warrant.

 

iii.            Rescission Rights.  If the
Company fails to cause the Transfer Agent to transmit to the Holder a
certificate or the certificates representing the Warrant Shares pursuant to Section
2(d)(i) by the Warrant Share Delivery Date, then, the Holder will have the
right to rescind such exercise.

 

iv.           Compensation for Buy-In on Failure to Timely Deliver
Certificates Upon Exercise.  In addition
to any other rights available to the Holder, if the Company fails to cause the
Transfer Agent to transmit to the Holder a certificate or the certificates
representing the Warrant Shares pursuant to an exercise on or before the
Warrant Share Delivery Date, and if after such date the Holder is required by
its broker to purchase (in an 

 

3

 

open market transaction
or otherwise) or the Holder’s brokerage firm otherwise purchases, shares of
Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant
Shares which the Holder anticipated receiving upon such exercise (a “Buy-In”),
then the Company shall (A) pay in cash to the Holder the amount, if any, by
which (x) the Holder’s total purchase price (including brokerage commissions,
if any) for the shares of Common Stock so purchased exceeds (y) the amount
obtained by multiplying (1) the number of Warrant Shares that the Company was
required to deliver to the Holder in connection with the exercise at issue
times (2) the price at which the sell order giving rise to such purchase
obligation was executed, and (B) at the option of the Holder, either reinstate
the portion of the Warrant and equivalent number of Warrant Shares for which
such exercise was not honored (in which case such exercise shall be deemed
rescinded) or deliver to the Holder the number of shares of Common Stock that
would have been issued had the Company timely complied with its exercise and
delivery obligations hereunder.  For
example, if the Holder purchases Common Stock having a total purchase price of
$11,000 to cover a Buy-In with respect to an attempted exercise of shares of
Common Stock with an aggregate sale price giving rise to such purchase
obligation of $10,000, under clause (A) of the immediately preceding sentence
the Company shall be required to pay the Holder $1,000. The Holder shall
provide the Company written notice indicating the amounts payable to the Holder
in respect of the Buy-In and, upon request of the Company, evidence of the
amount of such loss.  Nothing herein
shall limit a Holder’s right to pursue any other remedies available to it
hereunder, at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief with respect to the Company’s
failure to timely deliver certificates representing shares of Common Stock upon
exercise of the Warrant as required pursuant to the terms hereof.

 

v.              No Fractional Shares or Scrip. 
No fractional shares or scrip representing fractional shares shall be
issued upon the exercise of this Warrant. 
As to any fraction of a share which the Holder would otherwise be
entitled to purchase upon such exercise, the Company shall, at its election,
either pay a cash adjustment in respect of such final fraction in an amount
equal to such fraction multiplied by the Exercise Price or round up to the next
whole share.

 

vi.           Charges, Taxes and Expenses. 
Issuance of certificates for Warrant Shares shall be made without charge
to the Holder for any issue or transfer tax or other incidental expense in
respect of the issuance of such certificate, all of which taxes and expenses
shall be paid by the Company, and such certificates shall be issued in the name
of the Holder or in such name or names as may be directed by the Holder; provided,
however, that in the event certificates for Warrant Shares are to be
issued in a name other than the name of the Holder, this Warrant when 

 

4

 

surrendered for exercise
shall be accompanied by the Assignment Form attached hereto duly executed by
the Holder and the Company may require, as a condition thereto, the payment of
a sum sufficient to reimburse it for any transfer tax incidental thereto.

 

vii.        Closing of Books.  The Company
will not close its stockholder books or records in any manner which prevents
the timely exercise of this Warrant, pursuant to the terms hereof.

 

e)                                      Holder’s Exercise Limitations. 
The Company shall not effect any exercise of this Warrant, and a Holder
shall not have the right to exercise any portion of this Warrant, pursuant to Section
2 or otherwise, to the extent that after giving effect to such issuance after
exercise as set forth on the applicable Notice of Exercise, the Holder
(together with the Holder’s Affiliates, and any other Persons acting as a group
together with the Holder or any of the Holder’s Affiliates), would beneficially
own in excess of the Beneficial Ownership Limitation (as defined below).  For purposes of the foregoing sentence, the
number of shares of Common Stock beneficially owned by the Holder and its
Affiliates shall include the number of shares of Common Stock issuable upon
exercise of this Warrant with respect to which such determination is being
made, but shall exclude the number of shares of Common Stock which would be
issuable upon (i) exercise of the remaining, nonexercised portion of this
Warrant beneficially owned by the Holder or any of its Affiliates and (ii) exercise
or conversion of the unexercised or nonconverted portion of any other
securities of the Company (including, without limitation, any other  Common Stock Equivalents) subject to a
limitation on conversion or exercise analogous to the limitation contained
herein beneficially owned by the Holder or any of its Affiliates.  Except as set forth in the preceding sentence,
for purposes of this Section 2(e), beneficial ownership shall be calculated in
accordance with Section 13(d) of the Exchange Act and the rules and regulations
promulgated thereunder, it being acknowledged by the Holder that the Company is
not representing to the Holder that such calculation is in compliance with Section
13(d) of the Exchange Act and the Holder is solely responsible for any
schedules required to be filed in accordance therewith.   To the extent that the limitation contained
in this Section 2(e) applies, the determination of whether this Warrant is
exercisable (in relation to other securities owned by the Holder together with
any Affiliates) and of which portion of this Warrant is exercisable shall be in
the sole discretion of the Holder, and the submission of a Notice of Exercise
shall be deemed to be the Holder’s determination of whether this Warrant is
exercisable (in relation to other securities owned by the Holder together with
any Affiliates) and of which portion of this Warrant is exercisable, in each
case subject to the Beneficial Ownership Limitation, and the Company shall have
no obligation to verify or confirm the accuracy of such determination and shall
have no liability for exercises of the Warrant that are in noncompliance with
the Beneficial Ownership Limitation.   In
addition, a determination as to any group status as contemplated above shall be
determined in accordance with Section 13(d) of the Exchange Act and the rules and
regulations promulgated thereunder.  For
purposes of this Section 2(e), in determining the number of outstanding shares
of Common Stock, a Holder may rely on the number of outstanding shares of
Common Stock as reflected in (A) the Company’s most recent periodic or annual
report filed with the Commission, as the case may be, (B) a more recent public 

 

5

 

announcement by the
Company or (C) a more recent written notice by the Company or the Transfer
Agent setting forth the number of shares of Common Stock outstanding.  Upon the written or oral request of a Holder,
the Company shall within two Trading Days confirm orally and in writing to the
Holder the number of shares of Common Stock then outstanding.  In any case, the number of outstanding shares
of Common Stock shall be determined after giving effect to the conversion or
exercise of securities of the Company, including this Warrant, by the Holder or
its Affiliates since the date as of which such number of outstanding shares of
Common Stock was reported.  The “Beneficial
Ownership Limitation” shall be 4.9% of the number of shares of the Common
Stock outstanding immediately after giving effect to the issuance of shares of
Common Stock issuable upon exercise of this Warrant.  The Holder, upon not less than 61 days’ prior
notice to the Company, may increase or decrease the Beneficial Ownership
Limitation provisions of this Section 2(e), provided that the Beneficial
Ownership Limitation in no event exceeds 9.99% of the number of shares of the
Common Stock outstanding immediately after giving effect to the issuance of
shares of Common Stock upon exercise of this Warrant held by the Holder and the
provisions of this Section 2(e) shall continue to apply.  Any such increase or decrease will not be
effective until the 61st day after such notice is delivered to the
Company.  The provisions of this
paragraph shall be construed and implemented in a manner otherwise than in
strict conformity with the terms of this Section 2(e) to correct this paragraph
(or any portion hereof) which may be defective or inconsistent with the
intended Beneficial Ownership Limitation herein contained or to make changes or
supplements necessary or desirable to properly give effect to such limitation.
The limitations contained in this paragraph shall apply to a successor holder
of this Warrant.

 

Section
3.                                            Certain Adjustments.

 

a)                                      Stock Dividends and Splits. If the Company, at any time while this
Warrant is outstanding: (i) pays a stock dividend or otherwise makes a
distribution or distributions on shares of its Common Stock or any other equity
or equity equivalent securities payable in shares of Common Stock (which, for
avoidance of doubt, shall not include any shares of Common Stock issued by the
Company upon exercise of this Warrant), (ii) subdivides outstanding shares of
Common Stock into a larger number of shares, (iii) combines (including by way
of reverse stock split) outstanding shares of Common Stock into a smaller
number of shares, or (iv) issues by reclassification of shares of the Common
Stock any shares of capital stock of the Company, then in each case the
Exercise Price shall be multiplied by a fraction of which the numerator shall
be the number of shares of Common Stock (excluding treasury shares, if any)
outstanding immediately before such event and of which the denominator shall be
the number of shares of Common Stock outstanding immediately after such event,
and the number of shares issuable upon exercise of this Warrant shall be
proportionately adjusted such that the aggregate Exercise Price of this Warrant
shall remain unchanged.  Any adjustment
made pursuant to this Section 3(a) shall become effective immediately after the
record date for the determination of stockholders entitled to receive such
dividend or distribution and shall become effective immediately after the
effective date in the case of a subdivision, combination or re-classification.

 

6

 

b)                                     [RESERVED]

 

c)                                      Subsequent Rights Offerings. 
If the Company, at any time while the Warrant is outstanding, shall
issue rights, options or warrants to all holders of Common Stock (and not to
the Holders) entitling them to subscribe for or purchase shares of Common Stock
at a price per share less than the VWAP on the record date mentioned below,
then, the Exercise Price shall be multiplied by a fraction, of which the
denominator shall be the number of shares of the Common Stock outstanding on
the date of issuance of such rights, options or warrants plus the number of
additional shares of Common Stock offered for subscription or purchase, and of
which the numerator shall be the number of shares of the Common Stock
outstanding on the date of issuance of such rights, options or warrants plus
the number of shares which the aggregate offering price of the total number of
shares so offered (assuming receipt by the Company in full of all consideration
payable upon exercise of such rights, options or warrants) would purchase at
such VWAP.  Such adjustment shall be made
whenever such rights, options or warrants are issued, and shall become
effective immediately after the record date for the determination of
stockholders entitled to receive such rights, options or warrants.

 

d)                                     Pro Rata Distributions. 
If the Company, at any time while this Warrant is outstanding, shall
distribute to all holders of Common Stock (and not to the Holders) evidences of
its indebtedness or assets (including cash and cash dividends) or rights or
warrants to subscribe for or purchase any security other than the Common Stock,
then in each such case the Exercise Price shall be adjusted by multiplying the
Exercise Price in effect immediately prior to the record date fixed for
determination of stockholders entitled to receive such distribution by a
fraction of which the denominator shall be the VWAP determined as of the record
date mentioned above, and of which the numerator shall be such VWAP on such
record date less the then per share fair market value at such record date of
the portion of such assets or evidence of indebtedness so distributed
applicable to one outstanding share of the Common Stock as determined by the
Board of Directors in good faith.  In
either case the adjustments shall be described in a statement provided to the
Holder of the portion of assets or evidences of indebtedness so distributed or
such subscription rights applicable to one share of Common Stock.  Such adjustment shall be made whenever any
such distribution is made and shall become effective immediately after the
record date mentioned above.

 

e)                                      Fundamental Transaction. If, at any time while this Warrant is
outstanding, (i) the Company,
directly or indirectly, in one or more related transactions effects any merger or consolidation of
the Company with or into another Person, (ii) the Company, directly or indirectly, effects any sale, lease,
license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets
in one or a series of related transactions, (iii) any, direct or indirect,
purchase offer, tender offer or exchange offer (whether by the Company or
another Person) is completed pursuant to which holders of Common Stock are
permitted to sell, tender or exchange their shares for other securities, cash
or property and has been accepted by the holders of 50% or more of the
outstanding Common Stock, (iv) the Company,
directly or indirectly, in one or more related transactions effects any reclassification,
reorganization or recapitalization of the Common Stock or any compulsory share
exchange pursuant to which the Common Stock 

 

7

 

is effectively converted
into or exchanged for other securities, cash or property, (v) the Company, directly or indirectly, in one or more related transactions  consummates
a stock or share purchase agreement or other business
combination (including, without limitation, a reorganization, recapitalization,
spin-off or scheme of arrangement) with another
Person whereby such other Person acquires more than 50% of the
outstanding shares of Common Stock
(not including any shares of Common Stock held by the other Person or other
Persons making or party to, or associated or affiliated with the other Persons
making or party to, such stock or share purchase agreement or other
business combination) (each a “Fundamental Transaction”),
then, upon any subsequent exercise of
this Warrant, the Holder shall have the
right to receive, for each Warrant Share that would have been issuable upon
such exercise immediately prior to the occurrence of such Fundamental
Transaction, at the option of the Holder (without regard to any limitation in Section
2(e) on the exercise of this Warrant), the
number of shares of Common Stock of the successor or acquiring corporation or
of the Company, if it is the surviving corporation, and any additional
consideration (the “Alternate Consideration”) receivable as a result of such Fundamental Transaction
by a holder of the number of shares of Common Stock for which this Warrant is
exercisable immediately prior to such Fundamental Transaction (without
regard to any limitation in Section 2(e) on the exercise of this Warrant).  For
purposes of any such exercise, the determination of the Exercise Price shall be
appropriately adjusted to apply to such Alternate Consideration based on the
amount of Alternate Consideration issuable in respect of one share of Common
Stock in such Fundamental Transaction, and the Company shall apportion the
Exercise Price among the Alternate Consideration in a reasonable manner
reflecting the relative value of any different components of the Alternate
Consideration.  If holders of Common
Stock are given any choice as to the securities, cash or property to be
received in a Fundamental Transaction, then the Holder shall be given the same
choice as to the Alternate Consideration it receives upon any exercise of this
Warrant following such Fundamental Transaction. 
The Company shall cause any successor entity in a Fundamental
Transaction in which the Company is not the survivor (the “Successor Entity”)
to assume in writing all of the obligations of the Company under this Warrant
and the other Transaction Documents in accordance with the provisions of this Section
3(e) pursuant to written agreements in form and substance reasonably
satisfactory to the Holder and approved by the Holder (without unreasonable
delay) prior to such Fundamental Transaction and shall, at the option of the
holder of this Warrant, deliver to the Holder in exchange for this Warrant a
security of the Successor Entity evidenced by a written instrument
substantially similar in form and substance to this Warrant which is
exercisable for a corresponding number of shares of capital stock of such
Successor Entity (or its parent entity) equivalent to the shares of Common
Stock acquirable and receivable upon exercise of this Warrant (without regard
to any limitations on the exercise of this Warrant) prior to such Fundamental
Transaction, and with an exercise price which applies the exercise price
hereunder to such shares of capital stock (but taking into account the relative
value of the shares of Common Stock pursuant to such Fundamental Transaction
and the value of such shares of capital stock, such number of shares of capital
stock and such exercise price being for the purpose of protecting the economic
value of this Warrant immediately prior to the consummation of such Fundamental
Transaction), and which is reasonably satisfactory in form and substance to 

 

8

 

the
Holder. Upon the occurrence of any such Fundamental Transaction, the Successor
Entity shall succeed to, and be substituted for (so that from and after the
date of such Fundamental Transaction, the provisions of this Warrant and the
other Transaction Documents referring to the “Company” shall refer instead to
the Successor Entity), and may exercise every right and power of the Company
and shall assume all of the obligations of the Company under this Warrant and
the other Transaction Documents with the same effect as if such Successor
Entity had been named as the Company herein.

 

f)                                        Calculations. All calculations under this Section 3
shall be made to the nearest cent or the nearest 1/100th of a share, as the
case may be. For purposes of this Section 3, the number of shares of Common
Stock deemed to be issued and outstanding as of a given date shall be the sum
of the number of shares of Common Stock (excluding treasury shares, if any)
issued and outstanding.

 

g)                                     Notice to Holder.

 

i.                  Adjustment to Exercise Price. Whenever the Exercise Price is adjusted
pursuant to any provision of this Section 3, the Company shall promptly mail to
the Holder a notice setting forth the Exercise Price after such adjustment and
setting forth a brief statement of the facts requiring such adjustment.

 

ii.               Notice to Allow Exercise by Holder. If during the term in which this
Warrant may be exercised by the Holder (A) the Company shall declare a dividend
(or any other distribution in whatever form) on the Common Stock, (B) the
Company shall declare a special nonrecurring cash dividend on or a redemption
of the Common Stock, (C) the Company shall authorize the granting to all
holders of the Common Stock rights or warrants to subscribe for or purchase any
shares of capital stock of any class or of any rights, (D) the approval of any
stockholders of the Company shall be required in connection with any
reclassification of the Common Stock, any consolidation or merger to which the
Company is a party, any sale or transfer of all or substantially all of the
assets of the Company, or any compulsory share exchange whereby the Common
Stock is converted into other securities, cash or property, or (E) the Company
shall authorize the voluntary or involuntary dissolution, liquidation or
winding up of the affairs of the Company, then, in each case, the Company shall
cause to be mailed to the Holder at its last address as it shall appear upon
the Warrant Register of the Company, at least 20 calendar days prior to the
applicable record or effective date hereinafter specified, a notice stating (x)
the date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be
taken, the date as of which the holders of the Common Stock of record to be
entitled to such dividend, distributions, redemption, rights or warrants are to
be determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is

 

9

 

expected that holders of
the Common Stock of record shall be entitled to exchange their shares of the
Common Stock for securities, cash or other property deliverable upon such
reclassification, consolidation, merger, sale, transfer or share exchange; provided
that the failure to mail such notice or any defect therein or in the mailing
thereof shall not affect the validity of the corporate action required to be
specified in such notice.  To the extent
that any notice provided hereunder constitutes, or contains, material,
non-public information regarding the Company or any of the Subsidiaries, the
Company shall simultaneously disclose such information in compliance with
applicable securities laws.  The Holder
shall remain entitled to exercise this Warrant during the period commencing on
the date of such notice to the effective date of the event triggering such
notice except as may otherwise be expressly set forth herein.

 

Section 4.               Transfer of Warrant.

 

a)             Transferability. 
Subject to compliance with applicable securities laws, this Warrant and
all rights hereunder (including, without limitation, any registration rights)
are transferable, in whole or in part, upon surrender of this Warrant at the
principal office of the Company or its designated agent, together with a
written assignment of this Warrant substantially in the form attached hereto
duly executed by the Holder or its agent or attorney and funds sufficient to
pay any transfer taxes payable upon the making of such transfer.  Upon such surrender and, if required, such
payment, the Company shall execute and deliver a new Warrant or Warrants in the
name of the assignee or assignees, as applicable, and in the denomination or
denominations specified in such instrument of assignment, and shall issue to
the assignor a new Warrant evidencing the portion of this Warrant not so
assigned, and this Warrant shall promptly be cancelled.  The Warrant, if properly assigned in
accordance herewith, may be exercised by a new holder for the purchase of
Warrant Shares without having a new Warrant issued.

 

b)            New Warrants. This Warrant may be divided or
combined with other Warrants upon presentation hereof at the aforesaid office
of the Company, together with a written notice specifying the names and
denominations in which new Warrants are to be issued, signed by the Holder or
its agent or attorney.  Subject to
compliance with Section 4(a), as to any transfer which may be involved in
such division or combination, the Company shall execute and deliver a new
Warrant or Warrants in exchange for the Warrant or Warrants to be divided or
combined in accordance with such notice. All Warrants issued on transfers or
exchanges shall be dated the initial issuance date set forth on the first page of
this Warrant and shall be identical with this Warrant except as to the number
of Warrant Shares issuable pursuant thereto and the warrant number.

 

c)             Warrant Register. The Company shall register this
Warrant, upon records to be maintained by the Company for that purpose (the “Warrant
Register”), in the name of the record Holder hereof from time to time.  The Company may deem and treat the registered
Holder of this Warrant as the absolute owner hereof for the purpose of any 

 

10

 

exercise hereof or any
distribution to the Holder, and for all other purposes, absent actual notice to
the contrary.

 

Section 5.               Miscellaneous.

 

a)             No Rights as Stockholder Until Exercise.  This Warrant does not entitle the Holder to
any voting rights, dividends or other rights as a stockholder of the Company
prior to the exercise hereof as set forth in Section 2(d)(i).

 

b)            Loss, Theft, Destruction or Mutilation of Warrant.
The Company covenants that upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of this
Warrant or any stock certificate relating to the Warrant Shares, and in case of
loss, theft or destruction, of indemnity or security reasonably satisfactory to
it (which, in the case of the Warrant, shall not include the posting of any
bond), and upon surrender and cancellation of such Warrant or stock
certificate, if mutilated, the Company will make and deliver a new Warrant or
stock certificate of like tenor and dated as of such cancellation, in lieu of such
Warrant or stock certificate.

 

c)             Saturdays, Sundays, Holidays, etc.  If the last or appointed day for the taking
of any action or the expiration of any right required or granted herein shall
not be a Business Day, then, such action may be taken or such right may be
exercised on the next succeeding Business Day.

 

d)            Authorized Shares.

 

The Company covenants that, during the period the Warrant is
outstanding, it will reserve from its authorized and unissued Common Stock a
sufficient number of shares to provide for the issuance of the Warrant Shares
upon the exercise of any purchase rights under this Warrant.  The Company further covenants that its
issuance of this Warrant shall constitute full authority to its officers who
are charged with the duty of executing stock certificates to execute and issue
the necessary certificates for the Warrant Shares upon the exercise of the
purchase rights under this Warrant.  The
Company will take all such reasonable action as may be necessary to assure that
such Warrant Shares may be issued as provided herein without violation of any
applicable law or regulation, or of any requirements of the Trading Market upon
which the Common Stock may be listed. 
The Company covenants that all Warrant Shares which may be issued upon
the exercise of the purchase rights represented by this Warrant will, upon
exercise of the purchase rights represented by this Warrant and payment for
such Warrant Shares in accordance herewith, be duly authorized, validly issued,
fully paid and nonassessable and free from all taxes, liens and charges created
by the Company in respect of the issue thereof (other than taxes in respect of
any transfer occurring contemporaneously with such issue).

 

Except and to the extent as waived or consented to by
the Holder, the Company shall not by any action, including, without limitation,
amending its 

 

11

 

certificate of incorporation or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Warrant, but will at all
times in good faith assist in the carrying out of all such terms and in the
taking of all such actions as may be necessary or appropriate to protect the
rights of Holder as set forth in this Warrant against impairment.  Without limiting the generality of the
foregoing, the Company will (i) not increase the par value of any Warrant
Shares above the amount payable therefor upon such exercise immediately prior
to such increase in par value, (ii) take all such action as may be
necessary or appropriate in order that the Company may validly and legally
issue fully paid and nonassessable Warrant Shares upon the exercise of this
Warrant and (iii) use commercially reasonable efforts to obtain all such
authorizations, exemptions or consents from any public regulatory body having
jurisdiction thereof, as may be, necessary to enable the Company to perform its
obligations under this Warrant.

 

Before taking any action which would result in an
adjustment in the number of Warrant Shares for which this Warrant is
exercisable or in the Exercise Price, the Company shall obtain all such
authorizations or exemptions thereof, or consents thereto, as may be necessary
from any public regulatory body or bodies having jurisdiction thereof.

 

e)             Jurisdiction. All questions concerning the
construction, validity, enforcement and interpretation of this Warrant shall be
determined in accordance with the provisions of the Purchase Agreement.

 

f)             Restrictions. 
The Holder acknowledges that the Warrant Shares acquired upon the
exercise of this Warrant, if not registered, and the Holder does not utilize
cashless exercise, will have restrictions upon resale imposed by state and
federal securities laws.

 

g)            Nonwaiver and Expenses.  No course of dealing or any delay or failure
to exercise any right hereunder on the part of Holder shall operate as a waiver
of such right or otherwise prejudice Holder’s rights, powers or remedies.  Without limiting any other provision of this
Warrant or the Purchase Agreement, if the Company willfully and knowingly fails
to comply with any provision of this Warrant, which results in any material
damages to the Holder, the Company shall pay to Holder such amounts as shall be
sufficient to cover any costs and expenses including, but not limited to,
reasonable attorneys’ fees, including those of appellate proceedings, incurred
by Holder in collecting any amounts due pursuant hereto or in otherwise
enforcing any of its rights, powers or remedies hereunder.

 

h)            Notices. 
Any notice, request or other document required or permitted to be given
or delivered to the Holder by the Company shall be delivered in accordance with
the notice provisions of the Purchase Agreement.

 

12

 

i)              Limitation of Liability.  No provision hereof, in the absence of any
affirmative action by Holder to exercise this Warrant to purchase Warrant
Shares, and no enumeration herein of the rights or privileges of Holder, shall
give rise to any liability of Holder for the purchase price of any Common Stock
or as a stockholder of the Company, whether such liability is asserted by the
Company or by creditors of the Company.

 

j)              Remedies. 
The Holder, in addition to being entitled to exercise all rights granted
by law, including recovery of damages, will be entitled to specific performance
of its rights under this Warrant.  The
Company agrees that monetary damages would not be adequate compensation for any
loss incurred by reason of a breach by it of the provisions of this Warrant and
hereby agrees to waive and not to assert the defense in any action for specific
performance that a remedy at law would be adequate.

 

k)             Successors and Assigns.  Subject to applicable securities laws, this
Warrant and the rights and obligations evidenced hereby shall inure to the
benefit of and be binding upon the successors and permitted assigns of the
Company and the successors and permitted assigns of Holder.  The provisions of this Warrant are intended
to be for the benefit of any Holder from time to time of this Warrant and shall
be enforceable by the Holder or holder of Warrant Shares.

 

l)              Amendment. 
This Warrant may be modified or amended or the provisions hereof waived
with the written consent of the Company and Holders holding Warrants at least
equal to 67% of the Warrant Shares issuable upon exercise of all then
outstanding Warrants issued under the Purchase Agreement.

 

m)            Severability. 
Wherever possible, each provision of this Warrant shall be interpreted
in such manner as to be effective and valid under applicable law, but if any
provision of this Warrant shall be prohibited by or invalid under applicable
law, such provision shall be ineffective to the extent of such prohibition or
invalidity, without invalidating the remainder of such provisions or the
remaining provisions of this Warrant.

 

n)            Headings. 
The headings used in this Warrant are for the convenience of reference only
and shall not, for any purpose, be deemed a part of this Warrant.

 

********************

 

(Signature
Pages Follow)

 

13

 

IN WITNESS WHEREOF, the
Company has caused this Warrant to be executed by its officer thereunto duly
authorized as of the date first above indicated.

 

 

	
   

  	
  BIOSANTE PHARMACEUTICALS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  	
  Title:

  
				

 

14

 

NOTICE OF EXERCISE

 

TO:  BIOSANTE PHARMACEUTICALS,
INC.

 

(1)   The undersigned hereby elects to purchase
                
Warrant Shares of the Company pursuant to the terms of the attached Warrant
(only if exercised in full), and tenders herewith payment of the exercise price
in full, together with all applicable transfer taxes, if any.

 

(2)   Payment shall take the form of (check
applicable box):

 

[  ] in lawful money of the United States; or

 

[ ] [if permitted] the
cancellation of such number of Warrant Shares as is necessary, in accordance
with the formula set forth in subsection 2(c), to exercise this Warrant with
respect to the maximum number of Warrant Shares purchasable pursuant to the
cashless exercise procedure set forth in subsection 2(c).

 

(3)   Please issue a certificate or certificates
representing said Warrant Shares in the name of the undersigned or in such
other name as is specified below:

 

 

 

The Warrant Shares shall be delivered to the following DWAC Account
Number or by physical delivery of a certificate to:

 

 

 

[SIGNATURE OF
HOLDER]

 

	
  Name of
  Investing Entity:

  	
   

  
	
  Signature
  of Authorized Signatory of Investing Entity:

  	
   

  
	
  Name of
  Authorized Signatory:

  	
   

  
	
  Title of
  Authorized Signatory:

  	
   

  
	
  Date:

  	
   

  
						

 

 

ASSIGNMENT FORM

 

(To assign the foregoing warrant, execute

this form and supply required information. 

Do not use this form to exercise the warrant.)

 

FOR VALUE RECEIVED,
[        ] all of or
[              ]
shares of the foregoing Warrant and all rights evidenced thereby are hereby
assigned to

 

whose address is

 

.

 

 

Dated: 
                            ,

 

	
   

  	
  Holder’s
  Signature:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Holder’s
  Address:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  

 

 

	
  Signature
  Guaranteed:

  	
   

  	
   

  

 

 

NOTE:  The signature to this
Assignment Form must correspond with the name as it appears on the face of
the Warrant, without alteration or enlargement or any change whatsoever, and
must be guaranteed by a bank or trust company. 
Officers of corporations and those acting in a fiduciary or other
representative capacity should file proper evidence of authority to assign the
foregoing Warrant.

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