Document:

Exhibit 10.16

 

AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT

 

THIS
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT is made as
of the 31st day of December, 2004 (“Effective Date”)
by and between FLEET CAPITAL CORPORATION (“Lender”), a Rhode Island corporation with an office at 200
Glastonbury Boulevard, Glastonbury, Connecticut 06033; IWT TESORO CORPORATION, a Nevada
corporation with its chief executive office and principal place of business at
Suite 10, 191 Post Road West, Westport, Connecticut 06880; and INTERNATIONAL WHOLESALE TILE, INC., a
Florida corporation with its chief executive office and principal place of
business at 3500 S.W. 42nd Avenue, Palm City, Florida 34990 (collectively the “Borrower”), Capitalized terms used in this Agreement have
the meanings assigned to them in Appendix A,
General Definitions. Accounting terms not otherwise specifically defined herein
shall be construed in accordance with GAAP
consistently applied.

 

WHEREAS,
Lender and Borrower entered into a Loan and Security Agreement, dated September
10, 2003, as amended by that certain First Amendment to Loan and Security
Agreement dated February 19, 2004, as further amended by that certain Second
Amendment to Loan and Security Agreement dated March 22, 2004, and as further
amended by that certain Third Amendment to Loan and Security Agreement dated
October 7, 2004 (collectively the “Loan Agreement”); and

 

WHEREAS,
Lender and Borrower desire to further amend the Loan Agreement, to, among other
things, increase the Total Credit Facility;

 

NOW,
THEREFORE, for good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, Lender and Borrower agree to amend and restate
the Loan Agreement as follows:

 

SECTION 1.                                                                            CREDIT FACILITY

 

Subject to the terms and
conditions of, and in reliance upon the representations and warranties made in,
this Agreement and the other Loan Documents, Lender agrees to make a Total
Credit Facility of up to $25,000,000 available upon Borrower’s request
therefor, as follows:

 

1.1                               Revolving
Credit Loans.

 

1.1.1                     Loans
and Reserves.  Lender agrees, for
so long as no Default or Event of Default exists, to make Revolving Credit
Loans to Borrower from time to time, as requested by Borrower in the manner set
forth in subsection 3.1.1 hereof, up to a
maximum principal amount at any time outstanding equal to the Borrowing Base at
such time minus the LC Amount and reserves, if any.  Lender shall have the right to establish
reserves in such amounts, and with respect to such matters, as Lender shall deem
necessary or appropriate, against the amount of Revolving Credit Loans which
Borrower may otherwise request under this subsection 1.1.1,
including, without limitation, with respect to (i)
price adjustments, damages, unearned discounts, returned products or other
matters for which credit memoranda are issued in the ordinary course of
Borrower’s business; (ii) shrinkage,
spoilage and obsolescence of Inventory; (iii) slow
moving Inventory; (iv) other sums
chargeable against Borrower’s Loan Account as Revolving Credit Loans under any
section of this Agreement; (v) amounts
owing by Borrower to any Person to the extent secured by a Lien on, or trust
over, any Property of Borrower; and (vi) such other
matters, events, conditions or contingencies as to which Lender, in its
reasonable credit judgment, determines reserves should be established from time
to time hereunder. The Revolving Credit Loans shall be further evidenced by the
Revolving Credit Note and shall be secured by all of the Collateral.

 

1.1.2                     Use
of Proceeds.  The Revolving
Credit Loans shall be used solely for the satisfaction of existing Indebtedness
of Borrower to Congress Financial Corporation and for Borrower’s general
working capital needs in a manner consistent with the provisions of this Agreement
and all applicable laws.

 

1.1.3                     Joint Facility.  Borrower acknowledges and agrees that the
credit facility made pursuant to this Agreement is a joint credit facility
extended by Lender for the joint needs of IWT Tesoro Corporation and
International Wholesale Tile, Inc. Each of IWT Tesoro
Corporation and International Wholesale Tile, Inc.

 

 

acknowledge
and agree that their liability under this Agreement, the Revolving Credit Note
and the other Loan Documents in respect of the Obligations is joint and several.  IWT Tesoro Corporation and International
Wholesale Tile, Inc. each acknowledge and agree that each of them receives a
benefit from the extension of credit to the other as contemplated in this
Agreement and that in making Revolving Credit Loans under this Agreement,
Lender has relied upon the agreements of IWT Tesoro Corporation and
International Wholesale Tile, Inc. contained herein, including without
limitation their agreements to be jointly and severally liable for the
repayment of the Obligations.

 

1.2                               Letters
of Credit; LC Guaranties.  Lender
agrees, for so long as no Default or Event of Default exists and if requested
by Borrower, to (i) issue its, or cause to be
issued its Affiliate’s, Letters of Credit for the account of Borrower or (ii) execute LC Guaranties by which Lender or its Affiliate
shall guaranty the payment or performance by Borrower of its reimbursement
obligations with respect to Letters of Credit and letters of credit issued for
Borrower’s account by other Persons in support of Borrower’s obligations (other
than obligations for the repayment of Money Borrowed), provided that the
LC Amount at any time shall not exceed $8,000,000. No Letter of Credit or LC
Guarantee may have an expiration date that is later than thirty (30) days prior
to the last day of the Original Term or the then applicable Original Term. Any amounts paid by
Lender under any LC Guaranty or in connection with any Letter of Credit shall
be treated as Revolving Credit Loans, shall be secured by all of the Collateral
and shall bear interest and be payable at the same rate and in the same manner
as Revolving Credit Loans.

 

1.3                               Overadvance
Facility.  Notwithstanding
the provisions of Section 1.1.1.  hereof,
Borrower may from time to time request Revolving Credit Loans which exceed the
available Borrowing Base, but which, in addition to all Revolving Loans and
Obligations does not exceed the Total Credit Facility.  Lender agrees, for so long as no Default or
Event of Default exists and if requested by Borrower until the earlier of the
date of receipt by Borrower of the Equity Injection or June 30, 2005, to permit
an Overadvance of not more than $500,000 (“Overadvance Limit”).  Borrower agrees that, notwithstanding the
existence of any Availability, the first $500,000 extended to Borrower above
the outstanding balance after the Effective Date will be deemed an Overadvance.

 

SECTION 2.                                                                            INTEREST,  FEES AND CHARGES

 

2.1                               Interest.

 

2.1.1                     Rates
of Interest.  Interest shall
accrue on the Revolving Credit Loans in accordance with the terms of the
Revolving Credit Note. Interest shall accrue on the principal amount of the
Base Rate Advances outstanding at the end of each day at a fluctuating rate per
annum equal to 0.50% plus the Base Rate. Interest shall accrue on the
principal amount of each of the LIBOR Advances outstanding at the end of each
day at a fixed rate per annum equal to 3.00% plus the LIBOR for the applicable
Interest Period. The rate of interest applicable to Base Rate Advances shall
increase or decrease by an amount equal to any increase or decrease in the Base
Rate, effective as of the opening of business on the day that any such change
in the Base Rate occurs.  Interest shall
accrue on the principal amount of the Base Rate Overadvance outstanding at the
end of each day at a fluctuating rate per annum equal to 2.00% plus the
Base Rate. Interest shall accrue on the principal amount of each of the LIBOR
Overadvance outstanding at the end of each day at a fixed rate per annum equal
to 4.50% plus the LIBOR for the applicable Interest Period.

 

2.1.2                     Default
Rate of Interest.  Upon and after
the occurrence of an Event of Default, and during the continuation thereof, the
principal amount of all Loans shall bear interest at a rate per annum equal to
5% above the interest rate otherwise applicable thereto (the “Default Rate”).

 

2.1.3                     Maximum
Interest.  In no event whatsoever
shall the aggregate of all amounts deemed interest under the Revolving Credit
Note and charged or collected pursuant to the terms of this Agreement exceed
the highest rate permissible under any law which a court of competent
jurisdiction shall, in a final determination, deem applicable hereto. If any
provisions of this Agreement are in contravention of any such law, such
provisions shall be deemed amended to conform thereto.

 

2.2                               Computation of Interest and Fees.  Interest, Letter of Credit and LC Guaranty
fees and unused line fees and collection charges hereunder shall be calculated
daily and shall be computed on the actual number of

 

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days elapsed over a year of 360
days. For the purpose of computing interest hereunder, all items of payment
received by Lender shall be deemed applied by Lender on account of the
Obligations (subject to final payment of such items) on the second Business Day
after receipt by Lender of such items in Lender’s account located in Hartford,
Connecticut.

 

2.3                               Closing Fee. 
Borrower has paid to Lender a closing fee of $85,000.00, which was fully
earned and nonrefundable on the Closing Date.  Borrower shall pay an additional closing fee
of $25,000.00 which shall be fully earned and nonrefundable on the Effective
Date.

 

2.4                               Letter
of Credit and LC Guaranty Fees. 
Borrower shall pay to Lender:

 

(i)                                    for standby Letters
of Credit and LC Guaranties of standby Letters of Credit, 3% per annum of the
aggregate face amount of such Letters of Credit and LC Guaranties outstanding
from time to time during the term of this Agreement, plus all normal and
customary charges associated with the issuance thereof, which fees and charges
shall be deemed fully earned upon issuance of each such Letter of Credit or LC
Guaranty, shall be due and payable on the first Business Day of each month and
shall not be subject to rebate or proration upon the termination of this
Agreement for any reason; and

 

(ii)                                for documentary Letters
of Credit and LC Guaranties of documentary Letters of Credit, a fee equal to
..5% per annum of the face amount of each such Letter of Credit or LC Guaranty,
payable upon the issuance of such Letter of Credit or execution of such LC
Guaranty and an additional fee equal to .5% per annum of the face amount of
such Letter of Credit or LC Guaranty payable upon each renewal thereof and each
extension thereof plus the normal and customary charges associated with
the issuance and administration of each such Letter of Credit or LC Guaranty
(which fees and charges shall be fully earned upon issuance, renewal or
extension (as the case may be) of each such Letter of Credit or LC Guaranty,
shall be due and payable on the first Business Day of each month, and shall not
be subject to rebate or proration upon the termination of this Agreement for
any reason).

 

2.5                               Unused
Line Fee.  Borrower shall pay to
Lender a fee equal to 0.375% per annum of the average monthly amount of the
unused portion of the Total Credit Facility. The unused line fee shall be
payable monthly in arrears on the first day of each calendar month hereafter.

 

2.6                               Collection
Charges.  If items of payment are
received by Lender at a time when there are no Revolving Credit Loans
outstanding, such items of payment shall be subject to a collection charge
equal to any and all out-of-pocket costs incurred by Lender, which collection
charges shall be payable on the first Business Day of each month.

 

2.7                               Audit and Appraisal Fees.  Borrower shall pay to Lender audit and
appraisal fees in accordance with Lender’s current schedule of fees in effect
from time to time in connection with audits and appraisals of Borrower’s books
and records and such other matters as Lender shall deem appropriate, plus all
out-of-pocket expenses incurred by Lender in connection with such audits and
appraisals; provided, that Borrower shall not be obligated to pay any
such audit fees in excess of $850.00 per day, per person conducting such audit
or appraisal, plus any and all related expenses, during any fiscal year in
which no Default or Event of Default shall have occurred. Audit fees shall be
payable on the first day of the month following the date of issuance by Lender
of a request for payment thereof to Borrower.

 

2.8                               Reimbursement
of Expenses.  If, at any time or
times regardless of whether or not an Event of Default then exists, Lender or
any Participating Lender incurs legal or accounting expenses or any other costs
or out-of-pocket expenses in connection with (i)
the negotiation and preparation of this Agreement or any of the other Loan
Documents, any amendment of or modification of this Agreement or any of the
other Loan Documents, or any sale or attempted sale of any interest herein to a
Participating Lender; (ii) the
administration of this Agreement or any of the other Loan Documents and the
transactions contemplated hereby and thereby; (iii)
any litigation, contest, dispute, suit, proceeding or action (whether
instituted by Lender, Borrower or any other Person) in any way relating to the
Collateral, this Agreement or any of the other Loan Documents or Borrower’s
affairs; (iv) any attempt to

 

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enforce any rights of Lender or any Participating Lender against
Borrower or any other Person which may be obligated to Lender by virtue of this
Agreement or any of the other Loan Documents, including, without limitation,
the Account Debtors; or (v) any attempt
to inspect, verify, protect, preserve, restore, collect, sell, liquidate or
otherwise dispose of or realize upon the Collateral; then all such legal and
accounting expenses, other costs and out of pocket expenses of Lender shall be
charged to Borrower. All amounts chargeable to Borrower under this Section 2.8 shall be Obligations secured by all of the
Collateral, shall be payable on demand to Lender or to such Participating
Lender, as the case may be, and shall bear interest from the date such demand
is made until paid in full at the rate applicable to Base Rate Advances from
time to time. Borrower shall also reimburse Lender for expenses incurred by
Lender in its administration of the Collateral to the extent and in the manner
provided in Section 6 hereof.

 

2.9                               Bank
Charges.  Borrower shall pay to
Lender, on demand, any and all fees, costs or expenses which Lender or any
Participating Lender pays to a bank or other similar institution (including,
without limitation, any fees paid by Lender to any Participating Lender)
arising out of or in connection with (i) the
forwarding to Borrower or any other Person on behalf of Borrower, by Lender or
any Participating Lender, of proceeds of loans made by Lender to Borrower
pursuant to this Agreement and (ii) the
depositing for collection, by Lender or any Participating Lender, of any check
or item of payment received or delivered to Lender or any Participating Lender
on account of the Obligations.

 

SECTION 3.                                                                            LOAN
ADMINISTRATION

 

3.1                               Manner
of Borrowing Revolving Credit Loans. 
Borrowings under the credit facility established pursuant to Section 1 hereof shall be as follows:

 

3.1.1                     Loan
Requests.  A request for a
Revolving Credit Loan shall be made, or shall be deemed to be made, in the
following manner: (i) Borrower
may give Lender notice of its intention to borrow, in which notice Borrower
shall specify the amount of the proposed borrowing and the proposed borrowing
date, no later than 11:00 a.m. Connecticut time on the proposed borrowing date,
provided, however, that no such request may be made at a time when there
exists a Default or an Event of Default; and (ii)
the becoming due of any amount required to be paid under this Agreement,
whether as interest or for any other Obligation, shall be deemed irrevocably to
be a request for a Revolving Credit Loan on the due date in the amount required
to pay such interest or other Obligation. As an accommodation to Borrower,
Lender may permit facsimile or electronic requests for loans and electronic
transmittal of instructions, authorizations, agreements or reports to Lender by
Borrower. Unless Borrower specifically directs Lender in writing not to accept
or act upon facsimile or electronic communications from Borrower, Lender shall
have no liability to Borrower for any loss or damage suffered by Borrower as a
result of Lender’s honoring of any requests, execution of any instructions,
authorizations or agreements or reliance on any reports communicated to it by
facsimile or electronically and purporting to have been sent to Lender by
Borrower and Lender shall have no duty to verify the origin of any such
communication or the authority of the person sending it.

 

3.1.2                     Disbursement.  Borrower hereby irrevocably authorizes Lender
to disburse the proceeds of each Revolving Credit Loan requested, or deemed to
be requested, pursuant to this subsection 3.1.2
as follows: (i) the proceeds of each Revolving
Credit Loan requested under subsection 3.1.1(i)
shall be disbursed by Lender in lawful money of the United States of America in
immediately available funds, in the case of the initial borrowing, in
accordance with the terms of the written disbursement letter from Borrower, and
in the case of each subsequent borrowing, by wire transfer to such bank account
as may be agreed upon by Borrower and Lender from time to time or elsewhere if
pursuant to a written direction from Borrower; and (ii)
the proceeds of each Revolving Credit Loan requested under subsection
3.1.1(ii) shall be disbursed by Lender by way of direct payment of
the relevant interest or other Obligation.

 

3.1.3                     Authorization.  Borrower hereby irrevocably authorizes
Lender, in Lender’s sole discretion, to advance to Borrower, and to charge to
Borrower’s Loan Account hereunder as a Base Rate Advance, a sum sufficient to
pay all interest accrued on the Obligations during the immediately preceding
month and to pay all costs, fees and expenses at any time owed by Borrower to
Lender hereunder.

 

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3.1.4                     LIBOR
Advances.  Notwithstanding the
provisions of subsection 3.1.1, in the event Borrower desires to obtain a LIBOR
Advance or LIBOR Overadvance, Borrower shall give Lender prior, written,
irrevocable notice no later than 11:00 A.M. Hartford, Connecticut Time on the
2nd Business Day prior to the requested borrowing date specifying (i) Borrower’s
election to obtain a LIBOR Advance or LIBOR Overadvance, (ii) the date of the
proposed borrowing (which shall be a Business Day) and (iii) the amount to be
borrowed, which amount shall be in a minimum principal amount of $1,000,000 and
may increase in integral multiples of $250,000. In no event shall Borrower be
permitted to have outstanding at any one time LIBOR Advances or LIBOR
Overadvances with more than three (3) different Interest Periods.

 

3.1.5                     Conversion of Base Rate Advances.  Provided that no Default has occurred which
is then continuing, Borrower may, on any Business Day, convert any Base Rate
Advance or Base Rate Overadvance into a LIBOR Advance or LIBOR Overadvance,
respectively. If Borrower desires to convert a Base Rate Advance or Base Rate
Overadvance, Borrower shall give Lender not less than two (2) Business Days’
prior written notice (prior to 11:00 A.M. Hartford, Connecticut Time on such
Business Day), specifying the date of such conversion and the amount to be converted.
Each conversion into or conversion of a LIBOR Advance or LIBOR Overadvance
shall be in a minimum principal amount of $1,000,000 and may increase in
integral multiples of $250,000 in excess thereof. After giving effect to any
conversion of Base Rate Advances to LIBOR Advances or Base Rate Overadvances to
LIBOR Overadvances, Borrower shall not be permitted to have outstanding at any
one time LIBOR Advances and LIBOR Overadvances with more than three (3)
different Interest Periods.

 

3.1.6                     Continuation
of LIBOR Advances.  Borrower
shall have the right on two (2) Business Days’ prior irrevocable written notice
given to Lender by Borrower (prior to 11:00 A.M. Hartford, Connecticut Time on
such Business Day), subject to the provisions hereof, to continue any LIBOR
Advance into a subsequent Interest Period of the same or a different permitted
duration, in each case subject to the satisfaction of the following conditions:

 

(i)                                    in
the case of a continuation of less than all LIBOR Advances, the LIBOR Advances
continued shall each be in a minimum principal amount of $1,000,000 and may
increase in integral multiples of $250,000; and

 

(ii)                                no LIBOR Advance (or portion thereof) may be continued as a
LIBOR Advance if a Default has occurred which is then continuing or if, after
giving effect to such continuation, Borrower shall have outstanding more than
three (3) separate LIBOR Advances in the aggregate.

 

If Borrower shall fail to
give timely notice of its election to continue any LIBOR Advance or portion
thereof as provided above, or if such continuation shall not be permitted, such
LIBOR Advance or portion thereof, unless such LIBOR Advance shall be repaid,
shall automatically be converted into a Base Rate Advance at the end of the
Interest Period then in effect with respect to such LIBOR Advance.

 

3.1.7                     Inability
to Make LIBOR Advances. 
Notwithstanding any other provision hereof, if any applicable law,
treaty, regulation or directive, or any change therein or in the interpretation
or application thereof, shall make it unlawful for Lender (for purposes of this
subsection 3.1.7, the term “Lender” shall include the office or branch where Lender or
any corporation or bank then controlling any Lender makes or maintains any
LIBOR Advances) to make or maintain its LIBOR Advances or LIBOR Overadvances,
or if with respect to any Interest Period, Lender is unable to determine the
LIBOR relating thereto, or adverse or unusual conditions in, or changes in
applicable law relating to, the London interbank market make it, in the reasonable
judgment of Lender, impracticable to fund therein any of the LIBOR Advances, or
make the projected LIBOR unreflective of the actual costs of funds therefor to
Lender, the obligation of Lender to make LIBOR Advances or LIBOR Overadvances
hereunder shall forthwith be suspended during the pendency of such
circumstances and Borrower shall, if any affected LIBOR Advances or LIBOR
Overadvances are then outstanding, promptly upon request from Lender, convert
such affected LIBOR Advances or LIBOR Overadvances into Base Rate Advances.

 

3.2                               Payments.  Except where evidenced by notes or other
instruments issued or made by Borrower to Lender specifically containing
payment provisions which are in conflict with this Section 3.2
(in which event the

 

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conflicting provisions of said
notes or other instruments shall govern and control), the Obligations shall be
payable as follows:

 

3.2.1                     Principal.  Principal payable on account of Revolving
Credit Loans shall be payable by Borrower to Lender immediately upon the
earliest of (i) the receipt by Lender or
Borrower of any proceeds of any of the Collateral to the extent of said
proceeds, (ii) the occurrence of an Event of
Default in consequence of which Lender elects to accelerate the maturity and
payment of the Obligations, or (iii)
termination of this Agreement pursuant to Section 4
hereof; provided, however, that if an Overadvance shall exist at
any time, Borrower shall, on demand, repay the Overadvance. Each payment (including
principal prepayment) by Borrower on account of principal of the Revolving
Credit Loans shall be applied first to Base Rate Advances, then to LIBOR
Advances.

 

3.2.2                     Interest.  Interest accrued on the Revolving Credit
Loans shall be due on the earliest of (i) the first
calendar day of each month (for the immediately preceding month), computed
through the last calendar day of the preceding month, (ii)
the occurrence of an Event of Default in consequence of which Lender elects to
accelerate the maturity and payment of the Obligations or (iii)
termination of this Agreement pursuant to Section 4
hereof.

 

3.2.3                     Costs, Fees and Charges.  Costs, fees and charges payable pursuant to
this Agreement shall be payable by Borrower as and when provided in Section 2 hereof, to Lender or to any other Person
designated by Lender in writing.

 

3.2.4                     Other Obligations.  The balance of the Obligations requiring the
payment of money, if any, shall be payable by Borrower to Lender as and when
provided in this Agreement, the Other Agreements or the Security Documents, or
on demand, whichever is later.

 

3.2.5                     Prepayment of LIBOR Advances.  Borrower may prepay a LIBOR Advance only upon
at least three (3) Business Days prior written notice to Lender (which notice
shall be irrevocable), and any such prepayment shall occur only on the last day
of the Interest Period for such LIBOR Advance. Borrower shall pay to Lender,
upon request of Lender, such amount or amounts as shall be sufficient (in the
reasonable opinion of Lender) to compensate Lender for any loss, cost, or
expense incurred as a result of:  (i) any payment of a LIBOR Advance on a date other than the
last day of the Interest Period for such Loan; (ii)
any failure by Borrower to borrow a LIBOR Advance on the date specified by Borrower’s
written notice; or (iii) any failure by Borrower to pay a LIBOR Advance on the
date for payment specified in Borrower’s written notice. Without limiting the
foregoing, Borrower shall pay to Lender a “yield maintenance fee” in an amount
computed as follows:  the current rate
for United States Treasury securities (bills on a discounted basis shall be
converted to a bond equivalent) with a maturity date closest to the Interest
Period chosen pursuant to the LIBOR Advance as to which the prepayment is made,
shall be subtracted from the LIBOR in effect at the time of prepayment. If the
result is zero or a negative number, there shall be no yield maintenance fee.
If the result is a positive number, then the resulting percentage shall be
multiplied by the amount of the principal balance being prepaid. The resulting
amount shall be divided by 360 and multiplied by the number of days remaining
in the Interest Period chosen pursuant to the LIBOR Advance as to which the
prepayment is made. Said amount shall be reduced to present value calculated by
using the above referenced United States Treasury securities rate and the
number of days remaining in the term chosen pursuant to the LIBOR Advance as to
which prepayment is made. The resulting amount shall be the yield maintenance
fee due to Lender upon the prepayment of a LIBOR Advance. If by reason of an
Event of Default, Lender elects to declare the Obligations to be immediately
due and payable, then any yield maintenance fee with respect to a LIBOR Advance
shall become due and payable in the same manner as though the Borrower had
exercised such right of prepayment.

 

3.3                               Mandatory
Prepayments.

 

3.3.1                     Proceeds
of Sale, Loss, Destruction or Condemnation of Collateral.  Except as provided in subsection
6.4.2 hereof, if Borrower sells any Collateral or, if any of the
Collateral is lost or destroyed or taken by condemnation, Borrower shall pay to
Lender, unless otherwise agreed by Lender, as and when

 

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received by Borrower and as a mandatory prepayment of the Revolving
Loan, a sum equal to the proceeds (including insurance payments) received by
Borrower from such sale, loss, destruction or condemnation.

 

3.4                               Application
of Payments and Collections.  All
items of payment received by Lender by 12:00 noon, Connecticut time, on any
Business Day shall be deemed received on that Business Day. All items of
payment received after 12:00 noon, Connecticut time, on any Business Day shall
be deemed received on the following Business Day. Borrower irrevocably waives
the right to direct the application of any and all payments and collections at
any time or times hereafter received by Lender from or on behalf of Borrower,
and Borrower does hereby irrevocably agree that Lender shall have the
continuing exclusive right to apply and reapply any and all such payments and
collections received at any time or times hereafter by Lender or its agent
against the Obligations, in such manner as Lender may deem advisable,
notwithstanding any entry by Lender upon any of its books and records. If as
the result of collections of Accounts as authorized by subsection
6.2.6 hereof a credit balance exists in the Loan Account, such
credit balance shall not accrue interest in favor of Borrower, but shall be
available to Borrower at any time or times for so long as no Default or Event
of Default exists.

 

3.5                               All
Loans to Constitute One Obligation. 
The Loans and LC Guaranties shall constitute one general Obligation of
Borrower, and shall be secured by Lender’s Lien upon all of the Collateral.

 

3.6                               Loan
Account.  Lender shall enter all
Loans as debits to the Loan Account and shall also record in the Loan Account
all payments made by Borrower on any Obligations and all proceeds of Collateral
which are finally paid to Lender, and may record therein, in accordance with
customary accounting practice, other debits and credits, including interest and
all charges and expenses properly chargeable to Borrower.

 

3.7                               Statements
of Account.  Lender will account
to Borrower monthly with a statement of Loans, charges and payments made
pursuant to this Agreement, and such account rendered by Lender shall be deemed
final, binding and conclusive upon Borrower unless Lender is notified by
Borrower in writing to the contrary within thirty (30) days of the date each
accounting is mailed to Borrower. Such notice shall only be deemed an objection
to those items specifically objected to therein.

 

3.8                               Increased
Costs.  If any law or any
governmental or quasi-governmental rule, regulation, policy, guideline or
directive (whether or not having the force of law) adopted after the date of
this Agreement and having general applicability to all banks within the
jurisdiction in which Lender operates (excluding, for the avoidance of doubt,
the effect of and phasing in of capital requirements or other regulations or
guidelines passed prior to the date of this Agreement), or any interpretation
or application thereof by any governmental authority charged with the
interpretation or application thereof, or the compliance of Lender therewith,
shall:

 

(i)                                    (1)                                 subject
Lender to any tax with respect to this Agreement (other than any tax based on
or measured by net income or otherwise in the nature of a net income tax), or (2) change the basis of taxation of payments to Lender of
principal, fees, interest or any other amount payable hereunder or under any
Loan Documents (other than in respect of any tax based on or measured by net
income or otherwise in the nature of a net income tax;

 

(ii)                                impose,
modify or hold applicable any reserve (except any reserve taken into account in
the determination of the applicable LIBOR), special deposit, assessment or
similar requirement against assets held by, or deposits in or for the account
of, advances or loans by, or other credit extended by, any office of Lender,
including (without limitation) pursuant to Regulation D of the Board of
Governors of the Federal Reserve System; or

 

(iii)                            impose on Lender or the London interbank market any other
condition with respect to any Loan Document;

 

and the result of any of
the foregoing is to increase the cost to Lender of making, renewing or
maintaining Loans hereunder by an amount that Lender deems to be material or to
reduce the amount of any payment (whether of principal, interest or otherwise)
in respect of any of the Loans by an amount that Lender deems to be material,
then, in any such case, Borrower shall pay Lender, upon demand and
certification not later than sixty (60) days following

 

7

 

its receipt of notice of
the imposition of such increased costs, such additional amount as will
compensate Lender for such additional cost or such reduction, as the case may
be, to the extent Lender has not otherwise been compensated, with respect to a
particular Loan, for such increased cost as a result of an increase in the Base
Rate or the LIBOR. An officer of Lender shall determine the amount of such
additional cost or reduced amount using reasonable averaging and attribution
methods and shall certify the amount of such additional cost or reduced amount
to Borrower, which certification shall include a written explanation of such
additional cost or reduction to Borrower. 
Such certification shall be conclusive absent manifest error. If Lender
claims any additional cost or reduced amount pursuant to this Section 3.8, then Lender shall use reasonable efforts
(consistent with legal and regulatory restrictions) to designate a different
lending office or to file any certificate or document reasonably requested by
Borrower if the making of such designation or filing would avoid the need for,
or reduce the amount of, any such additional cost or reduced amount and would
not, in the sole discretion of Lender, be otherwise disadvantageous to Lender.

 

3.9                               Basis
for Determining Interest Rate Inadequate or Unfair.  In the event that Lender shall have
determined that:

 

(i)                                    reasonable means do not exist for ascertaining the LIBOR for
any Interest Period; or

 

(ii)                                Dollar
deposits in the relevant amount and for the relevant maturity are not available
in the London interbank market with respect to a proposed LIBOR Advance, or a
proposed conversion of a Base Rate Advance into a LIBOR Advance; then

 

Lender shall give
Borrower prompt written, telephonic or electronic notice of the determination
of such effect. If such notice is given, (i) any such requested LIBOR Advance
shall be made as a Base Rate Advance, unless Borrower shall notify Lender no
later than 10:00 A.M. (Hartford, Connecticut Time) two (2) Business Days prior to
the date of such proposed borrowing that the request for such borrowing shall
be canceled or made as an unaffected type of LIBOR Advance, and (ii) any Base
Rate Advance which was to have been converted to an affected type of LIBOR
Advance shall be continued as or converted into a Base Rate Advance, or, if
Borrower shall notify Lender, no later than 10:00 A.M. (Hartford, Connecticut
Time) two (2) Business Days prior to the proposed conversion, shall be
maintained as an unaffected type of LIBOR Advance.

 

SECTION 4.                                                                            TERM
AND TERMINATION

 

4.1                               Term
of Agreement.  Subject to Lender’s
right to cease making Loans to Borrower upon or after the occurrence of any
Default or Event of Default, this Agreement shall be in effect for a period of
three (3) years from the Closing Date, through and including September 10, 2006
(the “Term”).

 

4.2                               Termination.

 

4.2.1                     Termination
by Lender.  Lender may terminate
this Agreement, without notice, upon or after the occurrence of an Event of
Default.

 

4.2.2                     Termination
by Borrower.  Upon at least
ninety (90) days prior written notice to Lender, Borrower may, at its option,
terminate this Agreement; provided, however, no such termination
shall be effective until Borrower has paid all of the Obligations in
immediately available funds and all Letters of Credit and LC Guaranties have
expired or have been cash collateralized to Lender’s satisfaction. Any notice
of termination given by Borrower shall be irrevocable unless Lender otherwise
agrees in writing, and Lender shall have no obligation to make any Loans or
issue or procure any Letters of Credit or LC Guaranties on or after the
termination date stated in such notice. Borrower may elect to terminate this
Agreement in its entirety only. No section of this Agreement or type of Loan
available hereunder may be terminated singly.

 

4.2.3                     Termination
Charges.  At the effective date
of termination of this Agreement for any reason, Borrower shall pay to Lender
(in addition to the then outstanding principal, accrued interest and other
charges owing under the terms of this Agreement and any of the other Loan
Documents) as liquidated damages for

 

8

 

the loss of the bargain and not as a penalty, an amount equal to 2% of
the Total Credit Facility if termination occurs during the first twelve-month
period of the Term (September 10, 2003 through September 10, 2004); 1% of the
Total Credit Facility if termination occurs during the second 12-month period
of the Term (September 11, 2004 through September 10, 2005). If termination
occurs after September 10, 2005, no termination charge shall be payable.

 

4.2.4                     Effect
of Termination.  All of the
Obligations shall be immediately due and payable upon the termination date
stated in any notice of termination of this Agreement. All undertakings,
agreements, covenants, warranties and representations of Borrower contained in
the Loan Documents shall survive any such termination and Lender shall retain
its Liens in the Collateral and all of its rights and remedies under the Loan
Documents notwithstanding such termination until Borrower has paid the
Obligations to Lender, in full, in immediately available funds, together with
the applicable termination charge, if any. Notwithstanding the payment in full
of the Obligations, Lender shall not be required to terminate its security
interests in the Collateral unless, with respect to any loss or damage Lender
may incur as a result of dishonored checks or other items of payment received
by Lender from Borrower or any Account Debtor and applied to the Obligations,
Lender shall, at its option, (i) have
received a written agreement, executed by Borrower and by any Person whose
loans or other advances to Borrower are used in whole or in part to satisfy the
Obligations, indemnifying Lender from any such loss or damage; or (ii) have retained such monetary reserves and Liens on the
Collateral for such period of time as Lender, in its reasonable discretion, may
deem necessary to protect Lender from any such loss or damage.

 

SECTION 5.                                                                            SECURITY
INTERESTS

 

5.1                               Security
Interest in Collateral.  To
secure the prompt payment and performance to Lender of the Obligations,
Borrower hereby grants to Lender a continuing Lien upon all of Borrower’s
assets, including all of the following Property and interests in Property of
Borrower, whether now owned or existing or hereafter created, acquired or
arising and wheresoever located:

 

(i)                                    Accounts;

 

(ii)                                Certificated
Securities, excluding the stock of International Wholesale Tile, Inc. and the
Guarantors;

 

(iii)                            Chattel
Paper;

 

(iv)                               Computer
Hardware and Software and all rights with respect thereto, including, any and
all licenses, options, warranties, service contracts, program services, test
rights, maintenance rights, support rights, improvement rights, renewal rights
and indemnifications, and any substitutions, replacements, additions or model
conversions of any of the foregoing;

 

(v)                                   Contract
Rights;

 

(vi)                               Deposit Accounts;

 

(vii)                           Documents;

 

(viii)                       Equipment;

 

(ix)                              Financial
Assets;

 

(x)                                  Fixtures;

 

(xi)                              General
Intangibles, including Payment Intangibles and Software;

 

(xii)                          Goods
(including all of its Equipment and Fixtures), and all accessions, additions,
attachments, improvements, substitutions and replacements thereto and therefor;

 

9

 

(xiii)                      Health-Care-Insurance
Receivables;

 

(xiv)                         Instruments;

 

(xv)                             Intellectual
Property;

 

(xvi)                         Inventory;

 

(xvii)                     Investment
Property;

 

(xviii)                 money (of every jurisdiction whatsoever);

 

(xix)                        Letter-of-Credit
Rights;

 

(xx)                            Payment
Intangibles;

 

(xxi)                        Security
Entitlements;

 

(xxii)                    Supporting
Obligations;

 

(xxiii)                Uncertificated
Securities; and

 

(xxiv)                   to the extent not included in the foregoing, all other
personal property of any kind or description;

 

together with all books, records,
writings, data bases, information and other property relating to, used or
useful in connection with, or evidencing, embodying, incorporating or referring
to any of the foregoing, and all Proceeds, products, offspring, rents, issues,
profits and returns of and from any of the foregoing; provided that to the
extent that the provisions of any lease or license of Computer Hardware and
Software or Intellectual Property expressly prohibit (which prohibition is
enforceable under applicable law) any assignment thereof, and the grant of a
security interest therein, Lender will not enforce its security interest in
Borrower’s rights under such lease or license (other than in respect of the
Proceeds thereof) for so long as such prohibition continues, it being understood
that upon request of Lender, Borrower will in good faith use reasonable efforts
to obtain consent for the creation of a security interest in favor of Lender
(and to Lender’s enforcement of such security interest) in such Lender’s rights
under such lease or license.

 

5.2                               Other
Collateral.

 

5.2.1                     Commercial Tort Claims.  Borrower shall promptly notify Lender in
writing upon incurring or otherwise obtaining a Commercial Tort Claim after the
Closing Date against any third party and, upon request of Lender, promptly
enter into an amendment to this Agreement and do such other acts or things
deemed appropriate by Lender to give Lender a security interest in any such
Commercial Tort Claim.

 

5.2.2                     Other
Collateral.  Borrower shall
promptly notify Lender in writing upon acquiring or otherwise obtaining any
Collateral after the date hereof consisting of Deposit Accounts, Investment
Property, Letter-of-Credit Rights or Electronic Chattel Paper and, upon the
request of Lender, promptly execute such other documents, and do such other
acts or things deemed appropriate by Lender to deliver to Lender control with
respect to such Collateral; promptly notify Lender in writing upon acquiring or
otherwise obtaining any Collateral after the date hereof consisting of Documents
or Instruments and, upon the request of Lender, will promptly execute such
other documents, and do such other acts or things deemed appropriate by Lender
to deliver to Lender possession of such Documents which are negotiable and
Instruments, and, with respect to nonnegotiable Documents, to have such
nonnegotiable Documents issued in the name of Lender; and with respect to
Collateral in the possession of a third

 

10

 

party,
other than Certificated Securities and Goods covered by a Document and obtain
an acknowledgement from the third party that it is holding the Collateral for
the benefit of Lender.

 

5.3                               Lien
Perfection; Further Assurances. 
Borrower shall execute such UCC-1 financing statements as are required
by the UCC and such other instruments, assignments or documents as are
necessary to perfect Lender’s Lien upon any of the Collateral and shall take
such other action as may be required to perfect or to continue the perfection
of Lender’s Lien upon the Collateral. Unless prohibited by applicable law,
Borrower hereby irrevocably authorizes Lender to execute and file any such
financing statements, including, without limitation, financing statements that
indicate the Collateral (i) as all
assets of Borrower or words of similar effect, or (ii)
as being of an equal or lesser scope, or with greater or lesser detail, than as
set forth in Section 5.1, on Borrower’s
behalf.  Borrower also hereby ratifies
its authorization for Lender to have filed in any jurisdiction any like
financing statements or amendments thereto if filed prior to the date hereof.
The parties agree that a photographic or other reproduction of this Agreement
shall be sufficient as a financing statement and may be filed in any
appropriate office in lieu thereof. At Lender’s request, Borrower shall also
promptly execute or cause to be executed and shall deliver to Lender any and
all documents, instruments and agreements deemed necessary by Lender to give
effect to or carry out the terms or intent of the Loan Documents.

 

SECTION 6.                                                                            COLLATERAL
ADMINISTRATION

 

6.1                               General

 

6.1.1                     Location
of Collateral.  All Collateral,
other than Inventory in transit and motor vehicles, will at all times be kept
by Borrower and its Subsidiaries at one or more of the business locations set
forth in Exhibit C hereto and shall not, without
the prior written approval of Lender, be moved therefrom except, prior to an
Event of Default and Lender’s acceleration of the maturity of the Obligations
in consequence thereof, for (i) sales of
Inventory in the ordinary course of business; and (ii)
removals in connection with dispositions of Equipment that are authorized by subsection 6.4.2 hereof.

 

6.1.2                     Insurance
of Collateral.  Borrower shall
maintain and pay for credit insurance upon Eligible Extended Term Accounts and
insurance upon all Collateral wherever located and with respect to Borrower’s
business, covering casualty, hazard, public liability and such other risks in
such amounts and with such insurance companies as are reasonably satisfactory
to Lender. Borrower shall deliver the originals of such policies to Lender with
satisfactory lender’s loss payable endorsements, naming Lender as sole loss
payee, assignee or additional insured, as appropriate. Each policy of insurance
or endorsement shall contain a clause requiring the insurer to give not less
than thirty (30) days prior written notice to Lender in the event of
cancellation of the policy for any reason whatsoever and a clause specifying
that the interest of Lender shall not be impaired or invalidated by any act or
neglect of Borrower or the owner of the Property or by the occupation of the
premises for purposes more hazardous than are permitted by said policy. If Borrower fails to provide and pay for such insurance (including,
without limitation, the credit insurance), Lender may, at its option, but shall
not be required to, procure the same and charge Borrower therefor.
Borrower agrees to deliver to Lender, promptly as rendered, true copies of all
reports made in any reporting forms to insurance companies.

 

6.1.3                     Protection
of Collateral.  All expenses of
protecting, storing, warehousing, insuring, handling, maintaining and shipping
the Collateral, any and all excise, property, sales, and use taxes imposed by
any state, federal, or local authority on any of the Collateral or in respect
of the sale thereof shall be borne and paid by Borrower. If Borrower fails to
promptly pay any portion thereof when due, Lender may, at its option, but shall
not be required to, pay the same and charge Borrower therefor. Lender shall not
be liable or responsible in any way for the safekeeping of any of the
Collateral or for any loss or damage thereto (except for reasonable care in the
custody thereof while any Collateral is in Lender’s actual possession) or for
any diminution in the value thereof, or for any act or default of any
warehouseman, carrier, forwarding agency, or other person whomsoever, but the
same shall be at Borrower’s sole risk.

 

11

 

6.2                               Administration
of Accounts.

 

6.2.1                     Records,
Schedules and Assignments of Accounts. 
Borrower shall keep accurate and complete records of its Accounts and
all payments and collections thereon and shall submit to Lender on such
periodic basis as Lender shall request a sales and collections report for the
preceding period, in form satisfactory to Lender. In addition, if Accounts in
an aggregate face amount in excess of $100,000.00 become ineligible because
they fall within one of the specified categories of ineligibility set forth in
the definition of Eligible Accounts or otherwise established by Lender,
Borrower shall notify Lender of such occurrence on the first Business Day
following such occurrence and the Borrowing Base shall thereupon be adjusted to
reflect such occurrence. If requested by Lender, Borrower shall execute and
deliver to Lender formal written assignments of all of its Accounts weekly or
daily, which shall include all Accounts that have been created since the date
of the last assignment, together with copies of invoices or invoice registers
related thereto.

 

6.2.2                     Discounts,
Allowances, Disputes.  If
Borrower grants any discounts, allowances or credits that are not shown on the
face of the invoice for the Account involved, Borrower shall report such
discounts, allowances or credits, as the case may be, to Lender as part of the
next required Schedule of Accounts. If any amounts due and owing in excess of
$100,000.00 are in dispute between Borrower and any Account Debtor, Borrower
shall provide Lender with written notice thereof at the time of submission of
the next Schedule of Accounts, explaining in detail the reason for the dispute,
all claims related thereto and the amount in controversy.  Upon and after the occurrence of an Event of
Default, Lender shall have the right to settle or adjust all disputes and
claims directly with the Account Debtor and to compromise the amount or extend
the time for payment of the Accounts upon such terms and conditions as Lender
may deem advisable, and to charge the deficiencies, costs and expenses thereof,
including attorney’s fees, to Borrower.

 

6.2.3                     Taxes.  If an Account includes a charge for any tax
payable to any governmental taxing authority, Lender is authorized, in its sole
discretion, to pay the amount thereof to the proper taxing authority for the
account of Borrower and to charge Borrower therefor, provided, however that
Lender shall not be liable for any taxes to any governmental taxing authority
that may be due by Borrower.

 

6.2.4                     Account
Verification.  Whether or not a
Default or an Event of Default has occurred, any of Lender’s officers,
employees or agents shall have the right, at any time or times hereafter, in
the name of Lender, any designee of Lender, or Borrower, to verify the
validity, amount or any other matter relating to any Accounts by mail,
telephone, electronic communication or otherwise.  Borrower shall cooperate fully with Lender in
an effort to facilitate and promptly conclude any such verification process.

 

6.2.5                     Maintenance
of Dominion Account.  Borrower
shall maintain a Dominion Account acceptable to Lender with such banks as may
be selected by Borrower and be acceptable to Lender.  Borrower shall issue to any such banks an
irrevocable letter of instruction directing such banks to transfer on a daily
basis all amounts standing credit in such Dominion Account to the Fleet
Concentration Account for application on account of the Obligations. All funds
deposited in the Dominion Account shall immediately become the property of
Lender and Borrower shall obtain the agreement by such banks in favor of Lender
to waive any recoupment, setoff rights, and any security interest in, or
against the funds so deposited. Lender agrees with Borrower that Lender shall
not give any such instructions or withhold any withdrawal rights from Borrower
with respect to the Fleet Concentration Account unless a Default,
or an Event of Default has occurred and is continuing.

 

6.2.6                     Collection
of Accounts, Proceeds of Collateral.  To expedite collection, Borrower shall
endeavor in the first instance to make collection of its Accounts for Lender.
All remittances received by Borrower on account of Accounts, together with the
proceeds of any other Collateral, shall be held as Lender’s property by
Borrower as trustee of an express trust for Lender’s benefit and Borrower shall
immediately deposit same in kind in the Dominion Account.  Lender retains the right at all times after
the occurrence of a Default or an Event of Default to notify Account Debtors
that Accounts have been assigned to Lender and to collect Accounts directly in
its own name, or in the name of Lender’s agent, and to charge the collection
costs and expenses, including attorneys’ fees to Borrower.

 

12

 

6.3                               Administration
of Inventory.

 

6.3.1                     Records
and Reports of Inventory. 
Borrower shall keep accurate and complete records of its Inventory.
Borrower shall to furnish Lender Inventory reports in form and detail
satisfactory to Lender at such times as Lender may request, but at least once
each month, not later than the twentieth (20th) day of such month. Borrower
shall conduct a physical inventory no less frequently than annually and shall
provide to Lender a report based on each such physical inventory promptly
thereafter, together with such supporting information as Lender shall request.

 

6.3.2                     Returns
of Inventory.  If at any time or
times hereafter any Account Debtor returns any Inventory to Borrower the
shipment of which generated an Account on which such Account Debtor is
obligated in excess of $100,000.00, Borrower shall immediately notify Lender of
the same, specifying the reason for such return and the location, condition and
intended disposition of the returned Inventory.

 

6.4                               Administration
of Equipment.

 

6.4.1                     Records
and Schedules of Equipment. 
Borrower shall keep accurate records itemizing and describing the kind,
type, quality, quantity and value of its Equipment and all dispositions made in
accordance with subsection 6.4.2 hereof, and shall
furnish Lender with a current schedule containing the foregoing information on
at least an annual basis and more often if requested by Lender. Immediately on request therefor by Lender, Borrower shall deliver
to Lender any and all evidence of ownership, if any, of any of the Equipment.

 

6.4.2                     Dispositions
of Equipment.  Borrower will not
sell, lease or otherwise dispose of or transfer any of the Equipment or any
part thereof without the prior written consent of Lender; provided, however,
that the foregoing restriction shall not apply, for so long as no Default or
Event of Default exists, to (i)
dispositions of Equipment which, in the aggregate during any consecutive twelve-month
period, has a fair market value or book value, whichever is less, of $100,000
or less, provided that all proceeds thereof are remitted to Lender for
application to the Loans, or (ii)
replacements of Equipment that is substantially worn, damaged or obsolete with
Equipment of like kind, function and value, provided that the replacement
Equipment shall be acquired prior to or concurrently with any disposition of
the Equipment that is to be replaced, the replacement Equipment shall be free
and clear of Liens other than Permitted Liens that are not Purchase Money
Liens, and Borrower shall have given Lender at least five (5) days prior
written notice of such disposition.

 

6.5                               Payment
of Charges.  All amounts
chargeable to Borrower under Section 6
hereof shall be Obligations secured by all of the Collateral, shall be payable
on demand and shall bear interest from the date such advance was made until
paid in full at the rate applicable to Base Rate Advances from time to time.

 

SECTION 7.                                                                            REPRESENTATIONS AND WARRANTIES

 

7.1                               General
Representations and Warranties. 
To induce Lender to enter into this Agreement and to make advances
hereunder, Borrower warrants, represents and covenants to Lender that:

 

7.1.1                     Organization
and Qualification.  Each of
Borrower and its Subsidiaries is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its incorporation.
Each of Borrower and its Subsidiaries is duly qualified and is authorized to do
business and is in good standing as a foreign corporation in each state or
jurisdiction listed on Exhibit D
hereto and in all other states and jurisdictions where the character of its
Properties or the nature of its activities make such qualification necessary in
which the failure of Borrower or any of its Subsidiaries to be so qualified
would have a material adverse effect on the financial condition, business or
Properties of Borrower or any of its Subsidiaries.

 

7.1.2                     Corporate
Power and Authority.  Each of
Borrower and its Subsidiaries is duly authorized and empowered to enter into,
execute, deliver and perform this Agreement and each of the other Loan
Documents to which it is a party. The execution, delivery and performance of
this Agreement and each of the other Loan Documents have been duly authorized
by all necessary corporate action and do not and will not (i)
require any consent or approval of the shareholders (or members, in the case of
a limited liability company) of Borrower or any of its Subsidiaries; (ii) contravene Borrower’s or any of its Subsidiaries’
charter, articles or

 

13

 

certificate of
incorporation or by-laws; (iii) violate,
or cause Borrower or any of its Subsidiaries to be in default under, any
provision of any law, rule, regulation, order, writ, judgment, injunction,
decree, determination or award in effect having applicability to Borrower or
any of its Subsidiaries; (iv) result in
a breach of or constitute a default under any indenture or loan or credit
agreement or any other agreement, lease or instrument to which Borrower or any
of its Subsidiaries 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 Permitted Liens) upon or with
respect to any of the Properties now owned or hereafter acquired by Borrower or
any of its Subsidiaries.

 

7.1.3                     Legally
Enforceable Agreement.  This
Agreement is, and each of the other Loan Documents when delivered under this
Agreement will be, a legal, valid and binding obligation of each of Borrower
and its Subsidiaries enforceable against it in accordance with its respective
terms.

 

7.1.4                     Capital
Structure.  Exhibit E
hereto states (i) the correct name of each of
the Subsidiaries of Borrower, its jurisdiction of incorporation and the
percentage of its Voting Stock owned by Borrower, (ii)
the name of each of Borrower’s corporate or joint venture Affiliates and the
nature of the affiliation, (iii) the
number, nature and holder of all outstanding Securities of Borrower and each
Subsidiary of Borrower and (iv) the number
of authorized, issued and treasury shares of Borrower and each Subsidiary of
Borrower. Borrower has good title to all of the shares it purports to own of
the stock of each of its Subsidiaries, free and clear in each case of any Lien
other than Permitted Liens. All such shares have been duly issued and are fully
paid and non-assessable. As of June 17, 2003, there are no outstanding options
to purchase, or any rights or warrants to subscribe for, or any commitments or
agreements to issue or sell, or any Securities or obligations convertible into,
or any powers of attorney relating to, shares of the capital stock of Borrower
or any of its Subsidiaries, except as set forth on the Borrower’s registration
statement Form SB-2 effective June 17, 2003. 
There are no outstanding agreements or instruments binding upon any of
Borrower’s shareholders (or members, in the case of a limited liability
company) relating to the ownership of its shares of capital stock (or member
interests, in the case of a limited liability company).

 

7.1.5                     Corporate
Names, etc.  Neither Borrower nor
any of its Subsidiaries has been known as or used any corporate, fictitious or
trade names except those listed on Exhibit F
hereto. Except as set forth on Exhibit F,
neither Borrower nor any of its Subsidiaries has been the surviving corporation
of a merger or consolidation or acquired all or substantially all of the assets
of any Person.  Each of Borrower’s and
its Subsidiaries’ state(s) of incorporation or organization, Type of
Organization and Organizational I.D. Number is set forth on Exhibit F. The exact legal name of Borrower and each of its
Subsidiaries is set forth on Exhibit  F.

 

7.1.6                     Business
Locations; Agent for Process. 
Each of Borrower’s and its Subsidiaries’ chief executive office and
other places of business are as listed on Exhibit C
hereto. During the preceding one-year period, neither Borrower nor any of its
Subsidiaries has had an office, place of business or agent for service of
process other than as listed on Exhibit C.
Except as shown on Exhibit C, no
Inventory is stored with a bailee, warehouseman or similar party, nor is any
Inventory consigned to any Person.

 

7.1.7                     Title
to Properties; Priority of Liens. 
Each of Borrower and its Subsidiaries has good, indefeasible and
marketable title to and fee simple ownership of, or valid and subsisting
leasehold interests in, all of its real Property, and good title to all of the
Collateral and all of its other Property, in each case, free and clear of all
Liens except Permitted Liens. Borrower has paid or discharged all lawful claims
which, if unpaid, might become a Lien against any of Borrower’s Properties that
is not a Permitted Lien. The Liens granted to Lender under Section 5
hereof are first-priority Liens, subject only to Permitted Liens.

 

7.1.8                     Accounts.  Lender may rely, in determining which
Accounts are Eligible Accounts, on all statements and representations made by
Borrower with respect to any Account or Accounts. Unless otherwise indicated in
writing to Lender, with respect to each Account:

 

(i)                                    It is genuine and
in all respects what it purports to be, and it is not evidenced by a judgment;

 

14

 

(ii)                                It arises out of a
completed, bona  fide sale and delivery of goods or rendition of
services by Borrower in the ordinary course of its business and in accordance
with the terms and conditions of all purchase orders, contracts or other
documents relating thereto and forming a part of the contract between Borrower
and the Account Debtor;

 

(iii)                            It is for a liquidated
amount maturing as stated in the duplicate invoice covering such sale or
rendition of services, a copy of which has been furnished or is available to
Lender;

 

(iv)                               Such Account, and Lender’s
security interest therein, is not, and will not (by voluntary act or omission
of Borrower) be in the future, subject to any offset, Lien, deduction,
recoupment, defense, dispute, counterclaim or any other adverse condition
except for disputes resulting in returned goods where the amount in controversy
is deemed by Lender to be immaterial, and each such Account is absolutely owing
to Borrower and is not contingent in any respect or for any reason;

 

(v)                                   Borrower has made no
agreement with any Account Debtor thereunder for any extension, compromise,
settlement or modification of any such Account or any deduction therefrom,
except discounts or allowances which are granted by Borrower in the ordinary
course of its business for prompt payment and which are reflected in the
calculation of the net amount of each respective invoice related thereto and
are reflected in the Schedules of Accounts submitted to Lender pursuant to subsection 6.2.1 hereof;

 

(vi)                               There are no facts,
events or occurrences which in any way impair the validity or enforceability of
any Accounts or tend to reduce the amount payable thereunder from the face
amount of the invoice and statements delivered to Lender with respect thereto;

 

(vii)                           To the best of Borrower’s
knowledge, the Account Debtor thereunder (1) had the
capacity to contract at the time any contract or other document giving rise to
the Account was executed and (2) such
Account Debtor is Solvent; and

 

(viii)                       To the best of Borrower’s
knowledge, there are no proceedings or actions which are threatened or pending
against any Account Debtor thereunder which might result in any material
adverse change in such Account Debtor’s financial condition or the
collectibility of such Account.

 

7.1.9                     Equipment.  The Equipment is in good operating
condition and repair, and all necessary replacements of and repairs thereto shall be made so that the value and
operating efficiency of the Equipment shall be maintained and preserved,
reasonable wear and tear excepted. Borrower will not
permit any of the Equipment to become affixed to any real Property leased to
Borrower so that an interest arises therein under the real estate laws of the
applicable jurisdiction unless the landlord of such real Property has executed
a landlord waiver or leasehold mortgage in favor of and in form acceptable to
Lender, and Borrower will not permit any of the Equipment to become an
accession to any personal Property other than Equipment that is subject to
first-priority (except for Permitted Liens) Liens in favor of Lender.

 

7.1.10              Financial
Statements; Fiscal Year.  The Consolidated and consolidating
balance sheets of Borrower and such other Persons described therein (including
the accounts of all Subsidiaries of Borrower for the respective periods during
which a Subsidiary relationship existed) as of December 31, 2002, and the
related statements of income, changes in stockholder’s equity, and changes in
financial position for the periods ended on such dates, have been prepared in
accordance with GAAP, and present fairly the financial positions of Borrower
and such Persons at such dates and the results of Borrower’s and such Persons’
operations for such periods. Since June 30, 2003, there has been no material
change in the condition, financial or otherwise, of Borrower and such other
Persons as shown on the Consolidated balance sheet as of such date and no
material change in the aggregate value of Equipment and real Property owned by
Borrower or such other Persons, except changes in the ordinary course of
business, none of which individually or in the aggregate has been materially
adverse. The fiscal year of Borrower and each of its Subsidiaries ends on
December 31 of each year.

 

15

 

7.1.11              Full Disclosure.        The financial
statements referred to in subsection 7.1.10
hereof do not, nor does this Agreement or any other written statement of
Borrower to Lender, contain any untrue statement of a material fact or omit a
material fact necessary to make the statements contained therein or herein not
misleading. There is no fact which Borrower has failed to disclose to Lender in
writing which materially affects adversely or, so far as Borrower can now
foresee, will materially affect adversely the Properties, business, prospects,
profits or condition (financial or otherwise) of Borrower or any of its Subsidiaries
or the ability of Borrower or its Subsidiaries to perform this Agreement or the
other Loan Documents.

 

7.1.12              Solvent Financial
Condition.  Each of
Borrower and its Subsidiaries is now and, after giving effect to the Loans to
be made and the Letters of Credit and LC Guaranties to be issued hereunder, at
all times will be, Solvent.

 

7.1.13              Surety
Obligations.   Except as
set forth on Exhibit P, neither Borrower
nor any of its Subsidiaries is obligated as surety or indemnitor under any
surety or similar bond or other contract, or has issued or entered into any
agreement to assure payment, performance or completion of performance of any
undertaking or obligation of any Person.

 

7.1.14              Taxes.  Borrower’s federal
tax identification number is 912048019. The federal tax identification number
of each of Borrower’s Subsidiaries is shown on Exhibit G
hereto. Borrower and each of its Subsidiaries has filed all federal, state and
local tax returns and other reports it is required by law to file and has paid,
or made provision for the payment of, all taxes, assessments, fees, levies and
other governmental charges upon it, its income and Properties as and when such
taxes, assessments, fees, levies and charges are due and payable, unless and to
the extent any thereof are being actively contested in good faith and by
appropriate proceedings and Borrower maintains reasonable reserves on its books
therefor. The provision for taxes on the books of Borrower and its Subsidiaries
are adequate for all years not closed by applicable statutes, and for its
current fiscal year.

 

7.1.15              Brokers.  There are no claims
for brokerage commissions, finder’s fees or investment banking fees in
connection with the transactions contemplated by this Agreement.

 

7.1.16              Patents,
Trademarks, Copyrights and Licenses. Each of Borrower and its
Subsidiaries owns or possesses all the patents, trademarks, service marks, tradenames, copyrights and licenses necessary
for the present and planned future conduct of its business without any known
conflict with the rights of others. All such patents, trademarks, service
marks, tradenames, copyrights, licenses and other similar rights are listed on Exhibit H hereto.

 

7.1.17              Governmental
Consents.           Each
of Borrower and its Subsidiaries has, and is in good standing with respect to,
all material governmental consents, approvals, licenses, authorizations,
permits, certificates, inspections and franchises necessary to continue to
conduct its business as heretofore or proposed to be conducted by it and to own
or lease and operate its Properties as now owned or leased by it.

 

7.1.18              Compliance with
Laws. Each of Borrower and
its Subsidiaries has duly complied with, and its Properties, business
operations and leaseholds are in compliance in all material respects with, the
provisions of all federal, state and local laws, rules and regulations
applicable to Borrower or such Subsidiary, as applicable, its Properties or the
conduct of its business and there have been no citations, notices or orders of
noncompliance issued to Borrower or any of its Subsidiaries under any such law,
rule or regulation. Each of Borrower and its Subsidiaries has established and
maintains an adequate monitoring system to insure that it remains in material
compliance with all federal, state and local laws, rules and regulations
applicable to it. No Inventory has been produced in violation of the Fair Labor
Standards Act (29 U.S.C. §201 et  seq.), as amended.

 

7.1.19              Restrictions.  Neither Borrower nor any of its Subsidiaries
is a party or subject to any contract, agreement, or charter or other corporate
restriction, which materially and adversely affects its business or the use or
ownership of any of its Properties. Neither Borrower nor any of its
Subsidiaries is a party or subject to any contract or agreement which restricts
its right or ability to incur Indebtedness, other than as set forth

 

16

 

on  Exhibit I hereto, none of which prohibit the execution of or
compliance with this Agreement or the other Loan Documents by Borrower or any
of its Subsidiaries, as applicable.

 

7.1.20              Litigation.  Except as set forth on Exhibit J
hereto, there are no actions, suits, proceedings or investigations pending, or
to the best knowledge of Borrower, threatened, against or affecting Borrower or
any of its Subsidiaries, or the business, operations, Properties, prospects,
profits or condition of Borrower or any of its Subsidiaries. Neither Borrower
nor any of its Subsidiaries is in default with respect to any order, writ, injunction,
judgment, decree or rule of any court, governmental authority or arbitration
board or tribunal.

 

7.1.21              No Defaults.  No event has occurred and no condition exists
which would, upon or after the execution and delivery of this Agreement or
Borrower’s performance hereunder, constitute a Default or an Event of Default.
Neither Borrower nor any of its Subsidiaries is in default, and no event has
occurred and no condition exists which constitutes, or
which with the passage of time or the giving of notice or both would
constitute, a default in the payment of any Indebtedness to any Person for
Money Borrowed.

 

7.1.22              Leases.  Exhibit K
hereto is a complete listing of all capitalized leases of Borrower and its
Subsidiaries and Exhibit L hereto is a complete listing
of all operating leases of Borrower and its Subsidiaries. Each of Borrower and
its Subsidiaries is in full compliance with all of the terms of each of its
respective capitalized and operating leases.

 

7.1.23              Pension
Plans.  Except as disclosed on Exhibit M hereto, neither Borrower nor any of its
Subsidiaries has any Plan. Borrower and each of its Subsidiaries is in full compliance with the requirements of ERISA and the
regulations promulgated thereunder with respect to each Plan. No fact or
situation that could result in a material adverse change in the financial
condition of Borrower or any of its Subsidiaries exists in connection with any
Plan. Neither Borrower nor any of its Subsidiaries has any withdrawal liability
in connection with a Multi-employer Plan.

 

7.1.24              Trade Relations.  There exists no actual or, to the best
knowledge of Borrower, threatened termination, cancellation or limitation of,
or any modification or change in, the business relationship between Borrower or
any of its Subsidiaries and any customer or any group of customers whose
purchases individually or in the aggregate are material to the business of
Borrower or any of its Subsidiaries, or with any material supplier, and there
exists no present condition or state of facts or circumstances which would
materially affect adversely Borrower or any of its Subsidiaries or prevent
Borrower or any of its Subsidiaries from conducting such business after the
consummation of the transaction contemplated by this Agreement in substantially
the same manner in which it has heretofore been conducted.

 

7.1.25              Labor Relations.  Except as described on Exhibit N
hereto, neither Borrower nor any of its Subsidiaries is a party to any
collective bargaining agreement. There are no material grievances, disputes or
controversies with any union or any other organization of Borrower’s or any of
its Subsidiaries’ employees, or threats of strikes, work stoppages or any
asserted pending demands for collective bargaining by any union or
organization.

 

7.2                               Continuous
Nature of Representations and Warranties.  Each representation and warranty contained in
this Agreement and the other Loan Documents shall be continuous in nature and
shall remain materially accurate, complete and not misleading at all times
during the term of this Agreement, except for changes in the nature of Borrower’s
or its Subsidiaries’ business or operations that would render the information
in any exhibit attached hereto either inaccurate, incomplete or misleading, so
long as Lender has consented to such changes or such changes are expressly
permitted by this Agreement. Without limiting the generality of the foregoing,
each loan request made pursuant to subsection 3.1.1
hereof shall constitute Borrower’s reaffirmation, as of the date of each such loan
request, of each representation, warranty or other statement made or furnished
to Lender by or on behalf of Borrower, any Subsidiary of Borrower, or Guarantor
in this Agreement, any of the other Loan Documents, or any instrument,
certificate or financial statement furnished in compliance with or in reference
thereto.

 

17

 

7.3                               Survival
of Representations and Warranties. 
All representations and warranties of Borrower contained in this
Agreement or any of the other Loan Documents shall survive the execution,
delivery and acceptance thereof by Lender and the parties thereto and the
closing of the transactions described therein or related thereto.

 

SECTION 8.                                                                            COVENANTS AND CONTINUING AGREEMENTS

 

8.1                               Affirmative
Covenants.  During the term of
this Agreement, and thereafter for so long as there are any Obligations to
Lender, Borrower covenants that, unless otherwise consented to by Lender in
writing, it shall:

 

8.1.1                     Visits
and Inspections.  Permit
representatives of Lender, on at least three occasions during the first year of
the Loan, at least two occasions during each subsequent year of the Loan, and
from time to time, as often as may be reasonably requested, but only during
normal business hours, to visit and inspect the Properties of Borrower and each
of its Subsidiaries, inspect, audit and make extracts from its books and
records, and discuss with its officers, its employees and its independent
accountants, Borrower’s and each of its Subsidiaries’ business, assets,
liabilities, financial condition, business prospects and results of operations.

 

8.1.2                     Notices.  Promptly notify Lender in writing of the
occurrence of any event or the existence of any fact which renders any
representation or warranty in this Agreement or any of the other Loan Documents
inaccurate, incomplete or misleading.

 

8.1.3                     Financial
Statements.  Keep, and cause each
Subsidiary to keep, adequate records and books of account with respect to its
business activities in which proper entries are made in accordance with GAAP
reflecting all its financial transactions; and cause to be prepared and
furnished to Lender the following (all to be prepared in accordance with GAAP
applied on a consistent basis, unless Borrower’s certified public accountants concur
in any change therein and such change is disclosed to Lender and is consistent
with GAAP):

 

(i)                                    not later than one
hundred twenty (120) days after the close of each fiscal year of Borrower,
unqualified, audited financial statements of Borrower and its Subsidiaries as
of the end of such year, on a Consolidated and consolidating basis, certified
by a firm of independent certified public accountants of recognized standing
selected by Borrower but acceptable to Lender (except for a qualification for a
change in accounting principles with which the accountant concurs);

 

(ii)                                not later than thirty
(30) days after the end of each month hereafter, including the last month of
Borrower’s fiscal year, unaudited, interim financial statements of Borrower and
its Subsidiaries as of the end of such month and of the portion of Borrower’s
financial year then elapsed, on a Consolidated and consolidating basis
following December 31, 2003, certified by the principal financial officer of
Borrower as prepared in accordance with GAAP and fairly presenting the
Consolidated financial position and results of operations of Borrower and its
Subsidiaries for such month and period subject only to changes from audit and
year-end adjustments and except that such statements need not contain notes;

 

(iii)                            promptly upon Lender’s
request, but in any event, on the second full Business Day for the previous
week, a Borrowing Base Certificate, which includes a weekly report of sales,
credits and collections of the Borrower;

 

(iv)                               not later twenty (20) days after the end of
each month (a) a reconciliation of Accounts, (b) an aging of accounts
receivable, and accounts payable, and (c) inventory reporting set forth in
Section 6.3.1;

 

(v)                                   promptly
after the sending or filing thereof, as the case may be, copies of any proxy
statements, financial statements or reports which Borrower has made available
to its shareholders (or members, in the case of a limited liability company)
and copies of any regular, periodic and special reports or registration statements
which Borrower files with the Securities and Exchange Commission or any
governmental authority which may be substituted therefor, or any national
securities exchange;

 

18

 

(vi)                               promptly after the filing thereof, copies of any annual
report to be filed with ERISA in connection with each Plan;

 

(vii)                           such
other data and information (financial and otherwise) as Lender, from time to
time, may reasonably request, bearing upon or related to the Collateral or
Borrower’s and each of its Subsidiaries’ financial condition or results of
operations; and

 

(viii)                       not later than fifteen (15) days after the
close of each fiscal quarter of Borrower, the policy date review sheets with
respect to the life insurance policies taken as collateral by the Lender, which
policy date review sheets shall contain such information as required by Lender.

 

Concurrently with the
delivery of the financial statements described in clause (i) of this subsection 8.1.3, Borrower shall forward to Lender a copy of the
accountants’ letter to Borrower’s management that is prepared in connection
with such financial statements and also shall cause to be prepared and shall
furnish to Lender a certificate of the aforesaid certified public accountants certifying
to Lender that, based upon their examination of the financial statements of
Borrower and its Subsidiaries performed in connection with their examination of
said financial statements, they are not aware of any Default or Event of
Default, or, if they are aware of such Default or Event of Default, specifying
the nature thereof, and acknowledging, in a manner satisfactory to Lender, that
they are aware that Lender is relying on such financial statements in making
its decisions with respect to the Loans. Concurrently with the delivery of the
financial statements described in clauses (i) and (ii) of this subsection 8.1.3, or more frequently if
requested by Lender, Borrower shall cause to be prepared and furnished to
Lender a Compliance Certificate in the form of Exhibit O
hereto executed by the Chief Financial Officer of Borrower.

 

8.1.4                     Landlord
and Storage Agreements.  Provide
Lender with copies of all agreements between Borrower or
any of its Subsidiaries and any landlord or warehouseman which owns any
premises at which any Inventory may, from time to time, be kept.

 

8.1.5                     [Intentionally
Omitted.]

 

8.1.6                     Projections.  No later than thirty (30) days prior to the
end of each fiscal year of Borrower, deliver to Lender Projections of Borrower
for the forthcoming fiscal year, month by month.

 

8.1.7                     Deposit
and Brokerage Accounts.  For each
deposit account or brokerage account that Borrower at any time opens or
maintains, Borrower shall, at Lender’s request and option, pursuant to an
agreement in form and substance satisfactory to Lender, cause the depository
bank or securities intermediary, as applicable, to agree to comply at any time
with instructions from Lender to such depository bank or securities
intermediary, as applicable, directing the disposition of funds from time to
time credited to such deposit or brokerage account, without further consent of
Borrower.

 

8.2                               Negative
Covenants.  During the term of
this Agreement, and thereafter for so long as there are any Obligations to
Lender, Borrower covenants that, unless Lender has first consented thereto in
writing, it will not:

 

8.2.1                     Mergers;
Consolidations; Acquisitions; Structural Changes.  Merge or consolidate, or permit any
Subsidiary of Borrower to merge or consolidate, with any Person; nor acquire, nor
permit any of its Subsidiaries to acquire, all or any substantial part of the
Properties of any Person; nor change its or any of its Subsidiaries’ state of
incorporation or organization or Type of Organization; nor change its or any of
its Subsidiaries’ legal names.

 

8.2.2                     Loans.  Make, or permit any Subsidiary of Borrower to
make, any loans or other advances of money (other than for salary, travel
advances, advances against commissions and other similar advances in the
ordinary course of business) to any Person.

 

8.2.3                     Total
Indebtedness.  Create, incur,
assume, or suffer to exist, or permit any Subsidiary of Borrower to create,
incur or suffer to exist, any Indebtedness, except:

 

19

 

(i)                                    Obligations owing to
Lender;

 

(ii)                                Subordinated Debt
existing on the date of this Agreement;

 

(iii)                            Indebtedness of any
Subsidiary of Borrower to Borrower;

 

(iv)                               accounts payable to
trade creditors and current operating expenses (other than for Money Borrowed
and current trade creditors in the ordinary course of business) which are not
aged more than one hundred twenty (120) days from billing date or more than
sixty (60) days from the due date, in each case incurred in the ordinary course
of business and paid within such time period, unless the same are being
actively contested in good faith and by appropriate and lawful proceedings; and
Borrower or such Subsidiary shall have set aside such reserves, if any, with
respect thereto as are required by GAAP and deemed adequate by Borrower or such
Subsidiary and its independent accountants;

 

(v)                                   [Omitted.];

 

(vi)                               Permitted Purchase Money
Indebtedness;

 

(vii)                           contingent
liabilities arising out of endorsements of checks and other negotiable
instruments for deposit or collection in the ordinary course of business; and

 

(viii)                       Indebtedness not included in
paragraphs (i) through (vii)
above which does not exceed at any time, in the aggregate, the sum of
$25,000.00.

 

8.2.4                     Affiliate
Transactions.  Enter into, or be
a party to, or permit any Subsidiary of Borrower to enter into or be a party
to, any transaction with any Affiliate of Borrower or
stockholder, except in the ordinary course of and pursuant to the reasonable
requirements of Borrower’s or such Subsidiary’s business and upon fair and
reasonable terms which are fully disclosed to Lender and are no less favorable
to Borrower than would obtain in a comparable arm’s length transaction with a
Person not an Affiliate or stockholder of Borrower or such Subsidiary.

 

8.2.5                     Limitation
on Liens.  Create
or suffer to exist, or permit any Subsidiary of Borrower to create or suffer to
exist, any Lien upon any of its Property, income or profits, whether now owned
or hereafter acquired, except:

 

(i)                                    Liens at any time
granted in favor of Lender;

 

(ii)                                Liens for taxes
(excluding any Lien imposed pursuant to any of the provisions of ERISA) not yet
due, or being contested in the manner described in subsection
7.1.14 hereto, but only if in Lender’s judgment such Lien does not
adversely affect Lender’s rights or the priority of Lender’s Lien in the
Collateral;

 

(iii)                            Liens arising in the
ordinary course of Borrower’s business by operation of law or regulation, but
only if payment in respect of any such Lien is not at the time required and
such Liens do not, in the aggregate, materially detract from the value of the
Property of Borrower or materially impair the use thereof in the operation of
Borrower’s business;

 

(iv)                               Purchase
Money Liens securing Permitted Purchase Money Indebtedness;

 

(v)                                   Liens securing Indebtedness
of one of Borrower’s Subsidiaries to Borrower or another such Subsidiary;

 

20

 

(vi)                               such
other Liens as appear on Exhibit P
hereto; and

 

(vii)                           such
other Liens as Lender may hereafter approve in writing.

 

8.2.6                     Subordinated
Debt.  Make, or permit any
Subsidiary of Borrower to make, any payment of any part or all of any
Subordinated Debt or take any other action or omit to take any other action in
respect of any Subordinated Debt, except in accordance with the Subordination
Agreement relative thereto.

 

8.2.7                     Distributions.  Declare or make, or permit any Subsidiary of
Borrower to declare or make, any Distributions.

 

8.2.8                     Unfunded
Capital Expenditures.  Make
Unfunded Capital Expenditures which, in the aggregate, as to Borrower and its
Subsidiaries, exceed $1,500,000 during any fiscal year of Borrower, provided,
however, that if during the period from the Effective Date to June 30, 2005
Unfunded Capital Expenditures exceeds $1,500,000, the excess may be offset by
the Equity Injection during such period.

 

8.2.9                     Disposition
of Assets.  Sell, lease or
otherwise dispose of any of, or permit any Subsidiary of Borrower to sell,
lease or otherwise dispose of any of, its Properties, including any disposition
of Property as part of a sale and leaseback transaction, to or in favor of any
Person, except (i) sales of Inventory in the
ordinary course of business for so long as no Event of Default exists
hereunder, (ii) a transfer of Property to
Borrower by a Subsidiary of Borrower or (iii)
dispositions expressly authorized by this Agreement.

 

8.2.10              Stock of
Subsidiaries.  Permit any
of its Subsidiaries to issue any additional shares of its capital stock except
director’s qualifying shares.

 

8.2.11              Bill-and-Hold
Sales, Etc.  Make a sale
to any customer on a bill-and-hold, guaranteed sale, sale and return, sale on
approval or consignment basis, or any sale on a repurchase or return basis.

 

8.2.12              Restricted
Investment.  Make or have, or
permit any Subsidiary of Borrower to make or have, any Restricted Investment.

 

8.2.13              [Intentionally
Omitted.]

 

8.2.14              Tax Consolidation.  File or consent to the filing of any
consolidated income tax return with any Person other than a Subsidiary of
Borrower.

 

8.3                               Specific
Financial Covenants.  During the
term of this Agreement, and thereafter for so long as there are any Obligations
to Lender, Borrower covenants that, unless otherwise consented to by Lender in
writing, it shall:

 

8.3.1                     Leverage.  Maintain a ratio of Total Debt to
Tangible Capital Base not greater than the following ratios at the end of each
of the following fiscal quarters:

 

	
  Ratio

  	
   

  	
  Fiscal Quarter Ending

  
	
  6.5 : 1.0

  	
   

  	
  September 30, 2003

  
	
  4.2 : 1.0

  	
   

  	
  December 31, 2003 and
  March 31, 2004

  
	
  3.0
  : 1.0

  	
   

  	
  June
  30, 2004

  
	
  5.5
  : 1.0

  	
   

  	
  September
  30, 2004

  
	
  6.0
  : 1.0

  	
   

  	
  December
  31, 2004 and March 31, 2005

  
	
  3.5
  : 1.0

  	
   

  	
  June
  30, 2005 and each fiscal quarter thereafter.

  

 

21

 

8.3.2                     Inventory
Turnover.

 

(i)            As of the fiscal
quarter ending September 30, 2003 to September 30, 2004, maintain, (a) a ratio
of Inventory to COGS annualized of not less than 1.75 to 1.0 for each fiscal
quarter (based only on such ninety day period) if the Fixed Charge Coverage
Ratio determined pursuant to Section 8.3.3 hereof is equal to or greater than
1.5 to 1.0 but less than 1.75 to 1.0, or (b) a ratio of Inventory to COGS
annualized of not less than 1.5 to 1.0 for each fiscal quarter (based only on
such ninety day period) if the Fixed Charge Coverage Ratio (determined pursuant
to Section 8.3.3 hereof) is equal to or greater than 1.75 to 1.0.

 

(ii)           As of the fiscal
quarter ending December 31, 2004 and each fiscal quarter thereafter maintain a
ratio of Inventory to COGS annualized of not less than 1.25 to 1.0 for each
fiscal quarter (based only on such ninety day period).

 

(iii)         For purposes of the
calculation of the Inventory Turnover covenant at the fiscal quarter ending
December 31 of each year, COGS shall be determined by reference to the prior
six (6) months being tested multiplied by two (2).  For purposes of all other fiscal quarters
(ending March 31, June 30 and September 30 of each year), COGS shall be
determined by reference to the fiscal quarter being tested multiplied by four
(4).  This covenant shall be tested on
September 30, 2003 and on the last day of each fiscal quarter for the previous
fiscal quarter thereafter.

 

8.3.3                     Minimum
Fixed Charge Coverage Ratio. Maintain a ratio of EBITDA less (1)
Unfunded Capital Expenditures and less (2) taxes to Principal Paid (not including
the Loan) plus (i) Interest Expenses and (ii) Distributions of not less
than the following ratios for each of the following fiscal quarters:

 

	
  Ratio

  	
   

  	
  Fiscal Quarter Ending

  
	
  2.0 : 1.0

  	
   

  	
  September 30, 2003,

  
	
  1.4 : 1.0

  	
   

  	
  December 31, 2003 and
  September 30, 2004

  
	
  1.2 : 1.0

  	
   

  	
  December 31, 2004

  
	
  1.2 : 1.0

  	
   

  	
  March 31, 2005

  
	
  1.5 : 1.0

  	
   

  	
  June 30, 2005

  
	
  1.75 : 1.0

  	
   

  	
  September 30, 2005 and
  each fiscal quarter thereafter.

  

 

For the purpose of
calculating this covenant, any excess Unfunded Capital Expenditures in 2003 may
be rolled over in 2004 only. This covenant shall be tested on September 30,
2003 and December 31, 2003 on a year to date basis and thereafter on the last
day of each fiscal quarter on a rolling basis by reference to the fiscal
quarter then ending and the three immediately preceding fiscal quarters. For
purposes of testing this covenant on September 30, 2003 only, Unfunded Capital
Expenditures shall not be included. For purposes of testing this covenant
during the period from the Effective Date to June 30, 2005 only, if the
Unfunded Capital Expenditures exceed $1,500,000, the excess may be offset by
the Equity Injection during such period.

 

SECTION 9.                                                                                                         CONDITIONS
PRECEDENT

 

Notwithstanding any other
provision of this Agreement or any of the other Loan Documents, and without
affecting in any manner the rights of Lender under the other sections of this
Agreement, Lender shall not be required to make any Loan under this Agreement
unless and until each of the following conditions has been and continues to be satisfied:

 

9.1                               Documentation.  Lender shall have received, in form and
substance satisfactory to Lender, a duly executed copy of this Agreement and
the other Loan Documents, together with such additional documents, instruments
and certificates as Lender shall require in connection therewith from time to
time, all in form and substance satisfactory to Lender, including but not
limited to:

 

(i)                                    A certificate of the Secretary of each
Borrower certifying as to (a) the resolutions of the Borrower approving
the execution and delivery of this Agreement, (b) the fact that the Articles of
Incorporation and Bylaws of the Borrower, which were certified and delivered to
the Lender as of September 10, 2003 continue in full force and effect and have
not been amended or otherwise modified except as set forth in the Certificate
to be

 

22

 

delivered,
and (c) certifying that the officers and agents of the Borrower who have been
certified to the Lender, as being authorized to sign and to act on behalf of
the Borrower, continue to be so authorized and setting forth the sample
signatures of each of the officers and agents of the Borrower authorized to
execute and deliver this Agreement and all other documents, agreements and
certificates on behalf of the Borrower.

 

(ii)                                A certificate of the Secretary of each
Borrower on the Effective Date certifying that (a) there shall exist no Event
of Default or Default, (b) all representations and warranties contained herein
and in the other Loan Documents executed by the Borrower shall be true and
correct in all material respects with the same effect as though such
representations and warranties had been made on and as of such date, except to
the extent such representations and warranties relate to an earlier date, in
which case such representations and warranties shall be true and correct in all
material respects as of such earlier date.

 

9.2                               No
Default.  No Default or Event of
Default shall exist.

 

9.3                               Other
Loan Documents.  Each of the
conditions precedent set forth in the other Loan Documents shall have been
satisfied.

 

9.4                               Availability.  Lender shall have determined that immediately
after Lender has made the initial Loans and issued the initial Letters of
Credit and LC Guaranties contemplated hereby, and paid all closing costs
incurred in connection with the transactions contemplated hereby, Availability
as of the Closing Date shall not be less than $750,000.00.  Availability on a daily basis as of fiscal quarters
ending September 30, 2003 and December 31, 2003 shall not be less than
$300,000.00 and thereafter Availability on a daily basis as of the end of each
fiscal quarter shall not be less than $500,000.00.  This covenant shall be tested daily.

 

Notwithstanding
anything contained in this Section 9.4 to the contrary, the minimum
Availability required by this Section 9.4 shall be waived until the earlier to
occur of: (i) the date Borrower receives any of the Equity Injection, or
(ii) June 30, 2005.

 

9.5                               No Litigation.  No action, proceeding, investigation,
regulation or legislation shall have been instituted, or, to the best of
Borrower’s knowledge, threatened or proposed before any court, governmental
agency or legislative body to enjoin, restrain or prohibit, or to obtain
damages in respect of, or which is related to or arises out of this Agreement
or the consummation of the transactions contemplated hereby.

 

SECTION 10.                                                                     EVENTS
OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT

 

10.1                        Events
of Default.  The occurrence of
one or more of the following events shall constitute an “Event of
Default”:

 

10.1.1              Payment
of Note.  Borrower shall fail to
pay any installment of principal, interest or premium, if any, owing on the
Revolving Credit Note on or within ten (10) days after the due date of such
installment.

 

10.1.2              Payment
of Other Obligations.  Borrower
shall fail to pay any of the Obligations that are not evidenced by the
Revolving Credit Note on the due date thereof (whether due at stated maturity,
on demand, upon acceleration or otherwise).

 

10.1.3              Misrepresentations.
 Any representation, warranty or
other statement made or furnished to Lender by or on behalf of Borrower, any
Subsidiary of Borrower, or Guarantor in this Agreement, any of the other Loan
Documents or any instrument, certificate or financial statement furnished in
compliance with or in reference thereto proves to have been false or misleading
in any material respect when made or furnished or when reaffirmed pursuant to Section 7.2 hereof.

 

23

 

10.1.4              Breach
of Specific Covenants.  Borrower
shall fail or neglect to perform, keep or observe any covenant contained in Sections 5.2, 5.3, 6.1.1, 6.1.2, 6.2.5, 6.2.6, 8.1, 8.2 or 8.3 hereof on the date that Borrower is required to
perform, keep or observe such covenant.

 

10.1.5              Breach
of Other Covenants.  Borrower
shall fail or neglect to perform, keep or observe any covenant contained in
this Agreement (other than a covenant which is dealt with specifically
elsewhere in Section 10.1 hereof) and the breach
of such other covenant is not cured to Lender’s satisfaction within fifteen
(15) days after the sooner to occur of Borrower’s receipt of notice of such
breach from Lender or the date on which such failure or neglect first becomes
known to any officer of Borrower.

 

10.1.6              Default
Under Security Documents/Other Agreements.  Any event of default shall occur under, or
Borrower shall default in the performance or observance of any term, covenant,
condition or agreement contained in, any of the Security Documents; or the
Other Agreements and such default shall continue beyond any applicable grace
period.

 

10.1.7              Other
Defaults.  There shall occur any
default or event of default on the part of Borrower under any agreement,
document or instrument to which Borrower is a party or by which Borrower or any
of its Property is bound, creating or relating to any Indebtedness (other than
the Obligations) if the payment or maturity of such Indebtedness is accelerated
in consequence of such event of default or demand for payment of such
Indebtedness is made.

 

10.1.8              Uninsured
Losses.  Any material loss,
theft, damage or destruction of any of the Collateral not fully covered
(subject to such deductibles as Lender shall have permitted) by insurance.

 

10.1.9              Adverse
Changes.  There shall occur any
material adverse change in the financial condition or business prospects of
Borrower or any Guarantor.

 

10.1.10       Insolvency
and Related Proceedings. 
Borrower or any Guarantor shall cease to be Solvent or shall suffer the
appointment of a receiver, trustee, custodian or similar fiduciary, or shall
make an assignment for the benefit of creditors, or any petition for an order
for relief shall be filed by or against Borrower or any Guarantor under the
Bankruptcy Code (if against Borrower or any Guarantor, the continuation of such
proceeding for more than thirty (30) days), or Borrower or any Guarantor shall
make any offer of settlement, extension or composition to their respective
unsecured creditors generally.

 

10.1.11       Business
Disruption; Condemnation.  There
shall occur a cessation of a substantial part of the business of Borrower, any
Subsidiary of Borrower or any Guarantor for a period which significantly
affects Borrower’s or such Guarantor’s capacity to continue its business, on a
profitable basis; or Borrower, any Subsidiary of Borrower or any Guarantor
shall suffer the loss or revocation of any license or permit now held or
hereafter acquired by Borrower or such Guarantor which is necessary to the
continued or lawful operation of its business; or Borrower or any Guarantor
shall be enjoined, restrained or in any way prevented by court, governmental or
administrative order from conducting all or any material part of its business
affairs; or any material lease or agreement pursuant to which Borrower or any
Guarantor leases, uses or occupies any Property shall be canceled or terminated
prior to the expiration of its stated term; or any part of the Collateral shall
be taken through condemnation or the value of such Property shall be impaired
through condemnation.

 

10.1.12       Change
of Ownership.  Paul Boucher,
Forest Jordan and Grey Perna shall cease to own and control, beneficially and
of record, fifty-one (51%) percent of the issued and outstanding capital stock
of Borrower.

 

10.1.13       ERISA.  A Reportable Event shall occur which Lender,
in its sole discretion, shall determine in good faith constitutes grounds for
the termination by the Pension Benefit Guaranty Corporation of any Plan or for
the appointment by the appropriate United States district court of a trustee
for any Plan, or if any Plan shall be terminated or any such trustee shall be
requested or appointed, or if Borrower, any Subsidiary of Borrower or any
Guarantor is in “default” (as defined in Section 4219(c)(5) of ERISA) with
respect to payments to a

 

24

 

Multi-employer Plan
resulting from Borrower’s, such Subsidiary’s or such Guarantor’s complete or
partial withdrawal from such Plan.

 

10.1.14       Challenge
to Agreement.  Borrower, any Subsidiary
of Borrower or any Guarantor, or any Affiliate of any of them, shall challenge
or contest in any action, suit or proceeding the validity or enforceability of
this Agreement, or any of the other Loan Documents, the legality or
enforceability of any of the Obligations or the perfection or priority of any
Lien granted to Lender.

 

10.1.15       Repudiation
of or Default Under Guaranty Agreement. 
Any Guarantor shall revoke or attempt to revoke the Guaranty Agreement
signed by such Guarantor, or shall repudiate such Guarantor’s liability
thereunder or shall be in default under the terms thereof.

 

10.1.16       Criminal
Forfeiture.  Borrower, any
Subsidiary of Borrower or any Guarantor shall be criminally indicted or
convicted under any law that could lead to a forfeiture of any Property of
Borrower, any Subsidiary of Borrower or any Guarantor.

 

10.1.17       Judgments.  Any money judgment, writ of attachment or
similar process is filed against Borrower, any Subsidiary of Borrower or any
Guarantor, or any of their respective Property.

 

10.2                        Acceleration
of the Obligations.  Without in
any way limiting the right of Lender to demand payment of any portion of the
Obligations payable on demand in accordance with Section 3.2
hereof, upon or at any time after the occurrence of an Event of Default, all or
any portion of the Obligations shall, at the option of Lender and without
presentment, demand, protest or further notice by Lender, become at once due
and payable and Borrower shall forthwith pay to Lender, the full amount of such
Obligations, provided, that upon the occurrence of an Event of Default
specified in subsection 10.1.10 hereof, all of
the Obligations shall become automatically due and payable without declaration,
notice or demand by Lender.

 

10.3                        Other
Remedies.  Upon and after the
occurrence of an Event of Default, Lender shall have and may exercise from time
to time the following other rights and remedies:

 

10.3.1              All of the rights and remedies of a
secured party under the UCC or under other applicable law, and all other legal
and equitable rights to which Lender may be entitled, all of which rights and
remedies shall be cumulative and shall be in addition to any other rights or
remedies contained in this Agreement or any of the other Loan Documents, and
none of which shall be exclusive.

 

10.3.2              The
right to take immediate possession of the Collateral, and to (i) require Borrower to assemble the Collateral, at Borrower’s
expense, and make it available to Lender at a place designated by Lender which
is reasonably convenient to both parties, and (ii)
enter any premises where any of the Collateral shall be located and to keep and
store the Collateral on said premises until sold (and if said premises be the
Property of Borrower, Borrower agrees not to charge Lender for storage
thereof).

 

10.3.3              The
right to sell or otherwise dispose of all or any Collateral in its then
condition, or after any further manufacturing or processing thereof, at public
or private sale or sales, with such notice as may be required by law, in lots
or in bulk, for cash or on credit, all as Lender, in its sole discretion, may
deem advisable. Seller may, at Seller’s option, disclaim any and all warranties
regarding the Collateral in connection with any such sale. Borrower agrees that
ten (10) days written notice to Borrower of any public or private sale or other
disposition of Collateral shall be reasonable notice thereof, and such sale
shall be at such locations as Lender may designate in said notice. Lender shall
have the right to conduct such sales on Borrower’s premises, without charge
therefor, and such sales may be adjourned from time to time in accordance with
applicable law.  Lender shall have the
right to sell, lease or otherwise dispose of the Collateral, or any part
thereof, for cash, credit or any combination thereof, and Lender may purchase
all or any part of the Collateral at public or, if permitted by law, private
sale and, in lieu of actual payment of such purchase price, may set off the
amount of such price against the Obligations. The proceeds realized from the
sale of any Collateral may be applied, after allowing two (2) Business Days for
collection, first to the costs, expenses and attorneys’ fees incurred by Lender
in collecting the Obligations, in enforcing the

 

25

 

rights of Lender under
the Loan Documents and in collecting, retaking, completing, protecting,
removing, storing, advertising for sale, selling and delivering any Collateral;
second to the interest due upon any of the Obligations; and third, to the
principal of the Obligations. If any deficiency shall arise, Borrower and each
Guarantor (subject to the Guaranty Agreement) shall remain jointly and
severally liable to Lender therefor.

 

10.3.4              Lender
is hereby granted a license or other right to use, without charge, Borrower’s
labels, patents, copyrights, rights of use of any name, trade secrets,
tradenames, trademarks and advertising matter, or any Property of a similar
nature, as it pertains to the Collateral, in advertising for sale and selling
any Collateral and Borrower’s rights under all licenses and all franchise
agreements shall inure to Lender’s benefit.

 

10.3.5              Lender
may, at its option, require Borrower to deposit with Lender funds equal to the
LC Amount and, if Borrower fails to promptly make such deposit, Lender may
advance such amount as a Base Rate Advance (whether or not an Overadvance is
created thereby). Any such deposit or advance shall be held by Lender as a
reserve to fund future payments on such LC Guaranties and future drawings
against such Letters of Credit. At such time as all LC Guaranties have been
paid or terminated and all Letters of Credit have been drawn upon or expired,
any amounts remaining in such reserve shall be applied against any outstanding
Obligations, or, if all Obligations have been indefeasibly paid in full,
returned to Borrower.

 

10.4                        Remedies
Cumulative; No Waiver.  All
covenants, conditions, provisions, warranties, guaranties, indemnities, and
other undertakings of Borrower contained in this Agreement and the other Loan
Documents, or in any document referred to herein or contained in any agreement
supplementary hereto or in any schedule or in any Guaranty Agreement given to
Lender or contained in any other agreement between Lender and Borrower,
heretofore, concurrently, or hereafter entered into, shall be deemed cumulative
to and not in derogation or substitution of any of the terms, covenants,
conditions, or agreements of Borrower herein contained. The failure or delay of
Lender to require strict performance by Borrower of any provision of this
Agreement or to exercise or enforce any rights, Liens, powers, or remedies
hereunder or under any of the aforesaid agreements or other documents or
security or Collateral shall not operate as a waiver of such performance,
Liens, rights, powers and remedies, but all such requirements, Liens, rights,
powers, and remedies shall continue in full force and effect until all Loans
and all other Obligations owing or to become owing from Borrower to Lender
shall have been fully satisfied. None of the undertakings, agreements,
warranties, covenants and representations of Borrower contained in this
Agreement or any of the other Loan Documents and no Default or Event of Default
by Borrower under this Agreement or any other Loan Documents shall be deemed to
have been suspended or waived by Lender, unless such suspension or waiver is by
an instrument in writing specifying such suspension or waiver and is signed by
a duly authorized representative of Lender and directed to Borrower.

 

SECTION 11.                     MISCELLANEOUS

 

11.1                        Power
of Attorney.  Borrower hereby
irrevocably designates, makes, constitutes and appoints Lender (and all Persons
designated by Lender) as Borrower’s true and lawful attorney (and agent-in-fact)
and Lender, or Lender’s agent, may, without notice to Borrower and in either
Borrower’s or Lender’s name, but at the cost and expense of Borrower:

 

11.1.1     At
such time or times upon or after the occurrence of a Default or an Event of
Default as Lender or said agent, in its sole discretion, may determine, endorse
Borrower’s name on any checks, notes, acceptances, drafts, money orders or any
other evidence of payment or proceeds of the Collateral which come into the
possession of Lender or under Lender’s control.

 

11.1.2     At
such time or times upon or after the occurrence of an Event of Default as
Lender or its agent in its sole discretion may determine: (i)
demand payment of the Accounts from the Account Debtors, enforce payment of the
Accounts by legal proceedings or otherwise, and generally exercise all of
Borrower’s rights and remedies with respect to the collection of the Accounts; (ii) settle, adjust, compromise, discharge or release any of
the Accounts or other Collateral or any legal proceedings brought to collect
any of the Accounts or other Collateral; (iii) sell or
assign any of the Accounts and other Collateral upon such terms, for such
amounts and at such time or times as Lender deems advisable and, at Lender’s
option, with all warranties regarding

 

26

 

the Collateral
disclaimed; (iv) take control, in any manner,
of any item of payment or proceeds relating to any Collateral; (v) prepare, file and sign Borrower’s name to a proof of
claim in bankruptcy or similar document against any Account Debtor or to any
notice of lien, assignment or satisfaction of lien or similar document in
connection with any of the Collateral; (vi) receive,
open and dispose of all mail addressed to Borrower and to notify postal
authorities to change the address for delivery thereof to such address as
Lender may designate; (vii) endorse
the name of Borrower upon any of the items of payment or proceeds relating to
any Collateral and deposit the same to the account of Lender on account of the
Obligations; (viii) endorse the name of
Borrower upon any chattel paper, document, instrument, invoice, freight bill,
bill of lading or similar document or agreement relating to the Accounts,
Inventory and any other Collateral; (ix) use
Borrower’s stationery and sign the name of Borrower to verifications of the
Accounts and notices thereof to Account Debtors; (x)
use the information recorded on or contained in any data processing equipment
and computer hardware and software relating to the Accounts, Inventory, Equipment
and any other Collateral; (xi) make and
adjust claims under policies of insurance; and (xii)
do all other acts and things necessary, in Lender’s determination, to fulfill
Borrower’s obligations under this Agreement.

 

11.2                        Indemnity.  Borrower hereby agrees to indemnify Lender
and hold Lender harmless from and against any liability, loss, damage, suit,
action or proceeding ever suffered or incurred by Lender (including reasonable
attorneys fees and legal expenses) as the result of Borrower’s failure to
observe, perform or discharge Borrower’s duties hereunder. In addition,
Borrower shall defend Lender against and save it harmless from all claims of
any Person with respect to the Collateral. Without limiting the generality of
the foregoing, these indemnities shall extend to any claims asserted against
Lender by any Person under any Environmental Laws or similar laws by reason of
Borrower’s or any other Person’s failure to comply with laws applicable to
solid or hazardous waste materials or other toxic substances. Notwithstanding
any contrary provision in this Agreement, the obligation of Borrower under this
Section 11.2 shall survive the payment
in full of the Obligations and the termination of this Agreement.

 

11.3                        Modification
of Agreement; Sale of Interest. 
This Agreement may not be modified, altered or amended, except by an
agreement in writing signed by Borrower and Lender. Borrower may not sell,
assign or transfer any interest in this Agreement, any of the other Loan
Documents, or any of the Obligations, or any portion thereof, including,
without limitation, Borrower’s rights, title, interests, remedies, powers, and
duties hereunder or thereunder. Borrower hereby consents to Lender’s
participation, sale, assignment, transfer or other disposition, at any time or
times hereafter, of this Agreement and any of the other Loan Documents, or of
any portion hereof or thereof, including, without limitation, Lender’s rights,
title, interests, remedies, powers, and duties hereunder or thereunder. In the
case of an assignment, the assignee shall have, to the extent of such
assignment, the same rights, benefits and obligations as it would if it were “Lender”
hereunder and Lender shall be relieved of all obligations hereunder upon any
such assignments.  Borrower agrees that
it will use its best efforts to assist and cooperate with Lender in any manner
reasonably requested by Lender to effect the sale of participations in or
assignments of any of the Loan Documents or any portion thereof or interest
therein, including, without limitation, assisting in the preparation of
appropriate disclosure documents. Borrower further agrees that Lender may
disclose credit information regarding Borrower, its Subsidiaries and any
Guarantor to any potential participant or assignee.

 

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

 

11.5                        Successors
and Assigns.  This Agreement, the
Other Agreements and the Security Documents shall be binding upon and inure to
the benefit of the successors and assigns of Borrower and Lender permitted
under Section 11.3 hereof.

 

11.6                        Cumulative
Effect; Conflict of Terms.  The
provisions of the Other Agreements and the Security Documents are hereby made
cumulative with the provisions of this Agreement. Except as otherwise provided
in Section 3.2 hereof and except as
otherwise provided in any of the other Loan Documents by specific reference to
the applicable provision of this Agreement, if any provision contained in this
Agreement is in direct conflict with, or inconsistent with, any provision in
any of the other Loan Documents, the provision contained in this Agreement
shall govern and control.

 

27

 

11.7                        Execution
in Counterparts.  This Agreement
may be executed in any number of counterparts and by different parties hereto
in separate 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.

 

11.8                        Notice.  Except as otherwise provided herein, all
notices, requests and demands to or upon a party hereto, to be effective, shall
be in writing and shall be sent by certified or registered mail, return receipt
requested, by personal delivery against receipt, by overnight courier or by
facsimile and, unless otherwise expressly provided herein, shall be deemed to
have been validly served, given or delivered immediately when delivered against
receipt, one Business Day after deposit in the mail, postage prepaid, or with
an overnight courier or, in the case of facsimile notice, when sent, addressed
as follows:

 

	
  If
  to Lender:

  	
  Fleet
  Capital Corporation

  
	
   

  	
   

  	
  One Landmark Square

  
	
   

  	
   

  	
  2nd Floor

  
	
   

  	
   

  	
  CT 2-522-0201

  
	
   

  	
   

  	
  Stamford, CT 06901

  
	
   

  	
   

  	
  Attention: Deirdre Z.
  Sikora

  
	
   

  	
   

  	
  Facsimile No.: (203)
  964-9038

  
	
   

  	
   

  	
   

  
	
  With a copy to:

  	
  Updike, Kelly &
  Spellacy, P.C.

  
	
   

  	
   

  	
  One State Street

  
	
   

  	
   

  	
  Hartford, CT 06103

  
	
   

  	
   

  	
  Attention: Robert J.
  Martino, Esq.

  
	
   

  	
   

  	
  Facsimile No.: (860)
  548-2680

  
	
   

  	
   

  	
   

  
	
  If
  to Borrower:

  	
  IWT
  Tesoro Corporation

  
	
   

  	
   

  	
  Suite 10, 191 Post Road
  West

  
	
   

  	
   

  	
  Westport, CT 06880

  
	
   

  	
   

  	
  Attention: Henry J.
  Boucher, Jr.

  
	
   

  	
   

  	
  Facsimile No.: (203)
  221-2797

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  International
  Wholesale Tile, Inc.

  
	
   

  	
   

  	
  3500 S.W. 42nd Avenue

  
	
   

  	
   

  	
  Palm City, Florida
  34990

  
	
   

  	
   

  	
  Attention: Paul F.
  Boucher

  
	
   

  	
   

  	
  Facsimile No.: (772)
  223-0837

  
	
   

  	
   

  	
   

  
	
  With
  a copy to:

  	
  Rader
  and Coleman

  
	
   

  	
   

  	
  2101 North West Boca
  Raton

  
	
   

  	
   

  	
  Boulevard, Suite 1

  
	
   

  	
   

  	
  Boca Raton, Florida
  33431

  
	
   

  	
   

  	
  Attention: Gayle
  Coleman

  
	
   

  	
   

  	
  Facsimile No.: (561)
  367-1725

  

 

or to such other address
as each party may designate for itself by notice given in accordance with this Section 11.8; provided, however, that any
notice, request or demand to or upon Lender pursuant to subsection
3.1.1 or 4.2.2 hereof
shall not be effective until received by Lender.

 

11.9                        Lender’s
Consent.  Whenever Lender’s
consent is required to be obtained under this Agreement, any of the Other
Agreements or any of the Security Documents as a condition to any action, inaction,
condition or event, Lender shall be authorized to give or withhold such consent
in its sole and reasonable discretion and to condition its consent upon the
giving of additional collateral security for the Obligations, the payment of
money or any other matter.

 

28

 

11.10                 Credit
Inquiries.  Borrower hereby
authorizes and permits Lender to respond to usual and customary credit
inquiries from third parties concerning Borrower or any of its Subsidiaries or
any Guarantor.

 

11.11                 Time of
Essence.  Time is of the essence
of this Agreement, the Other Agreements and the Security Documents.

 

11.12                 Entire
Agreement.  This Agreement and
the other Loan Documents, together with all other instruments, agreements and
certificates executed by the parties in connection therewith or with reference
thereto, embody the entire understanding and agreement between the parties
hereto and thereto with respect to the subject matter hereof and thereof and
supersede all prior agreements, understandings and inducements, whether express
or implied, oral or written.

 

11.13                 Interpretation.  No provision of this Agreement or any of the
other Loan Documents shall be construed against or interpreted to the
disadvantage of any party hereto by any court or other governmental or judicial
authority by reason of such party having or being deemed to have structured or
dictated such provision.

 

11.14                 GOVERNING LAW; CONSENT TO FORUM. THIS
AGREEMENT HAS BEEN NEGOTIATED, EXECUTED AND DELIVERED AT AND SHALL BE DEEMED TO
HAVE BEEN MADE IN STAMFORD, CONNECTICUT.  THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF CONNECTICUT; PROVIDED, HOWEVER,
THAT IF ANY OF THE COLLATERAL SHALL BE LOCATED IN ANY JURISDICTION OTHER THAN CONNECTICUT,
THE LAWS OF SUCH JURISDICTION SHALL GOVERN THE METHOD, MANNER AND PROCEDURE FOR
FORECLOSURE OF LENDER’S LIEN UPON SUCH COLLATERAL AND THE ENFORCEMENT OF LENDER’S
OTHER REMEDIES IN RESPECT OF SUCH COLLATERAL TO THE EXTENT THAT THE LAWS OF SUCH
JURISDICTION ARE DIFFERENT FROM OR INCONSISTENT WITH THE LAWS OF CONNECTICUT.  AS PART OF THE CONSIDERATION FOR NEW VALUE RECEIVED,
AND REGARDLESS OF ANY PRESENT OR FUTURE DOMICILE OR PRINCIPAL PLACE OF BUSINESS
OF BORROWER OR LENDER, BORROWER HEREBY CONSENTS AND AGREES THAT THE SUPERIOR COURT
OF HARTFORD, CONNECTICUT, OR, AT LENDER’S OPTION, THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF CONNECTICUT, HARTFORD DIVISION, SHALL HAVE EXCLUSIVE JURISDICTION
TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN BORROWER AND LENDER PERTAINING
TO THIS AGREEMENT OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT.
 BORROWER EXPRESSLY SUBMITS AND CONSENTS IN
ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT,
AND BORROWER HEREBY WAIVES ANY OBJECTION WHICH BORROWER MAY HAVE BASED UPON LACK
OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM  NON  CONVENIENS
AND HEREBY CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED
APPROPRIATE BY SUCH COURT.  BORROWER HEREBY
WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY
SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER
PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO BORROWER AT THE
ADDRESS SET FORTH IN THIS AGREEMENT AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED
UPON THE EARLIER OF BORROWER’S ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT
IN THE U.S. MAILS, PROPER POSTAGE PREPAID. 
NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO AFFECT THE RIGHT
OF LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW, OR TO PRECLUDE
THE ENFORCEMENT BY LENDER OF ANY JUDGMENT OR ORDER OBTAINED IN SUCH FORUM OR THE
TAKING OF ANY ACTION UNDER THIS AGREEMENT TO ENFORCE SAME IN ANY OTHER APPROPRIATE
FORUM OR JURISDICTION.

 

29

 

11.15                 WAIVERS BY
BORROWER.  BORROWER WAIVES (i)  THE RIGHT TO TRIAL BY JURY (WHICH LENDER
HEREBY ALSO WAIVES) IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND
ARISING OUT OF OR RELATED TO ANY OF THE LOAN DOCUMENTS, THE OBLIGATIONS OR THE
COLLATERAL; (ii) PRESENTMENT, DEMAND AND PROTEST AND NOTICE OF PRESENTMENT,
PROTEST, DEFAULT, NON PAYMENT, MATURITY, RELEASE, COMPROMISE, SETTLEMENT,
EXTENSION OR RENEWAL OF ANY OR ALL COMMERCIAL PAPER, ACCOUNTS, CONTRACT RIGHTS,
DOCUMENTS, INSTRUMENTS, CHATTEL PAPER AND GUARANTIES AT ANY TIME HELD BY LENDER
ON WHICH BORROWER MAY IN ANY WAY BE LIABLE AND HEREBY RATIFIES AND CONFIRMS
WHATEVER LENDER MAY DO IN THIS REGARD; (iii) NOTICE PRIOR TO TAKING POSSESSION
OR CONTROL OF THE COLLATERAL OR ANY BOND OR SECURITY WHICH MIGHT BE REQUIRED BY
ANY COURT PRIOR TO ALLOWING LENDER TO EXERCISE ANY OF LENDER’S REMEDIES; (iv)
THE BENEFIT OF ALL VALUATION, APPRAISEMENT AND EXEMPTION LAWS; (v) NOTICE OF
ACCEPTANCE HEREOF; AND (VI) EXCEPT AS PROHIBITED BY LAW, ANY RIGHT TO CLAIM OR
RECOVER ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY
DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES. BORROWER ACKNOWLEDGES THAT
THE FOREGOING WAIVERS ARE A MATERIAL INDUCEMENT TO LENDER’S ENTERING INTO THIS
AGREEMENT AND THAT LENDER IS RELYING UPON THE FOREGOING WAIVERS IN ITS FUTURE
DEALINGS WITH BORROWER.  BORROWER
WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THE FOREGOING WAIVERS WITH ITS
LEGAL COUNSEL AND HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, THIS
AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.

 

[signature page follows]

 

30

 

IN
WITNESS WHEREOF,  this
Agreement has been duly executed on the day and year specified at the beginning
of this Agreement.

 

	
   

  	
  BORROWER:

  
	
   

  	
   

  
	
  ATTEST:

  	
  IWT
  TESORO CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
  By

  	
   

  	
   

  
	
   

  	
   

  	
  Henry J. Boucher, Jr.

  	
   

  
	
   

  	
   

  	
  Its President

  	
   

  
	
   

  	
   

  	
   

  	
  Duly Authorized

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  ATTEST:

  	
  INTERNATIONAL
  WHOLESALE TILE, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
  By

  	
   

  	
   

  
	
   

  	
   

  	
  Paul F. Boucher

  
	
   

  	
   

  	
  Its President

  
	
   

  	
   

  	
   

  	
  Duly Authorized

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  LENDER:

  
	
   

  	
   

  
	
   

  	
  Accepted in               ,
  Connecticut:

  
	
   

  	
   

  
	
   

  	
  FLEET
  CAPITAL CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By

  	
   

  	
   

  
	
   

  	
   

  	
  Name: Deirdre Z. Sikora

  
	
   

  	
   

  	
  Title: Vice President

  
	
   

  	
   

  	
  Duly Authorized

  
							

 

31

 

STATE OF                                            )

                ) ss                            

 

COUNTY OF                                         )

 

On this           
day of                   ,
200  , before me the undersigned officer, personally appeared                            ,
who acknowledged himself to be the                            
of IWT Tesoro Corporation, a Nevada corporation, and that he, as such
President, being authorized so to do, executed the foregoing instrument for the
purposes therein contained as his free act and deed and the free act and deed
of the corporation.

 

In Witness Whereof I
hereunto set my hand.

 

	
   

  	
   

  	
   

  
	
   

  	
  Commissioner of the
  Superior Court/

  
	
   

  	
  Notary Public

  
	
   

  	
  My Commission Expires:

  	
   

  	
   

  
					

 

STATE OF                                            )

                ) ss                            

 

COUNTY OF                                         )

 

On this          
day of                       ,
200  , before me the undersigned officer, personally appeared Paul F.
Boucher, who acknowledge himself to be the President of International Wholesale
Tile, Inc., a Florida corporation, and that he, as such President, being
authorized so to do, executed the foregoing instrument for the purposes therein
contained as their free act and deed and the free act and deed of the
corporation.

 

In Witness Whereof I
hereunto set my hand.

 

	
   

  	
   

  	
   

  
	
   

  	
  Commissioner of the
  Superior Court/

  
	
   

  	
  Notary Public

  
	
   

  	
  My Commission Expires:

  	
   

  	
   

  
					

 

32

 

APPENDIX
A

 

GENERAL DEFINITIONS

 

When used in the Amended
and Restated Loan and Security Agreement dated as of                       ,
200   , by and between Fleet Capital Corporation, IWT Tesoro
Corporation and International Wholesale Tile, Inc., (a)
the terms Account, Certificated Security,
Chattel Paper, Deposit Account, Document, Equipment,
Financial Asset, Fixture, General Intangibles, Goods,
Instrument, Inventory, Investment Property, Security,
Proceeds, Security Entitlement and Uncertificated
Security have the respective meanings assigned thereto under the
UCC (as defined below); (b) the terms Commercial Tort Claims, Electronic
Chattel Paper, Health-Care-Insurance Receivables, Letter-of-Credit
Rights, Payment Intangibles, Software, Supporting
Obligations and Tangible Chattel Paper
have the respective meanings assigned thereto in the UCC Revisions (as defined
below); (c) all terms indicating Collateral
having the meanings assigned thereto under the UCC or the UCC Revisions shall
be deemed to mean such Property, whether now owned or hereafter created or
acquired by Borrower or in which Borrower now has or hereafter acquires any
interest; (d) capitalized terms which are not
otherwise defined have the respective meanings assigned thereto in said Loan
and Security Agreement; and (e) the
following terms shall have the following meanings (terms defined in the
singular to have the same meaning when used in the plural and vice versa):

 

Account Debtor - any Person
who is or may become obligated on or under or on account of any Account,
Contract Right, Chattel Paper or General Intangible.

 

Adjusted Tangible Assets - all assets
except:  (i) any surplus resulting from
any write-up of assets subsequent to December 31, 2002; (ii) deferred assets,
other than prepaid insurance and prepaid taxes; (iii) patents, copyrights,
trademarks, trade names, non-compete agreements, franchises and other similar
intangibles; (iv) goodwill, including any amounts, however designated on a
Consolidated balance sheet of a Person or its Subsidiaries, representing the
excess of the purchase price paid for assets or stock over the value assigned
thereto on the books of such Person; (v) Restricted Investments; (vi)
unamortized debt discount and expense; (vii) assets located and notes and
receivables due from obligors outside of the United States of America; and
(viii) Accounts, notes and other receivables due from Affiliates or employees.

 

Adjusted Tangible Net Worth - at any
date means a sum equal to:

 

(i)                                     the
net book value (after deducting related depreciation, obsolescence,
amortization, valuation, and other proper reserves) at which the Adjusted
Tangible Assets of a Person would be shown on a balance sheet at such date in
accordance with GAAP, minus

 

(ii)                                  the
amount at which such Person’s liabilities (other than capital stock and
surplus) would be shown on such balance sheet in accordance with GAAP, and
including as liabilities all reserves for contingencies and other potential
liabilities.

 

Affiliate  - a Person (other
than a Subsidiary):  (i)
which directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, a Person; (ii)
which beneficially owns or holds 5% or more of any class of the Voting Stock of
a Person; or (iii) 5% or more of the Voting
Stock (or in the case of a Person which is not a corporation, 5% or more of the
equity interest) of which is beneficially owned or held by a Person or a
Subsidiary of a Person.

 

Agreement - the Loan and
Security Agreement referred to in the first sentence of this Appendix A, all
Exhibits thereto and this Appendix A.

 

Availability - the amount of
money which Borrower is entitled to borrow from time to time as Revolving
Credit Loans, such amount being the difference derived when the sum of the
principal amount of Revolving Credit Loans then outstanding (including any
amounts which Lender may have paid for the account of Borrower pursuant to any
of the Loan Documents and which have not been reimbursed by

 

 

Borrower) and the LC
Amount is subtracted from the Borrowing Base. 
If the amount outstanding is equal to or greater than the Borrowing
Base, Availability is zero (0).

 

Bank - Fleet National Bank,
or its successors or assigns.

 

Base Rate - the rate of
interest announced or quoted by Bank from time to time as its prime rate for
commercial loans, whether or not such rate is the lowest rate charged by Bank
to its most preferred borrowers; and, if such prime rate for commercial loans
is discontinued by Bank as a standard, a comparable reference rate designated
by Bank as a substitute therefor shall be the Base Rate.

 

Base Rate Advances – any
Loan bearing interest computed by reference to the Base Rate.

 

Base Rate Overadvance –
any Overadvance bearing interest computed by reference to the Base Rate.

 

Borrowing Base - as at any
date of determination thereof, an amount equal to the lesser of:

 

(i)                                         $25,000,000.00
at such date; or

 

(ii)                                     an
amount equal to the sum of :

 

(a)                                  85%
of the net amount of Eligible Accounts outstanding at such date; plus

 

(b)                                  the lesser of (1) $3,500,000.00 or (2) (i)
90% of the insured net amount of Eligible Extended Term Accounts at such date plus the lesser of (x)
$1,250,000 or (y) Accounts meeting the requirements of Eligible Extended Term
Accounts except for the requirement of Credit Insurance; plus

 

(c)                                  the sum of (1) 65% of the value of Eligible
Inventory consisting of floor tile, wall tile, marble and decorative tile
(provided however the 65% measurement contained in this subsection (1) shall be
increased to 70% on the Effective Date and continue until the earlier to occur
of (i) the date upon which Borrower receives any of the Equity Injection, or
(ii) June 30, 2005), plus (2) 50% of the value of Eligible Inventory
consisting of trim; plus (3) 40% of Listello; plus (4) 10% of
Intransit Inventory at such date, each calculated on the basis of the lower
of cost or market with the cost of raw materials and finished goods calculated
on a first-in, first-out basis; provided, however, such sum shall
not exceed 65% of the value of the Borrowing Base (provided however the 65%
measurement of the Borrowing Base shall be increased to 70% on the Effective
Date and continue until the earlier to occur of (i) the date upon which the
Borrowers receive any of the Equity Injection, or (ii) June 30, 2005); minus

 

(d)                                  the Exchange Exposure, plus

 

(iii)                                 90% of the then current cash surrender value
of all life insurance policies taken as collateral by the Lender and in which
the Lender has a first perfected lien.

 

For
purposes hereof, the net amount of Eligible Accounts and Eligible Extended Term
Accounts at any time shall be the face amount of such Eligible Accounts and
Eligible Extended Term Accounts less any and all returns, rebates, discounts
(which may, at Lender’s option, be calculated on shortest terms), credits,
allowances or excise taxes of any nature at any time issued, owing, claimed by
Account Debtors, granted, outstanding or payable in connection with such
Accounts at such time.

 

2

 

Borrowing Base Certificate –
a certificate by a responsible officer of Borrower, substantially in the form
of Exhibit Q (or another form acceptable
to Lender) setting forth the calculation of the Borrowing Base, including a
calculation of each component thereof, all in such detail as shall be satisfactory
to Lender.  All calculations of the
Borrowing Base in connection with the preparation of any Borrowing Base
Certificate shall originally be made by Borrower and certified to Lender;
provided, that Lender shall have the right to review and adjust, in the
exercise of its reasonable credit judgment, any such calculation after giving
notice thereof to the Borrower, (1) to reflect
its reasonable estimate of declines in value of any of the Collateral described
therein, and (2) to the extent that such
calculation is not in accordance with this Agreement.

 

Business Day - any day
excluding Saturday, Sunday and any day which is a legal holiday under the laws
of the State of Connecticut or is a day on which banking institutions located
in such state are closed.

 

Capitalized Lease Obligation
- any Indebtedness represented by obligations under a lease that is required to
be capitalized for financial reporting purposes in accordance with GAAP.

 

Closing Date - the date on
which all of the conditions precedent in Section 9 of
the Agreement were satisfied and the initial Loan was made or the initial
Letter of Credit or LC Guaranty was issued under the Agreement, September 10,
2003.

 

COGS – cost of Inventory of Borrower
sold to any Person (other than Guarantor, any Subsidiary or any other third
party related to Borrower) in the ordinary course of Borrower’s business.

 

Collateral - all of the
Property and interests in Property described in Section 5
of the Agreement, and all other Property and interests in Property that now or
hereafter secure the payment and performance of any of the Obligations.

 

Computer Hardware and Software
– all of Borrower’s rights (including rights as licensee and lessee) with respect
to (i) computer and other electronic data
processing hardware, including all integrated computer systems, central
processing units, memory units, display terminals, printers, computer elements,
card readers, tape drives, hard and soft disk drives, cables, electrical supply
hardware, generators, power equalizers, accessories, peripheral devices and
other related computer hardware; (ii) all
Software and all software programs designed for use on the computers and
electronic data processing hardware described in clause (i)
above, including all operating system software, utilities and application
programs in any form (source code and object code in magnetic tape, disk or
hard copy format or any other listings whatsoever); (iii)
any firmware associated with any of the foregoing; and (iv)
any documentation for hardware, Software and firmware described in clauses (i), (ii) and (iii) above, including flow charts, logic diagrams, manuals,
specifications, training materials, charts and pseudo codes.

 

Consolidated - the
consolidation in accordance with GAAP of the accounts or other items as to
which such term applies.

 

Contract Right – any right
of Borrower to payment under a contract for the sale or lease of goods or the
rendering of services, which right is at the time not yet earned by
performance.

 

Credit Insurance - at any
date means a policy of credit insurance obtained by the Borrower issued by a
reputable insurance carrier acceptable to Lender in its sole discretion and
with respect to which Lender has approved any deductible insured percentage,
credit limit or policy limit of liability, country limit of liability,
non-qualifying loss amount or other limitation on claims and which Credit
Insurance has been assigned to the Lender as additional collateral for the
Loans.

 

Current Assets - at any date
means the amount at which all of the current assets of a Person would be
properly classified as current assets shown on a balance sheet at such date in
accordance with GAAP.

 

3

 

Current Liabilities – at any
date means the amount at which all of the current liabilities of a Person would
be properly classified as current liabilities on a balance sheet at such date
in accordance with GAAP [excluding the Loans and current maturities of any
long-term Indebtedness].

 

Default - an event or
condition the occurrence of which would, with the lapse of time or the giving
of notice, or both, become an Event of Default.

 

Default Rate - as defined in
subsection 2.1.2 of the Agreement.

 

Distribution - in respect of
any corporation means and includes:  (i) the payment of any dividends or other distributions on
capital stock of the corporation (except distributions in such stock) and (ii) the redemption or acquisition of Securities unless made
contemporaneously from the net proceeds of the sale of Securities.

 

Dominion Account - a special
account established by Borrower pursuant to the Agreement at a bank selected by
Borrower, but acceptable to Lender in its reasonable discretion, which will
provide that the balances in such account shall on a daily basis automatically
be deposited into the Fleet Concentration Account and which Lender shall have
sole and exclusive access and control for withdrawal purposes.

 

EBITDA - with respect to any
fiscal period, the sum of Borrower’s Consolidated net earnings (or loss) before
interest expense, taxes, depreciation and amortization for said period as
determined in accordance with GAAP, excluding extraordinary gains and non-cash
adjustments made under the Financial Accounting Standards Board Statement No.
133.

 

Effective Date – has the
meaning set forth in the recitals of the Agreement.

 

Eligible Account - an
Account arising in the ordinary course of Borrower’s business from the sale of
goods or rendition of services which Lender, in its reasonable credit judgment,
deems to be an Eligible Account.  Without
limiting the generality of the foregoing, no Account shall be an Eligible
Account if:

 

(i)                                    it
arises out of a sale made by Borrower to a Subsidiary or an Affiliate of
Borrower or to a Person controlled by an Affiliate of Borrower; or

 

(ii)                                it
is unpaid for more than sixty (60) days after the original due date shown on
the invoice; or

 

(iii)                            it is
due or unpaid more than ninety (90) days after the original invoice date; or

 

(iv)                               50%
or more of the Accounts from the Account Debtor are not deemed Eligible
Accounts hereunder; or

 

(v)                                   the
total unpaid Accounts of the Account Debtor exceed 20% of the net amount of all
Eligible Accounts, to the extent of such excess; or

 

(vi)                               any
covenant, representation or warranty contained in the Agreement with respect to
such Account has been breached; or

 

(vii)                           the
Account Debtor is also Borrower’s creditor or supplier, or the Account Debtor
has disputed liability with respect to such Account, or the Account Debtor has
made any claim with respect to any other Account due from such Account Debtor
to Borrower, or the Account otherwise is or may become subject to any right of
setoff by the Account Debtor; or

 

4

 

(viii)                       the Account
Debtor has commenced a voluntary case under the federal bankruptcy laws, as now
constituted or hereafter amended, or made an assignment for the benefit of
creditors, or a decree or order for relief has been entered by a court having
jurisdiction in the premises in respect of the Account Debtor in an involuntary
case under the federal bankruptcy laws, as now constituted or hereafter
amended, or any other petition or other application for relief under the federal
bankruptcy laws has been filed against the Account Debtor, or if the Account
Debtor has failed, suspended business, ceased to be Solvent, or consented to or
suffered a receiver, trustee, liquidator or custodian to be appointed for it or
for all or a significant portion of its assets or affairs; or

 

(ix)                              it
arises from a sale to an Account Debtor outside the United States or Canada,
unless the sale is on letter of credit, guaranty or acceptance terms, in each
case acceptable to Lender in its sole discretion; or

 

(x)                                  it
arises from a sale to the Account Debtor on a bill-and-hold, guaranteed sale,
sale-or-return, sale-on-approval, consignment or any other repurchase or return
basis; or

 

(xi)                              the
Account Debtor is the United States of America or any department, agency or
instrumentality thereof, unless Borrower assigns its right to payment of such
Account to Lender, in a manner satisfactory to Lender, so as to comply with the
Assignment of Claims Act of 1940 (31 U.S.C. §203 et  seq., as
amended); or

 

(xii)                          the Account
is subject to a Lien other than a Permitted Lien; or

 

(xiii)                      the goods
giving rise to such Account have not been delivered to and accepted by the
Account Debtor (excluding 10% of goods in transit which shall be deemed
eligible hereunder) or the services giving rise to such Account have not been
performed by Borrower and accepted by the Account Debtor or the Account
otherwise does not represent a final sale; or

 

(xiv)                         the
Account is evidenced by chattel paper or an instrument of any kind, or has been
reduced to judgment; or

 

(xv)                             Borrower
has made any agreement with the Account Debtor for any deduction therefrom,
except for discounts or allowances which are made in the ordinary course of
business for prompt payment and which discounts or allowances are reflected in
the calculation of the face value of each invoice related to such Account; or

 

(xvi)                         Borrower
has made an agreement with the Account Debtor to extend the time of payment
thereof.

 

Eligible Extended Term Account
- an Account arising in the ordinary course of Borrower’s business from the
sale of goods or rendition of services which Lender, in its reasonable credit
judgment, deems to be an Eligible Extended Term Account.  Without limiting the generality of the
foregoing, no Account shall be an Eligible Extended Term Account if:

 

(i)                                    it
arises out of a sale made by Borrower to a Subsidiary or an Affiliate of
Borrower or to a Person controlled by an Affiliate of Borrower; or

 

(ii)                                it
is unpaid for more than sixty (60) days after the original due date shown on
the invoice; or

 

(iii)                            it is
due or unpaid more than one hundred eighty (180) days after the original
invoice date; or

 

5

 

(iv)                               50%
or more of the Accounts from the Account Debtor are not deemed Eligible
Extended Term Accounts hereunder or

 

(v)                                   the
total unpaid Accounts of the Account Debtor exceed 50% through December 31, 2003 and 20% thereafter of the net
amount of all Eligible Extended Term Accounts, to the extent of such excess; or

 

(vi)                               any
covenant, representation or warranty contained in the Agreement with respect to
such Account has been breached; or

 

(vii)                           the
Account Debtor is also Borrower’s creditor or supplier, or the Account Debtor
has disputed liability with respect to such Account, or the Account Debtor has
made any claim with respect to any other Account due from such Account Debtor
to Borrower, or the Account otherwise is or may become subject to any right of
setoff by the Account Debtor; or

 

(viii)                       the Account
Debtor has commenced a voluntary case under the federal bankruptcy laws, as now
constituted or hereafter amended, or made an assignment for the benefit of
creditors, or a decree or order for relief has been entered by a court having
jurisdiction in the premises in respect of the Account Debtor in an involuntary
case under the federal bankruptcy laws, as now constituted or hereafter
amended, or any other petition or other application for relief under the
federal bankruptcy laws has been filed against the Account Debtor, or if the Account
Debtor has failed, suspended business, ceased to be Solvent, or consented to or
suffered a receiver, trustee, liquidator or custodian to be appointed for it or
for all or a significant portion of its assets or affairs; or

 

(ix)                              it
arises from a sale to an Account Debtor outside the United States or Canada,
unless the sale is on letter of credit, guaranty or acceptance terms, in each
case acceptable to Lender in its sole discretion; or

 

(x)                                  it
arises from a sale to the Account Debtor on a bill-and-hold, guaranteed sale,
sale-or-return, sale-on-approval, consignment or any other repurchase or return
basis; or

 

(xi)                              the
Account Debtor is the United States of America or any department, agency or
instrumentality thereof, unless Borrower assigns its right to payment of such
Account to Lender, in a manner satisfactory to Lender, so as to comply with the
Assignment of Claims Act of 1940 (31 U.S.C. §203 et  seq., as
amended); or

 

(xii)                          the
Account is subject to a Lien other than a Permitted Lien; or

 

(xiii)                      the goods
giving rise to such Account have not been delivered to and accepted by the
Account Debtor (excluding 10% of goods in transit which shall be deemed
eligible hereunder) as evidenced by Borrower’s receipt of a proof of delivery
or the services giving rise to such Account have not been performed by Borrower
and accepted by the Account Debtor or the Account otherwise does not represent
a final sale; or

 

(xiv)                         the
Account is evidenced by chattel paper or an instrument of any kind, or has been
reduced to judgment; or

 

(xv)                             Borrower
has made any agreement with the Account Debtor for any deduction therefrom,
except for discounts or allowances which are made in the ordinary course of
business for prompt payment and which discounts or allowances are reflected in
the calculation of the face value of each invoice related to such Account; or

 

6

 

(xvi)                         Borrower
has made an agreement with the Account Debtor to extend the time of payment
beyond one hundred twenty (120) days of the due date thereof; or

 

(xvii)                     An
Account which is not subject to Credit Insurance; or

 

(xviii)                 An Account
which is subject to Credit Insurance and with respect to which (a) Borrower has
failed to comply with the terms, covenants, limitations and conditions of the
Credit Insurance, or (b) the insured has failed to make or honor a claim
present under the Credit Insurance within sixty (60) days of the submission
thereof or has earlier denied coverage with respect thereto.

 

Eligible Inventory - such Inventory
of Borrower (other than packaging materials and supplies) which Lender, in its
reasonable credit judgment, deems to be Eligible Inventory.  Without limiting the generality of the
foregoing, no Inventory shall be Eligible Inventory if:

 

(i)                                    it
is not raw materials or finished goods, or work-in-process that is, in Lender’s
opinion, readily marketable in its current form; or

 

(ii)                                it
is not in good, new and saleable condition; or

 

(iii)                            it is
slow-moving (which mean all items (a)
purchased more than two (2) years from the date of testing, and (b) which have
turnover of less than one-half times per year), obsolete or
unmerchantable; or

 

(iv)                               it
does not meet all standards imposed by any governmental agency or authority; or

 

(v)                                   it
does not conform in all respects to the warranties and representations set
forth in the Agreement; or

 

(vi)                               it
is not at all times subject to Lender’s duly perfected, first-priority security
interest and no other Lien except a Permitted Lien; or

 

(vii)                           it is
not situated at a location in compliance with the Agreement or is in transit.

 

Environmental Laws - all
federal, state and local laws, rules, regulations, ordinances, programs,
permits, guidances, orders and consent decrees relating to health, safety and
environmental matters.

 

Equity Injection – means proceeds paid to Borrower from the
issuance of securities of Borrower whether or not made pursuant to a
registration statement under the federal securities laws, which proceeds shall
be sufficient such that Borrower shall be in compliance with all financial
covenants set forth in Section 8.3 of
this Agreement.

 

ERISA - the Employee
Retirement Income Security Act of 1974, as amended, and all rules and
regulations from time to time promulgated thereunder.

 

Event of Default - as defined
in Section 10.1 of the Agreement.

 

Exchange Exposure means, at any time, ten percent (10%) of the
aggregate amount of Borrower’s outstanding foreign currencies exposure pursuant
to any and all agreements entered into by the Borrower, either directly or
through Bank, with foreign exchange services pursuant to the terms and
conditions set forth in a foreign exchange contract to be executed between Bank
and Borrower, so as to permit the Borrower to obtain, purchase, sell or
otherwise deal in specified foreign currencies pursuant to foreign exchange
contracts to be executed from time to time between Bank and Borrower.

 

7

 

Fleet Concentration Account – an
account in the name of the Lender at Bank, which Lender shall have sole and
exclusive access and control for withdrawal purposes.

 

GAAP - generally accepted
account principles in the United States of America in effect from time to time.

 

Guarantors – means
individually and collectively IWT Tesoro International, Ltd, a Bermuda exempt
company with a chief executive office located at Suite 10, 191 Post Road West,
Westport, Connecticut 06880, IWT Tesoro Transport, Inc., a Florida corporation
with a chief executive office located at Suite 10, Post Road West, Westport,
Connecticut 06880, and any other Person who may hereafter guarantee payment or
performance of the whole or any part of the Obligations.

 

Guaranty Agreements - the
Continuing Guaranty Agreements which are
to be executed by each Guarantor in form and substance satisfactory to Lender.

 

Indebtedness - as applied to
a Person means, without duplication

 

(i)                                    all
items which in accordance with GAAP would be included in determining total
liabilities as shown on the liability side of a balance sheet of such Person as
at the date as of which Indebtedness is to be determined, including, without
limitation, Capitalized Lease Obligations,

 

(ii)                                all
obligations of other Persons which such Person has guaranteed,

 

(iii)                            all
reimbursement obligations in connection with letters of credit or letter of
credit guaranties issued for the account of such Person, and

 

(iv)                               in
the case of Borrower (without duplication), the Obligations.

 

Intellectual Property – all
past, present and future:  trade secrets,
know-how and other proprietary information; trademarks, internet domain names,
service marks, trade dress, trade names, trademarks, business names, trade
styles, designs, logos, slogans (and all translations, adaptations, derivations
and combinations of the foregoing) indicia and other source and/or business
identifiers, and the goodwill of the business relating thereto and all
registrations or applications for registrations which have heretofore been or
may hereafter be issued thereon throughout the world, all renewals thereof; copyrights
(including copyrights for computer programs) and copyright registrations or
applications for registrations which have heretofore been or may hereafter be
issued throughout the world and all tangible property embodying the copyrights,
unpatented inventions (whether or not patentable); patent applications and
patents, all reissues and extensions thereof, and all proceeds thereof,
including the goodwill of the business connected with the use of and symbolized
by the same; industrial design applications and registered industrial designs;
license agreements, whether oral or written, related to any of the foregoing
and income therefrom; books, records, writings, computer tapes or disks, flow
diagrams, specification sheets, computer software, source codes, object codes,
executable code, data, databases and other physical manifestations, embodiments
or incorporations of any of the foregoing; the right to sue for all past,
present and future infringements of any of the foregoing; all other
intellectual property; any and all proceeds of any of the foregoing; and all
common law and other rights throughout the world in and to all of the
foregoing.

 

Interest Expenses  – means
with respect to any applicable period, scheduled interest payments required to
be made for such period in respect of Indebtedness.

 

Interest Period – as
applicable to any LIBOR Advance, a period commencing on the date a LIBOR
Advance is made, and ending on the date which is one (1) month, two (2) months,
three (3) months, or six (6) months later, as may then be requested by
Borrower; provided that (i) any
Interest Period which would otherwise end on a day which is not a Business Day
shall end in the next preceding or succeeding

 

8

 

Business Day as is Lender’s
custom in the market to which such LIBOR Advance relates; (ii)
there remains a minimum of one (1) month, two (2) months, three (3) months or
six (6) months (depending upon which Interest Period Borrower selects) in the
Term; and (iii) all Interest Periods of the same
duration which commence on the same date shall end on the same date.

 

Intransit Inventory – means Inventory
meeting the requirements of Eligible Inventory, except that it is in-transit
from a supplier’s location to Borrower’s location.

 

LC Amount - at any time, the
aggregate undrawn face amount of all Letters of Credit and LC Guaranties then
outstanding.

 

LC Guaranty - any guaranty
pursuant to which Lender or any Affiliate of Lender shall guaranty the payment
or performance by Borrower of its reimbursement obligation under any letter of
credit.

 

Letter of Credit - any
letter of credit issued by Lender or any of Lender’s Affiliates for the account
of Borrower.

 

LIBOR – as applicable to any
LIBOR Advance, the rate per annum (rounded upward, if necessary, to the nearest
1/32 of one percent) as determined on the basis of the offered rates for
deposits in U.S. dollars, for a period of time comparable to such LIBOR Advance
which appears on the Telerate page 3750 as of 11:00 a.m. (London time) on the
day that is two (2) London Banking Days preceding the first day of such LIBOR
Advance; provided, however, if the rate described above does not appear on the
Telerate System on any applicable interest determination date, the LIBOR rate
shall be the rate (rounded upwards as described above, if necessary) for
deposits in U.S. dollars for a period substantially equal to the interest
period on the Reuters Page “LIBO” (or such other page as may replace the LIBO
Page on that service for the purpose of displaying such rates), as of 11:00
a.m. (London Time), on the day that is two (2) London Banking Days prior to the
beginning of such interest period.  If
both the Telerate and Reuters systems are unavailable, then the rate for that
date will be determined on the basis of the offered rates for deposits in U.S.
dollars for a period of time comparable to such LIBOR Advance which are offered
by four (4) major banks in the London interbank market at approximately 11:00
a.m. (London time), on the day that is two (2) London Banking Days preceding
the first day of such LIBOR Advance as selected by Lender.  The principal London office of each of the
major London Banks so selected will be requested to provide a quotation of its
U.S. dollar deposit offered rate.  If at
least two (2) such quotations are provided, the rate for that date will be the
arithmetic mean of the quotations.  If
fewer than two quotations are provided as requested, the rate for that date
will be determined on the basis of the rates quoted for loans in U.S. dollars
to leading European banks for a period of time comparable to such LIBOR Advance
offered by major banks in Hartford, Connecticut at approximately 11:00 a.m.
(Hartford, Connecticut time), on the day that is two (2) London Banking Days
preceding the first day of such LIBOR Advance. 
In the event that Lender is unable to obtain any such quotation as
provided above, it will be determined that LIBOR pursuant to a LIBOR Advance
cannot be determined.  In the event that
the Board of Governors of the Federal Reserve System shall impose a Reserve
Percentage with respect to LIBOR deposits of Bank then for any period during
which such Reserve Percentage shall apply, LIBOR shall be equal to the amount
determined above divided by an amount equal to 1 minus the Reserve Percentage.

 

LIBOR Advance – any Loan
bearing interest computed by reference to the LIBOR.

 

LIBOR Overadvance – any
Overadvance bearing interest computed by reference to the LIBOR.

 

Lien - any interest in
Property securing an obligation owed to, or a claim by, a Person other than the
owner of the Property, whether such interest is based on common law, statute or
contract.  The term “Lien” shall also
include reservations, exceptions, encroachments, easements, rights-of-way,
covenants, conditions, restrictions, leases and other title exceptions and
encumbrances affecting Property.  For the
purpose of the Agreement, Borrower shall be deemed to be the owner of any
Property which it has acquired or holds subject to a conditional sale agreement
or other arrangement pursuant to which title to the Property has been retained
by or vested in some other Person for security purposes.

 

9

 

Loan Account - the loan
account established on the books of Lender pursuant to Section 3.6
of the Agreement.

 

Loan Documents - the
Agreement, the Other Agreements and the Security Documents.

 

Loans - all loans and
advances of any kind made by Lender, and/or by any affiliate of Lender,
pursuant to the Agreement.

 

London Banking Day – any
date on which commercial banks are open for business in London, England.

 

Money Borrowed - means (i) Indebtedness arising from the lending of money by any
Person to Borrower; (ii)
Indebtedness, whether or not in any such case arising from the lending by any
Person of money to Borrower, (A) which is
represented by notes payable or drafts accepted that evidence extensions of
credit, (B) which constitutes obligations
evidenced by bonds, debentures, notes or similar instruments, or (C) upon which interest charges are customarily paid (other
than accounts payable) or that was issued or assumed as full or partial payment
for Property; (iii) Indebtedness that
constitutes a Capitalized Lease Obligation; (iv)
reimbursement obligations with respect to letters of credit or guaranties of
letters of credit and (v)
Indebtedness of Borrower under any guaranty of obligations that would
constitute Indebtedness for Money Borrowed under clauses (i)
through (iii) hereof, if owed directly by
Borrower.

 

Multiemployer Plan - has the
meaning set forth in Section 4001(a)(3) of ERISA.

 

Obligations - all Loans and
all other advances, debts, liabilities, obligations, covenants and duties,
together with all interest, fees and other charges thereon, owing, arising, due
or payable from Borrower to Lender, and/or to any affiliate of Lender,  of any kind or nature, present or future,
whether or not evidenced by any note, guaranty or other instrument, whether
arising under the Agreement or any of the other Loan Documents or otherwise
whether direct or indirect (including those acquired by assignment), absolute
or contingent, primary or secondary, due or to become due, now existing or
hereafter arising and however acquired.

 

Organizational I.D. Number –
with respect to Borrower, the organizational identification number assigned to
Borrower by the applicable governmental unit or agency of the jurisdiction of
organization of Borrower.

 

Other Agreements - any and
all agreements, instruments and documents (other than the Agreement and the
Security Documents), heretofore, now or hereafter executed by Borrower, any
Subsidiary of Borrower or any other third party and delivered to Lender in
respect of the transactions contemplated by the Agreement.

 

Overadvance - the amount, if
any, by which the outstanding principal amount of Revolving Credit Loans plus
the LC Amount exceeds the Borrowing Base.

 

Overadvance Limit – has the
meaning set forth in Section 1.3 of the Agreement.

 

Participating Lender - each
Person who shall be granted the right by Lender to participate in any of the
Loans described in the Agreement and who shall have entered into a
participation agreement in form and substance satisfactory to Lender.

 

Permitted Liens - any Lien
of a kind specified in subsection 8.2.5
of the Agreement.

 

Permitted Purchase Money Indebtedness
- Purchase Money Indebtedness of Borrower incurred after the date hereof which
is secured by a Purchase Money Lien and which, when aggregated with the

 

10

 

principal amount of all
other such Indebtedness and Capitalized Lease Obligations of Borrower at the
time outstanding, does not exceed $25,000. 
For the purposes of this definition, the principal amount of any
Purchase Money Indebtedness consisting of capitalized leases shall be computed
as a Capitalized Lease Obligation.

 

Person - an individual,
partnership, corporation, limited liability company, joint stock company, land
trust, business trust, or unincorporated organization, or a government or
agency or political subdivision thereof.

 

Plan - an employee benefit
plan now or hereafter maintained for employees of Borrower that is covered by
Title IV of ERISA.

 

Principal Paid  - means as of any date as to which the amount thereof shall
be determined, all principal amounts scheduled to be paid during the applicable
period.

 

Projections - Borrower’s
forecasted Consolidated and consolidating (a) balance
sheets, (b) profit and loss statements, (c) cash flow statements, and (d)
revolving collateral to loan statements, all prepared on a consistent basis
with Borrower’s historical financial statements, together with appropriate
supporting details and a statement of underlying assumptions.

 

Property - any interest in
any kind of property or asset, whether real, personal or mixed, or tangible or
intangible.

 

Purchase Money Indebtedness -
means and includes (i)
Indebtedness (other than the Obligations) for the payment of all or any part of
the purchase price of any fixed assets, (ii) any
Indebtedness (other than the Obligations) incurred at the time of or within ten
(10) days prior to or after the acquisition of any fixed assets for the purpose
of financing all or any part of the purchase price thereof, and (iii) any renewals, extensions or refinancings thereof, but
not any increases in the principal amounts thereof outstanding at the time.

 

Purchase Money Lien - a Lien
upon fixed assets which secures Purchase Money Indebtedness, but only if such
Lien shall at all times be confined solely to the fixed assets the purchase
price of which was financed through the incurrence of the Purchase Money
Indebtedness secured by such Lien.

 

Reportable Event - any of
the events set forth in Section 4043(b) of ERISA.

 

Reserve Percentage – the
maximum aggregate reserve requirement (including all basic, supplemental,
marginal and other reserves) which is imposed on member banks of the Federal
Reserve System against “Euro-currency Liabilities” as defined in Regulation D.

 

Restricted Investment - any
investment made in cash or by delivery of Property to any Person, whether by
acquisition of stock, Indebtedness or other obligation or Security, or by loan,
advance or capital contribution, or otherwise, or in any Property except the
following:

 

(i)                                    investments
in one or more Subsidiaries of Borrower to the extent existing on the Closing
Date;

 

(ii)                                Property
to be used in the ordinary course of business;

 

(iii)                            Current
Assets arising from the sale of goods and services in the ordinary course of
business of Borrower and its Subsidiaries;

 

11

 

(iv)                               investments
in direct obligations of the United States of America, or any agency thereof or
obligations guaranteed by the United States of America, provided that such
obligations mature within one (1) year from the date of acquisition thereof;

 

(v)                                   investments
in certificates of deposit maturing within one (1) year from the date of
acquisition issued by a bank or trust company organized under the laws of the
United States or any state thereof having capital surplus and undivided profits
aggregating at least $100,000,000; and

 

(vi)                               investments
in commercial paper given the highest rating by a national credit rating agency
and maturing not more than 270 days from the date of creation thereof.

 

Revolving Credit Loan - a
Loan made by Lender as provided in Section 1.1 of
the Agreement and to the extent permitted under this Agreement, Section 1.3 hereof.

 

Revolving Credit Note – the
Amended and Restated Revolving Credit Note to be executed by Borrower on or
about the Effective Date in favor of Lender to evidence the Revolving Credit
Loan, which shall be in the form of Exhibit A to
the Agreement.

 

Schedule of Accounts - as
defined in subsection 6.2.1 of the Agreement.

 

Security - shall have the
same meaning as in Section 2(1) of
the Securities Act of 1933, as amended.

 

Security Documents - the
Guaranty Agreement and all other instruments and agreements now or at any time
hereafter securing the whole or any part of the Obligations.

 

Solvent – as to any Person,
that such Person (i) owns Property whose fair
saleable value is greater than the amount required to pay all of such Person’s
Indebtedness (including contingent debts), (ii) is able to
pay all of its Indebtedness as such Indebtedness matures and (iii) has capital sufficient to carry on its business and
transactions and all business and transactions in which it is about to engage.

 

Subordinated Debt -
Indebtedness of Borrower that is subordinated to the Obligations in a manner
satisfactory to Lender.

 

Subordination Agreement -
the Subordination Agreements to be dated on or about the Closing Date among
Borrower, Lender and Paul F. Boucher, Forrest Jordan and Grey Perna,
respectively.

 

Subsidiary - any corporation
of which a Person owns, directly or indirectly through one or more
intermediaries, more than 50% of the Voting Stock at the time of determination.

 

Tangible Capital Base – Adjusted
Tangible Net Worth of Borrower plus Subordinated Debt.

 

Term - as defined in Section 4.1 of the Agreement.

 

Total Credit Facility -
$25,000,000.00.

 

Total Debt – means as of any date as to
which the amount thereof shall be determined, all Indebtedness of Borrower,
including the Obligations less Subordinated Debt.

 

Type of Organization – with
respect to Borrower, the kind or type of entity by which Borrower is organized,
such as a corporation or limited liability company.

 

12

 

UCC – the Uniform Commercial
Code as in effect in the State of Connecticut on the date of this Agreement, as
the UCC may be amended or otherwise modified, including by the UCC Revisions.

 

UCC Revisions – the
revisions to Article 9 and other Articles of the Uniform Commercial Code, as
adopted by the State of Connecticut, effective October 1, 2001.

 

Unfunded Capital Expenditures
- expenditures made or liabilities incurred for the acquisition of any fixed
assets or improvements, replacements, substitutions or additions thereto which
have a useful life of more than one year, including the total principal portion
of Capitalized Lease Obligations, financed with operating earnings.

 

Voting Stock - Securities of
any class or classes of a corporation the holders of which are ordinarily, in
the absence of contingencies, entitled to elect a majority of the corporate
directors (or Persons performing similar functions).

 

Other Terms.  All other terms contained in the Agreement
shall have, when the context so indicates, the meanings provided for by the UCC
to the extent the same are used or defined therein.

 

Certain Matters of Construction.  The terms “herein,”
“hereof” and “hereunder”
and other words of similar import refer to the Agreement as a whole and not to
any particular section, paragraph or subdivision.  Any pronoun used shall be deemed to cover all
genders.  The section titles, table of
contents and list of exhibits appear as a matter of convenience only and shall
not affect the interpretation of the Agreement. 
All references to statutes and related regulations shall include any
amendments of same and any successor statutes and regulations.  All references to any of the Loan Documents
shall include any and all modifications thereto and any and all extensions or
renewals thereof.

 

13

 

LIST OF EXHIBITS

 

	
  Exhibit A

  	
   

  	
  Form of Amended and
  Restated Revolving Credit Note

  
	
  Exhibit B

  	
   

  	
  Intentionally Omitted

  
	
  Exhibit C

  	
   

  	
  Borrower’s and each
  Subsidiary’s Business Locations

  
	
  Exhibit D

  	
   

  	
  Jurisdictions in which
  Borrower and each Subsidiary is Authorized to do Business

  
	
   

  	
   

  	
   

  
	
  Exhibit E

  	
   

  	
  Capital Structure of
  Borrower

  
	
  Exhibit F

  	
   

  	
  Corporate Names

  
	
  Exhibit G

  	
   

  	
  Tax Identification
  Numbers of Subsidiaries

  
	
  Exhibit H

  	
   

  	
  Patents, Trademarks,
  Copyrights and Licenses

  
	
  Exhibit I

  	
   

  	
  Contracts Restricting
  Borrower’s Right to Incur Debts

  
	
  Exhibit J

  	
   

  	
  Litigation

  
	
  Exhibit K

  	
   

  	
  Capitalized Leases

  
	
  Exhibit L

  	
   

  	
  [Intentionally Omitted]

  
	
  Exhibit M

  	
   

  	
  Pension Plans

  
	
  Exhibit N

  	
   

  	
  Labor Contracts

  
	
  Exhibit O

  	
   

  	
  Compliance Certificate

  
	
  Exhibit P

  	
   

  	
  Permitted Liens

  
	
  Exhibit Q

  	
   

  	
  Borrowing Base
  CertificateExhibit 10.1

 

	
  350

  	
  TERM
  SHEET

  	
   

  

 

 

	
  350 Group, LLC

  

  350 Fifth Avenue South

  Suite 203

  Naples FL 34102

  Office 239-282-8300

  Fax 239 262 2212 

  	
  DATAMEG CORPORATION

  (NORTH ELECTRIC COMPANY, INC.)

  	
   

  
	
  Thursday, March 31,
  2005

  

  

  	
   

  

 

 

	
  Goals &

  Objectives

  	
   

  	
  To serve as advisor to the CEO/President of
  DataMeg Corporation and its affiliate entity, North Electric Company, Inc.
  (“North Electric” and together, “Datameg/NECI”), and apply 350 Group’s
  resources including global professional network, operational expertise, and
  corporate finance solutions to develop North Electric and respectively,
  DataMeg, as a viable and profitable provider of products and services to the
  IP telephony industry (including voice, data and video media).

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  350 Group

  	
   

  	
  1.

  	
   

  	
  Strategic Advisor

  
	
  Duties

  	
   

  	
   

  	
   

  	
  •

  	
  Serve as advisor to the proposed “Office of
  the CEO” as mentioned in Exhibit A;

  
	
   

  	
   

  	
   

  	
   

  	
  •

  	
  Advise on development of the Datameg/NECI
  Strategic Business Plan;

  
	
   

  	
   

  	
   

  	
   

  	
  •

  	
  Implement specific strategic initiatives as
  directed by Datameg/NECI CEO and Board; and

  
	
   

  	
   

  	
   

  	
   

  	
  •

  	
  Generally, provide management guidance in
  pursuit of monthly business progress following the points of outlined in Exhibit A,
  attached.

  
							

 

	
   

  	
   

  	
  2.

  	
   

  	
  Investment Banking

  
	
   

  	
   

  	
   

  	
   

  	
  •

  	
  Develop and implement the Datameg/NECI
  fundraising strategy;

  
	
   

  	
   

  	
   

  	
   

  	
  •

  	
  Provide introductions to suitable contacts
  through its relationship with high net worth private investors, institutional
  investors and investment banks, and manage, in collaboration with DataMeg
  Chairman and CEO, the investor interface between the company and the investment
  community; and

  
	
   

  	
   

  	
   

  	
   

  	
  •

  	
  Develop as a sales tool, instruments for
  equipment lease financing with the objective to facilitate more rapid market
  adoption of North Electric products and services.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  3.

  	
   

  	
  Operations Support

  
	
   

  	
   

  	
   

  	
   

  	
  •

  	
  Create sales, marketing, distribution and
  contract manufacturing relationships to enable routine production and
  delivery of products and services; and

  
	
   

  	
   

  	
   

  	
   

  	
  •

  	
  Oversee implementation of appropriate
  business systems and reporting tools to facilitate the routine, timely
  reporting required of DataMeg/NECI entities.

  

 

1

 

	
  DataMeg / North

  	
   

  	
  1.

  	
   

  	
  Obtain Board of Directors approval for 350
  Group Engagement;

  
	
  Electric Duties

  	
   

  	
  2.

  	
   

  	
  Grant access to the appropriate individuals
  in a timely fashion;

  
	
   

  	
   

  	
  3.

  	
   

  	
  Provide Business Strategy Content by
  submitting business documents, plans, ideas, marketing materials, financial
  reports to 350 Group and other content elements in a timely manner;

  
	
   

  	
   

  	
  4.

  	
   

  	
  Provide monthly management reports to 350
  Group (including sales and financial reports) and hold no less frequently
  than monthly status meetings; and

  
	
   

  	
   

  	
  5.

  	
   

  	
  Alert 350 Group to all inquires about
  partnerships, investment or licensing.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Engagement

  Term

  	
   

  	
  Thirty six (36) months automatically
  renewing in twelve (12) month installments. Exclusive representation
  agreement to handle business transactions related to the financing and
  capital structure of DataMeg/NECI (Stock Sales, Fundraising, Bridge and
  Mezzanine Loans, Joint Ventures, Partnerships, Asset Sales and the like).
  Success Fee protection for all contacts within 12 months after termination
  and 24 months for 350 Group contacts made prior to termination.

  
	
   

  	
   

  	
   

  
	
  Cancellation

  	
   

  	
  Thirty (30) days cancellation notice for
  either party, after first 120 days.

  
	
   

  	
   

  	
   

  
	
  Primary Staffing

  	
   

  	
  Tim Cartwright, Managing Director

  
	
   

  	
   

  	
  Craig Lyon, Managing Director

  
	
   

  	
   

  	
  Reznor Orr, Managing Director

  
	
   

  	
   

  	
   

  
	
  Success Fees

  	
   

  	
  1.

  	
   

  	
  Upon signature of Term Sheet, Twenty Five
  percent (25%) of DataMeg common stock issued at par value into performance pool;
  350 Group to earn stock over time utilizing a vesting schedule and only
  upon DataMeg /NECI achieving the specific performance milestones set forth in
  Exhibit B;

  
	
   

  	
   

  	
  2.

  	
   

  	
  During the term of the engagement; 350
  Group will receive a Success Fee in the amount 5% payable upon the company’s
  receipt of investor funds raised and received by the Company.

  
	
   

  	
   

  	
   

  
	
  Business Terms

  	
   

  	
  Includes standard indemnification and
  mutual confidentiality clauses.

  
	
   

  	
   

  	
   

  
	
  Expenses

  	
   

  	
  Out-of-pocket expenses for travel and
  related business expenses will be invoiced on a monthly basis and must be
  paid in 30 days. All reimbursable travel will be subject to DataMeg/NECI
  pre-approval.

  
	
   

  	
   

  	
   

  
	
  Expiration

  Notice

  	
   

  	
  The offer represented in this term sheet
  expires in 15 days. Within 20 days of signature of this Term Sheet, an
  Engagement Letter detailing the terms herein will be submitted to
  DataMeg/NECI.

  

 

 

	
   

  	
  /s/ Andrew Benson

  	
  4-1-05

  	
   

  	
  /s/ Timothy J Cartwright

  	
   

  	
    Director

  
	
   

  	
  Andrew Benson

  	
  Date

  	
   

  	
  Tim Cartwright

  	
  Date

  	
    4-1-05

  
	
   

  	
  Chairman

  	
  Managing Director

  
	
   

  	
  DataMeg Corporation

  	
  350 Group, LLC

  

 

2

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