Document:

ex10-5.htm

    Exhibit
10.5

    PROMISSORY
NOTE

    

    
      	
              US
      $100,000

            	
              April
      16, 2009

            

    

    

    FOR VALUE RECEIVED, the
undersigned, SUMOTEXT Incorporated, a Nevada corporation, which has a business
address of 2100 Riverdale, Suite 200, Little Rock, Arkansas, 72202 ("Maker"),
hereby promises to pay to the order of Timothy Miller, an individual ("Payee"),
the principal sum of One Hundred Thousand Dollars ($100,000), in lawful money in
United States of America, which shall be legal tender, bearing interest and
payable as provided herein.  This Promissory Note (this “Note”
or “Promissory
Note”) has an effective date of April 16, 2009 (the “Effective
Date”).

    

    
      	
              1.

            	
              Interest
      on the unpaid balance of this Note shall bear interest at the rate of ten
      percent (10%) per annum, which interest shall accrue from the Effective
      Date until the Maturity Date (as defined below), unless prepaid prior to
      such Maturity Date. All past-due principal and interest (which failure to
      pay such amounts shall be defined herein as an “Event
      of Default”) shall bear interest at the rate of fifteen percent
      (15%) per annum until paid in full.  Interest will be computed
      on the basis of a 360-day year.

            

    

    

    
      	
              2.

            	
              Payments
      of accrued interest on this Note shall be due and payable to Payee
      quarterly, beginning on the date three months from the Effective Date of
      this Note, and continuing every three months thereafter until April 15,
      2010 (the “Maturity
      Date”), at which time the entire principal amount of this Note and
      any and all accrued and unpaid interest shall be due and
      payable.

            

    

    

    
      	
              3.

            	
              This
      Note may be prepaid in whole or in part, at any time and from time to
      time, without premium or penalty.

            

    

    

    
      	
              4.

            	
              If
      any payment of principal or interest on this Note shall become due on a
      Saturday, Sunday or any other day on which national banks are not open for
      business, such payment shall be made on the next succeeding business
      day.

            

    

    

    
      	
              5.

            	
              This
      Note shall be binding upon and inure to the benefit of the Payee named
      herein and Payee’s respective successors and assigns.  Each
      holder of this Note, by accepting the same, agrees to and shall be bound
      by all of the provisions of this Note.  Payee may assign this
      Note or any of its rights, interests or obligations to this Note without
      the prior written approval of
Maker.

            

    

    

    
      	
              6.

            	
              No
      provision of this Note shall alter or impair the obligation of Maker to
      pay the principal of and interest on this Note at the times, places and
      rates, and in the coin or currency, herein
  prescribed.

            

    

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    
      	
              7.

            	
              The
      Maker will do or cause to be done all things reasonably necessary to
      preserve and keep in full force and effect its corporate existence, rights
      and franchises and comply with all laws applicable to the Maker, except
      where the failure to comply could not reasonably be expected to have a
      material adverse effect on the Maker. Failure to comply with this
      provision shall constitute an Event of
Default.

            

    

    

    
      	
              8.

            	
              Notwithstanding
      anything to the contrary in this Note or any other agreement entered into
      in connection herewith, whether now existing or hereafter arising and
      whether written or oral, it is agreed that the aggregate of all interest
      and any other charges constituting interest, or adjudicated as
      constituting interest, and contracted for, chargeable or receivable under
      this Note or otherwise in connection with this loan transaction, shall
      under no circumstances exceed the Maximum
Rate.

            

    

    

    
      	
              9.

            	
              Upon
      an Event of Default (as defined herein), Payee shall have the right to
      require the Maker to immediately pay the entire unpaid principal and
      interest due under this Note.

            

    

    

    
      	
              10.

            	
              In
      the event the maturity of this Note is accelerated by reason of an Event
      of Default under this Note, any other agreement entered into in connection
      herewith or therewith, or by voluntary prepayment by Maker or otherwise,
      then earned interest may never include more than the Maximum Rate
      allowable by law, computed from the dates of each advance of the loan
      proceeds outstanding until payment.  If from any circumstance
      any holder of this Note shall ever receive interest or any other charges
      constituting interest, or adjudicated as constituting interest, the
      amount, if any, which would exceed the Maximum Rate shall be applied to
      the reduction of the principal amount owing on this Note, and not to the
      payment of interest; or if such excessive interest exceeds the unpaid
      balance of principal hereof, the amount of such excessive interest that
      exceeds the unpaid balance of principal hereof shall be refunded to
      Maker.  In determining whether or not the interest paid or
      payable exceeds the Maximum Rate, to the extent permitted by applicable
      law (i) any nonprincipal payment shall be characterized as an expense, fee
      or premium rather than as interest; and (ii) all interest at any time
      contracted for, charged, received or preserved in connection herewith
      shall be amortized, prorated, allocated and spread in equal parts during
      the period of the full stated term of this Note.  The term
      "Maximum
      Rate" shall mean the maximum rate of interest allowed by applicable
      federal or state law.

            

    

    

    
      	
              11.

            	
              Except
      as provided herein, Maker and any sureties, guarantors and endorsers of
      this Note jointly and severally waive demand, presentment, notice of
      nonpayment or dishonor, notice of intent to accelerate, notice of
      acceleration, diligence in collecting, grace, notice and protest, and
      consent to all extensions without notice for any period or periods of time
      and partial payments, before or after maturity, without prejudice to the
      holder.  The holder shall similarly have the right to deal in
      any way, at any time, with one or more of the foregoing parties without
      notice to any other party, and to grant any such party any extensions of
      time for payment of any of said indebtedness, or to grant any other
      indulgences or forbearance whatsoever, without notice to any other party
      and without in any way affecting the personal liability of any party
      hereunder.  If any efforts are made to collect or enforce this
      Note or any installment due hereunder, the undersigned agrees to pay all
      collection costs and fees, including reasonable attorney's
      fees.

            

    

    
      
         

      

      
        -2-

        
          

        

      

      
         

      

    

    
      	
              12.

            	
              All
      of the terms, provisions and conditions of this Note shall be binding upon
      and shall inure to the benefit of and be enforceable by the parties hereto
      and their respective successors and permitted
  assigns.

            

    

    

    
      	
              13.

            	
              This
      Agreement shall be construed in accordance with and governed by the laws
      of the State of Arkansas, excluding any provision of this Note which would
      require the use of the laws of any other
  jurisdiction.

            

    

    

    
      	
              14.

            	
              This
      Note constitutes the entire agreement of the parties hereto and expressly
      supersedes all prior and contemporaneous understandings and commitments,
      whether written or oral, with respect to the subject matter
      hereof.  No variations, modifications, changes or extensions of
      this Note or any other terms hereof shall be binding upon any party hereto
      unless set forth in a document duly executed by such party or an
      authorized agent or such party.

            

    

    

    
      	
              15.

            	
              No
      failure on the part of the Payee to enforce any provisions of this Note
      will act as a waiver of the right to enforce that
    provision.

            

    

    

    
      	
              16.

            	
              A
      copy of this Promissory Note signed by one party and (a) faxed to another
      party or (b) scanned and emailed to another party shall be deemed to have
      been executed and delivered by the signing party as though an
      original.  A photocopy or PDF of this Promissory Note shall be
      effective as an original for all
purposes.

            

    

    

    

    

    

    

    

    [Remainder
of page left intentionally blank.  Signature page
follows.]

    
      
         

      

      
        -3-

        
          

        

      

      
         

      

    

    IN
WITNESS WHEREOF, Maker has duly executed this Note as of the day and year first
above written, with an Effective Date as provided above.

    

    

    
      
        
          	 
      	
                  SUMOTEXT Incorporated

                
	 
      	 
      
	 
      	 
      
	 
      	
                  /s/
      Matthew Lozeau

                
	 
      	
                  _______________________

                
	 
      	
                  Matthew
      Lozeau

                
	 
      	
                  Secretary

                

        

      

    

    

    

    
      
         

      

      
        -4-exhibit10_1.htm

     

    TD
BANK, N.A.

    

    LOAN
AND SECURITY AGREEMENT

    (ALL
ASSETS)

    

    

    

    

    

    LOAN AND SECURITY AGREEMENT (ALL
ASSETS), dated as of June 29, 2009 by and among The L. S. Starrett
Company, a Massachusetts corporation having a principal place of business
located at 121 Crescent Street, Athol, Massachusetts 01331 ("Starrett"), Evans Rule
Company, Inc., a New Jersey corporation having a principal place of business
located at 5965 Core Road, Suite 618, North Charleston, SC 29406 ("Evans Rule"), Level
Industries, Inc., a Massachusetts corporation having a principal place of
business located at 121 Crescent Street, Athol, Massachusetts 01331 ("Level Industries"), Tru-Stone
Technologies, Inc., a Delaware corporation having a principal place of business
located at 1101 Prosper Drive, P.O. Box 430, Waite Park, MN 56387 ("Tru-Stone"), and Starrett
Kinemetric Engineering, Inc., a Delaware corporation having a principal place of
business located at 26052 Merit Circle, Suite 103, Laguna Hills, CA 92653
("Kinemetric" and
together with Starrett, Evans Rule, Level Industries and Tru-Stone, each a "Borrower" and together the
"Borrower") and T.D.
Bank, N.A., a national banking association organized and existing under the laws
of the United States of America, the secured party hereunder having a place of
business located at 370 Main Street, Worcester, Massachusetts 01608 (the "Bank").  The parties
hereto hereby agree as follows:

    

    
      	
              1.

            	
              DEFINITIONS
      AND ACCOUNTING TERMS.

            

    

    

    Section 1.01.  As
used in this Agreement, the following terms have the following meanings (terms
defined in the singular to have the same meaning when used in the plural and
vice versa):

    

    “Adjusted EBITDA” shall mean,
during the applicable period, EBITDA minus Extraordinary Gains (or plus
Extraordinary Losses), minus dividends and distributions.

    

    “Affiliate” shall mean any
Person (a) which directly or indirectly Controls, or is Controlled by or is
under common Control with the Borrower or a subsidiary, (b) which directly or
indirectly beneficially holds or owns five (5%) percent or more of any class of
voting stock of the Borrower or any subsidiary, or (c) five (5%) percent or more
of the voting stock of which is directly or indirectly beneficially owned or
held by the Borrower or a subsidiary.

    

    “Bankruptcy Code” as used
herein shall mean Title 11 of the United States Code entitled
“Bankruptcy”.

    

    

    
      
        
        

      

      
        1

        
          

        

      

      
        
        

      

    

    “Borrowing Base” as used
herein shall mean the sum of the following:

    

    
      	
               
      

            	
              (a)

            	
              eighty
      (80%) percent of the unpaid face amount of Qualified Accounts (as defined
      below), PLUS

            

    

    

    
      	
               
      

            	
              (b)

            	
              fifty
      (50%) percent of the cost or market value, whichever is lower, of all
      Eligible Inventory (as defined
below).

            

    

    

    “Capital Assets” shall mean
assets that, in accordance with GAAP, are required or permitted to be
depreciated or amortized on the Borrower’s balance sheet.

    

    “Capital Expenditures” shall
mean but not be limited to amounts paid during such year for Capital Assets or
Capital Leases and shall include, in the case of a purchase, the entire purchase
price and, in the case of a Capital Lease (but not an operating lease), the
entire rental for the term.

    

    “Capital Leases” shall mean
Capital Leases, conditional sales contracts and other title retention agreements
relating to the purchase or acquisition of Capital Assets.

    

    “CMLTD” shall mean the current
maturity of long term indebtedness other than Revolving Loans to be paid during
the next twelve-month period, including but not limited to, amounts required to
be paid during such period under Capital Leases.

    

    “Collateral” shall have the
meaning assigned to such term in Section 5.

    

    “Commercial Letters of Credit”
shall mean a letter of credit issued to support the purchase by Borrower of
Inventory prior to its transport to one of Borrower’s places of business that
provides that all draws thereunder must require presentation of customary
documentation including, if applicable, commercial invoices, packing lists,
certificate of origin, bill of lading, an airway bill, customs clearance
documents, quota statement, certificate, beneficiaries statement and bill of
exchange, bills of lading, dock warrants, dock receipts, warehouse receipts or
other documents of title, in form and substance satisfactory to Bank and
reflecting passage to Borrower of title to first quality Inventory conforming to
Borrower’s contract with the seller thereof.

    

    “Control” shall mean the
possession, directly or indirectly, of the power to direct or cause the direction
of the management and policies of any Person, whether through the ownership of
voting securities, by contract or otherwise.

    

    “Credit Limit” means an amount
equal to Twenty-Three Million ($23,000,000.00) Dollars.

    

    “Debt” means (a) indebtedness
or liability for borrowed money; (b) obligations evidenced by bonds, debentures,
notes, or other similar instruments; (c) obligations for the deferred purchase
price of property or services (including trade obligations); (d) obligations as
lessee under Capital Leases; (e) current liabilities in respect of unfunded
vested benefits under plans covered by ERISA; (f) obligations under Letters of
Credit; (g) obligations under acceptance facilities; (h) all guaranties,
endorsements (other than for collection or deposit in the ordinary course of
business), and other contingent obligations to purchase, to provide funds for
payment, to supply funds to invest in any Person, or otherwise to assure a
creditor against loss; and (i) obligations secured by any Liens, whether or not
the obligations have been assumed.

    

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

    “Debt Service Coverage Ratio”
shall mean, during the applicable period, that quotient equal to (a) Adjusted
EBITDA, divided by (b) Fixed Charges, that is,

    

    Adjusted
EBITDA

    Fixed
Charges

    

    “Distributions” shall mean all
payment or distributions to Owners in cash or in property other than reasonable
salaries, bonuses and expense reimbursements.

    

    “EBIT” shall mean, for the
applicable period, income from continuing operations before the payment of
interest and taxes, determined in accordance with GAAP for Starrett and its
subsidiaries on a consolidated basis.

    

    “EBITDA” shall mean, for the
applicable period, EBIT plus depreciation, depletion, amortization and other
non-cash charges, determined in accordance with GAAP for Starrett and its
subsidiaries on a consolidated basis.

    

    “Eligible Inventory” means Borrower’s
raw materials and finished goods which are initially and at all times until
sold: new and unused or refurbished (except, with Bank’s written approval, used
equipment held for sale or lease), in first−class condition, merchantable and
saleable through normal trade channels; at a location which is in the United
States; subject to a perfected security interest in favor of Bank (upon Bank's
filing of Financing Statements as defined in Section 5(e) hereof); owned by
Borrower free and clear of any lien except in favor of Bank and/or Permitted
Liens; not obsolete; not scrap, waste, defective goods and the like; have been
produced by Borrower in accordance with the Federal Fair Labor Standards Act of
1938, as amended, and all rules, regulations and orders promulgated thereunder;
not stored with a bailee, warehouseman or similar party unless Bank has given
its prior written consent thereto; and have not been designated by Bank, in
accordance with its normal credit policies, as unacceptable for any reason by
notice to Borrower.

    

    “Environmental Law” means any
federal, state, local or other governmental statute, regulation, law or
ordinance dealing with the protection of human health and the
environment.

    

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

    

    “Event of Default” shall have
the meaning assigned to such term in Section 14.01.

    

    “Extraordinary Gains/Losses”
shall mean, during the applicable period, a gain or loss related to the sale of
a Capital Asset, income of a subsidiary Borrower under a concept of pooling or
accounting, income from minority interest under the equity method of accounting,
the write-up or impairment of assets, the forgiveness of Debt income, litigation
gain or loss, casualty loss and income or loss from discontinued operations or
the sale of a business.

    

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

    “Fixed Charges” shall mean
Interest plus CMLTD for the next 12 months

    

    “Funded Debt” shall mean, for
each quarterly period of Starrett and its consolidated subsidiaries, all
outstanding liabilities for borrowed money and other interest-bearing
liabilities, including current and long term Debt and Letters of Credit of
Starrett and its consolidated subsidiaries

    

    
      	
               
      

            	
              “GAAP” shall mean
      generally accepted accounting principles as in effect from time to time;
      provided, however, that for purposes of calculating the financial
      covenants contained in Section 13 GAAP shall mean generally accepted
      accounting principles as in effect on the date of this
      Agreement.

            

    

    

    “Hazardous Substances” means
pollutants, contaminants, hazardous substances, hazardous wastes, petroleum and
fractions thereof, and all other chemicals, wastes, substances and materials
listed in, regulated by or identified in any Environmental Law.

    

    “Interest” shall mean, for the
applicable period, all interest paid or payable, including, but not limited to,
interest paid or payable on indebtedness and on Capital Leases of Starrett and
its consolidated subsidiaries, determined in accordance with GAAP.

    

    “Letters of Credit” shall have
the meaning assigned to such term in Section 2.05.

    

    “Leverage Ratio” shall mean
the ratio of Funded Debt to EBITDA for the twelve (12) month period ending on
the last day of each fiscal quarter of Starrett and its consolidated
subsidiaries.

    

    “LIBOR” (London Interbank
Offered Rate) shall mean the rate of interest in U.S. Dollars (rounded upwards,
at the Bank's option, to the next 100th of one
percent) equal to the British Bankers' Association LIBOR ("BBA LIBOR") for one (1) month
as published by Bloomberg (or such other commercially available source providing
quotations of BBA LIBOR as designated by Bank form time to time) at
approximately 11:00 a.m. (London time) two (2) London Banking Days prior the
Reset Date; provided however, if more than one BBA LIBOR is specified, the
applicable rate shall be the arithmetic mean of all such
rates.  London Banking Days means any day on which commercial banks
are open for general business (including dealings in foreign exchange and
foreign currency deposits) in London, England.  If, for any reason,
such rate is not available, the term LIBOR shall mean, with respect to any one
(1) month period, the rate of interest per annum determined by Bank to be the
average rate per annum at which deposits in dollars are offered for such
Interest Period by major banks in London, England at approximately 11:00 a.m.
(London time) two (2) London Banking Days prior to the Reset Date.

    

    “Lien” means any mortgage,
deed of trust, pledge, security interest, hypothecation, assignment, deposit
arrangement, encumbrance, lien (statutory or other), or preference, priority, or
other security agreement or preferential arrangement, charge, or encumbrance of
any kind or nature whatsoever (including, without limitation, any conditional
sale or other title retention agreement, any financing lease having
substantially the same economic effect as any of the foregoing, and the filing
of any financing statement under the UCC or comparable law of any jurisdiction
to evidence any of the foregoing).

    

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

    “Margin” shall mean, during
the applicable period, the percentages set forth below, as determined by the
Borrower’s Leverage Ratio (as defined herein):

    

    
      	
              Level

            	
              Leverage
      Ratio

            	
              Margin

            
	
              1

            	
              Less
      than 1.00

            	
              1.50%

            
	
              2

            	
              1.00
      to 2.00

            	
              1.75%

            
	
              3

            	
              Greater
      than 2.00 and up to and including 2.50

            	
              2.00%

            
	
              4

            	
              Greater
      than 2.50

            	
              2.25%

            

    

    

    Prior to
the Bank's receipt of the Borrower's management prepared quarterly financial
statements for the period ending June 30, 2009, the Margin shall mean
1.75%.  Upon the Bank’s receipt of a Margin Certificate in the form of
Exhibit 1 attached
hereto and the financial statements of Starrett and its consolidated
subsidiaries in accordance with Section 11 of this Agreement (the "Required Documents") the
Margin shall be determined and be effective as of the first day of the following
month, which Margin shall remain in effect until the first day of the calendar
month following the Bank’s receipt of the subsequent Margin Certificate and
shall be adjusted, if at all, as at the end of each quarterly period thereafter
based on the applicable accurate Margin Certificate.  In the event
that the Borrower fails to timely furnish the Bank with the Required Documents
in accordance with Section 11 of this Agreement then the Margin shall be
determined as if Level 4 was applicable, from the first day after the date that
such Required Documents were due until the first day of the calendar month
following the Bank’s receipt of the Required Documents.

    

    “Note” shall have the meaning
assigned to such term in Section 2.02.

    

    “Obligations” shall have the
meaning assigned to such term in Section 6.

    

    “Organizational Documents”
means (a) with respect to a corporation, its certificate or articles of
incorporation and by-laws; (b) with respect to a partnership, its partnership
certificate and partnership agreement; (c) with respect to a limited liability
company, its articles or certificate of formation and its operating or
management agreement; and (d) with respect to a trust, the declaration of trust;
and, with respect to any of them, any other document required to be filed with
public authorities to evidence or establish authority to conduct
business.

    

    “Owner” means with respect to
Starrett and its subsidiaries, any Person having legal or beneficial title to an
ownership interest in Starrett and its subsidiaries or a right to acquire such
an interest.

    

    “Permitted Liens” shall have
the meaning assigned to such term in Section 13.08.

    

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

    “Permitted Protests” means the
right of the Borrower to protest any Lien (other than a Lien that secures the
Obligations), tax (other than payroll taxes or taxes that are the subject of a
federal or state tax lien) or rental payment, provided that (x) a reserve with
respect to such liability is established on the books of the Borrower, (y) any
such protest is instituted and diligently prosecuted by the Borrower in good
faith, and (z) the Bank is satisfied that, while such protest is pending, there
will be no impairment of the enforceability, validity or priority of any of the
Liens of the Bank in and to the Collateral.

    

    “Person” means an individual,
partnership, corporation, business trust, joint stock company, trust,
unincorporated association, joint venture, governmental authority, or other
entity of whatever nature.

    

    “Plan” means any employee plan
subject to Title IV of ERISA maintained for employees of Borrower, any
subsidiary of Borrower or any other trade or business under common control with
Borrower within the meaning of Section 414(c) of the Internal Revenue Code of
1986 or any regulations thereunder.

    

    “Qualified Account”, as used herein,
means an Account owing to Borrower which met the following specifications at the
time it came into existence and continues to meet the same until it is collected
in full:

    

    
      	
               
      

            	
              (a)

            	
              The
      Account is not more than ninety (90) days from the date of the invoice
      thereof.

            

    

    

    
      	
               
      

            	
              (b)

            	
              The
      Account arose from the performance of services or an outright sale of
      goods by Borrower, such goods have been shipped to the account debtor, and
      Borrower has possession of, or has delivered to Bank, shipping and
      delivery receipts evidencing such
shipment.

            

    

    

    
      	
               
      

            	
              (c)

            	
              The
      Account is not subject to any prior assignment, claim, lien, or security
      interest, and Borrower will not make any further assignment thereof or
      create any further security interest therein, nor permit Borrower’s rights
      therein to be reached by attachment, levy, garnishment or other judicial
      process.

            

    

    

    
      	
               
      

            	
              (d)

            	
              No
      set−off, credit, allowance or adjustment has been asserted by the account
      debtor, except discount allowed for prompt payment and the account debtor
      has not complained as to his liability thereon and has not returned any of
      the goods from the sale of which the Account
  arose.

            

    

    

    
      	
               
      

            	
              (e)

            	
              The
      Account arose in the ordinary course of Borrower’s business and did not
      arise from the performance of services or a sale of goods to a supplier or
      employee of the Borrower.

            

    

    

    
      	
               
      

            	
              (f)

            	
              No
      notice of bankruptcy or insolvency of the account debtor has been received
      by or is known to the Borrower.

            

    

    

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    

    
      	
               
      

            	
              (g)

            	
              The
      Account is not owed by an account debtor whose principal place of business
      is outside the United States of
America.

            

    

    

    
      	
               
      

            	
              (h)

            	
              The
      Account is not owed by an entity which is a parent, brother/sister,
      subsidiary or Affiliate of
Borrower.

            

    

    

    
      	
               
      

            	
              (i)

            	
              The
      account debtor is not located in the State of New Jersey or in the State
      of Minnesota, unless Borrower has filed and shall file all legally
      required Notice of Business Activities Reports with the New Jersey
      Division of Taxation or the Minnesota Department of Revenue, as the case
      may be.

            

    

    

    
      	
               
      

            	
              (j)

            	
              The
      Account when aggregated with all of the Accounts of that account debtor
      does not exceed fifty (50%) percent of the then aggregate of Qualified
      Accounts.

            

    

    

    
      	
               
      

            	
              (k)

            	
              The
      Account is not evidenced by a promissory
note.

            

    

    

    
      	
               
      

            	
              (l)

            	
              The
      Account did not arise out of any sale made on a bill and hold, dating or
      delayed shipment basis.

            

    

    

    
      	
               
      

            	
              (m)

            	
              The
      Account did not arise as a result of a progress billing or from a project
      on which the Account Debtor has a payment or performance
    bond.

            

    

    

    (n)           The
Account is not for retainage.

    

    (o)           Bank
has not deemed the Account to be unacceptable for any reasonin accordance with
its normal credit policies by notice toBorrower.

    

    PROVIDED
THAT if at any time fifty (50%) percent or more of the aggregate amount of the
Accounts due from any account debtor are unpaid in whole or in part more than
ninety (90) days from the respective dates of invoice, from and after such time
none of the Accounts (then existing or hereafter arising) due from such account
debtor shall be deemed to be Qualified Accounts until such time as all Accounts
due from such account debtor are (as a result of actual payments received
thereon) no more than ninety (90) days from the date of invoice; Accounts
payable by Borrower to an account debtor shall be netted against Accounts due
from such account debtor and the difference (if positive) shall constitute
Qualified Accounts from such account debtor for purposes of determining the
Borrowing Base (notwithstanding paragraph (d)
above);  characterization of any Account due from an account debtor as
a Qualified Account shall not be deemed a determination by Bank as to its actual
value nor in any way obligate Bank to accept any Account subsequently arising
from such account debtor to be, or to continue to deem such Account to be, a
Qualified Account; it is Borrower’s responsibility to determine the
creditworthiness of account debtors and all risks concerning the same and
collection of Accounts are with Borrower; and all Accounts whether or not
Qualified Accounts constitute Collateral.

    

    “Receivables” shall have the
meaning assigned to such term in Section 5.

    

    
      
        
        

      

      
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    “Revolving Loan(s)” shall mean
all loans, including all Letters of Credit, advanced by Bank to Borrower or for
the account of Borrower hereunder.

    

    “Security Trigger Event” shall
have the meaning assigned to such term in Section 5(e).

    

    “Senior Debt” shall mean any
Debt which is not Subordinated Debt.

    

    “Subordinated Debt” shall mean
Debt which is expressly stated to be subordinated or junior in right of payment
to Borrower’s Debt to Bank.

    

    “Tangible Net Worth” shall
mean the equity of Starrett and its consolidated subsidiaries determined in
accordance with GAAP, consistently applied, subtracting therefrom (a)
intangibles (as determined in accordance with such principles so applied), and
(b) Debt owing to Borrower from any employee, Owner, or other Affiliate of
Borrower.

    

    “UCC” shall mean the Uniform
Commercial Code as in effect in the Commonwealth of Massachusetts.

    

    Section 1.02.  All
accounting terms not specifically defined herein shall be construed in
accordance with GAAP consistent with those applied in the preparation of the
financial statements referred to in Section 8.05, and all financial data
submitted pursuant to this Agreement shall be prepared in accordance with such
principles.

    

    Section
1.03.  Unless otherwise defined in this Agreement, capitalized
words shall have the meanings set forth in the UCC as of the date of this
Agreement.

    

    2.           REVOLVING LOANS AND OTHER FINANCIAL
ACCOMMODATIONS.

    

    Section 2.01.  From
time to time upon Borrower’s request, so long as the sum of the aggregate
principal amount of all Revolving Loans outstanding, and the requested Revolving
Loan does not exceed the lesser of (a) the Borrowing Base, or (b) the Credit
Limit, Bank shall make such requested Revolving Loan, provided that there has
not occurred an Event of Default or an event which, with notice or the lapse of
time or both, would constitute an Event of Default.

    

    Section 2.02.  All
Revolving Loans shall bear interest and at the option of the Bank shall be
evidenced by and repayable in accordance with a revolving note drawn to the
order of Bank substantially the form of Exhibit 2 hereto (the “Note”), as the same may
hereafter be amended, supplemented or restated from time to time and any note or
notes issued in substitution therefor, but in the absence of the Note shall be
conclusively evidenced by Bank’s records of Revolving Loans and
repayments.

    

    Section
2.03.  Interest will be charged to Borrower at a fluctuating
rate which is the monthly equivalent to a per annum rate equal to the aggregate
of: (x) LIBOR, and (y) the Margin, or at such other rate agreed on from time to
time by the parties, upon any balance owing to Bank at the close of each day and
shall be payable (a) on the first day of each month in arrears; (b) on
termination of this Agreement; (c) on acceleration of the time for payment of
the Obligations; and (d) on the date the Obligations are paid in
full.  The rate of interest payable by Borrower shall be changed if at
all, effective as of the first day of each month (the "Reset 

    
      
        
        

      

      
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    Date").  The Bank
shall not be required to notify the Borrower of any adjustments to the interest
rate.  Interest shall be computed on the basis of the actual number of
days elapsed over a year of three hundred sixty (360) days.  Interest
shall be payable in lawful money of the United States of America to Bank, or as
Bank shall direct, without set-off, deduction or counterclaim monthly, in
arrears, on the first day of each month, commencing on the first day of the
month next succeeding the date hereof.

    

    Section
2.04.  Borrower hereby authorizes and directs Bank, in Bank’s
sole discretion (provided, however, Bank shall have no obligation to do so): (a)
to pay accrued interest as the same becomes due and payable pursuant to this
Agreement or pursuant to any note or other agreement between Borrower and Bank,
and to treat the same as a Revolving Loan to Borrower, which shall be added to
Borrower’s Revolving Loan balance pursuant to this Agreement; (b) to charge any
of Borrower’s accounts under the control of Bank; or (c) apply the proceeds of
Collateral, including, without limitation, payments on Accounts and other
payments from sales or lease of Inventory and any other funds to the payment of
such items.  Bank shall promptly notify Borrower of any such charges
or applications.

    

    Section 2.05.  At
the request of any Borrower, and upon the execution of letter of credit
documentation satisfactory to Bank, Bank, within the limits of the Borrowing
Base, as then computed and also within the limits of the Credit Limit as then
computed, shall issue letters of credit from time to time by Bank for the
account of any Borrower (collectively “Letters of
Credit”).  The Letters of Credit shall be on terms mutually
acceptable to Bank, Bank and any Borrower, and no Letter of Credit shall have an
expiration date later than the sooner to occur of (a) twelve (12) months from
the date of issuance of the subject Letter of Credit, or (b) the termination
date of this Agreement.  A Revolving Loan in an amount equal to any
amount paid by Bank under a Letter of Credit shall be deemed made to any
Borrower, without request therefor, immediately upon any payment by Bank on such
Letter of Credit.  In connection with the issuance of any Letter of
Credit, such Borrower shall pay to Bank a percentage of the face amount of such
Letter of Credit according to the fee schedule then in effect at Bank plus
transaction fees at the customary rates charged by Bank and all other normal and
customary fees charged by Bank.  Borrower hereby authorizes and
directs Bank, in Bank’s sole discretion (provided, however, Bank shall have no
obligation to do so) to pay all such fees and costs as the same become due and
payable and to treat the same as a Revolving Loan to such Borrower, which shall
be added to the Borrower’s Revolving Loan balance pursuant to this
Agreement.  For purposes of computing the Credit Limit, all Letters of
Credit and acceptances shall be deemed to be Revolving Loans.

    

    Section 2.06.  The
Borrowing Base formula set forth above is intended solely for monitoring
purposes.  The making of Revolving Loans by Bank to the Borrower in
excess of the above described Borrowing Base formula is for the benefit of the
Borrower and does not affect the obligations of Borrower hereunder; all such
Revolving Loans constitute Obligations and must be repaid by Borrower in
accordance with the terms of this Agreement.

    

    Section
2.07.  Borrower shall pay to Bank the principal amount of all
Revolving Loans as follows:

    

    (a)           Credit Limit or Borrowing
Base Exceeded. Whenever the outstanding principal balance of all
Revolving Loans exceed the lesser of the Credit Limit or the Borrowing Base,
Borrower shall immediately pay to Bank the excess of the outstanding principal
balance of the Revolving Loans over the Credit Limit or the Borrowing
Base.

    

    
      
        
        

      

      
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    (b)           Payment in Full on
Termination. On termination of this Agreement or upon acceleration of the
Obligations, Borrower shall pay to Bank the entire outstanding principal balance
of all Revolving Loans and shall deliver to Bank cash collateral in an amount
equal to the aggregate of (A) amounts then undrawn on all outstanding Letters of
Credit issued pursuant to this Agreement for the account of the Borrower, and
(B) the amount of all outstanding acceptances issued pursuant to this
Agreement.

    

    Section 2.08.  It is
the intention of the parties hereto to comply strictly with applicable usury
laws, if any; accordingly, notwithstanding any provisions to the contrary in
this Agreement or any other documents or instruments executed in connection
herewith, in no event shall this Agreement or such documents or instruments
require or permit the payment, taking, reserving, receiving, collecting or
charging of any sums constituting interest under applicable laws which exceed
the maximum amount permitted by such laws.  If any such excess
interest is called for, contracted for, charged, paid, taken, reserved,
collected or received in connection with the Obligations or in any communication
by Bank or any other Person to the Borrower or any other Person, or in the event
all or part of the principal of the Obligations or interest thereon shall be
prepaid or accelerated, so that under any of such circumstances or under any
other circumstance whatsoever the amount of interest contracted for, charged,
taken, collected, reserved, or received on the amount of principal actually
outstanding from time to time under this Agreement shall exceed the maximum
amount of interest permitted by applicable usury laws, if any, then in any such
event it is agreed as follows: (a) the provisions of this paragraph shall govern
and control, (b) neither the Borrower nor any other Person now or hereafter
liable for the payment of the Obligations shall be obligated to pay the amount
of such interest to the extent such interest is in excess of the maximum amount
of interest permitted by applicable usury laws, if any, (c) any such excess
which is or has been received notwithstanding this paragraph shall be credited
against the then unpaid principal balance hereof or, if the Obligations have
been or would be paid in full by such credit, refunded to the Borrower, and (d)
the provisions of this Agreement and the other documents or instruments executed
in connection herewith, and any communication to the Borrower, shall immediately
be deemed reformed and such excess interest reduced, without the necessity of
executing any other document, to the maximum lawful rate allowed under
applicable laws as now or hereafter construed by courts having jurisdiction
hereof or thereof.  Without limiting the foregoing, all calculations
of the rate of interest contracted for, charged, taken, collected, reserved, or
received in connection herewith which are made for the purpose of determining
whether such rate exceeds the maximum lawful rate shall be made to the extent
permitted by applicable laws by amortizing, prorating, allocating and spreading
during the period of the full term of the Obligations, including all prior and
subsequent renewals and extensions, all interest at any time contracted for,
charged, taken, collected, reserved or received.  The terms of this
paragraph shall be deemed to be incorporated in every loan document and
communication relating to the Obligations.

    

    Section 2.09.  In
order to facilitate the requesting and making of advances hereunder and the
delivery of certain certificates, Evans Rule, Level Industries, Tru-Stone and
Kinemetric do hereby appoint Starrett as their authorized agent to request,
receive and distribute all Revolving Loans made hereunder, to communicate with
the Bank with respect to the Revolving Loans, and to execute and furnish the
Bank with all Margin, Covenant Compliance and Borrowing Base certificates, and
Starrett hereby accepts such appointment.

    

    
      
        
        

      

      
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    Section 2.10.  In
addition to all other sums payable hereunder, the Borrower shall pay the Bank a
fee equal to one-quarter of one (0.25%) percent of the difference between: (i)
the Credit Limit, and (ii) the average amount of the principal balance of all
Revolving Loans outstanding hereunder for each quarterly period this Agreement
is in effect (the "Unused
Fee").  Such Unused Fee shall be payable quarterly in
arrears.  On any date which an Unused Fee is due hereunder, the Bank
may charge the Borrower's demand deposit account(s) with the amount
thereof.  The failure of the Bank to charge such account shall not
relieve the Borrower of its obligations to pay the Unused Fee.

    

    3.           BANK’S REPORTS.

    

    After the
end of each month, Bank will render to Borrower a statement of Borrower’s
Revolving Loan account with Bank hereunder, showing all applicable credits and
debits.  Each statement shall be considered correct and to have been
accepted by Borrower and shall be conclusively binding upon Borrower in respect
of all charges, debits and credits of whatsoever nature contained therein under
or pursuant to this Agreement, and the closing balance shown therein, unless
Borrower notifies Bank in writing of any discrepancy within twenty (20) days
from the mailing by Bank to Borrower of any such monthly statement.

    

    4.           CAPITAL ADEQUACY.

    

    If after
the date hereof, Bank determines that (a) the adoption of any applicable law,
rule, or regulation regarding capital requirements for banks or bank holding
companies or the subsidiaries thereof, (b) any change in the interpretation or
administration of any such law, rule or regulation by any governmental
authority, central bank, or comparable agency charged with the interpretation or
administration thereof, or (c) compliance by Bank or its holding company with
any request or directive of any such governmental authority, central bank or
comparable agency regarding capital adequacy (whether or not having the force of
law), has the effect of reducing the return on Bank’s capital to a level below
that which Bank could have achieved (taking into consideration Bank’s and its
holding company’s policies with respect to capital adequacy immediately before
such adoption, change, or compliance and assuming that Bank’s capital was fully
utilized prior to such adoption, change, or compliance) but for such adoption,
change, or compliance as a consequence of Bank’s commitment to make advances
pursuant hereto by any amount deemed by Bank to be material:

    

    (a)           Bank
shall promptly, after Bank’s determination of such occurrence, give notice
thereof to Borrower; and

    

    (b)           Borrower
shall pay to Bank as an additional fee from time to time, on demand, such amount
as Bank certified to be the amount that will compensate Bank for such
reduction.

    

    A
certificate of Bank claiming entitlement to compensation as set forth above will
be conclusive in the absence of manifest error.  Such certificate will
set forth the nature of the occurrence giving rise to such compensation, the
additional amount or amounts to be paid to Bank and the method by which such
amounts were determined.  In determining such amount, Bank may use any
reasonable averaging and attribution method.

    

    

    
      
        
        

      

      
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    5.           SECURITY
INTEREST.

    

    Borrower,
for valuable consideration, receipt whereof is hereby acknowledged, hereby
grants to Bank a continuing security interest in and to, and assigns to Bank,
the following property of the Borrower, wherever located and whether now owned
or hereafter acquired:

    

    (a)           All
Inventory, including all goods, merchandise, raw materials, goods and work in
process, finished goods, and other tangible personal property now owned or
hereafter acquired and held for sale or lease or furnished or to be furnished
under contracts of service or used or consumed in Borrower’s
business;

    

    (b)           All
Accounts, contracts, contract rights, notes, bills, drafts, acceptances, General
Intangibles (including without limitation registered and unregistered
tradenames, copyrights, customer lists, goodwill, computer programs, computer
records, computer software, computer data, trade secrets, trademarks, patents,
ledger sheets, files, records, data processing records relating to any Accounts
and all tax refunds of every kind and nature to which Borrower is now or
hereafter may become entitled to, no matter how arising), Instruments,
Documents, Chattel Paper (whether tangible or electronic), Deposit Accounts,
Letter or Credit Rights (whether or not the Letter of Credit is evidenced by a
writing), securities, Security Entitlements, Security Accounts, Investment
Property, Supporting Obligations, choses in action, Commercial Tort Claims and
all other debts, obligations and liabilities in whatever form, owing to Borrower
from any Person, whether now existing or hereafter arising, now or hereafter
received by or belonging or owing to Borrower, for goods sold by it or for
services rendered by it, or however otherwise same may have been established or
created, all guarantees and securities therefor, all right, title and interest
of Borrower in the merchandise or services which gave rise thereto, including
the rights of reclamation and stoppage in transit, all rights to replevy goods,
and all rights of an unpaid seller of merchandise or services
(all  hereinafter called the “Receivables”);

    

    (c)           All
machinery, Equipment, Fixtures and other Goods whether now owned or hereafter
acquired by the Borrower and wherever located, all replacements and
substitutions therefor or accessions thereto and all proceeds thereof (all
hereinafter, collectively, called the “Equipment”); and

    

    (d)           All
proceeds and products of all of the foregoing in any form, including, without
limitation, all proceeds of credit, fire or other insurance, and also including,
without limitation, rents and profits resulting from the temporary use of any of
the foregoing (which, with Inventory, Receivables and Equipment are all
hereinafter called “Collateral”).

    

    (e)           Notwithstanding
anything contained herein to the contrary, Bank shall not perfect its security
interest in the Collateral except as provided herein.  Upon the
execution of this Agreement, however, the Bank shall hold a Uniform Commercial
Code Financing Statement for each Borrower naming such Borrower as a debtor and
the Bank as a secured party (together, the "Financing Statements") and a
Patent Security Agreement in escrow.  Upon the occurrence of an Event
of Default(s) hereunder based upon the Borrower's failure to adhere to any of
the 

    
      
        
        

      

      
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    financial
covenants contained and calculated in accordance with Section 13 hereof in any
two (2) consecutive quarters (a “Security Trigger Event”), the
Bank may file the Financing Statements in such jurisdictions deemed necessary by
the Bank to perfect the Bank's security interest and the Bank may file the
Patent Security Agreement with the United States Patent and Trademark Office
("USPTO") in the
Collateral without any additional consent or authorization from the
Borrower.  For purposes of clarification the Bank's right to perfect
its security interest in the Collateral is not predicated upon the occurrence of
an Event of Default in the same financial covenant for two (2) consecutive
quarters.  The Bank's filing of the Financing Statements and the
Patent Security Agreement shall in no event be deemed a waiver of any rights or
remedies that the Bank has or may have against the Borrower at such time
resulting from the occurrence of such Event(s) of Default and the Bank hereby
reserves and preserves all of its rights and remedies against the Borrower under
this Agreement, any related documents executed in connection with this Agreement
and under applicable law.  In the event that the Bank has filed
Financing Statements, the Bank shall promptly file termination statements with
respect to the filed Financing Statements and a release of the Patent Security
Agreement upon the Borrower's achieving a Debt Service Coverage Ratio in excess
of 2.0:1.0 and a ratio of Total Debt divided by Tangible Net Worth on a
consolidated basis is less than 1.0:1.0 as evidenced by the financial statements
furnished to the Bank in accordance with Section 11 hereof and provided no Event
of Default has occurred and is continuing at that time. For purposes of this
covenant, Debt Service Coverage Ratio means Adjusted EBITDA measured at quarter
end based on the previous 12 months financial performance divided by Fixed
Charges measured at the same quarter end.  The Bank, however, may
refile such Financing Statements and refile the Patent Security Agreement upon
the occurrence of an Event(s) of Default based solely upon the financial
covenants contained in Section 13 herein for two (2) consecutive fiscal quarters
thereafter without any additional consent or authorization from the
Borrower.  Thereafter, the Bank will refile such Financing Statements
and/or Termination Statements all in accordance with this Section
5(e).

    

    (f)           Notwithstanding
anything contained herein to the contrary, the Borrower shall furnish the Bank
with Landlord's Consents and Waiver of Lien for each leased location of the
Borrower and a Warehousemen's Letter for each location of the Borrower that any
Inventory is stored upon the occurrence of an Event of Default hereunder based
solely upon the breach of a financial covenant contained in Section 13 herein
for any fiscal quarter of the Borrower.  Such Landlord's Consents and
Waiver of Lien and Warehousemen's Letters shall be delivered to the Bank in form
and substance satisfactory to the Bank in its sole discretion within thirty (30)
days of the earlier to occur of the Borrower's knowledge of such Event of
Default or the Borrower's receipt of written notice by the Bank of such Event of
Default.  The Borrower's failure to use all reasonable efforts to
comply with this Section 5(f) shall constitute an Event of Default
hereunder.

    

    6.           OBLIGATIONS
SECURED.

    

    The
security interest granted hereby is to secure payment and performance of all
Revolving Loans, debts, liabilities and obligations of Borrower to Bank
hereunder and also any and all other debts, liabilities and obligations of
Borrower to Bank of every kind and description, direct or indirect, absolute or
contingent, primary or secondary, due or to become due, now existing or
hereafter arising, whether or not such obligations are related to the
transactions described in this Agreement, by class, or kind, or whether or not
contemplated by the parties at the time of the granting of this security
interest, regardless of how they arise or by what 

    
      
        
        

      

      
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    agreement
or instrument they may be evidenced or whether evidenced by any agreement or
instrument, and includes obligations to perform acts and refrain from taking
action as well as obligations to pay money including, without limitation, all
interest, fees, charges, expenses and overdrafts, and also including, without
limitation, all obligations and liabilities which Bank may incur or become
liable for, on account of, or as a result of, any transactions between Bank and
Borrower including any which may arise out of any Letter of Credit, acceptance
or similar instrument or obligation issued for the account of Borrower and also
including obligations arising out of any foreign exchange contracts, interest
rate swap, cap, floor or hedging agreements and all obligations of Borrower to
Bank arising out of or in connection with any Automated Clearing House (“ACH”) agreements relating to
the processing of ACH transactions, together with the fees, expenses, charges
and other amounts owing or chargeable to Borrower under the ACH agreements (all
hereinafter called “Obligations”).

    

    
      	
              7.

            	
              BORROWER’S PLACES OF BUSINESS,
      INVENTORY LOCATIONS AND RETURNS
POLICY.

            

    

    

    Section
7.01.  Borrower warrants that Borrower has no places of
business other than that shown at the end of this Agreement, unless other places
of business are listed on Schedule “A”, annexed hereto, in which event Borrower
represents that it has additional places of business at those locations set
forth on Schedule “A”.

    

    Section
7.02.  Borrower’s principal executive office and the office
where Borrower keeps its records concerning its accounts, contract rights and
other property, is that shown at the end of this Agreement.  All
Inventory presently owned by Borrower is stored at the locations (in excess of
$50,000.00 per location) set forth on Schedule “A”.

    

    Section
7.03.  Borrower will promptly notify Bank in writing of any
change in the location of any principal place of business or the location of any
Inventory (in excess of $50,000.00) or the establishment of any new place of
business or location of Inventory (in excess of $50,000.00) or office where its
records are kept which would be shown in this Agreement if it were executed
after such change.

    

    Section
7.04.  Borrower represents and warrants that it has described
its returns policy in writing to Bank and that it does now, and will continue
to, apply such policy consistently in the conduct of its business and agrees
that it shall notify Bank in writing before changing its policy or the
application thereof.

    

    8.           BORROWER’S ADDITIONAL REPRESENTATIONS AND WARRANTIES.

    

    Borrower
represents and warrants that:

    

    Section
8.01.  Starrett and Level Industries are duly organized,
validly existing and in good standing under the laws of the Commonwealth of
Massachusetts as a corporation.  Tru-Stone and Kinemetric are duly
organized, validly existing and in good standing under the laws of the State of
Delaware as a corporation.  Evans Rule is duly organized, validly
existing and in good standing under the laws of the State of New Jersey as a
corporation.  Each Borrower shall hereafter remain in good standing in
that state, and is duly qualified and in good standing in every other state in
which it is required to be qualified, and shall hereafter remain duly qualified
and in good standing in every other state in which the failure to qualify or
become licensed could have a material adverse effect on the financial condition,
business or operations of the Borrower.

    

    
      
        
        

      

      
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    Section
8.02.  Borrower’s exact legal name is as set forth in this
Agreement and Borrower will not undertake or commit to undertake any act which
will result in a change of Borrower’s legal name, without giving Bank at least
thirty (30) days’ prior written notice of the same.

    

    Section 8.03.  The
execution, delivery and performance of this Agreement, and any other document
executed in connection herewith, are within the Borrower’s powers, have been
duly authorized, are not in contravention of law or the terms of the Borrower’s
Organizational Documents, or of any indenture, agreement or undertaking to which
the Borrower is a party or by which it or any of its properties may be
bound.

    

    Section 8.04.  All
Organization Documents and all amendments thereto of Borrower have been duly
filed and are in proper order.  All ownership interest of Borrower
outstanding was and is properly issued and all books and records of Borrower,
including but not limited to its minute books, Organization Documents and books
of account, are accurate and up to date and will be so maintained.

    

    Section 8.05. The balance
sheet of the Borrower as at June 28, 2008, and the related statements of income
and retained earnings of the Borrower for the fiscal year then ended, and the
accompanying footnotes, together with the opinion thereon, dated September 11,
2008, of the independent certified public accountants of the Borrower, and the
interim balance sheet of the Borrower as at March 29, 2009, and the related
statement of income and retained earnings for the nine (9) month period then
ended, copies of which have been furnished to the Bank, are complete and correct
and fairly present the financial condition of the Borrower as at such dates and
the results of the operations of the Borrower for the periods covered by such
statements, all in accordance with GAAP consistently applied (subject to
year-end adjustments in the case of the interim financial statements), and since
March 29, 2009, there has been no material adverse change in the condition
(financial or otherwise), business, or operations of the
Borrower.  There are no liabilities of the Borrower, fixed or
contingent, which are material but are not reflected in the financial statements
or in the notes thereto, other than liabilities arising in the ordinary course
of business since March 29, 2009.  No information, exhibit, or report
furnished by the Borrower to the Bank in connection with the negotiation of this
Agreement contained any material misstatement of fact or omitted to state a
material fact or any fact necessary to make the statement contained therein not
materially misleading.

    

    Section
8.06.  Borrower owns all of the assets reflected in the most
recent of Borrower’s financial statements provided to Bank, except assets sold
or otherwise disposed of in the ordinary course of business since the date
thereof, and such assets together with any assets acquired since such date,
including without limitation the Collateral, are free and clear of any Lien,
except (a) the security interests and other encumbrances (if any) listed on
Schedule “B” annexed hereto, (b) those leases set forth on Schedule “C” annexed
hereto, (c) those liens permitted pursuant to Section 13.05 of this Agreement,
(d) liens and security interests in favor of Bank, or (e) Permitted
Liens.

    

    
      
        
        

      

      
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    Section
8.07.  Borrower has made or filed all tax returns, reports and
declarations relating to any material tax liability required by any jurisdiction
to which it is subject (any tax liability which may result in a lien on any
Collateral being hereby deemed material); has paid all taxes shown or determined
to be due thereon except those being contested in good faith and which Borrower
has, prior to the date of such contest, identified in writing to Bank as being
contested; and has made adequate provision for the payment of all taxes so
contested, so that no lien will encumber any Collateral, and in respect of
subsequent periods.

    

    Section
8.08.  Borrower (a) is not subject to any restrictions in its
Organization Documents or other legal restriction, or any judgment, award,
decree, order, governmental rule or regulation or contractual restriction which
could have a material adverse effect on its financial condition, business or
prospects, and (b) is in compliance with its Organization Documents, all
contractual requirements by which it or any of its properties may be bound and
all applicable laws, rules and regulations (including without limitation those
relating to environmental protection) other than laws, rules or regulations the
validity or applicability of which it is contesting in good faith or provisions
of any of the foregoing the failure to comply with which cannot reasonably be
expected to materially adversely affect its financial condition, business or
prospects or the value of any Collateral.

    

    Section 8.09.  There
is no action, suit, proceeding or investigation pending or, to Borrower’s
knowledge, threatened against or affecting it or any of its assets before or by
any court or other governmental authority which, if determined adversely to it,
would have a material adverse effect on its financial condition, business or
prospects or the value of any Collateral.

    

    Section
8.10.  Borrower is in compliance with ERISA; no Reportable
Event has occurred and is continuing with respect to any Plan; and it has no
unfunded vested liability under any Plan.

    

    Section
8.11.  Neither Borrower nor, to the knowledge of Borrower, any
of its Owners or Affiliates, is in violation of any laws relating to terrorism
or money laundering (“Anti-Terrorism Laws”),
including Executive Order No. 13224 on Terrorist Financing, effective September
24, 2001 (the “Executive
Order”), and the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001,
Public Law 107-56.

    

    Section
8.12.  Neither Borrower nor, to the knowledge of Borrower, any
of its Owners or Affiliates or other agent of Borrower acting or benefitting in
any capacity in connection with the transactions contemplated hereunder, is any
of the following: (a) a Person that is listed in the annex to, or is otherwise
subject to the provisions of, the Executive Order; (b) a Person owned or
controlled by, or acting for or on behalf of, any Person that is listed in the
annex to, or is otherwise subject to the provisions of, the Executive Order; (c)
a Person with which Bank is prohibited from dealing or otherwise engaging in any
transaction by any Anti-Terrorism Law; (d) a Person that commits, threatens or
conspires to commit or supports “terrorism” as defined in the Executive Order;
or (e) a Person that is named as a “specially designated national and blocked
person” on the most current list published by the U.S. Treasury Department
Office of Foreign Assets Control (“OFAC”) at its official
website or any replacement website or other replacement official publication of
such list.

    

    Section
8.13.  Neither Borrower nor, to the knowledge of Borrower, any
agent of any of its Owners or Affiliates acting in any capacity in connection
with the transactions contemplated hereunder (a) conducts any business or
engages in making or receiving any contribution of funds, goods or services to
or for the benefit of any Person described in Section 8.12 above, (b) deals in,
or otherwise engages in any transaction relating to, any property or interest in
property blocked pursuant to the Executive Order, or (c) engages in or conspires
to engage in any transaction that evades or avoids, or has the purpose of
evading or avoiding, or attempts to violate, any of the prohibitions set forth
in any Anti-Terrorism Law.

    

    
      
        
        

      

      
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              9.

            	
              SALES OF INVENTORY.

            

    

    

    So long
as Borrower is not in default hereunder, Borrower shall have the right, in the
regular course of business, to process and sell Borrower’s
Inventory.  A sale in the ordinary course of business shall not
include a transfer in total or partial satisfaction of a debt.

    

    10.           FINANCING
STATEMENTS.

    

    Borrower
hereby irrevocably authorizes Bank at any time and from time to time after the
occurrence of a Security Trigger Event to file in any Uniform Commercial Code
jurisdiction any initial financing statements and amendments thereto in
accordance with the terms and conditions set forth in Section 5(e) hereof that
(a) indicate the Collateral (i) as all assets of Borrower or words of similar
effect, regardless of whether any particular asset comprised in the Collateral
falls within the scope of Article 9 of the Uniform Commercial Code of such
jurisdiction, or (ii) as being of an equal or lesser scope or with greater
detail, and (b) contain any other information required by the Uniform Commercial
Code for the sufficiency or filing office acceptance of any financing statement
or amendment, including (i) whether Borrower is an organization, the type of
organization and any organization identification number issued to Borrower, and
(ii) in the case of a financing statement filed as a fixture filing or
indicating Collateral as as-extracted Collateral or timber to be cut, a
sufficient description of real property to which the Collateral relates.
Borrower agrees to furnish any such information to Bank promptly upon
request.  Borrower also ratifies its authorization for Bank to have
filed in any Uniform Commercial Code jurisdiction any like initial financing
statements or amendments thereto if filed prior to the date hereof.

    

    11.           BORROWER’S
REPORTS.

    

    Section
11.01.  Within twenty (20) calendar days after the end of each
month, Borrower shall submit to Bank an aging report in form satisfactory to
Bank showing the amounts owing on all domestically-located Accounts according to
Borrower’s records as of the close of such month or such shorter period as may
be required by Bank from time to time, together with such other information as
Bank may require, all on a consolidating and consolidated basis.  If
Borrower’s monthly aging reports are prepared by an accounting service or other
agent, Borrower hereby authorizes such service or agent to deliver such aging
reports and any other related documents to Bank.

    

    Section 11.02. Within twenty
(20) calendar days after the end of each month, Borrower shall furnish to Bank a
certificate describing all of Borrower’s domestically-located Inventory by value
based on the lower of cost or market value, listing all Inventory by nature,
quantity and location, together with such other information as Bank may require,
all on a consolidating and consolidated basis.

    

    

    
      
        
        

      

      
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    Section 11.03. Borrower shall
deliver to Bank all documents, as frequently as indicated below, or at such
other times as Bank may request, and all other documents and information
requested by Bank:

    

    
      	 
      	
               

              DOCUMENT

            	
               

              FREQUENCY
      DUE

            
	
               

              (a)

            	
               

              A
      Borrowing Base Certificate, including cash receipts, credit memos, sales,
      debit memos, the unpaid loan balance, new borrowing requests and the
      adjusted loan balance

            	
               

              Monthly,
      within twenty (20) calendar days after the end of each
    month

            
	
               

              (b)

            	
               

              Notice
      of noncompliance with the provisions of this Agreement

            	
               

              Immediately
      upon learning of such noncompliance, or if any representation or warranty
      contained herein is no longer true or accurate

            
	
               

              (c)

            	
               

              Compliance
      Certificate in the form annexed hereto as Exhibit
3

            	
               

              As
      soon as available and in any event within forty-five (45) days after the
      close of each quarterly period of Borrower’s fiscal
  year

            

    

    

    Section
11.04.  Borrower will furnish Bank as soon as available, and in
any event within forty-five (45) days after the close of each quarterly period
of its fiscal year, a balance sheet as of the end of such period, and a
statement of income and retained earnings for the period commencing at the end
of the previous fiscal year and ending with the end of such period, and a
statement of cash flows of Starrett and its consolidated subsidiaries for the
portion of the fiscal year ended with the last day of such period, including the
Securities and Exchange Commission Form 10-Q, all in reasonable detail and
stating in comparative form the respective figures for the corresponding date
and period in the previous fiscal year, and all prepared in accordance with
GAAP, certified by the chief financial officer of the Borrower (subject to year
end adjustment), said financials shall be on a consolidating and consolidated
basis.

    

    Section 11.05. Borrower will
furnish Bank, annually, as soon as available, and in any event within one
hundred twenty (120) days after the end of each fiscal year of Starrett and its
consolidated subsidiaries, audited financial statements including a balance
sheet as of the end of such fiscal year, and a statement of income and retained
earnings for such fiscal year, and a statement of cash flows for such fiscal
year, including the Securities and Exchange Commission Form 10-K, all in
reasonable detail and stating in comparative form the respective figures for the
corresponding date and period in the prior fiscal year, and all prepared in
accordance with GAAP, all on a consolidating and consolidated basis and
accompanied by an unqualified opinion prepared by independent public accountants
selected by the Borrower and acceptable to Bank.

    

    
      
        
        

      

      
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    Section
11.06.  Borrower will promptly, upon receipt thereof, deliver
to Bank, copies of any reports submitted to the Borrower by Borrower’s
independent public accountants in connection with the examination of the
financial statements of Starrett and its consolidated subsidiaries made by such
accountants (the so-called “Management
Letter”).

    

    Section
11.07.  Borrower will furnish Bank as soon as possible, and in
any event within sixty (60) days after close of each fiscal year, a
management-prepared budget for the next twelve (12) months of Starrett and its
consolidated subsidiaries in form and content satisfactory to the Bank on a
consolidating and consolidated basis (the "Projections").

    

    Section 11.08.  In
addition to the foregoing, the Borrower promptly shall provide Bank with such
other and additional information concerning the Borrower, the Collateral, the
operation of the Borrower’s business, and the Borrower’s financial condition,
including financial reports and statements, as Bank may from time to time
reasonably request from the Borrower.  All financial information
provided Bank by the Borrower shall be prepared in accordance with GAAP or
generally accepted auditing principles (as applicable) applied consistently in
the preparation thereof and with prior periods to fairly reflect the financial
conditions of Starrett and its consolidated subsidiaries at the close of, and
its results of operations for, the periods in question.

    

    12.           GENERAL AGREEMENTS OF BORROWER.

    

    Section
12.01.  Borrower agrees to keep all the Collateral insured with
coverage and in amounts not less than that usually carried by one engaged in a
like business (including business interruption insurance) with loss payable to
Bank and Borrower, as their interests may appear, hereby appointing Bank as
attorney for Borrower in obtaining, adjusting, settling and canceling such
insurance and endorsing any drafts.  As further assurance for the
payment and performance of the Obligations, Borrower hereby assigns to Bank all
sums, including returns of unearned premiums, which may become payable under any
policy of insurance on the Collateral and Borrower hereby directs each insurance
company issuing any such policy to make payment of such sums directly to
Bank.

    

    Section 12.02.  Bank
or its agents have the right to inspect the Collateral and all records
pertaining thereto at reasonable intervals to be determined by Bank and without
hindrance or delay.

    

    Section
12.03.  Although, as above set forth, Bank has a continuing
security interest in all of Borrower’s Collateral and in the proceeds thereof,
Borrower will at all times maintain as the minimum security hereunder a
Borrowing Base not less than the aggregate unpaid principal of all Revolving
Loans made hereunder including the aggregate amount undrawn on all Letters of
Credit issued hereunder and if  Borrower fails to do so, Borrower will
immediately make the necessary reduction in the unpaid principal amount of said
Revolving Loans so that the sum of the Revolving Loans outstanding hereunder
plus the amount undrawn on Letters of Credit outstanding hereunder does not in
the aggregate exceed the Borrowing Base.

    

    
      
        
        

      

      
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    Section
12.04.  Borrower will at all times keep accurate and complete
records of Borrower’s Inventory, Accounts and other Collateral, and Bank, or any
of its agents, shall have the right to call at Borrower’s place or places of
business at intervals to be determined by Bank, and without hindrance or delay,
to inspect, audit, check, and make extracts from any copies of the books,
records, journals, orders, receipts, correspondence which relate to Borrower’s
Accounts, and other Collateral or other transactions, between the parties
thereto and the general financial condition of Borrower and Bank may remove any
of such records temporarily for the purpose of having copies made
thereof.  Borrower shall pay to Bank all reasonable audit fees, plus
all travel and other expenses incurred in connection with any such
audit.

    

    Section
12.05.  Borrower will maintain a standard and modern system of
accounting which enables Borrower to produce financial statements in accordance
with GAAP and maintain records pertaining to the Collateral that contain
information as from time to time may be requested by Bank.

    

    Section
12.06.  Starrett and its subsidiaries will maintain its
corporate existence in good standing and comply with all laws and regulations of
the United States or of any state or states thereof or of any political
subdivision thereof, or of any governmental authority which may be applicable to
it or to its business except where the failure to comply with which cannot
reasonably be expected to materially adversely effect its financial condition,
business or prospects or the value of any Collateral.

    

    Section
12.07.  Starrett and its subsidiaries will pay all real and
personal property taxes, assessments and charges and all franchises, income,
unemployment, old age benefits, withholding, sales and other taxes assessed
against it, or payable by it at such times and in such manner as to prevent any
penalty from accruing or any lien or charge from attaching to its
property.

    

    Section 12.08.  Bank
may in the name of others communicate with account debtors in order to verify
with them to Bank’s satisfaction the existence, amount and terms of any
Accounts, and upon the occurrence of an Event of Default the Bank may in its own
name communicate with account debtors in order to verify with them to Bank’s
satisfaction the existence, amount and terms of any Accounts.

    

    Section 12.09.  This
Agreement may but need not be supplemented by separate assignments of Accounts
and if such assignments are given the rights and security interests given
thereby shall be in addition to and not in limitation of the rights and security
interests given by this Agreement.

    

    Section 12.10.  If
any of Borrower’s Accounts arise out of contracts with the United States or any
department, agency, or instrumentality thereof when Bank has perfected its
security interest in the Collateral, Borrower will immediately notify Bank
thereof in writing and execute any instruments and take any steps required by
Bank in order that all monies due and to become due under such contracts shall
be assigned to Bank and notice thereof given to the Government under the Federal
Assignment of Claims Act.

    

    
      
        
        

      

      
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    Section 12.11.  If
any of Borrower’s Accounts should be evidenced by promissory notes, trade
acceptances, or other instruments for the payment of money when Bank has
perfected its security interest in the Collateral, Borrower will immediately
deliver same to Bank, appropriately endorsed to Bank’s order and, regardless of
the form of such endorsement, Borrower hereby waives presentment, demand, notice
of dishonor, protest and notice of protest and all other notices with respect
thereto.

    

    Section 12.12.  If
any material goods are at any time in the possession of a bailee when Bank has
perfected its security interest in the Collateral, Borrower shall promptly
notify Bank thereof and, if requested by Bank, shall, after the occurrence of a
Security Trigger Event, promptly obtain an acknowledgment from the bailee, in
form and substance satisfactory to Bank, that the bailee holds such Collateral
for the benefit of Bank and shall act upon the instructions of Bank, without the
further consent of Borrower.

    

    Section 12.13. If Borrower is
at any time a beneficiary under a letter of credit now or hereafter issued in
favor of Borrower, Borrower shall promptly notify Bank thereof and, at the
request and option of Bank, after the occurrence of a Security Trigger Event,
Borrower shall, pursuant to an agreement in form and substance satisfactory to
Bank, either (a) arrange for the issuer and any confirmer of such letter of
credit to consent to an assignment to Bank of the proceeds of any drawing under
the letter of credit, or (b) arrange for Bank to become the transferee
beneficiary of the letter of credit, with Bank agreeing, in each case, that the
proceeds of any drawing under the letter of credit are to be
applied  in the same manner as any other payment on an
Account.

    

    Section 12.14. If Borrower
shall at any time hold or acquire a commercial tort claim when Bank has
perfected its security interest in the Collateral, Borrower shall immediately
notify Bank in a writing signed by Borrower of the brief details thereof and
grant to Bank in such writing a security interest therein, and in the proceeds
thereof, all upon the terms of this Agreement, with such writing to be in form
and substance satisfactory to Bank.

    

    Section
12.15.  Borrower will promptly pay when due all taxes and
assessments upon the Collateral or for its use or operation or upon this
Agreement, or upon any note or notes evidencing the Obligations, and will, at
the request of Bank, promptly furnish Bank the receipted bills
therefor.  At its option, Bank may at any time following the
occurrence and continuance of an Event of Default hereunder, discharge taxes,
liens or security interests or other encumbrances at any time levied or placed
on the Collateral, may pay for insurance on the Collateral and may pay for the
maintenance and preservation of the Collateral.  Borrower agrees to
reimburse Bank on demand for any payments made, or any expenses incurred by Bank
pursuant to the foregoing authorization, and upon failure of the Borrower so to
reimburse Bank, any such sums paid or advanced by Bank shall be deemed secured
by the Collateral and constitute part of the Obligations.

    

    Section
12.16.  Borrower will immediately notify Bank upon receipt of
notification of any potential or known release or threat of release of Hazardous
Substance from any site operated by Starrett and its subsidiaries  of
the incurrence of any expense or loss in connection therewith or with the
Borrower’s obtaining knowledge of any investigation, action or the incurrence of
any expense or loss by any governmental authority in connection with the
assessment, containment or removal of any Hazardous Substance for which expense
or loss the Borrower may be liable.

    

    
      
        
        

      

      
        21

        
          

        

      

      
        
        

      

    

    Section
12.17.  Except for Bank’s gross negligence or willful
misconduct, Borrower will indemnify and save Bank harmless from all loss, costs,
damage, liability or expenses (including, without limitation, court costs and
reasonable attorneys’ fees) that Bank may sustain or incur by reason of
defending or protecting this security interest or the priority thereof or
enforcing the Obligations, or in the prosecution or defense of any action or
proceeding concerning any matter growing out of or in connection with this
Agreement and/or any other documents now or hereafter executed in connection
with this Agreement and/or the Obligations and/or the
Collateral.  This indemnity shall survive the repayment of the
Obligations and the termination of Bank’s agreement to make Revolving Loans
available to Borrower and the termination of this Agreement.

    

    Section 12.18.  At
the option of Bank, Borrower will furnish to Bank, from time to time, within
five (5) days after the accrual in accordance with applicable law of Starrett
and its subsidiaries’ obligation to make deposits for F.I.C.A. and withholding
taxes and/or sales taxes, proof satisfactory to Bank that such deposits have
been made as required.

    

    Section
12.19.  Should Borrower fail to make any of such deposits or
furnish such proof then Bank may, in its sole and absolute discretion, (a) make
any of such deposits or any part thereof, (b) pay such taxes, or any part
thereof, or (c) set up such reserves as Bank, in its judgment, shall deem
necessary to satisfy the liability for such taxes.  Each amount so
deposited or paid shall constitute an advance under the terms hereof, repayable
on demand with interest, as provided herein, and secured by all Collateral and
any other property at any time pledged by Borrower with Bank.  Nothing
herein shall be deemed to obligate Bank to make any such deposit or payment or
set up such reserve and the making of one or more of such deposits or payments
or the setting up of such reserve shall not constitute (a) an agreement on
Bank’s part to take any further or similar action, or (b) a waiver of any
default by Borrower under the terms hereof.

    

    Section 12.20.  All
advances by Bank to Borrower under this Agreement and under any other agreement
constitute one general revolving fluctuating loan, and all indebtedness of
Borrower to Bank under this and under any other agreement constitute one general
Obligation.  Each advance to Borrower hereunder or otherwise shall be
made upon the security of all of the Collateral held and to be held by
Bank.  It is distinctly understood and agreed that all of the rights
of Bank contained in this Agreement shall likewise apply, insofar as applicable,
to any modification of or supplement to this Agreement and to any other
agreements between Bank and Borrower.  The entire Obligation of
Borrower to Bank shall become due and payable when payments become due and
payable hereunder upon termination of this Agreement.

    

    Section
12.21.  After the occurrence of a Security Trigger Event,
Borrower will, at its expense, upon request of Bank promptly and duly execute
and deliver such documents and assurances and take such actions as may be
necessary or desirable or as Bank may request in order to correct any defect,
error or omission which may at any time be discovered or to more effectively
carry out the intent and purpose of this Agreement and to establish, perfect and
protect Bank’s security interest, rights and remedies created or intended to be
created hereunder.  Without limiting the generality of the above,
Borrower will, at all times when Bank has perfected its security interest in the
Collateral, join with Bank in executing financing and continuation statements
pursuant to the UCC or other notices appropriate under applicable Federal or
state law in form satisfactory to Bank and filing the same in all public offices
and jurisdictions wherever and whenever requested by Bank.

    

    
      
        
        

      

      
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    Section
12.22.  After the occurrence of a Security Trigger Event,
Borrower shall perform any and all further steps requested by Bank to perfect
Bank’s security interest in Inventory,

    

    Section
12.23.  Reserved.

    

    Section 12.24.  Bank
shall be Borrower’s main bank of deposit.  For each other deposit
account that Borrower at any time opens or maintains, Borrower shall, at Bank’s
request and option, pursuant to an agreement in form and substance satisfactory
to Bank, either (a) cause the depositary bank to agree to comply at any time
with instructions from Bank to such depositary bank directing the disposition of
funds from time to time credited to such deposit account, without further
consent of Borrower, or (b) arrange for Bank to become the customer of the
depositary bank with respect to the deposit account, with Borrower being
permitted, only with the consent of Bank, to exercise rights to withdraw funds
from such deposit account.  Bank agrees with Borrower that Bank shall
not give any such instructions or withhold any withdrawal rights from Borrower,
unless an Event of Default has occurred and is continuing, or, after giving
effect to any withdrawal not otherwise permitted by this Agreement would
occur.  The provisions of this paragraph shall not apply to (a) any
deposit account for which Borrower, the depositary bank and Bank have entered
into a cash collateral agreement specially negotiated among Borrower, the
depositary bank and Bank for the specific purpose set forth therein, (b) deposit
accounts specially and exclusively used for payroll, payroll taxes and other
employee wage and benefit payments to or for the benefit of Borrower’s salaried
employees.  Borrower shall utilize Bank's cash management services and
shall transfer such service from Bank of America, N.A. by September 30,
2009.

    

    Section 12.25. Borrower hereby
grants to Bank for a term to commence on the date of this Agreement and
continuing thereafter until all debts and Obligations of any kind or character
owing from Borrower to Bank are fully paid and discharged, the right to use all
premises or places of business which Borrower presently has or may hereafter
have and where any of the Collateral may be located, at a total rental for the
entire period of $1.00.  Bank agrees not to exercise the rights
granted in this paragraph unless and until Bank determines to exercise its
rights against the Collateral. In connection with the Bank’s exercise of the
Bank’s rights after the occurrence of an Event of Default, the Bank may enter
upon, occupy and use any premises owned or occupied by the Borrower, and may
exclude the Borrower from such premises or portion thereof as may have been so
entered upon, occupied, or used by the Bank.  The Bank shall not be
required to remove any of the Collateral from any such premises upon the Bank’s
taking possession thereof, and may render any Collateral unusable to the
Borrower.  In no event shall the Bank be liable to the Borrower beyond
the rental specified above for use or occupancy by the Bank of any premises
pursuant to this Agreement.

    

    Section
12.26.  Borrower hereby grants to Bank for a term to commence
on the date of this Agreement and continuing thereafter until all debts and
Obligations of any kind or character owed to Bank are fully paid and discharged,
a non−exclusive irrevocable royalty−free license in connection with Bank’s
exercise of its rights hereunder, to use, apply or affix any trademark, trade
name logo or the like and to use any patents, in which the Borrower now or
hereafter has 

    
      
        
        

      

      
        23

        
          

        

      

      
        
        

      

    

    rights,
which license may be used by Bank upon and after the occurrence of any one or
more of the Events of Default, provided, however, that such use by Bank shall be
suspended if such Events of Default are cured.  This license shall be
in addition to, and not in lieu of, the inclusion of all of Borrower’s
trademarks, servicemarks, tradenames, logos, goodwill, patents, franchises and
licenses in the Collateral; in addition to the right to use said Collateral as
provided in this paragraph, Bank shall have full right to exercise any and all
of its other rights regarding Collateral with respect to such trademarks,
servicemarks, tradenames, logos, goodwill, patents, franchises and
licenses.

    

    Section 12.27.  Any
and all deposits (whether demand or time deposits) or other sums at any time
credited by or due from Bank to Borrower shall at all times constitute
additional security for the Obligations and may be set−off against any
Obliga­tions at any time following the occurrence of an Event of Default or
an event which with notice or the lapse of time, or both, would constitute an
Event of Default whether or not they are then due or other security held by Bank
is considered by Bank to be adequate.  Any and all instruments,
documents, policies and certificates of insurance, securities, goods, accounts,
choses in action, general intangibles, chattel papers, cash, property and the
proceeds thereof (whether or not the same are Collateral or proceeds thereof
hereunder) owned by Borrower or in which Borrower has an interest, which now or
hereafter are at any time in possession or control of Bank or in transit by mail
or carrier to or from Bank or in the possession of any third party acting in
Bank’s behalf, without regard to whether Bank received the same in pledge, for
safekeeping, as agent for collection or transmission or otherwise or whether
Bank had conditionally released the same, shall constitute additional security
for the Obligations and may be applied at any time following the occurrence of
an Event of Default or an event which with notice or the lapse of time, or both,
would constitute an Event of Default, to any Obligations which are then owing,
whether due or not due.  Bank shall be entitled to presume, in the
absence of clear and specific written notice to the contrary hereinafter
provided by Borrower to Bank, that any and all deposits maintained by Borrower
with Bank are general accounts as to which no Person other than Borrower has any
legal or equitable interest whatsoever.

    

    Section
12.28.  Borrower shall pay to Bank on demand any and all
reasonable counsel fees and other expenses incurred by Bank in connection with
the preparation, interpretation, enforcement, administration or amendment of
this Agreement, or of any documents relating thereto, and any and all expenses,
including, but not limited to, a collection charge on all Accounts collected,
all attorneys’ fees and expenses, and all other expenses of like or unlike
nature which may be expended by Bank to obtain or enforce payment of any Account
either as against the account debtor, Borrower, or any guarantor or surety of
Borrower or in the prosecution or defense of any action or concerning any matter
growing out of or connected with the subject matter of this Agreement, the
Obligations or the Collateral or any of Bank’s rights or interests therein or
thereto, including, without limiting the generality of the foregoing, any
counsel fees or expenses incurred in any bankruptcy or insolvency proceedings
and all costs and expenses incurred or paid by Bank in connection with the
administration, supervision, protection or realization on any security held by
Bank for the debt secured hereby, whether such security was granted by Borrower
or by any other Person primarily or secondarily liable (with or without
recourse) with respect to such debt, and all costs and expenses incurred by Bank
in connection with the defense, settlement or satisfaction of any action, claim
or demand asserted against Bank in connection with the debt secured hereby, all
of which amounts shall be considered advances to protect Bank’s security, and
shall be secured hereby.  At its option, and without limiting any

    
      
        
        

      

      
        24

        
          

        

      

      
        
        

      

    

    other
rights or remedies, Bank may at any time pay or discharge any taxes, liens,
security interests or other encumbrances at any time levied against or placed on
any of the Collateral, and may procure and pay any premiums on any insurance
required to be carried by Borrower, and provide for the maintenance and
preservation of any of the Collateral, and otherwise take any action reasonably
deemed necessary to Bank to protect its security, and all amounts expended by
Bank in connection with any of the foregoing matters, including reasonable
attorneys’ fees, shall be considered obligations of Borrower and shall be
secured hereby.

    

    Section
12.29.  Borrower does hereby make, constitute and appoint any
officer or agent of Bank as Borrower’s true and lawful attorney−in−fact, with
power to endorse the name of Borrower or any of Borrower’s officers or agents
upon any notes, checks, drafts, money orders, or other instruments of payment
(including payments payable under any policy of insurance on the Collateral) or
Collateral that may come into possession of Bank in full or part payment of any
amounts owing to Bank; to sign and endorse the name of Borrower or any of
Borrower’s officers or agents upon any invoice, freight or express bill, bill of
lading, storage or warehouse receipts, drafts against debtors, assignments,
verifications and notices in connection with Accounts, and any instrument or
documents relating thereto or to Borrower’s rights therein; to give written
notice to such office and officials of the United States Post Office to effect
such change or changes of address so that all mail addressed to Borrower may be
delivered directly to Bank; granting upon Borrower’s said attorney full power to
do any and all things necessary to be done in and about the premises as fully
and effectually as Borrower might or could do, and hereby ratifying all that
said attorney shall lawfully do or cause to be done by virtue
hereof.  Neither Bank nor the attorney shall be liable for any acts or
omissions nor for any error of judgment or mistake, except for their gross
negligence or willful misconduct.  This power of attorney shall be
irrevocable for the term of this Agreement and all transactions hereunder and
thereafter as long as Borrower may be indebted to Bank.

    

    Section
12.30.  Borrower covenants and agrees that during the term of
this Agreement, neither Borrower nor any of its Owners or Affiliates shall,
directly or indirectly, by operation of law or otherwise, knowingly cause or
permit (a) any of the funds or properties of Borrower or any of its Owners or
Affiliates that are used to repay the Revolving Loans to constitute property of,
or be beneficially owned directly or indirectly by, any Person subject to
sanctions or trade restrictions under United States law (“Embargoed Person” or “Embargoed Persons”) that is
identified on (i) the “List of Specially Designated Nationals and Blocked
Persons” (the “SDN
List”) maintained by OFAC and/or on any other similar list (“Other List”) maintained by
OFAC pursuant to any authorizing statutes including, but not limited to, the
International Emergency Economic Powers Act, 50 U.S.C. §§ 1701 et seq., The
Trading with the Enemy Act, 50 U.S.C. App. 1 et seq., and any Executive Order or
regulation promulgated thereunder, with the result that the investment in
Borrower (whether directly or indirectly) is prohibited by law, or the Revolving
Loans made by Bank would be in violation of law, or (ii) the Executive Order,
any related enabling legislation or any other similar Executive Orders, or (b)
any Embargoed Person to have any direct or indirect interest, or any nature
whatsoever in Borrower or any of its Owners or Affiliates, with the result that
the investment in Borrower (whether directly or indirectly) is prohibited by law
or any of the transactions contemplated hereunder is in violation of
law.

    

    13.           BORROWER’S NEGATIVE
COVENANTS.  Borrower will not at any time:

    

    
      
        
        

      

      
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    Section
13.01.  Permit, for the twelve-month period ending on the last
day of any fiscal quarter of the Borrower commencing with the twelve (12) month
period ending on June 30, 2011, its Debt Service Coverage Ratio to be less than
1.25 to 1, such covenant shall be measured on a consolidated basis;

    

    Section
13.02.  Permit the Tangible Net Worth of Starrett and its
consolidated subsidiaries to be less than $140,000.00 as at June 30, 2009, which
amount shall increase by fifty (50%) percent of Starrett and its consolidated
subsidiaries’ net income as at the last day of each fiscal quarter thereafter,
and which amount shall not be reduced by losses in any fiscal quarter, such
covenant shall be measured on a consolidated basis;

    

    Section
13.03.  Permit EBITDA to be less than $3,500,000.00 for the
twelve (12) month period ending on June 30, 2009 and for the twelve (12) month
period ending on the last day of each fiscal quarter thereafter through and
including March 31, 2011, such covenant shall be measured on a consolidated
basis;

    

    Section
13.04.  During any fiscal year of Starrett and its consolidated
subsidiaries, make, directly or indirectly, capital expenditures in an aggregate
amount greater than $10,000,000.00, such covenant shall be measured on a
consolidated basis;

    

    Section
13.05.  Issue evidence of Debt or suffer to exist Debt in
addition to the Obligations, except (a) Debt for money borrowed which in the
aggregate does not exceed the sum of Two Million Five Hundred Thousand
($2,500,000.00) Dollars, or (b) Debt or liabilities of Borrower other than for
money borrowed, incurred or arising in the ordinary course of
business;

    

    Section 13.06.  Use
such proceeds of the Revolving Loans made hereunder in excess of $5,000,000.00
in the aggregate for acquisitions;

    

    Section
13.07.  Sell, assign, exchange or otherwise dispose of any of
the Collateral, other than Inventory consisting of (a) scrap, waste, defective
goods and the like; (b) obsolete goods; (c) finished goods sold in the ordinary
course of business or any interest therein to any individual, partnership, trust
or other corporation; and (d) Equipment which is no longer required or deemed
necessary for the conduct of Borrower’s business, so long as Borrower receives
therefor a sum substantially equal to such Equipment’s fair value;

    

    Section
13.08.  Create, permit to be created or suffer to exist any
Lien upon any of the Collateral or any other property of Borrower, now owned or
hereafter acquired, except: (a) landlords’, carriers’, warehousemen’s,
mechanics’ and other similar liens arising by operation of law in the ordinary
course of Borrower’s business; (b) arising out of pledge or deposits under
worker’s compensation, unemployment insurance, old age pension, social security,
retirement benefits or other similar legislation; (c) purchase money Liens
arising in the ordinary course of business (so long as the Debt secured thereby
does not exceed the lesser of the cost or fair market value of the property
subject thereto, and such Lien extends to no other property); (d) Liens for
unpaid taxes that are either (i) not yet due and payable, or (ii) the subject of
Permitted Protests; (e) Liens which are the subject of Permitted Protests; (f)
those Liens and encumbrances set forth on Schedule “B” or Schedule “C” annexed
hereto; and (g) in favor of Bank (hereinafter, collectively, “Permitted
Liens”);

    

    
      
        
        

      

      
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    Section 13.09. Pay or make any
distribution on account of any class of Borrower’s ownership interest in cash or
in property (other than additional ownership interest), or redeem, purchase or
otherwise acquire, directly or indirectly, any of the ownership interests at any
time after the occurrence and during the continuance of an Event of Default
hereunder on account of the Debt Service Coverage Ratio as defined and
calculated in accordance with Section 13.01 hereof both prior to and after
giving effect to such distribution;

    

    Section 13.10.  Make
any loans or advances to any Person, including without limitation Borrower’s
directors, officers and employees, except advances to officers or employees with
respect to expenses incurred by them in the ordinary course of their duties
which are properly reimbursable by Borrower and intercompany loans between each
Borrower;

    

    Section
13.11.  Assume, guaranty, endorse or otherwise become directly
or contingently liable in respect of (including without limitation by way of
agreement, contingent or otherwise, to purchase, provide funds to or otherwise
invest in a debtor or otherwise to assure a creditor against loss), any
indebtedness (except as set forth on Exhibit 13.11 and guarantees by endorsement
of instruments for deposit or collection in the ordinary course of business and
guarantees in favor of Bank) of any individual, partnership, trust or other
corporation;

    

    Section 13.12.  (a)
Use any Revolving Loan proceeds to purchase or carry any “margin stock” (as
defined in Regulation U of the Board of Governors of the Federal Reserve System)
or (b) invest in or purchase any stock or securities of any individual,
partnership, trust or other corporation except (x) readily marketable direct
obligations of, or obligations guaranteed by, the United States of America or
any agency thereof or (y) time deposits with or certificates of deposit issued
by the Bank;

    

    Section
13.13.  Enter into any lease or other transaction with any
Owner, officer or Affiliate on terms any less favorable than those which might
be obtained at the time from Persons who are not such a Owner, officer or
Affiliate;

    

    Section 13.14. Sell, transfer
or otherwise dispose of any stock of any subsidiary of Borrower; or

    

    Section 13.15. (a) Merge or
consolidate with or into any Person, (b) enter into any joint venture or
partnership with any Person; (c) convey, lease or sell all or any material
portion of its property or assets or business to any other Person, except for
the sale of Inventory in the ordinary course of its business; or (d) convey,
lease or sell any of its assets to any Person for less than the fair market
value thereof.

    

    14.           DEFAULT.

    

    Section 14.01.  Upon
the occurrence of any one or more of the following events (herein, “Events of Default”), Bank may decline to
make any or all further Revolving Loans hereunder or under any other agreements
with Borrower, any and all Obligations of the Borrower to Bank shall become
immediately due and payable, at the option of Bank and without notice or
demand.  The occurrence of any such Event of Default shall also
constitute, without notice or demand, a default under all other agreements
between Bank and the Borrower and instruments and papers given Bank by the
Borrower, whether such agreements, instruments, or papers now exist or hereafter
arise, namely:

    

    
      
        
        

      

      
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    (a)           The
failure by the Borrower to pay within five (5) business days after due any
principal, interest, fees, costs, and expenses due pursuant to this
Agreement.

    

    (b)           The
failure by the Borrower to pay within five (5) business days after

    due any
other Obligations.

    

    (c)           Default
by the Borrower in the observance or performance of any of the covenants or
agreements of the Borrower contained in Sections 13 and 15.08 of this
Agreement.

    

    (d)           The
failure by the Borrower to promptly, punctually and faithfully perform, or
observe any term, covenant or agreement on its part to be performed or observed
pursuant to any of the provisions of this Agreement, other than those described
in Sections 2.02, 2.07, 13, 12.25 or 15.08 or in any other agreement with Bank
which is not remedied within the earlier of thirty (30) days after (i) notice
thereof by Bank to Borrower, or (ii) the date Borrower was required to give
notice to Bank pursuant to Section 11.03(b) hereof.

    

    (e)           The
determination by Bank that any representation or warranty heretofore, now or
hereafter made by the Borrower to Bank, in any documents, instrument, agreement,
or paper was not true or accurate when given in any material
respect.

    

    (f)           The
occurrence of any event such that any material indebtedness of the Borrower from
any lender other than Bank has been accelerated.

    

    (g)           The
occurrence of any event which would cause a lien creditor, as that term is
defined in Section 9−301 of the Code, to take priority over advances made by
Bank at such time as the Bank has a perfected security interest in the
Collateral.

    

    (h)           A
filing against or relating to the Borrower of (i) a federal tax lien in favor of
the United States of America or any political subdivision of the United States
of America, or (ii) a state tax lien in favor of any state of the United States
of America or any political subdivision of any such state.

    

    (i)           Any
act by, against, or relating to the Borrower, or its property or assets, which
act constitutes the application for, consent to, or sufferance of the
appointment of a receiver, trustee or other Person, pursuant to court action or
otherwise, over all, or any part of the Borrower’s property.

    

    (j)           The
granting of any trust mortgage or execution of an assignment for the benefit of
the creditors of the Borrower, or the occurrence of any other voluntary or
involuntary liquidation or extension of debt agreement for the Borrower; the
failure by the Borrower to generally pay the debts of the Borrower as they
mature; adjudication of bankruptcy or insolvency relative to the Borrower; the
entry of an order for relief or similar order with respect to the Borrower in
any proceeding pursuant to the Bankruptcy

    
      
        
        

      

      
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     Code
or any other federal Bankruptcy law; the filing of any complaint, application,
or petition by or against the Borrower initiating any matter in which the
Borrower is or may be granted any relief from the debts of the Borrower pursuant
to the Bankruptcy Code or any other insolvency statute or procedure; the calling
or sufferance of a meeting of creditors of the Borrower; the meeting by the
Borrower of a formal or informal creditor’s committee; the offering by or
entering into by the Borrower of any composition, extension or any other
arrangement seeking relief or extension for the debts of the Borrower, or the
initiation of any other judicial or non−judicial proceeding or agreement by,
against or including the Borrower which seeks or intends to accomplish a
reorganization or arrangement with creditors.

    

    (k)           The
entry of any uninsured judgment(s) against Borrower in excess of $1,000,000.00,
which judgment(s) is not satisfied or appealed from (with execution or similar
process stayed) within fifteen (15) days of its entry.

    

    (l)           The
entry of any court order which enjoins, restrains or in any way prevents the
Borrower from conducting all or any part of its business affairs in the ordinary
course of business.

    

    (m)           The
service of any process upon Bank seeking to attach by trustee process any funds
of the Borrower on deposit with Bank.

    

    (n)           The
occurrence of any material uninsured loss, theft, damage or destruction to any
material asset(s) of the Borrower.

    

    (o)           Any
act by or against, or relating to the Borrower or its assets pursuant to which
any creditor of the Borrower seeks to reclaim or repossess or reclaims or
repossesses all or a portion of the Borrower’s assets.

    

    (p)           The
termination of existence, dissolution, or liquidation of the Borrower, or the
ceasing to carry on actively any substantial part of Borrower’s current
business.

    

    (q)           This
Agreement shall, at any time during which Bank has perfected its security
interest in the Collateral and for any reason, cease (i) to create a valid and
perfected first priority security interest in and to the property purported to
be subject to this Agreement; or (ii) to be in full force and effect or shall be
declared null and void, or the validity or enforceability hereof shall be
contested by the Borrower or any guarantor of the Borrower denies it has any
further liability or obligation hereunder.

    

    (r)           Any
of the following events occur or exist with respect to the Borrower or any ERISA
affiliate: (i) any “prohibited transaction” (as defined in Section 406 of ERISA
or Section 4975 of the Internal Revenue Code) involving any Plan; (ii) any
“reportable event” (as defined in Section 4043 of ERISA and the regulations
issued under such Section) shall occur with respect to any Plan; (iii) the
filing under Section 4041 of ERISA of a notice of intent to terminate any Plan
or the termination of any Plan; (iv) any event or circumstance exists which
might constitute grounds entitling the Pension Benefit Guaranty Corporation
(PBGC) to institute proceedings under Section 4042 of ERISA for the termination
of, or for the appointment of a trustee to administer, any Plan, or the

    
      
        
        

      

      
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    institution
by the PBGC of any such proceedings; (v) or partial withdrawal under Section
4201 or 4204 of ERISA from a Multiemployer Plan or the reorganization,
insolvency, or termination of any Multiemployer Plan; and in each case above,
such event or condition, together with all other events or conditions, if any,
could in the opinion of Bank subject the Borrower to any tax, penalty, or other
liability to a Plan, a Multiemployer Plan, the PBGC, or otherwise.

    

    Section 14.02.  Upon
the filing of any complaint, application, or petition by or against the Borrower
initiating any matter in which the Borrower is or may be granted any relief from
the debts of the Borrower pursuant to the Bankruptcy Code, Bank’s obligation
hereunder shall be canceled immediately, automatically, and without notice, and
all Obligations of the Borrower then outstanding shall become immediately due
and payable without presentation, demand, or notice of any kind to the
Borrower.

    

    
      	
              SECTION
    15.

            	
              RIGHTS AND REMEDIES UPON
      DEFAULT; SET-OFF; EXPENSES; POWER OF
  ATTORNEY.

            

    

    

    Upon the
occurrence of an Event of Default, the Bank shall have the following rights and
remedies, certain of which are predicated upon the Bank having perfected its
security interest in the Collateral.

    

    Section 15.01.  Bank
may declare any obligation Bank may have hereunder to be cancelled, declare all
Obligations of Borrower to be due and payable and proceed to enforce payment of
the Obligations and to exercise any and all of the rights and remedies afforded
to Bank by the UCC (at such time as the Bank has perfected its security interest
in the Collateral) or under the terms of this Agreement or
otherwise.  In addition, upon the occurrence of an Event of Default,
if Bank proceeds to enforce payment of the Obligations, Borrower shall be
obligated to deliver to Bank cash collateral in an amount equal to the aggregate
amounts then undrawn on all outstanding Letters of Credit or acceptances issued
or guaranteed by Bank for the account of Borrower, and Bank may proceed to
enforce payment of the same and to exercise all rights and remedies afforded to
Bank by the UCC or under the terms of this Agreement or otherwise. Upon the
occurrence of, and during the continuance of, an Event of Default, the Borrower,
as additional compensation to the Bank for its increased credit risk, promises
to pay interest on all Obligations (including, without limitation, principal,
whether or not past due, past due interest and any other amounts past due under
this Agreement) at a per annum rate of four (4%) percent greater than the rate
of interest then specified in Section 2.03 of this Agreement.

    

    Section 15.02.  In
connection with the Bank’s exercise of the Bank’s rights under this Agreement,
the Bank may enter upon, occupy and use any premises owned or occupied by the
Borrower, and may exclude the Borrower from such premises or portion thereof as
may have been so entered upon, occupied, or used by the Bank.  The
Bank shall not be required to remove any of the Collateral from any such
premises upon the Bank’s taking possession thereof, and may render any
Collateral unusable to the Borrower.  In no event shall the Bank be
liable to the Borrower for use or occupancy by the Bank of any premises pursuant
to this Agreement.

    

    Section 15.03.  Any
sale or other disposition of the Collateral may be at public or private sale
upon such terms and in such manner as the Bank deems advisable, having due
regard to compliance with any statute or regulation which might affect, limit or
apply to the Bank’s 

    
      
        
        

      

      
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    disposition
of the Collateral.  The Bank may conduct any such sale or other
disposition of the Collateral upon the Borrower’s premises.  Unless
the Collateral is perishable or threatens to decline speedily in value, or is of
a type customarily sold on a recognized market (in which event the Bank shall
provide the Borrower with such notice as may be practicable under the
circumstances), the Bank shall give the Borrower at least the greater of the
minimum notice required by law or seven (7) days prior written notice of the
date, time and place of any proposed public sale, and of the date after which
any private sale or other disposition of the Collateral may be
made.  The Bank may purchase the Collateral, or any portion of it at
any such sale.

    

    Section 15.04.  If
the Bank sells any of the Collateral on credit, the Borrower will be credited
only with payments actually made by the purchaser of such Collateral and
received by the Bank.  If the purchaser fails to pay for the
Collateral, the Bank may re-sell the Collateral and the Borrower shall be
credited with the proceeds of the sale.

    

    Section 15.05.  The
Bank may require the Borrower to assemble the Collateral and make it available
to the Bank at the Borrower’s sole risk and expense at a place or places which
are reasonably convenient to both the Bank and the Borrower.

    

    Section
15.06.  Borrower shall, following the occurrence of an Event of
Default which is continuing, deliver to Bank, daily, a schedule in form and
content satisfactory to Bank describing the invoices issued by Borrower since
the last schedule submitted to Bank.  The schedules to be provided
under this subsection are solely for the convenience of Bank in administering
this Agreement and maintaining records of the Collateral.  Borrower’s
failure to provide Bank with any such schedule shall not affect the security
interest of Bank in such Accounts.

    

    Section
15.07.  Within thirty (30) calendar days after the end of each
month or on such other basis as may be required by Bank from time to time,
Borrower shall, following the occurrence of an Event of Default which is
continuing, submit to Bank an accounts payable aging report in form satisfactory
to Bank showing the amounts due and owing on all accounts payable according to
Borrower’s records as of the close of such month or such shorter period as may
be required by Bank from time to time, together with such other information as
Bank may require.  If Borrower’s monthly accounts payable aging
reports are prepared by an accounting service or other agent, Borrower hereby
authorizes such service or agent to deliver such accounts payable aging reports
and any other related documents to Bank.

    

    Section 15.08.  From
and after the occurrence of an Event of Default which is continuing, Borrower
will immediately, upon receipt of all checks, drafts, cash and other remittances
in payment of any Inventory sold or in payment or on account of Borrower’s
accounts, contracts, contract rights, notes, bills, drafts, acceptances, general
intangibles, choses in action and all other forms of obligations, deliver the
same to Bank accompanied by a remittance report in form specified by
Bank.  Said proceeds shall be delivered to Bank in the same form
received except for the endorsement of Borrower where necessary to permit
collection of items, which endorsement Borrower agrees to make.  Bank
will credit (conditional upon final collection) all such payments against the
principal or interest of any Revolving Loans secured hereby; provided, however,
for the purpose of computing interest, any items requiring clearance or payment
shall not be considered to have been credited against any Revolving Loans
secured hereby until two (2) business days after receipt by Bank of any such
items.  The order and method of such application shall be in the sole
discretion of Bank and any portion of such funds 

    
      
        
        

      

      
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    which
Bank elects not to so apply shall be paid over from time to time by Bank to
Borrower. Bank will at all times have the right to require Borrower (a) to enter
into a lockbox arrangement with Bank for the collection of such remittances and
payments, or (b) to maintain its deposit accounts at Bank or, in the
alternative, at another financial institution which has agreed to accept drafts
drawn on it by Bank under a written depository transfer agreement with Bank and
to block Borrower’s account and waive its rights as against such
account.

    

    Section 15.09.  Bank
may at any time, after the occurrence of an Event of Default or an event which,
with notice or the passage of time or both, would constitute an Event of
Default, notify account debtors that Collateral has been assigned to Bank and
that payments shall be made directly to or as directed by Bank.  Upon
request of Bank at any time, Borrower will so notify such account debtors and
will indicate on all billings to such account debtors that their Accounts must
be paid directly to or as directed by Bank.  Bank shall have full
power to collect, compromise, endorse, sell or otherwise deal with the
Collateral or proceeds thereof in its own name or in the name of
Borrower.

    

    16.           WAIVER
OF JURY TRIAL.

    

    BORROWER
AND BANK EACH HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT
IT MAY HAVE OR HEREAFTER HAVE TO A TRIAL BY JURY IN RESPECT OF ANY SUIT, ACTION
OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT.  Borrower
hereby certifies that neither Bank nor any of its representatives, agents or
counsel has represented, expressly or otherwise, that Bank would not, in the
event of any such suit, action or proceeding, seek to enforce this waiver of
right to trial by jury.  Borrower acknowledges that it has read the
provisions of this Agreement and in particular, this section; has consulted
legal counsel; understands the right it is granting in this Agreement and is
waiving in this section in particular; and makes the above waiver knowingly,
voluntarily and intentionally.

    

    17.           CONSENT
TO JURISDICTION.

    

    Borrower
and Bank agree that any action or proceeding to enforce or arising out of this
Agreement may be commenced in any court of the Commonwealth of Massachusetts
sitting in the county of Suffolk, or in the District Court of the United States
for the District of Massachusetts, and Borrower waives personal service of
process and agrees that a summons and complaint commencing an action or
proceeding in any such court shall be properly served and confer personal
jurisdiction if served by registered or certified mail to Borrower, or as
otherwise provided by the laws of the Commonwealth of Massachusetts or the
United States of America.

    

    18.           TERMINATION.

    

    (a)           Unless
renewed in writing, this Agreement shall terminate on April 30, 2012 (the “Termination Date”), and all
Obligations shall be due and payable in full without presentation, demand, or
further notice of any kind, whether or not all or any part of the Obligations is
otherwise due and payable pursuant to the agreement or instrument evidencing
same.  Bank may terminate this Agreement immediately and without
notice upon the occurrence of an Event of Default.  Notwithstanding
the foregoing or anything in this Agreement or elsewhere to the contrary, the
security interest, Bank’s rights and remedies hereunder and Borrower’s
obligations 

    
      
        
        

      

      
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    and
liabilities hereunder shall survive any termination of this Agreement and shall
remain in full force and effect until all of the Obligations outstanding, or
contracted or committed for (whether or not outstanding), shall be finally and
irrevocably paid in full.  No Collateral shall be released or
financing statement terminated (if applicable) until such final and
irrevocable payment in full of the Obligations, as described in the preceding
sentence.

    

    (b)           In
the event that Bank continues to make Revolving Loans hereunder after the
Termination Date without a written extension of the Termination Date or after
the occurrence of an Event of Default, all such Revolving Loans: (i) shall be
made in the sole and absolute discretion of Bank; and (ii) shall, together with
all other Obligations, be payable thereafter ON DEMAND.

    

    19.           JOINT
AND SEVERAL LIABILITY.

    

    Section 19.01.  Each
Borrower is accepting joint and several liability under this Agreement in
consideration of the financial accommodations to be provided by Bank under this
Agreement, for the mutual benefit, directly and indirectly, of each Borrower and
in consideration of the undertakings of each other Borrower to accept joint and
several liability for the Obligations of each Borrower to Bank.

    

    Section 19.02.  Each
Borrower, jointly and severally, hereby irrevocably and unconditionally accepts,
not merely as a surety but also as a co-debtor, joint and several liability with
each other Borrower, with respect to the payment and performance of all of the
Obligations of each Borrower to Bank under this Agreement (including, without
limitation, any Obligations arising under this section), it being the intention
of the parties hereto that all the Obligations of each Borrower to Bank under
this Agreement shall be the joint and several Obligations of each of the
Borrowers without preferences or distinction among them.

    

    Section 19.03.  If
and to the extent that any of the Borrowers shall fail to make any payment with
respect to any of the Obligations of each Borrower to Bank under this
Agreement,  as and when due or to perform any of such Obligations in
accordance with the terms thereof, then in each such event the other Borrower,
under this Agreement will make such payment with respect to, or perform, such
Obligation.

    

    Section 19.04.  The
Obligations of each Borrower under the provisions of this section constitute
full recourse Obligations of each Borrower enforceable against each such
Borrower to the full extent of its properties and assets, irrespective of the
validity, regularity or enforceability of this Agreement or any other
circumstance whatsoever.

    

    Section 19.05.  Each
Borrower hereby waives notice of acceptance of its joint and several liability,
notice of any Revolving Loans made under this Agreement, notice of any action at
any time taken or omitted by Bank under or in respect of any of the Obligations
of each Borrower to Bank under this Agreement, and, generally, to the extent
permitted by applicable law, all demands, notices and other formalities of every
kind in connection with this Agreement.  Each Borrower hereby assents
to, and waives notice of, any extension or postponement of the time for the
payment of any of the Obligations of each Borrower to Bank under this Agreement,
the acceptance of any payment of any of such Obligations, the acceptance of any
partial payment thereon, any waiver, consent or other action or acquiescence by
Bank at any time or times in 

    
      
        
        

      

      
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    respect
of any default by any Borrower in the performance or satisfaction of any term,
covenant, condition or provision of this Agreement, any and all other
indulgences whatsoever by Bank in respect of any of the Obligations of each
Borrower to Bank under this Agreement, and the taking, addition, substitution or
release, in whole or in part, at any time or times, of any security for any of
such Obligations of each Borrower to Bank or the addition, substitution or
release, in whole or in part, of any Borrower.  Without limiting the
generality of the foregoing, each Borrower assents to any other action or delay
in acting or failure to act on Bank's part with respect to the failure by any
Borrower to comply with any of its respective Obligations, including, without
limitation, any failure strictly or diligently to assert any right or to pursue
any remedy or to comply fully with applicable laws or regulations thereunder,
which might, but for the provisions of this section, afford grounds for
terminating, discharging or relieving any Borrower, in whole or in part, from
any of its Obligations under this section, it being the intention of each
Borrower that, so long as any of the Obligations under this Agreement remain
unsatisfied, the Obligations of such Borrower under this section shall not be
discharged except by performance and then only to the extent of such
performance.  The Obligations of each Borrower under this section
shall not be diminished or rendered unenforceable by any winding up,
reorganization, arrangement, liquidation, reconstruction or similar proceeding
with respect to any other Borrower or Bank.  The joint and several
liability of each Borrower under this Agreement shall continue in full force and
effect notwithstanding any absorption, merger, amalgamation or any other change
whatsoever in the name, membership, constitution or place of formation of any
Borrower or Bank.

    

    Section 19.06.  The
provisions of this section are made for the benefit of Bank and Bank's
successors and assigns, and may be enforced by Bank in good faith from time to
time against any or all of the Borrowers as often as occasion therefor may arise
and without requirement on Bank's part first to marshal any of its claims or to
exercise any of its rights against any Borrower or to exhaust any remedies
available to Bank against any other Borrower or to resort to any other source or
means of obtaining payment of any of the Obligations under this Agreement or to
elect any other remedy.  The provisions of this section shall remain
in effect until all of the Obligations of each Borrower to Bank under this
Agreement shall have been paid in full or otherwise fully
satisfied.  If at any time, any payment, or any part thereof, made in
respect of any of such Obligations of each Borrower to Bank, is rescinded or
must otherwise be restored or returned by Bank upon the insolvency, bankruptcy
or reorganization of any Borrower, or otherwise, the provisions of this section
will forthwith be reinstated in effect, as though such payment had not been
made.

    

    Section 19.07.  Each
Borrower agrees that it shall not exercise, and hereby expressly waives until
full and final payment of all Obligations to Bank: (a) any right to subrogation
or indemnification, and any other right to payment from or reimbursement by any
other Borrower, in connection with or as a consequence of any payment made by
any Borrower to Bank, (b) any right to enforce any right or remedy which Bank
may have or may hereafter have against any other Borrower, and (c) any benefit
of, and any right to participate in (i) any collateral now or hereafter held by
Bank, or (ii) any payment to Bank by, or collection by Bank from any other
Borrower.  The provisions of this paragraph are made for the express
benefit of each Borrower as well as Bank, and may be enforced independently by
each Borrower or any successor in interest to each Borrower.

    

    
      
        
        

      

      
        34

        
          

        

      

      
        
        

      

    

    20.           MISCELLANEOUS.

    

    Section 20.01.  No
delay or omission on the part of Bank in exercising any rights shall operate as
a waiver of such right or any other right. Waiver on any one occasion shall not
be construed as a bar to or waiver of any right or remedy on any future
occasion.  All Bank’s rights and remedies, whether evidenced hereby or
by any other agreement, instrument or paper, shall be cumulative and may be
exercised singularly or concurrently.

    Section 20.02.  Bank
is authorized to make Revolving Loans under the terms of this Agreement upon the
request, either written or oral, in the name of Borrower or any authorized
person whose name appears at the end of this Agreement or of any of the
following named person, or persons, from time to time, holding the following
offices of Borrower, President, Treasurer and such other officers and authorized
signatories as may from time to time be set forth in separate banking and
borrowing resolutions.

    

    Section 20.03.  This
Agreement shall bind and inure to the benefit of the respective successors and
assigns of each of the parties hereto; provided, however, that
Borrower may not assign this Agreement or any rights or duties hereunder without
Bank’s prior written consent and any prohibited assignment shall be absolutely
void.  No consent to an assignment by Bank shall release Borrower from
its Obligations.  Bank may assign this Agreement and its rights and
duties hereunder and no consent or approval by Borrower is required in
connection with any such assignment.  Bank reserves the right to sell,
assign, transfer, negotiate or grant participations in all or any part of, or
any interest in Bank’s rights and benefits hereunder.  In connection
with any assignment or participation, Bank may disclose all documents and
information which Bank now or hereafter may have relating to Borrower or
Borrower’s business.  To the extent that Bank assigns its rights and
obligations hereunder to another party, Bank thereafter shall be released from
such assigned obligations to Borrower and such assignment shall effect a
novation between Borrower and such other party.

    

    Section
20.04.  Borrower agrees that any and all Revolving Loans made
by Bank to Borrower or for its account under this Agreement shall be
conclusively deemed to have been authorized by Borrower and to have been made
pursuant to duly authorized requests therefor on its behalf.

    

    Section
20.05.  Paragraph and section headings used in this Agreement
are for convenience only, and shall not effect the construction of this
Agreement.  If one or more provisions of this Agreement (or the
application thereof) shall be invalid, illegal or unenforceable in any respect
in any jurisdiction, the same shall not, invalidate or render illegal or
unenforceable such provision (or its application) in any other jurisdiction or
any other provision of this Agreement (or its application).  This
Agreement is the entire agreement of the parties with respect to the subject
matter hereof and supersedes any prior written or verbal communications or
instruments relating thereto.

    

    Section
20.06.  Unless otherwise provided in this Agreement, all
notices or demands by any party relating to this Agreement or any other loan
document shall be in writing and (except for financial statements and other
informational documents which may be sent by first-class mail, postage prepaid)
shall be personally delivered or sent by registered or certified mail (postage
prepaid, return receipt requested ), overnight courier, or facsimile to Borrower
or to Bank, as the case may be, at its address set forth below:

    

    
      
        
        

      

      
        35

        
          

        

      

      
        
        

      

    

    If to
Bank:                                           TD
Bank, N.A.

    370 Main Street

    Worcester, MA 01608

    Attn:                   Steven
S. Carpinella, Vice President

    Telephone: (508)
368-6537

    Telecopier: (508)
368-6521

    

    with a
copy
to:                                           Ruberto,
Israel & Weiner, P.C.

    100 North Washington
Street

    Boston, MA 02114

    Attn:                   Brian
T. Garrity, Esq.

    Telephone: (617)
742-4200

    Telecopier: (617)
742-2355

    

    If to
Borrower:                                           The
L. S. Starrett Company

    121 Crescent Street

    Athol, MA 01331

    Attn:                   Douglas
A. Starrett, President

    Telephone:

    Telecopier:

    

    with a
copy
to:                                           Ropes
& Gray, LLP

    One International Place

    Boston, MA 02110

    Attn:                   David
A. McKay, Esq.

    Telephone: (617)
951-7000

    Telecopier: (617)
951-7050

    

    The
parties hereto may change the address at which they are to receive notices
hereunder, by notice in writing in the foregoing manner given to the
other.  All notices or demand sent in accordance with this section
shall be deemed received on the earlier of the date of actual receipt or three
(3) days after the deposit thereof in the mail.

    

    Section
20.07.  Neither this Agreement nor any uncertainty or ambiguity
herein shall be construed or resolved against Bank or Borrower, whether under
any rule of construction or otherwise.  On the contrary, this
Agreement has been reviewed by all parties and shall be construed and
interpreted according to the ordinary meaning of the words used so as to fairly
accomplish the purposes and intentions of all parties hereto.

    

    Section 20.08.  Each
provision of this Agreement shall be severable from every other provision of
this Agreement for the purpose of determining the legal enforceability of any
specific provision.

    

    
      
        
        

      

      
        36

        
          

        

      

      
        
        

      

    

    Section 20.09.  This
Agreement, together with the other documents and instruments executed
concurrently herewith represent the entire and final understanding of the
parties with respect to the transactions contemplated hereby and shall not be
contradicted or qualified by evidence of any prior, contemporaneous or
subsequent other agreement, oral or written, before the date
hereof.

    

    Section 20.10.  This
Agreement can only be amended by a writing signed by both Bank and
Borrower.

    

    Section 20.11.  The
laws of Massachusetts shall govern the construction of this Agreement and the
rights and duties of the parties hereto.  This Agreement shall take
effect as a sealed instrument.

    

    <The
remainder of this page is intentionally left blank.>

    

    
      
        
          
            	
                  

          

           

          

        

         

      

      
        37

        
          

        

      

      
         

      

    

    [SIGNATURE
PAGE OF THE LOAN AND SECURITY AGREEMENT (ALL ASSETS)]

    

    BANK:

    Witnessed
by:                                                                     TD
BANK, N.A.

    

    

    /s/
Kathryn
DeCoteau                                                                     By:
/s/ Steven S. Carpinella

    Print
Name: Kathryn
DeCoteau                                                                     Steven
S. Carpinella, Vice President

    

    BORROWER:

    THE L. S. STARRETT
COMPANY

    

    

    /s/
Kathryn
DeCoteau                                                                     By:
/s/ Randall Hylek

    Print
Name: Kathryn
DeCoteau                                                                     Randall
Hylek,

    Chief Financial Officer and
Treasurer

    

    EVANS RULE COMPANY, INC.

    

    

    /s/
Kathryn
DeCoteau                                                                     By:
/s/ Randall Hylek

    Print
Name: Kathryn
DeCoteau                                                                     Randall
Hylek,

    Chief Financial Officer and
Treasurer

    

    LEVEL INDUSTRIES, INC.

    

    

    /s/
Kathryn
DeCoteau                                                                     By:
/s/ Randall Hylek

    Print
Name: Kathryn
DeCoteau                                                                     Randall
Hylek,

    Chief Financial Officer and
Treasurer

    

    

    TRU-STONE TECHNOLOGIES,
INC.

    

    

    /s/
Kathryn
DeCoteau                                                                     By:
/s/ Randall Hylek

    Print
Name: Kathryn
DeCoteau                                                                     Randall
Hylek,

    Chief Financial Officer and
Treasurer

    

    

    STARRETT KINEMETRIC ENGINEERING,
INC.

    

    

    /s/
Kathryn
DeCoteau                                                                     By:
/s/ Randall Hylek

    Print
Name: Kathryn
DeCoteau                                                                     Randall
Hylek,

    Chief Financial Officer and
Treasurer

    

    

    

    
      
        
        

      

      
        38

        
          

        

      

      
        
        

      

    

    [schedules
and exhibits omitted]

    

    

    
      
        
          
            	
                  

          

           

          

        

         

      

      
        39

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