Document:

Exhibit 10.1

 

 

AMENDMENT TO AMENDED AND

RESTATED CREDIT AGREEMENT

 

 

                                This AMENDMENT TO AMENDED AND

RESTATED CREDIT AGREEMENT (this “Amendment”) is made and entered into as of the

12th day of August, 2002, by and among Dover Downs Gaming and

Entertainment, Inc. (the “Borrower”) and Wilmington Trust Company, a Delaware

banking corporation (“WTC”), and PNC Bank, Delaware, a Delaware banking

corporation (collectively, the “Banks”) and WTC, as agent (the “Agent”).

 

                                WHEREAS, the Borrower, the Banks and

the Agent have entered into an Amended and Restated Credit Agreement, dated as

of March 25, 2002 (the “Agreement”), pursuant to which the Banks agreed to make

available certain credit facilities to the Borrower; and

 

                                WHEREAS, the Borrower, the Banks and

the Agent desire to amend the Agreement as set forth herein.

 

                                NOW THEREFORE, for good and valuable

consideration, the receipt and sufficiency of which are hereby acknowledged,

and intending to be legally bound hereby, the parties hereto hereby agree to

amend the Agreement as follows:

 

                                SECTION 1.           Defined Terms. 

Capitalized terms used herein and not otherwise defined are used as

defined in the Agreement.

 

                                SECTION 2.           Amendments. Schedule I of the Agreement is hereby

amended and restated in its entirety to read as set forth in Schedule I

attached hereto.  Exhibit B-1 of the

Agreement is hereby amended and restated in its entirety to read as set forth

in Exhibit B-1 attached hereto.  Section

2.10(c) of the Agreement is hereby amended and restated in its entirety to read

as follows:

 

                                                “Each reduction in the Total Commitment

hereunder, other than the scheduled reductions of $5,000,000 as of December 31,

2002 and $10,000,000 as of December 31, 2003, shall be made ratably among the

Banks in accordance with their respective Commitment Percentages.  The Borrower shall pay to the Agent for the

account of the Banks, on the date of each termination or reduction, the

Commitment Fees on the amount of the Commitments so terminated or reduced

accrued to the date of such termination or reduction.  In connection with any reduction of the Total Commitment, the

Borrower shall make any prepayment required under Section 2.11(b).

 

 

                                SECTION 3.           Binding Effect. 

This Amendment shall be binding upon, and shall inure to the benefit of,

the parties hereto and their respective successors and assigns.

 

                                SECTION 4.           Execution in Counterparts.  This Amendment may be executed in any number

of counterparts, all of which taken together shall constitute one and the same

instrument, and any of the parties hereto may execute this Amendment by signing

any such counterpart.

 

                                SECTION 5.           Agreement in Effect.  Except as hereby amended, the Agreement shall remain in full

force and effect.

 

                                SECTION 6.           Governing Law. 

This Amendment shall be governed by, and construed in accordance with,

the laws of the State of Delaware without regard to its principles of conflict

of laws, all rights and remedies being governed by Delaware’s substantive laws.

 

 

 

 

                                                IN WITNESS WHEREOF,

the parties hereto have duly executed this Amendment as of the date first above

written.

 

 

	

   

  	

   

  
	

   

  	

  DOVER DOWNS GAMING & ENTERTAINMENT, INC.

  
	

   

  	

   

  
	

   

  	

   

  
	

   

  	

  By: 

  	

   /s/ Denis McGlynn

  
	

   

  	

                  Name: Denis McGlynn

  
	

   

  	

                  Title: President

  
	

   

  	

   

  
	

   

  	

   

  
	

   

  	

   

  
	

   

  	

  WILMINGTON TRUST COMPANY, as Agent and as a Bank

  
	

   

  	

   

  
	

   

  	

   

  
	

   

  	

  By:

  	

   /s/ Michael B. Gast

  
	

   

  	

                  Name: Michael B. Gast

  
	

   

  	

                  Title: Vice President

  
	

   

  	

   

  
	

   

  	

   

  
	

   

  	

   

  
	

   

  	

  PNC BANK, DELAWARE, as a Bank

  
	

   

  	

   

  
	

   

  	

   

  
	

   

  	

  By: 

  	

   /s/ Theodore J. Prushinski

  
	

   

  	

                  Name: Theodore J. Prushinski

  
	

   

  	

                  Title: Vice President

  

 

 

 

SCHEDULE I

BANK AND

COMMITMENT INFORMATION

	

  Bank and Address

  	

   

  	

  Commitment

  	

   

  	

  Swing Line

  Commitment

  	

   

  
	

   

  	

   

  	

   

  	

   

  	

   

  	

   

  
	

  Wilmington Trust Company  

  121 South State Street  

  Dover, DE19901  

  Attn:  Commercial Banking Department

  	

   

  	

  $45,000,000 through December 31, 2003 and

  $35,000,000 thereafter

  	

   

  	

  $5,000,000

  	

   

  
	

   

  	

   

  	

   

  	

   

  	

   

  	

   

  
	

  PNC Bank, Delaware 

  222 Delaware Avenue  

  18th Floor  

  Wilmington, DE  19801  

  Attn:  Theodore J. Prushinski

  	

   

  	

  $15,000,000 through December 31, 2002 and

  $10,000,000 thereafter

  	

   

  	

   

  	

   

  
	

   

  	

   

  	

   

  	

   

  	

   

  	

   

  
	

   

  	

   

  	

  $60,000,000 through December 31, 2002, then

  $55,000,000 through December 31, 2003, and $45,000,000 thereafterExhibit

10.1

 

October

30, 2002

 

	

   

  

 

CREDIT

AND SECURITY AGREEMENT

 

BY AND

BETWEEN

 

DIGITAL

ANGEL CORPORATION

 

AND

 

WELLS

FARGO BUSINESS CREDIT, INC.

 

October

30, 2002

 

	

   

  

 

 

 

Table of Contents

 

	

  ARTICLE

  I DEFINITIONS

  
	

  Section 1.1

  	

  Definitions

  
	

  Section 1.2

  	

  Other Definitional Terms; Rules of

  Interpretation

  
	

   

  	

   

  
	

  ARTICLE

  II AMOUNT AND TERMS OF THE CREDIT FACILITY

  
	

  Section 2.1

  	

  Revolving Advances

  
	

  Section 2.2

  	

  Procedures for Requesting Advances

  
	

  Section 2.3

  	

  Increased Costs; Capital Adequacy; Funding

  Exceptions

  
	

  Section 2.4

  	

  Letters of Credit

  
	

  Section 2.5

  	

  Special Account

  
	

  Section 2.6

  	

  Payment of Amounts Drawn Under Letters of

  Credit; Obligation of Reimbursement

  
	

  Section 2.7

  	

  Obligations Absolute

  
	

  Section 2.8

  	

  Interest; Margin; Minimum Interest Charge;

  Default Interest; Participations; Clearance Days; 360 Day Year; Usury

  
	

  Section 2.9

  	

  Fees

  
	

  Section 2.10

  	

  Time for Interest Payments; Payment on

  Non-Banking Days; Computation of Interest and Fees

  
	

  Section 2.11

  	

  Lockbox; Collateral Account; Application

  of Payments

  
	

  Section 2.12

  	

  Voluntary Prepayment; Reduction of the

  Maximum Line; Termination of the Credit Facility by the Borrower

  
	

  Section 2.13

  	

  Mandatory Prepayment

  
	

  Section 2.14

  	

  Revolving Advances to Pay Obligations

  
	

  Section 2.15

  	

  Use of Proceeds

  
	

  Section 2.16

  	

  Liability Records

  
	

   

  	

   

  
	

  ARTICLE III SECURITY INTEREST; OCCUPANCY;

  SETOFF

  
	

  Section 3.1

  	

  Grant of Security Interest

  
	

  Section 3.2

  	

  Notification of Account Debtors and Other

  Obligors

  
	

  Section 3.3

  	

  Assignment of Insurance

  
	

  Section 3.4

  	

  Occupancy

  
	

  Section 3.5

  	

  License

  
	

  Section 3.6

  	

  Financing Statement

  
	

  Section 3.7

  	

  Setoff

  
	

  Section 3.8

  	

  Collateral

  
	

   

  	

   

  
	

  ARTICLE

  IV CONDITIONS OF LENDING

  
	

  Section 4.1

  	

  Conditions Precedent to the Initial

  Revolving Advance and Letter of Credit

  
	

  Section 4.2

  	

  Conditions Precedent to All Advances and

  Letters of Credit

  

 

 

	

  ARTICLE

  V REPRESENTATIONS AND WARRANTIES

  
	

  Section 5.1

  	

  Existence and Power; Name; Chief Executive

  Office; Inventory and Equipment Locations; Federal Employer Identification

  Number

  
	

  Section 5.2

  	

  Capitalization

  
	

  Section 5.3

  	

  Authorization of Borrowing; No Conflict as

  to Law or Agreements

  
	

  Section 5.4

  	

  Legal Agreements

  
	

  Section 5.5

  	

  Subsidiaries

  
	

  Section 5.6

  	

  Financial Condition; No Adverse Change

  
	

  Section 5.7

  	

  Litigation

  
	

  Section 5.8

  	

  Regulation U

  
	

  Section 5.9

  	

  Taxes

  
	

  Section 5.10

  	

  Titles and Liens

  
	

  Section 5.11

  	

  Intellectual Property Rights

  
	

  Section 5.12

  	

  Plans

  
	

  Section 5.13

  	

  Default

  
	

  Section 5.14

  	

  Environmental Matters

  
	

  Section 5.15

  	

  Submissions to Lender

  
	

  Section 5.16

  	

  Financing Statements

  
	

  Section 5.17

  	

  Rights to Payment

  
	

   

  	

   

  
	

  ARTICLE

  VI COVENANTS

  
	

  Section 6.1

  	

  Reporting Requirements

  
	

  Section 6.2

  	

  Financial Covenants

  
	

  Section 6.3

  	

  Permitted Liens; Financing Statements

  
	

  Section 6.4

  	

  Indebtedness

  
	

  Section 6.5

  	

  Guaranties

  
	

  Section 6.6

  	

  Investments and Subsidiaries

  
	

  Section 6.7

  	

  Dividends and Distributions

  
	

  Section 6.8

  	

  Salaries

  
	

  Section 6.9

  	

  Books and Records; Inspection and

  Examination

  
	

  Section 6.10

  	

  Account Verification

  
	

  Section 6.11

  	

  Compliance with Laws

  
	

  Section 6.12

  	

  Payment of Taxes and Other Claims

  
	

  Section 6.13

  	

  Maintenance of Properties

  
	

  Section 6.14

  	

  Insurance

  
	

  Section 6.15

  	

  Preservation of Existence

  
	

  Section 6.16

  	

  Delivery of Instruments, etc

  
	

  Section 6.17

  	

  Sale or Transfer of Assets; Suspension of

  Business Operations

  
	

  Section 6.18

  	

  Consolidation and Merger; Asset

  Acquisitions

  
	

  Section 6.19

  	

  Sale and Leaseback

  
	

  Section 6.20

  	

  Restrictions on Nature of Business

  
	

  Section 6.21

  	

  Accounting

  
	

  Section 6.22

  	

  Discounts, etc

  
	

  Section 6.23

  	

  Plans

  
	

  Section 6.24

  	

  Place of Business; Name

  
	

  Section 6.25

  	

  Constituent Documents; S Corporation

  Status

  
	

  Section 6.26

  	

  Performance by the Lender

  

 

 

	

  ARTICLE VII EVENTS OF DEFAULT, RIGHTS AND

  REMEDIES

  
	

  Section 7.1

  	

  Events of Default

  
	

  Section 7.2

  	

  Rights and Remedies

  
	

  Section 7.3

  	

  Certain Notices

  
	

   

  	

   

  
	

  ARTICLE VIII MISCELLANEOUS

  
	

  Section 8.1

  	

  No Waiver; Cumulative Remedies; Compliance

  with Laws

  
	

  Section 8.2

  	

  Amendments, Etc

  
	

  Section 8.3

  	

  Addresses for Notices; Requests for

  Accounting

  
	

  Section 8.4

  	

  Further Documents

  
	

  Section 8.5

  	

  Costs and Expenses

  
	

  Section 8.6

  	

  Indemnity

  
	

  Section 8.7

  	

  Participants

  
	

  Section 8.8

  	

  Execution in Counterparts; Telefacsimile

  Execution

  
	

  Section 8.9

  	

  Retention of Borrower’s Records

  
	

  Section 8.10

  	

  Binding Effect; Assignment; Complete

  Agreement; Exchanging Information

  
	

  Section 8.11

  	

  Severability of Provisions

  
	

  Section 8.12

  	

  Headings

  
	

  Section 8.13

  	

  Governing Law; Jurisdiction, Venue; Waiver

  of Jury Trial

  

 

 

CREDIT

AND SECURITY AGREEMENT

 

Dated as of October 30,

2002

 

DIGITAL ANGEL CORPORATION, a Delaware corporation (the

“Borrower”), and WELLS FARGO BUSINESS CREDIT, INC., a Minnesota corporation

(the “Lender”), hereby agree as follows:

 

ARTICLE I

 

DEFINITIONS

 

Section 1.1             Definitions.  For all purposes of this Agreement, except

as otherwise expressly provided, the following terms shall have the meanings

assigned to them in this Section or in the Section referenced after such term:

 

“Accounts” means all of

the Borrower’s accounts, as such term is defined in the UCC, including each and

every right of the Borrower to the payment of money, whether such right to

payment now exists or hereafter arises, whether such right to payment arises

out of a sale, lease or other disposition of goods or other property, out of a

rendering of services, out of a loan, out of the overpayment of taxes or other

liabilities, or otherwise arises under any contract or agreement, whether such

right to payment is created, generated or earned by the Borrower or by some

other person who subsequently transfers such person’s interest to the Borrower,

whether such right to payment is or is not already earned by performance, and

howsoever such right to payment may be evidenced, together with all other

rights and interests (including all Liens) which the Borrower may at any time

have by law or agreement against any account debtor or other obligor obligated

to make any such payment or against any property of such account debtor or

other obligor; all including but not limited to all present and future

accounts, contract rights, loans and obligations receivable, chattel papers,

bonds, notes and other debt instruments, tax refunds and rights to payment in

the nature of general intangibles.

 

“Advance” means a

Revolving Advance.

 

“Affiliate” or

“Affiliates” means any Person controlled by, controlling or under common

control with the Borrower, including any Subsidiary of the Borrower.  For purposes of this definition, “control,”

when used with respect to any specified Person, means the power to direct the

management and policies of such Person, directly or indirectly, whether through

the ownership of voting securities, by contract or otherwise.

 

“Agreement” means this

Credit and Security Agreement.

 

“Availability” means the

difference of (i) the Borrowing Base and (ii) the sum of (A) the

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

 

“Banking Day” means a day

on which the Federal Reserve Bank of New York is open for business.

 

 

“Base Rate” means the

rate of interest publicly announced from time to time by Wells Fargo Bank

National Association at its principal office in San Francisco as its “prime

rate”, with the understanding that the “prime rate” is one of Wells Fargo’s

base rates (not necessarily the lowest of such rates) and serves as the basis

upon which effective rates of interest are calculated for loans making

reference thereto.

 

“Book

Net Worth” means the aggregate of the common and preferred stockholders’ equity

in the Borrower, determined in accordance with GAAP.

 

“Borrowing Base” means at

any time the lesser of:

 

(a)           the Maximum Line; or

 

(b)           subject to change from time to time

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

 

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

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

 

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

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

 

“Capital Expenditures”

means for a period, any expenditure of money during such period for the lease, purchase or other acquisition

of any capital asset, or for the lease of any other asset whether payable

currently or in the future.

 

“Change

of Control” means the occurrence of any of the following events:

 

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

Sections 13(d) and 14(d) of the Securities Exchange Act of 1934) hereafter

becomes the “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under

the Securities Exchange Act of 1934, except that a Person will be deemed to

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

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

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

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

 

(b)           During any consecutive two-year period, individuals who at the beginning

of such period constituted the board of Directors of the Borrower (together

with any new Directors whose election to such board of Directors, or whose nomination

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

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

beginning of such period or whose election or nomination for election was

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

board of Directors of the Borrower then in office.

 

(c)           Randolph

K. Geissler shall cease to actively manage the Borrower’s day-to-day business

activities.

 

2

 

“Collateral” means all of

the Borrower’s Accounts, chattel paper, deposit accounts, documents, Equipment,

General Intangibles, goods, instruments, Inventory, Investment Property,

letter-of-credit rights, letters of credit, all sums on deposit in any

Collateral Account, and any items in any Lockbox; together with (i) all

substitutions and replacements for and products of any of the foregoing;

(ii) in the case of all goods, all accessions; (iii) all accessories,

attachments, parts, equipment and repairs now or hereafter attached or affixed

to or used in connection with any goods; (iv) all warehouse receipts,

bills of lading and other documents of title now or hereafter covering such

goods; (v) all collateral subject to the Lien of any Security Document;

(vi) any money, or other assets of the Borrower that now or hereafter come

into the possession, custody, or control of the Lender; (vii) all sums on

deposit in the Special Account; and (viii) proceeds of any and all of the

foregoing.

 

“Collateral Account”

means the “Lender Account” as defined in the Lockbox and Collection Account

Agreement.

 

“Commitment” means the

Lender’s commitment to make Advances to, and to cause the Issuer to issue

Letters of Credit for the account of, the Borrower pursuant to Article II.

 

“Constituent Documents”

means with respect to any Person, as applicable, such Person’s certificate of

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

articles of organization, limited liability company agreement, management

agreement, operating agreement, shareholder agreement, partnership agreement or

similar document or agreement governing such Person’s existence, organization

or management or concerning disposition of ownership interests of such Person

or voting rights among such Person’s owners.

 

“Credit Facility” means

the credit facility being made available to the Borrower by the Lender under

Article II.

 

“Debt” means of a Person

as of a given date, all items of indebtedness or liability which in accordance

with GAAP would be included in determining total liabilities as shown on the

liabilities side of a balance sheet for such Person and shall also include the

aggregate payments required to be made by such Person at any time under any

lease that is considered a capitalized lease under GAAP.

 

“Default” means an event

that, with giving of notice or passage of time or both, would constitute an

Event of Default.

 

“Default Period” means

any period of time beginning on the first day of any month during which a

Default or Event of Default has occurred and ending on the date the Lender

notifies the Borrower in writing that such Default or Event of Default has been

cured or waived.

 

“Default Rate” means an

annual interest rate equal to three percent (3%) over the Floating Rate, which

interest rate shall change when and as the Floating Rate changes.

 

3

 

“Director” means a

director if the Borrower is a corporation, a governor if the Borrower is a

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

 

“ERISA” means the

Employee Retirement Income Security Act of 1974.

 

“ERISA Affiliate” means

any trade or business (whether or not incorporated) that is a member of a group

which includes the Borrower and which is treated as a single employer under

Section 414 of the IRC.

 

“Earnings Before Taxes”

means from operations but including extraordinary losses.

 

“Eligible Accounts” means

all unpaid Accounts arising from the sale or lease of goods or the performance

of services, of the Borrower’s Animal Applications Division, net of any

credits, but excluding any such Accounts having any of the following

characteristics:

 

(i)            That

portion of Accounts which is unpaid more than 60 days past the stated due date

or more than 120 days past the invoice date;

 

(ii)           That

portion of Accounts that is disputed or subject to a claim of offset or a

contra account;

 

(iii)          That

portion of Accounts not yet earned by the final delivery of goods or rendition

of services, as applicable, by the Borrower to the customer, including progress

billings, and that portion of Accounts for which an invoice has not been sent

to the applicable account debtor;

 

(iv)          Accounts

constituting (i) proceeds of copyrightable material unless such

copyrightable material shall have been registered with the United States

Copyright Office, or (ii) proceeds of patentable inventions unless such

patentable inventions have been registered with the United States Patent and

Trademark Office;

 

(v)           Ninety

(90) days after the Funding Date, Accounts owed by any unit of government,

whether foreign or domestic (provided, however, that there shall be included in

Eligible Accounts that portion of Accounts owed by such units of government for

which the Borrower has provided evidence satisfactory to the Lender that

(A) the Lender has a first priority perfected security interest and

(B) such Accounts may be enforced by the Lender directly against such unit

of government under all applicable laws);

 

(vi)          Accounts

owed by an account debtor located outside the United States which are not

(A) backed by a bank letter of credit naming the Lender as beneficiary or

assigned to the Lender, in the Lender’s possession or control, and with respect

to which a control agreement concerning the letter-of-credit rights is in

effect, and acceptable to the Lender in all respects, in its sole discretion,

or

 

4

 

(B) covered by a foreign receivables insurance

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

Accounts”);

 

(vii)         Accounts

owed by an account debtor that is insolvent, the subject of bankruptcy

proceedings or has gone out of business;

 

(viii)        Accounts

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

 

(ix)           Accounts

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

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

 

(x)            That

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

 

(xi)           That

portion of Accounts that constitutes advertising, finance charges, service

charges or sales or excise taxes;

 

(xii)          Accounts

owed by an account debtor, regardless of whether otherwise eligible, if 10% or

more of the total amount due under Accounts from such debtor is ineligible

under clauses (i), (ii)or (x) above;

 

(xiii)         Accounts

constituting credit balances greater than 90 days; and

 

(xiv)        Accounts,

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

discretion.

 

“Eligible Foreign Accounts”

means Accounts due and owing by an Account debtor located outside the United

States; but excluding any Accounts having any of the following characteristics:

 

(i)            (A)

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

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

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

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

shipment date;

 

(ii)           That

portion of Accounts that is disputed or subject to a claim of offset or a

contra account;

 

(iii)          That

portion of Accounts not yet earned by the final delivery of goods or rendition

of services, as applicable, by the Borrower to the customer;

 

(iv)          That

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

account debtor;

 

(v)           Accounts

owed by any unit of government;

 

5

 

(vi)          Accounts

owed by an account debtor that is insolvent, the subject of bankruptcy proceedings

or has gone out of business;

 

(vii)         Accounts

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

 

(viii)        Accounts

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

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

 

(ix)           That

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

 

(x)            That

portion of Accounts that constitutes advertising, finance charges, service

charges or sales or excise taxes;

 

(xi)           That

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

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

one time;

 

(xii)          Accounts

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

Japanese yen, United Kingdom pounds sterling or Euros;

 

(xiii)         Accounts

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

the Account to the Collateral Account;

 

(xiv)        Accounts

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

discretion;

 

(xv)         Accounts

owed by an account debtor, regardless of whether otherwise eligible, if 10% or

more of the total amount due under Accounts from such debtor is ineligible

under clauses (i), (ii) or (ix) above; and

 

(xvi)        Accounts

otherwise deemed unacceptable to the Lender in its sole discretion.

 

“Environmental Law” means

any federal, state, local or other governmental statute, regulation, law or

ordinance dealing with the protection of human health and the environment.

 

“Equipment” means all of

the Borrower’s equipment, as such term is defined in the UCC, whether now owned

or hereafter acquired, including but not limited to all present and future

machinery, vehicles, furniture, fixtures, manufacturing equipment, shop

equipment, office and recordkeeping equipment, parts, tools, supplies, and

including specifically the goods described in any equipment schedule or list

herewith or hereafter furnished to the Lender by the Borrower.

 

“Event of Default” has the meaning specified in

Section 7.1.

 

“Financial Covenants” means the covenants set forth in

Section 6.2.

 

6

 

“Floating Rate” means an

annual interest rate equal to the sum of the Base Rate plus three percent (3%), which interest rate

shall change when and as the Base Rate changes.

 

“Funding Date” has the

meaning given in Section 2.1.

 

“GAAP” means generally

accepted accounting principles, applied on a basis consistent with the

accounting practices applied in the financial statements described in

Section 5.6.

 

“General Intangibles”

means all of the Borrower’s general intangibles, as such term is defined in the

UCC, whether now owned or hereafter acquired, including all present and future

Intellectual Property Rights, customer or supplier lists and contracts,

manuals, operating instructions, permits, franchises, the right to use the

Borrower’s name, and the goodwill of the Borrower’s business.

 

“Hazardous Substances”

means pollutants, contaminants, hazardous substances, hazardous wastes,

petroleum and fractions thereof, and all other chemicals, wastes, substances

and materials listed in, regulated by or identified in any Environmental Law.

 

“IRC” means the Internal

Revenue Code of 1986.

 

“Infringe” means when

used with respect to Intellectual Property Rights means any infringement or

other violation of Intellectual Property Rights.

 

“Intellectual Property

Rights” means all actual or prospective rights arising in connection with any

intellectual property or other proprietary rights, including all rights arising

in connection with copyrights, patents, service marks, trade dress, trade

secrets, trademarks, trade names or mask works.

 

“Inventory” means all of

the Borrower’s inventory, as such term is defined in the UCC, whether now owned

or hereafter acquired, whether consisting of whole goods, spare parts or

components, supplies or materials, whether acquired, held or furnished for

sale, for lease or under service contracts or for manufacture or processing,

and wherever located.

 

“Investment Property”

means all of the Borrower’s investment property, as such term is defined in the

UCC, whether now owned or hereafter acquired, including but not limited to all

securities, security entitlements, securities accounts, commodity contracts,

commodity accounts, stocks, bonds, mutual fund shares, money market shares and

U.S. Government securities.

 

“Issuer” means the issuer

of any Letter of Credit.

 

“L/C Amount” means the

sum of (i) the aggregate face amount of any issued and outstanding Letters

of Credit and (ii) the unpaid amount of the Obligation of Reimbursement.

 

7

 

“L/C Application” means

an application and agreement for letters of credit in a form acceptable to the

Issuer and the Lender.

 

“Letter of Credit” has

the meaning specified in Section 2.4.

 

“Licensed Intellectual

Property” has the meaning given in Section 5.11(c).

 

“Lien” means any security

interest, mortgage, deed of trust, pledge, lien, charge, encumbrance, title

retention agreement or analogous instrument or device, including the interest

of each lessor under any capitalized lease and the interest of any bondsman

under any payment or performance bond, in, of or on any assets or properties of

a Person, whether now owned or hereafter acquired and whether arising by

agreement or operation of law.

 

“Loan Documents” means

this Agreement, the Note, the Security Documents and any L/C Application.

 

“Lockbox” means as

defined in the Lockbox and Collection Account Agreement.

 

“Lockbox and Collection

Account Agreement” means the Lockbox and Collection Account Agreement by and

among the Borrower, Wells Fargo Bank

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

 

“Material

Adverse Effect” means any of the following:

 

(i)            a

material adverse effect on the business, operations, results of operations,

prospects, assets, liabilities or financial condition of the Borrower;

 

(ii)           a material adverse effect on the ability of the Borrower

to perform its obligations under the Loan Documents;

 

(iii)          a material adverse effect on the ability of the Lender to

enforce the Obligations or to realize the intended benefits of the Security

Documents, including a material adverse effect on the validity or

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

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

payment or performance of the Obligations; or

 

(iv)          any claim against the Borrower or threat of

litigation which if determined adversely to the Borrower would cause the

Borrower to be liable to pay an amount exceeding $300,000 or would be an event

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

 

“Maturity Date” means

October 30, 2005.

 

“Maximum Line” means

$5,000,000 unless said amount is reduced pursuant to Section 2.13, in

which event it means such lower amount.

 

8

 

“Minimum Interest Charge” has the meaning

given in Section 2.8(b).

 

“Multiemployer Plan”

means a multiemployer plan (as defined in Section 4001(a)(3) of ERISA) to

which the Borrower or any ERISA Affiliate contributes or is obligated to

contribute.

 

“Net Income” means fiscal

year-to-date after-tax net income from continuing operations as determined in

accordance with GAAP.

 

“Note” means the

Revolving Note.

 

“Obligation of

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

 

“Obligations” means the

Note, the Obligation of Reimbursement and each and every other debt, liability

and obligation of every type and description which the Borrower may now or at

any time hereafter owe to the Lender, whether such debt, liability or

obligation now exists or is hereafter created or incurred, whether it arises in

a transaction involving the Lender alone or in a transaction involving other creditors

of the Borrower, and whether it is direct or indirect, due or to become due,

absolute or contingent, primary or secondary, liquidated or unliquidated, or

sole, joint, several or joint and several, and including all indebtedness of

the Borrower arising under any Credit Document or guaranty between the Borrower

and the Lender, whether now in effect or hereafter entered into.

 

“Officer” means with

respect to the Borrower, an officer if the Borrower is a corporation, a manager

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

a partnership.

 

“Owned Intellectual

Property” has the meaning given in Section 5.11(a).

 

“Owner” means with

respect to the Borrower, each Person having legal or beneficial title to an

ownership interest in the Borrower or a right to acquire such an interest.

 

“Patent

and Trademark Security

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

favor of the Lender of even date herewith.

 

“Pension Plan” means a

pension plan (as defined in Section 3(2) of ERISA) maintained for

employees of the Borrower or any ERISA Affiliate and covered by Title IV of

ERISA.

 

“Permitted Lien” has the

meaning given in Section 6.3(a).

 

“Person” means any

individual, corporation, partnership, joint venture, limited liability company,

association, joint-stock company, trust, unincorporated organization or

government or any agency or political subdivision thereof.

 

9

 

“Plan” means an employee

benefit plan (as defined in Section 3(3) of ERISA) maintained for

employees of the Borrower or any ERISA Affiliate.

 

“Premises” means all

premises where the Borrower conducts its business and has any rights of

possession, including the premises legally described in Exhibit C attached

hereto.

 

“Reportable Event” means

a reportable event (as defined in Section 4043 of ERISA), other than an

event for which the 30-day notice requirement under ERISA has been waived in

regulations issued by the Pension Benefit Guaranty Corporation.

 

“Revolving Advance” has

the meaning given in Section 2.1.

 

“Revolving Note” means

the Borrower’s revolving promissory note, payable to the order of the Lender in

substantially the form of Exhibit A hereto.

 

“Security Documents”

means this Agreement, the Lockbox and Collection Account Agreement, the Patent and Trademark Security Agreement  and

any other document delivered to the Lender from time to time to secure the

Obligations.

 

“Security Interest” has

the meaning given in Section 3.1.

 

“Special Account” means a

specified cash collateral account maintained by a financial institution

acceptable to the Lender in connection with Letters of Credit, as contemplated

by Section 2.5.

 

“Subsidiary” means any

corporation of which more than 50% of the outstanding shares of capital stock

having general voting power under ordinary circumstances to elect a majority of

the board of Directors of such corporation, irrespective of whether or not at

the time stock of any other class or classes shall have or might have voting

power by reason of the happening of any contingency, is at the time directly or

indirectly owned by the Borrower, by the Borrower and one or more other

Subsidiaries, or by one or more other Subsidiaries.

 

“Termination Date” means

the earliest of (i) the Maturity Date, (ii) the date the Borrower

terminates the Credit Facility, or (iii) the date the Lender demands

payment of the Obligations after an Event of Default pursuant to

Section 7.2.

 

“UCC” means the Uniform

Commercial Code as in effect in the state designated in Section 8.14 as

the state whose laws shall govern this Agreement, or in any other state whose

laws are held to govern this Agreement or any portion hereof.

 

“Wells Fargo Bank

Minnesota” means Wells Fargo Bank Minnesota, National Association.

 

Section 1.2.            Other

Definitional Terms; Rules of Interpretation.  The words “hereof”, “herein” and “hereunder”

and words of similar import when used in this Agreement shall refer to this

Agreement as a whole and not to any particular provision of this Agreement.  All accounting

 

10

 

terms not otherwise defined herein have the meanings assigned to them

in accordance with GAAP.  All terms

defined in the UCC and not otherwise defined herein have the meanings assigned

to them in the UCC.  References to

Articles, Sections, subsections, Exhibits, Schedules and the like, are to

Articles, Sections and subsections of, or Exhibits or Schedules attached to,

this Agreement unless otherwise expressly provided.  The words “include”, “includes” and “including” shall be deemed

to be followed by the phrase “without limitation”.  Unless the context in which used herein otherwise clearly

requires, “or” has the inclusive meaning represented by the phrase

“and/or”.  Defined terms include in the

singular number the plural and in the plural number the singular.  Reference to any agreement (including the

Loan Documents), document or instrument means such agreement, document or

instrument as amended or modified and in effect from time to time in accordance

with the terms thereof (and, if applicable, in accordance with the terms hereof

and the other Loan Documents), except where otherwise explicitly provided, and

reference to any promissory note includes any promissory note which is an extension

or renewal thereof or a substitute or replacement therefor.  Reference to any law, rule, regulation,

order, decree, requirement, policy, guideline, directive or interpretation

means as amended, modified, codified, replaced or reenacted, in whole or in

part, and in effect on the determination date, including rules and regulations

promulgated thereunder.

 

ARTICLE II

 

AMOUNT

AND TERMS OF THE CREDIT FACILITY

 

Section 2.1             Revolving Advances.  The Lender agrees, on the terms and subject

to the conditions herein set forth, to make advances to the Borrower from time

to time from the date all of the conditions set forth in Section 4.1 are

satisfied (the “Funding Date”) to the Termination Date (the “Revolving

Advances”).  The Lender shall have no

obligation to make a Revolving Advance to the extent the amount of the

requested Revolving Advance exceeds Availability.  The Borrower’s obligation to pay the Revolving Advances shall be

evidenced by the Revolving Note and shall be secured by the Collateral.  Within the limits set forth in this

Section 2.1, the Borrower may borrow, prepay pursuant to Section 2.12

and reborrow.

 

Section 2.2             Procedures

for Requesting Advances.  The

Borrower shall comply with the following procedures in requesting Revolving

Advances:

 

(a)           Time for Requests.  The Borrower shall request each Advance not

later than 11:00 a.m., Minneapolis, Minnesota time on the Banking Day which is

the date the Advance is to be made. 

Each such request shall be effective upon receipt by the Lender, shall

be in writing or by telephone or telecopy transmission, to be confirmed in

writing by the Borrower if so requested by the Lender, shall be by (i) an

Officer of the Borrower; or (ii) a person designated as the Borrower’s

agent by an Officer of the Borrower in a writing delivered to the Lender; or

(iii) a person whom the Lender reasonably believes to be an Officer of the

Borrower or such a designated agent. 

The Borrower shall repay all Advances even if the Lender does not

receive such confirmation and even if the person requesting an Advance was not

in fact authorized to do so.  Any

request for an Advance, whether written or telephonic, shall be deemed to be a

representation by the Borrower that the conditions set forth in

Section 4.2 have been satisfied as of the time of the request.

 

11

 

(b)           Disbursement.  Upon fulfillment of the applicable

conditions set forth in Article IV, the Lender shall disburse the proceeds

of the requested Advance by crediting the same to the Borrower’s demand deposit

account maintained with Wells Fargo Bank Minnesota unless the Lender and the

Borrower shall agree in writing to another manner of disbursement.

 

Section 2.3             Increased

Costs; Capital Adequacy; Funding Exceptions.

 

(a)           Increased

Costs; Capital Adequacy.  If

the Lender determines at any time that its Return has been reduced as a result

of any Rule Change, such Lender may so notify the Borrower and require the

Borrower, beginning fifteen (15) days after such notice, to pay it the amount

necessary to restore its Return to what it would have been had there been no

Rule Change.  For purposes of this

Section 2.3:

 

(i)            “Capital

Adequacy Rule” means any law, rule, regulation, guideline, directive,

requirement or request regarding capital adequacy, or the interpretation or

administration thereof by any governmental or regulatory authority, central

bank or comparable agency, whether or not having the force of law, that applies

to any Related Lender, including rules requiring financial institutions to

maintain total capital in amounts based upon percentages of outstanding loans,

binding loan commitments and letters of credit.

 

(ii)           “L/C Rule” means any law, rule, regulation, guideline,

directive, requirement or request regarding letters of credit, or the

interpretation or administration thereof by any governmental or regulatory

authority, central bank or comparable agency, whether or not having the force

of law, that applies to any Related Lender, including those that impose taxes,

duties or other similar charges, or mandate reserves, special deposits or

similar requirements against assets of, deposits with or for the account of, or

credit extended by any Related Lender, on letters of credit.

 

(iii)          “Related Lender” includes (but is not limited

to) the Lender, any parent of the Lender, any assignee of any interest of the

Lender hereunder and any participant in the Credit Facility.

 

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

by dividing (i) the sum of interest and ongoing fees earned by the Lender

under this Agreement during such period, by (ii) the average capital such

Lender is required to maintain during such period as a result of its being a

party to this Agreement, as determined by such Lender based upon its total capital

requirements and a reasonable attribution formula that takes account of the

Capital Adequacy Rules and L/C Rules then in effect, costs of issuing or

maintaining any Advance or Letter of Credit and amounts received or receivable

under this Agreement or the Notes with respect to any Advance or Letter of

Credit.  Return may be calculated for

each calendar quarter and for the shorter period between the end of a calendar

quarter and the date of termination in whole of this Agreement.

 

12

 

(v)           “Rule

Change” means any change in any Capital Adequacy Rule, or L/C Rule occurring

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

administration thereof by any governmental or regulatory authority, but the

term does not include any changes that at the Funding Date are scheduled to

take place under the existing Capital Adequacy Rules or L/C Rules or any

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

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

that Lender’s financial condition.

 

The initial notice sent by the Lender shall be sent as

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

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

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

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

calculation of the amount of such reduction. 

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

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

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

Return for that quarter.  The Lender’s

calculation in any such notice shall be conclusive and binding absent

demonstrable error.

 

Section 2.4             Letters of Credit.

 

(a)           The

Lender agrees, on the terms and subject to the conditions herein set forth, to

cause an Issuer to issue, from the Funding Date to the Termination Date, one or

more irrevocable standby or documentary letters of credit (each, a “Letter of

Credit”) for the Borrower’s account by guaranteeing payment of the Borrower’s

obligations or being a co-applicant. 

The Lender shall have no obligation to cause an Issuer to issue any

Letter of Credit if the face amount of the Letter of Credit to be issued would

exceed the lesser of:

 

(i)            $5,000,000

less the L/C Amount, or

 

(ii)           Availability.

 

Each Letter of Credit, if any, shall be issued

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

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

the Lender and the Issuer.  The terms

and conditions set forth in each such L/C Application shall supplement the

terms and conditions hereof, but if the terms of any such L/C Application and

the terms of this Agreement are inconsistent, the terms hereof shall control.

 

(b)           No

Letter of Credit shall be issued with an expiry date later than the Termination

Date in effect as of the date of issuance.

 

(c)           Any

request to cause an Issuer to issue a Letter of Credit shall be deemed to be a

representation by the Borrower that the conditions set forth in

Section 4.2 have been satisfied as of the date of the request.

 

13

 

Section 2.5             Special

Account.  If the Credit

Facility is terminated for any reason while any Letter of Credit is

outstanding, the Borrower shall thereupon pay the Lender in immediately

available funds for deposit in the Special Account an amount equal to the L/C

Amount.  The Special Account shall be an

interest bearing account maintained for the Lender by any financial institution

acceptable to the Lender.  Any interest

earned on amounts deposited in the Special Account shall be credited to the

Special Account.  The Lender may apply

amounts on deposit in the Special Account at any time or from time to time to

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

Account as long as the Lender maintains a security interest therein.  The Lender agrees to transfer any balance in

the Special Account to the Borrower when the Lender is required to release its

security interest in the Special Account under applicable law.

 

Section 2.6             Payment

of Amounts Drawn Under Letters of Credit; Obligation of Reimbursement.  The Borrower acknowledges that the Lender,

as co-applicant, will be liable to the Issuer for reimbursement of any and all

draws under Letters of Credit and for all other amounts required to be paid

under the applicable L/C Application. 

Accordingly, the Borrower shall pay to the Lender any and all amounts

required to be paid under the applicable L/C Application, when and as required

to be paid thereby, and the amounts designated below, when and as designated:

 

(a)           The

Borrower shall pay to the Lender on the day a draft is honored under any Letter

of Credit a sum equal to all amounts drawn under such Letter of Credit plus any

and all reasonable charges and expenses that the Issuer or the Lender may pay

or incur relative to such draw and the applicable L/C Application, plus

interest on all such amounts, charges and expenses as set forth below (the

Borrower’s obligation to pay all such amounts is herein referred to as the

“Obligation of Reimbursement”).

 

(b)           Whenever

a draft is submitted under a Letter of Credit, the Borrower authorizes the

Lender to make a Revolving Advance in the amount of the Obligation of

Reimbursement and to apply the proceeds of such Revolving Advance thereto.  Such Revolving Advance shall be repayable in

accordance with and be treated in all other respects as a Revolving Advance

hereunder.

 

(c)           If

a draft is submitted under a Letter of Credit when the Borrower is unable,

because a Default Period exists or for any other reason, to obtain a Revolving

Advance to pay the Obligation of Reimbursement, the Borrower shall pay to the

Lender on demand and in immediately available funds, the amount of the

Obligation of Reimbursement together with interest, accrued from the date of

the draft until payment in full at the Default Rate.  Notwithstanding the Borrower’s inability to obtain a Revolving

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

discretion, to make a Revolving Advance in an amount sufficient to discharge

the Obligation of Reimbursement and all accrued but unpaid interest thereon.

 

(d)           The

Borrower’s obligation to pay any Revolving Advance made under this

Section 2.6, shall be evidenced by the Revolving Note and shall bear

interest as provided in Section 2.8.

 

14

 

Section 2.7             Obligations

Absolute.  The Borrower’s

obligations arising under Section 2.6 shall be absolute, unconditional and

irrevocable, and shall be paid strictly in accordance with the terms of

Section 2.6, under all circumstances whatsoever, including (without

limitation) the following circumstances:

 

(a)           any

lack of validity or enforceability of any Letter of Credit or any other

agreement or instrument relating to any Letter of Credit (collectively the

“Related Documents”);

 

(b)           any

amendment or waiver of or any consent to departure from all or any of the

Related Documents;

 

(c)           the

existence of any claim, setoff, defense or other right which the Borrower may

have at any time, against any beneficiary or any transferee of any Letter of

Credit (or any persons or entities for whom any such beneficiary or any such

transferee may be acting), or other person or entity, whether in connection

with this Agreement, the transactions contemplated herein or in the Related

Documents or any unrelated transactions;

 

(d)           any

statement or any other document presented under any Letter of Credit proving to

be forged, fraudulent, invalid or insufficient in any respect or any statement

therein being untrue or inaccurate in any respect whatsoever;

 

(e)           payment

by or on behalf of the Issuer under any Letter of Credit against presentation

of a draft or certificate which does not strictly comply with the terms of such

Letter of Credit; or

 

(f)            any

other circumstance or happening whatsoever, whether or not similar to any of

the foregoing.

 

Section 2.8             Interest;

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

Days; 360 Day Year; Usury.

 

(a)           Revolving Note.  Except as set forth in Subsections (d)

and (g), the outstanding principal balance of the Revolving Note shall bear

interest at the Floating Rate.

 

(b)           Minimum Interest Charge.  Notwithstanding the interest

payable pursuant to Subsection (a), the Borrower shall pay to the Lender

interest of not less than $120,000 per Loan Year (the “Minimum Interest

Charge”) during the term of this Agreement, and the Borrower shall pay any

deficiency between the Minimum Interest Charge and the amount of interest

otherwise calculated under Subsection (a) on the first day of each month

following each anniversary of the Funding Date and on the Termination

Date.  As used in this subsection (b),

“Loan Year” means each one-year period ending on an anniversary of the Funding

Date.

 

(c)           Default Interest Rate.  At any time during any Default Period,

in the Lender’s sole discretion and without waiving any of its other rights and

remedies, the

 

15

 

principal of the Advances outstanding from time to

time shall bear interest at the Default Rate, effective for any periods

designated by the Lender from time to time during that Default Period.

 

(d)           Participations.  If any Person shall acquire a participation

in the Advances under this Agreement, the Borrower shall be obligated to the

Lender to pay the full amount of all interest calculated under, along with all

other fees, charges and other amounts due under this Agreement, regardless if

such Person elects to accept interest with respect to its participation at a

lower rate than the Floating Rate, or otherwise elects to accept less than its

prorata share of such fees, charges and other amounts due under this Agreement.

 

Section 2.9             Fees.

 

(a)           Origination Fee.  The Borrower shall pay the Lender a

fully earned and non-refundable origination fee of $50,000, due and payable

upon the execution of this Agreement.

 

(b)           Audit Fees.  The Borrower shall pay the Lender, on

demand, audit fees in connection with any audits or inspections conducted by

the Lender of any Collateral or the Borrower’s operations or business at the

rates established from time to time by the Lender as its audit fees (which fees

are currently $800  per

day per auditor), together with all actual out-of-pocket costs and

expenses incurred in conducting any such audit or inspection.

 

(c)           Termination and Line Reduction

Fees.  If the Credit

Facility is terminated (i) by the Lender during a Default Period that

begins before a Maturity Date, (ii) by the Borrower as of a date other

than a Maturity Date, or if the Borrower reduces the Maximum Line, the Borrower

shall pay to the Lender a fee in an amount equal to a percentage of the Maximum Line (or the reduction of the Maximum Line,

as the case may be) as follows: 

(A) three percent (3%) if the termination or reduction occurs on or

before the first anniversary of the Funding Date; (B) two percent (2%) if

the termination or reduction occurs after the first anniversary of the Funding

Date but on or before the second anniversary of the Funding Date; and (C) one

percent (1%) if the termination or reduction occurs after the second

anniversary of the Funding Date, in the case of a reduction, by the amount of

the reduction expressed as a percentage of the Maximum Line immediately before

the reduction.

 

16

 

(d)           Waiver of Termination Fees.  The Borrower will not be required to pay the termination fees otherwise

due under subsection (c) if such termination is made because of refinancing by

an affiliate of the Lender.

 

(e)           Unused Line Fee.  For the purposes of this Section 2.9,

“Unused Amount” means the Maximum Line reduced by outstanding Revolving

Advances.  The Borrower agrees to pay to

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

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

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

day of the month and on the Termination Date.

 

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

Eligible Foreign Accounts Program  Fee at the rate of $10,000 per annum which

is equal to one percent (1%) of the maximum amount of the Eligible Foreign

Accounts.  The Eligible Foreign Accounts

Program Fee shall be payable on the Funding Date and on each anniversary of the

Funding Date.

 

(g)           Other Fees.  The Lender may from time to time, upon

five (5) days prior notice to the Borrower during a Default Period, charge

additional fees for Revolving Advances made in excess of the Borrowing Base,

for late delivery of reports, in lieu of imposing interest at the Default Rate,

and for other reasons.  The Borrower’s

request for a Revolving Advance at any time after such notice is given and such

five (5) day period has elapsed shall constitute the Borrower’s agreement to

pay the fees described in such notice.

 

Section 2.10           Time

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

Fees.

 

(a)           Time For Interest Payments.  Interest shall be due and payable in arrears

on the last day of each month and on the Termination Date.

 

(b)           Payment on Non-Banking Days.  Whenever any payment to be made hereunder

shall be stated to be due on a day which is not a Banking Day, such payment may

be made on the next succeeding Banking Day, and such extension of time shall in

such case be included in the computation of interest on the Advances or the

fees hereunder, as the case may be.

 

(c)           Computation of Interest and Fees.  Interest accruing on the outstanding

principal balance of the Advances and fees hereunder outstanding from time to

time shall be computed on the basis of actual number of days elapsed in a year

of 360 days.

 

Section 2.11           Lockbox;

Collateral Account; Application of Payments.

 

(a)           Lockbox and Collateral Account.

 

(i)            The

Borrower shall instruct all account debtors to pay all Accounts directly to the

Lockbox.  If, notwithstanding such

instructions, the Borrower receives any payments on Accounts, the Borrower

shall deposit such payments

 

17

 

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

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

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

of Collateral and shall not constitute payment of the Obligations.

 

(ii)           All

items deposited in the Collateral Account shall be subject to final

payment.  If any such item is returned

uncollected, the Borrower will immediately pay the Lender, or, for items

deposited in the Collateral Account, the bank maintaining such account, the

amount of that item, or such bank at its discretion may charge any uncollected

item to the Borrower’s commercial account or other account.  The Borrower shall be liable as an endorser

on all items deposited in the Collateral Account, whether or not in fact

endorsed by the Borrower.

 

(b)           Application of Payments.

 

(i)            The

Borrower may, from time to time, in accordance with the Lockbox and Collection

Account Agreement, cause funds in the Collateral Account to be transferred to

the Lender’s general account for payment of the Obligations.  Except as provided in the preceding

sentence, amounts deposited in the Collateral Account shall not be subject to

withdrawal by the Borrower, except after full payment and discharge of all

Obligations.

 

(ii)           All

payments to the Lender shall be made in immediately available funds and shall

be applied to the Obligations upon receipt by the Lender.  Funds received from the Collateral Account

shall be deemed to be immediately available. 

The Lender may hold all payments not constituting immediately available

funds for three (3) additional days before applying them to the Obligations.

 

Section 2.12           Voluntary

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

by the Borrower.  Except as

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

time or from time to time in part.  The

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

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

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

accordance with Section 2.9(c). 

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

$100,000 or an integral multiple thereof. 

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

be immediately due and payable.  Subject

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

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

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

entitled by law.

 

Section 2.13           Mandatory

Prepayment.  Without notice

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

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

Borrower shall (i) first, immediately prepay the Revolving Advances to the

extent necessary to eliminate such excess; and (ii) if prepayment in full

of the

 

18

 

Revolving Advances is insufficient to eliminate such excess, pay to the

Lender in immediately available funds for deposit in the Special Account an

amount equal to the remaining excess. 

Any payment received by the Lender under this Section 2.13 or under

Section 2.12 may be applied to the Obligations, in such order and in such

amounts as the Lender, in its discretion, may from time to time determine.

 

Section 2.14           Revolving

Advances to Pay Obligations. 

Notwithstanding anything in Section 2.1, the Lender may, in its

discretion at any time or from time to time, without the Borrower’s request and

even if the conditions set forth in Section 4.2 would not be satisfied,

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

from time to time due and payable.

 

Section 2.15           Use

of Proceeds.  The Borrower

shall use the proceeds of Advances and each Letter of Credit for ordinary

working capital purposes.

 

Section 2.16           Liability

Records.  The Lender may

maintain from time to time, at its discretion, records as to the

Obligations.  All entries made on any

such record shall be presumed correct until the Borrower establishes the

contrary.  Upon the Lender’s demand, the

Borrower will admit and certify in writing the exact principal balance of the

Obligations that the Borrower then asserts to be outstanding.  Any billing statement or accounting rendered

by the Lender shall be conclusive and fully binding on the Borrower unless the

Borrower gives the Lender specific written notice of exception within 30 days

after receipt.

 

ARTICLE III

 

SECURITY

INTEREST; OCCUPANCY; SETOFF

 

Section 3.1             Grant

of Security Interest.  The

Borrower hereby pledges, assigns and grants to the Lender a lien and security

interest (collectively referred to as the “Security Interest”) in the

Collateral, as security for the payment and performance of the

Obligations.  Upon request by the

Lender, the Borrower will grant the Lender a security interest in all

commercial tort claims it may have against any Person.

 

Section 3.2             Notification

of Account Debtors and Other Obligors.  The Lender may at any time (whether or not a Default Period then

exists) notify any account debtor or other person obligated to pay the amount

due that such right to payment has been assigned or transferred to the Lender

for security and shall be paid directly to the Lender.  The Borrower will join in giving such notice

if the Lender so requests.  At any time

after the Borrower or the Lender gives such notice to an account debtor or

other obligor, the Lender may, but need not, in the Lender’s name or in the

Borrower’s name, (a) demand, sue for, collect or receive any money or

property at any time payable or receivable on account of, or securing, any such

right to payment, or grant any extension to, make any compromise or settlement

with or otherwise agree to waive, modify, amend or change the obligations

(including collateral obligations) of any such account debtor or other obligor;

and (b) as the Borrower’s agent and attorney-in-fact, notify the United

States Postal Service to change the address for delivery of the Borrower’s mail

to any address designated by the Lender, otherwise intercept the Borrower’s

mail, and receive, open and dispose of the Borrower’s mail, applying all

Collateral as permitted under this Agreement and holding all

 

19

 

other mail for the Borrower’s account or forwarding such mail to the

Borrower’s last known address.

 

Section 3.3             Assignment

of Insurance.  As additional

security for the payment and performance of the Obligations, the Borrower

hereby assigns to the Lender any and all monies (including proceeds of

insurance and refunds of unearned premiums) due or to become due under, and all

other rights of the Borrower with respect to, any and all policies of insurance

now or at any time hereafter covering the Collateral or any evidence thereof or

any business records or valuable papers pertaining thereto, and the Borrower

hereby directs the issuer of any such policy to pay all such monies directly to

the Lender.  At any time, whether or not

a Default Period then exists, the Lender may (but need not), in the Lender’s

name or in the Borrower’s name, execute and deliver proof of claim, receive all

such monies, endorse checks and other instruments representing payment of such

monies, and adjust, litigate, compromise or release any claim against the

issuer of any such policy.

 

Section 3.4             Occupancy.

 

(a)           The

Borrower hereby irrevocably grants to the Lender the right to take exclusive

possession of the Premises at any time during a Default Period.

 

(b)           The

Lender may use the Premises only to hold, process, manufacture, sell, use,

store, liquidate, realize upon or otherwise dispose of goods that are

Collateral and for other purposes that the Lender may in good faith deem to be

related or incidental purposes.

 

(c)           The

Lender’s right to hold the Premises shall cease and terminate upon the earlier

of (i) payment in full and discharge of all Obligations and termination of

the Credit Facility, and (ii) final sale or disposition of all goods

constituting Collateral and delivery of all such goods to purchasers.

 

(d)           The

Lender shall not be obligated to pay or account for any rent or other

compensation for the possession, occupancy or use of any of the Premises;

provided, however, that if the Lender does pay or account for any rent or other

compensation for the possession, occupancy or use of any of the Premises, the

Borrower shall reimburse the Lender promptly for the full amount thereof.  In addition, the Borrower will pay, or

reimburse the Lender for, all taxes, fees, duties, imposts, charges and

expenses at any time incurred by or imposed upon the Lender by reason of the

execution, delivery, existence, recordation, performance or enforcement of this

Agreement or the provisions of this Section 3.4.

 

Section 3.5             License.  Without limiting the generality of any other

Security Document, the Borrower hereby grants to the Lender a non-exclusive,

worldwide and royalty-free license to use or otherwise exploit all Intellectual

Property Rights of the Borrower for the purpose of:  (a) completing the manufacture of any in-process materials during

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

accordance with the same quality standards previously adopted by the Borrower

for its own manufacturing and subject to the Borrower’s

 

20

 

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

or otherwise disposing of any or all Collateral during any Default Period.

 

Section 3.6             Financing

Statement.  The Borrower

authorizes the Lender to file from time to time where permitted by law, such

financing statements against collateral described as “all personal property” as

the Lender deems necessary or useful to perfect the Security Interest.  A carbon, photographic or other reproduction

of this Agreement or of any financing statements signed by the Borrower is

sufficient as a financing statement and may be filed as a financing statement

in any state to perfect the security interests granted hereby.  For this purpose, the following information

is set forth:

 

Name and address of Debtor:

 

Digital Angel Corporation

490 Villaume Avenue

St. Paul, MN 55075-2443

 

Federal Employer Identification No. 52-1233960

 

Name and address of Secured Party:

 

Wells Fargo Business Credit, Inc.
MAC N9312-040

Sixth and Marquette

Minneapolis, Minnesota  55479
Federal Employer Identification No. 

41-1237652

 

Section 3.7             Setoff.  The Lender may at any time or from time to

time, at its sole discretion and without demand and without notice to anyone,

setoff any liability owed to the Borrower by the Lender, whether or not due,

against any Obligation, whether or not due. 

In addition, each other Person holding a participating interest in any

Obligations shall have the right to appropriate or setoff any deposit or other

liability then owed by such Person to the Borrower, whether or not due, and

apply the same to the payment of said participating interest, as fully as if

such Person had lent directly to the Borrower the amount of such participating

interest.

 

Section 3.8             Collateral.  This Agreement does not contemplate a sale

of accounts, contract rights or chattel paper, and, as provided by law, the

Borrower is entitled to any surplus and shall remain liable for any

deficiency.  The Lender’s duty of care

with respect to Collateral in its possession (as imposed by law) shall be

deemed fulfilled if it exercises reasonable care in physically keeping such

Collateral, or in the case of Collateral in the custody or possession of a

bailee or other third person, exercises reasonable care in the selection of the

bailee or other third person, and the Lender need not otherwise preserve,

protect, insure or care for any Collateral. 

The Lender shall not be obligated to preserve any rights the Borrower

may have against prior parties, to realize on the Collateral at all or in any

particular manner or order or to apply any cash proceeds of the Collateral in

any particular order of application. 

The Lender has no obligation to clean-up or otherwise prepare the

Collateral for sale.  The Borrower

waives any right it may have to require the Lender to pursue any third person

for any of the Obligations.

 

21

 

ARTICLE IV

 

CONDITIONS

OF LENDING

 

Section 4.1             Conditions Precedent to the

Initial Revolving Advance and Letter of Credit.  The Lender’s obligation to make the initial

Advance hereunder or to cause any Letters of Credit to be issued shall be

subject to the condition precedent that the Lender shall have received all of

the following, each in form and substance satisfactory to the Lender:

 

(a)           This

Agreement, properly executed by the Borrower.

 

(b)           The

Note, properly executed by the Borrower.

 

(c)           A

true and correct copy of any and all leases pursuant to which the Borrower is

leasing the Premises, together with a landlord’s disclaimer and consent with

respect to each such lease.

 

(d)           A

true and correct copy of any and all mortgages pursuant to which the Borrower

has mortgaged the Premises, together with a mortgagee’s disclaimer and consent

with respect to each such mortgage.

 

(e)           The

Lockbox and Collection Account Agreement, properly executed by the Borrower and

Wells Fargo Bank Minnesota.

 

(f)            The

Patent and Trademark Security Agreement, properly executed by the Borrower.

 

(g)           Current

searches of appropriate filing offices showing that (i) no Liens have been

filed and remain in effect against the Borrower except Permitted Liens or Liens

held by Persons who have agreed in writing that upon receipt of proceeds of the

initial Advances, they will satisfy, release or terminate such Liens in a

manner satisfactory to the Lender, and (ii) the Lender has duly filed all

financing statements necessary to perfect the Security Interest, to the extent

the Security Interest is capable of being perfected by filing.

 

(h)           A

certificate of the Borrower’s Secretary or Assistant Secretary certifying that

attached to such certificate are (i) the resolutions of the Borrower’s

Directors and, if required, Owners, authorizing the execution, delivery and

performance of the Loan Documents, (ii) true, correct and complete copies

of the Borrower’s Constituent Documents, and (iii) examples of the

signatures of the Borrower’s Officers or agents authorized to execute and

deliver the Loan Documents and other instruments, agreements and certificates,

including Advance requests, on the Borrower’s behalf.

 

(i)            A

current certificate issued by the Secretary of State of Delaware certifying

that the Borrower is in compliance with all applicable organizational

requirements of the State of Delaware.

 

22

 

(j)            Evidence

that the Borrower is duly licensed or qualified to transact business in all

jurisdictions where the character of the property owned or leased or the nature

of the business transacted by it makes such licensing or qualification

necessary.

 

(k)           A

certificate of an Officer of the Borrower confirming, in his personal capacity,

the representations and warranties set forth in Article V.

 

(l)            An

opinion of counsel to the Borrower, addressed to the Lender.

 

(m)          Certificates

of the insurance required hereunder, with all hazard insurance containing a

lender’s loss payable endorsement in the Lender’s favor and with all liability

insurance naming the Lender as an additional insured.

 

(n)           Payment

of the fees and commissions due under Section 2.9 through the date of the

initial Advance or Letter of Credit and expenses incurred by the Lender through

such date and required to be paid by the Borrower under Section 8.6,

including all legal expenses incurred through the date of this Agreement.

 

(o)           Evidence that after making the initial Revolving

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

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

$1,000,000.

 

(p)           Such

other documents as the Lender in its sole discretion may require.

 

Section 4.2             Conditions

Precedent to All Advances and Letters of Credit.  The Lender’s obligation to make each Advance

and to cause each Letter of Credit to be issued shall be subject to the further

conditions precedent that:

 

(a)           the

representations and warranties contained in Article V are correct on and

as of the date of such Advance or issuance of a Letter of Credit as though made

on and as of such date, except to the extent that such representations and

warranties relate solely to an earlier date; and

 

(b)           no

event has occurred and is continuing, or would result from such Advance or

issuance of a Letter of Credit which constitutes a Default or an Event of

Default.

 

ARTICLE V

 

REPRESENTATIONS

AND WARRANTIES

 

The Borrower represents and warrants to the Lender as

follows:

 

Section 5.1             Existence

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

Federal Employer Identification Number.  The Borrower is a corporation, duly organized, validly existing

and in good standing under the laws of the State of Delaware and is duly

licensed or qualified to transact business in all jurisdictions where the

character of the property owned or leased or the nature of the business

transacted by it makes such licensing or

 

23

 

qualification necessary.  The

Borrower has all requisite power and authority to conduct its business, to own

its properties and to execute and deliver, and to perform all of its

obligations under, the Loan Documents. 

During its existence, the Borrower has done business solely under the

names set forth in Schedule 5.1 and all of the Borrower’s records relating

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

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

Schedule 5.1.  All Inventory and

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

in Schedule 5.1.  The Borrower’s

federal employer identification number is correctly set forth in

Section 3.6.

 

Section 5.2             Capitalization.  Schedule 5.2 constitutes a correct and

complete list of all ownership interests of the Borrower and rights to acquire

ownership interests including the record holder, number of interests and

percentage interests on a fully diluted basis, and an organizational chart

showing the ownership structure of all Subsidiaries of the Borrower.

 

Section 5.3             Authorization

of Borrowing; No Conflict as to Law or Agreements.  The execution, delivery and performance by

the Borrower of the Loan Documents and the borrowings from time to time

hereunder have been duly authorized by all necessary corporate  action and do not and will not

(i) require any consent or approval of the Borrower’s Owners;

(ii) require any authorization, consent or approval by, or registration,

declaration or filing with, or notice to, any governmental department,

commission, board, bureau, agency or instrumentality, domestic or foreign, or

any third party, except such authorization, consent, approval, registration,

declaration, filing or notice as has been obtained, accomplished or given prior

to the date hereof; (iii) violate any provision of any law, rule or

regulation (including Regulation X of the Board of Governors of the

Federal Reserve System) or of any order, writ, injunction or decree presently

in effect having applicability to the Borrower or of the Borrower’s Constituent

Documents; (iv) result in a breach of or constitute a default under any

indenture or loan or credit agreement or any other material agreement, lease or

instrument to which the Borrower is a party or by which it or its properties

may be bound or affected; or (v) result in, or require, the creation or

imposition of any Lien (other than the Security Interest) upon or with respect

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

 

Section 5.4             Legal

Agreements.  This Agreement

constitutes and, upon due execution by the Borrower, the other Loan Documents

will constitute the legal, valid and binding obligations of the Borrower,

enforceable against the Borrower in accordance with their respective terms.

 

Section 5.5             Subsidiaries.  Except as set forth in Schedule 5.5

hereto, the Borrower has no Subsidiaries.

 

Section 5.6             Financial

Condition; No Adverse Change. 

The Borrower has furnished to the Lender its audited financial

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

financial statements for the fiscal-year-to-date period ended August 31,

2002, and those statements fairly present the Borrower’s financial condition on

the dates thereof and the results of its operations and cash flows for the

periods then ended and were prepared in accordance with generally accepted

accounting principles.  Since the date

of the most recent financial statements, there has been no change in the Borrower’s business, properties

or condition (financial or otherwise) which has had a Material Adverse Effect.

 

24

 

Section 5.7             Litigation.  There are no actions, suits or proceedings

pending or, to the Borrower’s knowledge, threatened against or affecting the

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

its Affiliates before any court or governmental department, commission, board,

bureau, agency or instrumentality, domestic or foreign, which, if determined

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

 

Section 5.8             Regulation U.  The Borrower is not engaged in the business

of extending credit for the purpose of purchasing or carrying margin stock

(within the meaning of Regulation U of the Board of Governors of the Federal

Reserve System), and no part of the proceeds of any Advance will be used to

purchase or carry any margin stock or to extend credit to others for the

purpose of purchasing or carrying any margin stock.

 

Section 5.9             Taxes.  The Borrower and its Affiliates have paid or

caused to be paid to the proper authorities when due all federal, state and

local taxes required to be withheld by each of them.  The Borrower and its Affiliates have filed all federal, state and

local tax returns which to the knowledge of the Officers of the Borrower or any

Affiliate, as the case may be, are required to be filed, and the Borrower and

its Affiliates have paid or caused to be paid to the respective taxing

authorities all taxes as shown on said returns or on any assessment received by

any of them to the extent such taxes have become due.

 

Section 5.10           Titles

and Liens.  The Borrower has

good and absolute title to all Collateral free and clear of all Liens other

than Permitted Liens.  No financing

statement naming the Borrower as debtor is on file in any office except to

perfect only Permitted Liens.

 

Section 5.11           Intellectual

Property Rights.

 

(a)           Owned Intellectual Property.  Schedule 5.11 is a

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

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

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

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

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

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

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

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

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

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

Borrower has taken all commercially reasonable action necessary to maintain and

protect the Owned Intellectual Property.

 

(b)           Agreements with Employees and

Contractors.  The

Borrower has entered into a legally enforceable agreement with each of its

employees and subcontractors obligating each such Person to assign to the

Borrower, without any additional compensation, any Intellectual Property Rights

created, discovered or invented by such Person in the course of such Person’s

employment or engagement with the Borrower (except to the extent prohibited by

law), and further requiring such Person to cooperate with the Borrower, without

any additional compensation, in connection with securing and enforcing any

Intellectual Property Rights therein; provided, however, that the foregoing

 

25

 

shall not apply with respect to employees and

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

assignments are reasonably foreseeable.

 

(c)           Intellectual Property Rights

Licensed from Others. 

Schedule 5.11 is a complete list of all agreements under which the

Borrower has licensed Intellectual Property Rights from another Person

(“Licensed Intellectual Property”) other than readily available, non-negotiated

licenses of computer software and other intellectual property used solely for

performing accounting, word processing and similar administrative tasks

(“Off-the-shelf Software”) and a summary of any ongoing payments the Borrower

is obligated to make with respect thereto.  Except as disclosed on Schedule 5.11

and in written agreements copies of which have been given to the Lender, the

Borrower’s licenses to use the Licensed Intellectual Property are free and

clear of all restrictions, Liens, court orders, injunctions, decrees, or writs,

whether by written agreement or otherwise. 

Except as disclosed on Schedule 5.11, the Borrower is not

obligated or under any liability whatsoever to make any payments of a material

nature by way of royalties, fees or otherwise to any owner of, licensor of, or

other claimant to, any Intellectual Property Rights.

 

(d)           Other Intellectual Property Needed

for Business.  Except for

Off-the-shelf Software and as disclosed on Schedule 5.11, the Owned

Intellectual Property and the Licensed Intellectual Property constitute all Intellectual

Property Rights used or necessary to conduct the Borrower’s business as it is

presently conducted or as the Borrower reasonably foresees conducting it.

 

(e)           Infringement.  Except as disclosed on Schedule 5.11,

the Borrower has no knowledge of, and has not received any written claim or

notice alleging, any Infringement of another Person’s Intellectual Property

Rights (including any written claim that the Borrower must license or refrain

from using the Intellectual Property Rights of any third party) nor, to the

Borrower’s knowledge, is there any threatened claim or any reasonable basis for

any such claim.

 

Section 5.12           Plans.  Except as disclosed to the Lender in writing

prior to the date hereof, neither the Borrower nor any ERISA Affiliate

(i) maintains or has maintained any Pension Plan, (ii) contributes or

has contributed to any Multiemployer Plan or (iii) provides or has

provided post-retirement medical or insurance benefits with respect to

employees or former employees (other than benefits required under

Section 601 of ERISA, Section 4980B of the IRC or applicable state

law).  Neither the Borrower nor any

ERISA Affiliate has received any notice or has any knowledge to the effect that

it is not in full compliance with any of the requirements of ERISA, the IRC or

applicable state law with respect to any Plan. 

No Reportable Event exists in connection with any Pension Plan.  Each Plan which is intended to qualify under

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

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

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

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

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

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

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

circumstances which could result in any liability to the Pension Benefit

Guaranty Corporation, the Internal Revenue Service, the Department of 

 

26

 

Labor or any participant in connection with any Plan (other than

routine claims for benefits under the Plan).

 

Section 5.13           Default.  The Borrower is in compliance with all

provisions of all agreements, instruments, decrees and orders to which it is a

party or by which it or its property is bound or affected, the breach or

default of which could have a Material

Adverse Effect.

 

Section 5.14           Environmental

Matters.

 

(a)           To

the Borrower’s best knowledge, there are not present in, on or under the

Premises any Hazardous Substances in such form or quantity as to create any

material liability or obligation for either the Borrower or the Lender under

common law of any jurisdiction or under any Environmental Law, and no Hazardous

Substances have ever been stored, buried, spilled, leaked, discharged, emitted

or released in, on or under the Premises in such a way as to create any such material

liability.

 

(b)           To

the Borrower’s best knowledge, the Borrower has not disposed of Hazardous

Substances in such a manner as to create any material liability under any

Environmental Law.

 

(c)           To

the Borrower’s best knowledge, there are not and there never have been any

requests, claims, notices, investigations, demands, administrative proceedings,

hearings or litigation, relating in any way to the Premises or the Borrower,

alleging material liability under, violation of, or noncompliance with any Environmental

Law or any license, permit or other authorization issued pursuant thereto.  To the Borrower’s best knowledge, no such

matter is threatened or impending.

 

(d)           To

the Borrower’s best knowledge, the Borrower’s businesses are and have in the

past always been conducted in accordance with all Environmental Laws and all

licenses, permits and other authorizations required pursuant to any

Environmental Law and necessary for the lawful and efficient operation of such

businesses are in the Borrower’s possession and are in full force and

effect.  No permit required under any

Environmental Law is scheduled to expire within 12 months and there is no

threat that any such permit will be withdrawn, terminated, limited or materially

changed.

 

(e)           To

the Borrower’s best knowledge, the Premises are not and never have been listed

on the National Priorities List, the Comprehensive Environmental Response,

Compensation and Liability Information System or any similar federal, state or

local list, schedule, log, inventory or database.

 

(f)            The

Borrower has delivered to Lender all environmental assessments, audits,

reports, permits, licenses and other documents describing or relating in any

way to the Premises or Borrower’s businesses.

 

Section 5.15           Submissions

to Lender.  All financial and

other information provided to the Lender by or on behalf of the Borrower in

connection with the Borrower’s request for the credit facilities contemplated

hereby is (i) true and correct in all material respects, (ii) does

not omit any material fact necessary to make such information not misleading

and, (iii) as to

 

27

 

projections, valuations or proforma financial statements, present a

good faith opinion as to such projections, valuations and proforma condition

and results.

 

Section 5.16           Financing

Statements.  The Borrower has

provided to the Lender signed financing statements and has authorized the

filing of financing statements sufficient when filed to perfect the Security

Interest and the other security interests created by the Security

Documents.  When such financing

statements are filed in the offices noted therein, the Lender will have a valid

and perfected security interest in all Collateral which is capable of being

perfected by filing financing statements. 

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

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

 

Section 5.17           Rights

to Payment.  Each right to

payment and each instrument, document, chattel paper and other agreement

constituting or evidencing Collateral is (or, in the case of all future

Collateral, will be when arising or issued) the valid, genuine and legally

enforceable obligation, subject to no defense, setoff or counterclaim, of the

account debtor or other obligor named therein or in the Borrower’s records

pertaining thereto as being obligated to pay such obligation.

 

ARTICLE VI

 

COVENANTS

 

So long as the Obligations shall remain unpaid, or the

Credit Facility shall remain outstanding, the Borrower will comply with the

following requirements, unless the Lender shall otherwise consent in writing:

 

Section 6.1             Reporting

Requirements.  The Borrower

will deliver, or cause to be delivered, to the Lender each of the following,

which shall be in form and detail acceptable to the Lender:

 

(a)           Annual Financial Statements.  As soon as available, and in any event

within 90 days after the end of each fiscal year of the Borrower, the

Borrower will deliver, or cause to be delivered, to the Lender, the Borrower’s

audited financial statements with the unqualified opinion of independent

certified public accountants selected by the Borrower and acceptable to the

Lender, which annual financial statements shall include the Borrower’s balance

sheet as at the end of such fiscal year and the related statements of the

Borrower’s income, retained earnings and cash flows for the fiscal year then

ended, prepared, if the Lender so requests, on a consolidating and consolidated

basis to include any Affiliates, all in reasonable detail and prepared in

accordance with GAAP, together with (i) copies of all management letters

prepared by such accountants; (ii) a report signed by such accountants

stating that in making the investigations necessary for said opinion they obtained

no knowledge, except as specifically stated, of any Default or Event of Default

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

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

Covenants; and (iii) a certificate of the Borrower’s chief financial

officer stating that such financial statements have been prepared in accordance

with GAAP and whether or not

 

28

 

such officer has knowledge of the occurrence of any

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

with respect thereto.

 

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

20 days after the end of each month, the Borrower will deliver to the

Lender an unaudited/internal balance sheet and statements of income and

retained earnings of the Borrower as at the end of and for such month and for

the year to date period then ended, prepared, if the Lender so requests, on a

consolidating and consolidated basis to include any Affiliates, in reasonable

detail and stating in comparative form the figures for the corresponding date

and periods in the previous year, all prepared in accordance with GAAP, subject

to year-end audit adjustments; and accompanied by a certificate of the

Borrower’s chief financial Officer, substantially in the form of Exhibit B

hereto stating (i) that such financial statements have been prepared in

accordance with GAAP, subject to year-end audit adjustments, (ii) whether

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

Default not theretofore reported and remedied and, if so, stating in reasonable

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

reasonable detail to evidence, and the computations as to, whether or not the

Borrower is in compliance with the Financial Covenants.

 

(c)           Collateral Reports.  Within 15 days after the end of each month

or more frequently if the Lender so requires, the Borrower will deliver to the

Lender agings of the Borrower’s accounts receivable and its accounts payable,

an inventory certification report, and a calculation of the Borrower’s

Accounts, Eligible Accounts, Inventory and Eligible Inventory as at the end of

such month or shorter time period.

 

(d)           Projections.  At least 30 days before the beginning of

each fiscal year of the Borrower, the Borrower will deliver to the Lender the

projected balance sheets and income statements for each month of such year,

each in reasonable detail, representing the Borrower’s good faith projections

and certified by the Borrower’s chief financial Officer as being the most

accurate projections available and identical to the projections used by the

Borrower for internal planning purposes, together with a statement of

underlying assumptions and such supporting schedules and information as the

Lender may in its discretion require.

 

(e)           Litigation.  Immediately after the commencement thereof,

the Borrower will deliver to the Lender notice in writing of all litigation and

of all proceedings before any governmental or regulatory agency affecting the

Borrower (i) of the type described in Section 5.14(c) or

(ii) which seek a monetary recovery against the Borrower in excess of

$50,000.

 

(f)            Defaults.  As promptly as practicable (but in any event

not later than five business days) after an Officer of the Borrower obtains

knowledge of the occurrence of any Default or Event of Default, the Borrower

will deliver to the Lender notice of such occurrence, together with a detailed

statement by a responsible Officer of the Borrower of the steps being taken by

the Borrower to cure the effect thereof.

 

29

 

(g)           Plans.  As soon as possible, and in any event within

30 days after the Borrower knows or has reason to know that any Reportable

Event with respect to any Pension Plan has occurred, the Borrower will deliver

to the Lender a statement of the Borrower’s chief financial Officer setting

forth details as to such Reportable Event and the action which the Borrower

proposes to take with respect thereto, together with a copy of the notice of

such Reportable Event to the Pension Benefit Guaranty Corporation.  As soon as possible, and in any event within

10 days after the Borrower fails to make any quarterly contribution required

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

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

financial Officer setting forth details as to such failure and the action which

the Borrower proposes to take with respect thereto, together with a copy of any

notice of such failure required to be provided to the Pension Benefit Guaranty

Corporation.  As soon as possible, and

in any event with 10 days after the Borrower knows or has reason to know that

it has or is reasonably expected to have any liability under Section 4201

or 4243 of ERISA for any withdrawal, partial withdrawal, reorganization or

other event under any Multiemployer Plan, the Borrower will deliver to the

Lender a statement of the Borrower’s chief financial Officer setting forth

details as to such liability and the action which Borrower proposes to take

with respect thereto.

 

(h)           Disputes.  Promptly upon knowledge thereof, the

Borrower will deliver to the Lender notice of (i) any disputes or claims

by the Borrower’s customers  exceeding

$5,000 individually or $50,000 in the aggregate during any fiscal year;

(ii) credit memos; (iii) any goods returned to or recovered by the

Borrower.

 

(i)            Officers and Directors.  Promptly upon knowledge thereof, the

Borrower will deliver to the Lender notice any change in the persons

constituting the Borrower’s Officers and Directors.

 

(j)            Collateral.  Promptly upon knowledge thereof, the

Borrower will deliver to the Lender notice of any loss of or material damage to

any Collateral or of any substantial adverse change in any Collateral or the

prospect of payment thereof.

 

(k)           Commercial Tort Claims.  Promptly upon knowledge thereof, the

Borrower will deliver to the Lender notice of any commercial tort claims it may

bring against any person, including the name and address of each defendant, a

summary of the facts, an estimate of the Borrower’s damages, copies of any

complaint or demand letter submitted by the Borrower, and such other

information as the Lender may request.

 

(l)            Intellectual Property.

 

(i)            The

Borrower will give the Lender 30 days prior written notice of its intent to

acquire or to grant material Intellectual Property Rights and upon request

shall provide the Lender with copies of all proposed documents and agreements

concerning such rights.

 

(ii)           Promptly

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

(A) any Infringement of its Intellectual Property Rights by

 

30

 

others, (B) claims that the Borrower is

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

threatened cancellation, termination or material limitation of its Intellectual

Property Rights.

 

(iii)          Promptly

upon receipt, the Borrower will give the Lender copies of all registrations and

filings with respect to its Intellectual Property Rights.

 

(m)          Reports to Owners.  Promptly upon their distribution, the

Borrower will deliver to the Lender copies of all financial statements, reports

and proxy statements which the Borrower shall have sent to its Owners.

 

(n)           SEC Filings.  Promptly after the sending or filing

thereof, the Borrower will deliver to the Lender copies of all regular and

periodic reports which the Borrower shall file with the Securities and Exchange

Commission or any national securities exchange.

 

(o)           Tax Returns.  As

soon as possible, and in any event by not later five days after they are due,

copies of the state and federal tax returns and all schedules thereto and an

updated personal financial statement of each owner of the Borrower.

 

(p)           Violations of Law.  Promptly upon knowledge thereof, the

Borrower will deliver to the Lender notice of the Borrower’s violation of any

law, rule or regulation, the non-compliance with which could materially and

adversely affect the Borrower’s business or its financial condition.

 

(q)           Other Reports.  From time to time, with reasonable

promptness, the Borrower will deliver to the Lender any and all receivables

schedules, collection reports, deposit records, equipment schedules, copies of

invoices to account debtors, shipment documents and delivery receipts for goods

sold, and such other material, reports, records or information as the Lender

may request.

 

Section 6.2             Financial

Covenants.

 

(a)           Minimum Book Net Worth.  The Borrower will maintain, during each

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

month, at an amount not less than the

amount set forth opposite such period:

 

	

  Period

  	

   

  	

  Minimum

  Book Net Worth

  	

   

  
	

  October 2002

  	

   

  	

  $

  	

  120,913,000

  	

   

  
	

  November 2002

  	

   

  	

  $

  	

  120,476,000

  	

   

  
	

  December 2002

  	

   

  	

  $

  	

  121,298,000

  	

   

  
	

  January 2003

  	

   

  	

  $

  	

  120,681,000

  	

   

  
	

  February 2003

  	

   

  	

  $

  	

  120,283,000

  	

   

  
	

  March 2003

  	

   

  	

  $

  	

  120,082,000

  	

   

  
	

  April 2003

  	

   

  	

  $

  	

  120,569,000

  	

   

  
	

  May 2003

  	

   

  	

  $

  	

  120,524,000

  	

   

  
	

  June 2003

  	

   

  	

  $

  	

  120,046,000

  	

   

  
	

  July 2003

  	

   

  	

  $

  	

  119,911,000

  	

   

  
	

  August 2003

  	

   

  	

  $

  	

  120,124,000

  	

   

  
	

  September 2003

  	

   

  	

  $

  	

  120,954,000

  	

   

  
	

  October 2003

  	

   

  	

  $

  	

  121,299,000

  	

   

  
	

  November 2003

  	

   

  	

  $

  	

  121,441,000

  	

   

  
	

  December 2003

  	

   

  	

  $

  	

  123,212,000

  	

   

  

 

31

 

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

described below, Earnings Before Taxes, of not less than the amount set forth opposite such period:

 

	

  Period

  	

   

  	

  Minimum

  Earnings Before

  Taxes

  	

   

  
	

  October 2002

  	

   

  	

  $

  	

  (25,942,000

  	

  )

  
	

  November 2002

  	

   

  	

  $

  	

  (26,379,000

  	

  )

  
	

  December 2002

  	

   

  	

  $

  	

  (26,557,000

  	

  )

  
	

  January 2003

  	

   

  	

  $

  	

  (617,000

  	

  )

  
	

  February 2003

  	

   

  	

  $

  	

  (1,014,000

  	

  )

  
	

  March 2003

  	

   

  	

  $

  	

  (1,215,000

  	

  )

  
	

  April 2003

  	

   

  	

  $

  	

  (728,000

  	

  )

  
	

  May 2003

  	

   

  	

  $

  	

  (773,000

  	

  )

  
	

  June 2003

  	

   

  	

  $

  	

  (1,251,000

  	

  )

  
	

  July 2003

  	

   

  	

  $

  	

  (1,387,000

  	

  )

  
	

  August 2003

  	

   

  	

  $

  	

  (1,172,000

  	

  )

  
	

  September 2003

  	

   

  	

  $

  	

  (344,000

  	

  )

  
	

  October 2003

  	

   

  	

  $

  	

  2,000

  	

   

  
	

  November 2003

  	

   

  	

  $

  	

  143,000

  	

   

  
	

  December 2003

  	

   

  	

  $

  	

  1,915,000

  	

   

  

 

(c)           Capital Expenditures.  The Borrower will not incur or contract to

incur Capital Expenditures of more than (i) $2,200,000 in the aggregate during

fiscal year 2002 and  $1,200,000 in the

aggregate during fiscal year 2003.

 

Section 6.3             Permitted

Liens; Financing Statements.

 

(a)           The

Borrower will not create, incur or suffer to exist any Lien upon or of any of

its assets, now owned or hereafter acquired, to secure any indebtedness;

excluding, however, from the operation of the foregoing, the following

(collectively, “Permitted Liens”):

 

(i)            in

the case of any of the Borrower’s property which is not Collateral, covenants,

restrictions, rights, easements and minor irregularities in title which do not

materially interfere with the Borrower’s business or operations as presently

conducted;

 

(ii)           Liens

in existence on the date hereof and listed in Schedule 6.3 hereto,

securing indebtedness for borrowed money permitted under Section 6.4;

 

32

 

(iii)          the

Security Interest and Liens created by the Security Documents; and

 

(iv)          purchase

money Liens relating to the acquisition of machinery and equipment of the Borrower

not exceeding the lesser of cost or fair market value thereof and so long as no

Default Period is then in existence and none would exist immediately after such

acquisition.

 

(b)           The

Borrower will not amend any financing statements in favor of the Lender except

as permitted by law.

 

Section 6.4             Indebtedness.  The Borrower will not incur, create, assume

or permit to exist any indebtedness or liability on account of deposits or

advances or any indebtedness for borrowed money or letters of credit issued on the

Borrower’s behalf, or any other indebtedness or liability evidenced by notes,

bonds, debentures or similar obligations, except:

 

(a)           indebtedness

arising hereunder;

 

(b)           indebtedness

of the Borrower in existence on the date hereof and listed in Schedule 6.4

hereto; and

 

(c)           indebtedness

relating to Permitted Liens.

 

Section 6.5             Guaranties.  The Borrower will not assume, guarantee,

endorse or otherwise become directly or contingently liable in connection with

any obligations of any other Person, except:

 

(a)           the

endorsement of negotiable instruments by the Borrower for deposit or collection

or similar transactions in the ordinary course of business; and

 

(b)           guaranties,

endorsements and other direct or contingent liabilities in connection with the

obligations of other Persons, in existence on the date hereof and listed in

Schedule 6.4 hereto.

 

Section 6.6             Investments

and Subsidiaries.  The

Borrower will not purchase or hold beneficially any stock or other securities

or evidences of indebtedness of, make or permit to exist any loans or advances

to, or make any investment or acquire any interest whatsoever in, any other

Person, including any partnership or joint venture, except:

 

(a)           investments

in direct obligations of the United States of America or any agency or

instrumentality thereof whose obligations constitute full faith and credit

obligations of the United States of America having a maturity of one year or

less, commercial paper issued by U.S. corporations rated “A-1” or “A-2” by

Standard & Poors Corporation or “P-1” or “P-2” by Moody’s Investors

Service or certificates of deposit or bankers’ acceptances having a maturity of

one year or less issued by members of the Federal Reserve System having

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

acceptances are fully insured by the Federal Deposit Insurance Corporation);

 

33

 

(b)           travel

advances or loans to the Borrower’s Officers and employees not exceeding at any

one time an aggregate of $30,000;

 

(c)           advances

in the form of progress payments, prepaid rent not exceeding three months or

security deposits; and

 

(d)           current

investments in the Subsidiaries in existence on the date hereof and listed in

Schedule 5.5 hereto.

 

Section 6.7             Dividends and Distributions.  The  Borrower

will not declare or pay any dividends (other than dividends payable solely in

stock of the Borrower) on any class of its stock or make any payment on account

of the purchase, redemption or other retirement of any shares of such stock or

make any distribution in respect thereof, either directly or indirectly.

 

Section 6.8             Salaries.  The Borrower will not pay excessive or

unreasonable salaries, bonuses, commissions, consultant fees or other

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

other compensation of any Director, Officer or consultant, or any member of

their families, by more than 15% in any one year, either individually or for

all such persons in the aggregate, or pay any such increase from any source

other than profits earned in the year of payment.

 

Section 6.9             Books

and Records; Inspection and Examination.  The Borrower will keep accurate books of record and account for

itself pertaining to the Collateral and pertaining to the Borrower’s business

and financial condition and such other matters as the Lender may from time to

time request in which true and complete entries will be made in accordance with

GAAP and, upon the Lender’s request, will permit any officer, employee, attorney

or accountant for the Lender to audit, review, make extracts from or copy any

and all company and financial books and records of the Borrower at all times

during ordinary business hours, to send and discuss with account debtors and

other obligors requests for verification of amounts owed to the Borrower, and

to discuss the Borrower’s affairs with any of its Directors, Officers,

employees or agents.  The Borrower

hereby irrevocably authorizes all accountants and third parties to disclose and

deliver to Lender, at the Borrower’s expense, all financial information, books

and records, work papers, management reports and other information in their

possession regarding the Borrower.  The

Borrower will permit the Lender, or its employees, accountants, attorneys or

agents, to examine and inspect any Collateral or any other property of the

Borrower at any time during ordinary business hours.

 

Section 6.10           Account

Verification.  The Lender may

at any time and from time to time send or require the Borrower to send requests

for verification of accounts or notices of assignment to account debtors and

other obligors.  The Lender may also at

any time and from time to time telephone account debtors and other obligors to

verify accounts.

 

Section 6.11           Compliance with Laws.

 

(a)           The

Borrower will (i) comply with the requirements of applicable laws and

regulations, the non-compliance with which would materially and adversely

affect its business or its financial condition and (ii) use and keep the

Collateral, and require that

 

34

 

others use and keep the Collateral, only for lawful

purposes, without violation of any federal, state or local law, statute or

ordinance.

 

(b)           Without

limiting the foregoing undertakings, the Borrower specifically agrees that it

will comply with all applicable Environmental Laws and obtain and comply with

all permits, licenses and similar approvals required by any Environmental Laws,

and will not generate, use, transport, treat, store or dispose of any Hazardous

Substances in such a manner as to create any material liability or obligation

under the common law of any jurisdiction or any Environmental Law.

 

Section 6.12           Payment

of Taxes and Other Claims. 

The Borrower will pay or discharge, when due, (a) all taxes,

assessments and governmental charges levied or imposed upon it or upon its

income or profits, upon any properties belonging to it (including the

Collateral) or upon or against the creation, perfection or continuance of the

Security Interest, prior to the date on which penalties attach thereto,

(b) all federal, state and local taxes required to be withheld by it, and

(c) all lawful claims for labor, materials and supplies which, if unpaid,

might by law become a Lien upon any properties of the Borrower; provided, that

the Borrower shall not be required to pay any such tax, assessment, charge or

claim whose amount, applicability or validity is being contested in good faith

by appropriate proceedings and for which proper reserves have been made.

 

Section 6.13           Maintenance

of Properties.

 

(a)           The

Borrower will keep and maintain the Collateral and all of its other properties

necessary or useful in its business in good condition, repair and working order

(normal wear and tear excepted) and will from time to time replace or repair

any worn, defective or broken parts; provided, however, that nothing in this

Section 6.14 shall prevent the Borrower from discontinuing the operation

and maintenance of any of its properties if such discontinuance is, in the

Borrower’s judgment, desirable in the conduct of the Borrower’s business and

not disadvantageous in any material respect to the Lender.  The Borrower will take all commercially

reasonable steps necessary to protect and maintain its Intellectual Property

Rights.

 

(b)           The

Borrower will defend the Collateral against all Liens, claims or demands of all

Persons (other than the Lender) claiming the Collateral or any interest

therein.  The Borrower will keep all

Collateral free and clear of all Liens except Permitted Liens.  The Borrower will take all commercially

reasonable steps necessary to prosecute any Person Infringing its Intellectual

Property Rights and to defend itself against any Person accusing it of

Infringing any Person’s Intellectual Property Rights.

 

Section 6.14           Insurance.  The Borrower will obtain and at all times

maintain insurance with insurers believed by the Borrower to be responsible and

reputable, in such amounts and against such risks as may from time to time be

required by the Lender, but in all events in such amounts and against such

risks as is usually carried by companies engaged in similar business and owning

similar properties in the same general areas in which the Borrower

operates.  Without limiting the

generality of the foregoing, the Borrower will at all times maintain business interruption insurance

including coverage for force majeure and  keep all tangible Collateral

 

35

 

insured against risks of fire (including so-called extended coverage),

theft, collision (for Collateral consisting of motor vehicles) and such other

risks and in such amounts as the Lender may reasonably request, with any loss

payable to the Lender to the extent of its interest, and all policies of such

insurance shall contain a lender’s loss payable endorsement for the Lender’s

benefit.  All policies of liability

insurance required hereunder shall name the Lender as an additional insured.

 

Section 6.15           Preservation

of Existence.  The Borrower

will preserve and maintain its existence and all of its rights, privileges and

franchises necessary or desirable in the normal conduct of its business and

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

 

Section 6.16           Delivery

of Instruments, etc.  Upon

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

pledge all instruments, documents and chattel paper constituting Collateral,

duly endorsed or assigned by the Borrower.

 

Section 6.17           Sale

or Transfer of Assets; Suspension of Business Operations.  The Borrower will not sell, lease, assign,

transfer or otherwise dispose of (i) the stock of any Subsidiary,

(ii) all or a substantial part of its assets, or (iii) any Collateral

or any interest therein (whether in one transaction or in a series of

transactions) to any other Person other than the sale of Inventory in the

ordinary course of business and will not liquidate, dissolve or suspend

business operations.  The Borrower will

not transfer any part of its ownership interest in any Intellectual Property

Rights and will not permit any agreement under which it has licensed Licensed

Intellectual Property to lapse, except that the Borrower may transfer such

rights or permit such agreements to lapse if it shall have reasonably

determined that the applicable Intellectual Property Rights are no longer

useful in its business.  If the Borrower

transfers any Intellectual Property Rights for value, the Borrower will pay

over the proceeds to the Lender for application to the Obligations.  The Borrower will not license any other

Person to use any of the Borrower’s Intellectual Property Rights, except that

the Borrower may grant licenses in the ordinary course of its business in

connection with sales of Inventory or provision of services to its customers.

 

Section 6.18           Consolidation

and Merger; Asset Acquisitions. 

The Borrower will not consolidate with or merge into any Person, or

permit any other Person to merge into it, or acquire (in a transaction

analogous in purpose or effect to a consolidation or merger) all or

substantially all the assets of any other Person.

 

Section 6.19           Sale

and Leaseback.  The Borrower

will not enter into any arrangement, directly or indirectly, with any other

Person whereby the Borrower shall sell or transfer any real or personal property,

whether now owned or hereafter acquired, and then or thereafter rent or lease

as lessee such property or any part thereof or any other property which the

Borrower intends to use for substantially the same purpose or purposes as the

property being sold or transferred.

 

Section 6.20           Restrictions

on Nature of Business.  The

Borrower will not engage in any line of business materially different from that

presently engaged in by the Borrower and will not purchase, lease or otherwise

acquire assets not related to its business.

 

36

 

Section 6.21           Accounting.  The Borrower will not adopt any material

change in accounting principles other than as required by GAAP.  The Borrower will not adopt, permit or

consent to any change in its fiscal year.

 

Section 6.22           Discounts,

etc.  After notice from the Lender,

the Borrower will not grant any discount, credit or allowance to any customer

of the Borrower or accept any return of goods sold.  The Borrower will not at any time modify, amend, subordinate,

cancel or terminate the obligation of any account debtor or other obligor of

the Borrower.

 

Section 6.23           Plans.  Unless disclosed to the Lender pursuant to

Section 5.12, neither the Borrower nor any ERISA Affiliate will

(i) adopt, create, assume or become a party to any Pension Plan,

(ii) incur any obligation to contribute to any Multiemployer Plan,

(iii) incur any obligation to provide post-retirement medical or insurance

benefits with respect to employees or former employees (other than benefits

required by law) or (iv) amend any Plan in a manner that would materially

increase its funding obligations.

 

Section 6.24           Place

of Business; Name.  The Borrower

will not transfer its chief executive office or principal place of business, or

move, relocate, close or sell any business location.  The Borrower will not permit any tangible Collateral or any

records pertaining to the Collateral to be located in any state or area in

which, in the event of such location, a financing statement covering such

Collateral would be required to be, but has not in fact been, filed in order to

perfect the Security Interest.  The

Borrower will not change its name or jurisdiction of organization.

 

Section 6.25           Constituent

Documents; S Corporation Status.  The

Borrower will not amend its Constituent Documents.

 

Section 6.26           Performance

by the Lender.  If the Borrower at

any time fails to perform or observe any of the foregoing covenants contained

in this Article VI or elsewhere herein, and if such failure shall continue

for a period of ten calendar days after the Lender gives the Borrower written

notice thereof (or in the case of the agreements contained in

Sections 6.12 and 6.14, immediately upon the occurrence of such failure,

without notice or lapse of time), the Lender may, but need not, perform or

observe such covenant on behalf and in the name, place and stead of the

Borrower (or, at the Lender’s option, in the Lender’s name) and may, but need

not, take any and all other actions which the Lender may reasonably deem

necessary to cure or correct such failure (including the payment of taxes, the

satisfaction of Liens, the performance of obligations owed to account debtors

or other obligors, the procurement and maintenance of insurance, the execution

of assignments, security agreements and financing statements, and the

endorsement of instruments); and the Borrower shall thereupon pay to the Lender

on demand the amount of all monies expended and all costs and expenses

(including reasonable attorneys’ fees and legal expenses) incurred by the

Lender in connection with or as a result of the performance or observance of

such agreements or the taking of such action by the Lender, together with

interest thereon from the date expended or incurred at the Default Rate.  To facilitate the Lender’s performance or

observance of such covenants of the Borrower, the Borrower hereby irrevocably

appoints the Lender, or the Lender’s delegate, acting alone, as the Borrower’s

attorney in fact (which appointment is coupled with an interest) with the right

(but not the duty) from time to time to create, prepare, complete, execute,

deliver, endorse or file in the name and

 

37

 

on behalf of the Borrower any and all instruments, documents, assignments,

security agreements, financing statements, applications for insurance and other

agreements and writings required to be obtained, executed, delivered or

endorsed by the Borrower under this Section 6.26.

 

ARTICLE VII

 

EVENTS

OF DEFAULT, RIGHTS AND REMEDIES

 

Section 7.1             Events

of Default.  “Event of Default”,

wherever used herein, means any one of the following events:

 

(a)           Default

in the payment of any Obligations when they become due and payable;

 

(b)           Default

in the performance, or breach, of any covenant or agreement of the Borrower

contained in this Agreement;

 

(c)           A

Change of Control shall occur;

 

(d)           Any

Financial Covenant shall become inapplicable due to the lapse of time and the

failure to amend any such covenant to cover future periods;

 

(e)           The

Borrower shall be or become insolvent, or admit in writing its or his inability

to pay its or his debts as they mature, or make an assignment for the benefit

of creditors; or the Borrower shall apply for or consent to the appointment of

any receiver, trustee, or similar officer for it or him or for all or any

substantial part of its or his property; or such receiver, trustee or similar

officer shall be appointed without the application or consent of the Borrower;

or the Borrower shall institute (by petition, application, answer, consent or

otherwise) any bankruptcy, insolvency, reorganization, arrangement,

readjustment of debt, dissolution, liquidation or similar proceeding relating

to it or him under the laws of any jurisdiction; or any such proceeding shall

be instituted (by petition, application or otherwise) against the Borrower; or

any judgment, writ, warrant of attachment or execution or similar process shall

be issued or levied against a substantial part of the property of the Borrower;

 

(f)            A

petition shall be filed by or against the Borrower under the United States

Bankruptcy Code naming the Borrower as debtor;

 

(g)           Any

representation or warranty made by the Borrower in this Agreement, ,or by the

Borrower (or any of its Officers) in any agreement, certificate, instrument or

financial statement or other statement contemplated by or made or delivered

pursuant to or in connection with this Agreement shall prove to have been

incorrect in any material respect when deemed to be effective;

 

(h)           The

rendering against the Borrower of an arbitration award, final judgment, decree

or order for the payment of money in excess of $50,000 and the continuance of

such arbitration award, judgment, decree or order unsatisfied and in effect for

any period of 30 consecutive days without a stay of execution;

 

38

 

(i)            A

default under any bond, debenture, note or other evidence of material

indebtedness of the Borrower owed to any Person other than the Lender, or under

any indenture or other instrument under which any such evidence of indebtedness

has been issued or by which it is governed, or under any material lease or

other contract, and the expiration of the applicable period of grace, if any,

specified in such evidence of indebtedness, indenture, other instrument, lease

or contract;

 

(j)            Any

Reportable Event, which the Lender determines in good faith might constitute

grounds for the termination of any Pension Plan or for the appointment by the

appropriate United States District Court of a trustee to administer any Pension

Plan, shall have occurred and be continuing 30 days after written notice

to such effect shall have been given to the Borrower by the Lender; or a

trustee shall have been appointed by an appropriate United States District

Court to administer any Pension Plan; or the Pension Benefit Guaranty

Corporation shall have instituted proceedings to terminate any Pension Plan or

to appoint a trustee to administer any Pension Plan; or the Borrower or any

ERISA Affiliate shall have filed for a distress termination of any Pension Plan

under Title IV of ERISA; or the Borrower or any ERISA Affiliate shall have

failed to make any quarterly contribution required with respect to any Pension

Plan under Section 412(m) of the IRC, which the Lender determines in good

faith may by itself, or in combination with any such failures that the Lender

may determine are likely to occur in the future, result in the imposition of a

Lien on the Borrower’s assets in favor of the Pension Plan; or any withdrawal,

partial withdrawal, reorganization or other event occurs with respect to a

Multiemployer Plan which results or could reasonably be expected to result in a

material liability of the Borrower to the Multiemployer Plan under Title IV of

ERISA.

 

(k)           An

event of default shall occur under any Security Document;

 

(l)            The

Borrower shall liquidate, dissolve, terminate or suspend its business

operations or otherwise fail to operate its business in the ordinary course, or

sell or attempt to sell all or substantially all of its assets, without the

Lender’s prior written consent;

 

(m)          Default

in the payment of any amount owed by the Borrower to the Lender other than any

indebtedness arising hereunder;

 

(n)           Any

event or circumstance with respect to the Borrower shall occur such that the

Lender shall believe in good faith that the prospect of payment of all or any

part of the Obligations or the performance by the Borrower under the Loan

Documents is impaired or any material adverse change in the business or financial

condition of the Borrower shall occur; or

 

(o)           Any

breach, default or event of default by or attributable to any Affiliate under

any agreement between such Affiliate and the Lender shall occur.

 

Section 7.2             Rights

and Remedies.  During any Default

Period, the Lender may exercise any or all of the following rights and

remedies:

 

39

 

(a)           the

Lender may, by notice to the Borrower, declare the Commitment to be terminated,

whereupon the same shall forthwith terminate;

 

(b)           the

Lender may, by notice to the Borrower, declare the Obligations to be forthwith

due and payable, whereupon all Obligations shall become and be forthwith due

and payable, without presentment, notice of dishonor, protest or further notice

of any kind, all of which the Borrower hereby expressly waives;

 

(c)           the

Lender may, without notice to the Borrower and without further action, apply

any and all money owing by the Lender to the Borrower to the payment of the

Obligations;

 

(d)           the

Lender may exercise and enforce any and all rights and remedies available upon

default to a secured party under the UCC, including the right to take

possession of Collateral, or any evidence thereof, proceeding without judicial

process or by judicial process (without a prior hearing or notice thereof,

which the Borrower hereby expressly waives) and the right to sell, lease or

otherwise dispose of any or all of the Collateral (with or without giving any

warranties as to the Collateral, title to the Collateral or similar

warranties), and, in connection therewith, the Borrower will on demand assemble

the Collateral and make it available to the Lender at a place to be designated

by the Lender which is reasonably convenient to both parties;

 

(e)           the

Lender may make demand upon the Borrower and, forthwith upon such demand, the

Borrower will pay to the Lender in immediately available funds for deposit in

the Special Account pursuant to Section 2.13 an amount equal to the

aggregate maximum amount available to be drawn under all Letters of Credit then

outstanding, assuming compliance with all conditions for drawing thereunder;

 

(f)            the

Lender may exercise and enforce its rights and remedies under the Loan

Documents; and

 

(g)           the

Lender may exercise any other rights and remedies available to it by law or

agreement.

 

Notwithstanding the foregoing, upon the occurrence of an Event of

Default described in subsections (e) or (f) of Section 7.1, the

Obligations shall be immediately due and payable automatically without

presentment, demand, protest or notice of any kind.  If the Lender sells any of the Collateral on credit, the

Obligations will be reduced only to the extent of payments actually

received.  If the purchaser fails to pay

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

proceeds actually received to the Obligations.

 

Section 7.3             Certain

Notices.  If notice to the Borrower

of any intended disposition of Collateral or any other intended action is

required by law in a particular instance, such notice shall be deemed

commercially reasonable if given (in the manner specified in Section 8.3)

at least ten calendar days before the date of intended disposition or other

action.

 

40

 

ARTICLE

VIII

 

MISCELLANEOUS

 

Section 8.1             No

Waiver; Cumulative Remedies; Compliance with Laws.  No failure or delay by the Lender in

exercising any right, power or remedy under the Loan Documents shall operate as

a waiver thereof; nor shall any single or partial exercise of any such right,

power or remedy preclude any other or further exercise thereof or the exercise

of any other right, power or remedy under the Loan Documents.  The remedies provided in the Loan Documents

are cumulative and not exclusive of any remedies provided by law.  The Lender may comply with any applicable

state or federal law requirements in connection with a disposition of the

Collateral and such compliance will not be considered adversely to affect the

commercial reasonableness of any sale of the Collateral.

 

Section 8.2             Amendments,

Etc.  No amendment, modification,

termination or waiver of any provision of any Loan Document or consent to any

departure by the Borrower therefrom or any release of a Security Interest shall

be effective unless the same shall be in writing and signed by the Lender, and

then such waiver or consent shall be effective only in the specific instance

and for the specific purpose for which given. 

No notice to or demand on the Borrower in any case shall entitle the

Borrower to any other or further notice or demand in similar or other

circumstances.

 

Section 8.3             Addresses

for Notices; Requests for Accounting. 

Except as otherwise expressly provided herein, all notices, requests,

demands and other communications provided for under the Loan Documents shall be

in writing and shall be (a) personally delivered, (b) sent by first

class United States mail, (c) sent by overnight courier of national

reputation, or (d) transmitted by telecopy, in each case addressed or

telecopied to the party to whom notice is being given at its address or

telecopier number as set forth below next to its signature or, as to each

party, at such other address or telecopier number as may hereafter be

designated by such party in a written notice to the other party complying as to

delivery with the terms of this Section. 

All such notices, requests, demands and other communications shall be

deemed to have been given on (a) the date received if personally

delivered, (b) when deposited in the mail if delivered by mail, (c) the

date sent if sent by overnight courier, or (d) the date of transmission if

delivered by telecopy, except that notices or requests to the Lender pursuant

to any of the provisions of Article II shall not be effective until

received by the Lender.  All requests

under Section 9-210 of the UCC (i) shall be made in a writing signed

by a person authorized under Section 2.2(b), (ii) shall be personally

delivered, sent by registered or certified mail, return receipt requested, or

by overnight courier of national reputation (iii) shall be deemed to be

sent when received by the Lender and (iv) shall otherwise comply with the

requirements of Section 9-210.  The

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

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

any liability for so responding.  The

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

such requests.

 

Section 8.4             Further

Documents.  The Borrower will from

time to time execute and deliver or endorse any and all instruments, documents,

conveyances, assignments, security agreements, financing statements, control

agreements and other agreements and writings that the

 

41

 

Lender may reasonably request in order to secure, protect, perfect or

enforce the Security Interest or the Lender’s rights under the Loan Documents

(but any failure to request or assure that the Borrower executes, delivers or

endorses any such item shall not affect or impair the validity, sufficiency or

enforceability of the Loan Documents and the Security Interest, regardless of

whether any such item was or was not executed, delivered or endorsed in a

similar context or on a prior occasion).

 

Section 8.5             Costs

and Expenses.  The Borrower shall

pay on demand all costs and expenses, including reasonable attorneys’ fees,

incurred by the Lender in connection with the Obligations, this Agreement, the

Loan Documents, any Letter of Credit and any other document or agreement

related hereto or thereto, and the transactions contemplated hereby, including

all such costs, expenses and fees incurred in connection with the negotiation,

preparation, execution, amendment, administration, performance, collection and

enforcement of the Obligations and all such documents and agreements and the

creation, perfection, protection, satisfaction, foreclosure or enforcement of

the Security Interest.

 

Section 8.6             Indemnity.  In addition to the payment of expenses

pursuant to Section 8.5 the Borrower shall indemnify, defend and hold

harmless the Lender, and any of its participants, parent corporations,

subsidiary corporations, affiliated corporations, successor corporations, and

all present and future officers, directors, employees, attorneys and agents of

the foregoing (the “Indemnitees”) from and against any of the following

(collectively, “Indemnified Liabilities”):

 

(i)            any

and all transfer taxes, documentary taxes, assessments or charges made by any

governmental authority by reason of the execution and delivery of the Loan

Documents or the making of the Advances;

 

(ii)           any

claims, loss or damage to which any Indemnitee may be subjected if any

representation or warranty contained in Section 5.14 proves to be

incorrect in any respect or as a result of any violation of the covenant

contained in Section 6.12(b); and

 

(iii)          any

and all other liabilities, losses, damages, penalties, judgments, suits,

claims, costs and expenses of any kind or nature whatsoever (including the

reasonable fees and disbursements of counsel) in connection with the foregoing

and any other investigative, administrative or judicial proceedings, whether or

not such Indemnitee shall be designated a party thereto, which may be imposed

on, incurred by or asserted against any such Indemnitee, in any manner related

to or arising out of or in connection with the making of the Advances and the

Loan Documents or the use or intended use of the proceeds of the Advances.

 

If any investigative, judicial or administrative proceeding arising

from any of the foregoing is brought against any Indemnitee, upon such

Indemnitee’s request, the Borrower, or counsel designated by the Borrower and

satisfactory to the Indemnitee, will resist and defend such action, suit or

proceeding to the extent and in the manner directed by the Indemnitee, at the

Borrower’s sole costs and expense.  Each

Indemnitee will use its best efforts to cooperate in the defense of any such

action, suit or proceeding.  If the

foregoing undertaking to indemnify, defend and hold harmless may be held to be

unenforceable because it violates any law or public policy, the 

 

42

 

Borrower shall nevertheless make the maximum contribution to the

payment and satisfaction of each of the Indemnified Liabilities which is

permissible under applicable law.  The

Borrower’s obligation under this Section 8.6 shall survive the termination

of this Agreement and the discharge of the Borrower’s other obligations

hereunder.

 

Section 8.7             Participants.  The Lender and its participants, if any, are

not partners or joint venturers, and the Lender shall not have any liability or

responsibility for any obligation, act or omission of any of its

participants.  All rights and powers

specifically conferred upon the Lender may be transferred or delegated to any

of the Lender’s participants, successors or assigns.

 

Section 8.8             Execution

in Counterparts; Telefacsimile Execution. 

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

counterparts, each of which when so executed and delivered shall be deemed to

be an original and all of which counterparts, taken together, shall constitute

but one and the same instrument. 

Delivery of an executed counterpart of this Agreement by telefacsimile

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

of this Agreement.  Any party delivering

an executed counterpart of this Agreement by telefacsimile also shall deliver

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

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

and binding effect of this Agreement.

 

Section 8.9             Retention

of Borrower’s Records.  The Lender

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

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

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

after receipt by the Lender.

 

Section 8.10           Binding

Effect; Assignment; Complete Agreement; Exchanging Information.  The Loan Documents shall be binding upon and

inure to the benefit of the Borrower and the Lender and their respective

successors and assigns, except that the Borrower shall not have the right to

assign its rights thereunder or any interest therein without the Lender’s prior

written consent.  To the extent

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

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

Lender.  This Agreement shall also bind

all Persons who become a party to this Agreement as a borrower.  This Agreement, together with the Loan

Documents, comprises the complete and integrated agreement of the parties on

the subject matter hereof and supersedes all prior agreements, written or oral,

on the subject matter hereof.  Without

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

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

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

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

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

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

have with respect to such exchange of such information.

 

Section 8.11           Severability

of Provisions.  Any provision of

this Agreement which is prohibited or unenforceable shall be ineffective to the

extent of such prohibition or unenforceability without invalidating the

remaining provisions hereof.

 

43

 

Section 8.12           Headings.  Article, Section and subsection headings in

this Agreement are included herein for convenience of reference only and shall

not constitute a part of this Agreement for any other purpose.

 

Section 8.13           Governing

Law; Jurisdiction, Venue; Waiver of Jury Trial.  The Loan Documents shall be governed by and construed in

accordance with the substantive laws (other than conflict laws) of the State

of  Minnesota.  The parties hereto hereby (i) consent to the personal

jurisdiction of the state and federal courts located in the State of Minnesota

in connection with any controversy related to this Agreement; (ii) waive

any argument that venue in any such forum is not convenient, (iii) agree

that any litigation initiated by the Lender or the Borrower in connection with

this Agreement or the other Loan Documents may be venued in either the State or

Federal courts located in Hennepin County, Minnesota; and (iv) agree that

a final judgment in any such suit, action or proceeding shall be conclusive and

may be enforced in other jurisdictions by suit on the judgment or in any other

manner provided by law.

 

THE PARTIES WAIVE ANY RIGHT TO TRIAL

BY JURY IN ANY ACTION OR PROCEEDING BASED ON OR PERTAINING TO THIS AGREEMENT OR

ANY OTHER LOAN DOCUMENT.

 

44

 

IN WITNESS WHEREOF, the parties hereto have caused

this Agreement to be executed by their respective officers thereunto duly

authorized as of the date first above written.

 

	

   

  	

  DIGITAL ANGEL CORPORATION

  
	

  490 Villaume Avenue

  	

   

  
	

  St. Paul, MN 55075-2443

  	

  By

  	

   

  
	

  Telecopier: 

  (651) 455-0217

  	

   

  	

  Randolph K. Geissler

  
	

  Attention: 

  James P. Santelli

  	

  Its Chief Executive Officer

  
	

  email: 

  jsantelli@digitalangelcorp.com

  	

   

  
	

   

  	

   

  
	

  Wells Fargo Business Credit, Inc

  	

  WELLS FARGO BUSINESS CREDIT, INC.

  
	

   

  	

   

  
	

  MAC 

  N9312-040

  	

  By

  	

   

  
	

  Sixth and Marquette

  	

   

  	

  Michael L. Guillou

  
	

  Minneapolis, MN 55479

  	

  Its Assistant Vice President

  
	

  Telecopier: 

  (612) 673-8589

  	

   

  
	

  Attention: 

  Michael L. Guillou

  	

   

  
	

  e-mail: 

  michael.l.guillou@welsfargo.com

  	

   

  

 

 

Table of

Exhibits and Schedules

 

	

  Exhibit

  A

  	

  Form of Revolving Note

  
	

   

  	

   

  
	

  Exhibit

  B

  	

  Compliance Certificate

  
	

   

  	

   

  
	

  Exhibit

  C

  	

  Premises

  
	

   

  	

   

  
	

  Schedule 5.1

  	

  Trade Names, Chief Executive Office,

  Principal Place of Business, and Locations of Collateral

  
	

   

  	

   

  
	

  Schedule 5.2

  	

  Capitalization

  and Organizational Chart

  
	

   

  	

   

  
	

  Schedule 5.5

  	

  Subsidiaries

  
	

   

  	

   

  
	

  Schedule 5.11

  	

  Intellectual Property

  Disclosures

  
	

   

  	

   

  
	

  Schedule 6.3

  	

  Permitted Liens

  
	

   

  	

   

  
	

  Schedule 6.4

  	

  Permitted

  Indebtedness and Guaranties

  

 

 

Exhibit A

to Credit and Security Agreement

 

REVOLVING NOTE

 

	

  $5,000,000

  	

   

  	

  Minneapolis, Minnesota

  October 30,2002

  

 

For value received, the undersigned, DIGITAL ANGEL

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

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

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

at its main office in Minneapolis, Minnesota, or at any other place designated

at any time by the holder hereof, in lawful money of the United States of

America and in immediately available funds, the principal sum of FIVE MILLION

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

Revolving Advances made by the Lender to the Borrower under the Credit

Agreement (defined below) together with interest on the principal amount

hereunder remaining unpaid from time to time, computed on the basis of the

actual number of days elapsed and a 360-day year, from the date hereof until

this Note is fully paid at the rate from time to time in effect under the

Credit and Security Agreement of even date herewith (the “Credit Agreement”) by

and between the Lender and the Borrower. 

The principal hereof and interest accruing thereon shall be due and

payable as provided in the Credit Agreement. 

This Note may be prepaid only in accordance with the Credit Agreement.

 

This Note is issued pursuant, and is subject, to the

Credit Agreement, which provides, among other things, for acceleration

hereof.  This Note is the Revolving Note

referred to in the Credit Agreement. 

This Note is secured, among other things, pursuant to the Credit

Agreement and the Security Documents as therein defined, and may now or

hereafter be secured by one or more other security agreements, mortgages, deeds

of trust, assignments or other instruments or agreements.

 

The Borrower shall pay all costs of collection,

including reasonable attorneys’ fees and legal expenses if this Note is not

paid when due, whether or not legal proceedings are commenced.

 

Presentment or other demand for payment, notice of

dishonor and protest are expressly waived.

 

	

   

  	

  DIGITAL ANGEL CORPORATION

  
	

   

  	

   

  
	

   

  	

   

  
	

   

  	

  By

  	

   

  
	

   

  	

   

  	

  James P. Santelli

  
	

   

  	

  Its Vice President of Finance

  

 

 

Exhibit B

to Credit and Security Agreement

 

Compliance Certificate

 

	

  To:

  	

  Digital Angel Corporation

  Wells Fargo Business Credit, Inc.

  
	

   

  	

   

  
	

  Date:

  	

                     ,

  200    

  
	

   

  	

   

  
	

  Subject:

  	

   

  
	

   

  	

  Financial Statements

  

 

In accordance with our Credit and Security Agreement

dated as of October 30, 2002 (the “Credit Agreement”), attached are the

financial statements of

                         

(the “Borrower”) as of and for

                      

, 200      (the “Reporting Date”) and the year-to-date

period then ended (the “Current Financials”). 

All terms used in this certificate have the meanings given in the Credit

Agreement.

 

I certify that the Current Financials have been

prepared in accordance with GAAP, subject to year-end audit adjustments, and

fairly present the Borrower’s financial condition as of the date thereof.

 

Events of Default.  (Check one):

 

The undersigned does not have knowledge of the

occurrence of a Default or Event of Default under the Credit Agreement except

as previously reported in writing to the Lender.

 

The undersigned has knowledge of the occurrence of a

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

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

respect to thereto.  The Borrower

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

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

Period.

 

Financial Covenants.  I further hereby certify as follows:

 

1.                                      Minimum Book

Net Worth.  The Borrower

will maintain, during each period described below, its Book Net Worth,

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

 

	

  Period

  	

   

  	

  Minimum

  Book Net Worth

  	

   

  
	

  October 2002

  	

   

  	

  $

  	

  120,913,000

  	

   

  
	

  November 2002

  	

   

  	

  $

  	

  120,476,000

  	

   

  
	

  December 2002

  	

   

  	

  $

  	

  121,298,000

  	

   

  
	

  January 2003

  	

   

  	

  $

  	

  120,681,000

  	

   

  
	

  February 2003

  	

   

  	

  $

  	

  120,283,000

  	

   

  
	

  March 2003

  	

   

  	

  $

  	

  120,082,000

  	

   

  
	

  April 2003

  	

   

  	

  $

  	

  120,569,000 

  	

   

  
	

  May 2003

  	

   

  	

  $

  	

  120,524,000

  	

   

  
	

  June 2003

  	

   

  	

  $

  	

  120,046,000

  	

   

  
	

  July 2003

  	

   

  	

  $

  	

  119,911,000

  	

   

  
	

  August 2003

  	

   

  	

  $

  	

  120,124,000

  	

   

  
	

  September 2003

  	

   

  	

  $

  	

  120,954,000

  	

   

  
	

  October 2003

  	

   

  	

  $

  	

  121,299,000

  	

   

  
	

  November 2003

  	

   

  	

  $

  	

  121,441,000

  	

   

  
	

  December 2003

  	

   

  	

  $

  	

  123,212,000

  	

   

  

 

 

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

described below, Earnings Before Taxes, of not less than the amount set forth opposite such period.

 

	

  Period

  	

   

  	

  Minimum

  Earnings Before

  Taxes

  	

   

  
	

  October 2002

  	

   

  	

  $

  	

  (25,942,000

  	

  )

  
	

  November 2002

  	

   

  	

  $

  	

  (26,379,000

  	

  )

  
	

  December 2002

  	

   

  	

  $

  	

  (26,557,000

  	

  )

  
	

  January 2003

  	

   

  	

  $

  	

  (617,000

  	

  )

  
	

  February 2003

  	

   

  	

  $

  	

  (1,014,000

  	

  )

  
	

  March 2003

  	

   

  	

  $

  	

  (1,215,000

  	

  )

  
	

  April 2003

  	

   

  	

  $

  	

  (728,000

  	

  )

  
	

  May 2003

  	

   

  	

  $

  	

  (773,000

  	

  )

  
	

  June 2003

  	

   

  	

  $

  	

  (1,251,000

  	

  )

  
	

  July 2003

  	

   

  	

  $

  	

  (1,387,000

  	

  )

  
	

  August 2003

  	

   

  	

  $

  	

  (1,172,000

  	

  )

  
	

  September 2003

  	

   

  	

  $

  	

  (344,000

  	

  )

  
	

  October 2003

  	

   

  	

  $

  	

  2,000

  	

   

  
	

  November 2003

  	

   

  	

  $

  	

  143,000

  	

   

  
	

  December 2003

  	

   

  	

  $

  	

  1,915,000

  	

   

  

 

3.                                       Capital

Expenditures.  Pursuant to

Section 6.2 of the Credit Agreement, for the year-to-date period ending on

the Reporting Date, the Borrower has expended or contracted to expend during

the fiscal year ended December 31, 200    , for Capital

Expenditures, which o satisfies o does

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

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

 

4.                                       Salaries.  As of the Reporting Date, the Borrower o is

o is not in compliance with

Section 6.8 of the Credit Agreement concerning salaries.

 

2

 

Attached hereto are all relevant facts in reasonable

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

above.  These computations were made in

accordance with GAAP.

 

	

   

  	

  DIGITAL ANGEL CORPORATION

  
	

   

  	

   

  
	

   

  	

  By

  	

   

  
	

   

  	

   

  	

  Its Chief Financial Officer

  

 

3

 

Exhibit C

to Credit and Security Agreement

 

Premises

 

The Premises referred to in the Credit and Security

Agreement are legally described as follows:

 

	

  1.

  	

  490 Villaume Avenue, South St. Paul, MN 55075

  
	

   

  	

   

  
	

   

  	

   

  	

  [Need legal description  to be completed by Borrower]

  
	

   

  	

   

  
	

  2.

  	

  1451 Research Park Drive, Riverside, CA 92507

  
	

   

  	

   

  
	

   

  	

   

  	

  [Need legal description  to be completed by Borrower]

  
	

   

  	

   

  
	

  3.

  	

  8050 Southern Maryland Blvd., Owings, MD 20736

  
	

   

  	

   

  
	

   

  	

   

  	

  [Need legal description  to be completed by Borrower]

  
				

 

 

Schedule 5.1 to Credit and Security Agreement

 

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

and Locations of Collateral

 

	

  Trade

  Names

  
	

   

  
	

  Animal Applications

  Division

  
	

  Digital Angel Systems

  Division

  
	

  GPS &

  Communications Division

  
	

  Physicians Call Center

  Division

  
	

   

  
	

   

  
	

  Chief

  Executive Office/Principal Place of Business

  
	

   

  
	

  490 Villaume Avenue

  
	

  South St. Paul, MN

  55075

  
	

   

  
	

  Other Inventory and

  Equipment Locations

  
	

   

  
	

   

  	

  1451 Research Park Drive

  Riverside, CA 92507

  
	

   

  	

   

  
	

   

  	

   

  
	

   

  	

  8050 Southern Maryland Blvd.

  Owings, MD 20736

  
	

   

  	

   

  
	

   

  	

   

  
	

   

  	

  Tom Cribb Road

  Thamesmead

  London SE28 OBH

  United Kingdom

  

 

 

Schedule 5.2 to Credit and Security Agreement

 

Capitalization

and Organizational Chart

 

	

  Holder

  	

   

  	

  Type of

  Rights/Stock

  	

   

  	

  No. of

  shares (after

  exercise of all rights

  to acquire shares)

  	

   

  	

  Percent

  interest on a

  fully diluted basis

  	

   

  
	

   

  	

   

  	

   

  	

   

  	

   

  	

   

  	

   

  	

   

  
	

   

  	

   

  	

   

  	

   

  	

   

  	

   

  	

   

  	

   

  

 

Attach organizational chart showing the ownership structure of all

Subsidiaries of the Borrower.

 

[ to be completed by

Borrower ]

 

 

Schedule 5.5 

to Credit and Security Agreement

 

Subsidiaries

 

None

 

 

 

Schedule 5.11 to Credit and Security Agreement

 

Intellectual

Property Disclosures

 

See attached

 

 

 

Schedule 6.3 to Credit and Security Agreement

 

Permitted Liens

 

	

  Creditor

  	

   

  	

  Collateral

  	

   

  	

  Jurisdiction

  	

   

  	

  Filing

  Date

  	

   

  	

  Filing No.

  	

   

  
	

  None

  	

   

  	

   

  	

   

  	

   

  	

   

  	

   

  	

   

  	

   

  	

   

  

 

 

Schedule 6.4 to Credit and Security Agreement

 

Permitted

Indebtedness and Guaranties

 

Indebtedness

 

	

  Creditor

  	

   

  	

  Principal

  Amount

  	

   

  	

  Maturity

  Date

  	

   

  	

  Monthly

  Payment

  	

   

  	

  Collateral

  	

   

  
	

   

  	

   

  	

   

  	

   

  	

   

  	

   

  	

   

  	

   

  	

   

  	

   

  

 

 

Guaranties

 

	

  Primary

  Obligor

  	

   

  	

  Amount and

  Description of

  Obligation Guaranteed

  	

   

  	

  Beneficiary

  of Guaranty

  	

   

  
	

   

  	

   

  	

   

  	

   

  	

  Principal Capital Management

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00044-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00044-of-00352.parquet"}]]