Document:

exv10w1

 

Exhibit 10.1

 

CREDIT AND SECURITY AGREEMENT

BY AND BETWEEN

HEI, INC.

AND

WELLS FARGO BANK, NATIONAL ASSOCIATION

Acting through its Wells Fargo Business Credit operating division

May 15, 2007

 

 

 

Table of Contents

	 	 	 	 	 
	 	 	Page
	 
	ARTICLE I DEFINITIONS
	 	 	1	 
	 
	 	 	 	 
	Section 1.1 Definitions
	 	 	1	 
	Section 1.2 Other Definitional Terms; Rules of Interpretation
	 	 	12	 
	 
	 	 	 	 
	ARTICLE II AMOUNT AND TERMS OF THE CREDIT FACILITY
	 	 	13	 
	 
	 	 	 	 
	Section 2.1 Revolving Advances
	 	 	13	 
	Section 2.2 Procedures for Requesting Advances
	 	 	13	 
	Section 2.3 Term Advance
	 	 	13	 
	Section 2.4 Payment of Term Note
	 	 	14	 
	Section 2.5 Interest; Minimum Interest Charge; Default Interest Rate; Application of Payments; Participations; Usury
	 	 	14	 
	Section 2.6 Fees
	 	 	15	 
	Section 2.7 Time for Interest Payments; Payment on Non-Business Days; Computation of Interest and Fees
	 	 	17	 
	Section 2.8 Lockbox and Collateral Account; Sweep of Funds
	 	 	17	 
	Section 2.9 Voluntary Prepayment; Reduction of the Maximum Line Amount; Termination of the
Credit Facility by the Borrower
	 	 	18	 
	Section 2.10 Mandatory Prepayment
	 	 	18	 
	Section 2.11 Revolving Advances to Pay Indebtedness
	 	 	18	 
	Section 2.12 Use of Proceeds
	 	 	18	 
	Section 2.13 Liability Records
	 	 	18	 
	 
	 	 	 	 
	ARTICLE III SECURITY INTEREST; OCCUPANCY; SETOFF
	 	 	19	 
	 
	 	 	 	 
	Section 3.1 Grant of Security Interest
	 	 	19	 
	Section 3.2 Notification of Account Debtors and Other Obligors
	 	 	19	 
	Section 3.3 Assignment of Insurance
	 	 	19	 
	Section 3.4 Occupancy
	 	 	20	 
	Section 3.5 License
	 	 	20	 
	Section 3.6 Financing Statement
	 	 	21	 
	Section 3.7 Setoff
	 	 	21	 
	Section 3.8 Collateral
	 	 	21	 
	 
	 	 	 	 
	ARTICLE IV CONDITIONS OF LENDING
	 	 	22	 
	 
	 	 	 	 
	Section 4.1 Conditions Precedent to the Initial Advances
	 	 	22	 
	Section 4.2 Conditions Precedent to All Advances
	 	 	24	 
	 
	 	 	 	 
	ARTICLE V REPRESENTATIONS AND WARRANTIES
	 	 	24	 
	 
	 	 	 	 
	Section 5.1 Existence and Power; Name; Chief Executive Office; Inventory and Equipment
Locations; Federal Employer Identification Number and Organizational Identification Number
	 	 	24	 

 

 

	 	 	 	 	 
	 	 	Page
	 
	Section 5.2 Capitalization
	 	 	24	 
	Section 5.3 Authorization of Borrowing; No Conflict as to Law or Agreements
	 	 	25	 
	Section 5.4 Legal Agreements
	 	 	25	 
	Section 5.5 Subsidiaries and Affiliates
	 	 	25	 
	Section 5.6 Financial Condition; No Adverse Change
	 	 	25	 
	Section 5.7 Litigation
	 	 	25	 
	Section 5.8 Regulation U
	 	 	25	 
	Section 5.9 Taxes
	 	 	26	 
	Section 5.10 Titles and Liens
	 	 	26	 
	Section 5.11 Intellectual Property Rights
	 	 	26	 
	Section 5.12 Plans
	 	 	27	 
	Section 5.13 Default
	 	 	27	 
	Section 5.14 Environmental Matters
	 	 	27	 
	Section 5.15 Submissions to the Lender
	 	 	28	 
	Section 5.16 Financing Statements
	 	 	28	 
	Section 5.17 Rights to Payment
	 	 	29	 
	 
	 	 	 	 
	ARTICLE VI COVENANTS
	 	 	29	 
	 
	 	 	 	 
	Section 6.1 Reporting Requirements
	 	 	29	 
	Section 6.2 Financial Covenants
	 	 	32	 
	Section 6.3 Permitted Liens; Financing Statements
	 	 	33	 
	Section 6.4 Indebtedness
	 	 	33	 
	Section 6.5 Guaranties
	 	 	34	 
	Section 6.6 Investments and Subsidiaries
	 	 	34	 
	Section 6.7 Dividends and Distributions
	 	 	34	 
	Section 6.8 Salaries
	 	 	35	 
	Section 6.9 Books and Records; Collateral Examination, Inspection and Appraisals
	 	 	35	 
	Section 6.10 Account Verification
	 	 	35	 
	Section 6.11 Compliance with Laws
	 	 	35	 
	Section 6.12 Payment of Taxes and Other Claims
	 	 	36	 
	Section 6.13 Maintenance of Properties
	 	 	36	 
	Section 6.14 Insurance
	 	 	37	 
	Section 6.15 Preservation of Existence
	 	 	37	 
	Section 6.16 Delivery of Instruments, etc
	 	 	37	 
	Section 6.17 Sale or Transfer of Assets; Suspension of Business Operations
	 	 	37	 
	Section 6.18 Consolidation and Merger; Asset Acquisitions
	 	 	37	 
	Section 6.19 Sale and Leaseback
	 	 	38	 
	Section 6.20 Restrictions on Nature of Business
	 	 	38	 
	Section 6.21 Accounting
	 	 	38	 
	Section 6.22 Discounts, etc.
	 	 	38	 
	Section 6.23 Plans
	 	 	38	 
	Section 6.24 Place of Business; Name
	 	 	38	 
	Section 6.25 Constituent Documents; S Corporation Status
	 	 	38	 
	Section 6.26 Performance by the Lender
	 	 	38	 
	 
	 	 	 	 
	ARTICLE VII EVENTS OF DEFAULT, RIGHTS AND REMEDIES
	 	 	39	 

ii 

 

	 	 	 	 	 
	 	 	Page
	 
	Section 7.1 Events of Default
	 	 	39	 
	Section 7.2 Rights and Remedies
	 	 	41	 
	Section 7.3 Certain Notices
	 	 	42	 
	 
	 	 	 	 
	ARTICLE VIII MISCELLANEOUS
	 	 	42	 
	 
	 	 	 	 
	Section 8.1 No Waiver; Cumulative Remedies; Compliance with Laws
	 	 	42	 
	Section 8.2 Amendments, Etc
	 	 	43	 
	Section 8.3 Notices; Communication of Confidential Information; Requests for Accounting
	 	 	43	 
	Section 8.4 Further Documents
	 	 	43	 
	Section 8.5 Costs and Expenses
	 	 	44	 
	Section 8.6 Indemnity
	 	 	44	 
	Section 8.7 Participants
	 	 	45	 
	Section 8.8 Execution in Counterparts; Telefacsimile Execution
	 	 	45	 
	Section 8.9 Retention of the Borrower’s Records
	 	 	45	 
	Section 8.10 Binding Effect; Assignment; Complete Agreement; Sharing Information
	 	 	45	 
	Section 8.11 Severability of Provisions
	 	 	46	 
	Section 8.12 Headings
	 	 	46	 
	Section 8.13 Governing Law; Jurisdiction, Venue; Waiver of Jury Trial
	 	 	46	 
	Section 8.14 Attorneys’ Fees
	 	 	46	 

iii 

 

CREDIT AND SECURITY AGREEMENT

Dated as of May 15, 2007

     HEI, Inc., a Minnesota corporation (the “Borrower”), and WELLS FARGO BANK, NATIONAL
ASSOCIATION (as more fully defined in Article I herein, the “Lender”) acting through its Wells
Fargo Business Credit operating division, hereby agree as follows:

ARTICLE I

DEFINITIONS

     Section 1.1 Definitions. Except as otherwise expressly provided in this Agreement,
the following terms shall have the meanings given them in this Section:

     “Accounts” shall have the meaning given it under the UCC.

     “Accounts Advance Rate” means up to eighty-five percent (85%), or such lesser rate as
the Lender in its sole discretion may deem appropriate from time to time; provided that, as of the
date of each quarterly audit, the Accounts Advance Rate shall be reduced by one (1) percentage
point for each percentage by which Dilution is in excess of three percent (3.0%).

     “Advance” means a Revolving Advance.

     “Affiliate” or “Affiliates” means any other Person controlled by, controlling
or under common control with the Borrower, including any Subsidiary of the Borrower. For purposes
of this definition, “control,” when used with respect to any specified Person, means the power to
direct the management and policies of such Person, directly or indirectly, whether through the
ownership of voting securities, by contract or otherwise.

     “Agreement” means this Credit and Security Agreement.

     “Availability” means the amount, if any, by which the Borrowing Base exceeds the sum
of the outstanding principal balance of the Revolving Note.

     “Bond Advance Rate” means up to fifty percent (50%), or such lesser rate as the Lender
in its sole discretion may deem appropriate from time to time.

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

     (a) The Maximum Line Amount less the Ex-Im Amount; or

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

     (i) The product of the Accounts Advance Rate times Eligible Accounts, plus

     (ii) The lesser of (A) the product of the Inventory Advance Rate times Eligible
Inventory or (B) $750,000.00, less

     (iii) The product of the Bonds Advance Rate times Eligible marketable Bonds, less

 

 

     (iv) The Borrowing Base Reserve, less

     (v) The Ex-Im Reserve, less

     (vi) Indebtedness that the Borrower owes to the Lender that has not yet been advanced
on the Revolving Note and the dollar amount that the Lender in its reasonable discretion
then determines to be a reasonable determination of the Borrower’s credit exposure with
respect to any swap, derivative, foreign exchange, hedge, deposit, treasury management or
other similar transaction or arrangement offered to the Borrower by the Lender that is not
described in Article II of this Agreement and any indebtedness owed by the Borrower to Wells
Fargo Merchant Services, L.L.C.

     “Borrowing Base Reserve” means, as of any date of determination, such amounts
(expressed as either a specified amount or as a percentage of a specified category or item) as the
Lender may from time to time establish and adjust in reducing Availability (a) to reflect events,
conditions, contingencies or risks which, as determined by the Lender, do or may affect (i) the
Collateral or its value, (ii) the assets, business or prospects of the Borrower, or (iii) the
security interests and other rights of the Lender in the Collateral (including the enforceability,
perfection and priority thereof), or (b) to reflect the Lender’s judgment that any collateral
report or financial information furnished by or on behalf of the Borrower to the Lender is or may
have been incomplete, inaccurate or misleading in any material respect, or (c) in respect of any
state of facts that the Lender determines constitutes a Default or an Event of Default.

     “Business Day” means a day on which the Federal Reserve Bank of New York is open for
business.

     “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.

     “Collateral” means all of the Borrower’s Accounts, chattel paper and electronic
chattel paper, deposit accounts, documents, Machinery, Equipment, General Intangibles, goods,
instruments, Intellectual Property Rights, 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) proceeds of any and all of the foregoing; (viii) books and records of the Borrower,
including all mail or electronic mail addressed to the Borrower; and (ix) all of the foregoing,
whether now owned or existing or hereafter acquired or arising or in which the Borrower now has or
hereafter acquires any rights.

     “Collateral Account” means the “Lender Account” as defined in the Wholesale Lockbox
and Collection Account Agreement.

2

 

     “Commitment” means the Lender’s commitment to make Advances to the Borrower.

     “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.

     “Control Agreement” means the Notice to Securities Intermediary and Control Agreement
executed by Thomas F. Leahy, the Lender and Wells Fargo Investments, LLC, as securities
intermediary, and dated the date hereof, in the form required by the Lender, as the same may be
amended, restated or otherwise modified from time to time.

     “Credit Facility” means the credit facility under which Revolving Advances may be made
available to the Borrower by the Lender under Article II.

     “Cut-off Time” means 12:00 p.m. Minneapolis, Minnesota time or 11:00 a.m. Minneapolis
time on the last business day of each month.

     “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.

     “Debt Service Coverage Ratio” means (i) the sum of (A) Funds from Operations and (B)
Interest Expense minus (C) unfinanced Capital Expenditures divided by (ii) the sum of (A) Current
Maturities of Long Term Debt and (B) Interest Expense.

     “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 day a Default or Event of
Default occurs and ending on the date identified by the Lender in writing as the date that such
Default or Event of Default has been cured or waived.

     “Default Rate” means an annual interest rate in effect during a Default Period or
following the Termination Date, which interest rate shall be equal to three percent (3%) over the
applicable Floating Rate, as such rate may change from time to time.

     “Dilution” means, as of any date of determination, a percentage, based upon the
experience of the trailing six (6) month period ending on the date of determination, which is the
result of dividing (a) actual bad debt write-downs, discounts, advertising allowances, credits, or
other dilutive items with respect to the Accounts as determined by the Lender in its sole
discretion during such period, by (b) the Borrower’s net sales during such period (excluding
extraordinary items) plus the amount of subclause (a).

3

 

     “Director” means a director if the Borrower is a corporation, a governor or manager if
the Borrower is a limited liability company, or a general partner if the Borrower is a partnership.

     “Earnings Before Taxes” means pretax earnings from operations, excluding extraordinary
gains, but including extraordinary losses.

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

     (i) That portion of Accounts unpaid 60 days or more after the due date or more than 120
days past invoice date;

     (ii) That portion of Accounts related to goods or services with respect to which the
Borrower has received notice of a claim or dispute, which are subject to a claim of offset
or a contra account, or which reflect a reasonable reserve for warranty claims or returns;

     (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) 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 denominated in any currency other than United States dollars;

     (vii) Accounts owed by an account debtor located outside the United States which are
not (A) backed by a bank letter of credit naming the Lender as beneficiary or assigned to
the Lender, in the Lender’s possession or control, and with respect to which a control
agreement concerning the letter-of-credit rights is in effect, and acceptable to the Lender
in all respects, in its sole discretion, or (B) covered by a foreign receivables insurance
policy acceptable to the Lender in its sole discretion;

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

4

 

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

     (x) Accounts not subject to a duly perfected security interest in the Lender’s favor or
which are subject to any Lien in favor of any Person other than the Lender;

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

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

     (xiii) Accounts owed by an account debtor, regardless of whether otherwise eligible, to
the extent that the aggregate balance of such Accounts exceeds fifteen percent (15%) (but in
the case of Irvine Biomedical and Valley Lab, 20%) of the aggregate amount of Eligible
Accounts;

     (xiv) Accounts owed by an account debtor, regardless of whether otherwise eligible, if
twenty-five percent (25%) or more of the total amount of Accounts due from such debtor is
ineligible under clauses (i), (ii), or (xi) above;

     (xv) Accounts that represent milestone or progress billings;

     (xvi) Accounts, or portions thereof, otherwise deemed ineligible by the Lender in its
sole discretion; and

     (xvii) That portion of Accounts consisting of Ex-Im Accounts.

     “Eligible Equipment” means that Equipment of the Borrower designated by the Lender as
eligible from time to time in its sole discretion.

     “Eligible Finished Goods” means Finished Goods of the Borrower designated by the
Lender as eligible from time to time.

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

     (i) Inventory that is in-transit; located at any warehouse, job site or other premises
not approved by the Lender in writing; not subject to a duly perfected first priority
security interest in the Lender’s favor; covered by any negotiable or non-negotiable
warehouse receipt, bill of lading or other document of title; on consignment from any
Person; on consignment to any Person or subject to any bailment unless such consignee or
bailee has executed an agreement with the Lender;

     (ii) Supplies, packaging, parts or sample Inventory, or customer supplied parts or
Inventory;

5

 

     (iii) Work-in-process Inventory;

     (iv) Fabricated Parts Inventory;

     (v) Inventory that is damaged, defective, obsolete, slow moving or not currently
saleable in the normal course of the Borrower’s operations, or the amount of such Inventory
that has been reduced by shrinkage;

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

     (vii) Inventory that is perishable or live;

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

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

     (x) Inventory stored at locations in amounts less than $100,000.00;

     (xi) Inventory otherwise deemed ineligible by the Lender in its sole discretion; and

     (xii) Inventory consisting of routers and drill bits.

     “Eligible Marketable Bonds” means bonds (a) owned on a fully-paid basis by Thomas F.
Leahy, (b) carried in the Securities Account, (c) properly classified as “current assets” according
to GAAP and (d) of a type agreed to by the Bank in its sole discretion.

     “Eligible Raw Materials” means Raw Materials of the Borrower designated by the Lender
as eligible from time to time.

     “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” shall have the meaning given it under the UCC.

     “ERISA” means the Employee Retirement Income Security Act of 1974, as amended from
time to time.

     “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.

     “Event of Default” is defined in Section 7.1.

6

 

     “Ex-Im Accounts” means “Eligible Export-Related Accounts Receivable” as defined in the
Ex-Im Agreement.

     “Ex-Im Agreement” means the Credit and Security Agreement for the Export-Import Bank
Guaranteed Credit Facility by and between the Borrower and Lender dated as of May 15, 2007.

     “Ex-Im Amount” means the sum of the outstanding principal balance of the “Notes” (as
defined in the Ex-Im Agreement).

     “Ex-Im Borrowing Base” means the “Borrowing Base” as defined in the Ex-Im Agreement.

     “Ex-Im Credit Facility” means the “Credit Facility” as defined in the Ex-Im Agreement.

     “Ex-Im Documents” means the “Loan Documents” as defined in the Ex-Im Agreement.

     “Ex-Im Inventory” means “Eligible Export-Related Inventory” as defined in the Ex-Im
Agreement.

     “Ex-Im Reserve” means ten percent (10%) of any amount outstanding under the Ex-Im
Credit Facility, which amount may be increased or decreased from time to time as determined by the
Lender in its sole discretion.

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

     “Floating Rate” means, (i) with respect to Revolving Advances evidenced by the
Revolving Note, an annual interest rate equal to the sum of the Prime Rate plus two percent (2.0%),
and (ii) with respect to Term Advances evidenced by the Term Note, an annual interest rate equal to
the sum of the Prime Rate plus two and one quarter percent (2.25%), which interest rate shall
change when and as the Prime Rate changes.

     “Floating Rate Advance” means an Advance bearing interest at the Floating Rate.

     “Funding Date” is defined in Section 2.1.

     “Funds from Operations” means for a given period, the sum of (i) Net Income, (ii)
depreciation and amortization, (iii) any increase (or decrease) in deferred income taxes, (iv) any
increase (or decrease) in lifo reserves, and (v) other non-cash items, each as determined for such
period in accordance with GAAP.

     “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” shall have the meaning given it under the UCC.

     “Guarantor” means Thomas F. Leahy or any other person who executes a Guaranty in favor
of the Lender.

7

 

     “Guaranty” means each unconditional guaranty executed by a Guarantor in favor of the
Lender.

     “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.

     “Indebtedness” is used herein in its most comprehensive sense and means any and all
advances, debts, obligations and liabilities of the Borrower to the Lender, heretofore, now or
hereafter made, incurred or created, whether voluntary or involuntary and however arising, whether
due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined,
including under any swap, derivative, foreign exchange, hedge, deposit, treasury management or
other similar transaction or arrangement at any time entered into by the Borrower with the Lender
or with Wells Fargo Merchant Services, L.L.C., and whether the Borrower may be liable individually
or jointly with others, or whether recovery upon such Indebtedness may be or hereafter becomes
unenforceable.

     “Indemnified Liabilities” is defined in Section 8.6.

     “Indemnitees” is defined in Section 8.6.

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

     “Insolvency Event” is defined in Section 7.1(e).

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

     “Intellectual Property Rights” means all actual or prospective rights arising in
connection with any intellectual property or other proprietary rights, including all rights arising
in connection with copyrights, patents, service marks, trade dress, trade secrets, trademarks,
trade names or mask works.

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

     “Interest Payment Date” is defined in Section 2.7(a).

8

 

     “Inventory” shall have the meaning given it under the UCC but for purposes of this
Agreement shall include Raw Materials and Finished Goods.

     “Inventory Advance Rate” means fifteen percent (15%) of Eligible Raw Materials or
Eligible Finished Goods, not to exceed $750,000 (“Inventory Cap”), or such lesser rate or amount as
the Lender in its sole discretion may deem appropriate from time to time.

     “Investment Property” shall have the meaning given it under the UCC.

     “IRC” means the Internal Revenue Code of 1986, as amended from time to time.

     “Leahy Pledge Agreement” means the Collateral Pledge Agreement executed by Thomas F.
Leahy in favor of the Lender and dated the date hereof, as the same may be amended, restated or
otherwise modified from time to time.

     “Lender” means Wells Fargo Bank, National Association in its broadest and most
comprehensive sense as a legal entity, and is not limited in its meaning to the Lender’s Wells
Fargo Business Credit operating division, or to any other operating division of the Lender.

     “Licensed Intellectual Property” is defined 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
subsequently acquired and whether arising by agreement or operation of law.

     “Loan Documents” means this Agreement, the Revolving Note, the Term Note, each
Subordination Agreement, and the Security Documents, together with every other agreement, note,
document, contract or instrument to which the Borrower now or in the future may be a party and
which is required by the Lender.

     “Loan Year” is defined in Section 2.5(b).

     “Lockbox” means “Lockbox” as defined in the Wholesale Lockbox and Collection
Account Agreement.

     “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
Indebtedness 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

9

 

status, existence, perfection, priority (subject to Permitted Liens) or enforceability
of any Lien securing payment or performance of the Indebtedness; 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
$100,000 or would result in the occurrence of an event described in clauses (i), (ii) and
(iii) above.

     “Maturity Date” means, with respect to the Credit Facility, May 15, 200___.

     “Maximum Line Amount” means $8,000,000, unless this amount is reduced pursuant to
Section 2.9, in which event it means such lower amount.

     “Minimum Interest Charge” is defined in Section 2.5(b).

     “Mortgagee’s Disclaimer and Consent” means that agreement dated May 15, 2007 executed
by Commerce Bank in favor of the Lender.

     “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 Forced Liquidation Value” means a professional opinion of the estimated most
probable Net Cash Proceeds which could typically be realized at a properly advertised and conducted
public auction sale without reserve, held under forced sale conditions and under economic trends
current within 60 days of the appraisal. The opinion may consider physical location, difficulty of
removal, adaptability, specialization, marketability, physical condition, overall appearance and
psychological appeal.

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

     “OFAC” is defined in Section 6.11(c).

     “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.

     “Overadvance” means the amount, if any, by which the outstanding principal balance of
the Revolving Note is in excess of the then-existing Borrowing Base.

     “Owned Intellectual Property” is defined 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 each Patent and Trademark Security
Agreement now or hereafter executed by the Borrower in favor of the Lender.

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     “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” and “Permitted Liens” are defined in Section 6.3(a).

     “Person” means any individual, corporation, partnership, joint venture, limited
liability company, association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.

     “Plan” means an employee benefit plan (as defined in Section 3(3) of ERISA) maintained
for employees of the Borrower or any ERISA Affiliate.

     “Premises” means all locations where the Borrower conducts its business or has any
rights of possession, including the locations legally described in Exhibit D attached hereto.

     “Prime Rate” means at any time the rate of interest most recently announced by the
Lender at its principal office as its Prime Rate, with the understanding that the Prime Rate is one
of the Lender’s base rates, and serves as the basis upon which effective rates of interest are
calculated for those loans making reference thereto, and is evidenced by the recording thereof in
such internal publication or publications as the Lender may designate. Each change in the rate of
interest shall become effective on the date each Prime Rate change is announced by the Lender.

     “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” is defined 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, as same may be renewed and amended
from time to time, and all replacements thereto.

     “Securities Account” means the securities account numbered 6436-2579 maintained by
Wells Fargo Investments, LLC on behalf of Thomas F. Leahy.

     “Security Documents” means this Agreement, the Wholesale Lockbox and Collection
Account Agreement, the Patent and Trademark Security Agreement(s),each Guaranty, the Leahy Pledge
Agreement, the Control Agreement and any other document delivered to the Lender from time to time
to secure the Indebtedness.

     “Security Interest” is defined in Section 3.1.

     “Subordinated Creditor” means each Person now or in the future who agrees to
subordinate indebtedness of the Borrower held by that Person to the payment of the Indebtedness.

     “Subsidiary” means any Person of which more than fifty percent (50%) of the
outstanding ownership interests having general voting power under ordinary circumstances to

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elect a majority of the board of directors or the equivalent of such Person, regardless of
whether or not at the time ownership interests of any other class or classes shall have or might
have voting power by reason of the happening of any contingency, is at the time directly or
indirectly owned by the Borrower, by the Borrower and one or more other Subsidiaries, or by one or
more other Subsidiaries.

     “Term Advance” is defined in Section 2.3.

     “Term Note” means the Borrower’s Equipment promissory note, payable to the order of
the Lender in substantially the form of Exhibit B hereto, in an amount up to $340,000 but not
exceeding 100% of the net forced sale liquidation value of equipment as same may be renewed and
amended from time to time, and all replacements thereto.

     “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
Indebtedness, following an Event of Default, pursuant to Section 7.2.

     “Trademark Security Agreement” means each Trademark Security Agreement now or
hereafter executed by the Borrower in favor of the Lender.

     “UCC” means the Uniform Commercial Code in effect in the state designated in this
Agreement 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 of this Agreement.

     “Unused Amount” is defined in Section 2.6(b).

     “Wholesale Lockbox and Collection Account Agreement” means the Wholesale Lockbox and
Collection Account Agreement by and between the Borrower and the Lender, dated the same date as
this Agreement.

     Section 1.2 Other Definitional Terms; Rules of Interpretation. The words “hereof”,
“herein” and “hereunder” and words of similar import when used in this Agreement shall refer to
this Agreement as a whole and not to any particular provision of this Agreement. All accounting
terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP. All
terms defined in the UCC and not otherwise defined herein have the meanings assigned to them in the
UCC. References to Articles, Sections, subsections, Exhibits, Schedules and the like, are to
Articles, Sections and subsections of, or Exhibits or Schedules 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

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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, subject to the terms and
conditions of this Agreement, to make advances (“Revolving Advances”) to the Borrower from time to
time from the date that all of the conditions set forth in Section 4.1 are satisfied (the “Funding
Date”) to and until (but not including) the Termination Date in an amount not in excess of the
Maximum Line Amount less the Ex-Im Amount and as to Raw Materials and Finished Goods Inventory, not
in excess of the Inventory Cap. The Lender shall have no obligation to make a Revolving Advance to
the extent that 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 2.9, 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 the
Cut-off Time on the Business Day on which the Advance is to be made. Each request that conforms to
the terms of this Agreement shall be effective upon receipt by the Lender, shall be in writing or
by telephone, and shall be confirmed in writing by the Borrower if so requested by the Lender, 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.

          (b) Disbursement. Upon fulfillment of the applicable conditions set forth in Article
IV, the Lender shall disburse the proceeds of the requested Advance by crediting the same to the
Borrower’s demand deposit account maintained with the Lender unless the Lender and the Borrower
shall agree in writing to another manner of disbursement.

     Section 2.3 Term Advance.

     (a) The Lender agrees, subject to the terms and
conditions of this Agreement, to make a single advance to the Borrower on the Funding Date
(the “Term Advance”) in an amount not exceeding the lesser of $340,000 or one hundred
percent (100%) of the Net Forced Liquidation Value of the Borrower’s Eligible Equipment.
The Borrower’s obligation to pay the Term Advance shall be evidenced by the Term Note and
shall be secured by the Collateral as provided in Article III.

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     (b) Upon fulfillment of the applicable conditions set forth in Article IV, the Lender
shall deposit the proceeds of the requested Term Advance by crediting the same
to the Borrower’s demand deposit account specified in Section 2.2(b) unless the Lender
and the Borrower shall agree in writing to another manner of disbursement.

     Section 2.4 Payment of Term Note. The outstanding principal balance of the Term Note
shall be due and payable as follows:

     (a) In equal monthly installments of $5,666.67, beginning on June 1, 2007, and on the
first day of each month thereafter, in 60 equal monthly installments sufficient to fully
amortize the principal balance of the Term Note with the balance due and payable in full on
the Maturity Date.

     (b) If the Lender at any time obtains an appraisal of the Equipment as permitted under
Section 6.9(d) herein, and the appraisal shows the aggregate outstanding principal balance
of the Term Note to exceed Net Forced Liquidation Value of Eligible Equipment, then the
Borrower, upon demand by the Lender, shall make additional monthly principal payments in an
amount equal to the amount of such excess divided by 60 months, together with any prepayment
fee.

     (c) All prepayments of principal with respect to the Term Note shall be applied to the
most remote principal installment or installments then unpaid.

     (d) On the Termination Date of the Credit Facility, the entire unpaid principal balance
of the Term Note and all unpaid interest accrued thereon shall also be fully due and
payable.

     Section 2.5 Interest; Minimum Interest Charge; Default Interest Rate; Application of
Payments; Participations; Usury.

          (a) Interest. Except as provided in Section 2.5(c), the principal amount of each
Advance shall bear interest as a Floating Rate Advance.

          (b) Minimum Interest Charge. Notwithstanding any other terms of this Agreement to the
contrary, the Borrower shall pay to the Lender interest of not less than $150,000 per “Loan Year,”
paid quarterly, (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 Section 2.5(a) on the first day of each quarter following the Funding Date and
each anniversary of the Funding Date and on the Termination Date. “Loan Year” means each one year
period ending on the anniversary of the Funding Date. When calculating this deficiency, the
Default Rate, if applicable, shall be disregarded, and any interest that accrues on a payment
following its receipt on those days specified in Section 2.5(d) shall be excluded in determining
the total amount of interest otherwise calculated under Section 2.5(a).

          (c) Default Interest Rate. At any time during any Default Period or following the
Termination Date, in the Lender’s sole discretion and without waiving any of its other rights or
remedies, the principal of the Revolving Note and the Term Note shall bear interest at the

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Default
Rate or such lesser rate as the Lender may determine, effective as of the date the Event of Default
occurs through the last day of such Default Period, or any shorter time period that the Lender may
determine. The decision of the Lender to impose a rate that is less
than the Default
Rate or to not impose the Default Rate for the entire duration of the Default Period shall be
made by the Lender in its sole discretion and shall not be a waiver of any of its other rights and
remedies, including its right to retroactively impose the full Default Rate for the entirety of any
such Default Period or following the Termination Date.

          (d) Application of Payments. Payments shall be applied to the Indebtedness on the
Business Day of receipt by the Lender in the Lender’s general account, but the amount of principal
paid shall continue to accrue interest at the interest rate applicable under the terms of this
Agreement from the calendar day the Lender receives the payment, and continuing through the end of
the first Business Day following receipt of the payment.

          (e) Participations. If any Person shall acquire a participation in the Advances or
the Obligation of Reimbursement, the Borrower shall be obligated to the Lender to pay the full
amount of all interest calculated under this Section 2.5, 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 that calculated under this Section 2.5, or
otherwise elects to accept less than its prorata share of such fees, charges and other amounts due
under this Agreement.

          (f) Usury. In any event no rate change shall be put into effect which would result in
a rate greater than the highest rate permitted by law. Notwithstanding anything to the contrary
contained in any Loan Document, all agreements which either now are or which shall become
agreements between the Borrower and the Lender are hereby limited so that in no contingency or
event whatsoever shall the total liability for payments in the nature of interest, additional
interest and other charges exceed the applicable limits imposed by any applicable usury laws. If
any payments in the nature of interest, additional interest and other charges made under any Loan
Document are held to be in excess of the limits imposed by any applicable usury laws, it is agreed
that any such amount held to be in excess shall be considered payment of principal hereunder, and
the indebtedness evidenced hereby shall be reduced by such amount so that the total liability for
payments in the nature of interest, additional interest and other charges shall not exceed the
applicable limits imposed by any applicable usury laws, in compliance with the desires of the
Borrower and the Lender. This provision shall never be superseded or waived and shall control
every other provision of the Loan Documents and all agreements between the Borrower and the Lender,
or their successors and assigns.

     Section 2.6 Fees.

          (a) Closing Fee. The Borrower shall pay the Lender a fully earned and non-refundable
origination fee of $20,000.00, due and payable upon the execution of this Agreement.

          (b) Unused Line Fee. For the purposes of this Section 2.6(b), “Unused Amount” means
the Maximum Line Amount reduced by outstanding Revolving Advances. The Borrower agrees to pay to
the Lender an unused line fee at the rate of one quarter of one percent (0.25%) per annum on the
average daily Unused Amount from the date of this Agreement to and

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

          (c) Collateral Exam Fees. The Borrower shall pay the Lender fees in connection with
any collateral exams, audits or inspections conducted by or on behalf of 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 collateral exam fees which fees are currently $850 per eight hour day per
collateral examiner plus actual out of pocket expenses. Collateral exam fees will include a
pre-loan survey as well as Collateral exams thereafter. Collateral exams are typically performed
on a quarterly basis, but the Lender reserves the right to perform Collateral exams at any time in
its sole discretion.

          (d) Termination and Line Reduction Fees. If (i) the Lender terminates the Credit
Facility during a Default Period, or if (ii) the Borrower terminates or reduces the Credit Facility
on a date prior to the Maturity Date, then the Borrower shall pay the Lender as liquidated damages
and not as a penalty a termination fee in an amount equal to a percentage of the Maximum Line
Amount (or the reduction of the Maximum Line Amount, as the case may be) calculated 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.

          (e) Waiver of Termination and Prepayment Fees. The Borrower will be excused from the
payment of termination and prepayment fees otherwise due under this Agreement if such termination
or prepayment is made because of refinancing through another one of the Lender’s operating
divisions more than eighteen (18) months after the Funding Date.

          (f) Overadvance Fees. The Borrower shall pay an Overadvance fee in the amount of
$500.00 for each day or portion thereof during which an Overadvance exists, regardless of how the
Overadvance arises or whether or not the Overadvance has been agreed to in advance by the Lender.
The acceptance of payment of an Overadvance fee by the Lender shall not be deemed to constitute
either consent to the Overadvance or a waiver of the resulting Event of Default, unless the Lender
specifically consents to the Overadvance in writing and waives the Event of Default on whatever
conditions the Lender deems appropriate.

          (g) Ex-Im Fees. The Borrower shall pay the Lender, on demand, all fees due and
payable from time to time under the Ex-Im Documents.

          (h) Other Fees and Charges. The Lender may from time to time impose additional fees
and charges as consideration for Advances made in excess of Availability or for other events that
constitute an Event of Default or a Default hereunder, including fees and charges for the
administration of Collateral by the Lender, and fees and charges for the late delivery of reports,
which may be assessed in the Lender’s sole discretion on either an hourly, periodic, or flat fee
basis, and in lieu of or in addition to imposing interest at the Default Rate. Borrower shall also
be responsible for all out of pocket expenses in connection with the contemplated financing
including without limitation legal fees and expenses, closing costs,

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appraisal fees, UCC search and
recording fees, costs for individual corporate credit reports, mortgage recording fees, fees to
initiate electronic reporting, as well as collateral examination costs. Such costs are to be
funded by Borrower and shall survive.

     Section 2.7 Time for Interest Payments; Payment on Non-Business Days; Computation of
Interest and Fees.

          (a) Time For Interest Payments. Accrued and unpaid interest shall be due and payable
on the first day of each month and on the Termination Date (each an “Interest Payment Date”), or if
any such day is not a Business Day, on the next succeeding Business Day. Interest will accrue from
the most recent date to which interest has been paid or, if no interest has been paid, from the
date of advance to the Interest Payment Date. If an Interest Payment Date is not a Business Day,
payment shall be made on the next succeeding Business Day.

          (b) Payment on Non Business Days. Whenever any payment to be made hereunder shall be
stated to be due on a day which is not a Business Day, such payment may be made on the next
succeeding Business 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 2.8 Lockbox and Collateral Account; Sweep of Funds.

     (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 into the
Collateral Account. The Borrower shall also deposit all other cash proceeds of
Collateral regardless of source or nature directly into the Collateral Account.
Until so deposited, the Borrower shall hold all such payments and cash proceeds in
trust for and as the property of the Lender and shall not commingle such property
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
Indebtedness.

     (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.

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          (b) Sweep of Funds. The Lender shall from time to time, in accordance with the
Wholesale Lockbox and Collection Account Agreement, cause funds in the Collateral Account to be
transferred to the Lender’s general account for payment of the Indebtedness. Amounts deposited in
the Collateral Account shall not be subject to withdrawal by the Borrower, except after payment in
full and discharge of all Indebtedness.

     Section 2.9 Voluntary Prepayment; Reduction of the Maximum Line Amount; 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 Amount at any time if it (i) gives the Lender at least
90 days advance written notice prior to the proposed Termination Date, and (ii) pays the Lender
applicable termination and Maximum Line Amount reduction fees in accordance with the terms of this
Agreement. Any reduction in the Maximum Line Amount shall be in multiples of $100,000, and with a
minimum reduction of at least $500,000. If the Borrower terminates the Credit Facility or reduces
the Maximum Line Amount to zero, all Indebtedness shall be immediately due and payable, and if the
Borrower gives the Lender less than the required 90 days advance written notice, then the interest
rate applicable to borrowings evidenced by the Revolving Note shall be the Default Rate for the
period of time commencing 90 days prior to the proposed Termination Date through the date that the
Lender actually receives such written notice. If the Borrower does not wish the Lender to consider
renewal of the Credit Facility on the next Maturity Date, then the Borrower shall give the Lender
at least 90 days written notice prior to the Maturity Date that it will not be requesting renewal.
If the Borrower fails to give the Lender such timely notice, then the interest rate applicable to
borrowings evidenced by the Revolving Note shall be the Default Rate for the period of time
commencing 90 days prior to the Maturity Date through the date that the Lender actually receives
such written notice.

     Section 2.10 Mandatory Prepayment. Without notice or demand, if the sum of the
outstanding principal balance of the Revolving Advances shall at any time exceed the Borrowing
Base, the Borrower shall immediately prepay the Revolving Advances to the extent necessary to
eliminate such excess. Any prepayment received by the Lender under this Agreement may be applied
to the Indebtedness, in such order and in such amounts as the Lender in its sole discretion may
determine from time to time.

     Section 2.11 Revolving Advances to Pay Indebtedness. Notwithstanding the terms of
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, and
so long as this does not create an overadvance, make a Revolving Advance in an amount equal to the
portion of the Indebtedness from time to time due and payable, and may deliver the proceeds of any
such Revolving Advance to Wells Fargo Merchant Services, L.L.C. in satisfaction of any unpaid
obligations due to Wells Fargo Merchant Services, L.L.C.

     Section 2.12 Use of Proceeds. The Borrower shall use the proceeds of Advances for
ordinary working capital purposes, and to repay debts to Commerce Bank and Thomas F. Leahy.

     Section 2.13 Liability Records. The Lender may maintain from time to time, at its
discretion, records as to the Indebtedness. All entries made on any such record shall be

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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 Indebtedness 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, for the benefit of itself and as agent for Wells Fargo Merchant Services,
L.L.C., a lien and security interest (collectively referred to as the “Security Interest”) in the
Collateral, as security for the payment and performance of: (a) all present and future Indebtedness
of the Borrower to the Lender; (b) all obligations of the Borrower and rights of the Lender under
this Agreement; and (c) all present and future obligations of the Borrower to the Lender of other
kinds. Upon request by the Lender, the Borrower will grant to the Lender, for the benefit of itself
and as agent for Wells Fargo Merchant Services, L.L.C., a security interest in all commercial tort
claims that the Borrower may have against any Person. In addition, the Borrower to further secure
all such Indebtedness shall execute a Mortgage of $1,000,000 on property in Victoria, Minnesota.

     Section 3.2 Notification of Account Debtors and Other Obligors. The Lender may at any
time after an Event of Default, 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, 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. The Lender may, in
the Lender’s name or in the Borrower’s name, as the Borrower’s agent and attorney-in-fact, notify
the United States Postal Service to change the address for delivery of the Borrower’s mail to any
address designated by the Lender, otherwise intercept the Borrower’s mail, and receive, open and
dispose of the Borrower’s mail, applying all Collateral as permitted under this Agreement and
holding all other mail for the Borrower’s account or forwarding such mail to the Borrower’s last
known address.

     Section 3.3 Assignment of Insurance. Except for insurance obtained or pledged to a
Landlord covering leased premises, as additional security for the payment and performance of the
Indebtedness, 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

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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. Any
monies received as payment for any loss under any insurance policy mentioned above (other than
liability insurance policies) or as payment of any award or compensation for condemnation or taking
by eminent domain, shall be paid over to the Lender to be applied, at the option of the Lender,
either to the prepayment of the Indebtedness or shall be
disbursed to the Borrower under staged payment terms reasonably satisfactory to the Lender for
application to the cost of repairs, replacements, or restorations. Any such repairs, replacements,
or restorations shall be effected with reasonable promptness and shall be of a value at least equal
to the value of the items or property destroyed prior to such damage or destruction.

     Section 3.4 Occupancy.

     (a) To the greatest extent possible under existing or future leases and consistent with
any Landlord Waivers and Mortgagee Disclaimers, but subject to the mortgage of Commerce
Bank, the Borrower hereby irrevocably grants to the Lender the right to take exclusive
possession of the Premises at any time during a Default Period without notice or consent.

     (b) The Lender may use the Premises only to hold, process, manufacture, sell, use,
store, liquidate, realize upon or otherwise dispose of items 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 Indebtedness and termination of the Credit
Facility, and (ii) final sale or disposition of all items constituting Collateral and
delivery of all such items 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 reasonable exercise
of quality control; and (b) selling, leasing or otherwise disposing of any or all Collateral during
any Default Period.

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     Section 3.6 Financing Statement. The Borrower authorizes the Lender to file from time
to time, such financing statements against collateral described as “all personal property” or “all
assets” or describing specific items of collateral including commercial tort claims as the Lender
deems necessary or useful to perfect the Security Interest. All financing statements filed before
the date hereof to perfect the Security Interest were authorized by the Borrower and are
hereby re-authorized. 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 Borrower represents and warrants that the following information is true and
correct:

Name and address of Debtor:

HEI, Inc.

1495 Steiger Lake Lane

Victoria, Minnesota 55386

Federal Employer Identification No. 41-0944876

Organizational Identification No. MN 1P-877

Name and address of Secured Party:

Wells Fargo Bank, National Association

MAC N9312-040

Sixth and Marquette

Minneapolis, Minnesota 55479

     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 Indebtedness, whether or not due. In
addition, each other Person holding a participating interest in any Indebtedness 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 Indebtedness.

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ARTICLE IV

CONDITIONS OF LENDING

     Section 4.1 Conditions Precedent to the Initial Advances. The Lender’s obligation to
make the initial Advances shall be subject to the condition precedent that the Lender shall have
received all of the following, each properly executed by the appropriate party and in form and
substance satisfactory to the Lender:

     (a) This Agreement.

     (b) The Revolving Note and the Term Note.

     (c) The Ex-Im Documents.

     (d) 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.

     (e) 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.

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

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

     (h) An acknowledgment and agreement from SAP as licensor and any other licensor in
favor of the Lender, together with a true, correct and complete copy of any such license
agreements, except the expired Syteline License.

     (i) The Wholesale Lockbox and Collection Account Agreement.

     (j) Control agreements with each bank at which the Borrower maintains deposit accounts.

     (k) The Patent and Trademark Security Agreement.

     (l) The Mortgagee’s Disclaimer and Consent.

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     (m) 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.

     (n) 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.

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

     (p) 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.

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

     (r) 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.

     (s) Payment of all fees due under the terms of this Agreement through the date of the
initial Advance, the Term Advance, and payment of all expenses incurred by the Lender
through such date and that are required to be paid by the Borrower under this Agreement.

     (t) Evidence that after making the initial Revolving Advance, satisfying all
obligations owed to the Borrower’s prior lender, satisfying all trade payables older than 60
days from invoice date, book overdrafts and closing costs, Availability shall be not less
than $1,750,000.

     (u) A Customer Identification Information form and such other forms and verification as
the Lender may need to comply with the U.S.A. Patriot Act.

     (v) The Guaranty of Thomas F. Leahy.

     (w) The Leahy Pledge Agreement.

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     (x) The Control Agreement.

     (y) With respect to the real estate that is encumbered by the mortgage of the Lender
(i) a flood hazard determination form, confirming whether or not the parcel is in a flood
hazard area and whether or not flood insurance must be obtained, and, if the real estate is
located in a flood hazard area, (ii) a policy of flood insurance.

     (z) The Securities Account shall have been established.

     (aa) Such other documents as the Lender in its sole discretion may require.

     (bb) All conditions set forth in Section 4 of the Ex-Im Agreement shall have been
effectively completed (unless such conditions have been waived by the Lender).

     Section 4.2 Conditions Precedent to All Advances. The Lender’s obligation to make
each Advance 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 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 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 and Organizational Identification Number.
The Borrower is a corporation, duly organized, validly existing and in good standing under the laws
of the State of Minnesota and is duly licensed or qualified to transact business in all
jurisdictions where the character of the property owned or leased or the nature of the business
transacted by it makes such licensing or qualification necessary. The Borrower has all requisite
power and authority to conduct its business, to own its properties and to execute and deliver, and
to perform all of its obligations under, the Loan Documents. During its existence, the Borrower
has done business solely under the names set forth in Schedule 5.1. The Borrower’s chief executive
office and principal place of business is located at the address 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.
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 and organization
identification number are 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.

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     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 and Affiliates. Except as set forth in Schedule 5.5 hereto,
the Borrower has no Subsidiaries and no Affiliates.

     Section 5.6 Financial Condition; No Adverse Change. The Borrower has furnished to the
Lender its audited financial statements for its fiscal year ended September 2, 2006 and unaudited
financial statements for the fiscal-year-to-date period ended March 31, 2007, 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 GAAP.
Since the date of the most recent financial statements, there has been no material adverse change
in the Borrower’s business, properties or condition (financial or otherwise) which has had a
Material Adverse Effect.

     Section 5.7 Litigation. Except as set forth in Schedule 5.7, 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 on the financial condition, properties or operations of the Borrower
or any of its Affiliates.

     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.

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     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 to register trademarks, service marks,
applications to register service marks, mask works, trade dress and copyrights for which the
Borrower is the owner of record (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 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

26

 

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 (a) maintains or has maintained any Pension
Plan, (b) contributes or has contributed to any Multiemployer Plan or (c) provides or has provided
post-retirement medical or insurance benefits with respect to employees or former employees (other
than benefits required under Section 601 of ERISA, Section 4980B of the IRC or applicable state
law). Neither the Borrower nor any ERISA Affiliate has received any notice or has any knowledge to
the effect that it is not in full compliance with any of the requirements of ERISA, the IRC or
applicable state law with respect to any Plan. No Reportable Event exists in connection with any
Pension Plan. Each Plan which is intended to qualify under the IRC is so qualified, and no fact or
circumstance exists which may have an adverse effect on the Plan’s tax qualified status. Neither
the Borrower nor any ERISA Affiliate has (i) any accumulated funding deficiency (as defined in
Section 302 of ERISA and Section 412 of the IRC) under any Plan, whether or not waived, (ii) any
liability under Section 4201 or 4243 of ERISA for any withdrawal, partial withdrawal,
reorganization or other event under any Multiemployer Plan or (iii) any liability or knowledge of
any facts or circumstances which could result in any liability to the Pension Benefit Guaranty
Corporation, the Internal Revenue Service, the Department of Labor or any participant in connection
with any Plan (other than routine claims for benefits under the Plan).

     Section 5.13 Default. The Borrower is in compliance with all provisions of all
agreements, instruments, decrees and orders to which it is a party or by which it or its property
is bound or affected, the breach or default of which could have a Material Adverse Effect on the
Borrower’s financial condition, properties or operations.

     Section 5.14 Environmental Matters.

     (a) Except as disclosed on Schedule 5.14, to the best of the Borrower’s 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 the common law of any jurisdiction or under any Environmental Law, and to the
best of the Borrower’s knowledge, no Hazardous

27

 

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) Except as disclosed on Schedule 5.14, 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 best of the Borrower’s knowledge, and except as disclosed on Schedule 5.14,
there are no, (and there have not existed in the past), nor are there any threatened,
impending 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.

     (d) To the best of the Borrower’s knowledge, and except as disclosed on Schedule 5.14,
the Borrower’s businesses are, and to the best of Borrower’s knowledge, 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, nor has the Borrower been denied insurance on grounds related to
potential environmental liability. 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) Except as disclosed on Schedule 5.14, the Premises are not, and to the best of
Borrower’s knowledge, have never 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 the Lender all environmental assessments, audits,
reports, permits, licenses and other documents describing or relating in any way to the
Premises or the Borrower’s businesses.

     Section 5.15 Submissions to the 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 (i) is true and correct in all material respects, (ii) does
not omit any material fact necessary to make such information not misleading and, (iii) as to
projections, valuations or proforma financial statements, presents a good faith opinion as to such
projections, valuations and proforma condition and results.

     Section 5.16 Financing Statements. The Borrower 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.

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     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, except ordinary course of business returns and credit memos.

ARTICLE VI

COVENANTS

     So long as the Indebtedness 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 120
days after the end of each fiscal year of the Borrower, 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 (unaudited) and consolidated (audited) 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, fairly
represent the Borrower’s financial position and the results of its operations, and whether or not
such Officer has knowledge of the occurrence of any Default or Event of Default and, if so, stating
in reasonable detail the facts with respect thereto.

          (b) Monthly Financial Statements. As soon as available and in any event within 20
days after the end of each month, the 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 which fairly represent the Borrower’s financial position and the
results of its operations; and accompanied by a certificate of the Borrower’s chief financial
officer, substantially in the form of Exhibit C hereto stating (i) that such financial statements
have been prepared in accordance with GAAP, subject to year-end

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audit adjustments, and fairly
represent the Borrower’s financial position and the results of its operations, (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) Accounts Inventory. Within 15 days after the end of each month, the Borrower
shall provide a monthly accounts receivable and accounts payable listing and aging and an inventory
report, both of which shall be submitted electronically to the Lender via its vendor Collateral
Services Inc. (CSI). Monthly processing fees shall apply to such reporting.

          (d) Collateral Reports. Within 15 days after the end of each month or more frequently
if the Lender so requires, the Borrower’s accounts receivable and its accounts payable, a detailed
inventory report, 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.

          (e) Projections. No later than 30 days before the last day of each fiscal year, the
Borrower’s projected balance sheets, income statements, statements of cash flow for each month of
the succeeding fiscal year, each in reasonable detail. Such items will be certified by the
Officer who is the Borrower’s chief financial officer as being the most accurate projections
available and identical to the projections used by the Borrower for internal planning purposes and
be delivered with a statement of underlying assumptions and such supporting schedules and
information as the Lender may in its discretion require.

          (f) Supplemental Reports. Weekly, or more frequently if the Lender so requires, the
Borrower’s “Daily Collateral Reports”, receivables schedules, and collection reports, as well as
such additional reports as the Lender may require.

          (g) Litigation. Immediately after the commencement thereof, 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.

          (h) Defaults. When any Officer of the Borrower becomes aware of the probable
occurrence of any Default or Event of Default, and no later than 3 days after such Officer becomes
aware of such Default or Event of Default, 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.

          (i) 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, a statement signed by the Officer who is 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

30

 

Plan under Section
412(m) of the IRC, the Borrower will deliver to the Lender a statement signed by the Officer who is
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 within ten 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 Section
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 the Borrower
proposes to take with respect thereto.

          (j) Disputes. Promptly upon knowledge thereof, notice of (i) any disputes or claims
by the Borrower’s customers exceeding $10,000 individually or $25,000 in the aggregate during any
fiscal year; (ii) credit memos exceeding $10,000 individually or $25,000 in the aggregate during
any fiscal year;; and (iii) any goods returned to or recovered by the Borrower exceeding $10,000
individually or $25,000 in the aggregate during any fiscal year and excluding valid warranty work.

          (k) Officers and Directors. Promptly upon knowledge thereof, notice of any change in
the persons constituting the Borrower’s Officers and Directors.

          (l) Collateral. Promptly upon knowledge thereof, notice of any material loss of or
material damage to any Collateral or of any substantial adverse change in any Collateral or the
prospect of payment thereof.

          (m) Commercial Tort Claims. Promptly upon knowledge thereof, 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.

          (n) Intellectual Property.

     (i) 30 days prior written notice of Borrower’s intent to acquire material
Intellectual Property Rights; except for transfers permitted under Section 6.17, the
Borrower will give the Lender 30 days prior written notice of its intent to dispose
of 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, notice of (A) any Infringement of its
Intellectual Property Rights by others, (B) claims that the Borrower is Infringing
another Person’s Intellectual Property Rights and (C) any threatened cancellation,
termination or material limitation of its Intellectual Property Rights.

     (iii) Promptly upon receipt, copies of all registrations and filings with
respect to its Intellectual Property Rights.

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          (o) Reports to Owners. Promptly upon their distribution, copies of all financial
statements, reports and proxy statements which the Borrower shall have sent to its Owners.

          (p) SEC Filings. Promptly after the sending or filing thereof, copies of all regular
and periodic reports which the Borrower shall file with the Securities and Exchange Commission or
any national securities exchange.

          (q) Tax Returns of the Borrower. As soon as possible, and in any event no later than
five days after they are due to be filed or after any statutory extension, copies of the state and
federal income tax returns and all schedules thereto of the Borrower.

          (r) Violations of Law. Promptly upon knowledge thereof, notice of the Borrower’s
violation of any law, rule or regulation, the non-compliance with which could materially and
adversely affect the financial condition, properties or operations of the Borrower.

          (s) Other Reports. From time to time, with reasonable promptness, any and all
receivables schedules, inventory reports, 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 Earnings Before Taxes. The Borrower will achieve Earnings Before Taxes
each period defined below of not less than the amount set forth for each such period below:

	 	 	 
	 	 	Period to Date Pretax
	Period	 	Profit
	April, 2007

	 	$(875,000)
	April through May, 2007
	 	$(1,325,000)
	April through June, 2007
	 	$(1,575,000)
	April through July, 2007
	 	$(1,725,000)
	April through August, 2007
	 	$(1,775,000)
	 	 	 
	Fiscal Year 2008 through:	 	 
	September, 2007
	 	$0
	October, 2007
	 	$0
	November, 2007
	 	$300,000
	December, 2007
	 	$400,000
	January, 2008
	 	$500,000
	February, 2008
	 	$600,000

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          (b) Minimum Debt Service Coverage Ratio. The Borrower will maintain, as of each year
end, a Debt Service Coverage Ratio of not less than 1.1 to 1.0., during each fiscal year ending
described below:

	 	 	 	 	 
	 	 	Minimum Debt Service	 
	Period
	 	Coverage Ratio	 
	Through August, 2008
	 	1.1 to 1.00	 
	Through August, 2009
	 	1.1 to 1.00	 
	Through August, 2010
	 	1.1 to 1.00	 

          (c) Capital Expenditures. The Borrower will not incur or contract to incur Capital
Expenditures of more than $500,000 nor more than $100,000 unfinanced Capital Expenditures, in the
aggregate during any fiscal year and for the period from April to August, 2007. The Lender and the
Borrower will review the Capital Expenditures limits after the first quarter of Fiscal Year 2008 to
determine whether an amendment is appropriate.

     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 (each a “Permitted Lien”; 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 this Agreement;

     (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 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. Any authorization by the Lender to any Person to amend financing
statements in favor of the Lender shall be in writing.

     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

33

 

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) Any existing or future Indebtedness or any other obligations of the Borrower to the
Lender;

     (b) Any indebtedness of the Borrower in existence on the date hereof and listed in
Schedule 6.4 hereto; and

     (c) Any 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 6.5 hereto.

     Section 6.6 Investments and Subsidiaries.. The Borrower will not make or permit to
exist any loans or advances to, or make any investment or acquire any interest whatsoever in, any
other Person or Affiliate, including any partnership or joint venture, nor purchase or hold
beneficially any stock or other securities or evidence of indebtedness of any other Person or
Affiliate, 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 & Poor’s Ratings Services or “P 1” or
“P 2” by Moody’s Investors Service or certificates of deposit or bankers’ acceptances having
a maturity of one year or less issued by members of the Federal Reserve System having
deposits in excess of $100,000,000 (which certificates of deposit or bankers’ acceptances
are fully insured by the Federal Deposit Insurance Corporation);

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

     (c) Prepaid rent not exceeding one month 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. Borrower will not declare or pay any
dividends (other than dividends payable solely in stock of the Borrower) on any class of its

34

 

stock,
or make any payment on account of the purchase, redemption or other retirement of any shares of
such stock, or other securities or evidence of its indebtedness or make any distribution in respect
thereof, either directly or indirectly.

     Section 6.8 Salaries. The Borrower will not pay excessive or unreasonable salaries,
bonuses, commissions, consultant fees or other compensation; or increase the salary, bonus,
commissions, consultant fees or other compensation of any Director, Officer or consultant, or any
member of their families, by more than ten percent (10%) 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; Collateral Examination, Inspection and Appraisals.

     (a) 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, accountant or other agent of 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, and to discuss the Borrower’s affairs with any of
its Directors, Officers, employees or agents.

     (b) The Borrower hereby irrevocably authorizes all accountants and third parties to
disclose and deliver to the Lender or its designated agent, at the Borrower’s expense, all
financial information, books and records, work papers, management reports and other
information in their possession regarding the Borrower.

     (c) The Borrower will permit the Lender or its employees, accountants, attorneys or
agents, to examine and inspect any Collateral or any other property of the Borrower at any
time during ordinary business hours.

     (d) The Lender may also, from time to time, obtain at the Borrower’s expense an
appraisal of Collateral by an appraiser acceptable to the Lender in its sole discretion.
The Lender agrees that it will limit the cost of such to one appraisal per year so long as
the Borrower is not in default.

     Section 6.10 Account Verification.

     (a) The Lender or its agent 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 or its agent may also at any time and from time to
time telephone account debtors and other obligors to verify accounts.

     (b) The Borrower shall pay when due each account payable due to a Person holding a
Permitted Lien (as a result of such payable) on any Collateral.

     Section 6.11 Compliance with Laws.

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     (a) The Borrower shall (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
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.

     (c) The Borrower shall (i) not use or permit the use of the proceeds of the Credit
Facility or any other financial accommodation from the Lender to violate any of the foreign
asset control regulations of the Office of Foreign Assets Control (“OFAC”) or other
applicable law, (ii) comply with all applicable Bank Secrecy Act laws and regulations, as
amended from time to time, and (iii) otherwise comply with the USA Patriot Act as required
by federal law and the Lender’s policies and practices.

     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 covenant 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

36

 

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 acceptable to the Lender, in such amounts, on such terms (including any deductibles)
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 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 without prior written consent of the Lender 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 Indebtedness. 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.

37

 

     Section 6.19 Sale and Leaseback. The Borrower will not without the prior written
consent of the Lender 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.

     Section 6.21 Accounting. The Borrower will not adopt any material change in
accounting principles other than as required by GAAP without prior written consent of the Lender.
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. Except in the ordinary course of business, and after written notice to Lender, 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. Except as disclosed to the Lender in writing prior to the date
hereof, 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 Section 6.12 and Section
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

38

 

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 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 hereunder.

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 the Revolving Note, the Term Note, or any default with
respect to any other Indebtedness due from the Borrower to the Lender as such Indebtedness
becomes due and payable;

     (b) Default in the performance, or breach, of any covenant or agreement of the Borrower
contained in this Agreement;

     (c) An Overadvance arises as the result of any reduction in the Borrowing Base, or
arises in any manner on terms not otherwise approved of in advance by the Lender in writing;

     (d) Any Financial Covenant shall become inapplicable due to the lapse of time and the
failure of the Lender and the Borrower to come to an agreement to amend any such covenant to
cover future periods that is acceptable to the Lender in the Lender’s sole discretion;

     (e) The Borrower or any Guarantor shall be or become insolvent, or admit in writing its
or his inability to pay its or his debts as they mature, or make an assignment for the
benefit of creditors; or the Borrower or any Guarantor shall apply for or consent to the
appointment of any receiver, trustee, or similar officer for it or him or for all or any
substantial part of its or his property; or such receiver, trustee or similar officer shall
be appointed without the application or consent of the Borrower or such Guarantor, as the
case may be; or the Borrower or any Guarantor shall institute (by petition, application,
answer, consent or otherwise) any bankruptcy, insolvency, reorganization, arrangement,
readjustment of debt, dissolution, liquidation or similar proceeding relating to it or him

39

 

under the laws of any jurisdiction; or any such proceeding shall be instituted (by petition,
application or otherwise) against the Borrower or any such Guarantor; or any judgment, writ,
warrant of attachment or execution or similar process shall be issued or levied against a
substantial part of the property of the Borrower or any Guarantor (each such occurrence
constituting an “Insolvency Event”);

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

     (g) Any representation or warranty made by the Borrower in this Agreement, by any
Guarantor in any Guaranty delivered to the Lender, or by the Borrower (or any of
its Officers) or any Guarantor in any agreement, certificate, instrument or financial
statement or other statement contemplated by or made or delivered pursuant to or in
connection with this Agreement or any such Guaranty shall be incorrect in any material
respect;

     (h) The rendering against the Borrower of an arbitration award, a 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;

     (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;

40

 

     (k) An event of default shall occur under any Security Document;

     (l) Default in the payment of any amount owed by the Borrower to the Lender other than
any Indebtedness arising hereunder;

     (m) Any breach, default or event of default shall occur under the Borrower Agreement or
any Ex-Im Document;

     (n) The Borrower shall take or participate in any action which would be prohibited
under the provisions of any Subordination Agreement or make any payment with respect to
indebtedness that has been subordinated pursuant to any Subordination Agreement;

     (o) The Borrower shall fail to employ both a Chief Executive Officer and a Chief
Financial Officer which is, in each case, acceptable to the Lender in its sole discretion
within 60 days of the date hereof;

     (p) The Lender believes in good faith that the prospect of payment in full of any part
of the Indebtedness or that full performance by the Borrower under the Loan Documents, is
impaired, or that there has occurred any material adverse change in the business or
financial condition of the Borrower;

     (q) There has occurred any breach, default or event of default by, or attributable to,
any Affiliate under any agreement between the Affiliate and the Lender; or

     (r) The indictment of any Director, Officer, or any Owner of at least twenty percent
(20%) of the issued and outstanding common stock of the Borrower for a felony offence under
state or federal law.

     (s) Any Guarantor shall repudiate or purport to revoke its, his or her Guaranty, or any
Guaranty for any reason shall cease to be in full force and effect as to the Guarantor
executing and delivering the same or shall be judicially declared null and void as to such
Guarantor.

     Section 7.2 Rights and Remedies. During any Default Period, the Lender may exercise
any or all of the following rights and remedies:

     (a) The Lender may, by notice to the Borrower, declare the Commitment to be terminated,
whereupon the same shall forthwith terminate;

     (b) The Lender may, by notice to the Borrower, declare the Indebtedness to be forthwith
due and payable, whereupon all Indebtedness 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;

41

 

     (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 Indebtedness;

     (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 exercise and enforce its rights and remedies under the Loan
Documents;

     (f) The Lender may without regard to any waste, adequacy of the security or solvency of
the Borrower, apply for the appointment of a receiver of the Collateral, to which
appointment the Borrower hereby consents, whether or not foreclosure proceedings have been
commenced under the Security Documents and whether or not a foreclosure sale has occurred;
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 Section
7.1(e) or (f), the Indebtedness 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 Indebtedness 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 Indebtedness.

     Section 7.3 Certain Notices. If notice to the Borrower of any intended disposition of
Collateral or any other intended action is required by law in a particular instance, such notice
shall be deemed commercially reasonable if given (in the manner specified in Section 8.3) at least
ten calendar days before the date of intended disposition or other action.

ARTICLE VIII

MISCELLANEOUS

     Section 8.1 No Waiver; Cumulative Remedies; Compliance with Laws. No failure or delay
by the Lender in exercising any right, power or remedy under the Loan Documents or the Ex-Im
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 or the Ex-Im Documents. The remedies provided in
the Loan Documents or the Ex-Im Documents are cumulative and not exclusive of any remedies provided
by law. The Lender may comply with any applicable state

42

 

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 Notices; Communication of Confidential Information; 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, (d) transmitted by telecopy, or (e) sent as electronic mail, in each case
delivered or sent to the party to whom notice is being given to the business address, telecopier
number, or e mail address set forth below next to its signature or, as to each party, at such other
business address, telecopier number, or e mail address as it may hereafter designate in writing to
the other party pursuant to the terms of this Section. All such notices, requests, demands and
other communications shall be deemed to be an authenticated record communicated or given on (a) the
date received if personally delivered, (b) when deposited in the mail if delivered by mail, (c) the
date delivered to the courier if delivered by overnight courier, or (d) the date of transmission if
sent by telecopy or by e mail, except that notices or requests delivered to the Lender pursuant to
any of the provisions of Article II shall not be effective until received by the Lender. All
notices, financial information, or other business records sent by either party to this Agreement
may be transmitted, sent, or otherwise communicated via such medium as the sending party may deem
appropriate and commercially reasonable; provided, however, that the risk that the confidentiality
or privacy of such notices, financial information, or other business records sent by either party
may be compromised shall be borne exclusively by the Borrower. All requests for an accounting
under Section 9-210 of the UCC (i) shall be made in a writing signed by a Person authorized under
Section 2.2(a), (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
of the UCC. 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 the 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, deliver,
endorse and authorize the filing of any and all instruments, documents, conveyances, assignments,
security agreements, financing statements, control agreements and other agreements and writings
that the Lender may reasonably request in order to secure, protect, perfect or enforce the Security
Interest or the Lender’s rights under the Loan Documents (but any failure to request or assure that
the Borrower executes, delivers, endorses or authorizes the filing of any such item shall not
affect or impair the validity, sufficiency or enforceability of the Loan

43

 

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
Indebtedness, 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 Indebtedness 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
6.11(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 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

44

 

Borrower’s obligations
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 or any other Loan Document by telefacsimile or other electronic means shall be equally as
effective as delivery of an original executed counterpart of
this Agreement or such other Loan Document. Any party delivering an executed counterpart of
this Agreement or any other Loan Document by telefacsimile or other electronic means also shall
deliver an original executed counterpart of this Agreement or such other Loan Document but the
failure to deliver an original executed counterpart shall not affect the validity, enforceability,
and binding effect of this Agreement or such other Loan Document.

     Section 8.9 Retention of the 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 30
days after receipt by the Lender. If there is a special need to retain specific records, the
Borrower must inform the Lender of its need
to retain those records with particularity, which must be delivered in accordance with the
notice provisions of Section 8.3 within 30 days of the Lender taking control of same.

     Section 8.10 Binding Effect; Assignment; Complete Agreement; Sharing 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.
To the extent that any provision of this Agreement contradicts other provisions of the Loan
Documents, this Agreement shall control. 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 may share 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 sharing of information.

45

 

     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.

     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 Minneapolis, 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.

     Section 8.14 Attorneys’ Fees. References in the Loan Documents to fees and expenses
of attorneys or counsel shall include all such fees and expenses, whether incurred at the trial or
appellate level, in an arbitration or administrative proceeding, in bankruptcy (including, without
limitation, any adversary proceeding, contested matter or motion) or otherwise incurred.

[The remainder of this page intentionally left blank.]

46

 

     THE BORROWER AND THE LENDER WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION AT LAW OR IN EQUITY
OR IN ANY OTHER PROCEEDING BASED ON OR PERTAINING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT.

     Borrower’s
Initials /s/ MT ; Lender’s Initials /s/ MG.

     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.

HEI, INC.

1439 Steiger Lake Lane

Victoria, MN 55386

Telecopier: (952) 443-2668

Attention: Mark Thomas

e-mail: Mark.Thomas@heii.com

Wells Fargo Bank, National Association,

Wells Fargo Business Credit

MAC N9312-040

Sixth and Marquette

Minneapolis, Minnesota 55479

Telecopier: (612) 673-8589

Attention: Michael L. Guillou

e-mail: Michael.l.guillou@wellsfargo.com

GUARANTOR:

736 Widsten Circle

Wayzata, MN 55391

Telecopier:                     

e-mail:                     

	 	 	 	 	 
	HEI, INC.	 	 
	 
	 	 	 	 
	 
	 	 	 	 
	By:

	 	/s/ Mark Thomas
 

	 	 
	Name: Mark Thomas	 	 
	Its: Chief Executive Officer	 	 
	 
	 	 	 	 
	WELLS FARGO BANK, NATIONAL	 	 
	ASSOCIATION	 	 
	 
	 	 	 	 
	 
	 	 	 	 
	By:

	 	/s/ Michael L. Guillou
 

	 	 
	Name: Michael L. Guillou	 	 
	Its: Relationship Manager	 	 
	 
	 	 	 	 
	 
	 	 	 	 
	 
	 	 	 	 
	/s/ Thomas F. Leahy	 	 
	 	 	 
	Thomas F. Leahy	 	 

[Signature
page to Credit and Security Agreement]

 

Table of Exhibits and Schedules

	 	 	 
	Exhibit A
	 	Form of Revolving Note
	Exhibit B
	 	Form of Term Note
	Exhibit C
	 	Compliance Certificate
	Exhibit D
	 	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 5.7
	 	Litigation Matters
	Schedule 5.11
	 	Intellectual Property Disclosures
	Schedule 5.14
	 	Environmental Matters
	Schedule 6.3
	 	Permitted Liens
	Schedule 6.4
	 	Permitted Indebtedness
	Schedule 6.5
	 	Guaranties

 

 

Exhibit A to Credit and Security Agreement

REVOLVING NOTE

	 	 	 
	$8,000,000.00

	 	May                     , 2007

     For value received, the undersigned, HEI, Inc., a Minnesota corporation (the “Borrower”),
hereby promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION (the “Lender”),
acting through its Wells Fargo Business Credit operating division, on the Termination Date
referenced in the Credit and Security Agreement dated the same date as this Revolving Note that was
entered into by the Lender and the Borrower (as amended from time to time, the “Credit Agreement”),
at the Lender’s office located at 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 Eight Million Dollars ($8,000,000.00) or the aggregate unpaid
principal amount of all Revolving Advances made by the Lender to the Borrower under the Credit
Agreement, 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 Revolving Note is fully paid at the rate from time to time in effect under the
Credit Agreement.

     This Revolving Note is the Revolving Note referenced in the Credit Agreement and is subject to
the terms of the Credit Agreement, which provides, among other things, for acceleration hereof.
Principal and interest due hereunder shall be payable as provided in the Credit Agreement, and this
Revolving Note may be prepaid only in accordance with the terms of the Credit Agreement. This
Revolving 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 Revolving 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.

	 	 	 	 	 	 	 
	 	 	HEI, INC.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	Name:
	 	 

Mark Thomas
	 	 
	 

	 	Its:
	 	Chief Executive Officer and Chief
Financial Officer	 	 

A-1

 

Exhibit B to Credit and Security Agreement

TERM NOTE

	 	 	 
	$340,000.00

	 	May                     , 2007

     For value received, the undersigned, HEI, Inc., a Minnesota corporation (the “Borrower”),
hereby promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION (the “Lender”),
acting through its Wells Fargo Business Credit operating division, on the Termination Date set
forth in the Credit and Security Agreement dated the same date as this Term Note that was entered
into by the Lender and the Borrower (as amended from time to time, the “Credit Agreement”), at
Lender’s office located at 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 Three Hundred Forty Thousand Dollars ($340,000.00) or the aggregate
unpaid principal amount of all Term Advances made by the Lender to the Borrower under the Credit
Agreement 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 Term Note is fully paid at the rate from time to time in effect under the Credit
Agreement.

     This Term Note is the Term Note referred to in the Credit Agreement, and is subject to the
terms of, the Credit Agreement, which provides, among other things, for acceleration hereof.
Principal and interest due hereunder shall be payable as provided in the Credit Agreement, and this
Term Note may be prepaid only in accordance with the terms of the Credit Agreement. This Term 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 hereby agrees to pay all costs of collection, including attorneys’ fees and legal
expenses in the event this Term 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.

	 	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	Name:
	 	 

Mark Thomas
	 	 
	 

	 	Its:
	 	Chief Executive Officer and Chief
Financial Officer	 	 

B-1

 

Exhibit C to Credit and Security Agreement

COMPLIANCE CERTIFICATE

	 	 	 
	To:

	 	Wells Fargo Bank, National Association
	Attn:

	 	Michael L. Guillou
	Date:

	 	___, 200___
	Subject:

	 	Financial Statements

     In accordance with our Credit and Security Agreement dated as of [___] (as amended
from time to time, 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.

     I further hereby certify as follows: Events of Default. (Check one):

	 	o	 	The undersigned does not have knowledge of the occurrence of a Default or Event of
Default under the Credit Agreement except as previously reported in writing to the
Lender.
	 
	 	o	 	The undersigned has knowledge of the occurrence of a Default or Event of Default
under the Credit Agreement not previously reported in writing to the Lender and
attached hereto is a statement of the facts with respect to thereto. The Borrower
acknowledges that pursuant to Section 2.5(c) of the Credit
Agreement, the Lender may impose the Default Rate at any time during the resulting
Default Period.

     Material Adverse Change in Litigation Matters of the Borrower. I further hereby certify as
follows (check one):

	 	o	 	The undersigned has no knowledge of any material adverse change to the litigation
exposure of the Borrower or any of its Affiliates or of any Guarantor.
	 
	 	o	 	The undersigned has knowledge of material adverse changes to the litigation exposure
of the Borrower or any of its Affiliates or of any Guarantor not previously
disclosed in Schedule 5.7. Attached to this Certificate is a
statement of the facts with respect thereto.

Financial Covenants. I further hereby certify as follows (check and complete each of the
following):

     1. Minimum Earnings Before Taxes. Pursuant to Section 6.2(a) of
the Credit Agreement, the Borrower’s Earnings Before Taxes for the [                    ] period ending on
the Reporting Date, was $___, which
o satisfies
o does not satisfy the requirement that
such amount be not less than ___:

C-1

 

	 	 	 
	 	 	 	Minimum Earnings Before
	Period	 	 	Taxes
	April, 2007
	 		$ (875,000)	 
	April through May, 2007
	 		$ (1,325,000)	 
	April through June, 2007
	 		$ (1,575,000)	 
	April through July, 2007
	 		$ (1,725,000)	 
	April through August, 2007
	 		$ (1,775,000)	 
	 
	 
	Fiscal Year 2008 through:
	 	 
	September, 2007
	 		$ 0	 
	October, 2007
	 		$ 0	 
	November, 2007
	 		$ 300,000	 
	December, 2007
	 		$ 400,000	 
	January, 2008
	 		$ 500,000	 
	February, 2008
	 		$ 600,000	 

     2. Minimum
Debt Service Coverage Ratio. Pursuant to Section 6.2(b) of the Credit Agreement, as of the Reporting Date, the Borrower’s Debt Service Coverage
Ratio was [___] to 1.00, which o satisfies o does not satisfy the requirement that such ratio be
no less than the applicable ratio set forth in the table below on the Reporting Date:

	 	 	 
	 	 	Minimum Debt Service	 
	Period 	 	Coverage Ratio	 
	Through August, 2008
	 	1.1 to 1.00
	Through August, 2009
	 	1.1 to 1.00
	Through August, 2010
	 	1.1 to 1.00

     3. Capital
Expenditures. Pursuant to Section 6.2(c) 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 reporting period ended ___, 200___, for Capital
Expenditures, $ ___ in the aggregate and at most $
___ for any nonfinanced Capital
Expenditures, which o satisfies o does not satisfy the requirement that such expenditures not exceed
$500,000 in the aggregate and $100,000 for any nonfinanced Capital Expenditure during such year.

     4. Salaries. As of the Reporting Date, the Borrower has not paid excessive or
unreasonable salaries, bonuses, commissions, consultant fees or other compensation, or increased
the salary, bonus, commissions, consultant fees or other compensation of any Director, Officer or
consultant, or any member of their families, by more than ten percent (10%) over the amount paid in
the Borrower’s previous fiscal year, either individually or for all such persons in the aggregate,
and has not paid any increase from any source other than profits
earned in the year of payment, and as a consequence
o is
o is not in compliance with
Section 6.8 of the Credit Agreement.

 

 

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.

	 	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	Name:
	 	 

	 	 
	 

	 	Its:
	 	 

Chief Financial Officer
	 	 

 

 

Exhibit D to Credit and Security Agreement

PREMISES

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

Victoria Location – 1495 Steiger Lake Lane, Victoria, MN 55386, Legal description – Lot 2, Block 1,
Point Victoria, situated in Carver County, Minnesota

Chanhassen Location – 1546 Lake Drive West, Chanhassen, MN 55317

Boulder Location – 4801 North 63rd Street, Boulder, CO 80301

Tempe Location – 610 South Rockford Drive, Tempe, AZ 85281

D-1

 

Schedule 5.1 to Credit and Security Agreement

TRADE NAMES, CHIEF EXECUTIVE OFFICE, PRINCIPAL PLACE OF BUSINESS,

AND LOCATIONS OF COLLATERAL

TRADE NAMES

HEI, Inc., Microelectronics Operations (Victoria), Advanced Medical Operations (Boulder),
High Density Interconnect Operations (Tempe) and RFID Operations (Chanhassen)

CHIEF EXECUTIVE OFFICE/PRINCIPAL PLACE OF BUSINESS

1495 Steiger Lake Lane, Victoria, MN 55386

OTHER INVENTORY AND EQUIPMENT LOCATIONS

Chanhassen Location – 1546 Lake Drive West, Chanhassen, MN 55317

Boulder Location – 4801 North 63rd Street, Boulder, CO 80301

Tempe Location – 610 South Rockford Drive, Tempe, AZ 85281

D-2

 

Schedule 5.2 to Credit and Security Agreement

CAPITALIZATION AND ORGANIZATIONAL CHART

For Holders of more than 5% of outstanding stock on date of Closing.

	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	No. of shares (after	 	 
	 	 	 	 	 	 	exercise of all rights	 	Percent interest on a
	Holder	 	Type of Rights/Stock	 	to acquire shares)	 	fully diluted basis
	Thomas F. Leahy
	 	Common and Preferred Stock	 	 	1,128,054	 	 	 	11.8	%
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Minneapolis
Portfolio
Management Group
LLC
	 	Common Stock	 	 	905,246	 	 	 	9.5	%
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Perkins Capital
Management, Inc.
	 	Common Stock	 	 	748,350	 	 	 	7.8	%

HEI, Inc. has one subsidiary, Cross Technology, Inc. that is 100% owned by HEI, Inc.

S-5.2-1

 

 

Schedule 5.5 to Credit and Security Agreement

SUBSIDIARIES

HEI, Inc. has one subsidiary, Cross Technology, Inc. that is 100% owned by HEI, Inc.

S-5.5-1

 

 

Schedule 5.7 to Credit and Security Agreement

LITIGATION MATTERS

HEI, Inc. is not involved in any litigation at the time of this signing and has not received notice
of any threatened litigation as of this signing

S-5.7-1

 

Schedule 5.11 to Credit and Security Agreement

INTELLECTUAL PROPERTY DISCLOSURES

(Patents, Trademarks, and Copyrights)

Patents

	 	 	 	 	 	 	 
	Docket No.	 	Title	 	Serial/Patent No.	 	Status
	14605.113

	 	Information Technology System for Health
Care Environments (fka Information
Technology System that is Suitable for
Medical Applications)
	 	10/161, 168 (formerly

Provisions #60/295,181)
	 	B — Pending
	10139.007-CA-01

	 	Document Reading Apparatus
	 	 1,245,765
	 	A — Issued
	10139-0008-CA-01

	 	Photo-Optic Transducing Head Assembly
	 	 1,265,547
	 	A — Issued
	10139.0016-US-01

	 	Method of Mount DC Block Capacitor for
Microwave Circuit and Packaging
	 	 6,646,521
	 	A — Issued
	10139.0016-TA-01

	 	Method of Mount DC Block Capacitor for
Microwave Circuit and Packaging
	 	 194018
	 	A — Issued
	10139.0016-EP-WO

	 	Method of Mount DC Block Capacitor for
Microwave Circuit and Packaging
	 	 1,968,674
	 	B — Pending
	10139.0016-JP-WO

	 	Method of Mount DC Block Capacitor for
Microwave Circuit and Packaging
	 	 2527567
	 	B — Pending
	10139.0016-KS-WO

	 	Method of Mount DC Block Capacitor for
Microwave Circuit and Packaging
	 	 37003802
	 	B — Pending
	10139.0016-MY-01

	 	Method of Mount DC Block Capacitor for
Microwave Circuit and packaging
	 	 14267
	 	B — Pending
	10139.0016-TH-01

	 	Method of Mount DC Block Capacitor for
Microwave Circuit and Packaging
	 	 68354
	 	B — Pending
	10139.0017-US-01

	 	Interconnection Device and Method
	 	 6,294,966
	 	A — Issued
	10139.0017-US-C1

	 	Interconnection Device and Method
	 	 6,469,592
	 	A — Issued
	10139.0017-TA-01

	 	Interconnection Device and Method
	 	 156859
	 	A — Issued
	10139.0017-CC-WO

	 	Interconnection Device and Method
	 	 8186499
	 	B — Pending
	10139.0017-EP-WO

	 	Interconnection Device and Method
	 	 986661.7
	 	B — Pending
	10139.0017-IN-WO

	 	Interconnection Device and Method
	 	 2702
	 	B — Pending
	10139.0017-JP-WO

	 	Interconnection Device and Method
	 	 1550811
	 	B — Pending
	10139.0017-KS-WO

	 	Interconnection Device and Method
	 	 27008541
	 	B — Pending
	10139.0017-MY-01

	 	Interconnection Device and Method
	 	 6125
	 	B — Pending
	10139.0017-PH-01

	 	Interconnection Device and Method
	 	 10003580
	 	B — Pending
	101039.0017-TH-01

	 	Interconnection Device and Method
	 	 62789
	 	B — Pending
	10139.0017-US-C2

	 	interconnection Device and Method
	 	 10/228,587
	 	B  — Pending
	10139.0022-US-01

	 	Integrated Mem Switch
	 	 10/014,987
	 	B — Pending
	10139.0022-US-D1

	 	Low Voltage Mem Switch
	 	 10/409,742
	 	B — Pending
	10139.0027-TA-01

	 	Test Methods, Systems, and Probes for
High-Frequency Wireless Communications
Devices
	 	 189906
	 	A — Issued
	10139.0027-CC-WO

	 	Test Methods, Systems, and Probes for
High-Frequency Wireless Communications
Devices
	 	 18149812
	 	A — Issued
	10139.0027-EP-WO

	 	Test Methods, Systems, and Probes for
high-Frequency Wireless Communications
Devices
	 	 1959300.3
	 	B — Pending
	10139.0027-IN-WO

	 	Test Methods, Systems, and Probes for
High-Frequency Wireless Communications
Devices
	 	 10503
	 	B — Pending

S-5.11-1

 

 

	 	 	 	 	 	 	 
	Docket No.	 	Title	 	Serial/Patent No.	 	Status
	10139.0027-JP-WO

	 	Test Methods, Systems, and Probes for
High-Frequency Wireless Communications
Device
	 	 2516659
	 	B — Pending
	10139.0027-US-C1

	 	Test Methods, Systems, and Probes for
High-Frequency Wireless Communications
Device
	 	 09/725,646
	 	B -Pending
	10139.0031-US-01

	 	Flexible Circuit Board having an

Integrally Formed Battery
	 	 10/789,108
	 	B — Pending
	116.002US1

	 	EDGE TERMINALS FOR ELECTRONIC CIRCUIT

MODULES
	 	 08/542896
	 	A — Issued
	116.002CA1

	 	EDGE TERMINALS FOR ELECTRONIC CIRCUIT

MODULES
	 	 2187582
	 	B — Pending
	116.006US1

	 	HIGH DENSITY STACKED CIRCUIT MODULE
	 	 09/050318
	 	A — Issued
	116.006CA1

	 	HIGH DENSITY STACKED CIRCUIT MODULE
	 	 2266980
	 	B — Pending
	116.010US1

	 	HEARING-AID ASSEMBLY USING FOLDED FLEX

CIRCUITS
	 	 09/792700
	 	A  — Issued
	116.010US2

	 	HEARING-AID ASSEMBLY USING FOLDED FLEX

CIRCUITS
	 	 10/752414
	 	B — Pending
	116.012US1

	 	STRUCTURES AND ASSEMBLY METHODS FOR

RADIO-FREQUENCY-IDENTIFICATION MODULES
	 	 09/922245
	 	A — Issued
	116.012TH1

	 	STRUCTURES AND ASSEMBLY METHODS FOR

RADIO-FREQUENCY-IDENTIFICATION MODULES AND METHODS
	 	 67473
	 	B — Pending
	116.012US2

	 	STRUCTURES AND ASSEMBLY METHODS FOR

RADIO-FREQUENCY-IDENTIFICATION MODULES
	 	 10/785928
	 	B — Pending
	116.015CA1

	 	CODELOCK Design
	 	 547638
	 	B — Pending
	14605-125P

(provisions) 

50611-292864

(Utility)

	 	Collaboration Among Health Care Instruments
	 	 60/384,902 (provisional) 10/453,442
(utility)
	 	B — Pending
	 

	 	Driving and Clamping Power Regulation
Technique for Continuous, In-Phase,
Full-Duration, Switch-Mode Resonant
Converter Power Supply
	 	 5,267,138
	 	A — Issued
	 

	 	System and Method for Coupling a Plurality
of Medical Devices in a Serverless Grid
	 	 	 	B — Pending

Trademarks

	 	 	 	 	 
	Trademark name	 	Trademark Number	 	Reference #
	Lin iT
	 	76/518,141	 	File No. 50611-292862
	OneSource OutSource
	 	2569474	 	14605.096
	FRESH AIR
	 	75/830,817	 	14605.09
	ID-iT
	 	76/518,124	 	50611.2930219999
	GridView
	 	78/510068	 	40424.4US01

S-5.11-2

 

Schedule 5.14 to Credit and Security Agreement

ENVIRONMENTAL MATTERS 

HEI, Inc. has received a No Further Action Required letter from the State of Colorado regarding its
Boulder location and is not aware of any other environmental issues relating to any of the other
listed properties as of this signing.

S-5.14-1

 

 

Schedule 6.3 to Credit and Security Agreement

PERMITTED LIENS

HEI, Inc.

Permitted Liens

As of 05-01-07

Valid UCC Filings:

     

	 	 	 	 	 	 	 	 	 	 	 
	File Date	 	File No.	 	Type	 	Description if needed	 	Additional Information	 	Status
	5/21/2003
	 	20037526134	 	UCC-1	 	 	 	Beacon Bank	 	To be released with the SBA Revolver Payoff at Closing
	10/15/2003
	 	2003909557	 	AMEND	 	Amendment of 20037526134	 	Beacon Bank	 	To be released with the SBA Revolver Payoff at Closing
	7/21/2003
	 	20038148897	 	UCC-1	 	 	 	US Bancorp	 	Active Operating Lease
	6/8/2004
	 	200412104045	 	UCC-1	 	 	 	CNC Associates Inc.	 	Active Operating Lease
	12/14/2004
	 	200414358590	 	UCC-1	 	 	 	Commerce Financial Group	 	To be released with Tempe Equipment Lease Payoff at Closing
	3/10/2005
	 	200515537094	 	UCC-1	 	 	 	Lease Finance Group	 	Active Capital Lease
	9/12/2005
	 	20051793347	 	ASSIGN	 	Assingment of 200515537094	 	First Minnetonka City Bank	 	Active Capital Lease
	4/7/2005
	 	200515938368	 	UCC-1	 	 	 	Lease Finance Group	 	Active Capital Lease
	9/12/2005
	 	20051793426	 	AMEND	 	Expaned Collateral Description of
200515938368	 	Lease Finance Group	 	Active Capital Lease
	9/12/2005
	 	20051793433	 	ASSIGN	 	Assingment of 200515938368	 	First Minnetonka City Bank	 	Active Capital Lease
	4/7/2005
	 	200515938673	 	UCC-1	 	 	 	Lease Finance Group	 	Active Capital Lease
	8/16/2005
	 	200517630189	 	UCC-1	 	 	 	Lease Finance Group	 	Active Capital Lease
	 
	 	 	 	 	 	 	 	 	 	 
	9/19/2005
	 	20051802403	 	AMEND	 	Expaned Collateral Description of 2005176030189	 	Lease Finance Group	 	Active Capital Lease
	9/23/2005
	 	20051810670	 	AMEND	 	Addition of Secured Party of 2005176030189	 	Kevin Roberg	 	Active Capital Lease
	8/16/2005
	 	200517630468	 	UCC-1	 	 	 	Lease Finance Group	 	Active Capital Lease
	12/21/2005
	 	20051922206	 	AMEND	 	Expaned Collateral Description of  200517630468	 	Lease Finance Group	 	Active Capital Lease
	12/21/2005
	 	20051922224	 	AMEND	 	Addition of Secured Party of 200517630468	 	Kevin Robert	 	Active Capital Lease
	12/21/2005
	 	20051922236	 	AMEND	 	Correction of Secured Party of 200517630468	 	Kevin Roberg	 	Active Capital Lease
	8/16/2005
	 	200517630711	 	UCC-1	 	 	 	Lease Finance Group	 	Active Capital Lease
	11/29/2005
	 	20051892061	 	AMEND	 	Addition of Secured Party of 200517630711	 	Kevin Roberg	 	Active Capital Lease
	11/29/2005
	 	20051892084	 	AMEND	 	Expaned Collateral Description of
200517630711	 	Kevin Roberg	 	Active Capital Lease
	12/30/2005
	 	200519347755	 	UCC-1	 	 	 	Farnam Street Financial Inc	 	Active Operating Lease
	1/17/2006
	 	200610221439	 	UCC-1	 	This is now a Commerce Financial Capital Lease, but no filing was made by Commerce	 	Orbotech Inc	 	Not filed by Commerce Financial when they paid off Orbotech and look over the lease – Active Capital Lease
	1/30/2006
	 	200610390897	 	UCC-1	 	 	 	Lease Finance Group	 	Lease taken over by Allegiant and not refilled – Active Capital Lease
	3/20/2006
	 	200611076803	 	UCC-1	 	Believed to be the same as filed for under 200610390897	 	Lease Finance Group	 	Believed to be the same as filed for under 200610390897
	3/28/2006
	 	200611204728	 	UCC-1	 	 	 	Key Equipment Finance Inc	 	Active Operating Lease
	7/3/2006
	 	200612598015	 	UCC-1	 	 	 	Telogy. Inc.	 	Active Operating Lease
	8/1/2006
	 	200612953559	 	UCC-1	 	 	 	Telogy. Inc.	 	Active Operating Lease
	9/1/2006
	 	200613366278	 	UCC-1	 	 	 	Telogy. Inc.	 	Active Operating Lease
	 
	 	 	 	 	 	 	 	 	 	 
	Invalid UCC Filings:	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	11/2/1998
	 	2080454	 	UCC-1	 	 	 	Norwest Equipment Finance Inc	 	No Balance Due at 05-01-07 – Needs to be released
	9/8/2003
	 	2003866929	 	CONT	 	 	 	Norwest Equipment Finance Inc	 	No Balance Due at 05-01-07 – Needs to be released
	12/11/1998
	 	2090125	 	UCC-1	 	 	 	Norwest Equipment Finance Inc	 	No Balance Due at 05-01-07 – Needs to be released
	9/19/2003
	 	2003880308	 	CONT	 	 	 	Norwest Equipment Finance Inc	 	No Balance Due at 05-01-07 – Needs to be released
	6/2/2003
	 	20037625319	 	UCC-1	 	 	 	Luther & Maelzer Inc	 	No Balance Due at 05-01-07 – Needs to be released
	12/22/2005
	 	200519252218	 	UCC-1	 	 	 	Orbotech Inc	 	Not believed to be active – no balance is shown on our records

S-6.3-1

 

 

Schedule 6.4 to Credit and Security Agreement

PERMITTED INDEBTEDNESS

HEI Inc

Schedule of Permitted Indebtedness

Capital Leases and Mortgage

Balances as of March 31, 2007

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Creditor	 	Name	 	Original
 Amount	 	Security	 	PMY Res	 	Location	 	Origination
 Date	 	Last Pymt
 Date	 	Monthly Payment	 	Balance 03-31-07
	1	 	Lease Finance Group
	 	LFG 5 CNC Associates	 	 	22,926.73	 	 	 	 	LFG 5	 	Victoria	 	3/15/2005	 	3/15/2008	 	 	564.51	 	 	 	14,142.71	 
	2	 	Lease Finance Group
	 	MyData	 	 	212,150.00	 	 	Mydata my Hydra speedmount	 	LFG 5	 	Victoria	 	3/15/2005	 	3/15/2008	 	 	7,910.00	 	 	 	105,812.64	 
	3	 	Lease Finance Group
	 	Ekra	 	 	183,165.68	 	 	EKRA x5 in line screen printer, Ekra x5 inline screen printer	 	LFG 5	 	Victoria	 	3/15/2005	 	7/1/2008	 	 	6,829.32	 	 	 	91,358.02	 
	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	4	 	Lease Finance Group
	 	Sikama	 	 	28,154.30	 	 	Sikama Falseen S/c Solder Rodow Furance	 	LFG 2	 	Victoria	 	9/5/2005	 	9/5/2008	 	 	1,119.04	 	 	 	11,843.19	 
	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	5	 	Lease Finance Group
	 	CyberOptics	 	 	120,600.00	 	 	CyberOptics DEMO SE 300 inspection system	 	LFG 4	 	Victoria	 	10/1/2005	 	10/1/2008	 	 	4,170.53	 	 	 	64,643.36	 
	6	 	Lease Finance Group
	 	K&S	 	 	21,990.00	 	 	Kulcke & Soffa Model 4524 Bad Bonder	 	LFG 1	 	Victoria	 	12/1/2005	 	12/1/2008	 	 	760.45	 	 	 	12,968.45	 
	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	7	 	Lease Finance Group
	 	Nu Clean	 	 	82,400.00	 	 	Technical Devices Nu/Clean 31Bxf	 	LFG 3	 	Victoria	 	2/1/2006	 	2/1/2009	 	 	2,849.51	 	 	 	52,905.40	 
	8	 	HMP Allegiant
	 	Allegiant Partn HMP_AL	 	 	 	 	 	Infinity 2-2c 2.0 megapixel CCD Camera	 	 	 	Victoria	 	5/1/2006	 	2/23/2009	 	 	880.42	 	 	 	17,368.96	 
	9	 	OGP Allegiant
	 	OGP_AL	 	 	 	 	 	OGP Flash 300 Digital Coord measur system & HMP Infinity 2.0 Megapixesl CCD Camera	 	 	 	Victoria	 	3/1/2006	 	3/1/2009	 	 	1,782.83	 	 	 	38,014.34	 
	10	 	Commerce Financial
	 	CF_01Orbotech	 	 	875,000.00	 	 	Orbotech paragon 8000 imaging system	 	87,500	 	Tempe	 	2/15/2006	 	2/15/2009	 	 	21,272.00	 	 	 	689,127.97	 
	11	 	Commerce Financial
	 	CF_02Datacon	 	 	295,730.00	 	 	Datacon 2200 Malti-Chip Die Bonder	 	29,573	 	Victoria	 	3/15/2006	 	3/15/2009	 	 	8,612.00	 	 	 	232,544.08	 
	12	 	Commerce Financial
	 	CF_03Hirox	 	 	52,851.00	 	 	HIROX Microscope System & TechCut 4 Prec Saw & Polshing System	 	5,285	 	Victoria	 	5/15/2006	 	5/15/2009	 	 	1,547.00	 	 	 	41,961.51	 
	13	 	Commerce Financial
	 	CF_04MicroCraft	 	 	257,250.00	 	 	MicroCraft EMX-6151 Moving Probe Tester	 	25,725	 	Tempe	 	5/15/2006	 	5/15/2009	 	 	6,406.00	 	 	 	215,919.83	 
	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	14	 	Commerce Financial
	 	CF_05ESI	 	 	355,608.00	 	 	Two ESI Mdl 5200 UV YagLaser Dells	 	35,561	 	Tempe	 	4/15/2006	 	4/15/2009	 	 	10,036.00	 	 	 	285,434.01	 
	15	 	Commerce Financial
	 	CF_06Asymtek	 	 	112,625.00	 	 	Asymtek Spectrum S-820 Batch Disperser	 	11,263	 	Victoria	 	6/15/2006	 	6/15/2009	 	 	3,296.00	 	 	 	91,157.66	 
	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	16	 	Key Leasing
	 	Key - Cubes	 	 	62,848.00	 	 	 	 	 	 	Tempe	 	3/6/2006	 	3/6/2009	 	 	1,822.94	 	 	 	43,058.19	 
	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	17	 	Pitney Bowes
	 	Copier Lease-Boulder	 	 	33,610.51	 	 	Toshiba Copier	 	 	 	Boulder	 	 	 	 	 	 	681.50	 	 	 	15,068.33	 
	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	18	 	Commerce Bank
	 	Building Mortgage	 	 	1,200,000.00	 	 	Corporate Office & Vic Plant Lot 2. Block 1, Point Victoria	 	$100,000.00	 	Victoria	 	10/14/2003	 	11/1/2009	 	 	8,318.68	 	 	 	1,110,686.14	 

HEI Inc

Schedule of Permitted Indebtedness

Operating Leases

Balances as of March 31, 2007

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Account	 	Start	 	Ending	 	 	 	 
	Name	 	Item	 	Location	 	Number	 	Date	 	Date	 	Deposit	 	Payment
	Building Rent

Monk Properties
	 	1546 Lake Drive West	 	Chanhassen	 	 	 	 	 	 	 	 	 	 	 	 	 	 	6,591.67	 	 	 	12,971.00	 
	Boulder Dev. Corp.
	 	4801 N. 63rd Drive	 	Boulder	 	 	 	 	 	 	 	 	 	 	 	 	 	 	230,000.00	 	 	 	120,222.00	 
	Reynolds Property
	 	610 S Rockford Drive	 	Tempe	 	 	 	 	 	 	 	 	 	 	 	 	 	 	7,260.00	 	 	 	7,582.85	 
	Cutler Commercial
	 	326 South Siesta Lane	 	Tempe office	 	 	 	 	 	 	 	 	 	 	 	 	 	 	3,000.00	 	 	 	2,614.34	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Equipment

Farnam Street Financial — CTS
	 	Clara view & ClearCube	 	Tempe	 	HE122205-001	 	 	8/1/2006	 	 	 	 	 	 	 	 	 	 	 	2,184.32	 
	Key Leases
	 	Orbotech Discovery	 	Tempe	 	 	 	 	 	 	3/6/2006	 	 	 	3/6/2009	 	 	 	 	 	 	 	6,906.39	 
	Mobile Mini
	 	40’ Cargo & DLX Tri Doors	 	 	 	 	 	 	 	 	 	 	 	Monthly	 	 	 	 	 	 	145.94	 
	Pitney Bowes Global Financial
	 	Mailing scale A57z	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Quarterly	 	 	185.31	 
	Pitney Bowes Global Financial
	 	Mailing System	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Quarterly	 	 	1,166.18	 
	CNC Associates, Inc.
	 	HAAS Tool room mill	 	Chanhassen	 	 	20361001	 	 	 	6/4/2004	 	 	 	6/4/2009	 	 	 	 	 	 	 	564.51	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Computer Equipment

Toshiba Business Solutions
	 	Boulder Copier	 	Boulder	 	 	39120896	 	 	 	5/31/2002	 	 	 	6/4/2007	 	 	 	 	 	 	 	845.68	 
	Hewlett-Packard Financial Services
	 	 	 	 	 	50020650-01	 	 	 	10/11/2004	 	 	 	 	 	 	 	 	 	 	 	140.22	 
	Hewlett-Packard Financial Services
	 	 	 	 	 	5002064C-001	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	534.08	 
	US Bank
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	8/1/2007	 	 	 	 	 	 	 	759.64	 
	Pitney Bowes INC
	 	DLCQ Copier	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	812.35	 
	LFG — Marlin Leasing Corporation
	 	HP Compaq Notebook	 	 	 	001-0295999-001	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	725.24	 
	LFG — Marlin Leasing Corporation
	 	Computer System	 	 	 	001-0295999-002	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	785.65	 
	DeLage Landen
	 	Misc Equipment	 	Victoria, Tempe & Boulder	 	 	24705927	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	2,272.69	 
	DeLage Landen
	 	Boulder Copiers	 	 	 	 	534057	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	737.10	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Miscellaneous

DeLage Laden
	 	Forklift	 	Chanhassen	 	270266-476532	 	 	 	11/4/2004	 	 	 	11/4/2009	 	 	 	 	 	 	 	292.27	 

S-6.4-1

 

 

HEI Inc

Schedule of Commitments & Contingencies (Operating Leases)

Telogy

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Account	 	 	Start	 	 	Ending	 	 	 	 
	Name
	 	Item	 	Location	 	Number	 	 	Date	 	 	Date	 	 	Payment	 
	Leases
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	1 Telogy
	 	KEI 2410 	 	 	 	 	501428	 	 	 	6/7/2006	 	 	 	6/7/2007	 	 	 	1,028.00	 
	2 Telogy
	 	KEI25 10AT 	 	 	 	 	503485	 	 	 	11/3/2006	 	 	 	11/3/2007	 	 	 	448.00	 
	3 Telogy
	 	KEI 2001 	 	 	 	 	507431	 	 	 	11/6/2006	 	 	 	11/6/2007	 	 	 	282.00	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Rental — Month to Month	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	4 Telogy
	 	Various Equipment	 	 	 	 	487478	 	 	 	10/19/2005	 	 	 	 	 	 	 	476.00	 
	5 Telogy
	 	KEI (6485) 	 	 	 	 	515172	 	 	 	2/5/2007	 	 	 	 	 	 	 	100.00	 

S-6.4-2

 

 

Schedule 6.5 to Credit and Security Agreement

GUARANTIES

None

S-6.5-1exv10w2

 

Exhibit 10.2

      

CREDIT AND SECURITY AGREEMENT

FOR THE EXPORT – IMPORT BANK

GUARANTEED CREDIT FACILITY

BY AND BETWEEN

HEI, INC.

AND

WELLS FARGO BANK, NATIONAL ASSOCIATION

Acting through its Wells Fargo Business Credit operating division

May 15, 2007

      

 

 

Table of Contents

	 	 	 	 	 
	 	 	Page	 
	ARTICLE I DEFINITIONS
	 	 	1	 
	 
	 	 	 	 
	Section 1.1 Definitions
	 	 	1	 
	Section 1.2 Other Definitional Terms; Rules of Interpretation
	 	 	11	 
	 
	 	 	 	 
	ARTICLE II AMOUNT AND TERMS OF THE CREDIT FACILITY
	 	 	12	 
	 
	 	 	 	 
	Section 2.1 Revolving Advances
	 	 	12	 
	Section 2.2 Procedures for Requesting Advances
	 	 	12	 
	Section 2.3 Interest; Minimum Interest Charge; Default Interest Rate; Application of
Payments; Participations; Usury
	 	 	12	 
	Section 2.4 Fees. The fees and expenses charged under this Section shall be without
duplication of those paid and performed under Section 2.6 of the Domestic Agreement
	 	 	14	 
	Section 2.5 Time for Interest Payments; Payment on Non-Business Days; Computation of
Interest and Fees
	 	 	14	 
	Section 2.6 Lockbox and Collateral Account; Sweep of Funds
	 	 	15	 
	Section 2.7 Voluntary Prepayment; Reduction of the Maximum Line Amount; Termination
of the Credit Facility by the Borrower
	 	 	15	 
	Section 2.8 Mandatory Prepayment
	 	 	16	 
	Section 2.9 Revolving Advances to Pay Indebtedness
	 	 	16	 
	Section 2.10 Use of Proceeds
	 	 	16	 
	Section 2.11 Liability Records
	 	 	16	 
	 
	 	 	 	 
	ARTICLE III SECURITY INTEREST; OCCUPANCY; SETOFF
	 	 	17	 
	 
	 	 	 	 
	Section 3.1 Grant of Security Interest
	 	 	17	 
	Section 3.2 Notification of Account Debtors and Other Obligors
	 	 	17	 
	Section 3.3 Assignment of Insurance
	 	 	17	 
	Section 3.4 Occupancy
	 	 	18	 
	Section 3.5 License
	 	 	18	 
	Section 3.6 Financing Statement
	 	 	18	 
	Section 3.7 Setoff
	 	 	19	 
	Section 3.8 Collateral
	 	 	19	 
	 
	 	 	 	 
	ARTICLE IV CONDITIONS OF LENDING
	 	 	20	 
	 
	 	 	 	 
	Section 4.1 Conditions Precedent to the Initial Advances
	 	 	20	 
	Section 4.2 Conditions Precedent to All Advances
	 	 	22	 
	 
	 	 	 	 
	ARTICLE V REPRESENTATIONS AND WARRANTIES
	 	 	22	 
	 
	 	 	 	 
	Section 5.1 Existence and Power; Name; Chief Executive Office; Inventory and
Equipment Locations; Federal Employer Identification Number and Organizational
Identification Number
	 	 	22	 

 

 

	 	 	 	 	 
	 	 	Page	 
	Section 5.2   Capitalization
	 	 	23	 
	Section 5.3   Authorization of Borrowing; No Conflict as to Law or Agreements
	 	 	23	 
	Section 5.4   Legal Agreements
	 	 	23	 
	Section 5.5   Subsidiaries and Affiliates
	 	 	23	 
	Section 5.6   Financial Condition; No Adverse Change
	 	 	23	 
	Section 5.7   Litigation
	 	 	23	 
	Section 5.8   Regulation U
	 	 	24	 
	Section 5.9   Taxes
	 	 	24	 
	Section 5.10 Titles and Liens
	 	 	24	 
	Section 5.11 Intellectual Property Rights
	 	 	24	 
	Section 5.12 Plans
	 	 	25	 
	Section 5.13 Default
	 	 	26	 
	Section 5.14 Environmental Matters
	 	 	26	 
	Section 5.15 Submissions to the Lender
	 	 	26	 
	Section 5.16 Financing Statements
	 	 	27	 
	Section 5.17 Rights to Payment
	 	 	27	 
	 
	 	 	 	 
	ARTICLE VI COVENANTS
	 	 	27	 
	 
	 	 	 	 
	Section 6.1   Reporting Requirements
	 	 	27	 
	Section 6.2   Financial Covenants
	 	 	30	 
	Section 6.3   Permitted Liens; Financing Statements
	 	 	31	 
	Section 6.4   Indebtedness
	 	 	32	 
	Section 6.5   Guaranties
	 	 	32	 
	Section 6.6   Investments and Subsidiaries
	 	 	32	 
	Section 6.7   Dividends and Distributions
	 	 	33	 
	Section 6.8   Salaries
	 	 	33	 
	Section 6.9   Books and Records; Collateral Examination, Inspection and Appraisals
	 	 	33	 
	Section 6.10 Account Verification
	 	 	33	 
	Section 6.11 Compliance with Laws
	 	 	34	 
	Section 6.12 Payment of Taxes and Other Claims
	 	 	34	 
	Section 6.13 Maintenance of Properties
	 	 	34	 
	Section 6.14 Insurance
	 	 	35	 
	Section 6.15 Preservation of Existence
	 	 	35	 
	Section 6.16 Delivery of Instruments, etc.
	 	 	35	 
	Section 6.17 Sale or Transfer of Assets; Suspension of Business Operations
	 	 	35	 
	Section 6.18 Consolidation and Merger; Asset Acquisitions
	 	 	36	 
	Section 6.19 Sale and Leaseback
	 	 	36	 
	Section 6.20 Restrictions on Nature of Business
	 	 	36	 
	Section 6.21 Accounting
	 	 	36	 
	Section 6.22 Discounts, etc.
	 	 	36	 
	Section 6.23 Plans
	 	 	36	 
	Section 6.24 Place of Business; Name
	 	 	36	 
	Section 6.25 Constituent Documents; S Corporation Status
	 	 	36	 
	Section 6.26 Performance by the Lender
	 	 	37	 
	 
	 	 	 	 
	ARTICLE VII EVENTS OF DEFAULT, RIGHTS AND REMEDIES
	 	 	37	 

ii

 

	 	 	 	 	 
	 	 	Page	 
	Section 7.1 Events of Default
	 	 	37	 
	Section 7.2 Rights and Remedies
	 	 	40	 
	Section 7.3 Certain Notices
	 	 	41	 
	 
	 	 	 	 
	ARTICLE VIII MISCELLANEOUS
	 	 	41	 
	 
	 	 	 	 
	Section 8.1 No Waiver; Cumulative Remedies; Compliance with Laws
	 	 	41	 
	Section 8.2 Amendments, Etc.
	 	 	41	 
	Section 8.3 Notices; Communication of Confidential Information; Requests for
Accounting
	 	 	41	 
	Section 8.4 Further Documents
	 	 	42	 
	Section 8.5 Costs and Expenses
	 	 	42	 
	Section 8.6 Indemnity
	 	 	42	 
	Section 8.7 Participants
	 	 	43	 
	Section 8.8 Execution in Counterparts; Telefacsimile Execution
	 	 	43	 
	Section 8.9 Retention of the Borrower’s Records
	 	 	43	 
	Section 8.10 Binding Effect; Assignment; Complete Agreement; Sharing Information
	 	 	43	 
	Section 8.11 Severability of Provisions
	 	 	44	 
	Section 8.12 Headings
	 	 	44	 
	Section 8.13 Governing Law; Jurisdiction, Venue; Waiver of Jury Trial
	 	 	44	 
	Section 8.14 Attorneys’ Fees
	 	 	44	 

iii

 

CREDIT AND SECURITY AGREEMENT

FOR THE EXPORT-IMPORT CREDIT FACILITY

Dated as of May 15, 2007

     HEI, Inc., a Minnesota corporation (the “Borrower”), and WELLS FARGO BANK, NATIONAL
ASSOCIATION (as more fully defined in Article I herein, the “Lender”) acting through its Wells
Fargo Business Credit operating division, hereby agree as follows:

ARTICLE I

DEFINITIONS

     Section 1.1 Definitions. Except as otherwise expressly provided in this Agreement,
the following terms shall have the meanings given them in this Section:

     “Accounts” shall have the meaning given it under the UCC, including each and every
Eligible Export-Related Accounts Receivable.

     “Accounts Advance Rate” means up to ninety percent (90%), or such lesser rate as the
Lender in its sole discretion may deem appropriate from time to time; provided that, as of the date
of each quarterly audit, the Accounts Advance Rate shall be reduced by one (1) percentage point for
each percentage by which Dilution is in excess of three percent (3.0%).

     “Advance” means a Revolving Advance.

     “Affiliate” or “Affiliates” means any other Person controlled by, controlling
or under common control with the Borrower, including any Subsidiary of the Borrower. For purposes
of this definition, “control,” when used with respect to any specified Person, means the power to
direct the management and policies of such Person, directly or indirectly, whether through the
ownership of voting securities, by contract or otherwise.

     “Agreement” means this Credit and Security Agreement for the Export-Import Credit
Facility.

     “Availability” means the amount, if any, by which the Borrowing Base exceeds the sum
of the outstanding principal balance of the Revolving Note.

     “Borrower Agreement” means the Borrower Agreement by the Borrower in favor of the
Ex-Im Bank and the Lender, dated as of the date hereof.

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

     (a) The Maximum Line Amount; or

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

     (i) The product of the Accounts Advance Rate times the Eligible Export-Related Accounts
Receivable, plus

 

 

     (ii) The product of the Inventory Advance Rate times Export-Related Historical
Inventory Value for Borrower’s Inventory, including work in progress, less

     (iii) To the extent not fully reserved under the Domestic Agreement, the Borrowing Base
Reserve, less

     (iv) To the extent not fully reserved under the Domestic Agreement, the Indebtedness
that the Borrower owes to the Lender that has not yet been advanced on the Revolving Note
and the dollar amount that the Lender in its reasonable discretion then determines to be a
reasonable determination of the Borrower’s credit exposure with respect to any swap,
derivative, foreign exchange, hedge, deposit, treasury management or other similar
transaction or arrangement offered to the Borrower by the Lender that is not described in
Article II of this Agreement and any indebtedness owed by the Borrower to Wells Fargo
Merchant Services, L.L.C.

     “Borrowing Base Reserve” means, as of any date of determination, such amounts
(expressed as either a specified amount or as a percentage of a specified category or item) as the
Lender may from time to time establish and adjust in reducing Availability (a) to reflect events,
conditions, contingencies or risks which, as determined by the Lender, do or may affect (i) the
Collateral or its value, (ii) the assets, business or prospects of the Borrower, or (iii) the
security interests and other rights of the Lender in the Collateral (including the enforceability,
perfection and priority thereof), or (b) to reflect the Lender’s judgment that any collateral
report or financial information furnished by or on behalf of the Borrower to the Lender is or may
have been incomplete, inaccurate or misleading in any material respect, or (c) in respect of any
state of facts that the Lender determines constitutes a Default or an Event of Default.

     “Business Day” means a day on which the Federal Reserve Bank of New York is open for
business.

     “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.

     “Collateral” means all of the Borrower’s Accounts, chattel paper and electronic
chattel paper, deposit accounts, documents, Machinery, Equipment, General Intangibles, goods,
instruments, Intellectual Property Rights, 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) proceeds of any and all of the foregoing; (viii) books and records of the Borrower,
including all mail or electronic mail addressed to the Borrower; and (ix) all of the
foregoing, whether now owned or existing or hereafter acquired or arising or in which the Borrower
now has or hereafter acquires any rights.

2

 

     “Collateral Account” means the “Lender Account” as defined in the Wholesale Lockbox
and Collection Account Agreement.

     “Commitment” means the Lender’s commitment to make Advances to the Borrower.

     “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.

     “Control Agreement” means the Notice to Securities Intermediary and Control Agreement
executed by Thomas F. Leahy, the Lender and Wells Fargo Investments, LLC, as securities
intermediary, and dated the date hereof in the form required by the Lender, as the same may be
amended, restated or otherwise modified from time to time.

     “Credit Facility” means the credit facility under which Revolving Advances may be made
available to the Borrower by the Lender under Article II.

     “Cut-off Time” means 12:00 p.m. Minneapolis, Minnesota time or 11:00 a.m. Minneapolis
time on the last business day of each month.

     “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.

     “Debt Service Coverage Ratio” means (i) the sum of (A) Funds from Operations and (B)
Interest Expense minus (C) unfinanced Capital Expenditures divided by (ii) the sum of (A) Current
Maturities of Long Term Debt and (B) Interest Expense.

     “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 day a Default or Event of
Default occurs and ending on the date identified by the Lender in writing as the date that such
Default or Event of Default has been cured or waived.

     “Default Rate” means an annual interest rate in effect during a Default Period or
following the Termination Date, which interest rate shall be equal to three percent (3%) over the
applicable Floating Rate, as such rate may change from time to time.

     “Dilution” means, as of any date of determination, a percentage, based upon the
experience of the trailing six (6) month period ending on the date of determination, which is the
result of dividing (a) actual bad debt write-downs, discounts, advertising allowances, credits, or
other dilutive items with respect to the Accounts as determined by the Lender in its sole

3

 

discretion during such period, by (b) the Borrower’s net sales during such period (excluding
extraordinary items) plus the amount of subclause (a).

     “Director” means a director if the Borrower is a corporation, a governor or manager if
the Borrower is a limited liability company, or a general partner if the Borrower is a partnership.

     “Domestic Agreement” means the Credit and Security Agreement by and between the
Borrower and Lender, dated as of the date hereof.

     “Domestic Borrowing Base” means the “Borrowing Base” as defined in the Domestic
Agreement.

     “Domestic Credit Facility” means the “Credit Facility” as defined in the Domestic
Agreement.

     “Domestic Documents” means the “Loan Documents” as defined in the Domestic Agreement.

     “Earnings Before Taxes” means pretax earnings from operations, excluding extraordinary
gains, but including extraordinary losses.

     “Eligible Export-Related Accounts Receivable” means Eligible Export-Related Accounts
Receivable as defined in the Borrower Agreement as enumerated in the Export-Related Borrowing Base
Certificate, but excluding any such Accounts having any of the following characteristics:

     (i) That portion of Accounts unpaid 120 days or more after the invoice date;

     (ii) That portion of Accounts related to goods or services with respect to which the
Borrower has received notice of a claim or dispute, which are subject to a claim of offset
or a contra account, or which reflect a reasonable reserve for warranty claims or returns;

     (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) That portion of Accounts that is due and payable more than 60 days after the
invoice date;

     (vi) Accounts denominated in any currency other than United States dollars;

4

 

     (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, to
the extent that the aggregate balance of such Accounts exceeds fifteen percent (15%) of the
sum of the aggregate amount of all Eligible Export-Related Accounts Receivable plus the
aggregate amount of all Eligible Accounts (as defined in the Domestic Agreement);

     (xiv) Accounts owed by an account debtor, regardless of whether otherwise eligible, if
ten percent (10%) or more of the total amount of Accounts due from such debtor is ineligible
under clauses (i), (ii), or (x) above; and

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

     “Eligible Export-Related Inventory” means “Eligible Export-Related Inventory” as
defined in the Borrower Agreement and calculated using the Export-Related Sales Ratio as defined in
the Borrower Agreement and applied in the Export-Related Borrowing Base Certificate, other than
Export-Related Inventory, or portions thereof, otherwise deemed ineligible by the Lender in its
sole discretion.

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

     “Equipment” shall have the meaning given it under the UCC.

     “Event of Default” is defined in Section 7.1.

     “Ex-Im Bank” means the Export-Import Bank of the United States.

     “Export-Related Accounts Receivable” means “Export-Related Accounts Receivable” as
defined in the Borrower Agreement

5

 

     “Export-Related Accounts Receivable Value” means “Export-Related Accounts Receivable
Value” as defined in the Borrower Agreement.

     “Export-Related Borrowing Base Certificate” means the “Export-Related Borrowing Base
Certificate” as defined in the Borrower Agreement, a form of which is attached hereto as Exhibit D.

     “Export-Related Inventory” means “Export-Related Inventory” as defined in the Borrower
Agreement.

     “Export-Related Historical Inventory Value” means “Export-Related Historical Inventory
Value” as defined in the Borrower Agreement.

     “ERISA” means the Employee Retirement Income Security Act of 1974, as amended from
time to time.

     “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.

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

     “Floating Rate” means with respect to Revolving Advances evidenced by the Revolving
Note, an annual interest rate equal to the sum of the Prime Rate plus two percent (2.0%), and which
interest rate shall change when and as the Prime Rate changes.

     “Floating Rate Advance” means an Advance bearing interest at the Floating Rate.

     “Funding Date” is defined in Section 2.1.

     “Funds from Operations” means for a given period, the sum of (i) Net Income, (ii)
depreciation and amortization, (iii) any increase (or decrease) in deferred income taxes, (iv) any
increase (or decrease) in lifo reserves, and (v) other non-cash items, each as determined for such
period in accordance with GAAP.

     “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” shall have the meaning given it under the UCC.

     “Guarantor” means Thomas Leahy or any other person who executes a Guaranty in favor of
the Lender.

     “Guaranty” means each unconditional guaranty executed by a Guarantor in favor of the
Lender.

     “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.

6

 

     “Indebtedness” is used herein in its most comprehensive sense and means any and all
advances, debts, obligations and liabilities of the Borrower to the Lender, heretofore, now or
hereafter made, incurred or created, whether voluntary or involuntary and however arising, whether
due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined,
including under any swap, derivative, foreign exchange, hedge, deposit, treasury management or
other similar transaction or arrangement at any time entered into by the Borrower with the Lender
or with Wells Fargo Merchant Services, L.L.C., and whether the Borrower may be liable individually
or jointly with others, or whether recovery upon such Indebtedness may be or hereafter becomes
unenforceable.

     “Indemnified Liabilities” is defined in Section 8.6.

     “Indemnitees” is defined in Section 8.6.

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

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

     “Intellectual Property Rights” means all actual or prospective rights arising in
connection with any intellectual property or other proprietary rights, including all rights arising
in connection with copyrights, patents, service marks, trade dress, trade secrets, trademarks,
trade names or mask works.

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

     “Interest Payment Date” is defined in Section 2.5(a).

     “Inventory” shall have the meaning given it under the UCC but for purposes of this
Agreement shall include only Eligible Export-Related Inventory.

     “Inventory Advance Rate” means thirty percent (30%) or such lesser rate or amount as
the Lender in its sole discretion may deem appropriate from time to time.

     “Investment Property” shall have the meaning given it under the UCC.

     “IRC” means the Internal Revenue Code of 1986, as amended from time to time.

7

 

     “Leahy Pledge Agreement” means the Collateral Pledge Agreement executed by Thomas F.
Leahy in favor of the Lender and dated the date hereof, as the same may be amended, restated or
otherwise modified from time to time.

     “Lender” means Wells Fargo Bank, National Association in its broadest and most
comprehensive sense as a legal entity, and is not limited in its meaning to the Lender’s Wells
Fargo Business Credit operating division, or to any other operating division of the Lender.

     “Licensed Intellectual Property” is defined 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
subsequently acquired and whether arising by agreement or operation of law.

     “Loan Authorization Agreement” means the “Loan Authorization Agreement” as defined in
Borrower Agreement.

     “Loan Documents” means this Agreement, the Revolving Notes, the Loan Authorization
Agreement, and the Security Documents, together with every other agreement, note, document,
contract or instrument to which the Borrower now or in the future may be a party and which is
required by the Lender.

     “Loan Year” is defined in Section 2.3(b).

     “Lockbox” means “Lockbox” as defined in the Wholesale Lockbox and Collection
Account Agreement.

     “Master Guarantee Agreement” means the Master Guarantee Agreement dated as of November
1, 2005 by and between Wells Fargo Bank, N.A. and Ex-Im Bank, as the same may be amended, restated
or otherwise modified from time to time.

     “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
Indebtedness 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 Indebtedness; or

8

 

     (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
$100,000 or would result in the occurrence of an event described in clauses (i), (ii) and
(iii) above.

     “Maturity Date” means, with respect to the Credit Facility, May 15, 2010.

     “Maximum Line Amount” means $3,000,000, unless this amount is reduced pursuant to
Section 2.7, in which event it means such lower amount.

     “Minimum Interest Charge” is defined in Section 2.3(b).

     “Mortgagee’s Disclaimer and Consent” means that agreement dated May 15, 2007 executed
by Commerce Bank in favor of the Lender.

     “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 Forced Liquidation Value” means a professional opinion of the estimated most
probable Net Cash Proceeds which could typically be realized at a properly advertised and conducted
public auction sale without reserve, held under forced sale conditions and under economic trends
current within 60 days of the appraisal. The opinion may consider physical location, difficulty of
removal, adaptability, specialization, marketability, physical condition, overall appearance and
psychological appeal.

     “Note” means the Revolving Note and “Notes” means the Revolving Notes.

     “Obligations” is used herein in its most comprehensive sense and means any and all
advances, debts, obligations and liabilities of the Borrower to the Lender, heretofore, now or
hereafter made, incurred or created, whether voluntary or involuntary and however arising, whether
due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined,
including under any swap, derivative, foreign exchange, hedge, deposit, treasury management or
other similar transaction or arrangement at any time entered into by the Borrower with the Lender
or with Wells Fargo Merchant Services, L.L.C., and whether the Borrower may be liable individually
or jointly with others, or whether recovery upon such Indebtedness may be or hereafter becomes
unenforceable.

     “OFAC” is defined in Section 6.11(c).

     “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.

     “Overadvance” means the amount, if any, by which the outstanding principal balance of
the Revolving Note is in excess of the then-existing Borrowing Base.

     “Owned Intellectual Property” is defined in Section 5.11(a).

9

 

     “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 each Patent and Trademark Security
Agreement now or hereafter executed by the Borrower in favor of the Lender.

     “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” and “Permitted Liens” are defined in Section 6.3(a).

     “Person” means any individual, corporation, partnership, joint venture, limited
liability company, association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.

     “Plan” means an employee benefit plan (as defined in Section 3(3) of ERISA) maintained
for employees of the Borrower or any ERISA Affiliate.

     “Premises” means all locations where the Borrower conducts its business or has any
rights of possession, including the locations legally described in Exhibit C attached hereto.

     “Prime Rate” means at any time the rate of interest most recently announced by the
Lender at its principal office as its Prime Rate, with the understanding that the Prime Rate is one
of the Lender’s base rates, and serves as the basis upon which effective rates of interest are
calculated for those loans making reference thereto, and is evidenced by the recording thereof in
such internal publication or publications as the Lender may designate. Each change in the rate of
interest shall become effective on the date each Prime Rate change is announced by the Lender.

     “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” is defined in Section 2.1.

     “Revolving Note” means Borrower’s revolving promissory note, payable to the order of
the Lender in the original principal amount of $2,700,000 or the Borrower’s revolving promissory
note payable to the order of the Lender in the original principal amount of $300,000, each in
substantially the form of Exhibit A hereto, each as may be renewed and amended from time to time,
and all replacements thereto and “Revolving Notes” means both the Borrower’s revolving promissory
note, payable to the order of Lender, in the original principal amount of $2,700,000 and the
Borrower’s revolving promissory note, payable to the order of the Lender, in the original principal
amount of $300,000, each in substantially the form of Exhibit A hereto, each as may be renewed and
amended from time to time, and all replacements thereto.

     “Securities Account” means the securities account numbered 6436-2579 maintained by
Wells Fargo Investments, LLC on behalf of Thomas F. Leahy.

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     “Security Documents” means this Agreement, the Wholesale Lockbox and Collection
Account Agreement, the Patent and Trademark Security Agreement(s), each Guaranty, the Leahy Pledge
Agreement, the Control Agreement and any other document delivered to the Lender from time to time
to secure the Indebtedness.

     “Security Interest” is defined in Section 3.1.

     “Subordinated Creditor” means each Person now or in the future who agrees to
subordinate indebtedness of the Borrower held by that Person to the payment of the Indebtedness.

     “Subordination Agreement” means a subordination agreement executed by a Subordinated
Creditor in favor of the Lender and acknowledged by the Borrower (together with any other
subordination agreement that may be accepted by the Lender from time to time, the “Subordination
Agreements”).

     “Subsidiary” means any Person of which more than fifty percent (50%) of the
outstanding ownership interests having general voting power under ordinary circumstances to elect a
majority of the board of directors or the equivalent of such Person, regardless of whether or not
at the time ownership interests 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
Indebtedness, following an Event of Default, pursuant to Section 7.2.

     “UCC” means the Uniform Commercial Code in effect in the state designated in this
Agreement 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 of this Agreement.

     “Wholesale Lockbox and Collection Account Agreement” means the Wholesale Lockbox and
Collection Account Agreement by and between the Borrower and the Lender, dated the same date as
this Agreement.

     Section 1.2 Other Definitional Terms; Rules of Interpretation. The words “hereof”,
“herein” and “hereunder” and words of similar import when used in this Agreement shall refer to
this Agreement as a whole and not to any particular provision of this Agreement. All accounting
terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP. All
terms defined in the UCC and not otherwise defined herein have the meanings assigned to them in the
UCC. References to Articles, Sections, subsections, Exhibits, Schedules and the like, are to
Articles, Sections and subsections of, or Exhibits or Schedules 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),

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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, subject to the terms and
conditions of this Agreement, to make advances (“Revolving Advances”) to the Borrower from time to
time from the date that all of the conditions set forth in Section 4.1 are satisfied (the “Funding
Date”) to and until (but not including) the Termination Date in an amount not in excess of the
Maximum Line Amount. The Lender shall have no obligation to make a Revolving Advance to the extent
that the amount of the requested Revolving Advance exceeds Availability. The Borrower’s obligation
to pay the Revolving Advances shall be evidenced by the Revolving Notes 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 2.7, 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 the
Cut-off Time on the Business Day on which the Advance is to be made. Each request that conforms to
the terms of this Agreement shall be effective upon receipt by the Lender, shall be in writing or
by telephone, and shall be confirmed in writing by the Borrower if so requested by the Lender, 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.

          (b) Disbursement. Upon fulfillment of the applicable conditions set forth in Article
IV, the Lender shall disburse the proceeds of the requested Advance by crediting the same to the
Borrower’s demand
deposit account maintained with the Lender unless the Lender and the Borrower shall agree in
writing to another manner of disbursement.

     Section 2.3 Interest; Minimum Interest Charge; Default Interest Rate; Application of
Payments; Participations; Usury.

          (a) Interest. Except as provided in Section 2.3(c), the principal amount of each
Advance shall bear interest as a Floating Rate Advance.

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          (b) Minimum Interest Charge. Notwithstanding any other terms of this Agreement to the
contrary, the Borrower shall pay to the Lender interest of not less than $150,000 per “Loan Year,”
paid quarterly, (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 Section 2.3(a) on the first day of each quarter following the Funding Date and
each anniversary of the Funding Date and on the Termination Date. “Loan Year” means each one year
period ending on the anniversary of the Funding Date. When calculating this deficiency, the
Default Rate, if applicable, shall be disregarded, and any interest that accrues on a payment
following its receipt on those days specified in Section 2.3(d) shall be excluded in determining
the total amount of interest otherwise calculated under Section 2.3(a). Notwithstanding the
foregoing, the Minimum Interest Charge set forth in this Section 2.3(b) is intended to be the same
charge as, and not an additional charge to, the Minimum Interest Charge set forth in the Domestic
Agreement, and no duplication of such Minimum Interest Charge is intended herein or therein.

          (c) Default Interest Rate. At any time during any Default Period or following the
Termination Date, in the Lender’s sole discretion and without waiving any of its other rights or
remedies, the principal of the Revolving Note shall bear interest at the Default Rate or such
lesser rate as the Lender may determine, effective as of the date the Event of Default occurs
through the last day of such Default Period, or any shorter time period that the Lender may
determine. The decision of the Lender to impose a rate that is less than the Default Rate or to
not impose the Default Rate for the entire duration of the Default Period shall be made by the
Lender in its sole discretion and shall not be a waiver of any of its other rights and remedies,
including its right to retroactively impose the full Default Rate for the entirety of any such
Default Period or following the Termination Date. Notwithstanding the foregoing, the amount of
default interest required to be paid pursuant to this Section 2.3(c) is intended to be the same
amount of default interest required to be paid pursuant to the Domestic Agreement, and no
duplication of such defaul interest is intended herein or therein.

          (d) Application of Payments. Payments shall be applied to the Indebtedness on the
Business Day of receipt by the Lender in the Lender’s general account, but the amount of principal
paid shall continue to accrue
interest at the interest rate applicable under the terms of this Agreement from the calendar
day the Lender receives the payment, and continuing through the end of the first Business Day
following receipt of the payment.

          (e) Participations. If any Person shall acquire a participation in the Advances or
the Obligation of Reimbursement, the Borrower shall be obligated to the Lender to pay the full
amount of all interest calculated under this Section 2.3, 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 that calculated under this Section 2.3, or
otherwise elects to accept less than its prorata share of such fees, charges and other amounts due
under this Agreement.

          (f) Usury. In any event no rate change shall be put into effect which would result in
a rate greater than the highest rate permitted by law. Notwithstanding anything to the contrary
contained in any Loan Document, all agreements which either now are or which shall become
agreements between the Borrower and the Lender are hereby limited so that in no contingency or

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event whatsoever shall the total liability for payments in the nature of interest, additional
interest and other charges exceed the applicable limits imposed by any applicable usury laws. If
any payments in the nature of interest, additional interest and other charges made under any Loan
Document are held to be in excess of the limits imposed by any applicable usury laws, it is agreed
that any such amount held to be in excess shall be considered payment of principal hereunder, and
the indebtedness evidenced hereby shall be reduced by such amount so that the total liability for
payments in the nature of interest, additional interest and other charges shall not exceed the
applicable limits imposed by any applicable usury laws, in compliance with the desires of the
Borrower and the Lender. This provision shall never be superseded or waived and shall control
every other provision of the Loan Documents and all agreements between the Borrower and the Lender,
or their successors and assigns.

     Section 2.4 Fees. The fees and expenses charged under this Section shall be without
duplication of those paid and performed under Section 2.6 of the Domestic Agreement.

          (a) Ex-Im Annual Facility Fee. The Borrower agrees to pay the Lender an Ex-Im Annual
Facility Fee of 1.5% or $45,000, which fee shall be due and payable on the date hereof, each
anniversary of the date hereof, and on the Termination Date.

          (b) Ex-Im Application Fees. The Borrower agrees to pay to the Lender on the date
hereof a fully earned Ex-Im Application Fee of $100.

          (c) Overadvance Fees. The Borrower shall pay an Overadvance fee in the amount of
$500.00 for each day or portion thereof during which an Overadvance exists, regardless of how the
Overadvance arises or whether or not the Overadvance has been agreed to in advance by the Lender.
The acceptance of payment of an Overadvance fee by the Lender shall not be deemed to constitute
either consent to
the Overadvance or a waiver of the resulting Event of Default, unless the Lender specifically
consents to the Overadvance in writing and waives the Event of Default on whatever conditions the
Lender deems appropriate.

          (d) Domestic Fees. The Borrower shall pay the Lender, on demand, all fees due and
payable from time to time under the Ex-Im Documents.

          (e) Other Fees and Charges. The Lender may from time to time impose additional fees
and charges as consideration for Advances made in excess of Availability or for other events that
constitute an Event of Default or a Default hereunder, including fees and charges for the
administration of Collateral by the Lender, and fees and charges for the late delivery of reports,
which may be assessed in the Lender’s sole discretion on either an hourly, periodic, or flat fee
basis, and in lieu of or in addition to imposing interest at the Default Rate. Borrower shall also
be responsible for all out of pocket expenses in connection with the contemplated financing
including without limitation legal fees and expenses, closing costs, appraisal fees, UCC search and
recording fees, costs for individual corporate credit reports, mortgage recording fees, fees to
initiate electronic reporting, as well as collateral examination costs. Such costs are to be
funded by Borrower and shall survive.

     Section 2.5 Time for Interest Payments; Payment on Non-Business Days; Computation of
Interest and Fees.

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          (a) Time For Interest Payments. Accrued and unpaid interest shall be due and payable
on the first day of each month and on the Termination Date (each an “Interest Payment Date”), or if
any such day is not a Business Day, on the next succeeding Business Day. Interest will accrue from
the most recent date to which interest has been paid or, if no interest has been paid, from the
date of advance to the Interest Payment Date.

          (b) Payment on Non Business Days. Whenever any payment to be made hereunder shall be
stated to be due on a day which is not a Business Day, such payment may be made on the next
succeeding Business 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 2.6 Lockbox and Collateral Account; Sweep of Funds.

          (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 into the
Collateral Account. The Borrower shall also deposit all other cash proceeds of
Collateral regardless of source or nature directly into the Collateral Account.
Until so deposited, the Borrower shall hold all such payments and cash proceeds in
trust for and as the property of the Lender and shall not commingle such property
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
Indebtedness.

     (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) Sweep of Funds. The Lender shall from time to time, in accordance with the
Wholesale Lockbox and Collection Account Agreement, cause funds in the Collateral Account to be
transferred to the Lender’s general account for payment of the Indebtedness. Amounts deposited in
the Collateral Account shall not be subject to withdrawal by the Borrower, except after payment in
full and discharge of all Indebtedness.

     Section 2.7 Voluntary Prepayment; Reduction of the Maximum Line Amount; Termination of the
Credit Facility by the Borrower. Except as otherwise provided herein, the

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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 Amount at any time if it (i) gives the Lender at least
90 days advance written notice prior to the proposed Termination Date, and (ii) pays the Lender
applicable termination and Maximum Line Amount reduction fees in accordance with the terms of this
Agreement. Any reduction in the Maximum Line Amount shall be in multiples of $100,000, and with a
minimum reduction of at least $500,000. If the Borrower terminates the Credit Facility or reduces
the Maximum Line Amount to zero, all Indebtedness shall be immediately due and payable, and if the
Borrower gives the Lender less than the required 90 days advance written notice, then the interest
rate applicable to borrowings evidenced by the Revolving Note shall be the Default Rate for the
period of time commencing 90 days prior to the proposed Termination Date through the date that the
Lender actually receives such written notice. If the Borrower does not wish the Lender to consider
renewal of the Credit Facility on the next Maturity Date, then the Borrower shall give the Lender
at least 90 days written notice prior to the Maturity Date that it
will not be requesting renewal. If the Borrower fails to give the Lender such timely notice,
then the interest rate applicable to borrowings evidenced by the Revolving Note shall be the
Default Rate for the period of time commencing 90 days prior to the Maturity Date through the date
that the Lender actually receives such written notice. Notwithstanding the foregoing, the
termination and Maximum Line Amount reduction fees set forth in this Section 2.7 are intended to be
the same fees as, and not additional fees to, the fees set forth in Section 2.9 of the Domestic
Agreement, and no duplication of such fees is intended herein or therein.

     Section 2.8 Mandatory Prepayment. Without notice or demand, if the sum of the
outstanding principal balance of the Revolving Advances shall at any time exceed the Borrowing
Base, the Borrower shall immediately prepay the Revolving Advances to the extent necessary to
eliminate such excess. Any prepayment received by the Lender under this Agreement may be applied
to the Indebtedness, in such order and in such amounts as the Lender in its sole discretion may
determine from time to time.

     Section 2.9 Revolving Advances to Pay Indebtedness. Notwithstanding the terms of
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, and
so long as this does not create an overadvance, make a Revolving Advance in an amount equal to the
portion of the Indebtedness from time to time due and payable, and may deliver the proceeds of any
such Revolving Advance to Wells Fargo Merchant Services, L.L.C. in satisfaction of any unpaid
obligations due to Wells Fargo Merchant Services, L.L.C.

     Section 2.10
Use of Proceeds The Borrower shall use the proceeds of each Advance in
accordance with the Borrower Agreement.

     Section 2.11 Liability Records. The Lender may maintain from time to time, at its
discretion, records as to the Indebtedness. 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 Indebtedness 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.

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ARTICLE III

SECURITY INTEREST; OCCUPANCY; SETOFF

     Section 3.1 Grant of Security Interest. The Borrower hereby pledges, assigns and grants to the Lender, for the benefit of itself and
as agent for Wells Fargo Merchant Services, L.L.C., a lien and security interest (collectively
referred to as the “Security Interest”) in the Collateral, as security for the payment and
performance of: (a) all present and future Indebtedness of the Borrower to the Lender; (b) all
obligations of the Borrower and rights of the Lender under this Agreement; and (c) all present and
future obligations of the Borrower to the Lender of other kinds. Upon request by the Lender, the
Borrower will grant to the Lender, for the benefit of itself and as agent for Wells Fargo Merchant
Services, L.L.C., a security interest in all commercial tort claims that the Borrower may have
against any Person. In addition, the Borrower to further secure all such Indebtedness shall
execute a Mortgage of $1,000,000 on property in Victoria, Minnesota.

     Section 3.2 Notification of Account Debtors and Other Obligors. The Lender may at any
time after an Event of Default, 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, 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. The Lender may, in
the Lender’s name or in the Borrower’s name, as the Borrower’s agent and attorney-in-fact, notify
the United States Postal Service to change the address for delivery of the Borrower’s mail to any
address designated by the Lender, otherwise intercept the Borrower’s mail, and receive, open and
dispose of the Borrower’s mail, applying all Collateral as permitted under this Agreement and
holding all other mail for the Borrower’s account or forwarding such mail to the Borrower’s last
known address.

     Section 3.3 Assignment of Insurance. Except for insurance obtained or pledged to a
Landlord covering leased premises, as additional security for the payment and performance of the
Indebtedness, 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. Any
monies received as payment for any loss under any insurance policy mentioned above (other than
liability insurance policies) or as payment of any award or compensation for condemnation or taking
by eminent domain, shall be paid over to the Lender to be applied, at the option of the Lender,
either to the prepayment of the Indebtedness or shall be

17

 

disbursed to the Borrower under staged
payment terms reasonably satisfactory to the Lender for application to the cost of repairs,
replacements, or restorations. Any such repairs, replacements, or restorations shall be
effected with reasonable promptness and shall be of a value at least equal to the value of the
items or property destroyed prior to such damage or destruction.

     Section 3.4 Occupancy.

     (a) To the greatest extent possible under existing or future leases and consistent with
any Landlord Waivers and Mortgagee Disclaimers, but subject to the mortgages of Commerce
Bank or its affiliates, the Borrower hereby irrevocably grants to the Lender the right to
take exclusive possession of the Premises at any time during a Default Period without notice
or consent.

     (b) The Lender may use the Premises only to hold, process, manufacture, sell, use,
store, liquidate, realize upon or otherwise dispose of items 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 Indebtedness and termination of the Credit
Facility, and (ii) final sale or disposition of all items constituting Collateral and
delivery of all such items 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 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, such financing statements against collateral described as “all personal property” or “all
assets” or describing specific items of collateral including commercial tort claims as the Lender
deems necessary or
useful to perfect the Security Interest. All financing statements filed before the date
hereof to perfect the Security Interest were authorized by the Borrower and are

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hereby
re-authorized. 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 Borrower represents and warrants that the following information is true and correct:

Name and address of Debtor:

HEI, Inc.

1495 Steiger Lake Lane

Victoria, Minnesota 55386

Federal Employer Identification No. 41-0944876

Organizational Identification No. MN 1P-877

Name and address of Secured Party:

Wells Fargo Bank, National Association

MAC N9312-040

Sixth and Marquette

Minneapolis, Minnesota 55479

     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 Indebtedness, whether or not due. In
addition, each other Person holding a participating interest in any Indebtedness 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 Indebtedness.

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ARTICLE IV

CONDITIONS OF LENDING

     Section 4.1 Conditions Precedent to the Initial Advances. The Lender’s obligation to
make the initial Advances shall be subject to the condition precedent that the Lender shall have
received all of the following, each properly executed by the appropriate party and in form and
substance satisfactory to the Lender:

     (a) This Agreement.

     (b) The Revolving Notes.

     (c) The Domestic Documents.

     (d) The Borrower Agreement and the Ex-Im Bank Application dated prior to Closing.

     (e) The Export-Related Borrowing Base Certificate dated not more than five (5) days
prior to Closing.

     (f) 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.

     (g) 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.

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

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

     (j) An acknowledgment and agreement from SAP as licensor and any other licensor in
favor of the Lender, together with a true, correct and complete copy of any such license
agreements, except the expired Syteline License.

     (k) The Wholesale Lockbox and Collection Account Agreement.

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     (l) Control agreements with each bank at which the Borrower maintains deposit accounts.

     (m) The Patent and Trademark Security Agreement.

     (n) The Guaranty of Thomas F. Leahy.

     (o) The Leahy Pledge Agreement.

     (p) The Control Agreement.

     (q) The Mortgagee’s Disclaimer and Consent.

     (r) 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.

     (s) 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.

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

     (u) 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.

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

     (w) 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.

     (x) Payment of all fees due under the terms of this Agreement through the date of the
initial Advance, the Term Advance, and payment of all expenses incurred by the Lender
through such date and that are required to be paid by the Borrower under this Agreement.

21

 

     (y) Evidence that after making the initial Revolving Advance, satisfying all
obligations owed to the Borrower’s prior lender, satisfying all trade payables older than 60
days from invoice date, book overdrafts and closing costs, Availability shall be not less
than $1,750,000.

     (z) A Customer Identification Information form and such other forms and verification as
the Lender may need to comply with the U.S.A. Patriot Act.

     (aa) With respect to the real estate that is encumbered by the mortgage of the Lender
(i) a flood hazard determination form, confirming whether or not the parcel is in a flood
hazard area and whether or not flood insurance must be obtained, and, if the real estate is
located in a flood hazard area, (ii) a policy of flood insurance.

     (bb) Such other documents as the Lender in its sole discretion may require.

     (cc) The Securities Account shall have been established.

     (dd) A signed Economic Impact Certificate.

     (ee) Payment of all Ex-Im fees.

     (ff) All conditions set forth in Section 4 of the Domestic Agreement shall have been
effectively completed (unless such conditions have been waived by the Lender).

     Section 4.2 Conditions Precedent to All Advances. The Lender’s obligation to make
each Advance 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 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 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 and Organizational Identification Number.
The Borrower is a corporation, duly organized, validly existing and in good standing under the laws
of the State of Minnesota and is duly licensed or qualified to transact business in all
jurisdictions where the character of the property owned or leased or the nature of the business
transacted by it makes such licensing or qualification necessary. The Borrower has all
requisite power and authority to conduct its business, to own its properties and to execute and
deliver, and to perform all of its obligations under, the Loan Documents. During its existence,
the Borrower has done business solely under the names set forth in Schedule 5.1. The Borrower’s
chief

22

 

executive office and principal place of business is located at the address 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. 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 and
organization identification number are 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 and Affiliates. Except as set forth in Schedule 5.5 hereto,
the Borrower has no Subsidiaries and no Affiliates.

     Section 5.6 Financial Condition; No Adverse Change. The Borrower has furnished to the Lender its audited financial statements for its fiscal
year ended September 2, 2006 and unaudited financial statements for the fiscal-year-to-date period
ended March 31, 2007, 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 GAAP. Since the date of the most recent financial statements, there
has been no material adverse change in the Borrower’s business, properties or condition (financial
or otherwise) which has had a Material Adverse Effect.

     Section 5.7 Litigation. Except as set forth in Schedule 5.7, there are no actions,
suits or proceedings pending or, to the Borrower’s knowledge, threatened against or affecting the

23

 

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 on the financial condition, properties or operations of the Borrower
or any of its Affiliates.

     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 to register trademarks, service marks,
applications to register service marks, mask
works, trade dress and copyrights for which the Borrower is the owner of record (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 shall not apply with respect to employees and

24

 

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 (a) maintains or has maintained any Pension
Plan, (b) contributes or has contributed to any Multiemployer Plan or (c) provides or has provided
post-retirement medical or insurance benefits with respect to employees or former employees (other
than benefits required under Section 601 of ERISA, Section 4980B of the IRC or applicable state
law). Neither the Borrower nor any ERISA Affiliate has received any notice or has any knowledge to
the effect that it is not in full compliance with any of the requirements of ERISA, the IRC or
applicable state law with respect to any Plan. No Reportable Event exists in connection with any
Pension Plan. Each Plan which is intended to qualify under the IRC is so qualified, and no fact or
circumstance exists which may have an adverse effect on the Plan’s tax qualified status. Neither
the Borrower nor any ERISA Affiliate has (i) any accumulated funding deficiency (as defined in
Section 302 of ERISA and Section 412 of the IRC) under any Plan, whether or not waived, (ii) any
liability under Section 4201 or 4243 of ERISA for any withdrawal, partial withdrawal,
reorganization or other event under any Multiemployer Plan or (iii) any liability or knowledge of
any facts or circumstances which could result in any liability to the Pension Benefit Guaranty
Corporation, the Internal Revenue Service, the Department of Labor or any participant in connection
with any Plan (other than routine claims for benefits under the Plan).

25

 

     Section 5.13 Default. The Borrower is in compliance with all provisions of all
agreements, instruments, decrees and orders to which it is a party or by which it or its property
is bound or affected, the breach or default of which could have a Material Adverse Effect on the
Borrower’s financial condition, properties or operations.

     Section 5.14 Environmental Matters.

     (a) Except as disclosed on Schedule 5.14, to the best of the Borrower’s 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 the common law of any jurisdiction or under any Environmental Law, and to the
best of the Borrower’s knowledge, 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) Except as disclosed on Schedule 5.14, 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 best of the Borrower’s knowledge, and except as disclosed on Schedule 5.14,
there are no, (and there have not existed in the past), nor are there any threatened,
impending 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.

     (d) To the best of the Borrower’s knowledge, and except as disclosed on Schedule 5.14,
the Borrower’s businesses are, and to the best of Borrower’s knowledge, 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, nor has the Borrower been denied insurance on grounds related to
potential environmental liability. 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) Except as disclosed on Schedule 5.14, the Premises are not, and to the best of
Borrower’s knowledge, have never 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 the Lender all environmental assessments, audits,
reports, permits, licenses and other documents describing or relating in any way to the
Premises or the Borrower’s businesses.

     Section 5.15 Submissions to the 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 (i) is true and correct in all material respects, (ii) does
not

26

 

omit any material fact necessary to make such information not misleading and, (iii) as to
projections, valuations or proforma financial statements, presents a good faith opinion as to such
projections, valuations and proforma condition and results.

     Section 5.16 Financing Statements. The Borrower 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, except
ordinary course of business returns and credit memos.

ARTICLE VI

COVENANTS

     So long as the Indebtedness 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 120
days after the end of each fiscal year of the Borrower, 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 (unaudited) and consolidated (audited) 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, fairly
represent the Borrower’s financial position and the results of its operations, and whether or not
such Officer has knowledge of the occurrence of any Default or Event of Default and, if so, stating
in reasonable detail the facts with respect thereto.

27

 

          (b) Monthly Financial Statements. As soon as available and in any event within 20
days after the end of each month, the monthly Borrowing Base Certificate, the 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 which fairly represent
the Borrower’s financial position and the results of its operations; and accompanied by a
certificate of the Borrower’s chief financial officer, substantially in the form of Exhibit hereto
stating (i) that such financial statements have been prepared in accordance with GAAP, subject to
year-end audit adjustments, and fairly represent the Borrower’s financial position and the results
of its
operations, (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) Accounts Inventory. Within 15 days after the end of each month, the Borrower
shall provide a monthly accounts receivable and accounts payable listing and aging and an inventory
report, both of which shall be submitted electronically to the Lender via its vendor Collateral
Services Inc. (CSI). Monthly processing fees shall apply to such reporting.

          (d) Collateral Reports. Within 15 days after the end of each month or more frequently
if the Lender so requires, the Borrower’s accounts receivable and its accounts payable, a detailed
inventory report, an inventory certification report, a calculation of the Borrower’s Accounts,
Eligible Export-Related Accounts Receivable, Export-Related Accounts Receivable Value, Inventory,
Eligible Export-Related Inventory and Export-Related Value, an Export-Related Borrowing Base
Certificate and all Export Reports issued during such month, each as at the end of such month or
shorter time period and any additional reports required under the Ex-Im Documents.

          (e) Projections. No later than 30 days before the last day of each fiscal year, the
Borrower’s projected balance sheets, income statements, statements of cash flow for each month of
the succeeding fiscal year, each in reasonable detail. Such items will be certified by the
Officer who is the Borrower’s chief financial officer as being the most accurate projections
available and identical to the projections used by the Borrower for internal planning purposes and
be delivered with a statement of underlying assumptions and such supporting schedules and
information as the Lender may in its discretion require.

          (f) Supplemental Reports. Weekly, or more frequently if the Lender so requires, the
Borrower’s “Daily Collateral Reports”, the Export-Related Borrowing Base Certificate, a schedule of
Export Orders (as defined in the Borrower Agreement), receivables schedules, and collection
reports, as well as such additional reports as the Lender may require.

          (g) Litigation. Immediately after the commencement thereof, notice in writing of all
litigation and of all proceedings before any governmental or regulatory agency affecting the

28

 

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.

          (h) Defaults. When any Officer of the Borrower becomes aware of the probable occurrence of any Default or
Event of Default, and no later than 3 days after such Officer becomes aware of such Default or
Event of Default, 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.

          (i) 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, a statement signed by the Officer who is 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 signed by the Officer who is
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 within ten 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 Section 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 the Borrower proposes to take with respect
thereto.

          (j) Disputes. Promptly upon knowledge thereof, notice of (i) any disputes or claims
by the Borrower’s customers exceeding $10,000 individually or $25,000 in the aggregate during any
fiscal year; (ii) credit memos exceeding $10,000 individually or $25,000 in the aggregate during
any fiscal year;; and (iii) any goods returned to or recovered by the Borrower exceeding $10,000
individually or $25,000 in the aggregate during any fiscal year and excluding valid warranty work.

          (k) Officers and Directors. Promptly upon knowledge thereof, notice of any change in
the persons constituting the Borrower’s Officers and Directors.

          (l) Collateral. Promptly upon knowledge thereof, notice of any material loss of or
material damage to any Collateral or of any substantial adverse change in any Collateral or the
prospect of payment thereof.

          (m) Commercial Tort Claims. Promptly upon knowledge thereof, 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.

29

 

          (n) Intellectual Property.

     (i) 30 days prior written notice of Borrower’s intent to acquire material
Intellectual Property Rights; except for transfers permitted under Section 6.17, the
Borrower will give the Lender 30 days prior written notice of its intent to dispose
of 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, notice of (A) any Infringement of its
Intellectual Property Rights by others, (B) claims that the Borrower is Infringing
another Person’s Intellectual Property Rights and (C) any threatened cancellation,
termination or material limitation of its Intellectual Property Rights.

     (iii) Promptly upon receipt, copies of all registrations and filings with
respect to its Intellectual Property Rights.

          (o) Reports to Owners. Promptly upon their distribution, copies of all financial
statements, reports and proxy statements which the Borrower shall have sent to its Owners.

          (p) SEC Filings. Promptly after the sending or filing thereof, copies of all regular
and periodic reports which the Borrower shall file with the Securities and Exchange Commission or
any national securities exchange.

          (q) Tax Returns of the Borrower. As soon as possible, and in any event no later than
five days after they are due to be filed or after any statutory extension, copies of the state and
federal income tax returns and all schedules thereto of the Borrower.

          (r) Violations of Law. Promptly upon knowledge thereof, notice of the Borrower’s
violation of any law, rule or regulation, the non-compliance with which could materially and
adversely affect the financial condition, properties or operations of the Borrower.

          (s) Other Reports. From time to time, with reasonable promptness, any and all
receivables schedules, inventory reports, 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 Earnings Before Taxes. The Borrower will achieve Earnings Before Taxes
each period defined below of not less than the amount set forth for each such period below:

	 	 	 	 	 
	 	 	Period to Date Pretax
	Period	 	Profit
	April, 2007

	 	$	(875,000	)
	April through May, 2007

	 	$	(1,325,000	)
	April through June, 2007

	 	$	(1,575,000	)

30

 

	 	 	 	 	 
	 	 	Period to Date Pretax
	Period
	 	Profit
	April through July, 2007

	 	$	(1,725,000	)
	April through August, 2007

	 	$	(1,775,000	)
	 
	 	 	 	 
	Fiscal Year 2008 through:
	 	 	 	 
	September, 2007

	 	$	0	 
	October, 2007

	 	$	0	 
	November, 2007

	 	$	300,000	 
	December, 2007

	 	$	400,000	 
	January, 2008

	 	$	500,000	 
	February, 2008

	 	$	600,000	 

          (b) Minimum Debt Service Coverage Ratio. The Borrower will maintain, as of each year
end, a Debt Service Coverage Ratio of not less than 1.1 to 1.0., during each fiscal year ending
described below:

	 	 	 
	 	 	Minimum Debt Service
	Period	 	Coverage Ratio
	Through August, 2008

	 	1.1 to 1.00
	Through August, 2009

	 	1.1 to 1.00
	Through August, 2010

	 	1.1 to 1.00

          (c) Capital Expenditures. The Borrower will not incur or contract to incur Capital
Expenditures of more than $500,000 nor more than $100,000 unfinanced Capital Expenditures, in the
aggregate during any fiscal year and for the period from April to August, 2007. The Lender and the
Borrower will review the Capital Expenditures limits after the first quarter of Fiscal Year 2008 to
determine whether an amendment is appropriate.

     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 (each a “Permitted Lien”; 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 this Agreement;

     (iii) The Security Interest and Liens created by the Security Documents; and

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     (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 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. Any authorization by the Lender to any Person to amend financing
statements in favor of the Lender shall be in writing.

     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) Any existing or future Indebtedness or any other obligations of the Borrower to the
Lender;

     (b) Any indebtedness of the Borrower in existence on the date hereof and listed in
Schedule 6.4 hereto; and

     (c) Any 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 6.5 hereto.

     Section 6.6 Investments and Subsidiaries. The Borrower will not make or permit to
exist any loans or advances to, or make any investment or acquire any interest whatsoever in, any
other Person or Affiliate, including any partnership or joint venture, nor purchase or hold
beneficially any stock or other securities or evidence of indebtedness of any other Person or
Affiliate, 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 & Poor’s Ratings Services 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);

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

     (c) Prepaid rent not exceeding one month 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. Borrower will not declare or pay any
dividends (other than dividends payable solely in stock of the Borrower) on any class of its stock,
or make any payment on account of the purchase, redemption or other retirement of any shares of
such stock, or other securities or evidence of its indebtedness or make any distribution in respect
thereof, either directly or indirectly.

     Section 6.8 Salaries. The Borrower will not pay excessive or unreasonable salaries,
bonuses, commissions, consultant fees or other compensation; or increase the salary, bonus,
commissions, consultant fees or other compensation of any Director, Officer or consultant, or any
member of their families, by more than ten percent (10%) 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; Collateral Examination, Inspection and Appraisals.

     (a) 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, accountant or other agent of 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, and to discuss the Borrower’s affairs with any of
its Directors, Officers, employees or agents.

     (b) The Borrower hereby irrevocably authorizes all accountants and third parties to
disclose and deliver to the Lender or its designated agent, at the Borrower’s expense, all
financial information, books and records, work papers, management reports and other
information in their possession regarding the Borrower.

     (c) The Borrower will permit the Lender or its employees, accountants, attorneys or
agents, to examine and inspect any Collateral or any other property of the Borrower at any
time during ordinary business hours.

     (d) The Lender may also, from time to time, obtain at the Borrower’s expense an
appraisal of Collateral by an appraiser acceptable to the Lender in its sole discretion.
The Lender agrees that it will limit the cost of such to one appraisal per year so long as
the Borrower is not in default.

     Section 6.10 Account Verification.

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     (a) The Lender or its agent 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 or its agent may also at any time and from time to
time telephone account debtors and other obligors to verify accounts.

     (b) The Borrower shall pay when due each account payable due to a Person holding a
Permitted Lien (as a result of such payable) on any Collateral.

     Section 6.11 Compliance with Laws.

     (a) The Borrower shall (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
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.

     (c) The Borrower shall (i) not use or permit the use of the proceeds of the Credit
Facility or any other financial accommodation from the Lender to violate any of the foreign
asset control regulations of the Office of Foreign Assets Control, (“OFAC”) or other
applicable law, (ii) comply with all applicable Bank Secrecy Act laws and regulations, as
amended from time to time, and (iii) otherwise comply with the USA Patriot Act as required
by federal law and the Lender’s policies and practices.

     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 covenant shall prevent the Borrower
from discontinuing the operation and maintenance of any of its properties if

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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 acceptable to the Lender, in such amounts, on such terms (including any deductibles)
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 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 without prior written consent of the Lender 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 Indebtedness. The Borrower will not license any
other Person to use any of the Borrower’s Intellectual Property Rights, except that the Borrower

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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 without the prior written
consent of the Lender 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.

     Section 6.21 Accounting. The Borrower will not adopt any material change in
accounting principles other than as required by GAAP without prior written consent of the Lender.
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. Except in the ordinary course of business, and after written notice to Lender, 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. Except as disclosed to the Lender in writing prior to the date
hereof, 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.

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     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 Section 6.12 and Section 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
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 hereunder.

     Section 6.27 Credit Facility Subject to Ex-Im Bank Rules. The Borrower acknowledges
that the Lender is willing to make the Credit Facility available to the Borrower because Ex-Im Bank
is willing to guaranty payment of a significant portion of the Obligations pursuant to the master
Guarantee Agreement. Accordingly, in the event of any inconsistency among the Loan Documents and
the Guarantee Agreement or related documents, the provision that is the more stringent on the
Borrower shall control.

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 Note or any default with respect to any other
Indebtedness due from the Borrower to the Lender as such Indebtedness becomes due and
payable;

     (b) Default in the performance, or breach, of any covenant or agreement of the Borrower
contained in this Agreement;

     (c) An Overadvance arises as the result of any reduction in the Borrowing Base, or
arises in any manner on terms not otherwise approved of in advance by the Lender in writing;

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     (d) Any Financial Covenant shall become inapplicable due to the lapse of time and the
failure of the Lender and the Borrower to come to an agreement to amend any such covenant to
cover future periods that is acceptable to the Lender in the Lender’s sole discretion;

     (e) The Borrower or any Guarantor shall be or become insolvent, or admit in writing its
or his inability to pay its or his debts as they mature, or make an assignment for the
benefit of creditors; or the Borrower or any Guarantor shall apply for or consent to the
appointment of any receiver, trustee, or similar officer for it or him or for all or any
substantial part of its or his property; or such receiver, trustee or similar officer shall
be appointed without the application or consent of the Borrower or such Guarantor, as the
case may be; or the Borrower or any Guarantor shall institute (by petition, application,
answer, consent or otherwise) any bankruptcy, insolvency, reorganization, arrangement,
readjustment of debt, dissolution, liquidation or similar proceeding relating to it or him
under the laws of any jurisdiction; or any such proceeding shall be instituted (by petition,
application or otherwise) against the Borrower or any such Guarantor; or any judgment, writ,
warrant of attachment or execution or similar process shall be issued or levied against a
substantial part of the property of the Borrower or any Guarantor;

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

     (g) Any representation or warranty made by the Borrower in this Agreement, by any
Guarantor in any Guaranty delivered to the Lender, or by the Borrower (or any of its
Officers) or any Guarantor in any agreement, certificate, instrument or financial statement
or other statement contemplated by or made or delivered pursuant to or in connection with
this Agreement or any such Guaranty shall be incorrect in any material respect;

     (h) The rendering against the Borrower of an arbitration award, a 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;

     (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

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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) Default in the payment of any amount owed by the Borrower to the Lender other than
any Indebtedness arising hereunder;

     (m) Any breach, default or event of default shall occur under the Borrower Agreement or
any Domestic Document or any event described in Section 2.11 of the Borrower Agreement.

     (n) The Borrower shall take or participate in any action which would be prohibited
under the provisions of any Subordination Agreement or make any payment with respect to
indebtedness that has been subordinated pursuant to any Subordination Agreement;

     (o) The Borrower shall fail to employ both a Chief Executive Officer and a Chief
Financial Officer which is, in each case, acceptable to the Lender in its sole discretion
within 60 days of such cessation;

     (p) The Lender believes in good faith that the prospect of payment in full of any part
of the Indebtedness or that full performance by the Borrower under the Loan Documents, is
impaired, or that there has occurred any material adverse change in the business or
financial condition of the Borrower;

     (q) There has occurred any breach, default or event of default by, or attributable to,
any Affiliate under any agreement between the Affiliate and the Lender; or

     (r) The indictment of any Director, Officer, or any Owner of at least twenty percent
(20%) of the issued and outstanding common stock of the Borrower for a felony offence under
state or federal law.

     (s) Any Guarantor shall repudiate or purport to revoke its, his or her Guaranty, or any
Guaranty for any reason shall cease to be in full force and effect as to the Guarantor
executing or delivering the same or shall be judicially declared null and void as to such
Guarantor.

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     (t) Thomas F. Leahy should at any time cease to be the Chairman of the Board of
Directors of the Borrower.

     Section 7.2 Rights and Remedies. During any Default Period, the Lender may exercise
any or all of the following rights and remedies:

     (a) The Lender may, by notice to the Borrower, declare the Commitment to be terminated,
whereupon the same shall forthwith terminate;

     (b) The Lender may, by notice to the Borrower, declare the Indebtedness to be forthwith
due and payable, whereupon all Indebtedness 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 Indebtedness;

     (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 exercise and enforce its rights and remedies under the Loan
Documents;

     (f) The Lender may without regard to any waste, adequacy of the security or solvency of
the Borrower, apply for the appointment of a receiver of the Collateral, to which
appointment the Borrower hereby consents, whether or not foreclosure proceedings have been
commenced under the Security Documents and whether or not a foreclosure sale has occurred;
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 Section
7.1(e) or (f), the Indebtedness 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 Indebtedness 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 Indebtedness.

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     Section 7.3 Certain Notices. If notice to the Borrower of any intended disposition of
Collateral or any other intended action is required by law in a particular instance, such notice
shall be deemed commercially reasonable if given (in the manner specified in Section 8.3) at least
ten calendar days before the date of intended disposition or other action.

ARTICLE VIII

MISCELLANEOUS

     Section 8.1 No Waiver; Cumulative Remedies; Compliance with Laws. No failure or delay
by the Lender in exercising any right, power or remedy under the Loan Documents or the Domestic
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 or the Domestic Documents. The remedies provided
in the Loan Documents or the Domestic 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 Notices; Communication of Confidential Information; 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, (d) transmitted by telecopy, or (e) sent as electronic mail, in each case
delivered or sent to the party to whom notice is being given to the business address, telecopier
number, or e mail address set forth below next to its signature or, as to each party, at such other
business address, telecopier number, or e mail address as it may hereafter designate in writing to
the other party pursuant to the terms of this Section. All such notices, requests, demands
and other communications shall be deemed to be an authenticated record communicated or given on (a)
the date received if personally delivered, (b) when deposited in the mail if delivered by mail, (c)
the date delivered to the courier if delivered by overnight courier, or (d) the date of
transmission if sent by telecopy or by e mail, except that notices or requests delivered to the
Lender pursuant to any of the provisions of Article II shall not be effective until received by the
Lender. All notices, financial information, or other business records sent by either party to this
Agreement may be transmitted, sent, or otherwise communicated via such medium as the sending party
may deem appropriate and commercially reasonable; provided, however, that the risk that the
confidentiality or privacy of such notices, financial information, or other business records sent
by either party may be compromised shall be borne exclusively by the Borrower. All requests for an
accounting under Section 9-210 of the UCC (i) shall be made in a writing

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signed by a Person
authorized under Section 2.2(a), (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 of the UCC. 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 the 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, deliver,
endorse and authorize the filing of any and all instruments, documents, conveyances, assignments,
security agreements, financing statements, control agreements and other agreements and writings
that the Lender may reasonably request in order to secure, protect, perfect or enforce the Security
Interest or the Lender’s rights under the Loan Documents (but any failure to request or assure that
the Borrower executes, delivers, endorses or authorizes the filing of 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
Indebtedness, this Agreement, the Loan Documents, any Domestic 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 Indebtedness 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
6.11(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

42

 

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 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 obligations
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 or any other Loan Document by telefacsimile or other electronic means shall be equally as
effective as delivery of an original
executed counterpart of this Agreement or such other Loan Document. Any party delivering an
executed counterpart of this Agreement or any other Loan Document by telefacsimile or other
electronic means also shall deliver an original executed counterpart of this Agreement or such
other Loan Document but the failure to deliver an original executed counterpart shall not affect
the validity, enforceability, and binding effect of this Agreement or such other Loan Document.

     Section 8.9 Retention of the 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 30
days after receipt by the Lender. If there is a special need to retain specific records, the
Borrower must inform the Lender of its need to retain those records with particularity, which must
be delivered in accordance with the notice provisions of Section 8.3 within 30 days of the Lender
taking control of same.

     Section 8.10 Binding Effect; Assignment; Complete Agreement; Sharing 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

43

 

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. To the extent that any provision of this Agreement contradicts other provisions of
the Loan Documents, this Agreement shall control. 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 may share 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 sharing of information. The Borrower acknowledges
that the Lender is willing to make the Credit Facility available to the Borrower because Ex-Im Bank
is willing to guaranty payment of a significant portion of the Obligations pursuant to the Master
Guarantee Agreement. Accordingly, in the event of any inconsistency among the Loan Documents and
the Master Guarantee Agreement, or related documents, the provision that is the more stringent on
the Borrower shall control. This Agreement and the loans evidenced by the Revolving Notes are sub
loans under the Domestic Agreement and are not meant to provide additional credit above the Maximum
Line Amount defined therein.

     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. To the extent that any of
the terms of this Agreement conflict with the Borrower Agreement or any of the documents executed
in connection with the guaranty by Ex-Im Bank, the terms which are more restrictive to the Borrower
shall control.

     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 Minneapolis, 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.

     Section 8.14 Attorneys’ Fees. References in the Loan Documents to fees and expenses
of attorneys or counsel shall include all such fees and expenses, whether incurred at the trial or
appellate level, in an arbitration or administrative proceeding, in bankruptcy (including, without
limitation, any adversary proceeding, contested matter or motion) or otherwise incurred.

[The remainder of this page intentionally left blank.]

44

 

     THE BORROWER AND THE LENDER WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION AT LAW OR IN EQUITY
OR IN ANY OTHER PROCEEDING BASED ON OR PERTAINING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT.

     Borrower’s Initials /s/
MT                    ;            Lender’s Initials  /s/
MG                      .

     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.

	 	 	 	 	 	 	 	 	 
	HEI, INC.	 	HEI, INC.	 	 
	 
	1439 Steiger Lake Lane	 	 	 	 	 	 
	Victoria, MN 55386	 	 	 	 	 	 
	Telecopier: (952) 443-2668	 	By:	 	/s/ Mark Thomas	 	 
	 

	 	 	 	 	 	 	 	 
	Attention: Mark Thomas	 	Name: Mark Thomas	 	 
	e-mail: Mark.Thomas@heii.com	 	Its: Chief Executive Officer	 	 
	 
	 	 	 	 	 	 	 	 
	Wells Fargo Bank, National Association,	 	WELLS FARGO BANK, NATIONAL	 	 
	Wells Fargo Business Credit	 	ASSOCIATION	 	 
	MAC N9312-040	 	 	 	 	 	 
	Sixth and Marquette	 	 	 	 	 	 
	Minneapolis, Minnesota 55479	 	 	 	 	 	 
	Telecopier: (612) 673-8589	 	By:	 	/s/ Michael L. Guillou	 	 
	 

	 	 	 	 	 	 	 	 
	Attention: Michael L. Guillou	 	Name: Michael L. Guillou	 	 
	e-mail: Michael.l.guillou@wellsfargo.com	 	Its: Relationship Manager	 	 
	 
	 	 	 	 	 	 	 	 
	GUARANTOR:	 	 	 	 	 	 
	736 Widsten Circle	 	 	 	 	 	 
	Wayzata, MN 55391	 		 	 
	Telecopier:
	 	 	 	/s/ Thomas F. Leahy	 	 	 	 
	 	 	 	 	 	 	 
	e-mail:	 	 	 	Thomas F. Leahy	 	 
	 

	 	 

	 	 	 	 	 	 

[Signature page to Credit and Security Agreement for the Export-Import Bank]

 

 

Table of Exhibits and Schedules

	 	 	 
	Exhibit A

	 	Form of Revolving Note
	 
	 	 
	Exhibit B

	 	Compliance Certificate
	 
	 	 
	Exhibit C

	 	Premises
	 
	 	 
	Exhibit D

	 	Export-Related Borrowing Base Certificate
	 
	 	 
	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 5.7

	 	Litigation Matters
	 
	 	 
	Schedule 5.11

	 	Intellectual Property Disclosures
	 
	 	 
	Schedule 5.14

	 	Environmental Matters
	 
	 	 
	Schedule 6.3

	 	Permitted Liens
	 
	 	 
	Schedule 6.4

	 	Permitted Indebtedness
	 
	 	 
	Schedule 6.5

	 	Guaranties

 

 

Exhibit A to Credit and Security Agreement

REVOLVING NOTE

			
	$2,700,000.00/$300,000.00
	 	April ___, 2007

     For value received, the undersigned, HEI, Inc., a Minnesota corporation (the “Borrower”),
hereby promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION (the “Lender”),
acting through its Wells Fargo Business Credit operating division, on the Termination Date
referenced in the Credit and Security Agreement dated the same date as this Revolving Note that was
entered into by the Lender and the Borrower (as amended from time to time, the “Credit Agreement”),
at the Lender’s office located at 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 Two Million Seven hundred Thousand/Three Hundred Thousand
Dollars ($2,700,000.00/$300,000.00) or the aggregate unpaid principal amount of all Revolving
Advances made by the Lender to the Borrower under the Credit Agreement, 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 Revolving Note is
fully paid at the rate from time to time in effect under the Credit Agreement.

     This Revolving Note is the Revolving Note referenced in the Credit Agreement and is subject to
the terms of the Credit Agreement, which provides, among other things, for acceleration hereof.
Principal and interest due hereunder shall be payable as provided in the Credit Agreement, and this
Revolving Note may be prepaid only in accordance with the terms of the Credit Agreement. This
Revolving 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 Revolving 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.

	 	 	 	 	 	 	 
	 	 	HEI, INC.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 

	 	 
	 	 	Name: Mark Thomas	 	 
	 	 	Its: Chief Executive Officer and Chief Financial Officer	 	 

A-1

 

 

Exhibit B to Credit and Security Agreement

COMPLIANCE CERTIFICATE

To: Wells Fargo Bank, National Association

Attn: Michael L. Guillou

Date:                     , 200___

Subject: Financial Statements

     In accordance with our Credit and Security Agreement dated as of [___] (as amended
from time to time, 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.

     I further hereby certify as follows: Events of Default. (Check one):

	 	o	 	The undersigned does not have knowledge of the occurrence of a Default or Event of
Default under the Credit Agreement except as previously reported in writing to the
Lender.
	 
	 	o	 	The undersigned has knowledge of the occurrence of a Default or Event of Default
under the Credit Agreement not previously reported in writing to the Lender and
attached hereto is a statement of the facts with respect to thereto. The Borrower
acknowledges that pursuant to Section 2.3(c) of the Credit Agreement, the Lender may
impose the Default Rate at any time during the resulting Default Period.

     Material Adverse Change in Litigation Matters of the Borrower. I further hereby certify as
follows (check one):

	 	o	 	The undersigned has no knowledge of any material adverse change to the litigation
exposure of the Borrower or any of its Affiliates or of any Guarantor.
	 
	 	o	 	The undersigned has knowledge of material adverse changes to the litigation exposure
of the Borrower or any of its Affiliates or of any Guarantor not previously
disclosed in Schedule 5.7. Attached to this Certificate is a statement of the facts
with respect thereto.

Financial Covenants. I further hereby certify as follows (check and complete each of the
following):

B-1

 

 

     1. Minimum Earnings Before Taxes. Pursuant to Section 6.2(a) of the Credit Agreement,
the Borrower’s Earnings Before Taxes for the [                    ] period ending on the Reporting Date, was
$                    , which o satisfies o does not satisfy the
requirement that such amount be not less
than                     :

	 	 	 	 	 
	 	 	Minimum Earnings Before
	Period
	 	Taxes
	April, 2007

	 	$	(875,000	)
	April through May, 2007

	 	$	(1,325,000	)
	April through June, 2007

	 	$	(1,575,000	)
	April through July, 2007

	 	$	(1,725,000	)
	April through August, 2007

	 	$	(1,775,000	)
	 
	 	 	 	 
	Fiscal Year 2008 through:
	 	 	 	 
	September, 2007

	 	$	0	 
	October, 2007

	 	$	0	 
	November, 2007

	 	$	300,000	 
	December, 2007

	 	$	400,000	 
	January, 2008

	 	$	500,000	 
	February, 2008

	 	$	600,000	 

     2. Minimum Debt Service Coverage Ratio. Pursuant to Section 6.2(b) of the Credit
Agreement, as of the Reporting Date, the Borrower’s Debt Service Coverage Ratio was [___] to
1.00, whicho satisfieso  does not  satisfy the requirement that such ratio be no less than the
applicable ratio set forth in the table below on the Reporting Date:

	 	 	 
	 	 	Minimum Debt Service
	Period	 	Coverage Ratio
	Through August, 2008
	 	1.1 to 1.00
	Through August, 2009
	 	1.1 to 1.00
	Through August, 2010
	 	1.1 to 1.00

     3. Capital Expenditures. Pursuant to Section 6.2(c) 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 reporting period ended                     , 200___, for Capital Expenditures,
$                     in
the aggregate and at most $                     for any nonfinanced Capital Expenditures, which o satisfies
o
does not satisfy the requirement that such expenditures not exceed $500,000 in the aggregate and
$100,000 for any nonfinanced Capital Expenditure during such year.

     4. Salaries. As of the Reporting Date, the Borrower has not paid excessive or
unreasonable salaries, bonuses, commissions, consultant fees or other compensation, or increased
the salary, bonus, commissions, consultant fees or other compensation of any Director, Officer or
consultant, or any member of their families, by more than ten percent (10%) over the amount

B-2

 

 

paid in
the Borrower’s previous fiscal year, either individually or for all such persons in the aggregate,
and has not paid any increase from any source other than profits earned in the year of payment, and
as a consequence o is o is not in compliance with Section 6.8 of the Credit Agreement.

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.

	 	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 

	 	 
	 

	 	Name:	 	 	 	 
	 

	 	 	 	 	 	 
	 	 	Its: Chief Financial Officer	 	 

B-3

 

 

Exhibit C to Credit and Security Agreement

PREMISES

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

Victoria Location – 1495 Steiger Lake Lane, Victoria, MN 55386, Legal description – Lot 2, Block 1,
Point Victoria, situated in Carver County, Minnesota

Chanhassen Location – 1546 Lake Drive West, Chanhassen, MN 55317

Boulder Location – 4801 North 63rd Street, Boulder, CO 80301

Tempe Location – 610 South Rockford Drive, Tempe, AZ 85281

C-1

 

 

Schedule 5.1 to Credit and Security Agreement

TRADE NAMES, CHIEF EXECUTIVE OFFICE, PRINCIPAL PLACE OF BUSINESS,

AND LOCATIONS OF COLLATERAL

TRADE NAMES

HEI, Inc., Microelectronics Operations (Victoria), Advanced Medical Operations (Boulder), High
Density Interconnect Operations (Tempe) and RFID Operations (Chanhassen)

CHIEF EXECUTIVE OFFICE/PRINCIPAL PLACE OF BUSINESS

1495 Steiger Lake Lane, Victoria, MN 55386

OTHER INVENTORY AND EQUIPMENT LOCATIONS

Chanhassen Location – 1546 Lake Drive West, Chanhassen, MN 55317

Boulder Location – 4801 North 63rd Street, Boulder, CO 80301

Tempe Location – 610 South Rockford Drive, Tempe, AZ 85281

S. 5-1.1

 

 

Schedule 5.2 to Credit and Security Agreement

CAPITALIZATION AND ORGANIZATIONAL CHART

For Holders of more than 5% of outstanding stock on date of Closing.

	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	No. of shares (after	 	 
	 	 	 	 	exercise of all rights	 	Percent interest on a
	Holder	 	Type of Rights/Stock	 	to acquire shares)	 	fully diluted basis
	Thomas F. Leahy
	 	Common and Preferred Stock	 	 	1,128,054	 	 	 	11.8	%
	 
	 	 	 	 	 	 	 	 	 	 
	Minneapolis Portfolio
	 		 	 		 	 	 		
	Management Group
LLC
	 	Common Stock	 	 	905,246	 	 	 	9.5	%
	 
	 	 	 	 	 	 	 	 	 	 
	Perkins Capital
	 	 	 	 	 	 	 	 	 	 
	Management, Inc.
	 	Common Stock	 	 	748,350	 	 	 	7.8	%

HEI, Inc. has one subsidiary, Cross Technology, Inc. that is 100% owned by HEI, Inc.

S-5.2.1

 

 

Schedule 5.5 to Credit and Security Agreement

SUBSIDIARIES

HEI, Inc. has one subsidiary, Cross Technology, Inc. that is 100% owned by HEI, Inc.

S-5.5-1

 

 

Schedule 5.7 to Credit and Security Agreement

LITIGATION MATTERS

HEI, Inc. is not involved in any litigation at the time of this signing and has not received notice
of any threatened litigation as of this signing

S-5.7-1

 

 

Schedule 5.11 to Credit and Security Agreement

INTELLECTUAL PROPERTY DISCLOSURES

See attached

S-5.11-1

 

 

(Patents, Trademarks, and Copyrights)

Patents

	 	 	 	 	 	 	 
	Docket No.	 	Title	 	Serial/Patent No.	 	Status
	14605.113

	 	Information Technology System for Health
Care Environments (fka Information
Technology System that is Suitable for
Medical Applications)
	 	10/161, 168 (formerly

Provisions #60/295,181)
	 	B — Pending
	 
	 	 	 	 	 	 
	10139.007-CA-01

	 	Document Reading Apparatus
	 	 1,245,765
	 	A — Issued
	 
	 	 	 	 	 	 
	10139-0008-CA-01

	 	Photo-Optic Transducing Head Assembly
	 	1,265,547
	 	A — Issued
	 
	 	 	 	 	 	 
	10139.0016-US-01

	 	Method of Mount DC Block Capacitor for
Microwave Circuit and Packaging
	 	6,646,521
	 	A — Issued
	 
	 	 	 	 	 	 
	10139.0016-TA-01

	 	Method of Mount DC Block Capacitor for
Microwave Circuit and Packaging
	 	194018
	 	A — Issued
	 
	 	 	 	 	 	 
	10139.0016-EP-WO

	 	Method of Mount DC Block Capacitor for
Microwave Circuit and Packaging
	 	1,968,674
	 	B — Pending
	 
	 	 	 	 	 	 
	10139.0016-JP-WO

	 	Method of Mount DC Block Capacitor for
Microwave Circuit and Packaging
	 	2527567
	 	B — Pending
	 
	 	 	 	 	 	 
	10139.0016-KS-WO

	 	Method of Mount DC Block Capacitor for
Microwave Circuit and Packaging
	 	37003802
	 	B — Pending
	 
	 	 	 	 	 	 
	10139.0016-MY-01

	 	Method of Mount DC Block Capacitor for
Microwave Circuit and packaging
	 	14267
	 	B — Pending
	 
	 	 	 	 	 	 
	10139.0016-TH-01

	 	Method of Mount DC Block Capacitor for
Microwave Circuit and Packaging
	 	68354
	 	B — Pending
	 
	 	 	 	 	 	 
	10139.0017-US-01

	 	Interconnection Device and Method
	 	6,294,966
	 	A — Issued
	 
	 	 	 	 	 	 
	10139.0017-US-C1

	 	Interconnection Device and Method
	 	6,469,592
	 	A — Issued
	 
	 	 	 	 	 	 
	10139.0017-TA-01

	 	Interconnection Device and Method
	 	156859
	 	A — Issued
	 
	 	 	 	 	 	 
	10139.0017-CC-WO

	 	Interconnection Device and Method
	 	8186499
	 	B — Pending
	 
	 	 	 	 	 	 
	10139.0017-EP-WO

	 	Interconnection Device and Method
	 	986661.7
	 	B — Pending
	 
	 	 	 	 	 	 
	10139.0017-IN-WO

	 	Interconnection Device and Method
	 	2702
	 	B — Pending
	 
	 	 	 	 	 	 
	10139.0017-JP-WO

	 	Interconnection Device and Method
	 	1550811
	 	B — Pending
	 
	 	 	 	 	 	 
	10139.0017-KS-WO

	 	Interconnection Device and Method
	 	27008541
	 	B — Pending
	 
	 	 	 	 	 	 
	10139.0017-MY-01

	 	Interconnection Device and Method
	 	6125
	 	B — Pending
	 
	 	 	 	 	 	 
	10139.0017-PH-01

	 	Interconnection Device and Method
	 	10003580
	 	B — Pending
	 
	 	 	 	 	 	 
	101039.0017-TH-01

	 	Interconnection Device and Method
	 	62789
	 	B — Pending
	 
	 	 	 	 	 	 
	10139.0017-US-C2

	 	interconnection Device and Method
	 	10/228,587
	 	B  — Pending
	 
	 	 	 	 	 	 
	10139.0022-US-01

	 	Integrated Mem Switch
	 	10/014,987
	 	B — Pending
	 
	 	 	 	 	 	 
	10139.0022-US-D1

	 	Low Voltage Mem Switch
	 	10/409,742
	 	B — Pending
	 
	 	 	 	 	 	 
	10139.0027-TA-01

	 	Test Methods, Systems, and Probes for
High-Frequency Wireless Communications
Devices
	 	189906
	 	A — Issued
	 
	 	 	 	 	 	 
	10139.0027-CC-WO

	 	Test Methods, Systems, and Probes for
High-Frequency Wireless Communications
Devices
	 	18149812
	 	A — Issued

B-2

 

	 	 	 	 	 	 	 
	Docket No.	 	Title	 	Serial/Patent No.	 	Status
	10139.0027-EP-WO

	 	Test Methods, Systems, and Probes for
high-Frequency Wireless Communications
Devices
	 	1959300.3
	 	B — Pending
	 
	 	 	 	 	 	 
	10139.0027-IN-WO

	 	Test Methods, Systems, and Probes for
High-Frequency Wireless Communications
Devices
	 	10503
	 	B — Pending
	 
	 	 	 	 	 	 
	10139.0027-JP-WO

	 	Test Methods, Systems, and Probes for
High-Frequency Wireless Communications
Device
	 	2516659
	 	B — Pending
	 
	 	 	 	 	 	 
	10139.0027-US-C1

	 	Test Methods, Systems, and Probes for
High-Frequency Wireless Communications
Device
	 	09/725,646
	 	B -Pending
	 
	 	 	 	 	 	 
	10139.0031-US-01

	 	Flexible Circuit Board having an

Integrally Formed Battery
	 	10/789,108
	 	B — Pending
	 
	 	 	 	 	 	 
	116.002US1

	 	EDGE TERMINALS FOR ELECTRONIC CIRCUIT

MODULES
	 	 08/542896
	 	A — Issued
	 
	 	 	 	 	 	 
	116.002CA1

	 	EDGE TERMINALS FOR ELECTRONIC CIRCUIT

MODULES
	 	2187582
	 	B — Pending
	 
	 	 	 	 	 	 
	116.006US1

	 	HIGH DENSITY STACKED CIRCUIT MODULE
	 	09/050318
	 	A — Issued
	 
	 	 	 	 	 	 
	116.006CA1

	 	HIGH DENSITY STACKED CIRCUIT MODULE
	 	2266980
	 	B — Pending
	 
	 	 	 	 	 	 
	116.010US1

	 	HEARING-AID ASSEMBLY USING FOLDED FLEX

CIRCUITS
	 	09/792700
	 	A  — Issued
	 
	 	 	 	 	 	 
	116.010US2

	 	HEARING-AID ASSEMBLY USING FOLDED FLEX

CIRCUITS
	 	10/752414
	 	B — Pending
	 
	 	 	 	 	 	 
	116.012US1

	 	STRUCTURES AND ASSEMBLY METHODS FOR

RADIO-FREQUENCY-IDENTIFICATION MODULES
	 	09/922245
	 	A — Issued
	 
	 	 	 	 	 	 
	116.012TH1

	 	STRUCTURES AND ASSEMBLY METHODS FOR

RADIO-FREQUENCY-IDENTIFICATION MODULES AND

METHODS
	 	67473
	 	B — Pending
	 
	 	 	 	 	 	 
	116.012US2

	 	STRUCTURES AND ASSEMBLY METHODS FOR

RADIO-FREQUENCY-IDENTIFICATION MODULES
	 	10/785928
	 	B — Pending
	 
	 	 	 	 	 	 
	116.015CA1

	 	CODELOCK Design
	 	547638
	 	B — Pending
	 
	 	 	 	 	 	 
	14605-125P

(provisions)

	 	Collaboration Among Health Care Instruments
	 	60/384,902 (provisional)

10/453,442 (utility)
	 	B — Pending
	50611-292864

(Utility)
	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	Driving and Clamping Power Regulation
Technique for Continuous, In-Phase,
Full-Duration, Switch-Mode Resonant
Converter Power Supply
	 	5,267,138
	 	A — Issued
	 
	 	 	 	 	 	 
	 

	 	System and Method for Coupling a Plurality
of Medical Devices in a Serverless Grid
	 	 	 	B — Pending

Trademarks

	 	 	 	 	 
	Trademark name	 	Trademark Number	 	Reference #
	Lin iT

	 	76/518,141
	 	File No. 50611-292862
	 
	 	 	 	 
	OneSource OutSource

	 	2569474
	 	14605.096
	 
	 	 	 	 
	FRESH AIR

	 	75/830,817
	 	14605.09
	 
	 	 	 	 
	ID-iT

	 	76/518,124
	 	50611.2930219999
	 
	 	 	 	 
	GridView

	 	78/510068
	 	40424.4US01

B-3

 

 

Schedule 5.14 to Credit and Security Agreement

ENVIRONMENTAL MATTERS 

HEI, Inc. has received a No Further Action Required letter from the State of Colorado regarding its
Boulder location and is not aware of any other environmental issues relating to any of the other
listed properties as of this signing.

S-5.14-1

 

 

Schedule 6.3 to Credit and Security Agreement

PERMITTED LIENS

HEI, Inc.

Permited Liens

As of 05-01-07

Valid UCC Filings:

	 	 	 	 	 	 	 	 	 	 	 
	File Date	 	File No.	 	Type	 	Description if needed	 	Additional Information	 	Status
	5/21/2003

	 	20037526134
	 	UCC-1
	 	 	 	Beacon Bank
	 	To be released with the SBA Revolver Payoff at Closing
	10/15/2003

	 	2003909557
	 	AMEND
	 	Amendment of 20037526134
	 	Beacon Bank
	 	To be released with the SBA Revolver Payoff at Closing
	7/21/2003

	 	20038148897
	 	UCC-1
	 	 	 	US Bancorp
	 	Active Operating Lease
	6/8/2004

	 	200412104045
	 	UCC-1
	 	 	 	CNC Associates Inc
	 	Active Operating Lease
	12/14/2004

	 	200414358590
	 	UCC-1
	 	 	 	Commerce Financial Group
	 	To be released with Tempe Equipment Lease Payoff at Closing
	3/10/2005

	 	200515537094
	 	UCC-1
	 	 	 	Lease Finance Group
	 	Active Capital Lease
	9/12/2005

	 	20051793347
	 	ASSIGN
	 	Assingment of 200515537094
	 	First Minnetonka City Bank
	 	Active Capital Lease
	4/7/2005

	 	200515938368
	 	UCC-1
	 	 	 	Lease Finance Group
	 	Active Capital Lease
	9/12/2005

	 	20051793426
	 	AMEND
	 	Expaned Collateral Description of 200515938368
	 	Lease Finance Group
	 	Active Capital Lease
	9/12/2005

	 	20051793433
	 	ASSIGN
	 	Assingment of 200515938368
	 	First Minnetonka City Bank
	 	Active Capital Lease
	4/7/2005

	 	200515938673
	 	UCC-1
	 	 	 	Lease Finance Group
	 	Active Capital Lease
	8/16/2005

	 	200517630189
	 	UCC-1
	 	 	 	Lease Finance Group
	 	Active Capital Lease
	 
	 	 	 	 	 	 	 	 	 	 
	9/19/2005

	 	20051802403
	 	AMEND
	 	Expaned Collateral Description of 2005176030189
	 	Lease Finance Group
	 	Active Capital Lease
	9/23/2005

	 	20051810670
	 	AMEND
	 	Addition of Secured Party of 2005176030189
	 	Kevin Roberg
	 	Active Capital Lease
	8/16/2005

	 	200517630468
	 	UCC-1
	 	 	 	Lease Finance Group
	 	Active Capital Lease
	12/21/2005

	 	20051922206
	 	AMEND
	 	Expaned Collateral Description of 200517630468
	 	Lease Finance Group
	 	Active Capital Lease
	12/21/2005

	 	20051922224
	 	AMEND
	 	Addition of Secured Party of 200517630468
	 	Kevin Robert
	 	Active Capital Lease
	12/21/2005

	 	20051922236
	 	AMEND
	 	Correction of Secured Party of 200517630468
	 	Kevin Roberg
	 	Active Capital Lease
	8/16/2005

	 	200517630711
	 	UCC-1
	 	 	 	Lease Finance Group
	 	Active Capital Lease
	11/29/2005

	 	20051892061
	 	AMEND
	 	Addition of Secured Party of 200517630711
	 	Kevin Roberg
	 	Active Capital Lease
	11/29/2005

	 	20051892084
	 	AMEND
	 	Expaned Collateral Description of 200517630711
	 	Kevin Roberg
	 	Active Capital Lease
	12/30/2005

	 	200519347755
	 	UCC-1
	 	 	 	Farnam Street Financial Inc
	 	Active Operating Lease
	1/17/2006

	 	200610221439
	 	UCC-1
	 	This is now a Commerce Financial Capital Lease, but no filling was made by Commerce
	 	Orbotech Inc
	 	Not filed by Commerce Financial when they paid off Orbotech and look over the lease – Active Capital Lease
	1/30/2006

	 	200610390897
	 	UCC-1
	 	 	 	Lease Finance Group
	 	Lease taken over by Allegiant and not refiled – Active Capital Lease
	3/20/2006

	 	200611076803
	 	UCC-1
	 	Believed to be the same as filed for under 200610390897
	 	Lease Finance Group
	 	Believed to be the same as filed for under 200610390897
	3/28/2006

	 	200611204728
	 	UCC-1
	 	 	 	Key Equipment Finance Inc
	 	Active Operating Lease
	7/3/2006

	 	200612598015
	 	UCC-1
	 	 	 	Telogy, Inc.
	 	Active Operating Lease
	8/1/2006

	 	200612953559
	 	UCC-1
	 	 	 	Telogy, Inc.
	 	Active Operating Lease
	9/1/2006

	 	200613366278
	 	UCC-1
	 	 	 	Telogy, Inc.
	 	Active Operating Lease
	 

	 	 
	 	 	 	 
	 	 
	Invalid UCC Filings:

	 	 
	 	 	 	 
	 	 
	 

	 	 
	 	 	 	 
	 	 
	11/2/1998

	 	2080454
	 	UCC-1
	 	 	 	Norwest Equipment Finance Inc
	 	No Balance Due at 05-01-07 – Needs to be released
	9/8/2003

	 	2003866929
	 	CONT
	 	 	 	Norwest Equipment Finance Inc
	 	No Balance Due at 05-01-07 – Needs to be released
	12/11/1998

	 	2090125
	 	UCC-1
	 	 	 	Norwest Equipment Finance Inc
	 	No Balance Due at 05-01-07 – Needs to be released
	9/19/2003

	 	2003880308
	 	CONT
	 	 	 	Norwest Equipment Finance Inc
	 	No Balance Due at 05-01-07 – Needs to be released
	6/2/2003

	 	20037625319
	 	UCC-1
	 	 	 	Luther & Maelzer Inc
	 	No Balance Due at 05-01-07 – Needs to be released
	12/22/2005

	 	200519252218
	 	UCC-1
	 	 	 	Orbotech Inc
	 	Not believed to be active – no balance is shown on our records

S-6.3-1

 

 

Schedule 6.4 to Credit and Security Agreement

PERMITTED INDEBTEDNESS

HEI Inc

Schedule of Permitted Indebtedness

Capital Leases and Mortgage

Balances as of March 31, 2007

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Creditor	 	Name	 	Original
 Amount	 	Security	 	PMY Res	 	Location	 	Origination
 Date	 	Last Pymt
 Date	 	Monthly Payment	 	Balance 03-31-07
	1	 	Lease Finance Group
	 	LFG 5 CNC Associates	 	 	22,926.73	 	 	 	 	LFG 5	 	Victoria	 	3/15/2005	 	3/15/2008	 	 	564.51	 	 	 	14,142.71	 
	2	 	Lease Finance Group
	 	My Data	 	 	212,150.00	 	 	Mydata my Hydra speedmount	 	LFG 5	 	Victoria	 	3/15/2005	 	3/15/2008	 	 	7,910.00	 	 	 	105,812.64	 
	3	 	Lease Finance Group
	 	Ekra	 	 	183,165.68	 	 	EKRA x5 in line screen printer, Ekra x5 inline screen printer	 	LFG 5	 	Victoria	 	3/15/2005	 	7/1/2008	 	 	6,829.32	 	 	 	91,358.02	 
	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	4	 	Lease Finance Group
	 	Sikama	 	 	28,154.30	 	 	Sikama Falseen S/c Solder Rodow Furance	 	LFG 2	 	Victoria	 	9/5/2005	 	9/5/2008	 	 	1,119.04	 	 	 	11,843.19	 
	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	5	 	Lease Finance Group
	 	CyberOptics	 	 	120,600.00	 	 	CyberOptics DEMO SE 300 inspection system	 	LFG 4	 	Victoria	 	10/1/2005	 	10/1/2008	 	 	4,170.53	 	 	 	64,643.36	 
	6	 	Lease Finance Group
	 	K&S	 	 	21,990.00	 	 	Kulcke & Soffa Model 4524 Bad Bonder	 	LFG 1	 	Victoria	 	12/1/2005	 	12/1/2008	 	 	760.45	 	 	 	12,968.45	 
	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	7	 	Lease Finance Group
	 	Nu Clean	 	 	82,400.00	 	 	Technical Devices Nu/Clean 31Bxf	 	LFG 3	 	Victoria	 	2/1/2006	 	2/1/2009	 	 	2,849.51	 	 	 	52,905.40	 
	8	 	HMP Allegiant
	 	Allegiant Partn HMP_AL	 	 	 	 	 	Infinity 2-2c 2.0 megapixel CCD Camera	 	 	 	Victoria	 	5/1/2006	 	2/23/2009	 	 	880.42	 	 	 	17,368.96	 
	9	 	OGP Allegiant
	 	OGP_AL	 	 	 	 	 	OGP Flash 300 Digital Coord measur system & HMP Infinity 2.0 Megapixesl CCD Camera	 	 	 	Victoria	 	3/1/2006	 	3/1/2009	 	 	1,782.83	 	 	 	38,014.34	 
	10	 	Commerce Financial
	 	CF_01Orbotech	 	 	875,000.00	 	 	Orbotech paragon 8000 imaging system	 	87,500	 	Tempe	 	2/15/2006	 	2/15/2009	 	 	21,272.00	 	 	 	689,127.97	 
	11	 	Commerce Financial
	 	CF_02Datacon	 	 	295,730.00	 	 	Datacon 2200 Malti-Chip Die Bonder	 	29,573	 	Victoria	 	3/15/2006	 	3/15/2009	 	 	8,612.00	 	 	 	232,544.08	 
	12	 	Commerce Financial
	 	CF_03Hirox	 	 	52,851.00	 	 	HIROX Microscope System & TechCut 4 Prec Saw & Polshing System	 	5,285	 	Victoria	 	5/15/2006	 	5/15/2009	 	 	1,547.00	 	 	 	41,961.51	 
	13	 	Commerce Financial
	 	CF_04MicroCraft	 	 	257,250.00	 	 	MicroCraft EMX-6151 Moving Probe Tester	 	25,725	 	Tempe	 	5/15/2006	 	5/15/2009	 	 	6,406.00	 	 	 	215,919.83	 
	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	14	 	Commerce Financial
	 	CF_05ESI	 	 	355,608.00	 	 	Two ESI Mdl 5200 UV YagLaser Dells	 	35,561	 	Tempe	 	4/15/2006	 	4/15/2009	 	 	10,036.00	 	 	 	285,434.01	 
	15	 	Commerce Financial
	 	CF_06Asymtek	 	 	112,625.00	 	 	Asymtek Spectrum S-820 Batch Disperser	 	11,263	 	Victoria	 	6/15/2006	 	6/15/2009	 	 	3,296.00	 	 	 	91,157.66	 
	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	16	 	Key Leasing
	 	Key - Cubes	 	 	62,848.00	 	 	 	 	 	 	Tempe	 	3/6/2006	 	3/6/2009	 	 	1,822.94	 	 	 	43,058.19	 
	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	17	 	Pitney Bowes
	 	Copier Lease-Boulder	 	 	33,610.51	 	 	Toshiba Copier	 	 	 	Boulder	 	 	 	 	 	 	681.50	 	 	 	15,068.33	 
	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	18	 	Commerce Bank
	 	Building Mortgage	 	 	1,200,000.00	 	 	Corporate Office & Vic Plant
Lot 2.

 Block 1, Point 

Victoria	 	$100,000.00	 	Victoria	 	10/14/2003	 	11/1/2009	 	 	8,318.68	 	 	 	1,110,686.14	 

HEI Inc

Schedule of Permitted Indebtedness

Operating Leases

Balances as of March 31, 2007

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Account	 	Start	 	Ending	 	 	 	 
	Name	 	Item	 	Location	 	Number	 	Date	 	Date	 	Deposit	 	Payment
	Building Rent

Monk Properties
	 	1546 Lake Drive West	 	Chanhassen	 	 	 	 	 	 	 	 	 	 	 	 	 	 	6,591.67	 	 	 	12,971.00	 
	Boulder Dev. Corp.
	 	4801 N. 63rd Drive	 	Boulder	 	 	 	 	 	 	 	 	 	 	 	 	 	 	230,000.00	 	 	 	120,222.00	 
	Reynolds Property
	 	610 S Rockford Drive	 	Tempe	 	 	 	 	 	 	 	 	 	 	 	 	 	 	7,260.00	 	 	 	7,582.85	 
	Cutler Commercial
	 	326 South Siesta Lane	 	Tempe office	 	 	 	 	 	 	 	 	 	 	 	 	 	 	3,000.00	 	 	 	2,614.34	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Equipment

Farnam Street Financial — CTS
	 	Claraview & ClearCube	 	Tempe	 	HE122205-001	 	 	8/1/2006	 	 	 	 	 	 	 	 	 	 	 	2,184.32	 
	Key Leases
	 	Orbotech Discovery	 	Tempe	 	 	 	 	 	 	3/6/2006	 	 	 	3/6/2009	 	 	 	 	 	 	 	6,906.39	 
	Mobile Mini
	 	40’ Cargo & DLX Tri Doors	 	 	 	 	 	 	 	 	 	 	 	Monthly	 	 	 	 	 	 	145.94	 
	Pitney Bowes Global Financial
	 	Mailing scale A57z	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Quarterly	 	 	185.31	 
	Pitney Bowes Global Financial
	 	Mailing System	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Quarterly	 	 	1,166.18	 
	CNC Associates, Inc.
	 	HAAS Tool room mill	 	Chanhassen	 	 	20361001	 	 	 	6/4/2004	 	 	 	6/4/2009	 	 	 	 	 	 	 	564.51	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Computer Equipment

Toshiba Business Solutions
	 	Boulder Copier	 	Boulder	 	 	39120896	 	 	 	5/31/2002	 	 	 	6/4/2007	 	 	 	 	 	 	 	845.68	 
	Hewlett-Packard Financial Services
	 	 	 	 	 	50020650-01	 	 	 	10/11/2004	 	 	 	 	 	 	 	 	 	 	 	140.22	 
	Hewlett-Packard Financial Services
	 	 	 	 	 	5002064C-001	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	534.08	 
	US Bank
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	8/1/2007	 	 	 	 	 	 	 	759.64	 
	Pitney Bowes INC
	 	DLCQ Copier	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	812.35	 
	LFG — Marlin Leasing Corporation
	 	HP Compaq Notebook	 	 	 	001-0295999-001	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	725.24	 
	LFG — Marlin Leasing Corporation
	 	Computer System	 	 	 	001-0295999-002	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	785.65	 
	DeLage Landen
	 	Misc Equipment	 	Victoria, Tempe & Boulder	 	 	24705927	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	2,272.69	 
	DeLage Landen
	 	Boulder Copiers	 	 	 	 	534057	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	737.10	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Miscellaneous

DeLage Laden
	 	Forklift	 	Chanhassen	 	270266-476532	 	 	 	11/4/2004	 	 	 	11/4/2009	 	 	 	 	 	 	 	292.27	 

S-6.4-1

 

 

HEI Inc

Schedule of Commitments & Contingencies (Operating Leases)

Telogy

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	Account	 	 	         Start	 	 	Ending	 	 	 	 
	Name	 	Item	 	Location	 	 	Number	 	 	          Date	 	 	Date	 	 	Payment	 
	Leases
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	1 Telogy
	 	KEI 2410	 	 	 	 	 	 	501428	 	 	 	6/7/2006	 	 	 	6/7/2007	 	 	 	1,028.00	 
	2 Telogy
	 	KEI2510AT	 	 	 	 	 	 	503485	 	 	 	11/3/2006	 	 	 	11/3/2007	 	 	 	448.00	 
	3 Telogy
	 	KEI 2001	 	 	 	 	 	 	507431	 	 	 	11/6/2006	 	 	 	11/6/2007	 	 	 	282.00	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Rental — Month to Month	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	4 Telogy
	 	Various Equipment	 	 	 	 	 	 	487478	 	 	 	10/19/2005	 	 	 	 	 	 	 	476.00	 
	5 Telogy
	 	KEI (6485)	 	 	 	 	 	 	515172	 	 	 	2/5/2007	 	 	 	 	 	 	 	100.00	 

S-6.4-2

 

 

Schedule 6.5 to Credit and Security Agreement

GUARANTIES

None

S-5.14-1

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