THIRD AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT BY AND BETWEEN NORTECH SYSTEMS INCORPORATED AND WELLS FARGO BANK, NATIONAL ASSOCIATION Acting through its Wells Fargo Business Credit operating division May 27, 2010

Exhibit 10.6

THIRD AMENDED AND RESTATED
CREDIT AND SECURITY AGREEMENT

BY AND BETWEEN

NORTECH SYSTEMS INCORPORATED

AND

XXXXX FARGO BANK, NATIONAL ASSOCIATION

Acting through its Xxxxx Fargo Business Credit operating division

May 27, 2010

TABLE OF CONTENTS

			Page
1.	Amount and Terms of the Line of Credit and Term loan		1
1.1		Restated Credit Agreement; Line of Credit; Limitations on Borrowings; Termination Date; Use of Proceeds	1
1.2		Borrowing Base; Mandatory Prepayment	2
1.3		Procedures for Line of Credit Advances	3
1.4		Floating Rate Advances	4
1.5		Intentionally Deleted	4
1.6		Collection of Accounts and Application to Revolving Note	4
1.7		Term Loan	5
1.8		Interest and Interest Related Matters	6
1.9		Fees	7
1.10		Interest Accrual; Principal and Interest Payments; Computation	9
1.11		Termination, Reduction or Non-Renewal of Line of Credit by Company; Notice	10
1.12		Letters of Credit	11
1.13		Special Account	12
2.	Security Interest and Occupancy of Company’s Premises		12
2.1		Grant of Security Interest	12
2.2		Notifying Account Debtors and Other Obligors; Collection of Collateral	12
2.3		Assignment of Insurance	12
2.4		Company’s Premises	13
2.5		License	13
2.6		Financing Statements	14
2.7		Setoff	14
2.8		Collateral Related Matters	14
2.9		Notices Regarding Disposition of Collateral	14
3.	CONDITIONS PRECEDENT		15
3.1		Conditions Precedent to Initial Advance and Issuance of Initial Letter of Credit	15
3.2		Additional Conditions Precedent to All Advances and Letters of Credit	15
4.	Representations and Warranties		15

5.	Covenants		15
5.1		Reporting Requirements	15
5.2		Financial Covenants	18
5.3		Other Liens and Permitted Liens	19
5.4		Indebtedness	19
5.5		Guaranties	20
5.6		Investments and Subsidiaries	20
5.7		Dividends and Distributions	20
5.8		Salaries	20
5.9		Books and Records; Collateral Examination; Inspection and Appraisals	21
5.10		Account Verification; Payment of Permitted Liens	21
5.11		Compliance with Laws	21
5.12		Payment of Taxes and Other Claims	22
5.13		Maintenance of Collateral and Properties	22
5.14		Insurance	23
5.15		Preservation of Existence	23
5.16		Delivery of Instruments, etc	23
5.17		Sale or Transfer of Assets; Suspension of Business Operations	23
5.18		Consolidation and Merger; Asset Acquisitions	23
5.19		Sale and Leaseback	23
5.20		Restrictions on Nature of Business	23
5.21		Accounting	24
5.22		Discounts, etc	24
5.23		Pension Plans	24
5.24		Place of Business; Name	24
5.25		Constituent Documents; S Corporation Status	24
5.26		Performance by Xxxxx Fargo	24
5.27		Xxxxx Fargo Appointed as Company’s Attorney in Fact	24
6.	Events of Default and Remedies		24
6.1		Events of Default	24
6.2		Rights and Remedies	27
6.3		Immediate Default and Acceleration	28
7.	Miscellaneous		28
7.1		No Waiver; Cumulative Remedies	28
7.2		Amendments; Consents and Waivers; Authentication	28
7.3		Execution in Counterparts; Delivery of Counterparts	28
7.4		Notices, Requests, and Communications; Confidentiality	29
7.5		Company Information Reporting; Confidentiality	30
7.6		Further Documents	31
7.7		Costs and Expenses	31
7.8		Indemnity	31
7.9		Retention of Company’s Records	32

7.10	Release	32
7.11	Binding Effect; Assignment; Complete Agreement	32
7.12	Sharing of Information	33
7.13	Severability of Provisions	33
7.14	Headings	33
7.15	Definitional Terms and Rules of Interpretation	33
7.16	Governing Law; Jurisdiction, Venue; Waiver of Jury Trial	33

Exhibits

A — Definitions		A-1
B — Premises		B-1
C — Conditions Precedent		C-1
D — Representations and Warranties		D-1
E — Compliance Certificate		E-1
F — Permitted Liens; Indebtedness; and Guaranties		F-1

THIRD AMENDED AND RESTATED
CREDIT AND SECURITY AGREEMENT

THIS THIRD AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT (the “Agreement”) is dated May 27, 2010 and is entered into between NORTECH SYSTEMS INCORPORATED, a Minnesota corporation (“Company”), and XXXXX FARGO BANK, NATIONAL ASSOCIATION (as more fully defined in Exhibit A, “Xxxxx Fargo”), acting through its Xxxxx Fargo Business Credit operating division.

RECITALS

A. Company and Xxxxx Fargo previously entered into that certain Second Amended and Restated Credit and Security Agreement dated as of August 6, 2009 (as amended, the “Existing Credit Agreement”) pursuant to which the Company executed and delivered that certain (i) Amended and Restated Revolving Note dated as of August 6, 2009 made payable to the order of Xxxxx Fargo in the original principal amount of $12,000,000 (the “Existing Revolving Note”); and (ii) Amended and Restated Real Estate Term Note dated as of February 2, 2007 made payable to the order of Xxxxx Fargo in the original principal amount of $3,348,750 (the “Existing Term Note,” and together with the Existing Revolving Note, the “Existing Notes”).

B. Company has asked Xxxxx Fargo to continue to provide it with a $12,000,000 revolving line of credit (the “Line of Credit”) for working capital purposes and to facilitate the issuance of letters of credit.  Company has also requested that Xxxxx Fargo continue to provide the term loan (the “Term Loan”) currently evidenced by the Existing Term Note.  Xxxxx Fargo is agreeable to meeting Company’s request, provided that Company agrees to the terms and conditions of this Agreement.

C. The parties wish to completely amend and restate the Existing Credit Agreement.

D. For purposes of this Agreement, capitalized terms not otherwise defined in the Agreement shall have the meaning given them in Exhibit A.

1. AMOUNT AND TERMS OF THE LINE OF CREDIT AND TERM LOAN

1.1 Restated Credit Agreement; Line of Credit; Limitations on Borrowings; Termination Date; Use of Proceeds.

(a) Restated Credit Agreement; Existing Advances.  Xxxxx Fargo has made various revolving advances to the Borrower (the “Existing Advances”) as evidenced by the Existing Credit Agreement and the Existing Revolving Note.  As of May 24, 2010, the outstanding principal balance of the Existing Advances was $5,406,607.41.  On the effective date of this Agreement, (i) the Existing Credit Agreement shall be amended, restated and superseded in its entirety by this Agreement; (ii) the Existing Advances shall be deemed to be Advances made pursuant to Section 1.1(b) and shall be evidenced by and repayable in accordance with the Existing Revolving Note (as renewed, amended, substituted or replaced

from time to time, the “Revolving Note”); and (iii) all other existing Loan Documents shall continue in full force and effect except as expressly modified by this Agreement or in connection with any other document or agreement delivered to Xxxxx Fargo in connection with this Agreement.

(b) Line of Credit and Limitations on Borrowing.  Xxxxx Fargo shall make Advances to Company under the Line of Credit that, together with the L/C Amount, shall not at any time exceed in the aggregate the lesser of (i) $12,000,000 (the “Maximum Line Amount”), or (ii) the Borrowing Base limitations described in Section 1.2.  Within these limits, Company may periodically borrow, prepay in whole or in part, and reborrow.  Xxxxx Fargo has no obligation to make an Advance during a Default Period or at any time Xxxxx Fargo believes that an Advance would result in an Event of Default.

(c) Maturity and Termination Dates.  Company may request Line of Credit Advances from the date that the conditions set forth in Section 3 are satisfied until the earlier of: (i) the Maturity Date, (ii) the date Company terminates the Line of Credit, or (iii) the date Xxxxx Fargo terminates the Line of Credit following an Event of Default. (The earliest of these dates is the “Termination Date.”)

(d) Use of Line of Credit Proceeds.  Company shall use the proceeds of each Line of Credit Advance and each Letter of Credit for ordinary working capital purposes.

(e) Revolving Note.  Company’s obligation to repay Line of Credit Advances, regardless of how initiated under Section 1.3, shall be evidenced by the Revolving Note.

1.2 Borrowing Base; Mandatory Prepayment.

(a) Borrowing Base.  The borrowing base (the “Borrowing Base”) is an amount equal to:

(i) 80% or such lesser percentage of Eligible Accounts as Xxxxx Fargo in its sole discretion may deem appropriate; provided that this rate may be reduced at any time by Xxxxx Fargo’s in its sole discretion by one (1) percent for each percentage point by which Dilution on the date of determination is in excess of five percent (5.0%), plus

(ii) the lesser of $3,000,000 or the sum of:

(1) 30% or such lesser percentage of Eligible Finished Goods Inventory as Xxxxx Fargo in its sole discretion may deem appropriate, plus

(2) the lesser of $2,000,000, or 20% or such lesser percentage of Eligible Raw Materials Inventory as Xxxxx Fargo in its sole discretion may deem appropriate; less

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(iii) the Availability Reserve; less

(iv) the Borrowing Base Reserve, less

(v) the L/C Amount, less

(vi) Indebtedness (other than the L/C Amount and Indebtedness evidenced by the Term Note and/or the Reimbursement Agreement) that Company owes Xxxxx Fargo that has not been advanced on the Revolving Note, less

(vii) Indebtedness (other than the L/C Amount and Indebtedness evidenced by the Term Note and/or the Reimbursement Agreement) that is not otherwise described in Section 1, including Indebtedness that Xxxxx Fargo in its sole discretion finds on the date of determination to be equal to Xxxxx Fargo’s net credit exposure with respect to any Rate Hedge Agreement, derivative, foreign exchange, deposit, treasury management or similar transaction or arrangement extended to Company by Xxxxx Fargo.

(b) Mandatory Prepayment; Overadvances.  If unreimbursed Line of Credit Advances evidenced by the Revolving Note plus the L/C Amount exceed the Borrowing Base or the Maximum Line Amount at any time, then Company shall immediately prepay the Revolving Note in an amount sufficient to eliminate the excess, and if payment in full of the Revolving Note is insufficient to eliminate this excess and the L/C Amount continues to exceed the Borrowing Base, then Company shall deliver cash to Xxxxx Fargo in an amount equal to the remaining excess for deposit to the Special Account, unless in each case, Xxxxx Fargo has delivered to Company an Authenticated Record consenting to the Overadvance prior to its occurrence, in which event the Overadvance shall be temporarily permitted on such terms and conditions as Xxxxx Fargo in its sole discretion may deem appropriate, including the payment of additional fees or interest, or both.

1.3 Procedures for Line of Credit Advances.

(a) Advances Credited to Operating Account.  All Advances shall accrue interest at the Floating Rate (“Floating Rate Advances”) and shall be credited to Company’s demand deposit account maintained with Xxxxx Fargo (the “Operating Account”), unless the parties agree in an Authenticated Record to disburse to another account.

(b) Advances upon Company’s Request.  Company may request one or more Advances on any Business Day.  Each request shall be deemed a request for a Floating Rate Advance.  No request for an Advance will be deemed received until Xxxxx Fargo acknowledges receipt, and Company, if requested by Xxxxx Fargo, confirms the request in an Authenticated Record.  Company shall repay all Advances, even if the Person requesting the Advance on behalf of Company lacked authorization.

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(c) Advances through Loan Manager.  If Xxxxx Fargo has separately agreed that Company may use the Xxxxx Fargo Loan Manager service (“Loan Manager”), Line of Credit Advances will be initiated by Xxxxx Fargo and credited to the Operating Account as Floating Rate Advances as of the end of each Business Day in an amount sufficient to maintain an agreed upon ledger balance in the Operating Account, subject only to Line of Credit availability as provided in Section 1.1(a).  If Xxxxx Fargo terminates Company’s access to Loan Manager, Company may continue to request Line of Credit Advances as provided in Section 1.3(b).  Xxxxx Fargo shall have no obligation to make an Advance through Loan Manager during a Default Period, or in an amount in excess of Line of Credit availability, and may terminate Loan Manager at any time in its sole discretion.

(d) Protective Advances; Advances to Pay Indebtedness Due.  Xxxxx Fargo may initiate a Floating Rate Advance on the Line of Credit in its sole discretion for any reason at any time, without Company’s compliance with any of the conditions of this Agreement, and (i) disburse the proceeds directly to third Persons in order to protect Xxxxx Fargo’s interest in Collateral or to perform any of Company’s obligations under this Agreement, or (ii) apply the proceeds to the amount of any Indebtedness then due and payable to Xxxxx Fargo.

1.4 Floating Rate Advances.  Company may request an Advance at the Floating Rate no later than 11:00 a.m. Central Time on the Business Day on which Company wants the Floating Rate Advance to be funded.  Rate Xxxxxx may not be used with respect to any Advance that utilizes the Floating Rate.

1.5 Intentionally Deleted.

1.6 Collection of Accounts and Application to Revolving Note.

(a) The Collection Account.  Company has granted a security interest to Xxxxx Fargo in the Collateral, including without limitation, all Accounts. Except as otherwise agreed by both parties in an Authenticated Record, all Proceeds of Accounts and other Collateral, upon receipt or collection, shall be deposited each Business Day into the Collection Account. Funds so deposited (“Account Funds”) are the property of Xxxxx Fargo, and may only be withdrawn from the Collection Account by Xxxxx Fargo.

(b) Payment of Accounts by Company’s Account Debtors.  Company shall instruct all account debtors to make payments either directly to the Lockbox for deposit by Xxxxx Fargo directly to the Collection Account, or instruct them to deliver such payments to Xxxxx Fargo by wire transfer, ACH, or other means as Xxxxx Fargo may direct for deposit to the Collection Account or for direct application to the Line of Credit. If Company receives a payment or the Proceeds of Collateral directly, Company will promptly deposit the payment or Proceeds into the Collection Account. Until deposited, it will hold all such payments and Proceeds in trust for Xxxxx Fargo without commingling with other funds or property.  All

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deposits held in the Collection Account shall constitute Proceeds of Collateral and shall not constitute the payment of Indebtedness.

(c) Application of Payments to Revolving Note.  Xxxxx Fargo will withdraw Account Funds deposited to the Collection Account and pay down borrowings on the Line of Credit by applying them to the Revolving Note on the first Business Day following the Business Day of deposit to the Collection Account, or, if payments are received by Xxxxx Fargo that are not first deposited to the Collection Account pursuant to any treasury management service provided to Company by Xxxxx Fargo, such payments shall be applied to the Revolving Note as provided in the Master Agreement for Treasury Management Services and the relevant service description.

1.7 Term Loan.

(a) Existing Term Loan.  Xxxxx Fargo previously extended the Term Loan to the Company as evidenced by the Existing Term Note, repayable in accordance with the terms set forth therein and in this Agreement.  As of the date hereof, the outstanding principal balance under the Existing Term Note is $2,484,796.82.

(b) Term Note.  Company’s obligation to repay the Term Loan and each Term Loan Advance (if any) shall be evidenced by the Existing Term Note (as renewed, amended, substituted or replaced from time to time, the “Term Note”).

(c) Payments and Adjustments to Payments.  The outstanding principal balance of the Term Note shall be due and payable as specifically set forth in the Term Note and shall accrue interest at the rate set forth in Section 1.8, below.  Notwithstanding the foregoing, the entire unpaid principal balance of the Term Note, and all unpaid interest accrued thereon, shall in any event be due and payable on the Termination Date.

(d) Prepayments and Mandatory Prepayments; Use of Tax Refund Proceeds.

(i) Prepayments.  Company may prepay the Term Loan at any time.

(ii) Mandatory Prepayments.  If, at any time Xxxxx Fargo obtains an appraisal of the real estate subject to the Mortgages reflecting that the then current loan-to-value ratio with respect to (a) the aggregate real estate encumbered by, and described in, the Mortgages, and (b) the sum of (i) the aggregate principal amount of the Term Loan and all other term loans outstanding under this Agreement and secured by the Mortgages, (ii) the unpaid “Obligation of Reimbursement” under the Reimbursement Agreement, and (iii) the undrawn Available Amount of the Letter of Credit under the Reimbursement Agreement, is greater than 50%, then Company shall immediately make a prepayment of the term loans under this Agreement and/or an optional redemption of the Bonds secured by the Reimbursement Agreement (as contemplated in the Reimbursement

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Agreement) in an amount sufficient to reduce the aggregate loan-to value ratio to 50%.

(iii) Tax Refund Proceeds. On or before August 31, 2010, the Company shall (A) receive cash proceeds from a tax refund of not less that $2,250,000; and (B) make a prepayment of Indebtedness outstanding under the Term Note of not less that $1,000,000.

(e) Collection of Prepayments and Related Fees.  All Term Loan prepayments, including mandatory prepayments and prepayments due on the Termination Date, must be accompanied by any prepayment payable under this Agreement, which will be applied to the most remote principal installments then due and payable.  Any prepayments of principal shall be collected by Xxxxx Fargo through a debit to the Term Note and a simultaneous Line of Credit Advance in the same amount, or by such other method as the parties may agree.

1.8 Interest and Interest Related Matters.

(a) Interest Rates Applicable to Line of Credit and Term Loan.  Except as otherwise provided in this Agreement, the unpaid principal amount of each Line of Credit Advance evidenced by the Revolving Note, and the unpaid principal balance of the Term Loan evidenced by the Term Note, shall accrue interest at an annual interest rate calculated as follows:

Floating Rate Pricing

(i) The “Floating Rate” for Line of Credit Advances = An interest rate equal to Daily Three Month LIBOR plus four percent (4.0%), which interest rate shall change whenever Daily Three Month LIBOR changes;

(ii) The “Floating Rate” for the Term Loan = An interest rate equal to Daily Three Month LIBOR plus four and one-half of one percent (4.5%), which interest rate shall change whenever Daily Three Month LIBOR changes;

(b) Minimum Interest Charge.  Notwithstanding the other terms of Section 1.8 to the contrary, and except as limited by the usury savings provision of Section 1.8(e), Company shall pay Xxxxx Fargo at least $200,000 consisting of (i) interest,  (ii) Letter of Credit Fees under Section 1.9(h), and (iii) Commissions under Section 1.8(a) of the Reimbursement Agreement; each year or portion of a year following the initial Advance (the “Minimum Interest Charge”) during the term of this Agreement, and Company shall pay any deficiency between the Minimum Interest Charge and the amount of interest otherwise payable on the anniversary of the initial Advance and on the Termination Date.  When calculating this deficiency, the Default Rate set forth in Section 1.8(c), if applicable, shall be disregarded.

(c) Default Interest Rate.  Commencing on the day an Event of Default occurs, through and including the date identified by Xxxxx Fargo in a Record as the date

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that the Event of Default has been cured or waived (each such period a “Default Period”), or during a time period specified in Section 1.10, or at any time following the Termination Date, in Xxxxx Fargo’s sole discretion and without waiving any of its other rights or remedies, the principal amount of the Revolving Note and the Term Note shall bear interest at a rate that is three percent (3.0%) above the contractual rate set forth in Section 1.8(a) (the “Default Rate”), or any lesser rate that Xxxxx Fargo may deem appropriate, starting on the first day of the month in which the Default Period begins through the last day of that Default Period, or any shorter time period to which Xxxxx Fargo may agree in an Authenticated Record.

(d) Interest Accrual on Payments Applied to Revolving Note.  Payments received by Xxxxx Fargo shall be applied to the Revolving Note as provided in Section 1.6(c), but the principal amount paid down shall continue to accrue interest through the end of the first Business Day following the Business Day that the payment was applied to the Revolving Note.

(e) Usury.  No interest rate shall be effective which would result in a rate greater than the highest rate permitted by law.  Payments in the nature of interest and other charges made under any Loan Documents or any other document or agreement described in or related to this Agreement that are later determined to be in excess of the limits imposed by applicable usury law will be deemed to be a payment of principal, and the Indebtedness shall be reduced by that amount so that such payments will not be deemed usurious.

1.9 Fees.

(a) Origination Fee.  Company shall pay Xxxxx Fargo a one time origination fee of $35,000, which shall be fully earned and payable upon the execution of this Agreement.

(b) Unused Line Fee.  Company shall pay Xxxxx Fargo an annual unused line fee of one-half of one percent (0.50%) of the daily average of the Maximum Line Amount reduced by outstanding Advances and the L/C Amount (the “Unused Amount”), from the date of this Agreement to and including the Termination Date, which unused line fee shall be payable monthly in arrears on the first day of each month and on the Termination Date.

(c) Collateral Exam Fees.  Company shall pay Xxxxx Fargo fees in connection with any collateral exams, audits or inspections conducted by or on behalf of Xxxxx Fargo at the current rates established from time to time by Xxxxx Fargo as its collateral exam fees (which fees are currently $125 per hour per collateral examiner) together with all actual out-of-pocket costs and expenses incurred in conducting any collateral examination or inspection.

(d) Collateral Monitoring Fees.  Company shall pay Xxxxx Fargo a fee at the rates established from time to time by Xxxxx Fargo as its Collateral monitoring fees

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(which fees are currently $150 per month), due and payable monthly in arrears on the first day of the month and on the Termination Date.

(e) Line of Credit Termination and/or Reduction Fees.  If (i) Xxxxx Fargo terminates the Line of Credit during a Default Period, or if (ii) Company terminates the Line of Credit on a date prior to the Maturity Date, or if (iii) Company and Xxxxx Fargo agree to reduce the Maximum Line Amount, then Company shall pay Xxxxx Fargo as liquidated damages a termination or reduction 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 (3.0%) if the termination or reduction occurs on or before the first anniversary of the first Line of Credit Advance; (B) two  percent (2.0%) if the termination or reduction occurs after the first anniversary of the first Line of Credit Advance, but on or before the second anniversary of the first Line of Credit Advance; and (C) one percent (1.0%) if the termination or reduction occurs after the second anniversary of the first Line of Credit Advance.

(f) Overadvance Fees.  Company shall pay an Overadvance fee for each day that an Overadvance exists which was not agreed to by Xxxxx Fargo in an Authenticated Record prior to its occurrence; provided that Xxxxx Fargo’s acceptance of the payment of such fees shall not constitute either consent to the Overadvance or waiver of the resulting Event of Default.  Company shall pay additional Overadvance fees and interest in such amounts and on such terms as Xxxxx Fargo in its sole discretion may consider appropriate for any Overadvance to which Xxxxx Fargo has specifically consented in an Authenticated Record prior to its occurrence.

(g) Treasury Management Fees.  Company will pay service fees to Xxxxx Fargo for treasury management services provided pursuant to the Master Agreement for Treasury Management Services or any other agreement entered into by the parties, in the amount prescribed in Xxxxx Fargo’s current service fee schedule.

(h) Letter of Credit Fees.  Company shall pay a fee with respect to each Letter of Credit issued by Xxxxx Fargo of three percent (3.0%) of the aggregate undrawn amount of the Letter of Credit (the “Aggregate Face Amount”) accruing daily from and including the date the Letter of Credit is issued until the date that it either expires or is returned, which shall be payable monthly in arrears on the first day of each month and on the date that the Letter of Credit either expires or is returned; and following an Event of Default, this fee shall increase to three percent (3.0%) of the Aggregate Face Amount, commencing on the first day of the month in which the Default Period begins and continuing through the last day of such Default Period, or any shorter time period that Xxxxx Fargo in its sole discretion may deem appropriate, without waiving any of its other rights and remedies.

(i) Letter of Credit Administrative Fees.  Company shall pay all administrative fees charged by Xxxxx Fargo in connection with the honoring of drafts under any

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Letter of Credit, and any amendments to or transfers of any Letter of Credit, and any other activity with respect to the Letters of Credit at the current rates published by Xxxxx Fargo for such services rendered on behalf of its customers generally.

(j) Other Fees and Charges.  Xxxxx Fargo may impose additional fees and charges during a Default Period for (i) waiving an Event of Default, or for (ii) the administration of Collateral by Xxxxx Fargo. All such fees and charges shall be imposed at Xxxxx Fargo’s sole discretion following oral notice to Company on either an hourly, periodic, or flat fee basis, and in lieu of or in addition to imposing interest at the Default Rate, and Company’s request for an Advance following such notice shall constitute Company’s agreement to pay such fees and charges.

(k) Termination and Prepayment Fees Following Transfer Between Xxxxx Fargo Operating Divisions.  If the Loan Documents, following Company’s request and the consent of Xxxxx Fargo Business Credit (which consent may be withheld by Xxxxx Fargo Business Credit in its sole discretion), are transferred to an operating division of Xxxxx Fargo other than Xxxxx Fargo Business Credit on or after the date that is eighteen months after the date of this Agreement, the transfer will not be deemed a termination or prepayment resulting in the payment of termination and/or prepayment fees, provided that Company agrees, at the time of transfer, to the payment of comparable fees in an amount not less than that set forth in this Agreement, in the event that any facilities extended under this Agreement are terminated early or prepaid after the transfer.

(l) Term Loan Prepayment Fees.  Company may prepay the principal amount of the Term Note at any time in any amount, whether voluntarily, or by acceleration, or as otherwise required by this Agreement, provided that it concurrently pays with the prepayment a prepayment fee in an amount equal to (i) three percent (3.0%) of the amount prepaid, if prepayment occurs on or before the first anniversary of the date of this Agreement; (ii) two percent (2.0%) of the amount prepaid, if prepayment occurs after the first anniversary of the date of this Agreement but on or before the second anniversary of the date of this Agreement; and (iii) one percent (1.0%) of the amount prepaid, if prepayment occurs after the second anniversary of the date of this Agreement  Notwithstanding the foregoing, the Company shall not be required to pay a prepayment fee in conjunction with the $1,000,000 prepayment required under Section 1.7(d)(iii), above.

1.10 Interest Accrual; Principal and Interest Payments; Computation.

(a) Interest Payments and Interest Accrual.  Accrued and unpaid interest under the Revolving Note and the Term Note on Floating Rate Advances shall be due and payable on the first day of each month (each an “Interest Payment Date”) and on the Termination Date, and shall be paid in the manner provided in Section 1.6(c) and Section 1.7(d).  Interest shall accrue from the most recent date to which

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interest has been paid or, if no interest has been paid, from the date of Advance to the Interest Payment Date.

(b) Payment of Revolving Note and Term Note Principal.  The principal amount of the Revolving Note and the Term Note shall be paid from time to time as provided in this Agreement, and shall be fully due and payable on the Termination Date.

(c) Payments Due on Non-Business Days.  If an Interest Payment Date or the Termination Date falls on a day which is not a Business Day, payment shall be made on the next Business Day, and interest shall continue to accrue during that time period.

(d) Computation of Interest and Fees.  Interest accruing on the unpaid principal amount of the Revolving Note and the Term Note and fees payable under this Agreement shall be computed on the basis of the actual number of days elapsed in a year of 360 days.

(e) Liability Records.  Xxxxx Fargo shall maintain accounting and bookkeeping records of all Advances and payments with respect to the Indebtedness in such form and content as Xxxxx Fargo in its sole discretion deems appropriate.  Xxxxx Fargo’s calculation of the amount of the Indebtedness shall be presumed correct unless proven otherwise by Company.  Upon request, Company will admit and certify to Xxxxx Fargo in a Record the exact unpaid principal amount of Indebtedness that Company then believes to be due and payable to Xxxxx Fargo.  Any billing statement or accounting provided by Xxxxx Fargo shall be conclusive and binding unless Company notifies Xxxxx Fargo in a detailed Record of its intention to dispute the billing statement or accounting within 30 days of receipt.

1.11 Termination, Reduction or Non-Renewal of Line of Credit by Company; Notice.

(a) Termination or Reduction by Company after Advance Notice.  Company may terminate or reduce the Line of Credit at any time prior to the Maturity Date, if it (i) delivers an Authenticated Record notifying Xxxxx Fargo of its intentions at least 90 days prior to the proposed Termination Date, (ii) pays Xxxxx Fargo the termination fee set forth in Section 1.9(e), and (iii) pays the Indebtedness in full or down to the reduced Maximum Line Amount.  Any reduction in the Maximum Line Amount shall be in multiples of $100,000, with a minimum reduction of at least $500,000.

(b) Termination or Reduction by Company without Advance Notice.  If Company fails to deliver Xxxxx Fargo timely notice of its intention to terminate the Line of Credit or reduce the Maximum Line Amount as provided in Section 1.11(a), Company may nevertheless terminate the Line of Credit or reduce the Maximum Line Amount and pay the Indebtedness in full or down to the reduced Maximum Line Amount if it (i) pays the termination fee set forth in Section 1.9(e), and (ii) pays the Default Rate on the Revolving Note commencing on the 90th day prior to

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the Termination Date or reduction date, and continuing through the date that Xxxxx Fargo receives delivery of an Authenticated Record giving it actual notice of Company’s intention to terminate or reduce the Line of Credit.

(c) Non-Renewal by Company; Notice.  If Company does not wish Xxxxx Fargo to consider renewal of the Line of Credit on the next Maturity Date, Company shall deliver an Authenticated Record to Xxxxx Fargo at least 90 days prior to the Maturity Date notifying Xxxxx Fargo of its intention not to renew. If Company fails to deliver to Xxxxx Fargo such timely notice, then the Revolving Note shall accrue interest at the Default Rate commencing on the 90th day prior to the Maturity Date and continuing through the date that Xxxxx Fargo receives delivery of an Authenticated Record giving it actual notice of Company’s intention not to renew.

1.12 Letters of Credit.

(a) Issuance of Letters of Credit; Amount.  Xxxxx Fargo, subject to the terms and conditions of this Agreement, shall issue, on or after the date that Xxxxx Fargo is obligated to make its first Advance under this Agreement and prior to the Termination Date, one or more irrevocable letters of credit (each, a “Letter of Credit”, and collectively, “Letters of Credit”) for Company’s account.  Xxxxx Fargo will not issue any Letter of Credit if the face amount of the Letter of Credit would exceed the lesser of: (i) $1,000,000 less the L/C Amount, or (ii) the Borrowing Base, less an amount equal to aggregate unreimbursed Line of Credit Advances plus the L/C Amount.

(b) Additional Letter of Credit Documentation.  Prior to requesting issuance of a Letter of Credit, Company shall first execute and deliver to Xxxxx Fargo a an L/C Application, and any other documents that Xxxxx Fargo may request, which shall govern the issuance of the Letter of Credit and Company’s obligation to reimburse Xxxxx Fargo for any related Letter of Credit draws (the “Obligation of Reimbursement”).

(c) Expiration.  No Letter of Credit shall be issued that has an expiry date that is later than one (1) year from the date of issuance, or the Maturity Date in effect on the date of issuance, whichever is earlier.

(d) Obligation of Reimbursement During Default Periods.  If Company is unable, due to the existence of a Default Period or for any other reason, to obtain an Advance to pay any Obligation of Reimbursement, Company shall pay Xxxxx Fargo on demand and in immediately available funds, the amount of the Obligation of Reimbursement together with interest, accrued from the date presentment of the underlying draft until reimbursement in full at the Default Rate.  Xxxxx Fargo is authorized, alternatively and in its sole discretion, to make an Advance in an amount sufficient to discharge the Obligation of Reimbursement and pay all accrued but unpaid interest and fees with respect to the Obligation of Reimbursement.

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(e) Bond Letter of Credit.  For purposes of clarity, the provisions of this Section 1.12 do not apply to the Reimbursement Agreement or the letter of credit issued thereunder.

1.13 Special Account.  If the Line of Credit is terminated for any reason while a Letter of Credit is outstanding, or if after prepayment of the Revolving Note the L/C Amount continues to exceed the Borrowing Base, then Company shall promptly pay Xxxxx Fargo in immediately available funds for deposit to the Special Account, an amount equal, as the case may be, to either (a) the L/C Amount plus any anticipated fees and costs, or (b) the amount by which the L/C Amount exceeds the Borrowing Base.  If Company fails to pay these amounts promptly, then Xxxxx Fargo may in its sole discretion make an Advance to pay these amounts and deposit the proceeds to the Special Account.  The Special Account shall be an account maintained with Xxxxx Fargo or any other financial institution acceptable to Xxxxx Fargo.  Xxxxx Fargo may in its sole discretion apply amounts on deposit in the Special Account to the Indebtedness.  Company may not withdraw amounts deposited to the Special Account until the Line of Credit has been terminated and all outstanding Letters of Credit have either been returned to Xxxxx Fargo or have expired and the Indebtedness has been fully paid.

2. SECURITY INTEREST AND OCCUPANCY OF COMPANY’S PREMISES

2.1 Grant of Security Interest. Company hereby pledges, assigns and grants to Xxxxx Fargo a Lien and security interest (collectively referred to as the “Security Interest”) in the Collateral, as security for the payment and performance of all Indebtedness. Following request by Xxxxx Fargo, Company shall xxxxx Xxxxx Fargo a Lien and security interest in all commercial tort claims that it may have against any Person.

2.2 Notifying Account Debtors and Other Obligors; Collection of Collateral.  Xxxxx Fargo may at any time (whether or not a Default Period then exists) deliver a Record giving an account debtor or other Person obligated to pay an Account, a General Intangible, or other amount due, notice that the Account, General Intangible, or other amount due has been assigned to Xxxxx Fargo for security and must be paid directly to Xxxxx Fargo.  Company shall join in giving such notice and shall Authenticate any Record giving such notice upon Xxxxx Fargo’s request.  After Company or Xxxxx Fargo gives such notice, Xxxxx Fargo may, but need not, in Xxxxx Fargo’s or in Company’s name, demand, xxx for, collect or receive any money or property at any time payable or receivable on account of, or securing, such Account, General Intangible, or other amount due, 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 account debtor or other obligor.  Xxxxx Fargo may, in Xxxxx Fargo’s name or in Company’s name, as Company’s agent and attorney-in-fact, notify the United States Postal Service to change the address for delivery of Company’s mail to any address designated by Xxxxx Fargo, otherwise intercept Company’s mail, and receive, open and dispose of Company’s mail, applying all Collateral as permitted under this Agreement and holding all other mail for Company’s account or forwarding such mail to Company’s last known address.

2.3 Assignment of Insurance.  As additional security for the Indebtedness, Company hereby assigns to Xxxxx Fargo all rights of Company under every policy of insurance covering the Collateral and all business records and other documents relating to it, and all monies (including proceeds and refunds) that may be payable under any policy, and Company hereby directs the

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issuer of each policy to pay all such monies directly to Xxxxx Fargo.  At any time, whether or not a Default Period then exists, Xxxxx Fargo may (but need not), in Xxxxx Fargo’s or Company’s name, execute and deliver proofs of claim, receive payment of proceeds and endorse checks and other instruments representing payment of the policy of insurance, and adjust, litigate, compromise or release claims against the issuer of any policy.  Any monies received under any insurance policy assigned to Xxxxx Fargo, other than liability insurance policies, or received as payment of any award or compensation for condemnation or taking by eminent domain, shall be paid to Xxxxx Fargo and, as determined by Xxxxx Fargo in its sole discretion, either be applied to prepayment of the Indebtedness or disbursed to Company under staged payment terms reasonably satisfactory to Xxxxx Fargo for application to the cost of repairs, replacements, or restorations which shall be effected with reasonable promptness and shall be of a value at least equal to the value of the items or property destroyed.

2.4 Company’s Premises.

(a) Xxxxx Fargo’s Right to Occupy Company’s Premises.  Company hereby grants to Xxxxx Fargo the right, at any time during a Default Period and without notice or consent, to take exclusive possession of all locations where Company conducts its business or has any rights of possession, including without limitation the locations described on Exhibit B (the “Premises”), until the earlier of (i) payment in full and discharge of all Indebtedness and termination of the Line of Credit, or (ii) final sale or disposition of all items constituting Collateral and delivery of those items to purchasers.

(b) Xxxxx Fargo’s Use of Company’s Premises.  Xxxxx Fargo may use the Premises to store, process, manufacture, sell, use, and liquidate or otherwise dispose of items that are Collateral, and for any other incidental purposes deemed appropriate by Xxxxx Fargo in good faith.

(c) Company’s Obligation to Reimburse Xxxxx Fargo.  Xxxxx Fargo shall not be obligated to pay rent or other compensation for the possession or use of any Premises, but if Xxxxx Fargo elects to pay rent or other compensation to the owner of any Premises in order to have access to the Premises, then Company shall promptly reimburse Xxxxx Fargo all such amounts, as well as all taxes, fees, charges and other expenses at any time payable by Xxxxx Fargo with respect to the Premises by reason of the execution, delivery, recordation, performance or enforcement of any terms of this Agreement.

2.5 License.  Without limiting the generality of any other Security Document, Company hereby grants to Xxxxx Fargo a non-exclusive, worldwide and royalty-free license to use or otherwise exploit all Intellectual Property Rights of Company 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 Company for its own manufacturing and subject to Company’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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2.6 Financing Statements.

(a) Authorization to File.  Company authorizes Xxxxx Fargo to file financing statements describing Collateral to perfect Xxxxx Fargo’s Security Interest in the Collateral, and Xxxxx Fargo may describe the Collateral as “all personal property” or “all assets” or describe specific items of Collateral including without limitation any commercial tort claims.  All financing statements filed before the date of this Agreement to perfect the Security Interest were authorized by Company and are hereby re-authorized.

(b) Termination.  Xxxxx Fargo shall, at Company’s expense, release or terminate any filings or other agreements that perfect the Security Interest, provided that there are no suits, actions, proceedings or claims pending or threatened against any Indemnitee under this Agreement with respect to any Indemnified Liabilities, upon Xxxxx Fargo’s receipt of the following, in form and content satisfactory to Xxxxx Fargo: (i) cash payment in full of all Indebtedness and a completed performance by Company with respect to its other obligations under this Agreement, (ii) evidence that the commitment of Xxxxx Fargo to make Advances under the Line of Credit or under any other facility with Company has been terminated, (iii) a release of all claims against Xxxxx Fargo by Company relating to Xxxxx Fargo’s performance and obligations under the Loan Documents, and (iv) an agreement by Company or any Guarantor and any new lender to Company to indemnify Xxxxx Fargo for any payments received by Xxxxx Fargo that are applied to the Indebtedness as a final payoff that may subsequently be returned or otherwise not paid for any reason.

2.7 Setoff.  Xxxxx Fargo may at any time, in its sole discretion and without demand or notice to anyone, setoff any liability owed to Company by Xxxxx Fargo against any Indebtedness, whether or not due.

2.8 Collateral Related Matters.  This Agreement does not contemplate a sale of Accounts or chattel paper, and, as provided by law, Company is entitled to any surplus and shall remain liable for any deficiency.  Xxxxx Fargo’s duty of care with respect to Collateral in its possession (as imposed by law) will 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 third Person, and Xxxxx Fargo need not otherwise preserve, protect, insure or care for such Collateral.  Xxxxx Fargo shall not be obligated to preserve rights Company may have against prior parties, to liquidate the Collateral at all or in any particular manner or order or apply the Proceeds of the Collateral in any particular order of application.  Xxxxx Fargo has no obligation to clean-up or prepare Collateral for sale.  Company waives any right it may have to require Xxxxx Fargo to pursue any third Person for any of the Indebtedness.

2.9 Notices Regarding Disposition of Collateral.  If notice to Company of any intended disposition of Collateral or any other intended action is required by applicable law in a particular situation, such notice will be deemed commercially reasonable if given in the manner specified in Section 7.4 at least ten calendar days before the date of intended disposition or other action.

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3. CONDITIONS PRECEDENT

3.1 Conditions Precedent to Agreement, Initial Advance and Issuance of Initial Letter of Credit.  The legal effectiveness of this Agreement and Xxxxx Fargo’s obligation to make the initial Advance or issue the first Letter of Credit shall be subject to the condition that Xxxxx Fargo shall have received this Agreement and each of the Loan Documents, and any document, agreement, or other item described in or related to this Agreement, and all fees and information described in Exhibit C, executed and in form and content satisfactory to Xxxxx Fargo.

3.2 Additional Conditions Precedent to All Advances and Letters of Credit.  Xxxxx Fargo’s obligation to make any Advance (including the initial Advance) or issue any Letter of Credit shall be subject to the further additional conditions: (a) that the representations and warranties described in Exhibit D are correct on the date of the Advance or the issuance of the Letter of Credit, except to the extent that such representations and warranties relate solely to an earlier date; and (b) that no event has occurred and is continuing, or would result from the requested Advance or issuance of the Letter of Credit that would result in an Event of Default.

4. REPRESENTATIONS AND WARRANTIES

To induce Xxxxx Fargo to enter into this Agreement, Company makes the representations and warranties described in Exhibit D.  Any request for an Advance will be deemed a representation by Company that all representations and warranties described in Exhibit D are true, correct and complete as of the time of the request, unless they relate exclusively to an earlier date. Company shall promptly deliver a Record notifying Xxxxx Fargo of any change in circumstance that would affect the accuracy of any representation or warranty, unless the representation and warranty specifically relates to an earlier date.

5. COVENANTS

So long as the Indebtedness remains unpaid, or the Line of Credit has not been terminated, Company shall comply with each of the following covenants, unless Xxxxx Fargo shall consent otherwise in an Authenticated Record delivered to Company.

5.1 Reporting Requirements.  Company shall deliver to Xxxxx Fargo the following information, compiled where applicable using GAAP consistently applied, in form and content acceptable to Xxxxx Fargo:

(a) Annual Financial Statements.  As soon as available and in any event within 120 days after Company’s fiscal year end, Company’s audited financial statements prepared by an independent certified public accountant acceptable to Xxxxx Fargo, which shall include Company’s balance sheet, income statement, and statement of  retained earnings and cash flows prepared, if requested by Xxxxx Fargo, on a consolidated and consolidating basis to include Company’s Affiliates.  The annual financial statements shall be accompanied by the unqualified opinion of such accountant and a certificate (the “Compliance Certificate”) in the form of Exhibit E that is signed by Company’s chief financial officer.

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Each Compliance Certificate that accompanies an annual financial statement shall also be accompanied by (i) copies of all management letters prepared by Company’s accountants; and (ii) a report signed by the accountant stating that in making the investigations necessary to render the opinion, the accountant obtained no knowledge, except as specifically stated, of any Event of Default under the Agreement, and a detailed statement, including computations, demonstrating whether or not Company is in compliance with the financial covenants of this Agreement.

(b) Monthly Financial Statements.  As soon as available and in any event within 30 days after the end of each month, a Company prepared balance sheet, income statement, and statement of retained earnings prepared for that month and for the year—to-date period then ended, prepared, if requested by Xxxxx Fargo, on a consolidated and consolidating basis to include Company’s Affiliates, and stating in comparative form the figures for the corresponding date and periods in the prior fiscal year, subject to year-end adjustments.  The financial statements shall be accompanied by a Compliance Certificate in the form of Exhibit E that is signed by Company’s chief financial officer.

(c) Collateral Reports.  No later than 15 days after each month end (or more frequently if Xxxxx Fargo shall request it), detailed agings of Company’s accounts receivable and accounts payable, a detailed inventory report, an inventory certification report, and a calculation of Company’s Accounts, Eligible Accounts, Inventory and Eligible Inventory as of the end of that month or shorter time period requested by Xxxxx Fargo.

(d) Projections.  No later than 30 days prior to each fiscal year end, Company’s projected balance sheet and income statement and statement of cash flows for each month of the next fiscal year, certified as accurate by Company’s chief financial officer and accompanied by a statement of assumptions and supporting schedules and information.

(e) Supplemental Reports.  Weekly, or more frequently if Xxxxx Fargo requests, a completed Xxxxx Fargo standard form “daily collateral report”, together with receivables schedules, collection reports, and copies of invoices, shipment documents and delivery receipts for goods sold to account debtors.

(f) Litigation.  No later than three days after discovery, a Record notifying Xxxxx Fargo of any litigation or other proceeding before any court or governmental agency which seeks a monetary recovery against Company in excess of $50,000.

(g) Intellectual Property.  (i) No later than 30 days before it acquires material Intellectual Property Rights, a Record notifying Xxxxx Fargo of Company’s intention to acquire such rights; (ii) except for transfers permitted under Section 5.17, no later than 30 days before it disposes of material Intellectual Property Rights, a Record notifying Xxxxx Fargo of Company’s intention to dispose of such rights, along with copies of all proposed documents and agreements concerning

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the disposal of such rights as requested by Xxxxx Fargo; (iii) promptly upon discovery, a Record notifying Xxxxx Fargo of (A) any Infringement of Company’s Intellectual Property Rights by any Person, (B) claims that Company is Infringing another Person’s Intellectual Property Rights and (C) any threatened cancellation, termination or material limitation of Company’s Intellectual Property Rights; and (iv) promptly upon receipt, copies of all registrations and filings with respect to Company’s Intellectual Property Rights.

(h) Defaults.  No later than three days after learning of the probable occurrence of any Event of Default, a Record notifying Xxxxx Fargo of the Event of Default and the steps being taken by Company to cure the Event of Default.

(i) Disputes.  Promptly upon discovery, of (i) any disputes or claims by Company’s customers exceeding $25,000 individually or $50,000 in the aggregate during any fiscal year; (ii) credit memos not previously reported in Section 5.1(e); and (iii) any goods returned to or recovered by Company outside of the ordinary course of business.

(j) Changes in Officers and Directors.  Promptly following occurrence, a Record notifying Xxxxx Fargo of any change in the persons constituting Company’s Officers and Directors.

(k) Collateral.  Promptly upon discovery, a Record notifying Xxxxx Fargo of any loss of or material damage to any Collateral or of any substantial adverse change in any Collateral or the prospect of its payment.

(l) Commercial Tort Claims.  Promptly upon discovery, a Record notifying Xxxxx Fargo of any commercial tort claims brought by Company against any Person, including the name and address of each defendant, a summary of the facts, an estimate of Company’s damages, copies of any complaint or demand letter submitted by Company, and such other information as Xxxxx Fargo may request.

(m) Reports to Owners.  Promptly upon distribution, copies of all financial statements, reports and proxy statements which Company shall have sent to its Owners.

(n) Tax Returns of Company.  No later than five days after they are required to be filed, copies of Company’s signed and dated state and federal income tax returns and all related schedules, and copies of any extension requests.

(o) Tax Returns and Personal Financial Statements of Guarantor(s).  No later than April 30th of each year,  the current personal financial statement and signed and dated state and federal income tax returns and related schedules of each Guarantor (if any), and copies of any extension requests.

(p) Violations of Law.  No later than three days after discovery of any violation, a Record notifying Xxxxx Fargo of Company’s violation of any law, rule or

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regulation, the non-compliance with which could have a Material Adverse Effect on Company.

(q) Pension Plans.  (i) Promptly upon discovery, and in any event within 30 days after Company knows or has reason to know that any Reportable Event with respect to any Pension Plan has occurred, a Record authenticated by Company’s chief financial officer notifying Xxxxx Fargo of the Reportable Event in detail and the actions which Company proposes to take to correct the deficiency, together with a copy of any related notice sent to the Pension Benefit Guaranty Corporation; (ii) promptly upon discovery, and in any event within 10 days after Company fails to make a required quarterly Pension Plan contribution under Section 412(m) of the IRC, a Record authenticated by Company’s chief financial officer notifying Xxxxx Fargo of the failure in detail and the actions that Company will take to cure the failure, together with a copy of any related notice sent to the Pension Benefit Guaranty Corporation; and (iii) promptly upon discovery, and in any event within 10 days after Company knows or has reason to know that it may be liable or may be reasonably expected to have liability for any withdrawal, partial withdrawal, reorganization or other event under any Multiemployer Plan under Sections 4201 or 4243 of ERISA, a Record authenticated by Company’s chief financial officer notifying Xxxxx Fargo of the details of the event and the actions that Company proposes to take in response.

(r) Other Reports.  From time to time, with reasonable promptness, all customer lists receivables schedules, inventory reports, collection reports, deposit records, equipment schedules, invoices to account debtors, shipment documents and delivery receipts for goods sold, and such other materials, reports, records or information as Xxxxx Fargo may request.

5.2 Financial Covenants.  Company agrees to comply with the financial covenants described below, which shall be calculated using GAAP consistently applied, except as they may be otherwise modified by the following capitalized definitions:

(a) Minimum Earnings Before Taxes.  Company shall achieve, during each period described below, Earnings Before Taxes of not less than the amount set forth for each such period (numbers appearing between “< >“ are negative):

Period		Min. Earnings Before Taxes
Through June 30, 2010		$	0
Through September 30, 2010		$	0
Through December 31, 2010		$	0

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(b) Minimum Debt Service Coverage Ratio.  Company shall maintain, during each period described below, a Debt Service Coverage Ratio, determined as at the end of each fiscal quarter, of not less than the ratio set forth for each such period:

Period		Min. Debt Service Coverage Ratio
Through June 30, 2010*		1.20 to 1.00
Through June 30, 2010		0.80 to 1.00
Through September 30, 2010		1.20 to 1.00
Through December 31, 2010		1.20 to 1.00

* As adjusted for anticipated $2,250,000 tax refund, expected to be received in June 2010.

(c) Capital Expenditures.  Company shall not incur or contract to incur Capital Expenditures of more than (i) $1,400,000 in the aggregate during Company’s fiscal year ending December 31, 2010, and (ii) zero for each subsequent year until Company and Xxxxx Fargo agree on limits on Capital Expenditures for subsequent periods based on Company’s projections for such periods.

(d) Stop Loss.  Company shall not, during any single month, suffer a pre-tax Net Loss in excess of $250,000.00, commencing with the month of May 2010.

5.3 Other Liens and Permitted Liens.

(a) Other Liens; Permitted Liens.  Company shall not create, incur or suffer to exist any Lien upon any of its assets, now owned or later acquired, as security for any indebtedness, with the exception of the following (each a “Permitted Lien”; collectively, “Permitted Liens”): (i) In the case of real property, covenants, restrictions, rights, easements and minor irregularities in title which do not materially interfere with Company’s business or operations as presently conducted; (ii) Liens in existence on the date of this Agreement that are described in Exhibit F and secure indebtedness for borrowed money permitted under Section 5.4; (iii) The Security Interest and Liens created by the Security Documents; and (iv) Purchase money Liens relating to the acquisition of Equipment not exceeding the lesser of cost or fair market value and so long as no Default Period is then in existence and none would exist immediately after such acquisition.

(b) Financing Statements.  Company shall not authorize the filing of any financing statement by any Person as Secured Party with respect to any of Company’s assets, other than Xxxxx Fargo.  Company shall not amend any financing statement filed by Xxxxx Fargo as Secured Party except as permitted by law.

5.4 Indebtedness.  Company shall not incur, create, assume or permit to exist any indebtedness or liability on account of deposits or letters of credit issued on Company’s behalf, or advances or any indebtedness for borrowed money of any kind, whether or not evidenced by an instrument, except: (a) Indebtedness described in this Agreement; (b) indebtedness of Company described in Exhibit F; and (c) indebtedness secured by Permitted Liens.

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5.5 Guaranties.  Company shall not assume, guarantee, endorse or otherwise become directly or contingently liable for the obligations of any Person, except: (a) the endorsement of negotiable instruments by Company 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 of this Agreement and described in Exhibit F.

5.6 Investments and Subsidiaries.  Company shall not make or permit to exist any loans or advances to, or make any investment or acquire any interest whatsoever in, any Person or Affiliate, including without limitation any partnership or joint venture, nor purchase or hold beneficially any stock or other securities or evidence of indebtedness of any Person or Affiliate, except:

(a) Investments in direct obligations of the United States of America or any of its political subdivisions whose obligations constitute the full faith and credit obligations of the United States of America and have 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 Xxxxx’x 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 Company’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;

(d) Affiliate loans or advances to Manufacturing & Assembly Solutions of Monterrey S DE RL DE CV not to exceed $10,700,000 in the aggregate outstanding at any time up to and through December 30, 2010 and $10,300,000 at all times thereafter (including the fiscal year end measurement made at December 31, 2010); and

(e) Current investments in those Subsidiaries in existence on the date of this Agreement which are identified on Exhibit D.

5.7 Dividends and Distributions.  Company shall not declare or pay any dividends (other than dividends payable solely in stock of Company) on any class of its stock, or make any payment on account of the purchase, redemption or retirement of any shares of its stock, or other securities or evidence of its indebtedness or make any distribution regarding its stock, either directly or indirectly.

5.8 Salaries.  Company shall not pay excessive or unreasonable salaries, bonuses, commissions, consultant fees or other compensation to any Director, Officer or consultant, or any member of their families.

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5.9 Books and Records; Collateral Examination; Inspection and Appraisals.

(a) Books and Records; Inspection.  Company shall keep complete and accurate books and records with respect to the Collateral and Company’s business and financial condition and any other matters that Xxxxx Fargo may request, in accordance with GAAP. Company shall permit any employee, attorney, accountant or other agent of Xxxxx Fargo to audit, review, make extracts from and copy any of its books and records at any time during ordinary business hours, and to discuss Company’s affairs with any of its Directors, Officers, employees, Owners or agents.

(b) Authorization to Company’s Agents to Make Disclosures to Xxxxx Fargo.  Company authorizes all accountants and other Persons acting as its agent to disclose and deliver to Xxxxx Fargo’s employees, accountants, attorneys and other Persons acting as its agent, at Company’s expense, all financial information, books and records, work papers, management reports and other information in their possession regarding Company.

(c) Collateral Exams and Inspections.  Company shall permit Xxxxx Fargo’s employees, accountants, attorneys or other Persons acting as its agent, to examine and inspect any Collateral or any other property of Company at any time during ordinary business hours.

(d) Collateral Appraisals.  Xxxxx Fargo may also obtain, from time to time, at Company’s expense, an appraisal of Company’s Inventory, Equipment and/or the real estate subject to the Mortgages, by an appraiser acceptable to Xxxxx Fargo in its sole discretion.

5.10 Account Verification; Payment of Permitted Liens.

(a) Account Verification.  Xxxxx Fargo or its agents may (i) contact account debtors and other obligors at any time to verify Company’s Accounts; and (ii) require Company to send requests for verification of Accounts or send notices of assignment of Accounts to account debtors and other obligors.

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

5.11 Compliance with Laws.

(a) General Compliance with Applicable Law; Use of Collateral.  Company shall (i) comply, and cause each Subsidiary to comply, with the requirements of applicable laws and regulations, the non-compliance with which would have a Material Adverse Effect on 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.

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(b) Compliance with Federal Regulatory Laws.  Company shall (i) prohibit, and cause each Subsidiary to prohibit, any Person that is an Owner or Officer from being listed on the Specially Designated Nationals and Blocked Person List or other similar lists maintained by the Office of Foreign Assets Control (“OFAC”), the Department of the Treasury or included in any Executive Orders, (ii) not permit the proceeds of the Line of Credit or any other financial accommodation extended by Xxxxx Fargo to be used in any way that violates any foreign asset control regulations of OFAC or other applicable law, (iii) comply, and cause each Subsidiary to comply, with all applicable Bank Secrecy Act laws and regulations, as amended from time to time, and (iv) otherwise comply with the USA Patriot Act and Xxxxx Fargo’s related policies and procedures.

(c) Compliance with Environmental Laws.  Company shall (i) comply, and cause each Subsidiary to comply, with the requirements of applicable Environmental Laws and obtain and comply with all permits, licenses and similar approvals required by them, and (ii) 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.

5.12 Payment of Taxes and Other Claims.  Company shall pay or discharge, when due, and cause each Subsidiary to pay or discharge, when due, (a) all taxes, assessments and governmental charges levied or imposed upon it or upon its income or profits, upon any properties belonging to it (including without limitation the Collateral) or upon or against the creation, perfection or continuance of the Security Interest, prior to the date on which penalties attach, (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 Company, although Company 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.

5.13 Maintenance of Collateral and Properties.

(a) Company shall 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, although Company may discontinue the operation and maintenance of any properties if Company believes that such discontinuance is desirable to the conduct of its business and not disadvantageous in any material respect to Xxxxx Fargo.  Company shall take all commercially reasonable steps necessary to protect and maintain its Intellectual Property Rights.

(b) Company shall defend the Collateral against all Liens, claims and demands of all third Persons claiming any interest in the Collateral. Company shall keep all Collateral free and clear of all Liens except Permitted Liens. Company shall 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.

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5.14 Insurance.  Company shall at all times maintain insurance with insurers acceptable to Xxxxx Fargo, in such amounts and on such terms (including deductibles) as Xxxxx Fargo in its sole discretion may require and including, as applicable and without limitation, business interruption insurance (including force majeure coverage), hazard coverage on an “all risks” basis for all tangible Collateral, and theft and physical damage coverage for Collateral consisting of motor vehicles.  All insurance policies must contain an appropriate lender’s interest endorsement or clause, and name Xxxxx Fargo as an additional insured.

5.15 Preservation of Existence.  Company shall 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.

5.16 Delivery of Instruments, etc.  Upon request by Xxxxx Fargo, Company shall promptly deliver to Xxxxx Fargo in pledge all instruments, documents and chattel paper constituting Collateral, endorsed or assigned by Company.

5.17 Sale or Transfer of Assets; Suspension of Business Operations.  Company shall not sell, lease, assign, transfer or otherwise dispose of (a) the stock of any Subsidiary, (b) all or a substantial part of its assets, or (c) any Collateral or any interest in Collateral (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 shall not liquidate, dissolve or suspend business operations.  Company shall not transfer any part of its ownership interest in any Intellectual Property Rights and shall not permit its rights as licensee of Licensed Intellectual Property to lapse, except that Company may transfer such rights or permit them to lapse if it has reasonably determined that such Intellectual Property Rights are no longer useful in its business.  If Company transfers any Intellectual Property Rights for value, Company shall pay the Proceeds to Xxxxx Fargo for application to the Indebtedness.  Company shall not license any other Person to use any of Company’s Intellectual Property Rights, except that Company may grant licenses in the ordinary course of its business in connection with sales of Inventory or the provision of services to its customers.

5.18 Consolidation and Merger; Asset Acquisitions.  Company shall not consolidate with or merge into any other entity, or permit any other entity to merge into it, or acquire (in a transaction analogous in purpose or effect to a consolidation or merger) all or substantially all of the assets of any other entity.

5.19 Sale and Leaseback.  Company shall not enter into any arrangement, directly or indirectly, with any other Person pursuant to which Company shall sell or transfer any real or personal property, whether owned now or acquired in the future, and then rent or lease all or part of such property or any other property which Company intends to use for substantially the same purpose or purposes as the property being sold or transferred.

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

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5.21 Accounting.  Company will not adopt any material change in accounting principles except as required by GAAP, consistently applied.  Company will not change its fiscal year.

5.22 Discounts, etc.  After notice from Xxxxx Fargo, Company will not grant any discount, credit or allowance to any customer of Company or accept any return of goods sold.  Company will not at any time modify, amend, subordinate, cancel or terminate any Account.

5.23 Pension Plans.  Except as disclosed to Xxxxx Fargo in a Record prior to the date of this Agreement, neither Company nor any ERISA Affiliate will (a) adopt, create, assume or become party to any Pension Plan, (b) become obligated to contribute to any Multiemployer Plan, (c) 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 (d) amend any Plan in a manner that would materially increase its funding obligations.

5.24 Place of Business; Name.  Company will not transfer its chief executive office or principal place of business, or move, relocate, close or sell any business Premises.  Company will not permit any tangible Collateral or any records relating 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.  Company will not change its name or jurisdiction of organization.

5.25 Constituent Documents; S Corporation Status.  Company will not amend its Constituent Documents.  Company will not become an S Corporation.

5.26 Performance by Xxxxx Fargo.  If Company fails to perform or observe any of its obligations under this Agreement at any time, Xxxxx Fargo may, but need not, perform or observe them on behalf of Company and may, but need not, take any other actions which Xxxxx Fargo may reasonably deem necessary to cure or correct this failure; and Company shall pay Xxxxx Fargo upon demand the amount of all costs and expenses (including reasonable attorneys’ fees and legal expense) incurred by Xxxxx Fargo in performing these obligations, together with interest on these amounts at the Default Rate.

5.27 Xxxxx Fargo Appointed as Company’s Attorney in Fact.  To facilitate Xxxxx Fargo’s performance or observance of Company’s obligations under this Agreement, Company hereby irrevocably appoints Xxxxx Fargo and Xxxxx Fargo’s agents, as Company’s attorney in fact (which appointment is coupled with an interest) with the right (but not the duty) to create, prepare, complete, execute, deliver, endorse or file on behalf of Company any instruments, documents, assignments, security agreements, financing statements, applications for insurance and any other agreements or any Record required to be obtained, executed, delivered or endorsed by Company in accordance with the terms of this Agreement.

6. EVENTS OF DEFAULT AND REMEDIES

6.1 Events of Default.  An “Event of Default” means any of the following:

(a) Company fails to pay the amount of any Indebtedness on the date that it becomes due and payable;

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(b) Company fails to observe or perform any covenant or agreement of Company set forth in this Agreement, or in any of the Loan Documents, or in any other document or agreement described in or related to this Agreement or to any Indebtedness, or any covenant in Section 5.2 becomes inapplicable due to the lapse of time, and Company and Xxxxx Fargo fail to come to an agreement acceptable to Xxxxx Fargo in Xxxxx Fargo’s sole discretion to amend the covenant to apply to future periods;

(c) An Overadvance arises as the result of any reduction in the Borrowing Base, or arises in any manner or on terms not otherwise approved of in advance by Xxxxx Fargo in a Record that it has Authenticated;

(d) An event of default or termination event (however defined) occurs under any Rate Hedge Agreement, derivative, foreign exchange, or similar transaction or arrangement entered into between Company and Xxxxx Fargo;

(e) A Change of Control shall occur;

(f) Company or any Guarantor becomes insolvent or admits in a Record an inability to pay debts as they mature, or Company or any Guarantor makes an assignment for the benefit of creditors; or Company or any Guarantor applies for or consents to the appointment of any receiver, trustee, or similar officer for the benefit of Company or any Guarantor, or for any of its properties; or any receiver, trustee or similar officer is appointed without the application or consent of Company; or any judgment, writ, warrant of attachment or execution or similar process is issued or levied against a substantial part of the property of Company or any Guarantor;

(g) Company or any Guarantor files a petition under any chapter of the United States Bankruptcy Code or under the laws of any other jurisdiction naming Company or any Guarantor as debtor; or any such petition is instituted against Company or any Guarantor; or Company or any Guarantor institutes (by petition, application, answer, consent or otherwise) any bankruptcy, insolvency, reorganization, debt arrangement, dissolution, liquidation or similar proceeding under the laws of any jurisdiction; or any such proceeding is instituted (by petition, application or otherwise) against Company or any Guarantor.

(h) Any representation or warranty made by Company in this Agreement or by any Guarantor in any Guaranty, or by Company (or any of its Officers) or any Guarantor in any agreement, certificate, instrument or financial statement or other statement delivered to Xxxxx Fargo in connection with this Agreement or pursuant to such Guaranty is untrue or misleading in any material respect when delivered to Xxxxx Fargo;

(i) A final, non-appealable arbitration award, judgment, or decree or order for the payment of money in an amount in excess of $10,000 which is not insured or subject to indemnity, is entered against Company which is not immediately stayed or appealed;

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(j) Company is in default with respect to any bond, debenture, note or other evidence of material indebtedness issued by Company that is held by any third Person other than Xxxxx Fargo, or under any 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 applicable grace period, if any, has expired, regardless of whether such default has been waived by the holder of such indebtedness;

(k) Company liquidates, dissolves, terminates or suspends its business operations or otherwise fails to operate its business in the ordinary course, or merges with another Person; or sells or attempts to sell all or substantially all of its assets;

(l) Company fails to pay any indebtedness or obligation owed to Xxxxx Fargo which is unrelated to the Line of Credit or this Agreement as it becomes due and payable;

(m) Any Guarantor (if any) repudiates or purports to revoke the Guarantor’s Guaranty, or fails to perform any obligation under such Guaranty, or any individual Guarantor dies or becomes incapacitated, or any other Guarantor ceases to exist for any reason;

(n) Company engages in any act prohibited by any Subordination Agreement, or makes any payment on Subordinated Indebtedness (as defined in the Subordination Agreement) that the Subordinated Creditor was not contractually entitled to receive;

(o) Any event or circumstance occurs that Xxxxx Fargo in good faith believes may impair the prospect of payment of all or part of the Indebtedness, or Company’s ability to perform any of its material obligations under any of the Loan Documents, or any other document or agreement described in or related to this Agreement, or there occurs any material adverse change in the business or financial condition of Company.

(p) Any Director, Officer, Guarantor, or Owner of at least 20% of the issued and outstanding common stock of Company is indicted for a felony offence under state or federal law, or Company hires an Officer or appoints a Director who has been convicted of any such felony offense, or a Person becomes an Owner of at least 20% of the issued and outstanding common stock of Company who has been convicted of any such felony offense.

(q) Any Reportable Event, which Xxxxx Fargo in good faith believes to constitute sufficient grounds for termination of any Pension Plan or for the appointment of a trustee to administer any Pension Plan, has occurred and is continuing 30 days after Company gives Xxxxx Fargo a Record notifying it of the Reportable Event; or a trustee is appointed by an appropriate court to administer any Pension Plan; or the Pension Benefit Guaranty Corporation institutes proceedings to terminate or appoint a trustee to administer any Pension Plan; or Company or any ERISA

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Affiliate files for a distress termination of any Pension Plan under Title IV of ERISA; or Company or any ERISA Affiliate fails to make any quarterly Pension Plan contribution required under Section 412(m) of the IRC, which Xxxxx Fargo in good faith believes may, either by itself or in combination with other failures, result in the imposition of a Lien on Company’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 could reasonably be expected to result in a material liability by Company to the Multiemployer Plan under Title IV of ERISA.

6.2          Rights and Remedies.  During any Default Period, Xxxxx Fargo may in its discretion exercise any or all of the following rights and remedies:

(a) Xxxxx Fargo may terminate the Line of Credit and decline to make Advances including any unfunded Term Loan Advances, if any, and terminate any services extended to Company under the Master Agreement for Treasury Management Services;

(b) Xxxxx Fargo may declare the Indebtedness to be immediately due and payable and accelerate payment of the Revolving Note and the Term Note, and all Indebtedness shall immediately become due and payable, without presentment, notice of dishonor, protest or further notice of any kind, all of which Company hereby expressly waives;

(c) Xxxxx Fargo may, without notice to Company, apply any money owing by Xxxxx Fargo to Company to payment of the Indebtedness;

(d) Xxxxx Fargo may exercise and enforce any rights and remedies available upon default to a secured party under the UCC, including the right to take possession of Collateral (without posting a bond or other form of security, which Company hereby waives), to proceed with or without judicial process (without a prior hearing or notice of hearing, which Company hereby waives) and to sell, lease or otherwise dispose of Collateral for cash or on credit (with or without giving warranties as to condition, fitness, merchantability or title to Collateral, and in the event of a credit sale, Indebtedness shall be reduced only to the extent that payments are actually received), and Company will upon Xxxxx Fargo’s demand assemble the Collateral and make it available to Xxxxx Fargo at any place designated by Xxxxx Fargo which is reasonably convenient to both parties;

(e) Xxxxx Fargo may exercise and enforce its rights and remedies under any of the Loan Documents and any other document or agreement described in or related to this Agreement;

(f) Company will pay Xxxxx Fargo upon demand in immediately available funds an amount equal to the Aggregate Face Amount plus any anticipated costs and fees for deposit to the Special Account pursuant to Section 1.11;

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(g) Xxxxx Fargo may for any reason apply for the appointment of a receiver of the Collateral (to which appointment Company hereby consents) without the necessity of posting a bond or other form of security (which Company hereby waives); and

(h) Xxxxx Fargo may exercise any other rights and remedies available to it by law or agreement.

6.3          Immediate Default and Acceleration.  Following the occurrence of an Event of Default described in Section 6.1(f) or (g), the Line of Credit shall immediately terminate and all of Company’s Indebtedness shall immediately become due and payable without presentment, demand, protest or notice of any kind.

7.             MISCELLANEOUS

7.1          No Waiver; Cumulative Remedies.  No delay or any single or partial exercise by Xxxxx Fargo of any right, power or remedy under the Loan Documents, or under any other document or agreement described in or related to this Agreement, shall constitute a waiver of any other right, power or remedy under the Loan Documents or granted by Company to Xxxxx Fargo under other agreements or documents that are unrelated to the Loan Documents.  No notice to or demand on Company in any circumstance shall entitle Company to any additional notice or demand in any other circumstances.  The remedies provided in the Loan Documents or in any other document or agreement described in or related to this Agreement are cumulative and not exclusive of any remedies provided by law.  Xxxxx Fargo may comply with applicable law in connection with a disposition of Collateral, and such compliance will not be considered to adversely affect the commercial reasonableness of any sale of the Collateral.

7.2          Amendments; Consents and Waivers; Authentication.  No amendment or modification of any Loan Documents, or any other document or agreement described in or related to this Agreement, or consent to or waiver of any Event of Default, or consent to or waiver of the application of any covenant or representation set forth in any of the Loan Documents, or any other document or agreement described in or related to this Agreement, or any release of Xxxxx Fargo’s Security Interest in any Collateral, shall be effective unless it has been agreed to by Xxxxx Fargo and memorialized in a Record that: (a) specifically states that it is intended to amend or modify specific Loan Documents, or any other document or agreement described in or related to this Agreement, or waive any Event of Default or the application of any covenant or representation of any terms of specific Loan Documents, or any other document or agreement described in or related to this Agreement, or is intended to release Xxxxx Fargo’s Security Interest in specific Collateral; and (b) is Authenticated by the signature of an authorized employee of both parties, or by an authorized employee of Xxxxx Fargo with respect to a consent or waiver.  The terms of an amendment, consent or waiver memorialized in any Record shall be effective only to the extent, and in the specific instance, and for the limited purpose to which Xxxxx Fargo has agreed.

7.3          Execution in Counterparts; Delivery of Counterparts.  This Agreement and all other Loan Documents, or any other document or agreement described in or related to this Agreement, and any amendment or modification to them may be Authenticated by the parties in any number

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of counterparts, each of which, once authenticated and delivered in accordance with the terms of this Section 7.3, will be deemed an original, and all such counterparts, taken together, shall constitute one and the same instrument.  Delivery by fax or by encrypted e-mail or e-mail file attachment of any counterpart to any Loan Document Authenticated by an authorized signature will be deemed the equivalent of the delivery of the original Authenticated instrument.  Company shall send the original Authenticated counterpart to Xxxxx Fargo by first class U.S. mail or by overnight courier, but Company’s failure to deliver a Record in this form shall not affect the validity, enforceability, and binding effect of this Agreement or the other Loan Documents, or any other document or agreement described in or related to this Agreement.

7.4          Notices, Requests, and Communications; Confidentiality.  Except as otherwise expressly provided in this Agreement:

(a) Delivery of Notices, Requests and Communications.  Any notice, request, demand, or other communication by either party that is required under the Loan Documents, or any other document or agreement described in or related to this Agreement, to be in the form of a Record (but excluding any Record containing information Company must report to Xxxxx Fargo under Section 5.1) may be delivered (i) in person, (ii) by first class U.S. mail, (iii) by overnight courier of national reputation, or (iv) by fax, or the Record may be sent as an Electronic Record and delivered (v) by an encrypted e-mail, or (vi) through Xxxxx Fargo’s Commercial Electronic Office® (“CEO®”) portal or other secure electronic channel to which the parties have agreed.

(b) Addresses for Delivery.  Delivery of any Record under this Section 7.4 shall be made to the appropriate address set forth on the last page of this Agreement (which either party may modify by a Record sent to the other party), or through Xxxxx Fargo’s CEO portal or other secure electronic channel to which the parties have agreed.

(c) Date of Receipt.  Each Record sent pursuant to the terms of this Section 7.4 will be deemed to have been received on (i) the date of delivery if delivered in person, (ii) the date deposited in the mail if sent by mail, (iii) the date delivered to the courier if sent by overnight courier, (iv) the date of transmission if sent by fax, or (v) the date of transmission, if sent as an Electronic Record by electronic mail or through Xxxxx Fargo’s CEO portal or similar secure electronic channel to which the parties have agreed; except that any request for an Advance or any other notice, request, demand or other communication from Company required under Section 1, and any request for an accounting under Section 9-210 of the UCC, will not be deemed to have been received until actual receipt by Xxxxx Fargo on a Business Day by an authorized employee of Xxxxx Fargo.

(d) Confidentiality of Unencrypted E-mail.  Company acknowledges that if it sends an Electronic Record to Xxxxx Fargo without encryption by e-mail or as an e-mail file attachment, there is a risk that the Electronic Record may be received by unauthorized Persons, and that by so doing it will be deemed to have accepted this risk and the consequences of any such unauthorized disclosure.

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7.5          Company Information Reporting; Confidentiality.  Except as otherwise expressly provided in this Agreement:

(a) Delivery of Company Information Records.  Any information that Company is required to deliver under Section 5.1 in the form of a Record may be delivered to Xxxxx Fargo (i) in person, or by (ii) first class U.S. mail, (iii) overnight courier of national reputation, or (iv) fax, or the Record may be sent as an Electronic Record (v) by encrypted e-mail, or (vi) through the file upload service of Xxxxx Fargo’s CEO portal or other secure electronic channel to which the parties have agreed.

(b) Addresses for Delivery.  Delivery of any Record to Xxxxx Fargo under this Section 7.5 shall be made to the appropriate address set forth on the last page of this Agreement (which Xxxxx Fargo may modify by a Record sent to Company), or through Xxxxx Fargo’s CEO portal or other secure electronic channel to which the parties have agreed.

(c) Date of Receipt.  Each Record sent pursuant to this Section will be deemed to have been received on (i) the date of delivery to an authorized employee of Xxxxx Fargo, if delivered in person, or by U.S. mail, overnight courier, fax, or e-mail; or (ii) the date of transmission, if sent as an Electronic Record through Xxxxx Fargo’s CEO portal or similar secure electronic channel to which the parties have agreed.

(d) Authentication of Company Information Records.  Company shall Authenticate any Record delivered (i) in person, or by U.S. mail, overnight courier, or fax, by the signature of the Officer or employee of Company who prepared the Record; (ii) as an Electronic Record sent via encrypted e-mail, by the signature of the Officer or employee of Company who prepared the Record by any file format signature that is acceptable to Xxxxx Fargo, or by a separate certification signed and sent by fax; or (iii) as an Electronic Record via the file upload service of Xxxxx Fargo’s CEO portal or similar secure electronic channel to which the parties have agreed, through such credentialing process as Xxxxx Fargo and Company may agree to under the CEO agreement.

(e) Certification of Company Information Records.  Any Record (including without limitation any Electronic Record) Authenticated and delivered to Xxxxx Fargo under this Section 7.5 will be deemed to have been certified as materially true, correct, and complete by Company and each Officer or employee of Company who prepared and Authenticated the Record on behalf of Company, and may be legally relied upon by Xxxxx Fargo without regard to method of delivery or transmission.

(f) Confidentiality of Company Information Records Sent by Unencrypted E-mail.  Company acknowledges that if it sends an Electronic Record to Xxxxx Fargo without encryption by e-mail or as an e-mail file attachment, there is a risk that the Electronic Record may be received by unauthorized Persons, and that by so doing it will be deemed to have accepted this risk and the consequences of any such unauthorized disclosure.  Company acknowledges that it may deliver

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Electronic Records containing Company information to Xxxxx Fargo by e-mail pursuant to any encryption tool acceptable to Xxxxx Fargo and Company, or through Xxxxx Fargo’s CEO portal file upload service without risk of unauthorized disclosure.

7.6          Further Documents.  Company will from time to time execute, deliver, endorse and authorize the filing of any instruments, documents, conveyances, assignments, security agreements, financing statements, control agreements and other agreements that Xxxxx Fargo may reasonably request in order to secure, protect, perfect or enforce the Security Interest or Xxxxx Fargo’s rights under the Loan Documents, or any other document or agreement described in or related to this Agreement (but any failure to request or assure that Company 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, or any other document or agreement described in or related to this Agreement, 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).

7.7          Costs and Expenses.  Company shall pay on demand all costs and expenses, including without limitation reasonable attorneys’ fees, incurred by Xxxxx Fargo in connection with the Indebtedness, this Agreement, the Loan Documents, or any other document or agreement described in or related to this Agreement, and the transactions contemplated by this Agreement, including without limitation all such costs, expenses and fees incurred in connection with the negotiation, preparation, execution, delivery, 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.

7.8          Indemnity.  In addition to its obligation to pay Xxxxx Fargo’s expenses under the terms of this Agreement, Company shall indemnify, defend and hold harmless Xxxxx Fargo, its parent Xxxxx Fargo & Company, and any of its affiliates and successors, and all of their present and future Officers, Directors, employees, attorneys and agents (each an “Indemnitee”) from and against any of the following (collectively, “Indemnified Liabilities”):

(a) 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 any other document or agreement described in or related to this Agreement, or the making of the Advances;

(b) Any claims, loss or damage to which any Indemnitee may be subjected if any representation or warranty contained in Exhibit D proves to be incorrect in any respect or as a result of any violation of the covenants contained in Section 5.11; and

(c) Any and all other liabilities, losses, damages, penalties, judgments, suits, claims, costs and expenses of any kind or nature whatsoever (including without limitation the reasonable fees and disbursements of counsel) in connection with this Agreement and any other investigative, administrative or judicial proceedings, whether or not such Indemnitee shall be designated a party to such proceedings,

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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 any other document or agreement described in or related to this Agreement, or the use or intended use of the proceeds of the Advances, with the exception of any Indemnified Liability caused by the gross negligence or willful misconduct of an Indemnitee.

If any investigative, judicial or administrative proceeding described in this Section is brought against any Indemnitee, upon the Indemnitee’s request, Company, or counsel designated by Company and satisfactory to the Indemnitee, will resist and defend the action, suit or proceeding to the extent and in the manner directed by the Indemnitee, at Company’s sole cost and expense.  Each Indemnitee will use its best efforts to cooperate in the defense of any such action, suit or proceeding.  If this agreement to indemnify is held to be unenforceable because it violates any law or public policy, Company shall nevertheless make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities to the extent permissible under applicable law.  Company’s obligations under this Section shall survive the termination of this Agreement and the discharge of Company’s other obligations under this Agreement.

7.9          Retention of Company’s Records.  Xxxxx Fargo shall have no obligation to maintain Electronic Records or retain any documents, schedules, invoices, agings, or other Records delivered to Xxxxx Fargo by Company in connection with the Loan Documents, or any other document or agreement described in or related to this Agreement for more than 30 days after receipt by Xxxxx Fargo.  If there is a special need to retain specific Records, Company must notify Xxxxx Fargo of its need to retain or return such Records with particularity, which notice must be delivered to Xxxxx Fargo in accordance with the terms of this Agreement at the time of the initial delivery of the Record to Xxxxx Fargo.

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

7.11        Binding Effect; Assignment; Complete Agreement.  The Loan Documents, or any other document or agreement described in or related to this Agreement, shall be binding upon and inure to the benefit of Company and Xxxxx Fargo and their respective successors and assigns, except that Company shall not have the right to assign its rights under this Agreement or any interest in this Agreement without Xxxxx Fargo’s prior consent, which must be confirmed in a Record Authenticated by Xxxxx Fargo. To the extent permitted by law, Company waives and will not assert against any assignee any claims, defenses or set-offs which Company could assert against Xxxxx Fargo. This Agreement shall also bind all Persons who become a party to this Agreement as a borrower.  This Agreement, together with the Loan Documents, or any other

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document or agreement described in or related to this Agreement, comprises the complete and integrated agreement of the parties on the subject matter of this Agreement and supersedes all prior agreements, whether oral or evidenced in a Record.  To the extent that any provision of this Agreement contradicts other provisions of the Loan Documents other than this Agreement, or any other document or agreement described in or related to this Agreement, this Agreement shall control.

7.12        Sharing of Information.  Xxxxx Fargo may share any Confidential Information that it may have regarding Company and its Affiliates with its accountants, lawyers, and other advisors, and with each business unit and line of business within Xxxxx Fargo and each direct and indirect subsidiary of Xxxxx Fargo & Company.

7.13        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 terms of this Agreement.

7.14        Headings.  Section and subsection headings in this Agreement are included for convenience of reference only and shall not constitute a part of this Agreement for any other purpose.

7.15        Definitional Terms and Rules of Interpretation.  All accounting terms not otherwise defined in this Agreement shall have the meanings given them in accordance with GAAP.  Unless the context clearly requires otherwise, the word “or” has the inclusive meaning represented by the phrase “and/or”.  Reference to any agreement (including without limitation the Loan Documents), document or instrument means the agreement, document or instrument as amended or supplemented, subject to any restrictions on amendment contained therein (and, if applicable, in accordance with the terms of this Agreement and the other Loan Documents).  Unless otherwise specified, any reference to a statute or regulation means that statute or regulation as amended or supplemented from time to time, and any corresponding provisions of successor statutes or regulations.

7.16        Governing Law; Jurisdiction, Venue; Waiver of Jury Trial.  The Loan Documents (other than real estate related documents, if any) shall be governed by and construed in accordance with the substantive laws (other than conflict laws) of the State of Minnesota. The parties to this Agreement (a) 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; (b) waive any argument that venue in any such forum is not convenient; (c) agree that any litigation initiated by Xxxxx Fargo or Company in connection with this Agreement or the other Loan Documents may be venued in either the state or federal courts located in the City of Minneapolis, County of Hennepin, State of Minnesota; and (d) 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.

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COMPANY AND XXXXX FARGO WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION AT LAW OR IN EQUITY OR IN ANY OTHER PROCEEDING BASED ON OR PERTAIING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT.
NORTECH SYSTEMS			XXXXX FARGO BANK,
INCORPORATED			NATIONAL ASSOCIATION
By:			By:
Its:			Its:

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COMPANY AND XXXXX FARGO have executed this Agreement through their authorized officers as of the date set forth above.

XXXXX FARGO BANK, NATIONAL ASSOCIATION			NORTECH SYSTEMS INCORPORATED
By:			By:
	Xxxxx X. Xxxxxx
	Its Vice President		Its
Xxxxx Fargo Bank, National Association XXX- X0000-000 000 Xxxxx 0xx Xxxxxx, 0xx Xxxxx Xxxxxxxxxxx, XX 00000 Fax:  000.000.0000 Attention:  Xxxxx X. Xxxxxx e-mail: xxxxx.x.xxxxxx@xxxxxxxxxx.xxx			Nortech Systems Incorporated 0000 Xxxxxxx Xxxxxxxxx Xxxx Xxxxx 000 Xxxxxxx, XX 00000 Fax:  000.000.0000 Attention:  Xxxxxxx X. Xxxxxxxxxxx e-mail:  xxxxxxxxxxxx@xxxxxxxxxx.xxx Federal Employer Identification No.  00-0000000 Organizational Identification No.  6V-534 (MN)

Exhibit A to Credit and Security Agreement

DEFINITIONS

“Account Funds” is defined in Section 1.6(a).

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

“Advance” and “Advances” means an advance or advances under the Line of Credit or the Term Loan.

“Affiliate” or “Affiliates” means Nortech Medical Services, Inc., a Minnesota corporation, Xxxxx Xxxxx and any other Person controlled by, controlling or under common control with Company, including without limitation any Subsidiary of Company.  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.

“Aggregate Face Amount” means the aggregate amount that may then be drawn under each outstanding Letter of Credit, assuming compliance with all conditions for drawing.

“Agreement” means this Credit and Security Agreement.

“Authenticated” means (a) to have signed; or (b) to have executed or to have otherwise adopted a symbol, or have encrypted or similarly processed a Record in whole or in part, with the present intent of the authenticating Person to identify the Person and adopt or accept a Record.

“Availability Reserve” means (a) $500,000, from and after the effective date of this Agreement; and (b) $1,000,000, from and after the earlier of (i) date that the Company receives its tax refund (anticipated receipt in June 2010), or (ii) August 31, 2010.

“Book Net Worth” means the aggregate of the Owners’ equity in Company, determined in accordance with GAAP.

“Borrowing Base” is defined in Section 1.2(a).

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

“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.

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“CEO” is defined in Section 7.4(a).

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

(a)           Any Person or “group” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934) is or becomes the “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, except that any such Person, entity or group will be deemed to have “beneficial ownership” of all securities that such Person, entity or group has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than thirty-five percent (35%) of the voting power of all classes of ownership of Company, excluding Xxxxx Xxxxx;

(b)           During any consecutive two-year period, individuals who at the beginning of such period constituted the board of Directors of Company (together with any new Directors whose election to such board of Directors, or whose nomination for election by the Owners of Company, was approved by a vote of two thirds of the Directors then still in office who were either Directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the board of Directors of Company then in office;

(c)           Xxxxxxx Xxxxx ceases to actively manage the Company’s day-to-day business activities.

“Collateral” means all of Company’s Accounts, chattel paper and electronic chattel paper, deposit accounts, documents, Equipment, General Intangibles, goods, instruments, Inventory, Investment Property, letter-of-credit rights, letters of credit, all sums on deposit in any Collection Account, and any items in any Lockbox; together with (a) all substitutions and replacements for and products of such property; (b) in the case of all goods, all accessions; (c) all accessories, attachments, parts, Equipment and repairs now or subsequently attached or affixed to or used in connection with any goods; (d) all warehouse receipts, bills of lading and other documents of title that cover such goods now or in the future; (e) all collateral subject to the Lien of any of the Security Documents; (f) any money, or other assets of Company that come into the possession, custody, or control of Xxxxx Fargo now or in the future; (g) Proceeds of any of the above Collateral; (h) books and records of Company, including without limitation all mail or e-mail addressed to Company; and (i) all of the above Collateral, whether now owned or existing or acquired now or in the future or in which Company has rights now or in the future.

“Collection Account” means “Collection Account” as defined in the Master Agreement for Treasury Management Services and related Lockbox and Collection Account Service Description or Collection Account Service Description, whichever is applicable.

“Compliance Certificate” is defined in Section 5.1(a) and is in the form of Exhibit E.

“Commercial Letter of Credit Agreement” means an agreement governing the issuance of documentary letters of credit entered into between Company as applicant and Xxxxx Fargo as issuer.

“Confidential Information” means all non-public, confidential or proprietary information of Company that is disclosed to Xxxxx Fargo prior to or during the term of this Agreement by

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Company or any of its officers, employees, agents or representatives, and includes, without limitation, any trade secrets, research and development test results, marketing or business plans, strategies, forecasts, budgets, projections, customer and supplier information, and any other analyses, computations or studies prepared by or for Company.

“Constituent Documents” means with respect to any Person, as applicable, that 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.

“Current Maturities of Long Term Debt” means, during a period beginning and ending on designated dates, the amount of Company’s long-term debt and capitalized leases which become due during that period.

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

“Debt” means of a Person as of a given date, all items of indebtedness or liability which in accordance with GAAP would be included in determining total liabilities as shown on the liabilities side of a balance sheet for such Person and shall also include the aggregate payments required to be made by such Person at any time under any lease that is considered a capitalized lease under GAAP.

“Debt Service Coverage Ratio” means:

(a)           with respect to the fiscal year ending 2010 (i) the sum of (A) Funds from Operations, (B) Interest Expense, and (C) cash proceeds from the Company’s tax refund minus (D) Unfinanced Capital Expenditures, minus (E) dividends or distributions divided by (ii) the sum of (A) Current Maturities of Long Term Debt, (B) Interest Expense, and (C) payments of Indebtedness from the proceeds of the Company’s tax refund; and

(b)           with respect to any fiscal year ending after 2010 (i) the sum of (A) Funds from Operations, and (B) Interest Expense, minus (C) Unfinanced Capital Expenditures, minus (D) dividends or distributions, divided by (ii) the sum of (A) Current Maturities of Long Term Debt and (B) Interest Expense.

“Default Period” is defined in Section 1.8(c).

“Default Rate” is defined in Section 1.8(c).

“Dilution” means, as of any date of determination, a percentage, which is the result of dividing (a) actual bad debt write-downs, discounts, advertising allowances, credits, and any other items with respect to the Accounts determined to be dilutive by Xxxxx Fargo in its sole discretion during this period, by (b) Company’s net sales during such period (excluding extraordinary items) plus the amount of clause (a).

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“Director” means a director if Company is a corporation, or a governor or manager if Company is a limited liability company.

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

“Electronic Record” means a Record that is created, generated, sent, communicated, received, or stored by electronic means, but does not include any Record that is sent, communicated, or received by fax.

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

(a) That portion of Accounts unpaid 90 days or more after the invoice date; except that with respect to accounts owing from General Electric Company (and its affiliates) and Xxxxxxx Electric Co., that portion of Accounts unpaid 120 days or more after the invoice date;

(b) That portion of Accounts related to goods or services with respect to which Company 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;

(c) That portion of Accounts not yet earned by the final delivery of goods or that portion of Accounts not yet earned by the final rendition of services by Company to the account debtor, including with respect to both goods and services, progress xxxxxxxx, and that portion of Accounts for which an invoice has not been sent to the applicable account debtor;

(d) 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;

(e) Accounts owed by any unit of government, whether foreign or domestic (except that there shall be included in Eligible Accounts that portion of Accounts owed by such units of government for which Company has provided evidence satisfactory to Xxxxx Fargo that (i) Xxxxx Fargo’s Security Interest constitutes a perfected first priority Lien in such Accounts, and (ii) such Accounts may be enforced by Xxxxx Fargo directly against such unit of government under all applicable laws);

(f) Accounts denominated in any currency other than United States Dollars;

(g) Accounts owed by an account debtor located outside the United States which are not (i) backed by a bank letter of credit naming Xxxxx Fargo as beneficiary or assigned to Xxxxx Fargo, in Xxxxx Fargo’s possession or control, and with respect to which a control agreement concerning the letter-of-credit rights is in effect, and acceptable to Xxxxx Fargo in all respects, in its sole discretion, or (ii) covered by a

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foreign receivables insurance policy acceptable to Xxxxx Fargo in its sole discretion;

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

(i) Accounts owed by an Owner, Subsidiary, Affiliate, Officer or employee of Company;

(j) Accounts not subject to the Security Interest or which are subject to any Lien in favor of any Person other than Xxxxx Fargo;

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

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

(m) Accounts owed by an account debtor and its affiliates, regardless of whether otherwise eligible, to the extent that the aggregate balance of such Accounts exceeds 15% of the aggregate amount of all Accounts; except that with respect to General Electric Company (and its affiliates) and Xxxxxxx Electric Co., to the extent that the aggregate balance of such Accounts exceeds 25% of the aggregate amount of all Accounts;

(n) Accounts owed by an account debtor and its affiliate, regardless of whether otherwise eligible, if 10% or more of the total amount of Accounts due from such debtor is ineligible under clauses (a), (b), or (k) above; except that with respect to General Electric Company (and its affiliates), Xxxxxxx Electric Co., and Semitool, Inc. (together with Applied Materials, Inc.) if 25% or more of the total amount of Accounts due from such debtor is ineligible under clauses (a), (b), or (k) above;

(o) Accounts owing by Rockwell Xxxxxxx, Inc.;

(p) Unless otherwise agreed by Xxxxx Fargo, Accounts arising under the Company’s Trivirix operating division or otherwise owing from account debtors acquired via the Company’s purchase of the assets of Trivirix Minneapolis, Inc. and Trivirix International, Inc.; and

(q) Accounts, or portions of Accounts, otherwise deemed ineligible by Xxxxx Fargo in its sole discretion.

“Eligible Finished Goods Inventory” means Eligible Inventory classified as finished goods.

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

(a) Inventory that is: in-transit; located at any warehouse, job site or other premises not approved by Xxxxx Fargo in an Authenticated Record delivered to Company; not subject to a perfected first priority Lien in Xxxxx Fargo’s favor; covered by

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any negotiable or non-negotiable warehouse receipt, xxxx of lading or other document of title; on consignment from any consignor; or on consignment to any consignee or subject to any bailment unless the consignee or bailee has executed an agreement with Xxxxx Fargo;

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

(c) Work-in-process Inventory;

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

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

(f) Inventory that is perishable or live;

(g) Inventory manufactured by Company pursuant to a license unless the applicable licensor has agreed in a Record that has been Authenticated by licensor to permit Xxxxx Fargo to exercise its rights and remedies against such Inventory;

(h) Inventory that is subject to a Lien in favor of any Person other than Xxxxx Fargo;

(i) Inventory stored at locations holding less than $500,000 of the aggregate value of Company’s Inventory;

(j) Inventory classified by the Company as Burden and/or Outside Services;

(k) Unless otherwise agreed by Xxxxx Fargo in writing, Inventory related to the Company’s Trivirix operating division or otherwise relating to or acquired acquired via the Company’s purchase of the assets of Trivirix Minneapolis, Inc. and Trivirix International, Inc.; and

(l) Inventory otherwise deemed ineligible by Xxxxx Fargo in its sole discretion.

“Eligible Raw Materials Inventory” means Eligible Inventory classified as Raw Materials.

“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 Uniform Commercial Code in effect in the state whose laws govern this 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 Company and which is treated as a single employer under Section 414 of the IRC.

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“Event of Default” is defined in Section 6.1.

“Floating Rate” is defined in Section 1.8(a).

“Floating Rate Advance” is defined in Section 1.3(a).

“Funds from Operations” means for a given period, the sum of (a) Net Income, (b) depreciation and amortization, (c) any increase (or decrease) in deferred income taxes, (d) any increase (or decrease) in lifo reserves, and (e) 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 on Exhibit D.

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

“Guarantor” means any Person now or in the future guaranteeing any Indebtedness through the issuance of a Guaranty.

“Guaranty” means an unconditional continuing guaranty executed by a Guarantor in favor of Xxxxx Fargo (if more than one, the “Guaranties”).

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

“Indebtedness” is used in its most comprehensive sense and means any debts, obligations and liabilities of Company to Xxxxx Fargo, whether incurred in the past, present or future, whether voluntary or involuntary, and however arising, and whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined, and including without limitation all obligations arising under any Rate Hedge Agreement, derivative, foreign exchange, deposit, treasury management or similar transaction or arrangement however described or defined that Company may enter into at any time with Xxxxx Fargo, whether or not Company may be liable individually or jointly with others, or whether recovery upon such Indebtedness may subsequently become unenforceable.

“Indemnified Liabilities” is defined in Section 7.8.

“Indemnitee” is defined in Section 7.8.

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

“Intellectual Property Rights” means all actual or prospective rights arising in connection with any intellectual property or other proprietary rights, including without limitation 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, Company’s total gross interest expense during such period (excluding interest income), and shall in any event include (a) interest expensed (whether or not paid) on all Debt, (b) the amortization of debt discounts,

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(c) the amortization of all fees payable in connection with the incurrence of Debt to the extent included in interest expense, and (d) the portion of any capitalized lease obligation allocable to interest expense.

“Interest Payment Date” is defined in Section 1.10(a).

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

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

“L/C Amount” means the sum of (a) the Aggregate Face Amount of any outstanding Letters of Credit, plus (b) the amount of each Obligation of Reimbursement that either remains unreimbursed or has not been paid through an Advance on the Line of Credit.

“L/C Application” means an application for the issuance of standby or documentary Letters of Credit pursuant to the terms of a Standby Letter of Credit Agreement or Commercial Letter of Credit Agreement, in form acceptable to Xxxxx Fargo.

“Letter of Credit” and “Letters of Credit” are each defined in Section 1.12(a).

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

LIBOR =	Base LIBOR
	100% - LIBOR Reserve Percentage

(a) “Base LIBOR” means the rate per annum for United States dollar deposits quoted by Xxxxx Fargo for the purpose of calculating the effective Floating Rate for loans that reference Daily Three Month LIBOR as the Inter-Bank Market Offered Rate in effect from time to time for three (3) month delivery of funds in amounts approximately equal to the principal amount of such loans.  Company understands and agrees that Xxxxx Fargo may base its quotation of the Inter-Bank Market Offered Rate upon such offers or other market indicators of the Inter-Bank Market as Xxxxx Fargo in its discretion deems appropriate, including but not limited to the rate offered for U.S. dollar deposits on the London Inter-Bank Market.

(b) “LIBOR Reserve Percentage” means the reserve percentage prescribed by the Board of Governors of the Federal Reserve System (or any successor) for “Eurocurrency Liabilities” (as defined in Regulation D of the Federal Reserve Board, as amended), adjusted by Xxxxx Fargo for expected changes in such reserve percentage during the applicable term of the Revolving Note and Term Note.

“Licensed Intellectual Property” is defined in Exhibit D.

“Lien” means any security interest, mortgage, deed of trust, pledge, lien, charge, encumbrance, title retention agreement or analogous instrument or device, including without limitation 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.

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“Line of Credit” is defined in the Recitals.

“Loan Documents” means this Agreement, the Revolving Note, the Term Note, the Master Agreement for Treasury Management Services, each Standby Letter of Credit Agreement, each Commercial Letter of Credit Agreement, any L/C Applications, and the Security Documents, together with every other agreement, note, document, contract or instrument to which Company now or in the future may be a party and which may be required by Xxxxx Fargo in connection with, or as a condition to, the execution of this Agreement.  Any documents or other agreements entered into between Company and Xxxxx Fargo that relate to any Rate Hedge Agreement, derivative, foreign exchange, or similar product or transaction, or which are entered into with an operating division of Xxxxx Fargo other than Xxxxx Fargo Business Credit, shall not be included in this definition.

“Loan Manager” means the treasury management service defined in the Master Agreement for Treasury Management Services and related Loan Manager Service Description.

“Lockbox” means “Lockbox” as defined in the Master Agreement for Treasury Management Services and related Lockbox and Collection Account Service Description.

“Master Agreement for Treasury Management Services” means the Master Agreement for Treasury Management Services, the related Acceptance of Services, and the Service Description governing each treasury management service used by Company.

“Material Adverse Effect” means any of the following:

(a) A material adverse effect on the business, operations, results of operations, prospects, assets, liabilities or financial condition of Company;

(b) A material adverse effect on the ability of Company to perform its obligations under the Loan Documents, or any other document or agreement related to this Agreement;

(c) A material adverse effect on the ability of Xxxxx Fargo to enforce the Indebtedness or to realize the intended benefits of the Security Documents, including without limitation a material adverse effect on the validity or enforceability of any Loan Document or of any rights against any Guarantor, or on the status, existence, perfection, priority (subject to Permitted Liens) or enforceability of any Lien securing payment or performance of the Indebtedness; or

(d) Any claim against Company or threat of litigation which if determined adversely to Company would cause Company to be liable to pay an amount exceeding $500,000 or would result in the occurrence of an event described in clauses (a), (b) and (c) above.

“Maturity Date” means (a) with respect to the Line of Credit, May 31, 2013, and (b) with respect to the Term Loan, May 31, 2012.

“Maximum Line Amount” is defined in Section 1.1(a).

“Minimum Interest Charge” is defined in Section 1.8(b).

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“Mortgages” means collectively (i) that certain Mortgage, Security Agreement, Fixture Financing Statement and Assignment of Leases and Rents dated January 31, 2002 granting the Lender a first priority mortgage lien and assignment of leases and rents in the Borrower’s facilities located in Bemidji, Fairmont and Merrifield, Minnesota; (ii) that certain Mortgage, Security Agreement, Fixture Financing Statement and Assignment of Leases and Rents dated June 28, 2006 granting the Lender a first priority mortgage lien and assignment of leases and rents in the Borrower’s facilities located in Blue Earth, Minnesota; and (iii) that certain combination Mortgage, Security Agreement, Fixture Financing Statement and Assignment of Leases and Rents dated February 2, 2007, granting the Lender a first priority mortgage lien and assignment of leases and rents in the Borrower’s facilities located in Eau Claire County, Wisconsin; each of the foregoing as executed by the Borrower, as mortgagor, in favor of the Lender, as mortgagee, and as each may be amended from time to time.

“Multiemployer Plan” means a multiemployer plan (as defined in Section 4001(a)(3) of ERISA) to which Company or any ERISA Affiliate contributes or is obligated to contribute.

“Net Income” means fiscal year-to-date after tax income from continuing operations, including extraordinary losses and extraordinary gains, all as determined in accordance with GAAP.

“Net Loss” means fiscal year-to-date after-tax net loss from continuing operations including extraordinary losses and extraordinary gains, as determined in accordance with GAAP.

“Obligation of Reimbursement” is defined in Section 1.12(b).

“OFAC” is defined in Section 5.11(b).

“Officer” means with respect to Company, an officer if Company is a corporation, a manager if Company is a limited liability company, or a partner if Company is a partnership.

“Operating Account” is defined in Section 1.3(a), and maintained in accordance with the terms of Xxxxx Fargo’s Commercial Account Agreement in effect for demand deposit accounts.

“Overadvance” means the amount, if any, by which the unpaid principal amount of the Revolving Note, plus the L/C Amount, is in excess of the then-existing Borrowing Base.

“Owned Intellectual Property” is defined in Exhibit D.

“Owner” means with respect to Company, each Person having legal or beneficial title to an ownership interest in Company or a right to acquire such an interest.

“Pension Plan” means a pension plan (as defined in Section 3(2) of ERISA) maintained for employees of Company or any ERISA Affiliate and covered by Title IV of ERISA.

“Permitted Lien” and “Permitted Liens” are defined in Section 5.3(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 of a governmental entity.

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

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“Premises” is defined in Section 2.4(a).

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

“Rate Hedge” means any interest rate swap or interest rate collar agreement applicable to borrowings advanced by Xxxxx Fargo under this Agreement.

“Rate Hedge Agreement” is an agreement entered into between Xxxxx Fargo (or any of its affiliates) and Company for purposes of providing Company with a Rate Hedge.

“Record” means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form, and includes all information that is required to be reported by Company to Xxxxx Fargo pursuant to Section 5.1.

“Reimbursement Agreement” means that certain Letter of Credit and Reimbursement Agreement dated as of June 28, 2006 by and between Company and Xxxxx Fargo, as the same may be amended and/or restated from time to time.

“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 Note” is defined in Section 1.1(a).

“Security Documents” means this Agreement, and any other document delivered to Xxxxx Fargo from time to time to secure the Indebtedness.

“Security Interest” is defined in Section 2.1.

“Special Account” means a specified cash collateral account maintained with Xxxxx Fargo or another financial institution acceptable to Xxxxx Fargo in connection with each undrawn Letter of Credit issued by Xxxxx Fargo, as more fully described in Section 1.12.

“Standby Letter of Credit Agreement” means an agreement governing the issuance of standby letters of credit by Xxxxx Fargo entered into between Company as applicant and Xxxxx Fargo as issuer.

“Subsidiary” means any Person of which more than 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, irrespective 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 Company, by Company and one or more other Subsidiaries, or by one or more other Subsidiaries.

“Termination Date” is defined in Section 1.1(c).

“Term Loan” is defined in the Recitals.

“Term Note” is defined in Section 1.7(b).

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“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.

“Unfinanced Capital Expenditures” means for a period, any expenditure of money during such period for the purchase or construction of assets, or for improvements or additions to such assets, which are not financed with borrowed funds and are capitalized on Company’s balance sheet.

“Unused Amount” is defined in Section 1.9(b).

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

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Exhibit B to Credit and Security Agreement

PREMISES

The Premises referred to in the Credit and Security Agreement have the following street addresses and/or are legally described as follows:

1) WAYZATA:  0000 Xxxxxxx Xxxx, Xxxxx 000 & 000, Xxxxxxx, XX  00000

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

000 Xxxxxxxxxx Xxxxx, Xxxxxxx, XX 00000

3) XXXXXX:     Xxx 0, Xxxxx 0, Xxxxxx Xxxxxxxxxx Xxxx. Property ID 032050010060009

Xxx 0, Xxxxx 0, Xxxxxx Xxxxxxxxxx Xxxx.  Property ID 032050010050009

0000 Xxxxxxxx Xxxx, Xxxxxx, XX 00000

0000 Xxxxxxxx Xxxx, Xxxxxx, XX 00000

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

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

Beltrami County, Minnesota  -  Abstract Property

0000 Xxxxxx Xxxxx XX, Xxxxxxx, XX 00000

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5) FAIRMONT:

Parcel A:  Sold

Parcel B:  Lot Two (2), Block One (1), of the First Northeast Addition to the City of Fairmont, according to the plat thereof on file and of record in the Office of the Register of Deeds in and for Xxxxxx County, Minnesota, and that portion of Lot Three (3), Block One (1), First Northeast Addition aforesaid described as follows: Commencing at the Southwest corner of the aforementioned Lot Three (3) in Block One (1) of the First Northeast Addition to the City of Fairmont, Minnesota, thence East along the South line of said Lot Three (3) for a distance of 163.35 feet, thence deflecting 90 degrees 21 minutes left for a distance of 30.00 feet, thence deflecting 89 degrees 39 minutes left for a distance of 163.35 feet to a point on the West line of said Lot Three (3), thence South along said West line of Lot Three (3) for a distance of 30.00 feet to the point of beginning.

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

Abstract Property

0000 Xxxx 00xx Xxxxxx, Xxxxxxxx, XX 00000

0000 Xxxxxxxx Xxxxxx, Xxxxxxxx, XX 00000

6) MERRIFIELD:  That part of Govt. Xxx 0, Xxx. 00, Xxx. 000, Xxx. 28, described as follows:  Beginning at the Northeast corner of said Govt. Lot 6; thence South 00 degrees 59 minutes 20 seconds West, assumed bearing, 579.89 feet along the East line  of said Govt. Lot 6; thence North 82 degrees 38 minutes 21 seconds West 114.59 feet; thence South 81 degrees 39 minutes 36 seconds West 374.51 feet to the Easterly line of a 66 foot easement; thence North 70 degrees 11 minutes 23 seconds West 19.60 feet along said Easterly line of the 66 foot road easement; thence Northeasterly 44.66 feet along a tangential curve, concave to the Northeast, central angle 64 degrees 10 minutes 00 seconds and radius 39.88 feet continuing along said Easterly line of the 66 foot road easement; thence North 06 degrees 01 minutes 23 seconds West, along tangential of the last described curve, 24.02 feet continuing along said Easterly line of the 66 foot road easement; thence North 00 degrees 59 minutes 20 seconds East 565 feet, more or less, to the North line of said Govt. Lot 6; thence Easterly 600 feet, more or less, along the North line of said Govt. Lot 6 to the point of beginning.  AND that part of Govt. Xxx 0, Xxxx. 00, Xxx. 000, Xxx. 28, described as follows:  Commencing at the Northeast corner of said Govt. Lot 6; thence South 00 degrees 59 minutes 20 seconds West, assumed bearing, 579.89 feet along the East line of said Govt. Lot 6; thence North 82 degrees 38 minutes 21 seconds West 114.59 feet; thence South 81 degrees 39 minutes 36 seconds West 374.51 feet to the Easterly line of a 66 foot road easement; thence Northwesterly 44.66 feet along a tangential curve concave to the Northeast, central angle 64 degrees 10 minutes 00 seconds, radius 39.88 feet, continuing along said Easterly line of the 66 foot wide road easement; thence North 6 degrees 01 minutes 23 seconds West, along the tangent to the last described curve, 24.02 feet continuing along said Easterly line of the 66 foot road easement; thence

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South 83 degrees 58 minutes 37 seconds West 66.00 feet along the North line of said 66 foot road easement; thence North 00 degrees 59 minutes 20 seconds East 33.25 feet to the point of beginning of the tract to be described; thence South 83 degrees 58 minutes 37 seconds West 725 feet, more or less, to the West line of said Govt. Lot 6; thence Northerly 591 feet, more or less, along said West line of Govt. Lot 6 to the Northwest corner of said Govt. Lot 6; thence Easterly 716 feet, more or less, along the North line of said Govt. Lot 6 to the line bearing North 00 degrees 59 minutes 20 seconds East from the point of beginning; thence South 00 degrees 59 minutes 20 seconds West 523 feet, more or less, to the point of beginning.

Crow Wing Count, Minnesota

Abstract Property

00000 Xxxxxxx Xxxx Xxxx, Xxxxxxxxxx, XX 00000

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

Except a tract of land in the Southwest Quarter of Section 7, Township 102 North, Range 27 West in the City of Blue Earth, Faribault County, Minnesota, described as follows:  Commencing at the Southwest corner of said Section 7; thence North 89 degrees 04 minutes 19 seconds East, (assumed bearing) along the south line of the Southwest Quarter of said Section 7, a distance of 765.00 feet; thence North 00 degrees 00 minutes 00 seconds East, parallel with the West line of the Southwest Quarter of said Section 7, a distance of 78.10 feet to the northerly right-of-way line of County State Aid Xxxxxxx Xx. 00 and the point of beginning; thence continuing North 00 degrees 00 minutes 00 seconds East, a distance of 60.00 feet; thence South 89 degrees 04 minutes 19 seconds West, a distance of 20.00 feet; thence South 00 degrees 00 minutes 00 seconds West, a distance of 59.71 feet to said north highway right-of-way line; thence North 89 degrees 54 minutes 45 seconds East, along said highway right-of-way line, a distance of 20.00 feet to the point of beginning.

Together with an easement over that part of the West Half of the Southwest Quarter of said Section 7, excepting the tract described above, that lies between a line running parallel to but 10 feet North of the North right of way line of U.S. Trunk Xxxxxxx Xx. 00 and the North right of way line of said Trunk Xxxxxxx Xx. 00 as now located.

Faribault County, Minnesota.

0000 Xxxx Xxxxx Xxxxxx, Xxxx Xxxxx, XX 00000

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8)             MILACA, MINNESOTA.  Sect 25 TWP-038-Range 27 city of Milaca TR in NE of NE, Beg. at NE Corner of Lt 2 Xxx 0 Mip, S 450 ft. E 335 ft, NW’L 2.5 Acres.

PID:  21-025-0201

000 0xx Xxxxxx X.X., Xxxxxx, XX 00000

In the event of any conflict between the address and the legal description, the legal description shall control.

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Exhibit C to Credit and Security Agreement

CONDITIONS PRECEDENT

Xxxxx Fargo’s obligation to make an initial Advance shall be subject to the condition that Xxxxx Fargo shall have received the following, executed and in form and content satisfactory to Xxxxx Fargo.  The following descriptions are limited descriptions for reference purposes only and should not be construed as limiting in any way the subject matter that Xxxxx Fargo requires each document to address.

A.            Loan Documents to be Executed by Company:

1.             The Credit and Security Agreement.

2.             The Master Agreement for Treasury Management Services, the Acceptance of Services, and the related Service Description for each deposit or treasury management related product or service that Company will subscribe to, including without limitation the Loan Manager Service Description and the Lockbox and Collection Account Service Description.

3.             A Standby Letter of Credit Agreement and the Commercial Letter of Credit Agreement, and a separate L/C Application for each Letter of Credit that Company has requested that Xxxxx Fargo issue.

4.             The Second Amendment to Letter of Credit and Reimbursement Agreement by and between the Company and Xxxxx Fargo.

B.            Loan Documents to be Executed by Third Parties:

1.             Reaffirmation of the Support Agreements of Xxxxxxx Xxxxx and Xxxxxxx Xxxxxxxxxxx, pursuant to which that Person makes certain personal representations and warranties relating to Company’s Collateral in favor of Xxxxx Fargo.

2.             A Landlord’s Disclaimer and Consent to each lease entered into by Company and that Landlord with respect to the Premises, pursuant to which the Landlord waives its Lien in any goods or other Inventory of Company located on the Premises.

3.             Certificates Insurance required under this Agreement, with all hazard insurance containing a lender’s interest endorsement in Xxxxx Fargo’s favor and with all liability insurance naming Xxxxx Fargo as additional insured.

C.            Documents Related to the Premises

1.             Any leases pursuant to which Company is leasing the Premises from a lessor.

2.             Any mortgages or deeds of trust pursuant to which Company or the landlord to Company has encumbered the Premises.

3.             Every bailment or consignment pursuant to which any property of Company is in the possession of a third Person such as a consignee or subcontractor, together with, in the

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case of any goods held by such Person for resale, UCC financing statements sufficient to protect Company’s and Xxxxx Fargo’s interests in such goods.

D.            Federal Tax, State Tax, Judgment, UCC and Intellectual Property Lien Searches

1.             Current searches of Company in appropriate filing offices showing that (i) no Liens have been filed and remain in effect against Company and Collateral except Permitted Liens or Liens held by Persons who have agreed in an Authenticated Record that upon receipt of proceeds of the initial Advances, they will satisfy, release or terminate such Liens in a manner satisfactory to Xxxxx Fargo, and (ii) Xxxxx Fargo has filed all UCC financing statements necessary to perfect the Security Interest, to the extent the Security Interest is capable of being perfected by filing.

2.             Current searches of Third Persons in appropriate filing offices with respect to any of the Collateral that is in the possession of a Person other than Company that is held for resale, showing that (i) UCC financing statements sufficient to protect Company’s and Xxxxx Fargo’s interests in such Collateral have been filed, and (ii) no other secured party has filed a financing statement against such Person and covering property similar to Company’s, other than Company, or if there exists any such secured party, evidence that each such party has received notice from Company and Xxxxx Fargo sufficient to protect Company’s and Xxxxx Fargo’s interests in Company’s goods from any claim by such secured party.

E.             Constituent Documents:

1.             The Certificate of Authority of Company, which shall include as part of the Certificate or as exhibits to the Certificate, (i) the Resolution of Company’s Directors and, if required, Owners, authorizing the execution, delivery and performance of those Loan Documents and other documents or agreements described in or related to this Agreement to which Company is a party, (ii) an Incumbency Certificate containing the signatures of Company’s Officers or agents authorized to execute and deliver those instruments, agreements and certificates referenced in (i) above, as well as Advance requests, on Company’s behalf, (iii) Company’s Constituent Documents, (iv) a current Certificate of Good Standing or Certificate of Status issued by the secretary of state or other appropriate authority for Company’s state of organization, certifying that Company is in good standing and in compliance with all applicable organizational requirements of the state of organization, and (v) a Secretary’s Certificate of Company’s secretary or assistant secretary certifying that the Certificate of Authority of Company is true, correct and complete.

2.             Evidence that Company is 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.

3.             An Officer’s Certificate of an appropriate Officer of Company confirming, in his or her personal capacity, the representations and warranties set forth in this Agreement.

4.             A Customer Identification Information Form and such other forms and verification as Xxxxx Fargo may need to comply with the U.S.A. Patriot Act.

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F.             Real Estate Related Documents:

With respect to the real estate that is encumbered by the mortgage or deed of trust given by Company or any third Person to Xxxxx Fargo (unless otherwise waived by Xxxxx Fargo):

1.             An appraisal ordered by Xxxxx Fargo or its agent of the real property and all improvements to the real property, conforming to Uniform Standards of Professional Appraisal Practice.

2.             A American Land Title Association policy of title insurance, with such endorsements as Xxxxx Fargo may require, issued by an insurer in such amounts as Xxxxx Fargo may require, insuring Xxxxx Fargo’s first priority lien on said real estate, subject only to such exceptions as Xxxxx Fargo in its discretion may approve, together with such evidence relating to the payment of liens or potential liens as Xxxxx Fargo may require.

3.             An American Land Title Association survey certified to Xxxxx Fargo and to the title company.

4.             A current environmental site assessment indicating that the real property is subject to no “recognized environmental conditions”, as that term is defined by the American Society for Testing and Materials, in its standards for environmental due diligence, and is not in need of remedial action to avoid subjecting its owner to any present or future liability or contingent liability with respect to the release of toxic or hazardous wastes or substances.

5.             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, a policy of flood insurance.

6.             Copies of management services and maintenance contracts, fire, health and safety reports, certificates of occupancy, leases and rent rolls.

G.            Miscellaneous Matters or Documents:

1.             Payment of fees and reimbursable costs and expenses due under this Agreement through the date of this Agreement, including without limitation all legal expenses incurred through the date of the closing of this Agreement.

2.             Evidence that after making the initial Advance, satisfying all obligations owed to Company’s prior lender, reserving for all trade payables older than 60 days from invoice date, reserving for all book overdrafts and paying all closing costs, availability under the Line of Credit is not less than $1,500,000.00 (prior to giving effect to the Availability Reserve).

3.             Any documents or other agreements entered into by Company and Xxxxx Fargo that relate to any Rate Hedge Agreement, derivative, foreign exchange, deposit, treasury management or similar product or transaction extended to Company by Xxxxx Fargo not already provided pursuant to the requirements of (A)-(F) above.

4.             Such other documents as Xxxxx Fargo in its sole discretion may require.

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Exhibit D to Credit and Security Agreement

REPRESENTATIONS AND WARRANTIES

Company represents and warrants to Xxxxx Fargo as follows:

(a) Existence and Power; Name; Chief Executive Office; Inventory and Equipment Locations; Federal Employer Identification Number and Organizational Identification Number.  Company is a corporation organized, validly existing and in good standing under the laws of the State of Minnesota and is 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.  Company 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, those Loan Documents and any other documents or agreements that it has entered into with Xxxxx Fargo related to this Agreement.  During its existence, Company has done business solely under the names set forth below in addition to its correct legal name.  Company’s chief executive office and principal place of business is located at the address set forth below, and all of Company’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 set forth below.  Company’s name, Federal Employer Identification Number and Organization Identification Number are correctly set forth at the end of the Agreement next to Company’s signature.

Trade Names

Intercon One

Chief Executive Office / Principal Place of Business

0000 Xxxxxxx Xxxxxxxxx Xxxx, Xxxxx 000, Xxxxxxx, XX 00000

Other Inventory and Equipment Locations

1) 000 Xxxxxxxxxx Xxxxx, Xxxxxxx, XX  00000

2) 0000 Xxxx 00xx Xxxxxx, Xxxxxxxx, XX  00000

3) 0000 Xxxxxxxx Xxxx, Xxxxxx, XX  00000

4) 0000 Xxxxxxxx Xxxx, Xxxxxx, XX  00000

5) 0000 Xxxxxxxx Xxxxxx, Xxxxxxxx, XX  00000

6) 00000 Xxxxxxx Xxxx Xxxx, Xxxxxxxxxx, XX 00000

7) 0000 Xxxxxxx Xxxx, Xxx 000 & 000, Xxxxxxx, XX 00000

8) 0000 Xxxxxx Xxxxx XX, Xxxxxxx, XX 00000

9) 0000 Xxxx Xxxxx Xxxxxx, Xxxx Xxxxx, Xxxxxxxxx 00000

10) 000 0xx Xxxxxx X.X. Xxxxxx, Xxxxxxxxx 00000

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(b) Capitalization.  The Capitalization Chart below constitutes a correct and complete list of all ownership interests of Company and all rights to acquire ownership interests, including the record holder, number of interests and percentage interests on a fully diluted basis, and the Organizational Chart below shows the ownership structure of all Subsidiaries of Company.

Capitalization Chart

Holder		Type of Rights/Stock		No. of Shares (after exercise of all rights to acquire shares)
Publicly Held		Common Stock		2,742,992
Publicly Held		Preferred Stock		250,00

Organizational Chart

(c) Authorization of Borrowing; No Conflict as to Law or Agreements.  The execution, delivery and performance by Company of the Loan Documents and any other documents or agreements described in or related to this Agreement, and all borrowing under the Line of Credit have been authorized and do not (i) require the consent or approval of Company’s Owners; (ii) require the authorization, consent or approval by, or registration, declaration or filing with, or notice to, any governmental agency or instrumentality, whether domestic or foreign, or any other Person, except to the extent obtained, accomplished or given prior to the date of this Agreement; (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 Company or of Company’s Constituent Documents; (iv) result in a breach of or constitute a default or event of default under any indenture or loan or credit

D-2

agreement or any other material agreement, lease or instrument to which Company 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 subsequently acquired by Company.

(d) Legal Agreements.  This Agreement, the other Loan Documents, and any other document or agreement described in or related to this Agreement, will constitute the legal, valid and binding obligations of Company, enforceable against Company in accordance with their respective terms.

(e) Subsidiaries.  Except as disclosed below, Company has no Subsidiaries.

Subsidiaries

1. Nortech Medical Services, Inc. (wholly-owned) (Inactive)

2. Manufacturing & Assembly Solutions of Monterrey S DE RL DE CV (wholly-owned)

(f) Financial Condition; No Adverse Change.  Company has furnished to Xxxxx Fargo its audited financial statements for its fiscal year ended December 31, 2009 and unaudited financial statements for the fiscal-year-to-date period ended March 31, 2010 and those statements fairly present Company’s financial condition as of those dates and the results of Company’s 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 Effect in Company’s business, properties or condition (financial or otherwise).

(g) Litigation.  There are no actions, suits or proceedings pending or, to Company’s knowledge, threatened against or affecting Company or any of its Affiliates or the properties of Company 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 Company or any of its Affiliates, would result in a final judgment or judgments against Company or any of its Affiliates in an amount in excess of $10,000, apart from those matters specifically disclosed below.

Litigation Matters in Excess of $10,000

None.

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(h) Intellectual Property Rights.

(i) Owned Intellectual Property.  Set forth below 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 Company is the owner of record (the “Owned Intellectual Property”).  Except as set forth below, (A) Company owns the Owned Intellectual Property free and clear of all restrictions (including without limitation covenants not to xxx any Person), court orders, injunctions, decrees, writs or Liens, whether by agreement memorialized in a Record Authenticated by Company or otherwise, (B) no Person other than Company owns or has been granted any right in the Owned Intellectual Property, (C) all Owned Intellectual Property is valid, subsisting and enforceable, and (D) Company has taken all commercially reasonable action necessary to maintain and protect the Owned Intellectual Property.

(ii) Agreements with Employees and Contractors.  Company has entered into a legally enforceable agreement with each Person that is an employee or subcontractor obligating that Person to assign to Company, without additional compensation, any Intellectual Property Rights created, discovered or invented by that Person in the course of that Person’s employment or engagement with Company (except to the extent prohibited by law), and further obligating that Person to cooperate with Company, without additional compensation, to secure and enforce the Intellectual Property Rights on behalf of Company, unless the job description of the Person is such that it is not reasonably foreseeable that the employee or subcontractor will create, discover, or invent Intellectual Property Rights.

(iii) Intellectual Property Rights Licensed from Others.  Set forth below is a complete list of all agreements under which Company 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 Company is obligated to make with respect to Licensed Intellectual Property.  Except as set forth below or in any other Record, copies of which have been given to Xxxxx Fargo, Company’s licenses to use the Licensed Intellectual Property are free and clear of all restrictions, Liens, court orders, injunctions, decrees, or writs, whether agreed to in a Record Authenticated by Company or otherwise.  Except as disclosed below, Company is not contractually obligated to make royalty payments of a material nature, or pay fees to any owner of, licensor of, or other claimant to, any Intellectual Property Rights.

(iv) Other Intellectual Property Needed for Business.  Except for Off-the-shelf Software and as disclosed below, the Owned Intellectual Property and the Licensed Intellectual Property constitute all Intellectual Property Rights used or necessary to conduct Company’s business as it is presently conducted or as Company reasonably foresees conducting it.

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(v) Infringement.  Except as disclosed below, Company has no knowledge of, and has not received notice either orally or in a Record alleging, any Infringement of another Person’s Intellectual Property Rights (including any claim set forth in a Record that Company must license or refrain from using the Intellectual Property Rights of any Person) nor, to Company’s knowledge, is there any threatened claim or any reasonable basis for any such claim.

Intellectual Property Disclosures

None.

(i) Taxes.  Company 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.  Company and its Affiliates have filed all federal, state and local tax returns which to the knowledge of the Officers of Company or any Affiliate, as the case may be, are required to be filed, and Company and its Affiliates have paid or caused to be paid to the respective taxing authorities all taxes as shown on these returns or on any assessment received by any of them to the extent such taxes have become due.

(j) Titles and Liens.  Company has good and absolute title to all Collateral free and clear of all Liens other than Permitted Liens.  No financing statement naming Company as debtor is on file in any office except to perfect only Permitted Liens.

(k) No Defaults.  Company 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 Company’s financial condition, properties or operations .

(l) Submissions to Xxxxx Fargo.  All financial and other information provided to Xxxxx Fargo by or on behalf of Company in connection with this Agreement (i) is true, correct and complete in all material respects, (ii) does not omit any material fact that would cause such information to be 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.

(m) Financing Statements.  Company has previously authorized the filing of financing statements sufficient when filed to perfect the Security Interest and other Liens created by the Security Documents.  When such financing statements are filed, Xxxxx Fargo will have a valid and perfected security interest in all Collateral capable of being perfected by the filing of financing statements.  None of the Collateral is or will become a fixture on real estate, unless a sufficient fixture filing has been filed with respect to such Collateral.

(n) 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

D-5

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 in that instrument.

(o) Employee Benefit Plans.

(i) Maintenance and Contributions to Plans.  Except as disclosed below, neither Company 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 to employees or former employees (other than benefits required under Section 601 of ERISA, Section 4980B of the IRC, or applicable state law).

(ii) Knowledge of Plan Noncompliance with Applicable Law.  Except as disclosed below, neither Company nor any ERISA Affiliate has (A) knowledge that Company or the ERISA Affiliate is not in full compliance with the requirements of ERISA, the IRC, or applicable state law with respect to any Plan, (B) knowledge that a Reportable Event occurred or continues to exist in connection with any Pension Plan, or (C) sponsored a Plan that it intends to maintain as qualified under the IRC that is not so qualified, and no fact or circumstance exists which may have an adverse effect on such Plan’s tax-qualified status.

(iii) Funding Deficiencies and Other Liabilities.  Neither Company nor any ERISA Affiliate has liability for any (A) accumulated funding deficiency (as defined in Section 302 of ERISA and Section 412 of the IRC) under any Plan, whether or not waived, (B) withdrawal, partial withdrawal, reorganization or other event under any Multiemployer Plan under Section 4201 or 4243 of ERISA, or (C) event or circumstance which could result in financial obligation 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).

Employee Benefit Plans

None.

(p) Environmental Matters.

(i) Hazardous Substances on Premises.  Except as disclosed below, 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 Company or Xxxxx Fargo under the common law of any jurisdiction or under any Environmental Law, and no Hazardous Substances have ever been stored, buried, spilled, leaked, discharged, emitted or released in, on or under the Premises in such a way as to create a material liability.

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(ii) Disposal of Hazardous Substances.  Except as disclosed below, Company has not disposed of Hazardous Substances in such a manner as to create any material liability under any Environmental Law.

(iii) Claims and Proceedings with Respect to Environmental Law Compliance. Except as disclosed below, there have not existed in the past, nor are there any threatened or impending requests, claims, notices, investigations, demands, administrative proceedings, hearings or litigation relating in any way to the Premises or Company, alleging material liability under, violation of, or noncompliance with any Environmental Law or any license, permit or other authorization issued pursuant to such an Environmental Law.

(iv) Compliance with Environmental Law; Permits and Authorizations.  Except as disclosed below, Company (A) conducts its business at all times in compliance with applicable Environmental Law, (B) possesses valid licenses, permits and other authorizations required under applicable Environmental Law for the lawful and efficient operation of its business, none of which are scheduled to expire, or withdrawal, or material limitation within the next 12 months, and (C) has not been denied insurance on grounds related to potential environmental liability.

(v) Status of Premises.  Except as disclosed below, the Premises are not and never have been listed on the National Priorities List, the Comprehensive Environmental Response, Compensation and Liability Information System or any similar federal, state or local list, schedule, log, inventory or database.

(vi) Environmental Audits, Reports, Permits and Licenses.  Company has delivered to Xxxxx Fargo all environmental assessments, audits, reports, permits, licenses and other documents describing or relating in any way to the Premises or Company’s businesses.

Environmental Matters

None.

D-7

Exhibit E to Credit and Security Agreement

COMPLIANCE CERTIFICATE

To: Xxxxx Fargo Bank, National Association
Date:                                         , 201   
Subject:         Financial Statements

In accordance with our Third Amended and Restated Credit and Security Agreement dated May 27, 2010 (as amended from time to time, the “Credit Agreement”), attached are the financial statements of Nortech Systems Incorporated (the “Company”) dated [                              , 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.

A. Preparation and Accuracy of Financial Statements.  I certify that the Current Financials have been prepared in accordance with GAAP, subject to year-end audit adjustments, and fairly present Company’s financial condition as of the Reporting Date.

B. Name of Company; Merger and Consolidation.  I certify that:

(Check one)

o Company has not, since the date of the Credit Agreement, changed its name or jurisdiction of organization, nor has it consolidated or merged with another Person.

o Company has, since the date of the Credit Agreement, either changed its name or jurisdiction of organization, or both, or has consolidated or merged with another Person, which change, consolidation or merger: o was consented to in advance by Xxxxx Fargo in an Authenticated Record, and/or o is more fully described in the statement of facts attached to this Certificate.

C. Events of Default.  I certify that:

(Check one)

o I have no knowledge of the occurrence of an Event of Default under the Credit Agreement, except as previously reported to Xxxxx Fargo in a Record.

o I have knowledge of an Event of Default under the Credit Agreement not previously reported to Xxxxx Fargo in a Record, as more fully described in the statement of facts attached to this Certificate, and further, I acknowledge that Xxxxx Fargo may under the terms of the Credit Agreement impose the Default Rate at any time during the resulting Default Period.

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D. Litigation Matters.  I certify that:

(Check one)

o I have no knowledge of any material adverse change to the litigation exposure of Company or any of its Affiliates or of any Guarantor.

o I have knowledge of material adverse changes to the litigation exposure of Company or any of its Affiliates or of any Guarantor not previously disclosed in Exhibit D, as more fully described in the statement of facts attached to this Certificate.

E. Financial Covenants.  I further certify that:

(Check and complete each of the following)

5. Minimum Earnings Before Taxes.  Pursuant to Section 5.2(a) of the Credit Agreement, Company’s Earnings Before Taxes for the fiscal year-to-date period ending on the Reporting Date, was $                          , which o  satisfies o  does not satisfy the requirement that such amount be not less than the applicable amount set forth in the table below (numbers appearing between “< >“ are negative) on the Reporting Date:

Period		Min. Earnings Before Taxes
Through June 30, 2010		$	0
Through September 30, 2010		$	0
Through December 31, 2010		$	0

6. Minimum Debt Service Coverage Ratio.  Pursuant to Section 5.2(b) of the Credit Agreement, as of the Reporting Date, Company’s Debt Service Coverage Ratio was              to 1.00, which o satisfies o does not satisfy the requirement that such ratio be not less than the applicable ratio set forth in the table below on the Reporting Date:

Period		Min. Debt Service Coverage Ratio
Through June 30, 2010*		1.20 to 1.00
Through June 30, 2010		0.80 to 1.00
Through September 30, 2010		1.20 to 1.00
Through December 31, 2010		1.20 to 1.00

* As adjusted for anticipated $2,250,000 tax refund, expected to be received in June 2010.

7. Capital Expenditures.  Pursuant to Section 5.2(c) of the Credit Agreement, for the year-to-date period ending on the Reporting Date, Company has expended or contracted to expend during the fiscal year ended December 31, 2010 for Capital Expenditures, $                                 in the aggregate, which o satisfies o does not satisfy the requirement that such expenditures not exceed $1,400,000 in the aggregate.

8. Stop Loss.  Pursuant to Section 5.2(d) of the Credit Agreement, for the month ending on the Reporting Date, Company has suffered a Net Loss of $                            , which o satisfies o does not satisfy the requirement that Company suffer a Net Loss in any single month not in excess of $250,000.

E-2

9. Due From Affiliate.  Pursuant to Section 5.6(d) of the Credit Agreement, as of the Reporting Date, Company has $                             in affiliate loans or advances due from Manufacturing & Assembly Solutions of Monterrey S DE RL DE CV, which o satisfies o does not satisfy the requirement that Company not have loans or advances to Manufacturing & Assembly Solutions of Monterrey S DE RL DE CV, in an aggregate amount in excess of $9,500,000 at any time.

10. Salaries.  Company o has o has not paid excessive or unreasonable salaries, bonuses, commissions, consultant fees or other compensation to any Director, Officer or consultant, or any member of their families, as of the Reporting Date, and o has o has not paid any increase in such amounts (on a year over year basis, as of the Reporting Date) from any source other than profits earned in the year of payment, and as a consequence Company o is o is not in compliance with Section 5.8 of the Credit Agreement.

Attached are statements of all relevant facts and computations in reasonable detail sufficient to evidence Company’s compliance with the financial covenants referred to above, which computations were made in accordance with GAAP.

By:

Its Chief Financial Officer

E-3

Exhibit F to Credit and Security Agreement

PERMITTED LIENS

		Original		Original Filing		Lapse
Secured Party		Filing #		Date		Date		Collateral/Comments
Xxxxx Fargo Bank N.A.		0000000		12/17/1990		12/17/2010		All Assets
Xxxxx Fargo Bank N.A.		20023019434		2/8/2002		2/8/2012		Mortgage - Bemidji, Fairmont and Xxxxxxxxxx
Xxxxx Fargo Bank, N.A.		20023019607		2/8/2002		2/8/2012		All Assets
Xxxxx Fargo Equipment Finance, Inc.		200517515660		8/4/2005		8/4/2010		Specific Equipment Located in Xxxxxxxxxx, Bemidji, Fairmont and Xxxxxxx
Xxxxx Fargo Equipment Finance, Inc.		200611340371		4/6/2006		4/6/2011		Specific Equipment Located in Xxxxxxxxxx, Bemidji and Fairmont
Arrow Electronics, Inc.		200612304176		6/12/2006		6/12/2011		Consignment Inventory
Arrow Electronics, Inc.		200614885330		12/29/2006		12/29/2011		Consignment Inventory
Xxxxx Fargo Bank, National Association		200715472428		2/9/2007		2/9/2012		Mortgage - Xxxxxxx
Xxxx Microproducts Inc.		200715644660		2/22/2007		2/22/2012		Consignment inventory including all proceeds, products and accessories
Banc of America Leasing & Capital LLC/Meridian Leasing Corporation		200716052156		3/26/2007		3/26/2012		All leased equipment leased from lessor.
Xxxxxx Leasing Corp		200716427337		4/19/2007		4/19/2012		Lease Filing - Copier Equipment
Xxxxx Fargo Equipment Finance/Providence Capital		200718990862		11/16/2007		11/16/2012		Specific Equpment - Stirling Stone & Tile
Arrow Electronics, Inc.		200810873217		3/7/2008		3/7/2013		Consignment Inventory
Xxxxx Fargo Equipment Finance, Inc.		200814387268		12/30/2008		12/30/2013		Specific Equipment Located in Fairmont, Augusta and Xxxxxxxxxx
Xxxxx Fargo Equipment Finance, Inc.		200915015295		2/18/2009		2/18/2014		Specific Equipment Located in Xxxxxx, IA
X.X. Xxxxxxx Co. Inc.		200915138100		2/27/2009		2/27/2014		Office Equipment
Citibank, N.A.		200917251542		9/1/2009		9/1/2014		Accounts Receivable of Rockwell Xxxxxxx, Inc.
Manufacturers’ Lease Plans, Inc.		201018772818		1/15/2010		1/15/2015		Specific Equipment Lease in Bemidji
ERSA North America		201018911194		1/27/2010		1/27/2015		Specific Soldering Machine

INDEBTEDNESS

None.

GUARANTIES

None.

F-1