REVOLVING CREDIT AND TERM LOAN AGREEMENT

 

Exhibit 10.5

 

                    REVOLVING CREDIT AND TERM LOAN AGREEMENT

 

 

     THIS REVOLVING CREDIT AND TERM LOAN AGREEMENT ("Agreement") is made this

30th day of September, 2004, by and between ADDVANTAGE TECHNOLOGIES GROUP, INC.,

an Oklahoma corporation ("Borrower") and BANK OF OKLAHOMA, N.A. ("Lender").

 

                                    RECITALS

 

     A. Borrower has requested that Lender extend to Borrower a $7,000,000

revolving line of credit and an $8,000,000 term loan.

 

     B. Lender is willing to make such loan to Borrower upon the terms and

conditions set forth in this Agreement.

 

     NOW, THEREFORE, in consideration of the mutual covenants contained herein,

Borrower and Lender do hereby agree as follows:

 

1. CONSTRUCTION AND DEFINITION OF TERMS

 

     All terms used herein without definition which are defined by the Oklahoma

Uniform Commercial Code shall have the meanings assigned to them by the Oklahoma

Uniform Commercial Code, as in effect on the date hereof, unless and to the

extent varied by this Agreement. All accounting terms used herein without

definition shall have the meanings assigned to them as determined by generally

accepted accounting principles. Whenever the phrase "satisfactory to Lender" is

used in this Agreement, such phrase shall mean "satisfactory to Lender in its

sole discretion." The use of any gender or the neuter herein shall also refer to

the other gender or the neuter and the use of the plural shall also refer to the

singular, and vice versa. In addition to the terms defined elsewhere in this

Agreement, unless the context otherwise requires, when used herein, the

following terms shall have the following meanings:

 

     1.1. "Affiliate" means any Person: (i) which directly or indirectly

controls, or is controlled by, or is under common control with, Borrower; (ii)

which directly or indirectly beneficially owns or holds five percent (5%) or

more of any class of voting stock of Borrower; or (iii) five percent (5%) or

more of the voting stock of which is directly or indirectly beneficially owned

or held by Borrower. The term "control" means the possession, directly or

indirectly, of the power to direct or cause the direction of the management and

policies of a Person, whether through the ownership of voting securities, by

contract, or otherwise.

 

     1.2. "Agreement" means this Revolving Credit and Term Loan Agreement, as

amended, supplemented, or modified from time to time.

 

     1.3. "Base Rate" means a fluctuating interest rate per annum as in effect

from time to time, which interest rate per annum shall at all times be equal to

the rate of interest announced publicly from time to time (whether or not

charged in each instance), by JP Morgan Chase Bank, located at New York, NY

("Rate Lender"), as its base rate or general reference rate. Should the Rate

Lender abolish or abandon the practice of announcing or publishing a Base Rate,

then the Base Rate shall be that interest rate or other general reference rate

then in effect at the Rate Lender which, from time to time, in the reasonable

judgment of Lender, most effectively approximates the initial definition of the

"Base Rate."

 

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     1.4. "Borrower's Authority Documents" shall mean the following: (i) a

Certificate of Good Standing from Borrower's state of incorporation and such

other states in which Borrower does business and is required to domesticate or

otherwise register; (ii) a certified copy of Borrower's certificate of

incorporation; (iii) a copy of Borrower's bylaws; and (iv) a certificate of the

secretary of Borrower, in form and content set forth on Schedule "1.4" hereto,

certifying resolutions authorizing Borrower to enter into the Loan.

 

     1.5. "Borrowing Base" means, at any date of determination thereof, the sum

of eighty percent (80%) of Qualified Receivables at such date, plus fifty

percent (50%) of Qualified Inventory at such date less the outstanding balance

of the Term Loan at such date, as determined by Lender based upon the most

recent information relating thereto provided to Lender pursuant to Section 2.2.

 

     1.6. "Borrowing Base Certificate" means each certificate from Borrower to

Lender relating to the Borrowing Base, substantially in the form of Schedule

"1.6" hereto.

 

     1.7. "Business Day" means any day other than a Saturday, Sunday, or other

day on which commercial banks in Oklahoma are authorized or required to close

under the laws of the State of Oklahoma.

 

     1.8. "Business Premises" means Borrower's principal place of business,

located at 1605 E. Iola, Broken Arrow, Oklahoma 74012.

 

     1.9. "Capital Lease" means all leases which have been or should be

capitalized on the books of the lessee in accordance with GAAP.

 

     1.10. "Closing" shall mean the date on which this Agreement is executed.

 

      1.11. "Code" means the Internal Revenue Code of 1986, as amended from time

to time, and the regulations and published interpretations thereof.

 

     1.12. "Collateral" means all property in which Lender is intended to have a

security interest, as described in Section 3.

 

     1.13. "Commitment" means the Lender's obligation to make loans to the

Borrower pursuant to this Agreement.

 

     1.14. "Commonly Controlled Entity" means an entity, whether or not

incorporated, which is under common control with the Borrower within the meaning

of Section 414(b) or 414(c) of the Code.

 

     1.15. "Compliance Certificate" means a quarterly compliance certificate

from the Borrower with respect to the terms and conditions of this Agreement, in

form and content as set forth on Schedule "1.15" hereto.

 

     1.16. "Debt" means, including but not limited to: (i) indebtedness or

liability for borrowed money; (ii) obligations evidenced by bonds, debentures,

notes, or other similar instruments; (iii) obligations for the deferred purchase

price of property or services (including trade obligations); (iv) obligations

under letters of credit; (v) obligations under acceptance facilities; (vi) all

guaranties, endorsements (other than for collection or deposit in the ordinary

course of business), and other contingent obligations to purchase, to provide

funds for payment, to supply funds to invest in any Person or entity, or

otherwise to assure a creditor against loss; (vii) obligations secured by any

Liens, whether or not the obligations have been assumed; and (viii) any other

items which would properly be included in the liability section of a balance

sheet or in a footnote to a financial statement in accordance with GAAP, and

shall also include all contingent liabilities.

 

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     1.17. "EBITDA" shall mean, for the applicable reporting period, the sum of:

(i) consolidated pre-tax earnings, (ii) interest expense, (iii) depreciation,

depletion, obsolescence and amortization of property and (iv) other Lender

approved non-cash expenses.

 

     1.18. "Effective Net Worth" shall mean the sum of net worth, in accordance

with GAAP, plus debt determined by Lender in its sole discretion to be

subordinate to the Obligations.

 

     1.19. "$8,000,000 Term Note" shall mean the $8,000,000 Promissory Note in

form and content as set forth on Schedule "1.19" attached hereto.

 

     1.20. "ERISA" means the Employee Retirement Income Security Act of 1974, as

amended from time to time, and the regulations and published interpretations

thereof.

 

     1.21. "Event of Default" means any of the events described in Section 9

hereof . 1.22. "Funded Debt" shall mean the sum of total borrowings under this

Agreement plus any additional funded debt determined by Lender in its sole

discretion as pari passu with this Agreement and the Obligations, in accordance

with GAAP.

 

     1.23. "GAAP" means generally accepted accounting principles in the United

States, applied on a consistent basis.

 

     1.24. "Guarantor Authority Documents" shall mean the following: (i) a

Certificate of Good Standing from Guarantor's state of [incorporation]

[formation] [organization] and such other states in which Guarantor does

business and is required to domesticate or otherwise register; (ii) a certified

copy of Guarantor's [certificate of incorporation] [articles of organization];

(iii) a copy of Guarantor's [bylaws] [operating agreement] [partnership

agreement] [limited partnership agreement]; and (iv) [a certificate of the

secretary of Guarantor, in form and content set forth on Schedule "1.24" hereto,

certifying resolutions authorizing Guarantor to enter into the Loan.] [a

{limited liability company} {partnership} consent, executed by all {members}

{partners} of Guarantor, in form and content as set forth on Schedule "1.24"

hereto, authorizing Guarantor to enter into the Loan.]

 

     1.25. "Guarantor" means, separately and collectively, any Subsidiary of

Borrower, now existing or hereafter created.

 

     1.26. "Guaranty Agreement" means, separately and collectively, the Guaranty

Agreement to be executed by each Guarantor, in form and content as set forth on

Schedule "1.26" hereto.

 

     1.27. "Initial Default" means any Event of Default, whether or not any

requirement for the giving of notice, the lapse of time, or both, or any other

condition has been satisfied.

 

     1.28. "Insurance Certificate" means a certificate or certificates

evidencing that policies of insurance, with insurance companies satisfactory to

Lender, in such amounts and against such risks as shall be required by Lender,

as set forth herein, have been obtained by Borrower and are in full force and

effect, and that Lender is listed as an additional insured or loss payee

thereon.

 

     1.29. "Letter of Credit" means any letter of credit issued pursuant to

Section 2.2, for which, when issued, a Letter of Credit Fee should be paid.

 

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     1.30. "Letter of Credit Fee" means a fee of one and one-half percent

(1.50%) per annum on the face amount of any Letter of Credit issued or renewed

after the date hereof, payable quarterly for the immediately preceding quarter.

 

     1.31. "LIBOR Rate" means a fluctuating interest rate per annum (rounded

upward, if necessary, to the nearest 1/100 of 1%) as in effect from time to

time, which interest rate per annum shall at all times be equal to the thirty

(30) day London Interbank Offered Rate per annum published in the Wall Street

Journal, which shall be initially determined as of September 1, 2004, and

redetermined as of the first Business Day of each subsequent calendar month. If

the information is unavailable from such service, the rate shall be determined

by the Lender from information supplied to Lender by a nationally recognized

reporting service for similar information acceptable to Lender. Lender shall

promptly confirm to Borrower in writing the LIBOR Rate.

 

     1.32. "Lien" means any mortgage, pledge, hypothecation, assignment, deposit

arrangement, encumbrance, lien (statutory or other), or preference, priority or

other security agreement or preferential arrangement of any kind or nature

whatsoever (including, without limitation, any conditional sale or other title

retention agreement, any financing lease having substantially the same economic

effect as any of the foregoing, and the filing of any financing statement under

the Uniform Commercial Code or comparable law of any jurisdiction in respect of

any of the foregoing.)

 

     1.33. "Loan" means advances under the $7,000,000 Revolving Line or the

$8,000,000 Term Loan.

 

     1.34. "Loan Documents" shall mean any and all agreements, contracts,

promissory notes, security agreements, assignments, subordination agreements,

pledge or hypothecation agreements, guaranties, instruments, letters of credit,

letter of credit agreements and documents now and hereafter existing between

Lender and Borrower, executed and/or delivered pursuant to this Agreement or

otherwise or guaranteeing, securing or in any other manner relating to any of

the Obligations, including, without limitation, the instruments and documents

referred to in Section 4 hereof together with any other instrument or document

executed by Borrower, Lender or any other person in connection with the Loans.

 

     1.35. "Matured Default" means any Event of Default, provided that any

requirement for the giving of notice, the lapse of time, or both, or any other

condition has been satisfied.

 

     1.36. "Multiemployer Plan" means a Plan described in Section 4001(a) (3) of

ERISA.

 

     1.37. "Note" or "Notes" means, separately and collectively, the $8,000,000

Term Note and the $7,000,000 Line Note.

 

     1.38. "Note Rate" shall mean the LIBOR Rate or Base Rate, as elected by

Borrower in writing from time to time, plus the applicable margin set forth on

the Pricing Grid set forth as Schedule "1.38" hereto.

 

     1.39. "Obligations" shall include the full and punctual observance and

performance of all present and future duties, covenants and responsibilities due

to Lender by Borrower under this Agreement, the Note, the Loan Documents and

otherwise, all present and future obligations and liabilities of Borrower to

Lender for the payment of money under this Agreement, the Note, the Loan

Documents and otherwise, Rate Management Obligations and Rate Management

Transactions (extending to all principal amounts, interest, late charges, fees

and all other charges and sums, as well as all costs and expenses payable by

Borrower under this Agreement, the Note, the Loan Documents and otherwise),

whether direct or indirect, contingent or noncontingent, matured or unmatured,

accrued or not accrued, related or unrelated to this Agreement, whether or not

now contemplated, whether or not any instrument or agreement relating thereto

specifically refers to this Agreement and whether or not of the same character

or class as Borrower's obligations under this Agreement or the Note, including,

without limitation, overdrafts in any checking or other account of Borrower at

Lender and claims against Borrower acquired by assignment to Lender, whether or

not secured under any other document, or agreement or statutory or common law

provision, as well as all renewals, refinancings, consolidations, re-castings

and extensions of any of the foregoing, the parties acknowledging that the

nature of the relationship created hereby contemplates the making of future

advances by Lender to Borrower.

 

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     1.40. "Opinion of Borrower's Counsel" means a legal opinion from Borrower's

legal counsel including, without limitation, the opinions relating to Borrower

and this loan transaction as set forth on Schedule "1.40" attached hereto.

 

     1.41. "Opinion of Guarantor's Counsel" means a legal opinion from

Guarantor's legal counsel including, without limitation, the opinions relating

to Guarantor and this loan transaction as set forth on Schedule "1.41" attached

hereto.

 

     1.42. "PBGC" means the Pension Benefit Guaranty Corporation or any entity

succeeding to any or all of its functions under ERISA.

 

     1.43. "Permitted Liens" means, as to Borrower and all Subsidiaries:

 

     (1) Liens in favor of the Lender;

 

     (2) Liens for taxes or assessments or other government charges or levies if

not yet due and payable or, if due and payable or, if they are being contested

in good faith by appropriate proceedings and for which appropriate reserves are

maintained;

 

 

     (3) Liens imposed by law, such as mechanics', materialmen's, landlords',

warehousemen's, and carriers' liens, and other similar Liens, securing

obligations incurred in the ordinary course of business which are not past due

for more than thirty (30) days or which are being contested in good faith by

appropriate proceedings and for which appropriate reserves have been

established;

 

     (4) Liens under workers' compensation, unemployment insurance, Social

Security, or similar legislation;

 

     (5) Liens, deposits, or pledges to secure the performance of bids, tenders,

contracts (other than contracts for the payment of money), leases (permitted

under the terms of this Agreement), public or statutory obligations, surety,

stay, appeal, indemnity, performance or other similar bonds, or other similar

obligations arising in the ordinary course of business;

 

     (6) The liens described on Schedule "1.43(6)";

 

     (7) Judgment and other similar liens arising in connection with court

proceedings, provided the execution or other enforcement of such Liens is

effectively bonded, stayed and the claims secured thereby are being actively

contested in good faith and by appropriate proceedings;

 

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     (8) Easements, rights-of-way, restrictions, and other similar encumbrances

which, in the aggregate, do not materially interfere with the occupation, use

and enjoyment by the Borrower of the property or assets encumbered thereby in

the normal course of its business or materially impair the value of the property

subject thereto; and

 

     (9) Purchase-money liens on any property hereafter acquired or the

assumption of any lien on property existing at the time of such acquisition (and

not created in contemplation of such acquisition), or a lien incurred in

connection with any conditional sale or other title retention agreement or a

Capital Lease; provided that:

 

     (a) Any property subject to any of the foregoing is acquired by the

Borrower or any subsidiary in the ordinary course of its business; and

 

     (b) Each such lien shall attach only to the property so acquired and fixed

improvements thereon.

 

     1.44. "Person" shall include natural persons, corporations, associations,

limited liability companies, partnerships, joint ventures, trusts, governments

and agencies and departments thereof and every other entity of every kind.

 

     1.45. "Plan" means any pension plan which is covered by Title IV of ERISA

and in respect of which the Borrower or a Commonly Controlled Entity is an

"employer" as defined in Section 3(5) of ERISA.

 

     1.46. "Principal Office" means the Lender's main office located at Seven

East Second Street, One Williams Center - BOk Tower, Tulsa, Oklahoma.

 

     1.47. "Prohibited Transaction" means any transaction set forth in Section

406 of ERISA or Section 4975 of the Code.

 

     1.48. "Qualified Inventory" means the amount of inventory of Borrower and

each Subsidiary a party to a Security Agreement located in the United States of

America or Canada that is not subject to any Lien or adverse claim and that

conforms to the representations and warranties contained in this Agreement and

that is acceptable to the Lender in its sole discretion, less any packaging

materials and supplies, damaged or unsalvageable goods returned or rejected by

its customers, goods to be returned to its suppliers, goods in transit to third

parties (other than its agent or warehouses) and goods out at contractors, and

less any reserves required by the Lender in its sole discretion for special

order goods, market value declines and bill and hold (deferred shipment) sales.

 

     1.49. "Qualified Receivables" means and includes only accounts receivable

of Borrower and each Subsidiary party to a Security Agreement which meet the

following specifications at the time they came into existence and continue to

meet the same until collected in full.

 

     1.49.1. The account is due and payable. No account shall be outstanding for

more than ninety (90) days from the date of the applicable invoice.

 

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     1.49.2. The account arose from a bona fide outright sale of goods

previously made or from the performance of services, but not from leasing, and

the Borrower or Subsidiary has possession of or has delivered to Lender shipping

and delivery receipts evidencing shipment of the goods or, if representing

services, the services have been fully performed for the respective account

debtor.

 

     1.49.3. The account is not subject to any assignment, claim, lien or

security interest of any character or subject to any attachment, levy,

garnishment or other judicial process, except the security interest of Lender.

 

     1.49.4. The account is not subject to any claim for credit, setoff,

allowance, adjustment by the account debtor or counterclaim, and Borrower has

not received any notice of any such claim for credit, setoff, allowance,

adjustment or counterclaim from or on behalf of the account debtor.

 

     1.49.5. The account arose in the ordinary course of Borrower's or

Subsidiary's business and no notice of the bankruptcy, insolvency or adverse

change in the financial condition of the account debtor has been received by

Borrower or Lender.

 

     1.49.6. Lender has not previously notified Borrower that the account or the

account debtor is or has become unsatisfactory, based upon reasonable credit

standards, or the account debtor has been adjudicated bankrupt or is subject to

a similar proceeding.

 

     1.49.7. The account is not evidenced by a judgment, an instrument or

chattel paper.

 

     1.49.8. The account debtor is not a governmental entity or a foreign (i.e.,

residing or incorporated in or organized under a jurisdiction outside the United

States) person or company and is not a parent, subsidiary, officer, employee,

director, agent or Affiliate of any Borrower, and the account debtor and

Borrower do not have common shareholders, officers or directors; provided that

Lender specifically excludes any Lender Approved Account Debtor (defined below)

from this section.

 

     1.49.9. All receivables of one account debtor shall become ineligible if

more than 10% of such receivables are over ninety (90) days past due from the

invoice.

 

     1.49.10. The account debtor (excluding any Lender Approved Account Debtor)

cannot exceed 10% of the total accounts receivable, and any amounts over 10%

will be excluded from the Borrowing Base unless specifically waived in writing

in each instance by Lender in its sole discretion.

 

     1.49.11. With regard only to Sections 1.49.8 and 1.49.10, the term "Lender

Approved Account Debtor" means an express written designation acceptable to

Borrower and Lender as to an account debtor on a annual basis, effective October

of each calendar year. Borrower shall submit a proposed list of account debtors

to Lender at least ten (10) days prior to the annual designation date, which

list must be accompanied by such information relating to the proposed account

debtor as Lender may reasonably require. Lender shall advise Borrower on or

before the applicable annual effective date whether any or all of the proposed

account debtors has been designated as a Lender Approved Account Debtor. Any

such designation shall be effective only for the ensuing twelve (12) month

period, and any designation by Lender shall have no relevance with regard to

subsequent designations. The initially approved Lender Approved Account Debtors

are Power & Telephone, Time Warner and Cox Communications.

 

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     1.50. "Rate Management Obligations" of a Person means any and all

obligations of such Person, whether absolute or contingent and howsoever and

whensoever created, arising, evidenced or acquired (including all renewals,

extensions and modifications thereof and substitutions therefor), under (i) any

and all Rate Management Transactions, and (ii) any and all cancellations, buy

backs, reversals, terminations or assignments of any Rate Management

Transactions.

 

     1.51. "Rate Management Transactions" means any transaction (including an

agreement with respect thereto) now existing or hereafter entered by the

Borrower which is a rate swap, basis swap, forward rate transaction, commodity

swap, commodity option, equity or equity index swap, equity or equity index

option, bond option, interest rate option, foreign exchange transaction, cap

transaction, floor transaction, collar transaction, forward transaction,

currency swap transaction, cross-currency rate swap transaction, currency option

or any other similar transaction (including any option with respect to any of

these transactions) or any combination thereof, whether linked to one or more

interest rates, foreign currencies, commodity prices, equity prices or other

financial measures.

 

     1.52. "Reportable Event" means any of the events set forth in Section 4043

of ERISA.

 

     1.53. "Security Agreement" means the Security Agreement and other

Collateral documents described in Section 3.

 

     1.54. "$7,000,000 Line Note" shall mean the $7,000,000 Promissory Note in

form and content as set forth on Schedule "1.54" attached hereto.

 

     1.55. "Shareholder Notes" means the promissory notes described on Schedule

"1.55" hereto, together with extensions and renewals thereof.

 

     1.56. "Subordinating Parties" means the Subordination Agreements from each

of the Subordinating Parties, in form and content as set forth on Schedule

"1.56" hereto.

 

     1.57. "Subsidiaries" means any corporation of which shares of stock having

ordinary voting power (other than stock having such power only by reason of the

happening of a contingency) to elect a majority of the board of directors or

other managers of such corporation are at the time owned, or the management of

which is otherwise controlled, directly or indirectly through one or more

intermediaries, or both, by the Borrower. Current Subsidiaries include the

entities set forth on Schedule "1.57" hereto.

 

     1.58. "Total Fixed Charges" means, on a consolidated basis, the sum of: (i)

cash interest; (ii) cash taxes; (iii) scheduled principal payments; (iv) capital

lease payments; (v) cash dividends and other distributions (including payments

on Shareholder Notes); and (vi) capital expenditures.

 

     1.59. "UCC" shall mean the Uniform Commercial Code of the State of

Oklahoma.

 

     1.60. "UCC Chattel Check" means a UCC records search from the appropriate

filing office for the Collateral, and from any other office deemed necessary or

advisable by Lender, which records search must evidence no conflicting security

interests, except the Permitted Liens.

 

     1.61. "UCC-1 Financing Statement" means a financing statement in form and

content acceptable to Lender, which will be filed with the appropriate filing

office and shall evidence perfection of a first and prior security interest in

the Collateral in favor of Lender, except for the Permitted Liens.

 

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2. AMOUNT AND TERMS OF THE LOANS.

 

     2.1. $8,000,000 Term Loan. Subject to the terms and conditions of this

Agreement, the Lender agrees to loan Borrower $8,000,000, to be further

evidenced by the $8,000,000 Term Note. The purpose of the advance under the

$8,000,000 Term Note is to enable Borrower to repurchase convertible preferred

stock of Borrower.

 

     2.2. $7,000,000 Revolving Line. Subject to the terms and conditions of this

Agreement, and so long as no Event of Default has occurred, Lender agrees to

loan to Borrower (by advancing funds or issuing Letters of Credit), such amounts

up to $7,000,000 as Borrower may request from time to time on or before the

maturity of the $7,000,000 Line Note, provided that the aggregate outstanding

principal amount of advances at any time outstanding shall not exceed the lesser

of (i) $7,000,000 or (ii) the Borrowing Base. Such Borrowing Base shall be

computed on a monthly basis, and Borrower agrees to provide to Lender on the

last day of each month with regard to the period commencing with the 16th day of

the immediately preceding month through the 15th day of the current month, all

information requested in connection therewith, including without limitation a

Borrowing Base Certificate. In the event Lender shall make advances in excess of

the formula set forth above, any such advance shall, nevertheless, be secured by

all Collateral. In the event outstanding advances with respect to Qualified

Receivables or Qualified Inventory fail to comply with such formula, by reason

of any accounts receivable or inventory ceasing to be so qualified, for whatever

reason, then Borrower shall immediately notify Lender of such situation and

shall, within five (5) Business Days of the imbalance, either (i) reduce the

amount of the outstanding balances to bring such amounts within the formulas

prescribed, or (ii) provide additional Qualified Receivables or Qualified

Inventory, without any additional advance being made by Lender with respect

thereto, necessary to comply with the formulas required herein. Within the

limits set forth in this Section 2.2, Borrower may borrow, repay and reborrow at

any one time and from time to time.

 

     2.3. Notice and Manner of Borrowing. Subject to any other arrangement (e.g.

a swap) agreed to by Borrower and Bank, the Borrower shall give the Lender at

least one (1) Business Day's notice of any Loans under this Agreement,

specifying the date and amount thereof. Such notice shall be in writing or via

telephone (with voice verification by the appropriate officer), no later than

10:00 a.m. (Tulsa time) prior to the date of such Loan and upon fulfillment of

the applicable conditions, the Lender will make such Loan available to the

Borrower in immediately available funds by crediting the amount thereof to the

following account with the Lender: Account styled

_________________________________________________________________________ No.

_______________________________________________.

 

3. SECURITY. As security for the Obligations, Borrower and its Subsidiaries

shall grant to Lender the following liens and security interests:

 

     3.1. A first and prior security interest in all assets of Borrower and each

Subsidiary, including without limitation all accounts; chattel paper; deposit

accounts; documents; equipment; general intangibles; goods; instruments;

inventory; letter-of-credit rights; commercial tort claims; and proceeds and

products of all of the foregoing; whether now owned or hereafter acquired,

howsoever arising or wheresoever located, all as evidenced by the Security

Agreement in form and content as set forth on Schedule "3.1" attached hereto.

 

      3.2. All proceeds and products of the foregoing.

 

     Borrower also agrees to execute and deliver all financing statements or

other instruments, documents or agreements required by Lender in order to

effectuate the intent of the parties in connection herewith, including without

limitation documents necessary for proper perfection as deemed necessary and/or

advisable by Lender and legal counsel.

 

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4. CONDITIONS PRECEDENT.

 

     4.1. Closing. The Closing shall occur when all conditions described in this

Section 4.1 have been satisfied.

 

     4.1.1. Borrower shall execute and /or deliver to Lender the following:

 

                           A.        This Agreement;

 

                           B.        $7,000,000 Line Note;

 

                           C.        $8,000,000 Term Note;

 

                           D.        Guaranty Agreement;

 

                           E.        Security Agreement;

 

                           F.        Copies of Shareholders Notes;

 

                            G.        Subordination Agreements;

 

                           H.        UCC-1 Financing Statement;

 

                           I.        Borrower's Authority Documents;

 

                           J.        Guarantors' Authority Documents;

 

                           K.        UCC Chattel Check;

 

                           L.        Opinion of Borrower's Counsel;

 

                           M.        Opinion of Guarantor's Counsel;

 

                           N.        Insurance Certificates;

 

                           O.        completion of all schedules to this

                                    Agreement; and

 

                           P.        any other instruments,   documents or

                                    agreements   reasonably requested by Lender

                                    in connection herewith.

 

     4.1.2. The following statements shall be true and correct.

 

     A. The representations and warranties contained in this Agreement and the

other Loan Documents shall be true and correct; and

 

     B. No Event of Default has occurred and is continuing or will occur as a

result of the execution, delivery and/or performance by Borrower under any of

the Loan Documents.

 

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      4.1.3. The Lender shall have received such other approvals, opinions,

instruments, documents and/or agreements which it may reasonably request.

 

     5. REPRESENTATIONS AND WARRANTIES. To induce Lender to enter into this

Agreement, Borrower represents and warrants to Lender that:

 

     5.1. State of Incorporation and Legal Name. Borrower's state of

incorporation or formation and exact legal name are set forth in the first

paragraph of this Agreement.

 

     5.2. Good Standing. Borrower is a corporation duly organized, legally

existing and in good standing under the laws of the State of its incorporation,

has the power to own its property and to carry on its business and is duly

qualified to do business and is in good standing in each jurisdiction in which

the character of the properties owned by it therein or in which the transaction

of its business makes such qualification necessary.

 

     5.3. Authority. Borrower has full power and authority to enter into this

Agreement, to make the borrowings hereunder, to execute and deliver all

documents and instruments required hereunder and to incur and perform the

obligations provided for herein, all of which have been duly authorized by all

necessary and proper corporate and other action, and no consent or approval of

any person, including, without limitation, stockholders of Borrower and any

public authority or regulatory body, which has not been obtained is required as

a condition to the validity or enforceability hereof or thereof.

 

     5.4. Binding Agreements. This Agreement has been duly and properly executed

by Borrower, constitutes the valid and legally binding obligation of Borrower

and is fully enforceable against Borrower in accordance with its terms, subject

only to laws affecting the rights of creditors generally and application of

general principles of equity.

 

     5.5. No Conflicting Agreements. The execution, delivery and performance by

Borrower of this Agreement and the borrowings hereunder will not (a) violate (i)

any provision of law or any order, rule or regulation of any court or agency of

government, (ii) any award of any arbitrator, (iii) the Charter or Bylaws of

Borrower or (iv) any indenture, contract, agreement, mortgage, deed of trust or

other instrument to which Borrower is a party or by which Borrower or any of its

property is bound, or (b) be in conflict with, result in a breach of or

constitute (with due notice and/or lapse of time) a material default under, any

such award, indenture, contract, agreement, mortgage, deed of trust or other

instrument, or result in the creation or imposition of any Lien upon any of the

property or assets of Borrower except for Liens created in favor of Lender under

or pursuant to this Agreement.

 

     5.6. Litigation. Except as disclosed to Lender in Schedule "5.6" attached

hereto, there are no judgments, injunctions or similar orders or decrees,

claims, actions, suits or proceedings pending in excess of $250,000 or, to the

knowledge of Borrower, threatened against or affecting Borrower or any property

of Borrower, at law or in equity, by or before any court or any federal, State,

county, municipal or other governmental department, commission, board, bureau,

agency or instrumentality, domestic or foreign, which could result in any

material adverse change in the business, operations, prospects, properties or in

the condition, financial or otherwise, of Borrower, and Borrower is not, to

Borrower's knowledge, in default with respect to any judgment, order, writ,

injunction, decree, rule or regulation of any court or any federal, State,

county, municipal or other governmental department, commission, board, bureau,

agency or instrumentality, domestic or foreign, which could have a material

adverse effect on Borrower.

 

     5.7. Financial Condition. The financial statements of Borrower heretofore

delivered to Lender are true and complete, fairly present the financial

condition of Borrower as at such dates and the results of its operations for the

period then ended and were prepared in accordance with GAAP applied on a

consistent basis for prior periods. There is no Indebtedness of Borrower as of

the date of such statements which is not reflected therein and no material

adverse change in Borrower's financial condition has occurred since the date of

such statements. No information, exhibit, or report furnished by the Borrower to

the Lender in connection with the negotiation of this Agreement contains any

material misstatement of fact or omits to state a material fact or any fact

necessary to make the statement contained therein not materially misleading.

 

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     5.8. Taxes. Borrower has paid or caused to be paid all federal, State and

local taxes to the extent that such taxes have become due and has filed or

caused to be filed all federal, State and local tax returns which are required

to be filed by Borrower.

 

     5.9. Title to Properties. Borrower has good and marketable title to all of

its properties and assets (including the Collateral) and all of the properties

and assets of Borrower are free and clear of Liens, except for Permitted Liens.

 

     5.10. Place of Business. Borrower's principal place of business and chief

executive office is located at the Business Premises and Borrower has such other

business locations as disclosed to Lender prior to the date hereof. Borrower

will not change the location of the Business Premises or open additional

business locations (other than those locations heretofore disclosed to Lender)

without Lender's prior written consent, which shall not be unreasonably

withheld.

 

     5.11. Financial Information. All financial statements, schedules, reports

and other information supplied to Lender by or on behalf of Borrower heretofore

and hereafter are and wil