LOAN AND SECURITY AGREEMENT

Exhibit 10.17

LOAN AND SECURITY AGREEMENT

THIS LOAN AND SECURITY AGREEMENT (herein “Agreement”) dated as of January 17, 1997 between BFG ACQUISITION CORP., an Illinois corporation (hereafter, the “Borrower”) 1309 S. Cicero Avenue, Cicero, Illinois 60650 and LASALLE BANK NI, an Illinois state banking corporation (hereafter, the “Lender”), 3201 N. Ashland Avenue, Chicago, Illinois 60657.

W I T N E S S E T H:

WHEREAS, the Borrower has asked the Lender to make to the Borrower a secured $2,700,000.00 term loan and a secured $2,200,000.00 revolving loan to finance the acquisition of certain assets (the “Acquisition”) which are currently owned by Brad Foote Gear Works, Inc., a Delaware corporation (the “Seller”) and to provide working capital for the Borrower; and

WHEREAS, the Lender has agreed to make such loans on the terms and subject to the conditions set forth in this Agreement;

NOW THEREFORE, in consideration of the foregoing premises, the terms and conditions contained herein, and of any loans or extension of credit heretofore, now or hereafter made to or for the benefit of Borrower by Lender, the Borrower and the Lender hereby agree as follows:

SECTION 1.  DEFINITION.

1.1           Defined Terms .  As used in this Agreement, the following terms shall have the following respective meanings:

“ Accounts ”, “ Inventory ”, “ Equipment ”, and “ General Intangibles ” shall have the meanings assigned to them in Section 7 hereof.

“ Acquisition ” - see Preamble .

“ Agreement ” shall mean this Loan and Security Agreement, as amended, modified, restated or supplemented from time to time.

“ Bank Commitment ” shall mean the commitment letter dated December 16, 1996 issued by the Lender with respect to the Loans.

“ Bankruptcy Code ” shall mean Title 11 of the United States Code (11 U.S.C.  §101 et seq.), as amended from time to time, and any successor statute.

“ Borrower ” - see Preamble .

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“ Borrowing Base ” shall mean, as of any applicable date of determination, an amount equal to (i) eighty-five percent (85%) of Borrower’s Eligible Accounts, less (ii) until the Reserve Elimination Date, the Reserve.

“ Borrowing Base Certificate ” shall mean a certificate in such form and content as the Lender may request, completed in all appropriate respects and executed by the President of Borrower or such other officer of Borrower authorized in writing by the Borrower, and setting forth Borrower’s computation of the Borrowing Base as of the date of such certificate.

“ Business Day ” shall mean a day on which the Lender is open to carry on its normal commercial lending business.

“ Capital Expenditures ” shall mean such expenditures (including, in any event, all capitalized rentals and leasehold improvements) as shall be determined in accordance with GAAP to constitute capital expenditures.

“ Cash Flow Coverage ” shall mean, as of any applicable date of determination, (i) EBITDA, divided by (ii) current maturities of bank long term debt, plus interest expense (including interest owed to Lender and former owners), plus lease payments for Leased Equipment.

“ Cash Interest Expense ” shall mean, as of any applicable date of determination, Borrower’s total interest expense, whether paid or accrued (including the interest component of capital leases), including, without limitation, all commissions, discounts and other fees and charges owed with respect to letters of credit, but excluding, however, interest expense not payable in cash (including amortization of discount), all as determined in conformity with GAAP.

“ Charges ” shall mean all national, federal, state, county, city, municipal, and/or other governmental (including, without limitation, the Pension Benefit Guaranty Corporation) taxes, levies, assessments, charges, liens, claims or encumbrances upon and/or relating to (i) the Collateral or any portion thereof, (ii) the Indebtedness or any portion thereof, (iii) Borrower’s employees, payroll, income and/or gross receipts, (iv) Borrower’s ownership and/or use of any of its assets, or (v) any other aspect of Borrower’s business.

“ Collateral ” shall mean all property and interests in property now owned or hereafter acquired by the Borrower in or upon which a security interest, lien or mortgage is granted or in which a collateral assignment is made under this Agreement or under the other Collateral Documents.

“ Collateral Assignment of Life Insurance ” shall mean the collateral assignment of the life insurance policy on the life of J. Cameron Drecoll described in Section 6 hereof.

“ Collateral Documents ” shall mean this Agreement, the Collateral Assignment of Life Insurance, the Stock Pledge Agreements, the Security Agreement-Leased Equipment, and any other agreement, instrument, mortgage, deed of trust or document pursuant to which a security

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interest or lien is granted by the Borrower or any other obligor, to secure the payment and performance of the Indebtedness.

“ Commitment Amount ” shall mean, as of any applicable date of determination, Two Million Two Hundred Thousand and 00/100 ($2,200,000.00) Dollars.

“ Debt ” shall mean, as of any applicable date of determination, all items of indebtedness, obligation or liability of a Person, whether matured or unmatured, liquidated or unliquidated, direct or indirect, absolute or contingent, joint or several, that should be classified as liabilities in accordance with GAAP.

“ Default ” shall mean a condition or event which, with the giving of notice or the passage of time, or both, would become an Event of Default.

“ Disbursement Date ” shall mean each date upon which the Lender makes a loan to the Borrower under Section 2 of this Agreement.

“ EBIT ” shall mean, as of any applicable date of determination, with respect to Borrower, the sum of the amounts for such periods, of (i) Net Income, plus (ii) Cash Interest Expense, plus (iii) federal and state income taxes, plus (iv) extraordinary losses (and any unusual losses arising in or outside of the ordinary course of business not included in extraordinary losses determined in accordance with GAAP, which have been included in the determination of Net Income), minus, (v) extraordinary gains (and any unusual gains arising in or outside of the ordinary course of business not included in extraordinary gains determined in accordance with GAAP which have been included in the determination of Net Income).

“ EBITDA ” shall mean, as of any applicable date of determination, with respect to Borrower, the sum of the amounts for such periods, of (i) Net Income, plus (ii) depreciation and amortization expense, plus (iii) Cash Interest Expense, plus (iv) federal and state income taxes, plus (v) extraordinary losses (and any unusual losses arising in or outside of the ordinary course of business not included in extraordinary losses determined in accordance with GAAP, which have been included in the determination of Net Income), minus, (vi) extraordinary gains (and any unusual gains arising in or outside of the ordinary course of business not included in extraordinary gains determined in accordance with GAAP which have been included in the determination of Net Income).

“ Eligible Accounts ” shall mean those Accounts included in a Borrowing Base Certificate which, as of the date of such Borrowing Base Certificate and at all times thereafter:  (i) satisfy the requirements for eligibility as described in Section 2.6 of this Agreement, (ii) do not violate the negative covenants and other provisions of this Agreement and do satisfy the affirmative covenants and other provisions of this Agreement, and (iii) are deemed by Lender, in its reasonable credit judgment, to be Eligible Accounts.

“ Equipment Lease ” shall mean that certain Equipment Lease Agreement dated January 17, 1997 between Seller as lessor and Borrower as lessee, covering the Leased Equipment.

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“ ERISA ” shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor statute.

“ Event of Default ” shall mean any of those conditions or events listed in Section 15 of this Agreement.

“ Financing Statements ” shall mean UCC financing statements describing the Lender as secured party and Borrower as debtor covering the Collateral and otherwise in such form, for filing in such jurisdictions and with such filing offices, as the Lender shall deem necessary or advisable.

“ GAAP ” shall mean, as of any applicable date of determination, generally accepted accounting principles, consistently applied, set forth in the rules, regulations, statements, opinions and pronouncements of the American Institute of Certified Public Accountants and of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the accounting profession).

“ Guarantors ” shall mean collectively, J. Cameron Drecoll, Patrick Rosmonowski and Dennis Palmer, and “Guarantor” shall refer to any one of them.

“ Guaranties ” shall mean the continuing guaranties to be executed by the Guarantors in accordance with Section 5 hereof, pursuant to which the Guarantors jointly and severally unconditionally guarantee repayment to the Lender of all the Indebtedness, and “ Guaranty ” shall refer to any one of the Guaranties.

“ Hazardous Material ” shall have the meaning set forth in Section 13.1(u) hereof.

“ Indebtedness ” shall mean and include all loans, advances, debts, liabilities, obligations, covenants and duties owing to the Lender by the Borrower, whether now existing, or hereafter created or arising, including, without limitation:  (1) the Revolving Loan, together with all loans, advances and overadvances now or hereafter made thereunder, and all extensions, renewals, amendments, refinancings, modifications, consolidations and conversions thereof or increases thereto; and (2) the Term Loan, together with all extensions, renewals, amendments, refinancings, modifications, consolidations and conversions thereof; and (3) all interest, fees, charges, expenses, attorneys’ fees and other costs and sums now or hereafter payable by the Borrower under the terms of this Agreement, the Notes, or any of the other Loan Documents; and (4) any and all other loans, advances, overdrafts, indebtedness, liabilities and obligations now or hereafter owed by Borrower to Lender, of every kind and nature, howsoever created, arising or evidenced, and howsoever owned, held or acquired, whether now due or to become due, whether direct or indirect, or absolute or contingent, whether several, joint or joint and several, whether liquidated or unliquidated, whether legal or equitable, whether disputed or undisputed, whether secured or unsecured, or whether arising under this Agreement or any of the other Loan Documents or any other document or instrument, and, advances made by Lender to pay or discharge any other lien, security interest or encumbrance upon the Collateral; and (5) all advances made by Lender to protect the Collateral, and/or Lender’s security interest therein; and (6) all costs, expenses and fees (including reasonable attorneys’ fees) incurred by Lender pursuant to the terms of this Agreement or any of the other Loan Documents, or in connection

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with (i) the drafting and preparation of this Agreement and the other Loan Documents, (ii) the administration, enforcement and defense of this Agreement and any other Loan Documents, or the relationships and security interests created hereunder or thereunder, (iii) the collection of the Indebtedness and any other obligation or indebtedness secured hereby, and (iv) the sale or other disposition of the Collateral, or any portion thereof.

“ Leased Equipment ” shall mean all of the equipment described in the Equipment Lease, as described in Exhibit A attached hereto.

“ Lender ” - see Preamble .

“ Loan Documents ” shall mean this Agreement, the Notes, the Negative Pledge Agreement, the Collateral Assignment of Life Insurance, and all other agreements, instruments and documents, including, without limitation, the Collateral Documents, and any other security agreements, notes, guaranties, mortgages, assignments, financing statements, and all other writings heretofore, now, or hereafter executed by the Borrower or any other obligor, and delivered to Lender in connection with or relating to this Agreement, together with all agreements, instruments and documents referred to therein or contemplated thereby.

“ Loans ” shall mean collectively, the Revolving Loan, the Term Loan and all extensions, renewals, amendments, refinancings, modifications, consolidations, conversions, and increases thereof or thereto.

“ Lock Box ” shall mean the United States post office lock box established pursuant to the terms of Section 2 of this Agreement.

“ Negative Pledge Agreement ” shall mean the negative pledge agreement to be executed by Borrower in accordance with Section 6 hereof.

“ Net Income ” shall mean the net income or loss of the Borrower for any period determined in accordance with GAAP, but excluding in any event:

(a)                                   any gains or losses on the sale or other disposition, not in the ordinary course of business, of investments or fixed or capital assets, and any taxes on excluded gains and any tax deductions or credits on account of any excluded losses; and

(b)                                  net earnings of any Person in which the Borrower has an ownership interest, unless such net earnings have actually been received by the Borrower in the form of cash distributions.

“ Notes ” shall mean collectively, the Revolving Note, the Term Note and all extensions, renewals, amendments, refinancings, modifications, consolidations and conversions thereof or thereto.

“ PBGC ” shall mean the Pension Benefit Guaranty Corporation and any Person succeeding to the functions thereof.

“ Permitted Liens ” shall mean:

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(a)                                   Liens and encumbrances in favor of the Lender;

(b)                                  Liens for taxes, assessments or other governmental charges incurred in the ordinary course of business and for which no interest, late charge or penalty is attaching or which is being contested in good faith by appropriate proceedings and, if requested by the Lender, bonded in an amount and manner satisfactory to the Lender;

(c)                                   Liens, not delinquent, created by statute in connection with worker’s compensation, unemployment insurance, social security and similar statutory obligations; and

(d)                                  Liens of mechanics, materialmen, carriers, warehousemen or other like statutory or common law liens securing obligations incurred in good faith in the ordinary course of business that are not yet due and payable.

(e)                                   The subordinate security interest in the Collateral granted by Borrower to Seller, which has been subordinated to Lender’s security interest in the Collateral pursuant to the terms of the Seller/Bank Intercreditor Agreement.

“ Person ” shall mean and include any individual, corporation (including, without limitation, any affiliate or subsidiary of Borrower), partnership, joint venture, limited liability company, limited liability partnership, sole proprietorship, association, trust, unincorporated association, joint stock company, government, institution, municipality, political subdivision or agency, or other entity of whatever nature.

“ Pledged Stock ” shall have the meaning ascribed to it in Section 6 hereof.

“ Prime Rate ” shall mean the rate of interest publicly announced by LaSalle National Bank from time to time as its “prime rate”, without regard to whether such announced “prime rate” is the lowest rate of interest then offered by the Lender to its borrowers.

“ Real Property ” shall mean, for purposes of all provisions of this Agreement relating to Hazardous Materials, all real property now or hereafter occupied, owned or controlled by the Borrower.

“ Reserve ” shall have the meaning ascribed to it in Section 2.7 hereof.

“ Reserve Elimination Date ” shall have the meaning ascribed to it in Section 2.7 hereof.

“ Revolving Loan ” shall mean the $2,200,000.00 revolving line of credit loan extended by the Lender to the Borrower under Section 2 of this Agreement, and any and all extensions, renewals, amendments, modifications, refinancings, conversions, consolidations and increases thereof or thereto.

“ Revolving Note ” shall mean the promissory note evidencing the Revolving Loan executed by Borrower in accordance with Section 2 hereof, and any and all extensions, renewals, amendments, refinancings, or modifications, conversions or consolidations thereof or thereto.

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“ Seller/Bank Intercreditor Agreement ” shall mean the intercreditor agreement of even date herewith between Seller and the Lender described in Section 6 hereof.

“ Seller Note ” shall mean the subordinated promissory note dated January 17, 1997 in the principal sum of $1,200,000.00 issued by Borrower to Seller in connection with the Acquisition.

“ Stock Pledge Agreements ” shall have the meaning ascribed to it in Section 6 hereof.

“ Security Agreement-Leased Equipment ” shall have the meaning ascribed to it in Section 6 hereof.

“ Subordinated Debt ” shall mean indebtedness of the Borrower to third parties (including, without limit, the indebtedness evidenced by the Seller Note and all payments due and to become due under the Equipment Lease) which has been subordinated to the Indebtedness pursuant to a subordination agreement in form and content satisfactory to the Lender.

“ Subsidiary ” shall mean any corporation (whether now existing or hereafter organized or acquired) in which more than fifty percent (50%) of the outstanding securities having ordinary voting power for the election of directors, as of any applicable date of determination, shall be owned directly, or indirectly through one or more Subsidiaries, by Borrower.

“ Tangible Net Worth ” shall mean, as of any applicable date of determination, an amount equal to (i) the net book value of all assets of Borrower (other than patents, patent rights, trademarks, trade names, franchises, copyrights, licenses, goodwill, and similar intangible assets) after all appropriate deductions in accordance with GAAP, including, without limitation, reserves for doubtful receivables, obsolescence, depreciation, and amortization, less (ii) all loans due from officers, directors, shareholders, employees and/or affiliates of Borrower, less (iii) prepaid expenses, less (iv) all Debt, other than Subordinated Debt.

“ Term Loan ” shall mean the term loan described in Section 3 hereof and all extensions, renewals, amendments, refinancings, modifications, and consolidations thereof or thereto.

“ Term Note ” shall mean the promissory note evidencing the Term Loan executed by Borrower in accordance with Section 3 hereof, and any and all extensions, renewals, amendments, refinancings, modifications or consolidations thereof or thereto.

“ Termination Date ” shall mean April 1, 1999, or such earlier date upon which the Revolving Note becomes due and payable.

“ UCC ” shall mean the Illinois Uniform Commercial Code, 810 ILCS 5\1-101 et.  seq., as amended.

1.2                                  Accounting Terms .  All accounting terms not specifically defined in this Agreement shall be construed in accordance with GAAP.

1.3                                  Other Terms .  All other terms contained in this Agreement which are not otherwise defined in this Section 1 or in any other section of this Agreement, shall, unless the

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context indicates otherwise, have the meanings provided for by the UCC to the extent the same are used or defined therein.

1.4                                  Singular and Plural .  Where the context herein requires, the singular number shall be deemed to include the plural, the masculine gender shall include the feminine and neuter genders, and vice versa.

SECTION 2.  REVOLVING LOAN.

2.1                                  Revolving Credit Commitment .  Subject to and upon the terms and conditions of this Agreement, the Lender agrees to makes loans to Borrower on a revolving basis in such amount as the Borrower shall request pursuant to Section 2.2 of this Agreement at any time from the date of this Agreement until the Termination Date, up to an aggregate principal amount outstanding at any time not to exceed the lesser of the Commitment Amount or the Borrowing Base, provided that each Disbursement Date under this Agreement must be a Business Day and provided that the principal amount of each advance under the Revolving Loan must be in the minimum amount of One Thousand and no/100 ($1,000) Dollars.

2.2                                  Borrowing Procedures .

2.2.1                         Notice .  The Borrower shall give written notice to the Lender not later than 2:00 p.m. on or before the Business Day on which the Borrower requests the Lender to make an advance under the Revolving Loan.

2.2.2                         Lender Obligations .  The Lender, in its reasonable discretion and upon its reasonable determination, that the conditions set forth in this Agreement have been duly satisfied, will make the amount set forth in the Borrower’s notice available to or upon the order of the Borrower in immediately available funds at the Lender’s principal office, on the date of the proposed borrowing (which shall be a Business Day), provided, however, that the Lender shall not be obligated if:

(a)                                   With respect to the initial disbursement under the Revolving Loan, any of the conditions precedent set forth in Section 6 hereof shall not have been satisfied, or

(b)                                  With respect to all other advances under the Revolving Loan:

(i)                                      Any Default or Event of Default has occurred and is continuing, or

(ii)                                   Any of the warranties or representations set forth in this Agreement shall not be true or correct on and as of such Disbursement Date, or

(iii)                                Such proposed advance under the Revolving Loan would cause the aggregate unpaid principal amount of the Revolving Loan outstanding under this Agreement to exceed the lesser of the Commitment Amount or the Borrowing Base on the Disbursement Date, or

(iv)                               The Disbursement Date is on or after the Termination Date.

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2.3                                  Revolving Note .  The Revolving Loan shall be evidenced by a revolving note, executed by the Borrower, dated the date of this Agreement, payable to the Lender on April 1, 1999, and in the principal sum of Two Million Two Hundred Thousand and 00/100 ($2,200,000.00) Dollars (the “Revolving Note”).  The date and amount of each advance under the Revolving Loan made by the Lender and of each repayment of principal thereon received by the Lender shall be recorded by the Lender in its records.  The aggregate unpaid principal amount so recorded by the Lender shall be rebuttable presumptive evidence as to the principal amount outstanding thereunder, provided , however , that the failure by the Lender so to record any such amount or any error in so recording any such amount shall not limit or otherwise affect the obligations of the Borrower under this Agreement or the Revolving Note to repay the principal amount of the-entire Revolving Loan together with all interest accrued or accruing thereon.

Interest on the Revolving Note shall be payable monthly, commencing on February 1, 1997 and continuing on the same day of each month thereafter.  Interest shall accrue on the unpaid principal balances of the Revolving Note calculated at a variable rate per annum equal to the Prime Rate plus one-half percent (.50%) per annum, such rate to change on the day or days the Prime Rate changes.  Interest after maturity of the Revolving Note or an Event of Default shall be calculated on the unpaid principal balances of the Revolving Note at the variable rate per annum equal to the Prime Rate plus three and one-half percent (3.5%) per annum, such rate to change on the day or days the Prime Rate changes.  Interest on the Revolving Note shall be calculated on the basis of a 360-day year for the actual number of days the principal is outstanding.

Lender will reduce the interest rate charged on the Revolving Note by one-half percent (.5%) to Prime floating if (i) at Borrower’s fiscal year ended December 31, 1997, Borrower’s EBIT is equal to or greater than $2,000,000, and (ii) no Event of Default shall then have occurred and be continuing hereunder and Borrower shall be in full compliance with all of its financial covenants made in Section 14.1 hereof.

In addition, a late charge equal to five percent (5%) of each late payment may be charged on any payment not received by the Lender within five (5) calendar days after the payment due date, but acceptance of payment of this charge shall not waive any Default or Event of Default.

Immediately upon demand by Lender, the Borrower shall pay to Lender an amount of money equal to the amount theretofore advanced by the Lender to the Borrower upon any Account that is no longer an Eligible Account, and the Lender shall apply such payment to and on account of the Revolving Loan.  The Borrower shall notify the Lender within a reasonable time after learning that an Account is no longer an Eligible Account, but in any event, not later than the date of the next request by the Borrower for an advance under the Revolving Loan.

Borrower covenants to Lender and agrees that if at any time the then unpaid principal balance of the Revolving Loan shall be in excess of the lesser of the (i) Commitment Amount and (ii) the Borrowing Base as then determined and computed, the Borrower shall immediately without notice or demand pay over the amount of the excess to the Lender as and for a mandatory prepayment on the Revolving Loan.

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If Borrower shall voluntarily terminate the Revolving Loan for any reason prior to January 17, 1998, Borrower promises to pay to Lender on the date of such termination, in addition to the entire outstanding principal balance of the Revolving Note and all accrued interest thereon, a prepayment premium in the amount of Twenty-Two Thousand ($22,000.00) Dollars.

2.4                                  Lock Box .  Borrower shall at its sole expense establish and maintain, so long as the Revolving Loan shall remain unpaid, a United States post office lock box (the “Lock Box”), to which the Lender shall have exclusive access, and to which the Borrower shall have no access.  Borrower expressly authorizes Lender, from time to time to remove all contents from the Lock Box, for disposition in accordance with this Agreement.  Borrower agrees to notify all Account Debtors and other parties obligated to it that all payments made on any Account, invoice, or other Collateral shall be remitted, for the credit of Borrower, to the Lock Box, and Borrower shall include a like statement on all invoices.  Borrower shall execute all documents, authorizations and other agreements necessary to establish the Lock Box, and Lender’s exclusive access thereto.

Any and all cash, checks, drafts and other instruments for the payment of money received by Borrower at any time, in full or partial payment of any of the Collateral shall forthwith, upon receipt, be transmitted to and delivered to Lender (properly endorsed, where required, so that such items may be collected by Lender).  Any such items received by Borrower shall not be commingled with any other of Borrower’s funds or property, but will be held separate and apart from Borrower’s own funds or property, and upon express trust for the benefit of Lender until delivery is made to Lender.

All items or amounts which are remitted to the Lock Box or otherwise delivered by or for the benefit of the Borrower to Lender on account of partial or full payment of, or any other amount payable with respect to, any of the Collateral shall, at Lender’s option:  (i) be applied to the payment of the Indebtedness, in such order of application as Lender may determine in its sole discretion, or (ii) shall be deposited to the credit of a non-interest bearing cash collateral account in the name of Lender for the benefit of Borrower, to be established by Borrower with Lender pursuant to this section, as security for payment of the Indebtedness.  Borrower shall have no right whatsoever to withdraw any funds so deposited.  Borrower further grants to Lender a first priority security interest in and lien on all funds on deposit in such account.  Borrower hereby irrevocably authorizes and directs Lender to endorse all items received for deposit to said cash collateral account, notwithstanding the inclusion on any such item of a restrictive notation, e.g., “paid in full”, “balance of account”, or other restriction.

2.5                                  Collection of Proceeds .  Borrower agrees to collect and enforce payment of all Accounts until Lender shall direct Borrower to the contrary and, from and after this direction, Borrower agrees to fully and promptly cooperate and assist Lender (or any other person designated by Lender) in the collection and enforcement of all Accounts.  Borrower shall not grant any extension of time for the payment of Accounts, shall not compromise, compound or settle the Accounts or any part thereof for less than the full amount thereof, shall not release, in whole or in part, any person liable for the payment of the Accounts or any part thereof, or allow any credit, discount or allowance whatsoever upon the Accounts or any part thereof, unless such

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activity shall be deemed to be in the ordinary course of business and shall not occasion or threaten a material adverse change in the financial condition, results of operation or business of the Borrower, without first obtaining the written consent of the Lender.

Borrower irrevocably authorizes Lender or any employee or agent of Lender to endorse the name of Borrower upon any checks or other items which are received in payment of any Accounts or for any Inventory, and to do any and all things necessary in order to reduce these items to money.

The Lender shall have no duty as to the collection or protection of Collateral or the proceeds thereof, nor as to the preservation of any related rights, beyond the use of reasonable care in the custody and preservation of Collateral in the possession of Lender.  Borrower agrees to take all steps necessary to preserve rights against prior parties with respect to Borrower’s property in the possession of Lender.

For the purpose of calculating interest on the Revolving Loan, Borrower understands that the Lender imposes a minimum two Business Days delay in crediting payments received by the Lender on Eligible Accounts or other Collateral against the Revolving Loan to allow time for collection and Borrower agrees that the Lender may, at Lender’s option, make such credits only when payments are actually collected by Lender in immediately available funds.  Any credit of payment by Lender prior to receipt by Lender of immediately available funds is conditional upon Lender’s receipt of those funds.

All remittances will be received by Lender subject to collection, and the Lender assumes no responsibility in connection therewith beyond the exercise of ordinary care and will not be liable for default, negligence or willful misconduct of any correspondent or for losses in transit.

Borrower agrees that the Lender shall not be liable for any loss or damage which Borrower suffers or may suffer as a result of the Lender’s processing of items or its exercise of any other rights or remedies under this Agreement, including, without limitation, indirect, special or consequential damages, loss of revenues or profits, or any claim, demand or action by any third party arising out of or in connection with the processing of items or the exercise of any other rights or remedies hereunder.  Borrower further agrees to indemnify and hold Lender harmless from and against all such third party claims, demands or actions, including, without limitation, litigation costs and reasonable attorneys’ fees.

2.6                                  Eligible Accounts .  Upon Borrower’s delivery to Lender of a Borrowing Base Certificate, Lender shall determine, in its reasonable discretion, which Accounts listed thereon are “Eligible Accounts”.  In making this determination, Lender will consider the following requirements:

(a)                                   The Account is not owing more than ninety (90) days after the date of the original invoice or other writing evidencing such Account;

(b)                                  it is not owing by an Account Debtor who has failed to pay twenty-five percent (25%) or more of the aggregate amount of its Accounts owing to Borrower within ninety (90) days after the date of the respective invoices or other writings evidencing such Accounts;

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(c)                                   it arises from the sale of goods and such goods have been shipped or delivered to the Account Debtor under such Account; or it arises from services rendered and such services have been performed;

(d)                                  it is evidenced by an invoice, dated not later than the date of shipment or performance, rendered to such Account Debtor or some other evidence of billing acceptable to Lender;

(e)                                   it is not evidenced by any note, trade acceptance, draft or other negotiable instrument or by any chattel paper, unless such note or other document or instrument previously has been endorsed and delivered by Borrower to Lender and is acceptable to Lender;

(f)                                     it is a valid, legally enforceable obligation of the Account Debtor thereunder, and is not subject to any offset, counterclaim or other defense on the part of such Account Debtor or to any claim on the part of such Account Debtor denying liability thereunder in whole or in part;

(g)                                  it is not subject to any sale of accounts, any rights of offset, assignment, lien or security interest whatsoever other than to Lender, and the subordinate security interest of Seller;

(h)                                  it is not owing by a parent, subsidiary, affiliate, officer, employee or partner of Borrower, nor by an Account Debtor which (i) does not maintain its chief executive office in the United States of America or Canada, (ii) is not organized under the laws of the United States of America, or any state thereof, or under the laws of any province in Canada, or (iii) is the government of any foreign country or sovereign state, or of any state, province, municipality or other instrumentality thereof;

(i)                                      it is not an Account owing by the United States of America or any state or political subdivision thereof, or by any department, agency, public body corporate or other instrumentality of any of the foregoing, unless all necessary steps are taken to comply with the Federal Assignment of Claims Act of 1940, as amended, or with any comparable state law, if applicable, and all other necessary steps are taken to perfect Lender’s security interest and collection rights in such Account.

(j)                                      it is not owing by an Account Debtor for which Borrower has received a notice of (i) the death of the Account Debtor or any partner of the Account Debtor, (ii) the dissolution, liquidation, termination of existence, insolvency or business failure of the Account Debtor, (iii) the appointment of a receiver for any part of the property of the Account Debtor, or (iv) an assignment for the benefit of creditors, the filing of a petition in bankruptcy, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against the Account Debtor;

(k)                                   it is not an account billed in advance, payable on delivery, for consigned goods, for guaranteed sales, for unbilled sales, for progress billings, payable at a future date in accordance with its terms, subject to a retainage or holdback by the Account Debtor or insured by a surety company;

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(1)                                   If the Account Debtor is located in either the State of New Jersey, the State of Minnesota, or the State of Indiana, Borrower has filed a Notice of Business Activities Report or comparable report with the applicable state authority for the then current year;

(m)                                it is not owing by any Account Debtor whose obligations Lender, acting in its sole discretion, shall have notified Borrower are not deemed to constitute Eligible Accounts.

For purposes of determining eligibility, should twenty percent (20%) or more of the Eligible Accounts be due and owing from any one Account Debtor at any time, then the excess of said twenty percent (20%) of such Accounts shall not be eligible, regardless of whether such Accounts otherwise satisfy the criteria for eligibility set forth above.

An Account which is at any time an Eligible Account, but which subsequently fails to meet any of the foregoing requirements, shall forthwith cease to be an Eligible Account.

2.7                                  Reserve/Reserve Elimination Date .  The borrowing availability under the Revolving Loan shall be reduced by a $50,000.00 reserve (the “Reserve”).  The Reserve shall be eliminated on the date the first annual $50,000.00 payment is made by Borrower to Regal-Beloit Corporation pursuant to that certain Settlement Agreement dated December 2, 1996 by and among Borrower, Regal-Beloit Corporation, Seller and the Guarantors (the “Reserve Elimination Date”).

Proceeds of the Revolving Loan and the Term Loan will be used solely for the purpose of providing financing for the Acquisition and working capital for the Borrower in the Borrower’s ordinary course of business.

2.8                                  Unused Facility Fee .  The Borrower will pay to Lender an unused facility fee of one-quarter percent (1/4%) on the unused portion of the Revolving Loan, which fee shall be paid monthly in arrears.

SECTION 3.  TERM LOAN.

3.1                                  Term Loan .  The Lender agrees to make the Borrower a secured term loan in the principal amount of Two Million Seven Hundred Thousand and no/100 ($2,700,000.00) Dollars (herein, the “Term Loan”).  The Term Loan shall be evidenced by a term note of even date herewith, executed by Borrower, in the principal sum of Two Million Seven Hundred Thousand and no/100 ($2,700,000.00) Dollars (the “Term Note”), payable to the order of the Lender in twenty-three (23) successive monthly installments of principal in the sum of $32,143.00 each, plus interest, commencing March 1, 1997, and payable on the first (1st) day of each month thereafter, followed by a final balloon payment of the entire unpaid principal balance and accrued interest due on February 1, 1999.  Interest shall be payable monthly on the unpaid principal balance of the Term Note (concurrently with each principal payment), calculated at a per annum rate equal to the Prime Rate plus one-half percent (1/2%) per annum, and after default or maturity, at a rate per annum equal to the Prime Rate plus three and one-half percent (3-1/2%) per annum.  In addition, a late charge equal to five percent (5%) of each late payment may be charged on any payment not received by the Lender within five (5) calendar days after the payment due date, but acceptance of payment of this charge shall not waive any Default or Event

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of Default.  Interest on the Term Note shall be calculated on the basis of a 360-day year for the actual number of days the principal is outstanding.

Lender will reduce the interest rate charged on the Term Note by one-half percent (.5%) to Prime floating if (i) at Borrower’s fiscal year ended December 31, 1997, Borrower’s EBIT is equal to or greater than $2,000,000, and (ii) no Event of Default shall then have occurred and be continuing hereunder and Borrower shall be in full compliance with all of its financial covenants made in Section 14.1 hereof.

If Borrower shall prepay the Term Loan for any reason prior to January 17, 1998, Borrower promises to pay to Lender on the date of such prepayment, in addition to the entire outstanding principal balance of the Term Note and all accrued interest thereon, a prepayment premium in the amount of Twenty-Seven Thousand ($27,000.00) Dollars.

SECTION 4.  COLLATERAL; LOANS CROSS-DEFAULTED AND CROSS-COLLATERALIZED.

All Loans and other Indebtedness shall be secured by Borrower’s grant to the Lender of a first priority security interest in and to the Collateral (except that Lender shall maintain a second priority security interest in the Pledged Stock as herein provided).

Borrower acknowledges and agrees that all Loans shall be cross-defaulted, meaning that a default under any of the Loans shall constitute a default under all Loans, and (b) all Loans shall be cross-collateralized, meaning that the Collateral, and all other collateral in which the Lender is granted a security interest in connection with the Loans, shall secure all of the Loans, and all other Indebtedness.

SECTION 5.  GUARANTORS.

The payment and performance of all indebtedness, liabilities and obligations of the Borrower to the Lender, whether now existing or hereafter created or arising, including, without limitation, the Loans (and all renewals, extensions, modifications, amendments, refinancings and consolidations thereof or thereto), shall be jointly and severally unconditionally guaranteed by Guarantors, pursuant to continuing guaranties, in form and substance satisfactory to the Lender.

The Guaranty of J. Cameron Drecoll shall be unlimited.  The Guaranties of Patrick Rosmonowski and Dennis Palmer shall each be limited to the aggregate sum of $50,000.00 each.

SECTION 6.  CONDITIONS PRECEDENT TO INITIAL LOAN DISBURSEMENT.

The obligation of the Lender to make the Loans to Borrower is subject to the fulfillment of each and every one of the following conditions precedent:

(a)                                   The Lender shall have received on or before the day of the initial disbursement of the Loans, each of the following, in form, substance and execution satisfactory to the Lender and

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its counsel:  this Agreement, the Notes, Guaranties, UCC Financing Statements, Negative Pledge Agreement, Stock Pledge Agreement, Collateral Assignment of Life Insurance, lockbox agreement, Borrower’s opinion of counsel, consent of shareholders, authority to procure loans, authorization certificate, insurance certificates, projected opening day balance sheet prepared on a compiled basis (prepared by a firm of independent certified public accountants acceptable to Lender), cash flow projections, solvency affidavit, and such other documents, instruments, certificates, affidavits, debt subordination, landlord’s waiver certificate(s), supporting documents, approvals, evidence of insurance coverages, payoff letters, and searches of public records required by the Lender in connection with the Loans.

(b)                                  The Lender shall have received from Seller on or before the day of the initial disbursement of the Loans (i) the original executed Equipment Lease in pledge, a security agreement and assignment of lease (the “Security Agreement-Leased Equipment”) and UCC financing statements, each in such form and content satisfactory to the Lender, and sufficient to grant to the Lender a first priority security interest in the Equipment Lease and Leased Equipment, (ii) a certified copy of the Seller Note, in such form and content satisfactory to the Lender, which Seller Note shall contain a legend on the face page thereof disclosing that the indebtedness evidenced thereby has been subordinated to all indebtedness owed by the Borrower to the Lender pursuant to the intercreditor agreement hereafter described, (iii) an intercreditor agreement executed by Seller, in form and content satisfactory to the Lender, whereby Seller shall have subordinated its security interest in the Collateral to the Lender’s security interest therein, and its right to payment of the Seller Note and the Equipment Lease, to the Lender’s right to receive payment of the Indebtedness (the “Seller/Bank Intercreditor Agreement”); and (iv) copies of the final security agreement and UCC financing statement to be executed by Borrower in favor of Seller (which UCC financing statement shall contain a legend on the face page thereof, in form acceptable to the Lender, disclosing that the Seller’s security interest in the collateral described therein is subordinate to the Lender’s security interest in such collateral pursuant to the Seller/Bank Intercreditor Agreement.

(c)                                   The Lender shall have received on or before the day of the initial disbursement of the Loans copies of all other documents to be delivered by Borrower and Seller or others in connection with the Acquisition, including, without limit, a complete copy of the asset purchase agreement, bill of sale, consulting and employment agreements, leases or subleases of leased premises, and all other documents and instruments executed in connection with the Agreement, and the Lender shall have approved the terms and conditions thereof, in its sole discretion.

(d)                                  Borrower shall have furnished to the Lender, in form, content and amount satisfactory to the Lender, a negative pledge agreement (the “Negative Pledge Agreement”), agreeing not to mortgage, encumber or sell the commercial real property commonly known as 1310 S. 47th Avenue, Cicero, Illinois, being acquired from Seller.

(e)                                   Lender shall have received such valuations, appraisals and certifications as it may require to satisfy itself as to the value of the Collateral and the Leased Equipment and the financial condition of the Borrower and the Guarantors, each satisfactory to the Lender, in its sole discretion.

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(f)                                     Borrower shall have complied with all conditions set forth in the Lender Commitment, and no Event of Default shall have occurred thereunder.

(g)                                  The Borrower shall be in full compliance with all of the terms and conditions of this Agreement and the other Loan Documents, and the Borrower and other obligors shall be in full compliance with all of the terms and conditions of the Collateral Documents.

(h)                                  The Lender shall be satisfied with the corporate and legal structure and capitalization of Borrower, including the terms and conditions of its articles of incorporation and bylaws.

(i)                                      There shall have been no material adverse change in the business of Borrower or the financial condition of Borrower or any Guarantor from the most recent financial statements submitted by each of them to the Lender.

(j)                                      The Lender shall be satisfied with the corporate and legal structure and capitalization of Seller, including the terms and conditions of its articles of incorporation and bylaws.

(k)                                   The representations and warranties of Borrower contained in this Agreement and in all other Loan Documents shall be true and correct on the day of the initial loan disbursement.

(1)                                   The representations and warranties of Seller contained in the security agreement executed by it shall be true and correct on the day of the initial loan disbursement, and no event of default shall have occurred under such agreement.

(m)                                There shall exist no Event of Default as defined in Section 15 hereof and no condition, event or act which with notice or lapse of time, or both, would constitute an Event of Default.

(n)                                  All actions, proceedings, instruments and documents required to carry out the transactions contemplated by this Agreement or other Loan Documents and all other related legal matters shall have been satisfactory to and approved by legal counsel for the Lender, and said counsel shall have been furnished with such certified copies of actions and proceedings and such other instruments and documents as they shall have reasonably requested.

(o)                                  The Lender shall have been provided with evidence of all requisite governmental and third party approvals required for Borrower, Borrower’s conduct of business and the Real Property.

(p)                                  The Lender shall have been furnished with an original life insurance policy on the life of J. Cameron Drecoll in the sum of $1,000,000.00, together with an executed collateral assignment of such policy by Borrower to the Lender, on the Lender’s form or a form acceptable to Lender (“Collateral Assignment of Life Insurance”), acknowledged by the life insurer, and evidence of the payment of at least one year’s premium.  Borrower covenants to provide the Lender annually with evidence of payment of the then current premium for such insurance.

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(q)                                  The Guarantors shall have executed and delivered to the Lender security agreements (the “Stock Pledge Agreements”), granting the Lender a second priority security interest in all shares of stock of the Borrower (the “Pledged Stock”), subordinate only to the first priority security interest therein being granted to the Seller.  In addition, Guarantors shall execute and deliver to the Lender UCC financing statements and such other documents required by the Lender to perfect its second priority security interest in the Pledged Stock.

(r)                                     The Lender shall receive evidence that Borrower has received a minimum cash infusion of $500,000.00, injected by shareholders of Borrower in accordance with the terms of the Bank Commitment.

(s)                                   Borrower must have a minimum of $500,000.00 of borrowing availability under the Revolving Loan on the date hereof, in accordance with the terms of the Bank Commitment.

(t)                                     On or prior to the initial loan disbursement, Borrower shall have paid all accrued fees and expenses of the Lender.

SECTION 7.  SECURITY INTEREST.

7.1                                  Grant of Security Interest .  To secure the prompt and complete payment, observance and performance of the Indebtedness, Borrower hereby gives, grants and pledges to the Lender a continuing security interest in and to all of the Borrower’s right, title and interest in and to the following property and interests in property, whether now owned or existing or hereafter acquired or arising and wheresoever located:

ACCOUNTS:  All present and future accounts, accounts receivable, and other rights of the Borrower to payment for goods sold or leased or for services rendered (except those evidenced by instruments or chattel paper), whether now existing or hereafter arising and wherever arising, and whether or not they have been earned by performance (collectively, “Accounts”);

INVENTORY:  All inventory and goods now owned or hereafter acquired by the Borrower (wherever located, whether in the possession of the Borrower or of a bailee or other person for sale, storage, transit, processing, use or otherwise and whether consisting of whole goods, spare parts, components, supplies, materials, or consigned, returned, repossessed or reconsigned goods) which are held for sale or lease or to be furnished (or have been furnished) under any contract of service or which are raw materials, work in process or materials used or consumed in the Borrower’s business (collectively, “Inventory”);

EQUIPMENT:  All machinery, all manufacturing, distribution, selling, data processing and office equipment, all furniture, furnishings, appliances, fixtures and trade fixtures, tools, tooling, molds, dies, vehicles, vessels, aircraft and all other goods of every type and description (other than Inventory), in each instance whether now owned or hereafter acquired by the Borrower and wherever located (collectively, “Equipment”);

GENERAL INTANGIBLES:  All rights, interests, choses in action, causes of action, claims and other intangible property of the Borrower of every kind and nature (other than Accounts), in each instance whether now owned or hereafter acquired by the Borrower and

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however and whenever arising, including, without limitation, all corporate and other business records; all loans and other obligations receivable and all rights, remedies and security with respect thereto, all inventions, designs, all trade processes and trade secrets, computer programs, software, printouts and other computer materials, goodwill, corporate name, trade names, registration, copyrights, royalties, licenses, franchises, customer lists, credit files, correspondence, and advertising materials; all customer and supplier contracts, firm sale orders, rights under license and franchise agreements, and all other contracts and contract rights; all interests in partnerships and joint ventures; all tax refunds and tax refund claims; all right, title and interest under leases, subleases, licenses and concessions and other agreements relating to real or personal property; all payments due or made to Borrower in connection with any reacquisition, confiscation, condemnation, seizure or forfeiture of any property by any person or governmental authority; all deposit accounts (general or special) with any bank or other financial institution, including, without limitation, any deposits or other sums at any time credited by or due to the Borrower from Lender; all credits with and other claims against carriers and shippers; all rights to indemnification; all patents, trademarks, patent applications and trademark applications, and all other intellectual property not described herein, all reversionary interests in pension and profit sharing plans and reversionary, beneficial and residual interest in trusts; all proceeds of insurance of which the Borrower is the beneficiary; and all letters of credits, guaranties, liens, security interests and other security held by or granted to the Borrower; all return insurance premiums, and all other intangible property, whether or not similar to the foregoing (all of the foregoing collectively, “General Intangibles”);

CHATTEL PAPER, INSTRUMENTS AND DOCUMENTS:  All chattel paper, all leases, all instruments, all notes and debt instruments and all payments thereunder and instruments and other property from time to time delivered in respect thereof or in exchange therefor and all of the Borrower’s right, title and interest and all of the Borrower’s rights, remedies, collateral security, liens in, and in respect of any of the foregoing, and all bills of lading, warehouse receipts and other documents of title and all other documents, in each instance whether now owned or hereafter acquired by the Borrower;

OTHER PROPERTY:  All property and interest in property now owned or hereafter acquired by the Borrower which now may be owned or hereafter may come into the possession, custody or control of the Lender in any way or for any purpose (whether for safekeeping, deposit, custody, pledge, transmission, collection or otherwise); and all rights and interests of the Borrower, now existing or hereafter arising and however and wherever arising, in respect of any and all (i) notes, drafts, letters of credit, stocks, bonds, and debt and equity securities, whether or not certificated.  and warrants, options, puts and calls and other rights to acquire or otherwise relating to the same, and all other investment property now owned or hereafter acquired by Borrower; (ii) money; (iii) proceeds of loans, including, without limitation, the Loans; and (iv) insurance proceeds and books and records relating to any of the property covered by this Agreement; together, in each instance, with all accessions and additions thereto, substitutions therefor, and all renewals, replacements, proceeds and products thereof.

7.2                                  Authorization .  The Borrower hereby authorizes the Lender to set-off and retain, without any necessity on the Lender’s part to resort to other security or sources of reimbursement

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for the Indebtedness, at any time following the occurrence and during the continuance of any Event of Default, and without further notice to Borrower (such notice being expressly waived), any of the deposits referred to in Section 7.1 or elsewhere in this Agreement (whether general, or special, time or demand, provisional or final) or other sums or property held by Lender, for application against any Indebtedness, irrespective of whether any demand has been made or whether such Indebtedness is mature.  The Lender will promptly notify Borrower of the Lender’s receipt of such funds or other property for application against the Indebtedness, but failure to do so will not affect the validity or enforceability thereof.

7.3                                  Attachment and Continuity of Security Interest .  The pledge of, lien upon, and security interest granted and hereby created in the Collateral shall extend and attach to the entire Collateral which is presently