-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HbYwQCxuJ+1YsVnPln/Gzkea4OIM8SYGD4Hsli/ag+fWi6j//pHwIophawaSUEAh n78AfLrVKaUaLzgem9fiBg== 0000912057-96-014560.txt : 19960716 0000912057-96-014560.hdr.sgml : 19960716 ACCESSION NUMBER: 0000912057-96-014560 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960601 FILED AS OF DATE: 19960715 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEI INC CENTRAL INDEX KEY: 0000351298 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 410944876 STATE OF INCORPORATION: MN FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-10078 FILM NUMBER: 96594583 BUSINESS ADDRESS: STREET 1: 1495 STEIGER LAKE LN STREET 2: P O BOX 5000 CITY: VICTORIA STATE: MN ZIP: 55386 BUSINESS PHONE: 6124432500 MAIL ADDRESS: STREET 1: P O BOX 5000 STREET 2: 1495 STEIGER LAKE LANE CITY: VICTORIA STATE: MN ZIP: 55386 10QSB 1 10QSB SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB [X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 1, 1996 ("Third Quarter, Fiscal 1996") or [ ] Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ______________ to _______________ Commission File Number 0-10078 ------------------------------ HEI, INC. --------- (Exact name of small business issuer as specified in its charter) Minnesota 41-0944876 --------- ---------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) PO Box 5000, 1495 Steiger Lake Lane, Victoria, MN 55386 ------------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Issuer's Telephone number, including area code: (612) 443-2500 -------------- None ---- Former name, former address and former fiscal year, if changed since last report. Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ 4,030,427 Common Shares, par value $0.05, were outstanding as of June 1, 1996. This Form 10-QSB consists of 11 pages. 2 Table of Contents HEI, Inc. - ---------------------------------------------------------------------------- Part I - Financial Information Item 1. Financial Statements Balance Sheet................................... 3 Statement of Operations......................... 4 Statement of Cash Flows......................... 5 Notes to Financial Statements................... 6 - 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations... 8 - 9 Part II - Other Information Item 6. Exhibits and Reports on Form 8-K................ 10 Signatures................................................ 11 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS 3 HEI, INC. BALANCE SHEET (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - ------------------------------------------------------------------------------- June 1, 1996 August 31, 1995 ------------ --------------- ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 1,218 $ 1,438 Short-term investments 4,973 3,820 ------- ------- 6,191 5,258 Accounts receivable, net 1,999 2,525 Inventories 2,415 1,851 Other, principally deferred tax assets 388 349 - ------------------------------------------------------------------------------- Total current assets 10,993 9,983 - ------------------------------------------------------------------------------- Property and equipment: Land 216 184 Building and improvements 3,061 1,398 Fixtures and equipment 7,335 5,475 Accumulated depreciation and amortization (4,802) (4,183) - ------------------------------------------------------------------------------- Net property and equipment 5,810 2,874 Restricted cash 3,211 - Deferred financing costs 102 - - ------------------------------------------------------------------------------- Total assets $20,116 $12,857 - ------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 303 $ - Accounts payable 484 385 Accrued liabilities 1,198 1,043 Income taxes payable 123 175 - ------------------------------------------------------------------------------- Total current liabilities 2,108 1,603 - ------------------------------------------------------------------------------- Long-term debt 5,322 - Deferred tax liability 272 272 - ------------------------------------------------------------------------------- Shareholders' equity: Undesignated stock; 5,000,000 shares authorized, none issued Common stock, $.05 par; 10,000,000 shares authorized; 4,030,427 and 3,791,597 shares issued and outstanding 202 190 Paid-in capital 6,819 6,183 Retained earnings 5,393 4,609 - ------------------------------------------------------------------------------- Total shareholders' equity 12,414 10,982 - ------------------------------------------------------------------------------- Total liabilities and shareholders' equity $20,116 $12,857 - ------------------------------------------------------------------------------- See accompanying notes to unaudited financial statements.
HEI, INC. STATEMENT OF OPERATIONS (UNAUDITED) 4 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - ---------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended June 1, 1996 May 27, 1995 June 1, 1996 May 27, 1995 - ---------------------------------------------------------------------------------------- Net sales $ 4,656 $ 6,134 $ 14,283 $ 18,005 Cost of sales 3,563 4,806 10,885 13,026 - ---------------------------------------------------------------------------------------- Gross profit 1,093 1,328 3,398 4,979 - ---------------------------------------------------------------------------------------- Operating expenses: Selling, general and administrative 578 608 1,736 1,842 Research, development and engineering 231 194 629 578 - ---------------------------------------------------------------------------------------- Operating income 284 526 1,033 2,559 - --------------------------------------------------------------------------------------- Other income, net (58) (69) (211) (165) - ---------------------------------------------------------------------------------------- Income before income taxes 342 595 1,244 2,724 - ---------------------------------------------------------------------------------------- Income taxes 124 231 460 998 - ---------------------------------------------------------------------------------------- Net income $ 218 $ 364 $ 784 $ 1,726 - ---------------------------------------------------------------------------------------- Net income per common share $ .05 $ .09 $ .19 $ .44 - ---------------------------------------------------------------------------------------- Weighted average number of common and common equivalent shares outstanding 4,149,099 3,904,768 4,073,187 3,891,215 - ----------------------------------------------------------------------------------------
See accompanying notes to unaudited financial statements. HEI, INC. STATEMENT OF CASH FLOWS (UNAUDITED) 5 (DOLLARS IN THOUSANDS) Nine months ended June 1, 1996 May 27, 1995 - ----------------------------------------------------------------------------- CASH FLOW PROVIDED BY OPERATING ACTIVITIES: Net income $ 784 $1,726 Depreciation and amortization 620 565 - ----------------------------------------------------------------------------- CHANGES IN CURRENT OPERATING ITEMS: Accounts receivable 526 530 Inventories (564) (207) Other current assets (39) 13 Accounts payable 99 219 Accrued liabilities 155 117 Income taxes payable (52) (48) - ----------------------------------------------------------------------------- NET CASH FLOW PROVIDED BY OPERATING ACTIVITIES 1,529 2,915 - ----------------------------------------------------------------------------- CASH FLOW PROVIDED BY (USED FOR) INVESTING ACTIVITIES: Purchase of short-term investments (4,313) (4,817) Maturity of short-term investments 3,160 2,296 Additions to property and equipment (3,556) (559) Increase in restricted cash (3,211) - Increase in deferred financing costs (102) - - ----------------------------------------------------------------------------- NET CASH FLOW USED FOR INVESTING ACTIVITIES (8,022) (3,080) - ----------------------------------------------------------------------------- CASH FLOW PROVIDED BY (USED FOR) FINANCING ACTIVITIES: Proceeds from long-term debt 5,625 - Principal payments for obligations under capital leases - (42) Issuance of common shares 648 221 - ----------------------------------------------------------------------------- NET CASH FLOW PROVIDED BY FINANCING ACTIVITIES 6,273 179 - ----------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (220) 14 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,438 1,579 - ----------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $1,218 $1,593 - ----------------------------------------------------------------------------- See accompanying notes to unaudited financial statements. 6 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) HEI,INC. - -------------------------------------------------------------------------------- (1) BASIS OF FINANCIAL STATEMENT PRESENTATION The unaudited financial statements have been prepared by the Company, under the rules and regulations of the Securities and Exchange Commission. The accompanying financial statements contain all normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of such financial statements. Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted under such rules and regulations although the Company believes that the disclosures are adequate to make the information presented not misleading. The year-end balance sheet data were derived from audited financial statements, but do not include all disclosures required by generally accepted accounting principles. These unaudited financial statements should be read in conjunction with the financial statements and notes included in the Company's Annual Report to Shareholders on Form 10-KSB for the year ended August 31, 1995. Interim results of operations for the three and nine month periods ended June 1, 1996 may not necessarily be indicative of the results to be expected for the full year. (2) INVENTORIES Inventories are stated at the lower of cost or market and include materials, labor and overhead costs. The first-in, first-out cost method is used in valuing inventories. Inventories consist of the following: (Dollars in thousands) June 1, 1996 August 31, 1995 ------------ ----------------- (Unaudited) Purchased parts $1,897 $1,670 Work in process 1,254 907 Finished goods 219 233 Allowance for excess or obsolete stock (955) (959) ------ ------ $2,415 $1,851 ------ ------ ------ ------ 7 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - ----------------------------------------- (3) FINANCING ARRANGEMENTS In April 1996, the Company received proceeds of $5,625,000 from the issuance of industrial development revenue bonds. Of these funds, approximately $1,500,000 will be or has been used for the construction of the new addition to the Company's manufacturing facility, and the remainder will be used for equipment purchases. The bonds related to the facility expansion require annual principal payments of $95,000 on April 1 of each year through 2011. The bonds related to the equipment require payments over seven years from the date of purchase of the equipment through April 1, 2006. The bonds bear interest at a rate which varies weekly, and is limited to a maximum rate of 10%. The interest rate at June 1, 1996 was approximately 4%. A revolving commitment fee is paid annually to the bank at a rate of 1% of the average daily unused revolving commitment. The agreement contains certain restrictive covenants including limitations on other borrowings and maintenance of specified financial levels and ratios for net income, tangible net worth, debt to tangible net worth, cash flow and indebtedness. The bonds are collateralized by two irrevocable letters of credit and property and equipment. Restricted cash on the balance sheet represents advances under the bond held by the bond trustee in an interest bearing account and will be released to the Company over the next three years for construction and equipment purchases. Also in April 1996, the Company extended the due date of its $3,000,000 revolving line of credit to April 1998. At June 1, 1996 there were no borrowings outstanding under the line of credit. Any borrowings under this agreement would be collateralized by accounts receivable. The agreement contains certain restrictive covenants including limitations on other borrowings and maintenance of specified financial levels and ratios for net income, tangible net worth, debt to tangible net worth and cash flow. Borrowings are limited to the lesser of $3,000,000 or the borrowing base, which is 80% of eligible accounts receivable. Interest on the borrowings is, based at the Company's option, on the lender's prime rate of interest or at 2% above the lender's LIBOR rate. The prime rate of interest was 8.25% at June 1, 1996. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 8 AND RESULTS OF OPERATIONS HEI, INC. - ------------------------------------------------------------------------------- FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCESA The Company's net cash flow provided by operating activities was $1,529,000 for the nine months ended June 1, 1996. This included net income of $784,000, depreciation and amortization of $620,000, and a net decrease of $125,000 in current operating items for the first nine months of fiscal 1996. The decrease in current operating items principally included decreased accounts receivable of $526,000 and increased accrued liabilities of $155,000, partially offset by increased inventories of $564,000. The inventory increase is primarily due to increased purchased parts and work in process for customer scheduled build requirements. Accounts receivable average days outstanding was 44 days at June 1, 1996 compared to 43 days a year ago. Inventory turns were 5.6 turns for the third quarter of fiscal 1996 compared to 9.6 turns for the same period a year ago. The reduced inventory turns are primarily due to lower shipments and increased inventory to meet customer scheduled build requirements. Capital expenditures for the nine months ended June 1, 1996 were $3,556,000, primarily for the purchase of production equipment and the construction of a new addition to the Company's facility in Victoria, Minnesota. The new addition, completed in June 1996, more than doubled the manufacturing floor space of the Company's microelectronics fabrication facility. In connection with the construction, the Company has also been acquiring and integrating sophisticated new process equipment for the disk drive and other high volume continuous flow programs to be housed in the expanded space. During the remainder of 1996, the Company intends to spend approximately $800,000 to complete the expansion, make additional manufacturing facility improvements, and purchase capital equipment, all of which are intended to increase the Company's manufacturing capacity in order to meet anticipated requirements for continued revenue growth. To finance the Company's expansion and its equipment needs over the next three years, in April 1996, the Company obtained $5,625,000 from the proceeds of industrial development revenue bonds issued by the City of Victoria, Minnesota. Of these funds, approximately $1.5 million dollars will be or has been used for the construction of the new addition and the remainder will be used for equipment purchases over the next three years. The portion used for construction of the new facility will be repaid over 15 years. The portion used to purchase equipment will be repaid over seven years from the date of purchase of the related equipment. Repayment of the bonds is collateralized by two letters of credit and property and equipment of the Company. The agreement contains certain restrictive covenants including limitations on other borrowings and maintenance of specified financial levels and ratios for net income, tangible net worth, debt to tangible net worth, cash flow and indebtedness. The Company will pay an annual fee of 1% on the principal balance of the letters of credit. The interest rate on the bonds is variable weekly, not to exceed 10% per annum. The interest rate at June 1, 1996 was approximately 4%. Proceeds from the bond issue are being held by a trustee in an interest bearing account for payment to the Company over the next three years as funds are used for construction or equipment purchases. As of June 1, 1996, the Company had drawn approximately $2,414,000 of bond proceeds to cover costs previously incurred in connection with the expansion. During April 1996, the Company renewed its $3 million dollar revolving line of credit with a commercial bank. Borrowings under this agreement are collateralized by accounts receivable. The agreement contains certain restrictive covenants including limitations on other borrowings and maintenance of specified financial levels and ratios for net income, tangible net worth, debt to tangible net worth and cash flow. Borrowings are limited to the lesser of $3,000,000 or the borrowing base, which is 80% of eligible accounts receivable. Interest on the borrowings is, based on the Company's option, at the lender's prime rate of interest or 2% above the lender's LIBOR rate. This line of credit expires in April 1998. As of June 1, 1996, there were no borrowings under this line of credit. 9 REVIEW OF OPERATIONS NET SALES 1996 vs. 1995: HEI, Inc's net sales for the three and nine month periods ended June 1, 1996 decreased 24% and 21%, respectively, compared to the same periods a year ago. Microelectronic sales decreased 24% and 22%, respectively, from the same three and nine month periods last year as a result of reduced shipments in the high density disk drive business. However, the reduction in disk drive business shipments was partially offset by increased shipments to medical and hearing aid accounts. As previously reported, shipments to a new disk drive account are expected to increase as that program enters production volumes. In the fourth quarter of fiscal 1996, the major new disk drive customer is expected to absorb much of the capacity made available after the previous largest account model phased out. GROSS PROFIT 1996 vs. 1995: For the three and nine month periods ended June 1, 1996, gross profit decreased $235,000, or 18%, and $1,581,000, or 32%, respectively, from the same periods last year. The gross profit rate increased to 23% from 22% for the three month period and decreased to 24% from 28% for the nine month period ended June 1, 1996 versus the same periods last year. The gross profit rate decrease for the nine month period is primarily due to the effect of reduced volumes on manufacturing fixed costs, as well as the effect of lower margins on new business as the product mix evolves to a larger percentage of new programs bid under increasing price competition. OPERATING EXPENSES 1996 vs. 1995: Operating expenses for the three and nine month periods ended June 1, 1996 were flat compared to last year's comparable periods. Operating expenses were 17% of net sales for the three and nine month periods this year as compared to 13% for the three and nine month periods last year. The increase in the percentage of operating expenses to net sales is primarily due to the effect of reduced volumes on fixed expenses. INCOME TAXES During each quarter of fiscal 1996, the Company is recording income tax expense based on the expected effective rate for the full year. The expected effective income tax rate for fiscal 1996 is approximately 37%, the same rate as fiscal 1995. Income tax expense for the three month and nine month periods of fiscal 1996 was $124,000 and $460,000, respectively, as compared to $231,000 and $998,000, respectively, for the same periods a year ago. NET INCOME 1996 vs. 1995: The Company had net income of $218,000 for the third quarter of fiscal 1996 compared to $364,000 for the same period a year ago. The Company had net income of $784,000 for the nine months ended June 1, 1996 compared to $1,726,000 for the same period a year ago. The decrease in net income principally was the result of reduced sales and reduced operating income. 10 PART II - OTHER INFORMATION - ------------------------------------------------------------------------------- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits 4.1a Credit Agreement with Norwest Bank Minnesota, N.A. dated April 1, 1996. 4.1b Current Note and Security Agreement with Norwest Bank Minnesota, N.A. dated April 1, 1996. 4.2a Reimbursement Agreement by and between HEI, Inc. and Norwest Bank Minnesota, National Association dated as of April 1, 1996. 4.2b Mortgage Security Agreement Fixture Financing Statement and Assignment of Leases and Rents by HEI, Inc. as Mortgagor to Norwest Bank Minnesota, National Association as Mortgagee dated April 1, 1996. 4.2c Security Agreement by HEI, Inc. in favor of Norwest Bank Minnesota, National Association dated April 1, 1996. 27 Financial Data Schedule b) Reports on Form 8-K No Reports on Form 8-K were filed during the quarter ended June 1, 1996. 11 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HEI, INC. (Registrant) Date: JULY 10, 1996 /s/ Jerald H. Mortenson ------------------------- ------------------------- Jerald H. Mortenson Vice President of Finance and Administration, Chief Financial Officer and Treasurer (a duly authorized officer) EX-4.1A 2 EXHIBIT 4.1A CREDIT AGREEMENT Exhibit 4.1a THIS CREDIT AGREEMENT is dated as of the ___ day of April, 1996, and is by and between HEI, INC., a Minnesota corporation with offices located in Victoria, Minnesota (the "Borrower"), and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking association with offices located in Wayzata, Minnesota (the "Bank"). RECITALS: WHEREAS, the Borrower has requested the Lender to extend a revolving credit line in the principal amount of THREE MILLION AND NO/100 DOLLARS ($3,000,000.00) (the "Credit") for working capital purposes; and, WHEREAS, the Bank is willing to make the Credit available to the Borrower subject to the provisions of this Credit Agreement; NOW, THEREFORE, in consideration of the premises and of the mutual agreements herein, the parties agree as follows: SECTION 1 DEFINITIONS 1.1 In addition to those terms defined in the above recitals, as used herein: "Acceptable Accounts Receivable" shall mean Borrower's accounts receivable which are: (i) less than ninety (90) days in age; (ii) not part of an account, ten percent (10.0%) or more of which is ninety (90) days past due; (iii) not subject to offset or dispute; (iv) not due from the U.S. Government, foreign entities (not supported by letters of credit), Subsidiaries or affiliates of the Borrower; and (v) not representing booked but unfilled orders. NEED TO ADD FOREIGN ACCOUNTS AS REFLECTED ON EXHIBIT A ATTACHED. "Agreement" shall mean this Credit Agreement and all amendments and supplements hereto which may from time to time become effective hereafter in accordance with the terms hereof. "Banking Day" shall mean a day on which banks are generally open for business in Wayzata, Minnesota. "Base Rate" shall mean the "base" or "prime" rate of interest as announced by Norwest Bank Minnesota, National Association, at its principal office located in Minneapolis, Minnesota, as in effect from time to time. "Borrowed Money" shall mean funds obtained by incurring contractual indebtedness and shall not include trade accounts payable or money borrowed from the Bank. "Borrowing Base" shall mean 80% of Acceptable Accounts Receivable. NEED TO ADD 65% OF ACCEPTABLE FOREIGN AS PER EXHIBIT A. "Borrowing Base Certificate" shall mean a schedule of Borrower's accounts receivable and Acceptable Accounts Receivable, which certificate is prepared and furnished to Bank pursuant to Sections 2.1 and 3.2(C), and which is executed by an authorized officer of Borrower. "Closing Date" shall mean the date on which funds are advanced under the Credit. "Credit" shall mean the conditional revolving credit line established hereby, which shall not in any event exceed the aggregate principal amount of THREE MILLION AND NO/100 DOLLARS ($3,000,000.00) outstanding at any one time. "Current Note" shall mean the promissory note of the Borrower substantially in the form of attached Exhibit B, evidencing borrowings under Section 2.1 hereof. "Events of Default" shall mean any and all events of default described in Section 8 hereof. "Indebtedness" shall mean, as to the Borrower, or any Subsidiary, all items of indebtedness, obligation or liability, whether matured or unmatured, liquidated or unliquidated, direct or contingent, joint or several. "Interest Period" shall mean, relative to any LIBOR Rate election, the period which shall begin on (and include) the date on which such election is effective or continued as and, unless the maturity of the Note is accelerated, shall end on (but exclude) the day which is 30, 60 or 90 days thereafter, provided, however, that: A. If such Interest Period would otherwise end on a day which is not a Banking Day, such Interest Period shall end on the next following business day; or B. The Borrower may not select, and there shall not be applicable, any Interest Period that would end later than the Maturity Date. "LIBOR Rate" shall mean the average rate per annum (rounded up to the nearest one-sixteenth of one percent) of which U.S. Dollar deposits are offered to Norwest in the London Interbank Market with a term equal to the applicable Interest Period, in an amount equal to the outstanding principal balance of the Current Note. "Maturity Date" shall mean March , 1998. "Permitted Liens" shall mean: A. Liens in favor of the Bank; -2- B. Existing liens disclosed to the Bank in writing prior to the date of this Agreement; C. Liens for taxes not delinquent or which Borrower is contesting in good faith; and D. Purchase money liens. "Security Agreement" shall mean the security agreement substantially in the form of attached Exhibit C, pursuant to which, among other things, Borrower grants Bank a security interest in the accounts receivable of the Borrower. "Subsidiary" shall mean any corporation of which more than fifty percent (50%) of the outstanding voting securities shall, at the time of determination, be owned directly, or indirectly through one or more intermediaries, by the Borrower. "Tangible Net Worth" shall mean the sum of the par or stated value of all outstanding capital stock, surplus and undivided profits of the Borrower, less any amounts attributable to treasury stock, good will, patents, copyrights, mailing lists, catalogues, trademarks, bond discount and underwriting expenses, organization expenses, leasehold improvements and loans to officers or employees and other like intangibles (not including prepaid expenses classified as current assets or intangible assets offset by equal related liabilities), excluding also Subchapter S earnings unless such earnings are converted to notes and subordinated to bank debt or the Bank is given written confirmation, in form acceptable to the Bank, that such earnings are being retained as equity capital, all as determined in accordance with generally accepted accounting principles. 1.2 COMPUTATION OF TIME PERIODS. In this Agreement in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding." 1.3 ACCOUNTING TERMS. All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles consistent with those applied in the preparation of the financial statements referred to in Section 5.6. SECTION 2 THE LOAN 2.1 CREDIT. Subject to the other provisions of this Agreement, the Bank agrees to lend to the Borrower from time to time from the effective date hereof until the Maturity Date sums not to exceed the lesser of the Borrowing Base or THREE MILLION AND NO/100 DOLLARS ($3,000.000) in aggregate principal amount at any one time outstanding. Each borrowing under this Section 2.1 will be requested in writing or in person by an authorized officer of the Borrower, or telephonically by any person reasonably believed by the Bank to be an authorized officer of the Borrower. Each borrowing under this Section 2.1 will be evidenced by a notation on the Bank's records, which shall be conclusive evidence of such borrowing, and by the Current Note. The officer making the request must present the Bank with its most current -3- Borrowing Base Certificate. Within the limits of the Credit and subject to the terms and conditions hereof, the Borrower may borrow, prepay pursuant to Section 2.6 hereof and reborrow pursuant to this Section 2.1. 2.2 INTEREST RATE: Upon two business days prior notice (before the end of the applicable Interest Period for a prior LIBOR Rate election) Borrower may elect or convert all or a portion of its outstanding balance under the Credit to one of the following interest rates: A. Base Rate Option. Interest on the unpaid principal of the Current Note shall be calculated at an annual rate equal to the Base Rate in effect from time, to time, which rate shall change as and when the Base Rate changes, on the basis of the actual number of days elapsed in a year of 360 days, and shall change as and when the Base Rate changes. B. LIBOR Rate Option. Subject to the terms and conditions of this Agreement, the Borrower may elect that the principal balance outstanding under the Current Note in increments of $100,000.00 bear interest at an annual rate equal to two hundred (200) basis points (2.0%) in excess of the LIBOR Rate as determined as of approximately 11:00 A. M., London time, two business days before the beginning of the Interest Period selected by the Borrower. If two business days prior to the end of an Interest Period, Borrower does not elect a new interest rate option, then the Base Rate Option shall apply. 2.3 INTEREST PAYMENT. Interest on the Current Note shall be payable monthly, commencing March ____, 1996, and continuing on the same day of each succeeding month until the Current Note is paid; provided, however, if a LIBOR Rate Option has been selected, then interest shall be due and payable at the end of each Interest Period. 2.4 PRINCIPAL REPAYMENT. The principal of the Current Note shall be repayable on the Maturity Date. 2.5 PAYDOWN. Notwithstanding Section 2.4 above, the Borrower shall maintain a $0.00 outstanding principal balance under the Credit for a period of at least sixty (60) consecutive days in Borrower's fiscal year ending August 31, 1995 and for a period of thirty (30) consecutive days for Borrower's fiscal year ending August 31, 1996. 2.6 PREPAYMENT. The Borrower may at any time prepay the Current Note in whole or from time to time in part without premium or penalty. 2.7 MANDATORY PREPAYMENT. The Borrower shall be required to make prepayments of amounts due under the Current Note at any time the aggregate amount of borrowing outstanding is found to exceed the Borrowing Base. Such required prepayments shall be in an amount equal to the difference between borrowings outstanding and the Borrower Base. 2.8 SUMS PAYABLE. All sums payable to the Bank hereunder shall be paid directly to the Bank in immediately available funds. The Bank shall send the Borrower statements of all -4- amounts due hereunder, which statements shall be considered correct and conclusively binding on the Borrower unless the Borrower notifies the Bank to the contrary within thirty days of its receipt of any statement which it deems to be incorrect. Alternatively, at its sole discretion, the Bank may charge against any deposit account of the Borrower all or any part of any amount due hereunder. SECTION 3 CONDITIONS PRECEDENT 3.1 The Borrower shall deliver the following to the Bank on or before the Closing Date: A. The Current Note, duly executed by Borrower. B. The Security Agreement, duly executed by Borrower 3.2 The Bank shall not be obligated to lend hereunder on the occasion for any borrowing unless: A. The representations and warranties contained in Section 5 hereof are true and accurate on and as of such date; B. No Event of Default, and no event which might become an Event of Default after the lapse of time or the giving of notice and the lapse of time, has occurred and is continuing or will exist upon the disbursement of such loan; and, C. The Borrower shall have delivered to the Bank a Borrowing Base Certificate as provided in Section 2.1 hereof, and a certification by an appropriate officer of the Borrower as to the matters set forth in Sections 3.2(A) and 3.2(B) hereof. SECTION 4 SECURITY 4.1 SECURITY INTEREST. To secure the Current Note and the performance of its additional obligations as set forth hereunder, the Borrower has executed and delivered to the Bank before the Closing Date the financing statements, in form and substance satisfactory to the Bank, granting to the Bank a first security interest in accounts receivable, now owned or hereafter acquired. 4.2 DEPOSIT ACCOUNTS. As additional security for the prompt satisfaction of all obligations of Borrower under the Current Note and Security Agreement, the Borrower hereby assigns, transfers and sets over to the Bank all of its right, title and interest in and to, and grants the Bank a lien on and a security interest in, all amounts that may be owing from time to time by the Bank to the Borrower in any capacity, including, but without limitation, any balance or share belonging to the Borrower, of any deposit or other account with the Bank, which lien and security interest shall be independent of any right of set-off which the Bank may have. 4.3 COLLATERAL. The property in which a security interest is granted pursuant to the provisions of Sections 4.1 and 4.2 is herein collectively called the "Collateral". The Collateral, together with all of the Borrower's other property of any kind held by the Bank, -5- shall stand as one general, continuing collateral security for all Indebtedness to the Bank and may be retained by the Bank until all Indebtedness has been paid in full. ( Needs to be revised. Line of Credit and Direct Payment Letter of Credit and not cross collateralized. They are cross defaulted ???). New agreement calls for a negative on pledge on inventory. 4.4 ADDITIONAL DOCUMENTS. At any time requested by the Bank, the Borrower shall execute and deliver or cause to be executed and delivered to the Bank such additional documents as the Bank may consider to be necessary or desirable to evidence or perfect the security interests referred to in Section 4.1 hereof. 4.5 LIENS. The foregoing liens shall be first and prior liens except for Permitted Liens. SECTION 5 REPRESENTATIONS AND WARRANTIES To induce the Bank to enter into this Agreement, the Borrower represents and warrants to the Bank as follows: 5.1 CORPORATE STATUS. The Borrower is a corporation duly organized, existing and in good standing under the laws of the State of Minnesota. 5.2 AUTHORITY. The execution, delivery and performance of this Agreement, the Current Note and Security Agreement by the Borrower are within its corporate powers, have been duly authorized, and are not in contravention of law, or the terms of Borrower's Articles of Incorporation or By-Laws or of any undertaking to which the Borrower is a party or by which it is bound. 5.3 CONSENT. No consent, approval or authorization of or declaration or filing with any governmental authority on the part of the Borrower is required in connection with the execution and delivery of this Agreement or the borrowings by the Borrower hereunder or on the part of the Borrower in connection with the consummation of any transaction contemplated hereby. 5.4 LIENS. The property of the Borrower is not subject to any lien except Permitted Liens. 5.5 LITIGATION. No litigation or governmental proceeding is pending or, to the knowledge of the officers of the Borrower, threatened against the Borrower which could have a material adverse effect on the Borrower's financial condition or business. 5.6 FINANCIAL STATEMENTS. All financial statements delivered to Bank by or on behalf of Borrower, including any schedules and notes pertaining thereto, have been prepared in accordance with generally accepted accounting principles consistently applied, and fully and fairly present the financial condition of the Borrower at the dates thereof and the results of operations for the periods covered thereby, and there have been no material adverse changes in -6- the consolidated financial condition or business of the Borrower from November 30, 1995 to the date hereof. 5.7 LICENSES. The Borrower possesses adequate licenses, permits, franchises, patents, copyrights, trademarks and trade names, or rights thereto, to conduct its business substantially as now conducted and as presently proposed to be conducted. 5.8 ERISA. The Borrower does not have any unfunded liabilities in any pension plan, as such terms is defined in the Employee Retirement Income Security Act of 1974, as amended, and any successor statute of similar import ("ERISA"), together with the regulations thereunder. As used in this section, "unfunded liabilities" means with regard to any plan, the excess of the current value of the plan's benefits guaranteed under ERISA over the current value of the plan's assets allocable to such benefits. 5.9 ENVIRONMENTAL. The Borrower has obtained all permits, licenses and other authorizations which are required under federal, state and/or local laws ("Environmental Laws") relating to pollution or protection of the environment, including laws relating to emissions, discharges, releases or threatened releases of pollutants, contaminants, hazardous or toxic materials or wastes into ambient air, surface water, ground water or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants or hazardous or toxic materials or wastes ("Environmental Matters"). The Borrower is in compliance in all material respects with all terms and conditions of such required permits, licenses and authorizations is are also in full compliance with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in the Environmental Laws or contained in any plan, order, decree, judgment or notice. The Borrower is not aware of, nor has the Borrower received notice of, any events, conditions, circumstances, activities, practices, incidents, actions or plans which may interfere with or prevent continued compliance or which may give rise to any liability under any Environmental Laws or the common law. The Borrower has not received any summons, citation, directive, letter or other communication, written or oral, from any agency or department of any state, federal or local government relating to any Environmental Matters or any alleged Environmental Matters. No investigation, administrative order, consent order and agreement, litigation or settlement with respect to any Environmental Matters or any alleged Environmental Matters has been received by the Borrower or is proposed, threatened, anticipated or in existence with respect to the Borrower. 5.10 VALIDITY. This Agreement is, and the Notes when issued will be, valid and binding in accordance with their terms. 5.11 GOOD STANDING. The Borrower is duly qualified to do business and is in good standing in any additional jurisdictions where, on advice of legal counsel, registration was deemed necessary. 5.12 DEFAULT. The Borrower is not in default of a material provision under any material agreement, instrument, decree or order to which it is a party or by which it or its property is bound or affected. -7- SECTION 6 AFFIRMATIVE COVENANTS The Borrower covenants and agrees that so long as any indebtedness remains outstanding hereunder, unless the Bank shall otherwise consent in writing, it will: 6.1 TAXES. Pay, when due, all taxes assessed against it or its property except to the extent and so long as contested in good faith. 6.2 CORPORATE EXISTENCE. Maintain its corporate existence and comply with all laws and regulations applicable thereto. 6.3 REPORTS. Furnish to the Bank: A. Within 90 days after the end of each fiscal year of the Borrower a detailed report of audit of the Borrower for such fiscal year including the balance sheet of the Borrower as of the end of such fiscal year and the statements of profit and loss and surplus of the Borrower for the fiscal year then ended, prepared by independent certified public accountants satisfactory to the Bank. B. Within 30 days after the end of each quarter, or month if there are outstanding borrowings under the Credit, (i) the balance sheet of the Borrower as of the end of such month, (ii) the statement of profit and loss and surplus of the Borrower from the beginning of such fiscal year to the end of such month, (iii) an aged listing of Borrower's accounts receivable, and (iv) a Borrowing Base Certificate current through the end of the previous month, all in a form acceptable to Bank. All of the foregoing shall be unaudited, but certified as correct (subject to year end adjustments) by an appropriate officer of the Borrower. C. No later than 30 days prior to the beginning of each fiscal year, projected financial statements in form acceptable to the Bank. D. Promptly upon knowledge thereof, notice to the Bank in writing of the occurrence of any event which has or might, after the lapse of time or the giving of notice and the lapse of time, become an Event of Default. E. Promptly, such other information as the Bank may reasonably request. 6.4 MAINTENANCE OF PROPERTY. Maintain its inventory, equipment, real estate and other properties in good condition and repair (normal wear and tear excepted), and pay and discharge or cause to be paid and discharged when due, the cost of repairs to or maintenance of the same, and pay or cause to be paid all rental or mortgage payments due on such real estate. 6.5 INSURANCE. Cause its properties of an insurable nature to be adequately insured by reputable and solvent insurance companies against loss or damages customarily insured against -8- by persons operating similar properties, and similarly situated, and carry such other insurance as usually carried by persons engaged in the same or similar businesses and similarly situated. 6.6 RECORDS. Keep true, complete and accurate books, records and accounts in accordance with generally accepted accounting principles consistently applied. 6.7 INSPECTION. Permit any of Bank's duly authorized employees or agents the right, at any reasonable time and from time to time, to visit and inspect the properties of Borrower and to examine and take abstracts from its books and records. 6.8 COMPLIANCE. Continue to conduct the same general type of business as is now being carried on in compliance with all applicable statutes, laws, rules and regulations. 6.9 COLLATERAL AUDITS. Permit the Bank, at its discretion, to conduct annual collateral audits, the cost for which Borrower shall reimburse the Bank up to a maximum of $1,000.00 per audit. 6.10 PRIMARY DEPOSITORY. Maintain its primary deposit accounts with the Bank. SECTION 7 NEGATIVE COVENANTS Without the Bank's written consent, so long as any indebtedness remains outstanding under the Credit, the Borrower will not: 7.1 LIENS. Permit any lien including, without limitation, any pledge, assignment, mortgage, title retaining contract or other type of security interest to exist on its property, real or personal, except Permitted Liens. 7.2 MERGER. Enter into any transaction of merger or consolidation, or transfer, sell, assign, lease or otherwise dispose of (other than sales in the ordinary course of business) all or a substantial part of its properties or assets, or any of its notes or accounts receivable, or any stock (other than directors qualifying shares) or any assets or properties necessary or desirable for the proper conduct of its business, or change the nature of its business, or wind up, liquidate or dissolve, or agree to do any of the foregoing. 7.3 BORROWED MONEY. Create, incur, assume or suffer to exist, contingently or otherwise, indebtedness for Borrowed Money, except indebtedness disclosed to the Bank in writing as existing at the time of execution of this Agreement. 7.4 GUARANTEE. Become or remain a guarantor or surety, or pledge its credit or become liable in any manner (except by endorsement for deposit in the ordinary course of business) on undertakings of another. 7.5 ACQUISITIONS. Purchase or otherwise acquire all or substantially all of the assets of any person, firm, corporation or other entity. -9- 7.6 MINIMUM TANGIBLE NET WORTH. Permit its Tangible Net Worth to be less than $12,400,000.00 for its fiscal year ending August 31, 1996, and $13,900,000.00 for its fiscal year ending August 31, 1997. 7.7 DEBT RATIO. Permit its long-term debt to Tangible Net Worth ratio to exceed 1.0 to 1.0 SHOULD NOW READ "AT ALL TIMES" as of Borrower's fiscal year ending August 31, 1995, and for fiscal year ending August 31, 1996 at such revised level as may be established by the Bank based upon the projections delivered pursuant to Section 6.3(D). 7.8 MINIMUM NET PROFIT. Fail to produce a net profit after taxes quarterly and of at least $1,000,000.00 as of Borrower's fiscal years ending August 31, 1996 and August 31, 1997. 7.9 ACCOUNTING. Make a material change in its accounting procedures, whether for tax purposes or otherwise, including, but not limited to, making a Subchapter S election under the United States Internal Revenue Code. SECTION 8 EVENTS OF DEFAULT 8.1 Upon the occurrence of any of the following Events of Default: A. PAYMENT. Default in any payment of interest or of principal on the Current Note when due, and continuance thereof for 10 calendar days; B. PERFORMANCE. Default in the observance or performance of any other agreement of the Borrower set forth herein or in the Security Agreement and continuance thereof for 30 days; C. BORROWED MONEY. Default by the Borrower in the payment of any other indebtedness for Borrowed Money or in the observance or performance of any term, covenant or agreement of the Borrower in any agreement relating to any indebtedness of the Borrower, the effect of which default is to permit the holder of such indebtedness to declare the same due prior to the date fixed for its payment under the terms thereof; D. REPRESENTATIONS. Any representation or warranty made by the Borrower herein, or in any statement or certificate furnished by the Borrower hereunder, is untrue in any material respect; or E. LITIGATION. The occurrence of any litigation or governmental proceeding which is pending or threatened against the Borrower, which could have a material adverse effect on the Borrower's financial condition or business, and which is not remedied within a reasonable period of time (a reasonable period of time not to exceed 30 days) after notice thereof to the Borrower; -10- then, or at any time thereafter, unless such Event of Default is remedied, the Bank or the holder of the Current Note may, by notice in writing to the Borrower, terminate the Credit or declare the Current Note to be due and payable, or both, whereupon the Credit shall terminate forthwith or the Current Note shall immediately become due and payable, or both, as the case may be. 8.2 Upon the occurrence of any of the following Events of Default: BANKRUPTCY. The Borrower becomes insolvent or bankrupt, or makes an appointment for the benefit of creditors or consents to the appointment of a custodian, trustee or receiver for itself or for the greater part of its properties; or a custodian, trustee or receiver is appointed for the Borrower, or for the greater part of its properties without its consent and is not discharged within 60 days; or bankruptcy, reorganization or liquidation proceedings are instituted by or against the Borrower and, if instituted against it, are consented to by it or remain undismissed for 60 days; then the Credit shall automatically terminate and the Current Note shall automatically become immediately due and payable, without notice. SECTION 9 MISCELLANEOUS 9.1 OTHER AGREEMENTS. The provisions of this Agreement shall be in addition to those of any guaranty, pledge or security agreement, note or other evidence of liability held by the Bank, all of which shall be construed as complementary to each other. Nothing herein contained shall prevent the Bank from enforcing any or all other notes, guaranties, pledges or security agreements in accordance with their respective terms. (??? Should anythng specific be said about the IDRB Direct Pay LC's ???). 9.2 WAIVER. The Bank shall have the right at all times to enforce the provisions of this Agreement and the Collateral Documents in strict accordance with the terms hereof and thereof, notwithstanding any conduct or custom on the part of the Bank in refraining from so doing at any time or times. The failure of the Bank at any time or times to enforce its rights under such provisions, strictly in accordance with the same, shall not be construed as having created a custom in any way or manner contrary to specific provisions of this Agreement or as having in any way or manner modified or waived the same. All rights and remedies of the Bank are cumulative and concurrent and the exercise of one right or remedy shall not be deemed a waiver or release of any other right or remedy. 9.3 EXPENSES. The Borrower will pay all expenses, including the reasonable fees and expenses of legal counsel for the Bank, incurred in connection with the administration, amendment, modification or enforcement of this Agreement and the Security Agreement, and the collection or attempted collection of the Current Note. 9.4 NOTICES. Any notices or consents required or permitted by this Agreement shall be in writing and shall be deemed delivered if delivered in person or if sent by certified mail, postage prepaid, return receipt requested, or telegraph, as follows, unless such address is changed by written notice hereunder: -11- A. If to the Borrower: HEI, INC. 1495 Steiger Lake Lane Victoria, Minnesota 55386 Attention: Jerald H. Mortenson B. If to the Bank: Norwest Bank Minnesota, National Association 900 East Wayzata Boulevard Wayzata, Minnesota 55391 Attention: Judy Wenderoth 9.5 STATE LAW. The substantive Laws of the State of Minnesota shall govern the construction of this Agreement and the rights and remedies of the parties hereto. 9.6 SUCCESSORS. This Agreement shall inure to the benefit of, and shall be binding upon, the respective successors and permitted assigns of the parties hereto. The Borrower has no right to assign any of its rights or obligations hereunder without the prior written consent of the Bank. This Agreement, and the documents executed and delivered pursuant hereto, constitute the entire agreement between the parties, and may be amended only by a writing signed on behalf of each party. 9.7 VALIDITY. If any provision of this Agreement shall be held invalid under any applicable Laws, such invalidity shall not affect any other provision of this Agreement that can be given effect without the invalid provision, and, to this end, the provisions hereof are severable. 9.8 BANKING DAY. Whenever any installment of the interest on the Notes becomes due and payable on a day which is not a Banking Day, the maturity or due date thereof shall be extended to the next succeeding Banking Day and, in the case of principal of the Notes, interest shall be payable thereon at the rate per annum specified in the Notes during such extension. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. HEI, INC. By: By: --------------------------------- --------------------------------- Its: Its: -------------------------------- --------------------------------- -12- NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION By: --------------------------------- Its: -------------------------------- -13- EX-4.1B 3 EXHIBIT 4.1B CURRENT NOTE Exhibit 4.1b $3,000,000.00 , 1996 ----------------- On April __, 1998, for value received, HEI, Inc. (the "Borrower") promises to pay to the order of Norwest Bank Minnesota, National Association (the "Bank") at its office in Wayzata, Minnesota or at any other place designated at any time by the holder hereof, in lawful money of the United States of America, the principal sum of Three Million and no/100 Dollars ($3,000,000.00), or so much thereof as is disbursed and remains outstanding thereunder on the due date hereof, as shown by the Bank's liability record, together with interest (calculated on the basis of actual days elapsed in a 360 day year) on the unpaid balance hereof from the date hereof until this Note is fully paid, at one of the following rates: (a) Base Rate Option: A variable rate of interest equal to the Base Rate in effect from time to time. The interest rate under this option shall change as and when the Base Rate changes. (b) LIBOR Rate Option: The "LIBOR Rate" PLUS two percent (2.0%). The "LIBOR Rate" means the rate per annum (rounded up, if necessary, to the nearest one-sixteenth of one percent) equal to the offered quotation to the Bank in the London interbank Eurodollar market for United States dollar deposits for delivery on the date specified by the Borrower, in the approximate amount of the loan and for the period specified by the Borrower (which period must be 30, 60, or 90 days), determined as of approximately 11:00 A.M., London time, two business days prior to the delivery date. If the Borrower selects this LIBOR Rate Option, it must notify the Bank at least two business days prior to the date on which it wishes to receive the loan proceeds. Unless the Borrower shall otherwise notify the Bank at least two business days prior to the end of an Interest Period, each advance bearing interest at the LIBOR Rate shall continue to bear interest at the Base Rate. The LIBOR Rate Option may only be selected for minimum principal amounts of $100,000 or multiples thereof. As used herein, "Base Rate" means the rate of interest established by the Bank from time to time as its "base" or "prime" rate. Interest shall by payable monthly, commencing April 30, 1996 and continuing on the same day of each succeeding month and also at maturity. The Borrower may at any time prepay the Current Note in whole or in part without premium or penalty; except that any prepayment of amounts based on the LIBOR Rate where such prepayment is made on a day other than the final day of an Interest Period shall require a prepayment penalty in an amount equal to the difference between the amount of interest that would have been payable for the remainder of the Interest Period at the rate then in effect and the yield on a hypothetical U.S. Treasury Security that could be purchased on the date of prepayment and maturing on the last day of the Interest Period. If interest hereon is not paid when due, or if any other indebtedness of the undersigned to the Bank is not paid when due, or if a garnishment summons or a writ of attachment is issued against or served upon the Bank for the attachment of any property of the undersigned in the Bank's possession or any indebtedness owing to the undersigned, of if the holder hereof shall at any time in good faith believe that the prospect of due and punctual payment of this Note is impaired, then, in any such event, the holder hereof may, at its option, declare this Note to be immediately due and payable and thereupon this Note shall be immediately due and payable, together with all unpaid interest accrued hereon, without notice or demand; provided, however, that if this Note is payable on demand, nothing herein contained shall preclude or limit the holder hereof from demanding payment of this Note at any time and for any reason, without notice. If this Note is not paid when due (whether at maturity or upon acceleration or demand), the Bank shall also have the right to set off the indebtedness evidenced by this Note against any indebtedness of Bank to the undersigned. This Note shall also become automatically due and payable (including unpaid interest accrued thereon) without notice or demand should a petition be filed by or against the undersigned under the United States Bankruptcy Code. Unless prohibited by law, the undersigned agree(s) to pay all costs of collection, including reasonable attorneys' fees and legal expenses, incurred by the holder hereof in the event this Note is not duly paid. The holder hereof may at any time renew this Note or extend its maturity date for any period and release any security for, or any party to, this Note, all without notice to or consent of and without releasing any accommodation maker, endorser or guarantor from liability on this Note. Presentment or other demand for payment, notice of dishonor and protest are hereby waived by the undersigned and each endorser and guarantor. This Note shall be governed by the substantive laws of the State named as part of the Bank's address above. This Note is issued pursuant to a Credit Agreement dated April ____, 1996, between the Borrower and the Bank and is subject to the terms and conditions thereof. HEI, Inc. By: By: --------------------------- ----------------------------------- Its: Its: -------------------------- ---------------------------------- -2- EX-4.2A 4 EXHIBIT 4.2A Exhibit 4.2a REIMBURSEMENT AGREEMENT BY AND BETWEEN HEI, INC. AND NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION Dated As Of: April 1, 1996 This Instrument Was Drafted By: WINTHROP & WEINSTINE, P.A. 3200 Minnesota World Trade Center 30 East Seventh Street Saint Paul, Minnesota 55101 TABLE OF CONTENTS ARTICLE I. DEFINITIONS . . . . . . . . . . . . . . . 1 Section 1.1 DEFINED TERMS. . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 1.2 OTHER TERMS. . . . . . . . . . . . . . . . . . . . . . . . . 7 SECTION 1.3 REIMBURSEMENT AGREEMENT CONTROLLING. . . . . . . . . . . . . 7 ARTICLE II. COMMITMENT TO ISSUE THE LETTERS OF CREDIT AND APPROVAL OF ADVANCES. . . . . . . . . . . . 8 SECTION 2.1 LETTERS OF CREDIT; ADVANCES. . . . . . . . . . . . . . . . . 8 SECTION 2.2 DRAW REQUESTS - CONSTRUCTION COSTS . . . . . . . . . . . . . 8 SECTION 2.3 ADDITIONAL DEPOSITS. . . . . . . . . . . . . . . . . . . . .10 SECTION 2.4 ADVANCES - EQUIPMENT ACQUISITION COSTS . . . . . . . . . . .10 SECTION 2.5 ADVANCES WITHOUT RECEIPT OF DRAW REQUEST . . . . . . . . . .10 SECTION 2.6 EXPIRATION, RENEWAL OF LETTERS OF CREDIT . . . . . . . . . .10 SECTION 2.7 DRAW UNDER LETTERS OF CREDIT TO REDEEM OR DEFEASE BONDS. . .11 ARTICLE III. CONDITIONS OF LENDING. . . . . . . . . . . . .11 SECTION 3.1 CONDITIONS PRECEDENT TO ISSUANCE OF LETTERS OF CREDIT AND APPROVAL OF INITIAL ADVANCE. . . . . . . . . . . . . . . . .11 SECTION 3.2 FURTHER CONDITIONS PRECEDENT TO ANY ADVANCE. . . . . . . . .12 ARTICLE IV. REIMBURSEMENTS AND OTHER PAYMENTS: LENDER'S RIGHT TO CURE . . . . . . . . . . . .13 SECTION 4.1 OBLIGATION OF REIMBURSEMENT. . . . . . . . . . . . . . . . .13 SECTION 4.2 PAYMENT OF CREDIT ENHANCEMENT FEE. . . . . . . . . . . . . .13 SECTION 4.3 CAPITAL ADEQUACY/CHANGE IN LAW . . . . . . . . . . . . . . .14 SECTION 4.4 COMPUTATION OF CREDIT ENHANCEMENT FEE AND INTEREST . . . . .14 SECTION 4.5 RIGHT OF LENDER TO CURE DEFAULTS UNDER BOND DOCUMENTS. . . .14 SECTION 4.6 PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . .14 SECTION 4.7 COLLATERAL . . . . . . . . . . . . . . . . . . . . . . . . .14 SECTION 4.8 FEES . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 SECTION 4.9 REDEMPTIONS UNDER SERIES A BONDS . . . . . . . . . . . . . .15 -i- ARTICLE V. WARRANTIES, REPRESENTATIONS AND COVENANTS. . . . . . . . . . . . . . .16 SECTION 5.1 WARRANTIES AND REPRESENTATIONS . . . . . . . . . . . . . . .16 SECTION 5.2 COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . .19 ARTICLE VI. EVENTS OF DEFAULT; RIGHTS AND REMEDIES UPON EVENT OF DEFAULT. . . . . . . . . . . . . .23 SECTION 6.1 EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . . . . . .23 SECTION 6.2 RIGHTS AND REMEDIES. . . . . . . . . . . . . . . . . . . . .25 ARTICLE VII. MISCELLANEOUS. . . . . . . . . . . . . . .28 SECTION 7.1 INDEMNIFICATION BY BORROWER. . . . . . . . . . . . . . . . .28 SECTION 7.2 ADDRESSES FOR NOTICE . . . . . . . . . . . . . . . . . . . .29 SECTION 7.3 INSPECTIONS. . . . . . . . . . . . . . . . . . . . . . . . .30 SECTION 7.4 ADDITIONAL SECURITY INTEREST . . . . . . . . . . . . . . . .30 SECTION 7.5 FEES . . . . . . . . . . . . . . . . . . . . . . . . . . . .30 SECTION 7.6 TIME OF ESSENCE. . . . . . . . . . . . . . . . . . . . . . .30 SECTION 7.7 BINDING EFFECT AND ASSIGNMENT. . . . . . . . . . . . . . . .30 SECTION 7.8 WAIVERS. . . . . . . . . . . . . . . . . . . . . . . . . . .31 SECTION 7.9 REMEDIES CUMULATIVE. . . . . . . . . . . . . . . . . . . . .31 SECTION 7.10 GOVERNING LAW; CONSTRUCTION. . . . . . . . . . . . . . . . .31 SECTION 7.11 JURISDICTION . . . . . . . . . . . . . . . . . . . . . . . .31 SECTION 7.12 INTEREST RATE. . . . . . . . . . . . . . . . . . . . . . . .31 SECTION 7.13 COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . .31 SECTION 7.14 NOT JOINT VENTURERS. . . . . . . . . . . . . . . . . . . . .32 SECTION 7.15 ADEQUACY OF BOND PROCEEDS. . . . . . . . . . . . . . . . . .32 SECTION 7.16 OBLIGATIONS ABSOLUTE . . . . . . . . . . . . . . . . . . . .32 SECTION 7.17 TRANSFER OF LETTERS OF CREDIT. . . . . . . . . . . . . . . .32 SECTION 7.18 LIABILITY OF THE LENDER. . . . . . . . . . . . . . . . . . .32 SECTION 7.19 SECURITY INTEREST IN FUNDS AND BONDS . . . . . . . . . . . .33 SECTION 7.20 TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 SECTION 7.21 REDEMPTION OF THE BONDS UNDER CASUALTY OR CONDEMNATION LAWS. . . . . . . . . . . . . . . . . . . . . .34 SIGNATURES FORM OF DRAW REQUEST (EXHIBIT A) FORM OF AUTHORIZATION TO TRUSTEE-CONSTRUCTION COSTS (EXHIBIT B) FORM OF AUTHORIZATION TO TRUSTEE-EQUIPMENT ACQUISITION COSTS -ii- (EXHIBIT C) SCHEDULE OF REQUIRED PRINCIPAL PAYMENTS UNDER SERIES B BONDS (EXHIBIT D) JOINDER AGREEMENT -iii- REIMBURSEMENT AGREEMENT THIS REIMBURSEMENT AGREEMENT, made as of the 1st day of April, 1996, by and between HEI, INC., a Minnesota corporation (the "Borrower"), and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking association with its banking house located in Wayzata, Minnesota (the "Lender"). ARTICLE I. DEFINITIONS SECTION 1.1 DEFINED TERMS. As used in this Agreement, the following terms shall have the meanings set out respectively after each except where the context clearly requires otherwise (such meanings to be equally applicable to both the singular and plural forms of the terms defined): (a) ADVANCE: the disbursement from the Construction Fund by the Trustee pursuant to the Bond Documents. (b) ARCHITECT: C. M. Architecture, P.A. (c) BOND COUNSEL: Briggs & Morgan, P.A., or such other bond counsel which is acceptable to the Lender. (d) BOND DOCUMENTS: individually or collectively, as the context requires, the Loan Agreement and the Indenture. (e) BONDS: the $5,625,000 Variable Rate Demand Industrial Development Revenue Bonds, Series 1996 A and B (HEI, Inc. Project) issued by the Issuer. (f) BORROWED MONEY: funds obtained by incurring contractual indebtedness, exclusive of trade accounts payable or money borrowed from the Lender. (g) BORROWER DOCUMENTS: collectively, this Reimbursement Agreement, the Certificate, the Mortgage, the Security Agreement, the Financing Statements and any and all other documents and instruments executed by the Borrower and delivered to the Lender in connection with the financing transaction contemplated hereby. (h) CASH COLLATERAL ACCOUNT: shall have the meaning assigned thereto in Section 6.2(d) hereof. (i) CASH FLOW: for each fiscal year of the Borrower, the aggregate amount of the following items properly shown on its year-end income statement, determined in accordance with generally accepted accounting principles consistently applied: (i) net 1 income after taxes; (ii) amortization expense; (iii) depreciation and depletion expense; (iv) deferred tax expense; and (v) similar types of noncash charges against income which the Bank determines, in its reasonable discretion, to be appropriate "add-backs." (j) CERTIFICATE: the certificate of no hazardous material of even date herewith executed by the Borrower and delivered to the Lender. (k) COLLATERAL SECURITIES: shall have the meaning assigned thereto in Section 6.2(d)(1) hereof. (l) COMMITMENT: the commitment of the Lender hereunder to (i) issue the Letters of Credit, and (ii) approve the Advances to the Borrower in accordance with the provisions hereof in an aggregate principal amount of up to and including $5,625,000 plus investment earnings on sums on deposit in the Construction Fund. (m) COMMITMENT TERMINATION DATE: April 1, 1998, which date shall automatically be extended to February 1, 1999, in the event the Letters of Credit are extended pursuant to Section 2.6 hereof, or the date of termination of the Commitment pursuant to Section 6.2(a) hereof, whichever date occurs earlier. (n) COMPLETION DATE: July 1, 1996 (provided that if the Lender shall extend such date in writing, then the Completion Date shall be such later date), being the required date of completion of the Facility. (o) CREDIT ENHANCEMENT FEE: shall have the meaning assigned thereto in Section 4.2 hereof. (p) CONSTRUCTION COSTS: the actual costs of the construction of the Facility. (q) CONSTRUCTION DOCUMENTS: collectively, all of the following documents which shall be in form and substance acceptable to the Lender: (1) The Plans and Specifications; (2) Certificates of Builder's Risk, Worker's Compensation, Liability and Property and Extended Coverage Insurance, as required by Section 5.2(g) hereof and the Mortgage; (3) a preliminary sworn construction statement duly executed by the Borrower and the General Contractor showing all costs and expenses of any kind incurred and to be incurred in constructing and installing the Facility, together with a certificate signed by the Borrower otherwise reflecting Construction Costs, and showing that Construction Costs do not exceed $1,982,738; 2 (4) a copy of the contracts with the General Contractor and the Architect, and of all electrical, heating, masonry, plumbing, mechanical, and elevator contracts and all other subcontracts required by the Lender relating to the construction and installation of the Facility, and assignments thereof to the Lender duly executed and delivered by the Borrower, the General Contractor, the Architect and such subcontractors permitting the Lender, upon its election after the occurrence of an Event of Default, to complete the Facility pursuant to, and to acquire the interest of the Borrower under, the foregoing contracts and the Plans and Specifications; (5) all building permits and such other evidence as the Lender shall request to establish that all necessary building, zoning and rezoning, planned unit development, subdivision, platting and environmental protection and land use permits and approvals have been obtained, and that the Facility as constructed will comply in all respects with all applicable restrictions in prior conveyances and all applicable ordinance, building, zoning and rezoning, planned unit development, subdivision, platting and environmental protection and land use requirements; (6) evidence that no hazardous waste or substances are contained on, under or in the Project except as may be permitted pursuant to the terms of the Certificate; (7) a soil report, duly certified to the Lender (or in lieu thereof, a letter addressed to the Lender from the soil engineer permitting the Lender to rely therein), evidencing that satisfactory soil boring tests have been conducted by an engineering firm acceptable to the Lender at such locations of the Project as are acceptable to the Lender, and a certificate signed and delivered by the Architect certifying to the Lender that the plans and specifications for the Project implement and take into account the recommendations of the soil engineer set forth in such report that the foundation designed for the Project as reflected in the Plans and Specifications for the Project is adequate giving the existing soil conditions of the Project Premises; and (8) an appraisal prepared by an MAI designated appraiser acceptable to the Lender setting forth the estimated fair market value of the Project upon completion of the Facility in accordance with the Plans and Specifications relating to the Project of at least $1,775,000, together with such documentation as may be necessary to permit the Lender to rely thereon. (r) CONTRACTOR: any person who shall be engaged to work on, or to furnish materials and supplies for the Facility. (s) CURRENT MATURITIES OF LONG-TERM DEBT: that portion of the Borrower's "Long-Term Debt" that matures or that is scheduled to be paid during the current fiscal year of the Borrower. For the purposes of this definition, "Long-Term Debt" shall mean the following: (i) the aggregate amount of the Borrower's liabilities properly shown as non- 3 current liabilities on its balance sheet, determined in accordance with generally accepted accounting principles consistently applied, as of the last day of its preceding fiscal year; and (ii) any new liabilities of the Borrower incurred during its current fiscal year that, in accordance with generally accepted accounting principles consistently applied, should be shown as non-current liabilities on its balance sheet at fiscal year-end. (t) DRAW REQUEST: the form, substantially in the form of EXHIBIT A attached hereto, to be submitted to the Lender when an Advance is requested and which is referred to in Section 2.2 hereof. (u) ELIGIBLE SECURITIES: shall have the meaning assigned thereto in Section 6.2(d)(1) hereof. (v) ESCROW ACCOUNT: the non-interest bearing escrow account to be established by the Lender in the name of the Borrower into which any and all amounts required to be deposited by the Borrower pursuant to Section 2.3 hereof shall be deposited. (w) EQUIPMENT ACQUISITION COSTS: the actual cost of the acquisition of Project Equipment. (x) EVENT OF DEFAULT: shall have the meaning assigned thereto in Section 6.1 hereof. (y) FACILITY: the approximately 22,500 square foot addition to an existing 23,305 square foot manufacturing facility which will be constructed on the Project Premises pursuant to the Plans and Specifications, together with all additions to, replacements of and substitutions for any of the foregoing which may be made as permitted or required by the Lender. (z) FINANCING STATEMENTS: the UCC-1 Financing Statements executed by the Borrower to be filed of record in the office of the Minnesota Secretary of State and the Hennepin County Recorder, serving to perfect a valid first lien on the property subject to the Security Agreement and the personal property subject to the Mortgage. (aa) GENERAL CONTRACTOR: Hagman Construction, Inc. (bb) INDENTURE: the Indenture of Trust of even date herewith by and between the Issuer and the Trustee relating to the Bonds. (cc) INSPECTING ARCHITECT: HDR Engineering, Inc. (dd) INTEREST DRAWING: shall have the meaning assigned thereto in the Letters of Credit. (ee) ISSUER: City of Victoria, Minnesota. 4 (ff) LETTERS OF CREDIT: collectively, the Series A Letter of Credit and the Series B Letter of Credit. (gg) LOAN AGREEMENT: the Loan Agreement of even date herewith by and between the Issuer and the Borrower. (hh) MANDATORY REDEMPTION DATE: the date of each scheduled Mandatory Redemption Drawing pursuant to Section 3.1(4) of the Indenture. (ii) MANDATORY REDEMPTION DRAWING: shall have the meaning assigned thereto in the Letters of Credit. (jj) MORTGAGE: the Mortgage, Security Agreement, Fixture Financing Statement and Assignment of Leases and Rents of even date herewith executed by the Borrower for the benefit of the Lender securing payment of all amounts which may be advanced by the Lender under the Series B Letter of Credit and constituting a valid first lien on a good and marketable fee simple title to the Project Premises. (kk) OBLIGATION OF REIMBURSEMENT: shall have the meaning assigned thereto in Section 4.1 hereof. (ll) ORGANIZATIONAL DOCUMENTS: collectively, the following documents each of which shall be in form and substance acceptable to the Lender; (1) a copy of the Articles of Incorporation of the Borrower, duly certified by the Secretary of State of the State of Minnesota; (2) a copy of the Certificate of Good Standing of the Borrower, duly issued by the Secretary of State of the State of Minnesota; (3) a copy of the Bylaws of the Borrower, duly certified by an officer of the Borrower; (4) a copy of the resolutions of the Borrower authorizing the execution, delivery and performance of the Borrower Documents and the Loan Agreement, duly certified by an officer of the Borrower; and (5) an opinion of counsel for the Borrower dated as of the date hereof and acceptable in form and substance to the Lender. (mm) PLANS AND SPECIFICATIONS: the final plans and specifications for the Facility as approved by the Lender and the Inspecting Architect. 5 (nn) PROJECT: the Project Premises and the Facility, including all Project Equipment, as the same may from time to time exist. (oo) PROJECT COSTS: the sum of (i) Construction Costs; (ii) Equipment Acquisition Costs; and (iii) all commitment fees of the Lender, brokerage or finder's fees, interest charges, service fees, attorneys' fees, administrative fees, fiscal consultants' fees, contractors' fees, developers' fees, title insurance fees and charges, recording fees and registration taxes, paid or incurred by or on behalf of the Lender in connection with the Project. (pp) PROJECT EQUIPMENT: any and all equipment now or hereafter located within or used in connection with the Project Premises or the Facility acquired, in whole or in part, from proceeds of Bonds, and any additions to, replacements of and substitutions for any of the foregoing which may be permitted or required by the Lender. (qq) PROJECT PREMISES: the real estate described in Exhibit A attached to the Mortgage. (rr) RELATED DOCUMENTS: shall have the meaning assigned thereto in Section 7.16(a) hereof. (ss) SECURITY AGREEMENT: the Security Agreement of even date herewith executed by the Borrower for the benefit of the Lender securing payment of all amounts payable under this Agreement and constituting a valid first lien on all equipment now owned or hereafter acquired by the Borrower. (tt) SERIES A LETTER OF CREDIT: the Irrevocable Letter of Credit No. S404271 issued by the Lender to the Trustee for the account of the Borrower in the original stated amount of $4,388,753.00. (uu) SERIES B LETTER OF CREDIT: the Irrevocable Letter of Credit No. S404272 issued by the Lender to the Trustee for the account of the Borrower in the original stated amount of $1,482,053.00. (vv) TANGIBLE NET WORTH: the sum of the contributed capital, surplus and undivided profits of the Borrower, less any amounts attributable to treasury stock, good will, patents, copyrights, mailing lists, catalogues, trademarks, bond discount and underwriting expenses, organization expenses, leasehold improvements and loans to officers or employees and other like intangibles (not including prepaid expenses classified as current assets or intangible assets offset by equal related liabilities), all as determined in accordance with generally accepted accounting principles. (ww) TITLE COMPANY: Commercial Partners Title, LLC, as agent for Chicago Title Insurance Company, or such other title company as is acceptable to the Lender. 6 (xx) TITLE DOCUMENTS: collectively, the following documents, each of which shall be acceptable to the Lender: (1) a fully paid mortgagee's title insurance policy issued by the Title Company in an amount equal to $1,482,053 insuring the Mortgage as a first lien on a good and marketable fee simple title to the Project Premises, subject only to "Permitted Encumbrances" (as that term is defined in the Mortgage) and, without limiting the generality of the foregoing, insuring the Mortgage against claims for mechanics' liens, rights of parties in possession and matters which would be disclosed by a comprehensive survey and including special assessment searches, UCC searches, judgment searches and all other customary searches, and a long form zoning endorsement and a comprehensive endorsement; (2) written evidence of payment of (i) all real estate taxes relating to the Project Premises presently due and payable, and (ii) all levied and pending assessments relating to the Project Premises (or, in lieu thereof, payment in escrow of an amount determined by the Lender); and (3) a preliminary perimeter land survey of the Project Premises, prepared at the Borrower's expense, certified to the Lender by a licensed, registered surveyor acceptable to the Lender, dated within thirty (30) days of the date hereof and incorporating the legal description and street address of the Project Premises; showing the location of all points and lines referred to in the legal description; identifying the number of square feet and acres contained in the Project Premises and the number of vehicles which may be parked in designated parking areas; showing the actual or proposed location of the Project (including sidewalks, stoops and parking areas) as being within the exterior boundaries of the Project Premises and in compliance with all setback requirements of the city in which the Project is located; identifying the square footage of all existing structures and the number of stories of all existing structures; showing the location of all easements and encroachments onto or from the Project Premises that are visible on the Project Premises, known to the surveyor preparing the survey or of record and/or making a positive statement that there are no encroachments; identifying easements of record by recording data indicating, if possible, the dimensions of such easement; showing the location of all utilities serving the Project Premises (and tie-in points with respect hereto); showing any flood hazard areas; showing all service roads, highways, bicycle paths, walkways, right-of-way lines, driveways and parking areas on or serving the Project, including the distance from the nearest street; and showing any other matters affecting the title to the Project Premises or the use thereof. (yy) TOTAL COST OF PROJECT: The sum of all Project Costs. (zz) TRUSTEE: First Trust National Association, and any co-trustee or successor trustee 7 appointed, qualified and then acting as such under the provisions of the Indenture. SECTION I.2 OTHER TERMS. All capitalized terms used herein and not otherwise defined in this Agreement shall have the respective meanings for purposes of this Agreement as are assigned to such terms in Section 1.1 of the Indenture or Section 1.1 of the Loan Agreement, as the case may be, including, without limitation, the following terms: Prime Rate; Construction Fund; Interest Payment Date; Business Day; Alternate Letter of Credit; Series A Bonds; and Series B Bonds. SECTION I.3 REIMBURSEMENT AGREEMENT CONTROLLING. To the extent there exists any inconsistencies as between the terms and/or provisions contained in this Reimbursement Agreement and the Bond Documents, the language in this Reimbursement Agreement shall control. ARTICLE II COMMITMENT TO ISSUE THE LETTERS OF CREDIT AND APPROVAL OF ADVANCES SECTION II.1 LETTERS OF CREDIT; ADVANCES. The Lender hereby agrees that, on the terms and subject to the conditions hereinafter set forth, the Lender will issue the Letters of Credit to secure payment of the Bonds and approve the making of the Advances by the Trustee to the Borrower from time to time from the Construction Fund from and after the date hereof to the Commitment Termination Date. Notwithstanding anything to the contrary contained herein, the Lender shall only be obligated to approve the Advances to pay Project Costs in an amount up to or equal to the amount of the Commitment and such obligation is further subject to the conditions of Article III hereof. SECTION II.2 DRAW REQUESTS - CONSTRUCTION COSTS. (a) Whenever the Borrower desires to obtain an Advance for Construction Costs, which shall be no more often than monthly, the Borrower shall submit to the Lender and the Title Company a Draw Request, duly signed by the General Contractor, the Architect, the Inspecting Architect and the Borrower, setting forth the information requested therein. Each Draw Request shall, if so required by the Lender or the Title Company, be submitted at least ten (10) days before the date the Advance is desired. Each Draw Request shall constitute a representation and warranty by the Borrower that all representations and warranties set forth in the Borrower Documents are true and correct as of the date of such Draw Request. Draw Requests for Construction Costs may be made only from the proceeds of the Series B Bonds. (b) At the time of submission of each Draw Request, the Borrower shall submit to the Title Company and the Lender the following: 8 (1) A written lien waiver from each Contractor for work done and materials supplied by it which are to be paid for pursuant to all prior Draw Requests; and (2) Such other supporting evidence as may be reasonably requested by the Lender to substantiate all payments which are to be made out of the relevant Draw Request and/or substantiate all payments then made with respect to the Facility. (c) At the time of submission of the final Draw Request following completion of the Facility, the Borrower shall submit to the Lender a "as-built" survey with respect to the Project Premises complying with the requirement set forth in Section 1.1(av)(3) hereof, except that the actual, as opposed to the proposed, location of the Facility shall be shown thereon. (d) At the time of submission of the final Draw Request following completion of the Facility, which shall not be submitted before completion of Facility, including all landscape requirements, the Borrower shall submit to the Lender and to the Title Company the following, unless waived by the Lender and the Title Company in writing: (1) a final Sworn Construction Statement, in form and substance acceptable to the Lender, signed by the General Contractor and the Borrower, showing all costs and expenses of any kind incurred in constructing and installing the Facility, and a certificate signed by the Borrower reflecting all Construction Costs paid by the Borrower; (2) a written lien waiver from each Contractor for all work done and for all materials furnished by it for the Facility, which lien waiver shall conform in form and amount to the Sworn Construction Statement referred to in (1) above; (3) a master written lien waiver from the General Contractor in an amount equal to the total amount of the costs reflected in the Sworn Construction Statement referred to in (1) above; (4) such other supporting evidence as may be reasonably requested by the Lender or the Title Company to substantiate all payments which are to be made out of the final Draw Request and/or to substantiate all payments then made with respect to the Facility; (5) evidence reasonably satisfactory to the Lender that all work requiring inspection by municipal or other governmental authorities having jurisdiction has been inspected and approved by such authorities and by the rating or inspection organization, bureau, corporation or office having jurisdiction, and that requisite certificates of occupancy and other approvals have been issued; (6) an AIA Certificate of Substantial Completion signed by the Borrower, the 9 General Contractor, the Architect and the Inspecting Architect certifying that the Facility has been constructed and completed substantially in accordance with the Plans and Specifications; and (7) a Certificate of Occupancy duly issued by the Issuer. (e) If on the date an Advance for Construction Costs is desired, the Borrower has performed all of its agreements and complied with all requirements theretofore to be performed or complied with hereunder, the Lender shall (subject to the conditions set forth in Section 3.1 hereof and elsewhere herein) approve and authorize the Trustee to disburse the amount of the requested Advance for Construction Costs to the Title Company, first from the Escrow Account and second from the Construction Fund; provided, however, that the final Advance for Construction Costs shall be disbursed, first, from the Construction Fund and second from the Escrow Account, and the Title Company shall thereafter disburse the amount of the requested Advance within three (3) business days to or for the benefit of the Borrower. The request for the final Advance for Construction Costs may also include a request for reimbursement for any Construction Costs theretofore paid for using proceeds of the Escrow Account. The form of the authorization to the Trustee to advance for Construction Costs is attached hereto as EXHIBIT B. SECTION II.3 ADDITIONAL DEPOSITS. If the Lender or the Title Company shall at any time in good faith determine that the aggregate undisbursed amounts of the portion of the Construction Fund allocated for Construction Costs (i.e., the proceeds of the Series B Bonds together with accrued interest thereon) and the Escrow Account is less than the amount required to pay all costs and expenses of any kind which reasonably may be anticipated in connection with the completion of the Facility and shall thereupon send written notice thereof to the Borrower specifying the amount required to be deposited by Borrower with the Lender to provide sufficient funds to complete the Facility, the Borrower, shall within ten (10) calendar days of receipt of any such notice, deposit with the Lender in the Escrow Account the amount of funds specified in such notice. SECTION II.4 ADVANCES - EQUIPMENT ACQUISITION COSTS. (a) Whenever the Borrower desires to obtain an Advance for Equipment Acquisition Costs, which shall be no more often than monthly, the Borrower shall submit to the Lender a copy of the invoice for each item of Project Equipment for which the Borrower is seeking reimbursement, which invoice must be stamped "paid" by the vendor. Each such request for an Advance shall, if so required by the Lender, be submitted at least seven (7) days before the date the Advance is desired. Each such request for an Advance shall constitute a representation and warranty by the Borrower that all representations and warranties set forth in the Borrower Documents are true and correct as of the date of such request for an Advance. Requests for Advances for Equipment Acquisition Costs may be made only from the proceeds of the Series A Bonds. The form of the authorization to the 10 Trustee to advance for Equipment Acquisition Costs is attached hereto as EXHIBIT C. (b) Only new items of Project Equipment shall be subject to reimbursement pursuant to the terms of this Section 2.4. The Lender shall have the right, at its option, to inspect all items of Project Equipment prior to approving an Advance for reimbursement of the cost of acquisition of such item of Project Equipment. SECTION II.5 ADVANCES WITHOUT RECEIPT OF DRAW REQUEST. Notwithstanding anything to the contrary contained herein, the Lender shall have the irrevocable right at any time and from time to time to direct the Trustee to advance monies on deposit in the Construction Fund to pay any and all expenses referred to in Section 7.5 hereof, all without receipt of a Draw Request from or any approval or consent of the Borrower. SECTION II.6 EXPIRATION, RENEWAL OF LETTERS OF CREDIT. The Series A Letter of Credit shall have an initial expiration date of not later than April 1, 1998, but shall be automatically renewable for successive periods of two years each (but in no event to a date later than April 1, 2006) unless the Lender determines not to renew the term of the Series A Letter of Credit and gives written notice of such non-renewal to the Borrower and the Issuer and the Trustee at least sixty (60) calendar days prior to the expiration date of the Series A Letter of Credit. The Series B Letter of Credit shall have an initial expiration date of not later than April 1, 1998, but shall be automatically renewable for successive periods of two (2) years each (but in no event to a date later than April 1, 2011) unless the Lender determines not to renew the term of the Series B Letter of Credit and gives written notice of such non-renewal to the Borrower and the Issuer and the Trustee at least sixty (60) days prior to the expiration date of the Series B Letter of Credit. The Borrower acknowledges and agrees that the Lender shall have no obligation to renew either of the Letters of Credit at any time in the future. The Borrower further acknowledges and understands that the Bonds will be subject to mandatory redemption if the Lender does not renew the Letters of Credit thereby resulting in a draw under the Letters of Credit unless an Alternate Letter of Credit is delivered to the Trustee pursuant to the Indenture or unless the Bonds are re-marketed pursuant to the terms of the Indenture. SECTION II.7 DRAW UNDER LETTERS OF CREDIT TO REDEEM OR DEFEASE BONDS. The Borrower acknowledges and agrees that the consent of the Lender is required in order for the Trustee to submit a draft under the Letters of Credit for the purpose of optionally redeeming Bonds or to defease Bonds pursuant to the Indenture. Such consent shall not be required if the Borrower redeems or defeases the Bonds using funds from any other source. 11 ARTICLE III CONDITIONS OF LENDING SECTION III.1 CONDITIONS PRECEDENT TO ISSUANCE OF LETTERS OF CREDIT AND APPROVAL OF INITIAL ADVANCE. As a condition precedent to the issuance of the Letters of Credit and approval of the initial Advance hereunder, the following agreements, documents and other items shall have been executed and/or delivered to the Lender by the party indicated, each of which documents, agreements and other items shall be in form and substance acceptable to the Lender (unless waived in writing by the Lender): (a) the Borrower Documents, duly executed and delivered by the Borrower; (b) the Bond Documents, duly executed by the parties thereto; (c) evidence that the Mortgage has been duly filed of record in the office of the Hennepin County Recorder (a "marked-up" policy of title insurance issued by the Title Company shall satisfy this condition); (d) the Construction Documents; (e) the Organizational Documents; (f) the Title Documents; (g) evidence acceptable to the Lender, including presentation of lien waivers and other receipts of payment acceptable to the Lender, that the Borrower has theretofore paid costs and expenses with respect to the Project in an amount equal to the difference between the Construction Costs and the proceeds of the Series B Bonds, or, in lieu thereof, deposited such amount into the Escrow Account, and the Lender shall not be obligated to approve any Advance to reimburse the Borrower for such costs and expenses; (h) an opinion of Bond Counsel issued in connection with the Bonds which states that the Bonds are validly issued, are not arbitrage bonds, and the interest on the Bonds is not includable in gross income for federal income tax purposes either addressed to the Lender or accompanied by a reliance letter indicating that the Lender is entitled to rely on the opinion; (i) certified copies of the preliminary and final resolution or ordinances adopted by the Issuer authorizing the issuance of the Bonds; (j) the Credit Enhancement Fee in the amount of $58,055.74 for the Letters of Credit that will accrue from April 9, 1996, through and including March 31, 1997, as required under Section 4.2 hereof; 12 (k) evidence of payment to the Lender of a non-refundable real estate underwriting fee in the amount of $8,100.00; (l) evidence of payment to the Trustee of the $750.00 set up fee and the first semiannual trustee fee in the amount of $750.00; (m) evidence of payment of all expenses incurred by the Lender which are payable by the Borrower pursuant to Section 7.5 hereof; and (n) such other documents and instruments as the Lender may reasonably request. SECTION III.2 FURTHER CONDITIONS PRECEDENT TO ANY ADVANCE. The obligation of the Lender to make or cause to be made each Advance (including the initial Advance) shall be subject to the further conditions precedent that on the date of such Advance: (a) no Event of Default, and no event which with the giving of notice or the lapse of time or both would constitute an Event of Default, shall have occurred and be continuing and all representations and warranties made by the Borrower in Article V hereof shall continue to be true and correct as of the date of such Advance; (b) with respect to a request for an Advance for Construction Costs, no determination shall have been made by the Lender or the Title Company under the provisions of Section 2.3 hereof that additional funds are to be deposited with the Trustee, or, if such a determination has been made and notice thereof sent to the Borrower, the Borrower shall have deposited the necessary funds with the Trustee in accordance with Section 2.3 hereof; (c) with respect to a request for an Advance for Construction Costs, if required by the Lender, the Lender shall have been furnished with a statement of the Borrower and of any Contractor, in form and substance acceptable to the Lender setting forth the names, addresses and amounts due or to become due as well as the amounts previously paid to every Contractor, subcontractor, person, firm or corporation furnishing materials or performing labor in connection with the construction of any part of the Facility; (d) the Borrower shall have provided to the Lender such evidence of compliance with all of the provisions of this Agreement as the Lender may reasonably request; and (e) no license or permit necessary for the construction and installation of the Facility shall have been revoked nor the issuance of any such license or permit or the authority of the Borrower to construct the Facility shall have been subjected to challenge by or before any court or other governmental authority having or asserting jurisdiction over the Project. 13 ARTICLE IV REIMBURSEMENTS AND OTHER PAYMENTS: LENDER'S RIGHT TO CURE SECTION IV.1 OBLIGATION OF REIMBURSEMENT. The Borrower hereby agrees to pay Lender (the "Obligation of Reimbursement") (i) on the day that any amount is drawn under the Letters of Credit a sum equal to the amount drawn under the Letters of Credit plus any and all reasonable charges and expenses which the Lender may pay or incur relative to such draw, (ii) on demand, any amounts advanced by the Lender in its sole discretion to cure any event of default under the Bond Documents, and (iii) on demand, interest on all amounts remaining unpaid by the Borrower to the Lender under this Agreement at any time accruing from the date such amounts become payable (in the case of an amount payable on demand, which interest shall accrue from the date the Lender is first entitled to demand payment, regardless of whether a demand for payment is actually made), until payment in full, at an annual rate equal to two percent (2%) per annum in excess of the Prime Rate, as the same changes from time to time; provided, however, that no interest shall accrue or be payable on any amounts paid by the Lender pursuant to a draft submitted under the Letters of Credit if the full amount of such draft is reimbursed by the Borrower to the Lender, by 2:00 o'clock p.m. on the same day such draft is paid by the Lender. A schedule of the principal payments required under the Series B Bonds is attached hereto as EXHIBIT D. SECTION IV.2 PAYMENT OF CREDIT ENHANCEMENT FEE. So long as either of the Letters of Credit is outstanding, the Borrower agrees to pay the Lender a Credit Enhancement Fee with respect to the Letters of Credit (the "Credit Enhancement Fee") for each year commencing on April 1 and ending on March 31 (or portion thereof) that either of the Letters of Credit is outstanding equal to one percent (1.0%) per annum of the sum of (a) the maximum amount available to be drawn under the Letters of Credit on the first day of such year, plus (b) the amount which is subject to reinstatement (either automatic or optional) on such day pursuant to the Letters of Credit. The Credit Enhancement Fee shall be due and payable in advance on or before March 31 of each year. Notwithstanding the foregoing, if and for so long as an Event of Default has occurred and continues or exists, then, at the Lender's option, the Credit Enhancement Fee shall thereafter be increased by an additional two percent (2.0%) per annum. In addition, in the event the Borrower no longer maintains its line of credit or primary depository account(s) with the Lender, then, at the Lender's option, the Credit Enhancement Fee shall thereafter be increased by an additional one percent (1.0%) per annum. 14 SECTION IV.3 CAPITAL ADEQUACY/CHANGE IN LAW. If any change in any law or regulation or in the interpretation thereof by any court or administrative governmental authority charged with the administration thereof shall either (i) impose, modify or deem applicable or modify any capital adequacy, reserve, special deposit or similar requirement against letters of credit issued by, or assets held by, or deposits in or for the account of the Lender (including without limitation, a requirement which affects the Lender's allocation of capital resources), or (ii) impose on the Lender any other condition regarding this Agreement or either of the Letters of Credit, and the result of any event referred to in the preceding clause (i) or (ii) shall be to increase the cost (including without limitation, reserve or similar cost) to the Lender of issuing or maintaining the Letters of Credit or reduce the Lender's return hereunder or all or any of the Lender's capital is reduced (which increase in cost or reduction in return shall be determined by the Lender's reasonable allocation of the aggregate of such cost increases or return reductions resulting from such events), then upon demand by the Lender, the Borrower shall immediately pay to the Lender, from time to time as specified by the Lender, additional amounts which shall be sufficient to compensate the Lender for such increased cost, together with interest on each such amount from the date demanded until payment in full thereof at the rate provided for in Section 4.1 hereof. A certificate as to such increased costs incurred by the Lender as a result of any event mentioned in clause (i) or (ii) above, submitted by the Lender to the Borrower shall be conclusive, absent manifest error, as to the amount thereof. SECTION IV.4 COMPUTATION OF CREDIT ENHANCEMENT FEE AND INTEREST. The Credit Enhancement Fee and interest payable on amounts due under this Agreement shall be computed on the basis of a 360-day year and charged for actual days elapsed. SECTION IV.5 RIGHT OF LENDER TO CURE DEFAULTS UNDER BOND DOCUMENTS. If the Borrower shall fail to make any payments under the Bond Documents on the day such payment is first due and payable by the Borrower, or shall fail to comply with any other covenant or agreement of the Borrower under the Bond Documents, or if any other default or event of default shall occur under the Bond Documents, the Lender shall have the option, in the Lender's sole discretion, to cure any such failure by taking action reasonably required to effect such cure, including, without limitation, making the required payment directly to the Trustee. Any such payment by the Lender shall constitute an advance repayable by the Borrower in accordance with Section 4.1 hereof. The Borrower shall be responsible for any costs and/or expenses incurred by the Lender in curing any such default or event of default. SECTION IV.6 PAYMENTS. All payments by the Borrower to the Lender hereunder shall be made in lawful currency of the United States in immediately available funds at the Lender's office at 900 East Wayzata Boulevard, Wayzata, Minnesota 55391. In addition, the Lender shall have the right to debit any of the Borrower's accounts at the Lender without further authorization of the Borrower to make any such payments. SECTION IV.7 COLLATERAL. The Borrower hereby acknowledges that the Obligation of Reimbursement and each and every other liability and indebtedness of the Borrower hereunder are secured by the security interests and other liens granted to the Lender by the Borrower 15 pursuant to the Security Agreement, and that the Obligation of Reimbursement with respect to amounts advanced under the Series B Letter of Credit is also secured pursuant to the Mortgage. SECTION IV.8 FEES. In addition to the Credit Enhancement Fee, the Borrower shall pay to the Lender, on demand, such fees as are customarily charged by the Lender from time to time in connection with the amendment and administration of letters of credit, as the same change from time to time. In addition to the foregoing, the Borrower shall pay a customary transfer fee to the Lender (in an amount not to exceed $500 per transfer) if either or both of the Letters of Credit is transferred to a successor trustee under the Indenture. SECTION IV.9 REDEMPTIONS UNDER SERIES A BONDS. The parties hereto acknowledge that Advances for Equipment Acquisition Costs may be obtained from the Construction Fund from the date hereof through and including the Commitment Termination Date, but that the Borrower has not yet determined the timing of requests for Advances for Equipment Acquisition Costs. As a result, the Series A Bonds have been structured to require no principal payments on the Series A Bonds until the April 1, 2006 maturity date thereof. The Borrower agrees, however, that as of April 1 of each year during the term of the Series A Bonds commencing as of April 1, 1997, it shall, pursuant to the provisions of Section 8.2(a) of the Loan Agreement, direct the Trustee to call for redemption and prepayment of a portion of the Series A Bonds under the provisions of Section 3.1(1) of the Indenture, in an amount determined in accordance with the terms set forth in this Section 4.9. The amount of each annual redemption shall be determined as follows: (a) The total amount of Advances which have been made hereunder for Equipment Acquisition Costs from the date hereof through and including February 1, 1997, shall be divided by seven (7). This amount, when added to the amounts determined pursuant to subsections (b) and (c) below and rounded up pursuant to subsection (d) below, shall be applied to redeem a portion of the Series A Bonds on each April 1 commencing with April 1, 1997, continuing on each April 1 thereafter through and including April 1, 2003. (b) The total amount of Advances which have been made hereunder for Equipment Acquisition Costs from February 1, 1997, through and including January 31, 1998, shall be divided by seven (7). This amount, when added to the amounts determined pursuant to subsection (a) above and subsection (c) below and rounded up pursuant to subsection (d) below, shall be applied to redeem a portion of the Series A Bonds on each April 1 commencing with April 1, 1998, and continuing on each April 1 thereafter through and including April 1, 2004. (c) The total amount of Advances which have been made hereunder for Equipment Acquisition Costs from February 1, 1998, through and including February 1, 1999, shall be divided by seven (7). This amount, when added to the amounts determined pursuant to subsections (a) and (b) above and rounded up pursuant to subsection (d) below, shall be applied to redeem a portion of the Series A Bonds on each April 1 commencing with April 1, 1999, and continuing on each April 1 thereafter through and including April 1, 2005. 16 (d) The amounts payable on each April 1 as determined pursuant to subsections (a), (b) and (c) above shall be added together and rounded up to the next $5,000 increment. This amount shall be the amount applied to redeem the Series A Bonds pursuant to the terms of this Section 4.9. By way of illustration, assume that the total Advances for Equipment Acquisition Costs from the date hereof through February 1, 1997, is $1,400,000, that the total Advances for Equipment Acquisition Costs from February 1, 1997, through January 31, 1998, is $1,600,000, and that the total Advances for Equipment Acquisition Costs from February 1, 1998, through February 1, 1999, is $1,205,000. The required annual redemptions for the Series A Bonds shall be determined as follows:
Tranche (a) Tranche (b) Tranche (c) Date ($1,400,000/7) ($1,600,000/7) ($1,205,000/7) Sum Rounding - ---- -------------- -------------- -------------- --- -------- 4/1/97 200,000 200,000 200,000 4/1/98 200,000 228,571 428,571 430,000 4/1/99 200,000 228,571 172,143 600,714 605,000 4/1/00 200,000 228,571 172,143 600,714 605,000 4/1/01 200,000 228,571 172,143 600,714 605,000 4/1/02 200,000 228,571 172,143 600,714 605,000 4/1/03 200,000 228,571 172,143 600,714 605,000 4/1/04 228,571 172,143 400,714 405,000 4/1/05 172,143 172,143 145,000 --------- TOTAL REDEMPTIONS: 4,205,000 --------- ---------
ARTICLE V. WARRANTIES, REPRESENTATIONS AND COVENANTS SECTION V.1 WARRANTIES AND REPRESENTATIONS. The Borrower hereby represents and warrants to the Lender as follows: (a) the Borrower is a corporation duly organized, validly existing and in good standing under the laws of the State of Minnesota, and is under no legal disability to execute, deliver and perform the Borrower Documents and the Bond Documents and to own its property and conduct its business as presently conducted and as proposed to be conducted; 17 (b) the Borrower possesses adequate licenses, certificates, permits, franchises, patents, copyrights, trademarks and trade names, or rights thereto, to conduct its business substantially as now conducted and as presently proposed to be conducted; (c) the execution, delivery and performance of the Borrower Documents and the Bond Documents will not violate any provision of the organizational documents of the Borrower or of any law, rule, regulation or court order or result in the breach of or constitute a default under any indenture or loan, credit or other agreement or instrument to which the Borrower is a party or by which it or its properties may be bound or affected or result in the creation or imposition or any lien, charge or encumbrance of any nature upon any of its properties or assets contrary to the terms of any such instrument or agreement; (d) the Borrower Documents and the Bond Documents each constitutes the legal, valid and binding obligation of the Borrower enforceable in accordance with its respective terms (except, as to enforceability, to the extent limited by bankruptcy, insolvency and other similar laws affected creditors' rights generally); (e) the Project and the intended use thereof for the purpose and in the manner contemplated by this Agreement are permitted by and will comply in all material respects with all presently applicable use or other restrictions and requirements in prior conveyances, zoning ordinances and all development, pollution control, water conservation and other laws, regulations, rules and ordinances of the United States and the State of Minnesota and the respective agencies thereof, and the political subdivision in which the Project is located; (f) there is no suit, action or proceeding pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower before or by any court, arbitrator, administrative agency or other governmental authority which, if adversely determined, would materially and adversely affect its business, properties, operations, assets or condition (financial or otherwise) or the validity of any of the transactions contemplated by the Borrower Documents, the Bond Documents or any of the documents related thereto, or the ability of the Borrower to perform its obligations hereunder or thereunder or as contemplated hereby or thereby; (g) the Borrower has furnished the Lender with financial statements for the Borrower for its fiscal year ended August 31, 1995, and for its fiscal quarter ended February 29, 1996, each of which financial statements fairly presents the financial condition of the Borrower at and as of the date thereof, and, as of said date, there were no material liabilities of the Borrower, direct or indirect, fixed or contingent, which were not reflected in the financial statements or the notes thereto; (h) the Borrower has filed all federal and state tax returns and reports required to be filed, which returns properly reflect the taxes owed by it for the period covered thereby 18 and it has paid or made appropriate provisions for the payment of all taxes which may become due pursuant to said returns and for the payment of all present installments of any assessments, fees and other governmental charges upon it or upon any of its property; (i) no consent, approval or authorization of or permit or license from or registration with or notice to any federal or state regulatory authority or any third party is required in connection with the making or performance of the Borrower Documents, the Bond Documents or any document or instrument related hereto or thereto, or, if so required, such consent, approval, authorization, permit or license has been requested and obtained or such registration made or notice given or such other appropriate action taken on or prior to the date hereof; (j) the Borrower is not in default of a material provision under any material agreement, instrument, decree or order to which it is a party or to which it or its property is bound or affected; (k) to the Borrower's knowledge, and except as permitted by the Certificate, no pollutants or other toxic or hazardous waste or substances, including any solid, liquid, gaseous, or thermal irritant or contaminant, such as smoke, vapor, soot, fumes, acids, alkalis, chemicals or waste (including materials to be recycled, reconditioned or reclaimed) (collectively "substances") which is regulated by law, regulation, ordinance or code have existed in, on or under the Project Premises or have been discharged, dispersed, released, stored, treated, generated, disposed of, or allowed to escape (collectively referred to as an "incident") on the Project Premises. The Borrower shall not permit third parties to cause an incident, shall take reasonable steps to ensure that an incident does not occur, and shall promptly take all appropriate steps to remedy an incident, in compliance with all local, state and federal laws and regulations should an incident occur; (l) no underground storage tanks are located on the Project Premises or, to the Borrower's knowledge, were located on the Project Premises and subsequently removed or filled; (m) no dump, sanitary landfill or gasoline service station are or were located on Project Premises; (n) no investigation, administrative order, consent order and agreement, litigation, or settlement (collectively referred to as the "action") including, but not limited to, proceedings or actions commenced by any person (including, but not limited to any federal, state, or local government or agency or entity before any court or administrative agency) with respect to substances is proposed, threatened, anticipated or in existence with respect to Project Premises; (o) to the Borrower's knowledge, the Project and the Borrower's operations at the 19 Project always have been and now are in substantial compliance with all applicable federal, state and local statutes, laws and regulations. No notice has been served on the Borrower from any entity, governmental body or individual claiming any violation of any law, regulation, ordinance or code, or requiring compliance with any law, regulation, ordinance or code, or demanding payment or contribution for environmental damage or injury to natural resources, or any injury to human health; and (p) each and all of the warranties and representations of the Borrower set forth and contained in each of the Bond Documents are true and correct in all material respects as of the date hereof. Each of the foregoing representations and warranties shall be deemed to be repeated and reaffirmed in all material respects on and as of the date any Advance is made. In addition, the request for each Advance hereunder by the Borrower shall constitute a representation and warranty by the Lender that the representations of the Borrower as set forth in Section 3.5(3) of the Loan Agreement are true and correct with respect to the requested Advance. SECTION V.2 COVENANTS In addition to the covenants and agreements of the Borrower set forth and contained in the other Borrower Documents, the Borrower hereby covenants and agrees to and with the Lender as follows, so long as either of the Letters of Credit remains outstanding and any amounts remain due and payable to the Lender by the Borrower pursuant to Article IV hereof, unless otherwise agreed or consented to by the Lender: (a) that all Advances shall be used to pay Project Costs; that the Project does and shall comply with all applicable restrictions, conditions, ordinances, regulations and laws of governmental departments and agencies having jurisdiction over the Project, and does not and shall not violate any private restrictions or covenants or encroach upon or interfere with easements affecting the Project Premises; and that the Borrower will commence and carry on continuously, diligently and with reasonable dispatch, the construction of the Facility in conformance to the Plans and Specifications, free from all mechanics, labors, and materialmen's liens, and in good and workmanlike manner, and substantially complete the Facility on or before the Completion Date; (b) to keep, perform, enforce and maintain in full force and effect all of the terms, covenants, conditions and requirements of the Borrower Documents, the Bond Documents, the Title Documents, the Organizational Documents and the Construction Documents; not to amend, modify, supplement, terminate, cancel or waive any of the terms, covenants, conditions or requirements of any of said documents without the prior written consent of the Lender; and to execute such amendments, modifications, supplements and extensions of said documents as may be reasonably requested by the Lender; (c) upon the demand of the Lender for reasonable cause, from time to time not more frequently than once every two (2) years during the term hereof, to deliver to the Lender 20 an updated survey showing the Facility to be located within applicable lot lines of the Project Premises and set back lines and not encroaching upon any easements, streets or adjoining property, and to deliver to the Lender from time to time and at any time updated and recertified copies of the Title Documents, the Organizational Documents and Construction Documents; (d) not to create, permit to be created or to allow to exist, any liens, charges or encumbrances on the Project (other than "Permitted Encumbrances" as defined in the Mortgage) and the lien of general real estate taxes pending and special assessments not due and payable except for such liens, charges and encumbrances which are being diligently contested in good faith by appropriate proceedings and provided that, if requested by the Lender, the Borrower shall have deposited into escrow with the Lender an amount equal to such lien, charge or encumbrance plus some penalties accrued thereon; (e) not to assign this Agreement or any interest herein or all or any part of the Advances to be made hereunder; (f) to use its best efforts to require each Contractor to comply with all rules, regulations, ordinances and laws bearing on its conduct of work on the Facility; (g) to obtain and maintain at times during the process of constructing and installing the Facility and at all times thereafter during the term of the Letters of Credit, if applicable (and, from time to time at the request of the Lender, furnish the Lender with proof of payment of premiums on): (1) builder's risk insurance, written on the so-called "Builder's Risk Completed Value Basis", in an amount equal to total construction costs for the Facility, and with coverage available on the so-called "all risk", non-reporting form of policy, the Lender's interest to be protected in accordance with a loss payable clause in form and content satisfactory to the Lender, naming the Lender as mortgagee and loss payee; (2) comprehensive general liability insurance (including operations, contingent liability, operations of subcontractors, complete operations and contractual liability insurance) in such amount as the Lender may require from time to time (but with coverage of not less than $1,000,000/$1,000,000) and naming the Lender as an additional insured; (3) worker's compensation insurance, with statutory coverage covering all persons engaged in the construction or installation of the Project; (4) hazard insurance, with respect to completed portions of the Project, insuring against loss by fire, lightning, vandalism, malicious mischief and other 21 risks customarily covered by a standard extended coverage endorsement, in an amount not less than the face amount of the Series B Letter of Credit or the full insurable value of the Project, whichever is greater, and naming the Lender as mortgagee and loss payee; (5) flood insurance, if any of the Land is located in a "flood plain" as defined by the Federal Insurance Administration, in the maximum obtainable amount up to the face amount of the Series B Letter of Credit, naming the Lender as loss payee (unless an appropriate official of the city in which the Project Premises is located states in writing that all of the Project Premises is not located in a "flood plain" as defined by the Federal Insurance Administration); (6) rent loss or business interruption insurance, with respect to completed portions of the Project, with respect to the perils set forth in paragraph (4) above, in an amount sufficient to enable the Borrower to make the required payments under this Agreement, to pay taxes and insurance and continue operations during an assumed reconstruction period of one (1) year, naming the Lender as mortgagee and loss payee; and (7) such insurance with respect to the Project Equipment as is required by the Security Agreement; Such policies of insurance to be in form and content satisfactory to the Lender and to be placed with financially sound and reputable insurers licensed to transact business in the State of Minnesota and to contain an agreement of the insurer to give not less than thirty (30) days' advance written notice to the Lender in the event of cancellation, change or non- renewal of such policy effecting the coverage thereunder; acceptance of such insurance policies not to bar the Lender from requiring additional insurance (either in type or amount) at a later date which it reasonably deems necessary; (h) to keep accurate books of record and account for itself in which true and complete entries will be made in accordance with generally acceptable accounting principles consistently applied and, upon request of the Lender will give any representative of the Lender access during normal business hours to, and permit such representative to examine, copy or make extracts from any and all books, records, contracts, plans, drawings, permits, bills and statements of account pertaining to the Project, to inspect any of its properties and to discuss its affairs, finances and accounts with any of its officers, all at such times as often as it may reasonably be requested by the Lender or its officers or representatives; (i) to hold the Lender harmless, and the Lender shall have no liability or obligation of any kind to the Borrower, creditors of the Borrower or any third party, in connection with any defective, improper or inadequate workmanship performed in or about, or materials supplied to, the Project Premises and the Facility, or any mechanics, suppliers 22 or materialmen's liens arising as a result of such defective, improper or inadequate workmanship or materials, and upon the Lender's reasonable request, to replace or cause to be replaced, any such defective, improper or inadequate workmanship or materials; (j) to pay all real estate taxes prior to the attachment of penalties with respect thereto and installments of special assessments payable therewith, insurance premiums with respect to the insurance required to be maintained by the Borrower under the terms of any of the Borrower Documents, and any utility charges incurred by the Borrower prior to or during the term of this Agreement, except as to such taxes, assessments, premiums or charges which are being contested in good faith by appropriate proceedings and provided that, if requested by the Lender, the Borrower shall have deposited into escrow with the Lender an amount equal to such taxes, assessments, premiums or charges plus penalties accrued thereon; provided, however, that the right of the Borrower to contest such taxes and assessments shall only constitute an agreement between the Lender and the Borrower and, without limiting the generality of the foregoing, nothing contained herein shall constitute an agreement by or the consent of the Issuer to the nonpayment of any such taxes or assessments, whether or not the same are being so contested; (k) to perform each and all of the covenants and agreements set forth and contained in the Bond Documents; (l) to cause to be prepared and delivered to the Lender the following: (i) as soon as available and in any event within ninety (90) days after the end of its fiscal year, audited financial statements of the Borrower (balance sheet, income statement and statement of cash flow), all in reasonable detail and prepared in accordance with generally accepted accounting principles, consistently applied, prepared by independent certified public accountants acceptable to the Lender; and (ii) from time to time, with reasonable promptness, such further information regarding the business, operations, affairs and financial and other condition of the Borrower and the Project as the Lender may request; (m) to promptly give notice in writing to the Lender of any and all litigation involving the Borrower where the amount in dispute exceeds $50,000 and is not covered by insurance, and of any and all litigation if the aggregate amount in dispute in connection with such litigation exceeds $50,000 and is not covered by insurance, and of any and all material proceedings commenced against the Borrower by or before any court or governmental or regulatory agency; (n) to comply with the requirements of all applicable laws, rules, regulations and orders of any governmental authority, a breach of which would materially and adversely affect the business or credit of the Borrower, except where diligently contested in good 23 faith and by proper proceedings; (o) to preserve and maintain all of the Borrower's rights, privileges and franchises necessary or desirable in the normal conduct of the Borrower's business; and not to suspend business operations or convey, transfer, encumber or pledge a substantial portion of its properties or assets; (p) to keep all of the assets and properties necessary in the Borrower's business in good working order and condition, ordinary wear and tear excepted; (q) to obtain all necessary and convenient state, federal, local and private clearances, authorizations, permits and licenses with respect to the business operations of the Borrower, including, without limitation, any export and other trade licenses or permits required by law for the present or future business operations of the Borrower; (r) not to undertake or permit without prior written approval of the Lender any other or additional construction on the Project Premises or on any site or sites adjacent thereto owned by the Borrower or any parties related thereto; (s) not to create, incur, assume or suffer to exist, contingently or otherwise, indebtedness in excess of $500,000.00 for Borrowed Money in any fiscal year, except indebtedness disclosed to the Lender in writing as existing at the time of execution of this Agreement; (t) not to permit its Tangible Net Worth to be less than $12,400,000.00 for its fiscal year ending August 31, 1996, and $13,900,000.00 for its fiscal year ending August 31, 1997; (u) not to permit its long-term debt to Tangible Net Worth ratio to exceed 1.0 to 1.0 at any time during the term hereof; (v) to produce a net profit after taxes quarterly, and to produce an annual net profit of at least $1,500,000 for the Borrower's fiscal years ending August 31, 1996 and August 31, 1997; and (w) to maintain a ratio of Cash Flow to Current Maturities of Long-Term Debt of at least 1.5 to 1.0 for each fiscal year of the Borrower during the term hereof. ARTICLE VI EVENTS OF DEFAULT; RIGHTS AND REMEDIES UPON EVENT OF DEFAULT SECTION VI.1 Events of Default. Any one or more of the following events, conditions or 24 circumstances shall constitute an Event of Default: (a) the Borrower shall fail to pay, within five (5) days after the due date thereof, any amounts required to be paid by the Borrower under this Agreement or any other indebtedness of the Borrower to the Lender or any third party, whether any such indebtedness is now existing or hereafter arises and whether direct or indirect, due or to become due, absolute or contingent, primary or secondary or joint or joint and several; (b) the Borrower shall fail to observe or perform any of the covenants, conditions or agreements to be observed or performed by it under the Borrower Documents, the Bond Documents or any credit or similar agreement between the Borrower and the Lender for a period of thirty (30) days after written notice, specifying such default and requesting that it be remedied, given to such party by the Lender, unless the Lender shall agree in writing to an extension of such time prior to its expiration, or for such longer period as may be reasonably necessary to remedy such default (other than defaults which can be cured by a money payment) provided that the Borrower is proceeding with reasonable diligence to remedy the same; (c) the Borrower shall file a petition in bankruptcy or for reorganization or for an arrangement pursuant to any present or future state or federal bankruptcy act or under any similar federal or state law, or shall be adjudicated a bankrupt or insolvent, or shall make a general assignment for the benefit of its creditors, or shall be unable to pay its debts generally as they become due; or if a petition or answer proposing the adjudication of the Borrower as a bankrupt or its reorganization under any present or future state or federal bankruptcy act or any similar federal or state law shall be filed in any court and such petition or answer shall not be discharged or denied within sixty (60) days after the filing thereof; or if a receiver, trustee or liquidator of the Borrower or of all or substantially all of the assets of the Borrower or of the Project shall be appointed in any proceeding brought against the Borrower and shall not be discharged within sixty (60) days of such appointment; or if the Borrower shall consent to or acquiesce in such appointment; or if any property of the Borrower (including, without limitation, the estate or interest of the Borrower in the Project or any part thereof) shall be levied upon or attached in any proceeding; (d) final judgment(s) for the payment of money in excess of $50,000, individually or in the aggregate, shall be rendered against the Borrower and shall remain undischarged for a period of thirty (30) days during which execution shall not be effectively stayed; (e) the Borrower shall be or become insolvent (whether in the equity or bankruptcy sense); (f) any representation or warranty made by the Borrower in the Borrower Documents or the Bond Documents shall prove to be untrue or misleading in any material respect, or any statement, certificate or report furnished hereunder or under any of the foregoing 25 documents by or on behalf of the Borrower shall prove to be untrue or misleading in any material respect on the date when the facts set forth and recited therein are stated or certified; (g) at the time any Advance is requested by the Borrower hereunder the title to the Project is not reasonably satisfactory to the Lender, regardless of whether the lien, encumbrance or other question existed at the time of any prior Advance, unless such lien, or encumbrance has been consented to in writing by the Lender; (h) a survey shows that the Facility encroaches upon any unvacated street or upon any adjoining property to an extent deemed material by Lender; (i) the construction and installation of the Facility is abandoned or shall be unreasonably delayed or be discontinued for a period of twenty (20) consecutive calendar days following written notice to the Borrower by the Lender, in each instance for reasons other than acts of God, fire, storm, strikes, blackouts, labor difficulties, riots, inability to obtain materials, equipment or labor, governmental restrictions or any similar cause over which the Borrower is unable to exercise control; (j) the Borrower at any time prior to the completion and installation of the Facility shall (i) abandon the same, or (ii) delay construction or suffer construction to be delayed for any period of time, so that the completion of the construction and installation of the Facility cannot be accomplished, in the reasonable judgment of the Lender, by the Completion Date; (k) the Lender or the Title Company shall, under the provisions of Section 2.3 hereof, determine in good faith that additional sums are to be deposited with the Lender pursuant thereto and the Borrower shall fail to deposit such sums as required by said section; or (l) the Borrower shall fail to timely effect a prepayment of the Series A Bonds as required by Section 4.9 hereof. SECTION VI.2 Rights and Remedies. Upon the occurrence and continuance of an Event of Default, the Lender may, at its option, exercise any and all of the following rights and remedies (and any other rights and remedies available to it): (a) The Lender may refrain from approving Advances until such Event of Default is cured but the Lender may approve Advances after the occurrence of a Event of Default without thereby waiving its rights and remedies hereunder. (b) The Lender shall have the right, in addition to any other rights provided by law, to enforce its rights and remedies under the Borrower Documents and any other documents related hereto. 26 (c) The Lender may instruct the Trustee to accelerate the Bonds and submit a draft under either of the Letters of Credit pursuant to the Indenture. (d) The Lender may make demand upon the Borrower and forthwith upon such demand the Borrower will pay to the Lender in immediately available funds for deposit in a special cash collateral account maintained with the Lender (the "Cash Collateral Account") an amount equal to the maximum amount then available to be drawn under the Letters of Credit (assuming compliance with all conditions for drawing thereunder). The Lender hereby acknowledges the Trustee's security interest in any and all funds deposited by the Borrower hereunder and agrees that, so long as either of the Letters of Credit is outstanding, the Lender's interest in such funds shall be subordinate to the interest of the Trustee. Notwithstanding the foregoing, the Lender shall have sole discretion in administering such funds, including the right to return such funds to the Borrower if the Lender so elects, until the Obligation of Reimbursement and the Credit Enhancement Fee then due shall have been paid in full: (1) If requested by the Borrower and subject to the right of the Lender to withdraw funds from the Cash Collateral Account as provided below and subject to the limitations provided below, the Lender will from time to time invest funds on deposit in the Cash Collateral Account, reinvest proceeds and invest interest or other income received from any such investments, in such Eligible Securities (as hereinafter defined) as the Borrower may select and give notice thereof to the Lender. Such proceeds, interest or income which are not so invested or reinvested in Eligible Securities shall, except as otherwise provided in this Section 6.2(d), be deposited and held by the Lender in the Cash Collateral Account. "Eligible Securities" means (A) United States Treasury bills with a remaining maturity not in excess of 90 days, (B) negotiable certificates of deposit of the Lender or of any other bank having combined capital and surplus of at least $10,000,000 with a remaining maturity not in excess of 90 days, and (C) such other instruments as the Borrower may request and the Lender may approve in writing. Eligible Securities from time to time purchased and held pursuant to this subsection (d)(1) shall be referred to as "Collateral Securities" and shall, for purposes of this Agreement, constitute part of the funds held in the Cash Collateral Account in amounts equal to their respective outstanding principal amounts. (2) If at any time the Lender determines that any funds held in the Cash Collateral Account are subject to any right or claim of any person or entity other than the Lender or that the total amount of such funds is less than the maximum amount at such time available to be drawn under the Letters of Credit, the Borrower will, forthwith upon demand by the Lender, pay to the Lender, as 27 additional funds to be deposited and held in the Cash Collateral Account, an amount equal to the excess of (A) such maximum amount at such time available to be drawn under the Letters of Credit over (B) the total amount of funds, if any, then held in the Cash Collateral Account which the Lender determines to be free and clear of any such right and claim. (3) The Borrower hereby pledges and grants to the Lender a security interest in all funds held in the Cash Collateral Account (including Collateral Securities) from time to time and all proceeds thereof, as security for the payment of all amounts due and to become due from the Borrower to the Lender under this Agreement. (4) The Lender may, at any time or from time to time after funds are deposited in the Cash Collateral Account or invested in Collateral Securities, after selling (upon ten days' notice to the Borrower), if necessary, any Collateral Securities, apply funds then held in the Cash Collateral Account to the payment of any amounts, in such order as the Lender may elect, as shall have become or shall become due and payable by the Borrower to the Lender under this Agreement. The Borrower agrees that, to the extent notice of sale of any Collateral Securities shall be required by law, at least ten days' notice to the Borrower of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Lender may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. (5) Neither the Borrower nor any person or entity claiming on behalf of or through the Borrower shall have any right to withdraw any of the funds held in the Cash Collateral Account, except as otherwise provided in subsection (6) below, except that after the expiration of the Letters of Credit in accordance with its terms and the payment of all amounts payable by the Borrower to the Lender under this Agreement, any funds remaining in the Cash Collateral Account shall promptly be returned by the Lender to the Borrower or paid to whomever may be legally entitled thereto. (6) The Borrower agrees that it will not (A) sell or otherwise dispose of any interest in the Cash Collateral Account or any funds held therein, or (B) create or permit to exist any lien, security interest or other change or encumbrance upon or with respect to said account or any funds or Collateral Securities held therein except as provided in or contemplated by this Agreement. (7) The Lender shall exercise reasonable care in the custody and preservation of any funds held in the Cash Collateral Account and shall be deemed to have exercised such care if such funds are accorded treatment substantially equivalent 28 to that which the Lender accords its own property, it being understood that the Lender shall not have any responsibility for taking any necessary steps to preserve rights against any parties with respect to any such funds. (8) Any amount deposited in the Cash Collateral Account pursuant to Section 2.3 of the Mortgage may be utilized in connection with an Optional Tender Drawing under the terms of the Indenture. (e) The Lender, in its sole discretion, may pay any amount owing under the Bond Documents, including without limitation, principal of, interest and premium on the Bonds or the Lender may cure any other event of default under the Bond Documents; (f) The Lender may, by written notice to the Borrower in accordance with the terms of such indebtedness declare all indebtedness of every type or description owed by the Borrower to the Lender to be immediately due and payable and the same shall be thereupon be immediately due and payable; (g) The Lender may offset any deposits of the Borrower held by the Lender (including those held by the Lender in the Cash Collateral Account and any unmatured time deposits) against sums due hereunder or against any other indebtedness then owed by the Borrower to the Lender, whether or not then due; (h) The Lender may enter upon the Project and take possession thereof, and proceed in its own name or in the name of the Borrower (which authority is coupled with an interest and is irrevocable by the Borrower but which is not intended to nor shall it exclude the Borrower from possession thereof) to complete or cause to be completed the Facility, at the cost and expense of the Borrower. If the Lender elects to complete or cause to be completed the Project, it may do so according to the Plans and Specifications or according to such changes, alterations or modifications in and to the Plans and Specifications as the Lender may deem appropriate; and the Lender may enforce or cancel all contracts let by the Borrower relating to construction and installation of the Facility and/or let by other Contractors which in the Lender's sole judgment it may deem advisable; and the Borrower shall forthwith turn over and duly assign to the Lender, as the Lender may from time to time require, contracts relating to construction and installation of the Facility, the Plans and Specifications, blueprints, shop drawings, bonds, building permits, bills and statements of account pertaining to the Facility, whether paid or not, and any other instruments or records in the possession of the Borrower pertaining to the Facility. The Borrower shall be liable under this Agreement to pay to the Lender, on demand, any amount or amounts expended by the Lender in so completing the Facility together with any costs, charges, or expenses incident thereto or resulting therefrom, all of which shall be secured by the Mortgage and the Security Agreement. In the event that a proceeding is instituted against Borrower for recovery and reimbursement of any monies expended by the Lender in connection with the completion of the Facility, a statement of such expenditures, verified by the affidavit of an officer of the Lender, shall be prima facie evidence of the item so expended and of the propriety of and necessity for such expenditure; and the burden of proving to the contrary 29 shall be upon the Borrower. The Lender shall have the right to apply the funds on deposit in the Construction Fund and the Escrow Account to bring about the completion of the Facility and to pay the costs thereof; and if such funds are insufficient, in the sole judgment of the Lender, to pay for the Facility, the Borrower agrees to promptly deliver and pay to the Lender such sum or sums of money as the Lender may from time to time demand for the purpose of completing the Facility or of paying any liability, charge or expense which may have been incurred or assumed by the Lender under or in performance of this Agreement, or for the purpose of completing the Facility. It is expressly understood and agreed that in no event shall the Lender be obligated or liable in any way to complete the Facility or to pay for the costs of construction thereof beyond the amount of the Commitment. ARTICLE VII. MISCELLANEOUS SECTION VII.1 Indemnification by Borrower. (a) The Borrower agrees to indemnify and hold harmless the Lender, its officers, agents and employees, against any and all losses, claims, damages or liability to which the Lender, its officers, agents and employees, may become subject under any law in connection with the issuance and sale of the Bonds and the carrying out of the transactions contemplated by the Borrower Documents and the Bond Documents, or the conduct of any activity on the Borrower's premises, other than any such losses, claims, damages or liability resulting from the gross negligence or willful misconduct of the Lender or its officers, directors, agents or employees, and to reimburse the Lender, its officers, agents and employees, for any reasonable out-of-pocket legal and other expenses (including reasonable counsel fees) incurred by the Lender, its officers, agents and employees, in connection with investigating any such losses, claims, damages or liabilities or in connection with defending any actions relating thereto. The Lender agrees, at the request and expense of the Borrower, to cooperate in the making of any investigation in defense of any such claim and promptly to assert any or all of the rights and privileges and defenses which may be available to the Lender. The Borrower further releases and agrees to hold harmless the Lender, its officers, agents and employees, from any liability to the Borrower arising out of any covenant, representation or undertaking contained in the Bond Documents. The provisions of this Section shall survive the payment and redemption of the Bonds. (b) The Borrower hereby indemnifies and holds harmless the Lender from and against any and all claims, damages, losses, liabilities, costs or expenses whatsoever which the Lender may incur (or which may be claimed against the Lender by any person or entity whatsoever) (i) by reason of any untrue statement or alleged untrue statement of any material fact contained in any official statement or other offering document relating to the offer or sale of the Bonds or the omission or alleged omission to state therein a material 30 fact necessary to make such statements, in light of the circumstances under which they are made, not misleading (except any statement or omission relating to the Lender contained in any written materials supplied or approved by the Lender), or (ii) by reason of or in connection with the execution and delivery or transfer of, or payment or failure to pay under the Letters of Credit; provided, however, that the Borrower shall not be required to indemnify the Lender for any claims, damages, losses, liabilities, costs or expenses to the extent, but only to the extent, caused by the willful misconduct or gross negligence of the Lender or its officers, directors, agents or employees, in connection with paying or wrongfully dishonoring a draft presented under the Letters of Credit. Nothing in this Section 7.1 is intended to limit the Borrower's Obligation of Reimbursement. SECTION VII.2 ADDRESSES FOR NOTICE. All notices, consents, requests, demands and other communications hereunder shall be given to or made upon the respective parties hereto at their respective addresses specified below or, as to any party, at such other address as may be designated by it in a written notice to the other party. All notices, requests, consents and demands hereunder shall be effective when personally delivered or duly deposited in the United States mails, certified or registered, postage prepaid, sent via facsimile or delivered to the telegraph company addressed as aforesaid: If to the Lender: Norwest Bank Minnesota, National Association Wayzata Office 900 East Wayzata Boulevard Wayzata, MN 55391-2410 Attention: Commercial Banking Facsimile No: (612) 476-3382 If to the Borrower: HEI, Inc. 1495 Steiger Lake Lane P.O. Box 5000 Victoria, MN 55386 Facsimile No.: (612) 443-2668 SECTION VII.3 INSPECTIONS. The Borrower and the Architect shall be responsible for making inspections of the Project during the course of construction and shall determine to their own satisfaction that the work done or materials supplied by the Contractors to whom payment is to be made out of each Advance has been properly done or supplied in accordance with the applicable contracts with such Contractors. If any work done or materials supplied by a Contractor are not satisfactory to the Borrower or the Architect, the Borrower will immediately notify the Lender in writing of such fact. It is expressly understood and agreed that the Lender 31 or its authorized representative (including, without limitation, the Inspecting Architect) may conduct such inspections of the Project as it may deem necessary for the protection of the Lender's interest, and specifically, an architectural firm acceptable to the Lender (including, without limitation, the Inspecting Architect) may, at the option of the Lender, and at the expense of the Borrower, conduct such periodic inspections of the Project, prepare such written progress reports during the period of construction and prepare such written reports upon completion of the Project, as the Lender may request. Any inspections which may be made of the Project by the Lender or its representative (including without limitation, the Inspecting Architect) will be made, and all certificates issued by the Lender's representative (including without limitation, the Inspecting Architect) will be issued, solely for the benefit and protection of the Lender, and the Borrower will not rely thereon. SECTION VII.4 ADDITIONAL SECURITY INTEREST. In the event any Advance is to be made for materials then being fabricated or stored, or both, for later use in the completion of the Facility but which have not been stored upon the Project Premises or installed or incorporated into the Project, then such Advance shall be made only after the Borrower has given to the Lender such security instruments and insurance on such materials as the Lender may reasonably request. SECTION VII.5 FEES. The Borrower will reimburse the Lender upon demand for all reasonable costs and expenses, including without limitation, attorney's fees, appraisal fees, survey fees, closing charges, inspection fees, documentary or tax stamps, recording and filing fees, mortgage registration tax, insurance premiums and service charges, paid or incurred by the Lender in connection with (i) the preparation, negotiation, approval, execution and delivery of the Bonds, this Agreement, the Mortgage, the Security Agreement and any other documents and instruments related hereto or thereto; (ii) the negotiation of any amendments or modifications to any of the foregoing documents, instruments or agreements in the preparation of any and all documents necessary to effect such amendments or modifications; (iii) the servicing of the Letters of Credit; (iv) the review of any document submitted to the Lender pursuant to Article II or III hereof; and (v) the enforcement by the Lender during the term hereof or thereafter of any of the rights or remedies of the Lender hereunder or under any of the foregoing documents, instruments or agreements, including without limitation, costs and expenses of collection in the Event of Default, whether or not suit is filed with respect thereto. SECTION VII.6 TIME OF ESSENCE. Time is of the essence in the performance of this Agreement. SECTION VII.7 BINDING EFFECT AND ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the Borrower and its successors and permitted assigns, except that Borrower may not transfer or assign its rights hereunder without the prior written consent of the Lender. This Agreement shall inure to the benefit of the Lender and its participants, successors and assigns. All rights and powers specifically conferred upon the Lender may be transferred or delegated by the Lender to any of its participants, successors or assigns. SECTION VII.8 WAIVERS. No waiver by the Lender of any right, remedy or Event of Default 32 hereunder shall operate as a waiver of any other right, remedy, or Event of Default or of the same right, remedy or Event of Default on a future occasion. No delay on the part of the Lender in exercising any right or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right or remedy preclude other or future exercise thereof or the exercise of any other right or remedy. SECTION VII.9 REMEDIES CUMULATIVE. The rights and remedies herein specified of the Lender are cumulative and not exclusive of any rights or remedies which the Lender would otherwise have at law or in equity or by statute. SECTION VII.10 GOVERNING LAW; CONSTRUCTION. This Agreement shall be governed by and construed in accordance with the internal law, and not the law of conflict, of the State of Minnesota. Whenever possible, each provision of this Agreement and/or any of the other Borrower Documents, and any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be interpreted in such manner as to be effective and valid under such applicable law, but, if any provision of this Agreement and/or any of the other Borrower Documents or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto should be held to be prohibited or invalid under such applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement and/or any of the Borrower Documents, or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto. In the event of any conflict within, between or among the provisions of this Agreement, the other Borrower Documents, or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto, those provisions giving the Lender the greater right shall govern. SECTION VII.11 JURISDICTION. THE BORROWER HEREBY SUBMITS ITSELF TO THE JURISDICTION OF THE STATE OF MINNESOTA AND THE FEDERAL COURTS OF THE UNITED STATES LOCATED IN SUCH STATE IN RESPECT OF ALL ACTIONS ARISING OUT OF OR IN CONNECTION WITH THE INTERPRETATION OR ENFORCEMENT OF THIS AGREEMENT AND THE DOCUMENTS RELATED HERETO. SECTION VII.12 INTEREST RATE. Anything herein to the contrary notwithstanding, the obligations of the Borrower under this Agreement shall be subject to the limitation that payments of interest shall not be required to the extent that contracting for or receipt thereof would be contrary to the provisions of law applicable to the Lender limiting the highest rate of interest which may be lawfully contracted for, charged or received by the Lender. SECTION VII.13 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be an original, but such counterparts shall together constitute one and the same instrument. SECTION VII.14 NOT JOINT VENTURERS. The Lender is not, and shall not by reason of any 33 provision of any of the Borrower Documents be deemed to be, a joint venturer with or partner or agent of the Borrower. SECTION VII.15 ADEQUACY OF BOND PROCEEDS. The Lender has not made, nor shall it be deemed to have made, any representation or warranty that the funds to be advanced to the Borrower as contemplated hereby are or will be sufficient for the purposes intended by the Borrower. SECTION VII.16 OBLIGATIONS ABSOLUTE. Subject to Section 7.18 hereof, the obligations of the Borrower under this Agreement shall be absolute, unconditional and irrevocable, and shall be paid and performed strictly in accordance with the terms of this Agreement, under all circumstances whatsoever, including, the following circumstances: (a) any lack of validity or enforceability of the Letters of Credit, the Bonds, any of the Bond Documents, or any other agreement or instrument relating thereto (collectively the "Related Documents"); (b) any amendment or any waiver of or any consent to departure from all or any of the Related Documents; (c) the existence of any claim, set-off, defense or other right which the Borrower may have at any time against the Issuer, the Trustee, any beneficiary or any transferee of the Letters of Credit (or any person or entity for whom the Issuer, the Trustee, any such beneficiary or any such transferee may be acting), or any other person or entity, whether in connection with this Agreement, the transactions contemplated herein or in the Related Documents or any unrelated transactions; (d) any statement or any other document presented under the Letters of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect whatsoever; or (e) payment by the Lender under the Letters of Credit against presentation of a draft or certificate which does not comply with the terms of the Letters of Credit. SECTION VII.17 TRANSFER OF LETTERS OF CREDIT. The Letters of Credit may only be transferred in accordance with the terms thereof. SECTION VII.18 LIABILITY OF THE LENDER. The Borrower assumes all risks of the acts or omissions of the Issuer, the Trustee or any beneficiary or transferee of the Letters of Credit with respect to its use of the Letters of Credit. Neither the Lender nor any of its employees, officers or directors, in its or their capacity as issuer of the Letters of Credit shall be liable or responsible for: (a) the use which may be made of the Letters of Credit or for any acts or omissions 34 of the Issuer, the Trustee or any beneficiary or transferee in connection therewith; (b) the validity, sufficiency or genuineness of documents, or of any endorsement thereon, even if such documents should in fact prove to be in any or all respects invalid, insufficient, fraudulent or forged; or (c) payment by the Lender against presentation of documents which do not comply with the terms of the Letters of Credit, including failure of any documents to bear any reference or adequate reference to the Letters of Credit; except that the Borrower shall have a claim against the Lender, and the Lender shall be liable to the Borrower, to the extent, but only to the extent, of any direct, as opposed to consequential, damages (including reasonable attorneys fees, costs and expenses) suffered by the Borrower which were caused by: (1) the willful misconduct or gross negligence of the Lender or its officers, directors, agents or employees in determining whether documents presented under the Letters of Credit comply with the terms of the Letters of Credit; or (2) the willful failure or gross negligence of the Lender or its officers, directors, agents or employees to pay under the Letters of Credit after the presentation to it by the Trustee or an approved successor trustee of a draft and certificate strictly complying with the terms and conditions of the Letters of Credit. SECTION VII.19 SECURITY INTEREST IN FUNDS AND BONDS. As additional security for payment of its obligations under this Agreement, the Borrower hereby grants a security interest to the Lender in all securities, assets, deposits in and rights to payment from all funds now or hereafter on deposit in or otherwise a part of any fund created by the Trustee under the Indenture or any and all other accounts created under the Indenture, including Bonds and Bond proceeds held pursuant to the Indenture, and in the proceeds realized from the investment of any such items, and in any and all Bonds and substitutions of such Bonds at any time held by the Trustee; and the Borrower hereby consents to the Lender's appointment of the Trustee as the Lender's agent to perfect the Lender's security interest in such funds and other assets. The security interest granted hereunder shall be subordinate to the Trustee's right to apply such funds in accordance with the Indenture and subordinate to the rights of holders of the Bonds in and to such funds. All payments on Bonds or funds held by the Trustee as agent for the Lender under this Section 7.19, including (without limitation) any payment of principal or interest or proceeds of sale, shall be paid directly to the Lender. All such payments received by the Lender shall be credited against the Borrower's Obligation of Reimbursement. The Lender shall be entitled to exercise all of the rights of an owner of the Bonds held by the Trustee as agent for the Lender with respect to voting, consenting and directing the Trustee as if the Lender were the owner of such Bonds, and the Borrower hereby grants and assigns to the Lender all such rights. 35 SECTION VII.20 TERM. This Agreement shall automatically terminate upon the later of (i) expiration of the Letters of Credit, or (ii) payment in full of the Obligation of Reimbursement and all other amounts due and payable by the Borrower to the Lender hereunder or under the documents related hereto. SECTION VII.21 REDEMPTION OF THE BONDS UNDER CASUALTY OR CONDEMNATION LAWS. To the extent that the Borrower has the right to direct the Issuer to call for redemption of the Bonds under Section 3of the Indenture, the Borrower shall promptly give such direction to the Issuer if (i) the Lender has the right and shall have elected to apply proceeds of insurance or condemnation to redemption of the Bonds pursuant to the Mortgage; and (ii) the Borrower has been instructed in writing by the Lender to give such direction. A copy of any such written direction to the Issuer shall be given by the Borrower to the Lender. If the Borrower shall fail to give such direction to the Issuer within seven (7) calendar days after being instructed to do so by the Lender, the Lender shall have the authority to give such direction to the Issuer on behalf of the Borrower, and if the Borrower fails to deposit with the Trustee the amount required to redeem the Bonds, the Lender may direct the Trustee to submit a draft under the Letters of Credit, in which case the Borrower shall be obligated to repay the same pursuant to Section 4hereof, less the amount of any insurance or condemnation proceeds paid to the Lender pursuant to the Mortgage and available to the Lender for redemption of the Bonds. To facilitate such authority, the Borrower hereby irrevocably appoints (which appointment is coupled with an interest) the Lender or its delegate as the attorney-in-fact to the Borrower with the right to give such direction to the Issuer in the name of and on behalf of the Borrower. If the Lender elects to give such direction to the Issuer, the Lender will give the Borrower a copy of such direction. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION By: -------------------------- Its: ---------------------- 36 HEI, INC. By: -------------------------------- Its: ------------------------------- By: -------------------------------- Its: ------------------------------- 37 EXHIBIT A [FORM OF DRAW REQUEST] EXHIBIT B [FORM OF AUTHORIZATION TO TRUSTEE - CONSTRUCTION COSTS] To: First Trust National Association 180 E. Fifth Street St. Paul, Minnesota 55101 Attn: Corporate Trust Department RE: Letters of Credit Nos. S404271 and S404272 in favor of First Trust National Association, as trustee, issued by Norwest Bank Minnesota, National Association, to secure payment of the City of Victoria, Minnesota, $5,625,000 Variable Rate Demand Industrial Development Revenue Bonds, Series 1996 A and B (HEI, Inc. Project) You are hereby authorized to advance $____________ to Commercial Partners Title, LLC, in connection with the above-referenced financing. Dated:____________________ NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION By:_________________________________ Its:__________________________ EXHIBIT C [FORM OF AUTHORIZATION TO TRUSTEE - EQUIPMENT ACQUISITION COSTS] To: First Trust National Association 180 E. Fifth Street St. Paul, Minnesota 55101 Attn: Corporate Trust Department RE: Letters of Credit Nos. S404271 and S404272 in favor of First Trust National Association, as trustee, issued by Norwest Bank Minnesota, National Association, to secure payment of the City of Victoria, Minnesota, $5,625,000 Variable Rate Demand Industrial Development Revenue Bonds, Series 1996 A and B (HEI, Inc. Project) You are hereby authorized to advance $____________ to Norwest Bank Minnesota, National Association, in connection with the above-referenced financing. Dated:____________________ NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION By:_________________________________ Its:__________________________ EXHIBIT D (Schedule of Principal Payments Required Under Series B Bonds) JOINDER AGREEMENT For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned, Commercial Partners Title, LLC, as agent for Chicago Title Insurance Company ("Title"), hereby assumes and agrees to perform all of the duties and responsibilities of Title as specified in the within Reimbursement Agreement by and between Norwest Bank Minnesota, National Association (the "Lender"), and HEI, Inc. (the "Borrower") dated as of April 1, 1996 (the "Reimbursement Loan Agreement"), subject to the following conditions: (i) The responsibilities and duties assumed by Title shall include only those described in the Reimbursement Agreement, and Title shall not be obligated to act except in accordance with the terms and conditions of the Reimbursement Agreement. (ii) By executing this Agreement, Title does not thereby insure that (a) the Project will be completed, (b) the Project, when completed, will be in accordance with the Plans and Specifications, or (c) sufficient funds will be available for completion of the Project. (iii) By executing this Agreement, Title does not thereby make any certifications of the type required to be given by the inspectors, architects or engineers, nor does it assume any liability for the same other than procurement of such certifications as one of the conditions precedent to each disbursement. (iv) At any time prior to commencement of disbursement of funds hereunder, Title reserves the right to decline any risk offered for insurance hereunder, whereupon it shall return to the Lender any documents in its possession relating to such loan and the funds received by it. Commencement of disbursement makes this Agreement effective as to all funds received and disbursed. Where, after the first disbursement, a further title search reveals a subsequently recorded exception over which Title is unwilling to insure, it will notify the Lender and may discontinue disbursement, until the exception has been disposed of to its satisfaction. A mechanic's lien claim or other filing or title defect over which Title is required to insure hereunder does not warrant a discontinuance of disbursement. Title further agrees to deliver the mortgagee's policy of title insurance referred to in the Reimbursement Agreement and all recorded documents, when available, to the Lender, and bill all Title's charges to the Borrower. IN WITNESS WHEREOF, Title has executed and delivered this Joinder Agreement as of the 1st day April, 1996. TITLE: COMMERCIAL PARTNERS TITLE, LLC, as agent for Chicago Title Insurance Company By: ------------------------------------- Its: ------------------------------- EX-4.2B 5 EXHIBIT 4.2B EXHIBIT 4.2b MORTGAGE, SECURITY AGREEMENT, FIXTURE FINANCING STATEMENT ASSIGNMENT OF LEASES AND RENTS BY HEI, INC. AS MORTGAGOR, TO NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION AS MORTGAGEE, TO SECURE $1,482,053 LETTER OF CREDIT Dated: April 1, 1996 Tax statements for the real The instrument was drafted by: property described in this instrument should be sent WINTHROP & WEINSTINE, P.A. to: 3200 Minnesota World Trade Center 30 East Seventh Street Saint Paul, Minnesota 55101 HEI, Inc. 1495 Steiger Lake Lane THE MAXIMUM PRINCIPAL P.O. Box 5000 AMOUNTS OF THE OBLIGATIONS Victoria, Minnesota 55386 SECURED BY THIS MORTGAGE IS $1,482,053. MORTGAGE, SECURITY AGREEMENT, FIXTURE FINANCING STATEMENT AND ASSIGNMENT OF LEASES AND RENTS THIS MORTGAGE, SECURITY AGREEMENT, FIXTURE FINANCING STATEMENT AND ASSIGNMENT OF LEASES AND RENTS (the "Mortgage"), is made as of the 1st day of April, 1996, by HEI, INC., a Minnesota corporation (the "Mortgagor"), in favor of NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking association (the "Mortgagee"). W I T N E S S E T H: WHEREAS, the City of Victoria, Minnesota (the "Issuer") will issue those certain Variable Rate Demand Industrial Development Revenue Bonds, Series 1996B (HEI, Inc., Project) (the "Bonds"), pursuant to that certain Indenture of Trust of even date herewith (the "Indenture"), by and between the Issuer and First Trust National Association, as trustee (the "Trustee"); and WHEREAS, the Issuer will loan the proceeds of the Bonds to the Mortgagor pursuant to that certain Loan Agreement of even date herewith by and between the Issuer and the Mortgagor (the "Loan Agreement"), for the purpose of funding the loan to be made by the Issuer to the Mortgagor to finance the construction and installation of the project described therein (the "Project"); and WHEREAS, in order to provide credit and liquidity enhancement with respect to the Bonds, the Mortgagor has requested that the Mortgagee issue its Irrevocable Letter of Credit No. S404272 for the Mortgagor's account in the amount of $1,482,053 for the benefit of the trustee under the terms of the indenture (the "Credit"), which shall expire no later than April 1, 2011; and WHEREAS, as a condition to the issuance of the Credit, the Mortgagee has required that the Mortgagor execute that certain Reimbursement Agreement of even date herewith for the benefit of the Mortgagee (the "Reimbursement Agreement"), which requires, among other things, that the Mortgagor reimburse the Mortgagee for any and all draws made under the Credit; and WHEREAS, the Mortgagee is required as an express condition to issuing the Credit pursuant to the Reimbursement Agreement that the Mortgagor secure the obligations of the Mortgagor under the Reimbursement Agreement by this Mortgage. NOW THEREFORE, THIS MORTGAGE FURTHER WITNESSETH, that in consideration of the Mortgagee issuing the Credit on behalf of the Mortgagor pursuant to the Reimbursement Agreement in the original face amount of One Million Four Hundred Eighty-Two Thousand Fifty-Three and 00/100 Dollars ($1,482,053.00) (the "Mortgage Amount") and other good and lawful consideration, the receipt and sufficiency of which are hereby acknowledged, and to secure, and as security for, the payment of principal and interest and other premiums, penalties and charges on the Reimbursement Agreement and the performance and observance by the Mortgagor of all of the covenants, agreements, representations, warranties and conditions contained herein, the Mortgagor does hereby grant, bargain, sell, convey, assign, transfer, pledge, set over and confirm unto the Mortgagee, its successors and assigns, forever, and does hereby grant a mortgage lien and security interest to the Mortgagee, its successors and assigns, forever, in and to the tract of land legally described in EXHIBIT A attached hereto and made a part hereof (hereinafter referred to as the "Land"); Together with (a) all of the buildings, structures and other improvements now standing or at any time hereafter constructed or placed upon the Land; (b) all heating, plumbing and lighting apparatus, elevators and motors, engines and machinery, electrical equipment, incinerator apparatus, air-conditioning apparatus, water and gas apparatus, pipes, water heaters, refrigerating plant and refrigerators, water softeners, carpets, carpeting, storm windows and doors, window screens, screen doors, storm sash, window shades or blinds, awnings, locks, fences, trees, shrubs, and all other furniture, fixtures, machinery, equipment, appliances and personal property of every kind and nature whatsoever now or hereafter owned by the Mortgagor and attached or affixed to the Land and any improvements located thereon, including all extensions, additions, improvements, betterments, renewals and replacements of any of the foregoing; (c) all hereditaments, easements, rights, privileges and appurtenances now or hereafter belonging, attached or in any way pertaining to the Land or to any building, structure or improvement now or hereafter located thereon; (d) the immediate and continuing right to receive and collect all rents, income, issues and profits now due and which may hereafter become due under or by virtue of any lease or agreement (oral or written) for the leasing, subleasing, use or occupancy of all or part of the Land now, heretofore or hereafter made or agreed to by the Mortgagor; (e) all of the leases and agreements described in (d) above, together with all guarantees therefor and any renewals or extensions thereof; and (f) all insurance and other proceeds of, and all condemnation awards with respect to, the foregoing (all of the foregoing is hereinafter collectively referred to as the "Mortgaged Property"). The filing of this Mortgage shall constitute a fixture filing in the office where it is filed and a carbon, photographic or other reproduction of this document may also be filed as a financing statement: Name and Address of HEI, Inc. Debtor and Record 1495 Steiger Lake Lane Owner of Real Estate: P. O. Box 5000 Victoria, Minnesota 55386 Federal Tax Identification Number: 41-0944876 Name and Address of Norwest Bank Minnesota, National Association Secured Party: Wayzata Office 900 East Wayzata Boulevard Wayzata, Minnesota 55391-2410 -2- Description of the Types See above (or items) of property covered by this financing statement: Description of real estate See EXHIBIT A attached to which all or a part hereto. of the collateral is attached or upon which it is located: Some of the above described collateral is or is to become fixtures upon or minerals and mineral rights located upon the real estate described on EXHIBIT A, and this financing statement is to be filed for record in the public real estate records. AND THE MORTGAGOR, for itself, its successors and assigns, does covenant with the Mortgagee, its successors and assigns, that it is lawfully seized of the Mortgaged Property and has good right to sell and convey the same; that the Mortgaged Property is free from all encumbrances except as may be further stated in this Mortgage; that the Mortgagee, its successors and assigns, shall quietly enjoy and possess the Mortgaged Property; and that the Mortgagor will WARRANT AND DEFEND the title to the same against all lawful claims not specifically excepted in this Mortgage. PROVIDED, NEVERTHELESS, that if the Mortgagor shall pay any and all amounts advanced under the Reimbursement Agreement with respect to the Credit, plus interest at the rate set forth in the Reimbursement Agreement, as the same changes from time to time and is adjusted in the manner set forth in the Reimbursement Agreement, on the unpaid principal balance, as computed in accordance with the terms and conditions of the Reimbursement Agreement, and any other sums due and owing under the Reimbursement Agreement and shall also pay or cause to be paid all other sums, with interest thereon, as may be advanced by the Mortgagee in accordance with this Mortgage to protect the lien of this Mortgage, and shall also keep and perform all and singular the covenants herein, required on the part of the Mortgagor to be kept and performed (the obligations of the Mortgagor under the Reimbursement Agreement, including any and all renewals, amendments, extensions and modifications thereof, and all such sums, together with interest thereon, and such covenants herein collectively referred to as the "Indebtedness Secured Hereby"), and provided the Credit shall either expire or be returned to the Mortgagee without a draw being made thereunder, then this Mortgage shall be null and void, in which event the Mortgagee will execute and deliver to the Mortgagor in form suitable for recording a full satisfaction of this Mortgage; otherwise this Mortgage shall remain in full force and effect. ARTICLE I. GENERAL COVENANTS, AGREEMENTS, WARRANTIES -3- SECTION I.1. PAYMENT OF INDEBTEDNESS; OBSERVANCE OF COVENANTS. The Mortgagor shall duly and punctually pay each and every payment of principal, interest and all prepayment premiums and late charges, if any, required by the Reimbursement Agreement due to amounts advanced under the Credit, and all other Indebtedness Secured Hereby, as and when the same shall become due, and shall duly and punctually perform and observe all of the covenants, agreements and provisions contained herein, in the Reimbursement Agreement or in any other instrument given as security for the payment of the Reimbursement Agreement. SECTION I.2. MAINTENANCE; REPAIRS. Subject to the provisions of Section 2.3 hereof, the Mortgagor shall keep and maintain the Mortgaged Property in good condition, repair and operating condition free from any waste or misuse, and will comply with all material requirements of law, municipal ordinances and regulations, restrictions and covenants affecting the Mortgaged Property and its use, and will promptly repair or restore any building, improvements or structures now or hereafter located on the Land which may become damaged or destroyed to their condition prior to any such damage or destruction. The Mortgagor shall not acquiesce in any material rezoning classification, modification or restriction affecting the Land, without the prior written consent of the Mortgagee, which consent shall not be unreasonably withheld. The Mortgagor shall not vacate or abandon the Mortgaged Property. SECTION I.3. PAYMENT OF UTILITY CHARGES, TAXES AND ASSESSMENTS. The Mortgagor shall, before any penalty attaches thereto, pay or cause to be paid all charges made for electricity, gas, heat, water, sewer and other utilities furnished or used in connection with the Mortgaged Property, and all taxes, assessments and levies of every nature heretofore or hereafter assessed against the Mortgaged Property and upon demand will furnish the Mortgagee receipted bills evidencing such payment. Nothing in this Section 1.3 shall require the payment or discharge of any obligations imposed upon the Mortgagor by this Section so long as the Mortgagor shall diligently and in good faith and at its own expense contest the same or the validity thereof by appropriate legal proceeding which shall operate to prevent the collection thereof or other realization thereon and the sale or forfeiture of the Mortgaged Property or any part thereof to satisfy the same; provided, however, that during such contest the Mortgagor shall, at the reasonable request of the Mortgagee, provide security satisfactory to the Mortgagee, assuring the discharge of the Mortgagor's obligation under this Section and of any additional charge, penalty or expense arising from or incurred as a result of such contest; and provided further, however, that if at any time payment of any obligation imposed upon the Mortgagor by this Section shall become necessary to prevent the delivery of a tax deed conveying the Land or any portion thereof because of nonpayment, then the Mortgagor shall pay the same in sufficient time to prevent the delivery of such tax deed. SECTION I.4. LIENS. Except for liens and encumbrances, if any, listed on EXHIBIT B attached hereto or consented to in writing by or granted to the Mortgagee ("Permitted Encumbrances"), the Mortgagor will keep the Mortgaged Property free from all liens (other than liens for taxes, assessments and mechanics' liens not yet due and payable) and encumbrances of every nature whatsoever heretofore or hereafter arising and, upon written demand of the Mortgagee, the -4- Mortgagor will pay and procure the release of any such lien or encumbrances. SECTION I.5. COMPLIANCE WITH LAW. The Mortgagor will promptly comply in all material respects with all present and future laws, ordinances, rules and regulations of any governmental authority affecting the Mortgaged Property unless the same is being diligently contested by the Mortgagor in good faith and by proper proceedings. SECTION I.6. RIGHT OF THE MORTGAGEE TO ENTER. The Mortgagor will permit the Mortgagee and its agents to enter, and to authorize others to enter, upon any or all of the Land, at any time and from time to time, during normal business hours, to inspect the Mortgaged Property to perform or observe any covenants, conditions or terms hereunder which the Mortgagor shall fail to perform, meet or comply with, or for any other purpose in connection with the protection or preservation of the Mortgagee's security, without thereby becoming liable to the Mortgagor or any person in possession under the Mortgage. SECTION I.7. RIGHT OF THE MORTGAGEE TO PERFORM. If the Mortgagor fails to pay all and singular any taxes, assessments, levies or other similar charges or encumbrances heretofore or hereafter assessed against the Mortgaged Property or fails to obtain the release of any lien or encumbrance (other than a Permitted Encumbrance) of any nature heretofore or hereafter arising upon the Mortgaged Property or fails to perform any other covenants and agreements contained in this Mortgage or if any action or proceeding is commenced which adversely affects or questions the title to or possession of the Mortgaged Property or the interest of the Mortgagor or the Mortgagee therein, then the Mortgagee, at the Mortgagee's option, without notice to the Mortgagor, may perform such covenants and agreements, investigate and defend against such action or proceeding, and take such other action as the Mortgagee deems necessary to protect the Mortgagee's interest. Any amounts disbursed by the Mortgagee pursuant to this Section 1.7, including without limitation court costs and expenses and attorneys' fees, with interest thereon, shall become additional indebtedness of the Mortgagor and shall be secured by this Mortgage. Such amount shall be payable upon written notice from the Mortgagee to the Mortgagor requesting payment thereof, and shall bear interest from the date of disbursement at the rate set forth in Section 4.1 of the Reimbursement Agreement or, if such rate is illegal or usurious, at the maximum rate then permitted by law. Nothing contained in this Section 1.7 shall require the Mortgagee to incur any expense or to do any act or thing hereunder. SECTION I.8. ASSUMPTION. The Mortgagor shall not sell, assign, lease, convey, mortgage or otherwise encumber or dispose of either the legal or equitable title or both to all or any portion of the Mortgaged Property or any other interest therein without the prior written consent of the Mortgagee. SECTION I.9. ASSIGNMENT OF RENTS. The Mortgagor does hereby sell, assign and transfer unto the Mortgagee (i) the immediate and continuing right to receive and collect all rents, income, issues and profits now due and which may hereafter become due under or by virtue of any lease or agreement (oral or written) for the leasing, subleasing, use or occupancy of all or any part of the Mortgaged Property now, heretofore or hereafter made or agreed to by the -5- Mortgagor, and (ii) all of such leases and agreements, together with all guarantees therefor and any renewals or extensions thereof, for the purpose of securing payment of the indebtedness of the Mortgagor under the Reimbursement Agreement and the documents related thereto. The Mortgagor does hereby irrevocably appoint the Mortgagee its true and lawful attorney in its name, place and stead, with or without taking possession of the Mortgaged Property, to rent, lease, sublease, let or sublet all or any portion of the Mortgaged Property to any party or parties at such rental and upon such terms, as it in its discretion may determine, and to collect all of said avails, rents, income, issues and profits arising from or accruing at any time hereafter under each and all of such leases and agreements, with the same rights and powers and subject to the same immunities, exoneration of liability and rights of recourse and indemnity as the Mortgagee would have upon taking possession of the Mortgaged Property. The Mortgagor represents and agrees that no rent has been or will be paid in advance by any persons in possession of all or any portion of the Mortgaged Property for a period of more than one month and that the payment of none of the rents to accrue for all or any portion of the Mortgaged Property has or will be waived, released, reduced or discounted, or otherwise discharged or compromised, by the Mortgagor. The Mortgagor waives any right of setoff against any person in possession of all or any portion of the Mortgaged Property. The Mortgagor represents that it has not assigned any of said rents or profits to any third party and agrees that it will not so assign any of said rents or profits without the prior written consent of the Mortgagee. Nothing contained herein shall be construed as constituting the Mortgagee "a mortgagee in possession" in the absence of the taking of actual possession of the Mortgaged Property by the Mortgagee. In the exercise of the powers herein granted to the Mortgagee, no liability shall be asserted or enforced against the Mortgagee, all such liability being expressly waived and released by the Mortgagor. The Mortgagor further agrees to assign and transfer to the Mortgagee all rents from future leases or subleases upon all or any part of the Mortgaged Property and to execute and deliver, immediately upon request of the Mortgagee, as such further assurances and assignments in the Mortgaged Property as the Mortgagee from time to time shall require. Although it is the intention of the parties that this assignment of leases and rents shall be a present assignment, it is expressly understood and agreed that, anything herein contained to the contrary notwithstanding, the Mortgagee shall not exercise any of the rights and powers conferred upon it herein unless and until an Event of Default shall occur and nothing herein contained shall be deemed to affect or impair any rights which the Mortgagee may have under the Reimbursement Agreement, this Mortgage or any other document or agreement related hereto or thereto. The Mortgagor acknowledges and agrees that this assignment of leases of rents, and the Mortgagee's rights and remedies hereunder, may be enforced by the Mortgagee throughout the -6- entire redemption period provided by applicable law following any foreclosure sale of all or any portion of the Mortgaged Property. At any time after the occurrence of an Event of Default, the Mortgagee, without in any way waiving such default, may: I. at the Mortgagee's option without notice to the Mortgagor and without regard to the adequacy of the security for the obligations of the Mortgagor under the Reimbursement Agreement, either in person or by agent, with or without any action or proceeding, or by a receiver appointed by a court of competent jurisdiction pursuant to Minnesota Statutes, Section 559.17, Subd. 2, peaceably take possession of the Mortgaged Property and have, hold, manage, lease, sublease and operate the same as a mortgagee in possession; or II. the Mortgagee, without taking possession of the Mortgaged Property, may sue for or otherwise collect and receive all rents, income and profits from the Mortgaged Property to which the Mortgagor would otherwise be entitled, including those past due and unpaid with full power to make from time to time all adjustments thereto, as may seem proper to the Mortgagee. The Mortgagee shall not be obligated to perform or discharge, nor does it hereby undertake to perform or discharge, any obligation, duty or liability under any leases, sublease or rental agreements relating to the Mortgaged Property, and the Mortgagor shall and does hereby agree to indemnify and hold the Mortgagee harmless from and against any and all liability, loss or damage which it may or might incur under any such lease, sublease or agreement or under or by reason of the assignment of the rents thereof and from and against any and all claims and demands whatsoever which may be asserted against it by reason of any alleged obligations or undertakings on its part to perform or discharge any of the terms, covenants or agreements contained in any of such leases, provided that the Mortgagor shall not indemnify and hold harmless the Mortgagee from any liability loss or damage resulting from acts or omissions of the Mortgagee which occur on or after the date the Mortgagee takes possession of the Mortgaged Property. Should the Mortgagee incur any liability, loss or damage by reason of this assignment of leases and rents, or in the defense of any claim or demand, except where such liability, loss, damage, claim or demand results from actions or omissions of the Mortgagee, the Mortgagor agrees to reimburse the Mortgagee for the amount thereof, including costs, expenses and attorney's fees, immediately upon demand. The Mortgagee, or such agent or receiver, in the exercise of the rights and powers conferred upon it by this assignment of leases and rents shall have the full power to use and apply the avails, rents, issues, income and profits of the Mortgaged Property to which the Mortgagor would otherwise be entitled to the payment of or on account of the following in the order listed below: I. Reasonable receiver's fees; -7- II. Application of tenant security deposits as required by Minnesota Statutes, Section 504.20; III. Payment, when due, of prior or current real estate taxes or special assessments with respect to the Mortgaged Property, or the periodic escrow for the payment of the taxes or special assessments; IV. Payment, when due, of premiums for insurance of the type required by this Mortgage, or the periodic escrow for the payment of the premiums; and V. All expenses for normal maintenance of the Mortgaged Property; provided, however, that nothing herein shall prohibit the right to reinstate pursuant to Minnesota Statutes, Section 580.30, or the right to redeem granted pursuant to Minnesota Statutes, Sections 580.23 and 581.10. Any excess cash remaining after paying the expenses listed in clauses (I) through (V) above shall be applied to the payment of the obligations of the Mortgagor under the Reimbursement Agreement and shall be deemed to be credited to the amount required to be paid to effect a reinstatement or redemption or, if the period of redemption ends without redemption, such remaining amounts shall be paid to the purchaser at the foreclosure sale, its successors or assigns. The Mortgagor does further specifically authorize and instruct each and every present and future lessee, sublessee, tenant or subtenant of the whole or any part of the Mortgaged Property to pay all unpaid rental agreed upon in any lease or sublease to the Mortgagee upon receipt of demand from the Mortgagee so to pay the same. Any tenants, subtenants or other occupants of all or any part of the Mortgaged Property are hereby authorized to recognize the claims of the Mortgagee hereunder without investigating the reason for any action taken by the Mortgagee, or the validity or the amount of indebtedness owing to the Mortgagee, or the occurrence or existence of any Event of Default, or the application to be made by the Mortgagee of any amounts to be paid to the Mortgagee. The sole signature of any officer or attorney of the Mortgagee shall be sufficient for the exercise of any rights under this assignment of leases and rents and the sole receipt of the Mortgagee for any sums received by such tenants, subtenants or other occupants shall be a full discharge and release therefor. Checks for all or any part of the rentals collected under this Assignment of Leases and Rents shall be drawn to the exclusive order of the Mortgagee. SECTION I.10. FURTHER ASSURANCES. At any time and from time to time, upon request by the Mortgagee, the Mortgagor will make, execute and deliver or cause to be made, executed and delivered, to the Mortgagee, any and all other further instruments, certificates and other documents as may, in the reasonable opinion of the Mortgagee, be necessary or desirable in -8- order to effectuate, complete or perfect, or to continue and preserve, the obligations of the Mortgagor hereunder and under the Reimbursement Agreement and the mortgage and security interest granted by this Mortgage. Upon any failure by the Mortgagor so to do, the Mortgagee may make, execute and record any and all such instruments, certificates and documents for and in the name of the Mortgagor and the Mortgagor hereby irrevocably appoints the Mortgagee its agent and attorney in fact of the Mortgagor so to do. SECTION I.11. EXPENSES. The Mortgagor will pay or reimburse the Mortgagee for all attorney's fees, costs and expenses incurred by the Mortgagee in any legal proceeding or dispute of any kind in which the Mortgagee is made a party, or appears as party plaintiff or defendant, affecting the Indebtedness Secured Hereby, this Mortgage, the interest created herein or the Mortgaged Property, including but not limited to the exercise of the power of sale set forth in this Mortgage, any condemnation action involving the Mortgaged Property or any action to protect the security hereof and any such amounts paid by the Mortgagee shall be added to the indebtedness secured by this Mortgage. SECTION I.12. BOOKS AND RECORDS; FINANCIAL STATEMENTS. The Mortgagor will keep and maintain full, true and accurate books of account adequate to reflect correctly the results of the operation of the Mortgaged Property, all of which books and records relating thereto shall be open to inspection by the Mortgagee or its representative during normal business hours. SECTION I.13. HAZARDOUS SUBSTANCES. The Mortgagor warrants, covenants and represents that there does not exist in or under the Mortgaged Property any pollutant, toxic or hazardous waste or substance, or any other material the release or disposal of which is regulated by any law, regulation, ordinance or code related to pollution or environmental contamination, and, that no part of the Mortgaged Property was ever used for any industrial or manufacturing purpose or as a dump, sanitary landfill, or gasoline service station, and that there exists on the Mortgaged Property no storage tanks, electrical transformers or other equipment containing PCBs or material amounts of asbestos. The Mortgagor represents that it has received no summons, citations, directives, letters or other communications, written or oral, from any federal, state or local agency or department concerning the storing, releasing, pumping, pouring, emitting, emptying or dumping of any pollutant, toxic or hazardous waste or substance on the Mortgaged Property. Notwithstanding anything to the contrary contained herein, the Mortgagor shall be entitled to utilize hazardous substances at the Mortgaged Property in the ordinary course of its business provided the Mortgagor stores, uses and disposes of such hazardous substances in accordance with all applicable local, state and federal laws, rules and regulations. The Mortgagor covenants and agrees that it shall not, nor shall it permit others to, use the Mortgaged Property for the business of generating, transporting, storing, treating or disposing of any pollutant, toxic or hazardous waste or substance, nor shall it either take or fail to take any action which may result in a release of any hazardous substance from or onto the Mortgaged Property. In addition to all rights of access granted the Mortgagee pursuant to Section 1.6 hereof, during the term of the loan contemplated hereby, the Mortgagee, or any authorized -9- agent, contractor or representative of the Mortgagee, is hereby irrevocably authorized to enter upon the Mortgaged Property at any time and from time to time for the purpose of performing inspections, taking soil borings or other borings, or conducting any other tests or procedures on, in or about the Mortgaged Property as the Mortgagee deems necessary or appropriate to determine whether any hazardous or toxic substances, including without limitation asbestos or PCBs, are present on, under or about the Mortgaged Property. The Mortgagor agrees to indemnify and to hold the Mortgagee harmless from any and all claims, causes of action, damages, penalties, and costs (including, but not limited to, attorneys' fees, consultants' fees and related expenses) which may be asserted against, or incurred by, the Mortgagee resulting from or due to release of any hazardous substance or waste on the Mortgaged Property or arising out of any injury to human health or the environment by reason of the condition of or past activity upon the Mortgaged Property. The Mortgagor's duty to indemnify and hold harmless includes, but is not limited to, proceedings or actions commenced by any person (including, but not limited to, any federal, state, or local governmental agency or entity) before any court or administrative agency. The Mortgagor further agrees that pursuant to its duty to indemnify under this section, the Mortgagor shall indemnify the Mortgagee against all expenses incurred by the Mortgagee as they become due and not waiting for the ultimate outcome of the litigation or administrative proceeding. The Mortgagor's obligations to indemnify and hold the Mortgagee harmless hereunder shall survive repayment of the Mortgage Amount and satisfaction or foreclosure of this Mortgage. SECTION 1.14. TAX ESCROW. Upon request by the Mortgagee at any time after the occurrence of an Event of Default, the Mortgagor shall pay to the Mortgagee, on the day monthly installments of principal and/or interest are payable under the Reimbursement Agreement, a sum equal to one-twelfth (1/12th) of the annual taxes and assessments payable with respect to the Mortgaged Property, all as estimated initially and from time to time determined by the Mortgagee, to be applied by the Mortgagee to pay said taxes and assessments (such amounts being hereinafter referred to as the "Funds"). The Mortgagee shall apply the Funds to pay said taxes and assessments prior to the date that penalty attaches for non-payment. The Funds are hereby pledged as additional security for the Indebtedness Secured Hereby. No interest shall accrue on the Funds. If the amount of the Funds held by the Mortgagee shall exceed at any time the amount deemed necessary by the Mortgagee to provide for the payment of taxes and assessments, such excess shall, at the option of the Mortgagee, either be promptly repaid to the Mortgagor or be credited to the Mortgagor on the next monthly installment of Funds due. If at any time the Funds are less than the amount deemed necessary by the Mortgagee to pay taxes and assessments as they fall due, the Mortgagor shall promptly pay to the Mortgagee any amount necessary to make up the deficiency upon written notice from the Mortgagee to the Mortgagor requesting payment thereof. Upon the occurrence of an Event of Default, the Mortgagee may apply in any order as the Mortgagee shall determine in its sole discretion, any Funds held by the Mortgagee at the time of application to pay taxes and assessments which are then or will thereafter become due or as a -10- credit against the Indebtedness Secured Hereby. Upon payment in full of all Indebtedness Secured Hereby, the Mortgagee shall promptly refund to the Mortgagor any Funds held by the Mortgagee. ARTICLE II. INSURANCE, CONDEMNATION AND USE OF PROCEEDS SECTION II.1. INSURANCE. Until the Indebtedness Secured Hereby has been paid in full, the Mortgagor shall obtain and maintain the following: (1) The Mortgagor shall keep the buildings, structures, fixtures and other improvements now existing or hereafter erected on the Land insured against loss by fire, vandalism, and malicious mischief, perils of extended coverage, and such other hazards, casualties and contingencies as may be specified by the Mortgagee, in an amount not less than the greater of (a) the full replacement cost thereof and (b) the full insurable value thereof, which in no event shall be less than the amount of Indebtedness Secured Hereby, and naming the Mortgagee as mortgagee and loss payee. The Mortgagor shall also maintain rent loss or business interruption insurance with respect to such exposures and perils in an amount sufficient to enable the Mortgagor to make the required monthly payments under the Reimbursement Agreement, to pay taxes and insurance and to continue operations during an assumed reconstruction period of one (1) year, naming the Mortgagee as mortgagee and loss payee. The Mortgagor shall also maintain comprehensive general public liability insurance providing for limits of coverage of not less than $1,000,000 combined single limit coverage, and naming the Mortgagee as an additional insured. The Mortgagor shall also maintain such insurance as is required by the Reimbursement Agreement. (2) All insurance shall be carried in companies licensed to do business in the State of Minnesota and approved by the Mortgagee and the policies and renewals thereof shall (i) contain a waiver of defense based on coinsurance, (ii) be constantly assigned and pledged to and held by the Mortgagee as additional security for the Indebtedness Secured Hereby, (iii) have attached thereto loss-payable clauses in favor of and in form acceptable to the Mortgagee, and (iv) provide that the Mortgagee shall receive at least thirty (30) days' prior written notice of cancellation or any substantial modification of the policy. In default thereof, the Mortgagee may effect any insurance required to be maintained by the Mortgagor pursuant to this Section 2.1 and the amount paid therefor shall become immediately due and payable with interest at the rate set forth in Section 4.1 of the Reimbursement Agreement, or, if such rate is illegal or usurious, at the maximum rate permitted by law, and shall be secured by this Mortgage. In the event of loss or damage to the Mortgaged Property, the Mortgagor will give immediate written notice thereof to the Mortgagee, who may make proof of loss or damage if not made promptly by the Mortgagor. The Mortgagor hereby authorizes the Mortgagee to settle and compromise all claims on such policies and hereby authorizes and directs each insurance company -11- concerned to make payment for any such loss to the Mortgagor and the Mortgagee jointly. In the event of foreclosure of this Mortgage, all right, title and interest of the Mortgagor in and to any property insurance policies then in force shall pass to the purchaser at the foreclosure sale. SECTION II.2. CONDEMNATION. The Mortgagor shall give the Mortgagee immediate written notice of the actual or threatened commencement of any proceedings under condemnation or eminent domain affecting all or any part of the Mortgaged Property or any easement therein or appurtenance thereof. If all or any part of the Mortgaged Property is damaged, taken or acquired, either temporarily or permanently, in any condemnation proceeding, or by exercise of the right of eminent domain, the amount of any award or other payment for such taking, acquisition or damages made in consideration thereof, to the extent of the full amount of the remaining unpaid indebtedness secured by this instrument, is hereby assigned to the Mortgagee, who is empowered to collect and receive the same and to give proper receipts therefor in the name of the Mortgagor and the same shall be paid forthwith to the Mortgagee, to be applied to the Indebtedness Secured Hereby, and any excess shall be paid to the Mortgagor. Provided no Event of Default has occurred and is then continuing, the Mortgagor shall be entitled to settle and compromise all claims for condemnation awards (to be applied in accordance with the terms of the immediately preceding sentence) where the amount claimed is less than $50,000. SECTION II.3. THE MORTGAGOR TO REPAIR, REPLACE, REBUILD OR RESTORE. If any Indebtedness Secured Hereby is outstanding when all or any part of the Mortgaged Property is destroyed or damaged, unless the Mortgagee elects, at its option, which option is hereby irrevocably granted by the Mortgagor to the Mortgagee, to deposit such proceeds in the cash collateral account established pursuant to the terms of the Reimbursement Agreement, to be applied pursuant to the terms of the Reimbursement Agreement: (1) the Mortgagor shall either deposit such proceeds in the cash collateral account established pursuant to the terms of the Reimbursement Agreement, to be applied pursuant to the terms of the Reimbursement Agreement, or proceed promptly, subject to the provisions of subsection (2) of this Section 2.3, to replace, repair, rebuild and restore the Mortgaged Property to substantially the same condition as existed before the taking or event causing the damage or destruction; (2) all proceeds of any insurance claim shall be paid directly to the Mortgagee. The Mortgagee shall apply the proceeds, less such sum, if any, required for payment of all expenses incurred in collecting the same (the "Net Proceeds"), to payment of the costs of repair, replacement, rebuilding or restoration of the Mortgaged Property upon compliance with such construction and disbursement terms as the Mortgagee may deem reasonably necessary, including deposit by the Mortgagor with the Mortgagee of such funds of the Mortgagor as may be required to insure payment of all costs of rebuilding, restoration, repair or replacement. If such deposit is not made when requested by the Mortgagee, or if an Event of Default occurs while the Mortgagee is retaining the Net Proceeds, the Mortgagee may apply the Net Proceeds to the Indebtedness Secured -12- Hereby. The balance of the Net Proceeds remaining after payment of all costs of any repair, rebuilding, replacement or restoration of the Mortgaged Property shall be applied as a prepayment of the Indebtedness Secured Hereby, and any excess shall be paid to the Mortgagor; and (3) the Mortgagor shall not, by reason of the payment of any costs of repair, rebuilding, replacement or restoration, be entitled to any reimbursement from the Mortgagee or any abatement or diminution of the amounts payable under the Reimbursement Agreement or on any other Indebtedness Secured Hereby. Notwithstanding the foregoing, and provided no Event of Default has occurred and is then continuing, the Mortgagor shall be entitled to directly apply insurance proceeds to the repair, replacement, rebuilding or restoration of the Mortgaged Property as long as such damage or destruction is in an amount of less than $50,000. ARTICLE III. REMEDIES SECTION III.1. REMEDIES. Upon the occurrence of an Event of Default or at any time thereafter, the Mortgagee may, at its option, exercise any and all of the following rights and remedies (and any other rights and remedies available to it under applicable law or any document related hereto): (1) the Mortgagee shall be entitled to seek immediate appointment of a receiver for the Mortgaged Property; and (2) the Mortgagee may foreclose this Mortgage by action or advertisement upon written notice thereof to the Mortgagor, and the Mortgagor hereby authorizes the Mortgagee to do so, power being herein expressly granted to sell the Mortgaged Property at public auction without any prior hearing thereof and to convey the same to the purchaser, in fee simple, pursuant to the statutes of Minnesota in such case made and provided and, out of the proceeds arising from such sale, to pay all Indebtedness Secured Hereby with interest, and all legal costs and charges of such foreclosure and the maximum attorney's fees permitted by law, which costs, charges and fees the Mortgagor herein agrees to pay, and to pay the surplus, if any, to the Mortgagor, its successors or assigns; and (3) the Mortgagee may exercise any of the remedies made available to a secured party under the Uniform Commercial Code in effect in the State of Minnesota, or other applicable law, with respect to any of the Mortgaged Property which constitutes personal property, including without limitation the right to take possession thereof, proceeding without judicial process or by judicial process (without a prior hearing or notice thereof, which the Mortgagor hereby waives), and the right to sell, lease or otherwise dispose of -13- or use any or all of such personal property. The Mortgagee may require the Mortgagor to assemble such personal property and make it available to the Mortgagee at a place designated by the Mortgagee which is reasonably convenient to both the Mortgagor and the Mortgagee. If notice to the Mortgagor of any intended disposition of any of the Mortgaged Property constituting personal property or any other intended action is required by law in a particular instance, such notice shall be deemed commercially reasonable if given (in the manner specified in Section 4.2 hereof) at least ten (10) calendar days prior to the date of intended disposition or other action. In the event of a sale under this Mortgage, whether by virtue of judicial proceedings or otherwise, the Mortgaged Property may, at the option of the Mortgagee, be sold as one parcel and as an entirety or in such parcels, manner and order as the Mortgagee in its sole discretion may elect. SECTION III.2. PURCHASE OF MORTGAGED PROPERTY. In case of any sale of the Mortgaged Property pursuant to any judgment or decree of any court or otherwise in connection with the enforcement of any of the terms of this Mortgage, the Mortgagee, its successors and assigns, may become the purchaser, and for the purpose of making settlement for or payment of the purchase price, shall be entitled to turn in and use the Reimbursement Agreement and any claims for interest, late charges and prepayment premiums matured and unpaid thereon, together with any other Indebtedness Secured Hereby, if any, in order that there may be credited as paid on the purchase price the sum, or any part thereof, then due under the Reimbursement Agreement, including principal thereof and interest, late charges and prepayment premiums, if any, thereon, and any other Indebtedness Secured Hereby. ARTICLE IV. MISCELLANEOUS SECTION IV.1. SUCCESSORS AND ASSIGNS. The covenants and agreements contained herein, including, without limitation, the provision of Section 1.8 hereof, shall bind, and the rights hereunder shall inure to, the respective heirs, successors and assigns of the Mortgagor and the Mortgagee, including among the Mortgagor's assigns any purchasers or transferees of the Mortgaged Property. SECTION IV.2. NOTICES. Any notice, request, demand or other communication permitted or required hereunder shall be deemed duly given if delivered or mailed postage prepaid, certified or registered, addressed to the address of such party on page 2 of this Mortgage. SECTION IV.3. HEADINGS. The headings of the sections contained herein are for convenience only and are not to be construed to be a part of or limit or affect the terms hereof. SECTION IV.4. EXPENSES. The Mortgagor shall reimburse the Mortgagee and any participant, upon demand, for all reasonable costs and expenses, including without limitation -14- attorneys' fees, appraisal fees, survey fees, closing charges, documentary or tax stamps, recording and filing fees, insurance premiums and service charges, paid or incurred by the Mortgagee in connection with (i) the preparation, negotiation, approval, execution and delivery of the Reimbursement Agreement, this Mortgage and any other documents and instruments related hereto or thereto; (ii) the servicing of the loan contemplated by the Reimbursement Agreement; (iii) the negotiation of any amendments or modifications to any of the foregoing documents, instruments or agreements and the preparation of any and all documents necessary or desirable to effect such amendments or modifications; and (iv) the enforcement by the Mortgagee during the term hereof or thereafter of any of the rights or remedies of the Mortgagee or any participant hereunder or under any of the foregoing documents, instruments or agreements, including without limitation costs and expenses of collection, whether or not suit is filed with respect thereto and whether such costs are paid or incurred, or to be paid or incurred, prior to or after entry of judgment. SECTION IV.5. DEFINITIONS. As used herein, the term "Event of Default" shall have the meaning assigned to such term in the Reimbursement Agreement. IN WITNESS WHEREOF, the Mortgagor has caused this Mortgage to be duly executed and delivered to the Mortgagee as of the day and year first above written. HEI, INC. By: ------------------------------------- Its: --------------------------------- By: ------------------------------------- Its: ------------------------------------ -15- STATE OF MINNESOTA ) ) ss COUNTY OF ) The foregoing instrument was acknowledged before me this ____ day of March, 1996, by _________________________, the ________________, and by _________________________, the _____________________, of HEI, Inc., a Minnesota corporation, for and on behalf of said corporation. ----------------------------------------- Notary Public -16- EXHIBIT A (Legal Description) Lot 2, Block 1, Point Victoria, according to the recorded plat thereof, Carver County, Minnesota. EXHIBIT B (Permitted Encumbrances) 1. Easement for utilities and drainage as shown on the recorded plat. 2. The former County Highway No. 113 adjacent to subject property has been revoked as a county highway and is now under the jurisdiction of the City of Victoria, a shown by Resolution Revoking County Highway dated April 25, 1989, filed May 23, 1989 as Document No. T61038. SECURITY AGREEMENT THIS SECURITY AGREEMENT, is made as of this 1st day of April, 1996, by HEI, INC., a Minnesota corporation ("Debtor"), in favor of NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking association ("Secured Party"). In order to secure the payment and performance of Debtor of all of its obligations under and pursuant to that certain Reimbursement Agreement of even date herewith (the "Reimbursement Agreement") by and between Debtor and Secured Party (such obligations are herein collectively referred to as the "Secured Obligations"), Debtor hereby agrees as follows: 1. SECURITY INTEREST AND COLLATERAL. In order to secure the payment and performance of the Secured Obligations, Debtor hereby grants to Secured Party a security interest (herein called the "Security Interest") in and to the following property (hereinafter collectively referred to as the "Collateral"): any and all equipment now owned or hereafter acquired by the Debtor and wherever located, together with all substitutions and replacements for and products and proceeds of any of the foregoing property and all accessories, attachments, parts, accessions and repairs now or hereafter attached or affixed to or used in connection with any such equipment. 2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Debtor hereby represents and warrants to, and covenants and agrees with, Secured Party as follows: (a) The Collateral will be used primarily for business purposes. The Collateral shall be located within the State of Minnesota. Debtor's chief executive office is located at 1495 Steiger Lake Lane, Victoria, Minnesota, and it keeps and will keep all of its books and records with respect to all of its accounts at such address. (b) If any part or all of the Collateral will become so related to particular real estate as to become a fixture, the Debtor will promptly advise the Secured Party as to real estate concerned and the record owner thereof and execute and deliver any and all instruments necessary to perfect the Security Interest therein and to assure that such Security Interest will be prior to the interest therein of the owner of the real estate. (c) During the preceding one (1) year Debtor has not changed its name or operated or conducted business under any trade name or "d/b/a" which is different from its corporate name. Debtor shall promptly notify Secured Party of any change in such name or if it operates or conducts business under any trade name or "d/b/a" which is different from such name. (d) Debtor has (or will have at the time Debtor acquires rights in Collateral hereafter acquired or arising) and will maintain absolute title to each item of Collateral free and clear of all security interests, liens and encumbrances, except the Security Interest, liens granted to secure the acquisition of items of Collateral (other than items of Collateral acquired through proceeds of the Reimbursement Agreement), capitalized leases, and such other liens and encumbrances as are consented to in writing by Secured Party (the Security Interest and such other liens and encumbrances are hereinafter collectively referred to as the "Permitted Interests"), and will defend the Collateral against all claims or demands of all persons other than Secured Party and those holding Permitted Interests. Debtor will not sell or otherwise dispose of the Collateral or any interest therein where the book value of such Collateral is greater than $5,000 without the prior written consent of Secured Party. (e) Debtor will not permit any Collateral to be located in any state (and, if a county filing is required, in any county) in which a financing statement covering such Collateral is required to be, but has not in fact been, filed. (f) Debtor will (i) promptly pay all taxes and other governmental charges levied or assessed upon or against any Collateral or upon or against the creation, perfection or continuance of the Security Interest; (ii) keep all Collateral free and clear of all security interests, liens and encumbrances except the Permitted Interests; (iii) at all reasonable times, permit Secured Party or its representatives to examine or inspect any Collateral, wherever located, and to examine, inspect and copy Debtor's books and records pertaining to the Collateral and its business and financial condition; (iv) keep accurate and complete records pertaining to the Collateral and pertaining to Debtor's business and financial condition and will submit to Secured Party such periodic reports concerning the Collateral and Debtor's business and financial condition as Secured Party may from time to time reasonably request; (v) promptly notify Secured Party of any loss or material damage to any Collateral; (vi) at all times keep all Collateral insured against risks of fire (including so called extended coverage), theft and such other risks and in such amounts as Secured Party may reasonably request, with any loss payable to Secured Party to the extent of its interest and notify the Secured Party in writing of any loss or damage to the Collateral or any part; (vii) from time to time execute such financing statements as Secured Party may reasonably deem required to be filed in order to perfect the Security Interest and, if any Collateral is covered by a certificate of title, execute such documents as may be required to have the Security Interest properly noted on a certificate of title; (viii) pay when due or reimburse Secured Party on demand for all costs of collection of any of the Secured Obligations and all other out-of-pocket expenses (including in each case all attorneys' fees) incurred by Secured Party in connection with the creation, perfection, satisfaction or enforcement of the Security Interest or the execution or creation, continuance or enforcement of this Agreement or any or all of the Secured Obligations including expenses incurred in any litigation or bankruptcy or insolvency proceedings; (ix) execute, deliver or endorse any and all instruments, documents, -2- assignments, security agreements and other agreements and writings which Secured Party may at any time reasonably request in order to secure, protect, perfect or enforce the Security Interest and Secured Party's rights under this Agreement; (x) not use or keep any Collateral, or permit it to be used or kept, for any unlawful purpose or in violation of any federal, state or local law, statute or ordinance; and (xi) not permit any Collateral to become part of or to be affixed to any real property, without first assuring to the reasonable satisfaction of Secured Party that the Security Interest will be prior and senior to any interest or lien then held or thereafter acquired by any mortgagee of such real property or the owner or purchaser of any interest therein. If Debtor at any time fails to perform or observe any agreement contained in this Section 2(f), and if such failure shall continue for a period of ten (10) calendar days after Secured Party gives Debtor written notice thereof (or, in the case of the agreements contained in clauses (vi) and (vii) of this Section 2(f), immediately upon the occurrence of such failure, without notice or lapse of time) Secured Party may (but need not) perform or observe such agreement on behalf and in the name, place and stead of Debtor (or, at Secured Party's option, in Secured Party's own name) and may (but need not) take any and all other actions which Secured Party may reasonably deem necessary to cure or correct such failure (including, without limitation, the payment of taxes, the satisfaction of security interests, liens or encumbrances (other than Permitted Interests), the procurement and maintenance of insurance, the execution of financing statements, the endorsement of instruments, and the procurement of repairs, transportation or insurance); and, except to the extent that the effect of such payment would be to render any loan or forbearance of money usurious or otherwise illegal under any applicable law, Debtor shall thereupon pay Secured Party on demand the amount of all moneys expended and all costs and expenses (including attorneys' fees) incurred by Secured Party in connection with or as a result of Secured Party's performing or observing such agreements or taking such actions, together with interest thereon from the date expended or incurred by Secured Party at the rate set forth in Section 4.1 of the Reimbursement Agreement or, if such rate is illegal or usurious, at the maximum rates permitted by law. To facilitate the performance or observance by Secured Party of such agreements of Debtor, Debtor hereby irrevocably appoints (which appointment is coupled with an interest) Secured Party, or its delegate, as the attorney-in-fact of Debtor with the right (but not the duty) from time to time to create, prepare, complete, execute, deliver, endorse or file, in the name and on behalf of Debtor, any and all instruments, documents, financing statements, applications for insurance and other agreements and writings required to be obtained, executed, delivered or endorsed by Debtor under this Section 2. 3. ASSIGNMENT OF INSURANCE. Debtor hereby assigns to Secured Party, as additional security for the payment of the Secured Obligations, any and all moneys (including but not limited to proceeds of insurance and refunds of unearned premiums) due or to become due under, and all other rights of Debtor under or with respect to, any and all policies of insurance covering the Collateral, and Debtor hereby directs the issuer of any such policy to pay any such moneys to the Secured Party. Before and upon the occurrence of an Event of Default (as that term is defined in the Reimbursement Agreement), and at any time thereafter, Secured Party may -3- (but need not) in its own name or in Debtor's name, execute and deliver proofs of claim, receive all such moneys (subject to Debtor's rights), endorse checks and other instruments representing payment of such monies, and adjust, litigate, compromise or release any claim against the issuer of any such policy. Notwithstanding the foregoing, and provided no Event of Default has occurred and is then continuing, Debtor shall be entitled to directly settle and compromise claims where the amount of the claim is less than $10,000 without the consent of Secured Party. 4. REMEDIES. Upon the occurrence and during the continuance of an Event of Default, Secured Party may exercise any one or more of the following rights or remedies if any or all of the Secured Obligations are not paid when due: (i) exercise and enforce any or all rights and remedies available after default to a secured party under the Uniform Commercial Code, including but not limited to the right to take possession of any Collateral, proceeding without judicial process or by judicial process (without a prior hearing or notice thereof, which Debtor hereby expressly waives), and the right to sell, lease or otherwise dispose of or use any or all of the Collateral; (ii) Secured Party may require Debtor to assemble the Collateral and make it available to Secured Party at a place to be designated by Secured Party which is reasonably convenient to both parties; and (iii) exercise or enforce any or all other rights or remedies available to Secured Party by law or agreement against the Collateral, against Debtor or against any other person or property. If notice to Debtor of any intended disposition of Collateral or any other intended action is required by law in a particular instance, such notice shall be deemed commercially reasonable if given (in the manner specified in Section 5 hereof) at least ten (10) calendar days prior to the date of intended disposition or other action. 5. MISCELLANEOUS. This Agreement can be waived, modified, amended, terminated or discharged, and the Security Interest can be released, only explicitly in a writing signed by Secured Party. A waiver signed by Secured Party shall be effective only in the specific instance and for the purpose given. Mere delay or failure to act shall not preclude the exercise or enforcement of any of Secured Party's rights or remedies. All rights and remedies of Secured Party shall be cumulative and may be exercised singularly or concurrently, at Secured Party's option, and the exercise or enforcement of any one such right or remedy shall neither be a condition to nor bar the exercise or enforcement of any other. All notices to be given to Debtor shall be deemed sufficiently given if deposited in the United States mails, registered or certified, postage prepaid, or personally delivered to Debtor at its address set forth in Section 2(a) hereof. Secured Party's duty of care with respect to Collateral in its possession (as imposed by law) shall be deemed fulfilled if Secured Party exercises reasonable care in physically safe keeping such Collateral or, in the case of Collateral in the custody or possession of a bailee or other third person, exercises reasonable care in the selection of the bailee or other third person, and Secured Party need not otherwise preserve, protect, insure or care for any Collateral. Secured Party shall not be obligated to preserve any rights Debtor may have against any other party, to realize on the Collateral at all or in any particular manner or order, or to apply any cash proceeds of Collateral in any particular order of application. This Agreement shall be binding upon and inure to the benefit of Debtor and Secured Party and their respective heirs, representatives, successors and assigns and shall take effect when signed by Debtor and delivered to Secured Party, and Debtor waives notice of Secured Party's acceptance hereof. Secured Party may execute this Agreement -4- if appropriate for the purpose of filing, but the failure of Secured Party to execute this Agreement shall not affect or impair the validity or effectiveness of this Agreement. Except to the extent otherwise required by law, this Agreement shall be governed by the laws of the State of Minnesota and, unless the context otherwise requires, all terms used herein which are defined in Articles 1 and 9 of the Uniform Commercial Code, as in effect in said state, shall have the meanings therein stated. If any provision or application of this Agreement is held unlawful or unenforceable in any respect, such illegality or unenforceability shall not affect other provisions or applications which can be given effect, and this Agreement shall be construed as if the unlawful or unenforceable provision or application had never been contained herein or prescribed hereby. All representations and warranties contained in this Agreement shall survive the execution, delivery and performance of this Agreement and the creation and payment of the Secured Obligations. IN WITNESS WHEREOF, Debtor has executed and delivered to Secured Party this Security Agreement as of the day and year first above written. HEI, INC. By: -------------------------- Its: ---------------------- By: -------------------------- Its: ---------------------- -5- EX-27 6 EXHIBIT 27
5 1,000 9-MOS AUG-31-1996 SEP-01-1995 JUN-01-1996 1,218 0 1,999 0 2,415 10,993 10,612 4,802 20,116 2,108 5,322 0 0 202 12,212 20,116 14,283 14,283 10,885 10,885 2,154 0 0 1,244 460 784 0 0 0 784 .19 .19
-----END PRIVACY-ENHANCED MESSAGE-----