-----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, J7e4oTSiAA+CXDAXw6OSh2KHOiV26Ii/mjbq5CO2speyN02vJv5zIf274umNmek4 dtxNn++w/SE9k2RDE8ZsEA== 0000892712-96-000008.txt : 19960221 0000892712-96-000008.hdr.sgml : 19960221 ACCESSION NUMBER: 0000892712-96-000008 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19960220 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIANA CORP CENTRAL INDEX KEY: 0000057201 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-GROCERIES & RELATED PRODUCTS [5140] IRS NUMBER: 362448698 STATE OF INCORPORATION: DE FISCAL YEAR END: 0403 FILING VALUES: FORM TYPE: S-3 SEC ACT: 1933 Act SEC FILE NUMBER: 333-01055 FILM NUMBER: 96523300 BUSINESS ADDRESS: STREET 1: 8200 W BROWN DEER ROAD CITY: MILWAUKEE STATE: WI ZIP: 53223-1706 BUSINESS PHONE: 4143550037 FORMER COMPANY: FORMER CONFORMED NAME: FH INDUSTRIES CORP DATE OF NAME CHANGE: 19850814 FORMER COMPANY: FORMER CONFORMED NAME: SCOT LAD FOODS INC DATE OF NAME CHANGE: 19841202 S-3 1 As filed with the Securities and Exchange Commission on February 20, 1996 Reg. No. 33-________ _______________________________________________________ _______________________________________________________ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ___________________ FORM S-3 REGISTRATION STATEMENT Under The Securities Act of 1933 ___________________ THE DIANA CORPORATION (Exact name of registrant as specified in its charter) Delaware 36-2448698 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8200 West Brown Deer Road Suite 200 Milwaukee, Wisconsin 53223 (414) 355-0037 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Richard Y. Fisher The Diana Corporation 8200 West Brown Deer Road Suite 200 Milwaukee, WI 53223 (414) 355-0037 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies of all communications to: Larry D. Lieberman Godfrey & Kahn, S.C. 780 North Water Street Milwaukee, WI 53202 __________________ Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If the only securities being registered on this Form are being offered pursuant to dividend or reinvestment plans, please check the following box. [ ] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [ X ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE _______________________________________________________ _______________________________________________________ Title of Proposed each maximum Proposed class of Shares offering maximum securities to be price aggregate Amount of to be registered per offering registration registered (1) unit price fee _______________________________________________________ _______________________________________________________ Common Stock 350,000 $15.5625 $5,446,875 $1,879 (1) _______________________________________________________ _______________________________________________________ (1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(c) under the Securities Act of 1933 based on the reported average of the high and low prices of the Common Stock on the New York Stock Exchange on February 15, 1996. _________________ The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ____________________________________________________ ____________________________________________________ PROSPECTUS 350,000 Shares The Diana Corporation Common Stock This Prospectus relates to up to 350,000 shares of common stock, $1.00 par value per share (the "Shares"), of The Diana Corporation (the "Company") which may be offered from time to time by the selling shareholder named herein (the "Selling Shareholder"). The Company will not receive any of the proceeds from the sale of the Shares. The Company will bear the costs relating to the registration of the Shares, estimated to be approximately $8,000. The Shares may be offered for sale from time to time by the Selling Shareholder named herein, or by its pledges, donees, transferees or other successors in interest, to or through underwriters or directly to other purchasers or through agents in one or more transactions on or through the facilities of the New York Stock Exchange, Inc. ("NYSE"), in the over-the- counter market, in one or more private transactions, or in a combination of such methods of sale, at prices and on terms then prevailing, at prices related to such prices, or at negotiated prices. The Selling Shareholder may pledge all or a portion of the Shares as collateral in loan transactions. Upon default by the Selling Shareholder, the pledgee in such loan transaction would have the same rights of sale as the Selling Shareholder under this Prospectus. The Selling Shareholder may also transfer Shares by gift, and upon any such transfer the donee would have the same rights of sale as such Selling Shareholder under this Prospectus. The Selling Shareholder and any brokers and dealers through whom sales of the Shares are made may be deemed to be "underwriters" within the meaning of the Securities Act of 1933, as amended, and the commissions or discounts and other compensation paid to such persons may be regarded as underwriters' compensation. The Shares are included for quotation on the NYSE under the symbol "DNA". _____________________ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ______________________ The date of this Prospectus is February ____, 1996. AVAILABLE INFORMATION The Company is subject to the information requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy and information statements and other information with the Securities and Exchange Commission (the "Commission"). The Company has filed with the Commission a Registration Statement on Form S-3 (the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the Shares offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement and exhibits thereto, or amendments thereto, to which reference is hereby made. Such reports, proxy and information statements, Registration Statement and exhibits and other information filed by the Company may be inspected and, upon payment of prescribed fees, copied at the public reference facilities of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549, and at the Regional Offices of the Commission at 7 World Trade Center, 13th Floor, New York, New York 10048, and at Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661. In addition, the Company's Common Stock is included for quotation on the NYSE, and such reports, proxy and information statements, Registration Statement and other information concerning the Company should be available for inspection and copying at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005, on which exchange the Shares are traded. ___________________ No person has been authorized to give any information or to make on behalf of the Company any representations, other than those contained in this Prospectus, in connection with the offer made hereby, and, if given or made, such other information or representation must not be relied upon as having been authorized by the Company. This Prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, any security other than the securities offered hereby, or an offer to sell or solicitation of any offer to buy such securities in any jurisdiction in which such offer or solicitation is not qualified or to any person to whom such offer or solicitation would be unlawful. Neither the delivery of this Prospectus nor any sale made hereunder shall under any circumstances create any implication that there has been no change in the affairs of the Company since the date hereof or that the information contained or incorporated by reference herein is correct as of any date subsequent to the date hereof. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents filed by the Company with the Commission pursuant to the Exchange Act are incorporated in this Prospectus by reference: (1) the Company's Annual Report on Form 10-K for the year ended April 1, 1995; (2) the Company's Quarterly Reports on Form 10-Q for the quarters ended July 22, 1995, October 14, 1995 and January 6, 1996; (3) the Company's Current Reports on Form 8-K filed with the Commission on July 5, 1995, October 17, 1995, December 5, 1995 and January 31, 1996 and Form 8- K/A filed with the Commission on January 31, 1996; (4) the description of the Company's Common Stock contained in the Company's Registration Statement on Form 8-A filed with the Commission under the Exchange Act, including any amendment or report filed for the purpose of updating such description. All reports and other documents subsequently filed by the Company pursuant to Section 13, 14 or 15(d) of the Exchange Act and prior to the termination of the offering of the Common Stock offered hereby shall be deemed to be incorporated by reference into this Prospectus and to be a part hereof. Such documents, and the documents listed above, are hereinafter referred to as "Incorporated Documents." Any statement contained herein or in an Incorporated Document shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed Incorporated Document modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The information relating to the Company contained in this Prospectus summarizes, is based upon, or refers to, information and financial statements contained in one or more Incorporated Documents; accordingly, such information contained herein is qualified in its entirety by reference to Incorporated Documents and should be read in conjunction therewith. The Company will provide without charge to each person to whom a copy of this Prospectus has been delivered, upon the written or oral request of any such person, a copy of any or all of the Incorporated Documents, other than exhibits to such documents (unless such exhibits are specifically incorporated by reference into such documents). Requests for such copies should be directed to Corporate Secretary, The Diana Corporation, 8200 West Brown Deer Road, Suite 200, Milwaukee, Wisconsin 53223, telephone (414) 355- 0037. USE OF PROCEEDS The Company will not receive any proceeds from the sale of the Shares by the Selling Shareholder. SELLING SHAREHOLDER The following information regarding the Shares offered hereby has been provided to the Company by the Selling Shareholder identified below and reflects information concerning beneficial ownership of Shares as of the date of this Prospectus. All of the Shares offered hereby were acquired by the Selling Shareholder on January 16, 1996 in connection with the Company's acquisition of an additional 30% interest in Sattel Communications Corp. ("SCC"), the Company's subsidiary. As of the date hereof, the Selling Shareholder still owns 20% of the outstanding stock of SCC. In recognition of the fact that the Selling Shareholder may wish to be legally permitted to sell its Shares, other than in transactions exempt from registration under the securities laws, when it deems appropriate, the Company has filed with the Commission a Registration Statement on Form S-3 under the Securities Act, of which this Prospectus forms a part, with respect to the resale of the Shares from time to time. The Shares may be resold in transactions on the NYSE, on which exchange the Shares are included and traded, in other public securities markets or in private transactions or other transactions exempt from registration under the Securities Act. See "Plan of Distribution." Name of Shares Owned Shares Shares Owned Selling Prior to Offered After Shareholder this Offering Hereby(1) Offering _____________ _____________ _________ ___________ Sattel Technologies, Inc. 350,000 350,000 0(1) ______ (1) Some or all of the Shares covered by this Prospectus may be offered from time to time on a delayed or continuing basis by the Selling Shareholder. The Selling Shareholder has agreed with the Company that 50,000 Shares can be sold following effectiveness of the Registration Statement, an additional 150,000 Shares can be sold after January 16, 1997 and an additional 150,000 Shares can be sold after July 16, 1997, but once the Company's stock price closes at or above $16.75 per share, the Selling Shareholder can thereafter sell all of the Shares. The Selling Shareholder and the Company formed SCC in 1994. The Selling Shareholder has transferred certain intellectual property rights to SCC and has entered, and likely will continue to enter, into other arrangements with SCC in the ordinary course of business, including supplying inventory to SCC on agreed-upon terms. The Chairman, President, Chief Executive Officer and majority shareholder of the Selling Shareholder is also a member of the Board of Directors of SCC. PLAN OF DISTRIBUTION Any distribution of the Shares by the Selling Shareholder, or by pledgees, donees, transferees or other successors in interest, may be effected from time to time in one or more of the following transactions: (a) to underwriters who will acquire the Shares for their own account and resell them in one or more transactions, including negotiated transactions, at a fixed public offering price or at varying prices determined at the time of sale (any public offering price and any discount or concessions allowed or reallowed or paid to dealers may be changed from time to time); (b) through brokers, acting as principal or agent, in transactions (which may involve crosses and block transactions) on or through the facilities of the NYSE, other exchanges, in the over-the-counter market, in special offerings, or otherwise, at market prices prevailing at the time of sale, at prices related to such prevailing market prices, at negotiated prices or at fixed prices; or (c) directly or through brokers or agents in private sales at negotiated prices, or by any other legally available means. The Selling Shareholder and any such underwriters, brokers, dealers or agents, upon effecting the sale of the Shares, may be deemed "underwriters" as that term is defined by the Securities Act. Underwriters participating in any offering made pursuant to this Prospectus (as amended or supplemented from time to time) may receive underwriting discounts and commissions, and discounts or concessions may be allowed or reallowed or paid to dealers, and brokers or agents participating in such transactions may receive brokerage or agent's commissions or fees. In order to comply with the securities laws of certain states, if applicable, the Shares will be sold in such jurisdictions only through registered or licensed brokers or dealers. In addition, in certain states the Shares may not be sold unless the Shares have been registered or qualified for sale in such state or an exemption from registration or qualification is available and complied with. All costs, expenses and fees in connection with the registration of the Shares will be borne by the Company. Commissions and discounts, if any, attributable to the sale of the Shares will be borne by the Selling Shareholder. The Selling Shareholder and/or the Company may agree to indemnify any agent, dealer or broker-dealer that participates in transactions involving sales of the Shares against certain liabilities, including liabilities arising under the Securities Act. The Company and the Selling Shareholder may agree to indemnify each other and certain other persons against certain liabilities in connection with the offering of the Shares, including liabilities arising under the Securities Act. The Selling Shareholder may also sell Shares pursuant to Rule 144 under the Securities Act, or otherwise, in lieu of sales by means of this Prospectus. LEGAL OPINION The validity of the Shares hereby has been passed upon by Godfrey & Kahn, S.C. EXPERTS The consolidated financial statements of the Company appearing in its Annual Report (Form 10-K) for the year ended April 1, 1995, have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon included therein and incorporated herein by reference. Such financial statements are, and audited financial statements to be included in subsequently filed documents will be, incorporated herein in reliance upon the reports of Ernst & Young LLP pertaining to such financial statements (to the extent covered by consents filed with the Securities and Exchange Commission) given upon the authority of such firm as experts in accounting and auditing. PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS Item 14. Other Expenses of Issuance and Distribution. The following table sets forth the estimated expenses to be incurred by the Company in connection with the distribution of the securities being registered hereby: SEC registration fee . . . . . . . . . $ 1,879 Accounting fees and expenses . . . . . 3,000 Legal fees and expenses . . . . . . . 2,500 Miscellaneous . . . . . . . . . . . . 621 _____ TOTAL . . . . . . . . . . . . . . $8,000 _____ _____ All of the above expenses other than the SEC registration fee are estimates. All of the expenses listed will be paid by the Company. Item 15. Indemnification of Directors and Officers. Under Section 145 of the Delaware General Corporation Law, the Company is in certain circumstances permitted, and in other circumstances may be required, to indemnify its directors and officers against certain expenses (including attorneys' fees) and other amounts paid in connection with certain threatened, pending or completed civil, criminal, administrative or investigative actions, suits or proceedings (including certain civil actions and suits which may be instituted by or in the right of the Company), in which such persons were or are parties, or are threatened to be made parties, by reason of the fact that such persons were or are directors or officers of the Company. Such section also permits the Company to purchase and maintain insurance on behalf of its directors and officers against liability which may be asserted against, or incurred by, such persons in their capacities as directors or officers of the Company, or which may arise out of their status as directors or officers of the Company whether or not the Company would have the power to indemnify such persons against such liability under the provisions of such section. Under Article IX of the Company's Bylaws, the Company is in certain instances required to indemnify its directors and officers against certain expenses (including attorneys' fees) and other amounts paid in connection with the defense or settlement of certain threatened, pending or completed civil, criminal, administrative or investigative actions, suits or proceedings (including suits which may be instituted by or in the name of the Company), in which such persons were or are parties, or are threatened to be made parties, by reason of the fact that such persons were or are directors or officers of the Company. Through insurance, the officers and directors of the Company may from time to time also be insured for acts or omissions related to the conduct of their duties. The Company's Restated Certificate of Incorporation limits the personal liability of directors to the fullest extent permitted by Delaware law. Item 16. Exhibits. The following Exhibits are filed as part of this Registration Statement. Exhibit No. ___________ 5.1 Opinion of Counsel 10.1 Loan and Security Agreement dated January 2, 1996 between Sanwa Business Credit Corporation and C&L Communications, Inc., one of the Company's subsidiaries 10.2 Exchange Agreement dated January 16, 1996 between the Company and Sattel Technologies, Inc. 23.1 Consent of Independent Auditors 23.2 Consent of Counsel (included in Exhibit 5.1) 24.1 Powers of Attorney appear on the signature page hereof Item 17. Undertakings. *(a) The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) to include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement; (iii) to include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement; Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the Registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the Registration Statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. *(b) The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference in the Registration Statement shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. *(h) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defence of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. ____________________ * Paragraph references correspond to those of Item 512 of Regulation S-K. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Milwaukee, State of Wisconsin, on February 19, 1996. THE DIANA CORPORATION By: /s/ Richard Y. Fisher ___________________________ Richard Y. Fisher, Chairman of the Board, and Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Richard Y. Fisher and R. Scott Miswald, and each of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission and any other regulatory authority, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities on the dates indicated. Signature Title Date _________ _____ ____ /s/ Richard Y. Fisher Chairman of the Board, ______________________ Chief Executive Richard Y. Fisher Officer and Director /s/ Donald E. Runge President and Director ____________________ Donald E. Runge /s/ Sydney B. Lilly Senior Vice President ____________________ and Director Sydney B. Lilly /s/ R. Scott Miswald Vice President, _____________________ Treasurer and February , 1996 R. Scott Miswald Controller (Principal Financial and Accounting Officer) /s/ Donald D. Barr Director ___________________ Donald D. Barr /s/ Jack E. Donnelly Director _____________________ Jack E. Donnelly /s/ Jay M. Lieberman Director _____________________ Jay M. Lieberman Dated: February 19, 1996 EX-5.1 2 EXHIBIT 5.1 GODFREY & KAHN, S.C. Attorneys at Law 780 North Water Street Milwaukee, Wisconsin 53202-3590 Telephone: (414) 273-3500 February 19, 1996 The Diana Corporation 8200 West Brown Deer Road Suite 200 Milwaukee, Wisconsin 53223 Gentlemen: We have acted as counsel to The Diana Corporation, a Delaware corporation (the "Company"), in connection with the preparation of a Registration Statement on Form S-3 to be filed with the Securities and Exchange Commission on or about February 20, 1996 (the "Registration Statement"), relating to the sale by a certain selling shareholder (the "Selling Shareholder") of up to 350,000 shares of the Company's common stock, $1.00 par value (the "Shares"). We have examined: (a) the Registration Statement, (b) copies of the Company's Certificate of Incorporation and By-laws, as certified by the Company's Secretary, (c) certain resolutions of the Company's Board of Directors, as certified by the Company's Secretary and (d) such other proceedings, documents and records as we have deemed necessary to enable us to render this opinion. Based upon the foregoing, we are of the opinion that the Shares (a) have been duly and validly authorized by the Board of Directors of the Company for issuance to the Selling Shareholder, (b) have been fully paid for by the Selling Shareholder and (c) subject to Section 180.0622(2)(b) of the Wisconsin Statutes, are nonassessable. Section 180.0622(2)(b) of the Wisconsin Statutes provides that shareholders of a corporation may be assessed up to the par value of their shares to satisfy the obligations of such corporation to its employees for services rendered, but not exceeding six months service in the case of any individual employee. Certain Wisconsin courts have interpreted "par value" to mean the full amount paid by the purchaser of shares upon issuance thereof. The Supreme Court of the State of Wisconsin has interpreted the substantially similar predecessor to Section 180.0622(2)(b) of the Wisconsin Statutes to apply to foreign corporations licensed to do business in Wisconsin. We express no opinion regarding the applicability of Section 180.0622(2)(b) to the Shares. The foregoing opinion is limited to the laws of the State of Wisconsin and the General Corporation Law of the State of Delaware. We consent to the use of this opinion as an exhibit to the Registration Statement. In giving this consent, however, we do not admit that we are "experts" within the meaning of Section 11 of the Securities Act of 1933, as amended, or within the category of persons whose consent is required by Section 7 of said Act. Very truly yours, /s/ Godfrey & Kahn, S.C. GODFREY & KAHN, S.C. LDL/ica EX-10.1 3 LOAN AND SECURITY AGREEMENT BY AND BETWEEN SANWA BUSINESS CREDIT CORPORATION AND C&L COMMUNICATIONS, INC. TABLE OF CONTENTS Page 1. DEFINITIONS................................................5 1.1 "Accounts".................................................5 1.2 "Account Debtor"...........................................5 1.3 "Accounts Report"..........................................5 1.4 "Accumulated Funding Deficiency"...........................5 1.5 "Affiliate"................................................5 1.6 "Ancillary Agreements".....................................5 1.7 "Borrower's Knowledge".....................................5 1.8 "Business Day".............................................6 1.9 "Capital Leases"...........................................6 1.10 "Charges"..................................................6 1.11 "Closing"..................................................6 1.12 "Code".....................................................6 1.13 "Collateral"...............................................6 1.14 "Collateral Availability"..................................6 1.15 "Contract Year"............................................6 1.16 "Current Assets"...........................................6 1.17 "Current Liabilities"......................................6 1.18 "Default"..................................................7 1.19 "Default Rate".............................................7 1.20 "Depository Bank"..........................................7 1.21 "Designated Rate"..........................................7 1.22 "Eligible Accounts"........................................7 1.23 "Eligible Inventory".......................................7 1.24 "Employee Benefit Plan"....................................7 1.25 "Environmental Laws".......................................7 1.26 "Environmental Lien".......................................7 1.27 "Equipment"................................................8 1.28 "ERISA"....................................................8 1.29 "Event of Default".........................................8 1.30 "Excess Interest"..........................................8 1.31 "Financials"...............................................8 1.32 "General Intangibles"......................................8 1.33 "Hazardous Materials"......................................8 1.34 "Indebtedness".............................................8 1.35 "Interest Period"..........................................9 1.36 "Interest Rate Determination Date".........................9 1.37 "Inventory"................................................9 1.38 "Inventory Report".........................................9 1.39 "Liabilities"..............................................9 1.40 "LIBOR Rate"...............................................9 -i- 1.41 "LIBOR Rate Revolving Loan"...............................10 1.42 "Maximum Amount"..........................................10 1.43 "Multiemployer Plan"......................................10 1.44 "Participant".............................................10 1.45 "PBGC"....................................................10 1.46 "Permitted Liens".........................................10 1.47 "Person"..................................................10 1.48 "Plan Administrator"......................................10 1.49 "Plan Sponsor"............................................10 1.50 "Pre-Tax Net Income"......................................10 1.51 "Prime Rate"..............................................11 1.52 "Prime Rate Revolving Loan"...............................11 1.53 "Prohibited Transaction"..................................11 1.54 "Reportable Event"........................................11 1.55 "Revolving Loan"..........................................11 1.56 "Revolving Loan Account"..................................11 1.57 "Security Documents"......................................11 1.58 "Special Collateral"......................................11 1.59 "Special Deposit Account".................................11 1.60 "Stock"...................................................11 1.61 "Tangible Net Worth"......................................11 1.62 "Telerate Screen".........................................12 1.63 "Term"....................................................12 1.64 "Total Facility"..........................................12 1.65 "Unused Facility Fee".....................................12 1.66 Accounting Terms.........................................12 1.67 Other Terms..............................................12 2. LOANS: GENERAL TERMS.....................................12 2.1 Total Facility............................................12 2.2 Advances to Borrower Constitute One Loan; Guaranties......13 2.3 Interest Rate.............................................13 2.4 Term of Agreement; Liquidated Damages.....................17 2.5 Unused Facility Fee.......................................17 2.6 Closing Fee...............................................17 2.7 Special Provisions Governing LIBOR Rate Revolving Loan....17 2.8 Purposes..................................................19 3. ELIGIBLE ACCOUNTS; ELIGIBLE INVENTORY.....................19 3.1 Eligible Accounts.........................................19 3.2 Eligible Inventory........................................21 -ii- 4. PAYMENTS..................................................22 4.1 Revolving Loan Account; Method of Making Payments.........22 4.2 Payment Terms.............................................22 4.3 Collection of Accounts and Payments.......................22 4.4 Application of Payments and Collections...................23 4.5 Statements................................................23 5. COLLATERAL: GENERAL TERMS................................24 5.1 Security Interest.........................................24 5.2 Disclosure of Security Interest...........................24 5.3 Special Collateral........................................24 5.4 Further Assurances........................................24 5.5 Inspection................................................25 5.6 Location of Collateral....................................25 5.7 Lender's Payment of Claims Asserted Against Borrower......25 6. COLLATERAL: ACCOUNTS.....................................25 6.1 Verification of Accounts..................................25 6.2 Assignments, Records and Accounts Report..................25 6.3 Notice Regarding Disputed Accounts........................26 6.4 Sale or Encumbrance of Accounts...........................26 7. COLLATERAL: INVENTORY....................................26 7.1 Sale of Inventory.........................................26 7.2 Safekeeping of Inventory; Inventory Covenants.............26 7.3 Records and Schedules of Inventory........................26 7.4 Returned and Repossessed Inventory........................27 7.5 Evidence of Ownership of Inventory........................27 8. COLLATERAL: EQUIPMENT....................................27 8.1 Maintenance of the Equipment..............................27 8.2 Evidence of Ownership of Equipment........................27 8.3 Proceeds of the Equipment.................................27 9. WARRANTIES AND REPRESENTATIONS............................28 9.1 General Warranties and Representations....................28 9.2 Account Warranties and Representations....................31 9.3 Inventory Warranties and Representations..................32 -iii- 9.4 ERISA Warranties and Representations......................33 9.5 Automatic Warranty and Representation and Reaffirmation of Warranties and Representations............................35 9.6 Survival of Warranties and Representations................35 10. COVENANTS AND CONTINUING AGREEMENTS.......................35 10.1 Affirmative Covenants.....................................35 10.2 Negative Covenants........................................39 10.3 Contesting Charges........................................42 10.4 Payment of Charges........................................42 10.5 Insurance; Payment of Premiums............................42 10.6 Survival of Obligations Upon Termination of Agreement.....43 11. DEFAULT; RIGHTS AND REMEDIES ON DEFAULT...................43 11.1 Event of Default; Default.................................43 11.2 Acceleration of the Liabilities...........................46 11.3 Remedies..................................................46 11.4 Notice....................................................47 12. CONDITIONS PRECEDENT TO DISBURSEMENT......................47 12.1 Conditions Precedent................................47 12.2 Lender Satisfaction.......................................47 12.3 Additional Funding Requirements...........................48 13. MISCELLANEOUS.............................................49 13.1 Appointment of Lender as Borrower's Lawful Attorney-In Fact......................................................49 13.2 Modification of Agreement; Sale of Interest...............50 13.3 Attorneys' Fees and Expenses; Lender's Out-of-Pocket Expenses..................................................50 13.4 Indemnification...........................................51 13.5 Waiver by Lender..........................................51 13.6 Severability..............................................51 13.7 Parties; Entire Agreement.................................51 13.8 Conflict of Term..........................................51 13.9 Waiver by Borrower........................................52 13.10 Waiver and Governing Law................................52 13.11 Notice..................................................53 13.12 Release of Claims.......................................54 13.13 Representation by Counsel...............................54 13.14 Counterparts............................................54 13.15 LENDER'S WAIVER OF JURY.................................54 -iv- 13.16 Section Titles, Etc.....................................54 -v- LOAN AND SECURITY AGREEMENT THIS LOAN AND SECURITY AGREEMENT (this "Agreement") is made as of the 2nd day of January, 1996, by and between SANWA BUSINESS CREDIT CORPORATION, a Delaware corporation ("Lender") and C & L COMMUNICATIONS, INC., a Texas corporation ("Borrower"). W I T N E S S E T H: WHEREAS, Borrower desires to borrow funds and obtain other financial accommodations from Lender, and Lender is willing to make certain loans and provide other financial accommodations to Borrower upon the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the terms and conditions contained herein, and of any loans or extension of credit heretofore, now or hereafter made to or for the benefit of Borrower by Lender, the parties hereto hereby agree as follows: 1. DEFINITIONS When used herein, the following terms shall have the following meanings: 1.1 "Accounts" shall mean all accounts, contract rights, chattel paper, instruments and documents, whether now owned or hereafter acquired by Borrower. 1.2 "Account Debtor" shall mean any Person who is or who may become obligated to Borrower under, with respect to, or on account of an Account. 1.3 "Accounts Report" shall mean a report delivered to Lender by Borrower, as required by Section 6.2, consisting of a trial balance of all Accounts of Borrower existing as of the date of such Accounts Report, specifying for each Account Debtor obligated on the Accounts, such Account Debtor's name, address and outstanding balance. 1.4 "Accumulated Funding Deficiency" shall have the meaning assigned to that term in Section 302 of ERISA. 1.5 "Affiliate" shall mean any and all Persons which, in the sole and absolute judgment of Lender, directly or indirectly, own or control, are controlled by or are under common control with Borrower, and any and all Persons from whom, in the sole and absolute judgment of Lender, Borrower has not or is not likely to exhibit independence of decision or action. For the purpose of this definition, "control" means the possession, directly or indirectly, of the power to direct 1 or cause the direction of management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. 1.6 "Ancillary Agreements" shall mean all Security Documents and agreements, instruments and documents, including without limitation, notes, guaranties, mortgages, deeds of trust, chattel mortgages, pledges, powers of attorney, consents, assignments, contracts, notices, security agreements, leases, financing statements, subordination agreements, trust account agreements and all other written matter whether heretofore, now, or hereafter executed by or on behalf of Borrower or any other Person or delivered to Lender or any Participant with respect to this Agreement. 1.7 "Borrower's Knowledge" or words of such import shall mean all knowledge, including, actual knowledge and knowledge of matters which any reasonable person in such position knew or should have known, of the respective officers, directors and managers of Borrower. 1.8 "Business Day" shall mean (a) for all purposes other than as specified in clause (b), any day, other than a Saturday or Sunday, on which the main lobby of the Depository Bank and Lender are open for business with the general public, and (b) with respect to all notices, determinations, findings and payments in connection with the LIBOR Rate, any day that is a Business Day described in clause (a) and that is also a day for trading by and between banks in dollar deposits in the applicable interbank LIBOR market. 1.9 "Capital Leases" shall mean any lease of personal property of any Person, as lessee, which, in accordance with generally accepted accounting principles, is accounted for as a capital lease on the balance sheet of such Person. 1.10 "Charges" shall mean all national, federal, state, county, city, municipal, or other governmental (including, without limitation, the Pension Benefit Guaranty Corporation) taxes, levies, assessments, charges, liens, claims or encumbrances upon or relating to (i) the Collateral, (ii) the Liabilities, (iii) Borrower's employees, payroll, income or gross receipts, (iv) Borrower's ownership or use of any of its assets, or (v) any other aspect of Borrower's business. 1.11 "Closing" shall mean the date on which this Agreement is executed by both Borrower and Lender. 1.12 "Code" shall mean the Internal Revenue Code of 1986, as amended. 1.13 "Collateral" shall mean all of the property and interests in property described in Section 5.1 and all other property and interests in property which shall, from time to time, secure any part of the Liabilities. 1.14 "Collateral Availability" shall have the meaning ascribed to it in Section 2.1. 2 1.15 "Contract Year" shall mean initially, that period of time commencing on the Closing and one day prior to the anniversary of the Closing, and thereafter each period of one (1) year commencing on the date after the last day of the immediately preceeding Contract Year and any one (1) day prior to the anniversary of such date. 1.16 "Current Assets" shall mean the aggregate net book value of the current assets of Borrower as determined in accordance with generally accepted accounting principles, excluding any accounts owing to Borrower from any Affiliate. 1.17 "Current Liabilities" shall mean the aggregate amount of all liabilities of Borrower, including the indebtedness evidenced by the Revolving Loan and those liabilities which would be classified as current liabilities under generally accepted accounting principles. 1.18 "Default" shall mean the occurrence or existence of any one or more of the events described in Section 11.1. 1.19 "Default Rate" shall mean a rate per annum equal to two hundred (200) basis points in excess of the interest rate then in effect for the respective Liabilities. 1.20 "Depository Bank" shall mean the banking institution which is referred to in Section 4.3 and which shall be the signatory to the Special Deposit Agreement which is attached hereto as Exhibit A. 1.21 "Designated Rate" shall mean, with respect to (a) Prime Rate Revolving Loan, the Prime Rate, and (b) the LIBOR Rate Revolving Loan, the LIBOR Rate. 1.22 "Eligible Accounts" shall mean those Accounts included in an Accounts Report which, as of the date of such Accounts Report and at all times thereafter, (i) satisfy the requirements for eligibility as described in Section 3.1, (ii) do not violate the negative covenants and other provisions of this Agreement and do satisfy the affirmative covenants, warranties and other provisions of this Agreement and (iii) Lender, in its sole and absolute credit judgment and in the exercise of good faith, deems to be Eligible Accounts. 1.23 "Eligible Inventory" shall mean those items of Inventory included in an Inventory Report which, as of the date of such Inventory Report and at all times thereafter, (i) satisfy the requirements for eligibility as described in Section 3.2, (ii) do not violate the negative covenants and other provisions of this Agreement and do satisfy the affirmative covenants, warranties and other provisions of this Agreement and (iii) Lender, in its sole and absolute credit judgment and in the exercise of good faith, deems to be Eligible Inventory. 1.24 "Employee Benefit Plan" shall mean an employee benefit plan within the meaning of ERISA Section 3(3) maintained, sponsored or contributed to by the Borrower or any ERISA Affiliate. 3 1.25 "Environmental Laws" shall mean the Resource Conservation and Recovery Act of 1987, the Comprehensive Environmental Response, Compensation and Liability Act, any so-called "Superfund" or "Superlien" law, the Toxic Substances Control Act, or any other federal state or local statute, law, ordinance, code, rule, regulation, order or decree regulating, relating to, or imposing liability or standards of conduct concerning, any hazardous, toxic or dangerous waste, substance or material, as now or at any time hereafter in effect. 1.26 "Environmental Lien" shall mean a lien in favor of any governmental entity for (i) any liability under any Environmental Laws, or (ii) damages arising from or costs incurred by such governmental entity in response to a release of a Hazardous Material into the environment. 1.27 "Equipment" shall mean all Borrower's now owned and hereafter acquired equipment and fixtures, including without limitation, furniture, machinery, vehicles and trade fixtures, together with any and all accessories, parts and appurtenances thereto, substitutions therefor and replacements thereof. 1.28 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. 1.29 "Event of Default" shall mean any event or condition which, with the passage of time or the giving of notice or both, would constitute a Default. 1.30 "Excess Interest" shall mean have the meaning ascribed to it in Section 2.3(C)(ii). 1.31 "Financials" shall mean those financial statements of Borrower attached hereto as Exhibit B or delivered to Lender pursuant to Section 10.1. 1.32 "General Intangibles" shall mean all choses in action, general intangibles, causes of action and all other intangible personal property of Borrower of every kind and nature (other than Accounts) now owned or hereafter acquired by Borrower. Without in any way limiting the generality of the foregoing, General Intangibles specifically includes, without limitation, all corporate or other business records, deposit accounts, inventions, designs, patents, patent applications, trademarks, trademark applications, trade names, trade secrets, goodwill, copyrights, registrations, licenses, franchises, and tax refund claims owned by Borrower and all letters of credit, guarantee claims, security interests or other security held by or granted to Borrower to secure payment by an Account Debtor of any Accounts. 1.33 "Hazardous Materials" shall mean any hazardous substance or pollutant or contaminant defined as such in (or for the purposes of) any Environmental Law and shall include, but not be limited to, petroleum, any radioactive material, and asbestos in any form or condition. 1.34 "Indebtedness" shall mean all of Borrower's liabilities, obligations and indebtedness to any Person of any and every kind and nature, whether primary, secondary, direct, indirect, absolute, 4 contingent, fixed, or otherwise, heretofore, now or hereafter owing, due, or payable, however evidenced, created, incurred, acquired or owing and however arising, whether under written or oral agreement, by operation of law, or otherwise. Without in any way limiting the generality of the foregoing, Indebtedness specifically includes (i) the Liabilities, (ii) all obligations or liabilities of any Person that are secured by any lien, claim, encumbrance, or security interest upon property owned by Borrower, even though Borrower has not assumed or become liable for the payment thereof, (iii) all obligations or liabilities created or arising under any lease of real or personal property, or conditional sale or other title retention agreement with respect to property used or acquired by Borrower, even though the rights and remedies of the lessor, seller or lender thereunder are limited to repossession of such property, (iv) all obligations and liabilities in respect of unfunded vested benefits under any Employee Benefit Plan or in respect of withdrawal liabilities incurred under ERISA by the Borrower or any ERISA Affiliate to any Multiemployer Plan and (v) deferred taxes. 1.35 "Interest Period" means any actual period applicable to a LIBOR Rate Revolving Loan as determined pursuant to Section 2.3(D). 1.36 "Interest Rate Determination Date" means each date for calculating the LIBOR Rate for purposes of determining the interest rate applicable to any LIBOR Rate Revolving Loan made pursuant to Section 2.3. The Interest Rate Determination Date shall be the second Business Day prior to the first day of an Interest Period for a LIBOR Rate Revolving Loan. 1.37 "Inventory" shall mean all goods, inventory, merchandise and other personal property including, without limitation, goods in transit, wherever located and whether now owned or hereafter acquired by Borrower which is or may at any time be held for sale or lease, furnished under any contract of service or held as raw materials, work in process, supplies or materials used or consumed in Borrower's business, and all such property the sale or other disposition of which has given rise to Accounts and which has been returned to or repossessed or stopped in transit by Borrower. 1.38 "Inventory Report" shall mean a report delivered to Lender by Borrower, as required by Section 7.3, consisting of a detailed listing of all Inventory as of the date of such Inventory Report describing the kind, type, quality, quantity, location and the lower of cost (computed on the basis of an average cost flow assumption) or market value of such Inventory. 1.39 "Liabilities" shall mean all of Borrower's liabilities, obligations and indebtedness to Lender of any and every kind and nature, whether primary, secondary, direct, absolute, contingent, fixed, or otherwise (including, without limitation, interest, charges, expenses, attorneys' fees and other sums chargeable to Borrower by Lender, future advances made to or for the benefit of Borrower and obligations of performance), whether arising under this Agreement, under any of the Ancillary Agreements or acquired by Lender from any other source, whether heretofore, now or hereafter owing, arising, due, or payable from Borrower to Lender, however evidenced, created, incurred, acquired or owing and however arising, whether under written or oral agreement, operation of law, or otherwise. 5 1.40 "LIBOR Rate" shall mean, for each Interest Period, a rate of interest equal to the sum of: (a) the rate of interest determined by the Lender at which deposits in U.S. Dollars for the relevant Interest Period are offered based on information presented on the Telerate Screen as of 11:00 A.M. (London time) on the applicable Interest Rate Determination Date; provided, that if more than one (1) offered rate appears on the Telerate Screen in respect of such Interest Period, the arithmetic mean of all such rates (as determined by the Lender) will be the rate used; provided, further, that if Telerate ceases to provide LIBOR quotations, such rate shall be the average rate of interest determined by the Lender at which deposits in U.S. Dollars are offered for the relevant Interest Period by The Sanwa Bank, Limited (or its successor) to banks in London interbank markets as of 11:00 A.M. (London time) on the applicable Interest Rate Determination Date, plus (b) two hundred and twenty-five (225) basis points. 1.41 "LIBOR Rate Revolving Loan" shall mean the Revolving Loan, to the extent that it bears interest at the LIBOR Rate. 1.42 "Maximum Amount" shall mean an amount equal to $6,000,000. 1.43 "Multiemployer Plan" shall mean any plan described in Section 4001(a)(3) of ERISA to which contributions are or have been made by the Borrower or any ERISA Affiliate. 1.44 "Participant" shall mean any Person, now or at any time or times hereafter, participating with Lender in the loans made by Lender to Borrower pursuant to this Agreement and the Ancillary Agreements. 1.45 "PBGC" shall mean the Pension Benefit Guaranty Corporation or any governmental body succeeding to its functions. 1.46 "Permitted Liens" shall mean those liens scheduled on Exhibit G to this Agreement. 1.47 "Person" shall mean any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, institution, entity, party, or government (whether national, federal, state, county, city, municipal or otherwise, including, without limitation, any instrumentality, division, agency, body or department thereof). 1.48 "Plan Administrator" shall have the meaning assigned to it in Section 3(16)(A) of ERISA. 6 1.49 "Plan Sponsor" shall have the meaning assigned to it in Section 3(16)(B) of ERISA. 1.50 "Pre-Tax Net Income" shall mean, for any period, with respect to any Person, the gross revenues of such Person, less all operating and non-operating expenses (including, without limitation, interest expenses and all fees and commissions) of such Person for such period, derived in the ordinary course of its business, including all charges of a proper character (excluding, however, current and deferred taxes on income and provisions for taxes on income but including current additions to bad debt and other reserves), all determined on a basis consistent with prior years." 1.51 "Prime Rate" shall mean the highest "prime rate" of interest quoted, from time to time, by The Wall Street Journal as the base rate on corporate loans at large United States money center commercial banks, provided, however, that in the event that The Wall Street Journal ceases quoting a "prime rate" of the type described, Prime Rate shall mean the highest per annum rate of interest quoted as the "Bank Prime Loan" rate for "This week" in Statistical Release H.15(519) published from time to time by the Board of Governors of the Federal Reserve System. 1.52 "Prime Rate Revolving Loan" shall mean the Revolving Loan, to the extent that it bears interest at the Prime Rate. 1.53 "Prohibited Transaction" shall mean a transaction that is prohibited under Code Section 4975 or ERISA Section 406 and not exempt under Code Section 4975 or ERISA Section 408. 1.54 "Reportable Event" shall mean (a) an event described in Sections 4043(b), 4068(a) or 4063(a) of ERISA or in the regulations thereunder, (b) receipt of a notice of withdrawal liability with respect to a Multiemployer Plan pursuant to Section 4202 of ERISA, (c) an event requiring the Borrower or any ERISA Affiliate to provide security for an Employee Benefit Plan under Code Section 401(a)(29), and (d) any failure to make payment required under Code Section 412(m). 1.55 "Revolving Loan" shall have the meaning ascribed to it in Section 2.1. 1.56 "Revolving Loan Account" shall have the meaning ascribed to it in Section 4.1. 1.57 "Security Documents" shall mean this Agreement and all other agreements, instruments, documents, financing statements, warehouse receipts, bills of lading, notices of assignment, schedules, assignments, mortgages and other written matter necessary or requested by Lender to create perfect and maintain perfected Lender's security interest in the Collateral. 1.58 "Special Collateral" shall have the meaning ascribed to it in Section 5.3. 7 1.59 "Special Deposit Account" shall have the meaning ascribed to it in Section 4.3. 1.60 "Stock" shall mean all shares, options, interests, participations or other equivalents (however designated) of or in a corporation, whether voting or non-voting, including, without limitation, common stock, warrants, preferred stock, convertible debentures and all agreements, instruments and documents convertible, in whole or in part, into any one or more or all of the foregoing. 1.61 "Tangible Net Worth" shall mean, as of any particular date, calculated on an unconsolidated basis the difference between (a) Borrower's total assets as shown on the balance sheet of Borrower, but excluding therefrom all values attributable to goodwill, non- competition agreements, patents, copyrights, trademarks, licenses, prepaid expense, Capital Leases, other General Intangibles and Accounts due from Affiliates and (b) Borrower's total liabilities and deferred charges shown on such balance sheet, including as liability all guarantees of the indebtedness of Affiliates. 1.62 "Telerate Screen" means the display designated as Screen 3750 on the Telerate System or such other screen on the Telerate System as shall display the London interbank offered rates for deposits in U.S. dollars quoted by selected banks. 1.63 "Term" shall have the meaning ascribed to it in Section 2.4. 1.64 "Total Facility" shall have the meaning ascribed to it in Section 2.1. 1.65 "Unused Facility Fee" shall have the meaning set forth in Section 2.5 herein. 1.66 Accounting Terms. Any accounting terms used in this Agreement which are not specifically defined shall have the meanings customarily given them in accordance with generally accepted accounting principles. 1.67 Other Terms. All other terms contained in this Agreement which are not otherwise defined in this Agreement shall, unless the context indicates otherwise, have the meanings provided for by the Uniform Commercial Code of the State of Illinois to the extent the same are used or defined therein. 2. LOANS: GENERAL TERMS 2.1 Total Facility. Lender may, in its sole and absolute discretion, and in the exercise of good faith, make available for Borrower's use from time to time during the term of this Agreement, upon Borrower's request therefor, certain loans and other financial accommodations in an aggregate amount (except in Lender's sole and absolute discretion) not to exceed Six Million and No/100ths Dollars ($6,000,000.00) (the "Total Facility"). The Total Facility shall be subject to all of the terms and conditions of this Agreement and shall 8 comprise a revolving line of credit consisting of advances against Eligible Accounts and Eligible Inventory (the "Revolving Loan") in an aggregate principal amount not to exceed, at any time outstanding, the lesser of (i) $6,000,000.00 or (ii) the outstanding amount of Collateral Availability. As used in this Agreement, "Collateral Availability" shall mean, as of any date of determination, an amount equal to the sum of (i) up to eighty percent (80%) of the net amount (after deduction of such reserves as Lender deems proper and necessary in the exercise of good faith) of Eligible Accounts plus (ii) up to forty percent (40%) of the aggregate value of Eligible Inventory (determined on the basis of the lower of an average cost or market value, net of such reserves as Lender deems proper and necessary in the exercise of good faith), provided that Collateral Availability as to Eligible Inventory of Borrower shall not at any time exceed in the aggregate Three Million Five Hundred Thousand and No/100ths Dollars ($3,500,000.00). It is expressly understood and agreed by Borrower that nothing contained in this Agreement shall, at any time, require Lender to make loans or other extensions of credit to Borrower and the making and amount of such loans or other extensions of credit to Borrower under this Agreement shall at all times be in Lender's sole and absolute discretion in the exercise of good faith. Lender may, in the exercise of such discretion in the exercise of good faith, at any time and from time to time, increase or decrease the advance percentages to be applied to Eligible Accounts and Eligible Inventory which are contained in this Section 2.1. In the event such percentages are decreased, such decrease shall become effective immediately for the purpose of calculating the amount which Lender may be willing to advance, or allow to remain outstanding, against Eligible Accounts and Eligible Inventory. 2.2 Advances to Borrower Constitute One Loan; Guaranties. All loans and advances by Lender to Borrower under this Agreement and the Ancillary Agreements shall constitute one loan to Borrower and all indebtedness and obligations of Borrower to Lender under this Agreement and the Ancillary Agreements shall constitute one general obligation of Borrower secured by the Collateral of Borrower. 2.3 Interest Rate. (A) (i) So long as no Default has occurred and is continuing, the Borrower shall pay to the Lender interest on the outstanding principal balance of the Revolving Loan at the applicable Designated Rate; provided, however, that upon the occurrence and during the continuation of any Default, Lender may at its option, raise the interest rate charged on the Liabilities to the Default Rate with respect to the Liabilities from the date of the occurrence of the Event of Default until the earlier of (1) the Event of Default is cured or waived by Lender or (2) the Liabilities are paid in full. The applicable basis for determining the rate of interest with respect to the Revolving Loan shall be selected by the Borrower initially at the time a request for an advance is given pursuant to Section 12.3(J). The basis for determining the interest rate with respect to the Revolving Loan may be changed from time to time by Borrower pursuant to subsection 2.3(E). 9 (ii) Interest on the Revolving Loan shall be computed by multiplying the closing daily balance of the Revolving Loan as reflected in the Borrower's Revolving Loan Account for each day during the preceding month by the interest rate determined to be applicable hereunder on each such day. (iii) Interest and all fees hereunder (other than prepayment fees) shall be computed on the basis of a 360-day year for the actual number of days elapsed. In computing interest on the Revolving Loan, the date of funding of the Revolving Loan or the first day of an Interest Period applicable to such Revolving Loan if it is a LIBOR Rate Revolving Loan, or with respect to a Prime Rate Revolving Loan being converted from a LIBOR Rate Revolving Loan, the date of conversion of such LIBOR Rate Revolving Loan to such Prime Rate Revolving Loan, shall be included and the date of payment of such Revolving Loan or the expiration date of an Interest Period applicable to such Revolving Loan if it is a LIBOR Rate Revolving Loan, or with respect to a Prime Rate Revolving Loan being converted to a LIBOR Rate Revolving Loan, the date of conversion of such Prime Rate Revolving Loan to such LIBOR Rate Revolving Loan, shall be excluded; provided, that if a Revolving Loan is repaid on the same day on which it is made, one day's interest shall be paid on that Revolving Loan. (B) Following the occurrence of a Default, the Borrower shall pay to the Lender interest from the date of such Default to and including the date of cure of such Default on the outstanding principal balance of the Liabilities at the Default Rate applicable to such Liabilities; provided, however, that in the case of LIBOR Rate Revolving Loan, upon the expiration of the Interest Period in effect at the time any Default shall have occurred and be continuing, such LIBOR Rate Revolving Loan shall become Prime Rate Revolving Loan and thereafter bear interest at the Default Rate applicable to Prime Rate Revolving Loan. (C) (i) Interest shall be due at the Designated Rate as provided herein, after as well as before demand, default and judgment, notwithstanding any judgment rate of interest provided for in any statute. If any interest payment or other charge or fee payable hereunder exceeds the maximum amount then permitted by applicable law, then to the extent permitted by law and subject to the provisions of subparagraph (ii) below, the Borrower shall be obligated to pay the maximum amount then permitted by applicable law and the Borrower shall continue to pay the maximum amount from time to time permitted by applicable law until all such interest payments and other charges and fees otherwise due hereunder (in the absence of such restraint imposed by applicable law) have been paid in full. (ii) It is the intention of the Lender and the Borrower to comply with the laws of the State of Illinois, and notwithstanding any provision to the contrary contained herein or in the other Ancillary Agreements, the Borrower shall not be required to pay and the Lender shall not be permitted to collect any amount in excess of the maximum amount of interest permitted by law ("Excess Interest"). If any Excess Interest is provided for or determined to have been provided for by a court of competent jurisdiction in this Agreement or in any of the other Ancillary Agreements, then in such event: (a) the provisions of this subparagraph shall govern and control; (b) neither the Borrower nor any guarantor or endorser shall be obligated to pay 10 any Excess Interest; (c) any Excess Interest that the Lender may have received hereunder shall be, at the Lender's option (1) applied as a credit against the outstanding principal balance of the Liabilities or accrued and unpaid interest (not to exceed the maximum amount permitted by law), (2) refunded to the payor thereof, or (3) any combination of the foregoing; and (d) the interest rate(s) provided for herein shall be automatically reduced to the maximum lawful rate allowed under applicable law, and this Agreement and the other Ancillary Agreements shall be deemed to have been, and shall be, reformed and modified to reflect such reduction. (D) In connection with each LIBOR Rate Revolving Loan, the Borrower shall elect an interest period (each an "Interest Period") to be applicable to such Revolving Loan, which Interest Period shall be either a 30, 60 or 90 day period; provided, that: (i) the initial Interest Period for any Revolving Loan shall commence on the date of funding of such Revolving Loan; (ii) in the case of immediately successive Interest Periods, each successive Interest Period shall commence on the day on which the immediately preceding Interest Period expires (Borrower and Lender agree that this subsection does not obligate Borrower to pay interest twice for the same days' funds); (iii) if an Interest Period otherwise would expire on a day that is not a Business Day, such Interest Period shall expire on the next succeeding Business Day; provided, that if such next succeeding Business Day falls in a new calendar month, then such Interest Period shall expire on the immediately preceding Business Day; (iv) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to paragraph (v) below, end on the last Business Day of a calendar month; (v) no Interest Period shall extend beyond the last day of the Term; (vi) no Interest Period may extend beyond a date on which the Borrower is required to make a required payment or prepayment of principal of the Revolving Loan; and (vii) there shall be no more than two (2) Interest Periods relating to LIBOR Rate Revolving Loans outstanding at any time. (E) Subject to the provisions of subsection 2.3(D), the Borrower shall have the option to: 11 (i) convert at any time all or any part of the outstanding Prime Rate Revolving Loan equal to Five Hundred Thousand and No/100ths Dollars ($500,000) and integral multiples of One Hundred Thousand and No/100ths Dollars ($100,000) in excess of that amount from Prime Rate Revolving Loan to LIBOR Rate Revolving Loan or to convert LIBOR Rate Revolving Loan in amounts equal to Five Hundred Thousand and No/100ths Dollars ($500,000) and integral multiples of One Hundred Thousand and No/100ths Dollars ($100,000) in excess of that amount from LIBOR Rate Revolving Loan to Prime Rate Revolving Loan; or (ii) upon the expiration of any Interest Period applicable to a LIBOR Rate Revolving Loan, to continue all, or any portion of such Revolving Loan equal to any multiple of One Hundred Thousand and No/100ths Dollars ($100,000) in excess of or below that amount (but in no event less than $500,000) as a LIBOR Rate Revolving Loan and the succeeding Interest Period(s) of such continued LIBOR Rate Revolving Loan shall commence on the last day of the Interest Period of the LIBOR Rate Revolving Loan to be continued; provided, that LIBOR Rate Revolving Loan may only be converted into Prime Rate Revolving Loan on the expiration date of an Interest Period applicable thereto; provided, further, that no outstanding Revolving Loan may be continued as, or be converted into, a LIBOR Rate Revolving Loan when any Default with respect to the payment of money or any Event of Default has occurred and is continuing. (F) Subject to the provisions of subsection 2.3(E): (i) the Borrower shall deliver a Notice of Conversion/Continuation to the Lender no later than 1:00 P.M. (Chicago, Illinois time) at least two (2) Business Days in advance of the proposed conversion/continuation date. A Notice of Conversion/Continuation shall certify: (1) the proposed conversion/continuation date (which shall be a Business Day); (2) the amount of the Revolving Loan to be converted/continued; (3) the nature of the proposed conversion/ continuation; (4) in the case of a conversion to, or a continuation of, a LIBOR Rate Revolving Loan, the requested Interest Period; and (5) in the case of a conversion to, or a continuation of, a LIBOR Rate Revolving Loan, that no Default or Event of Default has occurred and is continuing or would result from the proposed conversion/continuation. In lieu of delivering the above-described Notice of Conversion/Continuation, the Borrower may give the Lender telephonic notice by the required time of any proposed conversion/continuation under subsection 2.3(E); provided, that such notice shall be promptly confirmed in writing by delivery of a Notice of Conversion/Continuation to the Lender on or before the proposed conversion/continuation date. If on any day a Revolving Loan is outstanding with respect to which notice has not been delivered to the Lender in accordance with the terms of this Agreement specifying the basis for determining the rate of interest, then for that day that Revolving Loan shall be deemed to be a Prime Rate Revolving Loan. 12 (ii) The Lender shall not incur any liability to the Borrower in acting upon any telephonic notice referred to above that the Lender believes in good faith to have been given by or at the direction of an officer of Borrower or for otherwise acting in good faith under this subsection 2.3(F) and, upon conversion/continuation by the Lender in accordance with this Agreement pursuant to any telephonic notice, the Borrower shall have effected such conversion or continuation, as the case may be, hereunder. (iii) A Notice of Conversion/Continuation for conversion to, or continuation of, a LIBOR Rate Revolving Loan (or telephonic notice in lieu thereof) shall be irrevocable once given, and the Borrower shall be bound to convert or continue in accordance therewith. (G) Subject to the provisions of Section 2.3, each LIBOR Rate Revolving Loan requested must equal at least Five Hundred Thousand and No/100ths Dollars ($500,000) and may only be in additional integral multiples of One Hundred Thousand and No/100ths Dollars ($100,000). 2.4 Term of Agreement; Liquidated Damages. This Agreement shall be in effect until the three year anniversary of the Closing (the "Term"). This Agreement may also be terminated by Lender upon the occurrence of a Default as provided in Section 11. Upon the effective date of termination, all of the Liabilities of Borrower shall become immediately due and payable without notice or demand. Notwithstanding any termination, until all of the Liabilities of Borrower shall have been fully paid and satisfied, Lender shall be entitled to retain its security interest in the Collateral, Borrower shall continue to remit collections of Accounts and proceeds of Collateral as provided in this Agreement, and Lender shall retain all of its rights and remedies under this Agreement. If, during the Term, this Agreement is terminated by Borrower other than as permitted in this Section 2.4, Borrower shall pay to Lender, for loss of the bargain and not as a penalty, as liquidated damages and compensation for the costs of being prepared to make funds available to Borrower under this Agreement, an amount (the "Prepayment Fee") equal to three percent (3%) of the Maximum Amount for any prepayment made during the first Contract Year; two percent (2%) of the Maximum Amount for any prepayment made during the second Contract Year; and one percent (1%) of the Maximum Amount for any prepayment made in the third Contract Year. 2.5 Unused Facility Fee. As an additional charge for Lender's agreement to extend credit to the Borrower under the terms hereof, Borrower shall pay Lender an Unused Facility Fee in the amount of one-quarter of one percent (0.25%) per annum of the average unused portion of the Revolving Loan for all periods after the Closing, payable monthly in arrears on the last day of each such month during the Term, commencing on January 31, 1996, and in each and every consecutive month thereafter. 2.6 Closing Fee. Borrower shall pay the Lender a non-refundable Closing Fee in an amount equal to Thirty Thousand and No/100ths Dollars ($30,000) to be paid at Closing. 13 2.7 Special Provisions Governing LIBOR Rate Revolving Loan. Notwithstanding any other provision of this Agreement, the following provisions shall govern with respect to LIBOR Rate Revolving Loan as to the matters covered: (A) As soon as practicable after 1:00 p.m. (Chicago, Illinois time) on each Interest Rate Determination Date, the Lender shall determine (which determination shall, absent manifest error, be final, conclusive and binding upon all parties) the interest rate that shall apply to the LIBOR Rate Revolving Loan for which an interest rate is then being determined for the applicable Interest Period and shall promptly give notice thereof (in writing or by telephone confirmed in writing) to the Borrower. (B) If on any Interest Rate Determination Date the Lender shall have determined (which determination shall be final and conclusive and binding upon the Borrower) that: (i) by reason of any changes arising after the date of this Agreement affecting the LIBOR market or affecting the position of the Lender in such market, adequate and fair means do not exist for ascertaining the applicable interest rate by reference to the LIBOR Rate with respect to the LIBOR Rate Revolving Loan as to which an interest rate determination is then being made; or (ii) by reason of (a) any change after the date hereof in any applicable law or governmental rule, regulation or order (or any interpretation thereof and including the introduction of any new law or governmental rule, regulation or order) or (b) other circumstances affecting the Lender or the LIBOR market or the position of the Lender in such market (such as for example, but not limited to, official reserve requirements required by Regulation D to the extent not given effect in the LIBOR Rate), the LIBOR Rate shall not represent the effective pricing to the Lender for dollar deposits of comparable amounts for the relevant period; then, and in any such event, the Lender shall, promptly after being notified of a borrowing, conversion or continuation, give notice (by telephone confirmed in writing) to the Borrower of such determination. Thereafter, the Borrower shall pay to the Lender, upon written demand therefor, such additional amounts (in the form of an increased rate of, or a different method of calculating, interest or otherwise as the Lender in its reasonable credit judgment shall determine) as shall be required to cause the Lender to receive interest with respect to the LIBOR Rate Revolving Loan for the Interest Period following that Interest Rate Determination Date at a rate per annum equal to two (2%) percent per annum in excess of the effective pricing to the Lender for dollar deposits to make or maintain the LIBOR Rate Revolving Loan. A certificate as to additional amounts owed the Lender, showing in reasonable detail the basis for the calculation thereof, submitted in good faith to the Borrower shall, absent manifest error, be final and conclusive and binding upon the Borrower. (C) If on any date the Lender shall have reasonably determined (which determination shall be final and conclusive and binding upon the Borrower) that the making or continuation of any 14 LIBOR Rate Revolving Loan has become unlawful or impossible by compliance by the Lender in good faith with any law, governmental rule, regulation or order (whether or not having the force of law and whether or not failure to comply therewith would be unlawful), then, and in any such event, the Lender shall promptly give notice (by telephone confirmed in writing) to the Borrower of that determination. The obligation of the Lender to make or maintain such LIBOR Rate Revolving Loan during any such period shall be terminated at the earlier of the termination of the Interest Period then in effect or when required by law and the Borrower shall no later than the termination of the Interest Period in effect at the time any such determination pursuant to this subsection is made or, earlier, when required by law, repay or prepay such LIBOR Rate Revolving Loan, together with all interest accrued thereon. (D) The Borrower shall compensate the Lender, upon written request by the Lender (which request shall set forth in reasonable detail the basis for requesting such amounts and which shall, absent manifest error, be conclusive and binding upon the Borrower), for all reasonable losses, expenses and liabilities (including, without limitation, any loss (including interest paid) sustained by the Lender in connection with the re-employment of such funds) the Lender may sustain: (1) if for any reason (other than a default by the Lender or the failure of a borrowing to occur due to the occurrence of any event described in subsection 2.7(C)) a borrowing of any LIBOR Rate Revolving Loan does not occur on a date specified therefor in a request for an advance, a Notice of Conversion/Continuation or a telephonic request for borrowing or conversion/continuation or a successive Interest Period does not commence after notice therefor is given pursuant to subsection 2.3(E); or (2) as a consequence of any other default by the Borrower to repay any LIBOR Rate Revolving Loan when required by the terms of this Agreement; provided, that during the period while any such amounts have not been paid, the Lender shall reserve an equal amount from amounts otherwise available to be borrowed under the Revolving Loan. The provisions of this subsection 2.7(D) shall survive the termination of this Agreement, the repayment of the Revolving Loan and the discharge of the Borrower's other obligations hereunder. (E) The Lender may make, carry or transfer any LIBOR Rate Revolving Loan at, to, or for the account of, any of its branch offices or the office of an affiliate of the Lender. (F) Calculation of all amounts payable to the Lender under Section 2.7 shall be made as though the Lender had actually funded the relevant LIBOR Rate Revolving Loan through the purchase of a LIBOR deposit bearing interest at the LIBOR Rate in an amount equal to the amount of that LIBOR Rate Revolving Loan and having a maturity comparable to the relevant Interest Period and through the transfer of such LIBOR deposit from an offshore office to a domestic office in the United States of America; provided, however, that the Lender may fund each of the LIBOR Rate Revolving Loan in any manner it sees fit and the foregoing assumption shall be utilized only for the calculation of amounts payable under Section 2.7. 2.8 Purposes. The purpose of the Revolving Loan is to provide Borrower with (i) working capital financing and (ii) the funds for any acquisitions of Borrower or its Affiliates as permitted herein. 15 3. ELIGIBLE ACCOUNTS; ELIGIBLE INVENTORY 3.1 Eligible Accounts. Upon Borrower's delivery to Lender of an Accounts Report, Lender shall determine, in its sole and absolute discretion and in the exercise of good faith, which individual Accounts listed thereon are Eligible Accounts. In making this determination, Lender will consider the following requirements: (A) If the individual Account arises from the sale of goods, such goods have been shipped or delivered on open account and on an absolute sale basis and not on consignment, on approval or on a sale-or-return basis or subject to any other repurchase or return agreement and no material part of such goods has been returned (other than returns described in Section 7.4), repossessed, rejected, lost or damaged; (B) The individual Account is not evidenced by chattel paper or an instrument of any kind; (C) The Account Debtor obligated on such individual Account is not insolvent or the subject of any bankruptcy or insolvency proceeding of any kind and Lender is satisfied with the creditworthiness of such Account Debtor; (D) If the individual Account is owing from an Account Debtor located outside the United States, such Account Debtor has furnished the Borrower with an irrevocable letter of credit which has been issued or confirmed by a financial institution acceptable to Lender, is in form and substance acceptable to Lender, has been pledged to Lender, and is payable in United States dollars in an amount not less than the face value of the individual Account; (E) The individual Account is a valid, legally enforceable obligation of the relevant Account Debtor and such Account Debtor has not asserted any offset, counterclaim or defense denying liability thereunder; provided, however, that if such offset, counterclaim or defense has been asserted, such Account shall be ineligible only to the extent of such asserted offset, counterclaim or defense; (F) The individual Account is subject to and covered by Lender's perfected security interest and is not subject to any other lien, claim, encumbrance or security interest, except for the Permitted Liens; (G) The individual Account is evidenced by an invoice or other documentation in form acceptable to Lender; (H) The individual Account has not remained unpaid for a period exceeding ninety (90) days after the related invoice date; (I) Accounts owing by a single Account Debtor or its Affiliate (whether or not such Affiliate is known by Borrower to be an Affiliate of such Account Debtor), including currently scheduled 16 Accounts, if fifty percent (50%) or more of the balance owing by such Account Debtor and its Affiliates, in the aggregate, upon Accounts remain ineligible by reason of the criteria set forth in clause (H) above; (J) The individual Account is not owing from an employee, officer, agent, director or stockholder of Borrower or any Affiliate or from the United States of America or any department, agency or instrumentality thereof; (K) Accounts with respect to which the Account Debtor is a director, officer, employee or agent of Borrower, or is a subsidiary or an Affiliate; (L) Each of the warranties and representations set forth in Section 9.2 has been reaffirmed with respect to such individual Account at the time that the most recent Accounts Report was delivered to Lender; (M) The individual Account is one against which Lender is legally permitted to make loans and advances; (N) If the Account Debtor is located in the State of New Jersey, all Accounts of such Account Debtor unless Borrower has filed a Notice of Business Activities Report with the New Jersey Division of Taxation for the then current year; and (O) If the Account Debtor is located in the State of Minnesota, all Accounts of such Account Debtor unless Borrower has filed a Business Activity Report with the Minnesota Department of Revenue. 3.2 Eligible Inventory. Upon Borrower's delivery to Lender of an Inventory Report, Lender shall determine, in its sole and absolute discretion and in the exercise of good faith, which items of Inventory listed thereon are Eligible Inventory and in the exercise of good faith. In making this determination, Lender will consider the following requirements: (A) The item of Inventory is in good condition, meets all standards imposed by any governmental agency, or department or division thereof, having regulatory authority over such goods, their use or sale and is either currently useable or currently saleable in the ordinary course of Borrower's (who owns such Inventory) business and is not otherwise unacceptable to Lender due to age, type, category or quantity; (B) The item of Inventory is located at one of the locations listed on Exhibit C attached hereto, is subject to and covered by Lender's perfected security interest and is not subject to any other lien, claim, encumbrance or security interest, except for the Permitted Liens; (C) The item of Inventory has not remained on hand for more than three hundred sixty (360) days; 17 (D) The item of Inventory has not been consigned, sold or leased to any Person; (E) Each of the warranties and representations set forth in Section 9.3 has been reaffirmed with respect to such items of Inventory at the date that the most recent Inventory Report was delivered to Lender; and (F) The item of Inventory was not purchased by Borrower in or as part of a "bulk" transfer or sale of assets unless Borrower, and the seller of such item, have complied with all applicable bulk sales or bulk transfer laws. 4. PAYMENTS 4.1 Revolving Loan Account; Method of Making Payments. Lender shall maintain a loan account (the "Revolving Loan Account") on its books in which shall be recorded (i) all loans and advances made by Lender to Borrower pursuant to this Agreement, (ii) all payments made by Borrower on all such loans and advances and (iii) all other appropriate debits and credits as provided in this Agreement, including, without limitation, all fees, charges, expenses and interest. All entries in the Revolving Loan Account shall be made in accordance with Lender's customary accounting practices as in effect from time to time. Unless otherwise agreed to in writing from time to time hereafter, all payments which Borrower is required to make to Lender under this Agreement or under any of the Ancillary Agreements shall be made by appropriate debits to the Revolving Loan Account. Lender may, in its sole and absolute discretion, elect to bill Borrower for such amounts in which case the amount shall be immediately due and payable with interest thereon at the rate set forth at the Prime Rate. 4.2 Payment Terms. All of the Liabilities shall be payable to Lender at the address set forth in Section 13.11. The Liabilities of Borrower will be repayable as follows: (i) interest shall be payable on the first day of each month (for the immediately preceding month) out of the first collections received with respect to any proceeds of Collateral, (ii) fees, costs, expenses and similar charges shall be payable as and when provided for in this Agreement or the Ancillary Agreements and (iii) the principal balance of the Liabilities shall be payable from collections received with respect to any proceeds of Collateral as such proceeds are received; provided, however, that if at any time the outstanding principal balance of the Revolving Loan to Borrower exceeds the Collateral Availability of Borrower or the outstanding principal balance of all of the Liabilities exceeds the Total Facility, the Borrower, shall immediately pay to Lender such amount as is necessary to eliminate such excess. Nothing contained in this Section 4.2 shall authorize Borrower to sell, lease or otherwise dispose of any Collateral other than as expressly set forth in Sections 6.4, 7.1 and 8.3. 4.3 Collection of Accounts and Payments. Borrower has established a special account (the "Special Deposit Account") in Borrower's name with NationsBank of Texas, N.A. ("Depository Bank") to which Borrower will immediately deposit all remittances and proceeds of the Collateral in the identical form in which such payment was made, whether by cash or check. The Depository Bank shall acknowledge and agree, in a manner satisfactory to Lender, that all payments made 18 to such special account are the sole and exclusive property of Lender, that Depository Bank has no right of setoff against the funds in such special and that Depository Bank will wire, or otherwise transfer immediately available funds in a manner satisfactory to Lender, funds deposited in such special account to Lender on a daily basis as soon as such funds are collected. Borrower hereby agrees that all payments made to such special account or otherwise received by Lender, whether on the Accounts or as proceeds of other Collateral or otherwise, will be the sole and exclusive property of Lender and will be applied on account of the Liabilities. Lender will credit (conditional upon final collection) all payments received through the special account to the Revolving Loan Account on the Business Day that Lender is in receipt of good funds. Upon the occurrence and during the continuance of an Event of Default or Default, Borrower and any Affiliates, shareholders, directors, officers, employees, agents of Borrower and all Persons acting for or in concert with Borrower shall, acting as trustee for Lender, receive, as the sole and exclusive property of Lender, any monies, checks, notes, drafts or any other payments relating to or proceeds of Accounts or other Collateral which come into their possession or under their control and immediately upon receipt thereof, shall remit the same or cause the same to be remitted, in kind, to Lender, at Lender's address set forth in Section 13.11 or deposit such items in the special account at the Depository Bank. Borrower agrees to pay to Lender any and all fees, costs and expenses (if any) which Lender incurs in connection with opening and maintaining the special account and depositing for collection by Lender any check or item of payment received or delivered to Depository Bank or Lender on account of the Liabilities and Borrower further agrees to reimburse Lender for any claims asserted by Depository Bank in connection with its Special Deposit Account or any returned or uncollected checks received by Depository Bank for deposit in the Special Deposit Account. 4.4 Application of Payments and Collections. Borrower irrevocably waives the right to direct the application of payments and collections received by Lender from or on behalf of Borrower, and Borrower agrees that Lender shall have the continuing exclusive right to apply and reapply any and all such payments and collections against the Liabilities in such manner as Lender may deem appropriate, notwithstanding any entry by Lender upon any of its books and records. To the extent that Borrower makes a payment or payments to Lender or Lender receives any payment or proceeds of the Collateral for Borrower's benefit, which payment(s) or proceeds or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, receiver or any other party under any bankruptcy act, state or federal law, common law or equitable cause, then to the extent of such payment or proceeds received, the Liabilities of the Borrower, as the case may be, or part thereof intended to be satisfied shall be revived and shall continue in full force and effect, as if such payments or proceeds had not been received by Lender. 4.5 Statements. All advances to Borrower, and all other debits and credits provided for in this Agreement, shall be evidenced by entries made by Lender in its internal data control systems showing the date, amount and reason for each such debit or credit. Until such time as Lender shall have rendered to Borrower written statements of account as provided herein, the balance in the Revolving Loan Account, as set forth on Lender's most recent statement, shall be rebuttably presumptive evidence of the amounts due and owing to Lender by 19 Borrower. Not less than ten (10) days after the final day of each calendar month, Lender shall render to Borrower a statement setting forth the balance of the Revolving Loan Account, including principal, interest, expenses and fees. Each such statement shall be subject to subsequent adjustment by Lender and Lender's right to reapply payments in accordance with Section 4.4, but shall, absent manifest errors or omissions, be presumed correct and binding upon Borrower and shall constitute an account stated unless, within thirty (30) days after receipt of any statement from Lender, Borrower, shall deliver to Lender written objection thereto specifying the error or errors, if any, contained in such statement. 5. COLLATERAL: GENERAL TERMS 5.1 Security Interest. To secure the prompt payment to Lender of the Liabilities, Borrower hereby grants to Lender a continuing security interest in and to all of the following property and interest in property of or in which Borrower has an interest, whether now owned or existing or hereafter acquired or arising and wherever located: (i) all Accounts, Inventory, Equipment, contract rights, General Intangibles, tax refunds, chattel paper, instruments, letters of credit, documents and documents of title; (ii) all of Borrower's deposit accounts (general or special) with and credits and other claims against Depository Bank or Lender, or any other financial institutions with which Borrower maintains deposits; (iii) all of Borrower's now owned or hereafter acquired monies, and any and all other property of Borrower now or hereafter coming into the actual possession, custody or control of Lender or any agent or affiliate of Lender in any way or for any purpose (whether for safekeeping, deposit, custody, pledge, transmission, collection or otherwise); (iv) all insurance proceeds of or relating to any of the foregoing; (v) all of Borrower's books and records relating to any of the foregoing; and (vi) all accessions and additions to, substitutions for, and replacements, products and proceeds of any of the foregoing. 5.2 Disclosure of Security Interest. Borrower shall make appropriate entries upon its financial statements and books and records disclosing Lender's security interest in the Collateral. 5.3 Special Collateral. Immediately upon Borrower's receipt of any Collateral that is evidenced or secured by an agreement, chattel paper, letter of credit, instrument or document, including, without limitation, promissory notes, documents of title and warehouse receipts (the "Special Collateral"), Borrower shall deliver the original thereof to Lender or to such agent of Lender as Lender shall designate, together with appropriate endorsements, the documents required to draw thereunder (as may be relevant to letters of credit) or other specific evidence (in form and substance acceptable to Lender) of assignment thereof to Lender. 5.4 Further Assurances. At Lender's request, Borrower shall, from time to time, (i) execute and deliver to Lender all Security Documents that Lender may reasonably request, in form and substance acceptable to Lender, and pay the costs of any recording or filing of the same and (ii) take such other actions as Lender may request in order to fully effect the purposes of this Agreement and to protect Lender's interest in the Collateral. Upon the occurrence of any Default, Borrower hereby irrevocably makes, constitutes and appoints Lender (and all Persons designated by Lender for that purpose) as 20 Borrower's true and lawful attorney and agent-in-fact to sign the name of Borrower on any of the Security Documents and to deliver any of the Security Documents to such Persons as Lender, in its sole discretion, may elect. Borrower agrees that a carbon, photographic, photostatic, or other reproduction of this Agreement or of a financing statement is sufficient as a financing statement. 5.5 Inspection. Lender (by any of its officers, employees or agents) shall have the right, at any time or times during Borrower's usual business hours, without prior notice, to inspect the Collateral, all records related thereto (and to make extracts from such records) and the premises upon which any of the Collateral is located, to discuss Borrower's affairs and finances with any Person and to verify the amount, quality, value and condition of, or any other matter relating to, the Collateral. 5.6 Location of Collateral. Borrower's chief executive office, principal place of business and all other offices and locations of the Collateral and books and records related thereto (including, without limitation, computer programs, printouts and other computer materials and records concerning the Collateral) are set forth on Exhibit C attached hereto. Borrower shall not remove its books and records or the Collateral from any such locations (except for removal of items of Inventory upon its sale in accordance with the terms of this Agreement) and shall not open any new offices or relocate any of its books and records or the Collateral except within the continental United States of America with at least thirty (30) days' prior notice thereof to Lender. Upon the opening of any new offices which are leased or the relocation of Borrower to a new office which is leased locations, Borrower shall cause the landlord of such location to execute and deliver to Lender a landlord's waiver in form and substance satisfactory to Lender within thirty (30) days after the opening of such new office or relocation from an existing office. 5.7 Lender's Payment of Claims Asserted Against Borrower. Upon and during the continuation of an Event of Default, Lender may, but shall not be obligated to, at any time or times hereafter, in its sole discretion, and without waiving any Default or waiving or releasing any obligation, liability or duty of Borrower under this Agreement or the Ancillary Agreements, pay, acquire or accept an assignment of any security interest, lien, claim or other encumbrance asserted by any Person against the Collateral. All sums paid by Lender under this Section 5.7, including all costs, fees (including without limitation reasonable attorney's and paralegals' fees and court costs), expenses and other charges relating thereto, shall be payable by Borrower to Lender on demand and shall be additional Liabilities secured by the Collateral. 6. COLLATERAL: ACCOUNTS 6.1 Verification of Accounts. Any of Lender's officers, employees or agents shall have the right, at any time or times hereafter, in Lender's or in Borrower's name or in the name of a firm of independent certified public accountants acceptable to Lender, to verify the validity, amount or any other matters relating to any Accounts by mail, telephone, telegraph or otherwise. 21 6.2 Assignments, Records and Accounts Report. Borrower shall keep accurate and complete records of its Accounts and not less frequently than weekly, Borrower shall deliver to Lender an Accounts Report and formal written assignments of all Accounts, together with copies of the invoices related thereto (collectively, the "Accounts Documents"); provided, however, after and during the continuance an Event of Default or Default, Borrower shall deliver to Lender the Accounts Documents as frequently as Lender shall require, but not less frequently than twice weekly. Borrower shall also deliver to Lender, upon demand, the original copy of all documents, including, without limitation, repayment histories, present status reports and shipment reports, relating to the Accounts included in any Accounts Report and such other matters and information relating to the status of then existing Accounts as Lender shall reasonably request. Borrower shall further deliver to Lender once per month, and after and during the continuance of an Event of Default or Default, as frequently as Lender shall require, but not less frequently than once per month, an aged Accounts Report of Borrower setting forth the aging of all Accounts as well as the Account Debtor's name, address and outstanding balance. 6.3 Notice Regarding Disputed Accounts. Borrower shall give Lender prompt notice of any Accounts in excess of $50,000 which are in dispute between any Account Debtor and Borrower. Each Accounts Report shall identify all disputed Accounts and disclose with respect thereto, in reasonable detail, the reason for the dispute, all claims related thereto and the amount in controversy. 6.4 Sale or Encumbrance of Accounts. Borrower shall not, without the prior written consent of Lender, sell, transfer, grant a security interest in or otherwise dispose of or encumber any of its Accounts to any Person other than Lender, except for the Permitted Liens. 7. COLLATERAL: INVENTORY 7.1 Sale of Inventory. Unless a Default occurs and is continuing, Borrower may sell Inventory in the ordinary course of its business (which does not include a transfer in partial or total satisfaction of Indebtedness, sales in bulk, sales on consignment or sales on an approval or sale or return basis). All proceeds of such sales shall be part of the Collateral and remitted to the Special Deposit Account. Borrower shall not rent, lease or otherwise transfer or dispose of any of the Inventory without Lender's prior written consent, except as set forth in this Section 7.1. 7.2 Safekeeping of Inventory; Inventory Covenants. Borrower shall maintain its Inventory in good and saleable condition at all times. Lender shall not be responsible for (i) the safekeeping of the Inventory; (ii) any loss or damage thereto or destruction thereof occurring or arising in any manner or fashion from any cause; (iii) any diminution in the value of Inventory or (iv) any act or default of any carrier, warehouseman, bailee or forwarding agency or any other Person in any way dealing with or handling the Inventory. All risk of loss, damage, distribution or diminution in value of the Inventory shall be borne by Borrower. 22 7.3 Records and Schedules of Inventory. Borrower shall keep correct and accurate daily records on an average cost basis, itemizing and describing the kind, type, quality and quantity of Inventory, Borrower's cost therefor and selling price thereof, and the daily withdrawals therefrom and additions thereto and Inventory then on consignment (if any, provided that Lender's prior written consent to such consignment must be obtained), and shall furnish to Lender (i) daily copies of the working papers related thereto; and (ii) monthly a current Inventory Report, based on an average cost assumption. A physical count of the Inventory shall be conducted no less often than annually and a report based on such count of the Inventory shall promptly thereafter be provided to Lender together with such supporting information including, without limitation, invoices relating to Borrower's purchase of goods listed in said report, as Lender shall, in its sole discretion, request. 7.4 Returned and Repossessed Inventory. If at any time prior to the occurrence of a Default, any Account Debtor returns any of the Inventory to Borrower, Borrower shall promptly determine the reason for such return and, if Borrower accepts such return, issue a credit memorandum (with a copy to be immediately sent to Lender) in the appropriate amount to such Account Debtor; provided, however, that Borrower shall not, without the prior consent of Lender, accept on any single day, returned Inventory the sale price of which was in excess of $50,000 in the aggregate. After the occurrence and during the continuation of a Default, Borrower shall hold all returned Inventory in trust for Lender, shall segregate all returned Inventory from all other property of Borrower or in Borrower's possession and shall conspicuously label such returned Inventory as the property of Lender. Borrower shall, in all cases, immediately notify Lender of the return of any Inventory, specifying the reason for such return and the location and condition of the returned Inventory. 7.5 Evidence of Ownership of Inventory. Borrower shall, upon Lender's request, deliver to Lender all evidence of ownership of the Inventory. 8. COLLATERAL: EQUIPMENT 8.1 Maintenance of the Equipment. Borrower shall keep and maintain the Equipment in good operating condition and repair, except for ordinary wear and tear, and shall make all necessary replacements thereof so that the value, utility and operating efficiency thereof shall at all times be maintained and preserved and shall promptly inform Lender of any additions to or deletions from the Equipment. Borrower shall not permit any such items to become affixed to real estate in such manner that such items of Equipment will become a fixture or an accession to other personal property. 8.2 Evidence of Ownership of Equipment. Borrower shall, upon Lender's request, deliver to Lender all evidence of ownership of the Equipment (including, without limitation, bills of sale, certificates of title and applications for title). 8.3 Proceeds of the Equipment. Borrower shall not sell, transfer, lease, grant a security interest in or otherwise dispose of or encumber the Equipment or any part thereof to any Person other than 23 Lender; provided, however, that in any fiscal year of Borrower, Borrower may sell or otherwise dispose of Equipment with an aggregate net book value not to exceed $25,000. In the event any Equipment is sold, transferred or otherwise disposed of as permitted in this Section 8.3, Borrower shall promptly notify Lender of such fact and deliver all of the cash proceeds of such sale, transfer or disposition to Lender, which proceeds shall be applied to the repayment of the Liabilities; provided, however, that with Lender's prior consent Borrower may use the proceeds of such sale, transfer or disposition to finance the purchase of replacement Equipment. Borrower shall deliver to Lender written evidence of the use of the proceeds for such purchase. All replacement Equipment purchased by Borrower shall be free and clear of all liens, claims, security interests and other encumbrances, except for the security interest granted to Lender, purchase money security interests consented to in writing by Lender, and the Permitted Liens. 9. WARRANTIES AND REPRESENTATIONS 9.1 General Warranties and Representations. Borrower warrants and represents that: (A) Borrower is a corporation duly organized and validly existing and in good standing under the laws of the state of its incorporation, and is qualified or licensed as a foreign corporation to do business in all other countries, states and provinces in which the laws thereof require Borrower to be so qualified or licensed and where failure to qualify would have a material adverse affect on Borrower's business or the Collateral; (B) Borrower has used, during the five (5) year period preceding the date of this Agreement, and does not intend to use, any other corporate or fictitious name, except as disclosed in Exhibit D attached hereto or as hereinafter disclosed in writing; (C) Borrower has the right and power and is duly authorized and empowered to enter into, execute, deliver and perform this Agreement and the Ancillary Agreements; (D) The execution, delivery and performance by Borrower of this Agreement and the Ancillary Agreements shall not, by their execution or performance, the lapse of time, the giving of notice or otherwise, constitute a violation of any applicable law, rule, regulation, judgment, order or decree or a breach of any provision contained in Borrower's charter documents or by-laws or contained in any agreement, instrument, indenture or other document to which Borrower is now a party or by which it is bound, except where such breach will not have a material adverse effect on Borrower's business or the Collateral; (E) Borrower's use of the proceeds of any advances made by Lender are, and will continue to be, legal and proper corporate uses (duly authorized by its board of directors, in accordance with any applicable law, rule or regulation) and such uses are consistent with all applicable laws, rules and regulations, as in effect as of the date hereof; 24 (F) Borrower has, and is current and in good standing with respect to, all governmental approvals, permits, certificates, inspections, consents and franchises necessary to conduct and to continue to conduct its present and intended business as heretofore conducted by it and to own or lease and operate its properties as now owned or leased and operated by it; (G) None of said approvals, permits, certificates, consents or franchises contains any term, provision, condition or limitation more burdensome than such as are generally applicable to Persons engaged in the same or similar business as Borrower; (H) Borrower now has capital sufficient to carry on its business and transactions and all businesses and transactions in which it is about to engage and is now solvent and able to pay its debts as they mature and Borrower now owns property the fair saleable value of which is greater than the amount required to pay Borrower's debts; (I) Except as disclosed on Exhibit E attached hereto and in the Financials or as hereinafter disclosed in writing, Borrower has no litigation pending, or to the best of its knowledge, threatened, and no Indebtedness (except for the Indebtedness shown on Exhibit I or as hereinafter disclosed in writing and trade payable arising in the ordinary course of its business since the dates reflected in the Financials) and has not guaranteed the obligations of any other Person; (J) Borrower (i) is not a party to any contract or agreement or subject to any charge, restriction, judgment, decree or order materially and adversely affecting its business, property, assets, operations or condition, financial or other, and is not a party to any labor dispute; and (ii) there are no lockouts, strikes or walkouts relating to any labor contracts and no such contract is scheduled to expire during the Term; except as to (i) and (ii) as are disclosed on Exhibit F attached hereto or as hereinafter disclosed to Lender in writing; (K) Borrower has good, indefeasible and merchantable title to and ownership of its Collateral, free and clear of all liens, claims, security interests and other encumbrances, except those of Lender and those, if any, described on Exhibit G attached hereto; (L) To the best of its knowledge, Borrower is not in violation of any applicable statute, rule, regulation or ordinance of any governmental entity, including, without limitation, the United States of America, any state, city, town, municipality, county or of any other jurisdiction, or of any agency thereof, in any respect materially and adversely affecting the Collateral or Borrower's business, property, assets, operations or condition, financial or other; (M) Borrower is not in default under any indenture, loan agreement, mortgage, lease, trust deed, deed of trust or other similar agreement relating to the borrowing of monies to which it is a party or by which it is bound; (N) The Financials fairly present the assets, liabilities and financial condition and results of operations of Borrower and such other Persons described therein as of the dates thereof; there are no 25 omissions or other facts or circumstances which are or may be material and there has been no material and adverse change in the assets, liabilities or financial or other condition of Borrower since the date of the Financials; there exist no equity or long term investments in or outstanding advances to any Person not reflected in the Financials; there are no actions or proceedings which are pending or, to the best of Borrower's knowledge, threatened, against Borrower or any other Person which might result in any material adverse change in Borrower's financial condition or materially and adversely affect Borrower's operations, its assets or the Collateral; (O) Borrower has not received any notice to the effect that it is not in full compliance with any of the requirements of ERISA and the regulations promulgated thereunder and, to the best of Borrower's knowledge, there exists no event described in Section 4043 of ERISA, excluding subsections 4043(b)(2) and 4043(b)(3) thereof ("Reportable Event"); (P) Borrower has filed all federal, state and local tax returns and other reports, or has been included in consolidated returns or reports filed by an Affiliate, which Borrower is required by law, rule or regulation to file and all Charges that are due and payable have been paid; (Q) The execution and delivery of this Agreement or any of the Ancillary Agreements by Borrower does do not directly or indirectly violate or result in any violation of the Securities Exchange Act of 1934, as amended, or any regulations issued pursuant thereto, including without limitation, Regulation U, G, T or X of the Board of Governors of the Federal Reserve System (12 CFR 221, 207, 220 and 224, respectively) and Borrower does not own or intend to purchase or carry any "margin security," as defined in such Regulations; (R) Exhibit J contains a true and complete list of all trademarks, brand-names, copyrights, patents, patent application in which Borrower has an interest; and (S) (i) the operations of Borrower, any other obligor and each of Borrower's subsidiaries, if any, comply in all material respects with all applicable Environmental Laws; (ii) none of the operations of Borrower, any other obligor or any Subsidiary are subject to any judicial or administrative proceeding alleging the violation of any Environmental laws; (iii) none of the operations of Borrower, any other obligor or any subsidiary are the subject of any federal or state investigation evaluating whether any remedial action is needed to respond to a release of any Hazardous Material into the environment; (iv) none of Borrower, any other obligor or any Subsidiary has filed any notice under any federal or state law indicating past or present treatment, storage or disposal of a Hazardous Material or reporting a spill or release of a Hazardous Material into the environment; and (v) none of Borrower, any other obligor or any Subsidiary has any known material contingent liability in connection with any release of any Hazardous Material into the environment. The materiality standard used in this Section 9.1(S) shall be exceeded if the facts giving rise to a breach or breaches of the representations or warranties contained herein might result in liability in excess of $50,000 in the aggregate. 26 Borrower hereby indemnifies Lender, its successors and assignees, and agrees to hold Lender harmless from and against any and all losses, liabilities, damages, injuries, costs, expenses and claims of any and every kind whatsoever (including, without limitation, court costs and attorneys' fees) which at any time or from time to time may be paid, incurred or suffered by, or asserted against, Lender for, with respect to, or as a direct or indirect result of the violation by Borrower, of the Environmental Laws or any laws or regulations relating to Hazardous Material, treatment, storage, disposal, generation and transportation, air, water and noise pollution, soil or ground or water contamination, the handling, storage or release into the environmental of Hazardous Materials; or with respect to, or as a direct or indirect result of the presence on or under, or the escape, seepage, leakage, spillage, discharge, emission or release from, properties utilized by Borrower, any other obligor or any of Borrower's subsidiaries in the conduct of their respective business into or upon any land, the atmosphere, or any watercourse, body of water or wetlands, of any Hazardous Material (including, without limitation, any losses, liabilities, damages, injuries, costs, expenses or claims asserted or arising under the Environmental Laws); and the provisions of and undertakings and indemnification set out in this Section 9.1(S) shall survive the satisfaction and payment of the Liabilities and the termination of this Agreement. 9.2 Account Warranties and Representations. Borrower warrants and represents that Lender may rely, in determining which Accounts listed on any Accounts Report submitted by Borrower are Eligible Accounts, without independent investigation, on all statements, warranties and representations made by Borrower on or with respect to any such Accounts Report and, unless otherwise indicated in writing by Borrower, that: (A) Such Accounts are genuine, are in all respects what they purport to be, are not reduced to a judgment and, if evidenced by any instrument, item of chattel paper, agreement, contract or documents, are evidenced by only one executed original instrument, item of chattel paper, agreement, contract, or document, which original has been endorsed and delivered to Lender; (B) Such Accounts represent undisputed, bona fide transactions completed in accordance with the terms and provisions contained in any documents related thereto; (C) Except for credits issued to any Account Debtor in the ordinary course of Borrower's business for Inventory returned pursuant to Section 7.4, the amounts shown on the Accounts Report, and all invoices and statements delivered to Lender with respect to any Account, are actually and absolutely owing to Borrower and are not contingent for any reason; (D) To the best of Borrower's knowledge, except as may be disclosed on such Accounts Report, there are no setoffs, counterclaims or disputes existing or asserted with respect to any Accounts included on an Accounts Report, and Borrower has not made any agreement with any Account Debtor for any deduction from such Account, except for discounts or allowances allowed by Borrower in the ordinary course of its business, which discounts and allowances have been disclosed to Lender and are reflected in the calculation of the invoice related to such Account; 27 (E) To the best of Borrower's knowledge, there are no facts, events or occurrences which in any way impair the validity or enforcement of any of the Accounts or tend to reduce the amount payable thereunder from the amount of the invoice shown on any Accounts Report, and on all contracts, invoices and statements delivered to Lender with respect thereto; (F) To the best of Borrower's knowledge, all Account Debtors are solvent and had the capacity to contract at the time any contract or other document giving rise to or evidencing the Accounts was executed; (G) The goods, the sale of which gave rise to the Accounts, are not, and were not at the time of the sale thereof, subject to any lien, claim, security interest or other encumbrance, except those of Lender, and those removed or terminated prior to the date hereof, and the Permitted Liens; (H) Borrower has no knowledge of any fact or circumstance which would impair the validity or collectibility of any of the Accounts; (I) To the best of Borrower's knowledge, there are no proceedings or actions which are threatened or pending against any Account Debtor which might result in any material adverse change in its financial or other condition; and (J) The Accounts have not been pledged or sold to any other Person or otherwise encumbered and the Borrower is the owner of the Accounts free of all liens and encumbrances except those of Lender and except for the Permitted Liens. 9.3 Inventory Warranties and Representations. Borrower warrants and represents that Lender may rely, in determining which items of Inventory listed on any Inventory Report submitted by Borrower are Eligible Inventory, without independent investigation, on all statements, warranties and representations made by Borrower on or with respect to any such Inventory Report and, unless otherwise indicated in writing by Borrower, that: (A) All Inventory is located on premises listed on Exhibit C or is Inventory which is in transit and is so identified on the relevant Inventory Report; (B) The Inventory is not subject to any lien, claim, security interest or other encumbrance whatsoever, except for the security interest of Lender hereunder and except for the Permitted Liens; (C) Except as specified on Exhibit C, no Inventory is now, and shall not at any time or times hereafter be, stored with a bailee, warehouseman or similar party without Lender's prior written consent and, if Lender gives such consent, Borrower will concurrently therewith cause any such bailee, warehouseman or similar party to issue and deliver to Lender, in form and substance acceptable to Lender, warehouse receipts therefor in Lender's name; and 28 (D) Borrower is the owner of all of the Inventory purported to be owned by Borrower free and clear of all liens and encumbrances, except for the Permitted Liens, and none of the Inventory has been leased, rented, transferred or sold, either on consignment, on a sale or return basis, on approval, or otherwise. 9.4 ERISA Warranties and Representations. Borrower warrants and represents that: (A) Exhibit K hereto describes the Employee Benefit Plans to which Borrower may have obligations; (B) Each Employee Benefit Plan of Borrower or any of its ERISA Affiliates is in compliance in all material respects with the applicable provisions of ERISA and the Code, except where the failure to so comply would not have a material (in the reasonable opinion of the Lender) adverse effect on the financial condition or results or operations of Borrower, and each such Employee Benefit Plan that is intended to be qualified under Section 401(a) of the Code has been determined by the Internal Revenue Service to be so qualified (or, consistent with Section 1140 of the Tax Reform Act of 1986, will be submitted to the Internal Revenue Service for such a determination within the applicable remedial amendment period), and each trust related to any such Employee Benefit Plan has been determined to be exempt from federal income tax under Section 501(a) of the Code; (C) Except as set forth in Exhibit K, neither Borrower nor any of its ERISA Affiliates maintains or contributes to any Employee Benefit Plan with an actuarial present value of projected benefit obligations that exceeds the fair market value of the net assets available for such benefits, calculated on the basis of the actuarial assumptions specified in the most recent actuarial valuation for such Employee Benefit Plan, and no such Employee Benefit Plan provides for subsidized early retirement benefits that, in the event of a reduction in force or plant closing, would have a material (in the reasonable opinion of the Lender) adverse effect on the financial condition or results or operations of Borrower; (D) Except as set forth on Exhibit K, neither Borrower nor any of its ERISA Affiliates maintains or contributes to any employee welfare benefit plan within the meaning of Section 3(1) of ERISA that provides benefits to employees after termination of employment other than as required by Section 601 of ERISA; (E) Neither Borrower nor any of its ERISA Affiliates has breached in any material respect any of the responsibilities, obligations, or duties imposed on it by ERISA or the regulations promulgated thereunder with respect to any Employee Benefit Plan, which breach would have a material (in the reasonable opinion of the Lender) adverse effect on the financial condition or results or operations of Borrower; (F) Neither Borrower nor any ERISA Affiliate has (i) failed to make a required contribution or payment to a Multiemployer Plan or (ii) made a complete or partial withdrawal under Sections 4203 or 4205 29 of ERISA from a Multiemployer Plan, where such failure or complete or partial withdrawal would have a material (in the reasonable opinion of the Lender) adverse effect on the financial condition or results or operations of Borrower; (G) At the date hereof, the aggregate potential withdrawal liability, as determined in accordance with Title IV of ERISA, of Borrower and any ERISA Affiliates with respect to all Employee Benefit Plans that are Multiemployer Plans does not exceed $250,000 and, to the best of Borrower's and its ERISA Affiliates' knowledge, no Multiemployer Plan is in reorganization or insolvent within the meaning of Section 4241 or 4245 of ERISA; (H) Neither Borrower nor any ERISA Affiliate has failed to make a required installment or any other required payment under Section 412 of the Code on or before the due date for such installment or other payment; (I) Neither Borrower nor any ERISA Affiliate is required to provide security to an Employee Benefit Plan under Section 401(a)(29) of the Code due to an Employee Benefit Plan amendment that results in an increase in current liability for the plan year; (J) No liability to the PBGC has been, or is expected by Borrower or any ERISA Affiliate to be, incurred by Borrower or any ERISA Affiliate, which liability would have a material (in the reasonable opinion of the Lender) adverse effect on the financial condition or results or operations of Borrower, and there are no premium payments that have become due and which are unpaid; (K) No events have occurred in connection with any Employee Benefit Plan that might constitute grounds for the termination of any such Employee Benefit Plan by the PBGC or for the appointment by any United States District Court of a trustee to administer any such Employee Benefit Plan; (L) Except as set forth in Exhibit K, no Reportable Event has, in the case of any Employee Benefit Plan maintained by Borrower or an ERISA Affiliate other than a Multiemployer Plan, occurred and is continuing, or to the best of Borrower's knowledge, has occurred and is continuing in the case of any such Employee Benefit Plan that is a Multiemployer Plan; (M) No Employee Benefit Plan maintained by the Borrower or an ERISA Affiliate had an Accumulated Funding Deficiency, whether or not waived, as of the last day of the most recent fiscal year of such Employee Benefit Plan or, in the case of any Multiemployer Plan, as of the most recent fiscal year of such Multiemployer Plan for which the annual reports of such Multiemployer Plan's actuaries and auditors have been received; and (N) Neither Borrower nor any ERISA Affiliate has engaged in a Prohibited Transaction prior to the date hereof, which Prohibited Transaction would have a material (in the reasonable opinion of the Lender) adverse effect on the financial condition or results or 30 operations of Borrower, and the execution, delivery, and carrying out of this Agreement will not involve any non-exempt Prohibited Transactions (within the meaning of Part 4 of Subtitle B of Title I of ERISA) or any transaction in connection with which a tax could be imposed pursuant to Section 4975 of the Code. 9.5 Automatic Warranty and Representation and Reaffirmation of Warranties and Representations. Each request for an advance made by Borrower pursuant to this Agreement or the Ancillary Agreements shall constitute (i) an automatic warranty and representation by Borrower to Lender that there does not then exist a Default or an Event of Default and (ii) a reaffirmation as of the date of said request of all of the warranties and representations of Borrower contained in this Agreement and in the Ancillary Agreements. 9.6 Survival of Warranties and Representations. Borrower covenants, warrants and represents to Lender that all representations and warranties of Borrower contained in this Agreement and the Ancillary Agreements shall be true at the time of Borrower's execution of this Agreement and the Ancillary Agreements, and shall survive the execution, delivery and acceptance hereof and thereof by the parties thereto and the closing of the transactions described herein and therein or related hereto or thereto. Borrower and Lender expressly agree that any misrepresentation or breach of any representation or warranty whatsoever contained in this Agreement or in any of the Ancillary Agreements shall be deemed material. 10. COVENANTS AND CONTINUING AGREEMENTS 10.1 Affirmative Covenants. Borrower covenants that it shall: (A) At all times during the Term, maintain a ratio of total liabilities to Tangible Net Worth of not more than 6.0:1.0; (ii) Tangible Net Worth at least equal to $2,000,000, to be adjusted for any dividends paid to or for the benefit of the holder or holders of Borrower's Stock, as permitted by Section 10.2(C), but in no event less than $1,500,000; (iii) a ratio of Current Assets to Current Liabilities of not less than 1.0:1.0; and (v) Pre-Tax Net Income of not less than $1,000,000, computed on a rolling 12-month basis; all as determined for each of the foregoing financial covenants in accordance with generally accepted accounting principles consistently applied; (B) Pay to Lender, on demand, any and all fees, costs or expenses which Lender or any Participant pays to a bank or other similar institution arising out of or in connection with (i) the forwarding to Borrower or any other Person on behalf of Borrower, by Lender or any Participant, of proceeds of loans made by Lender to Borrower pursuant to this Agreement and (ii) the depositing for collection, by Lender or any Participant, of any check or item of payment received or delivered to Lender or any Participant on account of the Liabilities; (C) At its sole cost and expense, keep and maintain the Collateral insured for its full insurable value against loss or damage by fire, theft, explosion, sprinklers and all other hazards and risks ordinarily insured against by other owners or users of such properties 31 in similar businesses and notify Lender promptly of any event or occurrence causing a material loss or decline in value of the Collateral and the estimated (or actual, if available) amount of such loss or decline; (D) Promptly upon Borrower's learning thereof, notify Lender of (i) any material delay in Borrower's performance of any of its obligations to any Account Debtor and of any assertion of any claims, offsets, defenses or counterclaims by any Account Debtor and of any allowances or credits granted (including all credits issued for returned or repossessed Inventory) or other monies advanced by Borrower to any Account Debtor and (ii) all material adverse information relating to the financial or other condition of any Account Debtor; (E) Keep books of account and prepare financial statements and furnish to Lender the following (all of the foregoing and following to be kept and prepared in accordance with generally accepted accounting principles applied on a basis consistent with the Financials, unless Borrower's independent certified public accountants concur in any changes therein and such changes are disclosed to Lender and are consistent with then generally accepted accounting principles): (i) as soon as available, but not later than one hundred twenty (120) days after the close of each fiscal year of Borrower, financial statements of Borrower (including a balance sheet, statement of cash flows and profit and loss statement with supporting footnotes) as at the end of such year and for the year then ended all in reasonable detail as requested by Lender and examined by a firm of independent certified public accountants of recognized national standing selected by Borrower and containing the unqualified opinion of such independent certified public accountants with respect to the financial statements; (ii) as soon as available, but no later than thirty (30) days after the end of each month, an unaudited financial statement of Borrower on an unconsolidated basis (including a statement of profit and loss and of surplus for the month then ended, statement of cash flows and a balance sheet as at the end of such month) as at the end of the portion of Borrower's fiscal year then elapsed, all in reasonable detail as requested by Lender and certified by Borrower's principal financial officer as prepared in accordance with generally accepted accounting principles and fairly presenting the financial position and results of operations of Borrower for such period; (iii) as soon as available, but not later than sixty (60) days before the beginning of each fiscal year, Borrower's balance sheet, profit and loss statement and cash flow projection, prepared on a month by month basis, for such fiscal year, together with appropriate supporting documents reasonably acceptable to Lender; and 32 (iv) such other data and information (financial and other) as Lender, from time to time, may reasonably request, bearing upon or related to the Collateral, Borrower's financial condition or results of its operations, or the financial condition of any Person who is a guarantor of any of the Liabilities; (F) Notify Lender promptly upon, but in no event later than, five (5) days after Borrower's learning thereof, that any Eligible Account or Eligible Inventory has ceased to be an Eligible Account or Eligible Inventory, respectively, and the reason(s) for such ineligibility; (G) Notify Lender, promptly upon Borrower's learning of (i) any litigation affecting Borrower, whether or not the claim is considered by Borrower to be covered by insurance; and (ii) the institution of any suit or administrative proceeding which may materially and adversely affect the operations, financial condition or business of Borrower or which may affect Lender's security interest in the Collateral; (H) Provide Lender with copies of all agreements between Borrower and any warehouse at which Inventory may, from time to time, be kept and all leases or similar agreements between Borrower and any Person, whether Borrower is lessor or lessee thereunder; (I) Maintain product liability insurance in an amount customary for the business conducted by Borrower; (J) As to the following ERISA reports: (i) As soon as possible, and in any event within ten (10) Business Days, after Borrower knows or has reason to know that, regarding any Employee Benefit Plan with respect to the Borrower or an ERISA Affiliate, a Prohibited Transaction or a Reportable Event has occurred (whether or not the requirement for notice of such Reportable Event has been waived by the PBGC), deliver to the Lender a certificate of a responsible officer of Borrower setting forth the details of such Prohibited Transaction or Reportable Event, the action that Borrower proposes to take with respect thereto, and, when known, any action taken or threatened by the Internal Revenue Service, Department of Labor, or PBGC; (ii) Upon request of the Lender made from time to time, deliver to the Lender a copy of the most recent actuarial report, funding waiver, and annual report received with respect to any Employee Benefit Plan maintained by Borrower or an ERISA Affiliate; and (iii) Upon reasonable request of the Lender made from time to time, deliver to the Lender a copy of any Employee Benefit Plan maintained by Borrower or any ERISA Affiliates; and 3 (iv) As soon as possible, and in any event within ten (10) Business Days, after it knows or has reason to know that any of the following have occurred with respect to any Employee Benefit Plan maintained by or contributed to Borrower or an ERISA Affiliate, deliver to the Lender a certificate of a responsible officer of Borrower setting forth the details of the events described in (a) through (l) and the action that the Borrower or any ERISA Affiliate proposes to take with respect thereto, together with a copy of any notice or filing from the PBGC or other agency of the United States government with respect to such of the events described in (a) through (l): (a) any Employee Benefit Plan has been terminated; (b) the Plan Sponsor intends to terminate any Employee Benefit Plan; (c) the PBGC has instituted or will institute proceedings under Section 4042 of ERISA to terminate any Employee Benefit Plan or to appoint a trustee to administer such Employee Benefit Plan, or the Borrower or any ERISA Affiliate receives a notice from a Multiemployer Plan that such action has been taken by the PBGC with respect to such Multiemployer Plan; (d) Borrower or any ERISA Affiliate withdraws from any Employee Benefit Plan, or notice of any withdrawal liability is received by Borrower or any ERISA Affiliate; (e) any Employee Benefit Plan has received an unfavorable determination letter from the Internal Revenue Service regarding the qualification of the Employee Benefit Plan under Section 401(a) of the Code; (f) the Borrower or any ERISA Affiliate fails to make a required installment or any other required payment under Section 412 of the Code on or before the due date for such installment or payment or has applied for a waiver of the minimum funding standard under Section 412 of the Code; (g) the imposition of any tax under Code Section 4980B(a) or the assessment by the Secretary of Labor of a civil penalty under Section 502(c) of ERISA; (h) there is a partial or complete withdrawal (as described in ERISA Section 4203 or 4205) by the Borrower or any ERISA Affiliate from a Multiemployer Plan; (i) the Borrower or any ERISA Affiliate is in "default" (as defined in ERISA Section 4219(c)(5)) with respect to payments to a Multiemployer Plan required by reason of its complete or partial withdrawal from such Employee Benefit Plan; (j) a Multiemployer Plan is in "reorganization" or "insolvent" (as described in Title IV of ERISA) or such Multiemployer Plan intends to terminate or has terminated under Section 4041A of ERISA; (k) the institution of a proceeding by a fiduciary of a Multiemployer Plan against the Borrower or any ERISA Affiliate to enforce Section 515 of ERISA; or (l) the Borrower or any ERISA Affiliate has increased benefits under any existing Employee Benefit Plan or commenced contributions to an Employee Benefit Plan to which Borrower or any ERISA Affiliate was not previously contributing. For purposes of this Section, the Borrower shall be deemed (i) to have knowledge of all facts known by the Plan Administrator of any Employee Benefit Plan of which Borrower is the Plan Sponsor or in which Borrower participates or to which Borrower contributes, and (ii) to have knowledge of all facts known by the Plan Administrator of any Employee Benefit Plan of which any ERISA Affiliate is the Plan Sponsor or in which any ERISA Affiliate participates or to which any ERISA Affiliate contributes and which facts could lead to an event or condition that could have a material (in the reasonable 34 opinion of the Lender) adverse effect on the financial condition or results or operations of Borrower; (K) Give written notice to Lender immediately upon receipt of any notice that (i) the operations of Borrower, any other obligor or any Subsidiary are not in full compliance with requirements of applicable Environmental Laws; (ii) Borrower, any other obligor or any Subsidiary is subject to any Federal or state investigation evaluating whether any remedial action is needed to respond to the release of any Hazardous Material into the environment; or (iii) any properties or assets of Borrower, any other obligor or any Subsidiary are subject to any Environmental Lien; (L) Without limiting the generality of any of Borrower's other covenants and agreements, the operations of Borrower, any other obligor and each of Borrower's Subsidiaries shall at all times comply in all material respects with all applicable Environmental Laws. The materiality standard used in this Section 10.1(L) shall be exceeded if the facts giving rise to a breach or breaches of the covenant contained herein might result in liability in excess of $50,000 in the aggregate, whether or not such liability may be covered by insurance; and (M) Within ten (10) days after the end of each fiscal month of Borrower, deliver to Lender a Covenant Compliance Certificate, in the form of Exhibit L attached hereto executed by an officer of Borrower attesting to the items set forth in such Certificate. 10.2 Negative Covenants. Borrower covenants that it shall not: (A) Merge or consolidate with or acquire any Person, or otherwise acquire all or substantially all of the assets or properties of any other Person (any such merger, consolidate or acquisition is sometimes referred to in this Agreement as an "Acquisition"); provided, however, as long as at the time of any proposed Acquisition, no Default or Event of Default has occurred or would be created by the making of such Acquisition, Borrower may make an Acquisition for a total purchase price up to $2,000,000.00 without the prior consent of Lender provided that (i) the Acquisition target is engaged in the same or a similar business as Borrower, (ii) Borrower has Collateral Availability of at least $1,000,000.00 immediately after the closing of the Acquisition, and (iii) Lender is notified of the proposed Acquisition at least thirty days prior to the closing thereof; (B) Other than in the ordinary course of business, make any investment in the securities of any Person; provided, however, as long as at the time of any proposed Acquisition of securities, no Default or Event of Default has occurred or would be created by the making of such Acquisition, Borrower may make an investment in the securities of any Person provided further that (i) the Acquisition target is engaged in the same or a similar business as Borrower, (ii) the Borrower acquires at least 51% of the issued and outstanding voting securities of such Person, (iii) the Borrower has Collateral Availability of at least $1,000,000 immediately after the closing of the Acquisition of such securities, and (iv) Lender is notified of the proposed Acquisition of securities at least 30 days prior to the closing thereof; (C) Declare or pay dividends upon any of Borrower's Stock or make any distribution of Borrower's property or assets to any Person, including, without limitation, any Affiliate, officer or employee of 35 Borrower; provided that, as long as at the time of any proposed payment of a dividend, no Default or Event of Default has occurred and is continuing or would be created by the making of such payment, Borrower may declare and pay dividends upon Borrower's Stock in an amount not to exceed $1,000,000.00 in any twelve month period (calculated on a rolling forward basis), provided further, that immediately after the payment of the dividend Borrower has Collateral Availability of $1,000,000.00 or more, and Borrower may issue stock dividends upon its Stock so long as the same is in accordance with all applicable laws; (D) Except as otherwise provided in Section 10.2(O), make any loans or other advances of money (other than salary) to officers, directors, stockholders or Affiliates of Borrower, or permit the annual salary and all other direct and indirect remuneration to Borrower's officers to exceed $350,000 individually or $635,000 in the aggregate, or permit the payment of any management fee to an Affiliate, except to D.O.N. Incorporated in an amount not to exceed $200,000.00 per year provided that no Default or Event of Default exists at the time of the intended payment of such management fee or would be created thereby; (E) Redeem, retire, purchase or otherwise acquire, directly or indirectly, any of Borrower's Stock, or make any material change in Borrower's capital structure or in any of its business objectives, purposes and operations which might in any way adversely affect the repayment of Liabilities; (F) Enter into, or be a party to, any transaction with any Affiliate, director, officer or stockholder of Borrower, except in the ordinary course of and pursuant to the reasonable requirements of Borrower's business and upon fair and reasonable terms which are fully disclosed to Lender (except that sales to Valley Communications, Inc. ("Valley") in the ordinary course of Borrower's business need not be disclosed to Lender outside of Borrower's reporting requirements set forth herein) and are no less favorable to Borrower than Borrower would obtain in a comparable arm's-length transaction with a Person not an Affiliate, director, officer or stockholder of Borrower; (G) Enter into any transaction which materially and adversely affects the Collateral or Borrower's ability to repay the Indebtedness or permit or agree to any extension, compromise or settlement or make any change or modification of any kind or nature with respect to any Account, including any of the terms relating thereto, except for credits given for Inventory returned pursuant to Section 7.4; (H) Guarantee or otherwise, in any way, become liable with respect to the obligations or liabilities of any Person, except by endorsement of instruments or items of payment for deposit to the general account of Borrower or for delivery to Lender on account of the Liabilities; (I) Except as otherwise permitted hereunder make deposits to or withdrawals from any of its deposit accounts for the benefit of any Affiliate; (J) Except as otherwise expressly permitted herein or in the Ancillary Agreements, pledge, mortgage, grant a security interest in, encumber, assign, sell, lease or otherwise dispose of or transfer, 36 whether by sale, merger, consolidation, liquidation, dissolution, or otherwise, any of Borrower's assets; (K) Incur any Indebtedness for borrowed money other than the indebtedness scheduled on Exhibit I attached hereto and the Liabilities, except for Indebtedness which is unsecured and is to Persons who execute and deliver to Lender (in form and substance acceptable to Lender and its counsel) subordination agreements subordinating their claims against Borrower to the payment of the Liabilities; (L) Make capital expenditures in any fiscal year which, in the aggregate, exceed $350,000.00 in any fiscal year; (M) Permit any Accounts owing to Borrower from any Affiliate to be payable on terms which would not allow Borrower to demand payment upon the occurrence of a default or permit the aggregate amount of all Accounts owing from its Affiliates (other than from Valley) at any time to exceed $10,000 unless a Default has occurred in which case Borrower shall not permit any Accounts to be owing from its Affiliates; or (N) Do any of the following: (i) Establish, maintain, and operate any Employee Benefit Plan that is not in compliance in all material respects with the provisions of ERISA, the Code, and all other applicable laws, and the regulations and interpretations thereunder, except where the failure to so comply would not have a material (in the reasonable opinion of the Lender) adverse effect on the financial condition or results or operations of the Borrower; (ii) Allow to exist any Accumulated Funding Deficiency with respect to any Employee Benefit Plan; (iii) Terminate any Employee Benefit Plan, or withdraw or effect a partial withdrawal from any Multiemployer Plan, if such termination, withdrawal, or partial withdrawal would have a material (in the reasonable opinion of the Lender) adverse effect on the financial condition or results or operations of Borrower; (iv) Fail to make any contribution or payment to any Multiemployer Plan which Borrower or any ERISA Affiliate may be required to make under any agreement relating to such Multiemployer Plan; (v) Fail to make any required installment or any other payment required under Section 412 of the Code on or before the due date for such installment or other payment; (vi) Amend any Employee Benefit Plan so as to result in an increase in current liability for the plan year such that Borrower or any ERISA Affiliate is required to provide 37 security to such Employee Benefit Plan under Section 401(a)(29) of the Code; (vii) Enter into any Prohibited Transaction involving any Employee Benefit Plan, which Prohibited Transaction would have a material (in the reasonable opinion of the Lender) adverse effect on the financial condition or results or operations of Borrower; (viii) Permit the occurrence of any Reportable Event, or any other event or condition, which would have a material (in the reasonable opinion of the Lender) adverse effect on the financial condition or results or operations of Borrower; or (ix) Allow or permit to exist with respect to any Employee Benefit Plan any other event or condition known or which reasonably should be known to Borrower and which would have a material (in the reasonable opinion of the Lender) adverse effect on the financial condition or results or operations of Borrower. (O) Make any loans, advances or extensions of credit to any Person, including, without limitation, any Affiliate, officer or employee of Borrower; provided, that, as long as at the time of any proposed loan, advance or extension of credit, no Default or Event of Default has occurred or in continuing, or would be created by the making of such loan, advance of extension of credit, Borrower may make an equity contribution of up to $2,900,000 to C&L Acquisition Corporation. 10.3 Contesting Charges. Notwithstanding anything to the contrary herein, Borrower may dispute any Charges without prior payment thereof, even if such non-payment may cause a lien to attach to Borrower's assets, provided that Borrower shall give Lender prompt notice of such dispute and shall be diligently contesting the same in good faith and by an appropriate proceeding and there is no danger of a loss or forfeiture of any of the Collateral and provided further that, if the same are potentially or actually in excess of $25,000 in the aggregate for Borrower at any time hereafter, Borrower shall give Lender such additional collateral and assurances as Lender, in its sole discretion, deems necessary under the circumstances, immediately upon demand by Lender. 10.4 Payment of Charges. Subject to the provisions of Section 10.3, Borrower shall pay promptly when due all of the Charges. In the event Borrower, at any time or times hereafter, shall fail to pay the Charges or to promptly obtain the satisfaction of such Charges, Borrower shall promptly so notify Lender thereof and Lender may, without waiving or releasing any obligation or liability of Borrower hereunder or any Default, in its sole discretion, at any time or times thereafter, make such payment or any part thereof (but shall not be obligated so to do), or obtain such satisfaction and take any other action with respect thereto which Lender deems advisable. All sums so paid by Lender and any expenses, including reasonable attorneys' fees, court costs, expenses and other charges relating thereto, shall be payable by Borrower to Lender upon demand and shall be additional Liabilities. 38 10.5 Insurance; Payment of Premiums. All policies of insurance on the Collateral or otherwise required hereunder shall be in form and amount satisfactory to Lender and with insurers reasonably recognized as adequate by Lender. Borrower shall deliver to Lender the original (or a certified copy) of each policy of insurance and evidence of payment of all premiums therefor and shall deliver renewals of all such policies to Lender at least thirty (30) days prior to their expiration dates. Such policies of insurance shall contain an endorsement, in form and substance acceptable to Lender, showing all losses payable to Lender to the extent of the Liabilities outstanding at the time of the payment. Such endorsement shall provide that the insurance companies will give Lender at least thirty (30) days' prior notice before any such policy shall be altered or cancelled and that no act or default of Borrower or any other person shall affect the right of Lender to recover under such policy in case of loss or damage. Borrower hereby directs all insurers under such policies to pay all proceeds payable thereunder directly to Lender. Upon the occurrence and during the continuation of a Default or Event of Default, Borrower irrevocably makes, constitutes and appoints Lender (and all officers, employees or agents designated by Lender) as Borrower's true and lawful attorney and agent-in-fact for the purpose of making, settling and adjusting claims under such policies (provided that Lender shall consult with Borrower prior to finally making, settling or adjusting claims under such policies), endorsing the name of Borrower in writing or by stamp on any check, draft, instrument or other item of payment for the proceeds of such policies and for making all determinations and decisions with respect to such policies. If Borrower shall fail to obtain or maintain any of the policies required by this Section 10.5 or to pay any premium relating thereto, then Lender, without waiving or releasing any obligation or default by Borrower hereunder, may (but shall be under no obligation to do so) obtain and maintain such policies of insurance and pay such premiums and take any other action with respect thereto which Lender deems advisable. All sums so disbursed by Lender, including reasonable attorneys' fees, court costs, expenses and other charges relating thereto, shall be payable by Borrower to Lender upon demand and shall be additional Liabilities. 10.6 Survival of Obligations Upon Termination of Agreement. Except as otherwise expressly provided for in this Agreement and in the Ancillary Agreements, no termination or cancellation (regardless of cause or procedure) of this Agreement or the Ancillary Agreements shall in any way affect or impair the powers, obligations, duties, rights, and liabilities of Borrower or Lender in any way or respect relating to any transaction or event occurring prior to such termination or cancellation, the Collateral, or any of the undertakings, agreements, covenants, warranties and representations of Borrower or Lender contained in this Agreement or the Ancillary Agreements. All such undertakings, agreements, covenants, warranties and representations shall survive such termination or cancellation. 11. DEFAULT; RIGHTS AND REMEDIES ON DEFAULT 11.1 Event of Default; Default. The occurrence of any one or more of the following events shall constitute an Event of Default which, if not cured within the applicable grace period or waived in writing by Lender, shall constitute a Default: (A) Borrower fails to pay any part of the Liabilities when due and payable or declared due and payable or is in default in the payment of any of the Indebtedness; 39 (B) Borrower or any Affiliate or guarantor of the Liabilities fails or neglects to perform, keep or observe any other term, provision, condition or covenant contained in this Agreement or in the Ancillary Agreements, which is required to be performed, kept or observed by Borrower or such Affiliate or guarantor and the same is not cured to Lender's satisfaction within twenty (20) days after Lender gives Borrower notice identifying such default; provided, however, that breach of any of the provisions, conditions or covenants contained in Sections 9.1(H), 9.1(N), 9.2(J), 10.1(A) and 10.2 shall without notice or time to cure be a Default; (C) Borrower shall default under any agreement, document or instrument, other than this Agreement or any of the Ancillary Agreements, now or hereafter existing, to which Borrower is a party; (D) Any statement, warranty, representation, report, financial statement, or certificate made or delivered by Borrower, or any of its officers, employees or agents, to Lender is not true and correct in any material respect; (E) There shall occur any material uninsured damage to or loss, theft, or destruction of any of the Collateral; (F) The Collateral or any of Borrower's other assets are attached, seized, levied upon or subjected to a writ or distress warrant, or come within the possession of any receiver, trustee, custodian or assignee for the benefit of creditors and the same is not cured within thirty (30) days thereafter; an application is made by any Person other than Borrower for the appointment of a receiver, trustee, or custodian for any of the Collateral or any of Borrower's other assets and the same is not dismissed within sixty (60) days after the application therefor; (G) An application is made by Borrower for the appointment of a receiver, trustee or custodian for any of the Collateral or any of Borrower's other assets; a petition under any section or chapter of the Bankruptcy Code or any similar law or regulation is filed by or against Borrower or any guarantor of the Liabilities and, if filed against Borrower or any guarantor, is not dismissed within sixty (60) days after filing; Borrower makes an assignment for the benefit of its creditors or any case or proceeding is filed by or against Borrower for its dissolution, liquidation, or termination; Borrower ceases to conduct its business as now conducted or is enjoined, restrained or in any way prevented by court order from conducting all or any material part of its business affairs; (H) Except as permitted in Section 10.3, a notice of lien, levy or assessment is filed of record with respect to all or any substantial portion of Borrower's assets by the United States, or any department, agency or instrumentality thereof, or by any state, county, municipal or other governmental agency including, without limitation, the Pension Benefit Guaranty Corporation, or any taxes or debts owing to any of the foregoing becomes a lien or encumbrance upon the Collateral or any of Borrower's other assets and such lien or encumbrance is not released within thirty (30) days after its creation; (I) Judgment(s) is or are rendered against Borrower in the aggregate in excess of $50,000 and Borrower fails within twenty (20) days after the entry thereof to pay such judgment, or fails to 40 commence appropriate proceedings to appeal such judgment(s) within the applicable appeal period or, after such appeal is filed, Borrower fails to diligently prosecute such appeal or such appeal is denied; (J) Borrower becomes insolvent or fails generally to pay its debts as they become due; (K) Any individual who is liable for the payment of any of the Liabilities, either primarily or secondarily (as a guarantor or an accommodation party ) shall die or become incompetent; (L) Any Person who is a guarantor, surety or endorser of all or any part of the Liabilities shall withdraw or terminate his, her or its guaranty, or if any guaranty of any of the Liabilities ceases to be effective for any reason; or (M) As to the following ERISA reports: (i) As soon as possible, and in any event within ten (10) Business Days, after Borrower knows or has reason to know that, regarding any Employee Benefit Plan with respect to the Borrower or an ERISA Affiliate, a Prohibited Transaction or a Reportable Event has occurred (whether or not the requirement for notice of such Reportable Event has been waived by the PBGC), deliver to the Lender a certificate of a responsible officer of Borrower setting forth the details of such Prohibited Transaction or Reportable Event, the action that Borrower proposes to take with respect thereto, and, when known, any action taken or threatened by the Internal Revenue Service, Department of Labor, or PBGC; (ii) Upon request of the Lender made from time to time, deliver to the Lender a copy of the most recent actuarial report, funding waiver, and annual report received with respect to any Employee Benefit Plan maintained by Borrower or an ERISA Affiliate; and (iii) Upon reasonable request of the Lender made from time to time, deliver to the Lender a copy of any Employee Benefit Plan maintained by Borrower or any ERISA Affiliates; and (iv) As soon as possible, and in any event within ten (10) Business Days, after it knows or has reason to know that any of the following have occurred with respect to any Employee Benefit Plan maintained by or contributed to Borrower or an ERISA Affiliate, deliver to the Lender a certificate of a responsible officer of Borrower setting forth the details of the events described in (a) through (l) and the action that the Borrower or any ERISA Affiliate proposes to take with respect thereto, together with a copy of any notice or filing from the PBGC or other agency of the United States government with respect to such of the events described in (a) through (l): (a) any Employee Benefit Plan has been terminated; (b) the Plan Sponsor intends to terminate any Employee Benefit 41 Plan; (c) the PBGC has instituted or will institute proceedings under Section 4042 of ERISA to terminate any Employee Benefit Plan or to appoint a trustee to administer such Employee Benefit Plan, or the Borrower or any ERISA Affiliate receives a notice from a Multiemployer Plan that such action has been taken by the PBGC with respect to such Multiemployer Plan; (d) Borrower or any ERISA Affiliate withdraws from any Employee Benefit Plan, or notice of any withdrawal liability is received by Borrower or any ERISA Affiliate; (e) any Employee Benefit Plan has received an unfavorable determination letter from the Internal Revenue Service regarding the qualification of the Employee Benefit Plan under Section 401(a) of the Code; (f) the Borrower or any ERISA Affiliate fails to make a required installment or any other required payment under Section 412 of the Code on or before the due date for such installment or payment or has applied for a waiver of the minimum funding standard under Section 412 of the Code; (g) the imposition of any tax under Code Section 4980B(a) or the assessment by the Secretary of Labor of a civil penalty under Section 502(c) of ERISA; (h) there is a partial or complete withdrawal (as described in ERISA Section 4203 or 4205) by the Borrower or any ERISA Affiliate from a Multiemployer Plan; (i) the Borrower or any ERISA Affiliate is in "default" (as defined in ERISA Section 4219(c)(5)) with respect to payments to a Multiemployer Plan required by reason of its complete or partial withdrawal from such Employee Benefit Plan; (j) a Multiemployer Plan is in "reorganization" or "insolvent" (as described in Title IV of ERISA) or such Multiemployer Plan intends to terminate or has terminated under Section 4041A of ERISA; (k) the institution of a proceeding by a fiduciary of a Multiemployer Plan against the Borrower or any ERISA Affiliate to enforce Section 515 of ERISA; or (l) the Borrower or any ERISA Affiliate has increased benefits under any existing Employee Benefit Plan or commenced contributions to an Employee Benefit Plan to which Borrower or any ERISA Affiliate was not previously contributing. For purposes of this Section, the Borrower shall be deemed (i) to have knowledge of all facts known by the Plan Administrator of any Employee Benefit Plan of which Borrower is the Plan Sponsor or in which Borrower participates or to which Borrower contributes, and (ii) to have knowledge of all facts known by the Plan Administrator of any Employee Benefit Plan of which any ERISA Affiliate is the Plan Sponsor or in which any ERISA Affiliate participates or to which any ERISA Affiliate contributes and which facts could lead to an event or condition that could have a material (in the reasonable opinion of the Lender) adverse effect on the financial condition or results or operations of Borrower. 11.2 Acceleration of the Liabilities. Upon and after the occurrence of a Default, all of the Liabilities of Borrower may, at the option of Lender and without demand, notice, or legal process of any kind, be declared, and immediately shall become, due and payable. 11.3 Remedies. Upon and after the occurrence of a Default, which is not waived or cured during any applicable grace or cure period, Lender shall have all of the following rights and remedies: 42 (A) All of the rights and remedies of a secured party under the Illinois Uniform Commercial Code or other applicable law, all of which rights and remedies shall be cumulative, and non-exclusive, to the extent permitted by law, and in addition to any other rights and remedies contained in this Agreement and in any of the Ancillary Agreements; (B) The right to (i) peacefully enter upon the premises of Borrower or any other place or places where the Collateral is located and kept, without any obligation to pay rent to Borrower or any other person, through self-help and without judicial process or first obtaining a final judgment or giving Borrower notice and opportunity for a hearing on the validity of Lender's claim, and remove the Collateral from such premises and places to the premises of Lender or any agent of Lender, for such time as Lender may require to collect or liquidate the Collateral, and/or (ii) require Borrower to assemble and deliver the Collateral to Lender at a place to be designated by Lender; (C) The right to (i) open Borrower's mail and collect any and all amounts due from Account Debtors, (ii) notify Account Debtors that the Accounts have been assigned to Lender and that Lender has a security interest therein and (iii) direct such Account Debtors to make all payments due from them upon the Accounts, including the Special Collateral, directly to Lender or to a lock box designated by Lender. Lender shall promptly furnish Borrower with a copy of any such notice sent, and Borrower hereby agrees that any such notice, in Lender's sole discretion, may be sent on Lender's stationery, in which event, Borrower shall, upon demand, co-sign such notice with Lender; and (D) The right to sell, lease or to otherwise dispose of all or any Collateral in its then condition, or after any further manufacturing or processing thereof, at public or private sale or sales, with such notice as provided in Section 11.4, in lots or in bulk, for cash or on credit, all as Lender, in its sole discretion, may deem advisable. At any such sale or sales of the Collateral, the Collateral need not be in view of those present and attending the sale, nor at the same location at which the sale is being conducted. Lender shall have the right to conduct such sales on Borrower's premises or elsewhere and shall have the right to use Borrower's premises without charge for such sales for such time or times as Lender may see fit. Lender is hereby granted a license or other right to use, without charge, Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in advertising for sale and selling any Collateral and Borrower's rights under all licenses and all franchise agreements shall inure to Lender's benefit but Lender shall have no obligations thereunder. Lender may purchase all or any part of the Collateral at public or, if permitted by law, private sale and, in lieu of actual payment of such purchase price, may setoff the amount of such price against the Liabilities. The proceeds realized from the sale of any Collateral shall be applied first to the reasonable costs, expenses and attorneys' and paralegal fees and expenses incurred by Lender for collection and for acquisition, completion, protection, removal, storage, sale and delivery of the Collateral; second to interest due upon any of the Liabilities; and third to the principal of the Liabilities Lender shall account to Borrower for any surplus. If any deficiency shall arise, Borrower shall remain liable to Lender therefor. 43 11.4 Notice. Borrower agrees that any notice required to be given by Lender of a sale, lease, other disposition of any of the Collateral or any other intended action by Lender, which is personally delivered to Borrower or which is deposited in the United States mail, postage prepaid and duly addressed to Borrower at the address set forth in Section 13.11, at least ten (10) days prior to any such public sale, lease or other disposition or other action being taken, or the time after which any private sale of the Collateral is to be held, shall constitute commercially reasonable and fair notice thereof to Borrower. 12. CONDITIONS PRECEDENT TO DISBURSEMENT. 12.1 Conditions Precedent. The obligation of Lender to make the loans to Borrower pursuant to the Total Facility is subject to the condition precedent that, in addition to satisfaction of the conditions set forth in Sections 12.2 and 12.3 hereof, Lender shall have received, prior to the first disbursement of the proceeds of any of the loans hereunder, the documents set forth on the Closing Checklist, a copy of which is attached hereto as Exhibit H, duly executed in the form and substance satisfactory to Lender; 12.2 Lender Satisfaction. The obligation of Lender to make the loans pursuant to the Total Facility to Borrower is subject to the further condition precedent that all proceedings taken in connection with the transaction contemplated by this Agreement, and all instruments, authorizations and other documents applicable thereto, shall be satisfactory in form and substance to Lender and its counsel. 12.3 Additional Funding Requirements. In addition to the foregoing, prior to Lender making of any and all loans hereunder, all of the following shall have been satisfied in a manner satisfactory to Lender: (A) No change in the condition or operations, financial or otherwise, of Borrower shall have occurred which change, in the reasonable credit judgment of Lender, may have a material adverse effect on Borrower or on any of the Collateral; (B) No litigation shall be outstanding or have been instituted or threatened which Lender determines to be material against Borrower or any of the Collateral; (C) All of the representations and warranties of Borrower set forth in this Agreement and each of the other Agreements to which Borrower is a party shall be true and correct on the date of the contemplated loan to the same extent as originally made on such date; (D) No Event of Default or Default shall exist or be continuing; (E) Lender shall be satisfied that the transactions contemplated by this Agreement are in compliance with all applicable laws, regulations, orders, and contractual obligations deemed relevant by Lender; (F) Lender's continuing due diligence review with respect to Borrower, including, without limitation, investigations and reviews of Borrower's condition (financial or otherwise), business, operations, 44 results of operations, assets, prospects, litigation and environmental matters, and field review of the Collateral by Lender's representatives, shall continue to be satisfactory to Lender as of the Closing Date; (G) Lender's liens and security interests securing the Liabilities shall have been duly created and perfected and be of first priority, except as otherwise expressly permitted by this Agreement; (H) The corporate, capital and legal structure, as well as the ownership and the organizational documents, of Borrower shall be satisfactory to Lender in all respects; and (I) The Lender shall have received, on or prior to 1:00 P.M. (Chicago, Illinois time) no later than the day a Prime Rate Revolving Loan is to be made and at least two (2) Business Days prior to the day a LIBOR Rate Revolving Loan is to be made, (i) a telephonic request (which telephonic request, in the case of LIBOR Rate Revolving Loan, shall be promptly confirmed in writing) from the Borrower for an advance in a specific amount, and (ii) a current daily certificate identifying the current Borrowing Base and all other documents required to have been delivered to the Lender hereunder prior to such date. In the case of LIBOR Rate Revolving Loan, advances may be made with respect to the Revolving Loan no more than twice each week and only in minimum amounts of Five Hundred Thousand and No/100ths Dollars ($500,000) or integral multiples of One Hundred Thousand and No/100ths Dollars ($100,000) in excess thereof. Each request for an advance for a Prime Rate Revolving Loan or a LIBOR Rate Revolving Loan shall specify: (1) the proposed date of funding (which shall be a Business Day); (2) the amount and type of advance requested; (3) that the aggregate amount of the Revolving Loan (including the advance then noticed) will not exceed the unused loan availability; (4) whether such advance shall consist of a Prime Rate Revolving Loan or a LIBOR Rate Revolving Loan; and (5) if such advance, or a portion thereof is a LIBOR Rate Revolving Loan, the amount thereof and the initial Interest Period therefor. 13. MISCELLANEOUS 13.1 Appointment of Lender as Borrower's Lawful Attorney-In Fact. Borrower irrevocably designates, makes, constitutes and appoints Lender (and all persons designated by Lender) as Borrower's true and lawful attorney and agent in-fact and Lender, or Lender's agent, may, without notice to Borrower: (A) At any time hereafter, endorse by writing or stamp Borrower's name on any checks, notes, drafts or any other payment relating to and/or proceeds of the Collateral which come into the possession of Lender or under Lender's control and deposit the same to the account of Lender for application to the Liabilities; (B) At any time after the occurrence of a Default, which is not waived or cured during any applicable grace or cure period, in Borrower's or Lender's name: (i) demand payment of the Collateral; (ii) enforce payment of the Collateral, by legal proceedings or otherwise; (iii) exercise all of Borrower's rights and remedies with respect to the collection of the Collateral; (iv) settle, compromise, extend or renew the Accounts and the Special Collateral; (v) settle, 45 adjust or compromise any legal proceedings brought to collect the Collateral; (vi) if permitted by applicable law, sell or assign the Collateral upon such terms, for such amounts and at such time or times as Lender deems advisable; (vii) satisfy and release the Accounts and Special Collateral; (viii) take control, in any manner, of any item of payment or proceeds referred to in Section 4.3; (ix) prepare, file and sign Borrower's name on any proof of claim in Bankruptcy or similar document against any Account Debtor; (x) prepare, file and sign Borrower's name on any notice of lien, assignment or satisfaction of lien or similar document in connection with the Collateral; (xi) do all acts and things necessary, in Lender's sole discretion, to fulfill Borrower's obligations under this Agreement; (xii) endorse by writing or stamp the name of Borrower upon any chattel paper, document, instrument, invoice, freight bill, bill of lading or similar document or agreement relating to the Collateral; and (xiii) use the information recorded on or contained in any data processing equipment and computer hardware and software relating to the Collateral to which Borrower has access; and (C) Upon and after the occurrence of a Default, which is not waived or cured during any applicable grace or cure period, notify the post office authorities to change the address for delivery of Borrower's mail to an address designated by Lender and receive, open and dispose of all mail addressed to Borrower. 13.2 Modification of Agreement; Sale of Interest. This Agreement and the Ancillary Agreements may not be modified, altered or amended, except by an agreement in writing signed by Borrower and Lender. Borrower may not sell, assign or transfer this Agreement or the Ancillary Agreements or any portion hereof or thereof, including, without limitation, Borrower's right, title, interest, remedies, powers, or duties hereunder or thereunder. Borrower hereby consents to Lender's participation, sale, assignment, transfer or other disposition, at any time or times hereafter, of this Agreement or the Ancillary Agreements or of any portion hereof or thereof, including, without limitation, Lender's right, title, interest, remedies, powers, or duties hereunder or thereunder. 13.3 Attorneys' Fees and Expenses; Lender's Out-of-Pocket Expenses. If, at any time or times, whether prior or subsequent to the date hereof and regardless of the existence of a Default or an Event of Default, Lender incurs legal or other costs and expenses or employs counsel, accountants or other professionals for advice or other representation or services in connection with: (A) The preparation, negotiation and execution of this Agreement, all Ancillary Agreements, any amendment of or modification of this Agreement or the Ancillary Agreements or any sale or attempted sale of any interest herein to a Participant; (B) Any litigation, contest, dispute, suit, proceeding or action (whether instituted by Lender, Borrower or any other Person) in any way relating to the Collateral, this Agreement, the Ancillary Agreements or Borrower's affairs; (C) Any attempt to enforce any rights of Lender or any Participant against Borrower or any other Person which may be obligated to Lender or such Participant by virtue of this Agreement or the Ancillary Agreements, including, without limitation, the Account Debtors; 46 (D) Any attempt to inspect, verify, protect, collect, sell, liquidate or otherwise dispose of any of the Collateral; or (E) Any inspection, verification, protection, collection, sale, liquidation or other disposition of any of the Collateral, including without limitation, Lender's periodic or special audits of Borrower's books and records; then, in any such event, the reasonable attorneys' and paralegals' fees and expenses arising from such services and all reasonably incurred expenses, costs, charges and other fees of or paid by Lender in any way or respect arising in connection with or relating to any of the events or actions described in this Section 13.3 shall be payable by Borrower to Lender upon demand and shall be additional Liabilities. Without limiting the generality of the foregoing, such expenses, costs, charges and fees may include accountants' fees, costs and expenses; court costs, fees and expenses; photocopying and duplicating expenses; court reporter fees, costs and expenses; long distance telephone charges; air express charges; telegram charges; secretarial overtime charges; and expenses for travel, lodging and food paid or incurred in connection with the performance of all such services. 13.4 Indemnification. Borrower further agrees to indemnify and save harmless Lender, any Participants and each of their respective officers, directors, employees, agents, attorneys-in-fact and Affiliates from and against any and all actions, causes of action, suits, losses, liabilities and damages and expenses (including, without limitation, attorneys' fees) in connection therewith (herein called the "Indemnified Liabilities") incurred by Lender, any Participants or any of their respective officers, directors, employees, agents, attorneys-in-fact or Affiliates as a result of, or arising out of or relating to any of the transactions contemplated hereby or by the other Security Documents, except for any Indemnified Liabilities arising on account of the gross negligence or willful misconduct of the Person seeking indemnity under this Section 13.3; provided, however, that, if and to the extent such agreement to indemnify may be unenforceable for any reason, the Borrower shall make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which shall be permissible under applicable law. The agreements in this Section 13.3 shall survive the payment of the Liabilities. 13.5 Waiver by Lender. Lender's failure, at any time or times hereafter, to require strict performance by Borrower of any provision of this Agreement or of any Ancillary Agreement shall not constitute a waiver, or affect or diminish any right of Lender thereafter to demand strict compliance and performance therewith. Any suspension or waiver by Lender of a Default under this Agreement or any Ancillary Agreement shall not suspend, waive or affect any other Default under this Agreement or the Ancillary Agreements, whether the same is prior or subsequent thereto and whether of the same or of a different type. None of the undertakings, agreements, warranties, covenants and representations of Borrower contained in this Agreement or the Ancillary Agreements and no Default under this Agreement or the Ancillary Agreements shall be deemed to have been suspended or waived by Lender, unless such suspension or waiver is by an instrument in writing signed by an officer of Lender and directed to Borrower specifying such suspension or waiver. 47 13.6 Severability. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 13.7 Parties; Entire Agreement. This Agreement and the Ancillary Agreements shall be binding upon and inure to the benefit of the respective successors and assigns of Borrower and Lender. Borrower's successors and assigns shall include, without limitation, a trustee, receiver or debtor-in-possession of or for Borrower. Nothing contained in this Section 13.7 shall be deemed to modify Section 13.2. Except as provided in Section 13.8, this Agreement is the complete statement of the agreement by and between Borrower and Lender and supersedes all prior negotiations, understandings and representations between them with respect to the subject matter of this Agreement. 13.8 Conflict of Term. The provisions of the Ancillary Agreements are incorporated in this Agreement by this reference. Except as otherwise provided in this Agreement and except as otherwise provided in the Ancillary Agreement, by specific reference to the applicable provision of this Agreement, if any provision contained in this Agreement is in conflict with, or inconsistent with, any provision in any Ancillary Agreement, the provision contained in this Agreement shall govern and control. 13.9 Waiver by Borrower. Except as otherwise provided for in this Agreement, Borrower waives (i) presentment, demand and protest, notice of protest, notice of presentment, default, nonpayment, maturity, release, compromise, settlement, extension or renewal of any or all commercial paper, accounts, contract rights, documents, instruments, chattel paper and guaranties at any time held by Lender on which Borrower may in any way be liable and hereby ratifies and confirms whatever Lender may do in this regard; (ii) all rights to notice and a hearing prior to Lender's taking possession or control of, or to Lender's replevy, attachment or levy upon the Collateral or any bond or security which might be required by any court prior to allowing Lender to exercise any of Lender's remedies; and (iii) the benefit of all valuation, appraisement, extension and exemption laws. Borrower acknowledges that it has been advised by its own counsel with respect to this Agreement and the transactions evidenced by this Agreement. 13.10 Waiver and Governing Law. THE LOANS EVIDENCED HEREBY HAVE BEEN MADE, AND THIS AGREEMENT HAS BEEN DELIVERED, AT CHICAGO, ILLINOIS, AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICTS OF LAWS PROVISIONS) OF THE STATE OF ILLINOIS. BORROWER (i) WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION TO ENFORCE OR DEFEND ANY MATTER ARISING FROM OR RELATED TO THIS AGREEMENT OR ANY OF THE ANCILLARY AGREEMENTS; (ii) IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED IN COOK COUNTY, ILLINOIS, OVER ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY MATTER ARISING FROM OR RELATED TO THIS AGREEMENT OR ANY OF THE ANCILLARY AGREEMENTS; (iii) IRREVOCABLY WAIVES, TO THE FULLEST EXTENT BORROWER MAY EFFECTIVELY DO SO, THE 48 DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF ANY SUCH ACTION OR PROCEEDING; (iv) AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN ANY OTHER JURISDICTION BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW; AND (v) AGREES NOT TO INSTITUTE ANY LEGAL ACTION OR PROCEEDING AGAINST LENDER OR ANY OF LENDER'S DIRECTORS, OFFICERS, EMPLOYEES, AGENTS OR PROPERTY, CONCERNING ANY MATTER ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE ANCILLARY AGREEMENTS IN ANY COURT OTHER THAN ONE LOCATED IN COOK COUNTY, ILLINOIS. BORROWER WAIVES PERSONAL SERVICE OF THE SUMMONS AND COMPLAINT, OR OTHER PROCESS OR PAPERS ISSUED IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY MATTER ARISING FROM OR RELATED TO THIS AGREEMENT OR ANY OF THE ANCILLARY AGREEMENTS, AND AGREES THAT SERVICE OF SUCH SUMMONS AND COMPLAINT, OR OTHER PROCESS OR PAPERS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO BORROWER AT THE ADDRESS SET FORTH IN SECTION 13.11. SHOULD BORROWER FAIL TO APPEAR OR ANSWER ANY SUMMONS, COMPLAINT, PROCESS OR PAPERS SERVED WITHIN THIRTY (30) DAYS AFTER THE MAILING THEREOF, IT SHALL BE DEEMED IN DEFAULT AND AN ORDER AND/OR JUDGMENT MAY BE ENTERED AGAINST IT AS DEMANDED OR PRAYED FOR IN SUCH SUMMONS, COMPLAINT, PROCESS OR PAPERS. NOTHING IN THIS PARAGRAPH SHALL AFFECT OR IMPAIR LENDER'S RIGHT TO SERVE LEGAL PROCESS IN ANY MANNER PERMITTED BY LAW OR LENDER'S RIGHT TO BRING ANY ACTION OR PROCEEDING AGAINST BORROWER OR ITS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION. 13.11 Notice. Except as otherwise provided herein, any notice required hereunder shall be in writing and shall be deemed to have been validly served, given or delivered upon deposit in the United States certified or registered mails, with proper postage prepaid, addressed to the party to be notified as follows: (a) If to Lender, at: Sanwa Business Credit Corporation One South Wacker Drive Chicago, Illinois 60606 Attn: First Vice President Asset Based Lending Division, Commercial Financial Services Group with a copy to: Sachnoff & Weaver, Ltd. 30 South Wacker Drive Suite 2900 49 Chicago, Illinois 60606 Attn: Richard G. Smolev (b) If to Borrower, at: C&L Communications, Inc. 26254 IH, West Boerne, Texas 78006 Attn: Michael Sonaco with a copy to: Richard Y. Fisher The Diana Corporation 8200 West Brown Deer Road Suite 200 Milwaukee, Wisconsin 53223 and Godfrey & Kahn, S.C. 780 North Water Street Milwaukee, Wisconsin 53202 Attn: Kenneth Hunt or to such other address as each party may designate for itself by like notice. 13.12 Release of Claims. Borrower releases Lender from any and all causes of action or claims which Borrower may now or hereafter have for any asserted loss or damage to Borrower claimed to be caused by or arising from: (a) any failure of Lender to protect, enforce or collect in whole or in part any of the Collateral; (b) Lender's notification to any Account Debtor of Lender's security interests in the Accounts and Special Collateral; (c) Lender's directing any Account Debtor to pay any sums owing to Borrower directly to Lender; and (d) any other act or omission to act on the part of Lender, its officers, agents or employees, except for gross negligence or willful misconduct. 13.13 Representation by Counsel. Borrower hereby represents that it has been represented by competent counsel of its choice in the negotiation and execution of this Agreement and the Ancillary Agreements; that it has read and fully understood the terms hereof and intends to be bound hereby. This Agreement has been thoroughly reviewed by counsel for Borrower and in the event of an ambiguity or conflict in the terms hereof, there shall be no presumption against Lender as the drafter hereof. 13.14 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original agreement, but all of which together shall constitute one and the same instrument. 50 13.15 LENDER'S WAIVER OF JURY. LENDER HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY ACTION TO ENFORCE OR PROSECUTE ANY MATTER ARISING FROM OR RELATED TO THIS AGREEMENT. 13.16 Section Titles, Etc. The section titles and table of contents, if any, contained in this Agreement are and shall be without substantive meaning or content of any kind whatsoever and are not a part of the agreement between the parties hereto. All references herein to Sections, paragraphs, clauses and other subdivisions refer to the corresponding Sections, paragraphs, clauses and other subdivisions of this Agreement; and the words "herein," "hereof," "hereby," "hereto," "hereunder," and words of similar import refer to this Agreement as a whole and not to any particular Section, paragraph, clause or subdivision hereof. All Exhibits which are referred to herein or attached hereto are hereby incorporated by reference. IN WITNESS WHEREOF, this Agreement has been duly executed as of the day and year specified at the beginning hereof. BORROWER: ATTEST: C & L COMMUNICATIONS, INC. By: Its: LENDER: SANWA BUSINESS CREDIT CORPORATION By: Its: Attachments: Exhibit A, B, C, D, E, F, G, H, I, J, K and L 51 EXHIBITS Exhibit A (1.20) Special Deposit Agreement Exhibit B (1.31) Financials Exhibit C Summary of Locations Exhibit D Fictitious Name Exhibit E Litigation Exhibit F Labor Matters Exhibit G (1.46) Existing Permitted Liens Exhibit H Closing Checklist Exhibit I Permitted Indebtedness Exhibit J Trademarks Exhibit K ERISA Matters Exhibit L Form of Covenant Compliance Checklist 52 EX-10.2 4 EXHIBIT 10.2 EXCHANGE AGREEMENT THIS EXCHANGE AGREEMENT is made and entered into this 16th day of January, 1996, by and among THE DIANA CORPORATION, a Delaware corporation ("Diana"), and SATTEL TECHNOLOGIES, INC., a California corporation ("Sattel"). BACKGROUND Diana owns five hundred (500) and Sattel owns five hundred (500) shares of common stock, without par value of Sattel Communications Corp. (the "Company"). Diana wishes to acquire, in exchange solely for its own voting stock, an additional 300 shares of the stock of the Company, the result of which will be that Diana will immediately after the acquisition have control of the Company (within the meaning of Section 368(c)(1) of the Internal Revenue Code of 1986, as amended). Accordingly, Diana and Sattel desire to exchange (the "Exchange") three hundred (300) shares of common stock of the Company (the "Subject Shares") held by Sattel for three hundred fifty thousand (350,000) shares of common stock, $1.00 par value per share, of Diana (the "Diana Shares") pursuant to the terms and conditions hereinafter set forth. In connection with the Exchange, Diana has agreed to undertake certain obligations to register the Diana Shares and to grant Sattel certain registration rights with respect thereto as more specifically set forth herein. NOW, THEREFORE, in consideration of the mutual covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Sattel and Diana agree as follows: 1. Exchange of Stock. At the Closing (as _________________ hereinafter defined) subject to the terms and conditions set forth herein, Sattel shall transfer, assign and convey to Diana all of Sattel's right, title and interest in the Subject Shares, free and clear of all liens, claims, encumbrances and restrictions. In exchange for the Subject Shares, at the Closing, Diana shall transfer, assign and convey to Sattel all of Diana's right, title and interest in the Diana Shares, free and clear of all liens, claims, encumbrances and restrictions. 2. Closing. The Closing of the Exchange _______ (the "Closing") shall occur concurrently with the execution and delivery of this Agreement. At the Closing, the following shall occur, all of which actions shall be deemed to have occurred simultaneously: (a) Sattel shall deliver to Diana a certificate or certificates representing the Subject Shares duly endorsed or endorsed in blank or accompanied by validly executed stock powers. (b) Diana shall deliver to Sattel a certificate or certificates representing the Diana Shares registered in the name of Sattel. 3. Representations and Warranties of Sattel. ________________________________________ Sattel hereby represents and warrants to Diana as follows, which representations and warranties shall survive the Closing. 3.1. Title to Subject Shares. Sattel owns _______________________ and at the Closing will deliver to Diana good, valid and marketable title to the Subject Shares, free and clear of all liens, encumbrances, agreements, charges, options, security interests, pledges, claims or restrictions of any nature whatsoever, except for restrictions of applicable state and federal securities laws. 3.2. Authority. The execution, delivery and _________ performance of this Agreement by Sattel have been duly authorized by all necessary corporate proceedings on the part of Sattel, and this Agreement constitutes the valid and legally binding obligation of Sattel, enforceable in accordance with its terms, except to the extent limited by bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally, or by general equitable principles. 3.3. Investment Representations and ______________________________ Covenants. _________ (a) Sattel is acquiring the Diana Shares for investment, for Sattel's own account and not with a view to or for resale, fractionalization, or division, in connection with any distribution thereof in violation of the Securities Act of 1933, as amended, or the applicable rules and regulations adopted thereunder (collectively, the "Securities Act"), except for distributions through the Registration Rights Agreement in compliance with the Securities Act. Sattel understands that the offer and sale of the Diana Shares to Sattel have not been registered under the Securities Act or under any state securities laws, by reason of exemptions from the registration provisions of the Securities Act, and the applicable state securities laws, but will be registered in accordance with the Registration Rights Agreement. Accordingly, the Diana Shares are "restricted securities" under the Securities Act and Sattel acknowledges and agrees that the Diana Shares must be held indefinitely unless they are subsequently registered under the Securities Act, as required under the Registration Rights Agreement, and any applicable state securities laws, or an exemption from such registration is available, as determined by Diana in its sole discretion. (b) Sattel is familiar with, and Sattel has been given full access by Diana to, all information concerning the business and financial condition, properties, operations and prospects of Diana that Sattel has deemed relevant for purposes of acquiring the Diana Shares. Sattel has had full opportunity to discuss with Diana its business, financial condition, properties, operations, and prospects, and all such other matters as Sattel has deemed appropriate in connection with acquiring the Diana Shares. Sattel has reviewed, among other things, a copy of Diana's most recent Form 10-K, Form 10-Q, Annual Report to Stockholders, and Proxy Statement. (c) Sattel is able to bear the economic risk of making the investment in the Diana Shares, including, without limiting the generality of the foregoing, the risk of losing part of or all Sattel's investment and the possible inability to sell or transfer the Diana Shares for an indefinite period of time. (d) By reason of Sattel's knowledge and experience in financial and business matters in general, Sattel is capable of evaluating the merits and risks of acquiring the Diana Shares. (e) The Diana Shares and each certificate evidencing the Diana Shares (or interests therein) shall (unless the transfer of the securities evidenced by such certificate shall have been registered under the Securities Act and applicable state securities laws) be stamped or otherwise imprinted with a legend in substantially the following form (in addition to any legend required under applicable state securities laws): THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAW, OR (ii) AN APPLICABLE EXEMPTION THEREFROM AND IN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE DIANA CORPORATION IS FURNISHED TO THE EFFECT THAT SUCH EXEMPTION IS AVAILABLE. (f) Sattel will comply with all applicable federal and state securities laws in connection with any sale or transfer of the Diana Shares including, without limitation, Rules 10b-5 and 10b-6 under the Securities Exchange Act of 1934, as amended, and Section 5 of the Securities Act. 4. Representations and Warranties of Diana. _______________________________________ Diana hereby represents and warrants to Sattel as follow, which representations and warranties shall survive the Closing. 4.1. Title to Subject Shares. Diana owns or _______________________ will newly issue the Diana Shares and at the Closing will deliver to Sattel good, valid and marketable title to the Diana Shares, free and clear of all liens, encumbrances, agreements, charges, options, security interests, pledges, claims or restrictions of any nature whatsoever except for restrictions of applicable state and federal securities laws. 4.2. Authority. The execution, delivery and _________ performance of this Agreement by Diana have been duly authorized by all necessary corporate proceedings on the part of Diana, and this Agreement constitutes the valid and legally binding obligation of Diana, enforceable in accordance with its terms, except to the extent limited by bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally, or by general equitable principles. 4.3. Investment Representations and ______________________________ Covenants. _________ (a) Diana is acquiring the Subject Shares for investment, for Diana's own account and not with a view to or for resale, fractionalization, or division, in connection with any distribution thereof in violation of the Securities Act. Diana understands that the offer and sale of the Subject Shares to Diana have not been registered under the Securities Act or under any state securities laws, by reason of exemptions from the registration provisions of the Securities Act, and the applicable state securities laws. Accordingly, the Subject Shares are "restricted securities" under the Securities Act and Diana acknowledges and agrees that the Subject Shares must be held indefinitely unless they are subsequently registered under the Securities Act, and any applicable state securities laws, or an exemption from such registration is available, as determined by the Company in its sole discretion. (b) Diana is familiar with, and Diana has been given full access to, all information concerning the business and financial condition, properties, operations and prospects of the Company that Diana has deemed relevant for purposes of acquiring the Subject Shares. Diana has had full opportunity to discuss with the Company and Sattel the Company's business, financial condition, properties, operations, and prospects, and all such other matters as Diana has deemed appropriate in connection with acquiring the Subject Shares. Notwithstanding the foregoing, nothing contained herein shall relieve Sattel of its obligations pursuant to specific representations and warranties made to Diana in this Agreement. (c) Diana is able to bear the economic risk of making the investment in the Subject Shares, including, without limiting the generality of the foregoing, the risk of losing part of or all Diana's investment and the possible inability to sell or transfer the Subject Shares for an indefinite period of time. (d) By reason of Diana's knowledge and experience in financial and business matters concerning the Company (and in the prior Joint Venture), Diana is capable of evaluating the merits and risks of acquiring the Subject Shares. 5. Registration Rights. Diana hereby grants ___________________ to Sattel the registration rights set forth on Exhibit _______ A, attached hereto and incorporated herein, with __ respect to the Diana Shares (the "Registration Rights"). 6. Miscellaneous. _____________ 6.1. Successors and Assigns. This Agreement ______________________ shall be binding upon and inure to the benefit of the parties and each of their respective successors and assigns. 6.2. Severability. If any provision of this ____________ Agreement is held for any reason to be unenforceable by a court of competent jurisdiction, the remainder of this Agreement shall, nevertheless, remain in full force and effect in such jurisdiction. 6.3. Use of Words. The use of the plural ____________ shall, when appropriate, include the singular and vice versa. Section headings are for reference purposes only and shall not affect the meaning or interpretation of this Agreement or any provision hereof. 6.4. Governing Law. This Agreement. shall _____________ be governed by and construed in accordance with the laws of Nevada without regard to the principles of conflicts of law thereunder. 6.5. Entire Agreement. This Agreement and ________________ the documents and instruments delivered in connection with this Agreement constitute the entire agreement among the parties and all prior agreements, correspondence, discussions and understandings of the parties are merged and made a part of this Agreement. 6.6. Notices. Any notice required or _______ permitted to be given or made by either party to the other hereunder shall be deemed delivered if hand delivered, five (5) days after mailed postage prepaid, one (1) business day after being sent by prepaid express or courier delivery service or one (1) business day after being sent by facsimile transmission and actually received by receiving equipment to the parties at their respective addresses set forth opposite the signatures hereto or to such changed address as either party shall designate by proper notice to the other. 6.7. Counterparts. This Agreement may be ____________ executed in one or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. 6.8. Reorganization. It is anticipated that ______________ the exchange of Subject Shares for the Diana Shares will qualify as a "reorganization" under Section 368(a)(1)(B) of the Internal Revenue Code of 1986, as amended. However, each party has made its own determination, with advice of its counsel, regarding how the transaction will be treated for tax purposes and is not relying upon the other party or its counsel with respect to such treatment. Both Diana and Sattel agree to report the transaction as a reorganization under section 368(a)(i)(b) for income tax purposes. 6.9. Tax Returns. It is understood that the ___________ Company will report its income, or loss, for the period ending on the date of Closing as a separate taxpayer, but thereafter will become a member of the Diana consolidated group. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written. Address for Notice: THE DIANA CORPORATION 8200 W. Brown Deer Rd. Milwaukee, WI 53223 Fax No. (414) 355-0815 By: /s/ Richard Y. Fisher ______________________ Richard Y. Fisher, Chairman With a copy to: Godfrey & Kahn, S.C. 780 N. Water Street Milwaukee, WI 53202 Attn: Kenneth C. Hunt Fax No. (414) 273-5198 Address for Notice: SATTEL TECHNOLOGIES, INC. 9145 Deering Ave. Chatsworth, CA 91311 Fax No. (818) 785-0629 By: /s/ George M. Weischadle ________________________ George Weischadle, Chairman With a copy to: Fulbright & Jaworski, LLP 865 South Figueroa Street 29th Floor Los Angeles, CA 90017 Attn: Timothy R. Greenleaf Paul S. Blencoe Fax No. (213) 680-4518 EXHIBIT A TO EXCHANGE AGREEMENT REGISTRATION RIGHTS ___________________ 1. Initial Registration. Promptly (but in ____________________ no event later than twenty (20) days) after the closing, Diana shall file with the Securities and Exchange commission (the "commission") and use its reasonable best efforts to cause to become effective a Registration Statement (the "Registration Statement") on a proper form to be selected by Diana under and complying with the Securities Act of 1933 as amended (the "Securities Act") with respect to the offering by Sattel of the three hundred fifty thousand (350,000) Diana Shares. Diana shall keep the Registration Statement effective until the earlier of the date on which Sattel has transferred all of the Diana Shares or January 11, 1998. Sattel shall be permitted to sell under the Registration Statement, up to fifty thousand (50,000) Diana Shares at any time following the date on which the Registration Statement becomes effective, an additional one hundred fifty thousand (150,000) Diana Shares at any time after twelve (12) months following the Closing, and the remaining one hundred fifty thousand (150,000) Diana Shares at any time after eighteen (18) months following the Closing; provided that if the closing price on the New York Stock Exchange ("NYSE") of a Diana Share shall on any date be equal or greater than 125% of the closing price on the NYSE of a Diana Share on the date of the Closing, then Sattel shall thereafter be permitted to sell all of its Diana Shares. Notwithstanding the foregoing, Sattel shall notify Diana of, and obtain confirmation from Diana prior to, any offers or sales by Sattel of Diana Shares of no Blackout Condition. If Diana determines, in its reasonable good faith judgement, that because of the existence of, or in anticipation of, any acquisition or financing activity, the unavailability of any required financial statements as the result of an actual, or proposed, acquisition, or the existence of any other material non-public information (a "Blackout Condition"), it would be materially adverse to Diana for the registration of the Diana Shares to be maintained effective, or to be filed and become effective, or for the Diana Shares to be sold under the Registration Statement, then Diana shall be entitled, until such Blackout Condition no longer exists, or is terminated or provided herein, to (i) if required by law, cause the Registration Statement to be withdrawn and the effectiveness of the Registration Statement to be delayed or terminated; (ii) direct that Sattel not make any public sales of Diana Shares; or (iii) in the event the Registration Statement has not yet been filed, to delay or not file the Registration Statement; provided that, unless Diana notifies Sattel of a Blackout Condition, Sattel may sell 50,000 Diana Shares within the first sixty (60) days following the effective date of the Registration Statement without further notice. Diana shall have one (1) business day after the receipt of notice from Sattel to declare the existence of a Blackout Condition. Diana's response shall be communicated via personal delivery, telecopy or overnight courier. If no timely response is received by Sattel from Diana, Diana shall be deemed to have permitted such sale. In the event Diana causes the Registration Statement to be withdrawn or delayed and terminated pursuant to clause (i), or clause (iii), of the preceding sentence as a result of a Blackout Condition, Diana shall file and use its reasonable best efforts to cause the Registration Statement to become effective promptly after a Blackout Condition ceases to exist. For purposes hereof, a Blackout Condition other than the unavailability of any required financial statements shall be deemed to terminate on the earlier of (i) the date such Blackout Condition ceases to exist or (ii) thirty (30) days after Diana's determination thereof, and a Blackout Condition which is the unavailability of any required financial statements as the result of an actual or proposed acquisition shall be deemed to terminate on the earlier of (i) the date such Blackout condition ceases to exist or (ii) seventy-five (75) days after the closing date of such acquisition. Sattel shall not to make any offers or sales of Diana Shares to the public until the Blackout Condition no longer exists or is terminated and shall comply with any prospectus delivery requirements in connection with Sattel's offer and sale of Diana Shares under the Registration Statement. Sattel shall offer and sell the Diana Shares only in accordance with the plan of distribution described in the Registration Statement. 2. Registration Procedures. Promptly after _______________________ the Closing, Diana shall: (a) prepare and file with the Commission the Registration Statement, and use its reasonable best efforts to cause such Registration Statement to become and remain effective all as set forth in paragraph 1; (b) prepare and file with the Commission such amendments to such Registration Statement and supplements to the prospectus contained therein as may be necessary to keep such Registration Statement effective for such period as may be reasonably necessary to effect the sale of such securities; (c) furnish to Sattel and to the underwriters of the securities being registered such reasonable number of copies of the Registration Statement, preliminary prospectus, final prospectus and such other documents as such underwriters may reasonably request in order to facilitate the public offering of such securities; (d) use its best efforts to register or qualify the securities covered by such Registration Statement under such state securities or blue sky laws of such jurisdictions as Sattel may reasonably request in writing except that Diana shall not for any purpose be required to execute a general consent to service of process or to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified; (e) notify Sattel promptly after it shall receive notice thereof, of the time when such Registration Statement has become effective or a supplement to any prospectus forming a part of such Registration Statement has been filed; (f) notify Sattel promptly of any request by the Commission for the amending or supplementing of such Registration Statement or prospectus or for additional information; (g) prepare and file with the Commission, promptly upon the request of Sattel any amendments or supplements to such Registration Statement or prospectus which, in the opinion of counsel for Sattel is required under the Securities Act or the rules and regulations thereunder in connection with the distribution of the Diana Shares by Sattel; (h) prepare and promptly file with the Commission and promptly notify Sattel of the filing of such amendment or supplement to such Registration Statement or prospectus as may be necessary to correct any statements or omissions if, at the time when a prospectus relating to such securities is required to be delivered under the Securities Act, any event shall have occurred as the result of which any such prospectus or any other prospectus as then in effect would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances in which they were made, not misleading; (i) advise Sattel promptly after it shall receive notice or obtain knowledge thereof, of the issuance of any stop order by the Commission suspending the effectiveness of such Registration Statement or the initiation or threatening of any proceeding for that purpose and promptly use its reasonable best efforts to prevent the issuance of any stop order or to obtain its withdrawal if such stop order should be issued; (j) not file any amendment or supplement to such Registration Statement or prospectus to which Sattel shall have reasonably objected on the grounds that such amendment or supplement does not comply in all material respects with the requirements of the Securities Act or the rules and regulations thereunder, after having been furnished with a copy thereof at least five business days prior to the filing thereof, unless in the opinion of counsel for Diana the filing of such amendment or supplement is reasonably necessary to protect Diana from any liabilities under any applicable federal or state law and such filing will not violate applicable law; and (k) at the request of Sattel, in connection with an underwritten offering of Diana Shares, furnish: (i) an opinion, dated as of the closing date, of the counsel representing Diana for the purposes of such registration, addressed to the underwriters, and to Sattel, covering such matters as such underwriters and Sattel may reasonably request; and (ii) letters dated as of the effective date of the Registration Statement and as of the closing date, from the independent certified public accountants of Diana, addressed to the underwriters, and to Sattel, covering such matters as such underwriters and holder or holders may reasonably request. 3. Expenses. With respect to the ________ registration of the Diana Shares pursuant to the Registration Statement, Diana shall bear the following fees, costs and expenses: all registration, filing and NASD fees, printing expenses, fees and disbursements of counsel and accountants for Diana, all internal Diana expenses, all legal fees and disbursements and other expenses of complying with state securities or blue sky laws of any jurisdictions in which the securities to be offered are to be registered or qualified, and the premiums and other costs of policies of insurance against liability (if any) arising out of such public offering. Fees and disbursements of counsel and accountants for Sattel, underwriting discounts and commissions and transfer taxes relating to Diana Shares, fees and disbursements of counsel for the underwriter or underwriters of such securities (if selling securityholders are required to bear such fees and disbursements) and any other expenses incurred by Sattel not expressly included above, shall be borne by Sattel. 4. Indemnification. Pursuant to the _______________ registration of the Diana Shares hereunder: (a) Diana will indemnify and hold harmless Sattel, its directors and officers, and any underwriter (as defined in the Securities Act) for Sattel and each person, if any, who controls Sattel or such underwriter within the meaning of the Securities Act, from and against, and will reimburse Sattel and each such underwriter and controlling person with respect to, any and all loss, damage, liability, cost and expense to which Sattel or any such underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, damages, liabilities, costs or expenses are caused by any untrue statement or alleged untrue statement of any material fact contained in such Registration Statement, any prospectus contained therein or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading; provided, however, that Diana will not be liable in any such case to the extent that any such loss, damage, liability, cost or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by Sattel, such underwriter or such controlling person in writing specifically for use in the preparation thereof; provided, however, that the foregoing indemnity with respect to any preliminary prospectus shall not inure to the benefit of any underwriter from whom the person asserting any such loss, damage, liability, cost or expense purchased Diana Shares, or any persons controlling such underwriter, if a copy of the prospectus (as then amended or supplemented if Diana shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such underwriter to such person at or prior to the written confirmation of the sale of Diana Shares to such person and if the prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, damage, liability, cost or expense. (b) Sattel will indemnify and hold harmless Diana, its directors and officers, any controlling person and any underwriter from and against, and will reimburse Diana, its directors and officers, any controlling person and any underwriter with respect to, any and all loss, damage, liability, cost or expense to which Diana or any controlling person and/or any underwriter may become subject under the Securities Act or otherwise, insofar as such losses damages, liabilities, costs or expenses are caused by any untrue or alleged untrue statement of any material fact contained in such Registration Statement, any prospectus contained therein or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was so made in reliance upon written information furnished by Sattel specifically for use in the preparation thereof. (c) Promptly after receipt by an indemnified party pursuant to the provisions of paragraph (a) or (b) of this paragraph 4 of notice of the commencement of any action involving the subject matter of the foregoing indemnity provisions such indemnified party will, if a claim thereof is to be made against the indemnifying party pursuant to the provisions of said paragraph (a) or (b), promptly notify the indemnifying party of the commencement thereof; but the omission to so notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than hereunder. In case such action is brought against any indemnified party and it notifies the indemnifying party of the commencement thereof, the indemnifying party shall have the right to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party, provided, however, if the defendants in any action include both the indemnified party and the indemnifying party and if there is a conflict of interest which would prevent counsel for the indemnifying party from also representing the indemnified party, the indemnified party or parties shall have the right to select separate counsel to participate in the defense of such action on behalf of such indemnified party or parties, but in no event shall the indemnifying parties be responsible for more than one such additional firm for all indemnified parties. After notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party pursuant to the provisions of said paragraph (a) or (b) for any legal or other expense subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation, unless (i) the indemnified party shall have employed counsel in accordance with the proviso of the preceding sentence, (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after the notice of the commencement of the action, or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. (d) If the indemnification provided for in this paragraph 4 is unavailable or insufficient to hold harmless an indemnified party under paragraph (a) or (b) above, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in paragraph (a) or (b) above, in such proportion as is in such proportion as is appropriate to reflect the relative fault of Diana, the selling stockholders and the underwriters in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by Diana, the selling stockholders or the underwriters and the parties' relevant intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. Diana, the selling stockholders and the underwriters shall agree that it would not be just and equitable if contributions pursuant to this paragraph (d) were to be determined by pro rata allocation (even if the underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the first sentence of this paragraph (d). The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this paragraph (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending against any action or claim which is the subject of this paragraph (d) . No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 5. Sattel Cooperation. Diana may require __________________ Sattel to furnish Diana in a timely manner such information with respect to Sattel and the distribution of Diana Stock as Diana may from time to time reasonably request. In connection with the registration of Diana Stock, Sattel will (a) cooperate with Diana and the underwriter, if any, in preparing the Registration Statement, (b) promptly supply Diana and the underwriter with all information and documents as the underwriter or Diana may deem reasonably necessary, (c) discontinue sales of Diana Stock upon notification of any stop order or suspension of the effectiveness of the Registration Statement, (d) notify Diana immediately upon any change in the plan of distribution or other information concerning Sattel described in the prospectus, (e) discontinue use of any prospectus following notification by Diana that the prospectus must be amended or supplemented, (f) comply with the applicable requirements of Rules 10b-5 and 10b-6 under the Securities Exchange Act of 1934, as amended, (g) not use any prospectus other than the most recent prospectus included in the Registration Statement, and (h) otherwise comply with the prospectus delivery requirements under the Securities Act. 6. Defined Terms. Terms with initial _____________ capital letters not otherwise defined herein shall have the meaning assigned in the Exchange Agreement to which these Registration Rights are an exhibit. 7. Assignment. Sattel's rights under this __________ agreement may be assigned, in whole or in part, to any subsequent transferee of Sattel's Diana shares, including, without limitation, any pledgee of such Diana Shares. 8. Notices. All notices hereunder shall be _______ in writing and shall be deemed to have been duly given upon delivery if delivered personally, twenty-four (24) hours after transmission by telecopy with answerback, 12:00 p.m. (noon) of the next business day after being sent via overnight courier, and five (5) days after being mailed, certified return receipt requested. Actual notice, however given, shall always be effective. EX-23.1 5 EXHIBIT 23.1 Consent of Ernst & Young LLP, Independent Auditors We consent to the reference to our firm under the caption "Experts" in the Registration Statement (Form S-3) and related Prospectus of The Diana Corporation for the registration of 350,000 shares of its common stock and to the incorporation by reference therein of our report dated June 2, 1995, except for Note 3 as to which the date is June 28, 1995, with respect to the consolidated financial statements and schedules of The Diana Corporation included in its Annual Report (Form 10-K) for the fiscal year ended April 1, 1995, filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP Milwaukee, Wisconsin ERNST & YOUNG LLP February 19, 1996 -----END PRIVACY-ENHANCED MESSAGE-----