OBLIGOR #

1.1    “Accounts” means all “accounts” (as defined in the UCC) together with all instruments, documents, and chattel paper related thereto; all guaranties, letters of credit, or other security therefore, now owned or hereafter created or acquired by Borrower including, without limitation, all of the following now owned or hereafter created or acquired by Borrower: (a) accounts receivable, contract rights, book debts, notes, drafts and other obligations or indebtedness owing to Borrower arising from the sale, lease or exchange of goods or other property and/or the performance of services; (b) Borrower’s rights in, to and under all purchase orders for goods, services or other property from Borrower; (c) Borrower’s rights to any goods, services or other property arising out of Accounts (including returned or repossessed goods and unpaid sellers’ rights of rescission, replying, reclamation and rights to stoppage in transit); (d) monies due to or to become due to Borrower under all contracts for the sale, lease or exchange of goods or other property and/or the performance of services including the right to payment of any interest or finance charges with respect thereto (whether or not yet earned by performance on the part of Borrower); and (e) proceeds of any of the foregoing and all collateral security and guaranties of any kind given by any Person with respect to any of the foregoing.

1.2    “Account Debtor” means, in addition to the definition of account debtor as contained in the UCC, the Person or Persons obligated to Borrower on an Account, or who is represented by the Borrower to be so obligated.

1.3    “Advance” or “Advances” means a loan or all loans by Bank to Borrower under the Revolving Facility.

1.4    “Affiliate” of any Person means any other Person that, directly or indirectly, controls, is controlled by or is under common control with such Person. A Person shall be deemed to be “controlled by” any other Person if such other Person (a) possesses, directly or indirectly, power to direct or cause the direction of the management and policies of such Person whether by contract or otherwise; or (b) owns at least twenty percent (20%) of the Equity Interests in such Person.

1.5    “Agreement” means this Loan and Security Agreement (Accounts and Inventory) and all exhibits, riders and addendums attached hereto as all of the foregoing may be amended, supplemented, or modified from time to time.

1.6    “Bank Expenses” shall mean and includes: all costs or expenses required to be paid by Borrower under this Agreement which are paid or advanced by Bank; taxes and insurance premiums of every nature and kind of Borrower paid by Bank; filing, recording, publication and search fees, appraiser fees, and auditor fees and costs paid or incurred by Bank in connection with Bank’s transactions with Borrower; costs and expenses incurred by Bank in collecting the Accounts (with or without suit) to correct any Event of Default or enforce any provision of this Agreement, or in gaining possession of, maintaining, handling, preserving, storing, shipping, selling, disposing of, preparing for sale and/or advertising to sell the Collateral, whether or not a sale is consummated in accordance with the terms hereof; costs and expenses of suit incurred by Bank in enforcing or defending this Agreement or any portion hereof, including, but not limited to, expenses incurred by Bank in attempting to obtain relief from any stay, restraining order, injunction or similar process which prohibits Bank from exercising any of its rights or remedies; and reasonable attorneys’ fees and expenses incurred by Bank in advising, structuring, drafting, reviewing, amending, terminating, enforcing, defending or concerning this Agreement, or any portion hereof or any agreement related hereto, whether or not suit is brought. Bank Expenses shall include Bank’s in-house legal charges at reasonable rates.

1.7    “Base Rate” shall mean the prime rate reported in the section entitled “Money Rates” in the western edition of the Wall Street Journal (or if the Wall Street Journal shall cease to be publicly available or if the information contained in the Wall Street Journal, in Bank’s reasonable judgment, shall cease to accurately reflect such Prime Rate, then the Prime Rate shall be as reported by any publicly available source of similar market data selected by Bank that, in Bank’s reasonable judgment, accurately reflects such Prime Rate.) If such rate is shown as a range, then the Prime Rate shall be the highest value in such range.

1.8    “Base Rate Advance” means any portion of the unpaid principal balance of the Advances when and to the extent that the interest rate therefor is determined by a reference to the Base Rate.

1.9    “Borrower’s Books” shall mean and includes all of Borrower’s books and records including but not limited to minute books; ledgers; records indicating, summarizing or evidencing Borrower’s assets, (including, without limitation, the Accounts) liabilities, business operations or financial condition, and all information relating thereto, computer programs; computer disk or tape files; computer printouts; computer runs; and other computer prepared information and equipment of any kind.

1.10    “Borrowing Base” means an amount equal to the sum of: (a) eighty percent (80%) of the Net Amount of Eligible Accounts; plus (b) seventy percent (70%) of the Value of Eligible In Storage Inventory; provided that the aggregate amount of Advances made under this Subsection 1.10(b) shall not exceed Ten Million and 00/100 Dollars ($10,000,000.00); plus (c) seventy percent (70%) of the Value of Eligible In Transit Inventory; provided that the aggregate amount of Advances made under this Subsection 1.10(c) shall not exceed Four Million and 00/100 Dollars ($4,000,000.00).

1.11    “Business Day” means a day other than a Saturday or Sunday or other day on which Bank is authorized or required to close under the laws of the State of California or applicable Federal Law.

1.12    “Collateral” means all of the following assets of Borrower, wherever located, and now owned or hereafter acquired or arising: (a) all Accounts; (b) all Inventory; (c) all general intangibles; (d) all deposit accounts; (e) all supporting obligations of any of the foregoing; (f) all of Borrower’s Books related to any of the foregoing; and (g) any and all claims, rights and interests in any of the foregoing and all substitutions for, additions and accessions and all cash and non cash proceeds of any of the foregoing, in whatever form (including proceeds in the form of inventory, equipment or any other form of personal property), including proceeds of proceeds, insurance proceeds and all claims against third parties for loss or damage to or destruction of any or all of the foregoing. The Collateral shall specifically exclude: (i) any lease, license, permit, contract, property right or agreement to which Borrower is a party or any of Borrower’s rights or interests thereunder if and only for so long as the grant of a Lien thereon shall (A) give any other Person party to such lease, license, permit, contract, property rights or agreement the right to terminate its obligations thereunder, (B) constitute or result in the abandonment, invalidation or unenforceability of any right, title or interest of Borrower therein or (C) constitute or result in a breach or termination pursuant to the terms of, or a default under, any such lease, license, permit, contract, property rights or agreement (other than to the extent that any such term would be rendered ineffective pursuant to Sections 9-406, 9-407, 9-408 or 9-409 of the UCC (or any successor provision or provisions)); and (ii) any equipment (as such term is defined in the UCC) owned by Borrower that is subject to a Permitted Lien.

  1.14    “Commodity Hedging Arrangements” means any arrangement to hedge the price of ethanol sales or purchases.

1.15    “Commodity Risk Management Plan” means risk management plans prepared by Borrower (or an Affiliate thereof) setting forth the terms and conditions relating to any Commodity Hedging Arrangements from time to time proposed to be entered into by Borrower, including any updates made to such risk management plans.

1.16    “Contingent Indebtedness” mean, as to any Person, any obligation of such Person guaranteeing or in effect guaranteeing any Indebtedness, leases, dividends, or other obligations (“primary obligations”) of any other Person (the “primary obligor”) in any manner, whether directly or indirectly, including, without limitation, any obligation of such Person, whether or not contingent, (a) to purchase any such primary obligation or any property constituting direct or indirect security therefore; (b) to advance or supply funds (i) for the purchase or payment of any such primary obligation; or (ii) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor; (c) to purchase property, securities, or services primarily for the purpose of assuring the beneficiary of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation; (d) for the obligations of a partnership in which such Person is a general partner; or (e) otherwise to assure or hold harmless the beneficiary of such primary obligation against loss in respect thereof; provided, however, that the term Contingent Indebtedness shall not include the endorsement of instruments for deposit or collection in the ordinary course of business. The amount of any Contingent Indebtedness shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Indebtedness is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by Bank in good faith.

1.18    “Debt” means, as to any Person at a particular time, without duplication, all of the following, whether or not included as indebtedness or liabilities in accordance with GAAP: (a) all obligations of such  Person for or in respect of moneys borrowed or raised, whether or not for cash by whatever means (including acceptances, deposits, discounting, letters of credit, factoring, and any other form of financing which is recognized in accordance with GAAP in such Person’s financial statements as being in the nature of a borrowing or is treated as “off-balance sheet” financing); (b) all obligations of such Person evidenced by bonds, debentures, notes, loan agreements or other similar instruments; (c) all obligations of such Person for the deferred purchase price of property or services; (d) all obligations of such Person under conditional sale or other title retention agreements relating to property or assets acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property or are otherwise limited in recourse); (e) the maximum amount of all direct or contingent obligations of such Person arising under letters of credit (including standby and commercial), bankers’ acceptances, bank guaranties, surety bonds and similar instruments; (f) all capitalized lease liabilities; (g) net obligations of such Person under any Swap Contract; (h) all obligations of such Person to purchase, redeem, retire, defease or otherwise make any payment in respect of any Equity Interests in such Person or any other Person or any warrants, rights or options to acquire such Equity Interests, valued, in the case of redeemable preferred interests, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends; and (i) all guarantees of such Person in respect of any of the foregoing. For all purposes hereof, the Indebtedness of any Person shall include the Indebtedness of any partnership or joint venture (other than a joint venture that is itself a corporation or limited liability company) in which such Person is a general partner or a joint venturer, unless such Indebtedness is expressly made non-recourse to such Person. The amount of any net obligation under any Swap Contract on any date shall be deemed to be the Swap Termination Value thereof as of such date.

1.20    “Eligible Accounts” means and includes those Accounts of Borrower which are due and payable within ninety (90) days, or less, from the date of invoice, that arise in the ordinary course of Borrower’s business, and have been collaterally assigned to Bank as contemplated by this Agreement. Unless otherwise agreed to by Bank, Eligible Accounts shall not include the following: (a) Accounts which remain uncollected for more than ninety (90) days from the date of invoice; (b) Accounts due from an Account Debtor that has suffered a business failure or the termination of its existence, or as to which a dissolution, insolvency or bankruptcy proceeding has been commenced, any assignment for the benefit of creditors has been made, or a trustee, receiver or conservator has been appointed for all or any part of the assets of such Account Debtor; (c) Accounts due from an Account Debtor who is an Affiliate of Borrower or affiliated with Borrower in any manner, including, without limitation, as stockholder, owner, officer, director, agent or employee; (d) Accounts with respect to which payment is or may be conditional; (e) Accounts with respect to which the Account Debtor is not a resident or citizen of, located in, or subject to service of process in, the United States, except Eligible Foreign Accounts; (f) Accounts due from the United States

of America, including, without limitation, any instrumentality, division, agency, body or department thereof, except Eligible Government Accounts; (g) Accounts commonly known as “bill and hold” or a similar arrangement; (h) that portion of Accounts due from an Account Debtor which is in excess of twenty percent (20%) percent of Borrower’s aggregate dollar amount of all outstanding Eligible Accounts, provided that (1) Eligible Accounts as to which Chevron Corporation, a Delaware corporation, Valero Energy Corporation, a Delaware corporation, ConocoPhillips, a Delaware corporation, Royal Dutch Shell plc, a corporation formed under the laws of England and Wales, and Tesoro Corporation, a Delaware corporation or any of their Affiliates, including Chevron Products Company, a division of Chevron U.S.A. Inc., Valero Marketing and Supply Company, ConocoPhillips Company, Shell Oil Products U.S. (SOPUS), Tesoro Refining and Marketing Company, ExxonMobil Oil Corporation, are the Account Debtors may each constitute up to thirty percent (30%) of the aggregate amount of Eligible Accounts; and (2) Eligible Accounts as to which New West Petroleum, a California corporation and Flying J, Inc., a Utah corporation or any of their Affiliates, including Big West of California, LLC, a subsidiary of Flying J Inc. are the Account Debtors may each constitute up to twenty-five percent (25%) of the aggregate amount of Eligible Accounts; (i) Accounts due from an Account Debtor as to which twenty percent (20%) percent or more of the aggregate dollar amount of all outstanding Accounts owing from such Account Debtor remain uncollected for more than ninety (90) days from invoice date; (j) that portion of Accounts with respect to which Account Debtors dispute liability or make any claim, or have any defense, crossclaim, counterclaim, or offset (except any reserve, discount, credit or allowance that has been deducted in computing the net amount thereof); (k) Accounts which are not free of all Liens, encumbrances, charges, rights and interest of any kind, except Permitted Liens; (l) Accounts which are supported or represented by an instrument, document, promissory note, post dated check or letter of credit unless such instrument is actually delivered to Bank to the extent required hereunder; and (m) Accounts that are payable in other than United States Dollars.

1.21    “Eligible Foreign Accounts” means otherwise Eligible Accounts which are either (a) covered by credit insurance in form and amount, and by an insurer, satisfactory to Bank, (b) supported by one or more letters of credit or acceptances that are assignable by their terms and have been delivered to Bank in an amount, of a tenor, and issued by a financial institution, acceptable to Bank; or (c) that Bank approves on a case by case basis.

1.22    “Eligible Government Accounts” means otherwise Eligible Accounts with respect to which: (a) the Account Debtor is the United States of America or any political subdivision, department, agency or instrumentality thereof; and (b) Borrower complies with the Federal Assignment of Claims Act of 1940, 31 U.S.C. §3727 and the regulations thereunder.

1.23    “Eligible Inventory” means that portion of Borrower’s Inventory consisting of ethanol and denaturant which is: (a) owned by Borrower, free and clear of all Liens or encumbrances, except Permitted Liens; (b) held for sale by Borrower in the ordinary course of the Borrower’s business; (c) of good and merchantable quality, free from defects for the purposes for which it is intended; (d) as to which Bank has been able to perfect and maintain a perfected first priority security interest; and (e) Bank, in its reasonable judgment and in good faith, has not determined that it is unacceptable or should be price-adjusted in any material respect.

1.24    “Eligible In Transit Inventory” means all Eligible Inventory in-transit for which title has passed to Borrower, which is insured to the full value thereof.

1.25    “Eligible In Storage Inventory” means Eligible Inventory stored with a bailee, warehouse, or similar party for which a Collateral Access Agreement is in effect.

1.26    “Equity Interests” means, with respect to any Person, all of the shares of capital stock of (or other ownership or profit interests in) such Person, all of the warrants, options or other rights for the purchase or acquisition from such Person of shares of capital stock of (or other ownership or profit interests in) such Person, all of the securities convertible into or exchangeable for shares of capital stock of (or other ownership or profit interests in) such Person or warrants, rights or options for the purchase or acquisition from such Person of such shares (or such other interests), and all of the other ownership or profit interests in such Person (including partnership, member or trust interests therein), whether voting or nonvoting, and whether or not such shares, warrants, options, rights or other interests are outstanding on any date of determination, in each such case including all voting rights and economic rights related thereto.

1.27    “Event of Default” shall mean one or more of those events described in Section 10 contained herein below.

1.28    “Funding Date” means the date that amounts are advanced by Bank under this Agreement, whether such Advances are made directly to Borrower or are made to any escrow holder or other third party pending the recordation or exchange of any documents or the occurrence or waiver of any conditions precedent by Bank under this Agreement or otherwise.

1.29    “GAAP” shall mean, as of any applicable period, generally accepted accounting principles in effect during such period.

1.30    “Governmental Authority” means any foreign, federal, state, regional, local, municipal or other government, or any department, commission, board, bureau, agency, public authority or instrumentality thereof, or any court or arbitrator.

1.31    “Guarantor” means Pacific Ethanol, Inc., a Delaware corporation.

1.32    “Indebtedness” means (a) the performance of all obligations of Borrower under this Agreement and all of the other Loan Documents; (b) all extensions, renewals, modifications, amendments, and refinancings of any of the foregoing; and (c) all Bank Expenses.

1.34    “Insolvency Proceeding” shall mean and includes any proceeding or case commenced by or against a Person under any provisions of the United States Bankruptcy Code, as amended, or any other ankruptcy or insolvency law, including, but not limited to assignments for the benefit of creditors, formal or informal moratoriums, composition or extensions with some or all creditors, any proceeding seeking a reorganization, arrangement or any other relief under the United States Bankruptcy Code, as amended, or any other bankruptcy or insolvency law.

1.35    “Interest Rate Protection Agreement” means each interest rate swap, collar, put, or cap, or other interest rate protection arrangement, with a Qualified Counterparty, in each such case that is reasonably satisfactory to Bank.

1.36    “Inventory” means all “inventory” (as defined in the UCC), now owned or hereafter acquired by Borrower, wherever located including, without limitation, ethanol, denaturant, finished goods, raw materials, work in process and other materials and supplies (including packaging and shipping materials) used or consumed in the manufacture or production thereof and goods which are returned to or repossessed by Borrower.

1.37    “Investment” means any beneficial ownership of (including stock, partnership interest or other securities) any Person, or any loan, advance or capital contribution to any Person.

1.38    “Judicial Officer or Assignee” shall mean and includes any trustee, receiver, controller, custodian, assignee for the benefit of creditors or any other person or entity having powers or duties like or similar to the powers and duties of trustee, receiver, controller, custodian or assignee for the benefit of creditors.

1.39    “Letter of Credit” means any commercial or standby letter of credit issued by Bank at the request of or for the account of Borrower.

1.40    “Letter of Credit Application” has the meaning set forth in Section 2.2.1.

1.41    “Letter of Credit Disbursement” means any payment or disbursement made by Bank pursuant to or arising out of any Letter of Credit.

1.42    “Letter of Credit Obligations” shall mean at any date of determination, the sum of (without duplication) (a) the aggregate undrawn amount of all Letters of Credit then outstanding; (b) the aggregate face amount of all Letters of Credit requested but not yet issued as of such date; and (c) the aggregate unpaid amount of all Letter of Credit Reimbursement Obligations.

1.43    “Letter of Credit Reimbursement Obligations” means, at any time, all obligations of Borrower to reimburse Bank for amounts paid by Bank in respect of drawings under Letters of Credit.

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

1.44.3                       “LIBOR Reserve Percentage” means the reserve percentage prescribed by the Board of Governors of the Federal Reserve System (or any successor) for “Eurocurrency Liabilities” (as defined in Regulation D of the Federal Reserve Board, as amended), adjusted by Bank for expected changes in such reserve percentage during the applicable LIBOR Period.

1.44.4                       “LIBOR Period” means: (a) initially, the period from the date of borrowing specified in the applicable notice of borrowing, or on the date specified in an applicable notice of interest rate election and ending thirty (30), sixty (60), ninety (90) or one hundred eighty (180) days thereafter (but not exceeding the Revolving Facility Maturity Date), so long as LIBOR is quoted for such period in the applicable interbank LIBOR market; and (b) thereafter, each period commencing on the last day of the next preceding LIBOR Period and continuing for thirty (30), sixty (60), ninety (90) or one hundred eighty (180) days thereafter (but not exceeding the Revolving Facility Maturity Date) so long as LIBOR is quoted for such period in the applicable interbank LIBOR market, provided that: (i) if any LIBOR Period would end on a day that is not a LIBOR Business Day, then such LIBOR Period shall be extended to the next succeeding LIBOR Business Day; and (ii) no LIBOR Period shall extend beyond the Revolving Facility Maturity Date.

1.45    “LIBOR Advance” means any portion of the unpaid principal balance of the Revolving Facility when and to the extent that the interest rate therefor is determined by a reference to LIBOR.

1.46    “Lien” means any mortgage, deed of trust, pledge, security interest, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), or preference, priority, or other security agreement or preferential arrangement, charge, or encumbrance of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of any financing statement under the UCC or comparable law of any jurisdiction to evidence any of the foregoing).

1.47    “Loan Documents” means, collectively, this Agreement and any other agreement or instrument entered into between Borrower and Bank or executed by Borrower or the Guarantor and delivered to Bank in connection with this Agreement, all as amended from time to time including, without limitation, any note or notes executed by Borrower.

1.48    “Material Adverse Effect” means a material adverse effect on (a) the business operations or condition (financial or otherwise) of Borrower; or (b) the ability of Borrower to repay the Indebtedness or otherwise perform its obligations under the Loan Documents.

1.49    “Net Amount of Eligible Accounts” shall mean the gross amount of Eligible Accounts; less the sum of (a) sales, excise or similar taxes included in the amount thereof; and (b) returns, discounts, claims, credits and allowances of any nature at any time issued, owing, granted, outstanding, available or claimed with respect thereto.

  1.50     “Net Income” shall mean the net income (or loss) of a person for any period of determination, determined in accordance with GAAP but excluding in any event: (a) any gains or losses on the sale or other disposition, not in the ordinary course of business, of investments or fixed or capital assets, and any taxes on the excluded gains and any tax deductions or credits on account on any excluded losses; and (b) in the case of Borrower, net earnings of any Person in which Borrower has an ownership interest, unless such net earnings shall have actually been received by Borrower in the form of cash distributions.

  1.51    “Negotiable Collateral” shall mean and include all of Borrower’s present and future letters of credit, advises of credit, letter-of-credit rights, certificates of deposit, notes, drafts, money, documents (including without limitation all negotiable documents), instruments (including without limitation all promissory notes), tangible chattel paper or any other similar property.

 1.52    “Permitted Debt” means: (a) Indebtedness of Borrower; (b) Debt existing on the date hereof and listed and described on Schedule 8.3 hereto, but no voluntary prepayments, renewals, extensions, or refinancing thereof; (c) Subordinated Debt; (d) accounts payable to trade creditors for goods or services incurred in the ordinary course of business, as presently conducted, and not more than ninety (90) days past due or being contested in good faith and by appropriate proceedings; (e) contingent liabilities incurred in the ordinary course of business (including customary indemnification agreements); (f) Interest Rate Protection Agreements; (g) Swap Contracts entered into in accordance with the Commodity Risk Management Plan; and (h) Debt of Borrower secured by purchase-money Liens permitted under clause (c) of Section 1.54.

 1.53     “Permitted Distributions” means: (a) distributions payable solely in Borrower’s membership units; (b) repurchases of Borrower’s membership units from the proceeds of the issuance of additional such units, provided that such repurchases are effectuated immediately upon the consummation of such transactions; (c) so long as no Event of Default has occurred and is continuing hereunder, to the extent that and so long as Borrower is an entity that is not directly subject to Federal income taxation and with respect to which any earnings are attributable ratably to each Person with an ownership interest in Borrower, Borrower may make distributions to each such Person in an amount necessary to pay each such Person’s income tax resulting from such ownership interest in Borrower, provided, further, that, promptly upon request of Bank, Borrower shall cause each such Person to provide Bank with copies of its tax return to substantiate any such distribution; and (d) cash distributions made in accordance with Borrower’s operating agreement, so long as no Event of Default has occurred and is continuing and no Event of Default would exist after giving effect to such distributions.

1.55.7  money market funds that (a) comply with the criteria set forth in Rule 2a-7 under the Investment Company Act of 1940; (b) are rated AAA by S&P and Aaa by Moody’s; and (c) have portfolio assets of at least Five Hundred Million and 00/100 Dollars ($500,000,000.00); and

1.55.8  time deposit accounts, certificates of deposit and money market deposits in an aggregate face amount not in excess of Ten Million and 00/100 Dollars ($10,000,000.00).

 

1.56    “Person” or “person” shall mean and includes any individual, corporation, partnership, joint venture, firm, association, trust, unincorporated association, joint stock company, government, municipality, political subdivision or agency or other entity.

 

1.57     “Qualified Counterparty” means any of the following: (a) Bank; or (b) any Affiliate of Bank.

1.59    “Regulatory Development” means any or all of the following: (a) any change in any law, regulation or interpretation thereof by any public authority (whether or not having the force of law); (b) the application of any existing law, regulation or the interpretation thereof by any public authority (whether or not having the force of law); and (c) compliance by Bank with any request or directive (whether or not having the force of law) of any public authority.

1.60    “Reinvestment Rates” mean the per annum rates of interest equal to one-half percent (1/2%) above the rates of interest reasonably determined by Bank to be in effect not more than seven (7) days prior to the Prepayment Date in the secondary market for United States Treasury Indebtedness in amount(s) and with maturity(ies) which correspond (as closely as possible) to the LIBOR Rate Advance being prepaid.

1.62    “Revolving Facility Commitment Limit” means the lesser of: (a) the Credit Limit; less the Letter of Credit Obligations; or (b) the Borrowing Base; less the Letter of Credit Obligations; provided, however, that Bank may from time to time agree to increase the Revolving Commitment Limit at its sole discretion.

1.63    “Revolving Facility Maturity Date” means July 1, 2009.

1.64    “Subordinated Debt” shall mean Debt of Borrower to any Person which has been subordinated to the Indebtedness pursuant to a Subordination Agreement in form and content satisfactory to Bank.

1.65    “Subordination Agreement” shall mean any subordination agreement, which is in form and substance satisfactory to Bank, and which makes any or all present and future indebtedness of Borrower to any Person subordinate to the Indebtedness.

1.66    “Swap Contract” means (a) any and all rate swap transactions, basis swaps, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward bond or forward bond price or forward bond index transactions, interest rate options, forward foreign exchange transactions, cap transactions, floor transactions, collar transactions, currency swap transactions, cross-currency rate swap transactions, currency options, spot contracts, or any other similar transactions or any combination of any of the foregoing (including any options to enter into any of the foregoing), whether or not any such transaction is governed by or subject to any master agreement; (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc., any International Foreign Exchange Master Agreement, or any other master agreement, including any such obligations or liabilities under any such master agreement; and (c) for the avoidance of doubt, includes the Permitted Commodity Hedging Arrangements and any Interest Rate Protection Agreements and excludes any contract for the physical sale or purchase of any commodity.

1.67    “Swap Termination Value” means, in respect of any one or more Swap Contracts (including any Permitted Commodity Hedging Arrangements or any Interest Rate Protection Agreements), after taking into account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (a) for any date on or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s); and (b) for any date prior to the date referenced in clause (a), the amount(s) determined as the mark-to-market value(s) for such Swap Contracts, in accordance with the terms of the applicable Swap Contract, or, if no provision is made therein, as determined based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts (which may include Bank or any Affiliate of Bank).

1.68    “Tangible Effective Net Worth” shall mean, with respect to any Person and as of any applicable date of determination, Tangible Net Worth; plus Subordinated Debt.

1.69    “Tangible Net Worth” shall mean, with respect to any Person and as of any applicable date of determination, the excess of: (a) the net book value of all assets of such Person (excluding affiliate receivables, patents, patent rights, trademarks, trade names, franchises, copyrights, licenses, goodwill, and all other intangible assets of such Person) after all appropriate deductions in accordance with GAAP (including, without limitation, reserves for doubtful receivables, obsolescence, depreciation and amortization); less all Debt of such Person at such time.

1.70    “Trademarks” means all state (including common law), federal and foreign trademarks, service marks, and trade names, and applications for registration of such trademarks, service marks and trade names, all licenses relating to any of the foregoing and all income and royalties with respect to any licenses, whether registered or unregistered and wherever registered, all rights to sue for past, present, or future infringement or unconsented use thereof, all rights arising therefrom and pertaining thereto and all reissues, extensions and renewals thereof.

1.71    “Value” means, as determined by Bank in good faith, with respect to Inventory, the lower of (a) cost computed on a first in first out basis in accordance with GAAP; or (b) market value.

2.1           Revolving Facility. Subject to and upon the terms and conditions of this Agreement, Bank agrees to make Advances to Borrower (pursuant to Section 2.1 hereof) and issue Letters of Credit (pursuant to Section 2.2 hereof) under a revolving line of credit (the “Revolving Facility”) from time to time during the period of this Agreement up to but not including the Revolving Facility Maturity Date in amounts requested by Borrower up to an aggregate outstanding principal amount equal to the Revolving Facility Commitment Limit. Subject to the terms and conditions of this Agreement, amounts borrowed pursuant to this Section 2.1 may be repaid and reborrowed at any time during the term of this Agreement, provided that each LIBOR Advance shall be in an amount not less than Five Hundred Thousand and 00/100 Dollars ($500,000.00) and increments thereof.

2.2.1  Issuance. Subject to the terms and conditions contained herein and the execution and delivery by Borrower of a letter of credit application on Bank’s customary form (a “Letter of Credit Application”), Bank agrees to issue, extend and renew for the account of Borrower one or more Letters of Credit in such form as may be requested from time to time by Borrower and reasonably agreed to Bank. Each Letter of Credit Application shall be completed to the reasonable satisfaction of Bank. In the event that any provision of any Letter of Credit Application shall be inconsistent with any provision of this Agreement, then the provisions of this Agreement shall, to the extent of any such inconsistency, govern.

2.4.3 Conversions and Renewals. Borrower may elect from time to time to convert all or a part of an Advance, or to renew all or part of an Advance, by giving Bank at least two (2) Business Days prior written notice before conversion into a Base Rate Advance, and at least three (3) LIBOR Business Days prior written notice before the conversion into or renewal of a LIBOR Advance, specifying: (a) the renewal or conversion date; (b) the amount of the Advance to be converted or renewed; (c) in the case of conversions, the type of Advance to be converted into (Base Rate or LIBOR); and (d) in the case of renewals of or a conversion into a LIBOR Advance, the duration of the LIBOR Period applicable thereto; provided that (i) the minimum amount of LIBOR Advances renewed or converted shall be Five Hundred Thousand and 00/100 Dollars ($500,000.00), and any greater amount shall be in increments of Five Hundred Thousand and 00/100 Dollars ($500,000.00); (ii) the minimum principal amount of LIBOR Advances outstanding after a renewal or conversion shall be Five Hundred Thousand and 00/100 Dollars ($500,000.00) and any greater amount shall be in increments of Five Hundred Thousand and 00/100 Dollars ($500,000.00); (iv) no Base Rate Advance may be converted into a LIBOR Advance when any Event of Default has occurred and is continuing; and (v) LIBOR Advances can be converted only on the last day of the LIBOR Period for such LIBOR Advance. If Borrower shall fail to give Bank the written notice as specified above for the renewal or conversion of a LIBOR Advance prior to the end of the LIBOR Period with respect thereto, such LIBOR Advance shall automatically be converted into a Base Rate Advance on the last day of the LIBOR Period for such LIBOR Advance.

2.5.1  Interest Only. Interest only shall be due and payable on the unpaid principal balance of the Advances, without claim, notice, presentment or demand, in consecutive monthly installments on the first (1st) day of each month commencing on the first (1st) day of the first (1st) full calendar month following the Initial Funding Date and continuing thereafter until the Revolving Facility is paid in full.

2.5.2 Overadvances. If, at any time of determination of the Borrowing Base, the outstanding principal balance of the Revolving Facility is greater than the Revolving Facility Commitment Limit at such time, then Borrower shall immediately pay to Bank, in cash, the amount of such excess.

2.5.3 Maturity of Revolving Facility. The Revolving Facility shall mature on the Revolving Facility Maturity Date, at which time all unpaid principal, all unpaid and accrued interest, and all other amounts due under the Revolving Facility shall be immediately due and payable.

2.6    Use of Proceeds. The proceeds of the Advances hereunder shall be used by Borrower for working capital purposes and/or to make distributions to the Guarantor. Borrower will not, directly or indirectly, use any part of such proceeds for the purpose of purchasing or carrying any margin stock within the meaning of Regulation U of the Board of Governors of the Federal Reserve System or to extend credit to any Person for the purpose of purchasing or carrying any such margin stock, or for any purpose which violates, or in inconsistent with, Regulation X of such Board of Governors.

3.1    Prepayment. In the event that LIBOR is the applicable interest rate for all or any part of the outstanding principal balance of the Revolving Facility, and any payment or prepayment of any such outstanding principal balance of the Revolving Facility shall occur on any day other than the last day of the applicable LIBOR Period (whether voluntarily, by acceleration, required payment, or otherwise), or if Borrower elects LIBOR as the applicable interest rate for all or any part of the outstanding principal balance of the Revolving Facility in accordance with the terms and conditions hereof, and, subsequent to such election, but prior to the commencement of the applicable LIBOR Period, Borrower revokes such election for any reason whatsoever, or if the applicable interest rate in respect of any outstanding principal balance of the Revolving Facility hereunder shall be changed, for any reason whatsoever, from LIBOR to the Base Rate prior to the last day of the applicable LIBOR Period, or if Borrower shall fail to make any payment of principal or interest hereunder at any time that the LIBOR is the applicable interest rate hereunder in respect of such outstanding principal balance of the Revolving Facility, Borrower shall reimburse Bank, on demand, for any resulting out-of-pocket loss, cost or expense actually incurred by Bank as a result thereof, including, without limitation, any such loss, cost or expense incurred in obtaining, liquidating, employing or redeploying deposits from third parties. Such amount payable by Borrower to Bank may include, without limitation, an amount equal to the excess, if any, of (a) the amount of interest which would have accrued on the amount so prepaid, or not so borrowed, refunded or converted, for the period from the date of such prepayment or of such failure to borrow, refund or convert, through the last day of the relevant LIBOR Period, at the applicable rate of interest for such outstanding principal balance of the Revolving Facility, as provided under the Revolving Facility; over (b) the amount of interest (as reasonably determined by Bank) which would have accrued to Bank on such amount by placing such amount on deposit for a comparable period with leading banks in the interbank LIBOR market. Calculation of any amounts payable to Bank under this Section 3.1 shall be made as though Bank shall have actually funded or committed to fund the relevant outstanding principal balance of the Revolving Facility hereunder through the purchase of an underlying deposit in an amount equal to the amount of such outstanding principal balance of the Revolving Facility and having a maturity comparable to the relevant LIBOR Period; provided, however, that Bank may fund the outstanding principal balance of the Revolving Facility hereunder in any manner it deems fit and the foregoing assumptions shall be utilized only for the purpose of the calculation of amounts payable under this paragraph. Upon the written request of Borrower, Bank shall deliver to Borrower a certificate setting forth the basis for determining such actual out-of-pocket losses, costs and expenses, which certificate shall be conclusively presumed correct, absent manifest error. Any prepayment hereunder shall also be accompanied by the payment of all accrued and unpaid interest on the amount so prepaid. Any outstanding principal balance of the Revolving Facility which is bearing interest at such time at the Base Rate may be prepaid without penalty or premium. Partial prepayments hereunder shall be applied to the installments hereunder in the inverse order of their maturities.

4.1    Grant. Borrower hereby grants to Bank a continuing security interest in all presently existing and hereafter arising Collateral in order to secure prompt repayment of any and all Indebtedness owed by Borrower to Bank and in order to secure prompt performance by Borrower of each and all of its covenants and obligations under this Agreement and otherwise created. Bank’s security interest in the Collateral shall attach to all Collateral without further act on the part of Bank or Borrower. Upon the occurrence and continuance of an Event of Default, and upon the request of Bank, Borrower shall (a) endorse or assign Negotiable Collateral to Bank; (b) deliver actual physical possession of Negotiable Collateral to Bank; and (c) mark conspicuously all of its records pertaining to Negotiable Collateral with a legend, in form and substance satisfactory to Bank (and in the case of Negotiable Collateral consisting of tangible chattel paper, immediately mark all such tangible chattel paper with a conspicuous legend in form and substance satisfactory to Bank), indicating that the Negotiable Collateral is subject to the security interest granted to Bank hereunder.

4.3    Inventory. Bank’s security interest in Inventory shall attach to all Inventory without further act on the part of Bank or Borrower. Upon the occurrence and continuance of an Event of Default, Borrower will at Borrower’s expense pledge, assemble and deliver such Inventory to Bank or to a third party as Bank’s bailee; or hold the same in trust for Bank’s account or store the same in a warehouse in Bank’s name; or deliver to Bank documents of title representing said Inventory; or evidence of Bank’s security interest in some other manner acceptable to Bank. Until the occurrence and continuance of an Event of Default, Borrower may, subject to the provisions hereof and consistent herewith, sell the Inventory, but only in the ordinary course of Borrower’s business. A sale of Inventory in Borrower’s ordinary course of business does not include an exchange or a transfer in partial or total satisfaction of a debt owing by Borrower. Nothing in this Section limits Borrower’s obligation to have Inventory be subject to a Collateral Access Agreement in order to be deemed to be Eligible In Storage Inventory.

4.4    Further Assurances. Concurrently with Borrower’s execution of this Agreement, and at any time or times hereafter at the request of Bank, Borrower shall (a) execute and deliver to Bank security agreements, mortgages, assignments, certificates of title, affidavits, reports, notices, schedules of Accounts, letters of authority and all other documents that Bank may reasonably request, in form satisfactory to Bank, to perfect and maintain perfected Bank’s security interest in the Collateral and in order to fully consummate all of the transactions contemplated under this Agreement; and (b) cooperate with Bank in obtaining a control agreement in form and substance satisfactory to Bank with respect to all deposit Accounts, electronic chattel paper, investment property, and letter-of-credit rights. By authenticating or becoming bound by this Agreement, Borrower authorizes the filing of initial financing statement(s), and any amendment(s) covering the Collateral to perfect and maintain perfected Bank’s security interest in the Collateral. Upon the occurrence and continuance of an Event of Default, Borrower hereby irrevocably makes, constitutes and appoints Bank (and any of Bank’s officers, employees or agents designated by Bank) as Borrower’s true and lawful attorney-in-fact with power to sign the name of Borrower on any security agreement, mortgage, assignment, certificate of title, affidavit, letter of authority, notice of other similar documents which must be executed and/or filed in order to perfect or continue perfected Bank’s security interest in the Collateral, and to take such actions in its own name or in Borrower’s name as Bank, in its sole discretion, deems necessary or appropriate to establish exclusive possession or control (as defined in the UCC) over any Collateral of such nature that perfection of Bank’s security interest may be accomplished by possession or control.

4.5    Borrower’s Books. Borrower shall make appropriate entries in Borrower’s Books disclosing Bank’s security interest in the Accounts. Bank (through any of its officers, employees or agents) shall have the right at any time or times hereafter, provided that reasonable notice is provided, during Borrower’s usual business hours, or during the usual business hours of any third party having control over the records of Borrower, to inspect and verify Borrower’s Books in order to verify the amount or condition of, or any other matter, relating to, said Collateral and Borrower’s financial condition.

4.6    Attorney in Fact. Effective only upon the occurrence and continuance of an Event of Default, Borrower appoints Bank or any other person whom Bank may designate as Borrower’s attorney-in-fact, with power: to endorse Borrower’s name on any checks, notes, acceptances, money order, drafts or other forms of payment or security that may come into Bank’s possession; to sign Borrower’s name on any invoice or bill of lading relating to any Accounts, on drafts against Account Debtors, on schedules and assignments of Accounts, on verifications of Accounts and on notices to Account Debtors; to establish a lock box arrangement and/or to notify the post office authorities to change the address for delivery of Borrower’s mail addressed to Borrower to an address designated by Bank, to receive and open all mail addressed to Borrower, and to retain all mail relating to the Collateral and forward all other mail to Borrower; to send, whether in writing or by telephone, requests for verification of Accounts; and to do all things necessary to carry out this Agreement. Borrower ratifies and approves all acts of the attorney-in-fact. Neither Bank nor its attorney-in-fact will be liable for any acts or omissions or for any error of judgment or mistake of fact or law. This power being coupled with an interest, is irrevocable so long as any Accounts in which Bank has a security interest remain unpaid and until the Indebtedness has been fully satisfied.

4.7    Discharge Liens. In order to protect or perfect any security interest which Bank is granted hereunder, Bank may, in its sole discretion, discharge any Lien or encumbrance or bond the same, pay any insurance, maintain guards, warehousemen, or any personnel to protect the Collateral, pay any service bureau, or, obtain any records, and all costs for the same shall be added to the Indebtedness and shall be payable on demand.

4.8    Release of Bank’s Lien. Upon the indefeasible payment in full of all Indebtedness, and the termination of all Bank commitments hereunder, Bank, at Borrower’s sole cost, shall promptly release all of its Liens on the Collateral.

5.1    As conditions precedent to the making of the initial Advance, Borrower shall execute, or cause to be executed, and deliver to Bank, in form and substance reasonably satisfactory to Bank and its counsel, the following:

5.1.1  this Agreement and the Guaranty by the Guarantor, each duly executed by the appropriate parties;

5.1.2  Borrower shall have paid to Bank a documentation fee in the amount of Twenty Five Thousand and 00/100 Dollars ($25,000.00);

5.1.3  Bank shall have received certified resolutions of the member of Borrower, together with a certificate identifying Borrower’s incumbent officers who are authorized to execute and deliver Loan Documents on behalf of Borrower;

5.1.6 Borrower shall have taken or caused to be taken such actions to create a valid and perfected security interest in the Collateral to the extent required by this Agreement. Such actions shall include the delivery to Bank of (a) the results of a recent search of all effective UCC financing statements which may have been made with respect to any personal or mixed property of Borrower; and (b) UCC financing statements the recordation of which has been authorized by Borrower as to all such Collateral for all jurisdictions as may be necessary or desirable to perfect Bank’s security interest in such Collateral;

5.1.7 Evidence that Borrower has obtained insurance and acceptable endorsements;

5.1.8 Collateral Access Agreements in the form of Exhibit A hereto from each lessor, warehouseman, bailee and other Person (to the extent Borrower desires that the Inventory held by such Persons constitute Eligible Inventory hereunder), duly executed by each such Person; and

5.1.9The representations and warranties contained herein shall be true and correct in all material respects on and as of the date hereof to the same extent as though made on and as of that date, except to the extent such representations and warranties specifically relate to an earlier date, in which case such representations and warranties shall have been true and correct in all material respects on and as of such earlier date.

5.2    The making of any Advance after the initial Advance (other than an Advance pursuant to Section 2.2.6) and the issuance of any Letter of Credit shall be subject to the satisfaction of the following conditions precedent:

5.2.1The representations and warranties contained herein shall be true and correct in all material respects on and as of the date of such Advance or Letter of Credit to the same extent as though made on and as of that date, except to the extent such representations and warranties specifically relate to an earlier date, in which case such representations and warranties shall have been true and correct in all material respects on and as of such earlier date;

5.2.2 No Default or Event of Default shall have occurred and be continuing; and

5.2.3  Borrower shall have complied with the administrative procedures set forth in Section 2.1.1 or Section 2.2.1 (as applicable).

6.    REPRESENTATIONS AND WARRANTIES. In order to induce Bank to enter into this Agreement and to make the Advances hereunder, Borrower represents and warrants to Bank as set forth in this Section 6 on the date hereof, on the date of each request of an Advance, and on each Funding Date in each case, except to the extent such representations and warranties expressly relate to a future date.

6.1    Organization, Good Standing, and Due Qualification. Borrower (a) is a limited liability company duly formed, validly existing and in good standing under the laws of the State of Oregon; (b) is duly qualified to do business as is now being conducted and as is proposed to be conducted by Borrower and is in good standing as a foreign limited liability company in each jurisdiction where the nature of its business requires such qualification (except where the failure to so qualify could reasonably be expected to have a Material Adverse Effect); and (c) has all requisite limited liability company power and authority required as of the date this representation is made or deemed repeated to enter into and perform its obligations under each Loan Document to which it is a party and to conduct its business as currently conducted by it.

6.2    Power and Authority. The execution, delivery, and performance by Borrower of the Loan Documents to which it is a party have been duly authorized by all necessary limited liability company action and do not (a) require any consent or approval of the members of Borrower (other than any consents or approvals which have been obtained); (b) contravene Borrower’s articles of organization or operating agreement; (c) violate in any material respect any provision of any law, rule, regulation (including, without limitation, Regulations U and X of the Board of Governors of the federal Reserve System), order, writ, judgment, injunction, decree, determination, or award presently in effect having applicability to Borrower; (d) result in a material breach of or constitute a default under any indenture or loan or credit agreement or any other material agreement, material lease, or material instrument to which Borrower is a party or by which it or its properties may be bound or affected; and (e) result in, or require, the creation or imposition of any Lien, upon or with respect to any of the properties now owned or hereafter acquired by Borrower (other than Permitted Liens).

6.3    Legally Enforceable Agreement. This Agreement is, and each of the other Loan Documents when  delivered under this Agreement will be, legal, valid, and binding obligations of Borrower, in accordance with their respective terms, except to the extent that such enforcement may be limited by applicable bankruptcy, insolvency, and other similar laws affecting creditors’ rights generally.

6.4    Ownership and Liens. Borrower has title to, or valid leasehold interests in, all of its properties and  assets, real and personal, which are included (as of the date this representation and warranty is being made) in the Borrowing  Base. Borrower has title to, or valid leasehold interests in, all of its other properties and assets, real and personal, except the failure of which to so maintain title could not reasonably be expected to have a Material Adverse Effect. None of Borrower’s assets and properties are subject to any Lien, except Permitted Liens. Nothing in this Section shall restrict Borrower’s ability to sell, lease or otherwise dispose of assets and properties to the extent permitted under the Loan Documents.

6.5    Other Agreements. Borrower is not a party to any indenture, loan, or credit agreement, or to any lease or other agreement or instrument or subject to any charter or corporate restriction which could reasonably be expected to have a Material Adverse Effect on the business, properties, assets, operations, or conditions, financial or otherwise, of Borrower, or the ability of Borrower to carry out its obligations under the Loan Documents to which it is a party. Borrower is not in default in any respect in the performance, observance, or fulfillment of any of the obligations, covenants, or conditions contained in any agreement or instrument material to its business to which it is a party, other than any such defaults which could not reasonably be expected to have a Material Adverse Effect.

6.6    Labor Disputes and Acts of God. Neither the business nor the properties of Borrower are affected by any fire, explosion, accident, strike, lockout, or other labor dispute, drought, storm, hail, earthquake, embargo, act of God or of the public enemy, or other casualty (whether or not covered by insurance), which could reasonably be expected to have a Material Adverse Effect.

6.8.1  Locations. Schedule 6.8.1 is a true and correct listing showing all places where Eligible Inventory is located (except for Eligible Inventory in transit), including, without limitation, facilities leased and operated by Borrower and locations neither owned nor leased by Borrower. Such list indicates whether the premises are those of warehouseman or other party. Borrower shall provide Bank at least ten (10) days’ prior written notice of any change in the locations set forth in Schedule 6.8.1 (and Borrower shall have the right to update such Schedule in connection with the provision of such notice).

6.8.2   Books and Records. Borrower does now keep and hereafter at all times shall keep correct and accurate records itemizing and describing the kind, type, quality, and quantity of the Eligible Inventory, and its cost therefor; all such records shall be available upon demand to Bank for inspection and copying.

6.8.3  Warehouses and Landlords. Eligible Inventory is not now and shall not at any time hereafter be stored with a bailee, warehouse, or similar party unless a Collateral Access Agreement is in effect with such Person.

6.9    Litigation. Except as set forth in Schedule 6.9, there are no actions or proceedings pending by or against Borrower before any court or administrative agency which could reasonably be expected to have a Material Adverse Effect. Borrower does not have knowledge of any such pending or threatened actions or proceedings.

6.10    No Material Adverse Change in Financial Statements. Except as otherwise disclosed to Bank, all financial statements related to Borrower that have been delivered by Borrower to Bank fairly present in all material respects Borrower’s financial condition as of the date thereof and Borrower’s results of operations for the period then ended. Since the date of the most recent of such financial statements submitted to Bank, no Material Adverse Effect has occurred and is continuing.

6.11    Solvency. Borrower is solvent (within the meaning given that term and similar terms under applicable laws relating to fraudulent transfers and conveyances).

6.12    ERISA. Borrower is in compliance in all material respects with all applicable provisions of ERISA; Borrower has not violated in any material respect any provision of any defined employee pension benefit plan (as defined in ERISA) maintained or contributed to by Borrower (each, a “Plan”); no Reportable Event as defined in ERISA has occurred and is continuing with respect to any Plan initiated by Borrower; Borrower has met its minimum funding requirements under ERISA with respect to each Plan; and each Plan will be able to fulfill its benefit obligations as they come due in accordance with the Plan documents and under GAAP.

6.13    Investment Company Act. Borrower is not an “investment company” or a company “controlled” by an “investment company” within the meaning of the Investment Company Act of 1940. Borrower is not engaged principally, or as one of the important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations G, T and U of the Board of Governors of the Federal Reserve System). Borrower has complied in all material respects with all the provisions of the Federal Fair Labor Standards Act. Borrower has not violated any statutes, laws, ordinances or rules applicable to it, violation of which could reasonably be expected to have a Material Adverse Effect.

6.14    Environmental Compliance. Borrower has taken all necessary steps to investigate the past and present condition and usage of all real property at any time owned by Borrower (“Real Estate”) and the operations conducted thereon and, based upon such diligent investigation, has determined that:

6.14.1 Borrower or any operator of the Real Estate or any operations thereon is in violation, or alleged violation, of any judgment, decree, order, law, license, rule or regulation pertaining to environmental matters, including without limitation, those arising under the Resource Conservation and Recovery Act (“RCRA”), the Comprehensive Environmental Response, Compensation and Liability Act of 1980 as amended (“CERCLA”), the Superfund Amendments and Reauthorization Act of 1986 (“SARA”), the Federal Clean Water Act, the Federal Clean Air Act, the Toxic Substances Control Act, or any state, local or foreign law, statute, regulation, ordinance, order or decree relating to health, safety or the environment (hereinafter “Environmental Laws”), which violation would have a material adverse effect on the environment or a Material Adverse Effect;

7.1    Good Standing. Borrower shall maintain its limited liability company existence and good standing in its jurisdiction of organization and maintain qualification in each jurisdiction in which the failure to so qualify could reasonably be expected to have a Material Adverse Effect. Borrower shall maintain to the extent consistent with prudent management of Borrower’s business, in force all licenses, approvals and agreements, the loss of which could reasonably be expected to have a Material Adverse Effect.

7.2    Government Compliance. Borrower shall meet the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. Borrower shall comply, with all statutes, laws, ordinances and government rules and regulations to which it is subject, noncompliance with which could reasonably be expected to have a Material Adverse Effect.

7.3    GAAP. Borrower at all times hereafter shall maintain a standard and modern system of accounting in accordance with GAAP consistently applied with ledger and account cards and/or computer tapes and computer disks, computer printouts and computer records pertaining to the Collateral which contain information as may from time to time be requested by Bank.

7.4.2 Guarantor’s Quarterly Financial Statements. As soon as practicable, but in any event not later than sixty (60) days after the end of each of the fiscal quarters of Guarantor, copies of the unaudited consolidated balance sheet of Guarantor, as at the end of such quarter, and the related statement of income for the portion of Guarantor’s fiscal year then elapsed, all in reasonable detail and prepared in accordance with GAAP, together with a certification by the principal financial or accounting officer of Guarantor that the information contained in such financial statements fairly presents, in all material respects, the financial position of Guarantor for the period then ending, subject to changes resulting from audit and normal year-end adjustments;

7.4.5 Guarantor’s SEC Filings. Within three (3) Business Days after the filing or mailing thereof, copies of all material of a financial nature filed with the Securities and Exchange Commission or sent to the stockholders of the Guarantor.

7.4.6 Compliance Certificate. Simultaneously with the delivery of the financial statements referred to in Sections 7.4.1 and 7.4.3, Borrower shall deliver to Bank a certificate, executed by the principal financial or accounting officer of the Borrower in form reasonably acceptable to Bank (a “Compliance Certificate”), stating that no Default or Event of Default shall have occurred and be continuing (or, if a Default or Event of Default exists, explaining such Default or Event of Default) and setting forth in reasonable detail computations evidencing compliance with the covenants contained in Section 9.

7.5    Monthly A/R and A/P Agings. Borrower shall execute and deliver to Bank no later than twenty (20) days after the last day of each month, (a) a detailed aging of Accounts by total, a summary of aging of Accounts by customer, and a reconciliation statement; and (b) a detailed aging of accounts payable.

7.6    Inventory Reports. Borrower shall execute and deliver to Bank, no later than twenty (20) days after the last day of each month, Bank’s form of inventory report specifying Borrower’s cost and the resale price of Borrower’s Inventory and such other information as Bank may reasonably request.

7.7    Borrowing Base Certificate. Until otherwise notified by Bank, Borrower shall deliver to Bank, on a weekly basis, a Borrowing Base Certificate signed by the principal financial or accounting officer of Borrower in form reasonably acceptable to Bank; and Borrower shall deliver to Bank, on a monthly basis, a reconciled Borrowing Base Certificate signed by the principal financial or accounting officer of Borrower in form reasonably acceptable to Bank.

7.8    Weekly Hedge Reports. Borrower shall deliver to Bank, on a weekly basis, a weekly hedge report setting forth outstanding Swap Contracts with regards to Borrower’s hedged positions with its ethanol Inventory.

7.11    Notice of Reportable Event. Borrower shall furnish to Bank: (a) as soon as possible, but in no event later than thirty (30) days after Borrower knows or has reason to know that any reportable event with respect to any deferred compensation plan has occurred, a statement of the chief financial officer of Borrower setting forth the details concerning such reportable event and the action which Borrower proposes to take with respect thereto, together with a copy of the notice of such reportable event given to the Pension Benefit Guaranty Corporation, if a copy of such notice is available to Borrower; (b) promptly after the filing thereof with the United States Secretary of Labor or the Pension Benefit Guaranty Corporation, copies of each annual report with respect to each deferred compensation plan; (c) promptly after receipt thereof, a copy of any notice Borrower may receive from the Pension Benefit Guaranty Corporation or the Internal Revenue Service with respect to any deferred compensation plan; provided, however, this subparagraph shall not apply to notice of general application issued by the Pension Benefit Guaranty Corporation or the Internal Revenue Service; and (d) when the same is made available to participants in the deferred compensation plan, all notices and other forms of information from time to time disseminated to the participants by the administrator of the deferred compensation plan.

7.12    Audit of Accounts and Inventory. Bank shall have the right to conduct audits of Borrower’s accounts and inventory on an annual basis during the term of this Agreement, and upon the occurrence and continuance of an Event of Default, as frequent as Bank may determine in its reasonable discretion. Borrower hereby acknowledges and agrees that upon completion of any such audit, subsequent to the date of this Agreement, Bank shall have the right to adjust the Borrowing Base percentage or the definition of Eligible Accounts and Eligible Inventory, in its sole and reasonable discretion, based on its review of the results of such audit.

7.13    Taxes. Borrower shall make due and timely payment or deposit of all material federal, state, and local taxes, assessments, or contributions required of it by law, and will execute and deliver to Bank, on demand, appropriate certificates attesting to the payment or deposit thereof; and Borrower will make timely payment or deposit of all material tax payments and withholding taxes required of it by applicable laws, including, but not limited to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Bank with proof reasonably satisfactory to Bank indicating that Borrower has made such payments or deposits; provided that Borrower need not make any payment if the amount or validity of such payment is contested in good faith by appropriate proceedings and is reserved against (to the extent required by GAAP) by Borrower.

7.16    Further Assurances. At any time and from time to time Borrower shall execute and deliver such further instruments and take such further action as may reasonably be requested by Bank to effect the purposes of this Agreement.

Borrower covenants and agrees that, so long as any credit hereunder shall be available and until payment in full of the outstanding Indebtedness hereunder or for so long as Bank may have any commitment to make any Advances, Borrower will not do any of the following without the prior written consent of Bank:

8.1    Sale of Assets. Sell, lease, assign, transfer, or otherwise dispose of, any of its now owned or hereafter acquired assets (including, without limitation, shares of stock and indebtedness of subsidiaries, accounts, and leasehold interests), except: (a) inventory, including ethanol, bio-diesel or other products, disposed of in the ordinary course of business; (b) the sale or other disposition of assets no longer used or useful in the conduct of its business; (c) that any subsidiary may sell, lease, assign, or otherwise transfer its assets to Borrower; or (d) any other asset sales, leases, assignments, transfers or other dispositions not exceeding One Million and 00/100 Dollars ($1,000,000.00) in the aggregate in any fiscal year.

8.2    Mergers or Acquisitions. Wind up, liquidate or dissolve itself, reorganize, merge or consolidate with or into, or convey, sell, assign, transfer, lease, or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired) to any Person, or acquire all of substantially all of the assets or the business of any Person, or permit any subsidiary to do so, except that (a) any subsidiary may merge into or transfer assets to the Borrower; and (b) any subsidiary may merge into or consolidate with or transfer assets to any other subsidiary.

8.3    Debt. Create, incur, assume or be or remain liable with respect to any Debt, or permit any Subsidiary so to do, other than Permitted Debt.

8.4    Encumbrances. Create, incur, assume or suffer to exist any Lien with respect to any of its property, or assign or otherwise convey any right to receive income, including the sale of any accounts, or permit any of its Subsidiaries so to do, except for Permitted Liens.

8.5    Distributions. Make any distributions of any kind whatsoever to its members; purchase, redeem, retire, defease or otherwise acquire for value any of its membership interests (or any other equity securities of it, if any) held by any Person; return any capital to any of its members; or set apart any sum for any such purpose; except that Borrower may make Permitted Distributions so long as no Default or Event of Default then exists or would result from such payment, to each such Person.

8.6    Investments. Make any loan or advance to any Person, or purchase or otherwise acquire, any capital stock, assets, obligations, or other securities of, make any capital contribution to, or otherwise invest in or acquire any interest in any Person, or participate as a partner or joint venture with any other Person, except Permitted Investments.

8.7    Transactions with Affiliates. Enter into any transaction, including, without limitation, the purchase, sale, or exchange of property or the rendering of any service, with any Affiliate, including, without limitation, the purchase, sale, or exchange of property or the rendering of any service, with any Affiliate, except (a) in the ordinary course of and pursuant to the reasonable requirements of the Borrower’s business and upon fair and reasonable terms no less favorable to the Borrower than would obtain in a comparable arm’s-length transaction with a Person not an Affiliate; (b) marketing agreements; or (c) as contemplated by Sections 6.18, 8.5, 8.6, and 8.9.

8.8    Guaranties, Etc. Assume, guarantee, endorse, or otherwise be or become directly or contingently responsible or liable, (including, but not limited to, an agreement to purchase any obligation, stock, assets, goods, or services, or to supply or advance any funds, assets, goods, or services, or an agreement to maintain or cause such Person to maintain a minimum working capital or net worth or otherwise to assure the creditors of any Person against loss), for obligations of any Person, except guaranties by endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business and any other Permitted Debt.

8.9    Subordinated Debt. Make any payment in respect of any Subordinated Debt, except in compliance with the terms of such Subordinated Debt, or amend any provision contained in any documentation relating to the Subordinated Debt without Bank’s prior written consent.

8.10    Compliance. Become an “investment company” controlled by an “investment company,” within the meaning of the Investment Company Act of 1940, or become principally engaged in, or undertake as one of its important activities, the business of extending credit for the purpose of purchasing or carrying margin stock, or use the proceeds of any Advance for such purpose.

8.11    Labor Standards. Fail to comply with the Federal Fair Labor Standards Act or violate any law or regulation, in each case which violation could reasonably be expected to have a Material Adverse Effect, or permit any of its Subsidiaries to do any of the foregoing.

8.12    Levy. Permit any Judicial Officer or Assignee to be appointed or to take possession of any or all of Borrower’s assets.

9.            FINANCIAL COVENANTS. As of the last business day of each fiscal quarter (commencing on December 31, 2007), Borrower shall maintain the following financial ratios and covenants on a consolidated and non-consolidated basis:

9.1    Current Ratio. Borrower shall not permit the ratio of current assets to current liabilities to be less than 1.25 to 1.00.

9.2    Working Capital. Borrower shall not permit Working Capital to be less than the sum of Twelve Million and 00/100 Dollars ($12,000,000.00).

9.3    Tangible Effective Net Worth. Borrower shall not permit Tangible Effective Net Worth to be less than the sum of Twelve Million and 00/100 Dollars ($12,000,000.00).

9.4    Leverage Ratio. Borrower shall not permit the ratio of Debt to Tangible Effective Net Worth to be greater than 3.50:1.00.

10.1    Payment. (a) Borrower shall fail to pay any principal of the Advances or any Letter of Credit Reimbursement Obligations when the same shall become due and payable, whether at the stated date of maturity or any accelerated date of maturity or at any other date fixed for payment; (b) Borrower shall fail to pay any interest on the Advances, any fees, including but not limited to letter of credit fees, when the same shall become due and payable, whether at the stated date of maturity or any accelerated date of maturity or at any other date fixed for payment, and such failure shall continue unremedied for a period of three (3) Business Days; or (c) Borrower shall fail to pay other sums due hereunder or under any of the other Loan Documents, and such failure shall continue unremedied for a period of five (5) Business Days; or

10.2    Default of Certain Provisions. Borrower shall fail to observe or perform any covenant, obligation, condition or agreement set forth in Section 8 or Section 9 of this Agreement; or

10.3    Representations. Any representation, warranty, certificate, or other statement (financial or otherwise) made or furnished by or on behalf of Borrower or Guarantor to Bank in connection with this Agreement or any of the other Loan Documents, or as an inducement to Bank to enter into this Agreement, shall be false, incorrect, incomplete or misleading in any material respect when made or furnished unless if such misstatement (and the effect thereof) is capable of being cured, Borrower or Guarantor cures such misstatement (and any effect thereof) within thirty (30) days of becoming aware thereof; or

10.4    Covenant Default. Any default in the performance of or compliance with any agreement or other provision contained in this Agreement (other than those described in sections 10.1, 10.2, and 10.3) and such default is not cured within thirty (30) days after Borrower receives notice thereof or any officer of Borrower becomes aware thereof; provided, however, that if the default cannot by its nature be cured within such thirty (30) day period or cannot after diligent attempts by Borrower be cured within such thirty (30) day period, and such default is likely to be cured within a reasonable time, then Borrower shall have an additional reasonable period (which shall not in any case exceed thirty (30) additional days) to attempt to cure such default, and within such reasonable time period the failure to have cured such default shall not be deemed an Event of Default (provided that no Advances will be required to be made during such cure period); or

10.5    Attachment. If any material portion of Borrower’s assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any trustee, receiver or person acting in a similar capacity and such attachment, seizure, writ or distress warrant or levy has not been removed, discharged or rescinded within ten (10) Business Days, or if Borrower is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs, or if a judgment or other claim becomes a lien or encumbrance upon any material portion of Borrower’s assets, or if a notice of lien, levy, or assessment is filed of record with respect to any of Borrower’s assets by the United States Government, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, and the same is not paid within ten (10) Business Days after Borrower receives notice thereof, provided that none of the foregoing shall constitute an Event of Default where such action or event is stayed or an adequate bond has been posted pending a good faith contest by Borrower (provided that no Advances will be required to be made during such cure period); or

10.6    Insolvency. If Borrower becomes insolvent, or if an Insolvency Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced against Borrower and is not dismissed or stayed within ten (10) Business Days (provided that no Advances will be made prior to the dismissal of such Insolvency Proceeding); or

10.7    Other Agreements. Borrower shall fail to make any payment when due under the terms of any bond, debenture, note or other evidence of Debt to be paid by such Person (excluding this Agreement and the other Loan Documents but including any other evidence of Debt of Borrower to Bank) and such failure shall continue beyond any period of grace provided with respect thereto, or shall default in the observance or performance of any other agreement, term or condition contained in any such bond, debenture, note or other evidence of Debt, and the effect of such failure or default is to cause, or permit the holder or holders thereof to cause Debt in an aggregate amount of One Million and 00/100 Dollars ($1,000,000.00) or more to become due prior to its stated date of maturity; or

10.8    Subordinated Debt. If Borrower makes any payment on account of Subordinated Debt, except to the extent such payment is allowed under any subordination agreement entered into with Bank; or

10.9    Judgments. The filing of a notice of judgment lien against Borrower; or the recording of any abstract of judgment against Borrower in any county in which Borrower has an interest in real property; or the service of a notice of levy and/or of a writ of attachment or execution, or other like process, against the assets of Borrower; or the entry of a judgment against Borrower; and with respect to any of the foregoing, the amount in dispute is in excess of One Million and 00/100 Dollars ($1,000,000.00); or

10.10    Guaranty. The guaranty by the Guarantor ceases for any reason to be in full force and effect, or the Guarantor fails to perform any obligation under such guaranty and such failure is not cured within ten (10) Business Days after Guarantor receives notice thereof or any officer of Guarantor becomes aware thereof; or

10.11    Change of Control. Should there occur a sale, conveyance, transfer, disposition or encumbrance, either voluntary or involuntary, or should an agreement be entered into to accomplish any thereof, with respect to more than ten percent (10%) of the issued and outstanding Equity Interests of Borrower; or

13.1    Borrower agrees that checks and other instruments received by Bank in payment or on account of Borrower’s Indebtedness constitute only conditional payment until such items are actually paid to Bank and Borrower waives the right to direct the application of any and all payments at any time or times hereafter received by Bank on account of Borrower’s Indebtedness and Borrower agrees that Bank shall have the continuing exclusive right to apply and reapply such payments in any manner as Bank may deem advisable, notwithstanding any entry by Bank upon its books.

13.2    Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension or renewal of any or all commercial paper, Accounts, documents, instruments, chattel paper, and guarantees at any time held by Bank on which Borrower may in any way be liable.

13.3    Bank shall not in any way or manner be liable or responsible for (a) the safekeeping of the Inventory; (b) any loss or damage thereto occurring or arising in any manner or fashion from any cause; (c) any diminution in the value thereof; or (d) any act or default of any carrier, warehouseman, bailee, forwarding agency or other person whomsoever. All risk of loss, damage or destruction of Inventory shall be borne by Borrower.

which is not a purchase money security interest as to that portion, unless expressly provided to the contrary in another place; or (b) if Borrower (or any of them) has (have) given or give(s) Bank a deed of trust or mortgage covering real property, that deed of trust or mortgage shall not secure the loan and any other Indebtedness of Borrower (or any of them), unless expressly provided to the contrary in another place.

15.            NOTICES. Unless otherwise provided in this Agreement, all notices or demands by either party on the other relating to this Agreement shall be in writing and sent by regular United States mail, postage prepaid, properly addressed to Borrower or to Bank at the addresses stated in this Agreement, or to such other addresses as Borrower or Bank may from time to time specify to the other in writing. Requests for information made to Borrower by Bank from time to time hereunder may be made orally or in writing, at Bank’s discretion.

16.            AUTHORIZATION TO DISBURSE. Bank is hereby authorized to make loans and advances hereunder upon telephonic or other instructions received from anyone purporting to be an officer, employee, or representative of Borrower, or at the discretion of Bank if said loans and advances are necessary to meet any Indebtedness of Borrower to Bank. Bank shall have no duty to make inquiry or verify the authority of any such party, and Borrower shall hold Bank harmless from any damage, claims or liability by reason of Bank’s honor of, or failure to honor, any such instructions.

17.            PAYMENTS. Borrower hereby authorizes Bank to deduct the full amount of any interest, fees, costs, or Bank Expenses due under this Agreement and not paid or collected when due in accordance with the terms and conditions hereof from any account maintained by Borrower with Bank. Should there be insufficient funds in any such account to pay all such sums when due, the full amount of such deficiency shall be immediately due and payable by Borrower; provided, however, that Bank shall not be obligated to advance funds to cover any such payment.

18.            DESTRUCTION OF BORROWER’S DOCUMENTS. Any documents, schedules, invoices or other papers delivered to Bank, may be destroyed or otherwise disposed of by Bank six (6) months after they are delivered to or received by Bank, unless Borrower requests, in writing, the return of the said documents, schedules, invoices or other papers and makes arrangements, at Borrower’s expense, for their return.

19.            CHOICE OF LAW. The validity of this Agreement, its construction, interpretation and enforcement, and the rights of the parties hereunder and concerning the Collateral, shall be determined according to the laws of the State of California. The parties agree that all actions or proceedings arising in connection with this Agreement shall be tried and litigated only in the state and federal courts in California.

20.2    Assignment. This Agreement shall bind and inure to the benefit of the respective successors and assigns of each of the parties; provided, however, that Borrower may not assign this Agreement or any rights hereunder without Bank’s prior written consent and any prohibited assignment shall be absolutely void. No consent to an assignment by Bank shall release Borrower or any guarantor from their obligations to Bank. Bank may assign this Agreement and its rights and duties hereunder. Bank reserves the right to sell, assign, transfer, negotiate or grant participations in all of Bank’s rights and benefits hereunder. In connection therewith, Bank may disclose all documents and information which Bank now or hereafter may have relating to Borrower or Borrower’s business.

20.3    Headings. Paragraph headings and paragraph numbers have been set forth herein for convenience only; unless the contrary is compelled by the context, everything contained in each paragraph applies equally to this entire Agreement. Unless the context of this Agreement clearly requires otherwise, references to the plural include the singular, references to the singular include the plural, and the term “including” is not limiting. The words “hereof”, “herein”, “hereby”, “hereunder”, and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement.

20.4    Indemnification. Borrower shall defend, indemnify and hold harmless Bank and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities claimed or asserted by any other party in connection with the transactions contemplated by this Agreement; and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank as a result of or in any way arising out of, following, or consequential to transactions between Bank and Borrower whether under this Agreement, or otherwise (including without limitation reasonable attorneys fees and expenses), except for losses caused by Bank’s gross negligence or willful misconduct.