Loan and Security Agreement

THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between PMC Financial Services Group, LLC, a Delaware limited liability company (“Lender”), whose address is 711 W. Kimberly Avenue, Suite 145, Placentia, CA  92870, and the borrower(s) named above (jointly and severally, the “Borrower”), whose chief executive office is located at the above address (“Borrower’s Address”). The Schedule to this Agreement (the “Schedule”) shall for all purposes be deemed to be a part of this Agreement, and the same is an integral part of this Agreement.  (Definitions of certain terms used in this Agreement are set forth in Section 8 below.)

  

1.    LOANS.

1.1    Loans. Lender will make loans to Borrower (the “Loans”), in amounts determined by Lender in its good faith business judgment, up to the amounts (the “Credit Limit”) shown on the Schedule, provided no Default or Event of Default has occurred and is continuing, and subject to deduction of Reserves for accrued interest and such other Reserves as Lender deems proper from time to time in its good faith business judgment.

 

1.2    Interest.  All Loans and all other monetary Obligations shall bear interest at the rate shown on the Schedule, except where expressly set forth to the contrary in this Agreement.  Accrued interest shall be payable monthly, on the last day of the month, and shall be charged to Borrower’s loan account (and the same shall thereafter bear interest at the same rate as the other Loans).

 

1.3    Overadvances. If at any time or for any reason the total of all outstanding Loans and all other monetary Obligations ex­ceeds the Credit Limit (an “Overadvance”), Borrower shall immediately pay the amount of the excess to Lender, with­out notice or demand.  Without limiting Borrower's obliga­tion to repay to Lender the amount of any Overadvance, Borrower agrees to pay Lender interest on the outstanding amount of any Overadvance, on demand, at the Default Rate.

 

1.4    Fees.  Borrower shall pay Lender the fees shown on the Schedule, which are in addition to all interest and other sums payable to Lender and are not refundable.

 

1.5    Loan Requests. To obtain a Loan, Borrower shall make a request to Lender by facsimile or telephone, such request to provide Lender with at least one Business Day’s notice. Loan requests received after 3:00 PM (California time) will not be considered by Lender until the next Business Day. Lender may rely on any telephone request for a Loan given by a person whom Lender believes is an authorized representative of Borrower, and Borrower will indemnify Lender for any loss Lender suffers as a result of that reliance.

2.    SECURITY INTEREST. To secure the payment and per­formance of all of the Obligations when due, Borrower hereby grants to Lender a security interest in all of the following (collectively, the “Collateral”):  all right, title and interest of Borrower in and to all of the following, whether now owned or hereafter arising or acquired and wherever located: all Accounts; all Inventory; all Equipment; all Deposit Accounts; all General Intangibles (including without limitation all Intellectual Property); all Investment Property; all Other Property; and any and all claims, rights and interests in any of the above, and all guaranties and security for any of the above, and all substitutions and replacements for, additions, accessions, attachments, accessories, and improvements to, and proceeds  (including proceeds of any insurance policies, pro­ceeds of proceeds and claims against third parties) of, any and all of the above, and all Borrower’s books relating to any and all of the above.

      

   

3.    REPRESENTATIONS, WARRANTIES AND COVENANTS OF BORROWER.

 

In order to induce Lender to enter into this Agreement and to make Loans, Borrower represents and warrants to Lender as follows, and Borrower covenants that the fol­lowing representations will continue to be true, and that Borrower will at all times comply with all of the following covenants, throughout the term of this Agreement and until all Obligations have been paid and performed in full:

 

3.1    Corporate Existence and Authority.  Borrower is and will continue to be, duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization.  Borrower is and will con­tinue to be qualified and licensed to do business in all ju­risdictions in which any failure to do so would result in a Material Adverse Change.  The execution, delivery and performance by Borrower of this Agreement, and all other documents contemplated hereby (i) have been duly and validly authorized, (ii) are enforceable against Borrower in accordance with their terms (except as en­forcement may be limited by equitable principles and by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to creditors' rights generally), and (iii) do not violate Borrower’s articles or certificate of incorporation, or Borrower’s by-laws, Borrower’s partnership agreement or operating agreement (as the case may be), or any law or any  material agreement or instru­ment which is binding upon Borrower or its property, and (iv) do not constitute grounds for acceleration of any indebtedness or obligation under any agreement or instru­ment which is binding upon Borrower or its property.

 

3.2    Name; Trade Names and Styles.  The name of Borrower set forth in the heading to this Agreement is its correct name.  Listed in the Representations are all prior names of Borrower and all of Borrower’s present and prior trade names.  Borrower shall give Lender 30 days' prior written notice before changing its name or doing business under any other name.  Borrower has complied, and will in the future comply, in all material respects, with all laws relating to the conduct of business under a fictitious business name.

 

3.3    Place of Business; Location of Collateral. The ad­dress set forth in the heading to this Agreement is Borrower's chief executive office.  In addition, Borrower has places of business and Collateral is located only at the locations set forth in the Representations.  Borrower will give Lender at least 30 days prior written notice before opening any additional place of business, changing its chief execu­tive office, or moving any of the Collateral to a location other than Borrower’s Address or one of the locations set forth in the Representations, without Lender’s prior written consent.

 

3.4    Title to Collateral; Perfection; Permitted Liens.

(a)    Borrower is now, and will at all times in the future be, the sole owner of all the Collateral, except for items of Equipment which are leased to Borrower.  The Collateral now is and will remain free and clear of any and all liens, charges, security interests, encumbrances and adverse claims, except for Permitted Liens.  Lender now has, and will continue to have, a first-priority perfected and enforceable security in­terest in all of the Collateral, subject only to Permitted Liens, and Borrower will at all times defend Lender and the Collateral against all claims of others.

 

(b)    Borrower has set forth in the Representations all of Borrower’s Deposit Accounts, and Borrower will give Lender five Business Days advance written notice before establishing any new Deposit Accounts and will cause the institution where any such new Deposit Account is maintained to execute and deliver to Lender a control agreement in form sufficient to perfect Lender’s security interest in the Deposit Account and otherwise satisfactory to Lender in its good faith business judgment.

 

(c)    In the event that Borrower shall at any time after the date hereof have any commercial tort claims against others, which it is asserting or intends to assert, and in which the potential recovery exceeds $25,000, Borrower shall promptly notify Lender thereof in writing and provide Lender with such information regarding the same as Lender shall request.  Such notification to Lender shall constitute a grant of a security interest in the commercial tort claim and all proceeds thereof to Lender, and Borrower shall execute and deliver all such documents and take all such actions as Lender shall request in connection therewith.

 

(d)    None of the Collateral now is or will be affixed to any real property in such a manner, or with such intent, as to become a fixture.  Borrower is not and will not become a lessee under any real property lease pursuant to which the lessor may obtain any rights in any of the Collateral and no such lease now prohibits, restrains, impairs or will prohibit, restrain or im­pair Borrower's right to remove any Collateral from the leased premises.  Whenever any Collateral is located upon real property in which any third party has an interest, Borrower shall, whenever requested by Lender, cause such third party to exe­cute and deliver to Lender, in form acceptable to Lender, such waivers and subordinations as Lender shall specify.  Borrower will keep in full force and effect, and will comply with all terms of, any lease of real property where any of the Collateral now or in the future may be located.

3.5    Maintenance of Collateral. Borrower will maintain the Collateral in good working condition (ordinary wear and tear excepted), and Borrower will not use the Collateral for any unlawful purpose.  Borrower will immediately advise Lender in writing of any material loss or damage to the Collateral.

  

  

3.6    Books and Records.  Borrower has maintained and will maintain at Borrower's Address complete and accurate books and records, comprising an accounting system in ac­cordance with GAAP.

 

3.7    Financial Condition, Statements and Reports.  All financial statements now or in the future delivered to Lender have been, and will be, prepared in conformity with GAAP and now and in the future will fairly present the results of operations and fi­nancial condition of Borrower, in accordance with GAAP, at the times and for the pe­riods therein stated.  Between the last date covered by any such statement provided to Lender and the date hereof, there has been no Material Adverse Change.

 

3.8    Tax Returns and Payments; Pension Contributions.  Borrower has timely filed, and will timely file, all required tax returns and reports, and Borrower has timely paid, and will timely pay, all foreign, federal, state and local taxes, as­sessments, deposits and contributions now or in the future owed by Borrower.  Borrower may, however, defer pay­ment of any contested taxes, provided that Borrower (i) in good faith contests Borrower's obligation to pay the taxes by appropriate proceedings promptly and diligently insti­tuted and conducted, (ii) notifies Lender in writing of the commencement of, and any material development in, the proceedings, and (iii) posts bonds or takes any other steps required to keep the contested taxes from becoming a lien upon any of the Collateral.  Borrower is unaware of any claims or adjustments proposed for any of Borrower's prior tax years which could result in additional taxes becoming due and payable by Borrower.  Borrower has paid, and shall continue to pay all amounts necessary to fund all pre­sent and future pension, profit sharing and deferred com­pensation plans in accordance with their terms, and Borrower has not and will not withdraw from participation in, permit partial or complete termination of, or permit the occurrence of any other event with respect to, any such plan which could reasonably be expected to result in any liability of Borrower, in­cluding any liability to the Pension Benefit Guaranty Corporation or its successors or any other governmental agency.

 

3.9    Compliance with Law.  Borrower has complied, and will comply, in all respects, with all provisions of all foreign, federal, state and local laws and regulations applicable to Borrower, including, but not limited to, those relating to Borrower's ownership of real or personal prop­erty, the conduct and licensing of Borrower's business, and all environmental matters.

 

3.10    Litigation.  There is no claim, suit, litigation, proceeding or investiga­tion pending or threat­ened against or affecting Borrower in any court or before any governmental agency (or any basis therefor known to Borrower).  Borrower will promptly inform Lender in writing of any claim, proceeding, litigation or investigation in the future threatened or instituted against Borrower.

 

3.11    Use of Proceeds.  All proceeds of all Loans shall be used solely for Borrower’s working capital.  Borrower is not purchasing or carrying any “margin stock” (as defined in Regulation G of the Board of Governors of the Federal Reserve System) and no part of the proceeds of any Loan will be used to purchase or carry any “margin stock” or to extend credit to others for the purpose of purchasing or carrying any “margin stock.”

 

(a)    Borrower represents and warrants to Lender as follows:  Each Account with respect to which Loans are requested by Borrower shall, on the date each Loan is requested and made, (i) represent an undisputed bona fide existing un­conditional obligation of the Account Debtor created by the sale, delivery, and acceptance of goods or the rendition of services, or the non-exclusive licensing of Intellectual Property, in the ordinary course of Borrower's business, and (ii) meet the Minimum Eligibility Requirements set forth in  Section 8 below.

 

(b)    Borrower represents and warrants to Lender as follows: (i) All Eligible Inventory is of good and merchantable quality, free from defects; and (ii) As to each item of Inventory that is identified by Borrower as Eligible Inventory in a borrowing base report submitted to Lender, such Inventory is not excluded as ineligible by virtue of one or more of the excluding criteria set forth in the definition of Eligible Inventory.

 

4.2    Representations Relating to Documents and Legal Compliance.  Borrower represents and warrants to Lender as follows:  All statements made and all unpaid balances appearing in all invoices, instruments and other documents evidencing the Accounts are and shall be true and cor­rect and all such invoices, instruments and other docu­ments and all of Borrower's books and records are and shall be genuine and in all respects what they purport to be.  All sales and other transactions underlying or giving rise to each Account shall comply in all material respects with all applicable laws and governmental rules and regulations.  To the best of Borrower’s knowledge, all signatures and endorsements on all documents, instru­ments, and agreements relating to all Accounts are and shall be genuine, and all such documents, instruments and agreements are and shall be legally enforceable in accor­dance with their terms.

 

4.3    Schedules and Documents relating to Accounts.  Borrower shall deliver to Lender transaction reports and schedules of collections, as provided in the Schedule, on Lender's standard forms; provided, however, that Borrower's failure to execute and deliver the same shall not affect or limit Lender's security interest and other rights in all of Borrower's Accounts, nor shall Lender's failure to ad­vance or lend against a specific Account affect or limit Lender's security interest and other rights therein. If requested by Lender, Borrower shall furnish Lender with copies (or, at Lender's request, originals) of all contracts, orders, invoices, and other similar documents, and all shipping instructions, delivery receipts, bills of lading, and other evidence of delivery, for any goods the sale or disposition of which gave rise to such Accounts, and Borrower warrants the genuineness of all of the fore­going.  Borrower shall also furnish to Lender an aged ac­counts receivable trial balance as provided in the Schedule.  In addition, Borrower shall deliver to Lender, on its request, the originals of all instruments, chattel paper, security agreements, guarantees and other documents and property evidencing or securing any Accounts, in the same form as received, with all necessary indorsements, and copies of all credit memos.

  

  

4.4    Collection of Accounts. Borrower agrees that any and all Accounts must be collected through the lockbox arrangements required under this Section 4.4.  Any and all payments on, and proceeds of, Accounts received by Borrower shall be held by Borrower in trust for Lender, and Borrower shall immediately deliver all such payments and proceeds to Lender in their original form, duly endorsed, to be applied to the Obligations in such order as Lender shall determine.  From and after the Effective Date, all proceeds of Collateral shall be de­posited by Borrower into a lockbox account, pursuant to a lockbox agreement in such form as Lender may specify in its good faith business judgment, and Borrower shall notify all Account Debtors to make all payments to the lockbox.  Without limiting the generality of the foregoing, Borrower’s invoices shall have imprinted or stamped on the face thereof notifications of assignment and check remittance information indicating Lender’s lock box address.  Lender may also notify all Account Debtors to make all payments to such lockbox.

 

4.5    Remittance of Proceeds.  All proceeds arising from the disposition of any Collateral shall be delivered, in kind, by Borrower to Lender in the original form in which re­ceived by Borrower not later than the following Business Day after receipt by Borrower, to be applied to the Obligations in such order as Lender shall determine.  Borrower agrees that it will not commingle proceeds of Collateral with any of Borrower's other funds or property, but will hold such proceeds separate and apart from such other funds and property and in an express trust for Lender.  Nothing in this Section limits the restrictions on disposi­tion of Collateral set forth elsewhere in this Agreement.

 

4.6    Disputes. Borrower shall notify Lender promptly of all disputes or claims relating to Accounts.  Borrower shall not forgive (completely or partially), compromise or settle any Account for less than payment in full, or agree to do any of the foregoing, except that Borrower may do so, provided that: (i) Borrower does so in good faith, in a commercially reasonable manner, in the ordinary course of business, and in arm’s length transactions, which are re­ported to Lender on the regular reports provided to Lender; (ii) no Default or Event of Default has occurred and is con­tinuing; and (iii) taking into account all such discounts, set­tlements and forgiveness, the total outstanding Loans will not exceed the Credit Limit.

 

4.7    Returns.  Provided no Event of Default has oc­curred and is continuing, if any Account Debtor returns any Inventory to Borrower, Borrower shall promptly determine the reason for such return and promptly issue a credit memorandum to the Account Debtor in the appropriate amount.  In the event any attempted return oc­curs after the occurrence and during the continuance of any Event of Default, Borrower shall hold the returned Inventory in trust for Lender, and immediately notify Lender of the return of the Inventory.

 

4.8    Verification.  Lender may, from time to time, verify directly with the respective Account Debtors the validity, amount and other matters relating to the Accounts, by means of mail, telephone or otherwise, either in the name of Borrower or Lender or such other name as Lender may choose, and Lender or its designee may, at any time, notify Account Debtors that it has a security interest in the Accounts.

 

4.9    No Liability.  Lender shall not be responsible or liable for any shortage or dis­crepancy in, damage to, or loss or destruction of, any goods, the sale or other disposition of which gives rise to an Account, or for any error, act, omission, or delay of any kind occurring in the settlement, failure to settle, collection or failure to collect any Account, or for settling any Account in good faith for less than the full amount thereof, nor shall Lender be deemed to be responsible for any of Borrower's obligations under any contract or agreement giving rise to an Account.

  

5.1    Financial and Other Covenants.  Borrower shall at all times comply with the financial and other covenants set forth in the Schedule.

 

5.2    Insurance.  Borrower shall, at all times insure all of the tangible personal property Collateral and carry such other business insurance, with insurers reasonably accept­able to Lender, in such form and amounts as Lender may require in its good faith business judgment, and Borrower shall provide evidence of such insurance to Lender.  All such insurance policies shall name Lender as the exclusive loss payee, and shall contain a lenders loss payee en­dorsement in form reasonably acceptable to Lender.  Upon receipt of the proceeds of any such insurance, Lender shall apply such proceeds in reduction of the Obligations as Lender shall determine in its good faith business judgment.  If Borrower fails to provide or pay for any in­surance, Lender may, but is not obligated to, obtain the same at Borrower's expense.  Borrower shall promptly de­liver to Lender copies of all material reports made to insurance companies.

 

5.3    Reports.  Borrower, at its expense, shall provide Lender with the written reports set forth in the Schedule, and such other written reports with respect to Borrower  as Lender shall from time to time specify in its good faith business judgment.

  

  

5.4    Access to Collateral, Books and Records.  At rea­sonable times, and on one Business Day’s notice, Lender, or its agents, shall have the right to inspect the Collateral, and the right to audit and copy Borrower's books and records. Such inspections or audits shall be conducted no more often than four times during each calendar year, but nothing herein restricts Lender’s right to conduct such audits more frequently if (i) Lender believes that it is advisable to do so in Lender’s good faith business judgment, or (ii) Lender believes in good faith that a Default or Event of Default has occurred.  The foregoing inspections and audits shall be at Borrower’s expense and the charge therefor shall be $850 per person per day (or such higher amount as shall repre­sent Lender’s then current standard charge for the same), plus reasonable out-of-pocket expenses.

 

5.5    Negative Covenants.  Except as may be permitted in the Schedule, Borrower shall not, without Lender's prior written consent (which shall be a matter of its good faith business judgment), do any of the following:

(i)    merge or con­solidate with another corporation or entity;

 

(ii)    acquire any assets, except in the ordinary course of business;

 

(iii)    enter into any other transaction outside the ordinary course of business;

 

(iv)    sell or transfer any Collateral, except for the sale of finished Inventory in the ordinary course of Borrower's business;

 

(v)    store any Inventory or other Collateral with any ware­houseman or other third party other than as disclosed in the Schedule or in Section 3(d) of the Representations;

 

(vi)    sell any Inventory on a sale-or-return, guaranteed sale, consignment, or other con­tingent basis;

 

(vii)    make any loans of any money or other assets or make any other Investments, other than Permitted Investments;

 

(viii)    create, incur, assume or permit to be outstanding any Indebtedness other than (a) the Obligations, (b) trade payables and other contractual obligations to suppliers and customers incurred in the ordinary course of business, (c) other Indebtedness in a total principal amount at any time outstanding for all such other Indebtedness not to exceed $50,000, and (d) Indebtedness owed pursuant to that certain sale-leaseback transaction by and between Borrower and 525 South Douglas Street, LLC pursuant to that certain Standard Offer Agreement and Escrow Instructions for Purchase of Real Estate dated April 23, 2009 (the “Sale-Leaseback Transaction”);

 

(ix)    guarantee or otherwise become liable with respect to the obligations of another party or entity;

 

(x)   pay or declare any dividends on, or distributions with respect to Borrower's common stock (except for dividends payable solely in stock of Borrower), or make any other distributions, directly or indirectly, with respect to any equity interest in Borrower; provided, however, that Borrower may distribute cash dividends on its Series A and Series B Preferred Stock, up to an aggregate of $125,000 in any fiscal year, to the extent allowed in the terms of the securities and provided that no Default or Event of Default has occurred and is continuing;

 

(xi)    redeem, retire, purchase or otherwise acquire, directly or indirectly, any of Borrower's stock or other equity securities, except for conversions of Series A and Series B Preferred Stock which may be converted to common stock of Borrower in accordance with the terms of the respective securities;

 

(xii)    engage, directly or indirectly, in any business other than the businesses currently engaged in by Borrower or reasonably related thereto; or

 

(xiii)    dissolve or elect to dissolve.

Transactions permitted by the foregoing provisions of this Section are only permitted if no Default or Event of Default has occurred and is continuing, or would occur as a result of such transac­tion.

5.6    Litigation Cooperation.  Should any third-party suit or proceeding be instituted by or against Lender with re­spect to any Collateral or relating to Borrower, Borrower shall, without expense to Lender, make available Borrower and its officers, employees and agents and Borrower's books and records, to the extent that Lender may deem them reasonably necessary in order to prosecute or defend any such suit or proceeding.

 

5.7   Notification of Changes.  Borrower will promptly notify Lender in writing of (i) any change in its officers or directors, and (ii) any Material Adverse Change.

 

5.8    Further Assurances.  Borrower agrees, at its ex­pense, on request by Lender, to execute all documents and take all actions, as Lender, may, in its good faith business judgment, deem neces­sary or useful in order to perfect and maintain Lender's perfected first-priority security interest in the Collateral (subject only to Permitted Liens), and in order to fully consummate the transactions contemplated by this Agreement.

6.1    Maturity Date.  This Agreement shall continue in effect until the maturity date set forth on the Schedule (the “Maturity Date”), subject to Section 6.3 below.

  

  

6.2    Early Termination.

 

(a)   Early Termination.  This Agreement may be termi­nated prior to the Maturity Date as follows:  (i) by Borrower on or after the first anniversary of the Effective Date, effective thirty days after written notice of termination is given to Lender; or (ii) by Lender at any time after the occurrence and during the continuance of an Event of Default, without notice, effective immediately.

 

(b)   Revolver.  If this Agreement is termi­nated by Borrower or by Lender under this Section 6.2, Borrower shall pay to Lender a termination fee in an amount equal to the following:  (i) 2.0% of the Maximum Revolver Amount, if the effective date of termination is on or prior to the second anniversary of the date hereof and (ii) 1% of the Maximum Revolver Amount, if the effective date of termination is after the second anniversary of the Effective Date.  The termination fee shall be due and payable on the effective date of termination and thereafter shall bear interest at a rate equal to the highest rate appli­cable to any of the Obligations.

 

(c)   Term Loan.  During the period commencing on the date of funding of the Term Loan and ending on the first anniversary of the Effective Date, Borrower shall not have the right to voluntarily prepay the Term Loan.  At any time after the first anniversary of the date of the date of funding of the Term Loan, Borrower shall have the option to prepay the Term Loan (together with all accrued but unpaid interest and the Term Loan Prepayment Fee) in whole, or in increments of $100,000 upon not less than 30 days prior written notice to Lender.  As used herein, the term “Term Loan Prepayment Fee” means, as of any date of determination, (i) 2.0% of the original principal amount of the Term Loan if such prepayment occurs on or before the second anniversary of the Effective Date and (ii) 1.0% of the original principal amount of the Term Loan if such prepayment occurs after the second anniversary of the Effective Date.  The Term Loan Prepayment Fee shall be due from Borrower to Lender upon any prepayment of the principal of the Term Loan, including without limitation any prepayment as a result of an Event of Default or the exercise of any rights or remedies by Lender following the same.

 

(d)   Cap Ex Loans.  Borrower is not obligated to finance equipment purchases with the Lender, and may enter into lease agreements as necessary with third parties to the extent permitted hereunder.  Should Borrower finance equipment purchases through the Lender, through the first anniversary of the Effective Date, Borrower shall not have the right to voluntarily prepay any Cap Ex Loan.  At any time after the first anniversary of the date of the date of funding of the Cap Ex Loan, Borrower shall have the option to prepay the Cap Ex Loan (together with all accrued but unpaid interest and the Cap Ex Loan Prepayment Fee) in whole, but not in part, upon not less than 30 days prior written notice to Lender.  As used herein, the term “Cap Ex Loan Prepayment Fee” means, as of any date of determination, (i) 2.0% of the original principal amount of the Cap Ex Loan if such prepayment occurs on or before the second anniversary of the Effective Date and (ii) 1.0% of the original principal amount of the Cap Ex Loan if such prepayment occurs after the second anniversary of the Effective Date.  The Cap Ex Loan Prepayment Fee shall be due from Borrower to Lender upon any prepayment of the principal of the Cap Ex Loan, including without limitation any prepayment as a result of an Event of Default or the exercise of any rights or remedies by Lender following the same.

 

6.3    Payment of Obligations.  On the Maturity Date or on any earlier effective date of termination, Borrower shall pay and perform in full all Obligations, whether evidenced by installment notes or otherwise, and whether or not all or any part of such Obligations are otherwise then due and payable. Notwithstanding any termination of this Agreement, all of Lender's security interests in all of the Collateral and all of the terms and provisions of this Agreement shall continue in full force and effect until all Obligations have been paid and performed in full; pro­vided that Lender may, in its sole discretion, refuse to make any further Loans after termination.  No termination shall in any way affect or impair any right or remedy of Lender, nor shall any such termination re­lieve Borrower of any Obligation to Lender, until all of the Obligations have been paid and performed in full.  Upon payment and performance in full of all the Obligations, termination of this Agreement, and execution and delivery by Borrower to Lender of a general release on Lender’s standard form, Lender shall promptly terminate its financing statements with respect to the Borrower and de­liver to Borrower such other documents as may be required to fully terminate Lender's security interests. Notwithstanding any such termination, the indemnity provisions of this Agreement shall continue in full force and effect.

7.1    Events of Default.  The  occurrence of any of the following events shall constitute an “Event of Default” un­der this Agreement, and Borrower shall give Lender im­mediate written notice thereof:

 

(a)    Any warranty, represen­tation, statement, report or certificate made or delivered to Lender by Borrower or any of Borrower's officers, em­ployees or agents, now or in the future, shall be untrue or misleading in a material respect when made or deemed to be made; or

 

(b)    Borrower shall fail to pay when due any Loan or any interest thereon or any other monetary Obligation and such payment remains unpaid for more than one day from the day such payment was due; or

 

(c)    The total Loans and other Obligations outstanding at any time shall exceed the Credit Limit and Borrower does not reduce the outstanding amount to the Credit Limit within one day of the occurrence thereof; or

  

  

(d)    Borrower shall fail to comply with any of the financial covenants set forth in the Schedule, or shall fail to perform any other non-monetary Obligation which by its nature cannot be cured, or shall fail to permit Lender to conduct an inspection or audit as specified in Section 5.4 hereof; or

 

(e)    Borrower shall fail to per­form any other non-monetary Obligation, which failure is not cured within five Business Days after the date due; or

 

(f)    Any levy, assessment, attachment, seizure, lien or encum­brance (other than a Permitted Lien) aggregating in excess of $100,000 at any given time is made on all or any part of the Collateral which is not cured within 10 days af­ter the occurrence of the same; or

 

(g)    Any default or event of default occurs under any obligation secured by a Permitted Lien, which is not cured within any applicable cure period or waived in writing by the holder of the Permitted Lien; or

 

(h)    Borrower breaches any material contract or obligation, which has resulted or may reasonably be ex­pected to result in a Material Adverse Change; or

 

(i)    Dissolution, termination of existence, temporary or permanent suspension of business, insolvency or business failure of Borrower or any Guarantor; or appointment of a receiver, trustee or custodian, for all or any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceeding by Borrower or any Guarantor under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect

 

(j)    The com­mencement of any proceeding against Borrower or any Guarantor under any reorganiza­tion, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any juris­diction, now or in the future in effect, which is not cured by the dismissal thereof within 30 days after the date commenced; or

 

(k)    [Omitted]; or

 

(l)    Revocation or termination of, or limitation or denial of liability upon, any pledge of any certificate of deposit, securities or other property or asset of any kind pledged by any third party to secure any or all of the Obligations, or any attempt to do any of the foregoing, or commencement of proceedings by or against any such third party under any bankruptcy or insolvency law; or

 

(m)    Borrower makes any payment on account of any indebtedness or obligation which has been subordinated to the Obligations other than as permitted in the applicable subordination agreement, or if any Person who has subordinated such indebtedness or obligations terminates or in any way limits his subordina­tion agreement; or

 

(n)    There shall be a decrease in the record or beneficial ownership of Christopher Reed in an aggregate of more than 20% of the outstanding shares of stock of, or equity ownership interest in, Borrower, in one or more transactions, compared to the ownership of the same in effect on the date hereof, without the prior written consent of Lender; or

 

(o)    There shall be a change in the President and Chief Executive Officer, or Chief Financial Officer, and such person is not replaced with another person acceptable to Lender in its good faith business judgment within 30 days thereafter; or

 

(p)    Borrower shall generally not pay its debts as they become due, or Borrower shall conceal, remove or transfer any part of its property, with intent to hinder, delay or defraud its creditors, or make or suffer any transfer of any of its prop­erty which may be fraudulent under any bankruptcy, fraudulent conveyance or similar law; or

 

(q)    A Material Adverse Change shall occur.

  

 

7.2    Remedies.  Upon the occurrence and during the continuance of any Event of Default, Lender, at its option, and without notice or demand of any kind (all of which are hereby expressly waived by Borrower), may do any one or more of the following: (a) Cease making Loans or other­wise extending credit to Borrower under this Agreement or any other Loan Document; (b) Accelerate and de­clare all or any part of the Obligations to be immediately due, payable, and performable, notwithstanding any de­ferred or installment payments allowed by any instrument or agreement evidencing or relating to any Obligation; (c) Take posses­sion of any or all of the Collateral wherever it may be found, and for that purpose Borrower hereby authorizes Lender without judicial process to enter onto any of Borrower's premises without interference to search for, take possession of, keep, store, or remove any of the Collateral, and remain on the premises or cause a custo­dian to remain on the premises in exclusive control thereof, without charge for so long as Lender deems it necessary, in its good faith business judgment, in order to complete the enforcement of its rights under this Agreement or any other agreement; provided, however, that should Lender seek to take posses­sion of any of the Collateral by court process, Borrower hereby irrevocably waives: (i) any bond and any surety or security relating thereto required by any statute, court rule or otherwise as an incident to such possession; (ii) any demand for possession prior to the commencement of any suit or action to recover possession thereof; and (iii) any requirement that Lender retain possession of, and not dis­pose of, any such Collateral until after trial or final judg­ment; (d) Require Borrower to assemble any or all of the Collateral and make it available to Lender at places desig­nated by Lender which are reasonably convenient to Lender and Borrower, and to remove the Collateral to such locations as Lender may deem advisable; (e) Complete the processing, manufacturing or repair of any Collateral prior to a disposition thereof and, for such purpose and for the purpose of removal, Lender shall have the right to use Borrower's premises, vehicles, hoists, lifts, cranes, and other Equip­ment and all other property without charge; (f) Sell, lease or otherwise dispose of any of the Collateral, in its condi­tion at the time Lender obtains possession of it or after further manufacturing, processing or repair, at one or more public and/or private sales, in lots or in bulk, for cash, ex­change or other property, or on credit, and to adjourn any such sale from time to time without notice other than oral announcement at the time scheduled for sale.  Lender shall have the right to conduct such disposition on Borrower's premises without charge, for such time or times as Lender deems reasonable, or on Lender's premises, or elsewhere and the Collateral need not be located at the place of dis­position.  Lender may directly or through any affiliated company purchase or lease any Collateral at any such pub­lic disposition, and if permissible under applicable law, at any private disposition.  Any sale or other disposition of Collateral shall not relieve Borrower of any liability Borrower may have if any Collateral is defective as to title or physical condition or otherwise at the time of sale; (g) Demand payment of, and collect any Accounts and General Intangibles comprising Collateral and, in connec­tion therewith, Borrower irrevocably authorizes Lender to endorse or sign Borrower's name on all collections, receipts, instruments and other documents, to take posses­sion of and open mail addressed to Borrower and remove therefrom payments made with respect to any item of the Collateral or proceeds thereof, and, in Lender's good faith business judgment, to grant extensions of time to pay, compromise claims and settle Accounts and the like for less than face value; and (h) Demand and receive possession of any of Borrower's federal and state income tax returns and the books and records utilized in the preparation thereof or re­ferring thereto.  All reasonable attorneys' fees, expenses, costs, liabilities and obligations incurred by Lender with respect to the foregoing shall be added to and become part of the Obligations, shall be due on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations.  Without limiting any of Lender's rights and remedies, from and after the occurrence and during the continuance of any Event of Default, the interest rate applicable to the Obligations shall be increased by an additional five percent per annum (the “Default Rate”).

 

7.3    Standards for Determining Commercial Reasonableness.  Borrower and Lender agree that a sale or other disposition (collectively, “sale”) of any Collateral which complies with the following standards will conclu­sively be deemed to be commercially reasonable:  (i) Notice of the sale is given to Borrower at least ten days prior to the sale, and, in the case of a public sale, notice of the sale is published at least five days before the sale in a newspaper of general circulation in the county where the sale is to be conducted; (ii) Notice of the sale describes the collateral in general, non-specific terms; (iii) The sale is conducted at a place designated by Lender, with or without the Collateral being present; (iv) The sale commences at any time between 8:00 a.m. and 6:00 p.m.;  (v) Payment of the purchase price in cash or by cashier’s check or wire transfer, or by deferred payment obligation acceptable to Lender in its discretion, is required; (vi) With respect to any sale of any of the Collateral, Lender may (but is not obligated to) direct any prospective purchaser to ascertain directly from Borrower any and all information concerning the same.  Lender shall be free to employ other methods of noticing and selling the Collateral, in its discretion, if they are commercially reasonable.

  

7.4    Power of Attorney.  Upon the occurrence and during the continuance of any Event of Default, without limiting Lender’s other rights and remedies, Borrower grants to Lender an irrevocable power of attorney coupled with an interest, authorizing and permitting Lender (acting through any of its employees, attorneys or agents) at any time, at its option, but without obligation, with or without notice to Borrower, and at Borrower's expense, to do any or all of the following, in Borrower's name or otherwise, but Lender agrees that if it exercises any right hereunder, it will do so in good faith and in a commercially reasonable manner:  (a) Execute on behalf of Borrower any docu­ments that Lender may, in its good faith business judgment, deem advis­able in order to perfect and maintain Lender's security in­terest in the Collateral, or in order to exercise a right of Borrower or Lender, or in order to fully consummate all the transactions contemplated under this Agreement, and all other Loan Documents; (b) Execute on behalf of Borrower, any invoices relating to any Account, any draft against any Account Debtor and any notice to any Account Debtor, any proof of claim in bankruptcy, any Notice of Lien, claim of mechanic's, materialman's or other lien, or assignment or satisfaction of mechanic's, materialman's or other lien; (c) Take control in any manner of any cash or non-cash items of payment or proceeds of Collateral; en­dorse the name of Borrower upon any instruments, or doc­uments, evidence of payment or Collateral that may come into Lender's possession; (d) Endorse all checks and other forms of remittances received by Lender; (e) Pay, contest or settle any lien, charge, encumbrance, security interest and adverse claim in or to any of the Collateral, or any judgment based thereon, or otherwise take any action to terminate or discharge the same; (f) Grant extensions of time to pay, compromise claims and settle Accounts and General Intangibles for less than face value and execute all releases and other documents in connection therewith; (g) Pay any sums required on account of Borrower's taxes or to secure the release of any liens therefor, or both; (h) Settle and adjust, and give releases of, any insurance claim that relates to any of the Collateral and obtain payment therefor; (i) Instruct any third party having custody or con­trol of any books or records belonging to, or relating to, Borrower to give Lender the same rights of access and other rights with respect thereto as Lender has under this Agreement; and (j) Take any action or pay any sum re­quired of Borrower pursuant to this Agreement and any other Loan Documents.  Any and all reasonable sums paid and any and all reasonable costs, expenses, lia­bilities, obligations and attorneys' fees incurred by Lender with respect to the foregoing shall be added to and become part of the Obligations, shall be payable on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations.  In no event shall Lender's rights under the foregoing power of attorney or any of Lender's other rights under this Agreement be deemed to indicate that Lender is in control of the busi­ness, management or properties of Borrower.

 

7.5    Application of Proceeds.  All proceeds realized as the result of any sale of the Collateral shall be applied by Lender to the Obligations, in such order as Lender shall determine in its sole discretion.  Any surplus shall be paid to Borrower or other persons legally entitled thereto; Borrower shall remain liable to Lender for any deficiency.  If, Lender, in its good faith business judgment, directly or indirectly en­ters into a deferred payment or other credit transaction with any purchaser at any sale of Collateral, Lender shall have the option, exercisable at any time, in its good faith business judgment, of either reducing the Obligations by the principal amount of purchase price or deferring the reduction of the Obligations until the actual receipt by Lender of the cash therefor.

 

7.6    Remedies Cumulative.  In addition to the rights and remedies set forth in this Agreement, Lender shall have all the other rights and remedies accorded a secured party un­der the California Uniform Commercial Code and under all other applicable laws, and under any other instrument or agreement now or in the future entered into between Lender and Borrower, and all of such rights and remedies are cumulative and none is exclusive.  Exercise or partial exercise by Lender of one or more of its rights or remedies shall not be deemed an election, nor bar Lender from sub­sequent exercise or partial exercise of any other rights or remedies.  The failure or delay of Lender to exercise any rights or remedies shall not operate as a waiver thereof, but all rights and remedies shall continue in full force and ef­fect until all of the Obligations have been fully paid and performed.

“Account Debtor” means the obligor on an Account.

 

“Accounts” means all present and future “accounts” as defined in the California Uniform Commercial Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation all accounts receivable and other sums owing to Borrower.

 

 “Affiliate” means, with respect to any Person, a relative, partner, shareholder, director, officer, or employee of such Person, or any parent or subsidiary of such Person, or any Person controlling, controlled by or under common control with such Person.

 

“Business Day” means a day on which Lender is open for business.

 

“Capital Expenditures” means all expenditures made and liabilities incurred for the acquisition of any fixed asset or improvement, replacement, substitution or addition thereto which has a useful life of more than one year and including, without limitation, those arising in connection with any lease of property by Borrower that, in accordance with GAAP, should be capitalized for financial reporting purposes and reflected as a liability on the balance sheet of Borrower.

 

“Code” means the Uniform Commercial Code as adopted and in effect in the State of California  from time to time.

 

“Collateral” has the meaning set forth in Section 2 above.

 

“continuing” and “during the continuance of” when used with reference to a Default or Event of Default means that the Default or Event of Default has occurred and has not been either waived in writing by Lender or cured within any applicable cure period.

 

“Debt Service” means, as of the last day of each fiscal quarter, principal and interest of Indebtedness of Borrower and its Subsidiaries determined on a consolidated basis due within twelve (12) months prior to such day.

 

“Default” means any event which with notice or passage of time or both, would constitute an Event of Default.

 

“Default Rate” has the meaning set forth in Section 7.2 above.

 

“Deposit Accounts” means all present and future “deposit accounts” as defined in the California Uniform Commercial Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation  all general and special bank accounts, demand accounts, checking accounts, savings accounts and certificates of deposit.

  

“Eligible Accounts” means Accounts arising in the ordinary course of Borrower's business from the sale of goods or the rendition of services, or the non-exclusive licensing of Intellectual Property, which Lender, in its good faith business judgment, shall deem eligible for borrowing.  Without limiting the fact that the determina­tion of which Accounts are eligible for borrowing is a matter of Lender’s good faith business judgment, the following (the “Minimum Eligibility Requirements”) are the minimum requirements for a Account to be an Eligible Account:

(i)    the Account must not be outstanding for more than 90 days from its invoice date (the “Eligibility Period”),

 

(ii)    the Account must not represent progress billings, or be due under a fulfillment or requirements contract with the Account Debtor,

 

(iii)    the Account must not be subject to any contingencies (including Accounts arising from sales on consignment, guaranteed sale or other terms pursuant to which payment by the Account Debtor may be condi­tional),

 

(iv)    the Account must not be owing from an Account Debtor with whom Borrower has any dispute (whether or not relating to the particular Account),

 

(v)    the Account must not be owing from an Affiliate of Borrower,

 

(vi)    the Account must not be owing from an Account Debtor which is subject to any known insolvency or bankruptcy proceeding (at which time, the Account will be not be an Eligible Account), or whose financial condition is not acceptable to Lender, or which, fails or goes out of a mate­rial portion of its business,

 

(vii)    the Account must not be owing from the United States or any department, agency or instrumentality thereof (unless there has been compliance, to Lender’s satisfaction, with the United States Assignment of Claims Act),

 

(viii)    the Account must not be owing from an Account Debtor located outside the United States or Canada (unless pre-approved by Lender in its discretion in writing, or backed by a letter of credit sat­isfactory to Lender),

 

(ix)    the Account must not be owing from an Account Debtor to whom Borrower is or may be liable for goods purchased from such Account Debtor or otherwise (but, in such case, the Account will be deemed not eligible only to the extent of any amounts owed by Borrower to such Account Debtor),

 

(x)    the Account must not constitute a retention billing/invoice;

 

(xi)    the Account must not be assigned for collection or designated for such assignment, or an Account for which Lender in its good faith business judgment determines collection to be doubtful; and

 

(xii)    the Account must not be for C.O.D., cash in advance, or similar terms.

Accounts owing from one Account Debtor will not be deemed Eligible Accounts to the extent they exceed 25% of the total Accounts outstanding; provided, however, such percentage will be 35% with respect to Accounts for which UNFI or Safeway is the Account Debtor.  In addi­tion, if more than 25% of the Accounts owing from an Account Debtor are outstanding for a period longer than their Eligibility Period (without regard to unapplied credits) or are otherwise not eligible Accounts, then all Accounts owing from that Account Debtor will be deemed ineligible for borrowing.  Lender may, from time to time, in its good faith business judgment, revise the Minimum Eligibility Requirements, upon written notice to Borrower.

 

“Eligible Inventory” means Inventory which Lender, in its good faith business judgment, deems eligible for borrowing.  Without limiting the fact that the determination of which Inventory is eligible for borrowing is a matter of Lender’s good faith business judgment, the following are the minimum requirements for Inventory to be  Eligible Inventory: (i) the Inventory must consist of raw materials and finished goods, in good, new and salable condition, not be perishable, not be obsolete or unmerchantable, and not be comprised of work in process, packaging and shipping materials or supplies; (ii) the Inventory must meet all applicable governmen­tal standards; (iii) the Inventory must have been manufactured in compliance with the Fair Labor Standards Act; (iv) the Inventory must conform in all respects to the warranties and representations set forth in this Agreement; (v) the Inventory must be at all times subject to Lender's duly per­fected, first priority security interest; (vi) the Inventory must be situated at Borrower’s Address or at one of the domestic locations set forth in the Representations and the Inventory at such locations must exceed $20,000 in value; (vii) the Inventory must not be located on real property leased by Borrower or in a contract warehouse, in each case, (A) unless either (1) it is subject to a landlord agreement or bailee agreement in favor of Lender executed by the lessor, warehouseman, or other third party, as the case may be, or (2) a Reserve, in an amount satisfactory to (and in the good faith business judgment of) Lender, in respect of the Inventory at such location has been established by Lender,  and (B) unless it is segregated or otherwise separately identifiable from goods of others (including any Guarantor), if any, stored on the premises; (viii) the Inventory must not be “slow-moving” (including without limitation, for purposes of this clause (viii), any Inventory held in excess of sales of finished goods over the prior twelve (12) months or any Inventory held in excess of consumption of raw materials over the prior twelve (12) months); (ix) Borrower must have have good, valid, and marketable title to such Inventory; (x) the Inventory must not consist of restrictive or custom items, or goods that constitute spare parts, supplies used or consumed in Borrower’s business, bill and hold goods, defective goods, “seconds,” or Inventory acquired on consignment; and (xi) the Inventory must not consist of Inventory in-transit from one location of Borrower to another location of Borrower.  For the purposes hereof, the term “raw materials” will include generic glass bottles that are widely sold throughout the United States and determined by Lender, in its good faith business judgment, to have a liquidation value at least equal to the Inventory Advance Rate multiplied by such Inventory.  Glass bottles determined to be of custom design and not widely sold throughout the United States shall be excluded from Eligible Inventory.

  

 

“Eligible Equipment” is the following to the extent it complies with all of Borrower’s representations and warranties to Lender, is acceptable to Lender in all respects, is located at a location which Lender has approved in writing, and is subject to Lender's duly per­fected, first priority security interest: (a) general purpose equipment, computer equipment, office equipment, test and laboratory equipment, furnishings, subject to the limitations set forth herein, and (b) Other Equipment.  Eligible Equipment excludes Equipment that is subject to a first priority security interest in favor of third parties under finance or lease agreements.

 

“Equipment” means all present and future “equipment” as defined in the California Uniform Commercial Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation all machinery, fixtures, goods, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing.  Equipment excludes Equipment subject to a first priority security interest in favor of third parties under finance or lease agreements.

 

“Event of Default” means any of the events set forth in Section 7.1 of this Agreement.

 

“GAAP” means generally accepted accounting principles consistently applied.

 

“General Intangibles” means all present and future “general intangibles” as defined in the California Uniform Commercial Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation all Intellectual Property, payment intangibles, royalties, contract rights, goodwill, franchise agreements, purchase orders, customer lists, route lists, telephone numbers, domain names, claims, income tax refunds, security and other deposits, options to purchase or sell real or personal property, rights in all litigation presently or hereafter pending (whether in contract, tort or otherwise), insurance policies (including without limitation key man, property damage, and business interruption insurance), payments of insurance and rights to payment of any kind.

 

“good faith business judgment” means honesty in fact and good faith (as defined in Section 1201 of the Code) in the exercise of Lender’s business judgment.

 

“Guarantor” means any Person who has guaranteed, or in the future guarantees, any of the Obligations.

 

 “including” means including (but not limited to).

 

“Indebtedness” means all of Borrower's present and future obligations, liabilities, debts, claims and indebtedness, contingent, fixed or otherwise, however evidenced, created, incurred, acquired, owing or arising, whether under written or oral agreement, operation of law or otherwise to any Person, and includes, without limiting the foregoing (i) the Obligations, (ii) obligations and liabilities of any Person secured by a lien, claim, encumbrance or security interest upon property owned by Borrower, even though Borrower has not assumed or become liable therefor, (iii) obligations and liabilities created or arising under any lease (including capital leases) or conditional sales contract 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 are limited to repossession (including, without limitation, the Sale-Leaseback Transaction), (iv) all unfunded pension fund obligations and liabilities and (v) deferred taxes.

 

 “Intellectual Property” means all present and future (a) copyrights, copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work thereof, whether published or unpublished, (b) trade secret rights, including all rights to unpatented inventions and know-how, and confidential information; (c) mask work or similar rights available for the protection of semiconductor chips; (d) patents, patent applications and like protections including without limitation improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same; (e) trademarks, servicemarks, trade styles, and trade names, whether or not any of the foregoing are registered, and all applications to register and registrations of the same and like protections, and the entire goodwill of the business of Borrower connected with and symbolized by any such trademarks; (f) computer software and computer software products; (g) designs and design rights; (h) technology; (i) all claims for damages by way of past, present and future infringement of any of the rights included above; and (j) all licenses or other rights to use any property or rights of a type described above.

 

“Inventory” means all present and future “inventory” as defined in the California Uniform Commercial Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation  all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products, including without limitation such inventory as is temporarily out of Borrower’s custody or possession or in transit and including any returned goods and any documents of title representing any of the above.

 

“Investment” means any beneficial ownership interest in any Person (including stock, securities, partnership interest, limited liability company interest, or other interests), and any loan, advance or capital contribution to any Person, including the creation or capital contribution to an wholly-owned or partially-owned subsidiary).  Employee advances made in the ordinary course of business under $5,000 (and not to exceed $20,000 in the aggregate at any one time outstanding) are excluded from the definition of Investment.

  

  

 “Investment Property” means all present and future investment property, securities, stocks, bonds, debentures, debt securities, partnership interests, limited liability company interests, options, security entitlements, securities accounts, commodity contracts, commodity accounts, and all financial assets held in any securities account or otherwise, and all options and warrants to purchase any of the foregoing, wherever located, and all other securities of every kind, whether certificated or uncertificated.

 

“Loan Documents” means, collectively, this Agreement, any Guaranty, any Subordination Agreement, the Representations, and all other present and future documents, instruments and agreements between Lender and Borrower (or Guarantor, if applicable), including, but not limited to those relating to this Agreement, and all amendments and modifications thereto and replacements therefor.

 

“Material Adverse Change” means any of the following: (i) a material adverse change in the business, operations, or financial or other condition of the Borrower that may cause a material impairment of the prospect of repayment of any portion of the Obligations; or (ii) a material impairment of the value or priority of Lender’s security interests in the Collateral.

 

“Net Income” means, as calculated on a consolidated basis for Borrower and its Subsidiaries for any period as at any date of determination, the net profit (or loss), after provision for taxes, of Borrower and its Subsidiaries for such period taken as a single accounting period.

 

“Obligations” means all present and future Loans, ad­vances, debts, liabilities, obligations, guaranties, covenants, duties and indebtedness at any time owing by Borrower to Lender, whether evidenced by this Agreement or any note or other instrument or document, or otherwise, whether aris­ing from an extension of credit, opening of a letter of credit, banker's acceptance, loan, guaranty, indemnifica­tion or otherwise, whether direct or indirect (including, without limitation, those acquired by assignment and any participation by Lender in Borrower's debts owing to oth­ers), absolute or contingent, due or to become due, includ­ing, without limitation, all interest, charges, expenses, fees, attorney's fees, expert witness fees, audit fees, letter of credit fees, collateral monitoring fees, closing fees, facility fees, auction fees, liquidation fees, appraisal fees, termination fees, minimum interest charges and any other sums chargeable to Borrower under this Agreement or under any other Loan Documents.

 

“Other Equipment” is leasehold improvements, intangible property such as computer software and software licenses, equipment specifically designed or manufactured for Borrower, other intangible property, limited use property and other similar property and soft costs approved by Bank, including taxes, shipping, warranty charges, freight discounts and installation expenses.

 

“Other Property” means the following as defined in the California Uniform Commercial Code in effect on the date hereof with such additions to such term as may hereafter be made, and all rights relating thereto: all present and future “commercial tort claims” (including without limitation any commercial tort claims identified in the Representations), “documents”, “instruments”, “promissory notes”, “chattel paper”, “letters of credit”, “letter-of-credit rights”, “fixtures”, “farm products” and “money”; and all other goods and personal property of every kind, tangible and intangible, whether or not governed by the Code.

 

“Payment” means all checks, wire transfers and other items of payment received by Lender (including proceeds of Accounts and payment of the Obligations in full) for credit to Borrower’s outstanding Loans.

 

“Permitted Investments” means:

(i)    Investments in Subsidiaries shown on the Representations and existing on the date hereof;

 

(ii)    cash and cash equivalents;

 

(iii)    Investments consisting of Deposit Accounts in which Lender has a first-priority perfected security interest; and

 

(iv)    Investments (including debt obligations) received in connection with the bankruptcy or reorganization of customers or suppliers and in settlement of delinquent obligations of, and other disputes with, customers or suppliers arising in the ordinary course of business;

 

“Permitted Liens” means the following:

 

(i)    purchase money security interests in specific items of Equipment listed in the Representations;

 

(ii)    leases of specific items of Equipment listed in the Representations (including, without limitation, the Sale-Leaseback Transaction);

 

(iii)    liens for taxes not yet payable;

 

(iv)    additional security interests and liens which are subordinate to the security interest of Lender and are consented to in writing by Lender, which consent may be withheld in its good faith business judgment; and

 

(v)    security interests being terminated substantially concurrently with this Agreement.

 

Lender will have the right to require, as a condition to its consent under sub­paragraph (iv) above, that the holder of the additional se­curity interest or lien sign an intercreditor agreement on Lender’s then standard form, acknowledge that the secu­rity interest is subordinate to the security interest in favor of Lender, and agree not to take any action to enforce its subordinate security interest so long as any Obligations remain outstanding, and that Borrower agree that any un­cured default in any obligation secured by the subordinate security interest shall also constitute an Event of Default under this Agreement.

  

  

“Person” means any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organiza­tion, association, corporation, limited liability company, government, or any agency or political division thereof, or any other entity.

 

 “Representations” means the written Representations and Warranties provided by Borrower to Lender referred to in the Schedule.

 

“Reserves” means, as of any date of determination, such amounts as Lender may from time to time establish and revise in its good faith business judgment, reducing the amount of Loans, and other financial accommodations which would otherwise be available to Borrower under the lending formula(s) provided in the Schedule:  (a) to reflect events, conditions, contingencies or risks which, as determined by Lender in its good faith business judgment, do or may adversely affect (i) the Collateral or any other property which is security for the Obligations or its value (including without limitation any increase in delinquencies of Accounts), (ii) the assets, business or prospects of Borrower or any Guarantor, or (iii) the security interests and other rights of Lender in the Collateral (including the enforceability, perfection and priority thereof); or (b) to reflect Lender's good faith belief that any collateral report or financial information furnished by or on behalf of Borrower or any Guarantor to Lender is or may have been incomplete, inaccurate or misleading in any material respect; or (c) in respect of any state of facts which Lender determines in good faith constitutes an Event of Default or may, with notice or passage of time or both, constitute an Event of Default.

 

“Subsidiary” means, with respect to any Person, a Person of which more than 50% of the voting stock or other equity interests is owned or controlled, directly or indirectly, by such Person or one or more Affiliates of such Person.

 

Other Terms.  All accounting terms used in this Agreement, unless otherwise indicated, shall have the meanings given to such terms in accordance with GAAP, consistently applied.  All other terms contained in this Agreement, unless otherwise indicated, shall have the meanings provided by the Code, to the extent such terms are defined therein.

 

9.1    Computations. In computing interest on the Obligations, all Payments received after 12:00 Noon Pacific Time on any day shall be deemed received on the next Business Day, and Payments received by Lender (including proceeds of Receivables and payment of the Obligations in full) shall be deemed applied by Lender on account of the Obligations two (2) Business Days after receipt by Lender of immediately available funds. Lender shall not be required to credit Borrower's account for the amount of any item of payment which is unsatisfactory to Lender in its good faith business judgment, and Lender may charge Borrower's loan account for the amount of any item of payment which is returned to Lender unpaid.

 

9.2    Application of Payments.  All payments with re­spect to the Obligations may be applied, and in Lender's good faith business judgment reversed and re-applied, to the Obligations, in such order and manner as Lender shall determine in its good faith business judgment.  For purposes of application to the Obligations (and not for the purpose of computing interest), funds received by Lender will be applied to the Obligations on the date Lender receives immediately available funds.

 

9.3    Increased Costs and Reduced Return. If Lender shall have determined that the adoption or implementation of, or any change in, any law, rule, treaty or regulation, or any policy, guideline or directive of, or any change in, the interpretation or administration thereof by, any court, central bank or other administrative or governmental authority, or compliance by Lender with any directive of, or guideline from, any central bank or other Governmental Authority or the introduction of, or change in, any accounting principles applicable to Lender (whether or not having the force of law) shall (i) subject the Lender to any tax, duty or other charge with respect to this Agreement or any Loan made hereunder, or change the basis of taxation of payments to Lender of any amounts payable hereunder (except for taxes on the overall net income of Lender), (ii) impose, modify or deem applicable any reserve, special deposit or similar requirement against any Loan, or against assets of or held by, or deposits with or for the account of, or credit extended by, Lender, or (iii) impose on Lender any other condition regarding this Agreement or any Loan, and the result of any event referred to in clauses (i), (ii) or (iii) above shall be to increase the cost to Lender of making any Loan, or agreeing to make any Loan or to reduce any amount received or receivable by Lender, then, upon demand by Lender, the Borrower shall pay to Lender such additional amounts as will compensate the Agent or such Lender for such increased costs or reductions in amount. All amounts payable under this Section shall bear interest from the date of demand by the Lender until payment in full to the Lender at the highest interest rate applicable to the Obligations.  A certificate of the Lender claiming compensation under this Section, specifying the event herein above described and the nature of such event shall be submitted by the Lender to the Borrower, setting forth the additional amount due and an explanation of the calculation thereof, and the Lender's reasons for invoking the provisions of this Section, and the same shall be final and conclusive absent manifest error.  If Borrower considers such cost increases under this Section 9.3 to be materially excessive or unreasonable, Borrower shall have the right to provide Lender with 60 days prior written notice of termination of this Agreement and repay the Obligations without having to pay the early termination fees provided for in Section 6.2 of this Agreement.

  

  

9.4    Charges to Accounts.  Lender may, in its discretion, require that Borrower pay monetary Obligations in cash to Lender, or charge them to Borrower’s Loan account, in which event they will bear interest at the same rate appli­cable to the Loans.

 

9.5    Monthly Accountings.  Lender shall, upon written request from Borrower, provide Borrower monthly with an account of advances, charges, expenses and payments made pursuant to this Agreement.  Such account shall be deemed correct, accurate and bind­ing on Borrower and an account stated (except for reverses and reapplications of payments made and corrections of er­rors discovered by Lender), unless Borrower notifies Lender in writing to the contrary within 60 days after such account is rendered, describing the nature of any al­leged errors or omissions.

 

9.6    Notices.  All notices to be given under this Agreement shall be in writing and shall be given either by electronic mail or personally or by reputable private delivery service or by regular first-class mail, or certified mail return receipt re­quested, addressed (i) to Borrower at the address shown in the heading to this Agreement (or, if by electronic mail, to both Christopher Reed at ***@***and Jim Linesch at ***@***), or (ii) to Lender at the address shown in the heading to this Agreement with a copy to Lender at 12243 Branford Street, Sun Valley, CA  91352, Attention:  T.C. Cheong (or, if by electronic mail, to each of Walter E. Buttkus, III at ***@***and Tim Rafanello at ***@***and T.C. Cheong at ***@***), or (iii) for either party at any other address designated in writing by one party to the other party. All no­tices shall be deemed to have been given upon transmission when sent by electronic mail, upon delivery in the case of notices personally delivered, or at the expira­tion of one Business Day following delivery to the private delivery service, or two Business Days following the de­posit thereof in the United States mail, with postage pre­paid.

 

9.7    Severability.  Should any provision of this Agreement be held by any court of competent jurisdiction to be void or unenforceable, such defect shall not affect the remainder of this Agreement, which shall continue in full force and effect.

 

9.8    Integration.  This Agreement and such other written agreements, documents and instruments as may be exe­cuted in connection herewith are the final, entire and com­plete agreement between Borrower and Lender and super­sede all prior and contemporaneous negotiations and oral representations and agreements, all of which are merged and integrated in this Agreement.  There are no oral under­standings, representations or agreements between the par­ties which are not set forth in this Agreement or in other written agreements signed by the parties in connection herewith.

 

9.9    Waivers; Indemnity.  The failure of Lender at any time or times to require Borrower to strictly comply with any of the pro­visions of this Agreement or any other Loan Document shall not waive or diminish any right of Lender later to demand and re­ceive strict compliance therewith.  Any waiver of any de­fault shall not waive or affect any other default, whether prior or subsequent, and whether or not similar.  None of the provisions of this Agreement or any other Loan Document shall be deemed to have been waived by any act or knowledge of Lender or its agents or employees, but only by a specific written waiver signed by an authorized officer of Lender and delivered to Borrower.  Borrower waives the benefit of all statutes of limitations relating to any of the Obligations or this Agreement or any other Loan Document, and Borrower waives demand, protest, notice of protest and notice of de­fault or dishonor, notice of payment and nonpayment, re­lease, compromise, settlement, extension or renewal of any commercial paper, instrument, account, General Intangible, document or guaranty at any time held by Lender on which Borrower is or may in any way be liable, and notice of any action taken by Lender, unless expressly required by this Agreement. Borrower hereby agrees to indemnify Lender and its affiliates, subsidiaries, parent, directors, officers, employees, agents, and attorneys, and to hold them harmless from and against any and all claims, debts, liabilities, demands, obligations, actions, causes of action, penalties, costs and expenses (including reasonable attor­neys' fees), of every kind, which they may sustain or incur based upon or arising out of any of the Obligations, or any relationship or agreement between Lender and Borrower, or any other matter, relating to Borrower or the Obligations; provided that this indemnity shall not extend to damages proximately caused by the indemnitee’s own gross negligence or willful misconduct.  Notwithstanding any provision in this Agreement to the contrary, the indemnity agreement set forth in this Section shall survive any termination of this Agreement and shall for all purposes continue in full force and effect.

 

9.10    Liability. NEITHER LENDER NOR ITS PARENT, NOR ANY OF ITS  AFFILIATES, SUBSIDIARIES, DIRECTORS, OFFICERS, EMPLOYEES, AGENTS OR ATTORNEYS SHALL BE LIABLE FOR ANY CLAIMS, DE­MANDS, LOSSES OR DAMAGES, OF ANY KIND WHATSOEVER, MADE, CLAIMED, INCURRED OR SUFFERED BY BORROWER OR ANY OTHER PARTY THROUGH THE ORDINARY NEGLIGENCE OF LENDER, OR ITS PARENT OR ANY OF ITS  AFFILIATES, SUBSIDIARIES, DIRECTORS, OFFICERS, EMPLOYEES, AGENTS OR ATTORNEYS, BUT NOTHING HEREIN SHALL RELIEVE LENDER FROM LIABILITY FOR ITS OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. NEITHER LENDER NOR ITS PARENT, NOR ANY OF ITS  AFFILIATES, SUBSIDIARIES, DIRECTORS, OFFICERS, EMPLOYEES, AGENTS OR ATTORNEYS SHALL BE RESPONSIBLE OR LIABLE TO BORROWER OR TO ANY OTHER PARTY FOR ANY INDIRECT, PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF ANY FINANCIAL ACCOMMODATION HAVING BEEN EXTENDED, SUSPENDED OR TERMINATED UNDER THIS AGREEMENT OR AS A RESULT OF ANY OTHER ACT, OMISSION OR TRANSACTION.

  

    

9.11    Amendment.  The terms and provisions of this Agreement may not be waived or amended, except in a writing executed by Borrower and a duly authorized offi­cer of Lender.

 

9.12    Time of Essence.  Time is of the essence in the performance by Borrower of each and every obligation under this Agreement.

 

9.13    Attorneys Fees and Costs.  Borrower shall reim­burse Lender for all reasonable attorneys' fees and all fil­ing, recording, search, title insurance, appraisal, audit, and other reasonable costs incurred by Lender, pursuant to, or in connection with, or relating to this Agreement (whether or not a lawsuit is filed), including, but not limited to, any reasonable attorneys' fees and costs Lender incurs in order to do the following: prepare and negotiate this Agreement and all present and future documents relating to this Agreement; obtain legal advice in connection with this Agreement or Borrower; en­force, or seek to enforce, any of its rights; prosecute ac­tions against, or defend actions by, Account Debtors; commence, intervene in, or defend any action or proceed­ing; initiate any complaint to be relieved of the automatic stay in bankruptcy; file or prosecute any probate claim, bankruptcy claim, third-party claim, or other claim; exam­ine, audit, copy, and inspect any of the Collateral or any of Borrower's books and records; protect, obtain possession of, lease, dispose of, or otherwise enforce Lender’s secu­rity interest in, the Collateral; and otherwise represent Lender in any litigation relating to Borrower. If either Lender or Borrower files any lawsuit against the other predicated on a breach of this Agreement, the prevailing party in such action shall be entitled to recover its reason­able costs and attorneys' fees, including (but not limited to) reasonable attorneys' fees and costs incurred in the en­forcement of, execution upon or defense of any order, de­cree, award or judgment.  All attorneys' fees and costs to which Lender may be entitled pursuant to this Paragraph shall immediately become part of Borrower's Obligations, shall be due on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations.

 

9.14    Benefit of Agreement.  The provisions of this Agreement shall be binding upon and inure to the benefit of the respective successors, assigns, heirs, beneficiaries and representatives of Borrower and Lender; provided, however, that Borrower may not assign or transfer any of its rights under this Agreement without the prior written consent of Lender, and any prohibited assignment shall be void.  No consent by Lender to any assignment shall re­lease Borrower from its liability for the Obligations.

 

9.15    Joint and Several Liability.  If Borrower consists of more than one Person, their liability shall be joint and several, and the compromise of any claim with, or the re­lease of, any Borrower shall not constitute a compromise with, or a release of, any other Borrower.

 

9.16    Limitation of Actions. Any claim or cause of action by Borrower against Lender, its directors, officers, employees, agents, accountants or attorneys, based upon, arising from, or relating to this Loan Agreement, or any other Loan Document, or any other transaction contemplated hereby or thereby or relating hereto or thereto, or any other matter, cause or thing whatsoever, occurred, done, omitted or suffered to be done by Lender, its directors, officers, employees, agents, accountants or attorneys, shall be barred unless asserted by Borrower by the commencement of an action or proceeding in a court of competent jurisdiction by the filing of a complaint within one year after the first act, occurrence or omission upon which such claim or cause of action, or any part thereof, is based, and the service of a summons and complaint on an officer of Lender, or on any other person authorized to accept service on behalf of Lender, within thirty (30) days thereafter.  Borrower agrees that such one-year period is a reasonable and sufficient time for Borrower to investigate and act upon any such claim or cause of action.  The one-year period provided herein shall not be waived, tolled, or extended except by the written consent of Lender in its sole discretion.  This provision shall survive any termination of this Loan Agreement or any other Loan Document.

 

9.17    Paragraph Headings; Construction.  Paragraph headings are only used in this Agreement for convenience.  Borrower and Lender acknowledge that the headings may not describe completely the subject matter of the applica­ble paragraph, and the headings shall not be used in any manner to construe, limit, define or interpret any term or provision of this Agreement. This Agreement has been fully reviewed and negotiated between the parties and no uncertainty or ambiguity in any term or provision of this Agreement shall be construed strictly against Lender or Borrower under any rule of construction or otherwise.

 

9.18    Public Announcement. Lender hereby agrees that Borrower may make a public announcement of the transactions contemplated by this Agreement in accordance with the requirements of the Securities and Exchange Commission (“SEC”) and NASDAQ, which shall include the posting of the entire agreement as an exhibit to a SEC filing. Borrower hereby agrees that Lender may make a public announcement of the transactions contemplated by this Agreement following the closing date.  Any further references to the Borrower in any written materials produced by the Lender must be pre-approved by Borrower in writing.

   

  

9.19    Governing Law; Jurisdiction; Venue. This Agreement and all acts, transactions disputes and controversies arising hereunder or relating hereto, and all rights and obligations of the parties shall be governed by, and construed in accordance with, the internal laws (and not the conflict of laws rules) of the State of California.  Each party consents to the jurisdiction of courts located within Los Angeles County California and the referee referred to in Section 9.20 below, and agrees that the exclusive venue for all actions and pro­ceedings relating directly or indirectly to this Agreement shall be Los Angeles County, California, provided that nothing herein shall limit the right of Lender to bring proceedings against Borrower in the courts of any other jurisdiction. Any judicial proceeding by Borrower against Lender or any affiliate thereof involving, directly or indirectly, any matter in any way arising out of, related to, or connected with any Loan Document shall be brought only in a court in Los Angeles County, California, and shall be subject to the provisions of Section 9.20 below.  Each party waives any and all rights the party may have to object to the jurisdiction of any such court or said referee, or to transfer or change the venue of any such action or proceeding from such court or said referee, including, without limitation, any objection to venue or request for change in venue based on the doctrine of forum non conveniens. Borrower consents to service of process in any action or proceeding brought against it by Lender, by personal delivery, or by mail addressed as set forth in this Agreement or by any other method permitted by law.

 

9.20    Dispute Resolution.  Any controversy, dispute or claim between the parties based upon, arising out of, or in any way relating to: (i) this Agreement or any sup­ple­ment or amendment thereto; or (ii) any other present or future instrument or agreement be­tween the parties hereto; or (iii) any breach, conduct, acts or omissions of any of the parties hereto or any of their respective direc­tors, officers, employees, agents, attorneys or any other person affiliated with or representing any of the parties hereto; in each of the forego­ing cases, whether sounding in contract or tort or otherwise (a “Dispute”) shall be resolved exclusively by judicial reference in accordance with Sections 638 et seq. of the California Code of Civil Procedure (“CCP”) and Rules 3.900 et seq. of the California Rules of Court (“CRC”), subject to the following terms and conditions. (All references in this section to provisions of the CCP and/or CRC shall be deemed to include any and all successor provisions.)

(a)    The reference shall be a consensual general reference pursuant to CCP Sections 638 and 644(a). Unless the parties otherwise agree in writing, the reference shall be to a single referee. The referee shall be a retired Judge of the Los Angeles County Superior Court  (“Superior Court”) or a retired Justice of the California Court of Appeal or California Supreme Court. Nothing in this section shall be construed to limit the right of Lender, pending or after the appointment of the referee, to seek and obtain provisional relief from the Superior Court or such referee, or any other court in a jurisdiction in which any Collateral is located or having jurisdiction over any Collateral, including without limitation, writ of attachment, writ of possession, appointment of a receiver, temporary restraining order and/or preliminary injunction, or other “provisional remedy” (as such term is defined in CCP Section 1281.8).

 

(b)    Within fifteen (15) days after a party gives written notice in accordance with this Agreement to all other parties to a Dispute that the Dispute exists, all parties to the Dispute shall attempt to agree on the individual to be appointed as referee. If the parties are unable to agree on the individual to be appointed as referee, the referee shall be appointed, upon noticed motion or ex parte application by any party, by the Superior Court in accordance with CCP Section 640, subject to all rights of the parties to challenge or object to the appointment, including without limitation the right to peremptory challenge under CCP Section 170.6. If the referee (or any successor referee) appointed by the Superior Court is unable, or at any time becomes unable, to serve as referee in the Dispute, the Superior Court shall appoint a new referee as agreed to by the parties or, if the parties cannot agree, in accordance with CCP Section 640, which new referee shall then have the same powers, and be subject to the same terms and conditions, as the predecessor referee.

 

(c)    Venue for all proceedings before the referee, and for any Superior Court proceeding for the appointment of the referee, shall be exclusively within the County of Los Angeles, State of California.  The referee shall have the exclusive power to determine whether a Dispute is subject to judicial reference pursuant to this section. Trial, and all proceedings and hearings on dispositive motions, conducted before the referee shall be conducted in the presence of, and shall be transcribed by, a court reporter, unless otherwise agreed in writing by all parties to the proceeding. The referee shall issue a written statement of decision, which shall be subject to objections of the parties pursuant to CRC Rule 3.1590 as if the statement of decision were issued by the Superior Court. The referee’s powers include, in addition to those set forth in CCP Sections 638, et seq., and CRC Rules 3.900 et seq., (i) the power to grant provisional relief, including without limitation, writ of attachment, writ of possession, appointment of a receiver, temporary restraining order and/or preliminary injunction, or other “provisional remedy” (as such term is defined in CCP Section 1281.8), and (ii) the power to hear and resolve all post-trial matters in connection with the Dispute that would otherwise be determined by the Superior Court, including without limitation motions for new trial, reconsideration, to vacate judgment, to stay execution or enforcement, to tax costs, and/or for attorneys’ fees. The parties shall, subject to the referee's power to award costs to the prevailing party, bear equally the costs of the reference proceeding, including without limitation the fees and costs of the referee and the court reporter.

  

  

(d)    The parties acknowledge and agree that (i) the referee alone shall determine all issues of fact and/or law in the Dispute, without a jury (subject, however, to the right of a party, pending or after the appointment of the referee, to seek and obtain provisional relief from the Superior Court or such referee, including without limitation, writ of attachment, writ of possession, appointment of a receiver, temporary restraining order and/or preliminary injunction, or other “provisional remedy” (as such term is defined in CCP Section 1281.8)), (ii) the referee does not have the power to empanel a jury, (iii) the Superior Court shall enter judgment on the decision of the referee pursuant to CCP Section 644(a) as if the decision were issued by the Superior Court, (iv) the decision of the referee shall not be subject to review by the Superior Court, and (v) the decision of the referee, once entered as a judgment by the Superior Court, shall be binding, final and conclusive, shall have the full force and effect of a judgment of the Superior Court, and shall be subject to appeal to the same extent as a judgment of the Superior Court.

9.21    Mutual Waiver of Jury Trial.  BORROWER AND LENDER EACH HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FU­TURE INSTRUMENT OR AGREEMENT BETWEEN LENDER AND BORROWER, OR ANY CONDUCT, ACTS OR OMISSIONS OF LENDER OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH LENDER OR BORROWER, IN ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.

This Schedule forms an integral part of the Loan and Security Agreement between PMC Financial Services Group, LLC and the above-borrower of even date (as amended, restated, supplemented, or otherwise modified from time to time, this “Agreement” or the “Loan Agreement”).

  

1.   CREDIT LIMIT (Section 1.1):

 

(a)   85% (the “A/R Advance Rate”, and also an “Advance Rate”) of the amount of Borrower’s Eligible Accounts (as defined in Section 8 above), plus

 

(b)   50% (the “Inventory Advance Rate”, and also an “Advance Rate”) of the value of Borrower's Eligible Inventory (as defined in Section 8 above), calculated at the lower of cost or market value and determined on a first-in, first-out basis.

 

Lender may, from time to time, modify the Advance Rates and/or the Maximum Revolver Amount, in its good faith business judgment, upon notice to the Borrower, based on changes in collection experience with respect to Accounts, changes in its evaluation of the Inventory, or other issues or factors relating to the Accounts, Inventory or other Collateral or Borrower that, in the good faith business judgment of Lender, may affect the collectability or valuation of the Accounts, Inventory or other Collateral.

   

 

 

The Term Loan shall be repaid by the Borrower to Lender in 48 equal monthly installments of principal and interest (each in the amount of $20,816.08), commencing on November 20, 2011, and continuing on the first day of each month thereafter until the earliest of the following dates (“Term Loan Maturity Date”): (i) the date the Term Loan has been paid in full; or (ii) October 20, 2014; or (iii) the Revolver Maturity Date; or (iv) the date this Agreement terminates by its terms or is terminated, as provided in this Agreement.  On the Term Loan Maturity Date (or, if earlier, upon acceleration of the Obligations in accordance with the terms of this Agreement), the entire unpaid principal balance of the Term Loan, plus all other Obligations relating to the Term Loan (including accrued and unpaid interest thereon, and, if applicable, the Term Loan Prepayment Fee) shall be due and payable. Any portion of the Term Loan that is repaid may not be reborrowed.

 

All payments by Borrower to Lender in respect of the Term Loan shall be made via ACH banking transfer to Lender's bank account per written instructions that Lender shall provide to Borrower.

 

C. Cap Ex Loans.  Subject to the terms and conditions of this Agreement, from the Effective Date through the first anniversary of the Effective Date (the “Draw Period”), Lender agrees to make Capital Expenditure loans (each a “Cap Ex Loan” and collectively, the “Cap Ex Loans”) in an aggregate outstanding amount not to exceed at any time $500,000. Cap Ex Loans may only be used to finance Eligible Equipment purchased after the Effective Date.  No Cap Ex Loans may exceed seventy-five percent (75%) of the total invoice for Eligible Equipment (excluding taxes, shipping, warranty charges, freight discounts and installation expenses relating to such Eligible Equipment).  Borrower is not obligated to finance Capital Expenditures with Lender Cap Ex Loans.

     

   

Interest on each Cap Ex Loan shall be paid monthly as provided in Section 1.2 of this Agreement and Section 2 of this Schedule.  In the event the Prime Rate increases, Borrower will be charged the difference between (i) the Prime Rate plus 11.6% and (ii) 14.85% and the amount of such difference will be charged to (and payable by) Borrower as of the end of each fiscal quarter.

 

Interest only shall be payable on any and all Cap Ex Loans outstanding from time to time until the end of each fiscal quarter, at which time, the principal amount of each outstanding Cap Ex Loan will be aggregated and repaid as provided for below. The aggregate principal amount of all Cap Ex Loans outstanding at the end of each fiscal quarter shall be repaid by the Borrower to Lender in 48 equal monthly installments of principal, plus accrued but unpaid interest, commencing on the twentieth (20th) day of the month immediately following the end of each fiscal quarter (each an “Initial Cap Ex Loan Payment”), and continuing on the same day of each month thereafter until the earliest of the following dates (“Cap Ex Loan Maturity Date”): (i) the date the Cap Ex Loan has been paid in full; or (ii) the date that is thirty-six (36) months from the applicable Initial Cap Ex Loan Payment; or (iii) the Revolver Maturity Date; or (iv) the date this Agreement terminates by its terms or is terminated, as provided in this Agreement.  On the Cap Ex Loan Maturity Date (or, if earlier, upon acceleration of the Obligations in accordance with the terms of this Agreement), the entire unpaid principal balance of the Cap Ex Loan, plus all other Obligations relating to the Cap Ex Loan (including accrued and unpaid interest thereon, and, if applicable, the Cap Ex Loan Prepayment Fee) shall be due and payable. Any portion of the Cap Ex Loan that is repaid may not be reborrowed.

 

All payments by Borrower to Lender in respect of the Cap Ex Loan shall be made via ACH banking transfer to Lender's bank account per written instructions that Lender shall provide to Borrower.

 

 

Interest Rate (Section 1.2):

 

The Revolving Loans outstanding from time to time shall bear interest at an annual rate equal to the “Prime Rate” in effect from time to time, plus 3.75% per annum.

  

  

The Term Loan shall bear interest at an annual rate equal to the “Prime Rate” in effect from time to time, plus 11.6% per annum.

 

The Cap Ex Loans shall bear interest at an annual rate equal to the “Prime Rate” in effect from time to time, plus 11.6% per annum.

 

Interest shall be calculated on the basis of a 360-day year for the actual number of days elapsed.

 

As used in this Agreement, “Prime Rate” means the greater of:  (i) the “prime rate” announced from time to time by Wells Fargo Bank, National Association or (ii) 3.25% per annum. (Borrower understands that said announced prime rate may not be the best rate available from said bank.)

 

The interest rate applicable to the Obligations shall change on each date there is an applicable change in the Prime Rate. Interest is also subject to the operation, as applicable, of Section 7.2 of the Loan Agreement as to the Default Rate.

  

2A.    USURY SAVINGS CLAUSE

 

Provisions Relating to Interest

 

Notwithstanding the provisions of this Agreement regarding the rates of interest applicable to the Loans, if at any time the amount of such interest computed on the basis of the interest rate set forth herein (the “Applicable Interest Rate”) would exceed the amount of such interest computed upon the basis of the maximum rate of interest permitted by applicable state or federal law in effect from time to time hereafter, after taking into account, to the extent required by applicable law, any and all fees, payments, charges and calculations provided for in this Agreement or in any other agreement between Borrower and Lender (the “Maximum Legal Rate”), the interest payable under this Agreement shall be computed upon the basis of the Maximum Legal Rate, but any subsequent reduction in the Applicable Interest Rate shall not reduce such interest thereafter payable hereunder below the amount computed on the basis of the Maximum Legal Rate until the aggregate amount of such interest accrued and payable under this Agreement equals the total amount of interest which would have accrued if such interest had been at all times computed solely on the basis of the Applicable Interest Rate.

  

No agreements, conditions, provisions or stipulations contained in this Agreement or any other instrument, document or agreement between the Borrower and Lender or default of the Borrower, or the exercise by Lender of the right to accelerate the payment of the maturity of principal and interest, or to exercise any option whatsoever contained in this Agreement or any other agreement between the Borrower and Lender, or the arising of any contingency whatsoever, shall entitle Lender to collect, in any event, interest exceeding the Maximum Legal Rate and in no event shall the Borrower be obligated to pay interest exceeding such Maximum Legal Rate and all agreements, conditions or stipulations, if any, which may in any event or contingency whatsoever operate to bind, obligate or compel the Borrower to pay a rate of interest exceeding the Maximum Legal Rate, shall be without binding force or effect, at law or in equity, to the extent only of the excess of interest over such Maximum Legal Rate.  In the event any interest is charged in excess of the Maximum Legal Rate (“Excess”), the Borrower acknowledges and stipulates that any such charge shall be the result of an accidental and bona fide error, and such Excess shall be, first, applied to reduce the principal then unpaid hereunder; second, applied to reduce the remaining Obligations; and third, returned to the Borrower, it being the intention of the parties hereto not to enter at any time into a usurious or otherwise illegal relationship.  The Borrower recognizes that, with fluctuations in the Applicable Interest Rate and the Maximum Legal Rate, such an unintentional result could inadvertently occur.  By the execution of this Agreement, the Borrower covenants that (i) the credit or return of any Excess shall constitute the acceptance by the Borrower of such Excess, and (ii) the Borrower shall not seek or pursue any other remedy, legal or equitable, against Lender, based in whole or in part upon the charging or receiving of any interest in excess of the maximum authorized by applicable law.  For the purpose of determining whether or not any Excess has been contracted for, charged or received by Lender, all interest at any time contracted for, charged or received by Lender in connection with this Agreement shall be amortized, prorated, allocated and spread in equal parts during the entire term of this Agreement.

 

The provisions of this Section 2A of this Schedule shall be deemed to be incorporated into every document or communication relating to the Obligations which sets forth or prescribes any account, right or claim or alleged account, right or claim of Lender with respect to the Borrower (or any other obligor in respect of Obligations), whether or not any provision of this Section 2A of this Schedule is referred to therein.  All such documents and communications and all figures set forth therein shall, for the sole purpose of computing the extent of the liabilities and obligations of the Borrower (or other obligor) asserted by Lender thereunder, be automatically recomputed by any Borrower or obligor, and by any court considering the same, to give effect to the adjustments or credits required by this Section 2A of this Schedule.

 

If the applicable state or federal law is amended in the future to allow a greater rate of interest to be charged under this Agreement or any other Loan Documents than is presently allowed by applicable state or federal law, then the limitation of interest under this Section 2A of this Schedule shall be increased to the maximum rate of interest allowed by applicable state or federal law as amended, which increase shall be effective hereunder on the effective date of such amendment, and all interest charges owing to Lender by reason thereof shall be payable upon demand.

   

3.   FEES (Section 1.4):

With respect to the Term Loan:  $15,000, fully earned as of the date hereof and payable concurrently herewith.

With respect to each Cap Ex Loan:  1.50% of the principal amount of each Cap Ex Loan, fully earned as of the date such Cap Ex Loan is made and payable concurrently therewith.

  

Anniversary Fees:  $30,000, payable on each anniversary of the Effective Date prior to the Revolver Maturity Date.

 

Collateral Monitoring Fee:  A monthly fee equal to 0.50% of the average outstanding balance of Revolving Loans per month, payable each month in arrears on the last day of each month (prorated for any partial month at the beginning and at termination of this Agreement).

4.    MATURITY DATE (Section 6.1):

   

As used herein, the term “Revolver Maturity Date” means the third anniversary of the Effective Date (i.e., November ___, 2014), and thereafter, the Revolver Maturity Date shall automatically be extended for successive periods of one year each, unless (i) Borrower shall give Lender written notice of termination not less than thirty days prior to the end of such one-year period, or (ii) Lender shall give Borrower written notice of termination not less than thirty days prior to the end of such one-year period.

 

The term “Term Loan Maturity Date” shall have the meaning ascribed to such term in Section 1 of this Schedule.

 

The term “Cap Ex Loan Maturity Date” shall have the meaning ascribed to such term in Section 1 of this Schedule.

   

Debt Service Coverage Ratio As of the last day of each fiscal quarter, a ratio of Net Income plus depreciation and amortization expenses plus interest plus lease expenses (to the extent included in Debt Service), in each case for the four (4) consecutive fiscal quarters then-ended, to Debt Service and non-financed Capital Expenditures calculated for the four (4) consecutive fiscal quarters then-ended of at least 1.0 to 1.0.

The foregoing Debt Service Coverage Ratio Financial Covenant shall only apply if Borrower’s availability under the Revolving Loans is less than $100,000 (the “DSCR Trigger”).  In such instance, the Debt Service Coverage Ratio Financial Covenant still would not apply if Borrower, within 60 days of the date of the DSCR Trigger, receives proceeds from the issuance of new equity securities of Borrower issued after the date thereof in an amount sufficient enough to bring Borrower’s Debt Service Coverage Ratio into compliance as set forth above, and Borrower provides evidence thereof to Lender satisfactory to Lender in its good faith business judgment.

   

Capital Expenditures. Borrower shall not make Capital Expenditures exceeding $500,000, in the aggregate in any fiscal year.

  

 

7.    BORROWER INFORMATION:

  

Borrower represents and warrants that the information set forth in the Representations and Warranties of the Borrower dated September 30, 2011, previously submitted to Lender (the “Representations”) is true and correct as of the date hereof.

   

8.    ADDITIONAL PROVISIONS

  

   

Concurrently Borrower shall cause the above Persons to execute and deliver to Lender Subordination Agreement with respect to the foregoing debt on Lender’s standard form. Prior to incurring any Inside Debt in the future, Borrower shall cause the person to whom such Inside Debt will be owed to execute and deliver to Lender a subordination agreement on Lender’s standard form.

    

(b) Copyrights, Patents, and Trademarks.

(i) Borrower hereby represents and warrants that, as of the date of this Agreement, Borrower does not have any maskworks, computer software, or other copyrights, that are registered (or are the subject of any application for registration) with the United States Copyright Office.  Borrower hereby covenants and agrees that Borrower will NOT register with the United States Copyright Office (or apply for such registration of) any of Borrower’s maskworks, computer software, or other copyrights, unless Borrower has provided Lender not less than 30 days prior written notice of the commencement of such registration/application and Borrower has executed and delivered to Lender such security agreement(s) and other documentation (in form and substance reasonably satisfactory to Lender) which Lender in its good faith business judgment may require for filing with the United States Copyright Office with respect to such registration or application.

     

   

(ii) Borrower will identify to Lender in writing any and all patents and trademarks of Borrower that are registered (or the subject of any application for registration) with the United States Patent and Trademark Office and, upon Lender’s request therefor, promptly execute and deliver to Lender such security agreement(s) and other documentation (in form and substance reasonably satisfactory to Lender) which Lender in its good faith business judgment may require for filing with the United States Patent and Trademark Office with respect to such registration or application.

  

(iii) Borrower will:  (x) protect, defend and maintain the validity and enforceability of Borrower’s copyrights, patents, and trademarks; (y) promptly advise Lender in writing of material infringements of Borrower’s copyrights, patents, or trademarks of which Borrower is or becomes aware; and (z) not allow any material item of Borrower’s copyrights, patents, or trademarks to be abandoned, forfeited or dedicated to the public without Lender’s written consent.

  

(c) Bailee Agreement. Borrower hereby represents and warrants that, as of the date of execution and deliver of this Agreement, no goods of Borrower are in the possession of any warehouseman or other bailee (except as set forth in Section 3(d) of the Representations), and hereby covenants that Borrower promptly shall deliver written notice to Lender of any goods of Borrower being in the possession of any other warehouseman or other bailee. With respect to any goods or other Collateral of Borrower in the possession of any warehouseman or other bailee (including any set forth in Section 3(d) of the Representations), Borrower shall, promptly upon Lender’s request therefor, use commercially reasonable efforts to deliver to Lender a bailee agreement (in form and substance satisfactory to Lender) duly executed by such warehouseman or other bailee.  In the event that Lender requests such a bailee agreement and Borrower uses such efforts but does not succeed in delivering such a bailee agreement, Lender may (in its good faith business judgment) maintain a Reserve with respect to such warehouse or other bailee location.  Regardless of whether a bailee agreement is executed or not, Lender will establish a Reserve equal to three (3) months’ worth of warehouse fees that are charged to Borrower with respect to each warehouseman or other bailee in possession of any goods of Borrower.

  

(d) Landlord Agreement. With respect to any leased premises of Borrower, Borrower shall, promptly upon Lender’s request therefor, deliver to Lender a landlord agreement (in form and substance satisfactory to Lender) duly executed by the lessor of such leased premises. Without limiting the generality of the foregoing, Lender has requested that Borrower deliver, on or before the date of this Agreement, such a landlord agreement duly executed by the applicable landlord with respect to Borrower’s Address, and Lender may (in its good faith business judgment) maintain a Reserve with respect to Borrower’s Address location in the event Lender does not receive such landlord agreement.

  

(e) Control Agreements. As to any Deposit Accounts (including any lockbox or blocked account) and Investment Property (including securities accounts) maintained with any institution as of the date of this Agreement, Borrower shall cause such institution, concurrently herewith, to enter into a control agreement in form acceptable to Lender in its good faith business judgment in order to perfect Lender’s first-priority security interest in such Deposit Accounts (including any lockbox or blocked account) and grant Lender “control” (within the meaning of Articles 8 and 9 of the Code) over such Investment Property (including securities accounts).  From and after the date of this Agreement, Borrower shall not maintain any Deposit Accounts (including any lockbox or blocked account) or Investment Property (including securities accounts) with any bank, securities intermediary, or other institution unless Lender has received such a control agreement duly executed by such party in favor of Lender covering such Deposit Account (including any lockbox or blocked account) or Investment Property (including securities accounts), as the case may be.

   

 

In addition to the other conditions precedent set forth in this Agreement, the making of the initial Loan hereunder is subject to the following additional conditions: