Exhibit 10.1

 

CREDIT AND SECURITY AGREEMENT

 

by and among

 

CHARLES & COLVARD, LTD., CHARLES & COLVARD DIRECT, LLC, and MOISSANITE.COM, LLC,

 

as Borrowers,

 

and

 

WELLS FARGO BANK, NATIONAL ASSOCIATION,

 

as Lender

 

Dated as of June 25, 2014

 

 

 

 

 

 

 

TABLE OF CONTENTS

 

      PAGE         1. DEFINITIONS AND CONSTRUCTION 1   1.1 Definitions, Code
Terms, Accounting Terms and Construction 1         2. LOANS AND TERMS OF PAYMENT
1   2.1 Revolving Loan Advances 1   2.2 Parent as Agent for Borrowers 1   2.3
Borrowing Procedures 2   2.4 Payments; Prepayments 2   2.5 Clearance Charge 3  
2.6 Interest Rates: Rates, Payments, and Calculations 3   2.7 Designated Account
4   2.8 Maintenance of Loan Account; Statements of Obligations 4   2.9 Maturity
and Termination Dates 4   2.10 Effect of Maturity 5   2.11 Termination or
Reduction by Borrowers 5   2.12 Fees 5   2.13 Letters of Credit 5   2.14
Illegality; Impracticability; Increased Costs 9   2.15 Capital Requirements 9  
2.16 Extent of Each Borrower’s Liability, Contribution 9   2.17 Ex-Im Advances
Subject to Ex-Im Bank Rules 10         3. SECURITY INTEREST 10   3.1 Grant of
Security Interest 10   3.2 Borrowers Remain Liable 10   3.3 Assignment of
Insurance 11   3.4 Financing Statements 11         4. CONDITIONS 11   4.1
Conditions Precedent to the Initial Extension of Credit 11   4.2 Conditions
Precedent to all Extensions of Credit 11   4.3 Conditions Subsequent 11        
5. REPRESENTATIONS AND WARRANTIES 11         6. AFFIRMATIVE COVENANTS 12   6.1
Financial Statements, Reports, Certificates 12   6.2 Collateral Reporting 12  
6.3 Existence 12   6.4 Maintenance of Properties 12   6.5 Taxes 12   6.6
Insurance 13   6.7 Inspections, Exams, Collateral Exams and Appraisals 13   6.8
Account Verification 13   6.9 Compliance with Laws 13   6.10 Environmental 13  
6.11 Disclosure Updates 14   6.12 Collateral Covenants 14   6.13 Material
Contracts 17   6.14 Location of Inventory, Equipment and Books 17   6.15 Further
Assurances 18         7. NEGATIVE COVENANTS 18   7.1 Indebtedness 18   7.2 Liens
18   7.3 Restrictions on Fundamental Changes 18   7.4 Disposal of Assets 19  
7.5 Change Name 19   7.6 Nature of Business 19   7.7 Prepayments and Amendments
19   7.8 Change of Control 19   7.9 Restricted Junior Payments 19

 

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  7.10 Accounting Methods 20   7.11 Investments; Controlled Investments 20  
7.12 Transactions with Affiliates 20   7.13 Use of Proceeds 20   7.14 Limitation
on Issuance of Stock 21   7.15 Consignments 21   7.16 Inventory and Equipment
with Bailees 21         8. FINANCIAL COVENANTS 21       9. EVENTS OF DEFAULT 21
      10. RIGHTS AND REMEDIES 23   10.1 Rights and Remedies 23   10.2 Additional
Rights and Remedies 24   10.3 Lender Appointed Attorney in Fact 25   10.4
Remedies Cumulative 25   10.5 Crediting of Payments and Proceeds 25   10.6
Marshaling 25   10.7 License 26         11. WAIVERS; INDEMNIFICATION 26   11.1
Demand; Protest; etc. 26   11.2 Lender’s Liability for Collateral 26   11.3
Indemnification 26         12. NOTICES 27       13. CHOICE OF LAW AND VENUE;
ARBITRATION; JURY TRIAL WAIVER 28       14. ASSIGNMENTS; SUCCESSORS 30       15.
AMENDMENTS; WAIVERS 30       16. TAXES 30       17. GENERAL PROVISIONS 30   17.1
Effectiveness 30   17.2 Section Headings 30   17.3 Interpretation 30   17.4
Severability of Provisions 30   17.5 Debtor-Creditor Relationship 30   17.6
Counterparts; Electronic Execution 31   17.7 Revival and Reinstatement of
Obligations 31   17.8 Confidentiality 31   17.9 Lender Expenses 31   17.10
Setoff 32   17.11 Survival 32   17.12 Patriot Act 32   17.13 Integration 32  
17.14 Bank Product Providers 32

 

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EXHIBITS AND SCHEDULES

 

Schedule 1.1 Definitions Schedule 2.12 Fees Schedule 6.1 Financial Statements,
Reports, Certificates     Schedule 6.2 Collateral Reporting Exhibit A Form of
Compliance Certificate Exhibit B Conditions Precedent Exhibit C Conditions
Subsequent Exhibit D Representations and Warranties Exhibit E Information
Certificate Exhibit F Country Limitation Schedule Schedule A-1 Collection
Account Schedule A-2 Authorized Persons Schedule D-1 Designated Account Schedule
P-1 Permitted Investments Schedule P-2 Permitted Liens

 

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CREDIT AND SECURITY AGREEMENT

 

THIS CREDIT AND SECURITY AGREEMENT (this “Agreement”) is entered into as of June
25, 2014 by and among WELLS FARGO BANK, NATIONAL ASSOCIATION (“Lender”), CHARLES
& COLVARD, LTD., a North Carolina corporation (“Parent”), CHARLES & COLVARD
DIRECT, LLC, a North Carolina limited liability company (“C&C Direct”), and
MOISSANITE.COM, LLC, a North Carolina limited liability company (“Moissanite”;
Parent, C&C Direct and Moissanite are sometimes referred to herein individually
as a “Borrower” and collectively as the “Borrowers”).

 

1.          DEFINITIONS AND CONSTRUCTION.

 

1.1           Definitions, Code Terms, Accounting Terms and Construction.
 Capitalized terms used in this Agreement shall have the meanings specified
therefor on Schedule 1.1. Additionally, matters of (a) interpretation of terms
defined in the Code, (b) interpretation of accounting terms and (c) construction
are set forth in Schedule 1.1.

 

2.          LOANS AND TERMS OF PAYMENT.

 

2.1           Revolving Loan Advances.

 

(a)          Subject to the terms and conditions of this Agreement, and during
the term of this Agreement, Lender agrees to make revolving loans (“Advances”)
to Borrowers in an amount at any one time outstanding not to exceed the lesser
of:

 

(i)          the Maximum Revolver Amount less the Letter of Credit Usage at such
time, and

 

(ii)         the Borrowing Base at such time less the Letter of Credit Usage at
such time.

 

(b)          Amounts borrowed pursuant to this Section 2.1 may be repaid and,
subject to the terms and conditions of this Agreement, reborrowed at any time
during the term of this Agreement. The outstanding principal amount of the
Advances, together with interest accrued and unpaid thereon, shall be due and
payable on the Termination Date. Lender has no obligation to make an Advance at
any time following the occurrence of a Default or an Event of Default.

 

(c)          If at any time the Maximum Revolver Amount is less than the amount
of the Borrowing Base, the amount of Advances available under Section 2.1(a)
above shall be reduced by the Ex-Im Bank Reserve and any other Reserves
established by Lender with respect to amounts that may be payable by any
Borrower to third parties.

 

2.2           Parent as Agent for Borrowers.  Each Borrower hereby irrevocably
appoints Parent as the borrowing agent and attorney-in-fact for all Borrowers
(the “Administrative Borrower”), which appointment shall remain in full force
and effect unless and until Lender shall have received prior written notice
signed by each Borrower that such appointment has been revoked and that another
Borrower has been appointed Administrative Borrower. Each Borrower hereby
irrevocably appoints and authorizes the Administrative Borrower (a) to provide
Lender with all notices with respect to Advances, Letters of Credit and other
extensions of credit obtained for the benefit of any Borrower and all other
notices and instructions under this Agreement, and (b) to take such action as
the Administrative Borrower deems appropriate on its behalf to obtain Advances,
Letters of Credit and other extensions of credit and to exercise such other
powers as are reasonably incidental thereto to carry out the purposes of this
Agreement. It is understood that the handling of the Loan Account and Collateral
in a combined fashion, as more fully set forth herein, is done solely as an
accommodation to Borrowers in order to utilize the collective borrowing powers
of Borrowers in the most efficient and economical manner and at their request,
and that Lender shall not incur liability to any Borrower as a result hereof.
Each Borrower expects to derive benefit, directly or indirectly, from the
handling of the Loan Account and the Collateral in a combined fashion due to the
fact that the successful operation of each Borrower is dependent on the
continued successful performance of the integrated group. To induce Lender to do
so, and in consideration thereof, each Borrower hereby jointly and severally
agrees to indemnify Lender and hold Lender harmless against any and all
liability, expense, loss or claim of damage or injury, made against Lender by
any Borrower or by any third party whosoever, arising from or incurred by reason
of (y) the handling of the Loan Account and Collateral of Borrowers as herein
provided, except to the extent any such liabilities, expenses, losses or claims
are determined in a final, non-appealable judgment of a court of competent
jurisdiction to have resulted directly from the gross negligence or willful
misconduct of Lender, or (z) Lender’s relying on any instructions of the
Administrative Borrower.

 

 

 

 

2.3           Borrowing Procedures.

 

(a)          Procedure for Borrowing.  Provided Lender has not separately agreed
that Borrowers may use the Loan Management Service, each Borrowing shall be made
by a written request by an Authorized Person delivered to Lender. Such written
request must be received by Lender no later than 11:00 a.m. (Eastern time) on
the Business Day that is the requested Funding Date specifying (i) the amount of
such Borrowing, and (ii) the requested Funding Date, which shall be a Business
Day. At Lender’s election, in lieu of delivering the above-described written
request, any Authorized Person may give Lender telephonic notice of such request
by the required time. Lender is authorized to make the Advances, and to issue
the Letters of Credit, under this Agreement based upon telephonic or other
instructions received from anyone purporting to be an Authorized Person.

 

(b)          Making of Loans.  Promptly after receipt of a request for a
Borrowing pursuant to Section 2.3(a), Lender shall make the proceeds thereof
available to Borrowers on the applicable Funding Date by transferring
immediately available funds equal to such amount to the Designated Account;
provided, however, that, Lender shall not have the obligation to make any
Advance if (i) one (1) or more of the applicable conditions precedent set forth
in Section 4 will not be satisfied on the requested Funding Date for the
applicable Borrowing unless such condition has been waived by Lender, or (ii)
the requested Borrowing would exceed the Availability on such Funding Date.

 

(c)          Loan Management Service.  If Lender has separately agreed that
Borrowers may use the Loan Management Service, Borrowers shall not request and
Lender shall no longer honor a request for an Advance made in accordance with
Section 2.3(a) and all Advances will instead be initiated by Lender and credited
to the Designated Account as Advances as of the end of each Business Day in an
amount sufficient to maintain an agreed upon ledger balance in the Designated
Account, subject only to Availability as provided in Section 2.1. If Lender
terminates Borrowers’ access to the Loan Management Service, Borrowers may
continue to request Advances as provided in Section 2.3(a), subject to the other
terms and conditions of this Agreement. Lender shall have no obligation to make
an Advance through the Loan Management Service after the occurrence of a Default
or an Event of Default, or in an amount in excess of Availability, and may
terminate the Loan Management Service at any time in its sole discretion.

 

(d)          Protective Advances.  Lender may make an Advance for any reason at
any time in its Permitted Discretion, without Borrowers’ compliance with any of
the conditions of this Agreement, and (i) disburse the proceeds directly to
third Persons in order to protect Lender’s interest in the Collateral or to
perform any obligation of Borrowers under this Agreement or otherwise to enhance
the likelihood of repayment of the Obligations, or (ii) apply the proceeds to
outstanding Obligations then due and payable (each such Advance, a “Protective
Advance”).

 

2.4           Payments; Prepayments.

 

(a)          Payments by Borrowers.  Except as otherwise expressly provided
herein, all payments by Borrowers shall be made as directed by Lender or as
otherwise specified in the applicable Cash Management Documents.

 

(b)          Payments by Account Debtors.  Borrowers shall instruct all Account
Debtors to make payments either directly to the Lockbox for deposit by Lender
directly to the Collection Account, or instruct them to deliver such payments to
Lender by wire transfer, ACH, or other means as Lender may direct for deposit to
the Lockbox or Collection Account or for direct application to reduce the
outstanding Advances. Lender shall deposit or cause to be deposited in the
Collection Account all such payments made by Account Debtors to the Lockbox no
later than the first Business Day following delivery of such payments to the
Lockbox. If any Borrower receives a payment of the Proceeds of Collateral
directly, such Borrower will promptly deposit the payment or Proceeds into the
Collection Account. Until so deposited, such Borrower will hold all such
payments and Proceeds in trust for Lender without commingling with other funds
or property.

 

(c)          Crediting Payments.  For purposes of calculating Availability and
the accrual of interest on outstanding Obligations, unless otherwise provided in
the applicable Cash Management Documents or as otherwise agreed between
Borrowers and Lender, each payment shall be applied to the Obligations as of the
first Business Day following the Business Day of deposit to the Collection
Account of immediately available funds or other receipt of immediately available
funds by Lender provided such payment is received in accordance with Lender’s
usual and customary practices as in effect from time to time. Any payment
received by Lender that is not a transfer of immediately available funds shall
be considered provisional until the item or items representing such payment have
been finally paid under applicable law. Should any payment item not be honored
when presented for payment, then Borrowers shall be deemed not to have made such
payment, and that portion of Borrowers’ outstanding Obligations corresponding to
the amount of such dishonored payment item shall be deemed to bear interest as
if the dishonored payment item had never been received by Lender. So long as no
Increased Reporting Period is in effect, such reduction in the amount of
outstanding Advances shall not be accompanied by an equal reduction in the
amount of outstanding Accounts. If an Increased Reporting Period is in effect,
each such reduction in the amount of outstanding Advances upon receipt of a
payment on Accounts shall automatically be accompanied by an equal reduction in
the amount of outstanding Accounts.

 

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(d)          Application of Payments.  All Collections and all Proceeds of
Collateral received by Lender shall be applied, so long as no Event of Default
has occurred and is continuing, to reduce the outstanding Obligations in such
manner as Lender shall determine in its discretion. After payment in full in
cash of all Obligations, any remaining balance shall be transferred to the
Designated Account or otherwise to such other Person entitled thereto under
applicable law. Amounts collected by Lender from a Loan Party in relation to or
for the account of Bank Product Obligations shall be remitted to the applicable
Bank Product Provider.

 

(e)          Mandatory Prepayments.  If, at any time, the Revolver Usage exceeds
(i) the Borrowing Base or (ii) the Maximum Revolver Amount, less Reserves (in
accordance with Section 2.1(c)) at such time, or if at any time the aggregate
outstanding amount of Ex-Im Advances exceeds Ex-Im Availability (any such excess
amount being referred to as the “Overadvance Amount”), then Borrowers shall
immediately upon demand prepay the Obligations in an aggregate amount equal to
the Overadvance Amount. Additionally, because Ex-Im Availability may not be used
to support any outstanding Letters of Credit, the definition of “Overadvance
Amount” shall also include, without limiting the preceding sentence, the amount,
if any, by which (w) the lesser of (i) the Borrowing Base or (ii) the Maximum
Revolver Amount, less Reserves (in accordance with Section 2.1(c)), less (x)
Ex-Im Availability, less (y) the aggregate outstanding principal balance of
Revolving Advances, exceeds (z) Letter of Credit Usage. If payment in full of
the outstanding Advances is insufficient to eliminate the Overadvance Amount and
Letter of Credit Usage continues to exceed the Borrowing Base, Borrowers shall
maintain Letter of Credit Collateralization of the outstanding Letter of Credit
Usage (to the extent of the remaining Overadvance Amount). Lender shall not be
obligated to provide any Advances during any period that an Overadvance Amount
is outstanding.

 

2.5           Clearance Charge.  Collections received by Lender shall be applied
as provided in Sections 2.4(c) and (d), but the Obligations paid with such
Collections shall continue to accrue interest at the rate then applicable to
Advances as provided under Section 2.6 through the end of the first Business Day
following the Business Day that such Collections were applied to the
Obligations. This one Business Day clearance charge on all Collections is
acknowledged by the parties to constitute an integral aspect of the pricing of
the financing of Borrowers. The parties acknowledge and agree that the economic
benefit of the foregoing provisions of this Section 2.5 shall accrue exclusively
to Lender.

 

2.6           Interest Rates: Rates, Payments, and Calculations.

 

(a)          Interest Rates.  Except as provided in Section 2.6(b), the
principal amount of all Obligations (except for undrawn Letters of Credit and
Bank Products) that have been charged to the Loan Account pursuant to the terms
hereof shall bear interest on the Daily Balance thereof at a per annum rate
equal to the Interest Rate plus the Applicable Margin. Daily Three Month LIBOR
on the Agreement Date is 0.2336% per annum and, therefore, the rate of interest
in effect hereunder on the Agreement Date, expressed in simple interest terms,
is 2.7336% per annum with respect to any portion of the Revolving Credit
Facility bearing interest based upon Daily Three Month LIBOR.

 

(b)          Default Rate.  Upon the occurrence and during the continuation of
an Event of Default and at any time following the Termination Date, at the
discretion of Lender,

 

(i)          the principal amount of all Obligations (except for undrawn Letters
of Credit and Bank Products) that have been charged to the Loan Account pursuant
to the terms hereof shall bear interest on the Daily Balance thereof at a per
annum rate equal to 3 percentage points above the per annum rate otherwise
applicable thereunder, and

 

(ii)         the Letter of Credit fee provided for in Section 2.12 shall be
increased by 3 percentage points above the per annum rate otherwise applicable
hereunder.

 

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For avoidance of doubt, Lender may assess the Default Rate commencing on the
date of the occurrence of an Event of Default irrespective of the date of
reporting or declaration of such Event of Default.

 

(c)          Payment.  Except to the extent provided to the contrary in Section
2.12 or in the applicable Cash Management Document or Bank Product Agreement,
all interest, all Letter of Credit fees, all other fees payable hereunder or
under any of the other Loan Documents, all costs and expenses payable hereunder
or under any of the other Loan Documents, and all Lender Expenses shall be due
and payable, in arrears, on the first day of each month. Each Borrower hereby
authorizes Lender, from time to time without prior notice to Borrowers, to
charge all interest, Letter of Credit fees, and all other fees payable hereunder
or under any of the other Loan Documents (in each case, as and when due and
payable), all costs and expenses payable hereunder or under any of the other
Loan Documents (in each case, as and when due and payable), all Lender Expenses
(as and when accrued or incurred), and all fees and costs provided for in
Section 2.12 (as and when due and payable), and all other payment obligations as
and when due and payable under any Loan Document or any Bank Product Agreement
(including any amounts due and payable to any Bank Product Provider in respect
of Bank Products that Borrowers have not otherwise made payment of or provided
for) to the Loan Account, which amounts shall thereupon constitute Advances
hereunder and, shall accrue interest at the rate then applicable to Advances.
Any interest, fees, costs, expenses, Lender Expenses, or other amounts payable
hereunder or under any other Loan Document or under any Bank Product Agreement
that are charged to the Loan Account shall thereafter constitute Advances
hereunder and shall accrue interest at the rate then applicable to Advances.

 

(d)          Computation.  All interest and fees chargeable under the Loan
Documents shall be computed on the basis of a 360 day year, in each case, for
the actual number of days elapsed in the period during which the interest or
fees accrue. In the event the Interest Rate is changed from time to time
hereafter, the rates of interest hereunder based upon the Interest Rate
automatically and immediately shall be increased or decreased by an amount equal
to such change in the Interest Rate.

 

(e)          Intent to Limit Charges to Maximum Lawful Rate.  In no event shall
the interest rate or rates payable under this Agreement, plus any other amounts
paid in connection herewith, exceed the highest rate permissible under any law
that a court of competent jurisdiction shall, in a final determination, deem
applicable. Borrowers and Lender, in executing and delivering this Agreement,
intend legally to agree upon the rate or rates of interest and manner of payment
stated within it; provided, however, that, anything contained herein to the
contrary notwithstanding, if said rate or rates of interest or manner of payment
exceeds the maximum allowable under applicable law, then, as of the date of this
Agreement, Borrowers are and shall be liable only for the payment of such
maximum amount as is allowed by law, and payment received from Borrowers in
excess of such legal maximum, whenever received, shall be applied to reduce the
principal balance of the Obligations to the extent of such excess.

 

2.7           Designated Account.  Borrowers agree to establish and maintain one
or more Designated Accounts, each in the name of a single Borrower, for the
purpose of receiving the proceeds of the Advances requested by Borrowers and
made by Lender hereunder. Unless otherwise agreed by Lender and Borrowers, any
Advance requested by Borrowers and made by Lender hereunder shall be made to the
applicable Designated Account.

 

2.8           Maintenance of Loan Account; Statements of Obligations.  Lender
shall maintain an account on its books in the name of Borrowers (the “Loan
Account”) in which will be recorded all Advances made by Lender to Borrowers or
for Borrowers’ account, the Letters of Credit issued or arranged by Lender for
Borrowers’ account, and all other payment Obligations hereunder or under the
other Loan Documents and, to the extent payment is charged to the Loan Account,
for payments under Bank Product Agreements, including accrued interest, fees and
expenses, and Lender Expenses. In accordance with Section 2.4 and Section 2.5,
the Loan Account will be credited with all payments received by Lender from
Borrowers or for Borrowers’ account. All monthly statements delivered by Lender
to Borrowers regarding the Loan Account, including with respect to principal,
interest, fees, and including an itemization of all charges and expenses
constituting Lender Expenses owing, shall be subject to subsequent adjustment by
Lender but shall, absent manifest error, be conclusively presumed to be correct
and accurate and constitute an account stated between Borrowers and Lender
unless, within 30 days after receipt thereof by Borrowers, Borrowers shall
deliver to Lender written objection thereto describing the error or errors
contained in any such statements.

 

2.9           Maturity and Termination Dates.  Lender’s obligations under this
Agreement shall continue in full force and effect for a term ending on the
earliest of (i) June 25, 2017 (the “Maturity Date”) or (ii) the date Borrowers
terminate the Revolving Credit Facility, or (iii) the date the Revolving Credit
Facility terminates pursuant to Sections 10.1 and 10.2 following an Event of
Default (the earliest of these dates, the “Termination Date”). The foregoing
notwithstanding, Lender shall have the right to terminate its obligations under
this Agreement immediately and without notice upon the occurrence and during the
continuation of an Event of Default. Each Borrower jointly and severally
promises to pay the Obligations (including principal, interest, fees, costs, and
expenses, including Lender Expenses) in full on the Termination Date (other than
the Hedge Obligations, which shall be paid in accordance with the applicable
Hedge Agreement).

 

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2.10       Effect of Maturity.  On the Termination Date, all obligations of
Lender to provide additional credit hereunder shall automatically be terminated
and all of the Obligations (other than Hedge Obligations which shall be
terminated in accordance with the applicable Hedge Agreement) shall immediately
become due and payable without notice or demand and Borrowers shall immediately
repay all of the Obligations in full. No termination of the obligations of
Lender (other than cash payment in full of the Obligations and termination of
the obligations of Lender to provide additional credit hereunder) shall relieve
or discharge any Loan Party of its duties, obligations, or covenants hereunder
or under any other Loan Document and Lender’s Liens in the Collateral shall
continue to secure the Obligations and shall remain in effect until all
Obligations have been paid in full in cash and Lender’s obligations to provide
additional credit hereunder shall have been terminated. Provided that there are
no suits, actions, proceedings or claims pending or threatened against any
Indemnified Person under this Agreement with respect to any Indemnified
Liabilities, Lender shall, at Borrowers’ expense, release or terminate (or
authorize Borrowers to terminate) any filings or other agreements that perfect
Lender’s Liens in the Collateral, upon Lender’s receipt of each of the
following, in form and content reasonably satisfactory to Lender: (i) cash
payment in full of all Obligations (including Hedge Obligations, subject,
however, to the next sentence) and completed performance by Borrowers with
respect to their other obligations under this Agreement (including Letter of
Credit Collateralization with respect to all outstanding Letter of Credit
Usage), (ii) evidence (which may be a writing signed by Borrowers in favor of
Lender) that any obligation of Lender to make Advances to any Borrower or
provide any further credit to any Borrower has been terminated, (iii) a general
release of all claims against Lender and its Affiliates by each Borrower and
each other Loan Party relating to Lender’s performance and obligations under the
Loan Documents, and (iv) an agreement by each Borrower, each Guarantor, and any
new lender to any Borrower to indemnify Lender and its Affiliates for any
payments received by Lender or its Affiliates that are applied to the
Obligations as a final payoff that may subsequently be returned or otherwise not
paid for any reason. With respect to any outstanding Hedge Obligations which are
not so paid in full, the Bank Product Provider may require Borrowers to cash
collateralize the then existing Hedge Obligations in an amount acceptable to
Lender prior to releasing or terminating any filings or other agreements that
perfect Lender’s Liens in the Collateral.

 

2.11       Termination or Reduction by Borrowers.

 

(a)          Borrowers may terminate the Credit Facility or reduce the Maximum
Revolver Amount at any time prior to the Maturity Date, if they (i) deliver a
notice to Lender of their intentions at least 30 days prior to the proposed
action, (ii) pay to Lender the applicable termination fee or reduction fee set
forth in Schedule 2.12, and (iii) pay the Obligations (other than the
outstanding Hedge Obligations, which shall be paid in accordance with the
applicable Hedge Agreement) in full or down to the reduced Maximum Revolver
Amount, as applicable. Any reduction in the Maximum Revolver Amount shall be in
multiples of $100,000, with a minimum reduction of at least $1,000,000. Each
such termination or reduction shall be irrevocable. Once reduced, the Maximum
Revolver Amount may not be increased.

 

(b)          The applicable termination fee and reduction fee set forth in
Schedule 2.12 shall be presumed to be the amount of damages sustained by Lender
as a result of an early termination or reduction, as applicable, and each
Borrower agrees that it is reasonable under the circumstances currently existing
(including the borrowings that are reasonably expected by Borrowers hereunder
and the interest, fees and other charges that are reasonably expected to be
received by Lender hereunder). In addition, Lender shall be entitled to such
early termination fee upon the occurrence of any Event of Default described in
Sections 9.4 and 9.5 hereof, even if Lender does not exercise its right to
terminate this Agreement, but elects, at its option, to provide financing to
Borrowers or permit the use of cash collateral during an Insolvency Proceeding.
The early termination fee and reduction fee, as applicable, provided for in
Schedule 2.12 shall be deemed included in the Obligations.

 

2.12       Fees.  Borrowers shall pay to Lender the fees set forth on Schedule
2.12 attached hereto.

 

2.13       Letters of Credit.

 

(a)          Subject to the terms and conditions of this Agreement, upon the
request of a Borrower made in accordance herewith, Lender agrees to issue a
requested Letter of Credit for the account of such Borrower. By submitting a
request to Lender for the issuance of a Letter of Credit, such Borrower shall be
deemed to have requested that Lender issue the requested Letter of Credit. Each
request for the issuance of a Letter of Credit, or the amendment, renewal, or
extension of any outstanding Letter of Credit, shall be irrevocable and shall be
made in writing by an Authorized Person and delivered to Lender via
telefacsimile, or other electronic method of transmission reasonably acceptable
to Lender and reasonably in advance of the requested date of issuance,
amendment, renewal, or extension. Each such request shall be in form and
substance reasonably satisfactory to Lender, and (i) shall specify (A) the
amount of such Letter of Credit, (B) the date of issuance, amendment, renewal,
or extension of such Letter of Credit, (C) the proposed expiration date of such
Letter of Credit, (D) the name and address of the beneficiary of the Letter of
Credit, and (E) such other information (including, the conditions to drawing,
and, in the case of an amendment, renewal, or extension, identification of the
Letter of Credit to be so amended, renewed, or extended) as shall be necessary
to prepare, amend, renew, or extend such Letter of Credit, and (ii) shall be
accompanied by such Letter of Credit Agreements as Lender may request or
require, to the extent that such requests or requirements are consistent with
the Letter of Credit Agreements that Lender generally requests for Letters of
Credit in similar circumstances. Lender’s records of the content of any such
request will be conclusive.

 

5

 

 

(b)          Lender shall have no obligation to issue, amend, renew or extend a
Letter of Credit if, after giving effect to the requested issuance, amendment,
renewal, or extension, the Letter of Credit Usage would exceed the lesser of:

 

(i)          the lesser of the Borrowing Base or the Maximum Revolver Amount,
less Reserves (in accordance with Section 2.1(c)), in each case less the
outstanding amount of Advances and Ex-Im Availability at such time, or

 

(ii)         $1,000,000.

 

(c)          Lender shall have no obligation to issue a Letter of Credit if (i)
any order, judgment, or decree of any Governmental Authority or arbitrator
shall, by its terms, purport to enjoin or restrain Lender from issuing such
Letter of Credit or any law applicable to Lender or any request or directive
(whether or not having the force of law) from any Governmental Authority with
jurisdiction over Lender shall prohibit or request that Lender refrain from the
issuance of letters of credit generally or such Letter of Credit in particular,
or (ii) the issuance of such Letter of Credit would violate one or more policies
of Lender applicable to letters of credit generally.

 

(d)          Each Letter of Credit shall be in form and substance reasonably
acceptable to Lender, including the requirement that the amounts payable
thereunder must be payable in Dollars, and shall expire on a date no more than
12 months after the date of issuance or last renewal of such Letter of Credit,
which date shall be no later than the Maturity Date. If Lender makes a payment
under a Letter of Credit, Borrowers shall pay to Lender an amount equal to the
applicable Letter of Credit Disbursement on the Business Day such Letter of
Credit Disbursement is made and, in the absence of such payment, the amount of
the Letter of Credit Disbursement immediately and automatically shall be deemed
to be an Advance hereunder (notwithstanding any failure to satisfy any condition
precedent set forth in Section 4 or this Section 2.13) and, initially, shall
bear interest at the rate then applicable to Advances. If a Letter of Credit
Disbursement is deemed to be an Advance hereunder, Borrowers’ obligation to pay
the amount of such Letter of Credit Disbursement to Lender shall be
automatically converted into an obligation to pay Lender such resulting Advance.

 

(e)          Each Borrower agrees to indemnify, defend and hold harmless Lender
(including its branches, Affiliates, and correspondents) and each such Person’s
respective directors, officers, employees, attorneys and agents (each, a “Letter
of Credit Related Person”) (to the fullest extent permitted by law) from and
against any and all claims, demands, suits, actions, investigations,
proceedings, liabilities, fines, costs, penalties, and damages, and all
reasonable fees and disbursements of attorneys, experts, or consultants and all
other costs and expenses actually incurred in connection therewith or in
connection with the enforcement of this indemnification (as and when they are
incurred and irrespective of whether suit is brought), which may be incurred by
or awarded against any such Letter of Credit Related Person (other than Taxes,
which shall be governed by Section 16) (the “Letter of Credit Indemnified
Costs”), and which arise out of or in connection with, or as a result of: (i)
any Letter of Credit or any pre-advice of its issuance; (ii) any transfer, sale,
delivery, surrender or endorsement of any Drawing Document at any time(s) held
by any such Letter of Credit Related Person in connection with any Letter of
Credit; (iii) any action or proceeding arising out of, or in connection with,
any Letter of Credit (whether administrative, judicial or in connection with
arbitration), including any action or proceeding to compel or restrain any
presentation or payment under any Letter of Credit, or for the wrongful dishonor
of, or honoring a presentation under, any Letter of Credit; (iv) any independent
undertakings issued by the beneficiary of any Letter of Credit; (v) any
unauthorized instruction or request made to Lender in connection with any Letter
of Credit or requested Letter of Credit or error in computer or electronic
transmission; (vi) an adviser, confirmer or other nominated person seeking to be
reimbursed, indemnified or compensated; (vii) any third party seeking to enforce
the rights of an applicant, beneficiary, nominated person, transferee, assignee
of Letter of Credit proceeds or holder of an instrument or document; (viii) the
fraud, forgery or illegal action of parties other than the Letter of Credit
Related Person; (ix) Lender’s performance of the obligations of a confirming
institution or entity that wrongfully dishonors a confirmation; or (x) the acts
or omissions, whether rightful or wrongful, of any present or future de jure or
de facto governmental or regulatory authority or cause or event beyond the
control of the Letter of Credit Related Person; in each case, including that
resulting from the Letter of Credit Related Person’s own negligence; provided,
however, that such indemnity shall not be available to any Letter of Credit
Related Person claiming indemnification under clauses (i) through (x) above to
the extent that such Letter of Credit Indemnified Costs may be finally
determined in a final, non-appealable judgment of a court of competent
jurisdiction to have resulted directly from the gross negligence or willful
misconduct of the Letter of Credit Related Person claiming indemnity. Borrowers
hereby agree to pay the Letter of Credit Related Person claiming indemnity on
demand from time to time all amounts owing under this Section 2.13(e). If and to
the extent that the obligations of Borrowers under this Section 2.13(e) are
unenforceable for any reason, Borrowers agree to make the maximum contribution
to the Letter of Credit Indemnified Costs permissible under applicable law. This
indemnification provision shall survive termination of this Agreement and all
Letters of Credit.

 

6

 

 

(f)          The liability of Lender (or any other Letter of Credit Related
Person) under, in connection with or arising out of any Letter of Credit (or
pre-advice), regardless of the form or legal grounds of the action or
proceeding, shall be limited to direct damages suffered by Borrowers that are
caused directly by Lender’s gross negligence or willful misconduct in (i)
honoring a presentation under a Letter of Credit that on its face does not at
least substantially comply with the terms and conditions of such Letter of
Credit, (ii) failing to honor a presentation under a Letter of Credit that
strictly complies with the terms and conditions of such Letter of Credit or
(iii) retaining Drawing Documents presented under a Letter of Credit. Lender
shall be deemed to have acted with due diligence and reasonable care if Lender’s
conduct is in accordance with Standard Letter of Credit Practice or in
accordance with this Agreement. Borrowers’ aggregate remedies against Lender and
any Letter of Credit Related Person for wrongfully honoring a presentation under
any Letter of Credit or wrongfully retaining honored Drawing Documents shall in
no event exceed the aggregate amount paid by Borrowers to Lender in respect of
the honored presentation in connection with such Letter of Credit under Section
2.13(d), plus interest at the rate then applicable to Advances hereunder.
Borrowers shall take action to avoid and mitigate the amount of any damages
claimed against Lender or any other Letter of Credit Related Person, including
by enforcing its rights against the beneficiaries of the Letters of Credit. Any
claim by Borrowers under or in connection with any Letter of Credit shall be
reduced by an amount equal to the sum of (x) the amount (if any) saved by
Borrowers as a result of the breach or alleged wrongful conduct complained of;
and (y) the amount (if any) of the loss that would have been avoided had
Borrowers taken all reasonable steps to mitigate any loss, and in case of a
claim of wrongful dishonor, by specifically and timely authorizing Lender to
effect a cure.

 

(g)          Borrowers are responsible for preparing or approving the final text
of the Letter of Credit as issued by Lender, irrespective of any assistance
Lender may provide such as drafting or recommending text or by Lender’s use or
refusal to use text submitted by Borrowers. Borrowers are solely responsible for
the suitability of the Letter of Credit for Borrowers’ purposes. With respect to
any Letter of Credit containing an “automatic amendment” to extend the
expiration date of such Letter of Credit, Lender, in its sole and absolute
discretion, may give notice of nonrenewal of such Letter of Credit and, if
Borrowers do not at any time want such Letter of Credit to be renewed, Borrowers
will so notify Lender at least 15 calendar days before Lender is required to
notify the beneficiary of such Letter of Credit or any advising bank of such
nonrenewal pursuant to the terms of such Letter of Credit.

 

(h)          Borrowers’ reimbursement and payment obligations under this Section
2.13 are absolute, unconditional and irrevocable and shall be performed strictly
in accordance with the terms of this Agreement under any and all circumstances
whatsoever, including: (i) any lack of validity, enforceability or legal effect
of any Letter of Credit or this Agreement or any term or provision therein or
herein; (ii) payment against presentation of any draft, demand or claim for
payment under any Drawing Document that does not comply in whole or in part with
the terms of the applicable Letter of Credit or which proves to be fraudulent,
forged or invalid in any respect or any statement therein being untrue or
inaccurate in any respect, or which is signed, issued or presented by a Person
or a transferee of such Person purporting to be a successor or transferee of the
beneficiary of such Letter of Credit; (iii) Lender or any of its branches or
Affiliates being the beneficiary of any Letter of Credit; (iv) Lender or any
correspondent honoring a drawing against a Drawing Document up to the amount
available under any Letter of Credit even if such Drawing Document claims an
amount in excess of the amount available under the Letter of Credit; (v) the
existence of any claim, set-off, defense or other right that any Borrower or any
of its Subsidiaries may have at any time against any beneficiary, any assignee
of proceeds, Lender or any other Person; (vi) any other event, circumstance or
conduct whatsoever, whether or not similar to any of the foregoing that might,
but for this Section 2.13(h), constitute a legal or equitable defense to or
discharge of, or provide a right of set-off against, any Borrower’s or any of
its Subsidiaries’ reimbursement and other payment obligations and liabilities,
arising under, or in connection with, any Letter of Credit, whether against
Lender, the beneficiary or any other Person; or (vii) the fact that any Default
or Event of Default shall have occurred and be continuing; provided, however,
that subject to Section 2.13(f) above, the foregoing shall not release Lender
from such liability to Borrowers as may be finally determined in a final,
non-appealable judgment of a court of competent jurisdiction against Lender
following reimbursement or payment of the obligations and liabilities, including
reimbursement and other payment obligations, of Borrowers to Lender arising
under, or in connection with, this Section 2.13 or any Letter of Credit.

 

7

 

 

(i)          Without limiting any other provision of this Agreement, Lender and
each other Letter of Credit Related Person (if applicable) shall not be
responsible to Borrowers for, and Lender’s rights and remedies against Borrowers
and the obligation of Borrowers to reimburse Lender for each drawing under each
Letter of Credit shall not be impaired by: (i) honor of a presentation under any
Letter of Credit that on its face substantially complies with the terms and
conditions of such Letter of Credit, even if the Letter of Credit requires
strict compliance by the beneficiary; (ii) honor of a presentation of any
Drawing Document that appears on its face to have been signed, presented or
issued (A) by any purported successor or transferee of any beneficiary or other
Person required to sign, present or issue such Drawing Document or (B) under a
new name of the beneficiary; (iii) acceptance as a draft of any written or
electronic demand or request for payment under a Letter of Credit, even if
nonnegotiable or not in the form of a draft or notwithstanding any requirement
that such draft, demand or request bear any or adequate reference to the Letter
of Credit; (iv) the identity or authority of any presenter or signer of any
Drawing Document or the form, accuracy, genuineness or legal effect of any
Drawing Document (other than Lender’s determination that such Drawing Document
appears on its face substantially to comply with the terms and conditions of the
Letter of Credit); (v) acting upon any instruction or request relative to a
Letter of Credit or requested Letter of Credit that Lender in good faith
believes to have been given by a Person authorized to give such instruction or
request; (vi) any errors, omissions, interruptions or delays in transmission or
delivery of any message, advice or document (regardless of how sent or
transmitted) or for errors in interpretation of technical terms or in
translation or any delay in giving or failing to give notice to Borrowers; (vii)
any acts, omissions or fraud by, or the insolvency of, any beneficiary, any
nominated person or entity or any other Person or any breach of contract between
any beneficiary and any Borrower or any of the parties to the underlying
transaction to which the Letter of Credit relates; (viii) assertion or waiver of
any provision of the ISP or UCP 600 that primarily benefits an issuer of a
letter of credit, including any requirement that any Drawing Document be
presented to it at a particular hour or place; (ix) payment to any paying or
negotiating bank (designated or permitted by the terms of the applicable Letter
of Credit) claiming that it rightfully honored or is entitled to reimbursement
or indemnity under Standard Letter of Credit Practice applicable to it; (x)
acting or failing to act as required or permitted under Standard Letter of
Credit Practice applicable to where Lender has issued, confirmed, advised or
negotiated such Letter of Credit, as the case may be; (xi) honor of a
presentation after the expiration date of any Letter of Credit notwithstanding
that a presentation was made prior to such expiration date and dishonored by
Lender if subsequently Lender or any court or other finder of fact determines
such presentation should have been honored; (xii) dishonor of any presentation
that does not strictly comply or that is fraudulent, forged or otherwise not
entitled to honor; or (xiii) honor of a presentation that is subsequently
determined by Lender to have been made in violation of international, federal,
state or local restrictions on the transaction of business with certain
prohibited Persons.

 

(j)          Each Borrower acknowledges and agrees that any and all fees,
charges, costs, or commissions in effect from time to time imposed by, and any
and all expenses incurred by, Lender, or by any adviser, confirming institution
or entity or other nominated Person relating to Letters of Credit, at the time
of issuance of any Letter of Credit and upon the occurrence of any other
activity with respect to any Letter of Credit (including transfers, assignment
of proceeds, amendments, drawings, renewals or cancellations), shall be
non-refundable Lender Expenses for purposes of this Agreement and shall be
reimbursable immediately by Borrowers to Lender.

 

(k)          If by reason of (i) any change after the Agreement Date in any
applicable law, treaty, rule, or regulation or any change in the interpretation
or application thereof by any Governmental Authority, or (ii) compliance by
Lender with any direction, request, or requirement (irrespective of whether
having the force of law) of any Governmental Authority or monetary authority
including, Regulation D of the Board of Governors as from time to time in effect
(and any successor thereto): (i) any reserve, deposit, or similar requirement is
or shall be imposed or modified in respect of any Letter of Credit issued or
caused to be issued hereunder or hereby, or (ii) there shall be imposed on
Lender any other condition regarding any Letter of Credit, and the result of the
foregoing is to increase, directly or indirectly, the cost to Lender of issuing,
making, participating in, or maintaining any Letter of Credit or to reduce the
amount receivable in respect thereof, then, and in any such case, Lender may, at
any time within a reasonable period after the additional cost is incurred or the
amount received is reduced, notify Borrowers, and Borrowers shall pay within 30
days after demand therefor, such amounts as Lender may specify to be necessary
to compensate Lender for such additional cost or reduced receipt, together with
interest on such amount from the date of such demand until payment in full
thereof at the rate then applicable to Advances hereunder; provided, that (A)
Borrowers shall not be required to provide any compensation pursuant to this
Section 2.13(k) for any such amounts incurred more than 180 days prior to the
date on which the demand for payment of such amounts is first made to Borrowers,
and (B) if an event or circumstance giving rise to such amounts is retroactive,
then the 180-day period referred to above shall be extended to include the
period of retroactive effect thereof. The determination by Lender of any amount
due pursuant to this Section 2.13(k), as set forth in a certificate setting
forth the calculation thereof in reasonable detail, shall, in the absence of
manifest or demonstrable error, be final and conclusive and binding on all of
the parties hereto.

 

8

 

 

(l)          Unless otherwise expressly agreed by Lender and Borrowers, when a
Letter of Credit is issued, (i) the rules of the ISP and UCP 600 shall apply to
each standby Letter of Credit, and (ii) the rules of UCP 600 shall apply to each
commercial Letter of Credit.

 

(m)          In the event of a direct conflict between the provisions of this
Section 2.13 and any provision contained in any Letter of Credit Agreement, it
is the intention of the parties hereto that such provisions be read together and
construed, to the fullest extent possible, to be in concert with each other. In
the event of any actual, irreconcilable conflict that cannot be resolved as
aforesaid, the terms and provisions of this Section 2.13 shall control and
govern.

 

2.14       Illegality; Impracticability; Increased Costs.  In the event that (a)
any change in market conditions or any law, regulation, treaty, or directive, or
any change therein or in the interpretation or application thereof make it
unlawful or impractical for Lender to fund or maintain extensions of credit with
interest based upon Daily Three Month LIBOR or to continue such funding or
maintaining, or to determine or charge interest rates based upon Daily Three
Month LIBOR, (b) Lender determines that by reasons affecting the London
Interbank Eurodollar market, adequate and reasonable means do not exist for
ascertaining Daily Three Month LIBOR, or (c) Lender determines that the interest
rate based on the Daily Three Month LIBOR will not adequately and fairly reflect
the cost to Lender of maintaining or funding Advances at the interest rate based
upon Daily Three Month LIBOR, Lender shall give notice of such changed
circumstances to Borrowers and (y) interest on the principal amount of such
extensions of credit thereafter shall accrue interest at a rate equal to the
Prime Rate plus the Applicable Margin, and (z) Borrowers shall not be entitled
to elect Daily Three Month LIBOR until Lender determines that it would no longer
be unlawful or impractical to do so or that such increased costs would no longer
be applicable.

 

2.15       Capital Requirements.  If, after the date hereof, Lender determines
that (a) the adoption of or change in any law, rule, regulation or guideline
regarding capital or reserve requirements for lenders, banks or bank holding
companies, or any change in the interpretation, implementation, or application
thereof by any Governmental Authority charged with the administration thereof,
including those changes resulting from the enactment of the Dodd-Frank Wall
Street Reform and Consumer Protection Act and Basel III, regardless of the date
enacted, adopted or issued, or (b) compliance by Lender or its parent bank
holding company with any guideline, request or directive of any such entity
regarding capital adequacy (whether or not having the force of law), has the
effect of reducing the return on Lender’s or such holding company’s capital as a
consequence of Lender’s loan commitments hereunder to a level below that which
such Lender or such holding company could have achieved but for such adoption,
change, or compliance (taking into consideration such Lender’s or such holding
company’s then existing policies with respect to capital adequacy and assuming
the full utilization of such entity’s capital) by any amount deemed by Lender to
be material, then Lender may notify Borrowers thereof. Following receipt of such
notice, Borrowers agree to pay Lender on demand the amount of such reduction of
return on capital as and when such reduction is determined, payable within 30
days after presentation by Lender of a statement of the amount and setting forth
in reasonable detail Lender’s calculation thereof and the assumptions upon which
such calculation was based (which statement shall be deemed true and correct
absent manifest error). In determining such amount, Lender may use any
reasonable averaging and attribution methods. Failure or delay on the part of
Lender to demand compensation pursuant to this Section shall not constitute a
waiver of Lender’s right to demand such compensation; provided that Borrowers
shall not be required to compensate Lender pursuant to this Section for any
reductions in return incurred more than 180 days prior to the date that Lender
notifies Borrowers of such law, rule, regulation or guideline giving rise to
such reductions and of Lender’s intention to claim compensation therefor;
provided further that if such claim arises by reason of the adoption of or
change in any law, rule, regulation or guideline that is retroactive, then the
180-day period referred to above shall be extended to include the period of
retroactive effect thereof.

 

2.16       Extent of Each Borrower’s Liability, Contribution.

 

(a)          Joint and Several Liability. Each Borrower agrees that it is
jointly and severally liable for, and absolutely and unconditionally guarantees
to Lender the prompt payment and performance of, all Obligations under this
Agreement and all agreements under the Loan Documents. Each Borrower agrees that
its guaranty obligations hereunder constitute a continuing guaranty of payment
and not of collection, that such obligations shall not be discharged until cash
payment in full of the Obligations, and that such obligations are absolute and
unconditional, irrespective of (i) the genuineness, validity, regularity,
enforceability, subordination or any future modification of, or change in, any
Obligations or Loan Document, or any other document, instrument or agreement to
which any Borrower is or may become a party or be bound; (ii) the absence of any
action to enforce this Agreement (including this Section) or any other Loan
Document, or any waiver, consent or indulgence of any kind by Lender with
respect thereto; (iii) the existence, value or condition of, or failure to
perfect any of Lender’s Liens or to preserve rights against, any security or
guaranty for the Obligations or any action, or the absence of any action, by
Lender in respect thereof (including the release of any security or guaranty);
(iv) the insolvency of any Borrower; (v) any election by Lender in an Insolvency
Proceeding for the application of Section 1111(b)(2) of the Bankruptcy Code;
(vi) any borrowing or grant of a Lien by any other Borrower, as
debtor-in-possession under Section 364 of the Bankruptcy Code or otherwise;
(vii) the disallowance of any claims of Lender against any Borrower for the
repayment of any Obligations under Section 502 of the Bankruptcy Code or
otherwise; or (viii) any other action or circumstances that might otherwise
constitute a legal or equitable discharge or defense of a surety or guarantor,
except cash payment in full of all Obligations.

 

9

 

 

(b)          Contribution. Each Borrower hereby agrees that it will not enforce
any of its rights of contribution or subrogation against any other Borrower with
respect to any liability incurred by it hereunder or under any of the other Loan
Documents, any payments made by it to Lender with respect to any of the
Obligations or any collateral security therefor until such time as all of the
Obligations have been paid in full in cash. Except as otherwise provided in the
Intercompany Subordination Agreement, including Section 4 thereof, any claim
which any Borrower may have against any other Borrower with respect to any
payments to Lender hereunder or under any of the Bank Product Agreements are
hereby expressly made subordinate and junior in right of payment, without
limitation as to any increases in the Obligations arising hereunder or
thereunder, to the prior payment in full in cash of the Obligations and, in the
event of any insolvency, bankruptcy, receivership, liquidation, reorganization
or other similar proceeding under the laws of any jurisdiction relating to any
Borrower, its debts or its assets, whether voluntary or involuntary, all such
Obligations shall be paid in full in cash before any payment or distribution of
any character, whether in cash, securities or other property, shall be made to
any other Borrower therefor.

 

(c)          No Limitation on Liability. Nothing contained in this Section 2.16
shall limit the liability of any Borrower to pay extensions of credit made
directly or indirectly to that Borrower (including revolving loans advanced to
any other Borrower and then re-loaned or otherwise transferred to, or for the
benefit of, such Borrower), Obligations relating to Letters of Credit issued to
support such Borrower’s business, and all accrued interest, fees, expenses and
other related Obligations with respect thereto, for which such Borrower shall be
primarily liable for all purposes hereunder. Lender shall have the right, at any
time in its discretion, to condition an extension of credit hereunder upon a
separate calculation of borrowing availability for each Borrower and to restrict
the disbursement and use of such extensions of credit to such Borrower.

 

2.17         Ex-Im Advances Subject to Ex-Im Bank Rules.  Each Borrower
acknowledges that Lender is willing to make the Ex-Im Advances available to
Borrowers because Ex-Im Bank is willing to guarantee payment of a significant
portion of the Ex-Im Advances pursuant to the Master Guaranty. Accordingly, in
the event of any inconsistency among the Master Guaranty or any other Ex-Im
Subfacility Document and any other Loan Document, the provision that is more
stringent, burdensome or restrictive upon Borrowers shall control. This
Agreement is supplemental to the Borrower Agreement, this Agreement constitutes
the “Loan Agreement” under the Borrower Agreement, and the facility for Ex-Im
Advances hereunder constitutes the “Loan Facility” under the Borrower Agreement.

 

3.          SECURITY INTEREST.

 

3.1           Grant of Security Interest.  Each Borrower hereby unconditionally
grants, assigns, and pledges to Lender for the benefit of Lender and each Bank
Product Provider, to secure payment and performance of the Obligations, a
continuing security interest (hereinafter referred to as the “Security
Interest”) in all of such Borrower’s right, title, and interest in and to the
Collateral, as security for the payment and performance of all Obligations.
Following request by Lender, each Borrower shall grant Lender a Lien and
security interest in all Commercial Tort Claims that it may have against any
Person. The Security Interest created hereby secures the payment and performance
of the Obligations, whether now existing or arising hereafter. Without limiting
the generality of the foregoing, this Agreement secures the payment of all
amounts which constitute part of the Obligations and would be owed by any
Borrower to Lender or any other Bank Product Provider, but for the fact that
they are unenforceable or not allowable (in whole or in part) as a claim in an
Insolvency Proceeding involving any Borrower due to the existence of such
Insolvency Proceeding.

 

3.2           Borrowers Remain Liable.  Anything herein to the contrary
notwithstanding, (a) Borrowers and each other Loan Party shall remain liable
under the contracts and agreements included in the Collateral to perform all of
the duties and obligations thereunder to the same extent as if this Agreement
had not been executed, (b) the exercise by Lender of any of the rights hereunder
shall not release any Borrower or any other Loan Party from any of its duties or
obligations under such contracts and agreements included in the Collateral, and
(c) Lender shall not have any obligation or liability under such contracts and
agreements included in the Collateral by reason of this Agreement, nor shall
Lender be obligated to perform any of the obligations or duties of any Borrower
or any other Loan Party thereunder or to take any action to collect or enforce
any claim for payment assigned hereunder.

 

10

 

 

3.3           Assignment of Insurance.  As additional security for the
Obligations, each Borrower hereby assigns to Lender for the benefit of Lender
and each Bank Product Provider all rights of such Borrower under every policy of
insurance covering the Collateral and all other assets and property of each
Borrower (including, without limitation business interruption insurance and
proceeds thereof) and all business records and other documents relating to it,
and all monies (including proceeds and refunds) that may be payable under any
policy, and each Borrower hereby directs the issuer of each policy to pay all
such monies directly and solely to Lender. At any time that an Event of Default
exists, Lender may (but need not), in Lender’s or any Borrower’s name, execute
and deliver proofs of claim, receive payment of proceeds and endorse checks and
other instruments representing payment of the policy of insurance, and adjust,
litigate, compromise or release claims against the issuer of any policy. Any
monies received under any insurance policy assigned to Lender, other than
liability insurance policies, or received as payment of any award or
compensation for condemnation or taking by eminent domain, shall be paid to
Lender and, as determined by Lender in its sole discretion, either be applied to
prepayment of the Obligations or disbursed to Borrowers under payment terms
reasonably satisfactory to Lender for application to the cost of repairs,
replacements, or restorations of the affected Collateral which shall be effected
with reasonable promptness and shall be of a value at least equal to the value
of the items or property destroyed.

 

3.4           Financing Statements.  Each Borrower authorizes Lender to file
financing statements describing Collateral to perfect Lender’s and each Bank
Product Provider’s Security Interest in the Collateral, and Lender may describe
the Collateral as “all personal property” or “all assets” or describe specific
items of Collateral including without limitation any Commercial Tort Claims. All
financing statements filed before the date of this Agreement to perfect the
Security Interest were authorized by such Borrower and are hereby ratified.

 

4.          CONDITIONS.

 

4.1         Conditions Precedent to the Initial Extension of Credit.  The
obligation of Lender to make the initial extension of credit provided for
hereunder is subject to the fulfillment, to the satisfaction of Lender, of each
of the conditions precedent set forth on Exhibit B.

 

4.2         Conditions Precedent to all Extensions of Credit.  The obligation of
Lender to make any Advances hereunder (or to extend any other credit hereunder)
at any time shall be subject to the following conditions precedent:

 

(a)          the representations and warranties of each Borrower and each other
Loan Party or its Subsidiaries contained in this Agreement or in the other Loan
Documents shall be true and correct in all material respects (except that such
materiality qualifier shall not be applicable to any representations and
warranties that already are qualified or modified by materiality in the text
thereof) on and as of the date of such extension of credit, as though made on
and as of such date (except to the extent that such representations and
warranties relate solely to an earlier date, in which case such representations
and warranties shall continue to be true and correct to the same extent as of
such earlier date); and

 

(b)          no Default or Event of Default shall have occurred and be
continuing on the date of such extension of credit, nor shall either result from
the making thereof.

 

Any request for an extension of credit shall be deemed to be a representation by
each Borrower and each other Loan Party that the statements set forth in this
Section 4.2 are correct as of the time of such request and if such extension of
credit is a request for an Advance or a Letter of Credit, sufficient
Availability exists for such Advance or Letter of Credit pursuant to Section
2.1(a) and Section 2.13.

 

4.3           Conditions Subsequent.  The obligation of Lender to continue to
make Advances (or otherwise extend credit hereunder) is subject to the
fulfillment, on or before the date applicable thereto, of the conditions
subsequent set forth on Exhibit C (the failure by any Borrower or any other Loan
Party to so perform or cause to be performed such conditions subsequent as and
when required by the terms thereof, shall constitute an Event of Default).

 

5.          REPRESENTATIONS AND WARRANTIES.

 

In order to induce Lender to enter into this Agreement, each Borrower, on behalf
of itself and the other Loan Parties, makes the representations and warranties
to Lender set forth on Exhibit D. Each of such representations and warranties
shall be true, correct, and complete, in all material respects (except that such
materiality qualifier shall not be applicable to any representations and
warranties that already are qualified or modified by materiality in the text
thereof), as of the Agreement Date, and shall be true, correct, and complete, in
all material respects (except that such materiality qualifier shall not be
applicable to any representations and warranties that already are qualified or
modified by materiality in the text thereof), as of the date of the making of
each Advance or other extension of credit made thereafter, as though made on and
as of the date of such Advance or other extension of credit (except to the
extent that such representations and warranties relate solely to an earlier date
in which case such representations and warranties shall continue to be true and
correct to the same extent as of such earlier date) and such representations and
warranties shall survive the execution and delivery of this Agreement.

 

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6.          AFFIRMATIVE COVENANTS.

 

Each Borrower covenants and agrees that, until termination of all of the
commitments of Lender hereunder to provide any further extensions of credit and
payment in full of the Obligations, each Borrower shall, and shall cause their
respective Subsidiaries and each of the other Loan Parties to, comply with each
of the following:

 

6.1         Financial Statements, Reports, Certificates.  Deliver to Lender
copies of each of the financial statements, reports, and other items set forth
on Schedule 6.1 no later than the times specified therein. In addition, each
Borrower agrees that no Subsidiary of a Borrower will have a fiscal year
different from that of Borrowers. Each Borrower agrees to maintain a system of
accounting that enables such Borrower to produce financial statements in
accordance with GAAP. Each Borrower shall also (a) keep a reporting system that
shows all additions, sales, claims, returns, and allowances with respect to the
sales of such Borrower and its Subsidiaries, and (b) maintain its billing
systems/practices substantially as in effect as of the Agreement Date and shall
only make material modifications following prior notice to Lender.

 

6.2         Collateral Reporting.  Provide Lender with each of the reports set
forth on Schedule 6.2 at the times specified therein. In addition, each Borrower
agrees to use commercially reasonable efforts in cooperation with Lender to
facilitate and implement a system of electronic collateral reporting in order to
provide electronic reporting of each of the items set forth on such Schedule.

 

6.3         Existence.  Except as otherwise permitted under Section 7.3 or
Section 7.4, at all times maintain and preserve in full force and effect (a) its
existence (including being in good standing in its jurisdiction of organization)
and (b) all rights and franchises, licenses and permits material to its
business; provided, however, that no Borrower nor any of its Subsidiaries shall
be required to preserve any such right or franchise, licenses or permits if such
Person’s board of directors (or similar governing body) shall determine that the
preservation thereof is no longer desirable in the conduct of the business of
such Person, and that the loss thereof is not disadvantageous in any material
respect to such Person or to Lender; provided that Borrowers deliver at least
ten (10) days prior written notice to Lender of the election of such Borrower or
such Subsidiary not to preserve any such right or franchise, license or permit.

 

6.4         Maintenance of Properties.  Maintain and preserve all of its assets
that are necessary or useful in the proper conduct of its business in good
working order and condition, ordinary wear, tear and casualty excepted and
Permitted Dispositions excepted (and except where the failure to so maintain and
preserve such assets could not reasonably be expected to result in a Material
Adverse Change), and comply with the material provisions of all material leases
to which it is a party as lessee, so as to prevent the loss or forfeiture
thereof, unless such provisions are the subject of a Permitted Protest.

 

6.5         Taxes.

 

(a)          Cause all assessments and taxes imposed, levied, or assessed
against any Loan Party or its Subsidiaries, or any of their respective assets or
in respect of any of its income, businesses, or franchises to be paid in full,
before delinquency or before the expiration of any extension period, except to
the extent that the validity of such assessment or tax shall be the subject of a
Permitted Protest and so long as, in the case of an assessment or tax that has
or may become a Lien against any of the Collateral, (i) such contest proceedings
conclusively operate to stay the sale of any portion of the Collateral to
satisfy such assessment or tax, and (ii) any such other Lien is at all times
subordinate to Lender’s Liens.

 

(b)          Make timely payment or deposit of all tax payments and withholding
taxes required of it and them by applicable laws, including those laws
concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal
income taxes, and will, upon request, furnish Lender with proof reasonably
satisfactory to Lender indicating that such Loan Party and its Subsidiaries have
made such payments or deposits.

 

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6.6         Insurance.  At Borrowers’ expense, maintain insurance with respect
to the assets of each Loan Party and each of its Subsidiaries wherever located,
covering liabilities, losses or damages as are customarily insured against by
other Persons engaged in the same or similar businesses. Borrowers also shall
maintain, with respect to each Borrower and each of its Subsidiaries, business
interruption insurance, general liability insurance, flood insurance for
Collateral located in a flood plain, product liability insurance, director’s and
officer’s liability insurance, fiduciary liability insurance, and employment
practices liability insurance, as well as insurance against larceny,
embezzlement, and criminal misappropriation. All such policies of insurance
shall be with financially sound and reputable insurance companies acceptable to
Lender and in such amounts as is carried generally in accordance with sound
business practice by companies in similar businesses similarly situated and
located and in any event in amount, adequacy and scope reasonably satisfactory
to Lender. All property insurance policies covering the Collateral are to be
made payable to Lender for the benefit of Lender, as its interests may appear,
in case of loss, pursuant to a lender loss payable endorsement acceptable to
Lender and are to contain such other provisions as Lender may reasonably require
to fully protect Lender’s interest in the Collateral and to any payments to be
made under such policies. Such evidence of property and general liability
insurance shall be delivered to Lender, with the lender loss payable
endorsements (but only in respect of Collateral) and additional insured
endorsements (with respect to general liability coverage) in favor of Lender and
shall provide for not less than 30 days (10 days in the case of non-payment)
prior written notice to Lender of the exercise of any right of cancellation (or
such lesser notice as Lender may agree to in its sole discretion). If Borrowers
fail to maintain such insurance, Lender may arrange for such insurance, but at
Borrowers’ expense and without any responsibility on Lender’s part for obtaining
the insurance, the solvency of the insurance companies, the adequacy of the
coverage, or the collection of claims. Borrowers shall give Lender prompt notice
of any loss exceeding $250,000 covered by their casualty or business
interruption insurance. Upon the occurrence of an Event of Default, Lender shall
have the sole right to file claims under any property and general liability
insurance policies in respect of the Collateral, to receive and give acquittance
for any payments that may be payable thereunder, and to execute any and all
endorsements, receipts, releases, assignments, reassignments or other documents
that may be necessary to effect the collection, compromise or settlement of any
claims under any such insurance policies.

 

6.7         Inspections, Exams, Collateral Exams and Appraisals.  Permit Lender
and each of Lender’s duly authorized representatives to visit any of its
properties and inspect any of its assets or books and records, to conduct
inspections, exams, audits and appraisals of the Collateral, to examine and make
copies of its books and records, and to discuss its affairs, finances, and
accounts with, and to be advised as to the same by, its officers and employees
at such reasonable times and intervals as Lender may designate and, so long as
no Default or Event of Default exists, with reasonable prior notice to
Borrowers.

 

6.8         Account Verification.  Permit Lender, in Lender's name or in the
name of a nominee of Lender, to verify the validity, amount or any other matter
relating to any Account, by mail, telephone, facsimile transmission or
otherwise. Further, at the request of Lender, Borrowers shall send requests for
verification of Accounts or send notices of assignment of Accounts to Account
Debtors and other obligors.

 

6.9         Compliance with Laws.  Comply with the requirements of all
applicable laws, rules, regulations, and orders of any Governmental Authority,
other than laws, rules, regulations, and orders the non-compliance with which,
individually or in the aggregate, could not reasonably be expected to result in
a Material Adverse Change.

 

6.10       Environmental.

 

(a)          Keep any property either owned or operated by any Borrower or any
other Loan Party or its Subsidiaries free of any Environmental Liens or post
bonds or other financial assurances satisfactory to Lender and in an amount
sufficient to satisfy the obligations or liability evidenced by such
Environmental Liens;

 

(b)          Comply, in all material respects, with Environmental Laws and
provide to Lender documentation of such compliance which Lender reasonably
requests;

 

(c)          Promptly notify Lender of any release of which any Borrower or any
other Loan Party has knowledge of a Hazardous Material in any reportable
quantity from or onto property owned or operated by any Loan Party or any of its
Subsidiaries and take any Remedial Actions required to abate said release or
otherwise to come into compliance, in all material respects, with applicable
Environmental Law; and

 

(d)          Promptly, but in any event within 5 Business Days of its receipt
thereof, provide Lender with written notice of any of the following: (i) notice
that an Environmental Lien has been filed against any of the real or personal
property of any Loan Party or its Subsidiaries, (ii) commencement of any
Environmental Action or written notice that an Environmental Action will be
filed against any Loan Party or any of its Subsidiaries, and (iii) written
notice of a violation, citation, or other administrative order from a
Governmental Authority.

 

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6.11         Disclosure Updates.

 

(a)          Promptly and in no event later than 5 Business Days after obtaining
knowledge thereof or after the occurrence thereof, whichever is earlier, notify
Lender:

 

(i)          if any written information, exhibit, or report furnished to Lender
contained, at the time it was furnished, any untrue statement of a material fact
or omitted to state any material fact necessary to make the statements contained
therein not misleading in light of the circumstances in which made. Any
notification pursuant to the foregoing provision will not cure or remedy the
effect of the prior untrue statement of a material fact or omission of any
material fact nor shall any such notification have the effect of amending or
modifying this Agreement or any of the Schedules hereto;

 

(ii)         of all actions, suits, or proceedings brought by or against any
Loan Party or any of its Subsidiaries before any court or Governmental Authority
which reasonably could be expected to result in a Material Adverse Change,
provided that, in any event, such notification shall not be later than 5 days
after service of process with respect thereto on any Loan Party or any of its
Subsidiaries;

 

(iii)        of (A) any disputes or claims by any Borrower’s customers exceeding
$200,000 in the aggregate during any fiscal year; or (ii) Goods returned to or
recovered by any Borrower outside of the ordinary course of business with a fair
market value exceeding, individually or in the aggregate during any fiscal year,
$200,000;

 

(iv)         of any material loss or damage to any Collateral or any substantial
adverse change in the Collateral; or

 

(v)          of a violation of any law, rule or regulation, the non-compliance
with which reasonably could be expected to result in a Material Adverse Change.

 

(b)          Immediately upon obtaining knowledge thereof or after the
occurrence thereof, notify Lender of any event or condition which constitutes a
Default or an Event of Default and provide a statement of the action that such
Borrower proposes to take with respect to such Default or Event of Default.

 

Upon request of Lender, each Loan Party shall deliver to Lender any other
materials, reports, records or information reasonably requested relating to the
operations, business affairs, financial condition of any Loan Party or its
Subsidiaries or the Collateral.

 

6.12         Collateral Covenants.

 

(a)          Possession of Collateral.  In the event that any Collateral,
including Proceeds, is evidenced by or consists of Negotiable Collateral,
Investment Related Property, or Chattel Paper, in each case, having an aggregate
value or face amount of $200,000 or more for all such Negotiable Collateral,
Investment Related Property, or Chattel Paper, the Loan Parties shall promptly
(and in any event within 2 Business Days after receipt thereof), notify Lender
thereof, and if and to the extent that perfection or priority of Lender’s Liens
is dependent on or enhanced by possession, the applicable Loan Party, promptly
(and in any event within 2 Business Days) after request by Lender, shall execute
such other documents and instruments as shall be requested by Lender or, if
applicable, endorse and deliver physical possession of such Negotiable
Collateral, Investment Related Property, or Chattel Paper to Lender, together
with such undated powers (or other relevant document of assignment or transfer
acceptable to Lender) endorsed in blank as shall be requested by Lender, and
shall do such other acts or things deemed necessary or desirable by Lender to
enhance, perfect and protect Lender’s Liens therein.

 

(b)          Chattel Paper.

 

(i)          Promptly (and in any event within 2 Business Days) after request by
Lender, each Loan Party shall take all steps reasonably necessary to grant
Lender control of all electronic Chattel Paper of any Loan Party in accordance
with the Code and all “transferable records” as that term is defined in Section
16 of the Uniform Electronic Transaction Act and Section 201 of the federal
Electronic Signatures in Global and National Commerce Act as in effect in any
relevant jurisdiction, to the extent that the individual or aggregate value or
face amount of such electronic Chattel Paper equals or exceeds $200,000; and

 

(ii)         If any Loan Party retains possession of any Chattel Paper or
instruments (which retention of possession shall be subject to the extent
permitted hereby), promptly upon the request of Lender, such Chattel Paper and
instruments shall be marked with the following legend: “This writing and the
obligations evidenced or secured hereby are subject to the Security Interest of
Wells Fargo Bank, National Association, as Lender”.

 

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(c)          Control Agreements.

 

(i)          Except to the extent otherwise provided by Section 7.11, each
Borrower shall obtain a Control Agreement from each bank (other than Lender)
maintaining a Deposit Account for such Borrower;

 

(ii)         Except to the extent otherwise provided by Section 7.11, each
Borrower shall obtain a Control Agreement from each issuer of uncertificated
securities, securities intermediary, or commodities intermediary issuing or
holding any financial assets or commodities to or for any Loan Party; and

 

(iii)        Except to the extent otherwise provided by Section 7.11, each
Borrower shall cause Lender to obtain “control”, as such term is defined in the
Code, with respect to all of such Borrower’s investment property.

 

(d)          Letter-of-Credit Rights.  If the Loan Parties (or any of them) are
or become the beneficiary of letters of credit having a face amount or value of
$200,000 or more in the aggregate, then the applicable Loan Party or Loan
Parties shall promptly (and in any event within 2 Business Days after becoming a
beneficiary), notify Lender thereof and, promptly (and in any event within 2
Business Days) after request by Lender, enter into a tri-party agreement with
Lender and the issuer or confirming bank with respect to letter-of-credit rights
assigning such letter-of-credit rights to Lender and directing all payments
thereunder to the Collection Account unless otherwise directed by Lender, all in
form and substance satisfactory to Lender.

 

(e)          Commercial Tort Claims.  If the Loan Parties (or any of them)
obtain Commercial Tort Claims having a value, or involving an asserted claim, in
the amount of $200,000 or more in the aggregate for all Commercial Tort Claims,
then the applicable Loan Party or Loan Parties shall promptly (and in any event
within 2 Business Days of obtaining such Commercial Tort Claim), notify Lender
upon incurring or otherwise obtaining such Commercial Tort Claims and, promptly
(and in any event within 2 Business Days) after request by Lender, amend
Schedule 5.6(d) to the Information Certificate to describe such Commercial Tort
Claims in a manner that reasonably identifies such Commercial Tort Claims and
which is otherwise reasonably satisfactory to Lender, and hereby authorizes the
filing of additional financing statements or amendments to existing financing
statements describing such Commercial Tort Claims, and agrees to do such other
acts or things deemed necessary or desirable by Lender to give Lender a first
priority, perfected security interest in any such Commercial Tort Claim, which
Commercial Tort Claim shall not be subject to any other Liens;

 

(f)          Government Contracts.  Other than Accounts and Chattel Paper the
aggregate value of which does not at any one time exceed $200,000, if any
Account or Chattel Paper of any Loan Party arises out of a contract or contracts
with the United States of America or any State or any department, agency, or
instrumentality thereof, Loan Parties shall promptly (and in any event within 2
Business Days of the creation thereof) notify Lender thereof and, promptly (and
in any event within 2 Business Days) after request by Lender, execute any
instruments or take any steps reasonably required by Lender in order that all
moneys due or to become due under such contract or contracts shall be assigned
to Lender, for the benefit of Lender and each Bank Product Provider, and shall
provide written notice thereof under the Assignment of Claims Act or other
applicable law.

 

(g)          Intellectual Property.

 

(i)          Upon the request of Lender, in order to facilitate filings with the
PTO and the United States Copyright Office, each Loan Party shall execute and
deliver to Lender one or more Copyright Security Agreements or Patent and
Trademark Security Agreements to further evidence Lender’s Lien on such Loan
Party’s Patents, Trademarks, or Copyrights, and the General Intangibles of such
Loan Party relating thereto or represented thereby;

 

15

 

 

(ii)         Each Loan Party shall have the duty, with respect to Intellectual
Property that is necessary in the conduct of such Loan Party’s business, to
protect and diligently enforce and defend at such Loan Party’s expense its
Intellectual Property, including (A) to diligently enforce and defend, including
promptly suing for infringement, misappropriation, or dilution and to recover
any and all damages for such infringement, misappropriation, or dilution, and
filing for opposition, interference, and cancellation against conflicting
Intellectual Property rights of any Person, (B) to prosecute diligently any
trademark application or service mark application that is part of the Trademarks
pending as of the date hereof or hereafter, (C) to prosecute diligently any
patent application that is part of the Patents pending as of the date hereof or
hereafter, (D) to take all reasonable and necessary action to preserve and
maintain all of such Loan Party’s Trademarks, Patents, Copyrights, Intellectual
Property Licenses, and its rights therein, including paying all maintenance fees
and filing of applications for renewal, affidavits of use, and affidavits of
noncontestability, and (E) to require all employees, consultants, and
contractors of each Loan Party who were involved in the creation or development
of such Intellectual Property to sign agreements containing assignment to such
Loan Party of Intellectual Property rights created or developed and obligations
of confidentiality. No Loan Party shall abandon any Intellectual Property or
Intellectual Property License that is necessary in the conduct of such Loan
Party’s business. Each Loan Party shall take the steps described in this Section
6.12(g)(ii) with respect to all new or acquired Intellectual Property to which
it or any of its Subsidiaries is now or later becomes entitled that is necessary
in the conduct of such Loan Party’s or Subsidiary’s business. Notwithstanding
the foregoing, no Loan Party shall be required to take any action pursuant to
this clause (g)(ii) if such Loan Party shall reasonably determine that such
action is not desirable in the conduct of the business of such Loan Party and
that the failure to take such action is not disadvantageous in any material
respect to any Loan Party or to Lender;

 

(iii)        Each Borrower acknowledges and agrees that Lender shall have no
duties with respect to any Intellectual Property or Intellectual Property
Licenses of any Loan Party. Without limiting the generality of this Section
6.12(g)(iii), each Borrower acknowledges and agrees that Lender shall not be
under any obligation to take any steps necessary to preserve rights in the
Collateral consisting of Intellectual Property or Intellectual Property Licenses
against any other Person, but Lender may do so at its option from and after the
occurrence and during the continuance of an Event of Default, and all expenses
incurred in connection therewith (including reasonable fees and expenses of
attorneys and other professionals) shall be for the sole account of Borrowers
and shall be chargeable to the Loan Account;

 

(iv)         Each Loan Party shall promptly file an application with the United
States Copyright Office for any Copyright that has not been registered with the
United States Copyright Office if such Copyright is necessary in connection with
the conduct of such Loan Party’s business. Any expenses incurred in connection
with the foregoing shall be borne by the Loan Parties; and

 

(v)          No Loan Party shall enter into any Intellectual Property License to
receive any license or rights in any Intellectual Property of any other Person
unless such Loan Party has used commercially reasonable efforts to permit the
assignment of or grant of a Lien in such Intellectual Property License (and all
rights of such Loan Party thereunder) to Lender (and any transferees of Lender).

 

(h)          Investment Related Property.

 

(i)          Upon the occurrence and during the continuance of an Event of
Default, following the request of Lender, all sums of money and property paid or
distributed in respect of the Investment Related Property that are received by
any Loan Party shall be held by such Loan Party in trust for the benefit of
Lender segregated from such Loan Party’s other property, and such Loan Party
shall deliver it promptly to Lender in the exact form received; and

 

(ii)         Each Loan Party shall cooperate with Lender in obtaining all
necessary approvals and making all necessary filings under federal, state,
local, or foreign law to effect the perfection of the Security Interest on the
Investment Related Property or to effect any sale or transfer thereof.

 

(i)          Real Property; Fixtures. Upon the acquisition by any Borrower of
any fee interest in Real Property, such Borrower will promptly (and in any event
within 2 Business Days of acquisition) notify Lender of the acquisition of such
Real Property and will grant to Lender a first priority Mortgage on each fee
interest in Real Property now or hereafter owned by such Borrower, which Real
Property shall not be subject to any other Liens except Permitted Liens, and
shall deliver such other documentation and opinions, in form and substance
satisfactory to Lender, in connection with the grant of such Mortgage as Lender
shall request in its Permitted Discretion, including appraisals, title insurance
policies and endorsements, surveys, financing statements, fixture filings, flood
insurance, flood insurance certifications and environmental audits and such
Borrower shall pay all recording costs, mortgage registration taxes, intangible
taxes and other fees and costs (including reasonable attorneys fees and
expenses) incurred in connection therewith. All such appraisals, title insurance
policies and endorsements, environmental audits and surveys shall be prepared or
issued by parties reasonably acceptable to Lender. To the extent permitted by
applicable law, all of the Collateral shall remain personal property regardless
of the manner of its attachment or affixation to real property.

 

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(j)          Controlled Accounts.

 

(i)          Within 90 days following the Agreement Date (the “Cash Management
Transition Period”), each Borrower shall establish and maintain at Lender all
Cash Management Services, including all deposit accounts and lockbox services.
Such Cash Management Services maintained by each Borrower shall be of a type and
on terms reasonably satisfactory to Lender;

 

(ii)         Until such time as Borrowers have established all of their Cash
Management Services with Lender, during the Cash Management Transition Period
each Borrower shall maintain Cash Management Services of a type and on terms
reasonably satisfactory to Lender at one or more of the banks set forth on
Schedule 6.12(j) to the Information Certificate (each a “Controlled Account
Bank”), and shall take reasonable steps to direct that all of the Account
Debtors of each Borrower and each of its Subsidiaries forward payment of the
amounts owed by them directly to such Controlled Account Bank, and (B) deposit
or cause to be deposited promptly, and in any event no later than the first
Business Day after the date of receipt thereof, all of their Collections
(including those sent directly by their Account Debtors to a Borrower or to a
Subsidiary of a Borrower) into a bank account of such Borrower at one of the
Controlled Account Banks (each, a “Controlled Account”); and

 

(iii)        During the Cash Management Transition Period, each Borrower shall
maintain Control Agreements with the applicable Controlled Account Bank, in form
and substance reasonably acceptable to Lender. Each such Control Agreement shall
provide, among other things, that (A) the Controlled Account Bank will comply
with any instructions originated by Lender directing the disposition of the
collected funds in such Controlled Account without further consent by the
applicable Borrower, (B) the Controlled Account Bank waives, subordinates, or
agrees not to exercise any rights of setoff or recoupment or any other claim
against the applicable Controlled Account other than for payment of its service
fees and other charges directly related to the administration of such Controlled
Account and for returned checks or other items of payment, and (C) the
Controlled Account Bank will, upon the instruction of Lender, forward, by daily
standing wire transfer, all amounts in the applicable Controlled Account to the
Collection Account or such other account as directed by Lender. Notwithstanding
the foregoing, Borrowers shall not be required to (y) provide Control Agreements
with respect to bank accounts maintained with PNC Bank, National Association as
of the Agreement Date unless Lender requests such Control Agreements in its
Permitted Discretion following the Agreement Date (and Borrowers covenant and
agree to close all such bank accounts no later than 90 days following the
Agreement Date unless Lender agrees in writing to extend such period), or (z)
provide Control Agreements with respect to bank accounts maintained with Lender
unless specifically requested by Lender.

 

(k)          Motor Vehicles. If requested by Lender, each Borrower shall
promptly deliver to Lender an original certificate of title for each such motor
vehicle owned by such Borrower, together with a signed motor vehicle title
application naming Lender as first lien holder with respect to such motor
vehicle and will cause such title certificates to be filed (with Lender’s Lien
noted thereon) in the appropriate state motor vehicle filing office.

 

(l)          Deposit Accounts. Unless Lender agrees otherwise in writing, each
Borrower agrees not to withdraw any funds from any Deposit Account pledged to
Lender pursuant to this Agreement except for the Designated Account and any
Deposit Accounts identified on Schedule 5.15 to the Information Certificate
which are specifically and exclusively used for payroll, payroll taxes and other
employee wage and benefit payments to or for employees of any Borrower or any of
their respective Subsidiaries.

 

6.13         Material Contracts.  Contemporaneously with the delivery of each
Compliance Certificate pursuant to Section 6.1, provide Lender with copies of
(a) each Material Contract entered into since the delivery of the previous
Compliance Certificate, (b) each material amendment or modification of any
Material Contract entered into since the delivery of the previous Compliance
Certificate, and (c) at the request of Lender, a “no-offset” letter in form and
substance reasonably acceptable to Lender from each customer of a Borrower which
is a party to any Material Contract. Borrowers shall maintain all Material
Contracts in full force and effect and shall not default in the payment or
performance of any material obligations thereunder.

 

6.14         Location of Inventory, Equipment and Books.  Keep the Inventory and
Equipment (other than vehicles and Equipment out for repair) and Books of each
Borrower and each of its Subsidiaries only at the locations identified on
Schedule 5.29 to the Information Certificate, or at other locations if the value
of Borrowers’ assets at each such location does not exceed $50,000 at any time,
and keep the chief executive office of each Borrower and each of its
Subsidiaries only at the locations identified on Schedule 5.6(b) to the
Information Certificate; provided, however, that Borrowers may amend Schedule
5.29 to the Information Certificate so long as such amendment occurs by written
notice to Lender not less than 10 days prior to the date on which such
Inventory, Equipment or Books are moved to such new location, and so long as, at
the time of such written notification, the applicable Borrower or Subsidiary
provides Lender a Collateral Access Agreement with respect thereto if such
location is not owned by such Borrower.

 

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6.15         Further Assurances.

 

(a)          At any time upon the reasonable request of Lender, execute or
deliver to Lender any and all financing statements, fixture filings, security
agreements, pledges, assignments, endorsements of certificates of title,
mortgages, deeds of trust, opinions of counsel, and all other documents (the
“Additional Documents”) that Lender may reasonably request and in form and
substance reasonably satisfactory to Lender, to create, perfect, and continue
perfection or to better perfect Lender’s Liens in all of the assets of each
Borrower (whether now owned or hereafter arising or acquired, tangible or
intangible, real or personal) other than Excluded Collateral, to create and
perfect Liens in favor of Lender in any Real Property acquired by any Borrower
after the Agreement Date, and in order to fully consummate all of the
transactions contemplated hereby and under the other Loan Documents. To the
maximum extent permitted by applicable law, if a Borrower refuses or fails to
execute or deliver any reasonably requested Additional Documents within a
reasonable period of time, not to exceed 10 days following the request to do so,
such Borrower hereby authorizes Lender to execute any such Additional Documents
in the applicable Borrower’s name, and authorizes Lender to file such executed
Additional Documents in any appropriate filing office. In furtherance and not in
limitation of the foregoing, each Borrower shall take such actions as Lender may
reasonably request from time to time to ensure that the Obligations are
guaranteed by the Guarantors and are secured by substantially all of the assets
of each Borrower and all of the outstanding capital Stock of each Borrower
(other than Parent), except for Excluded Collateral.

 

(b)          Each Borrower authorizes the filing by Lender of financing or
continuation statements, or amendments thereto, and such Borrower will execute
and deliver to Lender such other instruments or notices, as Lender may
reasonably request, in order to perfect and preserve the Security Interest
granted or purported to be granted hereby.

 

(c)          Each Borrower authorizes Lender at any time and from time to time
to file, transmit, or communicate, as applicable, financing statements and
amendments (i) describing the Collateral as “all personal property of debtor” or
“all assets of debtor” or words of similar effect, (ii) describing the
Collateral as being of equal or lesser scope or with greater detail, or (iii)
that contain any information required by Part 5 of Article 9 of the Code for the
sufficiency or filing office acceptance of such financing statement. Each
Borrower also hereby ratifies any and all financing statements or amendments
previously filed by Lender in any jurisdiction.

 

(d)          Each Borrower acknowledges that no Loan Party is authorized to file
any financing statement or amendment or termination statement with respect to
any financing statement filed in connection with this Agreement without the
prior written consent of Lender, subject to such Loan Party’s rights under
Section 9-509(d)(2) of the Code.

 

7.          NEGATIVE COVENANTS.

 

Each Borrower covenants and agrees that, until termination of all of the
commitments of Lender hereunder to provide any further extensions of credit and
payment in full of the Obligations, no Borrower will do, nor will any Borrower
permit any of its Subsidiaries or any other Loan Party to do any of the
following:

 

7.1         Indebtedness.  Create, incur, assume, suffer to exist, guarantee, or
otherwise become or remain, directly or indirectly, liable with respect to any
Indebtedness, except for Permitted Indebtedness.

 

7.2         Liens.  Create, incur, assume, or suffer to exist, directly or
indirectly, any Lien on or with respect to any of its assets, of any kind,
whether now owned or hereafter acquired, or any income or profits therefrom,
except for Permitted Liens. In connection with the grant of a Permitted Lien
described in clause (f) or (to the extent applicable to clause (f)), clause (g)
of the definition of “Permitted Liens,” if requested by Borrowers and at
Borrowers’ expense, Lender will provide a subordination of Lender’s Lien on the
Equipment subject to such Permitted Lien.

 

7.3         Restrictions on Fundamental Changes.

 

(a)          Enter into any merger, consolidation, reorganization, or
recapitalization, or reclassify its Stock, except for (i) any merger between
Loan Parties, provided that a Borrower must be the surviving entity of any such
merger to which it is a party, and (ii) any merger between Subsidiaries of a
Borrower that are not Loan Parties.

 

(b)          Liquidate, wind up, or dissolve itself (or suffer any liquidation
or dissolution), except for (i) the liquidation or dissolution of non-operating
Subsidiaries of any Borrower with nominal assets and nominal liabilities, (ii)
the liquidation or dissolution of a Loan Party (other than a Borrower) or any of
its wholly-owned Subsidiaries so long as all of the assets (including any
interest in any Stock) of such liquidating or dissolving Loan Party or
Subsidiary are transferred to a Loan Party that is not liquidating or
dissolving, or (iii) the liquidation or dissolution of a Subsidiary of a
Borrower that is not a Loan Party (other than any such Subsidiary the Stock of
which (or any portion thereof) is subject to a Lien in favor of Lender) so long
as all of the assets of such liquidating or dissolving Subsidiary are
transferred to a Subsidiary of a Borrower that is not liquidating or dissolving.

 

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(c)          Suspend or cease operation of a substantial portion of its or their
business, except as permitted pursuant to Sections 7.3(a) or (b) above or in
connection with the transactions permitted pursuant to Section 7.4.

 

(d)          Form or acquire any direct or indirect Subsidiary.

 

7.4           Disposal of Assets.  Other than Permitted Dispositions or
transactions expressly permitted by Sections 7.3 or 7.12, sell, assign (by
operation of law or otherwise) or otherwise dispose of, or grant any option with
respect to, any of the Collateral or any other asset except as expressly
permitted by this Agreement. Lender shall not be deemed to have consented to any
sale or other disposition of any of the Collateral or any other asset except as
expressly permitted in this Agreement or the other Loan Documents.

 

7.5           Change Name.  Change the name, organizational identification
number, state of organization, organizational identity or “location” for
purposes of Section 9-307 of the Code of any Loan Party or any of its
Subsidiaries.

 

7.6           Nature of Business.  Make any change in the nature of its or their
business as conducted on the date of this Agreement or acquire any properties or
assets that are not reasonably related to the conduct of such business
activities; provided, however, that the foregoing shall not prevent any Borrower
or any other Loan Party or any of its Subsidiaries from engaging in any business
that is reasonably related or ancillary to its business.

 

7.7           Prepayments and Amendments.

 

(a)          Except in connection with Refinancing Indebtedness permitted by
Section 7.1,

 

(i)          optionally prepay, redeem, defease, purchase, or otherwise acquire
any Indebtedness of any Loan Party or any of its Subsidiaries, other than (A)
the Obligations in accordance with this Agreement or a Bank Product Agreement,
and (B) Permitted Intercompany Advances, or

 

(ii)         make any payment on account of Indebtedness that has been
contractually subordinated in right of payment to the Obligations if such
payment is not permitted at such time under the subordination terms and
conditions, or

 

(b)          Directly or indirectly, amend, modify, or change any of the terms
or provisions of

 

(i)          any agreement, instrument, document, indenture, or other writing
evidencing or concerning Permitted Indebtedness other than (A) the Obligations
in accordance with this Agreement or a Bank Product Agreement, (B) Permitted
Intercompany Advances, and (C) Indebtedness permitted under clauses (c), (e) and
(f) of the definition of Permitted Indebtedness,

 

(ii)         any Material Contract except to the extent that such amendment,
modification, or change could not, individually or in the aggregate, reasonably
be expected to be materially adverse to the interests of Lender, or

 

(iii)        the Governing Documents of any Loan Party or any of its
Subsidiaries if the effect thereof, either individually or in the aggregate,
could reasonably be expected to be materially adverse to the interests of
Lender.

 

7.8           Change of Control.  Cause, permit, or suffer, directly or
indirectly, any Change of Control.

 

7.9           Restricted Junior Payments.  Make any Restricted Junior Payment;
provided, however, that, so long as it is permitted by law, and so long as no
Default or Event of Default shall have occurred and be continuing or would
result therefrom and so long as such Borrower is a “pass-through” tax entity for
United States federal income tax purposes, and after first providing such
supporting documentation as Lender may request (including the state and federal
tax returns (and all related schedules) of each owner of Stock in such Borrower,
such Borrower may declare and pay Pass-Through Tax Liabilities, net of any prior
year loss carry-forwards.

 

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7.10         Accounting Methods.  Modify or change its fiscal year or its method
of accounting (other than as may be required to conform to GAAP).

 

7.11         Investments; Controlled Investments.

 

(a)          Except for Permitted Investments, directly or indirectly, make or
acquire any Investment or incur any liabilities (including contingent
obligations) for or in connection with any Investment.

 

(b)          Other than (i) an aggregate amount of not more than $200,000 at any
one time, in the case of each Borrower, each other Loan Party and its
Subsidiaries, (ii) amounts deposited into Deposit Accounts identified on
Schedule 5.15 to the Information Certificate which are specially and exclusively
used for payroll, payroll taxes and other employee wage and benefit payments to
or for the employees of any Borrower or any other Loan Party or its
Subsidiaries, or (iii) as otherwise provided in the last sentence of Section
6.12(j)(iii), make, acquire, or permit to exist Permitted Investments consisting
of cash, Cash Equivalents, or amounts credited to Deposit Accounts or Securities
Accounts unless such Borrower and such other Loan Party or its Subsidiaries, as
applicable, and the applicable bank or securities intermediary (if other than
Lender) have entered into Control Agreements with Lender governing such
Permitted Investments in order to perfect (and further establish) Lender’s Liens
in such Permitted Investments. Except as provided in Section 6.12(j) and
Sections 7.11(b)(i), and (ii), Borrowers and such Loan Parties shall not, and
shall not permit their Subsidiaries to, establish or maintain any Deposit
Account or Securities Account with a banking institution other than Lender.

 

7.12         Transactions with Affiliates.  Directly or indirectly enter into or
permit to exist any transaction with any Affiliate of any Borrower, any other
Loan Party or any of their Subsidiaries except for:

 

(a)          transactions contemplated by the Loan Documents or transactions
(other than the payment of management, consulting, monitoring, or advisory fees)
with any Affiliates of any Borrower or any other Loan Party in the ordinary
course of business of such Borrower or other Loan Party, consistent with past
practices and undertaken in good faith, upon fair and reasonable terms and no
less favorable than would be obtained in a comparable arm’s length transaction
with a non-Affiliate;

 

(b)          so long as it has been approved by a Loan Party’s board of
directors (or comparable governing body) in accordance with applicable law, any
customary indemnities and reimbursements provided for the benefit of directors
and officers (or comparable managers) of such Loan Party, and any customary fees
paid to independent directors of such Loan Party;

 

(c)          so long as it has been approved by a Loan Party’s board of
directors (or comparable governing body) in accordance with applicable law, the
payment of reasonable compensation, severance, or employee benefit arrangements
to employees, officers, and outside directors of a Loan Party in the ordinary
course of business and consistent with industry practice; and

 

(d)          transactions permitted by Section 7.3, Section 7.9, or Section
7.14; any Permitted Intercompany Advance; any Investment consisting of the
issuance or ownership of Stock by a Borrower to or in another Borrower, or a
capital contribution by one Borrower to another Borrower; and any sale,
assignment, disposition or other conveyance of assets by one Borrower to another
Borrower.

 

7.13         Use of Proceeds.  Use the proceeds of any loan made hereunder for
any purpose other than (a) on the Agreement Date, to repay, in full, the
outstanding principal, accrued interest, and accrued fees and expenses owing
under or in connection with Borrowers’ credit facility with PNC Bank, National
Association, and to pay transactional fees, costs, and expenses, including
Lender Expenses, incurred in connection with this Agreement, the other Loan
Documents, and the transactions contemplated hereby and thereby, and (b)
thereafter, consistent with the terms and conditions hereof, for general
corporate and working capital purposes for their lawful and permitted purposes;
provided, however, that no part of the proceeds of the loans made to Borrowers
will be used to purchase or carry any such Margin Stock or to extend credit to
others for the purpose of purchasing or carrying any such Margin Stock or for
any purpose that violates the provisions of Regulation T, U or X of the Board of
Governors of the Federal Reserve System; provided, further, however, that
notwithstanding anything to the contrary contained in this Agreement or any
other Loan Document, in no event shall the proceeds of Ex-Im Advances be used
for any purpose not permitted by Section 2.01 of the Borrower Agreement.

 

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7.14         Limitation on Issuance of Stock.  Except for the issuance or sale
of common stock or Permitted Preferred Stock, or of options or warrants with
respect thereto, by a Borrower or other Loan Party, issue or sell or enter into
any agreement or arrangement for the issuance and sale of any of their Stock.

 

7.15         Consignments.  Consign any of its Inventory or sell any of its
Inventory on bill and hold, sale or return, sale on approval, or other
conditional terms of sale, except as set forth on Schedule 7.15 to the
Information Certificate, as such schedule is updated from time to time by
written notice from Borrowers to Lender.

 

7.16         Inventory and Equipment with Bailees.  Store the Inventory or
Equipment of any Loan Party or any of its Subsidiaries at any time now or
hereafter with a bailee, warehouseman, or similar party, except as set forth on
Schedule 7.16 to the Information Certificate.

 

8.          FINANCIAL COVENANTS.

 

Each Borrower covenants and agrees that, until termination of all obligations of
Lender to provide extensions of credit hereunder and payment in full of the
Obligations, Borrowers will comply with each of the following financial
covenants:

 

(a)          Minimum Excess Availability. Borrowers shall cause Excess
Availability to be at least $1,000,000 at all times.

 

(b)          Non-Financed Capital Expenditures. Borrowers shall not make or
incur Non-Financed Capital Expenditures in excess of $2,000,000 during any
fiscal year.

 

9.          EVENTS OF DEFAULT.

 

Any one or more of the following events shall constitute an event of default
(each, an “Event of Default”) under this Agreement:

 

9.1           If any Borrower fails to pay when due and payable, or when
declared due and payable, all or any portion of the Obligations consisting of
principal, interest, fees, charges or other amounts due Lender or any Bank
Product Provider, reimbursement of Lender Expenses, or other amounts
constituting Obligations (including any portion thereof that accrues after the
commencement of an Insolvency Proceeding, regardless of whether allowed or
allowable in whole or in part as a claim in any such Insolvency Proceeding), it
being understood that Lender’s failure to debit the Collection Account for any
such amount shall not constitute a Default or Event of Default if such amount is
on deposit in the Collection Account and otherwise available for application to
such amount on the date such amount is due;

 

9.2           If any Loan Party or any of its Subsidiaries:

 

(a)          fails to perform or observe any covenant or other agreement
contained in any of (i) Sections 4.3, 6.1, 6.2, 6.3 (solely if any Loan Party or
any of its Subsidiaries is not in existence in its jurisdiction of
organization), 6.5 (solely with respect to taxes or assessments (i) involving an
aggregate amount in excess of $100,000, or (ii) for which the relevant taxing
authority has filed, recorded or asserted a Lien which may have priority over
Lender’s Lien on any of the Collateral), 6.6, 6.7 (solely if any Loan Party or
any of its Subsidiaries refuses to allow Lender or its representatives or agents
to visit its properties, inspect its assets or books or records, examine and
make copies of its books and records, or discuss its affairs, finances, and
accounts with its officers and employees), 6.8, 6.11, 6.12, 6.13, 6.14 or 6.15,
(ii) Section 7 or (iii) Section 8;

 

(b)          fails to perform or observe any covenant or other agreement
contained in any of Sections 6.3 (other than if a Loan Party is not in existence
in its jurisdiction of organization), 6.4, 6.5 (other than with respect to taxes
or assessments (i) involving an aggregate amount in excess of $100,000, or (ii)
for which the relevant taxing authority has filed, recorded or asserted a Lien
which may have priority over Lender’s Lien on any of the Collateral), or 6.7
(other than if any Loan Party or any of its Subsidiaries refuses to allow Lender
or its representatives or agents to visit its properties, inspect its assets or
books or records, examine and make copies of its books or records or disclose it
affairs, finances and accounts with its officers and employees), and such
failure continues for a period of 15 days after the earlier of (i) the date on
which such failure shall first become known to or should have been known by any
officer of any Loan Party or (ii) the date on which written notice thereof is
given to any Loan Party by Lender; or

 

(c)          fails to perform or observe any covenant or other agreement
contained in this Agreement, or in any of the other Loan Documents, in each
case, other than any such covenant or agreement that is unable to be cured or is
the subject of another provision of this Section 9 (in which event such other
provision of this Section 9 shall govern), and such failure continues for a
period of 30 days after the earlier of (i) the date on which such failure shall
first become known to or should have been known by any officer of any Loan Party
or (ii) the date on which written notice thereof is given to any Loan Party by
Lender;

 

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9.3           If one or more judgments, orders, or awards for the payment of
money in an amount in excess of $200,000 in the aggregate (except to the extent
fully covered (other than to the extent of customary deductibles) by insurance
pursuant to which the insurer has not denied coverage) is entered or filed
against any Borrower or any of its Subsidiaries or against a Guarantor, or with
respect to any of their respective assets, and either (a) there is a period of
30 consecutive days at any time after the entry of any such judgment, order, or
award during which (1) the same is not discharged, satisfied, vacated, or bonded
pending appeal, or (2) a stay of enforcement thereof is not in effect, or (b)
enforcement proceedings are commenced upon such judgment, order, or award;

 

9.4           If an Insolvency Proceeding is commenced by a Loan Party or any of
its Subsidiaries;

 

9.5           If an Insolvency Proceeding is commenced against a Loan Party or
any of its Subsidiaries and any of the following events occur: (a) such Loan
Party or such Subsidiary consents to the institution of such Insolvency
Proceeding against it, (b) the petition commencing the Insolvency Proceeding is
not timely controverted, (c) the petition commencing the Insolvency Proceeding
is not dismissed within 60 calendar days of the date of the filing thereof, (d)
an interim trustee is appointed to take possession of all or any substantial
portion of the properties or assets of, or to operate all or any substantial
portion of the business of, such Loan Party or its Subsidiary, or (e) an order
for relief shall have been issued or entered therein; provided that Lender shall
have no obligation to provide any extension of credit to Borrowers during such
60 calendar day period specified in subsection (c);

 

9.6           If any Loan Party or any of its Subsidiaries is enjoined,
restrained, or in any way prevented by court order from continuing to conduct
all or any material part of the business affairs of such Loan Party and its
Subsidiaries, taken as a whole;

 

9.7           If there is (a) a default in one or more agreements to which a
Loan Party or any of its Subsidiaries is a party with one or more third Persons
relative to the Indebtedness of such Loan Party or such Subsidiary involving an
aggregate amount of $200,000 or more, and such default (i) occurs at the final
maturity of the obligations thereunder, or (ii) results in a right by such third
Person, irrespective of whether exercised, to accelerate the maturity of such
Loan Party’s or its Subsidiary’s obligations thereunder, or (b) a default in or
an involuntary early termination of one or more Hedge Agreements to which a Loan
Party or any of its Subsidiaries is a party involving an aggregate amount of
$200,000 or more of actual, potential or contingent liabilities of one or more
Loan Parties;

 

9.8           If any warranty, representation, certificate, statement, or Record
made herein or in any other Loan Document or delivered in writing to Lender in
connection with this Agreement or any other Loan Document proves to be untrue in
any material respect (except that such materiality qualifier shall not be
applicable to any representations and warranties that already are qualified or
modified by materiality in the text thereof) as of the date of issuance or
making or deemed making thereof;

 

9.9           If the obligation of any Guarantor under its Guaranty or any other
Loan Document to which any Guarantor is a party is limited or terminated by
operation of law or by such Guarantor (other than in accordance with the terms
of this Agreement), or if any Guarantor fails to perform any obligation under
its Guaranty or under any such Loan Document, or repudiates or revokes or
purports to repudiate or revoke any obligation under its Guaranty, or under any
such Loan Document, or any individual Guarantor dies or becomes incapacitated,
or any other Guarantor ceases to exist for any reason;

 

9.10         If this Agreement or any other Loan Document that purports to
create a Lien, shall, for any reason, fail or cease to create a valid and
perfected and, except to the extent of Permitted Liens which are permitted
purchase money Liens or the interests of lessors under Capital Leases, first
priority Lien on the Collateral covered thereby;

 

9.11         If any event or circumstance occurs that Lender in good faith
believes may impair the prospect of payment of all or part of the Obligations,
or any Borrower’s or any Guarantor’s ability to perform any of its material
obligations under any of the Loan Documents, or any other document or agreement
described in or related to this Agreement, or there occurs any Material Adverse
Change;

 

9.12         If any event or circumstance shall occur which, in the Permitted
Discretion of Lender exercised in good faith, causes Lender to suspect that any
Borrower or any Guarantor has engaged in fraudulent activity with respect to the
Collateral or other matters;

 

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9.13         If any director or officer of any Borrower or Guarantor, or if any
Guarantor, is convicted for a felony offense under state or federal law
involving embezzlement, fraud or any other financial crime or other felony
offense under state or federal law involving intentional misconduct and, in the
case of any such director or officer, such director or officer is not removed
from such position promptly (and in any event within 30 days) following such
conviction, or if a Borrower hires an officer or appoints a director who has
been convicted of any such felony offense;

 

9.14         If any Loan Party fails to pay any indebtedness or obligation owed
to Lender or its Affiliates which is unrelated to the Revolving Credit Facility
or this Agreement as it becomes due and payable or the occurrence of any default
or event of default under any agreement between any Loan Party and Lender or its
Affiliates unrelated to the Loan Documents;

 

9.15         If (a) any representation or warranty contained in or in connection
with any Ex-Im Subfacility Document proves to be untrue in any material respect,
or any breach of any covenant, or any other default or event of default, by any
Borrower or any Guarantor under any Ex-Im Subfacility Document (giving effect to
any applicable grace or cure period) shall occur, or (b) Ex-Im Bank shall cease
to guarantee to Lender the prompt repayment of at least 90% of the outstanding
Ex-Im Advances; provided, however, that any such cessation of the guaranty by
Ex-Im Bank shall not constitute an Event of Default so long as, on the second
Business Day following any such cessation of such guaranty, no Overadvance
Amount is outstanding after excluding Eligible Foreign Accounts, Eligible
Export-Related Inventory and the Ex-Im Bank Reserve from the Borrowing Base;

 

9.16         If any “event of default,” as such term is defined in any other
Loan Document, shall occur; or

 

9.17         If the validity or enforceability of any Loan Document shall at any
time for any reason be declared to be null and void, or a proceeding shall be
commenced by a Loan Party or any of its Subsidiaries, or by any Governmental
Authority having jurisdiction over a Loan Party or any of its Subsidiaries,
seeking to establish the invalidity or unenforceability thereof, or a Loan Party
or any of its Subsidiaries shall deny that such Loan Party or such Subsidiary
has any liability or obligation purported to be created under any Loan Document.

 

10.         RIGHTS AND REMEDIES.

 

10.1         Rights and Remedies.  Upon the occurrence and during the
continuation of an Event of Default, Lender may, in addition to any other rights
or remedies provided for hereunder or under any other Loan Document or by
applicable law, do any one or more of the following:

 

(a)          declare the Obligations (other than the Hedge Obligations, which
may be accelerated in accordance with the terms of the applicable Hedge
Agreement), whether evidenced by this Agreement or by any of the other Loan
Documents immediately due and payable, whereupon the same shall become and be
immediately due and payable and Borrowers shall be obligated to repay all of
such Obligations in full, without presentment, demand, protest, or further
notice or other requirements of any kind, all of which are hereby expressly
waived by each Borrower;

 

(b)          declare the funding obligations of Lender under this Agreement
terminated, whereupon such funding obligations shall immediately be terminated
together with any obligation of Lender hereunder to make Advances, extend any
other credit hereunder or issue Letters of Credit;

 

(c)          give notice to an Account Debtor or other Person obligated to pay
an Account, a General Intangible, Negotiable Collateral, or other amount due,
notice that the Account, General Intangible, Negotiable Collateral or other
amount due has been assigned to Lender for security and must be paid directly to
Lender and Lender may collect the Accounts, General Intangible and Negotiable
Collateral of each Borrower and each other Loan Party directly, and any
collection costs and expenses shall constitute part of the Obligations under the
Loan Documents;

 

(d)          in Lender’s name or in each Loan Party’s name, as such Loan Party’s
agent and attorney-in-fact, notify the United States Postal Service to change
the address for delivery of mail to any address designated by Lender, otherwise
intercept mail, and receive, open and dispose of such Loan Party’s mail,
applying all Collateral as permitted under this Agreement and holding all other
mail for such Loan Party’s account or forwarding such mail to such Loan Party’s
last known address;

 

(e)          without notice to or consent from any Loan Party or any of its
Subsidiaries, and without any obligation to pay rent or other compensation, take
exclusive possession of all locations where any Loan Party or any of its
Subsidiaries conduct its business or has any rights of possession and use the
locations to store, process, manufacture, sell, use, and liquidate or otherwise
dispose of items that are Collateral, and for any other incidental purposes
deemed appropriate by Lender in good faith; and

 

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(f)          exercise in respect of the Collateral, in addition to other rights
and remedies provided for herein, in the other Loan Documents, or otherwise
available to it, all the rights and remedies of a secured party on default under
the Code or any other applicable law.

 

10.2         Additional Rights and Remedies.  Without limiting the generality of
the foregoing, each Borrower expressly agrees that upon the occurrence and
during the continuation of an Event of Default:

 

(a)          Lender, without demand of performance or other demand,
advertisement or notice of any kind (except a notice specified below of time and
place of public or private sale) to or upon any Borrower, any other Loan Party
or any other Person (all and each of which demands, advertisements and notices
are hereby expressly waived to the maximum extent permitted by the Code or any
other applicable law), may take immediate possession of all or any portion of
the Collateral and (i) require Loan Parties to, and each Borrower hereby agrees
that it will at its own expense and upon request of Lender forthwith, assemble
all or part of the Collateral as directed by Lender and make it available to
Lender at one or more locations designated by Lender where such Borrower or
other Loan Party conducts business, and (ii) without notice except as specified
below, sell the Collateral or any part thereof in one or more parcels at public
or private sale, at any of Lender’s or Loan Party’s offices or elsewhere, for
cash, on credit, and upon such other terms as Lender may deem commercially
reasonable. Each Borrower agrees that, to the extent notice of sale shall be
required by law, at least 10 days notice to such Borrower or such other Loan
Party of the time and place of any public sale or the time after which any
private sale is to be made shall constitute reasonable notification and such
notice shall constitute a reasonable “authenticated notification of disposition”
within the meaning of Section 9-611 of the Code. Lender shall not be obligated
to make any sale of Collateral regardless of notice of sale having been given.
Lender may adjourn any public or private sale from time to time, and such sale
may be made at the time and place to which it was so adjourned. Each Borrower
agrees that the internet shall constitute a “place” for purposes of Section
9-610(b) of the Code. Each Borrower agrees that any sale of Collateral to a
licensor pursuant to the terms of a license agreement between such licensor and
such Borrower is sufficient to constitute a commercially reasonable sale
(including as to method, terms, manner, and time) within the meaning of Section
9-610 of the Code;

 

(b)          Lender may, in addition to other rights and remedies provided for
herein, in the other Loan Documents, or otherwise available to it under
applicable law and without the requirement of notice to or upon any Loan Party
or any other Person (which notice is hereby expressly waived to the maximum
extent permitted by the Code or any other applicable law), (i) with respect to
any Loan Party’s Deposit Accounts in which Lender’s Liens are perfected by
control under Section 9-104 of the Code, instruct the bank maintaining such
Deposit Account for the applicable Loan Party to pay the balance of such Deposit
Account to or for the benefit of Lender, and (ii) with respect to any Loan
Party’s Securities Accounts in which Lender’s Liens are perfected by control
under Section 9-106 of the Code, instruct the securities intermediary
maintaining such Securities Account for the applicable Loan Party to (A)
transfer any cash in such Securities Account to or for the benefit of Lender, or
(B) liquidate any financial assets in such Securities Account that are
customarily sold on a recognized market and transfer the cash proceeds thereof
to or for the benefit of Lender;

 

(c)          any cash held by Lender as Collateral and all cash proceeds
received by Lender in respect of any sale of, collection from, or other
realization upon all or any part of the Collateral shall be applied against the
Obligations in the order set forth in Section 10.5. In the event the proceeds of
Collateral are insufficient to satisfy all of the Obligations in full, each
Borrower and each other Loan Party shall remain jointly and severally liable for
any such deficiency; and

 

(d)          the Obligations arise out of a commercial transaction, and that if
an Event of Default shall occur Lender shall have the right to an immediate writ
of possession without notice of a hearing. Lender shall have the right to the
appointment of a receiver for each Loan Party or for the properties and assets
of each Loan Party, and each Borrower hereby consents to such rights and such
appointment and hereby waives any objection such Borrower may have thereto or
the right to have a bond or other security posted by Lender.

 

Notwithstanding the foregoing or anything to the contrary contained in Section
10.1, upon the occurrence of any Default or Event of Default described in
Section 9.4 or Section 9.5, in addition to the remedies set forth above, without
any notice to any Borrower or any other Person or any act by Lender, all
obligations of Lender to provide any further extensions of credit hereunder
shall automatically terminate and the Obligations (other than the Hedge
Obligations), shall automatically and immediately become due and payable and
each Borrower shall be obligated to repay all of such Obligations in full,
without presentment, demand, protest, or notice of any kind, all of which are
expressly waived by each Borrower.

 

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10.3         Lender Appointed Attorney in Fact.  Each Borrower hereby
irrevocably appoints Lender its attorney-in-fact, with full authority in the
place and stead of such Borrower and in the name of such Borrower or otherwise,
at such time as an Event of Default has occurred and is continuing, to take any
action and to execute any instrument which Lender may reasonably deem necessary
or advisable to accomplish the purposes of this Agreement, including:

 

(a)          to ask, demand, collect, sue for, recover, compromise, receive and
give acquittance and receipts for moneys due and to become due under or in
connection with the Accounts or any other Collateral of such Borrower;

 

(b)          to receive, indorse, and collect any drafts or other instruments,
documents, Negotiable Collateral or Chattel Paper;

 

(c)          to file any claims or take any action or institute any proceedings
which Lender may deem necessary or desirable for the collection of any of the
Collateral of such Borrower or otherwise to enforce the rights of Lender with
respect to any of the Collateral;

 

(d)          to repair, alter, or supply Goods, if any, necessary to fulfill in
whole or in part the purchase order of any Person obligated to Borrower in
respect of any Account of such Borrower;

 

(e)          to use any Intellectual Property or Intellectual Property Licenses
of such Borrower including but not limited to any labels, Patents, Trademarks,
trade names, URLs, domain names, industrial designs, Copyrights, or advertising
matter, in preparing for sale, advertising for sale, or selling Inventory or
other Collateral and to collect any amounts due under Accounts, contracts or
Negotiable Collateral of such Borrower;

 

(f)          to take exclusive possession of all locations where each Borrower
or any other Loan Party conducts its business or has rights of possession,
without notice to or consent of any Borrower or any other Loan Party and to use
such locations to store, process, manufacture, sell, use, and liquidate or
otherwise dispose of items that are Collateral, without obligation to pay rent
or other compensation for the possession or use of any location;

 

(g)          Lender shall have the right, but shall not be obligated, to bring
suit in its own name or in the applicable Loan Party’s name, to enforce the
Intellectual Property and Intellectual Property Licenses and, if Lender shall
commence any such suit, the appropriate Borrower or such other Loan Party shall,
at the request of Lender, do any and all lawful acts and execute any and all
proper documents reasonably required by Lender in aid of such enforcement; and

 

(h)          to the extent permitted by law, such Borrower hereby ratifies all
that such attorney-in-fact shall lawfully do or cause to be done by virtue
hereof. This power of attorney is coupled with an interest and shall be
irrevocable until all commitments of Lender under this Agreement to provide
extensions of credit are terminated and all Obligations have been paid in full
in cash.

 

10.4         Remedies Cumulative.  The rights and remedies of Lender under this
Agreement, the other Loan Documents, and all other agreements shall be
cumulative. Lender shall have all other rights and remedies not inconsistent
herewith as provided under the Code, by law, or in equity. No exercise by Lender
of one right or remedy shall be deemed an election, and no waiver by Lender of
any Default or Event of Default shall be deemed a continuing waiver. No delay by
Lender shall constitute a waiver, election, or acquiescence by it.

 

10.5         Crediting of Payments and Proceeds.  In the event that the
Obligations have been accelerated pursuant to Section 10.1 or Lender has
exercised any remedy set forth in this Agreement or any other Loan Document, all
payments received by Lender upon the Obligations and all net proceeds from the
enforcement of the Obligations shall be applied to the Obligations in such
manner as Lender shall determine in its discretion and, thereafter, to Borrowers
(to be wired to the Designated Account) or such other Person entitled thereto
under applicable law. For greater certainty, the acceleration of the Obligations
under this Agreement shall in no way affect, terminate or accelerate the Hedge
Obligations (which are governed by the terms of the applicable Hedge Agreement).

 

10.6         Marshaling.  Lender shall not be required to marshal any present or
future collateral security (including but not limited to the Collateral) for, or
other assurances of payment of, the Obligations or any of them or to resort to
such collateral security or other assurances of payment in any particular order,
and all of its rights and remedies under this Agreement and under the other Loan
Documents and in respect of such collateral security and other assurances of
payment shall be cumulative and in addition to all other rights and remedies,
however existing or arising. To the extent that it lawfully may, each Borrower
hereby agrees that it will not invoke any law relating to the marshaling of
collateral which might cause delay in or impede the enforcement of Lender’s
rights and remedies under this Agreement or under any other Loan Document or
instrument creating or evidencing any of the Obligations or under which any of
the Obligations is outstanding or by which any of the Obligations is secured or
payment thereof is otherwise assured, and, to the extent that it lawfully may,
each Borrower hereby irrevocably waives the benefits of all such laws.

 

25

 

 

10.7         License.  Each Borrower hereby grants to Lender a non-exclusive,
worldwide and royalty-free license to use or otherwise exploit all Intellectual
Property rights of such Borrower for the purpose of: (a) completing the
manufacture of any in-process materials following any Event of Default so that
such materials become saleable Inventory, all in accordance with the same
quality standards previously adopted by such Borrower for its own manufacturing;
and (b) selling, leasing or otherwise disposing of any or all Collateral
following any Event of Default.

 

11.         WAIVERS; INDEMNIFICATION.

 

11.1         Demand; Protest; etc.  Each Borrower waives demand, protest, notice
of protest, notice of default or dishonor, notice of payment and nonpayment,
nonpayment at maturity, release, compromise, settlement, extension, or renewal
of documents, instruments, chattel paper, and guarantees at any time held by
Lender on which such Borrower may in any way be liable.

 

11.2         Lender’s Liability for Collateral.  Each Borrower hereby agrees
that: (a) so long as Lender complies with its obligations, if any, under the
Code, Lender shall not in any way or manner be liable or responsible for: (i)
the safekeeping of the Collateral, (ii) any loss or damage thereto occurring or
arising in any manner or fashion from any cause, (iii) any diminution in the
value thereof, or (iv) any act or default of any carrier, warehouseman, bailee,
forwarding agency, or other Person, and (b) all risk of loss, damage, or
destruction of the Collateral shall be borne by each Borrower and the other Loan
Parties except to the extent any such loss, damage or destruction is determined
in a final, non-appealable judgment of a court of competent jurisdiction to have
resulted directly from the gross negligence or willful misconduct of Lender.

 

11.3         Indemnification.  Each Borrower shall pay, indemnify, defend, and
hold the Lender-Related Persons (each, an “Indemnified Person”) harmless (to the
fullest extent permitted by applicable law) from and against any and all claims,
demands, suits, actions, investigations, proceedings, liabilities, fines, costs,
penalties, and damages, and all reasonable fees and disbursements of attorneys,
experts, or consultants and all other costs and expenses actually incurred in
connection therewith or in connection with the enforcement of this
indemnification (as and when they are incurred and irrespective of whether suit
is brought), at any time asserted against, imposed upon, or incurred by any of
them (a) in connection with or as a result of or related to the execution and
delivery, enforcement, performance, or administration (including any
restructuring, forbearance or workout with respect hereto) of this Agreement,
any of the other Loan Documents, any Bank Product Agreement or the transactions
contemplated hereby or thereby or the monitoring of compliance by each Borrower
and each other Loan Party and each of its Subsidiaries with the terms of the
Loan Documents, (b) with respect to any investigation, litigation, or proceeding
related to this Agreement, any other Loan Document, or the use of the proceeds
of the credit provided hereunder (irrespective of whether any Indemnified Person
is a party thereto), or any act, omission, event, or circumstance in any manner
related thereto, (c) in connection with the custody, preservation, use or
operation of, or, upon an Event of Default, the sale of, collection from, or
other realization upon, any of the Collateral in accordance with this Agreement
and the other Loan Documents, (d) with respect to the failure by any Borrower or
any other Loan Party to perform or observe any of the provisions hereof or any
other Loan Document, (e) in connection with the exercise or enforcement of any
of the rights of Lender hereunder or under any other Loan Document, and (f) in
connection with or arising out of any presence or release of Hazardous Materials
at, on, under, to or from any assets or properties owned, leased or operated by
any Borrower or any other Loan Party or any Subsidiary of a Borrower or any
other Loan Party or any Environmental Actions, Environmental Liabilities or
Remedial Actions related in any way to any such assets or properties of such
Loan Party or any of its Subsidiaries (each and all of the foregoing, the
“Indemnified Liabilities”). The foregoing to the contrary notwithstanding, no
Borrower shall have any obligation to any Indemnified Person under this Section
11.3 with respect to any Indemnified Liability that a court of competent
jurisdiction finally determines to have resulted from the gross negligence or
willful misconduct of such Indemnified Person or its officers, directors,
employees, or attorneys. This provision shall survive the termination of this
Agreement and the repayment of the Obligations. If any Indemnified Person makes
any payment to any other Indemnified Person with respect to an Indemnified
Liability as to which a Borrower or any other Loan Party was required to
indemnify the Indemnified Person receiving such payment, the Indemnified Person
making such payment is entitled to be indemnified and reimbursed by such
Borrower or such other Loan Party with respect thereto. WITHOUT LIMITATION, THE
FOREGOING INDEMNITY SHALL APPLY TO EACH INDEMNIFIED PERSON WITH RESPECT TO
INDEMNIFIED LIABILITIES WHICH IN WHOLE OR IN PART ARE CAUSED BY OR ARISE OUT OF
ANY NEGLIGENT ACT OR OMISSION OF SUCH INDEMNIFIED PERSON OR OF ANY OTHER PERSON.

 

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12.         NOTICES.

 

Unless otherwise provided in this Agreement, all notices or demands relating to
this Agreement or any other Loan Document shall be in writing and (except for
financial statements and other informational documents which may be sent by
first-class mail, postage prepaid) shall be personally delivered or sent by
certified mail (postage prepaid, return receipt requested), overnight courier,
electronic mail (at such email addresses as a party may designate in accordance
herewith), or telefacsimile. In the case of notices or demands to Borrowers or
Lender, as the case may be, they shall be sent to the respective address set
forth below:

 

If to one or more Borrowers:   Charles & Colvard, Ltd.     170 Southport Drive  
  Morrisville, North Carolina  27560     Attn:  Chief Financial Officer    
Email: kmacemore@charlesandcolvard.com       with courtesy copies to     (which
shall not constitute     Notice for purposes of this     Section 12):   Margaret
N. Rosenfeld, Esq.     Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan,
L.L.P.     2500 Wachovia Capitol Center     150 Fayetteville Street     Raleigh,
North Carolina  27601     Fax No.:  919-821-6800    
Email:  mrosenfeld@smithlaw.com       If to Lender:   Wells Fargo Bank, National
Association     1100 Abernathy Road, NE - Suite 1600     MAC Code:  G0189-60    
Atlanta, Georgia  30328     Attn:  Portfolio Manager (Charles & Colvard)     Fax
No.:  855-353-4801     Email:  each of arthur.r.cordwell@wellsfargo.com and
bruce.vanweele@wellsfargo.com       with courtesy copies to     (which shall not
constitute     Notice for purposes of this     Section 12)   Stephen D. Palmer,
Esq.     Greenberg Traurig, LLP     Terminus 200     3333 Piedmont Road NE,
Suite 2500     Atlanta, Georgia  30305     Fax No.:  678-553-2261    
Email:  palmers@gtlaw.com

 

Any party hereto may change the address at which it is to receive notices
hereunder, by notice in writing in the foregoing manner given to the other
parties. All notices or demands sent in accordance with this Section 12 shall be
deemed received on the earlier of the date of actual receipt or 3 Business Days
after the deposit thereof in the mail; provided, that (a) notices sent by
overnight courier service shall be deemed to have been given when received, (b)
notices by facsimile shall be deemed to have been given when sent (except that,
if not given during normal business hours for the recipient, shall be deemed to
have been given at the opening of business on the next Business Day for the
recipient) and (c) notices by electronic mail shall be deemed received upon the
sender’s receipt of an acknowledgment from the intended recipient (such as by
the “return receipt requested” function, as available, return email or other
written acknowledgment). Any notice given by Lender to any Borrower as provided
in this Section 12 shall be deemed sufficient notice as to all Loan Parties,
regardless of whether each Loan Party is sent a separate copy of such notice or
whether each Loan Party is specifically identified in such notice.

 

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13.         CHOICE OF LAW AND VENUE; ARBITRATION; JURY TRIAL WAIVER.

 

(a)          Choice of Law. THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS (UNLESS EXPRESSLY PROVIDED TO THE CONTRARY IN ANOTHER LOAN DOCUMENT IN
RESPECT OF SUCH OTHER LOAN DOCUMENT), THE CONSTRUCTION, INTERPRETATION, AND
ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS OF THE PARTIES HERETO AND THERETO
WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR THEREUNDER OR RELATED HERETO OR
THERETO AS WELL AS ALL CLAIMS, CONTROVERSIES OR DISPUTES ARISING UNDER OR
RELATED TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE DETERMINED
UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
GEORGIA WITHOUT REGARD TO THE CONFLICTS OF LAW PRINCIPLES THEREOF.

 

(b)          Venue. SUBJECT TO AND WITHOUT LIMITING THE ARBITRATION PROVISIONS
SET FORTH BELOW, THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN
CONNECTION WITH THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS MAY BE TRIED AND
LITIGATED IN THE STATE AND, TO THE EXTENT PERMITTED BY APPLICABLE LAW, FEDERAL
COURTS LOCATED IN THE COUNTY OF FULTON, STATE OF GEORGIA; PROVIDED, HOWEVER,
THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY
BE BROUGHT, AT LENDER’S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE LENDER
ELECTS TO BRING SUCH ACTION OR WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE
FOUND. EACH BORROWER AND LENDER WAIVE, TO THE EXTENT PERMITTED UNDER APPLICABLE
LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR
TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH
THIS SECTION 13(b).

 

(c)          ARBITRATION. THE PARTIES HERETO AGREE, UPON DEMAND BY ANY PARTY, TO
SUBMIT TO BINDING ARBITRATION ALL CLAIMS, DISPUTES AND CONTROVERSIES BETWEEN OR
AMONG THEM (WHETHER OR NOT INCLUDING THEIR RESPECTIVE EMPLOYEES, OFFICERS,
DIRECTORS, ATTORNEYS, AND OTHER AGENTS), WHETHER IN TORT, CONTRACT OR OTHERWISE
IN ANY WAY ARISING OUT OF OR RELATING TO (i) ANY CREDIT SUBJECT HERETO, OR ANY
OF THE LOAN DOCUMENTS, AND THEIR NEGOTIATION, EXECUTION, COLLATERALIZATION,
ADMINISTRATION, REPAYMENT, MODIFICATION, EXTENSION, SUBSTITUTION, FORMATION,
INDUCEMENT, ENFORCEMENT, DEFAULT OR TERMINATION; OR (ii) REQUESTS FOR ADDITIONAL
CREDIT.

 

(d)          Governing Rules. Any arbitration proceeding will (i) proceed in a
location in Atlanta, Georgia mutually agreed by the parties or, if the parties
cannot agree, a location selected by the American Arbitration Association
(“AAA”); (ii) be governed by the Federal Arbitration Act (Title 9 of the United
States Code), notwithstanding any conflicting choice of law provision in any of
the documents between the parties; and (iii) be conducted by the AAA, or such
other administrator as the parties shall mutually agree upon, in accordance with
the AAA’s commercial dispute resolution procedures, unless the claim or
counterclaim is at least $1,000,000.00 exclusive of claimed interest,
arbitration fees and costs, in which case the arbitration shall be conducted in
accordance with the AAA’s optional procedures for large, complex commercial
disputes (the commercial dispute resolution procedures or the optional
procedures for large, complex commercial disputes to be referred to herein, as
applicable, as the “Rules”). If there is any inconsistency between the terms
hereof and the Rules, the terms and procedures set forth herein shall control.
Any party who fails or refuses to submit to arbitration following a demand by
any other party shall bear all costs and expenses incurred by such other party
in compelling arbitration of any dispute. Nothing contained herein shall be
deemed to be a waiver by any party that is a bank of the protections afforded to
it under 12 U.S.C. §91 or any similar applicable state law.

 

(e)          No Waiver of Provisional Remedies, Self-Help and Foreclosure. The
arbitration requirement does not limit the right of any party before, during or
after the pendency of any arbitration proceeding to (i) foreclose against real
or personal property Collateral; (ii) exercise self-help remedies relating to
Collateral or proceeds of Collateral such as setoff or repossession; or (iii)
obtain provisional or ancillary remedies such as replevin, writ of possession,
injunctive relief, attachment, garnishment or the appointment of a receiver.
This exclusion does not constitute a waiver of the right or obligation of any
party to submit any dispute to arbitration or reference hereunder, including
those arising from the exercise of the actions detailed in sections (i), (ii)
and (iii) of this paragraph.

 

28

 

 

(f)          Arbitrator Qualifications and Powers. Any arbitration proceeding in
which the parties agree that the amount in controversy is $5,000,000.00 or less
will be decided by a single arbitrator selected according to the Rules, and who
shall not render an award of greater than $5,000,000.00. Any dispute in which
any party believes the amount in controversy exceeds $5,000,000.00 shall be
decided by majority vote of a panel of three arbitrators; provided, however,
that all three arbitrators must actively participate in all hearings and
deliberations, except that a single arbitrator may decide pre-hearing discovery
disputes. The arbitrator(s) will be a neutral attorney licensed in the State of
Georgia a or a neutral retired judge of the state or federal judiciary of
Georgia, in either case with a minimum of ten years experience in the
substantive law applicable to the subject matter of the dispute to be
arbitrated. The arbitrator(s) will determine whether or not an issue is
arbitratable and will give effect to the statutes of limitation or repose in
determining any claim. In any arbitration proceeding the arbitrator(s) will
decide (by documents only or with a hearing at the arbitrator's discretion) any
pre-hearing motions which are similar to motions to dismiss for failure to state
a claim or motions for summary adjudication. The arbitrator(s) shall resolve all
disputes in accordance with the substantive law of Georgia and may grant any
remedy or relief that a court of such state could order or grant within the
scope hereof and such ancillary relief as is necessary to make effective any
award. The arbitrator(s) shall also have the power to award recovery of all
costs and fees, to impose sanctions and to take such other action as the
arbitrator(s) deems necessary to the same extent a judge could pursuant to the
Federal Rules of Civil Procedure, the Georgia Rules of Civil Procedure or other
applicable law. Judgment upon the award rendered by the arbitrator(s) may be
entered in any court having jurisdiction. The institution and maintenance of an
action for judicial relief or pursuit of a provisional or ancillary remedy shall
not constitute a waiver of the right of any party, including the plaintiff, to
submit the controversy or claim to arbitration if any other party contests such
action for judicial relief.

 

(g)          Discovery. In any arbitration proceeding, discovery will be
permitted in accordance with the Rules. All discovery shall be expressly limited
to matters directly relevant to the dispute being arbitrated and must be
completed no later than 20 days before the hearing date. Any requests for an
extension of the discovery periods, or any discovery disputes, will be subject
to final determination by the arbitrator(s) upon a showing that the request for
discovery is essential for the party's presentation and that no alternative
means for obtaining information is available.

 

(h)          Class Proceedings and Consolidations. No party hereto shall be
entitled to join or consolidate disputes by or against others in any
arbitration, except parties who have executed any Loan Document, or to include
in any arbitration any dispute as a representative or member of a class, or to
act in any arbitration in the interest of the general public or in a private
attorney general capacity.

 

(i)          Payment Of Arbitration Costs And Fees. The arbitrator(s) shall
award all costs and expenses of the arbitration proceeding.

 

(j)          Miscellaneous. To the maximum extent practicable, the AAA, the
arbitrator(s) and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the dispute with the
AAA. No arbitrator(s) or other party to an arbitration proceeding may disclose
the existence, content or results thereof, except for (i) filing of any results
in a court having jurisdiction to the extent necessary for enforcement, and (ii)
disclosures of information by a party required in the connection with financial
reporting in the ordinary course of its business or by applicable law or
regulation. If more than one agreement for arbitration by or between the parties
potentially applies to a dispute, the arbitration provision most directly
related to the Loan Documents or the subject matter of the dispute shall
control. This arbitration provision shall survive termination, amendment or
expiration of any of the Loan Documents or any relationship between the parties.

 

(k)          Waiver of Jury Trial. The parties hereto hereby acknowledge that by
agreeing to binding arbitration they have irrevocably waived their respective
rights to a jury trial with respect to any action, claim or other proceeding
arising out of any dispute in connection this Agreement or any other agreement
or document delivered in connection herewith, any rights or obligations
hereunder or thereunder, or the performance of such rights and obligations. This
provision is a material inducement for the parties entering into this Agreement.

 

(l)          Waiver of Punitive Damages. NO CLAIM MAY BE MADE BY ANY PARTY TO
THIS AGREEMENT AGAINST ANY OTHER PARTY TO THIS AGREEMENT, OR ANY AFFILIATE OF
ANY SUCH PARTY OR ANY DIRECTOR, OFFICER, EMPLOYEE, COUNSEL, REPRESENTATIVE,
AGENT, OR ATTORNEY-IN-FACT OF ANY OF THEM FOR ANY SPECIAL, INDIRECT,
CONSEQUENTIAL, OR PUNITIVE DAMAGES IN RESPECT OF ANY CLAIM FOR BREACH OF
CONTRACT OR ANY OTHER THEORY OF LIABILITY ARISING OUT OF OR RELATED TO THE
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY
ACT, OMISSION, OR EVENT OCCURRING IN CONNECTION THEREWITH, AND EACH PARTY TO
THIS AGREEMENT HEREBY WAIVES, RELEASES, AND AGREES NOT TO SUE UPON ANY CLAIM FOR
SUCH DAMAGES, WHETHER OR NOT ACCRUED AND WHETHER OR NOT KNOWN OR SUSPECTED TO
EXIST IN ITS FAVOR.

 

29

 

 

  14.         ASSIGNMENTS; SUCCESSORS.  This Agreement shall bind and inure to
the benefit of the respective successors and assigns of each of the parties;
provided, however, that no Borrower may assign this Agreement or any rights or
duties hereunder without Lender’s prior written consent and any prohibited
assignment shall be absolutely void ab initio. No consent to assignment by
Lender shall release any Borrower or any other Loan Party from its Obligations.
Lender may assign this Agreement and the other Loan Documents in whole or in
part and its rights and duties hereunder or grant participations in the
Obligations hereunder and thereunder and no consent or approval by any Borrower
or any other Loan Party is required in connection with any such assignment or
participation.

 

  15.         AMENDMENTS; WAIVERS.  No amendment or modification of this
Agreement or any other Loan Document or any other document or agreement
described in or related to this Agreement shall be effective unless it has been
agreed to by each party hereto in a writing that specifically states that it is
intended to amend or modify specific Loan Documents, or any other document or
agreement described in or related to this Agreement. No failure by Lender to
exercise any right, remedy, or option under this Agreement or any other Loan
Document, or delay by Lender in exercising the same, will operate as a waiver
thereof. No waiver by Lender will be effective unless it is in writing, and then
only to the extent specifically stated. No waiver by Lender on any occasion
shall affect or diminish Lender’s rights thereafter to require strict
performance by Borrowers of any provision of this Agreement. Lender’s rights
under this Agreement and the other Loan Documents will be cumulative and not
exclusive of any other right or remedy that Lender may have.

 

16.         TAXES.

 

(a)          All payments made by any Borrower or any other Loan Party hereunder
or under any note or other Loan Document will be made without setoff,
counterclaim, or other defense. In addition, all such payments will be made free
and clear of, and without deduction or withholding for, any present or future
Taxes, and in the event any deduction or withholding of Taxes is required, each
Borrower shall comply with the next sentence of this Section 16(a). If any Taxes
are so levied or imposed, each Borrower agrees to pay the full amount of such
Taxes and such additional amounts as may be necessary so that every payment of
all amounts due under this Agreement, any note, or Loan Document, including any
amount paid pursuant to this Section 16(a) after withholding or deduction for or
on account of any Taxes, will not be less than the amount provided for herein;
provided, however, that Borrowers shall not be required to increase any such
amounts if the increase in such amount payable results from Lender’s willful
misconduct or gross negligence (as finally determined by a court of competent
jurisdiction). Each Borrower will furnish to Lender as promptly as possible
after the date the payment of any Tax is due pursuant to applicable law,
certified copies of tax receipts evidencing such payment by such Borrower.

 

(b)          Each Borrower agrees to pay any present or future stamp, value
added or documentary taxes or any other excise or property taxes, charges, or
similar levies that arise from any payment made hereunder or from the execution,
delivery, performance, recordation, or filing of, or otherwise with respect to
this Agreement or any other Loan Document.

 

17.         GENERAL PROVISIONS.

 

17.1         Effectiveness.  This Agreement shall be binding and deemed
effective when executed by each Borrower and Lender.

 

17.2         Section Headings.  Headings and numbers have been set forth herein
for convenience only. Unless the contrary is compelled by the context,
everything contained in each Section applies equally to this entire Agreement.

 

17.3         Interpretation.  Neither this Agreement nor any uncertainty or
ambiguity herein shall be construed against Lender or any Borrower, whether
under any rule of construction or otherwise. On the contrary, this Agreement has
been reviewed by all parties and shall be construed and interpreted according to
the ordinary meaning of the words used so as to accomplish fairly the purposes
and intentions of all parties hereto.

 

17.4         Severability of Provisions.  Each provision of this Agreement shall
be severable from every other provision of this Agreement for the purpose of
determining the legal enforceability of any specific provision.

 

17.5         Debtor-Creditor Relationship.  The relationship between Lender, on
the one hand, and the Loan Parties, on the other hand, is solely that of
creditor and debtor. Lender shall not have (and shall not be deemed to have) any
fiduciary relationship or duty to any Loan Party arising out of or in connection
with the Loan Documents or the transactions contemplated thereby, and there is
no agency or joint venture relationship between Lender, on the one hand, and the
Loan Parties, on the other hand, by virtue of any Loan Document or any
transaction contemplated therein.

 

30

 

 

17.6       Counterparts; Electronic Execution.  This Agreement may be executed
in any number of counterparts and by different parties on separate counterparts,
each of which, when executed and delivered, shall be deemed to be an original,
and all of which, when taken together, shall constitute but one and the same
Agreement. Delivery of an executed counterpart of this Agreement by
telefacsimile or other electronic method of transmission shall be equally as
effective as delivery of an original executed counterpart of this Agreement. Any
party delivering an executed counterpart of this Agreement by telefacsimile or
other electronic method of transmission also shall deliver an original executed
counterpart of this Agreement but the failure to deliver an original executed
counterpart shall not affect the validity, enforceability, and binding effect of
this Agreement.

 

17.7       Revival and Reinstatement of Obligations.  If the incurrence or
payment of the Obligations by any Borrower or any other Loan Party or the
transfer to Lender of any property should for any reason subsequently be
asserted, or declared, to be void or voidable under any state or federal law
relating to creditors’ rights, including provisions of the Bankruptcy Code
relating to fraudulent conveyances, preferences, or other voidable or
recoverable payments of money or transfers of property (each, a “Voidable
Transfer”), and if Lender is required to repay or restore, in whole or in part,
any such Voidable Transfer, or elects to do so upon the reasonable advice of its
counsel, then, as to any such Voidable Transfer, or the amount thereof that
Lender is required or elects to repay or restore, and as to all reasonable
costs, expenses, and attorneys fees of Lender related thereto, the liability of
such Borrower or such other Loan Party automatically shall be revived,
reinstated, and restored and shall exist as though such Voidable Transfer had
never been made and all of Lender’s Liens in the Collateral shall be
automatically reinstated without further action.

 

17.8       Confidentiality.

 

(a)          Lender agrees that material, non-public information regarding the
Loan Parties and their Subsidiaries, their operations, assets, and existing and
contemplated business plans (“Confidential Information”) shall be treated by
Lender in a confidential manner, and shall not be disclosed by Lender to Persons
who are not parties to this Agreement, except: (i) to attorneys for and other
advisors, accountants, auditors, and consultants to Lender and to employees,
directors and officers of Lender (the Persons in this clause (i), “Lender
Representatives”) on a “need to know” basis in connection with this Agreement
and the transactions contemplated hereby and on a confidential basis, (ii) to
Subsidiaries and Affiliates of Lender, provided that any such Subsidiary or
Affiliate shall have agreed to receive such information hereunder subject to the
terms of this Section 17.8, (iii) as may be required by regulatory authorities,
(iv) as may be required by statute, decision, or judicial or administrative
order, rule, or regulation; provided that (x) prior to any disclosure under this
clause (iv), the disclosing party agrees to provide Borrowers with prior notice
thereof, to the extent that it is practicable to do so and to the extent that
the disclosing party is permitted to provide such prior notice to Borrowers
pursuant to the terms of the applicable statute, decision, or judicial or
administrative order, rule, or regulation and (y) any disclosure under this
clause (iv) shall be limited to the portion of the Confidential Information as
may be required by such statute, decision, or judicial or administrative order,
rule, or regulation, (v) as may be agreed to in advance in writing by Borrowers,
(vi) as requested or required by any Governmental Authority pursuant to any
subpoena or other legal process, provided, that, (x) prior to any disclosure
under this clause (vi) the disclosing party agrees to provide Borrowers with
prior written notice thereof, to the extent that it is practicable to do so and
to the extent that the disclosing party is permitted to provide such prior
written notice to Borrowers pursuant to the terms of the subpoena or other legal
process and (y) any disclosure under this clause (vi) shall be limited to the
portion of the Confidential Information as may be required by such Governmental
Authority pursuant to such subpoena or other legal process, (vii) as to any such
information that is or becomes generally available to the public (other than as
a result of prohibited disclosure by Lender or Lender Representatives), (viii)
in connection with any assignment, participation or pledge of any Lender’s
interest under this Agreement, provided that prior to receipt of Confidential
Information any such assignee, participant, or pledgee shall have agreed in
writing to receive such Confidential Information hereunder subject to the terms
of this Section 17.8, (ix) in connection with, and to the extent reasonably
necessary or advised by counsel for, any litigation or other adversary
proceeding involving parties hereto which such litigation or adversary
proceeding involves claims related to the rights or duties of such parties under
this Agreement or the other Loan Documents; (x) to each Loan Party and (xi) in
connection with, and to the extent reasonably necessary for, the exercise of any
secured creditor remedy under this Agreement or under any other Loan Document.

 

(b)          Anything in this Agreement to the contrary notwithstanding, Lender
may use the name, logos, and other insignia of the Loan Parties and the Maximum
Revolver Amount in any “tombstone” or comparable advertising, on its website or
in other marketing materials of Lender.

 

17.9       Lender Expenses.  Each Borrower agrees to pay the Lender Expenses on
the earlier of (a) the first day of the month following the date on which such
Lender Expenses were first incurred, or (b) the date on which demand therefor is
made by Lender and each Borrower agrees that its obligations contained in this
Section 17.9 shall survive payment or satisfaction in full of all other
Obligations.

 

31

 

 

17.10         Setoff.  Lender may at any time, in its sole discretion and
without demand or notice to anyone, setoff any liability owed to any Borrower or
any Guarantor by Lender against any of the Obligations, whether or not due.

 

17.11         Survival.  All representations and warranties made by the Loan
Parties in the Loan Documents and in the certificates or other instruments
delivered in connection with or pursuant to this Agreement or any other Loan
Document shall be considered to have been relied upon by the other parties
hereto and shall survive the execution and delivery of the Loan Documents and
the making of any loans and issuance of any Letters of Credit, regardless of any
investigation made by any such other party or on its behalf and notwithstanding
that Lender may have had notice or knowledge of any Default or Event of Default
or incorrect representation or warranty at the time any credit is extended
hereunder, and shall continue in full force and effect as long as any of the
Obligations is outstanding and unpaid or any Letter of Credit is outstanding and
so long as the obligation of Lender to provide extensions of credit hereunder
has not expired or been terminated.

 

17.12         Patriot Act.  Lender hereby notifies the Loan Parties that
pursuant to the requirements of the Patriot Act, it is required to obtain,
verify and record information that identifies each Loan Party, which information
includes the name and address of each Loan Party and other information that will
allow such Lender to identify each Loan Party in accordance with the Patriot
Act. In addition, if Lender is required by law or regulation or internal
policies to do so, it shall have the right to periodically conduct (a) Patriot
Act searches, OFAC/PEP searches, and customary individual background checks for
the Loan Parties, and (b) OFAC/PEP searches and customary individual background
checks of the Loan Parties’ senior management and key principals, and each
Borrower and each other Loan Party agrees to cooperate in respect of the conduct
of such searches and further agrees that the reasonable costs and charges for
such searches shall constitute Lender Expenses hereunder and be for the account
of Borrowers.

 

17.13         Integration.  This Agreement, together with the other Loan
Documents, reflects the entire understanding of the parties with respect to the
transactions contemplated hereby and shall not be contradicted or qualified by
any other agreement, oral or written, before the date hereof. The foregoing to
the contrary notwithstanding, all Bank Product Agreements, if any, are
independent agreements governed by the written provisions of such Bank Product
Agreements, which will remain in full force and effect, unaffected by any
repayment, prepayments, acceleration, reduction, increase, or change in the
terms of any credit extended hereunder, except as otherwise expressly provided
in such Bank Product Agreement.

 

17.14         Bank Product Providers.  Each Bank Product Provider shall be
deemed a third party beneficiary hereof and of the provisions of the other Loan
Documents for purposes of any reference in a Loan Document to the parties for
whom Lender is acting. Lender hereby agrees to act as agent for such Bank
Product Providers and, by virtue of entering into a Bank Product Agreement, the
applicable Bank Product Provider shall be automatically deemed to have appointed
Lender as its agent and to have accepted the benefits of the Loan Documents; it
being understood and agreed that the rights and benefits of each Bank Product
Provider under the Loan Documents consist exclusively of such Bank Product
Provider’s being a beneficiary of the Liens and security interests (and, if
applicable, guarantees) granted to Lender and the right to share in and receive
payments and collections of the Collateral and payments from Lender from amounts
charged to the Loan Account or that are otherwise collected from the Loan
Parties for the account of a Bank Product Provider as more fully set forth
herein and in the other Loan Documents. In addition, each Bank Product Provider,
by virtue of entering into a Bank Product Agreement, shall be automatically
deemed to have agreed that Lender shall have the right, but shall have no
obligation, to establish, maintain, relax, or release Reserves in respect of the
Bank Product Obligations and that if Reserves are established there is no
obligation on the part of Lender to determine or ensure whether the amount of
any such Reserve is appropriate or not. Notwithstanding anything to the contrary
in this Agreement or any other Loan Document, no Bank Product Provider (other
than Lender in its capacity as lender hereunder) shall have any voting or
approval rights hereunder solely by virtue of its status as the provider or
holder of such agreements or products or the Obligations owing thereunder, nor
shall the consent of any such provider or holder be required for any matter
hereunder or under any of the other Loan Documents, including as to any matter
relating to the Collateral or the release of Collateral or any other Loan Party.

 

[Signature pages to follow]

 

32

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Credit and Security
Agreement to be executed and delivered under seal as of the date first above
written.

 

  BORROWERS:

 

  CHARLES & COLVARD, LTD.

 

  By: /s/ Kyle S. Macemore   Name: Kyle S. Macemore   Title: Senior Vice
President and Chief Financial Officer

 

  Federal Employer Identification No.: 56-1928817   Organizational
Identification No.:  0372374

 

  CHARLES & COLVARD DIRECT, LLC

 

  By: /s/ Kyle S. Macemore   Name: Kyle S. Macemore   Title: Manager

 

  Federal Employer Identification No.: 45-2976143   Organizational
Identification No.:  1214846

 

  MOISSANITE.COM, LLC

 

  By: /s/ Kyle S. Macemore   Name: Kyle S. Macemore   Title: Manager

 

  Federal Employer Identification No.: 45-2966911   Organizational
Identification No.:  1214844       LENDER:       WELLS FARGO BANK, NATIONAL
ASSOCIATION

 

  By: /s/ James B. Fisher   Name: James B. Fisher   Title: Authorized Signatory

 

 

 

 

Schedule 1.1

 

a.           Definitions. As used in this Agreement, the following terms shall
have the following definitions:

 

“Account” means an account (as that term is defined in Article 9 of the Code).

 

“Account Debtor” means an account debtor (as that term is defined in the Code).

 

“Additional Documents” has the meaning specified therefor in Section 6.15.

 

“Administrative Borrower” has the meaning specified therefor in Section 2.2.

 

“Advances” has the meaning specified therefor in Section 2.1(a).

 

“Affiliate” means, as applied to any Person, any other Person who controls, is
controlled by, or is under common control with, such Person. For purposes of
this definition, “control” means the possession, directly or indirectly through
one or more intermediaries, of the power to direct the management and policies
of a Person, whether through the ownership of Stock, by contract, or otherwise;
provided, however, that, for purposes of the definition of Eligible Accounts,
Eligible Foreign Accounts and Section 7.12: (a) any Person which owns directly
or indirectly 10% or more of the Stock having ordinary voting power for the
election of the board of directors or equivalent governing body of a Person or
10% or more of the partnership or other ownership interests of a Person (other
than as a limited partner of such Person) shall be deemed an Affiliate of such
Person, (b) each director (or comparable manager) of a Person shall be deemed to
be an Affiliate of such Person, and (c) each partnership in which a Person is a
general partner shall be deemed an Affiliate of such Person.

 

“Agreement” means the Credit and Security Agreement to which this Schedule 1.1
is attached.

 

“Agreement Date” means the date as of which this Agreement is dated.

 

“Applicable Margin” means 2.50 percentage points when the Interest Rate is based
on Daily Three Month LIBOR and 1.50 percentage points when the Interest Rate is
based on the Prime Rate.

 

“Authorized Person” means any one of the individuals identified on Schedule A-2,
as such schedule is updated from time to time by written notice from Borrowers
to Lender.

 

“Availability” means, as of any date of determination, the amount that Borrowers
are entitled to borrow as Advances under Section 2.1 (after giving effect to all
then outstanding Obligations).

 

“Bank Product” means any one or more of the following financial products or
accommodations extended to a Loan Party or any of its/their Subsidiaries by a
Bank Product Provider: (a) commercial credit cards, (b) commercial credit card
processing services, (c) debit cards, (d) stored value cards, (e) purchase cards
(including so-called “procurement cards” or “P-cards”), (f) Cash Management
Services, or (g) transactions under Hedge Agreements.

 

“Bank Product Agreements” means those agreements entered into from time to time
by a Loan Party or any of its/their Subsidiaries with a Bank Product Provider in
connection with the obtaining of any of the Bank Products, including all Cash
Management Documents.

 

“Bank Product Collateralization” means providing cash collateral (pursuant to
documentation reasonably satisfactory to Lender) to be held by Lender for the
benefit of the Bank Product Provider in an amount determined by Lender as
sufficient to satisfy the reasonably estimated credit exposure with respect to
the then existing Bank Product Obligations (other than Hedge Obligations).

 

“Bank Product Obligations” means (a) all obligations, indebtedness, liabilities,
reimbursement obligations, fees, or expenses owing by a Loan Party or any of
its/their Subsidiaries to Lender or another Bank Product Provider pursuant to or
evidenced by a Bank Product Agreement and irrespective of whether for the
payment of money, whether direct or indirect, absolute or contingent, liquidated
or unliquidated, determined or undetermined, voluntary or involuntary, due, not
due or to become due, incurred in the past or now existing or hereafter arising,
however arising and (b) all Hedge Obligations.

 

“Bank Product Provider” means Lender or any of its Affiliates that provide Bank
Products to a Loan Party or any of its/ their Subsidiaries.

 

Schedule 1.1
Page 1

 

 

“Bank Product Reserve Amount” means, as of any date of determination, the Dollar
amount of reserves that Lender has determined it is necessary or appropriate to
establish (based upon Lender’s reasonable determination of the credit and
operating risk exposure to the Loan Parties and their Subsidiaries in respect of
Bank Product Obligations) in respect of Bank Products then provided or
outstanding.

 

“Bankruptcy Code” means title 11 of the United States Code, as in effect from
time to time.

 

“Benefit Plan” means a “defined benefit plan” (as defined in Section 3(35) of
ERISA) for which any Borrower or any of its Subsidiaries or ERISA Affiliates has
been an “employer” (as defined in Section 3(5) of ERISA) within the past six
years.

 

“Board of Directors” means the board of directors (or comparable managers) of a
Borrower or any other Loan Party or any committee thereof duly authorized to act
on behalf of the board of directors (or comparable managers).

 

“Books” means books and records (including a Borrower’s or any other Loan
Party’s Records indicating, summarizing, or evidencing such Borrower’s or such
other Loan Party’s assets (including the Collateral) or liabilities, such
Borrower’s or such other Loan Party’s Records relating to such Borrower’s or
such other Loan Party’s business operations or financial condition, or such
Borrower’s or such other Loan Party’s Goods or General Intangibles related to
such information).

 

“Borrower Agreement” means the Borrower Agreement dated on or about the date of
this Agreement by Borrowers in favor of Ex-Im Bank and Lender.

 

“Borrowers” has the meaning specified therefor in the introductory paragraph of
this Agreement.

 

“Borrowing” means a borrowing consisting of Advances (a) requested by Borrowers,
(b) made automatically pursuant to Section 2.3(c) without the request of
Borrowers, (c) made by Lender pursuant to Section 2.6(c), or (d) a Protective
Advance.

 

“Borrowing Base” means, as of any date of determination, the result of:

 

(a)          85% of the amount of Eligible Accounts, plus

 

(b)          the lowest of (i) 65% of Borrowers’ cost with respect to Eligible
Inventory, or (ii) 85% times the most recently determined Net Liquidation
Percentage times the Value of Eligible Inventory, plus

 

(c)          the lowest of

 

(i)          the Ex-Im Subfacility Amount, or

 

(ii)         the sum of:

 

(A)         90% of the amount of Eligible Foreign Accounts, plus

 

(B)         the lowest of (1) 75% of Borrowers’ cost with respect to Eligible
Export-Related Inventory, or (2) 85% times the most recently determined Net
Liquidation Percentage times the Value of Eligible Export-Related Inventory;
minus

 

(c)          the Ex-Im Bank Reserve, minus

 

(d)          the aggregate amount of Reserves other than the Ex-Im Bank Reserve,
if any.

 

In addition to and without limiting any of the foregoing limitations, the
aggregate outstanding amount of Advances made against the value of Eligible
Inventory and Eligible Export-Related Inventory shall not exceed the Inventory
Sublimit at any time.

 

“Borrowing Base Certificate” means a form of borrowing base certificate in form
and substance acceptable to Lender.

 

Schedule 1.1
Page 2

 

 

“Business Day” means any day that is not a Saturday, Sunday, or other day on
which banks are authorized or required to close pursuant to the rules and
regulations of the Federal Reserve System.

 

“Buyer” has the meaning ascribed to such term in the Borrower Agreement.

 

“Capital Expenditures” means, with respect to any Person for any period, the
aggregate of all expenditures by such Person and its Subsidiaries during such
period that are capital expenditures as determined in accordance with GAAP,
whether such expenditures are paid in cash or financed.

 

“Capitalized Lease Obligation” means that portion of the obligations under a
Capital Lease that is required to be capitalized in accordance with GAAP.

 

“Capital Lease” means a lease that is required to be capitalized for financial
reporting purposes in accordance with GAAP.

 

“Cash Equivalents” means (a) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States or issued by any agency thereof
and backed by the full faith and credit of the United States, in each case
maturing within 1 year from the date of acquisition thereof, (b) marketable
direct obligations issued or fully guaranteed by any state of the United States
or any political subdivision of any such state or any public instrumentality
thereof maturing within 1 year from the date of acquisition thereof and having
one of the two highest ratings obtainable from either Standard & Poor’s Rating
Group (“S&P”) or Moody’s Investors Service, Inc. (“Moody’s”), (c) commercial
paper maturing no more than 270 days from the date of creation thereof and, at
the time of acquisition, having a rating of at least A-1 from S&P or at least
P-1 from Moody’s, (d) certificates of deposit, time deposits, overnight bank
deposits or bankers’ acceptances maturing within 1 year from the date of
acquisition thereof issued by any bank organized under the laws of the United
States or any state thereof or the District of Columbia or any United States
branch of a foreign bank having combined capital and surplus of not less than
$250,000,000, (e) Deposit Accounts maintained with (i) any bank that satisfies
the criteria described in clause (d) above, or (ii) any other bank organized
under the laws of the United States or any state thereof so long as the full
amount maintained with any such other bank is insured by the Federal Deposit
Insurance Corporation, (f) repurchase obligations of any commercial bank
satisfying the requirements of clause (d) of this definition or recognized
securities dealer having combined capital and surplus of not less than
$250,000,000, having a term of not more than seven days, with respect to
securities satisfying the criteria in clauses (a) or (d) above, (g) debt
securities with maturities of six months or less from the date of acquisition
backed by standby letters of credit issued by any commercial bank satisfying the
criteria described in clause (d) above, and (h) Investments in money market
funds substantially all of whose assets are invested in the types of assets
described in clauses (a) through (g) above.

 

“Cash Management Documents” means the agreements governing each of the Cash
Management Services of Lender utilized by a Loan Party, which agreements shall
include, without limitation, the Master Agreement for Treasury Management
Services or other applicable treasury management services agreement, the
“Acceptance of Services”, the “Service Description” governing each such treasury
management service used by a Loan Party, and all replacement or successor
agreements which govern such Cash Management Services of Lender.

 

“Cash Management Services” means any cash management or related services
including treasury, depository, return items, overdraft, controlled
disbursement, merchant stored value cards, e-payables services, electronic funds
transfer, interstate depository network, automatic clearing house transfer
(including the Automated Clearing House processing of electronic funds transfers
through the direct Federal Reserve Fedline system) and other cash management
arrangements.

 

“Cash Management Transition Period” has the meaning specified in Section
6.12(j)(i).

 

“Change of Control” means that (a) any “person” or “group” (within the meaning
of Sections 13(d) and 14(d) of the Exchange Act), becomes the beneficial owner
(as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
40%, or more, of the Stock of Parent having the right to vote for the election
of members of Parent’s Board of Directors, (b) a majority of the members of the
Board of Directors do not constitute Continuing Directors, (c) Borrowers fail to
own and control, directly or indirectly, 100% of the Stock of each other Loan
Party, or (d) Parent fails to own and control, directly or indirectly, 100% of
the Stock of each other Borrower.

 

“Chattel Paper” means chattel paper (as that term is defined in the Code), and
includes tangible chattel paper and electronic chattel paper.

 

“Code” means the Georgia Uniform Commercial Code, as in effect from time to
time; provided, however, that in the event that, by reason of mandatory
provisions of law, any or all of the attachment, perfection, priority, or
remedies with respect to Lender’s Lien on any Collateral is governed by the
Uniform Commercial Code as enacted and in effect in a jurisdiction other than
the State of Georgia, the term “Code” shall mean the Uniform Commercial Code as
enacted and in effect in such other jurisdiction solely for purposes of the
provisions thereof relating to such attachment, perfection, priority, or
remedies. To the extent that defined terms set forth herein shall have different
meanings under different Articles under the Uniform Commercial Code, the meaning
assigned to such defined term under Article 9 of the Uniform Commercial Code
shall control.

 

Schedule 1.1
Page 3

 

 

“Collateral” means all of each Borrower’s now owned or hereafter acquired:

 

(a)          Accounts;

 

(b)          Books;

 

(c)          Chattel Paper;

 

(d)          Deposit Accounts;

 

(e)          Goods, including Equipment and Fixtures;

 

(f)          General Intangibles, including, without limitation, Intellectual
Property and Intellectual Property Licenses;

 

(g)          Inventory;

 

(h)          Investment Related Property;

 

(i)          Negotiable Collateral;

 

(j)          Supporting Obligations;

 

(k)          Commercial Tort Claims;

 

(l)          money, Cash Equivalents, or other assets of such Borrower that now
or hereafter come into the possession, custody, or control of Lender (or its
agent or designee); and

 

(m)          all of the proceeds (as such term is defined in the Code) and
products, whether tangible or intangible, of any of the foregoing, including
proceeds of insurance or Commercial Tort Claims covering or relating to any or
all of the foregoing, and any and all Accounts, Books, Chattel Paper, Deposit
Accounts, Equipment, Fixtures, General Intangibles (including, without
limitation, Intellectual Property and Intellectual Property Licenses),
Inventory, Investment Related Property, Negotiable Collateral, Supporting
Obligations, money, or other tangible or intangible property resulting from the
sale, lease, license, exchange, collection, or other disposition of any of the
foregoing, the proceeds of any award in condemnation with respect to any of the
foregoing, any rebates or refunds, whether for taxes or otherwise, and all
proceeds of any such proceeds, or any portion thereof or interest therein, and
the proceeds thereof, and all proceeds of any loss of, damage to, or destruction
of the above, whether insured or not insured, and, to the extent not otherwise
included, any indemnity, warranty, or guaranty payable by reason of loss or
damage to, or otherwise with respect to any of the foregoing (collectively, the
“Proceeds”). Without limiting the generality of the foregoing, the term
“Proceeds” includes whatever is receivable or received when Investment Related
Property or proceeds are sold, exchanged, collected, or otherwise disposed of,
whether such disposition is voluntary or involuntary, and includes proceeds of
any indemnity or guaranty payable to such Borrower or Lender from time to time
with respect to any of the Investment Related Property; provided that,
notwithstanding anything to the contrary in this Agreement or in any other Loan
Document, the “Collateral” shall not include, and no Lien is granted under this
Agreement or any other Loan Document in, any Excluded Collateral.

 

“Collateral Access Agreement” means a landlord waiver, bailee letter, or
acknowledgement agreement of any lessor, warehouseman, processor, consignee, or
other Person in possession of, having a Lien upon, or having rights or interests
in the Books, Equipment, Accounts or Inventory of any Loan Party or any of its
Subsidiaries, in each case, in favor of Lender with respect to the Collateral at
such premises or otherwise in the custody, control or possession of such lessor,
warehouseman, processor, consignee or other Person and in form and substance
reasonably satisfactory to Lender.

 

“Collection Account” means the Deposit Account identified on Schedule A-1.

 

Schedule 1.1
Page 4

 

 

“Collections” means all cash, checks, notes, instruments, wire transfers, ACH
transfers and other items of payment (including insurance Proceeds, cash
Proceeds of asset sales, rental Proceeds, and tax refunds).

 

“Commercial Tort Claims” means commercial tort claims (as that term is defined
in the Code), and includes those commercial tort claims listed on Schedule
5.6(d) to the Information Certificate.

 

“Compliance Certificate” means a certificate substantially in the form of
Exhibit A delivered by the chief financial officer of each Borrower to Lender.

 

“Confidential Information” has the meaning specified therefor in Section 17.8.

 

“Continuing Director” means (a) any member of the Board of Directors who was a
director (or comparable manager) of Parent on the Agreement Date, and (b) any
individual who becomes a member of the Board of Directors of Parent after the
Agreement Date if such individual was approved, appointed or nominated for
election to the Board of Directors by a majority of the Continuing Directors.

 

“Control Agreement” means a control agreement, in form and substance reasonably
satisfactory to Lender, executed and delivered by a Loan Party or any Subsidiary
of a Loan Party, Lender, and the applicable securities intermediary (with
respect to a Securities Account) or bank (with respect to a Deposit Account) or
issuer, (with respect to uncertificated securities).

 

“Controlled Account” has the meaning specified therefor in Section 6.12(j).

 

“Controlled Account Bank” has the meaning specified therefor in Section 6.12(j).

 

“Copyrights” means any and all rights in any works of authorship, including (i)
copyrights and moral rights, (ii) copyright registrations and recordings thereof
and all applications in connection therewith including those listed on Schedule
5.26(b) to the Information Certificate, (iii) income, license fees, royalties,
damages, and payments now and hereafter due or payable under and with respect
thereto, including payments under all licenses entered into in connection
therewith and damages and payments for past, present, or future infringements
thereof, (iv) the right to sue for past, present, and future infringements
thereof, and (v) all of each Borrower’s and each other Loan Party’s rights
corresponding thereto throughout the world.

 

“Copyright Security Agreement” means each Copyright Security Agreement executed
and delivered by a Borrower or another Loan Party and Lender, in form and
substance acceptable to Lender.

 

“Country Limitation Schedule” has the meaning ascribed to such term in the
Borrower Agreement. The Country Limitation Schedule as in effect on the date of
this Agreement is attached hereto as Exhibit F but remains subject to change
from time to time as contemplated by the Borrower Agreement.

 

“Cree” means Cree Research, Inc.

 

“Cree Contract” means that certain Amended and Restated Exclusive Supply
Agreement dated as of June 6, 1997 between Parent and Cree Research, Inc.

 

“Daily Balance” means, as of any date of determination and with respect to any
Obligation, the amount of such Obligation owed at the end of such day.

 

“Daily Three Month LIBOR” means, for any day the rate per annum for United
States dollar deposits determined by Lender for the purpose of calculating the
effective Interest Rate for loans that reference Daily Three Month LIBOR as the
Inter-Bank Market Offered Rate in effect from time to time for the 3 month
delivery of funds in amounts approximately equal to the principal amount of such
loans. Borrowers understand and agree that Lender may base its determination of
the Inter-Bank Market Offered Rate upon such offers or other market indicators
of the Inter-Bank Market as Lender in its discretion deems appropriate,
including but not limited to the rate offered for U.S. dollar deposits on the
London Inter-Bank Market. When interest is determined in relation to Daily Three
Month LIBOR, each change in the interest rate shall become effective each
Business Day that Lender determines that Daily Three Month LIBOR has changed.

 

“Default” means an event, condition, or default that, with the giving of notice,
the passage of time, or both, would be an Event of Default.

 

Schedule 1.1
Page 5

 

 

“Deposit Account” means any deposit account (as that term is defined in the
Code).

 

“Designated Account” means the operating Deposit Account of Borrowers at Lender
identified on Schedule D-1.

 

“Dilution” means, as of any date of determination, a percentage that is the
result of dividing the Dollar amount of (a) bad debt write-downs, discounts,
advertising allowances, credits, deductions, or other dilutive items as
determined by Lender in its Permitted Discretion with respect to Borrowers’
Accounts, by (b) Borrowers’ billings with respect to Accounts.

 

“Dilution Reserve” means, as of any date of determination, the difference
between (a) the dollar amount of Eligible Accounts and Eligible Foreign Accounts
calculated at the applicable stated advance rate against Eligible Accounts and
Eligible Foreign Accounts set forth in the definition of Borrowing Base and (b)
the dollar amount of Eligible Accounts and Eligible Foreign Accounts calculated
by reducing the stated advance rate against Eligible Accounts and Eligible
Foreign Accounts set forth in the definition of Borrowing Base by 1 percentage
point for each percentage point by which Dilution is in excess of 5.00%.

 

“Dollars” or “$” means United States dollars.

 

“Drawing Document” means any Letter of Credit or other document presented for
purposes of drawing under any Letter of Credit.

 

“Eligible Accounts” means those Accounts created by each Borrower in the
ordinary course of its business, that arise out of such Borrower’s sale of Goods
or rendition of services, that comply with each of the covenants,
representations and warranties respecting Accounts and/or Eligible Accounts made
in the Loan Documents, and that are not excluded as ineligible by virtue of one
or more of the excluding criteria set forth below; provided, however, that such
criteria may be revised from time to time by Lender in Lender’s Permitted
Discretion. In determining the amount to be included, Eligible Accounts shall be
calculated net of customer deposits, credits and unapplied cash. Eligible
Accounts shall not include the following:

 

(a)          Accounts that the Account Debtor has failed to pay within 30 days
of original due date;

 

(b)          Accounts with an original due date in excess of 90 days from the
date of determination;

 

(c)          Accounts owed by an Account Debtor (or its Affiliates) where 10% or
more of all Accounts owed by that Account Debtor (or its Affiliates) are deemed
ineligible under clause (a) above or clauses (i) or (s) below;

 

(d)          Accounts with respect to which the Account Debtor is an Affiliate,
agent or equity owner of such Borrower or an employee or agent of such Borrower
or any Affiliate of such Borrower;

 

(e)          Accounts arising in a transaction wherein Goods are placed on
consignment or are sold pursuant to a guaranteed sale, a sale or return, a sale
on approval, or any other terms by reason of which the payment by the Account
Debtor may be conditional or contingent;

 

(f)          Accounts that are not payable in Dollars;

 

(g)          Accounts with respect to which the Account Debtor either (i) does
not maintain its chief executive office in the United States, or (ii) is not
organized under the laws of the United States or any state thereof, or (iii) is
the government of any foreign country or sovereign state, or of any state,
province, municipality, or other political subdivision thereof, or of any
department, agency, public corporation, or other instrumentality thereof;

 

(h)          Accounts with respect to which the Account Debtor is either (i) the
United States or any department, agency, or instrumentality of the United States
(exclusive, however, of Accounts with respect to which such Borrower has
complied, to the reasonable satisfaction of Lender, with the Assignment of
Claims Act, 31 USC §3727), or (ii) any state of the United States;

 

(i)          Accounts with respect to which the Account Debtor is a creditor of
such Borrower, has or has asserted a right of setoff, or has disputed its
obligation to pay all or any portion of the Account, to the extent of such
claim, right of setoff, or dispute;

 

Schedule 1.1
Page 6

 

 

(j)          That portion of Accounts which reflect a reasonable reserve for
warranty claims or returns or amounts which are owed to account debtors,
including those for rebates, allowances, co-op advertising, new store allowances
or other deductions;

 

(k)          Accounts owing by a single Account Debtor or group of Affiliated
Account Debtors whose total obligations owing to Borrower exceed fifteen percent
(15%) percent of the aggregate amount of all Accounts (but the portion of the
Accounts not in excess of the foregoing applicable percentages may be Eligible
Accounts), such percentages being subject to reduction in the Lender’s Permitted
Discretion if the creditworthiness of such Account Debtor deteriorates;

 

(l)          Accounts with respect to which the Account Debtor is subject to an
Insolvency Proceeding, is not Solvent, has gone out of business, or as to which
such Borrower has received notice of an imminent Insolvency Proceeding or a
material impairment of the financial condition of such Account Debtor;

 

(m)        Accounts, the collection of which, Lender, in its Permitted
Discretion, believes to be doubtful by reason of the Account Debtor’s financial
condition;

 

(n)          Accounts representing credit card sales or “C.O.D.” sales;

 

(o)          Accounts that are not subject to a valid and perfected first
priority Lien in favor of Lender or that are subject to any other Lien;

 

(p)          Accounts that consist of progress billings (such that the
obligation of the Account Debtors with respect to such Accounts is conditioned
upon such Borrower's satisfactory completion of any further performance under
the agreement giving rise thereto) or retainage invoices;

 

(q)          Accounts with respect to which the Account Debtor is a Sanctioned
Person or Sanctioned Entity;

 

(r)          that portion of Accounts which represent finance charges, service
charges, sales taxes or excise taxes;

 

(s)          that portion of Accounts which has been restructured, extended,
amended or otherwise modified;

 

(t)          bill and hold invoices, except those with respect to which Lender
shall have received an agreement in writing from the Account Debtor, in form and
substance satisfactory to Lender, confirming the unconditional obligation of the
Account Debtor to take the Goods related thereto and pay such invoice, so long
as such Accounts satisfy all other criteria for Eligible Accounts hereunder;

 

(u)          Accounts which have not been invoiced;

 

(v)          Accounts constituting (i) Proceeds of copyrightable material unless
such copyrightable material shall have been registered with the United States
Copyright Office, or (ii) Proceeds of patentable inventions unless such
patentable inventions have been registered with the United States Patent and
Trademark Office; and

 

(w)          Accounts or that portion of Accounts otherwise deemed ineligible by
Lender in its Permitted Discretion.

 

Any Accounts which are not Eligible Accounts shall nonetheless constitute
Collateral. For the avoidance of doubt, no Account shall constitute both an
Eligible Account and an Eligible Foreign Account.

 

“Eligible Export-Related Inventory” means Inventory consisting of first quality
finished goods held for sale in the ordinary course of each Borrower’s business,
that complies with each of the covenants, representations and warranties
respecting Inventory and/or Eligible Export-Related Inventory made in the Loan
Documents, and that is not excluded as ineligible by virtue of one or more of
the excluding criteria set forth below; provided, however, that such criteria
may be revised from time to time by Lender in Lender’s Permitted Discretion. An
item of Inventory shall not be included in Eligible Export-Related Inventory if:

 

(a)          such Borrower does not have good, valid, and marketable title
thereto;

 

Schedule 1.1
Page 7

 

 

(b)          it consists of work-in-process Inventory, raw materials, components
which are not part of finished goods, supplies used or consumed in such
Borrower’s business, or Goods that constitute spare parts, maintenance parts,
packaging and shipping materials, or sample inventory or customer supplied parts
or Inventory;

 

(c)          it consists of Inventory that is perishable or live or where less
than 8 weeks remain until the Inventory’s stated expiration or “sell-by” or “use
by” date;

 

(d)          such Borrower does not have actual and exclusive possession thereof
(either directly or through a bailee or agent of such Borrower);

 

(e)          it is not located at one of the locations in the continental United
States set forth on Schedule 5.29 to the Information Certificate;

 

(f)          it is stored at locations holding less than $500,000 of the
aggregate value of Borrowers’ Inventory;

 

(g)          it is in-transit to or from a location of such Borrower (other than
in transit from one location set forth on Schedule 5.29 to the Information
Certificate to another location set forth on Schedule 5.29 to the Information
Certificate);

 

(h)          it is located on real property leased by such Borrower or in a
contract warehouse, in each case, unless it is subject to a Collateral Access
Agreement executed by the lessor or warehouseman, as the case may be, and unless
it is segregated or otherwise separately identifiable from Goods of others, if
any, stored on the premises;

 

(i)          it is the subject of a bill of lading or other document of title;

 

(j)          it is on consignment from any consignor; or on consignment to any
consignee or subject to any bailment unless the consignee or bailee has (i)
executed an agreement with Lender, and (ii) provided evidence acceptable to
Lender that the applicable Borrower has properly perfected a first priority
security interest in such consigned Inventory and has properly notified in
writing the other creditors of consignee who hold an interest in such Inventory
of Borrower’s security interest in such Inventory, and (iii) the applicable
Borrower has taken such other actions with respect to such consigned Inventory
as Lender may reasonably request;

 

(k)          it is not subject to a valid and perfected first priority Lender’s
Lien;

 

(l)          it consists of goods returned or rejected by such Borrower’s
customers;

 

(m)        it consists of Goods that are damaged, defective, obsolete or slow
moving;

 

(n)          it consists of Inventory that such Borrower has returned, has
attempted to return, is in the process of returning or intends to return to the
vendor of such Inventory;

 

(o)          it consists of Goods that are restricted or controlled, or
regulated items;

 

(p)          it consists of Goods that are bill and hold Goods;

 

(q)          it consists of damaged or defective Goods or “seconds”;

 

(r)          it is subject to third party trademark, licensing or other
proprietary rights, unless Lender is satisfied that such Inventory can be freely
sold by Lender on and after the occurrence of an Event of a Default despite such
third party rights;

 

(s)          it consists of customer-specific Inventory not supported by
purchase orders;

 

(t)          it consists of Inventory that is produced in violation of the Fair
Labor Standards Act or subject to the “hot goods” provisions contained in 29
U.S.C. § 215 or any successor statute or section;

 

(u)          it consists of Inventory that has been previously exported from the
United States;

 

(v)          it consists of Inventory that constitutes nuclear articles, defense
articles or defense services;

 

Schedule 1.1
Page 8

 

 

(w)          it consists of Inventory that is to be incorporated into Items
destined for shipment to a country as to which Ex-Im Bank is prohibited from
doing business as designated in the Country Limitation Schedule;

 

(x)          it consists of Inventory that is to be incorporated into Items
destined for shipment to a Buyer located in a country in which Ex-Im Bank
coverage is not available for commercial reasons as designated in the Country
Limitation Schedule, unless and only to the extent that such Items are to be
sold to such country on terms of a letter of credit confirmed by a bank
acceptable to Ex lm Bank;

 

(y)          it consists of Inventory that is the Foreign Content of Items
containing less than fifty percent (50%) U.S. content;

 

(z)          for Items containing at least 50% U.S. Content, such Inventory
consists of any Foreign Content not incorporated into such Items in the United
States;

 

(aa)         it consists of Inventory that is to be incorporated into Items
whose sale would result in an Account which would not be an Eligible Foreign
Account;

 

(bb)         it consists of Eligible Inventory; or

 

(cc)         it consists of Inventory otherwise deemed ineligible by Lender in
its Permitted Discretion.

 

Any Inventory which is not Eligible Export-Related Inventory shall nonetheless
constitute Collateral. For the avoidance of doubt, no item of Inventory shall
constitute both Eligible Inventory and Eligible Export-Related Inventory.

 

“Eligible Foreign Accounts” means those Accounts created by each Borrower in the
ordinary course of its business, that are owing by account debtors located
outside of the United States, that arise out of such Borrower’s sale of Goods or
rendition of services, that comply with each of the covenants, representations
and warranties respecting Accounts and/or Eligible Foreign Accounts made in the
Loan Documents, and that are not excluded as ineligible by virtue of one or more
of the excluding criteria set forth below; provided, however, that such criteria
may be revised from time to time by Lender in Lender’s Permitted Discretion. In
determining the amount to be included, Eligible Foreign Accounts shall be
calculated net of customer deposits, credits and unapplied cash. Eligible
Foreign Accounts shall not include any Account:

 

(a)          that does not arise from the sale of Items in the ordinary course
of the applicable Borrower’s business;

 

(b)          that is not subject to a valid, perfected first-priority Lien in
favor of Lender;

 

(c)          as to which any covenant, representation or warranty contained in
the Loan Documents with respect to such Account has been breached;

 

(d)          that is not owned by a Borrower or that is subject to any Lien of
another Person other than the Lien in favor of Lender;

 

(e)          with respect to which an invoice has not been sent;

 

(f)          that arises from the sale of defense articles or defense services;

 

(g)          that is due and payable from a Buyer located in a country with
which Ex-Im Bank is prohibited from doing business as designated in the Country
Limitation Schedule;

 

(h)          that does not comply with the requirements of the Country
Limitation Schedule;

 

(i)          that is due and payable more than 150 days from the date of
determination;

 

(j)          that is not paid within 30 calendar days from its original due
date;

 

(k)          that arises from a sale of goods to or performance of services for
an employee, stockholder, subsidiary or other Affiliate of any Borrower;

 

Schedule 1.1
Page 9

 

 

(l)          that is backed by a letter of credit unless the Items covered by
the subject letter of credit have been shipped;

 

(m)          that is due and payable in a currency other than Dollars, except as
may be approved in writing by Ex-Im Bank;

 

(n)          that is due and payable from a military Buyer, except as may be
approved in writing by Ex-Im Bank;

 

(o)          that does not comply with the terms of sale set forth in Section 7
of the Loan Authorization Notice;

 

(p)          that is due and payable from a Buyer who (i) applies for, suffers,
or consents to the appointment of, or the taking of possession by, a receiver,
custodian, trustee or liquidator of itself or of all or a substantial part of
its property or calls a meeting of its creditors, (ii) admits in writing its
inability, or is generally unable, to pay its debts as they become due or ceases
operations of its present business, (iii) makes a general assignment for the
benefit of creditors, (iv) commences a voluntary case under any state or federal
bankruptcy laws (as now or hereafter in effect), (v) is adjudicated as bankrupt
or insolvent, (vi) files a petition seeking to take advantage of any other law
providing for the relief of debtors, (vii) acquiesces to, or fails to have
dismissed, any petition which is filed against it in any involuntary case under
such bankruptcy laws, or (viii) takes any action for the purpose of effecting
any of the foregoing;

 

(q)          that arises from a bill-and-hold, guaranteed sale, sale-and-return,
sale on approval, consignment or any other repurchase or return basis or is
evidenced by chattel paper;

 

(r)          for which the Items giving rise to such Account have not been
shipped and delivered to and accepted by the Buyer or the services giving rise
to such Account have not been performed by the applicable Borrower and accepted
by the Buyer, or the Account otherwise does not represent a final sale;

 

(s)          that is subject to any offset, deduction, defense, dispute, or
counterclaim, or the Buyer is also a creditor or supplier of any Borrower or the
Account is contingent in any respect or for any reason;

 

(t)          for which any Borrower has made any agreement with the Buyer for
any deduction therefrom, except for discounts or allowances made in the ordinary
course of business for prompt payment, all of which discounts or allowances are
reflected in the calculation of the face value of each respective invoice
related thereto;

 

(u)          for which any of the Items giving rise to such Account have been
returned, rejected or repossessed;

 

(v)          constituting (i) proceeds of copyrightable material unless such
copyrightable material shall have been registered with the United States
Copyright Office, or (ii) proceeds of patentable inventions unless such
patentable inventions have been registered with the United States Patent and
Trademark Office;

 

(w)          owed by any unit of government, whether foreign or domestic
(provided, however, that there shall be included in Eligible Accounts that
portion of Accounts owed by such units of government for which Borrowers have
provided evidence satisfactory to Lender that (i) Lender has a first-priority
perfected security interest and (ii) such Accounts may be enforced by Lender
directly against such unit of government under all applicable laws);

 

(x)          if any portion of such Account has been restructured, extended,
amended or modified;

 

(y)          to the extent that such Account constitutes advertising, finance
charges, service charges or sales or excise taxes;

 

(z)          owed by an account debtor, regardless of whether otherwise
eligible, to the extent that the aggregate balance of such Accounts exceeds 15%
of the aggregate amount of all Accounts (but the portion of such Accounts not in
excess of the foregoing percentage may be Eligible Foreign Accounts);

 

(aa)         owed by an account debtor, regardless of whether otherwise
eligible, if 10% or more of the total amount of Accounts due from such account
debtor is ineligible under clause (j) above;

 

(bb)         that arises from the sale of Items containing less than 50% U.S.
Content;

 

Schedule 1.1
Page 10

 

 

(cc)         that arises from the sale of Items containing any Foreign Content
not incorporated into such Items in the United States;

 

(dd)         that arises from the sale of any Items to be used in the
construction, alteration, operation or maintenance of nuclear power, enrichment,
reprocessing, research or heavy water production facilities; or

 

(ee)         that is otherwise deemed ineligible for any reason by Lender in its
Permitted Discretion or by Ex-Im Bank in its reasonable discretion.

 

Any Accounts owing by account debtors located outside the United States which
are not Eligible Foreign Accounts shall nonetheless constitute Collateral. For
the avoidance of doubt, no Account shall constitute both an Eligible Account and
an Eligible Foreign Account.

 

“Eligible Inventory” means Inventory consisting of first quality finished goods
held for sale in the ordinary course of each Borrower’s business, that complies
with each of the covenants, representations and warranties respecting Inventory
and/or Eligible Inventory made in the Loan Documents, and that is not excluded
as ineligible by virtue of one or more of the excluding criteria set forth
below; provided, however, that such criteria may be revised from time to time by
Lender in Lender’s Permitted Discretion. An item of Inventory shall not be
included in Eligible Inventory if:

 

(a)          such Borrower does not have good, valid, and marketable title
thereto;

 

(b)          it consists of work-in-process Inventory, raw materials, components
which are not part of finished goods, supplies used or consumed in such
Borrower’s business, or Goods that constitute spare parts, maintenance parts,
packaging and shipping materials, or sample inventory or customer supplied parts
or Inventory;

 

(c)          it consists of Inventory that is perishable or live or where less
than 8 weeks remain until the Inventory’s stated expiration or “sell-by” or “use
by” date;

 

(d)          such Borrower does not have actual and exclusive possession thereof
(either directly or through a bailee or agent of such Borrower);

 

(e)          it is not located at one of the locations in the continental United
States set forth on Schedule 5.29 to the Information Certificate;

 

(f)          it is stored at locations holding less than $500,000 of the
aggregate value of Borrowers’ Inventory;

 

(g)          it is in-transit to or from a location of such Borrower (other than
in transit from one location set forth on Schedule 5.29 to the Information
Certificate to another location set forth on Schedule 5.29 to the Information
Certificate);

 

(h)          it is located on real property leased by such Borrower or in a
contract warehouse, in each case, unless it is subject to a Collateral Access
Agreement executed by the lessor or warehouseman, as the case may be, and unless
it is segregated or otherwise separately identifiable from Goods of others, if
any, stored on the premises;

 

(i)          it is the subject of a bill of lading or other document of title;

 

(j)          it is on consignment from any consignor; or on consignment to any
consignee or subject to any bailment unless the consignee or bailee has (i)
executed an agreement with Lender, and (ii) provided evidence acceptable to
Lender that the applicable Borrower has properly perfected a first priority
security interest in such consigned Inventory and has properly notified in
writing the other creditors of consignee who hold an interest in such Inventory
of Borrower’s security interest in such Inventory, and (iii) the applicable
Borrower has taken such other actions with respect to such consigned Inventory
as Lender may reasonably request;

 

(k)          it is not subject to a valid and perfected first priority Lender’s
Lien;

 

(l)          it consists of goods returned or rejected by such Borrower’s
customers;

 

(m)          it consists of Goods that are damaged, defective, obsolete or slow
moving;

 

Schedule 1.1
Page 11

 

 

(n)          it consists of Inventory that such Borrower has returned, has
attempted to return, is in the process of returning or intends to return to the
vendor of such Inventory;

 

(o)          it consists of Goods that are restricted or controlled, or
regulated items;

 

(p)          it consists of Goods that are bill and hold Goods;

 

(q)          it consists of damaged or defective Goods or “seconds”;

 

(r)          it is subject to third party trademark, licensing or other
proprietary rights, unless Lender is satisfied that such Inventory can be freely
sold by Lender on and after the occurrence of an Event of a Default despite such
third party rights;

 

(s)          it consists of customer-specific Inventory not supported by
purchase orders;

 

(t)          it consists of Eligible Export-Related Inventory; or

 

(u)          it consists of Inventory otherwise deemed ineligible by Lender in
its Permitted Discretion.

 

Any Inventory which is not Eligible Inventory shall nonetheless constitute
Collateral. For the avoidance of doubt, no item of Inventory shall constitute
both Eligible Inventory and Eligible Export-Related Inventory.

 

“Environmental Action” means any written complaint, summons, citation, notice,
directive, order, claim, litigation, investigation, judicial or administrative
proceeding, judgment, letter, or other written communication from any
Governmental Authority, or any third party involving violations of Environmental
Laws or releases of Hazardous Materials (a) from any assets, properties, or
businesses of any Loan Party, any Subsidiary of a Loan Party, or any of their
predecessors in interest, (b) from adjoining properties or businesses, or (c)
from or onto any facilities which received Hazardous Materials generated by any
Loan Party, any Subsidiary of a Loan Party, or any of their predecessors in
interest.

 

“Environmental Law” means any applicable federal, state, provincial, foreign or
local statute, law, rule, regulation, ordinance, code, binding and enforceable
guideline, binding and enforceable written policy, or rule of common law now or
hereafter in effect and in each case as amended, or any judicial or
administrative interpretation thereof, including any judicial or administrative
order, consent decree or judgment, in each case, to the extent binding on any
Loan Party or any of its Subsidiaries, relating to the environment, the effect
of the environment on employee health, or Hazardous Materials, in each case as
amended from time to time.

 

“Environmental Liabilities” means all liabilities, monetary obligations, losses,
damages, costs and expenses (including all reasonable fees, disbursements and
expenses of counsel, experts, or consultants, and costs of investigation and
feasibility studies), fines, penalties, sanctions, and interest incurred as a
result of any claim or demand, or Remedial Action required, by any Governmental
Authority or any third party, and which relate to any Environmental Action.

 

“Environmental Lien” means any Lien in favor of any Governmental Authority for
Environmental Liabilities.

 

“Equipment” means equipment (as that term is defined in the Code).

 

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended,
and any successor statute thereto.

 

“ERISA Affiliate” means (a) any Person subject to ERISA whose employees are
treated as employed by the same employer as the employees of any Loan Party or
its Subsidiaries under IRC Section 414(b), (b) any trade or business subject to
ERISA whose employees are treated as employed by the same employer as the
employees of any Loan Party or its Subsidiaries under IRC Section 414(c), (c)
solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any
organization subject to ERISA that is a member of an affiliated service group of
which any Loan Party or any of its Subsidiaries is a member under IRC Section
414(m), or (d) solely for purposes of Section 302 of ERISA and Section 412 and
430 of the IRC, any Person subject to ERISA that is a party to an arrangement
with any Loan Party or any of its Subsidiaries and whose employees are
aggregated with the employees of a Loan Party or its Subsidiaries under IRC
Section 414(o).

 

“Event of Default” has the meaning specified therefor in Section 9.

 

Schedule 1.1
Page 12

 

 

“Ex-Im Availability” means the amount determined pursuant to clause (c) of the
definition of “Borrowing Base”.

 

“Ex-Im Advance” means an Advance made against Ex-Im Availability.

 

“Ex-Im Bank” means The Export-Import Bank of the United States and any successor
thereto.

 

“Ex-Im Bank Reserve” means, from time to time, a reserve equal to ten percent
(10%) of the amount of outstanding Ex-Im Advances.

 

“Ex-Im Subfacility Amount” means $5,000,000.

 

“Ex-Im Subfacility Documents” means the Borrower Agreement, the Joint
Application, the Loan Authorization Notice, the Master Guaranty, and any other
agreement, document or instrument executed and/or delivered by any Borrower,
Lender or Ex-Im Bank in connection with any of the foregoing, including, without
limitation, any agreements between Lender and Ex-Im Bank establishing or
relating to the guaranty by Ex-Im Bank of the Ex-Im Advances.

 

“Excess Availability” means, as of any date of determination, the amount equal
to Availability minus the aggregate amount, if any, of all trade payables and
other obligations each Borrower and its Subsidiaries aged in excess of 30 days
beyond their terms as of the end of the immediately preceding month, and all
book overdrafts of each Borrower and its Subsidiaries, in each case as
determined by Lender in its Permitted Discretion.

 

“Exchange Act” means the Securities Exchange Act of 1934, as in effect from time
to time.

 

“Excluded Collateral” means (a) any Stock of any controlled foreign corporation
(as that term is defined in the IRC) (a “CFC”) solely to the extent that (i)
such Stock represents more than 65% of the outstanding voting Stock of such CFC,
and (ii) pledging or hypothecating more than 65% of the total outstanding voting
Stock of such CFC would result in material adverse tax consequences to
Borrowers, and (b) any rights or interest in any contract, lease, permit,
license, or license agreement covering real or personal property of any Borrower
if under the terms of such contract, lease, permit, license, or license
agreement, or applicable law with respect thereto, the grant of a security
interest or lien therein is prohibited as a matter of law or under the terms of
such contract, lease, permit, license, or license agreement and such prohibition
or restriction has not been waived or the consent of the other party to such
contract, lease, permit, license, or license agreement has not been obtained
(provided, that, (y) the foregoing exclusions from Collateral of this clause (b)
shall in no way be construed (1) to apply to the extent that any described
prohibition or restriction is unenforceable under Section 9-406, 9-407, 9-408,
or 9-409 of the Code or other applicable law, or (2) to apply to the extent that
any consent or waiver has been obtained that would permit Lender’s security
interest or other Lien notwithstanding the prohibition or restriction on the
pledge of such contract, lease, permit, license, or license agreement and (z)
the foregoing exclusions from Collateral contemplated by clauses (a) and (b)
shall in no way be construed to limit, impair, or otherwise affect any of
Lender’s continuing security interests in and other Liens upon any rights or
interests of any Borrower in or to (1) monies due or to become due under or in
connection with any described contract, lease, permit, license, license
agreement, or Stock (including any Accounts or Stock), or (2) any proceeds from
the sale, license, lease, or other dispositions of any such contract, lease,
permit, license, license agreement, or Stock).

 

“Export-Related Inventory” has the meaning given such term in the Borrower
Agreement.

 

“Fixtures” means fixtures (as that term is defined in the Code).

 

“Foreign Content” means, with respect to any Item, all of the labor, materials
and services which are not of United States origin or manufacture, or which are
not incorporated into such Item in the United States.

 

“Funding Date” means the date on which a Borrowing occurs.

 

“GAAP” means generally accepted accounting principles as in effect from time to
time in the United States, consistently applied; provided, however, that all
calculations relative to liabilities shall be made without giving effect to
Statement of Financial Accounting Standards No. 159.

 

“General Intangibles” means general intangibles (as that term is defined in the
Code), and includes payment intangibles, contract rights, rights to payment,
rights under Hedge Agreements (including the right to receive payment on account
of the termination (voluntarily or involuntarily) of any such Hedge Agreements),
rights arising under common law, statutes, or regulations, choses or things in
action, goodwill, Intellectual Property, Intellectual Property Licenses,
purchase orders, customer lists, monies due or recoverable from pension funds,
route lists, rights to payment and other rights under any royalty or licensing
agreements, including Intellectual Property Licenses, infringement claims,
pension plan refunds, pension plan refund claims, insurance premium rebates, tax
refunds, and tax refund claims, interests in a partnership or limited liability
company which do not constitute a security under Article 8 of the Code, and any
other personal property other than Commercial Tort Claims, money, Accounts,
Chattel Paper, Deposit Accounts, Goods, Investment Related Property, Negotiable
Collateral, and oil, gas, or other minerals before extraction.

 

Schedule 1.1
Page 13

 

 

“Goods” means goods (as that term is defined in the Code).

 

“Governing Documents” means, with respect to any Person, the certificate or
articles of incorporation, by-laws, or other organizational documents of such
Person.

 

“Governmental Authority” means any federal, state, local, or other governmental
or administrative body, instrumentality, board, department, or agency or any
court, tribunal, administrative hearing body, arbitration panel, commission, or
other similar dispute-resolving panel or body.

 

“Guarantors” means each Person that becomes a guarantor for all or any portion
of the Obligations after the Agreement Date, and each of them is a “Guarantor”.

 

“Guaranty” means any guaranty agreement delivered at any time by a Guarantor in
favor of Lender, and all of such guaranties are, collectively, the “Guaranties”.

 

“Hazardous Materials” means (a) substances that are defined or listed in, or
otherwise classified pursuant to, any applicable laws or regulations as
“hazardous substances,” “hazardous materials,” “hazardous wastes,” “toxic
substances,” or any other formulation intended to define, list, or classify
substances by reason of deleterious properties such as ignitability,
corrosivity, reactivity, carcinogenicity, reproductive toxicity, or “EP
toxicity”, (b) oil, petroleum, or petroleum derived substances, natural gas,
natural gas liquids, synthetic gas, drilling fluids, produced waters, and other
wastes associated with the exploration, development, or production of crude oil,
natural gas, or geothermal resources, (c) any explosives or any radioactive
materials, and (d) asbestos in any form or electrical equipment that contains
any oil or dielectric fluid containing levels of polychlorinated biphenyls in
excess of 50 parts per million.

 

“Hedge Agreement” means a “swap agreement” as that term is defined in Section
101(53B)(A) of the Bankruptcy Code.

 

“Hedge Obligations” means any and all obligations or liabilities, whether direct
or indirect, absolute or contingent, liquidated or unliquidated, determined or
undetermined, voluntary or involuntary, due, not due or to become due, incurred
in the past or now existing or hereafter arising, however arising of any Loan
Party or any of its/their Subsidiaries arising under, owing pursuant to, or
existing in respect of Hedge Agreements entered into with Lender or another Bank
Product Provider.

 

“Increased Reporting Period” means each period following the first to occur of
(a) the date on which Excess Availability is below $3,000,000, and (b) the date
on which Revolver Usage is greater than zero.

 

“Indebtedness” as to any Person means, without duplication, (a) all obligations
of such Person for borrowed money, (b) all obligations of such Person evidenced
by bonds, debentures, notes, or other similar instruments and all reimbursement
or other obligations in respect of letters of credit, bankers acceptances, or
other financial products, (c) all obligations of such Person as a lessee under
Capital Leases, (d) all obligations or liabilities of others secured by a Lien
on any asset of such Person, irrespective of whether such obligation or
liability is assumed, (e) all obligations of such Person to pay the deferred
purchase price of assets (other than trade payables incurred in the ordinary
course of business and repayable in accordance with customary trade practices),
(f) all obligations of such Person owing under Hedge Agreements (which amount
shall be calculated based on the amount that would be payable by such Person if
the Hedge Agreement were terminated on the date of determination), (g) any
Prohibited Preferred Stock of such Person, and (h) any obligation of such Person
guaranteeing or intended to guarantee (whether directly or indirectly
guaranteed, endorsed, co-made, discounted, or sold with recourse) any obligation
of any other Person that constitutes Indebtedness under any of clauses (a)
through (g) above. For purposes of this definition, (i) the amount of any
Indebtedness represented by a guaranty or other similar instrument shall be the
lesser of the principal amount of the obligations guaranteed and still
outstanding and the maximum amount for which the guaranteeing Person may be
liable pursuant to the terms of the instrument embodying such Indebtedness, and
(ii) the amount of any Indebtedness described in clause (d) above shall be the
lower of the amount of the obligation and the fair market value of the assets of
such Person securing such obligation.

 

“Indemnified Liabilities” has the meaning specified therefor in Section 11.3.

 

Schedule 1.1
Page 14

 

 

“Indemnified Person” has the meaning specified therefor in Section 11.3.

 

“Information Certificate” means the Information Certificate completed and
executed by the Loan Parties attached hereto as Exhibit E.

 

“Insolvency Proceeding” means any proceeding commenced by or against any Person
under any provision of the Bankruptcy Code or under any other state or federal
bankruptcy or insolvency law, assignments for the benefit of creditors,
receiverships, formal or informal moratoria, compositions, extensions generally
with creditors, or proceedings seeking reorganization, arrangement, or other
similar relief.

 

“Intellectual Property” means any and all Patents, Copyrights, Trademarks, trade
secrets, know-how, inventions (whether or not patentable), algorithms, software
programs (including source code and object code), processes, product designs,
industrial designs, blueprints, drawings, data, customer lists, URLs and domain
names, specifications, documentations, reports, catalogs, literature, and any
other forms of technology or proprietary information of any kind, including all
rights therein and all applications for registration or registrations thereof.

 

“Intellectual Property Licenses” means, with respect to any Person (the
“Specified Party”), (a) any licenses or other similar rights provided to the
Specified Party in or with respect to Intellectual Property owned or controlled
by any other Person, and (b) any licenses or other similar rights provided to
any other Person in or with respect to Intellectual Property owned or controlled
by the Specified Party, in each case, including (i) any software license
agreements (other than license agreements for commercially available
off-the-shelf software that is generally available to the public which have been
licensed to the Specified Party pursuant to end-user licenses), (ii) the license
agreements listed on Schedule 5.26(b) to the Information Certificate, and (iii)
the right to use any of the licenses or other similar rights described in this
definition in connection with the enforcement of Lender’s rights under the Loan
Documents.

 

“Intercompany Subordination Agreement” means an intercompany subordination
agreement, dated as of even date with this Agreement, executed and delivered by
each Borrower and Lender, the form and substance of which is reasonably
satisfactory to Lender.

 

“Interest Rate” means an interest rate equal to Daily Three Month LIBOR, which
interest rate shall change whenever Daily Three Month LIBOR changes.

 

“Inventory” means inventory (as that term is defined in the Code).

 

“Inventory Sublimit” means $3,000,000, as such amount may be increased from time
to time pursuant to an effective Inventory Sublimit Increase Request.

 

“Inventory Sublimit Increase Request” means a request by one or more Borrowers
to Lender for an increase in the Inventory Sublimit, which request shall be
provided at least 60 days prior to the proposed effective date of any such
increase. For the avoidance of doubt, Lender shall have no obligation to
increase the Inventory Sublimit, any such increase shall be conditioned upon
Lender’s receipt of a satisfactory appraisal with respect to Borrowers’
Inventory and such other items and information as Lender may require, and no
such increase in the Inventory Sublimit shall be effective unless and until
agreed to by Lender and Borrowers in a signed amendment to this Agreement on
terms and conditions acceptable to Lender.

 

“Investment” means, with respect to any Person, any investment by such Person in
any other Person (including Affiliates) in the form of loans, guarantees,
advances, capital contributions (excluding (a) commission, travel, and similar
advances to officers and employees of such Person made in the ordinary course of
business not to exceed $250,000 in the aggregate during any fiscal year of
Borrowers, and (b) bona fide Accounts arising in the ordinary course of
business), or acquisitions of Indebtedness, Stock, or all or substantially all
of the assets of such other Person (or of any division or business line of such
other Person), and any other items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP.

 

“Investment Related Property” means any and all investment property (as that
term is defined in the Code).

 

“IRC” means the Internal Revenue Code of 1986, as in effect from time to time.

 

“ISP” means, with respect to any Letter of Credit, the International Standby
Practices 1998 (International Chamber of Commerce Publication No. 590) and any
subsequent revision thereof adopted by the International Chamber of Commerce on
the date such Letter of Credit is issued.

 

Schedule 1.1
Page 15

 

 

“Items” means the finished goods or services which are intended for export from
the United States, as specified in Section 4(A) of the Loan Authorization
Notice.

 

“Joint Application” means the Joint Application for Working Capital Guarantee
made by Borrowers and Lender to Ex-Im Bank.

 

“Lender” has the meaning specified therefor in the preamble to this Agreement
and its successors and assigns.

 

“Lender Expenses” means all (a) reasonable costs or expenses (including taxes,
and insurance premiums) required to be paid by any Borrower or any of its
Subsidiaries or any Guarantor under any of the Loan Documents that are paid,
advanced, or incurred by Lender, (b) reasonable out-of-pocket fees or charges
paid or incurred by Lender in connection with Lender’s transactions with any
Borrower or any of its Subsidiaries or any Guarantor under any of the Loan
Documents, including, fees or charges for photocopying, notarization, couriers
and messengers, telecommunication, public record searches (including tax lien,
judgment lien, litigation, bankruptcy and Code searches and including searches
with the patent and trademark office, the copyright office, or the department of
motor vehicles), filing, recording, publication, appraisal (including periodic
collateral appraisals or business valuations to the extent of the fees and
charges (and up to the amount of any limitation contained in this Agreement),
real estate surveys, real estate title insurance policies and endorsements, and
environmental audits, (c) Lender’s customary fees and charges (as adjusted from
time to time) with respect to the disbursement of funds (or the receipt of
funds) to or for the account of Borrowers (whether by wire transfer or
otherwise), together with any out of pocket costs and expenses incurred in
connection therewith, (d) out-of-pocket charges paid or incurred by Lender
resulting from the dishonor of checks payable by or to any Loan Party, (e)
reasonable out-of-pocket costs and expenses paid or incurred by Lender to
correct any default or enforce any provision of the Loan Documents, or during
the continuance of an Event of Default, in gaining possession of, maintaining,
handling, preserving, storing, shipping, selling, preparing for sale, or
advertising to sell the Collateral, or any portion thereof, irrespective of
whether a sale is consummated, (f) fees and expenses to initiate electronic
reporting by Borrowers to Lender, (g) reasonable out-of-pocket examination fees
and expenses (including reasonable travel, meals, and lodging) of Lender related
to any inspections, audits, examinations, or appraisals to the extent of the
fees and charges (and up to the amount of any limitation) contained in this
Agreement, (h) reasonable out-of-pocket costs and expenses of third party claims
or any other suit paid or incurred by Lender in enforcing or defending the Loan
Documents or in connection with the transactions contemplated by the Loan
Documents or Lender’s relationship with any Loan Party or any of its
Subsidiaries, (i) Lender’s reasonable costs and expenses (including reasonable
attorneys fees) incurred in advising, structuring, drafting, reviewing,
administering (including reasonable travel, meals, and lodging), or amending the
Loan Documents, (j) Lender’s reasonable costs and expenses (including reasonable
attorneys, accountants, consultants, and other advisors fees and expenses)
incurred in terminating, enforcing (including reasonable attorneys, accountants,
consultants, and other advisors fees and expenses incurred in connection with a
“workout,” a “restructuring,” or an Insolvency Proceeding concerning any Loan
Party or any of its Subsidiaries or in exercising rights or remedies under the
Loan Documents), or defending the Loan Documents, irrespective of whether suit
is brought, or in taking any Remedial Action concerning the Collateral, and (k)
usage charges, charges, fees, costs and expenses for amendments, renewals,
extensions, transfers, or drawings from time to time imposed by Lender in
respect of Letters of Credit and out-of-pocket charges, fees, costs and expenses
paid or incurred by Lender in connection with the issuance, amendment, renewal,
extension, or transfer of, or drawing under, any Letter of Credit or any demand
for payment thereunder.

 

“Lender Representatives” has the meaning specified therefor in Section 17.8(a).

 

“Lender-Related Persons” means Lender, together with its Affiliates (including
in their capacity as a Bank Product Provider), officers, directors, employees,
attorneys, and agents.

 

“Lender’s Liens” mean the Liens granted by Borrowers and the other Loan Parties
and their Subsidiaries to Lender for its benefit and for the benefit of any Bank
Product Provider under the Loan Documents.

 

“Letter of Credit” means a letter of credit (as that term is defined in the
Code) issued by Lender.

 

“Letter of Credit Agreements” means a Letter of Credit Application, together
with any and all related letter of credit agreements pursuant to which Lender
agrees to issue, amend, or extend a Letter of Credit, or pursuant to which
Borrowers agree to reimburse Lender for all Letter of Credit Disbursements, each
such application and related agreement to be in the form specified by Lender
from time to time.

 

“Letter of Credit Application” means an application requesting Lender to issue,
amend, or extend a Letter of Credit, each such application to be in the form
specified by Lender from time to time.

 

Schedule 1.1
Page 16

 

 

“Letter of Credit Collateralization” means either (a) providing cash collateral
(pursuant to documentation reasonably satisfactory to Lender, including
provisions that specify that the Letter of Credit fee and all usage charges set
forth in this Agreement and the Letter of Credit Agreements will continue to
accrue while the Letters of Credit are outstanding) to be held by Lender for the
benefit of Lender in an amount equal to 110% of the then existing Letter of
Credit Usage, (b) delivering to Lender the original of each Letter of Credit,
together with documentation executed by all beneficiaries under each Letter of
Credit in form and substance acceptable to Lender terminating all of such
beneficiaries’ rights under such Letters of Credit, or (c) providing Lender with
a standby letter of credit, in form and substance reasonably satisfactory to
Lender, from a commercial bank acceptable to Lender (in its sole discretion) in
an amount equal to 110% of the then existing Letter of Credit Usage (it being
understood that the Letter of Credit fee and all usage charges set forth in this
Agreement will continue to accrue while the Letters of Credit are outstanding
and that any such fees that accrue must be an amount that can be drawn under any
such standby letter of credit).

 

“Letter of Credit Disbursement” means a payment made by Lender pursuant to a
Letter of Credit.

 

“Letter of Credit Indemnified Costs” has the meaning specified therefor in
Section 2.13(e) of this Agreement.

 

“Letter of Credit Related Person” has the meaning specified therefor in Section
2.13(e) of this Agreement.

 

“Letter of Credit Usage” means, as of any date of determination, the sum of (a)
the aggregate undrawn amount of all outstanding Letters of Credit, and (b) the
aggregate amount of outstanding reimbursement obligations with respect to
Letters of Credit.

 

“Lien” means any mortgage, deed of trust, pledge, hypothecation, assignment,
charge, deposit arrangement, encumbrance, easement, lien (statutory or other),
security interest, or other security arrangement and any other preference,
priority, or preferential arrangement of any kind or nature whatsoever,
including any conditional sale contract or other title retention agreement, the
interest of a lessor under a Capital Lease and any synthetic or other financing
lease having substantially the same economic effect as any of the foregoing.

 

“Loan Account” has the meaning specified therefor in Section 2.8.

 

“Loan Authorization Notice” means the Loan Authorization Notice executed and
delivered in connection with the guaranty by Ex-Im Bank of the Ex-Im Advances.

 

“Loan Documents” means this Agreement, any Borrowing Base Certificate, the
Control Agreements, the Cash Management Documents, each Patent and Trademark
Security Agreement, each Copyright Security Agreement, each Guaranty, the Ex-Im
Subfacility Documents, the Intercompany Subordination Agreement, the Letters of
Credit, the Revolving Notes, any other note or notes executed by any Borrower in
connection with this Agreement and payable to Lender, any Letter of Credit
Applications and other Letter of Credit Agreements entered into by any Loan
Party in connection with this Agreement, and any other instrument or agreement
entered into, now or in the future, by any Loan Party or any of its Subsidiaries
and Lender and/or Ex-Im Bank in connection with this Agreement and/or one or
more Ex-Im Subfacility Documents, but specifically excluding all Hedge
Agreements.

 

“Loan Management Service” means Lender’s proprietary automated loan management
program currently known as “Loan Manager” and any successor service or product
of Lender which performs similar services.

 

“Loan Parties” means collectively, each Borrower and each Guarantor, and each of
them is a “Loan Party”.

 

“Lockbox” means the “Lockbox”, as defined and described in the Cash Management
Documents.

 

“Margin Stock” as defined in Regulation U of the Board of Governors of the
Federal Reserve System as in effect from time to time.

 

“Master Guaranty” means that certain Master Guarantee Agreement Number
MN-MGA-05-001 dated as of November 1, 2005 by and between Lender and Ex-Im Bank.

 

“Material Adverse Change” means (a) a material adverse change in the business,
operations, results of operations, assets, liabilities or condition (financial
or otherwise) of Borrowers and their Subsidiaries taken as a whole, (b) a
material impairment of the ability of any Loan Party or any of its Subsidiaries
to perform its obligations under the Loan Documents to which it is a party or of
Lender’s ability to enforce the Obligations or realize upon the Collateral, or
(c) a material impairment of the enforceability or priority of Lender’s Liens
with respect to the Collateral as a result of an action or failure to act on the
part of any Loan Party or its Subsidiaries.

 

Schedule 1.1
Page 17

 

 

“Material Contract” means, with respect to any Person, (a) each contract or
agreement to which such Person or any of its Subsidiaries is a party involving
aggregate consideration payable to or by such Person or such Subsidiary of
$1,000,000 or more (other than purchase orders in the ordinary course of the
business of such Person or such Subsidiary), (b) all other contracts or
agreements, the loss of which could reasonably be expected to result in a
Material Adverse Change, and (c) the Cree Contract.

 

“Maturity Date” has the meaning specified therefor in Section 2.9.

 

“Maximum Revolver Amount” means $10,000,000, decreased by permanent reductions
in such amount made in accordance with Section 2.11.

 

“Moody’s” has the meaning specified therefor in the definition of Cash
Equivalents.

 

“Negotiable Collateral” means letters of credit, letter-of-credit rights,
instruments, promissory notes, drafts and documents (as each such term is
defined in the Code).

 

“Net Liquidation Percentage” means the percentage of the Value of a Borrower’s
Inventory that is estimated to be recoverable in an orderly liquidation of such
Inventory as set forth in the most recent acceptable appraisal received by
Lender and upon which Lender may rely, net of all operating expenses and
associated costs and expenses of such liquidation, such percentage to be as
determined from time to time by an appraisal company selected or approved by
Lender with such most recent acceptable appraisal to be in form, scope,
methodology and content acceptable to Lender in its Permitted Discretion.

 

“Non-Financed Capital Expenditures” means Capital Expenditures not financed by
the seller of the capital asset, by a third party lender or by means of any
extension of credit by Lender other than by means of an Advance under the
Revolving Credit Facility.

 

“Obligations” means (a) all loans (including the Advances), debts, principal,
interest (including any interest that accrues after the commencement of an
Insolvency Proceeding, regardless of whether allowed or allowable in whole or in
part as a claim in any such Insolvency Proceeding), reimbursement or
indemnification obligations with respect to Letters of Credit (irrespective of
whether contingent), premiums, liabilities (including all amounts charged to the
Loan Account pursuant to this Agreement), obligations (including indemnification
obligations), fees, Lender Expenses (including any fees or expenses that accrue
after the commencement of an Insolvency Proceeding, regardless of whether
allowed or allowable in whole or in part as a claim in any such Insolvency
Proceeding), guaranties, and all covenants and duties of any other kind and
description owing by any Loan Party pursuant to or evidenced by this Agreement
or any of the other Loan Documents and irrespective of whether for the payment
of money, whether direct or indirect, absolute or contingent, liquidated or
unliquidated, determined or undetermined, voluntary or involuntary, due, not due
or to become due, sole, joint, several or joint and several, incurred in the
past or now existing or hereafter arising, however arising, and including all
interest not paid when due, and all other expenses or other amounts that any
Borrower or any other Loan Party is required to pay or reimburse by the Loan
Documents or by law or otherwise in connection with the Loan Documents, and (b)
all Bank Product Obligations. Any reference in this Agreement or in the Loan
Documents to the Obligations shall include all or any portion thereof and any
extensions, modifications, renewals, or alterations thereof, both prior and
subsequent to any Insolvency Proceeding.

 

“OFAC” means The Office of Foreign Assets Control of the U.S. Department of the
Treasury.

 

“Overadvance Amount” has the meaning specified therefor in Section 2.4(e).

 

“Parent” has the meaning specified in the introductory paragraph of this
Agreement.

 

“Pass-Through Tax Liabilities” means the amount of state and federal income tax
paid or to be paid by the owner of any Stock in a Borrower on taxable income
earned by a Borrower and attributable to such owner of Stock as a result of such
Borrower’s “pass-through” tax status, assuming the highest marginal income tax
rate for federal and state (for the state or states in which any owner of Stock
is liable for income taxes with respect to such income) income tax purposes,
after taking into account any deduction for state income taxes in calculating
the federal income tax liability and all other deductions, credits, deferrals
and other reductions available to such owners of Stock from or through such
Borrower.

 

Schedule 1.1
Page 18

 

 

“Patents” means patents and patent applications, including (a) the patents and
patent applications listed on Schedule 5.26(b) to the Information Certificate,
(b) all continuations, divisionals, continuations-in-part, re-examinations,
reissues, and renewals thereof and improvements thereon, (c) all income,
royalties, damages and payments now and hereafter due or payable under and with
respect thereto, including payments under all licenses entered into in
connection therewith and damages and payments for past, present, or future
infringements thereof, (d) the right to sue for past, present, and future
infringements thereof, and (e) all of each Loan Party’s rights corresponding
thereto throughout the world.

 

“Patent and Trademark Security Agreement” means each Patent and Trademark
Security Agreement executed and delivered by the applicable Loan Party in favor
of Lender, in form and substance acceptable to Lender.

 

“Patriot Act” has the meaning specified therefor in Section 5.18 of Exhibit D to
this Agreement.

 

“Pension Plan” means a pension plan (as defined in Section 3(2) of ERISA)
maintained for employees of any Borrower or any of its Subsidiaries or any ERISA
Affiliate and covered by Title IV of ERISA.

 

“Permitted Discretion” means a determination made in the exercise of Lender’s
reasonable (from the perspective of a secured lender) business judgment.

 

“Permitted Dispositions” means:

 

(a)          sales, abandonment, or other dispositions of Equipment that is
substantially worn, damaged, unusable in Borrowers’ business, or obsolete in the
ordinary course of business;

 

(b)          sales of Inventory to buyers in the ordinary course of business;

 

(c)          the sale or discount, in each case without recourse, of Accounts
(but only to the extent the same are not included as Eligible Accounts on the
most recent Borrowing Base Certificate submitted to Lender) arising in the
ordinary course of business, but only in connection with the compromise or
collection thereof;

 

(d)          the granting of Permitted Liens;

 

(e)          the making of a Restricted Junior Payment that is expressly
permitted to be made pursuant to this Agreement;

 

(f)          the making of a Permitted Investment; and

 

(g)          so long as no Event of Default exists, the sale, assignment,
disposition or other conveyance of assets by one Borrower to another Borrower.

 

“Permitted Indebtedness” means:

 

(a)          Indebtedness evidenced by this Agreement or the other Loan
Documents;

 

(b)          Indebtedness set forth on Schedule 5.19 to the Information
Certificate and any Refinancing Indebtedness in respect of such Indebtedness;

 

(c)          Purchase Money Indebtedness and any Refinancing Indebtedness in
respect of such Indebtedness;

 

(d)          endorsement of instruments or other payment items for deposit;

 

(e)          the incurrence by any Loan Party or its/their Subsidiaries of
Indebtedness under Hedge Agreements that are incurred for the bona fide purpose
of hedging the interest rate, commodity, or foreign currency risks associated
with such Loan Party’s and its/their Subsidiaries’ operations and not for
speculative purposes;

 

(f)          Indebtedness incurred in respect of Bank Products other than
pursuant to Hedge Agreements; and

 

(g)          Indebtedness constituting Permitted Investments.

 

“Permitted Intercompany Advances” means loans made by (a) a Loan Party to
another Loan Party, (b) a Subsidiary of a Loan Party which is not a Loan Party
to another Subsidiary of a Loan Party which is not a Loan Party, and (c) a
Subsidiary of a Loan Party which is not a Loan Party to a Loan Party, so long as
the parties thereto are party to the Intercompany Subordination Agreement.

 

Schedule 1.1
Page 19

 

 

“Permitted Investments” means:

 

(a)          Investments in cash and Cash Equivalents;

 

(b)          Investments in negotiable instruments deposited or to be deposited
for collection in the ordinary course of business;

 

(c)          advances made in connection with purchases of Goods or services in
the ordinary course of business;

 

(d)          Investments owned by any Loan Party or any of its Subsidiaries on
the Agreement Date and set forth on Schedule P-1;

 

(e)          Permitted Intercompany Advances;

 

(f)          Investments resulting from entering into (i) Bank Product
Agreements, or (ii) agreements relative to Indebtedness that is permitted under
clause (g) of the definition of Permitted Indebtedness;

 

(g)          Investments received in settlement of amounts due to any Loan Party
or any of its Subsidiaries effected in the ordinary course of business or owing
to any Loan Party or any of its Subsidiaries as a result of Insolvency
Proceedings involving an Account Debtor or upon the foreclosure or enforcement
of any Lien in favor of a Loan Party or its Subsidiaries;

 

(h)          to the extent constituting Investments, Capital Expenditures
permitted pursuant to Section 8(b); and

 

(i)          Investments consisting of the issuance or ownership of Stock, or
capital contributions, by a Borrower in or to another Borrower.

 

“Permitted Liens” means

 

(a)          Liens granted to, or for the benefit of, Lender to secure the
Obligations;

 

(b)          Liens for unpaid taxes, assessments, or other governmental charges
or levies that either (i) are not yet delinquent, or (ii) do not have priority
over Lender’s Liens and the underlying taxes, assessments, or charges or levies
are the subject of Permitted Protests;

 

(c)          judgment Liens arising solely as a result of the existence of
judgments, orders, or awards that do not constitute an Event of Default under
Section 9.3;

 

(d)          Liens set forth on Schedule P-2; provided, however, that to qualify
as a Permitted Lien, any such Lien described on Schedule P-2 shall only secure
the Indebtedness or other obligation that it secures on the Agreement Date and
any Refinancing Indebtedness in respect thereof;

 

(e)          the interests of lessors under operating leases and non-exclusive
licensors under license agreements;

 

(f)          purchase money Liens on Equipment or the interests of lessors of
Equipment under Capital Leases to the extent that such Liens or interests secure
Purchase Money Indebtedness and so long as (i) such Lien attaches only to the
Equipment purchased or acquired and the proceeds thereof, and (ii) such Lien
only secures the Indebtedness that was incurred to acquire the Equipment
purchased or acquired or any Refinancing Indebtedness in respect thereof;

 

(g)          Liens that are replacements of Permitted Liens to the extent that
the original Indebtedness is the subject of permitted Refinancing Indebtedness
and so long as the replacement Liens only encumber those assets that secured the
original Indebtedness;

 

Schedule 1.1
Page 20

 

 

(h)          Liens arising by operation of law in favor of warehousemen,
landlords, carriers, mechanics, materialmen, laborers, or suppliers, in each
case to the extent incurred in the ordinary course of business and not in
connection with the borrowing of money, and which Liens either (i) are for sums
not yet delinquent, or (ii) are the subject of Permitted Protests; and

 

(i)          a security interest in favor of Cree pursuant to the Cree Contract,
but only to the extent that such security interest of Cree (i) is junior in
priority to the Security Interest, (ii) attaches only to goods sold by Cree to
Parent, and (iii) secures only the unpaid purchase price of such goods owing by
Parent to Cree.

 

“Permitted Preferred Stock” means and refers to any Preferred Stock issued by a
Borrower (and not by one or more of its Subsidiaries) that is not Prohibited
Preferred Stock.

 

“Permitted Protest” means the right of any Borrower or any other Loan Party or
any of their respective Subsidiaries to protest any Lien (other than any Lien
that secures the Obligations), taxes (other than payroll taxes or taxes that are
the subject of a United States federal tax lien), or rental payment, provided
that (a) a reserve with respect to such obligation is established on books and
records of such Borrower, such other Loan Party or such Subsidiary in such
amount as is required under GAAP, (b) any such protest is instituted promptly
and prosecuted diligently by such Borrower, Loan Party or Subsidiary, as
applicable, in good faith, and (c) Lender is satisfied that, while any such
protest is pending, there will be no impairment of the enforceability, validity,
or priority of any of Lender’s Liens.

 

“Person” means natural persons, corporations, limited liability companies,
limited partnerships, general partnerships, limited liability partnerships,
joint ventures, trusts, land trusts, business trusts, or other organizations,
irrespective of whether they are legal entities, and governments and agencies
and political subdivisions thereof.

 

“Plan” means an employee benefit plan (as defined in Section 3(3) of ERISA)
maintained for employees of any Borrower or any of its Subsidiaries or any ERISA
Affiliate.

 

“Preferred Stock” means, as applied to the Stock of any Person, the Stock of any
class or classes (however designated) that is preferred with respect to the
payment of dividends, or as to the distribution of assets upon any voluntary or
involuntary liquidation or dissolution of such Person, over shares of Stock of
any other class of such Person.

 

“Prime Rate” means at any time the rate of interest most recently announced by
Lender at its principal office as its Prime Rate, with the understanding that
the Prime Rate is one of Lender’s base rates, and serves as the basis upon which
effective rates of interest are calculated for those loans making reference to
it, and is evidenced by its recording in such internal publication or
publications as Lender may designate. Each change in the rate of interest shall
become effective on the date each Prime Rate change is announced by Lender.

 

“Proceeds” has the meaning specified therefor in the definition of “Collateral”
set forth in Schedule 1.1.

 

“Prohibited Preferred Stock” means any Preferred Stock that by its terms is
mandatorily redeemable or subject to any other payment obligation (including any
obligation to pay dividends, other than dividends of shares of Preferred Stock
of the same class and series payable in kind or dividends of shares of common
stock) on or before a date that is less than 1 year after the Maturity Date, or,
on or before the date that is less than 1 year after the Maturity Date, is
redeemable at the option of the holder thereof for cash or assets or securities
(other than distributions in kind of shares of Preferred Stock of the same class
and series or of shares of common stock).

 

“Projections” means Borrowers’ forecasted (a) balance sheets, (b) profit and
loss statements, (c) Availability projections, and (d) cash flow statements, all
prepared on a consolidated basis consistent with such Borrower’s historical
financial statements, together with appropriate supporting details and a
statement of underlying assumptions.

 

“Protective Advance” has the meaning specified therefor in Section 2.3(d).

 

“PTO” means the United States Patent and Trademark Office.

 

“Purchase Money Indebtedness” means Indebtedness (other than the Obligations,
but including Capitalized Lease Obligations), incurred at the time of, or within
20 days after, the acquisition of any fixed assets for the purpose of financing
all or any part of the acquisition cost thereof.

 

“Real Property” means any estates or interests in real property now owned or
hereafter acquired by a Loan Party and the improvements thereto.

 

Schedule 1.1
Page 21

 

 

“Record” means information that is inscribed on a tangible medium or that is
stored in an electronic or other medium and is retrievable in perceivable form.

 

“Refinancing Indebtedness” means refinancings, renewals, or extensions of
Indebtedness so long as:

 

(a)          such refinancings, renewals, or extensions do not result in an
increase in the principal amount of the Indebtedness so refinanced, renewed, or
extended, other than by the amount of premiums paid thereon and the fees and
expenses incurred in connection therewith and by the amount of unfunded
commitments with respect thereto,

 

(b)          such refinancings, renewals, or extensions do not result in a
shortening of the average weighted maturity (measured as of the refinancing,
renewal, or extension) of the Indebtedness so refinanced, renewed, or extended,
nor are they on terms or conditions that, taken as a whole, are or could
reasonably be expected to be materially adverse to the interests of Lender,

 

(c)          if the Indebtedness that is refinanced, renewed, or extended was
subordinated in right of payment to the Obligations, then the terms and
conditions of the refinancing, renewal, or extension must include subordination
terms and conditions that, taken as a whole, are at least as favorable to Lender
as those that were applicable to the refinanced, renewed, or extended
Indebtedness, and

 

(d)          the Indebtedness that is refinanced, renewed, or extended is not
recourse to any Person that is liable on account of the Obligations other than
those Persons which were obligated with respect to the Indebtedness that was
refinanced, renewed, or extended.

 

“Remedial Action” means all actions taken to (a) clean up, remove, remediate,
contain, treat, monitor, assess, evaluate, or in any way address Hazardous
Materials in the indoor or outdoor environment, (b) prevent or minimize a
release or threatened release of Hazardous Materials so they do not migrate or
endanger or threaten to endanger public health or welfare or the indoor or
outdoor environment, (c) restore or reclaim natural resources or the
environment, (d) perform any pre-remedial studies, investigations, or
post-remedial operation and maintenance activities, or (e) conduct any other
actions with respect to Hazardous Materials required by Environmental Laws.

 

“Reserves” means, as of any date of determination, the sum of (a) an amount or
percent of a specified item or category of items that Lender establishes from
time to time in its Permitted Discretion to reduce Availability under the
Borrowing Base or the Maximum Revolver Amount to reflect (i) such matters,
events, conditions, contingencies or risks which affect or which may reasonably
be expected to affect the assets, business or prospects of a Borrower, any other
Loan Party or the Collateral or its value or the enforceability, perfection or
priority of Lender’s Liens in the Collateral, or (ii) Lender’s judgment that any
collateral report or financial information relating to a Borrower or any other
Loan Party delivered to Lender is incomplete, inaccurate or misleading in any
material respect, plus (b) the Ex-Im Bank Reserve, the Dilution Reserve and the
Bank Product Reserve Amount. Without limiting the generality of the foregoing,
Lender may, from time to time in its Permitted Discretion, establish a Reserve
for the amounts owing by one or more Borrowers to Cree.

 

“Restricted Junior Payment” means (a) any declaration or payment of any dividend
or the making of any other payment or distribution on account of Stock issued by
any Loan Party (including any payment in connection with any merger or
consolidation involving any Loan Party) or to the direct or indirect holders of
Stock issued by any Loan Party in their capacity as such (other than dividends
or distributions payable in Stock (other than Prohibited Preferred Stock) issued
by any Loan Party, or (b) any purchase, redemption, or other acquisition or
retirement for value (including in connection with any merger or consolidation
involving any Loan Party) of any Stock issued by any Loan Party, in each case,
so long as no Event of Default exists, a dividend or distribution paid by one
Borrower to another or a purchase, redemption or other acquisition of the Stock
of one Borrower by another Borrower.

 

“Revolver Usage” means, as of any date of determination, the sum of (a) the
amount of outstanding Advances, plus (b) the amount of the Letter of Credit
Usage.

 

“Revolving Credit Facility” means the revolving line of credit facility
described in Section 2.1 and Section 2.13 pursuant to which Lender provides
Advances to Borrowers and issues Letters of Credit for the account of Borrowers.

 

“Revolving Note” means each of Borrowers’ revolving promissory notes in
connection with this Agreement, payable to the order of Lender and in form and
substance acceptable to Lender, as the same may be renewed and amended from time
to time, and all replacements thereof.

 

Schedule 1.1
Page 22

 

 

“Sanctioned Entity” means (a) a country or a government of a country, (b) an
agency of the government of a country, (c) an organization directly or
indirectly controlled by a country or its government, or (d) a Person resident
in or determined to be resident in a country, in each case, that is subject to a
country sanctions program administered and enforced by OFAC.

 

“Sanctioned Person” means a person named on the list of Specially Designated
Nationals maintained by OFAC.

 

“S&P” has the meaning specified therefor in the definition of Cash Equivalents.

 

“SEC” means the United States Securities and Exchange Commission and any
successor thereto.

 

“Securities Account” means a securities account (as that term is defined in the
Code).

 

“Securities Act” means the Securities Act of 1933, as amended from time to time,
and any successor statute.

 

“Security Interest” has the meaning specified therefor in Section 3.1.

 

“Solvent” means, with respect to any Person as of any date of determination,
that (a) at fair valuations, the sum of such Person’s debts (including
contingent liabilities) is less than all of such Person’s assets, (b) such
Person is not engaged or about to engage in a business or transaction for which
the remaining assets of such Person are unreasonably small in relation to the
business or transaction or for which the property remaining with such Person is
an unreasonably small capital, and (c) such Person has not incurred and does not
intend to incur, or reasonably believe that it will incur, debts beyond its
ability to pay such debts as they become due (whether at maturity or otherwise),
and (d) such Person is “solvent” or not “insolvent”, as applicable within the
meaning given those terms and similar terms under applicable laws relating to
fraudulent transfers and conveyances. For purposes of this definition, the
amount of any contingent liability at any time shall be computed as the amount
that, in light of all of the facts and circumstances existing at such time,
represents the amount that can reasonably be expected to become an actual or
matured liability (irrespective of whether such contingent liabilities meet the
criteria for accrual under Statement of Financial Accounting Standard No. 5).

 

“Standard Letter of Credit Practice” means, for Lender, any domestic or foreign
law or letter of credit practices applicable in the city in which Lender issued
the applicable Letter of Credit or, for its branch or correspondent, such laws
and practices applicable in the city in which it has advised, confirmed or
negotiated such Letter of Credit, as the case may be, in each case, (a) which
letter of credit practices are of banks that regularly issue letters of credit
in the particular city, and (b) which laws or letter of credit practices are
required or permitted under ISP or UCP 600, as chosen in the applicable Letter
of Credit.

 

“Stock” means all shares, options, warrants, interests, participations, or other
equivalents (regardless of how designated) of or in a Person, whether voting or
nonvoting, including common stock, preferred stock, or any other “equity
security” (as such term is defined in Rule 3a11-1 of the General Rules and
Regulations promulgated by the SEC under the Exchange Act).

 

“Subsidiary” of a Person means a corporation, partnership, limited liability
company, or other entity in which that Person directly or indirectly owns or
controls the shares of Stock having ordinary voting power to elect a majority of
the board of directors (or appoint other comparable managers) of such
corporation, partnership, limited liability company, or other entity.

 

“Supporting Obligations” means supporting obligations (as such term is defined
in the Code), and includes letters of credit and guaranties issued in support of
Accounts, Chattel Paper, documents, General Intangibles, instruments or
Investment Related Property.

 

“Taxes” means any taxes, levies, imposts, duties, fees, assessments or other
charges of whatever nature now or hereafter imposed by any jurisdiction or by
any political subdivision or taxing authority thereof or therein with respect to
such payments and all interest, penalties or similar liabilities with respect
thereto; provided, however, that Taxes shall exclude any tax imposed on the net
income or net profits of Lender (including any branch profits taxes), in each
case imposed by the jurisdiction (or by any political subdivision or taxing
authority thereof in which Lender is organized or the jurisdiction (or by any
political subdivision or taxing authority thereof) in which Lender’s principal
office is located in each case as a result of a present or former connection
between Lender and the jurisdiction or taxing authority imposing the tax (other
than any such connection arising solely from Lender having executed, delivered
or performed its obligations or received payment under, or enforced its rights
or remedies under this Agreement or any other Loan Document).

 

Schedule 1.1
Page 23

 

 

“Termination Date” has the meaning specified therefor in Section 2.9.

 

“Trademarks” means any and all trademarks, trade names, registered trademarks,
trademark applications, service marks, registered service marks and service mark
applications, including (a) the trade names, registered trademarks, trademark
applications, registered service marks and service mark applications listed on
Schedule 5.26(b) to the Information Certificate, (b) all renewals thereof, (c)
all income, royalties, damages and payments now and hereafter due or payable
under and with respect thereto, including payments under all licenses entered
into in connection therewith and damages and payments for past or future
infringements or dilutions thereof, (d) the right to sue for past, present and
future infringements and dilutions thereof, (e) the goodwill of each Loan
Party’s business symbolized by the foregoing or connected therewith, and (f) all
of each Loan Party’s rights corresponding thereto throughout the world.

 

“UCP 600” means, with respect to any Letter of Credit, the Uniform Customs and
Practice for Documentary Credits 2007 Revision, International Chamber of
Commerce Publication No. 600 and any subsequent revision thereof adopted by the
International Chamber of Commerce on the date such Letter of Credit is issued.

 

“United States” means the United States of America.

 

“URL” means “uniform resource locator,” an internet web address.

 

“U.S. Content” has the meaning ascribed to such term in the Borrower Agreement.

 

“Value” means, as determined by Lender in good faith in its Permitted
Discretion, with respect to Inventory, the lower of (a) cost computed on a
weighted average cost basis in accordance with GAAP or (b) market value,
provided that for purposes of the calculation of the Borrowing Base, (i) the
Value of the Inventory shall not include: (A) the portion of the value of
Inventory equal to the profit earned by any Affiliate on the sale thereof to any
Borrower or (B) write-ups or write-downs in value with respect to changes in
currency exchange rates and (ii) notwithstanding anything to the contrary
contained herein, the cost of the Inventory shall be computed in the same manner
and consistent with the most recent appraisal of the Inventory received and
accepted by Lender, if any.

 

“Voidable Transfer” has the meaning specified therefor in Section 17.7.

 

b.           Accounting Terms. All accounting terms not specifically defined
herein shall be construed in accordance with GAAP; provided, however, that if
any Borrower notifies Lender that such Borrower requests an amendment to any
provision hereof to eliminate the effect of any change in accounting principles
required by the promulgation of any rule, regulation, pronouncement or opinion
by the Financial Accounting Standards Board of the American Institute of
Certified Public Accountants (or successor thereto or any agency with similar
functions) (an “Accounting Change”) occurring after the Agreement Date, or in
the application thereof (or if Lender notifies any Borrower that Lender requests
an amendment to any provision hereof for such purpose), regardless of whether
any such notice is given before or after such Accounting Change or in the
application thereof, then Lender and Borrowers agree that they will negotiate in
good faith amendments to the provisions of this Agreement that are directly
affected by such Accounting Change with the intent of having the respective
positions of Lender and each Borrower after such Accounting Change conform as
nearly as possible to their respective positions as of the date of this
Agreement and, until any such amendments have been agreed upon, the provisions
in this Agreement shall be calculated as if no such Accounting Change had
occurred. Whenever used herein, the term “financial statements” shall include
the footnotes and schedules thereto. Whenever the term “Borrower” is used in
respect of a financial covenant or a related definition, it shall be understood
to mean Borrowers and their respective Subsidiaries on a consolidated basis,
unless the context clearly requires otherwise.

 

c.           Code. Any terms used in this Agreement that are defined in the Code
shall be construed and defined as set forth in the Code unless otherwise defined
herein. The meaning of any term defined herein by reference to the Code will not
be limited by reason of any limitation set forth on the scope of the Code,
whether under Section 9-109 of the Code, by reason of federal preemption or
otherwise.

 

Schedule 1.1
Page 24

 

 

d.           Construction. Unless the context of this Agreement or any other
Loan Document clearly requires otherwise, references to the plural include the
singular, references to the singular include the plural, the terms “includes”
and “including” are not limiting, and the term “or” has, except where otherwise
indicated, the inclusive meaning represented by the phrase “and/or.” The words
“hereof,” “herein,” “hereby,” “hereunder,” and similar terms in this Agreement
or any other Loan Document refer to this Agreement or such other Loan Document,
as the case may be, as a whole and not to any particular provision of this
Agreement or such other Loan Document, as the case may be. Section, subsection,
clause, schedule, and exhibit references herein are to this Agreement unless
otherwise specified. Any reference in this Agreement or in any other Loan
Document to any agreement, instrument, or document shall include all
alterations, amendments, changes, extensions, modifications, renewals,
replacements, substitutions, joinders, and supplements, thereto and thereof, as
applicable (subject to any restrictions on such alterations, amendments,
changes, extensions, modifications, renewals, replacements, substitutions,
joinders, and supplements set forth herein). The words “asset” and “property”
shall be construed to have the same meaning and effect and to refer to any and
all tangible and intangible assets and properties, including cash, securities,
accounts, and contract rights. Any reference herein or in any other Loan
Document to the satisfaction, repayment, or payment in full of the Obligations
shall mean the repayment in full in cash or immediately available funds (or, (a)
in the case of contingent reimbursement obligations with respect to Letters of
Credit, providing Letter of Credit Collateralization, and (b) in the case of
obligations with respect to Bank Products (other than Hedge Obligations),
providing Bank Product Collateralization) of all of the Obligations (including
the payment of any Lender Expenses that have accrued irrespective of whether
demand has been made therefor and the payment of any termination amount then
applicable (or which would or could become applicable as a result of the
repayment of the other Obligations) under Hedge Agreements) other than
unasserted contingent indemnification Obligations. Any reference herein to any
Person shall be construed to include such Person’s successors and assigns. Any
requirement of a writing contained herein or in any other Loan Document shall be
satisfied by the transmission of a Record. References herein to any statute or
any provision thereof include such statute or provision (and all rules,
regulations and interpretations thereunder) as amended, revised, re-enacted, and
/or consolidated from time to time and any successor statute thereto.

 

e.           Schedules and Exhibits. All of the schedules and exhibits attached
to this Agreement shall be deemed incorporated herein by reference.

 

Schedule 1.1
Page 25

 

 

Schedule 2.12

 

TO CREDIT AND SECURITY AGREEMENT

 

Borrowers shall pay to Lender each of the following fees:

 

On the Agreement Date:

 

(a)Origination Fee. A one-time origination fee of $20,000, which shall be fully
earned and payable upon the execution of this Agreement.

 

(b)Ex-Im Origination Fee. A one-time origination fee of $75,000, which shall be
fully earned and payable upon the execution of this Agreement.

 

Monthly:

 

(a)          Collateral Monitoring Fee. A collateral monitoring fee of $350 per
month, due and payable monthly in advance on the first day of the month.

 

(b)          Cash Management and Other Service Fees. Service fees to Lender for
Cash Management Services provided pursuant to the Cash Management Documents,
Bank Product Agreements or any other agreement entered into by the parties,
including Lender’s customary fees and charges (as adjusted from time to time)
with respect to the disbursement of funds (or the receipt of funds) to or for
the account of Borrowers (whether by wire transfer or otherwise) in the amount
prescribed in Lender’s current service fee schedule.

 

(c)          Letter of Credit Fees. A Letter of Credit fee (in addition to the
charges, commissions, fees, and costs set forth in Section 2.13(e)) which shall
accrue at a rate equal to 2.50% per annum times the Daily Balance of the undrawn
amount of all outstanding Letters of Credit, payable in arrears on the first day
of each month and on the Termination Date and continuing until all undrawn
Letters of Credit have expired or been returned for cancellation. All fees upon
the occurrence of any other activity with respect to any Letter of Credit
(including, without limitation, the issuance, transfer, amendment, extension or
cancellation of any Letter of Credit and honoring of draws under any Letter of
Credit) determined in accordance with Lender’s standard fees and charges then in
effect for such activity.

 

Annually:

 

(a)          Facility Fee. An annual facility fee in an amount equal to (i)
$75,000, less (ii) interest payments received by Lender with respect to the
Revolving Credit Facility during the immediately preceding one-year period
(exclusive of interest payments received as a result of the imposition of the
Default Rate), which facility fee will be fully earned and payable in advance on
each anniversary of the Agreement Date. No installment of such annual facility
fee will be pro-rated upon any early termination of this Agreement.

 

(b)          Ex-Im Facility Fee. An annual facility fee in an amount equal to
1.50% of the Ex-Im Subfacility Amount, which facility fee will be fully earned
and payable in advance upon each anniversary of the Agreement Date. No
installment of such annual facility fee will be pro-rated upon any early
termination of this Agreement.

 

Upon demand by Lender or as otherwise specified in this Agreement:

 

(a)          Collateral Exam Fees, Costs and Expenses. Lender’s fees, costs and
out-of-pocket expenses in connection with any collateral exams or inspections
conducted by or on behalf of Lender at the current rates established from time
to time by Lender as its fee for collateral exams or inspections (which fees are
currently $1,000 per day per collateral examiner), together with all actual
out-of-pocket costs and expenses incurred in conducting any collateral exam or
inspection. For the avoidance of doubt, Borrowers shall be obligated to
reimburse Lender for all fees, costs and expenses related to any collateral
exams or inspections obtained prior to the Agreement Date. Applicable fees
related to electronic collateral reporting will also be charged.

 

(b)          Appraisal Fees, Costs and Expenses. Lender’s fees, costs and
out-of-pocket expenses (including any fees, costs and expenses incurred by any
appraiser) in connection with any appraisal of all or any part of the Collateral
conducted at the request of Lender; provided, however, that Borrowers shall not
be obligated to reimburse Lender for fees, costs and expenses for any appraisal
of Borrowers’ Inventory unless (i) an Event of Default shall have occurred and
be continuing, or (ii) such appraisal occurs in connection with an Inventory
Sublimit Increase Request or at any time that the Inventory Sublimit is in
excess of $3,000,000.

 

Schedule 2.12
Page 1

 

 

(c)          Termination and Reduction Fees. If (i) Lender terminates the
Revolving Credit Facility after the occurrence of an Event of Default, or (ii)
Borrowers terminate the Revolving Credit Facility on a date prior to the
Maturity Date, or (iii) Borrowers reduce the Maximum Revolver Amount or if
Borrowers and Lender agree to reduce the Maximum Revolver Amount, then Borrowers
shall pay Lender as liquidated damages (and not as a penalty) a termination or
reduction fee in an amount equal to a percentage of the Maximum Revolver Amount
in the case of a termination of the Revolving Credit Facility, or a percentage
of the amount of reduction of the Maximum Revolver Amount in the case of a
reduction in the Maximum Revolver Amount, as the case may be, calculated as
follows: (A) two percent (2.00%) if the termination or reduction occurs on or
before the first anniversary of the Agreement Date; (B) one percent (1.00%) if
the termination or reduction occurs after the first anniversary of the Agreement
Date, but on or before the second anniversary of the Agreement Date; and (C)
zero percent (0.00%) if the termination or reduction occurs after the second
anniversary of the Agreement Date.

 

Schedule 2.12
Page 2

 

 

Schedule 6.1

 

TO CREDIT AND SECURITY AGREEMENT

 

Borrowers shall deliver to Lender each of the financial statements, reports, or
other items set forth below at the following times in form satisfactory to
Lender:

 

as soon as available, but in any event within 25 days after the end of each
month, or, in the case of the last month of each fiscal quarter, within 45 days
after the end of such month,

(a)          an unaudited consolidated balance sheet, income statement,
statement of cash flow, and statement of owner’s equity with respect to
Borrowers and their respective Subsidiaries during such period and compared to
the prior period and plan, prepared in accordance with GAAP, subject to year-end
audit adjustments and the absence of footnotes, together with a corresponding
discussion and analysis of results from management; and

 

(b)          a Compliance Certificate along with the underlying calculations,
including the calculations to establish compliance with the financial covenants
set forth in Section 8 and certain other covenants under this Agreement.

 

as soon as available, but in any event within 120 days after the end of each
fiscal year,

(a)          consolidated financial statements of Borrowers and their respective
Subsidiaries for such fiscal year, audited by independent certified public
accountants reasonably acceptable to Lender, prepared in accordance with GAAP,
and certified, without any qualifications (including any (i) “going concern” or
like qualification or exception, (ii) qualification or exception as to the scope
of such audit, or (iii) qualification which relates to the treatment or
classification of any item and which, as a condition to the removal of such
qualification, would require an adjustment to such item), by such accountants to
have been prepared in accordance with GAAP (such audited financial statements to
include a balance sheet, income statement, statement of cash flow, and statement
of owner’s equity and, if prepared, such accountants’ letter to management); and

 

(b)          a Compliance Certificate along with the underlying calculations,
including the calculations to establish compliance with the financial covenants
set forth in Section 8 and certain other covenants under this Agreement.

 

as soon as available, but in any event within 30 days before the start of each
of Borrowers’ fiscal years,

(a)          copies of Borrowers’ Projections, in form and substance (including
as to scope and underlying assumptions) satisfactory to Lender, in its Permitted
Discretion, for the forthcoming fiscal year, on a monthly basis, certified by
the chief financial officer of Borrowers as being such officer’s good faith
estimate of the financial performance of Borrowers and their respective
Subsidiaries during the period covered thereby.

 

if and when filed by any Borrower, unless publicly available on the SEC’s
website,

(a)          Form 10-Q quarterly reports, Form 10-K annual reports, and Form 8-K
current reports;

 

(b)          any other filings made by any Borrower with the SEC; and

 

(c)          any other information that is provided by any Borrower to its
shareholders generally.

 

 

Schedule 6.1
Page 1

 

 

Schedule 6.2

 

TO CREDIT AND SECURITY AGREEMENT

 

Borrowers shall provide Lender with each of the documents and information set
forth below at the following times in form and substance satisfactory to Lender:

 

Monthly (no later than the 15th day of each month), or, during any Increased
Reporting Period, weekly (on the first Business Day of each week), or more
frequently if Lender requests

(a)          a Borrowing Base Certificate;

 

(b) an Account roll-forward with supporting details supplied from sales
journals, collection journals, credit registers and any other records;

 

(c)          notice of all claims, offsets, or disputes asserted by Account
Debtors with respect to each Borrower’s and its Subsidiaries’ Accounts; and

 

(d)          copies of invoices together with corresponding shipping and
delivery documents and credit memos together with corresponding supporting
documentation with respect to invoices and credit memos in excess of an amount
determined in the sole discretion of Lender from time to time.

 

Monthly (no later than the 15th day of each month) or more frequently if Lender
requests

(a)          a monthly Account roll-forward, in a format acceptable to Lender in
its discretion;

 

(b)          a detailed aging of each Borrower’s Accounts, together with a
reconciliation to the monthly Account roll-forward and supporting documentation
for any reconciling items noted (delivered electronically in an acceptable
format, if such Borrower has implemented electronic reporting);

 

(c)          a detailed calculation of those Accounts that are not eligible for
the Borrowing Base, together with a detailed calculation of Eligible Foreign
Accounts and Eligible Export-Related Inventory;

 

(d)          a detailed Inventory system/perpetual report specifying the cost of
each Borrower’s Inventory, by location and by category (delivered electronically
in an acceptable format, if such Borrower has implemented electronic reporting);

 

(e)          a detailed calculation of Inventory categories that are not
eligible for the Borrowing Base;

 

(f)          a summary aging, by vendor, of each Borrower’s and its
Subsidiaries’ accounts payable (delivered electronically in an acceptable
format, if such Borrower has implemented electronic reporting); and

 

(g)          a detailed report regarding each Borrower’s and its Subsidiaries’
cash and Cash Equivalents.

 

Monthly (no later than the 30th day of each month) or more frequently if Lender
requests (a)          a reconciliation of Accounts aging, trade accounts payable
aging, and Inventory perpetual of each Borrower to the general ledger and the
monthly financial statements, including any book reserves related to each
category. Annually, or more frequently, if requested by Lender (a)          a
detailed list of each Borrower’s and its Subsidiaries’ customers, with address
and contact information. Upon request by Lender from time to time
(a)          such other reports and information as to the Collateral and as to
each Loan Party and its Subsidiaries as Lender may reasonably request.

 

Schedule 6.2
Page 1

 

 

EXHIBIT A

 

TO CREDIT AND SECURITY AGREEMENT

 

FORM OF COMPLIANCE CERTIFICATE

 

[on Parent’s letterhead]

 

To:Wells Fargo Bank, National Association

1100 Abernathy Road, NE - Suite 1600

MAC Code: G0189-60

Atlanta, Georgia 30328

Attn: Portfolio Manager (Charles & Colvard)

 

Re:Compliance Certificate dated [                                             ]

 

Ladies and Gentlemen:

 

Reference is made to that certain Credit and Security Agreement (as amended,
restated, supplemented or otherwise modified from time to time, the “Credit
Agreement”) dated as of June 25, 2014 by and among CHARLES & COLVARD, LTD.,
CHARLES & COLVARD DIRECT, LLC, MOISSANITE.COM, LLC (“Borrowers”) and Wells FarGO
BANK, NATIONAL ASSOCIATION (“Lender”). Capitalized terms used in this Compliance
Certificate have the meanings set forth in the Credit Agreement unless
specifically defined herein.

 

Pursuant to Schedule 6.1 of the Credit Agreement, the undersigned officer of
Parent hereby certifies that:

 

1.          Attached is the financial information of Borrowers and their
Subsidiaries which is required to be furnished to Lender pursuant to Section 6.1
of the Credit Agreement for the period ended ____________, __________ (the
“Reporting Date”). Such financial information has been prepared in accordance
with GAAP, and fairly presents in all material respects the financial condition
of Borrowers and their Subsidiaries, subject (in the case of monthly financial
information) to customary year-end adjustments and the absence of footnotes.

 

2.          Such officer has reviewed the terms of the Credit Agreement and has
made, or caused to be made under his/her supervision, a review in reasonable
detail of the transactions and condition of each Borrower and its Subsidiaries
during the accounting period covered by the financial statements delivered
pursuant to Schedule 6.1 of the Credit Agreement.

 

3.          Such review has not disclosed the existence on and as of the date
hereof, and the undersigned does not have knowledge of the existence as of the
date hereof, of any event or condition that constitutes a Default or Event of
Default.

 

4.          The representations and warranties of each Loan Party and its
Subsidiaries set forth in the Credit Agreement and the other Loan Documents are
true and correct in all material respects on and as of the date hereof (except
to the extent they relate to a specified earlier date).

 

5.          As of the Reporting Date, the Borrowers and their respective
Subsidiaries are in compliance with the applicable covenants contained in
Section 8 of the Credit Agreement as demonstrated on Schedule 1 hereof.

 

IN WITNESS WHEREOF, this Compliance Certificate is executed by the undersigned
this [_____] day of [_______________], [________].

 

  CHARLES & COLVARD, LTD.

 

  By:     Name:     Title:  

 

Exhibit A

 

 

 

 

SCHEDULE 1 TO COMPLIANCE CERTIFICATE

 

Financial Covenants

 

I further certify that (Please check and complete each of the following):

 

1.Excess Availability. Excess Availability □ was □ was not at least $1,000,000
at all times during the fiscal month ending on the Reporting Date, which
□ satisfies □ does not satisfy the requirement set forth in Section 8(a) of the
Credit Agreement that Excess Availability be not less than $1,000,000 at all
times.

 

2.Non-Financed Capital Expenditures. Borrowers have made or incurred
Non-Financed Capital Expenditures in the aggregate amount of $_________ for the
fiscal-year-to-date period ending on the Reporting Date, which □ satisfies □
does not satisfy the requirement set forth in Section 8(b) of the Credit
Agreement that Non-Financed Capital Expenditures be not more than $2,000,000
during any fiscal year.

 

Schedule 1 to Compliance Certificate 

 

 

 

 

Exhibit B

 

TO CREDIT AND SECURITY AGREEMENT

 

CONDITIONS PRECEDENT

 

The obligation of Lender to make its initial extension of credit provided for in
this Agreement is subject to the fulfilment, to the satisfaction of Lender, of
each of the following conditions precedent:

 

(a)          Lender shall have received evidence that appropriate financing
statements have been duly filed in such office or offices as may be necessary
or, in the opinion of Lender, desirable to perfect Lender’s Liens in and to the
Collateral, and Lender shall have received searches reflecting the filing of all
such financing statements;

 

(b)          Lender shall have received each of the following documents, in each
case in form and substance satisfactory to Lender, duly executed, and each such
document shall be in full force and effect:

 

(i)          this Agreement, the Revolving Notes, the Patent and Trademark
Security Agreement and the other Loan Documents,

 

(ii)         the Cash Management Documents,

 

(iii)        the Control Agreements,

 

(iv)         the Intercompany Subordination Agreement,

 

(vi)         the Borrower Agreement, the Joint Application, the Loan
Authorization Notice, an exceptions approval executed and delivered by Ex-Im
Bank, and such other agreements, documents and instruments as Ex-Im Bank may
require or as Lender deems necessary or appropriate in order to ensure that
Ex-Im Bank has validly guaranteed at least 90% of the Ex-Im Advances,

 

(vii)        a letter from PNC Bank, National Association (“Existing Lender”) to
Lender with respect to the amount necessary to repay in full all of the
obligations of the Borrowers and their Subsidiaries owing to Existing Lender and
to obtain a release of all of the Liens existing in favor of Existing Lender in
and to the assets of Loan Parties and their Subsidiaries, together with
termination statements and other documentation evidencing the termination by
Existing Lender of its Liens in and to the properties and assets of the Loan
Parties and their Subsidiaries, and

 

(viii)      a disbursement letter executed and delivered by each Borrower to
Lender regarding the extensions of credit to be made on the Agreement Date.

 

(g)          Lender shall have received a certificate from the Chief Financial
Officer or Manager of each Borrower (i) attesting to the resolutions of such
Borrower’s Board of Directors authorizing its execution, delivery, and
performance of this Agreement and the other Loan Documents to which such
Borrower is a party, (ii) authorizing specific officers of such Borrower to
execute the same, and (iii) attesting to the incumbency and signatures of such
specific officers of such Borrower;

 

(h)          Lender shall have received copies of each Borrower’s Governing
Documents, as amended, modified, or supplemented to the Agreement Date,
certified as true, correct and complete by the Chief Financial Officer or
Manager of such Borrower;

 

(i)          Lender shall have received a certificate of status with respect to
each Borrower, dated within 20 days of the Agreement Date, such certificate to
be issued by the appropriate officer of the jurisdiction of organization of each
Borrower, which certificate shall indicate that such Borrower is in good
standing in such jurisdiction;

 

(j)          Lender shall have received certificates of status with respect to
each Borrower, each dated within 30 days of the Agreement Date, such
certificates to be issued by the appropriate officer of the jurisdictions (other
than the jurisdiction of organization of such Borrower) in which its failure to
be duly qualified or licensed would constitute a Material Adverse Change, which
certificates shall indicate that such Borrower is in good standing in such
jurisdictions;

 

Exhibit B
Page 1

 

 

(k)          Lender shall have received copies of the policies of insurance and
certificates of insurance, together with the endorsements thereto, as are
required by Section 6.6, the form and substance of which shall be satisfactory
to Lender;

 

(l)          Lender shall have received a completed and duly executed Borrowing
Base Certificate, which Borrowing Base Certificate shall demonstrate that
Borrowers have Excess Availability of at least $2,000,000 after giving effect to
(i) the initial extensions of credit hereunder, and (ii) the payment of all fees
and expenses required to be paid by Borrowers on the Agreement Date under this
Agreement or the other Loan Documents;

 

(m)        Borrowers shall have paid all Lender Expenses incurred in connection
with the transactions evidenced by this Agreement to the extent the same have
become due and payable;

 

(n)          each Borrower and each of its Subsidiaries shall have received all
licenses, approvals or evidence of other actions required by any Governmental
Authority in connection with the execution and delivery by such Borrower or its
Subsidiaries of the Loan Documents or with the consummation of the transactions
contemplated thereby;

 

(o)          Lender shall have received a set of Borrower projections
satisfactory to Lender, it being agreed that the projections previously
delivered to Lender are satisfactory; and

 

(p)          all other documents and legal matters in connection with the
transactions contemplated by this Agreement shall have been delivered, executed,
or recorded and shall be in form and substance satisfactory to Lender.

 

Exhibit B
Page 2

 

 

EXHIBIT C

 

TO CREDIT AND SECURITY AGREEMENT

 

CONDITIONS SUBSEQUENT

 

1.          No later than 30 days following the Agreement Date, Borrowers shall
transfer all Inventory and other tangible Collateral held in bank vaults with
PNC Bank, National Association to Borrowers’ premises located at 170 Southport
Drive, Morrisville, NC 27560 and/or to one or more bank vaults maintained by
Lender.

 

2.          No later than 30 days following the Agreement Date, Borrowers shall
provide to Lender lender’s loss payee endorsements and additional insured
endorsements as required by Section 6.6 of the Agreement.

 

3.          Other than the Advances to be made on the Agreement Date described
on the disbursement authorization letter from Borrowers to Lender dated as of
the Agreement Date, Lender shall have no obligation to make any Advance or to
issue any Letter of Credit unless and until Lender receives evidence reasonably
satisfactory to Lender that PNC Bank, National Association, has released all of
its Liens on the assets of each Borrower, including, without limitation, copies
of duly recorded termination statements with respect to the following financing
statements:

 

(a)          Financing statement #20130090919F filed on 9/20/13 in favor of PNC
Bank, National Association with the North Carolina Secretary of State;

 

(b)          Financing statement #20130090920H filed on 9/20/13 in favor of PNC
Bank, National Association with the North Carolina Secretary of State; and

 

(c)          Financing statement #20130090921J filed on 9/20/13 in favor of PNC
Bank, National Association with the North Carolina Secretary of State.

 

Exhibit C
Page 1

 

 

EXHIBIT D

 

TO CREDIT AND SECURITY AGREEMENT

 

REPRESENTATIONS AND WARRANTIES

 

5.1         Due Organization and Qualification; Subsidiaries.

 

(a)          Each Loan Party and each Subsidiary of each Loan Party (i) is duly
organized and existing and in good standing under the laws of the jurisdiction
of its organization, (ii) is qualified to do business in any jurisdiction where
the failure to be so qualified could reasonably be expected to result in a
Material Adverse Change, and (iii) has all requisite power and authority to own
and operate its properties, to carry on its business as now conducted and as
proposed to be conducted, to enter into the Loan Documents to which it is a
party and to carry out the transactions contemplated thereby.

 

(b)          Set forth on Schedule 5.1(b) to the Information Certificate is a
complete and accurate description of the authorized capital Stock of each Loan
Party, by class, and, as of the Agreement Date, a description of the number of
shares of each such class that are issued and outstanding. Other than as
described on Schedule 5.1(b) to the Information Certificate, there are no
subscriptions, options, warrants, or calls relating to any shares of any Loan
Party’s capital Stock, including any right of conversion or exchange under any
outstanding security or other instrument. No Loan Party is subject to any
obligation (contingent or otherwise) to repurchase or otherwise acquire or
retire any shares of its capital Stock or any security convertible into or
exchangeable for any of its capital Stock.

 

(c)          Set forth on Schedule 5.1(c) to the Information Certificate (as
such Schedule may be updated from time to time to reflect changes resulting from
transactions permitted under this Agreement), is a complete and accurate list of
the Loan Parties’ direct and indirect Subsidiaries, showing: (i) the number of
shares of each class of common and preferred Stock authorized for each of such
Subsidiaries, and (ii) the number and the percentage of the outstanding shares
of each such class owned directly or indirectly by each Loan Party. All of the
outstanding capital Stock of each such Subsidiary has been validly issued and is
fully paid and non-assessable.

 

(d)          Except as set forth on Schedule 5.1(c) to the Information
Certificate, there are no subscriptions, options, warrants, or calls relating to
any shares of any capital stock or any Loan Party or of any of its Subsidiaries,
including any right of conversion or exchange under any outstanding security or
other instrument. No Loan Party nor any of its Subsidiaries is subject to any
obligation (contingent or otherwise) to repurchase or otherwise acquire or
retire any shares of such Loan Party’s Subsidiaries’ capital Stock or any
security convertible into or exchangeable for any such capital Stock.

 

5.2         Due Authorization; No Conflict.

 

(a)          As to each Loan Party, the execution, delivery, and performance by
such Loan Party of the Loan Documents to which it is a party have been duly
authorized by all necessary action on the part of such Loan Party.

 

(b)          As to each Loan Party, the execution, delivery, and performance by
such Loan Party of the Loan Documents to which it is a party do not and will not
(i) violate any material provision of federal, state, or local law or regulation
applicable to any Loan Party or its Subsidiaries, the Governing Documents of any
Loan Party or its Subsidiaries, or any order, judgment, or decree of any court
or other Governmental Authority binding on any Loan Party or its Subsidiaries,
(ii) conflict with, result in a breach of, or constitute (with due notice or
lapse of time or both) a default under any Material Contract of any Loan Party
or its Subsidiaries except to the extent that any such conflict, breach or
default could not individually or in the aggregate reasonably be expected to
cause a Material Adverse Change, (iii) result in or require the creation or
imposition of any Lien of any nature whatsoever upon any assets of any Loan
Party, other than Permitted Liens, or (iv) require any approval of any Loan
Party’s equity interest holders or any approval or consent of any Person under
any Material Contract of any Loan Party, other than consents or approvals that
have been obtained and that are still in force and effect and except, in the
case of Material Contracts, for consents or approvals, the failure to obtain
could not individually or in the aggregate reasonably be expected to cause a
Material Adverse Change.

 

5.3         Governmental and Other Consents. No consent, approval,
authorization, or other order or other action by, and no notice to or filing
with, any Governmental Authority or any other Person is required (a) for the
grant of a Lien by such Loan Party in and to the Collateral pursuant to this
Agreement or the other Loan Documents or for the execution, delivery, or
performance of this Agreement by such Loan Party, or (b) for the exercise by
Lender of the voting or other rights provided for in this Agreement with respect
to the Investment Related Property or the remedies in respect of the Collateral
pursuant to this Agreement, except as may be required in connection with such
disposition of Investment Related Property by laws affecting the offering and
sale of securities generally. No Intellectual Property License of any Loan Party
that is necessary to the conduct of such Loan Party’s business requires any
consent of any other Person in order for such Loan Party to grant the security
interest granted hereunder in such Loan Party’s right, title or interest in or
to such Intellectual Property License.

 

Exhibit D
Page 1

 

 

5.4         Binding Obligations. Each Loan Document has been duly executed and
delivered by each Loan Party that is a party thereto and is the legally valid
and binding obligation of such Loan Party, enforceable against such Loan Party
in accordance with its respective terms, except as enforcement may be limited by
equitable principles or by bankruptcy, insolvency, reorganization, moratorium,
or similar laws relating to or limiting creditors’ rights generally.

 

5.5         Title to Assets; No Encumbrances. Each of the Loan Parties and its
Subsidiaries has (a) good, sufficient and legal title to (in the case of fee
interests in Real Property), (b) valid leasehold interests in (in the case of
leasehold interests in real or personal property), and (c) good and marketable
title to (in the case of all other personal property), all of their respective
assets reflected in their most recent financial statements delivered pursuant to
Section 6.1 and most recent collateral reports delivered pursuant to Section
6.2, in each case except for assets disposed of since the date of such financial
statements to the extent permitted hereby. All of such assets are free and clear
of Liens except for Permitted Liens.

 

5.6         Jurisdiction of Organization; Location of Chief Executive Office;
Organizational Identification Number; Commercial Tort Claims.

 

(a)          The exact legal name of (within the meaning of Section 9-503 of the
Code) and jurisdiction of organization of each Loan Party and each of its
Subsidiaries is set forth on Schedule 5.6(a) to the Information Certificate (as
such Schedule may be updated from time to time to reflect changes resulting from
transactions permitted under this Agreement).

 

(b)          The chief executive office of each Loan Party and each of its
Subsidiaries is located at the address indicated on Schedule 5.6(b) to the
Information Certificate (as such Schedule may be updated from time to time to
reflect changes resulting from transactions permitted under this Agreement).

 

(c)          The tax identification number and organizational identification
number, if any, of each Loan Party and each of its Subsidiaries are identified
on Schedule 5.6(c) to the Information Certificate (as such Schedule may be
updated from time to time to reflect changes resulting from transactions
permitted under this Agreement).

 

(d)          As of the Agreement Date, no Loan Party and no Subsidiary of a Loan
Party holds any Commercial Tort Claims, except as set forth on Schedule 5.6(d)
to the Information Certificate.

 

5.7         Litigation.

 

(a)          There are no actions, suits, or proceedings pending or, to the
knowledge of any Loan Party, after due inquiry, threatened in writing against a
Loan Party or any of its Subsidiaries that either individually or in the
aggregate could reasonably be expected to result in a Material Adverse Change.

 

(b)          Schedule 5.7(b) to the Information Certificate sets forth a
complete and accurate description, with respect to each of the actions, suits,
or proceedings that, as of the Agreement Date, is pending or, to the knowledge
of any Loan Party, after due inquiry, threatened against any Loan Party or any
of its Subsidiaries, including (i) the parties to such actions, suits, or
proceedings, (ii) the nature of the dispute that is the subject of such actions,
suits, or proceedings, (iii) the status, as of the Agreement Date, with respect
to such actions, suits, or proceedings, and (iv) whether any liability of any
Loan Party or any Subsidiary in connection with such actions, suits, or
proceedings is covered by insurance.

 

5.8         Compliance with Laws. No Loan Party nor any of its Subsidiaries
(a) is in violation of any applicable laws, rules, regulations, executive
orders, or codes (including Environmental Laws) that, individually or in the
aggregate, could reasonably be expected to result in a Material Adverse Change,
or (b) is subject to or in default with respect to any final judgments, writs,
injunctions, decrees, rules or regulations of any court or any federal, state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, that, individually or in the aggregate,
could reasonably be expected to result in a Material Adverse Change.

 

5.9         No Material Adverse Change. All historical financial statements
relating to the Loan Parties and their Subsidiaries that have been delivered by
Borrowers to Lender have been prepared in accordance with GAAP (except, in the
case of unaudited financial statements, for the lack of footnotes and being
subject to year-end audit adjustments) and present fairly in all material
respects, the consolidated financial condition of the Loan Parties and their
Subsidiaries as of the date thereof and results of operations for the period
then ended. Since the date of the most recent financial statement delivered to
Lender, no event, circumstance, or change has occurred that has or could
reasonably be expected to result in a Material Adverse Change with respect to
the Loan Parties and their Subsidiaries.

 

Exhibit D
Page 2

 

 

5.10         Fraudulent Transfer.

 

(a)          Each Loan Party is Solvent.

 

(b)          No transfer of property is being made by any Loan Party and no
obligation is being incurred by any Loan Party in connection with the
transactions contemplated by this Agreement or the other Loan Documents with the
intent to hinder, delay, or defraud either present or future creditors of such
Loan Party.

 

5.11         Employee Benefits. No Loan Party, none of their Subsidiaries, nor
any of their ERISA Affiliates maintains or contributes to any Benefit Plan.

 

5.12         Environmental Condition. Except as set forth on Schedule 5.12 to
the Information Certificate, (a) to each Loan Party’s knowledge, no properties
or assets of any Loan Party or any of its Subsidiaries have ever been used by a
Loan Party, its Subsidiaries, or by previous owners or operators in the disposal
of, or to produce, store, handle, treat, release, or transport, any Hazardous
Materials, where such disposal, production, storage, handling, treatment,
release or transport was in violation, in any material respect, of any
applicable Environmental Law, (b) to each Loan Party’s knowledge, after due
inquiry, no Loan Party’s nor any of its Subsidiaries’ properties or assets have
ever been designated or identified in any manner pursuant to any environmental
protection statute as a Hazardous Materials disposal site, (c) no Loan Party nor
any of its Subsidiaries has received notice that a Lien arising under any
Environmental Law has attached to any revenues or to any Real Property owned or
operated by a Loan Party or its Subsidiaries, and (d) no Loan Party nor any of
its Subsidiaries nor any of their respective facilities or operations is subject
to any outstanding written order, consent decree, or settlement agreement with
any Person relating to any Environmental Law or Environmental Liability that,
individually or in the aggregate, could reasonably be expected to result in a
Material Adverse Change.

 

5.13         Intellectual Property. Each Loan Party and each of its Subsidiaries
own, or hold licenses in, all trademarks, trade names, copyrights, patents, and
licenses that are necessary to the conduct of its business as currently
conducted.

 

5.14         Leases. Each Loan Party and each of its Subsidiaries enjoy peaceful
and undisturbed possession under all leases material to their business and to
which it is a party or under which it is operating, and, subject to Permitted
Protests, all of such material leases are valid and subsisting and no material
default by the applicable Loan Party or the applicable Subsidiary exists under
any of them.

 

5.15         Deposit Accounts and Securities Accounts. Set forth on Schedule
5.15 to the Information Certificate is a listing of all of the Deposit Accounts
and Securities Accounts of each Loan Party and each of its Subsidiaries,
including, with respect to each bank or securities intermediary (a) the name and
address of such Person, and (b) the account numbers of the Deposit Accounts or
Securities Accounts maintained with such Person.

 

5.16         Complete Disclosure. All factual information taken as a whole
(other than forward-looking information and projections and information of a
general economic nature and general information about the industry of a Loan
Party or any of its Subsidiaries) furnished by or on behalf of a Loan Party or
any of its Subsidiaries in writing to Lender (including all information
contained in the Schedules hereto or in the other Loan Documents) for purposes
of or in connection with this Agreement or the other Loan Documents, and all
other such factual information taken as a whole (other than forward-looking
information and projections and information of a general economic nature and
general information about the industry of a Loan Party or any of its
Subsidiaries) hereafter furnished by or on behalf of a Loan Party or any of its
Subsidiaries in writing to Lender will be, true and accurate, in all material
respects, on the date as of which such information is dated or certified and not
incomplete by omitting to state any fact necessary to make such information
(taken as a whole) not misleading in any material respect at such time in light
of the circumstances under which such information was provided. The Projections
most recently delivered to Lender represent, and as of the date on which any
other Projections are delivered to Lender, such additional Projections
represent, each Borrowers’ good faith estimate, on the date such Projections are
delivered, of the future performance of a Loan Party or any of its Subsidiaries
for the periods covered thereby based upon assumptions believed by Borrowers to
be reasonable at the time of the delivery thereof to Lender.

 

5.17         Material Contracts. Set forth on Schedule 5.17 to the Information
Certificate (as such Schedule may be updated from time to time in accordance
herewith) is a reasonably detailed description of the Material Contracts of each
Loan Party and each of its Subsidiaries as of the most recent date on which
Borrowers provided their Compliance Certificate pursuant to Section 6.1;
provided, however, that any Borrower may amend Schedule 5.17 to the Information
Certificate to add additional Material Contracts so long as such amendment
occurs by written notice to Lender on the date that such Borrower provides its
Compliance Certificate. Except for matters which, either individually or in the
aggregate, could not reasonably be expected to result in a Material Adverse
Change, each Material Contract (other than those that have expired at the end of
their normal terms) (a) is in full force and effect and is binding upon and
enforceable against the applicable Loan Party or the applicable Subsidiary and,
to such Borrower’s knowledge, after due inquiry, each other Person that is a
party thereto in accordance with its terms, (b) has not been otherwise amended
or modified (other than amendments or modifications permitted by Section
7.7(b)), and (c) is not in default due to the action or inaction of the
applicable Loan Party or the applicable Subsidiary.

 

Exhibit D
Page 3

 

 

5.18         Patriot Act. To the extent applicable, each Loan Party and each of
its Subsidiaries is in compliance, in all material respects, with the
(a) Trading with the Enemy Act, as amended, and each of the foreign assets
control regulations of the United States Treasury Department (31 CFR, Subtitle
B, Chapter V, as amended) and any other enabling legislation or executive order
relating thereto, and (b) Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism (USA Patriot Act
of 2001) (the “Patriot Act”). No part of the proceeds of the loans made
hereunder will be used by any Loan Party or any of its Subsidiaries or any of
their Affiliates, directly or indirectly, for any payments to any governmental
official or employee, political party, official of a political party, candidate
for political office, or anyone else acting in an official capacity, in order to
obtain, retain or direct business or obtain any improper advantage, in violation
of the United States Foreign Corrupt Practices Act of 1977, as amended.

 

5.19         Indebtedness. Set forth on Schedule 5.19 to the Information
Certificate is a true and complete list of all Indebtedness of each Loan Party
and each of its Subsidiaries outstanding immediately prior to the Agreement Date
that is to remain outstanding immediately after giving effect to the closing
hereunder on the Agreement Date and such Schedule accurately sets forth the
aggregate principal amount of such Indebtedness as of the Agreement Date.

 

5.20         Payment of Taxes. Except as otherwise permitted under Section 6.5,
all tax returns and reports of each Loan Party and each of its Subsidiaries
required to be filed by any of them have been timely filed, and all taxes shown
on such tax returns to be due and payable and all assessments, fees and other
governmental charges upon a Loan Party and its Subsidiaries and upon their
respective assets, income, businesses and franchises that are due and payable
have been paid when due and payable. Each Loan Party and each of its
Subsidiaries have made adequate provision in accordance with GAAP for all taxes
not yet due and payable. No Borrower knows of any proposed tax assessment
against a Loan Party or any of its Subsidiaries that is not being actively
contested by such Loan Party or such Subsidiary diligently, in good faith, and
by appropriate proceedings; provided such reserves or other appropriate
provisions, if any, as shall be required in conformity with GAAP shall have been
made or provided therefor.

 

5.21         Margin Stock. No Loan Party nor any of its Subsidiaries is engaged
principally, or as one of its important activities, in the business of extending
credit for the purpose of purchasing or carrying any Margin Stock. No part of
the proceeds of the loans made to Borrowers will be used to purchase or carry
any such Margin Stock or to extend credit to others for the purpose of
purchasing or carrying any such Margin Stock or for any purpose that violates
the provisions of Regulation T, U or X of the Board of Governors of the United
States Federal Reserve.

 

5.22         Governmental Regulation. No Loan Party nor any of its Subsidiaries
is subject to regulation under the Federal Power Act or the Investment Company
Act of 1940 or under any other federal or state statute or regulation which may
limit its ability to incur Indebtedness or which may otherwise render all or any
portion of the Obligations unenforceable. No Loan Party nor any of its
Subsidiaries is a “registered investment company” or a company “controlled” by a
“registered investment company” or a “principal underwriter” of a “registered
investment company” as such terms are defined in the Investment Company Act of
1940.

 

5.23         OFAC. No Loan Party nor any of its Subsidiaries is in violation of
any of the country or list based economic and trade sanctions administered and
enforced by OFAC. No Loan Party nor any of its Subsidiaries (a) is a Sanctioned
Person or a Sanctioned Entity, (b) has its assets located in Sanctioned
Entities, or (c) derives revenues from investments in, or transactions with
Sanctioned Persons or Sanctioned Entities. No proceeds of any loan made
hereunder will be used to fund any operations in, finance any investments or
activities in, or make any payments to, a Sanctioned Person or a Sanctioned
Entity.

 

5.24         Employee and Labor Matters. There is (a) no unfair labor practice
complaint pending or, to the knowledge of Borrowers, threatened against any Loan
Party or any of its Subsidiaries before any Governmental Authority and no
grievance or arbitration proceeding pending or threatened against any Loan Party
or any of its Subsidiaries which arises out of or under any collective
bargaining agreement and that could reasonably be expected to result in a
material liability, (b) no strike, labor dispute, slowdown, stoppage or similar
action or grievance pending or threatened in writing against any Loan Party or
any of its Subsidiaries that could reasonably be expected to result in a
material liability, or (c) to the knowledge of Borrowers, after due inquiry, no
union representation question existing with respect to the employees of any Loan
Party or any of its Subsidiaries and no union organizing activity taking place
with respect to any of the employees of any Loan Party or any of its
Subsidiaries. No Loan Party or any of its Subsidiaries has incurred any
liability or obligation under the Worker Adjustment and Retraining Notification
Act or similar state law, which remains unpaid or unsatisfied. The hours worked
and payments made to employees of each Loan Party and each of its Subsidiaries
have not been in violation of the Fair Labor Standards Act or any other
applicable legal requirements, except to the extent such violations could not,
individually or in the aggregate, reasonably be expected to result in a Material
Adverse Change. All material payments due from any Loan Party or any of its
Subsidiaries on account of wages and employee health and welfare insurance and
other benefits have been paid or accrued as a liability on the books of such
Loan Party, except where the failure to do so could not, individually or in the
aggregate, reasonably be expected to result in a Material Adverse Change.

 

Exhibit D
Page 4

 

 

5.25         Reserved.

 

5.26         Collateral.

 

(a)          Real Property. Schedule 5.26(a) to the Information Certificate sets
forth all Real Property owned in fee by any of the Loan Parties as of the
Agreement Date.

 

(b)          Intellectual Property.

 

(i) As of the Agreement Date, Schedule 5.26(b) to the Information Certificate
provides a complete and correct list of: (A) all registered Copyrights owned by
any Loan Party, all applications for registration of Copyrights owned by any
Loan Party, and all other Copyrights owned by any Loan Party and material to the
conduct of the business of any Loan Party; (B) all Intellectual Property
Licenses entered into by any Loan Party pursuant to which (x) any Loan Party has
provided any license or other rights in Intellectual Property owned or
controlled by such Loan Party to any other Person or (y) any Person has granted
to any Loan Party any license or other rights in Intellectual Property owned or
controlled by such Person that is material to the business of such Loan Party,
including any Intellectual Property that is incorporated in any Inventory,
software, or other product marketed, sold, licensed, or distributed by such Loan
Party; (C) all Patents owned by any Loan Party and all applications for Patents
owned by any Loan Party; and (D) all registered Trademarks owned by any Loan
Party, all applications for registration of Trademarks owned by any Loan Party,
and all other Trademarks owned by any Loan Party and material to the conduct of
the business of any Loan Party;

 

(ii)         all employees of each Loan Party who were involved in the creation
or development of any Intellectual Property for such Loan Party that is
necessary to the business of such Loan Party have signed agreements containing
assignment of Intellectual Property rights to such Loan Party and obligations of
confidentiality;

 

(iii)        to each Loan Party’s knowledge after reasonable inquiry, no Person
has infringed or misappropriated or is currently infringing or misappropriating
any Intellectual Property rights owned by such Loan Party, in each case, that
either individually or in the aggregate could reasonably be expected to result
in a Material Adverse Change;

 

(iv)         to each Loan Party’s knowledge after reasonable inquiry, all
registered Copyrights, registered Trademarks, and issued Patents that are owned
by such Loan Party and necessary in to the conduct of its business are valid,
subsisting and enforceable and in compliance with all legal requirements,
filings, and payments and other actions that are required to maintain such
Intellectual Property in full force and effect; and

 

(v)          each Loan Party has taken reasonable steps to maintain the
confidentiality of and otherwise protect and enforce its rights in all trade
secrets owned by such Loan Party that are necessary in the business of such Loan
Party.

 

(c)          Motor Vehicles. Schedule 5.26(c) to the Information Certificate
sets forth all motor vehicles owned by each Loan Party as of the Agreement Date
by model, model year and vehicle identification number.

 

(d)          Valid Security Interest. This Agreement creates a valid security
interest in the Collateral of each Loan Party, to the extent a security interest
therein can be created under the Code, securing the payment of the Obligations.
Except to the extent a security interest in the Collateral cannot be perfected
by the filing of a financing statement under the Code, all filings and other
actions necessary or desirable to perfect and protect such security interest
have been duly taken or will have been taken upon the filing of financing
statements listing each applicable Loan Party, as a debtor, and Lender for
itself and as agent for the Bank Product Providers, as secured party, in the
jurisdictions listed next to such Loan Party’s name on Schedule 5.6(a) to the
Information Certificate. Upon the making of such filings, Lender shall have a
first priority perfected security interest in the Collateral of each Loan Party
to the extent such security interest can be perfected by the filing of a
financing statement, subject only to Permitted Liens. Upon filing of the
Copyright Security Agreement with the United States Copyright Office, filing of
the Patent and Trademark Security Agreement with the PTO, and the filing of
appropriate financing statements in the jurisdictions listed on Schedule 5.6(a)
to the Information Certificate, all action necessary or desirable to protect and
perfect the Security Interest in and to on each Loan Party’s Patents,
Trademarks, or Copyrights has been taken and such perfected Security Interest is
enforceable as such as against any and all creditors of and purchasers from any
Loan Party. All action by any Loan Party necessary to protect and perfect such
security interest on each item of Collateral has been duly taken.

 

Exhibit D
Page 5

 

 

5.27         Eligible Accounts and Eligible Foreign Accounts. As to each Account
that is identified by a Borrower as an Eligible Account or an Eligible Foreign
Account in a Borrowing Base Certificate submitted to Lender, such Account is (a)
a bona fide existing payment obligation of the applicable Account Debtor created
by the sale and delivery of Inventory or the rendition of services to such
Account Debtor in the ordinary course of such Borrower’s business, (b) owed to
such Borrower, and (c) not excluded as ineligible by virtue of one or more of
the excluding criteria (other than Lender-discretionary criteria) set forth in
the definition of Eligible Accounts or Eligible Foreign Accounts, as applicable.

 

5.28         Eligible Inventory and Eligible Export-Related Inventory. As to
each item of Inventory that is identified by Borrower as Eligible Inventory or
Eligible Export-Related Inventory in a Borrowing Base Certificate submitted to
Lender, such Inventory is (a) of good and merchantable quality, free from known
defects, and (b) not excluded as ineligible by virtue of one or more of the
excluding criteria (other than Lender-discretionary criteria) set forth in the
definition of Eligible Inventory or Eligible Export-Related Inventory, as
applicable.

 

5.29         Locations of Inventory and Equipment. The Inventory and Equipment
(other than vehicles or Equipment out for repair) of the Loan Parties and their
Subsidiaries are not stored with a bailee, warehouseman, or similar party
(except as noted on Schedule 7.16 to the Information Certificate) and are
located only at, or in-transit between or to, the locations identified on
Schedule 5.29 to the Information Certificate (as such Schedule may be updated
pursuant to Section 6.14).

 

5.30         Inventory Records. Each Loan Party keeps correct and accurate
records itemizing and describing the type, quality, and quantity of its
Inventory and of the Inventory of its Subsidiaries and the book value thereof.

 

Exhibit D
Page 6

 

 

EXHIBIT E

 

TO CREDIT AND SECURITY AGREEMENT

 

INFORMATION CERTIFICATE

OF

CHARLES & COLVARD, LTD.

Charles & Colvard Direct, LLC

Moissanite.com, LLC

 

 

 

Dated: June 25, 2014