Exhibit 10.1

 

NINTH AMENDMENT TO LOAN AND SECURITY AGREEMENT

 

THIS NINTH AMENDMENT TO LOAN AND SECURITY AGREEMENT ("Amendment"), dated as of
May 3, 2013 (or dated as of March 31, 2013, in the case of the definition of the
term "Revolver Termination Date" as contained in the Loan Agreement attached
hereto as Exhibit A) (the "Amendment Date"), is between LAPOLLA INDUSTRIES, INC.
("Borrower") and BANK OF AMERICA, N.A., a national banking association
("Lender").

RECITALS

 

Borrower and Lender have entered into that certain Loan and Security Agreement
dated as of August 31, 2010, as amended by the First Amendment to Loan and
Security Agreement dated as of November 10, 2010, the Second Amendment to Loan
and Security Agreement dated as of March 14, 2011, the Third Amendment to Loan
and Security Agreement dated as of May 11, 2011, the Fourth Amendment to Loan
and Security Agreement dated as of August 17, 2011, the Fifth Amendment to Loan
and Security Agreement dated as of November 21, 2011, the Sixth Amendment to
Loan and Security Agreement dated as of April 16, 2012, the Seventh Amendment to
Loan and Security Agreement dated as of June 29, 2012, and the Eighth Amendment
to Loan and Security Agreement dated as November 15, 2012 (collectively, and as
may hereafter be amended or otherwise modified, the "Loan Agreement").

NOW, THEREFORE, in consideration of the premises herein contained and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows effective as of the date
hereof unless otherwise indicated:

ARTICLE 1
Definitions

 

Section 1.1 Definitions. Terms defined by the Loan Agreement, where used herein
and not otherwise defined, shall have the same meanings herein as are prescribed
by the Loan Agreement, as amended hereby.

ARTICLE 2
Amendments

 

Section 2.1 Amendments to the Loan Agreement. Effective as of the Amendment
Date, the Loan Agreement (including all Schedules and Exhibits thereto) is
hereby amended to read in its entirety as set forth in, and to be in the form
and substance as provided in, Exhibit A attached hereto and incorporated herein
by reference.

 

ARTICLE 3

Conditions Precedent

 

Section 3.1 Condition Precedent. The effectiveness of this Amendment is subject
to the satisfaction of each of the following conditions precedent (except if and
to the extent that any such condition precedent is waived in writing by Lender
at any time):

 

(a) Borrower shall have delivered or paid (as applicable) to Lender:

 

(i) an executed original counterpart of this Amendment, in form and substance
satisfactory to Lender, duly executed by Borrower; and

 

(ii) Borrower shall have paid to Lender an amendment fee in the amount of
$32,500;

 

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(b) after giving effect to this Amendment, no Default or Event of Default shall
be in existence; and

 

(c) all proceedings taken in connection with the transactions contemplated by
this Amendment and all documentation and other legal matters incident thereto
shall be satisfactory to Lender.

 

SECTION 1.      ARTICLE 4
Ratifications, Representations and Warranties

Section 4.1 Ratifications. The terms and provisions set forth in this Amendment
shall modify and supersede all inconsistent terms and provisions set forth in
the Loan Agreement and, except as expressly modified and superseded by this
Amendment, the terms and provisions of the Loan Agreement and the other Loan
Documents are ratified and confirmed and shall continue in full force and
effect. Borrower and Lender agree that the Loan Agreement as amended hereby and
the other Loan Documents shall continue to be legal, valid, binding and
enforceable in accordance with their respective terms.

Section 4.2 Representations and Warranties. Borrower hereby represents and
warrants to Lender as follows: (a) no Default or Event of Default exists; and
(b) the representations and warranties set forth in the Loan Documents are true
and correct on and as of the date hereof with the same effect as though made on
and as of such date except with respect to any representations and warranties
limited by their terms to a specific date.

Section 4.3 WAIVER AND RELEASE. TO INDUCE LENDER TO AGREE TO THE TERMS OF THIS
AMENDMENT, EACH OBLIGOR (BY ITS EXECUTION BELOW) REPRESENTS AND WARRANTS THAT AS
OF THE DATE OF ITS EXECUTION OF THIS AMENDMENT THERE ARE NO CLAIMS OR OFFSETS
AGAINST OR RIGHTS OF RECOUPMENT WITH RESPECT TO OR DEFENSES OR COUNTERCLAIMS TO
ITS OBLIGATIONS UNDER THE LOAN DOCUMENTS AND IN ACCORDANCE THEREWITH IT:

1.1.1        (a) HEREBY WAIVES ANY AND ALL SUCH CLAIMS, OFFSETS, RIGHTS OF
RECOUPMENT, DEFENSES OR COUNTERCLAIMS, WHETHER KNOWN OR UNKNOWN, ARISING PRIOR
TO THE DATE OF ITS EXECUTION OF THIS AMENDMENT; AND

1.1.2        (b) HEREBY RELEASES AND DISCHARGES LENDER, AND ITS OFFICERS,
DIRECTORS, EMPLOYEES, AGENTS, SHAREHOLDERS, AFFILIATES AND ATTORNEYS
(COLLECTIVELY THE "RELEASED PARTIES"), FROM ANY AND ALL OBLIGATIONS,
INDEBTEDNESS, LIABILITIES, CLAIMS, RIGHTS, CAUSES OF ACTION OR DEMANDS
WHATSOEVER, WHETHER KNOWN OR UNKNOWN, SUSPECTED OR UNSUSPECTED, IN LAW OR
EQUITY, WHICH ANY OBLIGOR EVER HAD, NOW HAS, CLAIMS TO HAVE OR MAY HAVE AGAINST
ANY RELEASED PARTY ARISING PRIOR TO THE DATE HEREOF AND FROM OR IN CONNECTION
WITH THE LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY.

 

 

 

 

 

 

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SECTION 2.      ARTICLE 5
Other Agreements

Section 5.1 Survival of Representations and Warranties. All representations and
warranties made in this Amendment or any other Loan Document, including any Loan
Document furnished in connection with this Amendment, shall survive the
execution and delivery of this Amendment and the other Loan Documents, and no
investigation by Lender or any closing shall affect the representations and
warranties or the right of Lender to rely upon them.

Section 5.2 Reference to Loan Agreement. Each of the Loan Documents, including
the Loan Agreement, is hereby amended so that any reference in such Loan
Document to the Loan Agreement shall mean a reference to the Loan Agreement as
amended hereby. This Amendment shall constitute a Loan Document.

Section 5.3 Expenses of Lender. As provided in the Loan Agreement, Borrower
agrees to pay on demand all costs and expenses incurred by Lender in connection
with the preparation, negotiation and execution of this Amendment and the other
Loan Documents executed pursuant hereto, including without limitation, the costs
and fees of Lender's legal counsel.

Section 5.4 Severability. Each provision of this Amendment shall be interpreted
in such manner as to be valid under Applicable Law. If any provision is found to
be invalid under Applicable Law, it shall be ineffective only to the extent of
such invalidity and the remaining provisions of this Amendment shall remain in
full force and effect.

Section 5.5 GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY THE LAWS OF THE
STATE OF TEXAS, WITHOUT GIVING EFFECT TO ANY CONFLICT OF LAW PRINCIPLES (BUT
GIVING EFFECT TO FEDERAL LAWS RELATING TO NATIONAL BANKS).

Section 5.6 Successors and Assigns. This Amendment is binding upon and shall
inure to the benefit of Lender and Borrower and their respective successors and
assigns, except Borrower may not assign or transfer any of its rights or
obligations hereunder without the prior written consent of Lender. Any
assignment in violation of this Section 5.6 shall be void.

Section 5.7 Counterparts; Facsimile or Electronic Signatures. This Amendment may
be executed in counterparts, each of which shall constitute an original, but all
of which when taken together shall constitute a single contract. This Amendment
shall become effective when Lender has received counterparts bearing the
signatures of all parties hereto. Delivery of a signature page of this Amendment
by telecopy or other electronic means shall be effective as delivery of a
manually executed counterpart of such agreement.

Section 5.8 Headings. The headings, captions and arrangements used in this
Amendment are for convenience only and shall not affect the interpretation of
this Amendment.

Section 5.9 Amendment Fee. Borrower shall pay to Lender, concurrently with
Borrower's execution of this Amendment, an amendment fee in the amount of
$32,500, which amendment fee shall be fully earned when payable and shall be
non-refundable.

Section 5.10 Entire Agreement. Time is of the essence of this Amendment. This
Amendment, the Loan Agreement and the other Loan Documents embody the final,
entire agreement among the parties relating to the subject matter hereof and
supersede any and all previous commitments, agreements, representations and
understandings, whether oral or written, relating to the subject matter hereof
and may not be contradicted or varied by evidence of prior, contemporaneous or
subsequent oral agreements or discussions of the parties hereto.

 

 

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Section 5.11 Effective Date of Amendment to the Definition of the Term "Revolver
Termination Date". Notwithstanding anything to the contrary contained herein,
the effective date of the amendment and restatement of the definition of the
term "Revolver Termination Date" as contained in the Loan Agreement attached
hereto as Exhibit A is March 31, 2013, for all purposes.

Executed effective as of the Amendment Date.

 

 

BORROWER:

 

LAPOLLA INDUSTRIES, INC.

 

 

By: /s Michael T. Adams, EVP

Name: Michael T. Adams

Title: Executive Vice President

 

 

LENDER:

 

BANK OF AMERICA, N.A.

 

 

By: /s/ H. Michael Wills, SVP

Name: H. Michael Wills

Title: Senior Vice President

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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EXHIBIT A

TO

NINTH AMENDMENT TO LOAN AND SECURITY AGREEMENT

DATED AS OF MAY 3, 2013

BETWEEN

LAPOLLA INDUSTRIES, INC.

AND

BANK OF AMERICA, N.A.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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LAPOLLA INDUSTRIES, INC.

as Borrower

______________________________________________________________________________

______________________________________________________________________________

LOAN AND SECURITY AGREEMENT

Dated as of August 31, 2010, as amended by the

First Amendment to Loan and Security Agreement dated as of November 10, 2010,

the Second Amendment to Loan and Security Agreement dated as of March 14, 2011,

the Third Amendment to Loan and Security Agreement dated as of May 11, 2011,

the Fourth Amendment to Loan and Security Agreement dated as of August 17, 2011,

the Fifth Amendment to Loan and Security Agreement dated as of November 21,
2011,

the Sixth Amendment to Loan and Security Agreement dated as of April 16, 2012,

the Seventh Amendment to Loan and Security Agreement dated as of June 29, 2012,

the Eighth Amendment to Loan and Security Agreement dated as of November 12,
2012,

and the Ninth Amendment to Loan and Security Agreement, dated as of May 3, 2013

______________________________________________________________________________

______________________________________________________________________________

BANK OF AMERICA, N.A.,

as Lender

 
 
 

TABLE OF CONTENTS

Page

 

SECTION 1. DEFINITIONS; RULES OF CONSTRUCTION 1 1.1. Definitions. 1 1.2.
Accounting Terms. 19 1.3. Uniform Commercial Code.20   1.4. Certain Matters of
Construction. 20 SECTION 2. CREDIT FACILITIES 20 2.1. Revolver Commitment. 20
2.2. Term Loan Commitment. 21 2.3. Letter of Credit Facility. 21 SECTION 3.
INTEREST, FEES AND CHARGES 22 3.1. Interest. 22 3.2. Fees. 24 3.3. Computation
of Interest, Fees, Yield Protection. 24 3.4. Reimbursement Obligations. 24 3.5.
Illegality. 25 3.6. Inability to Determine Rates. 25 3.7. Increased Costs;
Capital Adequacy. 25 3.8. Mitigation. 26 3.9. Funding Losses. 26 3.10. Maximum
Interest. 26 3.11. Excess Resulting from Exchange Rate. 26 SECTION 4. LOAN
ADMINISTRATION 27 4.1. Manner of Borrowing and Funding Revolver Loans. 27 4.2.
Number and Amount of LIBOR Loans; Determination of Rate. 27 4.3. One Obligation.
28 4.4. Effect of Termination. 28 SECTION 5. PAYMENTS 28 5.1. General Payment
Provisions. 28 5.2. Repayment of Revolver Loans. 28 5.3. Repayment of Term Loan.
28 5.4. Payment of Other Obligations. 29 5.5. Marshaling; Payments Set Aside. 29
5.6. Application of Payments. 29 5.7. Loan Account; Account Stated. 30 5.8.
Taxes. 30 5.9. Nature and Extent of Borrower's Liability. 30 SECTION 6.
CONDITIONS PRECEDENT 31 6.1. Conditions Precedent to Initial Loans. 31 6.2.
Conditions Precedent to All Credit Extensions. 33 SECTION 7. COLLATERAL 33 7.1.
Grant of Security Interest. 33 7.2. Lien on Deposit Accounts; Cash Collateral.
34 7.3. Reserved. 34 7.4. Other Collateral. 34 7.5. No Assumption of Liability.
35 7.6. Further Assurances; Extent of Liens. 35 7.7. Foreign Subsidiary Stock.
35

 

 

 

(i)

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SECTION 8. COLLATERAL ADMINISTRATION 35 8.1. Borrowing Base Certificates. 35
8.2. Administration of Accounts. 35 8.3. Administration of Inventory. 37 8.4.
Administration of Equipment. 37 8.5. Administration of Deposit Accounts. 38 8.6.
General Provisions. 38 8.7. Power of Attorney. 39 SECTION 9. REPRESENTATIONS AND
WARRANTIES 40 9.1. General Representations and Warranties. 40 9.2. Complete
Disclosure. 44 SECTION 10. COVENANTS AND CONTINUING AGREEMENTS 44 10.1.
Affirmative Covenants. 44 10.2. Negative Covenants. 47 10.3. Financial
Covenants. 50 SECTION 11. EVENTS OF DEFAULT; REMEDIES ON DEFAULT 51 11.1. Events
of Default. 51 11.2. Remedies upon Default. 52 11.3. License. 53 11.4. Setoff.
53 11.5. Remedies Cumulative; No Waiver. 53 SECTION 12. MISCELLANEOUS 53 12.1.
Consents, Amendments and Waivers. 53 12.2. Indemnity. 54 12.3. Notices and
Communications. 54 12.4. Performance of Borrower's Obligations. 54 12.5. Credit
Inquiries. 55 12.6. Severability. 55 12.7. Cumulative Effect; Conflict of Terms.
55 12.8. Counterparts. 55 12.9. Entire Agreement. 55 12.10. No Control; No
Advisory or Fiduciary Responsibility. 55 12.11. Confidentiality. 56 12.12.
Reserved. 56 12.13. GOVERNING LAW. 56 12.14. Consent to Forum. 56 12.15. Waivers
by Borrower. 56 12.16. Patriot Act Notice.. 57 12.17. NO ORAL AGREEMENT. 57

 

LIST OF SCHEDULES

Schedule 8.5 Deposit Accounts Schedule 8.6.1 Business Locations Schedule 9.1.4
Names and Capital Structure Schedule 9.1.11 Patents, Trademarks, Copyrights and
Licenses Schedule 9.1.14 Environmental Matters Schedule 9.1.15 Restrictive
Agreements Schedule 9.1.16 Litigation Schedule 9.1.18 Pension Plans Schedule
10.2.2 Existing Liens Schedule 10.2.17 Existing Affiliate Transactions

 

(ii)

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LOAN AND SECURITY AGREEMENT

THIS LOAN AND SECURITY AGREEMENT, dated as of August 31, 2010, as amended by the
First Amendment to Loan and Security Agreement dated as of November 10, 2010,
the Second Amendment to Loan and Security Agreement dated as of March 14, 2011,
the Third Amendment to Loan and Security Agreement dated as of May 11, 2011, the
Fourth Amendment to Loan and Security Agreement dated as of August 17, 2011, the
Fifth Amendment to Loan and Security Agreement dated as of November 21, 2011,
the Sixth Amendment to Loan and Security Agreement dated as of April 16, 2012,
the Seventh Amendment to Loan and Security Agreement dated as of June 29, 2012,
the Eighth Amendment to Loan and Security Agreement dated as of November 12,
2012, and the Ninth Amendment to Loan and Security Agreement, dated as of May 3,
2013 (or dated as of March 31, 2013, in the case of the definition of the term
"Revolver Termination Date"), is between LaPolla Industries, Inc., a Delaware
corporation ("Borrower"), and BANK OF AMERICA, N.A., a national banking
association ("Lender").

R E C I T A L S:

Borrower has requested that Lender provide a credit facility to Borrower to
finance its business enterprise. Lender is willing to provide the credit
facility on the terms and conditions set forth in this Agreement.

NOW, THEREFORE, for valuable consideration hereby acknowledged, the parties
agree as follows:

SECTION 3.      DEFINITIONS; RULES OF CONSTRUCTION

3.1.            Definitions. As used herein, the following terms have the
meanings set forth below:

Account: as defined in the UCC, including all rights to payment for goods sold
or leased, or for services rendered.

Account Debtor: a Person who is obligated under an Account, Chattel Paper or
General Intangible.

Accounts Formula Amount: 85% of the Value of Eligible Accounts.

Activation Notice: a written notice by Lender to Borrower pursuant to
Section 8.2.5(d), directing that all payments in respect of payments on Canadian
Accounts shall be transferred to a Dominion Account other than the Canadian
Dominion Account.

Affiliate: with respect to any Person, another Person that directly, or
indirectly through one or more intermediaries, Controls or is Controlled by or
is under common Control with the Person specified. "Control" means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of a Person, whether through the ability
to exercise voting power, by contract or otherwise. "Controlling" and
"Controlled" have correlative meanings.

Agreement: this Loan and Security Agreement, as it may be amended, supplemented,
renewed, extended, replaced or otherwise modified from time to time.

Anti-Terrorism Laws: any laws relating to terrorism or money laundering,
including the Patriot Act.

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Applicable Law: all laws, rules, regulations and governmental guidelines
applicable to the Person, conduct, transaction, agreement or matter in question,
including all applicable statutory law, common law and equitable principles, and
all provisions of constitutions, treaties, statutes, rules, regulations, orders
and decrees of Governmental Authorities.

Applicable Margin: with respect to any Type of Loan, the margin set forth below:

Base Rate Revolver Loans and UK Base Rate Revolver Loans  LIBOR Revolver Loans 
LIBOR Term Loans  2.25%   3.25%   4.00%

 

 

Asset Disposition: a sale, lease, license, consignment, transfer or other
disposition of Property of an Obligor, including a disposition of Property in
connection with a sale-leaseback transaction or synthetic lease.

Availability: the Borrowing Base minus the principal balance of all Revolver
Loans.

Availability Reserve: the sum (without duplication) of (a) the Basic Reserve
plus (b) the Inventory Reserve plus (c) the Rent and Charges Reserve plus
(d) the LC Reserve plus (e) the Bank Product Reserve plus (f) UK Priority
Payable Reserve plus (g) all accrued Royalties, whether or not then due and
payable by a Borrower plus (h) the aggregate amount of liabilities secured by
Liens upon Collateral that are senior to Lender's Liens (but imposition of any
such reserve shall not waive an Event of Default arising therefrom) plus
(i) such additional reserves, in such amounts and with respect to such matters,
as Lender in its discretion may elect to impose from time to time.

 

Bank Product: any of the following products, services or facilities extended to
Borrower or Subsidiary by Lender or any of its Affiliates: (a) Cash Management
Services; (b) products under Hedging Agreements; (c) commercial credit card and
merchant card services; and (d) leases and other banking products or services as
may be requested by Borrower or Subsidiary, other than Letters of Credit.

Bank Product Debt: Debt and other obligations of an Obligor relating to Bank
Products.

Bank Product Reserve: the aggregate amount of reserves established by Lender
from time to time in its discretion in respect of Bank Product Debt.

Bankruptcy Code: Title 11 of the United States Code.

Base Rate: for any day, a per annum rate equal to the greater of (a) the Prime
Rate for such day; (b) the Federal Funds Rate for such day, plus 0.50%; or (c)
LIBOR for a 30 day interest period as determined on such day, plus 1.50%.

Base Rate Loan: any Loan that bears interest based on the Base Rate.

Basic Reserve: an amount, determined as of any day, equal to $500,000.

Base Rate Revolver Loan: a Revolver Loan that bears interest based on the Base
Rate.

Board of Governors: the Board of Governors of the Federal Reserve System.

 

 

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Borrowed Money: with respect to any Obligor, without duplication, its (a) Debt
that (i) arises from the lending of money by any Person to such Obligor, (ii) is
evidenced by notes, drafts, bonds, debentures, credit documents or similar
instruments, (iii) accrues interest or is a type upon which interest charges are
customarily paid (excluding trade payables owing in the Ordinary Course of
Business), or (iv) was issued or assumed as full or partial payment for
Property; (b) Capital Leases; (c) reimbursement obligations with respect to
letters of credit; and (d) guaranties of any Debt of the foregoing types owing
by another Person.

Borrowing: a group of Loans of one Type that are made on the same day or are
converted into Loans of one Type on the same day.

Borrowing Base: on any date of determination, an amount equal to the lesser of
(a) the Revolver Commitment, minus the LC Reserve; or (b) the sum of the
Accounts Formula Amount, plus the Inventory Formula Amount, minus the
Availability Reserve; provided notwithstanding the foregoing that, for purposes
of clause (b) preceding, the amount included in the Inventory Formula Amount in
respect of Inventory located in Canada plus the amount included in the Accounts
Formula Amount in respect of Accounts payable by an Account Debtor that is
organized or has its principal office or assets in Canada shall not at any time
exceed $4,000,000

Borrowing Base Certificate: a certificate, in form and substance satisfactory to
Lender, by which Borrower certifies calculation of the Borrowing Base.

Business Day: any day other than a Saturday, Sunday or other day on which
commercial banks are authorized to close under the laws of, or are in fact
closed in, North Carolina and Texas, and if such day relates to a LIBOR Loan,
any such day on which dealings in Dollar deposits are conducted between banks in
the London interbank Eurodollar market.

Canadian Accounts: Accounts resulting from Canadian Sales.

 

Canadian Disbursement Account: deposit account #711449328214 maintained at Bank
of America, N.A., (acting through its Canada branch), or such other account as
may be mutually agreed in writing by Lender and Borrower.

 

Canadian Dominion Account: a Dominion Account, deposit account #711449328206,
maintained at Bank of America, N.A., (acting through its Canada branch), or such
other account as may be designated by Lender to Borrower in writing for the
deposit of payments on Canadian Accounts.

 

Canadian Sales: all sales of goods or services by Borrower to residents of
Canada or with respect to which the sales price is payable by residents of
Canada.

 

Capital Expenditures: all liabilities incurred or expenditures made by Borrower
or Subsidiary for the acquisition of fixed assets, or any improvements,
replacements, substitutions or additions thereto with a useful life of more than
one year.

Capital Lease: any lease that is required to be capitalized for financial
reporting purposes in accordance with GAAP.

Cash Collateral: cash, and any interest or other income earned thereon, that is
delivered to Lender to Cash Collateralize any Obligations.

Cash Collateral Account: a demand deposit, money market or other account
maintained with Lender and subject to Lender's Liens.

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Cash Collateralize: the delivery of cash to Lender, as security for the payment
of Obligations, in an amount equal to (a) with respect to LC Obligations, 105%
of the aggregate LC Obligations, and (b) with respect to any inchoate,
contingent or other Obligations (including Obligations arising under Bank
Products), Lender's good faith estimate of the amount due or to become due,
including all fees and other amounts relating to such Obligations. "Cash
Collateralization" has a correlative meaning.

Cash Equivalents: (a) marketable obligations issued or unconditionally
guaranteed by, and backed by the full faith and credit of, the United States
government, maturing within 12 months of the date of acquisition; (b)
certificates of deposit, time deposits and bankers' acceptances maturing within
12 months of the date of acquisition, and overnight bank deposits, in each case
which are issued by a commercial bank organized under the laws of the United
States or any state or district thereof, rated A-1 (or better) by S&P or P-1 (or
better) by Moody's at the time of acquisition, and (unless issued by Lender) not
subject to offset rights; (c) repurchase obligations with a term of not more
than 30 days for underlying investments of the types described in clauses (a)
and (b) entered into with any bank meeting the qualifications specified in
clause (b); (d) commercial paper rated A-1 (or better) by S&P or P-1 (or better)
by Moody's, and maturing within nine months of the date of acquisition; and (e)
shares of any money market fund that has substantially all of its assets
invested continuously in the types of investments referred to above, has net
assets of at least $500,000,000 and has the highest rating obtainable from
either Moody's or S&P.

Cash Management Services: any services provided from time to time by Lender or
any of its Affiliates to Borrower or Subsidiary in connection with operating,
collections, payroll, trust, or other depository or disbursement accounts,
including automated clearinghouse, e-payable, electronic funds transfer, wire
transfer, controlled disbursement, overdraft, depository, information reporting,
lockbox and stop payment services.

CERCLA: the Comprehensive Environmental Response Compensation and Liability Act
(42 U.S.C. § 9601 et seq.).

Change in Law: the occurrence, after the date hereof, of (a) the adoption or
taking effect of any law, rule, regulation or treaty; (b) any change in any law,
rule, regulation or treaty or in the administration, interpretation or
application thereof by any Governmental Authority; or (c) the making or issuance
of any request, guideline or directive (whether or not having the force of law)
by any Governmental Authority.

Change of Control: (a) Richard J. Kurtz ceases to own and control, beneficially
and of record, directly or indirectly, greater than 51% of all Voting Equity
Interests in Borrower; (b) a change in the majority of directors of Borrower,
unless approved by the then majority of directors; or (c) all or substantially
all of Borrower's assets are sold or transferred.

Claims: all liabilities, obligations, losses, damages, penalties, judgments,
proceedings, interest, costs and expenses of any kind (including remedial
response costs, reasonable attorneys' fees and Extraordinary Expenses) at any
time (including after Full Payment of the Obligations) incurred by or asserted
against any Indemnitee in any way relating to (a) any Loans, Letters of Credit,
Loan Documents, or the use thereof or transactions relating thereto, (b) any
action taken or omitted to be taken by any Indemnitee in connection with any
Loan Documents, (c) the existence or perfection of any Liens, or realization
upon any Collateral, (d) exercise of any rights or remedies under any Loan
Documents or Applicable Law, or (e) failure by any Obligor to perform or observe
any terms of any Loan Document, in each case including all costs and expenses
relating to any investigation, litigation, arbitration or other proceeding
(including an Insolvency Proceeding or appellate proceedings), whether or not
the applicable Indemnitee is a party thereto.

Closing Date: as defined in Section 6.1, which date was August 31, 2010.

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Code: the Internal Revenue Code of 1986.

Collateral: all Property described in Section 7.1, all Property described in any
Security Documents as security for any Obligations, and all other Property that
now or hereafter secures (or is intended to secure) any Obligations.

Commitment Termination Date: the earliest to occur of (a) the Revolver
Termination Date; (b) the date on which Borrower terminates the Revolver
Commitment pursuant to Section 2.1.3; or (c) the date on which the Revolver
Commitment is terminated pursuant to Section 11.2.

Commitments: the Revolver Commitment and Term Loan Commitment.

Compliance Certificate: a certificate, in form and substance satisfactory to
Lender, by which Borrower certifies compliance with Sections 10.2.3 and 10.3 and
lists all outstanding Bank Products.

Contingent Obligation: any obligation of a Person arising from a guaranty,
indemnity or other assurance of payment or performance of any Debt, lease,
dividend or other obligation ("primary obligations") of another obligor
("primary obligor") in any manner, whether directly or indirectly, including any
obligation of such Person under any (a) guaranty, endorsement, co-making or sale
with recourse of an obligation of a primary obligor; (b) obligation to make
take-or-pay or similar payments regardless of nonperformance by any other party
to an agreement; and (c) arrangement (i) to purchase any primary obligation or
security therefor, (ii) to supply funds for the purchase or payment of any
primary obligation, (iii) to maintain or assure working capital, equity capital,
net worth or solvency of the primary obligor, (iv) to purchase Property or
services for the purpose of assuring the ability of the primary obligor to
perform a primary obligation, or (v) otherwise to assure or hold harmless the
holder of any primary obligation against loss in respect thereof. The amount of
any Contingent Obligation shall be deemed to be the stated or determinable
amount of the primary obligation (or, if less, the maximum amount for which such
Person may be liable under the instrument evidencing the Contingent Obligation)
or, if not stated or determinable, the maximum reasonably anticipated liability
with respect thereto.

CWA: the Clean Water Act (33 U.S.C. §§ 1251 et seq.).

Debt: as applied to any Person, without duplication, (a) all items that would be
included as liabilities on a balance sheet in accordance with GAAP, including
Capital Leases, but excluding trade payables incurred and being paid in the
Ordinary Course of Business; (b) all Contingent Obligations; (c) all
reimbursement obligations in connection with letters of credit issued for the
account of such Person; and (d) in the case of Borrower, the Obligations. The
Debt of a Person shall include any recourse Debt of any partnership in which
such Person is a general partner or joint venturer.

Default: an event or condition that, with the lapse of time or giving of notice,
would constitute an Event of Default.

Default Rate: for any Obligation (including, to the extent permitted by law,
interest not paid when due), 2% plus the interest rate otherwise applicable
thereto.

Deposit Account: (i) any "deposit account" as such term is defined in Article 9
of the UCC and in any event shall include all accounts and sub-accounts relating
to any of the foregoing and (ii) with respect to any such Deposit Account
located outside of the U.S., any bank account with a deposit function.

 

 

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Deposit Account Control Agreements: the Deposit Account control agreements
(whether in the form of an agreement, notice and acknowledgement or like
instrument) to be executed by each institution maintaining a Deposit Account for
Borrower, in favor of Lender, as security for the Obligations.

Designated Account Debtor: means an Account Debtor that is identified by
Borrower and Lender as a "Designated Account Debtor" for purposes of
clause (a)(iii) of the definition of Eligible Account, and evidenced in writing
signed by Borrower and Lender.

Distribution: any declaration or payment of a distribution, interest or dividend
on any Equity Interest (other than payment-in-kind); any distribution, advance
or repayment of Debt to a holder of Equity Interests; or any purchase,
redemption, or other acquisition or retirement for value of any Equity Interest.

Dollar Equivalent: on any date, with respect to any amount denominated in
Dollars, such amount in Dollars, and with respect to any stated amount in a
currency other than Dollars, the amount of Dollars that Lender determines (which
determination shall be conclusive and binding absent manifest error) would be
necessary to be sold on such date at the applicable Exchange Rate to obtain the
stated amount of the other currency.

Dollars: lawful money of the United States.

Dominion Account: a special account established by Borrower at Lender or a bank
acceptable to Lender, over which Lender has exclusive control for withdrawal
purposes.

EBITDA: determined on a consolidated basis for Borrower and Subsidiaries, net
income, calculated before interest expense, provision for income taxes,
depreciation and amortization expense, non-cash stock-based compensation
expense, gains or losses arising from the sale of capital assets, gains arising
from the write-up of assets, and any extraordinary gains (in each case, to the
extent included in determining net income).

 

Eligible Account: an Account owing to Borrower that arises in the Ordinary
Course of Business from the sale of goods, is payable in Dollars (or, in the
case of an Account owing by ** Group or another Account Debtor approved by
Lender in its sole discretion as provided in clause (g) below, is payable in
Euros or Sterling) and is deemed by Lender, in its discretion, to be an Eligible
Account. Without limiting the foregoing, no Account shall be an Eligible Account
if (a) it is unpaid for more than (i) 90 days after the original invoice date if
the original due date is 30 days or less from the original invoice date or (iii)
120 days after the original invoice date if the original due date is more than
30 days and less than or equal to 60 days from the original invoice date and the
Account Debtor for such Account is a Designated Account Debtor; (b) 25% or more
of the Accounts owing by the Account Debtor are not Eligible Accounts under the
foregoing clause; (c) when aggregated with other Accounts owing by the Account
Debtor, it exceeds 15% of the aggregate Eligible Accounts (or such higher
percentage as Lender may establish for the Account Debtor from time to time);
(d) it does not conform with a covenant or representation herein; (e) it is
owing by a creditor or supplier, or is otherwise subject to a potential offset,
counterclaim, dispute, deduction, discount, recoupment, reserve, defense,
chargeback, credit or allowance (but ineligibility shall be limited to the
amount thereof); (f) an Insolvency Proceeding has been commenced by or against
the Account Debtor; or the Account Debtor has failed, has suspended or ceased
doing business, is liquidating, dissolving or winding up its affairs, or is not
Solvent; or the Borrower is not able to bring suit or enforce remedies against
the Account Debtor through judicial process; (g) the Account Debtor is organized
or has its principal offices or assets outside the United States or Canada,
unless payment of such Account is secured by an irrevocable letter of credit, in
form and substance satisfactory to Lender and issued by a financial institution
acceptable to Lender, in each case in Lender's sole discretion, payable in
Dollars in the full face amount of such Account, and Lender has control (as

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defined by Section 9.107 of the UCC) of all Letter of Credit Rights associated
with such letter of credit, provided that ** or any other Account Debtor from
time to time approved in writing by Lender (for purposes of this definition of
the term Eligible Account) in its sole discretion which is organized or has its
principal office and assets in the United Kingdom shall not be excluded by
virtue of this clause (g) if (but only if) the Accounts of such Account Debtor
are acceptable to Lender in its sole discretion, which Accounts may be payable
in Dollars, Euros or Sterling, and are fully covered by credit insurance in form
and substance and provided by an insurance company acceptable to Lender in its
sole discretion; (h) it is owing by a Government Authority, unless the Account
Debtor is the United States or any department, agency or instrumentality thereof
and the Account has been assigned to Lender in compliance with the Assignment of
Claims Act; (i) it is not subject to a duly perfected, first priority Lien in
favor of Lender, or is subject to any other Lien; (j) the goods giving rise to
it have not been delivered to and accepted by the Account Debtor, the services
giving rise to it have not been accepted by the Account Debtor, or it otherwise
does not represent a final sale; (k) it is evidenced by Chattel Paper or an
Instrument of any kind, or has been reduced to judgment; (l) its payment has
been extended, the Account Debtor has made a partial payment, or it arises from
a sale on a cash-on-delivery basis; (m) it arises from a sale to an Affiliate,
from a sale on a bill-and-hold, guaranteed sale, sale-or-return,
sale-on-approval, consignment, or other repurchase or return basis, or from a
sale to a Person for personal, family or household purposes; (n) it represents a
progress billing or retainage, or relates to services for which a performance,
surety or completion bond or similar assurance has been issued; or (o) it
includes a billing for interest, fees or late charges, but ineligibility shall
be limited to the extent thereof. In calculating delinquent portions of Accounts
under clauses (a) and (b), credit balances more than 90 days old will be
excluded. For the avoidance of doubt, in the event that any Eligible Accounts
are payable in Euros or Sterling, then the amount of such Eligible Accounts for
purposes of the determination of the Borrowing Base and other matters under this
Agreement shall be the Dollar Equivalent thereof.

Eligible Inventory: Inventory owned by Borrower that Lender, in its discretion,
deems to be Eligible Inventory. Without limiting the foregoing, no Inventory
shall be Eligible Inventory unless it (a) is finished goods or raw materials,
and not work-in-process, packaging or shipping materials, labels, samples,
display items, bags, replacement parts or manufacturing supplies; (b) is not
held on consignment, nor subject to any deposit or downpayment; (c) is in new
and saleable condition and is not damaged, defective, shopworn or otherwise
unfit for sale; (d) is not slow-moving, obsolete or unmerchantable, and does not
constitute returned or repossessed goods; (e) meets all standards imposed by any
Governmental Authority, and does not constitute hazardous materials under any
Environmental Law; (f) conforms with the covenants and representations herein;
(g) is subject to Lender's duly perfected, first priority Lien, and no other
Lien; (h) is within the continental United States or Canada, is not in transit
except between locations of Borrower, and is not consigned to any Person; (i) is
not subject to any warehouse receipt or negotiable Document; (j) is not subject
to any License or other arrangement that restricts Borrower's or Lender's right
to dispose of such Inventory, unless Lender has received an appropriate Lien
Waiver; (k) is located on premises owned or leased by Borrower at which the
aggregate Value of all Eligible Inventory located on such premises exceeds
$100,000, (l) is not located on leased premises or in the possession of a
warehouseman, processor, repairman, mechanic, shipper, freight forwarder or
other Person, unless the lessor or such Person has delivered a Lien Waiver or an
appropriate Rent and Charges Reserve has been established; and (m) is reflected
in the details of a current perpetual inventory report.

Enforcement Action: any action to enforce any Obligations or Loan Documents or
to realize upon any Collateral (whether by judicial action, self-help,
notification of Account Debtors, exercise of setoff or recoupment, or
otherwise).

 

 

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Environmental Laws: all Applicable Laws (including all programs, permits and
guidance promulgated by regulatory agencies), relating to public health (but
excluding occupational safety and health, to the extent regulated by OSHA) or
the protection or pollution of the environment, including CERCLA, RCRA and CWA.

Environmental Notice: a notice (whether written or oral) from any Governmental
Authority or other Person of any possible noncompliance with, investigation of a
possible violation of, litigation relating to, or potential fine or liability
under any Environmental Law, or with respect to any Environmental Release,
environmental pollution or hazardous materials, including any complaint,
summons, citation, order, claim, demand or request for correction, remediation
or otherwise.

Environmental Release: a release as defined in CERCLA or under any other
Environmental Law.

Equity Interest: the interest of any (a) shareholder in a corporation; (b)
partner in a partnership (whether general, limited, limited liability or joint
venture); (c) member in a limited liability company; or (d) other Person having
any other form of equity security or ownership interest.

ERISA: the Employee Retirement Income Security Act of 1974.

ERISA Affiliate: any trade or business (whether or not incorporated) under
common control with an Obligor within the meaning of Section 414(b) or (c) of
the Code (and Sections 414(m) and (o) of the Code for purposes of provisions
relating to Section 412 of the Code).

ERISA Event: (a) a Reportable Event with respect to a Pension Plan; (b) a
withdrawal by any Obligor or ERISA Affiliate from a Pension Plan subject to
Section 4063 of ERISA during a plan year in which it was a substantial employer
(as defined in Section 4001(a)(2) of ERISA) or a cessation of operations that is
treated as such a withdrawal under Section 4062(e) of ERISA; (c) a complete or
partial withdrawal by any Obligor or ERISA Affiliate from a Multiemployer Plan
or notification that a Multiemployer Plan is in reorganization; (d) the filing
of a notice of intent to terminate, the treatment of a Plan amendment as a
termination under Section 4041 or 4041A of ERISA, or the commencement of
proceedings by the PBGC to terminate a Pension Plan or Multiemployer Plan; (e)
any Obligor or ERISA Affiliate fails to meet any funding obligations with
respect to any Pension Plan or Multiemployer Plan, or requests a minimum funding
waiver; (f) an event or condition which constitutes grounds under Section 4042
of ERISA for the termination of, or the appointment of a trustee to administer,
any Pension Plan or Multiemployer Plan; or (g) the imposition of any liability
under Title IV of ERISA, other than for PBGC premiums due but not delinquent
under Section 4007 of ERISA, upon any Obligor or ERISA Affiliate.

Euro: the single currency of the Participating Member States which have adopted
the euro unit as their single currency pursuant to the Treaty of Rome of March
25, 1957, establishing the European Community.

Event of Default: as defined in Section 11.

Exchange Rate: the exchange rate, as determined by Lender, applicable to
conversion of a currency into Dollars that is (a) reported by Bloomberg (or
another commercially available source designated by Lender) as of the end of the
preceding Business Day in the financial market for such currency; or (b) if such
report is unavailable for any reason, the spot rate for the purchase of such
currency with Dollars through Lender's principal foreign exchange trading office
for the currency during such office's preceding Business Day.

 

 

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Excluded Tax: with respect to Lender or any other recipient of a payment to be
made by or on account of any Obligation, (a) taxes imposed on or measured by its
overall net income (however denominated), and franchise taxes imposed on it (in
lieu of net income taxes), by the jurisdiction (or any political subdivision
thereof) under the laws of which such recipient is organized or in which its
principal office is located or, in the case of Lender, in which its applicable
lending office is located; and (b) any branch profits taxes imposed by the
United States, Canada or any similar tax imposed by any other jurisdiction in
which Borrower is located.

Extraordinary Expenses: all costs, expenses or advances that Lender may incur
during a Default or Event of Default, or during the pendency of an Insolvency
Proceeding of an Obligor, including those relating to (a) any audit, inspection,
repossession, storage, repair, appraisal, insurance, manufacture, preparation or
advertising for sale, sale, collection, or other preservation of or realization
upon any Collateral; (b) any action, arbitration or other proceeding (whether
instituted by or against Lender, any Obligor, any representative of creditors of
an Obligor or any other Person) in any way relating to any Collateral (including
the validity, perfection, priority or avoidability of Lender's Liens with
respect to any Collateral), Loan Documents, Letters of Credit or Obligations,
including any lender liability or other Claims; (c) the exercise, protection or
enforcement of any rights or remedies of Lender in, or the monitoring of, any
Insolvency Proceeding; (d) settlement or satisfaction of any taxes, charges or
Liens with respect to any Collateral; (e) any Enforcement Action; and (f)
negotiation and documentation of any modification, waiver, workout,
restructuring or forbearance with respect to any Loan Documents or Obligations.
Such costs, expenses and advances include transfer fees, Other Taxes, storage
fees, insurance costs, permit fees, utility reservation and standby fees, legal
fees, appraisal fees, brokers' fees and commissions, auctioneers' fees and
commissions, accountants' fees, environmental study fees, wages and salaries
paid to employees of any Obligor or independent contractors in liquidating any
Collateral, and travel expenses.

Federal Funds Rate: (a) the weighted average of interest rates on overnight
federal funds transactions with members of the Federal Reserve System arranged
by federal funds brokers on the applicable Business Day (or on the preceding
Business Day, if the applicable day is not a Business Day), as published by the
Federal Reserve Bank of New York on the next Business Day; or (b) if no such
rate is published on the next Business Day, the average rate (rounded up, if
necessary, to the nearest 1/8 of 1%) charged to Lender on the applicable day on
such transactions, as determined by Lender.

Fiscal Quarter: each period of three months, commencing on the first day of a
Fiscal Year.

Fiscal Year: the fiscal year of Borrower and Subsidiaries for accounting and tax
purposes, ending on December 31 of each year.

Fixed Charge Coverage Ratio: the ratio, determined for any period on a
consolidated basis for Borrower and Subsidiaries, of (a) EBITDA to (b) the sum
of Capital Expenditures (except those financed with Borrowed Money other than
Revolver Loans), cash taxes paid, interest expense (other than payment-in-kind),
principal payments made on Borrowed Money, and Distributions made, in each case
determined for such period.

 

FLSA: the Fair Labor Standards Act of 1938.

Foreign Plan: any employee benefit plan or arrangement (a) maintained or
contributed to by any Obligor or Subsidiary that is not subject to the laws of
the United States; or (b) mandated by a government other than the United States
for employees of any Obligor or Subsidiary.

 

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Foreign Subsidiary: a Subsidiary that is a "controlled foreign corporation"
under Section 957 of the Code, such that a guaranty by such Subsidiary of the
Obligations or a Lien on the assets of such Subsidiary to secure the Obligations
would result in material tax liability to Borrower.

Full Payment: with respect to any Obligations, (a) the full and indefeasible
cash payment thereof, including any interest, fees and other charges accruing
during an Insolvency Proceeding (whether or not allowed in the proceeding); (b)
if such Obligations are LC Obligations or inchoate or contingent in nature, Cash
Collateralization thereof (or delivery of a standby letter of credit acceptable
to Lender in its discretion, in the amount of required Cash Collateral); and (c)
a release of any Claims of Obligors against Lender arising on or before the
payment date. The Revolver Loans shall not be deemed to have been paid in full
until the Revolver Commitment has expired or been terminated.

GAAP: generally accepted accounting principles in effect in the United States
from time to time.

Governmental Approvals: all authorizations, consents, approvals, licenses and
exemptions of, registrations and filings with, and required reports to, all
Governmental Authorities.

Governmental Authority: any federal, state, municipal, foreign or other
governmental department, agency, commission, board, bureau, court, tribunal,
instrumentality, political subdivision, or other entity or officer exercising
executive, legislative, judicial, regulatory or administrative functions for or
pertaining to any government or court, in each case whether associated with the
United States, a state, district or territory thereof, or a foreign entity or
government.

Guarantors: Richard Kurtz and each other Person who guarantees payment or
performance of any Obligations, and Guarantor means any of the foregoing.

Guaranty: each guaranty agreement executed by a Guarantor in favor of Lender.

Hedging Agreement: an agreement relating to any swap, cap, floor, collar,
option, forward, cross right or obligation, or combination thereof or similar
transaction, with respect to interest rate, foreign exchange, currency,
commodity, credit or equity risk.

Indemnified Taxes: Taxes other than Excluded Taxes.

Indemnitees: Lender and its officers, directors, employees, Affiliates, agents
and attorneys.

Insolvency Proceeding: any case or proceeding commenced by or against a Person
under any state, federal or foreign law for, or any agreement of such Person to,
(a) the entry of an order for relief under the Bankruptcy Code, Bankruptcy and
Insolvency Act (Canada), Companies' Creditors Arrangement Act (Canada),
Bankruptcy Act 1966 (Cth), the Corporations Act (2001) (Cth) or any other
insolvency, debtor relief or debt adjustment law; (b) the appointment of a
receiver, trustee, liquidator, administrator, conservator or other custodian for
such Person or any part of its Property; or (c) an assignment or trust mortgage
for the benefit of creditors.

Insurance Assignment: each collateral assignment of insurance pursuant to which
an Obligor assigns to Lender such Obligor's rights under key-man life, business
interruption or other insurance policies as Lender deems appropriate, as
security for the Obligations.

 

 

 

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Intellectual Property: all intellectual and similar Property of a Person,
including inventions, designs, patents, copyrights, trademarks, service marks,
trade names, trade secrets, confidential or proprietary information, customer
lists, know-how, software and databases; all embodiments or fixations thereof
and all related documentation, applications, registrations and franchises; all
licenses or other rights to use any of the foregoing; and all books and records
relating to the foregoing.

Intellectual Property Claim: any claim or assertion (whether in writing, by suit
or otherwise) that Borrower's or Subsidiary's ownership, use, marketing, sale or
distribution of any Inventory, Equipment, Intellectual Property or other
Property violates another Person's Intellectual Property.

Interest Period: as defined in Section 3.1.3.

Inventory: as defined in the UCC, including all goods intended for sale, lease,
display or demonstration; all work in process; and all raw materials, and other
materials and supplies of any kind that are or could be used in connection with
the manufacture, printing, packing, shipping, advertising, sale, lease or
furnishing of such goods, or otherwise used or consumed in Borrower's business
(but excluding Equipment).

Inventory Formula Amount: the lesser of (i) 55% of the Value of Eligible
Inventory, (ii) 85% of the NOLV Percentage of the Value of Eligible Inventory or
(iii) $5,000,000.

Inventory Reserve: reserves established by Lender to reflect factors that may
negatively impact the Value of Inventory, including change in salability,
obsolescence, seasonality, theft, shrinkage, imbalance, change in composition or
mix, markdowns and vendor chargebacks.

Investment: any acquisition of all or substantially all assets of a Person; any
acquisition of record or beneficial ownership of any Equity Interests of a
Person; or any advance or capital contribution to or other investment in a
Person.

IRS: the United States Internal Revenue Service.

LC Application: an application by Borrower to Lender for issuance of a Letter of
Credit, in form and substance satisfactory to Lender.

LC Conditions: the following conditions necessary for issuance of a Letter of
Credit: (a) each of the conditions set forth in Section 6; (b) after giving
effect to such issuance, total LC Obligations do not exceed the Letter of Credit
Subline, no Overadvance exists and, if no Revolver Loans are outstanding, the LC
Obligations do not exceed the Borrowing Base (without giving effect to the LC
Reserve for purposes of this calculation); (c) the expiration date of such
Letter of Credit is (i) no more than 365 days from issuance, in the case of
standby Letters of Credit, (ii) no more than 120 days from issuance, in the case
of documentary Letters of Credit, and (iii) at least 20 Business Days prior to
the Revolver Termination Date; (d) the Letter of Credit and payments thereunder
are denominated in Dollars; and (e) the purpose and form of the proposed Letter
of Credit is satisfactory to Lender in its discretion.

LC Documents: all documents, instruments and agreements (including LC Requests
and LC Applications) delivered by Borrower or any other Person to Lender in
connection with issuance, amendment or renewal of, or payment under, any Letter
of Credit.

LC Obligations: the sum (without duplication) of (a) all amounts owing by
Borrower for any drawings under Letters of Credit; (b) the stated amount of all
outstanding Letters of Credit; and (c) all fees and other amounts owing with
respect to Letters of Credit.

 

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LC Request: a request for issuance of a Letter of Credit, to be provided by
Borrower, in form satisfactory to Lender.

LC Reserve: the aggregate of all LC Obligations, other than (a) those that have
been Cash Collateralized; and (b) if no Default or Event of Default exists,
those constituting charges owing to Lender.

Lender: as defined in the preamble to this Agreement and includes the foreign
branches of Bank of America, N.A., including Bank of America, N.A. (acting
through its London branch).

Lender Professionals: attorneys, accountants, appraisers, auditors, business
valuation experts, environmental engineers or consultants, turnaround
consultants, and other professionals and experts retained by Lender.

Letter of Credit: any standby or documentary letter of credit issued by Lender
for the account of Borrower, or any indemnity, guarantee, exposure transmittal
memorandum or similar form of credit support issued by Lender for the benefit of
Borrower.

Letter of Credit Subline: $3,000,000.

LIBOR: for any Interest Period with respect to a LIBOR Loan, the per annum rate
of interest (rounded up, if necessary, to the nearest 1/8th of 1%), determined
by Lender at approximately 11:00 a.m. (London time) two Business Days prior to
commencement of such Interest Period, for a term comparable to such Interest
Period, equal to (a) the British Bankers Association LIBOR Rate ("BBA LIBOR"),
as published by Reuters (or other commercially available source designated by
Lender); or (b) if BBA LIBOR is not available for any reason, the interest rate
at which Dollar deposits in the approximate amount of the LIBOR Loan would be
offered by Lender's London branch to major banks in the London interbank
Eurodollar market. If the Board of Governors imposes a Reserve Percentage with
respect to LIBOR deposits, then LIBOR shall be the foregoing rate, divided by 1
minus the Reserve Percentage.

LIBOR Loan: each set of LIBOR Revolver Loans or LIBOR Term Loans having a common
length and commencement of Interest Period.

LIBOR Revolver Loan: a Revolver Loan that bears interest based on LIBOR.

LIBOR Term Loan: a Term Loan that bears interest based on LIBOR.

License: any license or agreement under which an Obligor is authorized to use
Intellectual Property in connection with any manufacture, marketing,
distribution or disposition of Collateral, any use of Property or any other
conduct of its business.

Licensor: any Person from whom an Obligor obtains the right to use any
Intellectual Property.

Lien: any Person's interest in Property securing an obligation owed to, or a
claim by, such Person, whether such interest is based on common law, statute or
contract, including liens, security interests, pledges, hypothecations,
statutory trusts, reservations, exceptions, encroachments, easements,
rights-of-way, covenants, conditions, restrictions, leases, and other title
exceptions and encumbrances affecting Property.

 

 

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Lien Waiver: an agreement, in form and substance satisfactory to Lender, by
which (a) for any material Collateral located on leased premises, the lessor
waives or subordinates any Lien it may have on the Collateral, and agrees to
permit Lender to enter upon the premises and remove the Collateral or to use the
premises to store or dispose of the Collateral; (b) for any Collateral held by a
warehouseman, processor, shipper, customs broker or freight forwarder, such
Person waives or subordinates any Lien it may have on the Collateral, agrees to
hold any Documents in its possession relating to the Collateral as agent for
Lender, and agrees to deliver the Collateral to Lender upon request; (c) for any
Collateral held by a repairman, mechanic or bailee, such Person acknowledges
Lender's Lien, waives or subordinates any Lien it may have on the Collateral,
and agrees to deliver the Collateral to Lender upon request; and (d) for any
Collateral subject to a Licensor's Intellectual Property rights, the Licensor
grants to Lender the right, vis-à-vis such Licensor, to enforce Lender's Liens
with respect to the Collateral, including the right to dispose of it with the
benefit of the Intellectual Property, whether or not a default exists under any
applicable License.

Loan: a Revolver Loan or Term Loan.

Loan Account: the loan account established by Lender on its books pursuant to
Section 5.7.

Loan Documents: this Agreement, Other Agreements and Security Documents.

Loan Year: each 12 month period commencing on the Closing Date and on each
anniversary of the Closing Date.

Margin Stock: as defined in Regulation U of the Board of Governors.

Material Adverse Effect: the effect of any event or circumstance that, taken
alone or in conjunction with other events or circumstances, (a) has or could be
reasonably expected to have a material adverse effect on the business,
operations, Properties, prospects or condition (financial or otherwise) of any
Obligor, on the value of any material Collateral, on the enforceability of any
Loan Documents, or on the validity or priority of Lender's Liens on any
Collateral; (b) impairs the ability of any Obligor to perform any obligations
under the Loan Documents, including repayment of any Obligations; or (c)
otherwise impairs the ability of Lender to enforce or collect any Obligations or
to realize upon any Collateral.

Material Contract: any agreement or arrangement to which Borrower or Subsidiary
is party (other than the Loan Documents) (a) that is deemed to be a material
contract under any securities law applicable to such Obligor, including the
Securities Act of 1933; (b) for which breach, termination, nonperformance or
failure to renew could reasonably be expected to have a Material Adverse Effect;
or (c) that relates to Subordinated Debt, or Debt in an aggregate amount of
$250,000 or more.

Moody's: Moody's Investors Service, Inc., and its successors.

Multiemployer Plan: any employee benefit plan of the type described in Section
4001(a)(3) of ERISA, to which any Obligor or ERISA Affiliate makes or is
obligated to make contributions, or during the preceding five plan years, has
made or been obligated to make contributions.

Net Proceeds: with respect to an Asset Disposition, proceeds (including, when
received, any deferred or escrowed payments) received by Borrower or Subsidiary
in cash from such disposition, net of (a) reasonable and customary costs and
expenses actually incurred in connection therewith, including legal fees and
sales commissions; (b) amounts applied to repayment of Debt secured by a
Permitted Lien senior to Lender's Liens on Collateral sold; (c) transfer or
similar taxes; and (d) reserves for indemnities, until such reserves are no
longer needed.

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NOLV Percentage: the net orderly liquidation value of Inventory, expressed as a
percentage, expected to be realized at an orderly, negotiated sale held within a
reasonable period of time, net of all liquidation expenses, as determined from
the most recent appraisal, if any, of Borrower's Inventory performed by an
appraiser and on terms satisfactory to Lender.

Notice of Borrowing: a Notice of Borrowing to be provided by Borrower to request
a Borrowing of Revolver Loans, in form satisfactory to Lender.

Notice of Conversion/Continuation: a Notice of Conversion/Continuation to be
provided by Borrower to request a conversion or continuation of any Loans as
LIBOR Loans, in form satisfactory to Lender.

Obligations: all (a) principal of and premium, if any, on the Loans, (b) LC
Obligations and other obligations of Obligors with respect to Letters of Credit,
(c) interest, expenses, fees and other sums payable by Obligors under Loan
Documents, (d) obligations of Obligors under any indemnity for Claims, (e)
Extraordinary Expenses, (f) Bank Product Debt, and (g) other Debts, obligations
and liabilities of any kind owing by any Obligor to Lender, whether now existing
or hereafter arising, whether evidenced by a note or other writing, whether
allowed in any Insolvency Proceeding, whether arising from an extension of
credit, issuance of a letter of credit, acceptance, loan, guaranty,
indemnification or otherwise, and whether direct or indirect, absolute or
contingent, due or to become due, primary or secondary, or joint or several.

Obligor: Borrower, each Guarantor, and any other Person that is liable for
payment of any Obligations or that has granted a Lien in favor of Lender on its
assets to secure any Obligations, and "Obligors" means all the foregoing.

Ordinary Course of Business: the ordinary course of business of Borrower or
Subsidiary, consistent with past practices and undertaken in good faith.

Organic Documents: with respect to any Person, its charter, certificate or
articles of incorporation, bylaws, articles of organization, limited liability
agreement, operating agreement, members agreement, shareholders agreement,
partnership agreement, certificate of partnership, certificate of formation,
voting trust agreement, or similar agreement or instrument governing the
formation or operation of such Person.

OSHA: the Occupational Safety and Hazard Act of 1970.

Other Agreement: each LC Document; Lien Waiver; Borrowing Base Certificate,
Compliance Certificate, financial statement or report delivered hereunder; or
other document, instrument or agreement (other than this Agreement or a Security
Document) now or hereafter delivered by an Obligor or other Person to Lender in
connection with any transactions relating hereto.

Other Taxes: all present or future stamp or documentary taxes or any other
excise or property taxes, charges or similar levies arising from any payment
made under any Loan Document or from the execution, delivery or enforcement of,
or otherwise with respect to, any Loan Document.

Overadvance: as defined in Section 2.1.4.

Patent Assignment: each patent collateral assignment agreement pursuant to which
an Obligor assigns to Lender such Obligor's interests in its patents, as
security for the Obligations.

Patriot Act: the Uniting and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism Act of 2001, Pub. L. No.
107-56, 115 Stat. 272 (2001).

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Payment Item: each check, draft or other item of payment payable to Borrower,
including those constituting proceeds of any Collateral.

PBGC: the Pension Benefit Guaranty Corporation.

Pension Plan: any employee pension benefit plan (as such term is defined in
Section 3(2) of ERISA), other than a Multiemployer Plan, that is subject to
Title IV of ERISA and is sponsored or maintained by any Obligor or ERISA
Affiliate or to which the Obligor or ERISA Affiliate contributes or has an
obligation to contribute, or in the case of a multiple employer or other plan
described in Section 4064(a) of ERISA, has made contributions at any time during
the preceding five plan years.

Permitted Asset Disposition: as long as no Default or Event of Default exists
and all Net Proceeds are remitted to Lender, an Asset Disposition that is (a) a
sale of Inventory in the Ordinary Course of Business; (b) a disposition of
Equipment that, in the aggregate during any 12 month period, has a fair market
or book value (whichever is more) of $100,000 or less; (c) a disposition of
Inventory that is obsolete, unmerchantable or otherwise unsalable in the
Ordinary Course of Business; (d) termination of a lease of real or personal
Property that is not necessary for the Ordinary Course of Business, could not
reasonably be expected to have a Material Adverse Effect and does not result
from an Obligor's default; or (e) approved in writing by Lender.

Permitted Contingent Obligations: Contingent Obligations (a) arising from
endorsements of Payment Items for collection or deposit in the Ordinary Course
of Business; (b) arising from Hedging Agreements permitted hereunder; (c)
existing on the Closing Date, and any extension or renewal thereof that does not
increase the amount of such Contingent Obligation when extended or renewed; (d)
incurred in the Ordinary Course of Business with respect to surety, appeal or
performance bonds, or other similar obligations; (e) arising from customary
indemnification obligations in favor of purchasers in connection with
dispositions of Equipment permitted hereunder; (f) arising under the Loan
Documents; or (g) in an aggregate amount of $100,000 or less at any time.

Permitted Distribution: A Distributions in respect of preferred shares of
Borrower, provided, that Borrower has demonstrated to Lender on a pro forma
basis that (a) Availability equaled or exceeded and amount equal to the sum of
(i) $1,500,000 plus (ii) the amount of such proposed Distribution, for each of
the 30 consecutive days preceding the date of making such proposed Distribution,
(b) the Fixed Charge Coverage Ratio is 1.25:1.0, (c) all Obligations in respect
of the Term Loan have been paid in full and (d) no Default or Event of Default
shall be in existence.

Permitted Lien: as defined in Section 10.2.2.

Permitted Purchase Money Debt: Purchase Money Debt of Borrower and Subsidiaries
that is unsecured or secured only by a Purchase Money Lien, as long as the
aggregate amount does not exceed $100,000 at any time and its incurrence does
not violate Section 10.2.3.

Person: any individual, corporation, limited liability company, partnership,
joint venture, joint stock company, land trust, business trust, unincorporated
organization, Governmental Authority or other entity.

Plan: any employee benefit plan (as such term is defined in Section 3(3) of
ERISA) established by an Obligor or, with respect to any such plan that is
subject to Section 412 of the Code or Title IV of ERISA, an ERISA Affiliate.

 

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Prime Rate: the rate of interest announced by Lender from time to time as its
prime rate. Such rate is set by Lender on the basis of various factors,
including its costs and desired return, general economic conditions and other
factors, and is used as a reference point for pricing some loans, which may be
priced at, above or below such rate. Any change in such rate announced by Lender
shall take effect at the opening of business on the day specified in the public
announcement of such change.

Properly Contested: with respect to any obligation of an Obligor, (a) the
obligation is subject to a bona fide dispute regarding amount or the Obligor's
liability to pay; (b) the obligation is being properly contested in good faith
by appropriate proceedings promptly instituted and diligently pursued; (c)
appropriate reserves have been established in accordance with GAAP; (d)
non-payment could not have a Material Adverse Effect, nor result in forfeiture
or sale of any assets of the Obligor; (e) no Lien is imposed on assets of the
Obligor, unless bonded and stayed to the satisfaction of Lender; and (f) if the
obligation results from entry of a judgment or other order, such judgment or
order is stayed pending appeal or other judicial review.

Property: any interest in any kind of property or asset, whether real, personal
or mixed, or tangible or intangible.

Purchase Money Debt: (a) Debt (other than the Obligations) for payment of any of
the purchase price of fixed assets; (b) Debt (other than the Obligations)
incurred within 10 days before or after acquisition of any fixed assets, for the
purpose of financing any of the purchase price thereof; and (c) any renewals,
extensions or refinancings (but not increases) thereof.

Purchase Money Lien: a Lien that secures Purchase Money Debt, encumbering only
the fixed assets acquired with such Debt and constituting a Capital Lease or a
purchase money security interest under the UCC.

RCRA: the Resource Conservation and Recovery Act (42 U.S.C. §§ 6991-6991i).

Real Estate: all right, title and interest (whether as owner, lessor or lessee)
in any real Property or any buildings, structures, parking areas or other
improvements thereon.

Refinancing Conditions: the following conditions for Refinancing Debt: (a) it is
in an aggregate principal amount that does not exceed the principal amount of
the Debt being extended, renewed or refinanced; (b) it has a final maturity no
sooner than, a weighted average life no less than, and an interest rate no
greater than, the Debt being extended, renewed or refinanced; (c) it is
subordinated to the Obligations at least to the same extent as the Debt being
extended, renewed or refinanced; (d) the representations, covenants and defaults
applicable to it are no less favorable to Borrower than those applicable to the
Debt being extended, renewed or refinanced; (e) no additional Lien is granted to
secure it; (f) no additional Person is obligated on such Debt; and (g) upon
giving effect to it, no Default or Event of Default exists.

Refinancing Debt: Borrowed Money that is the result of an extension, renewal or
refinancing of Debt permitted under Section 10.2.1(b), (d) or (f).

Reimbursement Date: as defined in Section 2.3.2.

Rent and Charges Reserve: the aggregate of (a) all past due rent and other
amounts owing by an Obligor to any landlord, warehouseman, processor, repairman,
mechanic, shipper, freight forwarder, broker or other Person who possesses any
Collateral or could assert a Lien on any Collateral; and (b) a reserve at least
equal to three months rent and other charges that could be payable to any such
Person, unless it has executed a Lien Waiver.

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Reportable Event: any of the events set forth in Section 4043(c) of ERISA, other
than events for which the 30 day notice period has been waived.

Reserve Percentage: the reserve percentage (expressed as a decimal, rounded up
to the nearest 1/8th of 1%) applicable to member banks under regulations issued
from time to time by the Board of Governors for determining the maximum reserve
requirement (including any emergency, supplemental or other marginal reserve
requirement) with respect to Eurocurrency funding (currently referred to as
"Eurocurrency liabilities").

Restricted Investment: any Investment by Borrower or Subsidiary, other than (a)
Investments in Subsidiaries to the extent existing on the Closing Date; (b) Cash
Equivalents that are subject to Lender's Lien and control, pursuant to
documentation in form and substance satisfactory to Lender; and (c) loans and
advances permitted under Section 10.2.7.

Restrictive Agreement: an agreement (other than a Loan Document) that conditions
or restricts the right of any Borrower, Subsidiary or other Obligor to incur or
repay Borrowed Money, to grant Liens on any assets, to declare or make
Distributions, to modify, extend or renew any agreement evidencing Borrowed
Money, or to repay any intercompany Debt.

Revolver Commitment: Lender's obligation to make Revolving Loans and to issue
Letters of Credit in an amount up to $13,000,000 in the aggregate.

Revolver Loan: a loan made pursuant to Section 2.1 or deemed made pursuant to
Section 2.3.2.

Revolver Termination Date: the earliest to occur of (a) March 31, 2016, (b) 90
days prior to the maturity date of the Subordinated Term Debt (which maturity
date presently is June 29, 2014), provided, however, that this clause (b) shall
not be applicable if either (i) the Subordinated Term Debt has been refinanced,
on or before March 31, 2016, on terms acceptable to Lender in its sole
discretion as confirmed in writing by Lender to Borrower or (ii) the
Subordinated Term Debt has been paid in full on or before 90 days prior to its
maturity date, or (c) 90 days prior to the maturity date of the indebtedness
evidenced and governed by that certain "Junior Note" as such term is defined in
that certain Subordinated Agreement dated as of April 16, 2012, among Borrower,
Richard J. Kurtz and Lender (which maturity date presently is October 1, 2014).

Royalties: all royalties, fees, expense reimbursement and other amounts payable
by Borrower under a License.

S&P: Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc., and its successors.

Secured Parties: Lender and providers of Bank Products.

Security Documents: the Guaranties, UK Security Agreements, Patent Assignments,
Trademark Security Agreements, Insurance Assignments, Deposit Account Control
Agreements, and all other documents, instruments and agreements now or hereafter
securing (or given with the intent to secure) any Obligations.

Senior Officer: the chairman of the board, president, chief executive officer or
chief financial officer of Borrower or, if the context requires, an Obligor.

 

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Seventh Amendment Effective Date: means the "Amendment Date" as defined by the
certain Seventh Amendment to Loan and Security Agreement dated as of the
"Amendment Date" defined therein, between Lender and Borrower.

Solvent: as to any Person, such Person (a) owns Property whose fair salable
value is greater than the amount required to pay all of its debts (including
contingent, subordinated, unmatured and unliquidated liabilities); (b) owns
Property whose present fair salable value (as defined below) is greater than the
probable total liabilities (including contingent, subordinated, unmatured and
unliquidated liabilities) of such Person as they become absolute and matured;
(c) is able to pay all of its debts as they mature; (d) has capital that is not
unreasonably small for its business and is sufficient to carry on its business
and transactions and all business and transactions in which it is about to
engage; (e) is not "insolvent" within the meaning of Section 101(32) of the
Bankruptcy Code; and (f) has not incurred (by way of assumption or otherwise)
any obligations or liabilities (contingent or otherwise) under any Loan
Documents, or made any conveyance in connection therewith, with actual intent to
hinder, delay or defraud either present or future creditors of such Person or
any of its Affiliates. "Fair salable value" means the amount that could be
obtained for assets within a reasonable time, either through collection or
through sale under ordinary selling conditions by a capable and diligent seller
to an interested buyer who is willing (but under no compulsion) to purchase.

Sterling: the lawful currency of the United Kingdom.

Subordinated Debt: Debt incurred by Borrower that is expressly subordinate and
junior in right of payment to Full Payment of all Obligations, and is on terms
(including maturity, interest, fees, repayment, covenants and subordination)
satisfactory to Lender.

Subordinated Term Debt: Subordinated Debt in the principal amount of $4,400,000
under the certain Note Purchase Agreement, dated as of the Seventh Amendment
Effective Date, among Borrower, Enhanced Capital Texas Fund LP, a Texas limited
partnership, as junior agent, and the "Purchasers" defined therein, as may be
amended, amended and restated, supplemented or otherwise modified in accordance
with the terms of the Subordinated Term Debt Intercreditor Agreement.

Subordinated Term Debt Intercreditor Agreement: The certain Intercreditor
Agreement dated as of the Seventh Amendment Effective Date, among Lender,
Borrower and Enhanced Capital Texas Fund LP, a Texas limited partnership, as
junior agent, as may be amended, amended and restated, supplemented or otherwise
modified in accordance with the terms thereof.

Subsidiary: any entity at least 50% of whose voting securities or Equity
Interests is owned by Borrower (including indirect ownership by Borrower through
other entities in which the Borrower directly or indirectly owns 50% of the
voting securities or Equity Interests).

Taxes: all present or future taxes, levies, imposts, duties, deductions,
withholdings, assessments, fees or other charges imposed by any Governmental
Authority, including any interest, additions to tax or penalties applicable
thereto.

Term Loan: a loan made pursuant to Section 2.2.

Term Loan Commitment: Lender's obligation to make a Term Loan in an amount up to
$2,500,000.

Term Loan Maturity Date: August 31, 2012.

 

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Trademark Security Agreement: each trademark security agreement pursuant to
which an Obligor grants a Lien to Lender on such Obligor's interests in
trademarks, as security for the Obligations.

Type: any type of a Loan (i.e., Base Rate Loan, UK Base Rate Revolver Loan or
LIBOR Loan) that has the same interest option and, in the case of LIBOR Loans,
the same Interest Period.

UCC: the Uniform Commercial Code as in effect in the State of Texas or, when the
laws of any other jurisdiction govern the perfection or enforcement of any Lien,
the Uniform Commercial Code of such jurisdiction.

UK or United Kingdom: the United Kingdom of Great Britain and Northern Ireland.

UK Accounts: Accounts resulting from UK Sales.

 

UK Base Rate: with respect to Euros and Sterling, for any day, a fluctuating
rate of interest per annum equal to the rate of interest in effect for such day
as announced from time to time by Bank of America, N.A. (acting through its
London branch) as its "base rate" with respect to such currency. Any change in
such rate shall take effect at the opening of business on the day of such
change.

 

UK Base Rate Revolver Loan: a UK Revolver Loan that bears interest based on the
UK Base Rate.

 

UK Disbursement Account: a deposit account maintained at Bank of America, N.A.
(acting through its London branch) and designated by Lender as the UK
Disbursement Account, or such other account as may be mutually agreed in writing
by Lender and Borrower.

 

UK Dominion Account: a Dominion Account maintained at Bank of America, N.A.
(acting through its London branch) and designated by Lender as the UK Dominion
Account, or such other account as may be designated by Lender to Borrower in
writing for the deposit of payments on UK Accounts, over which Lender has
exclusive control for withdrawal purposes.

 

UK Loan Sublimit: $500,000.

 

UK Priority Payables Reserve: on any date of determination, a reserve in such
amount as Lender may determine in its discretion (but not exceeding any
statutory limit on any such amounts) which reflects the full amount of any
liabilities or amounts which (by virtue of any Liens, choate or inchoate, or any
statutory provision) rank or are capable of ranking in priority to Lender's
Liens and/or for amounts which may represent costs relating to the enforcement
of Lender's Liens including, without limitation, but only to the extent
prescribed pursuant to English law and statute then in force, (i) amounts due to
employees in respect of unpaid wages and holiday pay, (ii) the "prescribed part"
of floating charge realisations held for unsecured creditors, (iii) the expenses
and liabilities incurred by any administrator (or other insolvency officer) and
any remuneration of such administrator (or other insolvency officer), and (iv)
the amount of any unpaid contributions to occupational pension schemes and state
scheme premiums.

 

UK Revolver Loan: a Revolver Loan made by Lender to Borrower pursuant to Section
2.1, which Revolver Loan shall be denominated in Sterling or Euros and shall be
a UK Base Rate Revolver Loan.

 

UK Sales: all sales of goods or services by Borrower to residents of the UK or
with respect to which the sales price is payable by residents of the UK.

 

 

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UK Security Agreements: each debenture or other security agreement among
Borrower and Lender which is governed by, or intended for use by Lender under or
with respect to, UK Law.

 

Unfunded Pension Liability: the excess of a Pension Plan's benefit liabilities
under Section 4001(a)(16) of ERISA, over the current value of that Pension
Plan's assets, determined in accordance with the assumptions used for funding
the Pension Plan pursuant to Section 412 of the Code for the applicable plan
year.

Upstream Payment: a Distribution by a Subsidiary of Borrower to Borrower.

US Dominion Account: means (a) Dominion Account, deposit account # ** or
(b) Dominion Account, deposit account # **, in each case maintained at Bank of
America, N.A., or such other account as may be designated by Lender to Borrower
in writing for the deposit of payments on Accounts and Collateral other than
Canadian Accounts.

Value: (a) for Inventory, its value determined on the basis of the lower of cost
or market, calculated on a first-in, first-out basis, and excluding any portion
of cost attributable to intercompany profit among Borrower and its Affiliates;
and (b) for an Account, its face amount, net of any returns, rebates, discounts
(calculated on the shortest terms), credits, allowances or Taxes (including
sales, excise or other taxes) that have been or could be claimed by the Account
Debtor or any other Person.

Voting Equity Interests: in the case of a corporation, Equity Interests that, by
their terms or pursuant to any voting agreement or arrangement, entitle the
record or beneficial owner thereof to vote in an election of directors of such
corporation.

 

3.2.            Accounting Terms. Under the Loan Documents (except as otherwise
specified herein), all accounting terms shall be interpreted, all accounting
determinations shall be made, and all financial statements shall be prepared, in
accordance with GAAP applied on a basis consistent with the most recent audited
financial statements of Borrower delivered to Lender before the Closing Date and
using the same inventory valuation method as used in such financial statements,
except for any change required or permitted by GAAP if Borrower's certified
public accountants concur in such change, the change is disclosed to Lender, and
Section 10.3 is amended in a manner satisfactory to Lender to take into account
the effects of the change.

3.3.            Uniform Commercial Code. As used herein, the following terms are
defined in accordance with the UCC in effect in the State of Texas from time to
time: "Chattel Paper," "Commercial Tort Claim," "Deposit Account," "Document,"
"Equipment," "General Intangibles," "Goods," "Instrument," "Investment
Property," "Letter-of-Credit Right" and "Supporting Obligation."

3.4.            Certain Matters of Construction. The terms "herein," "hereof,"
"hereunder" and other words of similar import refer to this Agreement as a whole
and not to any particular section, paragraph or subdivision. Any pronoun used
shall be deemed to cover all genders. In the computation of periods of time from
a specified date to a later specified date, "from" means "from and including,"
and "to" and "until" each mean "to but excluding." The terms "including" and
"include" shall mean "including, without limitation" and, for purposes of each
Loan Document, the parties agree that the rule of ejusdem generis shall not be
applicable to limit any provision. Section titles appear as a matter of
convenience only and shall not affect the interpretation of any Loan Document.
All references to (a) laws or statutes include all related rules, regulations,
interpretations, amendments and successor provisions; (b) any document,
instrument or agreement include any amendments, waivers and other modifications,
extensions or renewals (to the extent permitted by the Loan Documents); (c) any
section mean, unless the context otherwise requires, a section of this
Agreement; (d) any exhibits or schedules mean, unless the context

 

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otherwise requires, exhibits and schedules attached hereto, which are hereby
incorporated by reference; (e) any Person include successors and assigns; (f)
time of day mean time of day at Lender's notice address under Section 12.3.1; or
(g) discretion of Lender mean its sole and absolute discretion. All calculations
of Value, fundings of Loans, issuances of Letters of Credit and payments of
Obligations shall be in Dollars and, unless the context otherwise requires, all
determinations (including calculations of Borrowing Base and financial
covenants) made from time to time under the Loan Documents shall be made in
light of the circumstances existing at such time. Borrowing Base calculations
shall be consistent with historical methods of valuation and calculation, and
otherwise satisfactory to Lender (and not necessarily calculated in accordance
with GAAP). Borrower shall have the burden of establishing any alleged
negligence, misconduct or lack of good faith by Lender under any Loan Documents.
No provision of any Loan Documents shall be construed against any party by
reason of such party having, or being deemed to have, drafted the provision.
Whenever the phrase "to the best of Borrower's knowledge" or words of similar
import are used in any Loan Documents, it means actual knowledge of a Senior
Officer, or knowledge that a Senior Officer would have obtained if he or she had
engaged in good faith and diligent performance of his or her duties, including
reasonably specific inquiries of employees or agents and a good faith attempt to
ascertain the matter to which such phrase relates.

SECTION 4.      CREDIT FACILITIES

4.1.            Revolver Commitment.

4.1.1        Revolver Loans. Lender agrees, on the terms set forth herein, to
make Revolver Loans to Borrower in an aggregate amount up to the Revolver
Commitment, from time to time through the Commitment Termination Date. The
Revolver Loans may be repaid and reborrowed as provided herein. In no event
shall Lender have any obligation to honor a request for a Revolver Loan that is
a UK Revolver Loan if such request, when added to the unpaid balance of UK
Revolver Loans outstanding, would exceed the UK Loan Sublimit. In no event shall
Lender have any obligation to honor a request for a Revolver Loan if the unpaid
balance (based on the Dollar Equivalent thereof) of Revolver Loans outstanding
at such time (including the requested Loan) would exceed the Borrowing Base.

4.1.2        Use of Proceeds. The proceeds of Revolver Loans shall be used by
Borrower solely (a) to satisfy existing Debt; (b) to pay fees and transaction
expenses associated with the closing of this credit facility; (c) to pay
Obligations in accordance with this Agreement; and (d) for working capital and
other lawful corporate purposes of Borrower.

4.1.3        Voluntary Reduction or Termination of Revolver Commitment.

(a)                The Revolver Commitment shall terminate on the Revolver
Termination Date, unless sooner terminated in accordance with this Agreement.
Upon at least 90 days prior written notice to Lender at any time after the first
Loan Year, Borrower may, at its option, terminate the Revolver Commitment and
this credit facility. Any notice of termination given by Borrower shall be
irrevocable. On the termination date, Borrower shall make Full Payment of all
Obligations.

(b)               Borrower may permanently reduce the Revolver Commitment upon
at least 90 days prior written notice to Lender, which notice shall specify the
amount of the reduction and shall be irrevocable once given. Each reduction
shall be in a minimum amount of $1,000,000, or an increment of $1,000,000 in
excess thereof.

 

 

 

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4.1.4        Overadvances. If the sum of all outstanding Revolver Loans plus the
LC Obligations (exclusive of fees owing with respect to Letters of Credit )
exceeds the Borrowing Base ("Overadvance") at any time, the excess amount shall
be payable by Borrower on demand by Lender, but all such Revolver Loans and LC
Obligations shall nevertheless constitute Obligations secured by the Collateral
and entitled to all benefits of the Loan Documents. Any funding or sufferance of
an Overadvance shall not constitute a waiver of the Event of Default caused
thereby.

4.2.            Term Loan Commitment. Lender agrees, on the terms set forth
herein, to make a Term Loan to Borrower in an amount up to the Term Loan
Commitment. The Term Loan shall be funded by Lender on the Closing Date, and the
Term Loan Commitment shall expire upon funding. Once repaid, whether such
repayment is voluntary or required, no portion of the Term Loan may be
reborrowed.

4.3.            Letter of Credit Facility.

4.3.1        Issuance of Letters of Credit. Lender agrees to issue Letters of
Credit from time to time until 30 days prior to the Revolver Termination Date
(or until the Commitment Termination Date, if earlier), on the terms set forth
herein, including the following:

(a)                Borrower acknowledges that Lender's willingness to issue any
Letter of Credit is conditioned upon its receipt of a LC Application with
respect to the requested Letter of Credit, as well as such other instruments and
agreements as Lender may customarily require for issuance of a letter of credit
of similar type and amount. Lender shall have no obligation to issue any Letter
of Credit unless (i) it receives a LC Request and LC Application at least three
Business Days prior to the requested date of issuance; and (ii) each LC
Condition is satisfied.

(b)               Letters of Credit may be requested by Borrower only (i) to
support obligations of Borrower incurred in the Ordinary Course of Business; or
(ii) for other purposes as Lender may approve from time to time in writing. The
renewal or extension of any Letter of Credit shall be treated as the issuance of
a new Letter of Credit, except that delivery of a new LC Application shall be
required at the discretion of Lender.

(c)                Borrower assumes all risks of the acts, omissions or misuses
of any Letter of Credit by the beneficiary. In connection with issuance of any
Letter of Credit, Lender shall not be responsible for the existence, character,
quality, quantity, condition, packing, value or delivery of any goods purported
to be represented by any Documents; any differences or variation in the
character, quality, quantity, condition, packing, value or delivery of any goods
from that expressed in any Documents; the form, validity, sufficiency, accuracy,
genuineness or legal effect of any Documents or of any endorsements thereon; the
time, place, manner or order in which shipment of goods is made; partial or
incomplete shipment of, or failure to ship, any goods referred to in a Letter of
Credit or Documents; any deviation from instructions, delay, default or fraud by
any shipper or other Person in connection with any goods, shipment or delivery;
any breach of contract between a shipper or vendor and Borrower; errors,
omissions, interruptions or delays in transmission or delivery of any messages,
by mail, cable, telegraph, telex, telecopy, e-mail, telephone or otherwise;
errors in interpretation of technical terms; the misapplication by a beneficiary
of any Letter of Credit or the proceeds thereof; or any consequences arising
from causes beyond the control of Lender, including any act or omission of a
Governmental Authority. Lender shall be fully subrogated to the rights and
remedies of each beneficiary whose claims against Borrower are discharged with
proceeds of any Letter of Credit.

 

 

 

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(d)               In connection with its administration of and enforcement of
rights or remedies under any Letters of Credit or LC Documents, Lender shall be
entitled to act, and shall be fully protected in acting, upon any certification,
documentation or communication in whatever form believed by Lender, in good
faith, to be genuine and correct and to have been signed, sent or made by a
proper Person. Lender may consult with and employ legal counsel, accountants and
other experts to advise it concerning its obligations, rights and remedies, and
shall be entitled to act upon, and shall be fully protected in any action taken
in good faith reliance upon, any advice given by such experts. Lender may employ
agents and attorneys-in-fact in connection with any matter relating to Letters
of Credit or LC Documents, and shall not be liable for the negligence or
misconduct of agents and attorneys-in-fact selected with reasonable care.

4.3.2        Reimbursement. If Lender honors any request for payment under a
Letter of Credit, Borrower shall pay to Lender, on the same day ("Reimbursement
Date"), the amount paid under such Letter of Credit, together with interest at
the interest rate for Base Rate Revolver Loans from the Reimbursement Date until
payment by Borrower. The obligation of Borrower to reimburse Lender for any
payment made under a Letter of Credit shall be absolute, unconditional,
irrevocable, and joint and several, and shall be paid without regard to any lack
of validity or enforceability of any Letter of Credit or the existence of any
claim, setoff, defense or other right that Borrower may have at any time against
the beneficiary. Whether or not Borrower submits a Notice of Borrowing, Borrower
shall be deemed to have requested, and, unless otherwise determined by Lender,
Lender shall be deemed to have made, a Borrowing of Base Rate Revolver Loans in
an amount necessary to pay all amounts due on any Reimbursement Date.

4.3.3        Cash Collateral. If any LC Obligations, whether or not then due or
payable, shall for any reason be outstanding at any time (a) that an Event of
Default exists, (b) that Availability is less than zero, (c) after the
Commitment Termination Date, or (d) within 20 Business Days prior to the
Revolver Termination Date, then Borrower shall, at Lender's request, Cash
Collateralize the stated amount of all outstanding Letters of Credit and pay to
Lender the amount of all other LC Obligations. If Borrower fails to provide Cash
Collateral as required herein, Lender may advance, as Revolver Loans, the amount
of the Cash Collateral required.

SECTION 5.      INTEREST, FEES AND CHARGES

5.1.            Interest.

5.1.1        Rates and Payment of Interest.

(a)                The Obligations shall bear interest (i) if a Base Rate Loan,
at the Base Rate in effect from time to time, plus the Applicable Margin; (ii)
if a UK Base Rate Revolver Loan, at the UK Base Rate in effect from time to
time, plus the Applicable Margin, (iii) if a LIBOR Loan, at LIBOR for the
applicable Interest Period, plus the Applicable Margin; and (iv) if any other
Obligation (including, to the extent permitted by law, interest not paid when
due), at the Base Rate in effect from time to time, plus the Applicable Margin
for Base Rate Revolver Loans. Interest shall accrue from the date the Loan is
advanced or the Obligation is incurred or payable, until paid by Borrower. If a
Loan is repaid on the same day made, one day's interest shall accrue.

(b)               During an Insolvency Proceeding with respect to Borrower, or
during any other Event of Default if Lender in its discretion so elects,
Obligations shall bear interest at the Default Rate (whether before or after any
judgment). Borrower acknowledges that the cost and expense to Lender due to an
Event of Default are difficult to ascertain and that the Default Rate is a fair
and reasonable estimate to compensate Lender for this.

 

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(c)                Interest accrued on the Loans shall be due and payable in
arrears, (i) on the first day of each month; (ii) on any date of prepayment,
with respect to the principal amount of Loans being prepaid; and (iii) on the
Commitment Termination Date. Interest accrued on any other Obligations shall be
due and payable as provided in the Loan Documents and, if no payment date is
specified, shall be due and payable on demand. Notwithstanding the foregoing,
interest accrued at the Default Rate shall be due and payable on demand.

5.1.2        Application of LIBOR to Outstanding Loans.

(a)                Borrower may on any Business Day, subject to delivery of a
Notice of Conversion/Continuation, elect to convert any portion of the Base Rate
Loans to, or to continue any LIBOR Loan at the end of its Interest Period as, a
LIBOR Loan. During any Default or Event of Default, Lender may declare that no
Loan may be made, converted or continued as a LIBOR Loan.

(b)               Whenever Borrower desires to convert or continue Loans as
LIBOR Loans, Borrower shall give Lender a Notice of Conversion/Continuation, no
later than 11:00 a.m. at least three Business Days before the requested
conversion or continuation date. Each Notice of Conversion/Continuation shall be
irrevocable, and shall specify the amount of Loans to be converted or continued,
the conversion or continuation date (which shall be a Business Day), and the
duration of the Interest Period (which shall be deemed to be 30 days if not
specified). If, upon the expiration of any Interest Period in respect of any
LIBOR Loans, Borrower shall have failed to deliver a Notice of
Conversion/Continuation, they shall be deemed to have elected to convert such
Loans into Base Rate Loans.

5.1.3        Interest Periods. In connection with the making, conversion or
continuation of any LIBOR Loans, Borrower shall select an interest period
("Interest Period") to apply, which interest period shall be 30, 60, or 90 days;
provided, however, that:

(a)                the Interest Period shall commence on the date the Loan is
made or continued as, or converted into, a LIBOR Loan, and shall expire on the
numerically corresponding day in the calendar month at its end;

(b)               if any Interest Period commences on a day for which there is
no corresponding day in the calendar month at its end or if such corresponding
day falls after the last Business Day of such month, then the Interest Period
shall expire on the last Business Day of such month; and if any Interest Period
would expire on a day that is not a Business Day, the period shall expire on the
next Business Day; and

(c)                no Interest Period shall extend beyond the Revolver
Termination Date; and no Interest Period for a LIBOR Term Loan may be
established that would require repayment before the end of an Interest Period in
order to make any scheduled principal payment on the Term Loan.

5.1.4        Interest Rate Not Ascertainable. If Lender shall determine that on
any date for determining LIBOR, due to any circumstance affecting the London
interbank market, adequate and fair means do not exist for ascertaining such
rate on the basis provided herein, then Lender shall immediately notify Borrower
of such determination. Until Lender notifies Borrower that such circumstance no
longer exists, the obligation of Lender to make LIBOR Loans shall be suspended,
and no further Loans may be converted into or continued as LIBOR Loans.

 

 

 

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5.2.            Fees.

5.2.1        Unused Line Fee. Borrower shall pay to Lender a fee equal to 0.75%
per annum times the amount by which the Revolver Commitment exceeds the average
daily balance of Revolver Loans and stated amount of Letters of Credit during
any month. Such fee shall be payable in arrears, on the first day of each month
and on the Commitment Termination Date.

5.2.2        LC Facility Fees. Borrower shall pay to Lender (a) a fee equal to
the Applicable Margin in effect for LIBOR Revolver Loans times the average daily
stated amount of Letters of Credit, which fee shall be payable monthly in
arrears, on the first day of each month; (b) a fronting fee equal to 0.25% per
annum on the stated amount of each Letter of Credit, which fee shall be payable
monthly in arrears, on the first day of each month; and (c) all customary
charges associated with the issuance, amending, negotiating, payment,
processing, transfer and administration of Letters of Credit, which charges
shall be paid as and when incurred. During an Event of Default, the fee payable
under clause (a) shall be increased by 2% per annum.

5.2.3        Closing Fee. Borrower shall pay to Lender a closing fee of
$100,000, which shall be paid concurrently with the funding of the initial Loans
hereunder.

5.3.            Computation of Interest, Fees, Yield Protection. All interest,
as well as fees and other charges calculated on a per annum basis, shall be
computed for the actual days elapsed, based on a year of 360 days. Each
determination by Lender of any interest, fees or interest rate hereunder shall
be final, conclusive and binding for all purposes, absent manifest error. All
fees shall be fully earned when due and shall not be subject to rebate, refund
or proration. All fees payable under Section 3.2 are compensation for services
and are not, and shall not be deemed to be, interest or any other charge for the
use, forbearance or detention of money. A certificate as to amounts payable by
Borrower under Section 3.4, 3.6, 3.7, 3.9 or 5.8, submitted to Borrower by
Lender shall be final, conclusive and binding for all purposes, absent manifest
error, and Borrower shall pay such amounts to the appropriate party within 10
days following receipt of the certificate.

5.4.            Reimbursement Obligations. Borrower shall reimburse Lender for
all Extraordinary Expenses. Borrower shall also reimburse Lender for all legal,
accounting, appraisal, consulting, and other fees, costs and expenses incurred
by it in connection with (a) negotiation and preparation of any Loan Documents,
including any amendment or other modification thereof; (b) administration of and
actions relating to any Collateral, Loan Documents and transactions contemplated
thereby, including any actions taken to perfect or maintain priority of Lender's
Liens on any Collateral, to maintain any insurance required hereunder or to
verify Collateral; and (c) subject to the limits of Section 10.1.1(b), each
inspection, audit or appraisal with respect to any Obligor or Collateral,
whether prepared by Lender's personnel or a third party. All legal, accounting
and consulting fees shall be charged to Borrower by Lender's professionals at
their full hourly rates, regardless of any reduced or alternative fee billing
arrangements that Lender or any of its Affiliates may have with such
professionals with respect to this or any other transaction. If, for any reason
(including inaccurate reporting on financial statements or a Compliance
Certificate), it is determined that a higher Applicable Margin should have
applied to a period than was actually applied, then the proper margin shall be
applied retroactively and Borrower shall immediately pay to Lender an amount
equal to the difference between the amount of interest and fees that would have
accrued using the proper margin and the amount actually paid. All amounts
payable by Borrower under this Section shall be due on demand.

 

 

 

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5.5.            Illegality. If Lender determines that any Applicable Law has
made it unlawful, or that any Governmental Authority has asserted that it is
unlawful, for Lender to make, maintain or fund LIBOR Loans, or to determine or
charge interest rates based upon LIBOR, or any Governmental Authority has
imposed material restrictions on the authority of Lender to purchase or sell, or
to take deposits of, Dollars in the London interbank market, then, on notice
thereof by Lender to Borrower, any obligation of Lender to make or continue
LIBOR Loans or to convert Base Rate Loans to LIBOR Loans shall be suspended
until Lender notifies Borrower that the circumstances giving rise to such
determination no longer exist. Upon delivery of such notice, Borrower shall
prepay or, if applicable, convert all LIBOR Loans to Base Rate Loans, either on
the last day of the Interest Period therefor, if Lender may lawfully continue to
maintain LIBOR Loans to such day, or immediately, if Lender may not lawfully
continue to maintain LIBOR Loans. Upon any such prepayment or conversion,
Borrower shall also pay accrued interest on the amount so prepaid or converted.

5.6.            Inability to Determine Rates. If Lender notifies Borrower for
any reason in connection with a request for a Borrowing of, conversion to or
continuation of, a LIBOR Loan that (a) Dollar deposits are not being offered to
banks in the London interbank Eurodollar market for the applicable amount and
Interest Period of such Loan, (b) adequate and reasonable means do not exist for
determining LIBOR for the requested Interest Period, or (c) LIBOR for the
requested Interest Period does not adequately and fairly reflect the cost to
Lender of funding such Loan, then the obligation of Lender to make or maintain
LIBOR Loans shall be suspended until it revokes the notice. Upon receipt of the
notice, Borrower may revoke any pending request for a Borrowing of, conversion
to or continuation of a LIBOR Loan or, failing that, will be deemed to have
submitted a request for a Base Rate Loan.

5.7.            Increased Costs; Capital Adequacy.

5.7.1        Change in Law. If any Change in Law shall:

(a)                impose modify or deem applicable any reserve, special
deposit, compulsory loan, insurance charge or similar requirement against assets
of, deposits with or for the account of, or credit extended or participated in
by, Lender (except any reserve requirement reflected in LIBOR);

(b)               subject Lender to any Tax with respect to any Loan, Loan
Document or Letter of Credit, or change the basis of taxation of payments to
Lender in respect thereof (except for Indemnified Taxes or Other Taxes covered
by Section 5.8 and the imposition of, or any change in the rate of, any Excluded
Tax payable by Lender); or

(c)                impose on Lender or the London interbank market any other
condition, cost or expense affecting any Loan, Loan Document or Letter of
Credit;

and the result thereof shall be to increase the cost to Lender of making or
maintaining any LIBOR Loan (or of maintaining its obligation to make any such
Loan), or to increase the cost to Lender of issuing or maintaining any Letter of
Credit (or of maintaining its obligation to issue any Letter of Credit), or to
reduce the amount of any sum received or receivable by Lender hereunder (whether
of principal, interest or any other amount) then, upon request by Lender,
Borrower will pay to Lender such additional amount or amounts as will compensate
Lender for such additional costs incurred or reduction suffered.

 

 

 

 

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5.7.2        Capital Adequacy. If Lender determines that any Change in Law
affecting Lender or its holding company regarding capital requirements has or
would have the effect of reducing the rate of return on Lender's or such holding
company's capital as a consequence of this Agreement, Commitments, Loans or
Letters of Credit to a level below that which Lender or such holding company
could have achieved but for such Change in Law (taking into consideration
Lender's and such holding company's policies with respect to capital adequacy),
then from time to time Borrower will pay to Lender such additional amount or
amounts as will compensate it or its holding company for any such reduction
suffered.

5.7.3        Compensation. Failure or delay on the part of Lender to demand
compensation pursuant to this Section shall not constitute a waiver of its right
to demand such compensation, but Borrower shall not be required to compensate
Lender for any increased costs incurred or reductions suffered more than nine
months prior to the date that Lender notifies Borrower of the Change in Law
giving rise to such increased costs or reductions and of Lender's intention to
claim compensation therefor (except that, if the Change in Law giving rise to
such increased costs or reductions is retroactive, then the nine-month period
referred to above shall be extended to include the period of retroactive effect
thereof).

5.8.            Mitigation. If Lender gives a notice under Section 3.5 or
requests compensation under Section 3.7, or if Borrower is required to pay
additional amounts under Section 5.8, then Lender shall use reasonable efforts
to designate a different lending office or to assign its rights and obligations
hereunder to another of its offices, branches or Affiliates, if, in the judgment
of Lender, such designation or assignment (a) would eliminate the need for such
notice or reduce amounts payable or to be withheld in the future, as applicable;
and (b) would not subject Lender to any unreimbursed cost or expense and would
not otherwise be disadvantageous to it. Borrower shall pay all reasonable costs
and expenses incurred by Lender in connection with any such designation or
assignment.

5.9.            Funding Losses. If for any reason (a) any Borrowing of, or
conversion to or continuation of, a LIBOR Loan does not occur on the date
specified therefor in a Notice of Borrowing or Notice of Conversion/Continuation
(whether or not withdrawn), (b) any repayment or conversion of a LIBOR Loan
occurs on a day other than the end of its Interest Period, or (c) Borrower fails
to repay a LIBOR Loan when required hereunder, then Borrower shall pay to Lender
all losses and expenses that it sustains as a consequence thereof, including
loss of anticipated profits and any loss or expense arising from liquidation or
redeployment of funds or from fees payable to terminate deposits of matching
funds. Lender shall not be required to purchase Dollar deposits in the London
interbank market or any other offshore Dollar market to fund any LIBOR Loan, but
the provisions hereof shall be deemed to apply as if Lender had purchased such
deposits to fund its LIBOR Loans.

5.10.        Maximum Interest. Notwithstanding anything to the contrary
contained in any Loan Document, the interest paid or agreed to be paid under the
Loan Documents shall not exceed the maximum rate of non-usurious interest
permitted by Applicable Law ("maximum rate"). If Lender shall receive interest
in an amount that exceeds the maximum rate, the excess interest shall be applied
to the principal of the Obligations or, if it exceeds such unpaid principal,
refunded to Borrower. In determining whether the interest contracted for,
charged or received by Lender exceeds the maximum rate, Lender may, to the
extent permitted by Applicable Law, (a) characterize any payment that is not
principal as an expense, fee or premium rather than interest; (b) exclude
voluntary prepayments and the effects thereof; and (c) amortize, prorate,
allocate and spread in equal or unequal parts the total amount of interest
throughout the contemplated term of the Obligations hereunder.

 

 

 

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5.11.        Excess Resulting from Exchange Rate. If, as a result of
fluctuations in exchange rates or otherwise, the Dollar Equivalent of (a) the
sum of all outstanding Revolver Loans plus LC Obligations (exclusive of fees
owing with respect to Letters of Credit) exceeds the Borrowing Base, or (b) the
sum of all outstanding UK Revolver Loans exceeds the UK Loan Sublimit, then in
each case the excess amount thereof shall be payable by Borrower within three
Business Days following demand by Lender. Without in any way limiting the
foregoing provisions, Lender may daily on each Business Day (or less frequently,
as Lender may desire) make the necessary exchange rate calculations to determine
whether any such excess exists on such date and advise Borrower if such excess
exists.

SECTION 6.      LOAN ADMINISTRATION

6.1.            Manner of Borrowing and Funding Revolver Loans.

6.1.1        Notice of Borrowing.

(a)                Whenever Borrower desires funding of a Borrowing of Revolver
Loans, Borrower shall give Lender a Notice of Borrowing. Such notice must be
received by Lender no later than 11:00 a.m. (i) on the Business Day of the
requested funding date, in the case of Base Rate Loans, (ii) at least two
Business Days prior to the requested funding date, in the case of UK Revolver
Loans, and (iii) at least three Business Days prior to the requested funding
date, in the case of LIBOR Loans. Notices received after 11:00 a.m. shall be
deemed received on the next Business Day. Each Notice of Borrowing shall be
irrevocable and shall specify (A) the amount of the Borrowing, (B) the requested
funding date (which must be a Business Day), (C) whether the Borrowing is to be
made as Base Rate Loans, UK Base Rate Revolver Loans or LIBOR Loans, and (D) in
the case of LIBOR Loans, the duration of the applicable Interest Period (which
shall be deemed to be 30 days if not specified).

(b)               Unless payment is otherwise timely made by Borrower, the
becoming due of any Obligations (whether principal, interest, fees or other
charges, including Extraordinary Expenses, LC Obligations, Cash Collateral and
Bank Product Debt) shall be deemed to be a request for Base Rate Revolver Loans
on the due date, in the amount of such Obligations. The proceeds of such
Revolver Loans shall be disbursed as direct payment of the relevant Obligation.
In addition, Lender may, at its option, charge such Obligations against any
operating, investment or other account of Borrower maintained with Lender or any
of its Affiliates.

(c)                If Borrower establishes a controlled disbursement account
with Lender or any of its Affiliates, then the presentation for payment of any
check or other item of payment drawn on such account at a time when there are
insufficient funds to cover it shall be deemed to be a request for Base Rate
Revolver Loans or UK Base Rate Revolver Loans, as applicable, on the date of
such presentation, in the amount of the check and items presented for payment.
The proceeds of such Revolver Loans may be disbursed directly to the controlled
disbursement account or other appropriate account.

6.1.2        Fundings. Lender shall fund each Borrowing on the applicable
funding date and, subject to the terms of this Agreement, shall disburse the
proceeds as directed by Borrower, provided that the funding of any Borrowing of
UK Base Rate Revolver Loans shall be made to Borrower, by Bank of America, N.A.
(acting through its London branch) in the UK Disbursement Account.

 

 

 

 

 

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6.1.3        Notices. Borrower authorizes Lender to extend, convert or continue
Loans, effect selections of interest rates, and transfer funds to or on behalf
of Borrower based on telephonic or e-mailed instructions. Borrower shall confirm
each such request by prompt delivery to Lender of a Notice of Borrowing or
Notice of Conversion/Continuation, if applicable, but if it differs in any
material respect from the action taken by Lender, the records of Lender shall
govern. Lender shall not have any liability for any loss suffered by Borrower as
a result of Lender acting upon its understanding of telephonic or e-mailed
instructions from a person believed in good faith to be a person authorized to
give such instructions on Borrower's behalf.

6.2.            Number and Amount of LIBOR Loans; Determination of Rate. Each
Borrowing of LIBOR Loans when made shall be in a minimum amount of $500,000 plus
any increment of $100,000 in excess thereof. No more than four Borrowings of
LIBOR Loans may be outstanding at any time, and all LIBOR Loans having the same
length and beginning date of their Interest Periods shall be aggregated together
and considered one Borrowing for this purpose. Upon determining LIBOR for any
Interest Period requested by Borrower, Lender shall promptly notify Borrower
thereof by telephone or electronically and, if requested by Borrower, shall
confirm any telephonic notice in writing.

6.3.            One Obligation. The Loans, LC Obligations and other Obligations
shall constitute one general obligation of Borrower and (unless otherwise
expressly provided in any Loan Document) shall be secured by Lender's Lien upon
all Collateral.

6.4.            Effect of Termination. On the effective date of any termination
of the Revolver Commitment, all Obligations shall be immediately due and
payable, and each Secured Party may terminate its Bank Products. All
undertakings of Borrower contained in the Loan Documents shall survive any
termination, and Lender shall retain its Liens in the Collateral and all of its
rights and remedies under the Loan Documents until Full Payment of the
Obligations. Notwithstanding Full Payment of the Obligations, Lender shall not
be required to terminate its Liens in any Collateral unless, with respect to any
damages Lender may incur as a result of the dishonor or return of Payment Items
applied to Obligations, Lender receives (a) a written agreement, executed by
Borrower and any Person whose advances are used in whole or in part to satisfy
the Obligations, indemnifying Lender from any such damages; or (b) such Cash
Collateral as Lender, in its discretion, deems necessary to protect against any
such damages. The provisions of Sections 2.3, 3.4, 3.6, 3.7, 3.9, 5.5, 5.8, 12.2
and this Section, and the obligation of each Obligor with respect to each
indemnity given by it in any Loan Document, shall survive Full Payment of the
Obligations and any release relating to this credit facility.

SECTION 7.      PAYMENTS

7.1.            General Payment Provisions. All payments of Obligations shall be
made in the currency of the underlying Obligations, without offset, counterclaim
or defense of any kind, free of (and without deduction for) any Taxes, and in
immediately available funds, not later than 12:00 noon on the due date. Any
payment after such time shall be deemed made on the next Business Day. Any
payment of a LIBOR Loan prior to the end of its Interest Period shall be
accompanied by all amounts due under Section 3.9. Any prepayment of Loans shall
be applied first to Base Rate Loans and UK Base Rate Revolver Loans and then to
LIBOR Loans.

 

 

 

 

 

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7.2.            Repayment of Revolver Loans. Revolver Loans shall be due and
payable in full on the Revolver Termination Date, unless payment is sooner
required hereunder. Revolver Loans may be prepaid from time to time, without
penalty or premium. If any Asset Disposition includes the disposition of
Accounts or Inventory, then Net Proceeds equal to the greater of (a) the net
book value of such Accounts and Inventory, or (b) the reduction in the Borrowing
Base upon giving effect to such disposition, shall be applied to the Revolver
Loans. Notwithstanding anything herein to the contrary, if an Overadvance
exists, Borrower shall, on the sooner of Lender's demand or the first Business
Day after Borrower has knowledge thereof, repay the outstanding Revolver Loans
in an amount sufficient to reduce the principal balance of Revolver Loans to the
Borrowing Base.

7.3.            Repayment of Term Loan.

7.3.1        Payment of Principal. Principal of the Term Loan shall be repaid on
the first Business Day of each month in consecutive monthly installments on the
first Business Day of each month, commencing on October 1, 2010, each such
installment to be in an amount equal to 1/24 of the principal balance of the
Term Loan outstanding on the Closing Date, until the Term Loan Maturity Date, on
which date all principal, interest and other amounts owing with respect to the
Term Loan shall be due and payable in full. Once repaid, whether such repayment
is voluntary or required, no portion of the Term Loan may be reborrowed.

7.3.2        Mandatory Prepayments.

(a)                Concurrently with any Permitted Asset Disposition of
Equipment, Borrower shall prepay the Term Loan in an amount equal to the Net
Proceeds of such disposition;

(b)               Concurrently with the receipt of any proceeds of insurance or
condemnation awards paid in respect of any Equipment or Real Estate, Borrower
shall prepay the Term Loan in an amount equal to such proceeds, subject to
Section 8.6.2;

(c)                Concurrently with the receipt of any key man life insurance
proceeds, Borrower shall prepay the Term Loan in an amount equal to such
proceeds;

(d)               Concurrently with any issuance of Equity Interests by Borrower
(other than Equity Interests issued pursuant to Borrower's Equity Incentive Plan
or the exercise of any outstanding warrants), Borrower shall prepay the Term
Loan in an amount equal to the net proceeds of such issuance; and

(e)                On the Commitment Termination Date, Borrower shall prepay the
entire Term Loan (unless sooner repaid hereunder).

7.3.3        Optional Prepayments. Borrower may, at its option from time to time
after April 15, 2011, prepay the Term Loan, which prepayment must be at least
$50,000, plus any increment of $50,000 in excess thereof, provided that (a) no
Default or Event of Default shall exist at the time of, or result from, such
prepayment, and (b) Borrower's Availability shall exceed $1,500,000, in each
such case after giving effect to such prepayment. Borrower shall give written
notice to Lender of an intended prepayment of the Term Loan, which notice shall
specify the amount of the prepayment, shall be irrevocable once given, shall be
given at least 10 Business Days prior to the end of a month and shall be
effective as of the first day of the next month.

 

 

 

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7.3.4        Interest; Application of Prepayments. Each prepayment of the Term
Loan shall be accompanied by all interest accrued thereon and any amounts
payable under Section 3.9, and shall be applied to principal in inverse order of
maturity.

7.4.            Payment of Other Obligations. Obligations other than Loans,
including LC Obligations and Extraordinary Expenses, shall be paid by Borrower
as provided in the Loan Documents or, if no payment date is specified, on
demand.

7.5.            Marshaling; Payments Set Aside. Lender shall have no obligation
to marshal any assets in favor of any Obligor or against any Obligations. If any
payment by or on behalf of Borrower is made to Lender, or Lender exercises a
right of setoff, and such payment or the proceeds of such setoff or any part
thereof is subsequently invalidated, declared to be fraudulent or preferential,
set aside or required (including pursuant to any settlement entered into by
Lender in its discretion) to be repaid to a trustee, receiver or any other
Person, then to the extent of such recovery, the Obligation originally intended
to be satisfied, and all Liens, rights and remedies relating thereto, shall be
revived and continued in full force and effect as if such payment had not been
made or such setoff had not occurred.

7.6.            Application of Payments. The ledger balance in (a) the US
Dominion Accounts as of the end of each Business Day, and (b) the Canadian
Dominion Account as of the end of each Business Day after Lender sends to
Borrower an Activation Notice, in each case shall be applied to the Obligations
at the beginning of the next Business Day, as applicable. However, solely for
purposes of computing interest hereunder, and in addition to Lender's standard
fees and charges relating to the account, any application by Lender of such
balance to the Obligations shall be deemed to be made at the beginning of the
second Business Day. If, as a result of such application, a credit balance
exists, the balance shall not accrue interest in favor of Borrower and shall be
made available to Borrower as long as no Default or Event of Default exists.
Borrower irrevocably waives the right to direct the application of any payments
or Collateral proceeds, and agrees that Lender shall have the continuing,
exclusive right to apply and reapply same against the Obligations, in such
manner as Lender deems advisable.

7.7.            Loan Account; Account Stated.

7.7.1        Loan Account. Lender shall maintain in accordance with its usual
and customary practices an account or accounts ("Loan Account") evidencing the
Debt of Borrower resulting from each Loan or issuance of a Letter of Credit from
time to time. Any failure of Lender to record anything in the Loan Account, or
any error in doing so, shall not limit or otherwise affect the obligation of
Borrower to pay any amount owing hereunder. Lender may maintain a single Loan
Account in the name of Borrower, and Borrower confirms that such arrangement
shall have no effect on the joint and several character of its liability for the
Obligations. Entries Binding. Entries made in the Loan Account shall constitute
presumptive evidence of the information contained therein. If any information
contained in the Loan Account is provided to or inspected by any Person, then
such information shall be conclusive and binding on such Person for all purposes
absent manifest error, except to the extent such Person notifies Lender in
writing within 30 days after receipt or inspection that specific information is
subject to dispute.

 

 

 

 

 

 

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7.8.            Taxes.

7.8.1        Payments Free of Taxes. All payments by Obligors of Obligations
shall be free and clear of and without reduction for any Taxes. If Applicable
Law requires any Obligor or Lender to withhold or deduct any Tax (including
backup withholding or withholding Tax), Lender shall pay the amount withheld or
deducted to the relevant Governmental Authority. If the withholding or deduction
is made on account of Indemnified Taxes or Other Taxes, the sum payable by
Borrower shall be increased so that Lender receives an amount equal to the sum
it would have received if no such withholding or deduction (including deductions
applicable to additional sums payable under this Section) had been made. Without
limiting the foregoing, Borrower shall timely pay all Other Taxes to the
relevant Governmental Authorities.

7.8.2        Payment. Borrower shall indemnify, hold harmless and reimburse
(within 10 days after demand therefor) Lender for any Indemnified Taxes or Other
Taxes (including those attributable to amounts payable under this Section)
withheld or deducted by any Obligor or Lender, or paid by Lender, with respect
to any Obligations, Letters of Credit or Loan Documents, whether or not such
Taxes were properly asserted by the relevant Governmental Authority, and
including all penalties, interest and reasonable expenses relating thereto. A
certificate as to the amount of any such payment or liability delivered to
Borrower by Lender shall be conclusive, absent manifest error. As soon as
practicable after any payment of Taxes by Borrower, Borrower shall deliver to
Lender a receipt from the Governmental Authority or other evidence of payment
satisfactory to Lender.

7.9.            Nature and Extent of Borrower's Liability.

7.9.1        Liability. Borrower agrees that it is liable for, and absolutely
and unconditionally agrees to pay and perform all Obligations and all agreements
under the Loan Documents. Borrower agrees that its obligations hereunder shall
not be discharged until Full Payment of the Obligations, and that such
obligations are absolute and unconditional, irrespective of (a) 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 Obligor is or may become a party or be
bound; (b) 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; (c) the existence, value or condition of,
or failure to perfect a Lien 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);
(d) the insolvency of any Obligor; (e) any election by Lender in an Insolvency
Proceeding for the application of Section 1111(b)(2) of the Bankruptcy Code; (f)
the disallowance of any claims of Lender against any Obligor for the repayment
of any Obligations under Section 502 of the Bankruptcy Code or otherwise; or (g)
any other action or circumstances that might otherwise constitute a legal or
equitable discharge or defense of a surety or guarantor, except Full Payment of
all Obligations.

7.9.2        Waivers.

(a)                Borrower expressly waives all rights that it may have now or
in the future under any statute, at common law, in equity or otherwise, to
compel Lender to marshal assets or to proceed against any Obligor, other Person
or security for the payment or performance of any Obligations before, or as a
condition to, proceeding against Borrower. Borrower waives all defenses
available to a surety, guarantor or accommodation co-obligor other than Full
Payment of all Obligations. It is agreed among Borrower and Lender that the
provisions of this Section 5.9 are of the essence of the transaction
contemplated by the Loan Documents and that, but for such provisions, Lender
would decline to make Loans and issue Letters of Credit. Borrower acknowledges
that its guaranty pursuant to this Section is necessary to the conduct and
promotion of its business, and can be expected to benefit such business.

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(b)               Lender may, in its discretion, pursue such rights and remedies
as it deems appropriate, including realization upon Collateral or any Real
Estate by judicial foreclosure or non-judicial sale or enforcement, without
affecting any rights and remedies under this Section 5.9. If, in taking any
action in connection with the exercise of any rights or remedies, Lender shall
forfeit any other rights or remedies, including the right to enter a deficiency
judgment against Borrower or other Person, whether because of any Applicable
Laws pertaining to "election of remedies" or otherwise, Borrower consents to
such action and waives any claim based upon it, even if the action may result in
loss of any rights of subrogation that Borrower might otherwise have had.
Borrower waives all rights and defenses arising out of an election of remedies,
such as nonjudicial foreclosure with respect to any security for the
Obligations, even though that election of remedies destroys Borrower's rights of
subrogation against any other Person. Lender may bid all or a portion of the
Obligations at any foreclosure or trustee's sale or at any private sale, and the
amount of such bid need not be paid by Lender but shall be credited against the
Obligations. The amount of the successful bid at any such sale, whether Lender
or any other Person is the successful bidder, shall be conclusively deemed to be
the fair market value of the Collateral, and the difference between such bid
amount and the remaining balance of the Obligations shall be conclusively deemed
to be the amount of the Obligations guaranteed under this Section 5.9,
notwithstanding that any present or future law or court decision may have the
effect of reducing the amount of any deficiency claim to which Lender might
otherwise be entitled but for such bidding at any such sale.

7.9.3        Subordination. Borrower hereby subordinates any claims, including
any rights at law or in equity to payment, subrogation, reimbursement,
exoneration, contribution, indemnification or set off, that it may have at any
time against any other Obligor, howsoever arising, to the Full Payment of all
Obligations.

SECTION 8.      CONDITIONS PRECEDENT

8.1.            Conditions Precedent to Initial Loans. In addition to the
conditions set forth in Section 6.2, Lender shall not be required to fund any
requested Loan, issue any Letter of Credit or otherwise extend credit to
Borrower hereunder, until the date ("Closing Date") that each of the following
conditions has been satisfied:

(a)                Each other Loan Document shall have been duly executed and
delivered to Lender by each of the signatories thereto, and each Obligor shall
be in compliance with all terms thereof.

(b)               Lender shall have received acknowledgments of all filings or
recordations necessary to perfect its Liens in the Collateral, as well as all
Lien searches and other evidence satisfactory to Lender that such Liens are the
only Liens upon the Collateral, except Permitted Liens.

(c)                Lender shall have received evidence, in form and substance
satisfactory to Lender, that concurrently upon disbursement of the initial
Borrowings all Debt owing by Borrower to ComVest Capital, LLC will be paid in
full and all Liens securing such Debt will be released and terminated.

(d)               Lender shall have received duly executed agreements
establishing each Dominion Account and related lockbox, in form and substance,
and with financial institutions, satisfactory to Lender.

(e)                Lender shall have received certificates, in form and
substance satisfactory to it, from a knowledgeable Senior Officer of Borrower
certifying that, after giving effect to the initial Loans and transactions
hereunder, (i) Borrower is Solvent; (ii) no Default or Event of Default exists;
(iii) the representations and warranties set forth in Section 9 are true and
correct; and (iv) Borrower has complied with all agreements and conditions to be
satisfied by it under the Loan Documents.

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(f)                Lender shall have received a certificate of a duly authorized
officer of each Obligor, certifying (i) that attached copies of such Obligor's
Organic Documents are true and complete, and in full force and effect, without
amendment except as shown; (ii) that an attached copy of resolutions authorizing
execution and delivery of the Loan Documents is true and complete, and that such
resolutions are in full force and effect, were duly adopted, have not been
amended, modified or revoked, and constitute all resolutions adopted with
respect to this credit facility; and (iii) to the title, name and signature of
each Person authorized to sign the Loan Documents. Lender may conclusively rely
on this certificate until it is otherwise notified by the applicable Obligor in
writing.

(g)                Lender shall have received a written opinion of Greenbaum
Rowe Smith & Davis LLP, as well as any local counsel to Borrower or Lender, in
form and substance satisfactory to Lender.

(h)               Lender shall have received copies of the charter documents of
each Obligor, certified by the Secretary of State or other appropriate official
of such Obligor's jurisdiction of organization. Lender shall have received good
standing certificates for each Obligor, issued by the Secretary of State or
other appropriate official of such Obligor's jurisdiction of organization and
each jurisdiction where such Obligor's conduct of business or ownership of
Property necessitates qualification.

(i)                 Lender shall have received copies of policies or
certificates of insurance for the insurance policies carried by Borrower, all in
compliance with the Loan Documents.

(j)                 Lender shall have completed its business, financial and
legal due diligence of Obligors, including a roll-forward of its previous field
examination, with results satisfactory to Lender. No material adverse change in
the financial condition of any Obligor or in the quality, quantity or value of
any Collateral shall have occurred since December 31, 2009.

(k)               Borrower shall have paid all fees and expenses to be paid to
Lender on the Closing Date.

(l)                 Lender shall have received a Borrowing Base Certificate
prepared as of the Closing Date.

(m)             After giving effect to all Borrowings to be made on the Closing
Date and payment of all fees and expenses due hereunder, and with all of
Borrower's indebtedness, liabilities, and obligations current, Borrower's
Availability, less the aggregate amount of past due payables aged 60 days or
more past the original invoice date, shall not be less than the greater of (i)
10% of the Borrowing Base and (ii) $1,000,000.

(n)               Borrower shall have delivered evidence to Lender, in form and
substance satisfactory to Lender, that EBITDA for the fiscal quarter ended June
30, 2010 was not less than $750,000.

(o)               Lender shall have received financial statements, in form and
substance acceptable to Lender, for Guarantor.

(p)               an Insurance Assignment in respect of key man life insurance
on the life of Douglas J. Kramer, in form and substance acceptable to Lender.

(q)               a Deposit Account Control Agreement for each deposit account
into which any proceeds of Collateral will be deposited pursuant to this
Agreement.

 

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8.2.            Conditions Precedent to All Credit Extensions. Lender shall not
be required to fund any Loans, issue any Letters of Credit, or grant any other
accommodation to or for the benefit of Borrower, unless the following conditions
are satisfied:

(a)                No Default or Event of Default shall exist at the time of, or
result from, such funding, issuance or grant;

(b)               The representations and warranties of each Obligor in the Loan
Documents shall be true and correct on the date of, and upon giving effect to,
such funding, issuance or grant (except for representations and warranties that
expressly relate to an earlier date);

(c)                All conditions precedent in any other Loan Document shall be
satisfied;

(d)               No event shall have occurred or circumstance exist that has or
could reasonably be expected to have a Material Adverse Effect; and

(e)                With respect to issuance of a Letter of Credit, the LC
Conditions shall be satisfied.

Each request (or deemed request) by Borrower for funding of a Loan, issuance of
a Letter of Credit or grant of an accommodation shall constitute a
representation by Borrower that the foregoing conditions are satisfied on the
date of such request and on the date of such funding, issuance or grant. As an
additional condition to any funding, issuance or grant, Lender shall have
received such other information, documents, instruments and agreements as it
deems appropriate in connection therewith.

SECTION 9.      COLLATERAL

9.1.            Grant of Security Interest. To secure the prompt payment and
performance of all Obligations, Borrower hereby grants to Lender a continuing
security interest in and Lien upon all Property of Borrower, including all of
the following Property, whether now owned or hereafter acquired, and wherever
located:

(a)                all Accounts;

(b)               all Chattel Paper, including electronic chattel paper;

(c)                all Commercial Tort Claims, including those shown on Schedule
9.1.16;

(d)               all Deposit Accounts;

(e)                all Documents;

(f)                all General Intangibles, including Intellectual Property;

(g)                all Goods, including Inventory, Equipment and fixtures;

(h)               all Instruments;

(i)                 all Investment Property;

(j)                 all Letter-of-Credit Rights;

 

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(k)               all Supporting Obligations;

(l)                 all monies, whether or not in the possession or under the
control of Lender, or a bailee or Affiliate of Lender, including any Cash
Collateral;

(m)             all accessions to, substitutions for, and all replacements,
products, and cash and non-cash proceeds of the foregoing, including proceeds of
and unearned premiums with respect to insurance policies, and claims against any
Person for loss, damage or destruction of any Collateral; and

(n)               all books and records (including customer lists, files,
correspondence, tapes, computer programs, print-outs and computer records)
pertaining to the foregoing.

9.2.            Lien on Deposit Accounts; Cash Collateral.

9.2.1        Deposit Accounts. To further secure the prompt payment and
performance of all Obligations, Borrower hereby grants to Lender a continuing
security interest in and Lien upon all amounts credited to any Deposit Account
of Borrower, including any sums in any blocked or lockbox accounts or in any
accounts into which such sums are swept. Borrower hereby authorizes and directs
each bank or other depository to deliver to Lender, upon request, all balances
in any Deposit Account maintained by Borrower, without inquiry into the
authority or right of Lender to make such request.

9.2.2        Cash Collateral. Any Cash Collateral may be invested, at Lender's
discretion and with the consent of Borrower, but Lender shall have no duty to do
so, regardless of any agreement or course of dealing with Borrower, and shall
have no responsibility for any investment or loss. Borrower hereby grants to
Lender a security interest in all Cash Collateral held from time to time and all
proceeds thereof, as security for the Obligations, whether such Cash Collateral
is held in a Cash Collateral Account or elsewhere. Lender may apply Cash
Collateral to the payment of any Obligations, in such order as Lender may elect,
as they become due and payable. Each Cash Collateral Account and all Cash
Collateral shall be under the sole dominion and control of Lender. Borrower or
other Person claiming through or on behalf of any Borrower shall not have any
right to any Cash Collateral, until Full Payment of all Obligations.

9.3.            Reserved.

9.4.            Other Collateral.

9.4.1        Commercial Tort Claims. Borrower shall promptly notify Lender in
writing if Borrower has a Commercial Tort Claim (other than, as long as no
Default or Event of Default exists, a Commercial Tort Claim for less than
$100,000), shall promptly amend Schedule 9.1.16 to include such claim, and shall
take such actions as Lender deems appropriate to subject such claim to a duly
perfected, first priority Lien in favor of Lender.

9.4.2        Certain After-Acquired Collateral. Borrower shall promptly notify
Lender in writing if, after the Closing Date, Borrower obtains any interest in
any Collateral consisting of Deposit Accounts, Chattel Paper, Documents,
Instruments, Intellectual Property, Investment Property or Letter-of-Credit
Rights and, upon Lender's request, shall promptly take such actions as Lender
deems appropriate to effect Lender's duly perfected, first priority Lien upon
such Collateral, including obtaining any appropriate possession, control
agreement or Lien Waiver. If any Collateral is in the possession of a third
party, at Lender's request, Borrower shall obtain an acknowledgment that such
third party holds the Collateral for the benefit of Lender.

 

 

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9.5.            No Assumption of Liability. The Lien on Collateral granted
hereunder is given as security only and shall not subject Lender to, or in any
way modify, any obligation or liability of Borrower relating to any Collateral.

9.6.            Further Assurances; Extent of Liens. Promptly upon request,
Borrower shall deliver such instruments, assignments, title certificates, or
other documents or agreements, and shall take such actions, as Lender deems
appropriate under Applicable Law to evidence or perfect its Lien on any
Collateral, or otherwise to give effect to the intent of this Agreement.
Borrower authorizes Lender to file any financing statement that indicates the
Collateral as "all assets" or "all personal property" of Borrower, or words to
similar effect, and ratifies any action taken by Lender before the Closing Date
to effect or perfect its Lien on any Collateral. All of Lender's Liens on
Collateral (and all evidences of such Liens), whether effected hereunder or
under any other Loan Document, are granted to Lender as agent for the benefit of
all Secured Parties.

9.7.            Foreign Subsidiary Stock. Notwithstanding Section 7.1, the
Collateral shall include only 65% of the voting stock of any Foreign Subsidiary.

SECTION 10.  COLLATERAL ADMINISTRATION

10.1.        Borrowing Base Certificates. As soon as available but in any event
(i) within 3 Business Days after the end of each calendar week for so long as
Availability is greater than or equal to $1,500,000 or (ii) daily following any
day on which Availability is less than $1,500,000 and continuing until
Availability has equaled or exceeded $1,500,000 for at least 45 consecutive
days, Borrower shall deliver to Lender a Borrowing Base Certificate prepared as
of the close of business, and at such other times as Lender may request. All
calculations of Availability in any Borrowing Base Certificate shall originally
be made by Borrower and certified by a Senior Officer, provided that Lender may
from time to time review and adjust any such calculation (a) to reflect its
reasonable estimate of declines in value of any Collateral, due to collections
received in the Dominion Accounts or otherwise; (b) to adjust advance rates to
reflect changes in dilution, quality, mix and other factors affecting
Collateral; and (c) to the extent the calculation is not made in accordance with
this Agreement or does not accurately reflect the Availability Reserve.

10.2.        Administration of Accounts.

10.2.1    Records and Schedules of Accounts. Borrower shall keep accurate and
complete records of its Accounts, including all payments and collections
thereon, and shall submit to Lender sales, collection, reconciliation and other
reports in form satisfactory to Lender, on such periodic basis as Lender may
request. Borrower shall also provide to Lender, on or before the 15th day of
each month, a detailed aged trial balance of all Accounts as of the end of the
preceding month, specifying each Account's Account Debtor name and address,
amount, invoice date and due date, showing any discount, allowance, credit,
authorized return or dispute, and including such proof of delivery, copies of
invoices and invoice registers, copies of related documents, repayment
histories, status reports and other information as Lender may reasonably
request. If Accounts in an aggregate face amount of $500,000 or more cease to be
Eligible Accounts, Borrower shall notify Lender of such occurrence promptly (and
in any event within one Business Day) after Borrower has knowledge thereof.

10.2.2    Taxes. If an Account of Borrower includes a charge for any Taxes,
Lender is authorized, in its discretion, to pay the amount thereof to the proper
taxing authority for the account of Borrower and to charge Borrower therefor;
provided, however, that Lender shall not be liable for any Taxes that may be due
from Borrower or with respect to any Collateral.

 

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10.2.3    Account Verification. Whether or not a Default or Event of Default
exists, Lender shall have the right at any time, in the name of Lender, any
designee of Lender or Borrower, to verify the validity, amount or any other
matter relating to any Accounts of Borrower by mail, telephone or otherwise.
Borrower shall cooperate fully with Lender in an effort to facilitate and
promptly conclude any such verification process.

10.2.4    Maintenance of Dominion Account. Borrower shall maintain Dominion
Accounts pursuant to lockbox or other arrangements acceptable to Lender.
Borrower shall obtain a Deposit Account Control Agreement from each lockbox
servicer and Dominion Account bank, establishing Lender's control over and Lien
in the lockbox or Dominion Account, requiring immediate deposit of all
remittances received in the lockbox to a Dominion Account, and waiving offset
rights of such servicer or bank, except for customary administrative charges.
Notwithstanding any other provisions in this Agreement, UK Dominion Accounts
must be maintained exclusively at Bank of America, N.A. (acting through its
London branch) and shall be under the sole dominion and exclusive control of
Lender; provided, that collected funds will be disbursed from UK Dominion
Accounts in the discretion of Lender. If a Dominion Account or a UK Dominion
Account is not maintained with Lender, Lender may require immediate transfer of
all funds in such account to a Dominion Account or a UK Dominion Account,
respectively, maintained with Lender. Lender assumes no responsibility to
Borrower for any lockbox arrangement or Dominion Account, including any claim of
accord and satisfaction or release with respect to any Payment Items accepted by
any bank.

10.2.5    Proceeds of Collateral; Canadian Disbursement Account.

(a)                Borrower shall request in writing and otherwise take all
necessary steps to ensure that all payments on Canadian Accounts are made
directly to the Canadian Dominion Account (or a lockbox relating to the Canadian
Dominion Account). If Borrower or any Subsidiary receives cash or Payment Items
with respect to any Canadian Accounts, it shall hold same in trust for Lender
and promptly (not later than the next Business Day) deposit same into the
Canadian Dominion Account.

(b)               Borrower shall request in writing and otherwise take all
necessary steps to ensure that all payments on Accounts other than Canadian
Accounts or otherwise relating to any Collateral other than Canadian Accounts
are made directly to a US Dominion Account (or a lockbox relating to a US
Dominion Account). If Borrower or Subsidiary receives cash or Payment Items with
respect to any Accounts other than Canadian Accounts or otherwise relating to
any Collateral other than Canadian Accounts, it shall hold same in trust for
Lender and promptly (not later than the next Business Day) deposit same into a
US Dominion Account.

(c)                For so long as Lender has not sent to Borrower an Activation
Notice pursuant to Section 8.25(d) collected funds that are deposited to the
Canadian Dominion Account shall be transferred to the Canadian Disbursement
Account, provided, that the Canadian Disbursement Account is subject to Lender's
control pursuant to Section 8.5. All collected funds in the Canadian Dominion
Account on and after the date on which Lender sends to Borrower an Activation
Notice shall be transferred to Lender for application to the Obligations.

(d)               Lender shall have the irrevocable right to send Borrower an
Activation Notice with respect to the Canadian Dominion Account at any time in
Lender's sole discretion, without prior notice, whether or not any Default or
Event of Default has occurred or remains in existence.

 

 

 

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(e)                The aggregate amount of funds on deposit in the Canadian
Disbursement Account shall not exceed, on any day, an amount (determined
according to applicable currency exchange rates on such day as determined by
Lender) equivalent to 150,000 Dollars. Borrower shall cause all amounts, if any,
at any time on deposit in the Canadian Disbursement Account in excess of an
amount (determined according to applicable currency exchange rates on such day
as determined by Lender) equivalent to 150,000 Dollars to be promptly
transferred to Lender for application to the Obligations.

10.3.        Administration of Inventory.

10.3.1    Records and Reports of Inventory. Borrower shall keep accurate and
complete records of its Inventory, including costs and daily withdrawals and
additions, and shall submit to Lender inventory and reconciliation reports in
form satisfactory to Lender, on such periodic basis as Lender may request.
Borrower shall conduct a physical inventory at least once per calendar year (and
on a more frequent basis if requested by Lender when an Event of Default exists)
and periodic cycle counts consistent with historical practices, and shall
provide to Lender a report based on each such inventory and count promptly upon
completion thereof, together with such supporting information as Lender may
request. Lender may participate in and observe each physical count.

10.3.2    Returns of Inventory. Borrower shall not return any Inventory to a
supplier, vendor or other Person, whether for cash, credit or otherwise, unless
(a) such return is in the Ordinary Course of Business; (b) no Default, Event of
Default or Overadvance exists or would result therefrom; (c) Lender is promptly
notified if the aggregate Value of all Inventory returned in any month exceeds
$100,000; and (d) any payment received by Borrower for a return is promptly
remitted to Lender for application to the Obligations.

10.3.3    Acquisition, Sale and Maintenance. Borrower shall not acquire or
accept any Inventory on consignment or approval, and shall take all steps to
assure that all Inventory is produced in accordance with Applicable Law,
including the FLSA. Borrower shall not sell any Inventory on consignment or
approval or any other basis under which the customer may return or require
Borrower to repurchase such Inventory. Borrower shall use, store and maintain
all Inventory with reasonable care and caution, in accordance with applicable
standards of any insurance and in conformity with all Applicable Law, and shall
make current rent payments (within applicable grace periods provided for in
leases) at all locations where any Collateral is located.

10.4.        Administration of Equipment.

10.4.1    Records and Schedules of Equipment. Borrower shall keep accurate and
complete records of its Equipment, including kind, quality, quantity, cost,
acquisitions and dispositions thereof, and shall submit to Lender, on such
periodic basis as Lender may request, a current schedule thereof, in form
satisfactory to Lender. Promptly upon request, Borrower shall deliver to Lender
evidence of their ownership or interests in any Equipment.

10.4.2    Dispositions of Equipment. Borrower shall not sell, lease or otherwise
dispose of any Equipment, without the prior written consent of Lender, other
than (a) a Permitted Asset Disposition; and (b) replacement of Equipment that is
worn, damaged or obsolete with Equipment of like function and value, if the
replacement Equipment is acquired substantially contemporaneously with such
disposition and is free of Liens.

 

 

 

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10.4.3    Condition of Equipment. The Equipment is in good operating condition
and repair, and all necessary replacements and repairs have been made so that
the value and operating efficiency of the Equipment is preserved at all times,
reasonable wear and tear excepted. Borrower shall ensure that the Equipment is
mechanically and structurally sound, and capable of performing the functions for
which it was designed, in accordance with manufacturer specifications. Borrower
shall not permit any Equipment to become affixed to real Property unless any
landlord or mortgagee delivers a Lien Waiver.

10.5.        Administration of Deposit Accounts. Schedule 8.5 sets forth all
Deposit Accounts maintained by Borrower, including all Dominion Accounts.
Borrower shall take all actions necessary to establish Lender's control of each
such Deposit Account through a Deposit Account Control Agreement (other than an
account domiciled in the U.S. or Canada exclusively used for payroll, payroll
taxes or employee benefits, or an account containing not more than $10,000 at
any time). Borrower shall be the sole account holder of each Deposit Account and
shall not allow any other Person (other than Lender) to have control over a
Deposit Account or any Property deposited therein. Borrower shall promptly
notify Lender of any opening or closing of a Deposit Account and, with the
consent of Lender, will amend Schedule 8.5 to reflect same.

10.6.        General Provisions.

10.6.1    Location of Collateral. All tangible items of Collateral, other than
Inventory in transit, shall at all times be kept by Borrower at the business
locations set forth in Schedule 8.6.1, except that Borrower may (a) make sales
or other dispositions of Collateral in accordance with Section 10.2.6; and (b)
move Collateral to another location in the United States, upon 30 Business Days
prior written notice to Lender.

10.6.2    Insurance of Collateral; Condemnation Proceeds.

(a)                Borrower shall maintain insurance with respect to the
Collateral, covering casualty, hazard, theft, malicious mischief, flood and
other risks, in amounts, with endorsements and with insurers (with a Best Rating
of at least A7, unless otherwise approved by Lender) satisfactory to Lender. All
proceeds under each policy shall be payable to Lender. From time to time upon
request, Borrower shall deliver to Lender the originals or certified copies of
its insurance policies and updated flood plain searches. Unless Lender shall
agree otherwise, each policy shall include satisfactory endorsements (i) showing
Lender as loss payee; (ii) requiring 30 days prior written notice to Lender in
the event of cancellation of the policy for any reason whatsoever; and (iii)
specifying that the interest of Lender shall not be impaired or invalidated by
any act or neglect of Borrower or the owner of the Property, nor by the
occupation of the premises for purposes more hazardous than are permitted by the
policy. If Borrower fails to provide and pay for any insurance, Lender may, at
its option, but shall not be required to, procure the insurance and charge
Borrower therefor. Borrower agrees to deliver to Lender, promptly as rendered,
copies of all reports made to insurance companies. While no Event of Default
exists, Borrower may settle, adjust or compromise any insurance claim, as long
as the proceeds are delivered to Lender. If an Event of Default exists, only
Lender shall be authorized to settle, adjust and compromise such claims.

(b)               Any proceeds of insurance (other than proceeds from workers'
compensation or D&O insurance) and any awards arising from condemnation of any
Collateral shall be paid to Lender. Any such proceeds or awards that relate to
Inventory shall be applied to payment of the Revolver Loans, and then to any
other Obligations outstanding, other than the Term Loan. Subject to clause (c)
below, any proceeds or awards that relate to Equipment or Real Estate shall be
applied first to the Term Loan, then to Revolver Loans and then to other
Obligations.

 

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(c)                If requested by Borrower in writing within 15 days after
Lender's receipt of any insurance proceeds or condemnation awards relating to
any loss or destruction of Equipment or Real Estate, Borrower may use such
proceeds or awards to repair or replace such Equipment or Real Estate (and until
so used, the proceeds shall be held by Lender as Cash Collateral) as long as (i)
no Default or Event of Default exists; (ii) such repair or replacement is
promptly undertaken and concluded, in accordance with plans satisfactory to
Lender; (iii) replacement buildings are constructed on the sites of the original
casualties and are of comparable size, quality and utility to the destroyed
buildings; (iv) the repaired or replaced Property is free of Liens, other than
Permitted Liens that are not Purchase Money Liens; (v) Borrower complies with
disbursement procedures for such repair or replacement as Lender may reasonably
require; and (vi) the aggregate amount of such proceeds or awards from any
single casualty or condemnation does not exceed $3,000,000.

10.6.3    Protection of Collateral. All expenses of protecting, storing,
warehousing, insuring, handling, maintaining and shipping any Collateral, all
Taxes payable with respect to any Collateral (including any sale thereof), and
all other payments required to be made by Lender to any Person to realize upon
any Collateral, shall be borne and paid by Borrower. Lender shall not be liable
or responsible in any way for the safekeeping of any Collateral, for any loss or
damage thereto (except for reasonable care in its custody while Collateral is in
Lender's actual possession), for any diminution in the value thereof, or for any
act or default of any warehouseman, carrier, forwarding agency or other Person
whatsoever, but the same shall be at Borrower's sole risk.

10.6.4    Defense of Title to Collateral. Borrower shall at all times defend its
title to Collateral and Lender's Liens therein against all Persons, claims and
demands whatsoever, except Permitted Liens.

10.7.        Power of Attorney. Borrower hereby irrevocably constitutes and
appoints Lender (and all Persons designated by Lender) as Borrower's true and
lawful attorney (and agent-in-fact) for the purposes provided in this Section.
Lender, or Lender's designee, may, without notice and in either its or
Borrower's name, but at the cost and expense of Borrower:

(a)                Endorse Borrower's name on any Payment Item or other proceeds
of Collateral (including proceeds of insurance) that come into Lender's
possession or control; and

(b)               During an Event of Default, (i) notify any Account Debtors of
the assignment of their Accounts, demand and enforce payment of Accounts, by
legal proceedings or otherwise, and generally exercise any rights and remedies
with respect to Accounts; (ii) settle, adjust, modify, compromise, discharge or
release any Accounts or other Collateral, or any legal proceedings brought to
collect Accounts or Collateral; (iii) sell or assign any Accounts and other
Collateral upon such terms, for such amounts and at such times as Lender deems
advisable; (iv) collect, liquidate and receive balances in Deposit Accounts or
investment accounts, and take control, in any manner, of proceeds of Collateral;
(v) prepare, file and sign Borrower's name to a proof of claim or other document
in a bankruptcy of an Account Debtor, or to any notice, assignment or
satisfaction of Lien or similar document; (vi) receive, open and dispose of mail
addressed to Borrower, and notify postal authorities to deliver any such mail to
an address designated by Lender; (vii) endorse any Chattel Paper, Document,
Instrument, bill of lading, or other document or agreement relating to any
Accounts, Inventory or other Collateral; (viii) use Borrower's stationery and
sign its name to verifications of Accounts and notices to Account Debtors; (ix)
use information contained in any data processing, electronic or information
systems relating to Collateral; (x) make and adjust claims under insurance
policies; (xi) take any action as may be necessary or appropriate to obtain
payment under any letter of credit, banker's acceptance or other instrument for
which Borrower is a beneficiary; and (xii) take all other actions as Lender
deems appropriate to fulfill Borrower's obligations under the Loan Documents.

 

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SECTION 11.  REPRESENTATIONS AND WARRANTIES

11.1.        General Representations and Warranties. To induce Lender to enter
into this Agreement and to make available the Commitments, Loans and Letters of
Credit, Borrower represents and warrants that:

11.1.1    Organization and Qualification. Borrower and Subsidiary is duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization. Borrower and Subsidiary is duly qualified,
authorized to do business and in good standing as a foreign corporation in each
jurisdiction where failure to be so qualified could reasonably be expected to
have a Material Adverse Effect.

11.1.2    Power and Authority. Each Obligor is duly authorized to execute,
deliver and perform its Loan Documents. The execution, delivery and performance
of the Loan Documents have been duly authorized by all necessary action, and do
not (a) require any consent or approval of any holders of Equity Interests of
any Obligor, other than those already obtained; (b) contravene the Organic
Documents of any Obligor; (c) violate or cause a default under any Applicable
Law or Material Contract; or (d) result in or require the imposition of any Lien
(other than Permitted Liens) on any Property of any Obligor.

11.1.3    Enforceability. Each Loan Document is a legal, valid and binding
obligation of each Obligor party thereto, enforceable in accordance with its
terms, except as enforceability may be limited by bankruptcy, insolvency or
similar laws affecting the enforcement of creditors' rights generally.

11.1.4    Capital Structure. Schedule 9.1.4 shows, for Borrower and Subsidiary,
its name, its jurisdiction of organization, its authorized and issued Equity
Interests, the holders of its Equity Interests, and all agreements binding on
such holders with respect to their Equity Interests. Except as disclosed on
Schedule 9.1.4, in the five years preceding the Closing Date, no Borrower or
Subsidiary has acquired any substantial assets from any other Person nor been
the surviving entity in a merger or combination. Borrower has good title to its
Equity Interests in its Subsidiaries, subject only to Lender's Lien, and all
such Equity Interests are duly issued, fully paid and non-assessable. There are
no outstanding purchase options, warrants, subscription rights, agreements to
issue or sell, convertible interests, phantom rights or powers of attorney
relating to Equity Interests of any Borrower or Subsidiary.

11.1.5    Title to Properties; Priority of Liens. Borrower and each Subsidiary
have good and marketable title to (or valid leasehold interests in) all of its
Real Estate, and good title to all of its personal Property, including all
Property reflected in any financial statements delivered to Lender, in each case
free of Liens except Permitted Liens. Borrower and each Subsidiary has paid and
discharged all lawful claims that, if unpaid, could become a Lien on its
Properties, other than Permitted Liens. All Liens of Lender in the Collateral
are duly perfected, first priority Liens, subject only to Permitted Liens that
are expressly allowed to have priority over Lender's Liens.

11.1.6    Accounts. Lender may rely, in determining which Accounts are Eligible
Accounts, on all statements and representations made by Borrower with respect
thereto. Borrower warrants, with respect to each Account at the time it is shown
as an Eligible Account in a Borrowing Base Certificate, that:

(a)                it is genuine and in all respects what it purports to be, and
is not evidenced by a judgment;

(b)               it arises out of a completed, bona fide sale and delivery of
goods in the Ordinary Course of Business, and substantially in accordance with
any purchase order, contract or other document relating thereto;

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(c)                it is for a sum certain, maturing as stated in the invoice
covering such sale, a copy of which has been furnished or is available to Lender
on request;

(d)               it is not subject to any offset, Lien (other than Lender's
Lien), deduction, defense, dispute, counterclaim or other adverse condition
except as arising in the Ordinary Course of Business and disclosed to Lender;
and it is absolutely owing by the Account Debtor, without contingency in any
respect;

(e)                no purchase order, agreement, document or Applicable Law
restricts assignment of the Account to Lender (regardless of whether, under the
UCC, the restriction is ineffective), and the Borrower is the sole payee or
remittance party shown on the invoice;

(f)                no extension, compromise, settlement, modification, credit,
deduction or return has been authorized with respect to the Account, except
discounts or allowances granted in the Ordinary Course of Business for prompt
payment that are reflected on the face of the invoice related thereto and in the
reports submitted to Lender hereunder; and

(g)                to the best of Borrower's knowledge, (i) there are no facts
or circumstances that are reasonably likely to impair the enforceability or
collectibility of such Account; (ii) the Account Debtor had the capacity to
contract when the Account arose, continues to meet the Borrower's customary
credit standards, is Solvent, is not contemplating or subject to an Insolvency
Proceeding, and has not failed, or suspended or ceased doing business; and (iii)
there are no proceedings or actions threatened or pending against any Account
Debtor that could reasonably be expected to have a material adverse effect on
the Account Debtor's financial condition.

11.1.7    Financial Statements. The consolidated and consolidating balance
sheets, and related statements of income, cash flow and shareholder's equity, of
Borrower and Subsidiaries that have been and are hereafter delivered to Lender,
are prepared in accordance with GAAP, and fairly present the financial positions
and results of operations of Borrower and Subsidiaries at the dates and for the
periods indicated. All projections delivered from time to time to Lender have
been prepared in good faith, based on reasonable assumptions in light of the
circumstances at such time. Since December 31, 2009, there has been no change in
the condition, financial or otherwise, of any Borrower or Subsidiary that could
reasonably be expected to have a Material Adverse Effect. No financial statement
delivered to Lender at any time contains any untrue statement of a material
fact, nor fails to disclose any material fact necessary to make such statement
not materially misleading. Borrower and each Subsidiary are Solvent.

11.1.8    Surety Obligations. No Borrower or Subsidiary is obligated as surety
or indemnitor under any bond or other contract that assures payment or
performance of any obligation of any Person, except as permitted hereunder.

11.1.9    Taxes. Borrower and each Subsidiary have filed all federal, state and
local tax returns and other reports that it is required by law to file, and has
paid, or made provision for the payment of, all Taxes upon it, its income and
its Properties that are due and payable, except to the extent being Properly
Contested. The provision for Taxes on the books of Borrower and each Subsidiary
is adequate for all years not closed by applicable statutes, and for its current
Fiscal Year.

11.1.10                        Brokers. There are no brokerage commissions,
finder's fees or investment banking fees payable in connection with any
transactions contemplated by the Loan Documents.

 

 

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11.1.11                        Intellectual Property. Borrower and each
Subsidiary own or has the lawful right to use all Intellectual Property
necessary for the conduct of its business, without conflict with any rights of
others. There is no pending or, to Borrower's knowledge, threatened Intellectual
Property Claim with respect to Borrower, any Subsidiary or any of their Property
(including any Intellectual Property). Except as disclosed on Schedule 9.1.11,
no Borrower or Subsidiary pays or owes any Royalty or other compensation to any
Person with respect to any Intellectual Property. All Intellectual Property
owned, used or licensed by, or otherwise subject to any interests of, any
Borrower or Subsidiary is shown on Schedule 9.1.11.

11.1.12                        Governmental Approvals. Borrower and each
Subsidiary have, is in compliance with, and is in good standing with respect to,
all Governmental Approvals necessary to conduct its business and to own, lease
and operate its Properties. All necessary import, export or other licenses,
permits or certificates for the import or handling of any goods or other
Collateral have been procured and are in effect, and Borrower and Subsidiaries
have complied with all foreign and domestic laws with respect to the shipment
and importation of any goods or Collateral, except where noncompliance could not
reasonably be expected to have a Material Adverse Effect.

11.1.13                        Compliance with Laws. Borrower and each
Subsidiary have duly complied, and its Properties and business operations are in
compliance, in all material respects with all Applicable Law, except where
noncompliance could not reasonably be expected to have a Material Adverse
Effect. There have been no citations, notices or orders of material
noncompliance issued to any Borrower or Subsidiary under any Applicable Law. No
Inventory has been produced in violation of the FLSA.

11.1.14                        Compliance with Environmental Laws. Except as
disclosed on Schedule 9.1.14, to Borrower's knowledge, no Borrower's or
Subsidiary's past or present operations, Real Estate or other Properties are
subject to any federal, state or local investigation to determine whether any
remedial action is needed to address any environmental pollution, hazardous
material or environmental clean-up. No Borrower or Subsidiary has received any
Environmental Notice. No Borrower or Subsidiary has any contingent liability
with respect to any Environmental Release, environmental pollution or hazardous
material on any Real Estate now or previously owned, leased or operated by it.

11.1.15                        Burdensome Contracts. No Borrower or Subsidiary
is a party or subject to any contract, agreement or charter restriction that
could reasonably be expected to have a Material Adverse Effect. No Borrower or
Subsidiary is party or subject to any Restrictive Agreement, except as shown on
Schedule 9.1.15. No such Restrictive Agreement prohibits the execution, delivery
or performance of any Loan Document by an Obligor.

11.1.16                        Litigation. Except as shown on Schedule 9.1.16,
there are no proceedings or investigations pending or, to any Borrower's
knowledge, threatened against Borrower or Subsidiary, or any of their
businesses, operations, Properties, prospects or conditions, that (a) relate to
any Loan Documents or transactions contemplated thereby; or (b) could reasonably
be expected to have a Material Adverse Effect if determined adversely to
Borrower or Subsidiary. Except as shown on such Schedule, no Obligor has a
Commercial Tort Claim (other than, as long as no Default or Event of Default
exists, a Commercial Tort Claim for less than $100,000). No Borrower or
Subsidiary is in default with respect to any order, injunction or judgment of
any Governmental Authority.

11.1.17                        No Defaults. No event or circumstance has
occurred or exists that constitutes a Default or Event of Default. No Borrower
or Subsidiary is in default, and no event or circumstance has occurred or exists
that with the passage of time or giving of notice would constitute a default,
under any Material Contract or in the payment of any Borrowed Money. There is no
basis upon which any party (other than Borrower or Subsidiary) could terminate a
Material Contract prior to its scheduled termination date.

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11.1.18                        ERISA. Except as disclosed on Schedule 9.1.18:

(a)                Each Plan is in compliance in all material respects with the
applicable provisions of ERISA, the Code, and other federal and state laws. Each
Plan that is intended to qualify under Section 401(a) of the Code has received a
favorable determination letter from the IRS or an application for such a letter
is currently being processed by the IRS with respect thereto and, to the
knowledge of Borrower, nothing has occurred which would prevent, or cause the
loss of, such qualification. Each Obligor and ERISA Affiliate has made all
required contributions to each Plan subject to Section 412 of the Code, and no
application for a funding waiver or an extension of any amortization period
pursuant to Section 412 of the Code has been made with respect to any Plan.

(b)               There are no pending or, to the knowledge of Borrower,
threatened claims, actions or lawsuits, or action by any Governmental Authority,
with respect to any Plan that could reasonably be expected to have a Material
Adverse Effect. There has been no prohibited transaction or violation of the
fiduciary responsibility rules with respect to any Plan that has resulted in or
could reasonably be expected to have a Material Adverse Effect.

(c)                (i) No ERISA Event has occurred or is reasonably expected to
occur; (ii) no Pension Plan has any Unfunded Pension Liability; (iii) no Obligor
or ERISA Affiliate has incurred, or reasonably expects to incur, any liability
under Title IV of ERISA with respect to any Pension Plan (other than premiums
due and not delinquent under Section 4007 of ERISA); (iv) no Obligor or ERISA
Affiliate has incurred, or reasonably expects to incur, any liability (and no
event has occurred which, with the giving of notice under Section 4219 of ERISA,
would result in such liability) under Section 4201 or 4243 of ERISA with respect
to a Multiemployer Plan; and (v) no Obligor or ERISA Affiliate has engaged in a
transaction that could be subject to Section 4069 or 4212(c) of ERISA.

(d)               With respect to any Foreign Plan, (i) all employer and
employee contributions required by law or by the terms of the Foreign Plan have
been made, or, if applicable, accrued, in accordance with normal accounting
practices; (ii) the fair market value of the assets of each funded Foreign Plan,
the liability of each insurer for any Foreign Plan funded through insurance, or
the book reserve established for any Foreign Plan, together with any accrued
contributions, is sufficient to procure or provide for the accrued benefit
obligations with respect to all current and former participants in such Foreign
Plan according to the actuarial assumptions and valuations most recently used to
account for such obligations in accordance with applicable generally accepted
accounting principles; and (iii) it has been registered as required and has been
maintained in good standing with applicable regulatory authorities.

11.1.19                        Trade Relations. There exists no actual or
threatened termination, limitation or modification of any business relationship
between Borrower or Subsidiary and any customer or supplier, or any group of
customers or suppliers, who individually or in the aggregate are material to the
business of Borrower or Subsidiary. There exists no condition or circumstance
that could reasonably be expected to impair the ability of Borrower or
Subsidiary to conduct its business at any time hereafter in substantially the
same manner as conducted on the Closing Date.

11.1.20                        Labor Relations. No Borrower or Subsidiary is
party to or bound by any collective bargaining agreement, management agreement
or consulting agreement. There are no material grievances, disputes or
controversies with any union or other organization of any Borrower's or
Subsidiary's employees, or, to Borrower's knowledge, any asserted or threatened
strikes, work stoppages or demands for collective bargaining.

11.1.21                        Payable Practices. No Borrower or Subsidiary has
made any material change in its historical accounts payable practices from those
in effect on the Closing Date.

 

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11.1.22                        Not a Regulated Entity. No Obligor is (a) an
"investment company" or a "person directly or indirectly controlled by or acting
on behalf of an investment company" within the meaning of the Investment Company
Act of 1940; or (b) subject to regulation under the Federal Power Act, the
Interstate Commerce Act, any public utilities code or any other Applicable Law
regarding its authority to incur Debt.

11.1.23                        Margin Stock. No Borrower or Subsidiary 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
Loan proceeds or Letters of Credit will be used by Borrower to purchase or
carry, or to reduce or refinance any Debt incurred to purchase or carry, any
Margin Stock or for any related purpose governed by Regulations T, U or X of the
Board of Governors.

11.2.        Complete Disclosure. No Loan Document contains any untrue statement
of a material fact, nor fails to disclose any material fact necessary to make
the statements contained therein not materially misleading. There is no fact or
circumstance that any Obligor has failed to disclose to Lender in writing that
could reasonably be expected to have a Material Adverse Effect.

SECTION 12.  COVENANTS AND CONTINUING AGREEMENTS

12.1.        Affirmative Covenants. As long as any Commitment or Obligations are
outstanding, Borrower shall, and shall cause each Subsidiary to:

12.1.1    Inspections; Appraisals.

(a)                Permit Lender from time to time, subject (except when a
Default or Event of Default exists) to reasonable notice and normal business
hours, to visit and inspect the Properties of Borrower or Subsidiary, inspect,
audit and make extracts from Borrower's or Subsidiary's books and records, and
discuss with its officers, employees, agents, advisors and independent
accountants Borrower's or Subsidiary's business, financial condition, assets,
prospects and results of operations. Lender shall not have any duty to Borrower
to make any inspection, nor to share any results of any inspection, appraisal or
report with Borrower. Borrower acknowledges that all inspections, appraisals and
reports are prepared by Lender for its purposes, and Borrower shall not be
entitled to rely upon them.

(b)               Reimburse Lender for all its charges, costs and expenses in
connection with (i) examinations of any Obligor's books and records or any other
financial or Collateral matters as Lender deems appropriate, up to three times
per Loan Year; and (ii) appraisals of Inventory, Equipment up to one time per
Loan Year; provided, however, that if an examination or appraisal is initiated
during a Default or Event of Default, all charges, costs and expenses therefor
shall be reimbursed by Borrower without regard to such limits. Subject to and
without limiting the foregoing, Borrower specifically agrees to pay Lender's
then standard charges for each day that an employee of Lender or its Affiliates
is engaged in any examination activities, and shall pay the standard charges of
Lender's internal appraisal group. This Section shall not be construed to limit
Lender's right to conduct examinations or to obtain appraisals at any time in
its discretion, nor to use third parties for such purposes.

12.1.2    Financial and Other Information. Keep adequate records and books of
account with respect to its business activities, in which proper entries are
made in accordance with GAAP reflecting all financial transactions; and furnish
to Lender:

 

 

 

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(a)                as soon as available, and in any event within 105 days after
the close of each Fiscal Year, balance sheets as of the end of such Fiscal Year
and the related statements of income, cash flow and shareholders' equity for
such Fiscal Year, on consolidated and consolidating bases for Borrower and
Subsidiaries, which consolidated statements shall be audited and certified
(without qualification) by a firm of independent certified public accountants of
recognized standing selected by Borrower and acceptable to Lender, and shall set
forth in comparative form corresponding figures for the preceding Fiscal Year
and other information acceptable to Lender;

(b)               as soon as available, and in any event within 20 days after
the end of each month (but within 75 days after the last month in a Fiscal
Year), unaudited balance sheets as of the end of such month and the related
statements of income and cash flow for such month and for the portion of the
Fiscal Year then elapsed, on consolidated and consolidating bases for Borrower
and Subsidiaries, setting forth in comparative form corresponding figures for
the preceding Fiscal Year and certified by the chief financial officer of
Borrower as prepared in accordance with GAAP and fairly presenting the financial
position and results of operations for such month and period, subject to normal
year-end adjustments and the absence of footnotes;

(c)                concurrently with delivery of financial statements under
clauses (a) and (b) above, or more frequently if requested by Lender while a
Default or Event of Default exists, a Compliance Certificate executed by the
chief financial officer of Borrower;

(d)               concurrently with delivery of financial statements under
clause (a) above, copies of all management letters and other material reports
submitted to Borrower by its accountants in connection with such financial
statements;

(e)                not later than 20 days prior to the end of each Fiscal Year,
projections of Borrower's consolidated balance sheets, results of operations,
cash flow and Availability for the next Fiscal Year, month by month;

(f)                at Lender's request, a listing of Borrower's trade payables,
specifying the trade creditor and balance due, and a detailed trade payable
aging, all in form satisfactory to Lender;

(g)                promptly after the sending or filing thereof, copies of any
proxy statements, financial statements or reports that Borrower has made
generally available to its shareholders; copies of any regular, periodic and
special reports or registration statements or prospectuses that Borrower files
with the Securities and Exchange Commission or any other Governmental Authority,
or any securities exchange; and copies of any press releases or other statements
made available by Borrower to the public concerning material changes to or
developments in the business of Borrower;

(h)               promptly after the sending or filing thereof, copies of any
annual report to be filed in connection with each Plan or Foreign Plan;

(i)                 such other reports and information (financial or otherwise)
as Lender may request from time to time in connection with any Collateral or
Borrower's, Subsidiary's or other Obligor's financial condition or business;

(j)                 as soon as available, and in any event within 120 days after
the close of each Fiscal Year, financial statements for each Guarantor, in form
and substance satisfactory to Lender; and

(k)               as soon as available, and in any event no fewer than three
times per Fiscal Year as requested by Lender if no Event of Default has
occurred, a field examination, and at such other times as may be requested by
Lender if a Default or an Event of Default has occurred, a field examination and
appraisal of Inventory, in form and substance satisfactory to Lender.

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12.1.3    Notices. Notify Lender in writing, promptly after Borrower's obtaining
knowledge thereof, of any of the following that affects an Obligor: (a) the
threat or commencement of any proceeding or investigation, whether or not
covered by insurance, if an adverse determination could have a Material Adverse
Effect; (b) any pending or threatened labor dispute, strike or walkout, or the
expiration of any material labor contract; (c) any default under or termination
of a Material Contract; (d) the existence of any Default or Event of Default;
(e) any judgment in an amount exceeding $50,000; (f) the assertion of any
Intellectual Property Claim, if an adverse resolution could have a Material
Adverse Effect; (g) any violation or asserted violation of any Applicable Law
(including ERISA, OSHA, FLSA, or any Environmental Laws), if an adverse
resolution could have a Material Adverse Effect; (h) any Environmental Release
by an Obligor or on any Property owned, leased or occupied by an Obligor; or
receipt of any Environmental Notice; (i) the occurrence of any ERISA Event; (j)
the discharge of or any withdrawal or resignation by Borrower' independent
accountants; or (k) any opening of a new office or place of business, at least
30 days prior to such opening.

12.1.4    Landlord and Storage Agreements. Upon request, provide Lender with
copies of all existing agreements, and promptly after execution thereof provide
Lender with copies of all future agreements, between an Obligor and any
landlord, warehouseman, processor, shipper, bailee or other Person that owns any
premises at which any Collateral may be kept or that otherwise may possess or
handle any Collateral.

12.1.5    Compliance with Laws. Comply with all Applicable Laws, including
ERISA, Environmental Laws, FLSA, OSHA, Anti-Terrorism Laws, and laws regarding
collection and payment of Taxes, and maintain all Governmental Approvals
necessary to the ownership of its Properties or conduct of its business, unless
failure to comply (other than failure to comply with Anti-Terrorism Laws) or
maintain could not reasonably be expected to have a Material Adverse Effect.
Without limiting the generality of the foregoing, if any Environmental Release
occurs at or on any Properties of Borrower or Subsidiary, it shall act promptly
and diligently to investigate and report to Lender and all appropriate
Governmental Authorities the extent of, and to make appropriate remedial action
to eliminate, such Environmental Release, whether or not directed to do so by
any Governmental Authority.

12.1.6    Taxes. Pay and discharge all Taxes prior to the date on which they
become delinquent or penalties attach, unless such Taxes are being Properly
Contested.

12.1.7    Insurance. In addition to the insurance required hereunder with
respect to Collateral, maintain insurance with insurers (with a Best Rating of
at least A7, unless otherwise approved by Lender) satisfactory to Lender, (a)
with respect to the Properties and business of Borrower and Subsidiaries of such
type (including product liability, workers' compensation, larceny, embezzlement,
or other criminal misappropriation insurance), in such amounts, and with such
coverages and deductibles as are customary for companies similarly situated; and
(b) business interruption insurance in an amount not less than $3,000,000, with
deductibles and subject to an Insurance Assignment satisfactory to Lender.

12.1.8    Licenses. Keep each License affecting any Collateral (including the
manufacture, distribution or disposition of Inventory) or any other material
Property of Borrower and Subsidiaries in full force and effect; promptly notify
Lender of any proposed modification to any such License, or entry into any new
License, in each case at least 30 days prior to its effective date; pay all
Royalties when due; and notify Lender of any default or breach asserted by any
Person to have occurred under any License.

 

 

 

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12.1.9    Future Subsidiaries. Promptly notify Lender upon any Person becoming a
Subsidiary and, if such Person is not a Foreign Subsidiary, cause it to guaranty
the Obligations in a manner satisfactory to Lender, and to execute and deliver
such documents, instruments and agreements and to take such other actions as
Lender shall require to evidence and perfect a Lien in favor of Lender on all
assets of such Person, including delivery of such legal opinions, in form and
substance satisfactory to Lender, as it shall deem appropriate.

12.1.10                        Depository Bank. Maintain Lender as its principal
depository bank, including for the maintenance of all operating, collection,
disbursement and other deposit accounts and for all Cash Management Services.

12.1.11                        Reserved.

12.1.12                        Key Man Life Insurance. Maintain life insurance
policies, with insurers satisfactory to Lender, insuring the life of Douglas J.
Kramer in an amount at least equal to $2,500,000, with respect to which the
owner and beneficiary shall be Borrower and all proceeds shall be collaterally
assigned to Lender pursuant to an Insurance Assignment in form and substance
acceptable to Lender.

12.1.13                        Principal Depository Bank. Borrower and each
Subsidiary will maintain Lender as its principal depository bank, including for
the maintenance of operating, administrative, cash management, collection
activity, and other deposit accounts for the conduct of its business.

12.1.14                        Liquidity Forecast. Not later than the third
Business Day following any three consecutive Business Days on which Availability
is less than $500,000, Borrower will deliver to Lender a liquidity forecast,
forecasting Borrower's Availability for the next succeeding 20 Business Days
thereafter, which forecast shall be in form and substance satisfactory to Lender
and demonstrate, to Lender' satisfaction in its discretion, adequate available
liquidity for Borrower's operations during such period.

12.1.15                        Canadian Operations. Not later than thirty (30)
days after the end of any fiscal quarter in which the aggregate Canadian Sales
for the four (4) preceding fiscal quarters then ended exceed $20,000,000,
Borrower shall notify Lender that Canadian Sales for such period exceeded such
amount and provide information and documentation to Lender, in form and
substance satisfactory to Lender, with regard to each of the following matters,
in each case demonstrating such matters to Lender's satisfaction in its sole
discretion: (i) the structure of operations of the Canadian portion of
Borrower's business, including without limitation, any continuation as an
unincorporated branch and all loan, security and related documentation (
including opinions confirming the enforceability of  Lender's first priority
Liens), (ii) Borrower's compliance with all covenants under the Loan Documents,
including without limitation, the payment and remittance of all Taxes, including
corporate, harmonized or other sales, excise, customs and withholding Taxes, in
respect of the Canadian portion of Borrower's business and/or any collection and
remittance to Borrower or any other Person in the United States or to Lender or
deposit accounts controlled or swept by Lender (and if requested by Lender,
Borrower covenants and agrees to provide documentary evidence of the
calculation, payment and remittance to Canada Revenue Agency and other
applicable taxing authorities in Canada to the satisfaction of Lender) and (iii)
any inclusion in the Borrowing Base of Inventory located in Canada or Accounts
payable by residents of Canada.

12.2.        Negative Covenants. As long as any Commitment or Obligations are
outstanding, Borrower shall not, and shall cause each Subsidiary not to:

12.2.1    Permitted Debt. Create, incur, guarantee or suffer to exist any Debt,
except:

 

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(a)                the Obligations;

(b)               Subordinated Debt, including without limitation, the
Subordinated Term Debt, provided that such Subordinated Term Debt is
subordinated in right of payment and claim pursuant to the Subordinated Term
Debt Intercreditor Agreement;

(c)                Permitted Purchase Money Debt;

(d)               Borrowed Money (other than the Obligations, Subordinated Debt
and Permitted Purchase Money Debt), but only to the extent outstanding on the
Closing Date and not satisfied with proceeds of the initial Loans;

(e)                Bank Product Debt;

(f)                Debt that is in existence when a Person becomes a Subsidiary
or that is secured by an asset when acquired by Borrower or Subsidiary, as long
as such Debt was not incurred in contemplation of such Person becoming a
Subsidiary or such acquisition, and does not exceed $100,000 in the aggregate at
any time;

(g)                Permitted Contingent Obligations;

(h)               Refinancing Debt as long as each Refinancing Condition is
satisfied; and

(i)                 Debt that is not included in any of the preceding clauses of
this Section, is not secured by a Lien and does not exceed $100,000 in the
aggregate at any time.

12.2.2    Permitted Liens. Create or suffer to exist any Lien upon any of its
Property, except the following (collectively, "Permitted Liens"):

(a)                Liens in favor of Lender;

(b)               Purchase Money Liens securing Permitted Purchase Money Debt;

(c)                Liens for Taxes not yet due or being Properly Contested;

(d)               statutory Liens (other than Liens for Taxes or imposed under
ERISA) arising in the Ordinary Course of Business, but only if (i) payment of
the obligations secured thereby is not yet due or is being Properly Contested,
and (ii) such Liens do not materially impair the value or use of the Property or
materially impair operation of the business of Borrower or Subsidiary;

(e)                Liens incurred or deposits made in the Ordinary Course of
Business to secure the performance of tenders, bids, leases, contracts (except
those relating to Borrowed Money), statutory obligations and other similar
obligations, or arising as a result of progress payments under government
contracts, as long as such Liens are at all times junior to Lender's Liens;

(f)                Liens arising in the Ordinary Course of Business that are
subject to Lien Waivers;

(g)                Liens arising by virtue of a judgment or judicial order
against Borrower or Subsidiary, or any Property of Borrower or Subsidiary, as
long as such Liens are (i) in existence for less than 20 consecutive days or
being Properly Contested, and (ii) at all times junior to Lender's Liens;

 

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(h)               easements, rights-of-way, restrictions, covenants or other
agreements of record, and other similar charges or encumbrances on Real Estate,
that do not secure any monetary obligation and do not interfere with the
Ordinary Course of Business;

(i)                 normal and customary rights of setoff upon deposits in favor
of depository institutions, and Liens of a collecting bank on Payment Items in
the course of collection;

(j)                 existing Liens shown on Schedule 10.2.2; and

(k)               Liens securing the Subordinated Term Debt, provided, that such
Liens are subordinated to Lender's Liens under the Loan Documents pursuant to
the Subordinated Term Debt Intercreditor Agreement.

12.2.3    Capital Expenditures. Make Capital Expenditures in excess of $625,000
in the aggregate during any Fiscal Year.

12.2.4    Distributions; Upstream Payments. Declare or make any Distributions,
except Upstream Payments or Permitted Distributions; or create or suffer to
exist any encumbrance or restriction on the ability of a Subsidiary to make any
Upstream Payment, except for restrictions under the Loan Documents, under
Applicable Law or in effect on the Closing Date as shown on Schedule 9.1.15.

12.2.5    Restricted Investments. Make any Restricted Investment.

12.2.6    Disposition of Assets. Make any Asset Disposition, except a Permitted
Asset Disposition, a disposition of Equipment under Section 8.4.2, or a transfer
of Property by a Subsidiary or Obligor to Borrower.

12.2.7    Loans. Make any loans or other advances of money to any Person, except
(a) advances to an officer or employee for salary, travel expenses, commissions
and similar items in the Ordinary Course of Business; (b) prepaid expenses and
extensions of trade credit made in the Ordinary Course of Business; and (c)
deposits with financial institutions permitted hereunder

12.2.8    Restrictions on Payment of Certain Debt. Make any payments (whether
voluntary or mandatory, or a prepayment, redemption, retirement, defeasance or
acquisition) with respect to any (a) Subordinated Debt, except regularly
scheduled payments of principal, interest and fees, but only to the extent
permitted under any subordination agreement relating to such Debt (and a Senior
Officer of Borrower shall certify to Lender, not less than five Business Days
prior to the date of payment, that all conditions under such agreement have been
satisfied); or (b) Borrowed Money (other than the Obligations) prior to its due
date under the agreements evidencing such Debt as in effect on the Closing Date
(or as amended thereafter with the consent of Lender).

12.2.9    Fundamental Changes. Merge, combine or consolidate with any Person, or
liquidate, wind up its affairs or dissolve itself, in each case whether in a
single transaction or in a series of related transactions, except for mergers or
consolidations of a wholly-owned Subsidiary with another wholly-owned Subsidiary
or into Borrower; change its name or conduct business under any fictitious name;
change its tax, charter or other organizational identification number; or change
its form or state of organization.

12.2.10                        Subsidiaries. Form or acquire any Subsidiary
after the Closing Date, except in accordance with Sections 10.1.9 and 10.2.5; or
permit any existing Subsidiary to issue any additional Equity Interests except
director's qualifying shares.

 

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12.2.11                        Organic Documents. Amend, modify or otherwise
change any of its Organic Documents as in effect on the Closing Date.

12.2.12                        Tax Consolidation. File or consent to the filing
of any consolidated income tax return with any Person other than Borrower and
Subsidiaries.

12.2.13                        Accounting Changes. Make any material change in
accounting treatment or reporting practices, except as required by GAAP and in
accordance with Section 1.2; or change its Fiscal Year.

12.2.14                        Restrictive Agreements. Become a party to any
Restrictive Agreement, except a Restrictive Agreement (a) in effect on the
Closing Date; (b) relating to secured Debt permitted hereunder, as long as the
restrictions apply only to collateral for such Debt; or (c) constituting
customary restrictions on assignment in leases and other contracts.

12.2.15                        Hedging Agreements. Enter into any Hedging
Agreement, except to hedge risks arising in the Ordinary Course of Business and
not for speculative purposes.

12.2.16                        Conduct of Business. Engage in any business,
other than its business as conducted on the Closing Date and any activities
incidental thereto.

12.2.17                        Affiliate Transactions. Enter into or be party to
any transaction with an Affiliate, except (a) transactions contemplated by the
Loan Documents; (b) payment of reasonable compensation to officers and employees
for services actually rendered, and loans and advances permitted by
Section 10.2.7; (c) payment of customary directors' fees and indemnities; (d)
transactions with Affiliates that were consummated prior to May 3, 2013, as
shown on Schedule 10.2.17; and (e) transactions with Affiliates in the Ordinary
Course of Business, upon fair and reasonable terms fully disclosed to Lender and
no less favorable than would be obtained in a comparable arm's-length
transaction with a non-Affiliate.

12.2.18                        Plans. Become party to any Multiemployer Plan or
Foreign Plan, other than any in existence on the Closing Date.

12.2.19                        Amendments to Subordinated Debt. Amend,
supplement or otherwise modify any document, instrument or agreement relating to
any Subordinated Debt, if such modification (a) increases the principal balance
of such Debt, or increases any required payment of principal or interest; (b)
accelerates the date on which any installment of principal or any interest is
due, or adds any additional redemption, put or prepayment provisions; (c)
shortens the final maturity date or otherwise accelerates amortization; (d)
increases the interest rate; (e) increases or adds any fees or charges; (f)
modifies any covenant in a manner or adds any representation, covenant or
default that is more onerous or restrictive in any material respect for Borrower
or Subsidiary, or that is otherwise materially adverse to Borrower, any
Subsidiary or Lender; or (g) results in the Obligations not being fully
benefited by the subordination provisions thereof.

12.3.        Financial Covenants. As long as any Commitment or Obligations are
outstanding, Borrower shall:

12.3.1    Minimum EBITDA (March 2012). Achieve EBITDA, for the period
March 1, 2012 through March 31, 2012, of at least deficit $125,000 (<$125,000>).

 

 

 

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12.3.2    Fixed Charge Coverage Ratio. Maintain a Fixed Charge Coverage Ratio
equal to at least 1.00, tested monthly as of the last day of each calendar month
beginning on September 30, 2012 and continuing thereafter (a) with respect to
any such test date on or before June 30, 2013, for the period July 1, 2012
through such test date, and (b) thereafter, for the most recently completed
twelve calendar months.

 

SECTION 13.  EVENTS OF DEFAULT; REMEDIES ON DEFAULT

13.1.        Events of Default. Each of the following shall be an "Event of
Default" hereunder, if the same shall occur for any reason whatsoever, whether
voluntary or involuntary, by operation of law or otherwise:

(a)                Borrower fails to pay any Obligations when due (whether at
stated maturity, on demand, upon acceleration or otherwise);

(b)               Any representation, warranty or other written statement of an
Obligor made in connection with any Loan Documents or transactions contemplated
thereby is incorrect or misleading in any material respect when given;

(c)                Borrower breaches or fails to perform any covenant contained
in Section 7.2, 7.4, 7.6, 8.1, 8.2.4, 8.2.5, 8.6.2, 10.1.1, 10.1.2, 10.2 or
10.3;

(d)               An Obligor breaches or fails to perform any other covenant
contained in any Loan Documents, and such breach or failure is not cured within
15 days after a Senior Officer of such Obligor has knowledge thereof or receives
notice thereof from Lender, whichever is sooner; provided, however, that such
notice and opportunity to cure shall not apply if the breach or failure to
perform is not capable of being cured within such period or is a willful breach
by an Obligor;

(e)                A Guarantor repudiates, revokes or attempts to revoke its
Guaranty; an Obligor or third party denies or contests the validity or
enforceability of any Loan Documents or Obligations, or the perfection or
priority of any Lien granted to Lender; or any Loan Document ceases to be in
full force or effect for any reason (other than a waiver or release by Lender);

(f)                Any breach or default of an Obligor occurs under any
document, instrument or agreement to which it is a party or by which it or any
of its Properties is bound, relating to (i) the Subordinated Term Debt or (ii)
any other Debt (other than the Obligations) in excess of $100,000, if (in either
such case) the maturity of or any payment with respect to such Debt may be
accelerated or demanded due to such breach;

(g)                Any judgment or order for the payment of money is entered
against an Obligor in an amount that exceeds, individually or cumulatively with
all unsatisfied judgments or orders against all Obligors, $50,000 (net of any
insurance coverage therefor acknowledged in writing by the insurer), unless a
stay of enforcement of such judgment or order is in effect, by reason of a
pending appeal or otherwise;

(h)               A loss, theft, damage or destruction occurs with respect to
any Collateral if the amount not covered by insurance exceeds $100,000;

 

 

 

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(i)                 An Obligor is enjoined, restrained or in any way prevented
by any Governmental Authority from conducting any material part of its business;
an Obligor suffers the loss, revocation or termination of any material license,
permit, lease or agreement necessary to its business; there is a cessation of
any material part of an Obligor's business for a material period of time; any
material Collateral or Property of an Obligor is taken or impaired through
condemnation; an Obligor agrees to or commences any liquidation, dissolution or
winding up of its affairs; or an Obligor is not Solvent;

(j)                 An Insolvency Proceeding is commenced by an Obligor; an
Obligor makes an offer of settlement, extension or composition to its unsecured
creditors generally; a trustee is appointed to take possession of any
substantial Property of or to operate any of the business of an Obligor; or an
Insolvency Proceeding is commenced against an Obligor and: the Obligor consents
to institution of the proceeding, the petition commencing the proceeding is not
timely contested by the Obligor, the petition is not dismissed within 30 days
after filing, or an order for relief is entered in the proceeding;

(k)               An ERISA Event occurs with respect to a Pension Plan or
Multiemployer Plan that has resulted or could reasonably be expected to result
in liability of an Obligor to a Pension Plan, Multiemployer Plan or PBGC, or
that constitutes grounds for appointment of a trustee for or termination by the
PBGC of any Pension Plan or Multiemployer Plan; an Obligor or ERISA Affiliate
fails to pay when due any installment payment with respect to its withdrawal
liability under Section 4201 of ERISA under a Multiemployer Plan; or any event
similar to the foregoing occurs or exists with respect to a Foreign Plan;

(l)                 An Obligor or any of its Senior Officers is criminally
indicted or convicted for (i) a felony committed in the conduct of the Obligor's
business, or (ii) violating any state or federal law (including the Controlled
Substances Act, Money Laundering Control Act of 1986 and Illegal Exportation of
War Materials Act) that could lead to forfeiture of any material Property or any
Collateral; or

(m)             A Change of Control occurs.

13.2.        Remedies upon Default.

13.2.1    If an Event of Default described in Section 11.1(j) occurs with
respect to Borrower, then to the extent permitted by Applicable Law, all
Obligations shall become automatically due and payable and all Commitments shall
terminate, without any action by Lender or notice of any kind.

13.2.2    If an Event of Default described in Section 11.1(j) occurs with
respect to Guarantor Richard J. Kurtz or if an Event of Default described in
Section 11.1(e) occurs as a result of action by Guarantor Richard J. Kurtz or in
the event of the death of Guarantor Richard J. Kurtz, then, in any such event,
Lender may in its discretion declare the Term Loan and all Obligations relating
to the Term Loan to be immediately due and payable, whereupon the Term Loan and
all such related Obligations shall be due and payable without diligence,
presentment, demand, protest or notice of any kind, all of which are hereby
waived by Borrower to the fullest extent permitted by law;

13.2.3    Without limiting Section 11.2.1 or Section 11.2.2, if any Event of
Default exists, Lender may in its discretion do any one or more of the following
from time to time:

(a)                declare any Obligations immediately due and payable,
whereupon they shall be due and payable without diligence, presentment, demand,
protest or notice of any kind, all of which are hereby waived by Borrower to the
fullest extent permitted by law;

(b)               terminate, reduce or condition any Commitment, or make any
adjustment to the Borrowing Base;

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(c)                require Obligors to Cash Collateralize LC Obligations, Bank
Product Debt and other Obligations that are contingent or not yet due and
payable, and, if Obligors fail promptly to deposit such Cash Collateral, Lender
may advance the required Cash Collateral as Revolver Loans (whether or not an
Overadvance exists or is created thereby, or the conditions in Section 6 are
satisfied); and

(d)               exercise any other rights or remedies afforded under any
agreement, by law, at equity or otherwise, including the rights and remedies of
a secured party under the UCC. Such rights and remedies include the rights to
(i) take possession of any Collateral; (ii) require Borrower to assemble
Collateral, at Borrower's expense, and make it available to Lender at a place
designated by Lender; (iii) enter any premises where Collateral is located and
store Collateral on such premises until sold (and if the premises are owned or
leased by Borrower, Borrower agrees not to charge for such storage); and (iv)
sell or otherwise dispose of any Collateral in its then condition, or after any
further manufacturing or processing thereof, at public or private sale, with
such notice as may be required by Applicable Law, in lots or in bulk, at such
locations, all as Lender, in its discretion, deems advisable. Borrower agrees
that 10 days notice of any proposed sale or other disposition of Collateral by
Lender shall be reasonable. Lender shall have the right to conduct such sales on
any Obligor's premises, without charge, and such sales may be adjourned from
time to time in accordance with Applicable Law. Lender shall have the right to
sell, lease or otherwise dispose of any Collateral for cash, credit or any
combination thereof, and Lender may purchase any Collateral at public or, if
permitted by law, private sale and, in lieu of actual payment of the purchase
price, may set off the amount of such price against the Obligations.

13.3.        License. Lender is hereby granted an irrevocable, non-exclusive
license or other right to use, license or sub-license (without payment of
royalty or other compensation to any Person) any or all Intellectual Property of
Borrower, computer hardware and software, trade secrets, brochures, customer
lists, promotional and advertising materials, labels, packaging materials and
other Property, in advertising for sale, marketing, selling, collecting,
completing manufacture of, or otherwise exercising any rights or remedies with
respect to, any Collateral. Borrower's rights and interests under Intellectual
Property shall inure to Lender's benefit.

13.4.        Setoff. At any time during an Event of Default, Lender and its
Affiliates are authorized, to the fullest extent permitted by Applicable Law, to
set off and apply any and all deposits (general or special, time or demand,
provisional or final, in whatever currency) at any time held and other
obligations (in whatever currency) at any time owing by Lender or such Affiliate
to or for the credit or the account of an Obligor against any Obligations,
irrespective of whether or not Lender or such Affiliate shall have made any
demand under this Agreement or any other Loan Document and although such
Obligations may be contingent or unmatured or are owed to a branch or office of
Lender or such Affiliate different from the branch or office holding such
deposit or obligated on such indebtedness. The rights of Lender and each such
Affiliate under this Section are in addition to other rights and remedies
(including other rights of setoff) that such Person may have.

13.5.        Remedies Cumulative; No Waiver.

13.5.1    Cumulative Rights. All agreements, warranties, guaranties, indemnities
and other undertakings of Borrower under the Loan Documents are cumulative and
not in derogation of each other. The rights and remedies of Lender are
cumulative, may be exercised at any time and from time to time, concurrently or
in any order, and are not exclusive of any other rights or remedies available by
agreement, by law, at equity or otherwise. All such rights and remedies shall
continue in full force and effect until Full Payment of all Obligations.

 

 

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13.5.2    Waivers. No waiver or course of dealing shall be established by (a)
the failure or delay of Lender to require strict performance by Borrower with
any terms of the Loan Documents, or to exercise any rights or remedies with
respect to Collateral or otherwise; (b) the making of any Loan or issuance of
any Letter of Credit during a Default, Event of Default or other failure to
satisfy any conditions precedent; or (c) acceptance by Lender of any payment or
performance by an Obligor under any Loan Documents in a manner other than that
specified therein. It is expressly acknowledged by Borrower that any failure to
satisfy a financial covenant on a measurement date shall not be cured or
remedied by satisfaction of such covenant on a subsequent date.

SECTION 14.  MISCELLANEOUS

14.1.        Consents, Amendments and Waivers.

14.1.1    Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of Borrower, Lender, and their respective successors and assigns,
except that Borrower shall not have the right to assign its rights or delegate
its obligations under any Loan Documents.

14.1.2    Amendments and Other Modifications. No modification of any Loan
Document, including any extension or amendment of a Loan Document or any waiver
of a Default or Event of Default, shall be effective without the prior written
agreement of Lender and each Obligor party to such Loan Document; provided,
however, that only the consent of the parties to a Bank Product agreement shall
be required for any modification of such agreement. Any waiver or consent
granted by Lender shall be effective only if in writing, and only for the matter
specified.

14.2.        Indemnity. BORROWER SHALL INDEMNIFY AND HOLD HARMLESS THE
INDEMNITEES AGAINST ANY CLAIMS THAT MAY BE INCURRED BY OR ASSERTED AGAINST ANY
INDEMNITEE, INCLUDING CLAIMS ARISING FROM THE NEGLIGENCE OF AN INDEMNITEE. In no
event shall any party to a Loan Document have any obligation thereunder to
indemnify or hold harmless an Indemnitee with respect to a Claim that is
determined in a final, non-appealable judgment by a court of competent
jurisdiction to result from the gross negligence or willful misconduct of such
Indemnitee.

14.3.        Notices and Communications.

14.3.1    Notice Address. Subject to Section 4.1.3, all notices and other
communications by or to a party hereto shall be in writing and shall be given to
Borrower, at Borrower's address shown on the signature pages hereof, and to any
other Person at its address shown on the signature pages hereof, or at such
other address as a party may hereafter specify by notice in accordance with this
Section 12.3. Each such notice or other communication shall be effective only
(a) if given by facsimile transmission, when transmitted to the applicable
facsimile number, if confirmation of receipt is received; (b) if given by mail,
three Business Days after deposit in the U.S. mail, with first-class postage
pre-paid, addressed to the applicable address; or (c) if given by personal
delivery, when duly delivered to the notice address with receipt acknowledged.
Notwithstanding the foregoing, no notice to Lender pursuant to Section 2.1.3,
2.3, 3.1.2, 4.1.1 or 5.3.3 shall be effective until actually received by the
individual to whose attention at Lender such notice is required to be sent. Any
written notice or other communication that is not sent in conformity with the
foregoing provisions shall nevertheless be effective on the date actually
received by the noticed party.

 

 

 

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14.3.2    Electronic Communications; Voice Mail. Electronic mail and internet
websites may be used only for routine communications, such as financial
statements, Borrowing Base Certificates and other information required by
Section 10.1.2, administrative matters, distribution of Loan Documents for
execution, and matters permitted under Section 4.1.3. Lender make no assurances
as to the privacy and security of electronic communications. Electronic and
voice mail may not be used as effective notice under the Loan Documents.

14.3.3    Non-Conforming Communications. Lender may rely upon any notices
purportedly given by or on behalf of Borrower even if such notices were not made
in a manner specified herein, were incomplete or were not confirmed, or if the
terms thereof, as understood by the recipient, varied from a later confirmation.
Borrower shall indemnify and hold harmless each Indemnitee from any liabilities,
losses, costs and expenses arising from any telephonic communication purportedly
given by or on behalf of Borrower.

14.4.        Performance of Borrower's Obligations. Lender may, in its
discretion at any time and from time to time, at Borrower's expense, pay any
amount or do any act required of Borrower under any Loan Documents or otherwise
lawfully requested by Lender to (a) enforce any Loan Documents or collect any
Obligations; (b) protect, insure, maintain or realize upon any Collateral; or
(c) defend or maintain the validity or priority of Lender's Liens in any
Collateral, including any payment of a judgment, insurance premium, warehouse
charge, finishing or processing charge, or landlord claim, or any discharge of a
Lien. All payments, costs and expenses (including Extraordinary Expenses) of
Lender under this Section shall be reimbursed by Borrower, on demand, with
interest from the date incurred to the date of payment thereof at the Default
Rate applicable to Base Rate Revolver Loans. Any payment made or action taken by
Lender under this Section shall be without prejudice to any right to assert an
Event of Default or to exercise any other rights or remedies under the Loan
Documents.

14.5.        Credit Inquiries. Borrower hereby authorizes Lender (but it shall
have no obligation) to respond to usual and customary credit inquiries from
third parties concerning Borrower or Subsidiary.

14.6.        Severability. Wherever possible, each provision of the Loan
Documents shall be interpreted in such manner as to be valid under Applicable
Law. If any provision is found to be invalid under Applicable Law, it shall be
ineffective only to the extent of such invalidity and the remaining provisions
of the Loan Documents shall remain in full force and effect.

14.7.        Cumulative Effect; Conflict of Terms. The provisions of the Loan
Documents are cumulative. The parties acknowledge that the Loan Documents may
use several limitations, tests or measurements to regulate similar matters, and
they agree that these are cumulative and that each must be performed as
provided. Except as otherwise provided in another Loan Document (by specific
reference to the applicable provision of this Agreement), if any provision
contained herein is in direct conflict with any provision in another Loan
Document, the provision herein shall govern and control.

14.8.        Counterparts. Any Loan Document may be executed in counterparts,
each of which shall constitute an original, but all of which when taken together
shall constitute a single contract. This Agreement shall become effective when
Lender has received counterparts bearing the signatures of all parties hereto.
Delivery of a signature page of any Loan Document by telecopy or other
electronic means shall be effective as delivery of a manually executed
counterpart of such agreement.

14.9.        Entire Agreement. Time is of the essence of the Loan Documents. The
Loan Documents constitute the entire contract among the parties relating to the
subject matter hereof, and supersede any and all previous agreements and
understandings, oral or written, relating to the subject matter hereof.

 

57

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14.10.    No Control; No Advisory or Fiduciary Responsibility. Nothing in any
Loan Document and no action of Lender pursuant to any Loan Document shall be
deemed to constitute control of any Obligor by Lender. In connection with all
aspects of each transaction contemplated by any Loan Document, Borrower
acknowledges and agree that (a)(i) this credit facility and all related services
by Lender or its Affiliates are arm's-length commercial transactions between
Borrower and such Person; (ii) Borrower has consulted its own legal, accounting,
regulatory and tax advisors to the extent they have deemed appropriate; and
(iii) Borrower is capable of evaluating and understanding, and do understand and
accept, the terms, risks and conditions of the transactions contemplated by the
Loan Documents; (b) each of Lender and its Affiliates is and has been acting
solely as a principal in connection with this credit facility, is not the
financial advisor, agent or fiduciary for Borrower, any of its Affiliates or any
other Person, and has no obligation with respect to the transactions
contemplated by the Loan Documents except as expressly set forth therein; and
(c) Lender and its Affiliates may be engaged in a broad range of transactions
that involve interests that differ from those of Borrower and its Affiliates,
and have no obligation to disclose any of such interests to Borrower or its
Affiliates. To the fullest extent permitted by Applicable Law, Borrower hereby
waives and releases any claims that it may have against Lender and its
Affiliates with respect to any breach or alleged breach of agency or fiduciary
duty in connection with any aspect of any transaction contemplated by a Loan
Document.

14.11.    Confidentiality. Lender agrees to maintain the confidentiality of all
Information (as defined below), except that Information may be disclosed (a) to
its Affiliates, and its and their partners, directors, officers, employees,
agents, advisors and representatives (provided such Persons are informed of the
confidential nature of the Information and instructed to keep it confidential);
(b) to the extent requested by any governmental, regulatory or self-regulatory
authority purporting to have jurisdiction over it or its Affiliates; (c) to the
extent required by Applicable Law or by any subpoena or other legal process; (d)
to any other party hereto; (e) in connection with any action or proceeding, or
other exercise of rights or remedies, relating to any Loan Documents or
Obligations; (f) subject to an agreement containing provisions substantially the
same as this Section, to any potential or actual transferee of any interest in a
Loan Document or any actual or prospective party (or its advisors) to any Bank
Product; (g) with the consent of Borrower; or (h) to the extent such Information
(i) becomes publicly available other than as a result of a breach of this
Section or (ii) is available to Lender or its Affiliates on a nonconfidential
basis from a source other than Borrower. Notwithstanding the foregoing, Lender
may publish or disseminate general information describing this credit facility,
including the names and addresses of Borrower and a general description of
Borrower's businesses, and may use Borrower's logos, trademarks or product
photographs in advertising materials. As used herein, "Information" means all
information received from an Obligor or Subsidiary relating to it or its
business, that is identified as confidential when delivered. Any Person required
to maintain the confidentiality of Information pursuant to this Section shall be
deemed to have complied if it exercises the same degree of care that it accords
its own confidential information. Lender acknowledges that (i) Information may
include material non-public information concerning an Obligor or Subsidiary;
(ii) it has developed compliance procedures regarding the use of material
non-public information; and (iii) it will handle such material non-public
information in accordance with Applicable Law, including federal and state
securities laws.

14.12.    Reserved.

14.13.    GOVERNING LAW. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, UNLESS
OTHERWISE SPECIFIED, SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS,
WITHOUT GIVING EFFECT TO ANY CONFLICT OF LAW PRINCIPLES (BUT GIVING EFFECT TO
FEDERAL LAWS RELATING TO NATIONAL BANKS).

 

 

58

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14.14.    Consent to Forum.

14.14.1                        Forum. BORROWER HEREBY CONSENTS TO THE
NON-EXCLUSIVE JURISDICTION OF ANY FEDERAL OR STATE COURT SITTING IN OR WITH
JURISDICTION OVER DALLAS COUNTY, TEXAS, IN ANY PROCEEDING OR DISPUTE RELATING IN
ANY WAY TO ANY LOAN DOCUMENTS, AND AGREES THAT ANY SUCH PROCEEDING SHALL BE
BROUGHT BY IT SOLELY IN ANY SUCH COURT. BORROWER IRREVOCABLY WAIVES ALL CLAIMS,
OBJECTIONS AND DEFENSES THAT IT MAY HAVE REGARDING SUCH COURT'S PERSONAL OR
SUBJECT MATTER JURISDICTION, VENUE OR INCONVENIENT FORUM. EACH PARTY HERETO
IRREVOCABLY CONSENTS TO SERVICE OF PROCESS IN THE MANNER PROVIDED FOR NOTICES IN
SECTION 12.3.1. Nothing herein shall limit the right of Lender to bring
proceedings against any Obligor in any other court, nor limit the right of any
party to serve process in any other manner permitted by Applicable Law. Nothing
in this Agreement shall be deemed to preclude enforcement by Lender of any
judgment or order obtained in any forum or jurisdiction.

14.15.    Waivers by Borrower. To the fullest extent permitted by Applicable
Law, Borrower waives (a) the right to trial by jury (which Lender hereby also
waives) in any proceeding or dispute of any kind relating in any way to any Loan
Documents, Obligations or Collateral; (b) presentment, demand, protest, notice
of presentment, default, non-payment, maturity, release, compromise, settlement,
extension or renewal of any commercial paper, accounts, documents, instruments,
chattel paper and guaranties at any time held by Lender on which Borrower may in
any way be liable, and hereby ratifies anything Lender may do in this regard;
(c) notice prior to taking possession or control of any Collateral; (d) any bond
or security that might be required by a court prior to allowing Lender to
exercise any rights or remedies; (e) the benefit of all valuation, appraisement
and exemption laws; (f) any claim against Lender, on any theory of liability,
for special, indirect, consequential, exemplary or punitive damages (as opposed
to direct or actual damages) in any way relating to any Enforcement Action,
Obligations, Loan Documents or transactions relating thereto; and (g) notice of
acceptance hereof. Borrower acknowledges that the foregoing waivers are a
material inducement to Lender entering into this Agreement and that Lender is
relying upon the foregoing in its dealings with Borrower. Borrower has reviewed
the foregoing waivers with its legal counsel and has knowingly and voluntarily
waived its jury trial and other rights following consultation with legal
counsel. In the event of litigation, this Agreement may be filed as a written
consent to a trial by the court.

14.16.    Patriot Act Notice. Lender hereby notifies Borrower that pursuant to
the requirements of the Patriot Act, Lender is required to obtain, verify and
record information that identifies Borrower, including its legal name, address,
tax ID number and other information that will allow Lender to identify it in
accordance with the Patriot Act. Lender will also require information regarding
each personal guarantor, if any, and may require information regarding
Borrower's management and owners, such as legal name, address, social security
number and date of birth.

14.17.    NO ORAL AGREEMENT. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS
REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THE
PARTIES. THERE ARE NO UNWRITTEN AGREEMENTS BETWEEN THE PARTIES.

[Remainder of page intentionally left blank; signatures begin on following page]

 

 

59

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IN WITNESS WHEREOF, this Agreement has been executed and delivered as of the
date set forth above.

 

LENDER:

BANK OF AMERICA, N.A.

By: /s/ H. Michael Wills, SVP

H. Michael Wills, Senior Vice President

Address:

901 Main Street, 11th Floor

Dallas, Texas 75202

TX1-492-11-23

Attention: H. Michael Wills

Senior Vice President

Telecopy: (214) 209-4766

 

 

 

BORROWER:

LAPOLLA INDUSTRIES, INC.

By: /s/ Michael T. Adams, EVP

Michael T. Adams, Executive Vice President

Address:

Lapolla Industries, Inc.

15402 Vantage Parkway East

Suite 322

Houston, Texas  77032

Attention: Michael T. Adams

Executive Vice President

Telecopy: (281) 219-4710

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

60

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SCHEDULE 8.5

to

Loan and Security Agreement

DEPOSIT ACCOUNTS

 

Depository Bank Type of Account Account Number Bank of America, N.A. US Dominion
Account ** Bank of America, N.A. US Dominion Account ** Bank of America, N.A.
Operating Account ** Bank of America, N.A. Controlled Disbursement Account **
Bank of America, N.A., acting through its Canada branch Canadian Dominion
Account ** Bank of America, N.A., acting through its Canada branch Canadian
Disbursement Account **

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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SCHEDULE 8.6.1

to

Loan and Security Agreement

BUSINESS LOCATIONS

1.Borrower currently has the following business locations, and no others:

Chief Executive Office: Lapolla Industries, Inc. - Houston Office (Headquarters)

15402 Vantage Parkway East

Suite 322

Houston, Texas 77032

 

Other Locations: Lapolla Industries, Inc. - New Jersey Office

270 Sylvan Avenue

Suite 3

Englewood Cliffs, New Jersey 07632

 

2.In the five years preceding the Closing Date, Borrower has had no office or
place of business located in any county other than as set forth above, except:

 

Lapolla Industries, Inc.-Canada Registered Office (Closed 2012)

6707 Goreway Drive

Unit 8

Mississauga, Ontario L4V 1P7

 

Lapolla Industries, Inc. - Georgia Office (Closed 2011)

145 Newborn Road

Rutledge, Georgia 30663

 

Lapolla Industries, Inc. - Florida Sales Office (Closed 2011)

1280 Northwest 22nd Street

Pompano Beach, Florida 33069 

 

Lapolla Industries, Inc. - Arizona Office (Closed 2008) 

441 West Geneva Drive 

Tempe, Arizona 85282 

 

Lapolla Industries, Inc. - Florida Office (Old Headquarters) 

718 South Military Trail 

Deerfield Beach, Florida 33442 

 

 

3.Each Subsidiary currently has the following business locations, and no others:
(Not Applicable)

Chief Executive Office: N/A Other Locations: N/A

4.The following bailees, warehouseman, similar parties and consignees hold
inventory of Borrower or Subsidiary:

 

Name and Address of Party

Nature of

Relationship

  Amount of Inventory  Owner of Inventory    ** (All Bonded Warehouses)  TBD 
Borrower   

 

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SCHEDULE 9.1.4

to

Loan and Security Agreement

NAMES AND CAPITAL STRUCTURE

1.The corporate names, jurisdictions of incorporation, and authorized and issued
Equity Interests of Borrower and Subsidiary are as follows:

Borrower:

Lapolla Industries, Inc.

Incorporated in Delaware

 

Authorized Shares:

 

Preferred Stock, par value $1.00 per share: 2,000,000 shares authorized

Common Stock, par value $.01: 140,000,000 shares authorized

 

Issued Shares:

Preferred Stock: None

Common Stock: 110,487,177 shares (as of March 31, 2013)

 

Subsidiary:

None

 

2.The record holders of Equity Interests of Borrower and Subsidiary are as
follows: Borrower is a publicly traded company with approximately 2,350
shareholders. The following is an extract of information disclosed in the
Borrower's Annual Report on Form 10-K for the year ended December 31, 2012 with
respect to the ownership of Equity Interests by the Borrower's officers,
directors and holders of at least five percent (5%) of the Borrower's
outstanding common stock:

Directors and Executive Officers

 

The following table sets forth information as of March 10, 2013, regarding the
beneficial ownership of common stock by (i) each director, (ii) CEO and
President, CGO and Executive Vice President, CFO and Treasurer, and COO, and
(iii) all of our directors, named executive officers and executive officers as a
group. Beneficial ownership is determined under the rules of the SEC and
generally includes voting or investment power over securities. Except in cases
where community property laws apply, we believe that each stockholder identified
in the table possesses sole voting and investment power over all shares of
common stock shown as beneficially owned by the stockholder. Shares of common
stock subject to vesting or options that are currently exercisable or
exercisable within 60 days of March 10, 2013 are considered outstanding and
beneficially owned by the person granted the shares or holding the options for
the purpose of computing the percentage ownership of that person but are not
treated as outstanding for the purpose of computing the percentage ownership of
any other person.

 

 

 

 

 

 

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SECURITY OWNERSHIP OF MANAGEMENT TABLE

 

   Shares of  Rights to  Total Shares       Common Stock  Acquire Shares of  of
Common Stock  Percent Beneficial Owner  Owned  Common Stock (1)  Beneficially
Owned  of Class (2) Directors:                     Richard J. Kurtz, Chairman 
 80,656,188    1,555,251    82,211,439    69.8%    Nine Duck Pond Road, Alpine,
NJ 07620                     Jay C. Nadel, Vice Chairman   5,239,425  
 1,032,254    6,271,679    6.8% Lt. Gen. Arthur J. Gregg, US Army (Ret) 
 60,000    225,000    285,000    0.2% Augustus J. Larson   60,000    135,000  
 195,000    0.2% Howard L. Brown   60,000    500,000    560,000    0.5% Douglas
J. Kramer (3)   —      2,312,500    2,312,500    2.0% Michael T. Adams (4) 
 —      80,000    80,000    0.1%                       Executive Officers:      
              Charles A. Zajaczkowski, CFO and Treasurer   —      —      —    
 —    Harvey L. Schnitzer, COO   —      —      —      —                         
All Directors and Executive Officers as a Group   86,075,613    5,840,005  
 91,915,618    79.6% (1) Represents common stock which the person has the right
to acquire within 60 days after March 10, 2013. For executive officers: (a) Mr.
Kramer has 2,500,000 vested stock options, of which 2,312,500 are exercisable,
and (b) Mr. Adams has 80,000 vested and exercisable stock options; and
directors: (a) Mr. Kurtz has 733,333 vested and exercisable stock options and
821,918 shares of restricted common stock pursuant to his guaranty agreement,
(b) Mr. Nadel has 450,000 vested and exercisable stock options and 582,254
shares of restricted common stock pursuant to his advisory and consultant
agreement (includes anti-dilution aspects), (c) Mr. Gregg as 225,000 vested and
exercisable stock options, (d) Mr. Larson has 135,000 vested and exercisable
stock options, and (e) Mr. Brown has 500,000 vested and exercisable stock
options. Refer to Item 11 – Executive and Director Compensation for more
information. (2) Based on 117,729,715 shares of our common stock outstanding at
March 10, 2013 (Includes those shares in the "Rights to Acquire Shares of Common
Stock" column in this table and the Security Ownership of Certain Beneficial
Owners Table below). (3) Mr. Kramer is also our CEO and President. (4) Mr. Adams
is also our CGO, EVP and Secretary.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS TABLE

 

Except as set forth in the above and below tables, our management knows of no
person who is the beneficial owner of more than 5% of our issued and outstanding
common stock.

 

  Shares of Rights to Total Shares of     Common Stock Acquire Shares of Common
Stock Percent Name and Address of Beneficial Owners (1) Owned Common Stock (1)
(2) Beneficially Owned of Class (3) ComVest Capital LLC — 2,500,000 2,500,000
2.1 % ComVest Capital Management LLC         ComVest Group Holdings, LLC        
Michael S. Falk         One North Clematis, Suite 300         West Palm Beach,
Florida  33401         (1) Based on the information provided pursuant to a joint
statement on a Schedule 13G filed with SEC on February 26, 2007, the name of the
Reporting Person is ComVest Capital LLC, a Delaware limited liability company
("ComVest"). ComVest is a private investment company. The managing member of
ComVest is ComVest Capital Management LLC, a Delaware limited liability company,
the managing member of which is ComVest Group Holdings, LLC, a Delaware limited
liability company ("CGH"). Michael Falk ("Falk") is the Chairman and principal
member of CGH. Falk is a citizen of the United States of America. The group of
beneficial owners share the same principal business address provided in this
table. (2) Based on 117,729,715 shares of our common stock outstanding at March
10, 2013 (Includes those shares in the "Rights to Acquire Shares of Common
Stock" column in this table and the Security Ownership of Management Table
above). (3) The Company issued certain detachable warrants and registered the
underlying shares pursuant to a mezzanine financing with ComVest on February 21,
2007. The warrants are for the purchase of an aggregate of 2,500,000 shares of
common stock, of which 1,500,000 are exercisable at an adjusted price of $.53
per share and 1,000,000 are exercisable at an adjusted price of $.65 per share,
and expire June 30, 2013.

 

 

 

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3.All agreements binding on holders of Equity Interests of Borrower and
Subsidiaries with respect to such interests are as follows: None known.

 

4.In the five years preceding the Closing Date, Borrower has not acquired any
substantial assets from any other Person nor been the surviving entity in a
merger or combination, except: On July 1, 2008, Borrower made an asset
acquisition. Below are excerpts from the Borrower's Form 10-K for the year ended
December 31, 2001 filed with the SEC:

 

Air-Tight Marketing and Distribution, Inc.

 

On July 1, 2008, Lapolla entered into and closed an Amended and Restated Asset
Purchase Agreement ("Asset Purchase Agreement") with Air-Tight Marketing and
Distribution, Inc., a Georgia corporation ("AirTight") and its stockholders,
Larry P. Medford and Ted J. Medford ("Shareholders"), wherein the Company agreed
to pay $1,500,000 in cash, issue 2,000,000 shares of restricted common stock,
par value $.01, valued at $1,480,000 (calculated from the number of shares times
the Lapolla closing price per share of $.74 on the date of closing), and forgive
an outstanding trade receivable balance of $1,419,649 due from AirTight on the
date of the closing, in exchange for certain assets and liabilities of AirTight.
The Company paid $100,000 in cash at closing and issued a promissory note
totaling $1,400,000 to AirTight and the AirTight Shareholders, payable in
installments on the last day of each calendar year until paid in full by
December 31, 2012. A contingency payment of $150,000 is included in the
promissory note which is payable if certain AirTight sales goals are met during
the period ended December 31, 2012. Lapolla undertook efforts to audit the
financial statements of AirTight in accordance with SEC rules and prior to
completion of the audit determined based on the preliminary findings that
certain adjustments needed to be made to the AirTight financial statements as
originally presented to Lapolla. Lapolla notified the AirTight Shareholders of
the adjustments and recorded a purchase price reduction equal to the amount due
under the promissory note in accordance with the Asset Purchase Agreement and
promissory note as of December 31, 2008. During 2009, Lapolla and the AirTight
Shareholders settled their differences with respect to the purchase price
reduction and Lapolla added back $270,258 under the promissory note, of which
$90,086 was paid in December 2009, leaving a balance due of $180,172 under the
promissory note. The $150,000 contingency will be recorded when it is more
likely than not that the agreed upon AirTight sales goals will be met. Lapolla
purchased AirTight's customer base which includes commercial and residential
spray foam insulation contractors. The basic assets purchased from AirTight
include, but are not limited to, trademarks, customer list, Shareholder
non-competes, inventories, equipment, accounts receivable, and goodwill. The
results of AirTight's operations have been included in Lapolla's financial
statements since July 1, 2008. The following table summarizes the components of
the adjusted AirTight purchase:

 

Cash  $100,000  Promissory Note   1,250,000  Purchase Price Reduction 
 (979,742) Restricted Common Stock   1,480,000  Forgiven Lapolla Accounts
Receivable   1,419,649   Subtotal  $3,269,907  Sales Goal Contingency Payment 
 150,000  Purchase Price Reduction   —     Total  $3,419,907 

 

 

 

 

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The AirTight purchase price was allocated to tangible and intangible assets
acquired and liabilities assumed based on their estimated fair values at the
acquisition date. The excess of the purchase price over the fair value of net
assets acquired was allocated to goodwill. The goodwill acquired in the AirTight
acquisition is not deductible for federal income tax purposes. The Company
believes the fair values assigned to the AirTight assets acquired and
liabilities assumed were based on reasonable assumptions. The following table
summarizes the estimated fair values of the assets acquired and liabilities
assumed:

 

Current Assets  $1,113,823  Property, Plant and Equipment   363,934 
Identifiable Intangible Assets   1,700,000  Goodwill   2,283,827  Current
Liabilities   (1,862,525) Other Liabilities   (329,152) Total  $3,269,907 

 

The $150,000 contingency under the promissory note is not included in the above
table and will be recorded when it is more likely than not that the agreed upon
AirTight sales goals will be met. In connection with the allocation of the
adjusted purchase price by Lapolla, $1,700,000 was attributed to Other
Intangible Assets, of which $700,000 was assigned to trade names (15 year useful
lives), $790,000 was assigned to the customer list (5 year useful life), and
$210,000 was assigned to the Shareholder and sales force non-competes (5 year
useful lives). The $2,283,827 of goodwill was assigned to the Foam segment.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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SCHEDULE 9.1.11

to

Loan and Security Agreement

PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES

1.Borrower's and Subsidiaries' patents: None

 

2.Borrower's and Subsidiaries' trademarks:

 

Trademark Owner

Status in

Trademark Office

Federal

Registration No.

Registration

    Date    

  AIRTIGHT SPRAY FOAM INSULATION (logo) Borrower Registered U.S. Registration
No. 4139386  May 18, 2012   AIRTIGHT SPRAYFOAM (logo) Borrower Registered U.S.
Registration No. 3888459  December 14, 2010   AIRTIGHT SPRAYFOAM (wording only)
Borrower Registered U.S. Registration No. 3888458  December 14, 2010   AIRTIGHT
(wording only) Borrower Registered U.S. Registration No. 3888457  December 14,
2010   THERMO-FLEX (wording only) Borrower Pending U.S. Application Serial No.
77/626,768  Filed December 4, 2008   THERM-O-FLEX (wording only) Borrower
Pending U.S. Application Serial No. 77/626,778  Filed December 4, 2008  
AirTight Insulation, Inc. (logo) Borrower Registered State of South Carolina
Only  Registration – Renewed until December 15, 2013   AirTight SprayFoam (logo)
Borrower Registered State of South Carolina Only  Registration – Renewed until
December 15, 2013   AirTight Spray Foam Insulation MFG BY LAPOLLA (design and
wording) Borrower Pending U.S. Application Serial No. 85636809  Filed May 29,
2012   LAPOLLA (design and wording) Borrower Registered US Registration No.
4104322  February 28, 2012   LAPOLLA (wording only) Borrower Registered US
Registration No. 4104321  February 28, 2012  

 

3.Borrower's and Subsidiaries' copyrights: None.

 

4.Borrower's and Subsidiaries' licenses (other than routine business licenses,
authorizing them to transact business in local jurisdictions): None

 

 

 

 

 

 

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SCHEDULE 9.1.14

to

Loan and Security Agreement

ENVIRONMENTAL MATTERS

None

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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SCHEDULE 9.1.15

to

Loan and Security Agreement

RESTRICTIVE AGREEMENTS

None

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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SCHEDULE 9.1.16

to

Loan and Security Agreement

LITIGATION

1. The following is an extract of information disclosed in the Borrower's Annual
Report on Form 10-K for the year ended December 31, 2012 with respect to
outstanding material litigation:

 

(a) Neil and Kristine Markey, et al., Plaintiffs v. Lapolla Industries, Inc.,
Delfino Insulation, et al, Defendants

 

A complaint entitled Neil and Kristine Markey, individually, and on behalf of
all others similarly situated, Plaintiffs, vs. Lapolla industries, Inc., a
Delaware corporation; Lapolla International, Inc., a Delaware corporation; and
Delfino Insulation Company, Inc., a New York Corporation, Defendants, was filed
in the United States District Court for the Eastern District of New York and
served on or about October 10, 2012 and amended on February 20, 2013. Plaintiffs
bring this lawsuit individually and on behalf of a nationwide class as well as
two New York subclasses. The complaint alleges, among other things, that Lapolla
designs, labels, distributes, and manufactures spray polyurethane foam
insulation, which creates a highly toxic compound when applied as insulation
resulting in exposure to harmful gases. Plaintiffs are seeking: (i) an order
certifying the lawsuit as a class action and certifying the class and
sub-classes of Plaintiffs; (ii) actual, compensatory, and punitive damages;
(iii) injunctive relief; and (iv) attorney fees. Lapolla considers the
allegations to be without merit and has mounted a vigorous defense against the
class action, as well as all other allegations. The outcome of this litigation
cannot be determined at this time.

 

2. The following is an extract of information disclosed in the Borrower's
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2013 with
respect to outstanding material litigation:

 

(a) Robert and Cynthia Gibson, et al., Plaintiffs v. Lapolla Industries, Inc.
and Air Tight Insulation of Mid-Florida, LLC, Defendants

 

A complaint entitled Robert and Cynthia Gibson, individually and on behalf of
others similarly situated, Plaintiffs v. Lapolla Industries, Inc., a Delaware
corporation, and Air Tight Insulation of Mid-Florida, LLC, Defendants, was filed
in the United States District Court for the Middle District of Florida on April
22, 2003 and served on or about April 23, 2013. The Plaintiffs bring this
lawsuit individually and on behalf of a nationwide class against the Defendants
as well as two Florida subclasses. The complaint alleges, among other things,
negligence in connection with the design, manufacture, distribution, and
installation of Lapolla's spray polyurethane foam insulation, resulting in
exposure to harmful gases, breach of express and implied warranties, and
violation of various state statutes. Plaintiffs are seeking, among other things:
(i) an order certifying the lawsuit as a class action and certifying the class
and sub-classes of Plaintiffs; (ii) actual, compensatory, statutory, and
punitive damages; (iii) injunctive relief; and (iv) attorney fees. Lapolla
considers the allegations to be without merit and shall mount a vigorous defense
against the proposed class action, as well as all other allegations. The outcome
of this litigation cannot be determined at this time.

 

Important Note: Each of the litigation matters referred to in items 1 and 2 of
this Schedule 9.1.16 above is disclosed by Borrower to Lender for informational
purposes only. Borrower and Lender hereby agree that, notwithstanding anything
to the contrary contained in the Agreement to which this Schedule is attached,
(a) Borrower does not believe that either of such litigation matters referred to
in item 1 or item 2 above could reasonably be expected to have a Material
Adverse Effect and (b) Borrower acknowledges and agrees that the disclosure of
such litigation matters on this Schedule does not in any way constitute or
result in a waiver or modification of any term or provision of this Agreement or
any right or remedy that Lender may have as a result of any such litigation
matter or any Material Adverse Effect that may result therefrom.

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SCHEDULE 9.1.18

to

Loan and Security Agreement

PENSION PLAN DISCLOSURES

None.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

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SCHEDULE 10.2.2

to

Loan and Security Agreement

EXISTING LIENS

None.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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SCHEDULE 10.2.17

to

Loan and Security Agreement

EXISTING AFFILIATE TRANSACTIONS

The following is an extract of information disclosed in the Borrower's Annual
Report on Form 10-K for the year ended December 31, 2012 with respect to
existing affiliate transactions:

 

Note 12. Related Party Transactions.

 

(a) On January 20, 2012, the Company received a $300,000 prepayment from a
customer in which the Chairman of the Board has an ownership interest, for the
purchase of foam products. The prepayment was converted into a promissory note
due and payable from the Company to the customer prior to any order being
delivered to the customer. See Item (f) below.

 

(b) On February 28, 2012, a non-affiliated third party financing company owned
and operated by a relative of the Company's Chairman of the Board, advanced
$500,000 to the Company to build spray rigs. The advance was converted into a
promissory note due and payable from the Company to the financing company prior
to any spray rigs being built and delivered to customers. See Item (g) below.

 

(c) On April 2, 2012, the Chairman of the Board advanced $500,000 to the Company
for working capital purposes. Prior to paying back the advance, the advance was
converted into a promissory note due and payable from the Company to the
Chairman. See also Item (h) below.

 

(d) On April 5, 2012, the Company entered into an Executive Employment Agreement
with Harvey L. Schnitzer, as Chief Operating Officer, good until December 31,
2014, with an annual base salary of $200,000. Mr. Schnitzer is eligible for a
varying EBITDA based annual bonus if the Company's Budgeted Earnings are
achieved during any given year. He is also entitled to a change in control bonus
equal to 50% of his annual base salary if the change in control occurs during
his first 12 months of employment or 100% of his annual base salary if it occurs
after the first 12 months during his Term or 6 months after the end of his Term.

 

(e) On April 13, 2012, the Chairman of the Board advanced $265,000 to the
Company for a specific liability and the Company repaid the Chairman back on
said date.

 

(f) On April 16, 2012, the $300,000 promissory note between the Company and a
customer in which the Chairman of the Board has an ownership interest was
assigned to the Chairman of the Board. Refer to Item (a) above and See also (h)
below.

 

(g) On April 16, 2012, the $500,000 promissory note between the Company and a
non-affiliated third party financing company owned and operated by a relative of
the Chairman of the Board was assigned to the Chairman of the Board. Refer to
Item (b) above and See also (h) below.

 

(h) On April 16, 2012, the Company consolidated the promissory notes described
in Items (c), (f) and (g) above into one $1,300,000 promissory note, bearing
interest at 5% per annum, due, including accrued interest, on October 31, 2013,
as part of a negotiation with the Bank to cure a default at December 31, 2011 in
the Loan Agreement, and entered into a subordination agreement with the Bank. At
December 31, 2012, the Company has accrued interest of $47,038 relating to this
promissory note. See also Item (j) below.

 

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(i) On June 29, 2012, in connection with the Note Purchase Agreement (described
in Note 9 – Financing Instruments, Item (b)), the Chairman of the Board and
majority stockholder of the Company, entered into a Guaranty Agreement of even
date with Enhanced Texas Fund, as agent under the Note Purchase Agreement, to
secure the Company's performance under the Note Purchase Agreement. The Company,
in exchange for Guarantor's personal guarantee of the obligations under the Note
Purchase Agreement, issued Guarantor 5 Million shares of restricted common
stock, par value $.01, which vests monthly on a pro rata basis over the two year
term of the Note Purchase Agreement. The Shares were valued at $.27 per share,
which was the closing price of the Company common stock as quoted on the OTC
Markets on the day preceding (June 28, 2012) the closing date of June 29, 2012,
for an aggregate amount of $1,350,000. The aggregate value of the shares is
being classified as interest expense – related party. At December 31, 2012, an
aggregate of 1,273,973 shares have vested and interest expense – related party
recorded was $343,884.

 

(j) On June 29, 2012, in connection with the Note Purchase Agreement (described
in Note 9 – Financing Instruments, Item (b)), the Chairman of the Board and
majority stockholder of the Company was required to extend the maturity date on
his $1,300,000 promissory note (described in Item (h) above) to October 1, 2014
and further subordinate it to the Enhanced Notes.

 

(k) Effective July 1, 2012, the Company and the CEO and President entered into a
third amendment to that certain Executive Employment Agreement dated May 5,
2008, as amended, changing his annual base salary from $400,000 per annum to
$350,000 per annum and including eligibility for an additional discretionary
cash bonus as approved by the Compensation Committee of the Board of Directors
on an annual basis.

 

(l) Effective July 1, 2012, the Company and CGO, EVP, and Secretary entered into
a fourth amendment to that certain Executive Employment Agreement dated May 18,
2009, as amended, changing his annual base salary from $200,000 per annum to
$180,000 per annum and including eligibility for an additional discretionary
cash bonus as approved by the Compensation Committee of the Board of Directors
on an annual basis.

 

(m) Effective July 1, 2012, the Company and the CFO and Treasurer, entered into
a second amendment to that certain Executive Employment Agreement dated May 10,
2010, as amended, changing his annual base salary from $185,000 per annum to
$166,500 per annum and including eligibility for an additional discretionary
cash bonus as approved by the Compensation Committee of the Board of Directors
on an annual basis.

 

(n) Effective July 1, 2012, the Company and the Vice Chairman entered into an
first amendment to that certain Advisory and Consulting Agreement dated February
22, 2011, changing his monthly fee from $16,667 to $13,333 ($200,000 per annum
to $180,000 per annum). On February 22, 2011, the Company entered into an
Advisory and Consulting Agreement wherein Mr. Nadel, a non-employee director
became an advisor and consultant and the Vice Chairman of the Board for a 3 year
period. In addition to any other compensation the Vice Chairman is currently
receiving from the Company, he was granted 5,000,000 shares of restricted common
stock, which vest monthly over 3 years, and $200,000 in cash fees per year. See
also Item (t) below.

 

(o) Effective July 9, 2012, the COO, received an increase in his annual base
salary to $250,000 per annum. See also Item (d) above.

 

(p) Effective December 31, 2012, the Company amended the CFO and Treasurer's
Executive Employment Agreement to extend the Term for an additional year to
expire on December 31, 2013.

 

 

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(q) The Company extended the 2,000,000 vested 6-year stock options originally
granted to the CEO and President on July 12, 2005, at an exercise price of $.67
per share, (expiring December 31, 2012), for an additional 3 years (now expiring
December 31, 2015). The closing price of the Company's common stock as traded on
the OTCBB on December 31, 2012, the date of the approval of the extension, was
$.18 per share. There was no incremental cost associated with the modification.

 

(r) On December 31, 2012, the Company vested an additional 160,000 shares of the
restricted common stock under the Board adopted Non-Employee Director Restricted
Stock Plan, of which 100,000 shares were for Mr. Nadel, and 20,000 shares were
for Mr. Gregg, Mr. Brown, and Mr. Larson, respectively, and paid an aggregate of
$40,000 in cash to non-employee directors during 2012. The Director Plan,
effective July 1, 2010, provides for the grant of an aggregate of 800,000 shares
of restricted common stock with each outside director receiving a stock grant of
100,000 shares (Mr. Gregg, Mr. Brown, and Mr. Larson), and Mr. Nadel who will
receive a stock grant of 500,000 shares (Mr. Nadel was an outside director at
the time of approval of the Director Plan), and each outside director will
receive cash payments of $2,500 each quarter, payable at the end of each
quarter. All stock grants will vest over a four and half year period, with one
fifth vesting at the end of each calendar year beginning in 2010; provided,
however, if there is a change in the control of the Company, all stock grants,
which have not vested, will vest immediately upon the change in control. As of
December 31, 2012, a total of 480,000 shares of restricted common stock have
vested with a corresponding share based compensation expense of $312,000, of
which $104,000 was for 2012, 2011, and 2010, respectively.

 

(s) The Company accepts funds in for the purchase of certain spray rigs by
customers from non-affiliated third party financing companies, including a
financing company owned and operated by a relative of the Chairman of the Board
(not part of the Chairman's immediate family nor does the relative reside with
the Chairman). The relative's third party financing is provided based on
competitive bidding. The total aggregate of funds received in connection with
the financing of spray rigs from the relative's company during the 2012 year was
approximately $65,000.

 

(t) During 2012, the Company vested an aggregate of 1,731,805 shares of
restricted common stock, par value $.01 per share, to a director for advisory
and consulting services, which transactions were valued and recorded in the
aggregate at $963,894.

 

Note 9. Financing Instruments

 

(b) Note Purchase Agreement. On June 29, 2012, the Company and Enhanced Jobs for
Texas Fund, LLC ("Enhanced Jobs for Texas") and Enhanced Capital Texas Fund, LP
("Enhanced Texas Fund"), entered into a Note Purchase Agreement for $4.4 Million
Subordinated Secured Variable Rate Notes due June 29, 2014 ("Note Purchase
Agreement"), of which $2.2 Million was with Enhanced Jobs for Texas and $2.2
Million was with Enhanced Texas Fund (collectively, the "Enhanced Notes").
Repayment of the principal amount of the Enhanced Notes is at the rate of
$53,333 per month from October 31, 2012 through June 30, 2013, $150,000 per
month from July 2013 through May 31, 2014, and $2,270,000 on June 30, 2014.
Interest on the Enhanced Notes is at a rate equal to 10.0% per annum from June
29, 2012 until December 31, 2012, 10.75% per annum from January 1, 2013 until
March 31, 2013, and at a rate 0.75% higher each quarter thereafter until June
29, 2014, and an additional rate of 2.0% per annum from June 29, 2012 through
June 29, 2014 on the principal balance of the Enhanced Notes on each monthly
payment date, with the default interest rate 6% higher. The Company is required
in the event of a liquidity event, to prepay any outstanding balance under the
Enhanced Notes, plus accrued interest, the net proceeds arising from a casualty
event, the net proceeds arising from an asset disposition, and the amounts paid
to the Company pursuant to the issuance of capital stock (other than permitted
issuances) or indebtedness (other than permitted indebtedness) following June
29, 2012. The Company has the right to prepay the Enhanced Notes without premium
or penalty. The Company also entered into a security

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agreement with the Note Purchase Agreement providing for a second lien on all
assets of the corporation after the Bank, which has a first lien on all asset of
the corporation. The debt covenants agreed upon by the Company under the Note
Purchase agreement consist of a minimum EBITDA which cannot for the three (3)
months ending on the last day of each month set forth in a schedule be less than
the corresponding amount set forth in the schedule for such period. In addition,
if liquidity (a) is less than $1,250,000 on any 3 consecutive days or (b) is
less than $1,000,000 on any day, then, as of the last day of the preceding
calendar month and as of the last day of each calendar month thereafter, the
Company is required maintain a FCCR, tested monthly as of the last day of the
calendar month for the most recently completed twelve calendar months, of at
least 1.0 to 1.0. The Company is required to maintain minimum liquidity of
$500,000 on any given day. The Note Purchase Agreement was personally guaranteed
by the Chairman of the Board and majority stockholder of the Company
("Guarantor"), in exchange for the Company issuing the Guarantor 5 Million
shares of restricted common stock, par value $.01, which vests monthly on a pro
rata basis over the two year term of the Note Purchase Agreement. The shares of
restricted common stock were valued at $.27 per share (closing price of the
Company's common stock as quoted on the OTC Markets on the day preceding the
closing) for an aggregate amount of $1,350,000, and which amount is being
recorded as interest expense – related party, thereby increasing the effective
interest rate on the Enhanced Notes. The Company and Enhanced entered an
amendment dated November 15, 2012 to the Note Purchase Agreement, wherein the
minimum EBITDA schedule which cannot for the three (3) months ending on the last
day of each month set forth in a schedule be less than the corresponding amount
set forth in the schedule for such period was revised, the liquidity range
mechanism triggering testing of the FCCR on a monthly basis was deleted, a
mechanism was put into place to maintain an FCCR equal to at least 1.00 tested
monthly as of the last day of each calendar month beginning on September 30,
2012 and continuing thereafter with respect to any such test date, and
thereafter, for the most recently completed twelve calendar months. At December
31, 2012, the balance outstanding on the Enhanced Notes was $4,337,334 and the
weighted-average interest rate was 10.0%. The Company was in compliance with its
Note Purchase Agreement debt covenants at December 31, 2012.

The following is an extract of information disclosed in the Borrower's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2013 with respect
to with respect to existing affiliate transactions:

 

Note 12. Related Party Transactions.

 

(a) The Company vested an aggregate of 464,348 shares of restricted common
stock, par value $.01 per share, to a director for advisory and consulting
services, which transactions were valued and recorded in the aggregate at
$248,231.

 

(b) The Company vested an aggregate of 616,438 shares of restricted common
stock, par value $.01 per share, to the Chairman of the Board and majority
stockholder in connection with his personal guaranty for a Note Purchase
Agreement, which transactions were valued and recorded in the aggregate at
$166,526, and classified as interest expense – related party. See also Note 9 –
Financing Instruments, Item (b) – Note Purchase Agreement, for more information.

 

(c) The Company issued an aggregate of 34,125 shares of restricted common stock,
par value $.01 per share, for consulting fees relating to capital raising
efforts, which transactions were valued and recorded in the aggregate at
$10,000.

 

(d) The Company accrued an aggregate of $16,676 in interest relating to the Note
Payable – Related Party. See also Note 9 – Financing Instruments, Item (c) –
Note Payable – Related Party, for more information.

 

 

 

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Note 9. Financing Instruments

 

(b) Note Purchase Agreement. On June 29, 2012, the Company and Enhanced Jobs for
Texas Fund, LLC ("Enhanced Jobs for Texas") and Enhanced Capital Texas Fund, LP
("Enhanced Texas Fund"), entered into a Note Purchase Agreement for $4.4 Million
Subordinated Secured Variable Rate Notes due June 29, 2014 ("Note Purchase
Agreement"), of which $2.2 Million was with Enhanced Jobs for Texas and $2.2
Million was with Enhanced Texas Fund (collectively, the "Enhanced Notes").
Repayment of the principal amount of the Enhanced Notes is at the rate of
$53,333 per month from October 31, 2012 through June 30, 2013, $150,000 per
month from July 2013 through May 31, 2014, and $2,270,000 on June 30, 2014.
Interest on the Enhanced Notes is at a rate equal to 10.0% per annum from June
29, 2012 until December 31, 2012, 10.75% per annum from January 1, 2013 until
March 31, 2013, and at a rate 0.75% higher each quarter thereafter until June
29, 2014, and an additional rate of 2.0% per annum from June 29, 2012 through
June 29, 2014 on the principal balance of the Enhanced Notes on each monthly
payment date, with the default interest rate 6% higher. The Company is required
in the event of a liquidity event, to prepay any outstanding balance under the
Enhanced Notes, plus accrued interest, the net proceeds arising from a casualty
event, the net proceeds arising from an asset disposition, and the amounts paid
to the Company pursuant to the issuance of capital stock (other than permitted
issuances) or indebtedness (other than permitted indebtedness) following June
29, 2012. The Company has the right to prepay the Enhanced Notes without premium
or penalty. The Company also entered into a security agreement with the Note
Purchase Agreement providing for a second lien on all assets of the corporation
after the Bank, which has a first lien on all asset of the corporation. The debt
covenants agreed upon by the Company under the Note Purchase agreement consist
of a minimum EBITDA which cannot for the three (3) months ending on the last day
of each month set forth in a schedule be less than the corresponding amount set
forth in the schedule for such period. The minimum EBITDA targets for the three
month periods ended January 31, February 28, and March 31, 2013, were $254,742,
$232,294, and $242,601, respectively. The Note Purchase Agreement was personally
guaranteed by the Chairman of the Board and majority stockholder of the Company
("Guarantor"), in exchange for the Company issuing the Guarantor 5 Million
shares of restricted common stock, par value $.01, which vests monthly on a pro
rata basis over the two year term of the Note Purchase Agreement. The shares of
restricted common stock were valued at $.27 per share for an aggregate amount of
$1,350,000, and which amount is being recorded as interest expense – related
party, thereby increasing the effective interest rate on the Enhanced Notes. At
March 31, 2013, the balance outstanding on the Enhanced Notes was $4,177,335 and
the weighted-average effective interest rate was approximately 26.6%. The
Company was in compliance with its Note Purchase Agreement debt covenants at
March 31, 2013.

 

(c) Note Payable – Related Party. On April 16, 2012, the Company entered into a
consolidated $1,300,000 promissory note, bearing interest at 5% per annum, due,
including interest, on October 31, 2013, and entered into a subordination
agreement with the Bank. On June 29, 2012, in connection with the Note Purchase
Agreement (described in Item (b) above), the maturity date of the promissory
note was extended to October 1, 2014 and further subordinated to the Enhanced
Notes. At March 31, 2013, the Company had accrued interest of $63,714 relating
to this promissory note.

 

 

 

 

 

 

 

 

 

 

 

 

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