Exhibit 10.2
Revolving Credit and Term Loan Agreement by and between ComVest Capital ,LLC and
AFP Imaging Corporation.

 
REVOLVING CREDIT AND TERM LOAN AGREEMENT
 
AGREEMENT (this “Agreement”) is made and entered into as of the 13th day of
April, 2007, by and between COMVEST CAPITAL, LLC, a Delaware limited liability
company (the “Lender”), and AFP IMAGING CORPORATION, a New York corporation (the
“Borrower”).
 
W I T N E S S E T H :
 
WHEREAS, the Borrower is engaged in the business of designing, developing,
manufacturing and distributing equipment for generating, capturing and/or
producing medical and dental diagnostic images through electronic technologies,
and the chemical processing of photosensitive materials (collectively, the
“Business Operations”); and
 
WHEREAS, QR-Italy (as such term is hereinafter defined) is party to the
Acquisition Agreement (as such term hereinafter defined), and the Borrower seeks
funds to [loan] [contribute] to QR-Italy to enable QR-Italy to pay the purchase
price payable pursuant to the Acquisition Agreement; and
 
WHEREAS, in order to provide funds for (a) the repayment and retirement of the
Borrower’s existing loan facility with the Existing Lender (as such term is
hereinafter defined), (b) the payment of a portion of the purchase price payable
under the Acquisition Agreement, and (c) the Borrower’s working capital and
other general corporate purposes, the Borrower has requested the Lender to
extend to the Borrower a revolving credit facility and a term loan on the terms
and conditions of this Agreement; and
 
WHEREAS, the Lender is willing and able to provide such revolving credit
facility and make such term loan to the Borrower on the terms and conditions of
this Agreement;
 
NOW, THEREFORE, in consideration of the premises and the mutual covenants herein
contained, the parties hereby agree as follows:
 
I. DEFINITIONS
 
Section 1.01. Defined Terms. In addition to the other terms defined elsewhere in
this Agreement, as used herein, the following terms shall have the following
meanings:
 
“Accounts” shall mean “accounts” (as defined in the UCC) of the Borrower and its
Domestic Subsidiaries from time to time.
 
“Account Debtor” shall mean any Person who is obligated on an Account.
 
“Acquisition Agreement” shall mean the Preliminary Contract for Share Transfer
dated February 22, 2007 between NIM S.R.L., Gianmaria Tommasi, Mara Tacconi,
Attilio Tacconi, Pierluigi Mozzo, and QR-Italy.
 
“Acquisition Documents” shall mean, collectively, the Acquisition Agreement and
any and all agreements, instruments, certificates and other documents executed
and/or delivered pursuant thereto.
 
 
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“Act” shall mean the Securities Act of 1933, as amended, and the rules and
regulations thereunder.
 
“Advances” shall mean the principal amounts loaned to the Borrower from time to
time pursuant to Section 2.01 below.
 
“Affiliate” shall mean, with respect to any Person, any other Person in Control
of, Controlled by, or under common Control with the first Person, and any other
Person who has a substantial interest, direct or indirect, in the first Person
or any of its Affiliates, including, without limitation, any officer or director
of the first Person or any of its Affiliates; provided, however, that neither
the Lender nor any of its Affiliates shall be deemed an “Affiliate” of the
Borrower for any purposes of this Agreement. For the purpose of this definition,
a “substantial interest” shall mean the direct or indirect legal or beneficial
ownership of more than ten (10%) percent of any class of stock or similar
interest.
 
“Agreement” shall mean this Revolving Credit and Term Loan Agreement as it may
from time to time be amended, modified, supplemented and/or restated.
 
“Applicable Law” shall mean all applicable provisions of all (a) constitutions,
statutes, ordinances, rules, regulations and orders of all governmental and/or
quasi-governmental bodies, (b) Government Approvals, and (c) order, judgments
and decrees of all courts and arbitrators.
 
“Availability” shall mean the amount (if any) by which, at the time of
determination, (a) the Revolving Credit Commitment exceeds (b) the outstanding
principal amount of Advances.
 
“Borrowing Base” shall mean an amount, determined in accordance with the most
recent borrowing base report provided to the Lender under Section 5.04(e)
hereof, equal to (a) 85% of Eligible Accounts, plus (b) the lesser of (i) 50% of
(A) Eligible Inventory minus (B) the Inventory Reserve, or (ii) $1,600,000,
minus (c) such reserves as the Lender may establish from time to time in its
Permitted Discretion (including, without limitation, to account for
concentration and other risks of collection). In the event that the Borrower has
not timely delivered a current Borrowing Base report in accordance with Section
5.04(e) below, then the applicable Borrowing Base shall be such amount as is
established by the Lender, until such time as the Borrower has delivered a
current Borrowing Base report.
 
“Borrowing Date” means the Business Day on which the Lender makes a Loan
hereunder.
 
“Business Day” shall mean a day other than (a) a Saturday, (b) a Sunday, or (c)
a day on which banking institutions in either the State of Florida or the State
of New York are authorized or required by law or executive order to close.
 
“Capital Expenditures” shall mean with respect to any Person, all expenditures
of such Person for tangible assets which are capitalized, and the fair value of
any tangible assets leased by such Person under any lease which would be a
Capitalized Lease, determined in accordance with GAAP, including all amounts
paid or accrued by such Person in connection with the purchase (whether on a
cash or deferred payment basis) or lease (including Capitalized Lease
Obligations) of any machinery, equipment, real property, improvements to real
property (including leasehold improvements), or any other tangible asset of such
Person which is required, in accordance with GAAP, to be treated as a fixed
asset on the consolidated balance sheet of such Person.
 
 
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“Capitalized Lease” shall mean any lease which is or should be capitalized on
the balance sheet of the lessee thereunder in accordance with GAAP.
 
“Capitalized Lease Obligation” shall mean with respect to any Person, the amount
of the liability which reflects the amount of future payments under all
Capitalized Leases of such Person as at any date, determined in accordance with
GAAP.
 
“Cash Equivalents” shall mean (a) marketable securities issued, or directly and
fully guaranteed or insured, by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof) having maturities of not more
than twelve (12) months from the date of acquisition; (b) time deposits, demand
deposits, certificates of deposit, acceptances or prime commercial paper issued
by, or repurchase obligations for underlying securities of the types described
in clause (a) entered into with any commercial bank having a short-term deposit
rating of at least A-2 or the equivalent thereof by Standard & Poor’s
Corporation or at least P-2 or the equivalent thereof by Moody’s Investors
Service, Inc.; (c) commercial paper with a rating of A-I or A-2 or the
equivalent thereof by Standard & Poor’s Corporation or P-1 or P-2 or the
equivalent thereof by Moody’s Investors Service, Inc. and in each case maturing
within twelve (12) months after the date of acquisition; (d) marketable direct
obligations issued by any state in the United States or any agency or
instrumentality thereof maturing within twelve (12) months from the date of
acquisition thereof and, at the time of acquisition, have one of the two highest
ratings generally obtainable from either Standard & Poor’s Corporation or
Moody’s Investors Services, Inc.; (e) tax-exempt commercial paper of United
States municipal, state or local governments rated at least A-2 or the
equivalent thereof by Standard & Poor’s Corporation or at least P-2 or the
equivalent thereof by Moody’s Investors Services, Inc. and maturing within
twelve (12) months after the date of acquisition thereof; (f) any other items
selected by the Borrower and approved by the Lender (which approval shall not be
unreasonably withheld or delayed); or (g) any mutual fund or other pooled
investment vehicle which invests principally in the foregoing obligations.
 
“Closing Date” shall mean the date on which the Term Loan is funded, which shall
be simultaneous with the consummation of the transactions pursuant to the
Acquisition Agreement.
 
“Closing Fees” shall mean (a) the sum of $30,000 in respect of the revolving
credit facility hereunder, and (b) the sum of $150,000 with respect to the Term
Loan, all of which shall be payable in accordance with Section 2.03(a) below.
 
“Code” shall mean the Internal Revenue Code of 1986, and the rules and
regulations promulgated thereunder, as in effect from time to time.
 
“Collateral” shall mean all collateral pledged by the Borrower and/or any of the
Subsidiaries as security for the payment and performance of the Obligations,
whether pursuant to the Collateral Agreement or any other Security Document.
 
“Collateral Agreement” shall mean the Collateral Agreement, dated as of the
Closing Date, by and between the Borrower and the Lender, as same may be
amended, modified, supplemented and/or restated from time to time.
 
“Commitment Fees” shall mean the annual fees payable to the Lender pursuant to
Section 2.03(b)(iii) below.
 
 
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“Common Stock” shall mean the authorized common stock of the Company, $.01 par
value per share.
 
“Confidential Information” shall mean information that the Borrower furnishes to
the Lender which is not generally available to the public or available to the
Lender from a source other than the Borrower which is not, to the Lender’s
knowledge, bound by any confidentiality agreement in respect thereof.
 
“Contract” shall mean any indenture, agreement (other than this Agreement),
other contractual restriction, lease in which the Borrower or any Subsidiary is
a lessor or lessee, license or instrument.
 
“Control” shall mean 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 ownership of voting securities, by contract or otherwise, and the
terms “Controlling” and “Controlled” shall have meanings correlative thereto.
 
“Control Agreement” shall mean, with respect to each bank account and/or
securities account maintained by or in the name of the Borrower or any Domestic
Subsidiary, an agreement executed and delivered by the Borrower (or the subject
Domestic Subsidiary, as applicable) and the account intermediary, whereby the
account intermediary acknowledges the Lender’s Lien on such account and all
funds or property therein, and “control” (within the meaning of the UCC) over
such account is established in favor of the Lender.
 
“Default” shall mean any of the events specified in Article VII hereof, whether
or not any requirement for the giving of notice, the lapse of time, or both, or
any other condition, has been satisfied.
 
“Disclosure Schedule” shall mean the disclosure schedule, dated as of the
Closing Date, executed and delivered by the Borrower to the Lender, the section
numbers of which correspond to the Section numbers of this Agreement.
 
“Dollars” or “$” shall mean United States Dollars, lawful currency for the
payment of public and private debts.
 
“Domestic Subsidiary” shall mean any Subsidiary which is incorporated or formed
under the laws of the United States, any State or Commonwealth in the United
States, or the District of Columbia.
 
“Eligible Account” shall mean the face amount of each trade Account of the
Borrower or a Domestic Subsidiary (if same has executed a Guaranty Agreement and
become a party to the Collateral Agreement) for services rendered or goods and
products sold in the ordinary course of the Business Operations which the
Lender, in its Permitted Discretion, deems to be an Eligible Account; provided,
however, that an Account shall not be deemed an Eligible Account unless it meets
all of the following conditions:
 
(a) the subject services or products and goods have been rendered, shipped or
delivered on an absolute sale basis to an Account Debtor which is not an
Affiliate, vendor or supplier of the Borrower or a Subsidiary, with an invoice
date contemporaneous with or within thirty (30) calendar days after the date of
shipment or service, and which does not constitute a consignment sale,
bill-and-hold sale, sale-and-return or other such arrangement and is not subject
to any other repurchase, return or offset agreement binding upon the Borrower or
a Domestic Subsidiary; the subject services or products and goods have been
rendered, shipped and delivered (or shipped f.o.b.) to such Account Debtor on an
open account basis (or with payment guaranteed by a domestic letter of credit,
drawn on or by a domestic financial institution, acceptable to the Lender in all
respects), and no part of the subject services, products or goods has been
returned, rejected, lost or damaged; the Account is not evidenced by chattel
paper or an instrument of any kind; and such Account Debtor, unless pre-approved
in writing by the Lender, is not insolvent or the subject of any bankruptcy or
insolvency proceeding of any kind in any jurisdiction;
 
 
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(b) if the Account Debtor is located outside the continental United States,
payment for the subject services or goods shall be secured by an irrevocable
letter of credit, which letter of credit shall have been confirmed by a
financial institutional reasonably acceptable to the Lender payable in the full
amount of the face value of the Account in lawful currency of the United States;
provided, however, that the letter of credit requirement shall not be applicable
to Accounts payable by Account Debtors whose principal place of business is
located outside the continental United States to the extent that (i) the
aggregate Accounts owed by such Account Debtors does not exceed the lesser of
$500,000 or 25% of all Eligible Accounts, and (ii) each such Account would
otherwise constitute an Eligible Account in accordance with the other criteria
contained in this definition of “Eligible Account”; and further provided, that
the Lender may, from time to time, in its sole and absolute discretion, waive
any of the requirements of this subsection (b);
 
(c) it is a valid, legally enforceable obligation of the Account Debtor
thereunder payable in Dollars and is not subject to any recoupment, offset or
other defense or any discount or chargeback on the part of such Account Debtor
(provided that prompt payment discounts granted in the ordinary course of
business shall not cause an Account to be disqualified hereunder, so long as
only the discounted amount of such Account, if not otherwise disqualified, is
included in the calculation of the Borrowing Base) or to any claim on the part
of such Account Debtor denying liability thereunder (provided that the
undisputed portion may be considered to be an Eligible Account);
 
(d) it is subject to no Lien whatsoever, except for the Lien of the Lender;
 
(e) it has not remained unpaid in whole or in part for a period exceeding ninety
(90) days after the original invoice date;
 
(f) it does not arise out of a transaction (whether direct or indirect) with an
employee, officer, agent, director or Affiliate of the Borrower or any
Subsidiary or with any entity controlled by any employee, officer, agent or
director of the Borrower or any Subsidiary;
 
(g) it is not subject to any contract retainage or other withholding of any
portion of payments on amounts invoiced, whether to secure the Borrower’s or any
Subsidiary’s performance or otherwise;
 
(h) it does not represent the unpaid portion of an Account any portion of which
was previously paid or agreed to be paid through the issuance or delivery of
equity securities or other non-cash consideration;
 
 
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(i) if the Account Debtor is the United States, any State or Commonwealth
therein, or any department, agency or instrumentality thereof, the Borrower or
the applicable Domestic Subsidiary has duly assigned its rights to payment of
such Account to the Lender pursuant to the federal Assignment of Claims Act and
any comparable state statutes;
 
(j) the Lender has a perfected first priority Lien in such Account;
 
(k) such Account is not payable by any person other than the Account Debtor
(such as a beneficiary, recipient or subscriber individually), provided that the
portion thereof which is payable by the Account Debtor may be considered to be
an Eligible Domestic Account;
 
(l) at least sixty (60%) percent in dollar amount of the total Accounts owed by
such Account Debtor and/or its Affiliates constitute Eligible Accounts;
 
(m) the total Accounts owed by the subject Account Debtor and/or its Affiliates
constitute less than fifteen (15%) percent of the net collectible dollar value
of all Eligible Accounts (provided that only the excess over fifteen (15%)
percent shall be disqualified under this clause (m), unless the Lender has
otherwise consented in writing to the inclusion of all or any portion of such
excess);
 
(n) such Account is payable solely to the Borrower or a Domestic Subsidiary, and
the Borrower or such Domestic Subsidiary is not aware of any dispute by the
Account Debtor with respect to such Account; and
 
(o) it is not otherwise determined by the Lender, in the Lender’s Permitted
Discretion, to be difficult to collect, uncollectible or otherwise unacceptable
for any reason.
 
“Eligible Inventory” shall mean the lower of the cost (on a first in-first out
basis) or fair market value of that inventory consisting of raw materials or
finished goods (but excluding work in process and product models or samples) of
Borrower or any Subsidiary which is party to the Collateral Agreement which (a)
is in good and merchantable condition, (b) meets all standards imposed by any
governmental agency having regulatory authority over such goods and/or their
use, manufacture and/or sale, (c) has been physically received in the
continental United States by the Borrower or the subject Subsidiary, or has been
shipped to the Borrower or the subject Subsidiary with title thereto having
passed to the Borrower or such Subsidiary, (d) is currently usable or currently
saleable in the normal course of the Business Operations, (e) is not on
consignment to or from any Person (provided that goods on consignment to the
Borrower’s or the subject Subsidiary’s sales representatives and distributors
shall not be excluded to the extent that the aggregate value (determined at the
lower of cost or fair market value as aforesaid) of such goods is less than
$250,000), (f) is not subject to any Lien whatsoever, except for the Lien of the
Lender, which shall be perfected with respect to such inventory, (g) has not
been sold to any Person, and (h) is otherwise satisfactory to the Lender in its
Permitted Discretion.
 
“ERISA” shall mean the Employee Retirement Income Security Act of 1974, as in
effect from time to time.
 
“ERISA Affiliate” shall mean, with respect to any Person, any other Person which
is under common control with the first Person within the meaning of Section
414(b) or 414(c) of the Code; provided, however, that with respect to the
Borrower, no Person which is an Affiliate of the Lender (other than the Borrower
and its Subsidiaries) shall be deemed an ERISA Affiliate for purposes of this
Agreement
 
 
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“Event of Default” has the meaning set forth in Article VII below.
 
“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.
 
“Existing Lender” shall mean Keltic Financial Partners LP, as the lender under
the outstanding line of credit facility by and between such lender and the
Borrower.
 
“Financial Statements” has the meaning set forth in Section 3.01(a) below.
 
“Fiscal Year” shall mean the fiscal year of the Borrower which ends on June 30
of each year.
 
“Foreign Subsidiary” shall mean any Subsidiary which is not a Domestic
Subsidiary.
 
“GAAP” shall mean generally accepted accounting principles in the United States
of America, consistently applied, unless the context otherwise requires, with
respect to any financial terms contained herein, as then in effect with respect
to the preparation of financial statements.
 
“Government Approval” shall mean an authorization, consent, non-action,
approval, license or exemption of, registration or filing with, or report to,
any governmental or quasi-governmental department, agency, body or other unit.
 
“Guaranty”, “Guaranteed” or to “Guarantee”, as applied to any Indebtedness,
liability or other obligation, shall mean (a) a guaranty, directly or
indirectly, in any manner, including by way of endorsement (other than
endorsements of negotiable instruments for collection in the ordinary course of
business), of any part or all of such obligation, and (b) an agreement,
contingent or otherwise, and whether or not constituting a guaranty, assuring,
or intended to assure, the payment or performance (or payment of damages in the
event of non-performance) of any part or all of such obligation by any means
(including, without limitation, the purchase of securities or obligations, the
purchase or sale of property or services, or the supplying of funds).
 
“Guaranty Agreement” shall mean a guaranty agreement, in form and substance
satisfactory to the Lender, to be executed by each Domestic Subsidiary in favor
of the Lender, pursuant to which such Domestic Subsidiary will guaranty the full
and timely payment and performance of all of the Obligations.
 
“Indebtedness” shall mean (without duplication), with respect to any Person, (a)
all obligations or liabilities, contingent or otherwise, for borrowed money, (b)
any and all obligations represented by promissory notes, bonds, debentures or
the like, or on which interest charges are customarily paid, (c) any liability
secured by any mortgage, pledge, lien or security interest on property owned or
acquired, whether or not such liability shall have been assumed, (d) obligations
of such Person under conditional sale or other title retention agreements
relating to property or assets purchased by such Person, (e) all obligations of
such Person issued or assumed as the deferred purchase price of property or
services (excluding trade payables and accrued obligations incurred in the
ordinary course of business), (f) any obligations (contingent or otherwise) of
such Person as an account party or applicant in respect of letters of credit
and/or bankers’ acceptances, or in respect of financial or other hedging
obligations, and (g) Guarantees, endorsements (other than for collection in the
ordinary course of business) and other contingent obligations in respect of the
obligations of others.
 
 
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“Intellectual Property” shall have the meaning ascribed thereto in the
Collateral Agreement.
 
“Inventory Reserve” shall mean, as of any date of determination, an amount equal
to the sum of (a) the lower of the cost (on a first in-first out basis) or fair
market value of those parts or other inventory of the Borrower and/or the
Subsidiaries which are party to the Collateral Agreement which has been returned
by customers and is subject to the Borrower’s or Subsidiary’s quarantine
procedures or manufacturer’s review board policies as then in effect, plus (b)
the greater of (i) $100,000, or (ii) the amount required to be recorded by the
Borrower and the Subsidiaries party to the Collateral Agreement as obsolete
inventory in accordance with GAAP, in each case calculated as of (A) the close
of the current calendar month with respect to Borrowing Base reports rendered as
of the close of a calendar month, and (B) the close of the immediately
proceeding calendar month with respect to all other Borrowing Base reports.
 
“Investment”, as applied to the Borrower or any Subsidiary, shall mean: (a) any
shares of capital stock, evidence of Indebtedness or other security issued by
any other Person to the Borrower or any Subsidiary, (b) any loan, advance or
extension of credit to, or contribution to the capital of, any other Person,
other than credit terms extended to customers in the ordinary course of
business, (c) any other investment by the Borrower or any Subsidiary in any
assets or securities of any other Person, and (d) any commitment to make any
Investment.
 
“Knowledge” or “Known” or words of similar import shall mean, with respect to
the Borrower and/or any Subsidiary, the actual knowledge of David Vozick, Donald
Rabinovitch and Elise Nissen (and/or their respective successors as officers of
the Borrower) after reasonable inquiry of the appropriate employees of the
Borrower and the Subsidiaries.
 
“Landlord Waiver” shall mean a landlord waiver, subordination and/or access
agreement, in form and substance reasonably satisfactory to the Lender, executed
in favor of the Lender by the Landlord of a Real Property leased or occupied by
the Borrower or any Subsidiary.
 
“Liabilities and Contingencies” has the meaning set forth in Section 3.01(c)
below.
 
“Lien”, as applied to the property or assets (or the income or profits
therefrom) of the Borrower or any Subsidiary, shall mean (in each case, whether
the same is consensual or nonconsensual or arises by contract, operation of law,
legal process or otherwise): (a) any mortgage, lien, pledge, hypothecation,
attachment, assignment, deposit arrangement, encumbrance, charge, lease
constituting a Capitalized Lease Obligation, conditional sale or other title
retention agreement, or other security interest or encumbrance of any kind in
respect of any property (including, without limitation, stock of any Subsidiary)
of the Borrower or any Subsidiary, or upon the income or profits therefrom; (b)
any arrangement under which any property of the Borrower or any Subsidiary is
transferred, sequestered or otherwise identified for the purpose of subjecting
or making available the same for the payment of Indebtedness or the performance
of any other liability in priority to the payment of the general, unsecured
creditors of the Borrower or any Subsidiary; (c) any Indebtedness or liability
which remains unpaid after the same shall become due and payable and which, if
unpaid, by law or otherwise is given any priority whatsoever over the general
unsecured creditors of the Borrower or any Subsidiary; and (d) any agreement
(other than this Agreement) or other arrangement which, directly or indirectly,
prohibits the Borrower or any Subsidiary from creating or incurring any lien on
any of its properties or assets or which conditions the ability to do so on the
security, on a pro rata or other basis, of Indebtedness other than Indebtedness
outstanding under this Agreement.
 
 
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“Loan Documents” shall mean the collective reference to this Agreement, the
Notes, the Security Documents, the Warrants, the Registration Rights Agreement,
and any and all other agreements, instruments, certificates and other documents
as may be executed and delivered by the Borrower and/or any of the Subsidiaries
pursuant hereto or thereto.
 
“Loans” shall mean, collectively, the Advances and the Term Loan.
 
“Material Adverse Effect” shall mean any event, act, omission, condition or
circumstance which has or would reasonably be expected to have a material
adverse effect on (a) the business, operations, properties, assets or condition,
financial or otherwise, of the Borrower and the Subsidiaries, taken as a whole,
(b) the ability of the Borrower or any Subsidiary to perform any of its
obligations under any of the Loan Documents, or (c) the validity or
enforceability of, or the Lender’s rights and remedies under, any of the Loan
Documents, other than due to the acts or omissions of the Lender or any of its
Affiliates.
 
“Maturity Date” shall mean April 30, 2012.
 
“Maximum Revolver Amount” shall mean $3,000,000.
 
“Monitoring Fee” shall mean the fees payable to the Lender pursuant to Section
2.03(b)(i) below.
 
“Notes” shall mean, collectively, the Revolving Credit Note and the Term Note.
 
“Obligations” shall mean the collective reference to all Indebtedness and other
liabilities and obligations of every kind and description owed by the Borrower
to the Lender from time to time under or pursuant to this Agreement, the Notes,
the Security Documents and the other Loan Documents (excluding the Warrant and
Registration Rights Agreement, other than amounts payable from time to time
pursuant to Section 2(c) of the Registration Rights Agreement), and/or otherwise
in respect of the Loans, however evidenced, created or incurred, fixed or
contingent, now or hereafter existing, due or to become due.
 
“Organic Documents” shall mean, with respect to any Person, the certificate of
incorporation, articles of incorporation, certificate of formation, certificate
of limited partnership, by-laws, operating agreement, limited partnership
agreement or other such document of such Person.
 
“Permitted Discretion” shall mean a determination or judgment made by the Lender
in good faith in the exercise of reasonable business judgment from the
perspective of a secured lender.
 
“Permitted Indebtedness” shall mean any and all Indebtedness expressly permitted
pursuant to Section 6.01 below.
 
“Permitted Liens” shall mean those Liens expressly permitted pursuant to Section
6.02 below.
 
 
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“Person” shall mean any individual, partnership, corporation, limited liability
company, banking association, business trust, joint stock company, trust,
unincorporated association, joint venture, governmental authority or other
entity of whatever nature.
 
“Qualified Proceeds” shall mean any and all net proceeds received by the
Borrower from time to time after the date of this Agreement from the issuance
and/or sale of any capital stock of the Borrower or any security or Indebtedness
convertible into or exchangeable for capital stock of the Borrower, except to
the extent that such proceeds are, within thirty (30) days after the receipt
thereof, applied to pay the purchase price and/or directly associated expenses
of the Borrower’s acquisition (directly or through a Wholly-Owned Subsidiary) of
another business (whether through merger, consolidation, share exchange, stock
purchase, or purchase of all or substantially all of the assets of the target
company or an operating division or unit thereof), in each case effected subject
to and in accordance with the requirements of this Agreement. In determining the
amount of net proceeds for purposes of this definition, there shall be deducted
from gross proceeds only those reasonable expenses incurred by the Borrower
directly related to the subject issuance or sale, exclusive of any fees or
commissions paid to any officer, director or other Affiliate of the Borrower or
any Affiliate of any of the foregoing.
 
“QR-Italy” shall mean QR Imaging S.r.l., an Italian corporation which is a
wholly-owned Foreign Subsidiary.
 
“Real Properties” shall mean, collectively, any real properties (land, buildings
and/or improvements) now owned or leased or occupied by the Borrower or any of
the Subsidiaries, and, during the period of the Borrower’s and/or Subsidiary’s
occupancy thereof, any other real properties heretofore owned or leased by the
Borrower or any Subsidiary (provided that, with respect to leased properties,
the “Real Property” shall refer only to the portion of the subject property
(excluding common areas) leased by the Borrower or a Subsidiary).
 
“Registration Rights Agreement” shall mean the Registration Rights Agreement, to
be dated as of the Closing Date, made by the Borrower for the benefit of the
Lender and any subsequent Holders (as such term is defined in the Registration
Rights Agreement), as same may be amended, modified, supplemented and/or
restated from time to time.
 
“Revolving Credit Commitment” shall mean the Lender’s agreement to make Advances
to the Borrower within the limitations set forth in Section 2.01 below.
 
“Revolving Credit Note” shall mean the promissory note of the Borrower issued to
the Lender to represent the Advances and interest thereon, as described in
Section 2.01(f) below.
 
“Sale” shall mean any transaction or series of related transactions (a) whereby
Control of the Borrower is held by a Person (or group of Persons acting in
concert) other than the management of the Borrower on the date of this Agreement
(or Affiliates of such management), provided that the resignation, termination,
death or disability at any time of either or both of David Vozick or Donald
Rabinovitch shall not constitute a Sale hereunder, (b) in which the Borrower is
a constituent party to any merger, consolidation or share exchange and as a
result thereof (i) the holders of the outstanding capital stock of the Borrower
which ordinarily has voting power for the election of directors (including
preferred stock counted on an “as converted” basis into common stock)
immediately prior to such merger or consolidation cease to own a majority of the
outstanding capital stock of the Borrower which ordinarily has voting power for
the election of directors (including preferred stock counted on an “as
converted” basis into common stock), or (ii) the Borrower is not the surviving
corporation, or (c) whereby all or any material portion of the assets of the
Borrower or any Subsidiary are sold, assigned or transferred.
 
 
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“SEC” shall mean the United States Securities and Exchange Commission, and any
successor agency performing the functions thereof.
 
“SEC Reports” shall mean the periodic and current reports, registration
statements, proxy statements and other reports filed or required to be filed by
the Borrower with the SEC pursuant to the Act and/or the Exchange Act, and any
amendments or supplements thereto filed with the SEC.
 
“Security Documents” shall mean the Guaranty Agreement, the Collateral
Agreement, any Collateral Assignments, Landlord Waivers, Control Agreements,
financing statements or other such agreements or documents pursuant thereto, and
any other agreements or instruments securing or creating or evidencing Liens
securing the Obligations.
 
“Subordinated Debt” shall mean all Indebtedness for money borrowed and other
liabilities of the Borrower, whether or not evidenced by promissory notes, which
is contractually subordinated in right of payment, in a manner satisfactory to
the Lender (as evidenced by the Lender’s prior written approval thereof), to all
Obligations of the Borrower to the Lender.
 
“Subsidiary” or “Subsidiaries” shall mean the individual or collective reference
to any corporation, limited liability company or other entity of which 50% or
more of the outstanding shares of stock or other equity interests of each class
having ordinary voting power and/or rights to profits (other than stock having
such power only by reason of the happening of a contingency) is at the time
owned by the Borrower, directly or indirectly through one or more Subsidiaries
of the Borrower.
 
“Term Loan” shall mean the term loan in the principal amount of $5,000,000 to be
made pursuant to Section 2.02(a) below.
 
“Term Note” shall mean the promissory note of the Borrower issued to the Lender
as described in Section 2.02(d) below.
 
“UCC” means the Uniform Commercial Code as in effect in the State of New York on
the date hereof and hereafter from time to time.
 
“Unused Commitment Fee” shall mean a fee, payable in accordance with Section
2.03(b)(ii) below, equal to one-half of one (0.5%) percent per annum of (a) the
Maximum Revolver Amount, minus (b) the average daily principal amount of
Advances outstanding during the subject calculation period, calculated using a
360-day year and the actual number of days in the subject calculation period.
 
“Warrants” shall mean the warrants to purchase shares of Common Stock (such
warrants covering an aggregate of 800,000 shares of Common Stock, subject to
adjustment) to be issued by the Borrower to the Lender on the Closing Date.
 
“Wholly-Owned Subsidiary” shall mean each Domestic Subsidiary of which all of
the outstanding equity securities (other than directors’ qualifying shares) are
owned by the Borrower or another such Wholly-Owned Subsidiary.
 
 
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Section 1.02. Use of Defined Terms. All terms defined in this Agreement shall
have their defined meanings when used in the Notes, the Security Documents, the
other Loan Documents, and all certificates, reports or other documents made or
delivered pursuant to this Agreement, unless otherwise defined therein or unless
the specific context shall otherwise require.
 
Section 1.03. Accounting Terms. All accounting terms not specifically defined
herein shall be construed in accordance with GAAP.
 
Section 1.04. Other Definitional Provisions. The words “hereof,” “herein”,
“hereto” and “hereunder” and words of similar import when used in this Agreement
shall refer to this Agreement as a whole and not to any particular provision of
this Agreement, and Section references are to this Agreement unless otherwise
specified. The meanings given to terms defined herein shall be equally
applicable to both the singular and plural forms of such terms. The word
“including” and words of similar import when used in this Agreement shall mean
“including, without limitation,” unless otherwise specified.
 
II. GENERAL TERMS
 
Section 2.01. Revolving Credit Loans.
 
(a) Subject at all times to all of the terms and conditions of this Agreement,
the Lender hereby agrees to extend to the Borrower a secured revolving credit
facility, from the Closing Date to the Maturity Date, in an aggregate principal
amount not to exceed, at any time outstanding, the lesser of (i) the Borrowing
Base at the subject time, or (ii) the Maximum Revolver Amount (the "Revolving
Credit Commitment").
 
(b) Such revolving credit loans are herein sometimes referred to individually as
an "Advance" and collectively as the "Advances." Subject at all times to all of
the terms and conditions of this Agreement, from the Closing Date to the
Maturity Date and within the limits of the Revolving Credit Commitment, the
Lender shall lend, and the Borrower may borrow, prepay (without premium or
penalty) and reborrow under this Section 2.01. Each request for an Advance (i)
shall be irrevocable, (ii) shall be deemed to constitute an express affirmation
that all conditions precedent set forth in part B of Article IV hereof are
satisfied on the date of such request and will be satisfied on the requested
Borrowing Date, and (iii) shall be made to the Lender in writing, not later than
three (3) Business Days prior to the requested Borrowing Date, by an authorized
officer of the Borrower or by telephonic communication by such authorized
officer to the Lender, which shall be confirmed by written notice to the Lender
to be delivered to the Lender by the Business Day next following the subject
request. In no event shall the Borrower request, or shall the Lender be required
to honor, (A) any request for an Advance in an amount greater than the
Availability at such time, (B) any request for an Advance in an amount less than
$100,000, or (C) more than one request for the borrowing of Advances in any
seven (7) calendar day period.
 
(c) The Borrower shall pay the Lender interest on all Advances at the rate(s)
per annum as in effect from time to time in accordance with the Revolving Credit
Note. Such interest shall be payable monthly in arrears on the last day of each
calendar month and on the Maturity Date, and shall be computed on the daily
unpaid balance of all Advances made under the Borrower's revolving credit loan
accounts with the Lender, based on a three hundred sixty (360) day year,
counting the actual number of days elapsed. The Borrower hereby authorizes the
Lender to charge the Borrower's revolving credit loan accounts for all such
interest; provided, however, that the Lender shall be under no obligation to
make any such charge to the Borrower’s revolving credit loan accounts
(including, without limitation, if there is insufficient Availability at the
time such interest is due and payable).
 
 
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(d) In the event and to the extent that, at any time, the outstanding principal
amount of Advances exceeds the Revolving Credit Commitment then in effect, then
the Borrower shall immediately, without notice or demand, make a payment to the
Lender in respect of the Advances in an amount sufficient to cause the
outstanding principal amount of Advances to be equal to or less than the
Revolving Credit Commitment then in effect.
 
(e) Unless sooner due and payable by reason of an Event of Default or Sale
having occurred, the Borrower shall pay in full all of the Obligations to the
Lender in respect of all Advances on or prior to the Maturity Date. Anything
elsewhere contained herein to the contrary notwithstanding, in the event that
and at such time as the Term Loan shall be repaid or be required to be repaid in
full, the Revolving Credit Commitment shall thereupon terminate and all
outstanding Advances, all accrued interest thereon and all other outstanding
Obligations (including, without limitation, prorated accrued Commitment Fees and
Unused Commitment Fees) shall be immediately due and payable, without
requirement of any notice or demand.
 
(f) All Advances shall be evidenced by a secured Revolving Credit Note of the
Borrower payable to the order of the Lender.
 
(g) In the event and to the extent that the Borrower or any of its Subsidiaries
shall receive payment in respect of any indemnification claim under the
Acquisition Agreement, the Maximum Revolver Amount shall thereupon automatically
be reduced by an amount equal to the amount of such indemnification payment
received, and (i) the Borrower shall immediately give written notice to the
Lender upon receipt of such indemnification payment, stating the date and amount
of such payment, and (ii) the Borrower shall, if and to the extent required
pursuant to Section 2.01(d) above, make a payment to the Lender in respect of
the Advances in an amount sufficient to cause the outstanding principal amount
of Advances to be equal to or less than the reduced Revolving Credit Commitment.
 
(h) The Borrower may, at its option, terminate the Revolving Credit Commitment
at any time upon ten (10) Business Days’ prior written notice, and paying to the
Lender, on the date fixed for termination, an amount equal to the sum of (i) all
outstanding principal and accrued interest of the Advances, and (ii) prorated
accrued Commitment Fees and Unused Commitment Fees.
 
Section 2.02. Term Loan.
 
(a) Subject at all times to all of the terms and conditions of this Agreement,
the Lender hereby agrees to extend to the Borrower a Term Loan in the principal
amount of $5,000,000. The Term Loan shall be borrowed in a single borrowing on
the Closing Date, and any principal amounts repaid in respect of the Term Loan
may not be reborrowed.
 
(b) The Term Loan shall be repayable in installments, in accordance with the
schedules of payments set forth in the Term Note. The Borrower shall be required
to prepay the Term Loan (i) in full simultaneously with the consummation of any
Sale, and (ii) in whole or in part from time to time in the event and to the
extent of 50% of any Qualified Proceeds received by the Borrower from time to
time. Any prepayment required under the foregoing clause (ii) shall be due and
payable as and when the amount of Qualified Proceeds is determined (i.e., upon
receipt of such Qualified Proceeds in the event that no acquisition transaction
is then pending, or thirty (30) days after receipt of such Qualified Proceeds to
the extent that such Qualified Proceeds are not applied to the purchase price
and/or related expenses of a consummated business acquisition).
 
 
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(c) The Borrower shall pay the Lender interest on the principal balance of the
Term Loan at the rate(s) per annum as in effect from time to time in accordance
with the Term Note. Such interest shall be payable monthly in arrears on the
last day of each calendar month and on the Maturity Date, and shall be computed
on the daily unpaid balance of the Term Loan, based on a three hundred sixty
(360) day year, counting the actual number of days elapsed. The Borrower hereby
authorizes the Lender to charge the Borrower’s revolving credit loan accounts
for all such interest and/or for any or all principal amounts due and payable in
respect of the Term Loans; provided, however, that the Lender shall be under no
obligation to make any such charge to the Borrower’s revolving credit loan
accounts (including, without limitation, if there is insufficient Availability
at the time such interest and/or principal is due and payable).
 
(d) The Term Loan shall be evidenced by a secured Convertible Term Note of the
Borrower payable to the order of the Lender.
 
Section 2.03. Fees and Premiums.
 
(a) The Borrower shall pay the Closing Fees to the Lender on the Closing Date.
The Closing Fees shall be deemed fully earned on the Closing Date and shall not
be refundable in whole or in part and shall not be subject to reduction or
set-off under any circumstances.
 
(b) The Borrower shall further pay to the Lender, in respect of the Revolving
Credit Commitment:
 
(i) in advance on the Closing Date and on the first (1st) Business Day of each
calendar month prior to (A) the Maturity Date, or (B) the earlier termination of
the Revolving Credit Commitment and payment of the Obligations thereon in
accordance with this Agreement, a collateral monitoring and administrative fee
in the amount of $1,000 per month or portion thereof;
 
(ii) on the last day of each calendar month, and upon any early termination of
the Revolving Credit Commitment, the Unused Commitment Fee; and
 
(iii) on April 30 of each year commencing April 30, 2008, and upon any early
termination of the Revolving Credit Commitment (appropriately prorated in such
latter case), an annual Commitment Fee in the amount of $30,000.
 
(c) In the event of any prepayment of all or any portion of the Term Loan, in
addition to the payment of the subject principal amount and all unpaid accrued
interest thereon, the Borrower shall be required to pay to the Lender a
prepayment premium in an amount equal to two (2%) percent of the principal
amount being prepaid; provided, however, that no such prepayment premium shall
be required with respect to any required prepayment out of Qualified Proceeds.
 
(d) Payments received in respect of the Obligations after 12:00 Noon on any day
shall be deemed to be received on the next succeeding Business Day, and if any
payment is received other than by wire transfer of immediately available funds,
such payment shall be subject to three (3) Business Days’ clearance prior to
being credited to the Obligations for interest calculation purposes.
 
 
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(e) In the event that the Lender notifies the Borrower that the Lender is ready,
willing and able to fund the Loan on substantially the terms of this Agreement
and the Closing Date has not occurred within thirty (30) days thereafter other
than due to the fault of the Lender, then the Lender may, at any time thereafter
until the Closing Date, terminate this Agreement by written notice to the
Borrower, in which event the Borrower shall (i) immediately pay to the Lender an
amount equal to all out-of-pocket costs, charges and expenses (up to an
aggregate maximum of $37,500) incurred by the Lender in respect of the
transactions contemplated by this Agreement, and (ii) further pay to the Lender,
if, as and when the transactions contemplated by the Acquisition Agreement are
consummated within one (1) year after the expiration of the aforesaid thirty
(30) day period, an additional fee in the amount of $125,000. This Section
2.03(e) shall survive any termination of this Agreement.
 
Section 2.04. Use of Proceeds. The Borrower shall utilize the proceeds of the
Loans solely (a) to repay and retire the Borrower’s existing loan facility with
the Existing Lender, (b) to loan and/or contribute funds to QR-Italy to be
utilized by QR-Italy to pay a portion of the purchase price payable under the
Acquisition Agreement, and (c) for working capital and other general corporate
purposes of the Borrower.
 
Section 2.05. Further Obligations. With respect to all Obligations for which the
interest rate is not otherwise specified herein (whether such Obligations arise
hereunder, pursuant to the Notes or Security Documents, or otherwise), such
Obligations shall bear interest at the rate(s) in effect from time to time
pursuant to the Revolving Credit Note.
 
Section 2.06. Application of Payments. All amounts paid to or received by the
Lender in respect of the Loans from whatever source (whether from the Borrower,
any Subsidiary pursuant to the Guaranty Agreement, any realization upon any
Collateral, or otherwise) shall, unless otherwise directed by the Borrower with
respect to any particular payment (unless an Event of Default shall then be
continuing, in which event the Lender may disregard the Borrower’s direction),
be applied (a) first, to reimburse the Lender for all out-of-pocket costs and
expenses incurred by the Lender which are reimbursable to the Lender in
accordance with this Agreement, the Notes and/or any of the other Loan
Documents, (b) next, to any accrued but unpaid fees or prepayment premiums, and
amounts payable under Section 2.2(c) of the Registration Rights Agreement, (c)
next, to unpaid accrued interest on the Term Loan, (d) next, to unpaid accrued
interest on the Advances, (e) next, to the outstanding principal of the Term
Loan, to the extent then due and payable, (f) next, to the outstanding principal
of the Advances, and (g) finally, to the payment of any other outstanding
Obligations; and after payment in full of the Obligations, any further amounts
paid to or received by the Lender in respect of the Loans shall be paid over to
the Borrower or such other Person(s) as may be legally entitled thereto.
 
Section 2.07. Sale. Anything elsewhere contained in this Agreement and/or the
Notes to the contrary notwithstanding, the Revolving Credit commitment shall
terminate and all Obligations shall become immediately due and payable, without
requirement of any notice or demand, upon the consummation of any Sale.
 
 
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Section 2.08. Obligations Unconditional.
 
(a) The payment and performance of all Obligations shall constitute the absolute
and unconditional obligations of the Borrower, and shall be independent of any
defense or rights of set-off, recoupment or counterclaim which the Borrower
might otherwise have against the Lender. All payments required by this Agreement
and/or the Notes shall be paid free of any deductions or withholdings for any
taxes or other amounts and without abatement, diminution or set-off. If the
Borrower is required by law to make such a deduction or withholding from a
payment hereunder, the Borrower shall pay to the Lender such additional amount
as is necessary to ensure that, after the making of such deduction or
withholding, the Lender receives (free from any liability in respect of any such
deduction or withholding) a net sum equal to the sum which it would have
received and so retained had no such deduction or withholding been made or
required to be made. The Borrower shall (i) pay the full amount of any deduction
or withholding, which it is required to make by-law, to the relevant authority
within the payment period set by the relevant law, and (ii) promptly after any
such payment, deliver to the Lender an original (or certified copy) official
receipt issued by the relevant authority in respect of the amount withheld or
deducted or, if the relevant authority does not issue such official receipts,
such other evidence of payment of the amount withheld or deducted as is
reasonably acceptable to the Lender.
 
(b) If, at any time and from time to time after the Closing Date, (i) any change
in any existing law, regulation, treaty or directive or in the interpretation or
application thereof, (ii) any new law, regulation, treaty or directive enacted
or application thereof, or (iii) compliance by the Lender with any request or
directive (whether or not having the force of law) from any governmental
authority (A) subjects the Lender to any tax, levy, impost, deduction,
assessment, charge or withholding of any kind whatsoever with respect to any
Loan Document, or changes the basis of taxation of payments to the Lender of any
amount payable thereunder (except for net income taxes, or franchise taxes
imposed in lieu of net income taxes, imposed generally by federal, state or
local taxing authorities with respect to interest or commitment fees or other
fees payable hereunder or changes in the rate of tax on the overall net income
of the Lender or its members), or (B) imposes on the Lender any other condition
or increased cost in connection with the transactions contemplated thereby or
participations therein, and the result of any of the foregoing is to increase
the cost to the Lender of making or continuing any Loan or to reduce any amount
receivable hereunder, then, in any such case, the Borrower shall promptly pay to
the Lender any additional amounts necessary to compensate the Lender, on an
after-tax basis, for such additional cost or reduced amount as determined by the
Lender. If the Lender becomes entitled to claim any additional amounts pursuant
to this Section 2.08(b), the Lender shall promptly notify the Borrower of the
event by reason of which the Lender has become so entitled, and each such notice
of additional amounts payable pursuant to this Section 2.08(b) submitted by the
Lender to the Borrower shall, absent manifest error, be final, conclusive and
binding for all purposes.
 
Section 2.09. Reversal of Payments. To the extent that any payment or payments
made to or received by the Lender pursuant to this Agreement or any other Loan
Document are subsequently invalidated, declared to be fraudulent or
preferential, set aside, or required to be repaid to any trustee, receiver or
other person under any state or federal bankruptcy or other such law, then, to
the extent thereof, such amounts shall be revived as Obligations and continue in
full force and effect hereunder as if such payment or payments had not been
received by the Lender.
 
 
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III. REPRESENTATIONS AND WARRANTIES
 
As of the Closing Date and on each Borrowing Date (unless the representation and
warranty refers to a specific date), the Borrower hereby makes the following
representations and warranties to the Lender, all of which representations and
warranties shall survive the Closing Date, the delivery of the Notes and the
making of the Loans, shall be continuing in nature so long as any Obligations
are outstanding or the Revolving Credit Commitment remains in effect, and are as
follows:
 
Section 3.01. Financial Matters.
 
(a) The Borrower has heretofore furnished to the Lender (i) the audited
consolidated financial statements (including balance sheets, statements of
income and statements of cash flows) of the Borrower and its Subsidiaries as at
June 30, 2005 and 2006, and for the Fiscal Years then ended, and (ii) the
unaudited consolidated financial statements of the Borrower and its Subsidiaries
as of December 31, 2006 and for the six (6) months then ended (collectively, the
“Financial Statements”).
 
(b) The Financial Statements (i) have been prepared in accordance with GAAP and
Regulation S-X promulgated under the Act on a consistent basis for all periods
(subject, in the case of unaudited statements, to the absence of full footnote
disclosures, and to normal non-material audit adjustments), (ii) are complete
and correct in all material respects, (iii) fairly present the consolidated
financial condition of the Borrower and its Subsidiaries as of said dates, and
the results of their operations for the periods stated, (iv) contain and reflect
all necessary adjustments and accruals for a fair presentation of the Borrower’s
and its Subsidiaries’ consolidated financial condition and results of operations
as of the dates of and for the periods covered by such Financial Statements, and
(v) make full and adequate provision, subject to and in accordance with GAAP,
for the various assets and liabilities (including, without limitation, deferred
revenues) of the Borrower, fixed or contingent, and the results of their
operations and transactions in their accounts, as of the dates and for the
periods referred to therein.
 
(c) Except as set forth in Schedule 3.01 of the Disclosure Schedule, neither the
Borrower nor any of its Subsidiaries have any liabilities, obligations or
commitments of any kind or nature whatsoever, whether absolute, accrued,
contingent or otherwise (collectively “Liabilities and Contingencies”),
including, without limitation, Liabilities and Contingencies under employment
agreements and with respect to any “earn-outs”, stock appreciation rights, or
related compensation obligations, except: (i) Liabilities and Contingencies
disclosed in the Financial Statements or footnotes thereto, (ii) Liabilities and
Contingencies incurred in the ordinary course of business and consistent with
past practice since the date of the most recent Financial Statements, or (iii)
those Liabilities and Contingencies which are not required to be disclosed under
GAAP. The reserves, if any, reflected on the balance sheet included in the most
recent Financial Statements are appropriate and reasonable. Neither the Borrower
nor any of its Subsidiaries have any Indebtedness for money borrowed,
outstanding obligations for the purchase price of property, contingent
obligations or liabilities for taxes, or any unusual forward or long-term
commitments, except as specifically set forth or provided for in the Financial
Statements or in Schedule 3.01 of the Disclosure Schedule.
 
(d) Since the date of the most recent Financial Statements, except as set forth
in Schedule 3.01 of the Disclosure Schedule, there has been no material adverse
change in the working capital, condition (financial or otherwise), assets,
liabilities, reserves, business, management, operations or prospects of the
Borrower or any of its Subsidiaries, including, without limitation, the
following:
 
(i) there has been no material change in any assumptions underlying, or in any
methods of calculating, any bad debt, contingency or other reserve relating to
the Borrower or any Subsidiary;
 
 
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(ii) there have been (A) no material write-downs in the value of any inventory
of, and there have been no write-offs as uncollectible of any notes, accounts
receivable or other receivables of, the Borrower or any Subsidiary other than
write-offs of accounts receivable reserved in full as of the date of the most
recent financial statements delivered to the Lender, and (B) no reserves
established for the uncollectibility of any notes, Accounts or other receivables
of the Borrower or any Subsidiary except to the extent that same have been
disclosed to the Lender in writing and would not, individually or in the
aggregate, cause the outstanding Advances to exceed the Revolving Credit
Commitment;
 
(iii) no debts have been cancelled, no claims or rights of substantial value
have been waived and no properties or assets (real, personal or mixed, tangible
or intangible) have been sold, transferred, or otherwise disposed of by the
Borrower or any Subsidiary except in the ordinary course of business and
consistent with past practice;
 
(iv) there has been no change in any method of accounting or accounting practice
utilized by the Borrower or any Subsidiary;
 
(v) no material casualty, loss or damage has been suffered by the Borrower or
any Subsidiary, regardless of whether such casualty, loss or damage is or was
covered by insurance;
 
(vi) Any announced changes in the policies or practices of any customer,
supplier or referral source which would reasonably be expected to have a
Material Adverse Effect;
 
(vii) Any incurrence of (A) any liability or obligation outside of the ordinary
course of business, or (B) any Indebtedness other than Permitted Indebtedness;
 
(viii) Any declaration, setting aside or payment of any dividend or distribution
or any other payment of any kind by the Borrower to or in respect of any equity
securities of the Borrower; and
 
(ix) No action described in this Section 3.01(d) has been agreed to be taken by
the Borrower or any Subsidiary.
 
(e) Subsequent to January 1, 2007, the Borrower has received binding
subscriptions for the purchase of Common Stock which will yield net proceeds to
the Borrower of not less than $7,500,000.
 
(f) The Borrower has in place adequate systems of internal controls and
disclosure controls and procedures sufficient to provide reasonable assurance
that (i) transactions are executed in accordance with management’s general or
specific authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP and to maintain
asset accountability, (iii) access to assets is permitted only in accordance
with management’s general or specific authorization, (iv) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences, and
(v) the Borrower and its management are able to obtain timely and accurate
information regarding the Business Operations and all material transactions
relating to the Borrower and the Subsidiaries; and no material deficiency exists
with respect to the Borrower’s systems of internal controls.
 
 
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(g) All of the SEC Reports, as of the respective dates thereof, complied in all
material respects, as applicable, with the Act and the Exchange Act.
 
Section 3.02. Organization; Corporate Existence.
 
(a) The Borrower (i) is a corporation duly organized, validly existing and in
good standing under the laws of the State of New York, (ii) has all requisite
corporate power and authority to own its properties and to carry on its business
as now conducted and as proposed hereafter to be conducted, (iii) is qualified
to do business as a foreign corporation in each jurisdiction in which the
failure of the Borrower to be so qualified would have a Material Adverse Effect,
and (iv) has all requisite corporate power and authority to execute and deliver,
and perform all of its obligations under, the Loan Documents. True and complete
copies of the Organic Documents of the Borrower, together with all amendments
thereto, have been furnished to the Lender.
 
(b) On the date of this Agreement, the outstanding capital stock of the Company,
the number and amount of all outstanding options, warrants, convertible
securities, subscriptions and other rights to acquire capital stock of the
Company, and the number of shares reserved under outstanding option plans or the
like, are as set forth in Schedule 3.02 of the Disclosure Schedule. All of such
outstanding capital stock is validly issued, fully paid and nonassessable.
Except as set forth in such Schedule 3.02, no holders of any such securities
have any registration rights in respect thereof.
 
(c) Schedule 3.02 of the Disclosure Schedule further sets forth, with respect to
each Subsidiary on the date of this Agreement, (i) its proper legal name, (ii)
its jurisdiction of incorporation or formation, (iii) the jurisdictions in which
it is qualified to do business as a foreign entity, (iv) the number of shares of
capital stock, equity securities or ownership interests outstanding (all of
which are validly issued, fully paid and nonassessable), and (v) the owner(s) of
such outstanding capital stock, equity securities or other ownership interests.
Each of the Subsidiaries (A) is an entity duly organized, validly existing and
in good standing under the laws of the jurisdiction of its incorporation or
formation, (B) has all requisite power and authority to own its properties and
to carry on its business as now conducted and as proposed hereafter to be
conducted, and to execute and deliver, and perform all of its obligations under,
the Loan Documents to which it is a party, and (C) is not required to be
qualified to do business as a foreign entity in any jurisdiction in which it is
not so qualified and the failure to be so qualified would reasonably be expected
to have a Material Adverse Effect. True and complete copies of the Organic
Documents of each Subsidiary, together with all amendments thereto to the date
hereof, have been furnished to the Lender.
 
Section 3.03. Authorization.
 
(a) The execution, delivery and performance by the Borrower and the Subsidiaries
of their respective obligations under the Loan Documents have been duly
authorized by all requisite corporate and other action and will not, either
prior to or as a result of the consummation of the transactions contemplated by
this Agreement: (i) violate any provision of Applicable Law, any order of any
court or other agency of government, any provision of the Organic Documents of
the Borrower or any Subsidiary, or any Contract, indenture, agreement or other
instrument to which the Borrower or any of the Subsidiaries is a party, or by
which the Borrower or any of the Subsidiaries or any of its assets or properties
are bound, or (ii) be in conflict with, result in a breach of, or constitute
(after the giving of notice or lapse of time or both) a default under, or,
except as may be provided in the Loan Documents, result in the creation or
imposition of any Lien of any nature whatsoever upon any of the property or
assets of the Borrower or any of the Subsidiaries pursuant to, any such
Contract, indenture, agreement or other instrument.
 
 
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(b) This Agreement and other Loan Documents have been duly executed and
delivered by the Borrower and its Subsidiaries party thereto, and constitute the
valid and binding obligations of the Borrower and its Subsidiaries party
thereto, enforceable against the Borrower and such Subsidiaries in accordance
with their respective terms, except to the extent that enforceability may be
limited by bankruptcy, insolvency, reorganization, moretorium, fraudulent
transfer or other similar laws now or hereafter in effect relating to creditors’
rights generally, and by general principles of equity.
 
(c) Neither the Borrower nor any of the Subsidiaries is required to obtain any
Government Approval, consent or authorization from, or to file any declaration
or statement with, any governmental instrumentality or agency in connection with
or as a condition to the execution, delivery or performance of any of the Loan
Documents.
 
(d) Without limitation of Sections 3.03(a) through 3.03(c) above, the issuance
of the Warrants has been authorized by all requisite corporate action of the
Borrower, and such issuance does not conflict with any shareholders’ agreement,
preemptive rights, limitation under or requirement of Organic Documents, or
other agreement or commitment of the Borrower. Upon exercise of the Warrants in
accordance with the terms thereof, the Warrant Shares (as such term is defined
in the Warrants) will be validly issued, fully paid and nonassessable.
 
Section 3.04. Litigation. Except as disclosed on Schedule 3.04 of the Disclosure
Schedule, there is no action, suit or proceeding at law or in equity or by or
before any governmental instrumentality or other agency now pending or, to the
knowledge of the Borrower, threatened against or affecting the Borrower or any
of the Subsidiaries or any of their respective assets, which, if adversely
determined, would have a Material Adverse Effect. The Borrower has no Knowledge
of any state of facts, events, conditions or circumstances which are reasonably
likely to give rise to, or would properly constitute grounds for or the basis
of, any suit, action, arbitration, proceeding or investigation (including,
without limitation, any unfair labor practice charges, interference with union
organizing activities, or other labor or employment claims) against or with
respect to the Borrower or any Subsidiary.
 
Section 3.05. Material Contracts. Except as disclosed on Schedule 3.05 of the
Disclosure Schedule, neither the Borrower nor any of the Subsidiaries is (a) a
party to any Contract, agreement or instrument or subject to any charter or
other corporate or organizational restriction which has had or could reasonably
be expected to have a Material Adverse Effect, (b) subject to any liability or
obligation under or relating to any collective bargaining agreement, or (c) in
default in the performance, observance or fulfillment of any of the obligations,
covenants or conditions contained in any Contract, agreement or instrument to
which it is a party or by which any of its assets or properties is bound, which
default, individually or in the aggregate, would have or could reasonably be
expected to have a Material Adverse Effect.
 
Section 3.06. Title to Properties. The Borrower and each of the Subsidiaries has
good title to all of its properties and assets, free and clear of all mortgages,
security interests, restrictions, encumbrances or other Liens of any kind,
except for restrictions on the nature of use thereof imposed by Applicable Law,
and except for Permitted Liens, none of which materially interfere with the use
and enjoyment of such properties and assets in the normal course of the Business
Operations as presently conducted, or materially impair the value of such
properties and assets for the purpose of such business.
 
 
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Section 3.07. Real Property. Schedule 3.07 of the Disclosure Schedule sets forth
a correct and complete list of all Real Properties leased or occupied by the
Borrower on the date of this Agreement. The Borrower does not own any Real
Properties. The Borrower has a valid lessee’s interest in each Real Property
currently leased or occupied by the Borrower. Neither the Borrower nor, to the
Borrower’s Knowledge, any other party thereto, is in material breach or
violation of any requirements of any such lease; and such Real Properties are in
good condition (reasonable wear and tear excepted) and are adequate for the
current and proposed businesses of the Borrower. To the Borrower’s Knowledge,
its use of the Real Properties in the normal conduct of the Business Operations
does not violate any applicable building, zoning or other law, ordinance or
regulation affecting such Real Properties, and no covenants, easements,
rights-of-way or other such conditions of record impair the Borrower’s use of
the Real Properties in the normal conduct of the Business Operations.
 
Section 3.08. Machinery and Equipment. The machinery and equipment owned and/or
used by the Borrower and the Subsidiaries is, as to each individual material
item of machinery and equipment, and in the aggregate as to all such equipment,
in good and usable condition and in a state of good maintenance and repair
(reasonable wear and tear excepted), and adequate for its use in the Business
Operations.
 
Section 3.09. Capitalization. Except as set forth in Schedule 3.02 of the
Disclosure Schedule and for new Subsidiaries which may hereafter be formed or
acquired in compliance with this Agreement, the Borrower does not, directly or
indirectly, own any capital stock of or any form of equity interest in any other
Person.
 
Section 3.10. Solvency. After giving effect to the Loans and the other
transactions contemplated hereby, the borrowings made and/or to be made by the
Borrower under this Agreement do not and will not render the Borrower insolvent
or with unreasonably small capital for its business; the fair saleable value of
all of the assets and properties of the Borrower does now, and will, upon the
funding of the Loans contemplated hereby, exceed the aggregate liabilities and
Indebtedness of the Borrower (including contingent liabilities); the Borrower is
not contemplating either the filing of a petition under any state or federal
bankruptcy or insolvency law, or the liquidation of all or any substantial
portion of its assets or property; the Borrower has no knowledge of any Person
contemplating the filing of any such petition against the Borrower; and the
Borrower reasonably anticipates that it will be able to pay its debts as they
mature.
 
Section 3.11. No Investment Company. The Borrower is not an “investment company”
or a company “controlled” by an “investment company” as such terms are defined
in the Investment Company Act of 1940, as amended.
 
Section 3.12. Margin Securities. The Borrower does not own or have any present
intention of acquiring any “margin security” or any “margin stock” within the
meaning of Regulations G, T, U or X of the Board of Governors of the Federal
Reserve System (herein called “margin security” and “margin stock”). None of the
proceeds of the Loans will be used, directly or indirectly, for the purpose of
purchasing or carrying, or for the purpose of reducing or retiring any
Indebtedness which was originally incurred to purchase or carry, any margin
security or margin stock or for any other purpose which might constitute the
transactions contemplated hereby a “purpose credit” within the meaning of said
Regulations G, T, U or X, or cause this Agreement to violate any other
regulation of the Board of Governors of the Federal Reserve System or the
Exchange Act, or any rules or regulations promulgated under such statutes.
 
 
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Section 3.13. Taxes.
 
(a) All federal, state and local tax returns and tax reports required to be
filed by the Borrower and/or any Subsidiary have been timely filed with the
appropriate governmental agencies in all jurisdictions in which such returns and
reports are required to be filed, and all of such tax returns, tax reports and
other filings are correct and complete in all material respects. All federal,
state and local income, franchise, sales, use, property, excise, ad valorem,
value-added, payroll and other taxes (including interest, penalties and
additions to tax and including estimated tax installments where required to be
filed and paid) due from or with respect to the Borrower and the Subsidiaries
have been fully paid, and appropriate accruals have been made on the Borrower’s
books for taxes not yet due and payable. All taxes and other assessments and
levies which the Borrower and/or any Subsidiary is required by law to withhold
or to collect have been duly withheld and collected, and have been paid over to
the proper governmental authorities to the extent due and payable. Except as set
forth in Schedule 3.13 of the Disclosure Schedule, there are no outstanding or
pending claims, deficiencies or assessments for taxes, interest or penalties
with respect to any taxable period of the Borrower or any Subsidiary, and no
outstanding tax Liens.
 
(b) Except as disclosed in Schedule 3.13 of the Disclosure Schedule, the
Borrower has no Knowledge and has not received notice of any pending audit with
respect to any federal, state or local tax returns of the Borrower or any
Subsidiary, and no waivers of statutes of limitations have been given or
requested with respect to any tax years or tax filings of the Borrower or any
Subsidiary.
 
Section 3.14. ERISA. Except as set forth in Schedule 3.14 of the Disclosure
Schedule, neither the Borrower nor any ERISA Affiliate of the Borrower maintains
or has any obligation to make any contributions to any pension, profit sharing
or other similar plan providing for deferred compensation to any employee. With
respect to any such plan(s) as may now exist or may hereafter be established by
the Borrower or any ERISA Affiliate of the Borrower, and which constitutes an
“employee pension benefit plan” within the meaning of Section 3(2) of ERISA,
except as set forth on Schedule 3.14 of the Disclosure Schedule: (a) the
Borrower or the subject ERISA Affiliate has paid and shall cause to be paid when
due all amounts necessary to fund such plan(s) in accordance with its terms, (b)
except for normal premiums payable by the Borrower to the Pension Benefit
Guaranty Corporation (“PBGC”), the Borrower or the subject ERISA Affiliate has
not taken and shall not take any action which could result in any liability to
the PBGC, or any of its successors or assigns, (c) the present value of all
accrued benefits thereunder shall not at any time exceed the value of the assets
of such plan(s) allocable to such accrued benefits, (d) there have not been and
there shall not be any transactions such as would cause the imposition of any
tax or penalty under Section 4975 of the Code or under Section 502 of ERISA,
which would adversely affect the funded benefits attributable to the Borrower or
the subject ERISA Affiliate, (e) there has not been and there shall not be any
termination or partial termination thereof (other than a partial termination
resulting solely from a reduction in the number of employees of the Borrower or
an ERISA Affiliate of the Borrower, which reduction is not anticipated by the
Borrower), and there has not been and there shall not be any “reportable event”
(as such term is defined in Section 4043(b) of ERISA) on or after the effective
date of Section 4043(b) of ERISA with respect to any such plan(s) subject to
Title IV of ERISA, (f) no “accumulated funding deficiency” (as defined in
Section 412 of the Code) has been or shall be incurred on or after the effective
date of Section 412 of the Code, (g) such plan(s) have been and shall be
determined to be “qualified” within the meaning of Section 401(a) of the Code,
and have been and shall be duly administered in compliance with ERISA and the
Code, and (h) the Borrower is not aware of any fact, event, condition or cause
which might adversely affect the qualified status thereof. As respects any
“multi-employer plan” (as such term is defined in Section 3(37) of ERISA) to
which the Borrower or any ERISA Affiliate thereof has heretofore been, is now,
or may hereafter be required to make contributions, the Borrower or such ERISA
Affiliate has made and shall make all required contributions thereto, and there
has not been and shall not be any “complete withdrawal” or “partial withdrawal”
(as such terms are respectively defined in Sections 4203 and 4205 of ERISA)
therefrom on the part of the Borrower or such ERISA Affiliate.
 
 
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Section 3.15. Intellectual Property.
 
(a) The Borrower and the Subsidiaries own or have the valid right to use all
material patents, trademarks, copyrights, software, computer programs, equipment
designs, network designs, equipment configurations, technology and other
intellectual property used, marketed and sold in the Business Operations, and
the Borrower and the Subsidiaries are in compliance in all material respects
with all licenses, user agreements and other such agreements regarding the use
of intellectual property used in the Business Operations; and the Borrower has
no Knowledge of or received notice claiming that any such intellectual property
infringes upon or violates the rights of any other Person.
 
(b) Schedule 3.15(b) of the Disclosure Schedule sets forth all material
Intellectual Property owned by the Borrower and its Subsidiaries (“Owned
Intellectual Property”), including the name, if any, and a brief description
thereof. Except as set forth in such Schedule 3.15(b), to the Knowledge fo the
Borrower, either the Borrower or one of its Subsidiaries holds, good, valid and
indefeasible title to all Owned Intellectual Property, free and clear of any
liens or encumbrances of any kind, except for: (i) any lien for current taxes
not yet due and payable, and (ii) liens that have arisen in the ordinary course
of business and that do not (individually or in the aggregate) materially
detract from the value of the assets subject thereto or materially impair the
operations of the Borrower and its Subsidiaries.
 
(c) Schedule 3.15(c) of the Disclosure Schedule sets forth: (i) all material
Intellectual Property licensed by the Borrowers or any of its Subsidiaries from
third parties and used in the conduct of the business of the Borrower and its
Subsidiaries (“Licensed Intellectual Property”), including a brief description
thereof; (ii) with respect to any Owned Intellectual Property that is the
subject of any registration or pending application in any jurisdiction, the
names of the jurisdictions, any registration and/or application serial numbers,
and the current status thereof; (iii) a brief description of all material
licenses, sublicenses, and other agreements pursuant to which the Borrower (or
any of its Subsidiaries) or any sublicensee of the Borrower (or any of its
Subsidiaries) has granted to any third party the right to use any of the Owned
Intellectual Property; (iv) all other material consents, indemnifications,
forbearances to sue, settlement agreements and licensing or cross-licensing
arrangements to which the Borrower or any of its Subsidiaries is a party
relating to the Owned Intellectual Property; and (v) any ongoing royalty or
payment obligations with respect to the Licensed Intellectual Property.
 
(d) To the Knowledge of the Borrower, the Borrower and its Subsidiaries have a
valid right to use, license, and otherwise exploit all Licensed Intellectual
Property, and any rights thereunder will not be affected by the Borrower and its
Subsidiaries entering into this Agreement, the other Loan Documents and the
agreements and transactions contemplated hereby and thereby. Except as set forth
in Schedule 3.15(d) of the Disclosure Schedule, neither the Borrower nor any of
its Subsidiaries is under any obligation to pay royalties or other payments in
connection with any license, sublicense, or other agreement, nor restricted from
assigning its right under any sublicense or agreement respecting the Licensed
Intellectual Property, nor will the Borrower or any of its Subsidiaries
otherwise be, as a result of the execution and delivery of this Agreement, the
other Loan Documents or the performance of their obligations hereunder and
thereunder, in breach of any license, sublicense or other agreement relating to
the Licensed Intellectual Property.
 
(e) To the Knowledge of the Borrower, each of the Borrower’s and its
Subsidiaries’ rights in all of the Owned Intellectual Property are valid,
subsisting, and enforceable. None of the Owned Intellectual Property or any
registrations therefor have been cancelled or adjudicated invalid or
unenforceable, or are subject any outstanding order, judgment, or decree
restricting its use or adversely affecting or reflecting the Borrower’s or any
of its Subsidiaries’ rights thereto. To the knowledge of the Borrower, all Owned
Intellectual Property that is the subject of a registration or pending
application is valid, subsisting, unexpired, and in proper form, and all renewal
fees and other maintenance fees that have fallen due on or prior to the Closing
Date have been paid. Either the Borrower or its applicable Subsidiary has timely
made all filings and payments with the appropriate intellectual property offices
required to maintain in subsistence all Owned Intellectual Property. All
documentation necessary to confirm and effect the Borrower’s and its
Subsidiaries’ ownership of and rights in any Owned Intellectual Property that is
the subject of a registration or pending application acquired by the Borrower or
any of its Subsidiaries from third parties has been filed in the United States
Patent and Trademark Office and the United States Copyright Office, and any and
all other relevant intellectual property offices and agencies in other
jurisdictions. No Owned Intellectual Property is the subject of any legal or
governmental proceeding before any governmental, registration or other authority
in any jurisdiction, including any office action or other form of preliminary or
final refusal of registration.
 
(f) The consummation of the transactions contemplated hereby will not materially
alter or impair any Owned Intellectual Property. To the Knowledge of the
Borrower, no Owned Intellectual Property has been used, divulged, disclosed or
appropriated to the detriment of the Borrower or any of its Subsidiaries for the
benefit of any third party; and, to the Knowledge of the Borrower, no employee
or agent of the Company or any of its Subsidiaries has misappropriated any
material trade secrets or other material confidential information of any third
party in the course of the performance of his or her duties as an employee of
the Borrower or any of its Subsidiaries. To the Knowledge of the Borrower, (i)
none of the Owned Intellectual Property infringes on any Intellectual Property
owned or used by any other Person; (ii) none of the products that are or have
been designed, created, developed, assembled, manufactured or sold by the
Borrower or any of its Subsidiaries is infringing, misappropriating, or making
any unlawful use of any Intellectual Property owned by any other Person, and the
Borrower and its Subsidiaries have all rights and licenses reasonably necessary
in order to make, have made, use or sell such products, (iii) no other Person is
infringing, misappropriating or making any unlawful use of, and no Intellectual
Property owned or used by any other Person infringes on any Owned Intellectual
Property, and (iv) there is no claim, suit, action or proceeding pending or
threatened or asserted against the Borrower or any of its Subsidiaries: (A)
alleging any conflict or infringement by the Borrower or any of its Subsidiaries
of any other Person’s intellectual property or proprietary rights; or (B)
challenging the Borrower’s or any of its Subsidiaries’ ownership or use of, or
the validity or enforceability of, any of the Owned Intellectual Property or the
Licensed Intellectual Property.
 
 
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Section 3.16. Compliance with Laws.
 
(a) The Borrower and the Subsidiaries are in compliance with all occupational
safety, health, wage and hour, employment discrimination, environmental,
flammability, labeling and other Applicable Law which are material to the
Business Operations, except where such non-compliance would not, individually or
in the aggregate, have a Material Adverse Effect. Neither the Borrower nor any
Subsidiary is aware of any state or facts, events, conditions or occurrences
which may now or hereafter constitute or result in a violation of any Applicable
Law, or which may give rise to the assertion of any such violation, which could
have a Material Adverse Effect. Neither the Borrower nor any Subsidiary has
received written notice of default or violation, nor is the Borrower or any
Subsidiary in default or violation, with respect to any judgment, order, writ,
injunction, decree, demand or assessment issued by any court or any federal,
state, local, municipal or other governmental agency, board, commission, bureau,
instrumentality or department, domestic or foreign, relating to any aspect of
the Borrower’s or any Subsidiaries’ business, affairs, properties or assets.
Neither the Borrower nor any Subsidiary has received written notice of or been
charged with, or is, to the Borrower’s Knowledge, under investigation with
respect to, any violation of any provision of any Applicable Law, which
violation would have a Material Adverse Effect.
 
(b) Except as set forth in Schedule 3.16(b) of the Disclosure Schedule or as
would not, individually or in the aggregate, have a Material Adverse Effect, the
Borrower and each of its Subsidiaries is in the compliance with all applicable
laws, regulations, rules and policies of or administered by, as the case may be,
the United States Department of Health and Human Services (“HHS”) and each of
its constituent agencies, including, but not limited to, the Food and Drug
Administration (“FDA”), the Centers for Medicare & Medicaid Services (“CMS”),
and the Office of Inspector General (“OIG”), and with all laws, regulations,
rules and policies of or administered by their respective foreign counterparts,
and state and local governments. For purposes of applying this Section 3.16, any
responsibility of the Borrower or any of its Subsidiaries under any of the
aforementioned laws, rules, regulations or policies that has been transferred by
the Borrower or such Subsidiaries through contract to another person or entity
shall, for purposes of ascertaining compliance with this Section 3.16, be deemed
to be the responsibility fo the Borrower notwithstanding any contract to the
contrary.
 
(c) Except as set forth in Schedule 3.16(c) of the Disclosure Schedule or as
would not, individually or in the aggregate, have a Material Adverse Effect, the
Borrower and each of its Subsidiaries has obtained all necessary and applicable
approvals, clearances, authorizations, licenses and registrations required by
United States or foreign governments or government agencies to permit the
design, development, pre-clinical and clinical testing, manufacture, labeling,
sale, distribution and promotion of the Borrower’s and its Subsidiaries’
products (the “Company Products”) in jurisdictions where the Borrower and/or any
Subsidiary currently conducts such activities (the “Activities to Date”) with
respect to each Company Product (collectively, the “Approvals”). The Borrower
and each of its Subsidiaries is in compliance in all material respects with the
terms and conditions of each of the Approvals and has no reason to believe that
any governmental entity will seek to revoke or otherwise cancel or amend any of
the Approvals.
 
(d) The Borrower and each of its Subsidiaries is in compliance with all FDA and
non-United States equivalent agencies and similar state and local laws, rules or
regulations applicable to the maintenance, compilation and filing of reports,
including medical device reports, with regard to the Company Products, except
for such non-compliance as would not, individually or in the aggregate, have a
Material Adverse Effect. Schedule 3.16(d) of the Disclosure Schedule sets forth
a list of all applicable adverse event reports related to any Company Products
including any Medical Device Reports (as defined in 21 CFR part 803). Set forth
on Schedule 3.16(d) of the Disclosure Schedule are complaint review and analysis
reports of the Borrower and its Subsidiaries in connection with the their
business through the date hereof, including information regarding complaints,
categorized by product and root cause analysis of closed complaints, which
reports are correct in all material respects.
 
 
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(e) Except as set forth in Schedule 3.16(e) of the Disclosure Schedule, neither
the Borrower nor any of its Subsidiaries has received any written notice or
other written communication from the FDA or any other governmental entity and
has no reason to believe that it will receive such notice for any act or
omission prior to the date of this Agreement (i) contesting the pre-market
clearance or approval of, the uses of or the labeling and promotion of any of
the Company Products, or (ii) otherwise alleging any violation of any laws,
rules or regulations by the Borrower, any Subsidiary or any of their employees
or contractors.
 
(f) There have been no recalls, field notifications or seizures ordered or
adverse regulatory actions taken (or, to the Knowledge of the Borrower,
threatened), including but not limited to FDA Form 483 and FDA Warning Letters,
by any governmental entity with respect to any of the Company Products,
including any facilities where any such products are produced, processed,
packaged or stored, and neither the Borrower nor any of its Subsidiaries has,
within the last three (3) years, either voluntarily or at the request of any
governmental entity, initiated or participated in a recall or field upgrade of
any Company Product or proposed Company Product.
 
(g) The Borrower has conducted all of its clinical trials with respect to the
Company Products with reasonable care and in accordance with all applicable
laws, rules, regulations and policies, and the stated protocols for such
clinical trials.
 
(h) All filings with the submissions to the HHS, FDA ,CMS, OIG and any similar
regulatory entity in any other jurisdiction made by the Borrower or any of its
Subsidiaries with regard to any Company Products or proposed Company Products,
whether oral, written or electronically delivered, were true, accurate and
complete in all material respects as of the date made, and, to the extent
required to be updated, have been updated to be true, accurate and complete in
all material respects as of the date of such update; and to the Knowledge of the
Borrower, such filings, submissions and updates comply with all regulations of
the HHS, FDA, CMS, OIG or such similar regulatory entity regarding material
misstatements and omissions to state material facts.
 
Section 3.17. Licenses and Permits. The Borrower and each Subsidiary has all
federal, state and local licenses and permits required to be maintained in
connection with and material to the Business Operations, and all such licenses
and permits are valid and in full force and effect. The Borrower and each
Subsidiary has complied with the requirements of such licenses and permits in
all material respects, and has received no notice of any pending or threatened
proceedings for the suspension, termination, revocation or limitation thereof.
There is no circumstance or condition Known to the Borrower that would cause or
permit any of such licenses or permits to be voided, revoked or withdrawn.
 
Section 3.18. Insurance. Schedule 3.18 of the Disclosure Schedule lists all
insurance coverages maintained by the Borrower on the date of this Agreement,
including the names of insurers, policy limits and deductibles. The Borrower has
not received written notice of cancellation or intent not to renew any of such
policies, and there has not occurred, and there does not exist, any condition
(other than general industry-wide conditions) such as would cause any of such
insurers to cancel any of such insurance coverages, or would be reasonably
likely to materially increase the premiums charged to the Borrower for coverages
consistent with the scope and amounts of coverages as in effect on the date
hereof.
 
 
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Section 3.19. Environmental Laws.
 
(a) The Borrower and each Subsidiary has complied in all material respects with
all Environmental Laws relating to its business and properties, and to the
Knowledge of the Borrower there exist no Hazardous Substances in amounts in
violation of applicable Environmental Laws or underground storage tanks on any
of the Real Properties the existence of which would have a Material Adverse
Effect, except those that are stored and used in compliance with Applicable
Laws.
 
(b) Neither the Borrower nor any Subsidiary has received notice of any pending
or threatened litigation or administrative proceeding which in any instance (i)
asserts or alleges any violation of applicable Environmental Laws on the part of
the Borrower or any Subsidiary, (ii) asserts or alleges that the Borrower or any
Subsidiary is required to clean up, remove or otherwise take remedial or other
response action due to the disposal, depositing, discharge, leaking or other
release of any Hazardous Substances or materials, or (iii) asserts or alleges
that the Borrower or any Subsidiary is required to pay all or any portion of the
costs of any past, present or future cleanup, removal or remedial or other
response action which arises out of or is related to the disposal, depositing,
discharge, leaking or other release of any hazardous substances or materials by
the Borrower or any Subsidiary. To the Borrower’s Knowledge, neither the
Borrower nor any Subsidiary is subject to any judgment, decree, order or
citation related to or arising out of any Environmental Laws. To the Borrower’s
Knowledge, neither the Borrower nor any Subsidiary has been named or listed as a
potentially responsible party by any governmental body or agency in any matter
arising under any Environmental Laws. Neither the Borrower nor any Subsidiary is
a participant in, nor does the Borrower have Knowledge of, any governmental
investigation involving any of the Real Properties.
 
(c) Neither the Borrower or any Subsidiary nor, to the Borrower’s Knowledge, any
other person, firm, corporation or governmental entity has caused or permitted
any Hazardous Substances or other materials to be stored, deposited, treated,
recycled or disposed of on, under or at any of the Real Properties which
materials, if known to be present, would reasonably be expected to require or
authorize cleanup, removal or other remedial action under any applicable
Environmental Laws.
 
(d) As used in this Section 3.19 and in Section 5.08 below, the following terms
have the following meanings:
 
“Environmental Laws” include all federal, state, and local laws, rules,
regulations, ordinances, permits, orders, and consent decrees agreed to by the
Borrower or any Subsidiary, relating to health, safety, and environmental
matters applicable to the business and property of the Borrower or any
Subsidiary. Such laws and regulations include but are not limited to the
Resource Conservation and Recovery Act (“RCRA”), 42 U.S.C. §6901 et seq., as
amended; the Comprehensive Environmental Response, Compensation and Liability
Act (“CERCLA”), 42 U.S.C. §9601 et seq., as amended; the Toxic Substances
Control Act (“TSCA”), 15 U.S.C. §2601 et seq., as amended; and the Clean Water
Act, 33 U.S.C. §1331 et seq., as amended.
 
“Hazardous Substances”, “Release”, “Respond” and “Response” shall have the
meanings assigned to them in CERCLA, 42 U.S.C. §9601, as amended.
 
“Notice” means any actual summons, citation, directive, information request,
notice of potential responsibility, notice of violation or deficiency, order,
claim, complaint, investigation, proceeding, judgment, letter, or other
communication, written or oral, from the United States Environmental Protection
Agency or other federal, state, or local agency or authority, or any other
entity or individual, public or private, concerning any intentional or
unintentional act or omission which involves management of Hazardous Substances
in amounts in violation of Environmental Laws on or off any Real Properties; the
imposition of any lien on any Real Properties, including but not limited to
liens asserted by government entities in connection with any Borrower’s or
Subsidiary’s response to the presence or Release of Hazardous Substances in
amounts in violation of Environmental Laws; and any alleged violation of or
responsibility under any Environmental Laws.
 
 
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Section 3.20. Sensitive Payments. Neither the Borrower nor any Subsidiary has
(a) made any contributions, payments or gifts to or for the private use of any
governmental official, employee or agent where either the payment or the purpose
of such contribution, payment or gift is illegal under the laws of the United
States or the jurisdiction in which made, (b) established or maintained any
unrecorded fund or asset for any purpose or made any false or artificial entries
on its books, (c) made any payments to any person with the intention that any
part of such payment was to be used for any purpose other than that described in
the documents supporting the payment, or (d) engaged in any “trading with the
enemy” or other transactions violating any rules or regulations of the Office of
Foreign Assets Control or any similar laws, rules or regulations.
 
Section 3.21. Acquisition Agreement. To the Borrower’s Knowledge, all
representations and warranties made in the Acquisition Agreement are true and
correct in all material respects.
 
Section 3.22. Full Disclosure. No statement of fact made by the Borrower in this
Agreement or any other Loan Document, in any SEC Report, or in any information
memorandum, business summary, agreement, certificate, schedule or other written
statement furnished by the Borrower or any Subsidiary to the Lender pursuant
hereto, contains or will contain any untrue statement of a material fact, or
omits or will omit to state any material fact necessary to make any statements
contained herein or therein not misleading. Except for matters of a general
economic or political nature which do not affect the Borrower or any Subsidiary
uniquely, there is no fact presently known to the Borrower which has not been
disclosed to the Lender, which has had or would reasonably be expected to have a
Material Adverse Effect.
 
Section 3.23. Reaffirmation. Each and every request by the Borrower for an
Advance shall constitute a reaffirmation of the truth and accuracy of the
Borrowers’ and each Subsidiary’s representations and warranties made in this
Agreement and the Security Documents on and as of the date of such request.
 
IV. CONDITIONS OF MAKING THE LOANS
 
A. The obligation of the Lender to make the initial Loan hereunder and to
consummate the other transactions contemplated hereby are subject to the
following conditions precedent:
 
Section 4.01. Representations and Warranties. The representations and warranties
set forth in Article III hereof and in the other Loan Documents shall be true
and correct on and as of the Closing Date.
 
Section 4.02. Loan Documents. The Borrower and its Subsidiaries (as applicable)
shall have duly executed and/or delivered to the Lender all of the following:
 
 
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(a) The Notes;
 
(b) The Guaranty Agreement, the Collateral Agreement and any and all other
Security Documents required by the Lender at the Closing Date (including,
without limitation, a Landlord Waiver in respect of Borrower’s business premises
in Elmsford, New York and any warehousemen’s waivers, bailee letters or consents
required by the Lender);
 
(c) The Warrants;
 
(d) The Registration Rights Agreement;
 
(e) A certificate or certificates of insurance, with loss payable endorsements,
evidencing the insurance required by Section 5.01(d) below;
 
(f) A current Borrowing Base report in conformity with Section 5.04(e) hereof,
and a written request for the borrowing of the Term Loan (and, if applicable,
the initial Advance);
 
(g) A certificate of the Secretary or an Assistant Secretary of the Borrower and
each Subsidiary, certifying the vote of the Boards of Directors of the Borrower
and each Subsidiary, authorizing and directing the execution and delivery of the
Loan Documents and all further agreements, instruments, certificates and other
documents pursuant hereto and thereto;
 
(h) A certificate of the Secretary or an Assistant Secretary of the Borrower and
each Subsidiary, certifying the names of the officers of the Borrower and each
Subsidiary who are authorized to execute and deliver the Loan Documents and all
other agreements, instruments, certificates and other documents to be delivered
pursuant hereto and thereto, together with the true signatures of such officers.
The Lender may conclusively rely on such certificate until the Lender shall
receive any further such certificate canceling or amending the prior certificate
and submitting the signatures of the officers named in such further certificate;
 
(j) Certified copies of the Organic Documents of the Borrower and each
Subsidiary, and a certificate of the Secretary of State or other appropriate
official of the jurisdiction of incorporation of the Borrower and each
Subsidiary and of each jurisdiction in which the Borrower and each Subsidiary is
qualified to do business as a foreign corporation, dated reasonably prior to the
Closing Date, stating that the Borrower and each Subsidiary is duly formed or
qualified and in good standing in such jurisdiction;
 
(k) Copies of the Acquisition Documents, certified to be true, complete and
accurate by an executive officer of the Borrower, which certificate shall
further certify to the consummation of the transactions contemplated by the
Acquisition Agreement in accordance with the terms thereof (without waiver,
amendment or other material variation); and
 
(l) Such other agreements, instruments, documents and certificates (including,
without limitation, satisfactory lien and judgment searches respecting the
Borrower) as the Lender or its counsel may reasonably request.
 
Section 4.03. Payoff and Release Letter. The Borrower shall have received, and
shall have delivered to the Lender, a payoff and release letter signed by the
Existing Lender, in form and substance satisfactory to the Lender, (a)
confirming the amount required to be paid to the Existing Lender on the Closing
Date in order to pay all of the Borrower’s and its Subsidiaries’ obligations to
the Existing Lender under the Borrower’s loan facility with the Existing Lender,
(b) affirming that, upon receipt of such amount on the Closing Date, all liens,
encumbrances and security interests held by the Existing Lender in respect of
such loan facility shall be terminated and released, and all collateral therefor
shall be released and returned to the owners thereof, and (c) authorizing the
filing, upon receipt of such amount on the Closing Date, of termination
statements in respect of any and all lien filings against the Borrower in
respect of such liens, encumbrances and security interests of the Existing
Lender.
 
 
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Section 4.04. Equity Proceeds. The Borrower shall have received net proceeds of
not less than $7,500,000 from the issuance and sale of Common Stock subsequent
to January 1, 2007, and shall have provided written evidence thereof to the
Lender.
 
Section 4.05. Related Transactions. The transactions contemplated by the
Acquisition Agreement shall have been consummated in accordance with the terms
thereof (without waiver, amendment or material variation).
 
Section 4.06. Legal Opinion. The Lender shall have received a written opinion of
Snow Becker Krauss P.C., counsel for the Borrower and the Subsidiaries, dated
the Closing Date, satisfactory to the Lender and its counsel in scope and
substance.
 
Section 4.07. Fees and Reimbursements. The Borrower shall have paid to the
Lender the Closing Fee and the initial Monitoring Fee, and shall have paid or
reimbursed the Lender for its reasonable out-of-pocket costs, charges and
expenses incurred to the Closing Date (up to a maximum of $37,500); and in
connection herewith, the Borrower hereby irrevocably authorizes the Lender to
charge such amounts as Advances to the Borrower’s revolving credit loan account.
Failure of the Lender to effect any such charge shall not excuse the Borrower
from its obligation to pay such amounts.
 
Section 4.08. Further Matters. All legal matters, and the form and substance of
all documents, incident to the transactions contemplated hereby shall be
satisfactory to counsel for the Lender.
 
Section 4.09. No Default. No Default or Event of Default shall have occurred and
be continuing.
 
A. The obligation of the Lender to make any Advances subsequent to the Closing
Date is subject to (a) the representations and warranties set forth in Article
III and in the other Loan Documents being true and correct in all material
respects (except that, to the extent that any representation or warranty is
already qualified by concepts of materiality and/or Material Adverse Effect,
then such representations and warranties shall be true and correct in all
respects) on and as of the subject Borrowing Date, (b) the Lender’s receipt of a
current Borrowing Base report in conformity with Section 5.04(e) hereof, (c) the
execution and delivery of such further Security Documents as the Lender may have
reasonably requested pursuant to the Security Documents theretofore executed and
delivered, and (d) there being no continuing Default or Event of Default.
 
 
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V. AFFIRMATIVE COVENANTS
 
The Borrower hereby covenants and agrees that, from the date hereof and until
all Obligations (whether now existing or hereafter arising) have been paid in
full and the Revolving Credit Commitment has been terminated, unless the Lender
shall otherwise consent in writing, the Borrower shall, and shall cause each of
its Subsidiaries to:
 
Section 5.01. Corporate and Insurance. Do or cause to be done all things
necessary to at all times (a) preserve, renew and keep in full force and effect
its corporate or other legal existence, rights, licenses, permits and
franchises, (b) comply with the Loan Documents and any other agreements and
instruments executed and delivered hereunder and thereunder (to the extent a
party thereto), (c) maintain, preserve and protect all of its franchises and
material trade names, and preserve all of its material property used or useful
in the conduct of its business and keep the same in good repair, working order
and condition (reasonable wear and tear excepted), and from time to time make,
or cause to be made, all needed and proper repairs, renewals, replacements,
betterments and improvements thereto, so that the Business Operations carried on
in connection therewith may be properly and advantageously conducted at all
times, (d) maintain insurance in amounts, on such terms and against such risks
(including fire and other hazards insured against by extended coverage, and
public liability insurance covering claims for personal injury, death or
property damage) as are customary for companies of similar size in the same or
similar businesses and operating in the same or similar locations, as well as
all such other insurance as is required by the Collateral Agreement, each of
which policies (other than workers compensation) shall be issued by a
financially sound and reputable insurer reasonably satisfactory to the Lender
and shall name the Lender as loss payee and additional insured as its interest
appears and provide for the Lender to receive written notice thereof at least
thirty (30) days prior to any cancellation of the subject policy, and (e) comply
with all material Contracts and material obligations to which it is a party or
by which it is bound, all benefit plans which it maintains or is required to
contribute to, and all Applicable Law (including, without limitation,
Environmental Laws) material to its Business Operations, and all requirements of
its insurers, whether now in effect or hereafter enacted, promulgated or issued.
The Borrower will provide to the Lender a certificate of the foregoing
insurance, promptly upon request.
 
Section 5.02. Payment of Taxes. File, pay and discharge, or cause to be paid and
discharged, all material taxes, assessments and governmental charges or levies
imposed upon the Borrower and/or any Subsidiary or upon its income and profits
or upon any of its property (real, personal or mixed) or upon any part thereof,
before the same shall become in default, as well as all lawful claims for labor,
materials, supplies and otherwise, which, if unpaid when due, might become a
Lien or charge upon such property or any part thereof; provided, however, that
neither the Borrower nor any Subsidiary shall be required to pay and discharge
or cause to be paid and discharged any such tax, assessment, charge, levy or
claim so long as (a) the validity thereof shall be contested in good faith by
appropriate proceedings and the Borrower or such Subsidiary shall have set aside
on its books adequate reserves with respect to any such tax, assessment, charge,
levy or claim so contested, and (b) payment with respect to any such tax,
assessment, charge, levy or claim shall be made before any of the Borrower’s or
such Subsidiary’s property shall be seized or sold in satisfaction thereof.
 
Section 5.03. Notices. Give prompt written notice to the Lender of (a) the
filing by the Borrower of any SEC Reports, (b) any proceedings instituted
against the Borrower or any Subsidiary in any federal or state court or before
any commission or other regulatory body, whether federal, state or local, which,
if adversely determined, could reasonably be expected to have a Material Adverse
Effect (c) occupancy of any new or additional Real Property, and (d) the
occurrence of any material casualty to any Collateral, any Material Adverse
Effect, or any Default or Event of Default, and the action that the Borrower has
taken, is taking, or proposes to take with respect thereto.
 
 
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Section 5.04. Periodic Reports. Furnish to the Lender:
 
(a) Within ninety (90) calendar days after the end of each Fiscal Year,
consolidated balance sheets, and consolidated and consolidating statements of
income, statements of stockholders’ equity, and statements of cash flows of the
Borrower and its Subsidiaries, together with footnotes and supporting schedules
thereto, certified (as to the consolidated statements) by independent certified
public accountants selected by the Borrower and reasonably satisfactory to the
Lender, showing the financial condition of the Borrower and its Subsidiaries at
the close of such Fiscal Year and the results of operations of the Borrower and
its Subsidiaries during such Fiscal Year;
 
(b) Within (i) thirty (30) calendar days after the end of each calendar month
(forty-five (45) calendar days in the case of the end of a fiscal quarter),
consolidated (and, if specifically requested by the Lender reasonably in
advance, consolidating) unaudited balance sheets and statements of income of the
Borrower and its Subsidiaries, and (ii) forty-five (45) calendar days after then
of each fiscal quarter, consolidated (and, if specifically requested by the
Lender, consolidating) statements of cash flows of the Borrower and its
Subsidiaries, in each case with supporting schedules thereto, prepared by the
Borrower and certified by the Borrower’s Chairman, President, Chief Executive
Officer, Chief Financial Officer or Chief Accounting Officer, such balance
sheets to be as of the close of such calendar month and such statements of
income and statements of cash flows to be for the period from the beginning of
the then-current Fiscal Year to the end of such calendar month or calendar
quarter (as the case may be), together with comparative statements of income and
cash flows for the corresponding period in the immediately preceding Fiscal
Year, in each case subject to normal audit and year-end adjustments; provided,
however, that with respect to accounting periods ending on or prior to October
31, 2007, Foreign Subsidiaries need be included only in the quarterly financial
statements.
 
(c) Concurrently with the delivery of each of the financial statements required
by Sections 5.04(a) and 5.04(b) above, a certificate on behalf of the Borrower
(signed by the Chairman, President, Chief Executive Officer, Chief Financial
Officer or Chief Accounting Officer of the Borrower), certifying that he has
examined the provisions of this Agreement and that no Default or Event of
Default has occurred and/or is continuing;
 
(d) On or prior to (i) the fifteenth (15th) calendar day of each calendar month,
a detailed calculation of the Borrowing Base as of a date not earlier than the
first (1st) day of such calendar month, and (ii) the twentieth (20th) calendar
day of each calendar month, a detailed calculation of the Borrowing Base as of a
date not earlier than the fifteenth (15th) calendar day of such calendar month,
in each case in form and substance, and with supporting documentation;
(including, without limitation, receivables and payables agings as of the close
of the immediately preceding calendar month) as may reasonably be required by
the Lender;
 
(e) As soon as approved by the Borrower’s Board of Directors (but in any event
not later than thirty (30) days after the beginning of each Fiscal Year), a
budget and operating plan (on a quarter-by-quarter basis) for such Fiscal Year,
in such detail as may reasonably be required by the Lender;
 
(f) As and when distributed to the Borrower’s shareholders, copies of all proxy
materials, reports and other information which the Borrower provides to its
shareholders; and as and when distributed to any other holders of Indebtedness
of the Borrower or the Subsidiaries, copies of all reports, statements and other
information provided to such lenders; and
 
 
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(g) Promptly, from time to time, such other information (including, without
limitation, receivables and payables agings, and sales reports) regarding the
Borrower’s or any Subsidiary’s operations, assets, business, affairs and
financial condition, as the Lender may reasonably request.
 
To the extent that the financial statements required by Sections 5.04(a) and
5.04(b) are contained in any SEC Reports filed by the Borrower within the
required time period hereunder for the delivery of such financial statements,
then the Borrower shall be deemed to have complied with the subject financial
statement delivery by notifying the Lender of the filing of the subject SEC
Report.
 
To the extent that any report or other delivery required under this Section 5.04
or elsewhere in this Agreement will, at the time of anticipated delivery to the
Lender, contain any material non-public information, the Borrower will notify
the Lender thereof as promptly as practicable prior to the delivery of such
report (but without disclosing the specific items of material non-public
information or the nature thereof), and if so requested by the Lender prior to
the required date of the information delivery hereunder, the Borrower shall (x)
if reasonably practicable, redact such material non-public information from the
subject report prior to the delivery thereof to the Lender, or (y) defer
delivery of such report until such time as the Borrower has made public
disclosure of the subject material information or the Lender has affirmatively
requested delivery of such report. Absent timely request by the Lender as
aforesaid, the Borrower shall make the required delivery to the Lender on a
timely basis.
 
Section 5.05. Books and Records; Inspection. Maintain centralized books and
records regarding all of the Business Operations at the Borrower’s principal
place of business, and permit agents or representatives of the Lender to
inspect, at any time during normal business hours, upon reasonable notice, and
without undue material disruption of the Business Operations, all of the
Borrower’s and its Subsidiaries’ various books and records, to make copies,
abstracts and/or reproductions thereof, and to discuss the business and affairs
of the Borrower and the Subsidiaries with the management of the Borrower.
 
Section 5.06. Accounting. Maintain a standard system of accounting in order to
permit the preparation of financial statements in accordance with GAAP and
Regulation S-X promulgated under the Act.
 
Section 5.07. Reimbursements. Pay or reimburse the Lender or other appropriate
Persons on demand for all reasonable costs, expenses and other charges incurred
or payable from time to time in connection with the transactions contemplated by
this Agreement, any waivers or amendments in respect of any Loan Documents
(whether or not completed or executed), and any “workout” or enforcement action
(whether or not consummated or completed, and regardless of the outcome
thereof), including but not limited to any and all search fees, recording fees,
costs of inspections, legal and accounting fees, and costs related to routine
Exchange Act filings in respect of the Lender’s and its Affiliates’ position in
securities of the Borrower.
 
Section 5.08. Environmental Response. In the event of any material discharge,
spill, injection, escape, emission, disposal, leak or other Release of Hazardous
Substances in amounts in violation of applicable Environmental Laws by the
Borrower or any Subsidiary on any Real Property owned or leased by the Borrower
or any Subsidiary, which is not authorized by a permit or other approval issued
by the appropriate governmental agencies and which requires notification to or
the filing of any report with any federal or state governmental agency, the
Borrower shall promptly: (a) notify the Lender; and (b) comply with the notice
requirements of the Environmental Protection Agency and applicable state
agencies, and take all steps necessary to promptly clean up such discharge,
spill, injection, escape, emission, disposal, leak or other Release in
accordance with all applicable Environmental Laws and the Federal National
Contingency Plan, and, if required, receive a certification from all applicable
state agencies or the Environmental Protection Agency, that such Real Property
has been cleaned up to the satisfaction of such agency(ies).
 
 
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Section 5.09. Management. Cause David Vozick to continue to be employed or to
function as the Chairman and Co-Chief Executive Officer of the Borrower, Donald
Rabinovitch to continue to be employed or to function as the President and
Co-Chief Executive Officer of the Borrower, and Elise Nissen to continue to be
employed or to function as the Chief Financial Officer of the Borrower, unless a
successor is appointed within sixty (60) days after the termination of any such
individual’s employment and such successor is reasonably satisfactory to the
Lender.
 
Section 5.10. Use of Proceeds. Cause all proceeds of the Loans to be utilized
solely in the manner and for the purposes set forth in Section 2.04 above.
 
Section 5.11. Future Subsidiaries. At any time and from time to time when the
Borrower or any of its Domestic Subsidiaries proposes to form or acquire any
Domestic Subsidiary subsequent to the Closing Date, the Borrower shall give
written notice thereof to the Lender reasonably in advance of (and in no event
less than fifteen (15) days prior to) the formation or acquisition of such
Domestic Subsidiary, accompanied by true and complete copies of the Organic
Documents of such Domestic Subsidiary and stating, with respect to such Domestic
Subsidiary, (a) its proper legal name, (b) its jurisdiction of incorporation or
formation, (c) the jurisdictions (if any) in which it is qualified or is
required to be qualified to do business as a foreign entity, (d) the number of
shares of capital stock, equity securities or ownership interests outstanding,
and (e) the record owners of such outstanding capital stock, equity securities
or other ownership interests; and contemporaneously with the formation or
acquisition of such new Domestic Subsidiary, such new Domestic Subsidiary shall
be deemed to have made and joined in all of the representations and warranties
made by the Borrower in this Agreement and the other Loan Documents (all of
which shall be applicable to such new Domestic Subsidiary as if named therein),
and the Borrower shall cause such new Domestic Subsidiary to execute and deliver
to the Lender (i) a Guaranty Agreement in substantially the form of the Guaranty
Agreement as then in effect (or a joinder agreement with respect to the existing
Guaranty Agreement in form and substance reasonably satisfactory to the Lender),
and (ii) a Collateral Agreement (with completed perfection certificate and other
appropriate Security Documents) in substantially the form of the Collateral
Agreement as then in effect (or a joinder agreement with respect to the existing
Collateral Agreement in form and substance reasonably satisfactory to the
Lender) and other Security Documents as reasonably requested by the Lender.
 
Section 5.12. Landlord Waivers. To the extent requested by the Lender from time
to time subsequent to the Closing Date, the Borrower and the Subsidiaries shall
use their commercially reasonable efforts to obtain, in form and substance
reasonably satisfactory to the Lender, any and all bailee waivers,
warehousemen’s waivers, Landlord Waivers and/or access agreements requested by
the Lender in respect of locations where there is stored or held Collateral
having an aggregate fair market value in excess of $100,000.
 
Section 5.13. Deposit Accounts. On or before July 31, 2007, the Borrower and the
Domestic Subsidiaries shall have (a) ceased all active use of deposit accounts
at JPMorgan Chase Bank and, to the extent that such deposit accounts have not
been finally closed, taken steps to effect the winding down and closure of such
deposit accounts, and (b) established and commenced active use of substitute
deposit accounts at one or more commercial banks (other than JPMorgan Chase
Bank), and such banks and the Borrower (or the subject Domestic Subsidiary, as
applicable) shall have executed and delivered to the Lender one or more Control
Agreements in respect of all such deposit accounts in form and substance
reasonably satisfactory to the Lender.
 
 
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VI. NEGATIVE COVENANTS
 
The Borrower hereby covenants and agrees that, until all Obligations (whether
now existing or hereafter arising) have been paid in full and the Revolving
Credit Commitment has been terminated, unless the Lender shall otherwise consent
in writing, the Borrower shall not, and shall not permit any Subsidiary to,
directly or indirectly:
 
Section 6.01. Indebtedness. Incur, create, assume, become or be liable in any
manner with respect to, or permit to exist, any Indebtedness, other than:
 
(a) Indebtedness to the Lender pursuant to the Loan Documents;
 
(b) liabilities with respect to trade obligations, accounts payable, advances,
royalty or other similar payments, operating leases and other normal accruals
incurred in the ordinary course of business, or with respect to which the
Borrower or the subject Subsidiary is contesting in good faith the amount or
validity thereof by appropriate proceedings, and then only to the extent that
the Borrower or the subject Subsidiary has set aside on its books adequate
reserves therefor;
 
(c) Indebtedness existing on the date of this Agreement owed to those Persons,
in those amounts and having those maturities as set forth in Schedule 3.01 of
the Disclosure Schedule;
 
(d) Capitalized Leases reflected in the Financial Statements, and Capitalized
Leases hereafter entered into by the Borrower or its Subsidiaries;
 
(e) purchase money Indebtedness incurred in connection with the Borrower’s or
its Subsidiaries’ acquisition of capital assets;
 
(f) Subordinated Debt in such amounts and upon such terms and conditions as
shall be acceptable to the Lender in its sole and absolute discretion;
 
(g) intercompany Indebtedness between the Borrower and any Wholly-Owned
Subsidiary or between Wholly-Owned Subsidiaries; and
 
(h) Guarantees to the extent permitted pursuant to Section 6.03 below.
 
Section 6.02. Liens. Create, incur, assume or suffer to exist any Lien or other
encumbrance of any nature whatsoever on any of its assets, now or hereafter
owned, other than:
 
(a) subject to Section 5.02 above, Liens securing the payment of taxes which are
either not yet due or the validity of which is being contested in good faith by
appropriate proceedings, and as to which the Borrower or the subject Subsidiary
shall have set aside on its books adequate reserves;
 
 
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(b) deposits under workers’ compensation, unemployment insurance and social
security laws, or to secure the performance of bids, tenders, contracts (other
than for the repayment of money borrowed) or leases, or to secure statutory
obligations or surety or appeal bonds, or to secure indemnity, performance or
other similar bonds in the ordinary course of business;
 
(c) statutory Liens of landlords and Liens imposed by law, such as, carriers’,
warehousemen’s, materialmen’s or mechanics’ liens, incurred by the Borrower or
any Subsidiary in good faith in the ordinary course of business and discharged
promptly after same are incurred; fully bonded Liens arising out of a judgment
or award against the Borrower or any Subsidiary with respect to which the
Borrower or such Subsidiary shall currently be prosecuting an appeal, a stay of
execution pending such appeal having been secured; and Liens arising out of a
judgment or award against the Borrower or any Subsidiary which are fully covered
by insurance (subject to applicable deductibles) and for which the relevant
insurer has not denied or disclaimed coverage;
 
(d) other Liens incurred in connection with Indebtedness expressly permitted
pursuant to Section 6.01(d) and/or Section 6.01(e) above, provided that such
Liens do not extend to any assets or property other than the specific assets or
properties acquired pursuant to such permitted Indebtedness;
 
(e) encumbrances consisting of easements, rights-of-way, survey exceptions and
other similar restrictions on the use of Real Property, or minor irregularities
in title thereto which do not materially impair the use of such property in the
operation of the business of the Borrower and its Subsidiaries;
 
(f) Liens in existence on the date of this Agreement, as set forth on Schedule
6.02 of the Disclosure Schedule;
 
(g) Liens arising out of judgments or awards (i) which are fully covered by
insurance (subject to applicable deductibles) and for which the relevant insurer
has not denied or disclaimed coverage, or (ii) with respect to which the
Borrower or the subject Subsidiary shall be prosecuting an appeal in good faith
and in respect of which a stay of execution shall have been issued;
 
(h) Liens in favor of the Lender; and
 
(i) extensions, renewals or replacements of any Lien referred to in clauses (a)
through (f) above, provided that same shall not effect any increase in any
principal amount secured thereby.
 
Section 6.03. Guarantees. Guarantee, endorse or otherwise in any manner become
or be responsible for obligations of any other Person, except (a) endorsements
of negotiable instruments for collection in the ordinary course of business, (b)
Guarantees by the Borrower of obligations of Wholly-Owned Subsidiaries in the
ordinary course of business, and (c) the Guaranty by the Borrower of certain
employment obligations of QR S.r.l. to Gianmaria Tommasi and certain other
employees of QR S.r.l. or an Affiliate thereof as provided in the Acquisition
Documents.
 
Section 6.04. Sales of Assets and Management. (a) Sell, lease, transfer,
encumber or otherwise dispose of any of the Borrower’s or any Subsidiary’s
properties, assets, rights, licenses or franchises other than (i) sales of
inventory in the ordinary course of business, (ii) licenses, joint ventures and
related transactions entered into, modified or terminated in the ordinary course
of business, or (iii) the disposition of surplus or obsolete personal properties
in the ordinary course of business, or (b) permit any Affiliate of the Borrower
(other than a Subsidiary which is a party to the Collateral Agreement) to own or
obtain any patent, patent application, copyright, copyright application,
trademark, trademark application, license, or other intangible asset relating to
the Business Operations except in the normal course of business on terms and
conditions no less favorable to the Borrower or any Subsidiary than those which
could be obtained in an arms’ length transaction with an unaffiliated third
party.
 
 
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Section 6.05. Sale-Leaseback. Enter into any arrangement, directly or
indirectly, with any Person whereby the Borrower or any Subsidiary shall sell or
transfer any property (real, personal or mixed) used or useful in the Business
Operations, whether now owned or hereafter acquired, and thereafter rent or
lease such property.
 
Section 6.06. Investments; Acquisitions. Make any Investment in, or otherwise
acquire or hold securities (including, without limitation, capital stock and
evidences of Indebtedness) of, or make loans or advances to, or enter into any
arrangement for the purpose of providing funds or credit to, any other Person
(including any Affiliate), except:
 
(a) Investments (i) in Wholly-Owned Subsidiaries which have complied with the
requirements of Section 5.11 hereof, and (ii) Investments in QR-Italy to the
extent disclosed in Schedule 6.06 of the Disclosure Schedule;
 
(b) advances (to the extent permitted by Applicable Law, including federal
securities laws) to employees of the Borrower or any Wholly-Owned Subsidiaries
for normal business expenses not to exceed at any time $10,000 in the aggregate;
 
(c) Investments of excess cash generated in the Business Operations in Cash
Equivalents;
 
(d) Investments of cash in overnight deposits or other customary cash management
Investments with commercial banks or in commercial paper satisfying the criteria
for such banks or commercial paper as set forth in the definition of Cash
Equivalents.
 
Section 6.07. Corporate Form; Acquisitions. Purchase or acquire any Real
Property or any ownership interest in any Real Property; or dissolve or
liquidate, or consolidate or merge with or into, sell all or substantially all
of the assets of the Borrower or any Subsidiary to, or acquire all or
substantially all of the securities, assets or properties of, any other Person,
except for (a) consolidations of a Subsidiary with a Wholly-Owned Subsidiary;
(b) mergers of a Wholly-Owned Subsidiary into the Borrower or into a
Wholly-Owned Subsidiary; or (c) sales to the Borrower or another Subsidiary for
fair value.
 
Section 6.08. Dividends and Redemptions. Directly or indirectly declare or pay
any dividends, or make any distribution of cash or property, or both, to any
Person in respect of any of the shares of the capital stock or other equity
securities of the Borrower or any other Person, or directly or indirectly
redeem, purchase or otherwise acquire for consideration any securities or shares
of the capital stock or other equity securities of the Borrower or any other
Person; provided, that this Section 6.08 shall not be deemed to prohibit the
payment of dividends or distributions by any Subsidiary to the Borrower or to
any other direct or indirect Wholly-Owned Subsidiary.
 
 
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Section 6.09. Compensation. Directly or indirectly pay any cash compensation to
any executive officers of the Borrower except in accordance with the
compensation levels disclosed in Schedule 6.09 of the Disclosure Schedule or as
otherwise approved by the independent members of the Board of Directors of the
Borrower but in no case in any amount or amounts which would cause or reasonably
be expected to cause a Material Adverse Effect.
 
Section 6.10. Change of Business. Directly or indirectly: (a) engage in a
business materially different from the general nature of the Business Operations
(i) as now being conducted, or (ii) as the same may hereafter be reasonably
expanded from time to time in like areas of business; (b) wind up the Business
Operations or cease substantially all of its normal Business Operations for a
period in excess of ten (10) consecutive days; or (c) suffer any material
disruption, interruption or discontinuance of a material portion of its normal
Business Operations for a period in excess of ten (10) consecutive days.
 
Section 6.11. Receivables. Sell or assign in any way any accounts receivable,
promissory notes or trade acceptances held by the Borrower or any Subsidiary
with or without recourse, except for collections (including endorsements) in the
ordinary course of business.
 
Section 6.12. Certain Amendments. Agree, consent, permit or otherwise undertake
to amend any of the terms or provisions of the Borrower’s or any Subsidiary’s
Organic Documents in a manner which may impair in any respect any of the
Lender’s rights under any of the Loan Documents.
 
Section 6.13. Affiliate Transactions. Enter into any Contract, agreement or
transaction with any Affiliate of the Borrower except (a) as disclosed in
Schedule 6.13 of the Disclosure Schedule, (b) for intercompany Indebtedness
between the Borrower and any Wholly-Owned Subsidiary or between any Wholly-Owned
Subsidiaries, or (c) in the normal course of business on terms and conditions no
less favorable to the Borrower or any Subsidiary than those which could be
obtained in an arms’ length transaction with an unaffiliated third party.
 
Section 6.14. Fiscal Year. Amend its Fiscal Year.
 
Section 6.15. Subordinated Debt. Prepay, redeem or purchase any Subordinated
Debt, or make any payment on any Subordinated Debt, in each case in violation of
the applicable subordination agreement.
 
VII. DEFAULTS
 
Section 7.01. Events of Default. Each of the following events is herein, and in
the Notes, sometimes referred to as an Event of Default:
 
(a) if any representation or warranty made herein or in any other Loan Document,
or in any certificate, financial statement, Borrowing Base report, instrument or
other written statement furnished by the Borrower or any Subsidiary in
connection with this Agreement, any other Loan Document or any of the borrowings
hereunder shall be false, inaccurate or misleading in any material respect when
made or when deemed made hereunder;
 
(b) any default in the payment of any principal or interest under any of the
Notes or any other Obligations when the same shall be due and payable, whether
at the due date thereof or at a date required for prepayment or by acceleration
or otherwise, and the continuance of any such non-payment (in whole or in part)
for a period of five (5) Business Days;
 
 
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(c) any default in the due observance or performance of any covenant, condition
or agreement contained in any Section of Article VI hereof, which, if capable of
being cured, is not fully cured within thirty (30) days after the occurrence
thereof;
 
(d) any default in the due observance or performance of any covenant, condition
or agreement to be observed or performed under Article V hereof, or otherwise
pursuant to the terms hereof or any other Loan Document and not addressed in
Sections 7.01(a), (b) or (c), and the continuance of such default unremedied for
a period of thirty (30) days (ten (10) Business Days in the case of Section
5.01(d) hereof) after written notice thereof to the Borrower, or such other cure
period as may be provided in the applicable Loan Document;
 
(e) any default with respect to any Indebtedness of the Borrower or any of the
Subsidiaries (other than to the Lender) in an amount in excess of $50,000, if
the effect of such default is to permit the holder, with or without notice or
lapse of time or both, to accelerate the maturity of any such Indebtedness for
money borrowed or to cause such Indebtedness for money borrowed to become due
prior to the stated maturity thereof;
 
(f) if the Borrower or any Subsidiary shall: (i) apply for or consent to the
appointment of a receiver, trustee, custodian or liquidator of it or any of its
properties, (ii) admit in writing its inability to pay its debts as they mature,
(iii) make a general assignment for the benefit of creditors, (iv) be
adjudicated a bankrupt or insolvent or be the subject of an order for relief
under Title 11 of the United States Code, or (v) file a voluntary petition in
bankruptcy, or a petition or an answer seeking reorganization or an arrangement
with creditors or to take advantage or any bankruptcy, reorganization,
insolvency, readjustment of debt, dissolution or liquidation law or statute, or
an answer admitting the material allegations of a petition filed against him or
it in any proceeding under any such law, or (vi) take or permit to be taken any
action in furtherance of or for the purpose of effecting any of the foregoing;
 
(g) if any order, judgment or decree shall be entered, without the application,
approval or consent of the Borrower or any Subsidiary, by any court of competent
jurisdiction, approving a petition seeking reorganization of the Borrower or any
Subsidiary, or appointing a receiver, trustee, custodian or liquidator of the
Borrower or any Subsidiary, or of all or any substantial part of its assets, and
such order, judgment or decree shall continue unstayed and in effect for any
period of sixty (60) days;
 
(h) if final judgment(s) or administrative order for the payment of money in an
uninsured amount in excess of $50,000 individually or in the aggregate shall be
rendered against the Borrower and/or any Subsidiary, and the same shall remain
undischarged or unbonded for a period of thirty (30) consecutive days, during
which execution shall not be effectively stayed;
 
(i) the occurrence of any levy upon or seizure or attachment of, or any
uninsured loss of or damage to, any property of the Borrower or any Subsidiary
having an aggregate fair value or repair cost (as the case may be) in excess of
$50,000 individually or in the aggregate, and any such levy, seizure or
attachment shall not be set aside, bonded or discharged within thirty (30) days
after the date thereof;
 
(j) if any Lien purported to be created by any Security Document shall cease to
be a valid perfected first priority Lien (subject only to any priority accorded
by law to Permitted Liens) on the assets or properties covered thereby, or the
Borrower or any Subsidiary shall assert in writing that any Lien purported to be
created by any Security Document is not a valid perfected first priority lien
(subject only to any priority accorded by law to Permitted Liens) on the assets
or properties purported to be covered thereby;
 
 
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(k) if any of the Loan Documents shall, other than by reason of the Lender’s
default, bankruptcy or insolvency, cease to be in full force and effect (other
than as a result of the discharge thereof in accordance with the terms thereof
or by written agreement of all parties thereto);
 
(l) if the Common Stock shall not be listed or traded on any national securities
exchange or any NASDAQ market, or shall cease to be listed or quoted on the OTC
Bulletin Board, for any period in excess of thirty (30) consecutive days; or
 
(m) if the Borrower or any Subsidiary shall be indicted for, convicted of or
plead nolo contendere to any criminal offense; or
 
(n) the occurrence of a Material Adverse Effect.
 
Section 7.02. Remedies. Upon the occurrence of any Event of Default, and at all
times thereafter during the continuance thereof: (a) the Notes, and any and all
other Obligations, shall, at the Lender’s option (except in the case of Sections
7.01(f) and 7.01(g) hereof, the occurrence of which shall automatically effect
acceleration, regardless of any action or forbearance in respect of any prior or
ongoing Default or Event of Default which may be inconsistent with such
automatic acceleration), become immediately due and payable, both as to
principal, interest and other charges, without presentment, demand, protest or
notice of any kind, all of which are hereby expressly waived, anything contained
herein or in the Notes or other evidence of such Obligations to the contrary
notwithstanding, (b) all outstanding Obligations under the Notes, and all other
outstanding Obligations, shall bear interest at the default rates of interest
provided in the Notes, (c) the Lender may file suit against the Borrower on the
Notes and against the Borrower and the Subsidiaries under the other Loan
Documents and/or seek specific performance or injunctive relief thereunder
(whether or not a remedy exists at law or is adequate), (d) the Lender shall
have the right, in accordance with the Security Documents, to exercise any and
all remedies in respect of such or all of the Collateral as the Lender may
determine in its discretion (without any requirement of marshalling of assets or
other such requirement, all of which are hereby waived by the Borrower), and (e)
the Revolving Credit Commitment shall, at the Lender’s option (except in the
case of Sections 7.01(f) and 7/01(g) hereof, the occurrence of which shall
automatically effect termination, regardless of any action or forbearance in
respect of any prior or ongoing Default or Event of Default which may be
inconsistent with such automatic termination), be immediately terminated or
reduced, and the Lender shall be under no further obligation to consider making
any further Advances.
 
VIII. PARTICIPATING LENDERS; ASSIGNMENT.
 
Section 8.01. Participations. Anything in this Agreement to the contrary
notwithstanding, the Lender may, at any time and from time to time, without in
any manner affecting or impairing the validity of any Obligations, transfer,
assign or grant participating interests in the Loans as the Lender shall in its
sole discretion determine, to such other Persons (the “Participants”) as the
Lender may determine. Upon any such transfer, assignment or granting of
participating interests, the Participants shall be deemed to be included within
the term “Lender” for all purposes of this Agreement, subject to such agreements
and arrangements as the Lender and the Participants may agree upon.
Notwithstanding the granting of any such participating interests: (a) the
Borrower shall look solely to the Lender for all purposes of this Agreement and
the transactions contemplated hereby, (b) the Borrower shall at all times have
the right to rely upon any waivers or consents signed by the Lender as being
binding upon all of the Participants, and (c) all communications in respect of
this Agreement and such transactions shall remain solely between the Borrower
and the Lender (exclusive of Participants) hereunder.
 
Section 8.02. Transfer and Assignment. Anything in this Agreement to the
contrary notwithstanding, the Lender may, at any time and from time to time,
without in any manner affecting or impairing the validity of any Obligations,
transfer and assign all or any portion of its interest in this Agreement, the
Notes and the other Loan Documents to any Person (an “Assignee Lender”) as the
Lender may determine. Upon any such transfer or assignment, the Assignee Lender
shall be deemed to succeed (to the extent of the interest assigned) to the
rights and obligations of the Lender for all purposes of this Agreement. In the
event of any transfer and assignment of the Lender’s entire interest in this
Agreement, the Notes and the Security Documents, the Lender shall be replaced by
the Assignee Lender as “Secured Party” under the Collateral Agreement and all
other Security Documents.
 
 
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IX. MISCELLANEOUS
 
Section 9.01. Survival. This Agreement and all covenants, agreements,
representations and warranties made herein and in the certificates delivered
pursuant hereto, shall survive the making by the Lender of the Loans and the
execution and delivery to the Lender of the Notes, and shall continue in full
force and effect for so long as the Notes or any other Obligations are
outstanding and unpaid or the Revolving Credit Commitment remains outstanding.
Whenever in this Agreement any of the parties hereto is referred to, such
reference shall be deemed to include the successors and permitted assigns of
such party; and all covenants, promises and agreements in this Agreement
contained, by or on behalf of the Borrower shall inure to the benefit of the
successors and assigns of the Lender.
 
Section 9.02. Indemnification. The Borrower shall indemnify the Lender and its
directors, officers, employees, attorneys and agents against, and shall hold the
Lender and such Persons harmless from, any and all losses, claims, damages and
liabilities and related expenses, including reasonable counsel fees and
expenses, incurred by the Lender or any such Person arising out of, in any way
connected with, or as a result of: (a) the use of any of the proceeds of the
Loans made by the Lender to the Borrower; (b) this Agreement, the ownership and
operation of the Borrower’s and any Subsidiary’s assets, including all Real
Properties and improvements or any Contract, the performance by the Borrower or
any other Person of their respective obligations thereunder, and the
consummation of the transactions contemplated by this Agreement; (c) any
finder’s fee, brokerage commission of other such obligation payable or alleged
to be payable in respect of the transactions contemplated by this Agreement
which arises or is alleged to arise from any agreement, action or conduct of the
Borrower or any of its Affiliates, and/or (d) any claim, litigation,
investigation or proceeding relating to any of the foregoing, whether or not the
Lender or its directors, officers, managers, employees, attorneys or agents are
a party thereto; provided that such indemnity shall not apply to any such
losses, claims, damages, liabilities or related expenses arising from (i) any
unexcused breach by the Lender of any of its obligations under this Agreement,
(ii) the willful misconduct or gross negligence of the Lender as determined by a
final, non-appealable judgment of a court of competent jurisdiction, or (iii)
the breach of any commitment or legal obligation of the Lender to any Person
other than the Borrower or its Affiliates, provided that such breach is
determined pursuant to a final and nonappealable decision of a court of
competent jurisdiction. The foregoing indemnity shall remain operative and in
full force and effect regardless of the expiration or any termination of this
Agreement, the consummation of the transactions contemplated by this Agreement,
the repayment of the Loans, the invalidity or unenforceability of any term or
provision of any Loan Document, any investigation made by or on behalf of the
Lender, and the content or accuracy of any representation or warranty made by
the Borrower or any Subsidiary in any Loan Document. All amounts due under this
Section 9.02 shall be payable on written demand therefor.
 
 
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Section 9.03. Governing Law. This Agreement and the other Loan Documents shall
(irrespective of where same are executed and delivered) be governed by and
construed in accordance with the laws of the State of New York (without giving
effect to principles of conflicts of laws).
 
Section 9.04. Waiver and Amendment. Neither any modification or waiver of any
provision of this Agreement, the Notes, or any other Loan Document, nor any
consent to any departure by the Borrower or any Subsidiary therefrom, shall in
any event be effective unless the same shall be set forth in writing duly signed
or acknowledged by the Lender and all parties to such Loan Document, and then
such waiver or consent shall be effective only in the specific instance, and for
the specific purpose, for which given. No notice to or demand on the Borrower in
any instance shall entitle the Borrower to any other or future notice or demand
in the same, similar or other circumstances.
 
Section 9.05. Reservation of Remedies. Neither any failure nor any delay on the
part of the Lender in exercising any right, power or privilege hereunder or
under the Notes or any other Loan Document shall operate as a waiver thereof,
nor shall a single or partial exercise thereof preclude any other or future
exercise, or the exercise of any other right, power or privilege.
 
Section 9.06. Notices. All notices, requests, demands and other communications
under or in respect of this Agreement or any transactions hereunder shall be in
writing (which may include telegraphic or telecopied communication) and shall be
personally delivered or mailed (by prepaid registered or certified mail, return
receipt requested), sent by prepaid recognized overnight courier service, or
telegraphed or telecopied by facsimile transmission to the applicable party at
its address or telecopier number indicated below.
 
If to the Lender:
 
ComVest Capital, LLC
One North Clematis, Suite 300
West Palm Beach, FL 33401
Attention: Chief Financial Officer
Telecopier: (212) 829-5986
 
with a copy to:
 
Greenberg Traurig, LLP
200 Park Avenue
New York, New York 10166
Attention: Shahe Sinanian, Esq.
Telecopier: (212) 801-6400
 
 
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If to the Borrower:
 
AFP Imaging Corporation
250 Clearbrook Road
Elmsford, New York 10523
Attention: Chief Financial Officer
Telecopier: (914) 592-6148
 
with a copy to:
 
Snow Becker Krauss P.C.
605 Third Avenue, 25th Floor
New York, New York 10158
Attention: David R. Fishkin, Esq.
Telecopier: (212) 949-7052
 
or, as to each party, at such other address or telecopier number as shall be
designated by such party in a written notice to the other party delivered as
aforesaid. All such notices, requests, demands and other communications shall be
deemed given (a) when personally delivered, (b) three (3) Business Days after
being deposited in the mails with postage prepaid (by registered or certified
mail, return receipt requested), (c) one (1) Business Day after being delivered
to the telegraph company or overnight courier service, if prepaid and sent
overnight delivery, addressed as aforesaid and with all charges prepaid or
billed to the account of the sender, or (d) when sent by facsimile transmission
to a telecopier number designated by such addressee.
 
Section 9.07. Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the Borrower and the Lender and their respective successors and
assigns, except that the Borrower shall not assign any of its rights or
obligations hereunder without the prior written consent of the Lender.
 
Section 9.08. Consent to Jurisdiction; Waiver of Jury Trial. The Borrower hereby
consents to the jurisdiction of all courts of the State of New York and the
United States District Court for the Southern District of New York, as well as
to the jurisdiction of all courts from which an appeal may be taken from such
courts, for the purpose of any suit, action or other proceeding arising out of
or with respect to this Agreement, any other Loan Document, any other
agreements, instruments, certificates or other documents executed in connection
herewith or therewith, or any of the transactions contemplated hereby or
thereby, or any of the Borrower’s or any Subsidiary’s obligations hereunder or
thereunder. The Borrower hereby waives the right to interpose any counterclaims
(other than compulsory counterclaims) in any action brought by the Lender
hereunder or in respect of any other Loan Document, provided that this waiver
shall not preclude the Borrower from pursuing any such claims by means of
separate proceedings. THE BORROWER HEREBY EXPRESSLY WAIVES ANY AND ALL
OBJECTIONS WHICH IT MAY HAVE AS TO VENUE IN ANY OF SUCH COURTS, AND ALSO WAIVES
TRIAL BY JURY IN ANY SUCH SUIT, ACTION OR PROCEEDING. The Lender may file a copy
of this Agreement as evidence of the foregoing waiver of right to jury trial.
 
Section 9.09. Certain Waivers. The Borrower and the Lender each hereby waives
any claims for special, consequential or punitive damages in any way arising out
of or relating to this Agreement, any of the other Loan Documents, or any breach
hereof or thereof.
 
 
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Section 9.10. Severability. If any provision of this Agreement is held invalid
or unenforceable, either in its entirety or by virtue of its scope or
application to given circumstances, such provision shall thereupon be deemed
modified only to the extent necessary to render same valid, or not applicable to
given circumstances, or excised from this Agreement, as the situation may
require, and this Agreement shall be construed and enforced as if such provision
had been included herein as so modified in scope or application, or had not been
included herein, as the case may be.
 
Section 9.11. Captions. The Article and Section headings in this Agreement are
included herein for convenience of reference only, and shall not affect the
construction or interpretation of any provision of this Agreement.
 
Section 9.12. Sole and Entire Agreement. This Agreement, the Notes, the other
Loan Documents, and the other agreements, instruments, certificates and
documents referred to or described herein and therein constitute the sole and
entire agreement and understanding between the parties hereto as to the subject
matter hereof, and supersede all prior discussions, agreements and
understandings of every kind and nature between the parties as to such subject
matter.
 
Section 9.13. Confidentiality. The Lender shall not disclose any Confidential
Information to any Person without the prior written consent of the Borrower;
provided, however, that nothing herein contained shall limit any disclosure of
the tax structure of the transactions contemplated hereby, or the disclosure of
any information (a) to the extent required by statute, rule, regulation or
judicial process, (b) to counsel for the Lender, (c) to bank examiners,
auditors, accountants or, if required by law, any regulatory authority, (d) to
the officers, partners, managers, directors, employees, agents and advisors
(including independent auditors and counsel) of the Lender, provided that such
Persons shall be bound by this Section 9.13, (e) in connection with any
litigation which relates to this Agreement to which the Lender is a party, (f)
to a subsidiary or Affiliate of the Lender, or (g) to any assignee or
participant (or prospective assignee or participant) which agrees to be bound by
this Section 9.13, and further provided, that in no event shall the Lender be
obligated or required to return any materials furnished by the Borrower. The
obligations of the Lender under this Section 9.13 shall supersede and replace
the obligations of the Lender under any confidentiality letter in respect of
this financing previously signed and delivered by the Lender to the Borrower.
 
Section 9.14. Counterparts; Fax Signatures. This Agreement may be executed in
any number of counterparts, all of which shall constitute one and the same
agreement. This Agreement may be executed by fax signatures, each of which shall
be fully binding on the signing party.
 
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by their duly authorized officer as of the day and year first written
above.
 
COMVEST CAPITAL, LLC
 
By: /s/ Larry E. Lenig, Jr.
Name: Larry E. Lenig, Jr.
Title: Senior Partner/Portfolio Manager
 
AFP IMAGING CORPORATION
 
By: /s/ David Vozick
Name: David Vozick
Title: Chairman of the Board
 
 
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