Exhibit 10.69

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CREDIT AND SECURITY AGREEMENT

 

BY AND BETWEEN

 

PROVENA FOODS INC.

 

AND

 

WELLS FARGO BANK, NATIONAL ASSOCIATION

 

ACTING THROUGH ITS WELLS FARGO BUSINESS CREDIT OPERATING

DIVISION

 

NOVEMBER 29, 2005

 

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TABLE OF CONTENTS

 

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ARTICLE I

   DEFINITIONS    1

Section 1.1

   Definitions    1

Section 1.2

   Other Definitional Terms; Rules of Interpretation    13

ARTICLE II

   AMOUNT AND TERMS OF THE CREDIT FACILITY    14

Section 2.1

   Revolving Advances    14

Section 2.2

   Procedures for Requesting Advances    14

Section 2.3

   [Intentionally Omitted]    14

Section 2.4

   Letters of Credit    14

Section 2.5

   Special Account    15

Section 2.6

   [Intentionally Omitted]    15

Section 2.7

   [Intentionally Omitted]    15

Section 2.8

   Interest; Minimum Interest Charge; Default Interest Rate; Application of
Payments; Participations; Usury    15

Section 2.9

   Fees    17

Section 2.10

   Time for Interest Payments; Payment on Non-Business Days; Computation of
Interest and Fees    18

Section 2.11

   Lockbox and Collateral Account; Sweep of Funds    19

Section 2.12

   Voluntary Prepayment; Termination of the Credit Facility by the Borrower   
19

Section 2.13

   Mandatory Prepayment    20

Section 2.14

   Revolving Advances to Pay Obligations    20

Section 2.15

   Use of Proceeds    20

Section 2.16

   Liability Records    20

ARTICLE III

   SECURITY INTEREST; OCCUPANCY; SETOFF    20

Section 3.1

   Grant of Security Interest    20

Section 3.2

   Notification of Account Debtors and Other Obligors    21

Section 3.3

   Assignment of Insurance    21

Section 3.4

   Occupancy    21

Section 3.5

   License    22

Section 3.6

   Financing Statement    22

Section 3.7

   Setoff    23

Section 3.8

   Collateral    23

ARTICLE IV

   CONDITIONS OF LENDING    23

Section 4.1

   Conditions Precedent to the Initial Advances and Letter of Credit    23

Section 4.2

   Conditions Precedent to All Advances and Letters of Credit    26

 

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TABLE OF CONTENTS

(continued)

 

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ARTICLE V

   REPRESENTATIONS AND WARRANTIES    26

Section 5.1

   Existence and Power; Name; Chief Executive Office; Inventory and Equipment
Locations; Federal Employer Identification Number and Organizational
Identification Number    26

Section 5.2

   Capitalization    27

Section 5.3

   Authorization of Borrowing; No Conflict as to Law or Agreements    27

Section 5.4

   Legal Agreements    27

Section 5.5

   Subsidiaries    27

Section 5.6

   Financial Condition; No Adverse Change    27

Section 5.7

   Litigation    28

Section 5.8

   Regulation U    28

Section 5.9

   Taxes    28

Section 5.10

   Titles and Liens    28

Section 5.11

   Intellectual Property Rights    28

Section 5.12

   Plans    29

Section 5.13

   Default    30

Section 5.14

   Environmental Matters    30

Section 5.15

   Submissions to Lender    30

Section 5.16

   Financing Statements    31

Section 5.17

   Rights to Payment    31

Section 5.18

   Financial Solvency    31

ARTICLE VI

   COVENANTS    32

Section 6.1

   Reporting Requirements    32

Section 6.2

   Financial Covenants    35

Section 6.3

   Permitted Liens; Financing Statements    36

Section 6.4

   Indebtedness    36

Section 6.5

   Guaranties    37

Section 6.6

   Investments and Subsidiaries    37

Section 6.7

   Dividends and Distributions    37

Section 6.8

   Salaries    37

Section 6.9

   [Intentionally Omitted]    37

Section 6.10

   Books and Records; Collateral Examination, Inspection and Appraisals    38

Section 6.11

   Account Verification    38

Section 6.12

   Compliance with Laws    38

Section 6.13

   Payment of Taxes and Other Claims    39

Section 6.14

   Maintenance of Properties    39

Section 6.15

   Insurance    39

Section 6.16

   Preservation of Existence    40

Section 6.17

   Delivery of Instruments, etc.    40

Section 6.18

   Sale or Transfer of Assets; Suspension of Business Operations    40

 

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TABLE OF CONTENTS

(continued)

 

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Section 6.19

   Consolidation and Merger; Asset Acquisitions    40

Section 6.20

   Sale and Leaseback    40

Section 6.21

   Restrictions on Nature of Business    40

Section 6.22

   Accounting    40

Section 6.23

   Discounts, etc    41

Section 6.24

   Plans    41

Section 6.25

   Place of Business; Name    41

Section 6.26

   Constituent Documents; S Corporation Status    41

Section 6.27

   Performance by the Lender    41

ARTICLE VII

   EVENTS OF DEFAULT, RIGHTS AND REMEDIES    42

Section 7.1

   Events of Default    42

Section 7.2

   Rights and Remedies    44

Section 7.3

   Certain Notices    45

ARTICLE VIII

   MISCELLANEOUS    45

Section 8.1

   No Waiver; Cumulative Remedies; Compliance with Laws    45

Section 8.2

   Amendments, Etc    45

Section 8.3

   Notices; Communication of Confidential Information; Requests for Accounting
   45

Section 8.4

   Further Documents    46

Section 8.5

   Costs and Expenses    46

Section 8.6

   Indemnity    46

Section 8.7

   Participants    47

Section 8.8

   Execution in Counterparts; Telefacsimile Execution    47

Section 8.9

   Retention of Borrower’s Records    47

Section 8.10

   Binding Effect; Assignment; Complete Agreement; Sharing Information    48

Section 8.11

   Severability of Provisions    48

Section 8.12

   Headings    48

Section 8.13

   Governing Law; Jurisdiction, Venue    48

Section 8.14

   Arbitration    48

 

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CREDIT AND SECURITY AGREEMENT

 

Dated as of November     , 2005

 

PROVENA FOODS INC., a California corporation (the “Borrower”), and WELLS FARGO
BANK, NATIONAL ASSOCIATION ( “Lender”) through its WELLS FARGO BUSINESS CREDIT
operating division, hereby agree as follows:

 

ARTICLE I

 

DEFINITIONS

 

Section 1.1 Definitions. Except as otherwise expressly provided in this
Agreement, the following terms shall have the meanings given them in this
Section:

 

“Accounts” shall have the meaning given it under the UCC.

 

“Accounts Advance Rate” means up to eighty-five. percent (85%), or such lesser
rate as the Lender in its sole discretion may deem appropriate from time to
time.

 

“Advance” means a Revolving Advance.

 

“Affiliate” or “Affiliates” means any Person controlled by, controlling or under
common control with the Borrower, including any Subsidiary of the Borrower. For
purposes of this definition, “control,” when used with respect to any specified
Person, means the power to direct the management and policies of such Person,
directly or indirectly, whether through the ownership of voting securities, by
contract or otherwise.

 

“Agreement” means this Credit and Security Agreement.

 

“Aggregate Credit Limit” means the aggregate of the Maximum Line Amount and the
L/C Amount.

 

“Availability” means the amount, if any, by which the Borrowing Base exceeds the
outstanding principal balance of the Revolving Note.

 

“Bond” means the Variable/Fixed Rate Demand Bonds, Series 2003A issued for the
benefit of the Borrower pursuant to the Indenture.

 

“Bond L/C” means the Letter of Credit issued by Lender in connection with and as
security for the payment of the Bond in the face amount of $6,233,000 which said
Letter of Credit shall be secured by the Collateral, including, but not limited
to the Deed of Trust and the Equipment.

 

“Book Net Worth” means the aggregate of the common and preferred shareholders’
equity in the Borrower, determined in accordance with GAAP.

 

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“Borrowing Base” means at any time the lesser of:

 

(a) The Maximum Line Amount; or

 

(b) Subject to change from time to time in the Lender’s sole discretion, the sum
of:

 

(i) The product of the Accounts Advance Rate times Eligible Accounts, plus

 

(ii) The lesser of (A) $ 2,700,000, or (B) the product of the Inventory Advance
Rate times Eligible Inventory, or (C) 85% of the Net Orderly Liquidation Value
of Eligible Inventory; provided, that the aggregate amount of outstanding
Advances supported by (x) Eligible Inventory of the Royal Angelus Macaroni
Company pasta division of the Borrower shall at no time exceed $150,000, and
(y) Eligible Inventory consisting of Inventory that is work-in-process shall at
no time exceed $1,300,000, less

 

(iii) The Borrowing Base Reserve, less

 

(iv) The Permanent Reserve, less

 

(v) The Real Estate Reserve, less

 

(vi) The Letter of Credit Reserve, Less

 

(vii) Obligations that the Borrower owes to the Lender that have not yet been
advanced on the Revolving Note, and the dollar amount that the Lender in its
reasonable discretion then determines to be a reasonable determination of the
Borrower’s credit exposure with respect to Wells Fargo Bank Affiliate
Obligations.

 

“Borrowing Base Reserve” means, as of any date of determination, such amounts
(expressed as either a specified amount or as a percentage of a specified
category or item) as the Lender may from time to time establish and adjust in
reducing Availability (a) to reflect events, conditions, contingencies or risks
which, as determined by the Lender, do or may affect (i) the Collateral or its
value, (ii) the assets, business or prospects of the Borrower, or (iii) the
security interests and other rights of the Lender in the Collateral (including
the enforceability, perfection and priority thereof), or (b) to reflect the
Lender’s judgment that any collateral report or financial information furnished
by or on behalf of the Borrower to the Lender is or may have been incomplete,
inaccurate or misleading in any material respect, or (c) in respect of any state
of facts that the Lender determines constitutes a Default or an Event of
Default.

 

“Business Day” means a day on which the Federal Reserve Bank of New York is open
for business.

 

“Capital Expenditures” means for a period, any expenditure of money during such
period (i) for the purchase or construction of assets, or for improvements or
additions thereto, which are capitalized on the Borrower’s balance sheet, or
(ii) for the lease, purchase or other acquisition of any capital asset, or for
the lease of any other asset whether payable currently or in the future.

 

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“Change of Control” means the occurrence of any of the following events:

 

(a) Any Person or “group” (as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934) is or becomes the “beneficial owner” (as
defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934,
except that a Person will be deemed to have “beneficial ownership” of all
securities that such Person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of more than fifty percent (50%) of the voting power of all classes
of Owners of the Borrower;

 

(b) During any consecutive two-year period, individuals who at the beginning of
such period constituted the board of Directors of the Borrower (together with
any new Directors whose election to such board of Directors, or whose nomination
for election by the Owners of the Borrower, was approved by a vote of two thirds
of the Directors then still in office who were either Directors at the beginning
of such period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the board of
Directors of the Borrower then in office; or

 

(c) Theodore Arena and Santo Zito shall cease to actively manage the Borrower’s
day-to-day business activities and no replacement acceptable to Lender is
obtained within 60 days.

 

“Collateral” means all of the Borrower’s Accounts, chattel paper and electronic
chattel paper, deposit accounts, documents, Equipment, General Intangibles,
goods, instruments, Inventory, Investment Property, letter-of-credit rights,
letters of credit, all sums on deposit in any Collateral Account, and any items
in any Lockbox; together with (i) all substitutions and replacements for and
products of any of the foregoing; (ii) in the case of all goods, all accessions;
(iii) all accessories, attachments, parts, equipment and repairs now or
hereafter attached or affixed to or used in connection with any goods; (iv) all
warehouse receipts, bills of lading and other documents of title now or
hereafter covering such goods; (v) all collateral subject to the Lien of any
Security Document; (vi) any money, or other assets of the Borrower that now or
hereafter come into the possession, custody, or control of the Lender; (vii) all
sums on deposit in the Special Account; (viii) proceeds of any and all of the
foregoing; (ix) books and records of the Borrower, including all mail or
electronic mail addressed to the Borrower; and (x) all of the foregoing, whether
now owned or existing or hereafter acquired or arising or in which the Borrower
now has or hereafter acquires any rights.

 

“Collateral Account” means the “Lender Account” as defined in the Wholesale
Lockbox and Collection Account Agreement.

 

“Commitment” means the Lender’s commitment to make Advances to, and to issue
Letters of Credit for the account of, the Borrower.

 

“Constituent Documents” means with respect to any Person, as applicable, such
Person’s certificate of incorporation, articles of incorporation, by-laws,
certificate of formation, articles of organization, limited liability company
agreement, management agreement, operating agreement, shareholder agreement,
partnership agreement or similar document or agreement governing such Person’s
existence, organization or management or concerning disposition of ownership
interests of such Person or voting rights among such Person’s owners.

 

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“Credit Facility” means the credit facility under which Revolving Advances and
Letters of Credit may be made available to the Borrower by the Lender under
Article II.

 

“Current Maturities of Long Term Debt” means as of each month end, the amount of
the Borrower’s long-term debt and capitalized leases which will become due
during that monthly period.

 

“Cut-off Time” means 10:00 a.m. Los Angeles, California time.

 

“Debt” means of a Person as of a given date, all items of indebtedness or
liability which in accordance with GAAP would be included in determining total
liabilities as shown on the liabilities side of a balance sheet for such Person
and shall also include the aggregate payments required to be made by such Person
at any time under any lease that is considered a capitalized lease under GAAP.

 

“Debt Service Coverage Ratio” means (i) the sum of (A) Funds from Operations and
(B) Interest Expense minus (C) unfinanced Capital Expenditures and (D) non-cash
deferred income, divided by (ii) the sum of (A) Current Maturities of Long Term
Debt, (B) the amount of the Letter of Credit Reserve for such year determined
quarterly on a pro rata basis and (B) Interest Expense.

 

“Deed of Trust” means that certain deed of trust, assignment of rents, security
agreement and fixture filing executed by Borrower in favor of Lender with
respect to the Borrower’s real property located in Lathrop, California.

 

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

 

“Default Period” means any period of time beginning on the day a Default or
Event of Default occurs and ending on the date identified by the Lender in
writing as the date that such Default or Event of Default has been cured or
waived.

 

“Default Rate” means an annual interest rate in effect during a Default Period
or following the Termination Date, which interest rate shall be equal to three
percent (3%) over the applicable Floating Rate, as such rate may change from
time to time.

 

“Director” means a director if the Borrower is a corporation, a governor or
manager if the Borrower is a limited liability company, or a general partner if
the Borrower is a partnership.

 

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended
from time to time.

 

“ERISA Affiliate” means any trade or business (whether or not incorporated) that
is a member of a group which includes the Borrower and which is treated as a
single employer under Section 414 of the IRC.

 

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“Eligible Accounts” means all unpaid Accounts arising from the sale or lease of
goods or the performance of services, net of any credits, but excluding any such
Accounts having any of the following characteristics:

 

(i) That portion of Accounts unpaid 90 days or more after the invoice date;

 

(ii) That portion of Accounts related to goods or services with respect to which
the Borrower has received notice of a claim or dispute, which are subject to a
claim of offset or a contra account, or which reflect a reasonable reserve for
warranty claims or returns;

 

(iii) That portion of Accounts not yet earned by the final delivery of goods or
rendition of services, as applicable, by the Borrower to the customer, including
progress billings, and that portion of Accounts for which an invoice has not
been sent to the applicable account debtor;

 

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

 

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

 

(vi) Accounts denominated in any currency other than United States dollars;

 

(vii) Accounts owed by an account debtor located outside the United States or
Canada which are not (A) backed by a bank letter of credit naming the Lender as
beneficiary or assigned to the Lender, in the Lender’s possession or control,
and with respect to which a control agreement concerning the letter-of-credit
rights is in effect, and acceptable to the Lender in all respects, in its sole
discretion, or (B) covered by a foreign receivables insurance policy acceptable
to the Lender in its sole discretion;

 

(viii) Accounts owed by an account debtor that is insolvent, the subject of
bankruptcy proceedings or has gone out of business;

 

(ix) Accounts owed by an Owner, Subsidiary, Affiliate, Officer or employee of
the Borrower;

 

(x) Accounts not subject to a duly perfected security interest in the Lender’s
favor or which are subject to any Lien in favor of any Person other than the
Lender;

 

(xi) That portion of Accounts that has been restructured, extended, amended or
modified;

 

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(xii) That portion of Accounts that constitutes advertising, finance charges,
service charges or sales or excise taxes;

 

(xiii) Accounts owed by an account debtor, regardless of whether otherwise
eligible, to the extent that the aggregate balance of such Accounts exceeds 15%
of the aggregate amount of all Accounts, provided, that such percentage with
respect to Accounts owed by Blue Line Dist, Saladinos, and Roma Foods shall be
25%.

 

(xiv) Accounts owed by an account debtor, regardless of whether otherwise
eligible, if 25% or more of the total amount of Accounts due from such debtor is
ineligible under clauses (i), (ii), or (x) above; and

 

(xv) Accounts, or portions thereof, otherwise deemed ineligible by the Lender in
its sole discretion.

 

“Eligible Inventory” means all Inventory of the Borrower, valued at the lower of
cost or market in accordance with GAAP; but excluding any Inventory having any
of the following characteristics:

 

(i) Inventory that is: in-transit; located at any warehouse, job site or other
premises not approved by the Lender in writing; not subject to a duly perfected
first priority security interest in the Lender’s favor; subject to any lien or
encumbrance that is subordinate to the Lender’s first priority security
interest; covered by any negotiable or non-negotiable warehouse receipt, bill of
lading or other document of title; on consignment from any Person; on
consignment to any Person or subject to any bailment unless such consignee or
bailee has executed an agreement with the Lender;

 

(ii) Supplies, packaging, maintenance parts or sample Inventory, or customer
supplied parts or Inventory;

 

(iii) Inventory that is damaged, defective, obsolete, slow moving or not
currently saleable in the normal course of the Borrower’s operations, or the
amount of such Inventory that has been reduced by shrinkage;

 

(iv) Inventory that the Borrower has returned, has attempted to return, is in
the process of returning or intends to return to the vendor thereof;

 

(v) Inventory that is one year or more from the date of its manufacture;

 

(vi) Inventory manufactured by the Borrower pursuant to a license unless the
applicable licensor has agreed in writing to permit the Lender to exercise its
rights and remedies against such Inventory;

 

(vii) Inventory that is subject to a Lien in favor of any Person other than the
Lender;

 

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(viii) Except in the case of Inventory located at 5010 Eucalyptus Avenue, Chino,
California 91710 and 5060 Eucalyptus Avenue, Chino, California 91710, Inventory
stored at locations holding less than 10% of the aggregate value of Borrower’s
Inventory; and

 

(ix) Inventory otherwise deemed ineligible by the Lender in its sole discretion.

 

“Environmental Law” means any federal, state, local or other governmental
statute, regulation, law or ordinance dealing with the protection of human
health and the environment.

 

“Equipment” means all of the Borrower’s equipment, as such term is defined in
the UCC, whether now owned or hereafter acquired, including all present and
future machinery, vehicles, furniture, fixtures, manufacturing equipment, shop
equipment, office and recordkeeping equipment, parts, tools, supplies, and
including specifically the goods described in any equipment schedule or list
herewith or hereafter furnished to the Lender by the Borrower.

 

“Event of Default” is defined in Section 7.1.

 

“Financial Covenants” means the covenants set forth in Section 6.2.

 

“Floating Rate” means with respect to Revolving Advances evidenced by the
Revolving Note, an annual interest rate equal to the sum of the Prime Rate plus
one-half of one percent (0.5%), which interest rate shall, in each case, change
when and as the Prime Rate changes; provided, however, if Borrower fails to meet
its projections as set forth in the Initial Projections, the Floating Rate shall
increase by one-half of one percent (0.5%). If necessary, such increase will
become effective as of the first day of the quarter on which the Borrower’s
financial performance, measured quarterly on a year to date basis, deviates from
such projections as set forth on the monthly financial statements delivered to
Lender pursuant to Section 6.1(b).

 

“Floating Rate Advance” means an Advance bearing interest at the Floating Rate.

 

“Funding Date” is defined in Section 2.1.

 

“Funds from Operations” means for a given period, the sum of (i) Net Income,
(ii) depreciation and amortization, (iii) any increase (or decrease) in deferred
income taxes, (iv) any increase (or decrease) in lifo reserves, and (v) other
non-cash items, each as determined for such period in accordance with GAAP.

 

“GAAP” means generally accepted accounting principles, applied on a basis
consistent with the accounting practices applied in the financial statements
described in Section 5.6.

 

“General Intangibles” shall have the meaning given it under the UCC.

 

“Guarantor(s)” means any Person now or in the future guaranteeing the
Obligations.

 

“Guaranty” means each unconditional continuing guaranty or unconditional
continuing guaranty by corporation executed by a Guarantor in favor of the
Lender (collectively, the “Guaranties”).

 

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“Hazardous Substances” means pollutants, contaminants, hazardous substances,
hazardous wastes, petroleum and fractions thereof, and all other chemicals,
wastes, substances and materials listed in, regulated by or identified in any
Environmental Law.

 

“Indemnified Liabilities” is defined in Section 8.6

 

“Indemnitees” is defined in Section 8.6.

 

“Indenture” means that certain Indenture of Trust dated as of December 1, 2003
by and between the Borrower and US Bank National Association.

 

“Initial Projections” means the Borrower’s projections for the remainder of
fiscal year ending in 2005 reflecting a loss before taxes no greater than
$1,575,000 (excluding the impact of deferred income or gains on the sale of real
property) for such year, and fiscal year ending in 2006 a net profit before
taxes of $220,000 (excluding the impact of deferred income or gains on the sale
of real property) for such year.

 

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

 

“Infringement” or “Infringing” when used with respect to Intellectual Property
Rights means any infringement or other violation of Intellectual Property
Rights.

 

“Intellectual Property Rights” means all actual or prospective rights arising in
connection with any intellectual property or other proprietary rights, including
all rights arising in connection with copyrights, patents, service marks, trade
dress, trade secrets, trademarks, trade names or mask works.

 

“Interest Expense” means for a fiscal year-to-date period, the Borrower’s total
gross interest expense during such period (excluding interest income), and shall
in any event include (i) interest expensed (whether or not paid) on all Debt,
(ii) the amortization of debt discounts, (iii) the amortization of all fees
payable in connection with the incurrence of Debt to the extent included in
interest expense, and (iv) the portion of any capitalized lease obligation
allocable to interest expense.

 

“Interest Payment Date” is defined in Section 2.10(a).

 

“Inventory” shall have the meaning given it under the UCC.

 

“Inventory Advance Rate” means up to forty-nine percent (49%), or such lesser
rate as the Lender in its sole discretion may deem appropriate from time to
time.

 

“Investment Property” shall have the meaning given it under the UCC.

 

“L/C Amount” means the sum of (i) the face amount of the Bond L/C (ii) the face
amount of the Workers’ Comp L/C and (ii) the unpaid amount of the Obligation of
Reimbursement.

 

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“L/C Application” means an application for the issuance of standby or
documentary letters of credit pursuant to the terms of a Standby Letter of
Credit Agreement, in form acceptable to the Lender.

 

“Letter of Credit” is defined in Section 2.4.

 

“Letter of Credit Reimbursement Agreement” means that certain Letter of Credit
Reimbursement Agreement executed by Lender and Borrower with respect to the
standby letter of credit issued by Lender for the benefit of Borrower with
respect to the Variable/Fixed Rate Demand Bonds, Series 2003A issued in favor of
Borrower pursuant to the Indenture.

 

“Letter of Credit Reserve” means a reserve against Availability between $544,000
and the principal reduction payments made by Borrower for each year with respect
to the Bonds as set forth in the Indenture. Such reserve amount shall be
cumulative from year to year.

 

“Licensed Intellectual Property” is defined in Section 5.11(c).

 

“Lien” means any security interest, mortgage, deed of trust, pledge, lien,
charge, encumbrance, title retention agreement or analogous instrument or
device, including the interest of each lessor under any capitalized lease and
the interest of any bondsman under any payment or performance bond, in, of or on
any assets or properties of a Person, whether now owned or subsequently acquired
and whether arising by agreement or operation of law.

 

“Loan Documents” means this Agreement, the Notes, the Letter of Credit
Reimbursement Agreement any L/C Applications and the Security Documents,
together with every other agreement, note, document, contract or instrument to
which the Borrower now or in the future may be a party and which is required by
the Lender.

 

“Lockbox” means “Lockbox” as defined in the Wholesale Lockbox and Collection
Account Agreement.

 

“Material Adverse Effect” means any of the following:

 

(i) A material adverse effect on the business, operations, results of
operations, prospects, assets, liabilities or financial condition of the
Borrower;

 

(ii) A material adverse effect on the ability of the Borrower to perform its
obligations under the Loan Documents;

 

(iii) A material adverse effect on the ability of the Lender to enforce the
Obligations or to realize the intended benefits of the Security Documents,
including a material adverse effect on the validity or enforceability of any
Loan Document or of any rights against any Guarantor, or on the status,
existence, perfection, priority (subject to Permitted Liens) or enforceability
of any Lien securing payment or performance of the Obligations; or

 

(iv) Any claim against the Borrower or threat of litigation which if determined
adversely to the Borrower would cause the Borrower to be liable to pay an amount
exceeding

 

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$100,000 or would result in the occurrence of an event described in clauses (i),
(ii) and (iii) above.

 

“Maturity Date” means, with respect to the Credit Facility, December 30, 2008.

 

“Maximum Line Amount” means $6,000,000.

 

“Minimum Interest Charge” is defined in Section 2.8(c).

 

“Multiemployer Plan” means a multiemployer plan (as defined in
Section 4001(a)(3) of ERISA) to which the Borrower or any ERISA Affiliate
contributes or is obligated to contribute.

 

“Net Cash Proceeds” means in connection with any asset sale, the cash proceeds
(including any cash payments received by way of deferred payment whether
pursuant to a note, installment receivable or otherwise, but only as and when
actually received) from such asset sale, net of (i) attorneys’ fees,
accountants’ fees, investment banking fees, brokerage commissions and amounts
required to be applied to the repayment of any portion of the Debt secured by a
Lien not prohibited hereunder on the asset which is the subject of such sale,
and (ii) taxes paid or reasonably estimated to be payable as a result of such
asset sale.

 

“Net Income” means fiscal year-to-date after-tax net income from continuing
operations, including extraordinary losses but excluding extraordinary gains,
all as determined in accordance with GAAP.

 

“Net Loss” means fiscal year-to-date after-tax net loss from continuing
operations as determined in accordance with GAAP.

 

“Net Orderly Liquidation Value” means a professional opinion of the estimated
most probable Net Cash Proceeds which could typically be realized at a properly
advertised and professionally managed liquidation sale, conducted under orderly
sale conditions for an extended period of time (usually six to nine months),
under the economic trends existing at the time of the appraisal.

 

“Note” means the Revolving Note.

 

“Obligation of Reimbursement” means the obligation of the Borrower to reimburse
the Lender pursuant to the terms of the Standby Letter of Credit Agreement and
any applicable L/C Application.

 

“Obligations” means each Note, the Obligation of Reimbursement, Borrower’s
obligations to Lender under the Letter of Credit Reimbursement Agreement, and
each and every other debt, liability and obligation of every type and
description which the Borrower may now or at any time hereafter owe to the
Lender, whether such debt, liability or obligation now exists or is hereafter
created or incurred, whether it arises in a transaction involving the Lender
alone or in a transaction involving other creditors of the Borrower, and whether
it is direct or indirect, due or to become due, absolute or contingent, primary
or secondary, liquidated or unliquidated, or sole, joint, several or joint and
several, and including all indebtedness of the Borrower arising under

 

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any Loan Document or guaranty between the Borrower and the Lender, whether now
in effect or subsequently entered into, and all Wells Fargo Bank Affiliate
Obligations.

 

“Officer” means with respect to the Borrower, an officer if the Borrower is a
corporation, a manager if the Borrower is a limited liability company, or a
partner if the Borrower is a partnership.

 

“OFAC” is defined in Section 6.12(c).

 

“Overadvance” means the amount, if any, by which the outstanding principal
balance of the Revolving Note is in excess of the then-existing Borrowing Base.

 

“Owned Intellectual Property” is defined in Section 5.11(a).

 

“Owner” means with respect to the Borrower, each Person having legal or
beneficial title to an ownership interest in the Borrower or a right to acquire
such an interest.

 

“Patent and Trademark Security Agreement” means each and every Patent and
Trademark Security Agreement now or hereafter executed by the Borrower in favor
of the Lender dated the same date as this Agreement.

 

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

 

“Permanent Reserve” means a reserve against Availability in the amount of
$500,000; provided, that such amount shall be reduced to $375,000 upon receipt
by Lender of the Borrower’s financial statements as set forth in Section 6.1,
evidencing a Debt Service Coverage Ratio equal to or greater than 1.10:1.00 for
four (4) consecutive quarters, and shall continue to be reduced in increments of
$125,000 every two (2) quarters thereafter so long as Borrower continues to
achieve a Debt Service Coverage Ratio equal to or greater than 1.10:1.00 for
each following two (2) consecutive quarters on a quarter by quarter basis.

 

“Permitted Lien” and “Permitted Liens” are defined in Section 6.3(a).

 

“Person” means any individual, corporation, partnership, joint venture, limited
liability company, association, joint-stock company, trust, unincorporated
organization or government or any agency or political subdivision thereof.

 

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

 

“Premises” means all locations where the Borrower conducts its business or has
any rights of possession, including the locations legally described in Exhibit C
attached hereto.

 

“Prime Rate” means at any time the rate of interest most recently announced by
the Lender at its principal office as its Prime Rate, with the understanding
that the Prime Rate is one of the Lender’s base rates, and serves as the basis
upon which effective rates of interest are calculated for those loans making
reference thereto, and is evidenced by the recording thereof in

 

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such internal publication or publications as the Lender may designate. Each
change in the rate of interest shall become effective on the date each Prime
Rate change is announced by the Lender.

 

“Real Estate Reserve” means a monthly reserve against Availability of $8,000 per
month for real estate property taxes and improvements with respect to the real
property located at 251 D’Arcy Parkway, Lathrop, California 95330. The amount
held in the Real Estate Reserve may be reduced from time to time by the amount
of any real estate property taxes paid by Borrower and improvement made by
Borrower to the real property referred to in the previous sentence upon
evidence, satisfactory to Lender, that such taxes have been paid and such
improvements have been made. To the extent that the Real Estate Reserve is
reduced pursuant to the previous sentence it shall thereafter be replenished on
a monthly basis at the rate of $8,000 per month.

 

“Reportable Event” means a reportable event (as defined in Section 4043 of
ERISA), other than an event for which the 30-day notice requirement under ERISA
has been waived in regulations issued by the Pension Benefit Guaranty
Corporation.

 

“Revolving Advance” is defined in Section 2.1.

 

“Revolving Note” means the Borrower’s revolving promissory note, payable to the
order of the Lender in substantially the form of Exhibit A hereto, as same may
be renewed and amended from time to time, and all replacements thereto.

 

“Security Documents” means this Agreement, the Wholesale Lockbox and Collection
Account Agreement, the Patent and Trademark Security Agreement, the Deed of
Trust, and any other document delivered to the Lender from time to time to
secure the Obligations.

 

“Security Interest” is defined in Section 3.1.

 

“Special Account” means a specified cash collateral account maintained with
Lender or another financial institution acceptable to the Lender in connection
with Letters of Credit, as contemplated by Section 2.5.

 

“Standby Letter of Credit Agreement” means an agreement governing the issuance
of standby letters of credit by Lender entered into between the Borrower as
applicant and Lender as issuer.

 

“Subsidiary” means any Person of which more than 50% of the outstanding
ownership interests having general voting power under ordinary circumstances to
elect a majority of the board of directors or the equivalent of such Person,
regardless of whether or not at the time ownership interests of any other class
or classes shall have or might have voting power by reason of the happening of
any contingency, is at the time directly or indirectly owned by the Borrower, by
the Borrower and one or more other Subsidiaries, or by one or more other
Subsidiaries.

 

“Termination Date” means the earliest of (i) the Maturity Date, (ii) the date
the Borrower terminates the Credit Facility, or (iii) the date the Lender
demands payment of the Obligations, following an Event of Default, pursuant to
Section 7.2.

 

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“UCC” means the Uniform Commercial Code as in effect in the state designated in
this Agreement as the state whose laws shall govern this Agreement, or in any
other state whose laws are held to govern this Agreement or any portion of this
Agreement.

 

“Unused Amount” is defined in Section 2.9(b).

 

“Wells Fargo Bank Affiliate Obligations” means all obligations, liabilities,
contingent reimbursement obligations, fees, and expenses owing by the Borrower
or its Subsidiaries to any Person that is owned in material part by the Lender,
and that relates to any service or facility extended to the Borrower or its
Subsidiaries, including: (a) credit cards, (b) credit card processing services,
(c) debit cards, and (d) purchase cards, as well as any other services or
facilities from time to time specified by the Lender, whether direct or
indirect, absolute or contingent, due or to become due, and whether existing now
or in the future.

 

“Wholesale Lockbox and Collection Account Agreement” means the Wholesale Lockbox
and Collection Account Agreement by and between the Borrower and the Lender,
dated the same date as this Agreement.

 

“Workers’ Comp L/C” means those certain Letters of Credit in the aggregate face
amount of $1,217,614, issued by Lender in connection with Borrower’s workers
compensation insurance, which said Letters of Credit shall be secured by the
Collateral, including, but not limited to, cash equal to the aggregate face
amount of such Letters of Credit, which said cash shall at all time be subject
to a control agreement in favor of the Lender.

 

Section 1.2 Other Definitional Terms; Rules of Interpretation. The words
“hereof”, “herein” 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. All accounting terms not otherwise defined herein
have the meanings assigned to them in accordance with GAAP. All terms defined in
the UCC and not otherwise defined herein have the meanings assigned to them in
the UCC. References to Articles, Sections, subsections, Exhibits, Schedules and
the like, are to Articles, Sections and subsections of, or Exhibits or Schedules
attached to, this Agreement unless otherwise expressly provided. The words
“include”, “includes” and “including” shall be deemed to be followed by the
phrase “without limitation”. Unless the context in which used herein otherwise
clearly requires, “or” has the inclusive meaning represented by the phrase
“and/or”. Defined terms include in the singular number the plural and in the
plural number the singular. Reference to any agreement (including the Loan
Documents), document or instrument means such agreement, document or instrument
as amended or modified and in effect from time to time in accordance with the
terms thereof (and, if applicable, in accordance with the terms hereof and the
other Loan Documents), except where otherwise explicitly provided, and reference
to any promissory note includes any promissory note which is an extension or
renewal thereof or a substitute or replacement therefor. Reference to any law,
rule, regulation, order, decree, requirement, policy, guideline, directive or
interpretation means as amended, modified, codified, replaced or reenacted, in
whole or in part, and in effect on the determination date, including rules and
regulations promulgated thereunder.

 

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ARTICLE II

 

AMOUNT AND TERMS OF THE CREDIT FACILITY

 

Section 2.1 Revolving Advances. The Lender agrees, subject to the terms and
conditions of this Agreement, to make advances (“Revolving Advances”) to the
Borrower from time to time from the date that all of the conditions set forth in
4.1 are satisfied (the “Funding Date”) to and until (but not including) the
Termination Date in an amount not in excess of the Maximum Line Amount. The
Lender shall have no obligation to make a Revolving Advance to the extent that
the amount of the requested Revolving Advance exceeds Availability. The
Borrower’s obligation to pay the Revolving Advances shall be evidenced by the
Revolving Note and shall be secured by the Collateral. Within the limits set
forth in this Section 2.1, the Borrower may borrow, prepay pursuant to
Section 2.12, and reborrow.

 

Section 2.2 Procedures for Requesting Advances. The Borrower shall comply with
the following procedures in requesting Revolving Advances:

 

(a) [Intentionally Omitted].

 

(b) Time for Requests. The Borrower shall request each Advance not later than
the Cut-off Time on the Business Day on which the Advance is to be made. Each
request that conforms to the terms of this Agreement shall be effective upon
receipt by the Lender, shall be in writing or by telephone or telecopy
transmission, and shall be confirmed in writing by the Borrower if so requested
by the Lender, by (i) an Officer of the Borrower; or (ii) a Person designated as
the Borrower’s agent by an Officer of the Borrower in a writing delivered to the
Lender; or (iii) a Person whom the Lender reasonably believes to be an Officer
of the Borrower or such a designated agent. The Borrower shall repay all
Advances even if the Lender does not receive such confirmation and even if the
Person requesting an Advance was not in fact authorized to do so. Any request
for an Advance, whether written or telephonic, shall be deemed to be a
representation by the Borrower that the conditions set forth in Section 4.2 have
been satisfied as of the time of the request.

 

(c) Disbursement. Upon fulfillment of the applicable conditions set forth in
Article IV, the Lender shall disburse the proceeds of the requested Advance by
crediting the same to the Borrower’s demand deposit account maintained with the
Lender unless the Lender and the Borrower shall agree in writing to another
manner of disbursement.

 

Section 2.3 [Intentionally Omitted].

 

Section 2.4 Letters of Credit.

 

(a) The Lender agrees, subject to the terms and conditions of this Agreement, to
issue, the Bond L/C and the Workers’ Comp L/C and any replacement or
substitutions therefore (each, a “Letter of Credit”) for the Borrower’s account.
Each Letter of Credit shall be issued pursuant to a separate L/C Application
made by the Borrower to the Lender, which must be completed in a manner
satisfactory to the Lender. The terms and conditions set forth in each such L/C
Application shall supplement the terms and conditions of the Standby Letter of
Credit Agreement.

 

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(b) The Workers Comp L/C and any replacement or substitution therefore, shall be
issued with an expiry date no later than eighteen (18) months from the date of
issuance or the Maturity Date in effect as of the date of issuance, whichever is
earlier. The Bond L/C shall be issued with the Maturity Date as its expiry date.

 

(c) Any request for issuance of a Letter of Credit shall be deemed to be a
representation by the Borrower that the conditions set forth in Section 4.2 have
been satisfied as of the date of the request.

 

(d) If a draft is submitted under a Letter of Credit when the Borrower is
unable, because a Default Period exists or for any other reason, to obtain a
Revolving Advance to pay the Obligation of Reimbursement, the Borrower shall pay
to the Lender on demand and in immediately available funds, the amount of the
Obligation of Reimbursement together with interest, accrued from the date of the
draft until payment in full at the Default Rate. Notwithstanding the Borrower’s
inability to obtain a Revolving Advance for any reason, the Lender is
irrevocably authorized, in its sole discretion, to make a Revolving Advance in
an amount sufficient to discharge the Obligation of Reimbursement and all
accrued but unpaid interest thereon.

 

Section 2.5 Special Account. If the Credit Facility is terminated for any reason
while any Letter of Credit is outstanding, the Borrower shall thereupon pay the
Lender in immediately available funds for deposit in the Special Account an
amount equal to the L/C Amount plus any anticipated fees and costs. If the
Borrower fails to promptly make any such payment in the amount required
hereunder, then the Lender may make a Revolving Advance against the Credit
Facility in an amount sufficient to fulfill this obligation and deposit the
proceeds to the Special Account. The Special Account shall be an interest
bearing account either maintained with the Lender or with a financial
institution acceptable to the Lender. Any interest earned on amounts deposited
in the Special Account shall be credited to the Special Account. The Lender may
apply amounts on deposit in the Special Account at any time or from time to time
to the Obligations in the Lender’s sole discretion. The Borrower may not
withdraw any amounts on deposit in the Special Account as long as the Lender
maintains a security interest therein. The Lender agrees to transfer any balance
in the Special Account to the Borrower when the Lender is required to release
its security interest in the Special Account under applicable law.

 

Section 2.6 [Intentionally Omitted].

 

Section 2.7 [Intentionally Omitted].

 

Section 2.8 Interest; Minimum Interest Charge; Default Interest Rate;
Application of Payments; Participations; Usury.

 

(a) Interest. Except as provided in Section 2.8(d) and Section 2.8(g), the
principal amount of each Advance shall bear interest as a Floating Rate Advance.

 

(b) [Intentionally Omitted].

 

(c) Minimum Interest Charge. Notwithstanding any other terms of this Agreement
to the contrary, the Borrower shall pay to the Lender interest of not less than
$16,000

 

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per calendar month (the “Minimum Interest Charge”) during the term of this
Agreement, and the Borrower shall pay any deficiency between the Minimum
Interest Charge and the amount of interest otherwise calculated under
Section 2.8(a) on the first day of each month and on the Termination Date. When
calculating this deficiency, the Default Rate, if applicable, shall be
disregarded.

 

(d) Default Interest Rate. At any time during any Default Period or following
the Termination Date, in the Lender’s sole discretion and without waiving any of
its other rights or remedies, the principal of the Revolving Note shall bear
interest at the Default Rate or such lesser rate as the Lender may determine,
effective as of the first day of the month in which any Default Period begins
through the last day of such Default Period, or any shorter time period that the
Lender may determine. The decision of the Lender to impose a rate that is less
than the Default Rate or to not impose the Default Rate for the entire duration
of the Default Period shall be made by the Lender in its sole discretion and
shall not be a waiver of any of its other rights and remedies, including its
right to retroactively impose the full Default Rate for the entirety of any such
Default Period or following the Termination Date.

 

(e) Application of Payments. Payments shall be applied to the Obligations on the
Business Day of receipt by the Lender in the Lender’s general account, but the
amount of principal paid shall continue to accrue interest at the interest rate
applicable under the terms of this Agreement from the calendar day the Lender
receives the payment, and continuing through the end of the first Business Day
following receipt of the payment.

 

(f) Participations. If any Person shall acquire a participation in the Advances
or the Obligation of Reimbursement, the Borrower shall be obligated to the
Lender to pay the full amount of all interest calculated under this Section 2.8,
along with all other fees, charges and other amounts due under this Agreement,
regardless if such Person elects to accept interest with respect to its
participation at a lower rate than that calculated under this Section 2.8, or
otherwise elects to accept less than its prorata share of such fees, charges and
other amounts due under this Agreement.

 

(g) Usury. In any event no rate change shall be put into effect which would
result in a rate greater than the highest rate permitted by law. Notwithstanding
anything to the contrary contained in any Loan Document, all agreements which
either now are or which shall become agreements between the Borrower and the
Lender are hereby limited so that in no contingency or event whatsoever shall
the total liability for payments in the nature of interest, additional interest
and other charges exceed the applicable limits imposed by any applicable usury
laws. If any payments in the nature of interest, additional interest and other
charges made under any Loan Document are held to be in excess of the limits
imposed by any applicable usury laws, it is agreed that any such amount held to
be in excess shall be considered payment of principal hereunder, and the
indebtedness evidenced hereby shall be reduced by such amount so that the total
liability for payments in the nature of interest, additional interest and other
charges shall not exceed the applicable limits imposed by any applicable usury
laws, in compliance with the desires of the Borrower and the Lender. This
provision shall never be superseded or waived and shall control every other
provision of the Loan Documents and all agreements between the Borrower and the
Lender, or their successors and assigns.

 

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Section 2.9 Fees.

 

(a) Origination Fee. The Borrower shall pay the Lender a fully earned and
non-refundable origination fee of $135,000, payable in three (3) equal
installments of $45,000 due upon the execution of this Agreement and on the
first two anniversaries thereof.

 

(b) Unused Line Fee. For the purposes of this Section 2.9(b), “Unused Amount”
means the Maximum Line Amount reduced by (i) the outstanding Revolving Advances,
(ii) the Real Estate Reserve, (iii) the Permanent Reserve, and (iv) the Letter
of Credit Reserve. The Borrower agrees to pay to the Lender an unused line fee
at the rate of one-quarter of one percent (0.25%) per annum on the average daily
Unused Amount from the date of this Agreement to and including the Termination
Date, due and payable monthly in arrears on the first day of the month and on
the Termination Date.

 

(c) Facility Fee. The Borrower agrees to pay to the Lender an annual facility
fee in the amount of $25,000, which facility fee shall be due and payable on the
first and second anniversary of the Closing Date.

 

(d) Collateral Exam Fees. The Borrower shall pay the Lender fees in connection
with any collateral exams, audits or inspections conducted by or on behalf of
the Lender of any Collateral or the Borrower’s operations or business at the
rates established from time to time by the Lender as its collateral exam fees
(which fees are currently $95 per hour per collateral examiner), together with
all actual out-of-pocket costs and expenses incurred in conducting any such
collateral examination or inspection.

 

(e) Letter of Credit Fees. The Borrower shall pay to the Lender a fee with
respect to each Letter of Credit, if any, accruing on a daily basis and computed
at an annual rate of one and one-half of one percent (1.5%) of the aggregate
amount that may then be drawn, assuming compliance with all conditions for
drawing (the “Aggregate Face Amount”), from and including the date of issuance
of such Letter of Credit until such date as such Letter of Credit shall
terminate by its terms or be returned to the Lender, due and payable monthly in
arrears on the first day of each month and on the date that the Letter of Credit
shall terminate by its terms or be returned to the Lender; provided, however,
effective as of the first day of the month in which any Default Period begins
through the last day of such Default Period, or any shorter time period that the
Lender may determine, in the Lender’s sole discretion and without waiving any of
its other rights and remedies, such fee shall increase to three and one-half of
one percent (3.5%) of the Aggregate Face Amount; provided, further, however, the
fee shall not increase as to the face amount of any Letter of Credit that is
secured by cash. The foregoing fee shall be in addition to any and all fees,
commissions and charges imposed by Lender with respect to or in connection with
such Letter of Credit.

 

(f) Letter of Credit Administrative Fees. The Borrower shall pay all
administrative fees charged by Lender in connection with the honoring of drafts
under any Letter of Credit, amendments thereto, transfers thereof and all other
activity with respect to the Letters of Credit at the then – current rates
published by Lender for such services rendered on behalf of customers of Lender
generally.

 

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(g) Termination Fee. If (i) the Lender terminates the Credit Facility during a
Default Period, or if (ii) the Borrower terminates the Credit Facility on a date
prior to the Maturity Date, then the Borrower shall pay the Lender as liquidated
damages a termination fee in an amount equal to a percentage of the Maximum Line
Amount calculated as follows: (A) three percent (3%) if the termination occurs
on or before the first anniversary of the Funding Date; (B) two percent (2%) if
the termination occurs after the first anniversary of the Funding Date, but on
or before the second anniversary of the Funding Date; and (C) one percent
(1%) if the termination occurs after the second anniversary of the Funding Date.

 

(h) [Intentionally Omitted].

 

(i) [Intentionally Omitted].

 

(j) Waiver of Termination and Prepayment Fees. The Borrower, at the Lender’s
discretion, will be excused from the payment of termination and prepayment fees
otherwise due under Section 2.9(g) if such termination or prepayment is made
because of refinancing through another division of Lender.

 

(k) Overadvance Fees. The Borrower shall pay an Overadvance fee in the amount of
$500.00 for each day or portion thereof during which an Overadvance exists,
regardless of how the Overadvance arises or whether or not the Overadvance has
been agreed to in advance by the Lender. The acceptance of payment of an
Overadvance fee by the Lender shall not be deemed to constitute either consent
to the Overadvance or a waiver of the resulting Event of Default, unless the
Lender specifically consents to the Overadvance in writing and waives the Event
of Default on whatever conditions the Lender deems appropriate.

 

(l) Other Fees and Charges; Payment of Fees. The Lender may from time to time
impose additional fees and charges as consideration for Advances made in excess
of Availability or for other events that constitute an Event of Default or a
Default hereunder, including fees and charges for the administration of
Collateral by the Lender, and fees and charges for the late delivery of reports,
which may be assessed in the Lender’s sole discretion on either an hourly,
periodic, or flat fee basis, and in lieu of or in addition to imposing interest
at the Default Rate.

 

Section 2.10 Time for Interest Payments; Payment on Non-Business Days;
Computation of Interest and Fees.

 

(a) Time For Interest Payments. Accrued and unpaid interest shall be due and
payable on the first day of each month and on the Termination Date (each an
“Interest Payment Date”), or if any such day is not a Business Day, on the next
succeeding Business Day. Interest will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from the date of
advance to the Interest Payment Date. If an Interest Payment Date is not a
Business Day, payment shall be made on the next succeeding Business Day.

 

(b) Payment on Non-Business Days. Whenever any payment to be made hereunder
shall be stated to be due on a day which is not a Business Day, such payment may
be made on the next succeeding Business Day, and such extension of time shall in
such case be

 

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included in the computation of interest on the Advances or the fees hereunder,
as the case may be.

 

(c) Computation of Interest and Fees. Interest accruing on the outstanding
principal balance of the Advances and fees hereunder outstanding from time to
time shall be computed on the basis of actual number of days elapsed in a year
of 360 days.

 

Section 2.11 Lockbox and Collateral Account; Sweep of Funds.

 

(a) Lockbox and Collateral Account.

 

(i) The Borrower upon request by Lender at any time after the occurrence of an
Event of Default, shall instruct all account debtors to pay all Accounts
directly to the Lockbox. If, notwithstanding such instructions, the Borrower
receives any payments on Accounts, the Borrower shall deposit such payments into
the Collateral Account. The Borrower shall also deposit all cash proceeds of
Collateral regardless of source or nature directly into the Collateral Account.
Until so deposited, the Borrower shall hold all such payments and cash proceeds
in trust for and as the property of the Lender and shall not commingle such
property with any of its other funds or property. All deposits in the Collateral
Account shall constitute proceeds of Collateral and shall not constitute payment
of the Obligations.

 

(ii) All items deposited in the Collateral Account shall be subject to final
payment. If any such item is returned uncollected, the Borrower will immediately
pay the Lender, or, for items deposited in the Collateral Account, the bank
maintaining such account, the amount of that item, or such bank at its
discretion may charge any uncollected item to the Borrower’s commercial account
or other account. The Borrower shall be liable as an endorser on all items
deposited in the Collateral Account, whether or not in fact endorsed by the
Borrower.

 

(b) Sweep of Funds. The Lender shall from time to time, in accordance with the
Wholesale Lockbox and Collection Account Agreement, cause funds in the
Collateral Account to be transferred to the Lender’s general account for payment
of the Obligations. Amounts deposited in the Collateral Account shall not be
subject to withdrawal by the Borrower, except after payment in full and
discharge of all Obligations.

 

Section 2.12 Voluntary Prepayment; Termination of the Credit Facility by the
Borrower. Except as otherwise provided herein, the Borrower may prepay the
Advances in whole at any time or from time to time in part. The Borrower may
terminate the Credit Facility at any time if it (i) gives the Lender at least 30
days advance written notice prior to the proposed Termination Date, and
(ii) pays the Lender applicable termination fees in accordance with
Section 2.9(g). If the Borrower terminates the Credit Facility, all Obligations
shall be immediately due and payable, and if the Borrower gives the Lender less
than the required 30 days advance written notice, then the interest rate
applicable to borrowings evidenced by Revolving Note shall be the Default Rate
for the period of time commencing 30 days prior to the proposed Termination Date
through the date that the Lender actually receives such written notice. If the
Borrower does not wish the Lender to consider renewal of the Credit Facility on
the next Maturity Date, then the Borrower shall give the Lender at least 30 days
written notice

 

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prior to the Maturity Date that it will not be requesting renewal. If the
Borrower fails to give the Lender such timely notice, then the interest rate
applicable to borrowings evidenced by the Revolving Note shall be the Default
Rate for the period of time commencing 30 days prior to the Maturity Date
through the date that the Lender actually receives such written notice.

 

Section 2.13 Mandatory Prepayment. Without notice or demand, if the sum of the
outstanding principal balance of the Revolving Advances shall at any time exceed
the Borrowing Base, the Borrower shall (i) first, immediately prepay the
Revolving Advances to the extent necessary to eliminate such excess; and (ii) if
prepayment in full of the Revolving Advances is insufficient to eliminate such
excess, pay to the Lender in immediately available funds for deposit in the
Special Account an amount equal to the remaining excess. Any payment received by
the Lender hereunder or under Section 2.12 may be applied to the Obligations, in
such order and in such amounts as the Lender in its sole discretion may
determine from time to time.

 

Section 2.14 Revolving Advances to Pay Obligations. Notwithstanding the terms of
Section 2.1, the Lender may, in its discretion at any time or from time to time,
without the Borrower’s request and even if the conditions set forth in
Section 4.2 would not be satisfied, make a Revolving Advance in an amount equal
to the portion of the Obligations from time to time due and payable, and may
deliver the proceeds of any such Revolving Advance to any affiliate of the
Lender in satisfaction of any Wells Fargo Bank Affiliate Obligations.

 

Section 2.15 Use of Proceeds. The Borrower shall use the proceeds of Advances
and each Letter of Credit for ordinary working capital purposes.

 

Section 2.16 Liability Records. The Lender may maintain from time to time, at
its discretion, records as to the Obligations. All entries made on any such
record shall be presumed correct until the Borrower establishes the contrary.
Upon the Lender’s demand, the Borrower will admit and certify in writing the
exact principal balance of the Obligations that the Borrower then asserts to be
outstanding. Any billing statement or accounting rendered by the Lender shall be
conclusive and fully binding on the Borrower unless the Borrower gives the
Lender specific written notice of exception within 30 days after receipt.

 

ARTICLE III

 

SECURITY INTEREST; OCCUPANCY; SETOFF

 

Section 3.1 Grant of Security Interest. The Borrower hereby pledges, assigns and
grants to the Lender, for the benefit of itself and as agent for any affiliate
of the Lender that may provide credit or services to the Borrower that
constitute Wells Fargo Bank Affiliate Obligations, a lien and security interest
(collectively referred to as the “Security Interest”) in the Collateral, as
security for the payment and performance of the Obligations. Upon request by the
Lender, the Borrower will grant the Lender, for the benefit of itself and as
agent for any affiliate of the Lender that may provide credit or services to the
Borrower that constitute Wells Fargo Bank Affiliate Obligations, a security
interest in all commercial tort claims that the Borrower may have against any
Person.

 

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Section 3.2 Notification of Account Debtors and Other Obligors. The Lender may
at any time (whether or not a Default Period then exists) notify any account
debtor or other Person obligated to pay the amount due that such right to
payment has been assigned or transferred to the Lender for security and shall be
paid directly to the Lender. The Borrower will join in giving such notice if the
Lender so requests. At any time after the Borrower or the Lender gives such
notice to an account debtor or other obligor, the Lender may, but need not, in
the Lender’s name or in the Borrower’s name, demand, sue for, collect or receive
any money or property at any time payable or receivable on account of, or
securing, any such right to payment, or grant any extension to, make any
compromise or settlement with or otherwise agree to waive, modify, amend or
change the obligations (including collateral obligations) of any such account
debtor or other obligor. The Lender may, in the Lender’s name or in the
Borrower’s name, as the Borrower’s agent and attorney-in-fact, notify the United
States Postal Service to change the address for delivery of the Borrower’s mail
to any address designated by the Lender, otherwise intercept the Borrower’s
mail, and receive, open and dispose of the Borrower’s mail, applying all
Collateral as permitted under this Agreement and holding all other mail for the
Borrower’s account or forwarding such mail to the Borrower’s last known address.

 

Section 3.3 Assignment of Insurance. As additional security for the payment and
performance of the Obligations, the Borrower hereby assigns to the Lender any
and all monies (including proceeds of insurance and refunds of unearned
premiums) due or to become due under, and all other rights of the Borrower with
respect to, any and all policies of insurance now or at any time hereafter
covering the Collateral or any evidence thereof or any business records or
valuable papers pertaining thereto, and the Borrower hereby directs the issuer
of any such policy to pay all such monies directly to the Lender. At any time,
whether or not a Default Period then exists, the Lender may (but need not), in
the Lender’s name or in the Borrower’s name, execute and deliver proof of claim,
receive all such monies, endorse checks and other instruments representing
payment of such monies, and adjust, litigate, compromise or release any claim
against the issuer of any such policy. Any monies received as payment for any
loss under any insurance policy mentioned above (other than liability insurance
policies) or as payment of any award or compensation for condemnation or taking
by eminent domain, shall be paid over to the Lender to be applied, at the option
of the Lender, either to the prepayment of the Obligations or shall be disbursed
to the Borrower under staged payment terms reasonably satisfactory to the Lender
for application to the cost of repairs, replacements, or restorations. Any such
repairs, replacements, or restorations shall be effected with reasonable
promptness and shall be of a value at least equal to the value of the items or
property destroyed prior to such damage or destruction.

 

Section 3.4 Occupancy.

 

(a) The Borrower hereby irrevocably grants to the Lender the right to take
exclusive possession of the Premises at any time during a Default Period without
notice or consent.

 

(b) The Lender may use the Premises only to hold, process, manufacture, sell,
use, store, liquidate, realize upon or otherwise dispose of goods that are
Collateral and for other purposes that the Lender may in good faith deem to be
related or incidental purposes.

 

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(c) The Lender’s right to hold the Premises shall cease and terminate upon the
earlier of (i) payment in full and discharge of all Obligations and termination
of the Credit Facility, and (ii) final sale or disposition of all goods
constituting Collateral and delivery of all such goods to purchasers.

 

(d) The Lender shall not be obligated to pay or account for any rent or other
compensation for the possession, occupancy or use of any of the Premises;
provided, however, that if the Lender does pay or account for any rent or other
compensation for the possession, occupancy or use of any of the Premises, the
Borrower shall reimburse the Lender promptly for the full amount thereof. In
addition, the Borrower will pay, or reimburse the Lender for, all taxes, fees,
duties, imposts, charges and expenses at any time incurred by or imposed upon
the Lender by reason of the execution, delivery, existence, recordation,
performance or enforcement of this Agreement or the provisions of this
Section 3.4.

 

Section 3.5 License. Without limiting the generality of any other Security
Document, the Borrower hereby grants to the Lender a non-exclusive, worldwide
and royalty-free license to use or otherwise exploit all Intellectual Property
Rights of the Borrower for the purpose of: (a) completing the manufacture of any
in-process materials during any Default Period so that such materials become
saleable Inventory, all in accordance with the same quality standards previously
adopted by the Borrower for its own manufacturing and subject to the Borrower’s
reasonable exercise of quality control; and (b) selling, leasing or otherwise
disposing of any or all Collateral during any Default Period.

 

Section 3.6 Financing Statement. The Borrower authorizes the Lender to file from
time to time, such financing statements against collateral described as “all
personal property” or “all assets” or describing specific items of collateral
including commercial tort claims as the Lender deems necessary or useful to
perfect the Security Interest. All financing statements filed before the date
hereof to perfect the Security Interest were authorized by the Borrower and are
hereby re-authorized. A carbon, photographic or other reproduction of this
Agreement or of any financing statements signed by the Borrower is sufficient as
a financing statement and may be filed as a financing statement in any state to
perfect the security interests granted hereby. For this purpose, the Borrower
represents and warrants that the following information is true and correct:

 

Name and address of Debtor:

 

Provena Foods Inc.

5010 Eucalyptus Avenue

Chino, California 91710

 

Federal Employer Identification No. 95-2782215

Organizational Identification No. C0662567

 

Name and address of Secured Party:

Wells Fargo Business Credit

245 South Los Robles Avenue, Suite 700

Pasadena, California 91101

 

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Section 3.7 Setoff. The Lender may at any time or from time to time, at its sole
discretion and without demand and without notice to anyone, setoff any liability
owed to the Borrower by the Lender, whether or not due, against any Obligation,
whether or not due. In addition, each other Person holding a participating
interest in any Obligations shall have the right to appropriate or setoff any
deposit or other liability then owed by such Person to the Borrower, whether or
not due, and apply the same to the payment of said participating interest, as
fully as if such Person had lent directly to the Borrower the amount of such
participating interest.

 

Section 3.8 Collateral. This Agreement does not contemplate a sale of accounts,
contract rights or chattel paper, and, as provided by law, the Borrower is
entitled to any surplus and shall remain liable for any deficiency. The Lender’s
duty of care with respect to Collateral in its possession (as imposed by law)
shall be deemed fulfilled if it exercises reasonable care in physically keeping
such Collateral, or in the case of Collateral in the custody or possession of a
bailee or other third Person, exercises reasonable care in the selection of the
bailee or other third Person, and the Lender need not otherwise preserve,
protect, insure or care for any Collateral. The Lender shall not be obligated to
preserve any rights the Borrower may have against prior parties, to realize on
the Collateral at all or in any particular manner or order or to apply any cash
proceeds of the Collateral in any particular order of application. The Lender
has no obligation to clean-up or otherwise prepare the Collateral for sale. The
Borrower waives any right it may have to require the Lender to pursue any third
Person for any of the Obligations.

 

ARTICLE IV

 

CONDITIONS OF LENDING

 

Section 4.1 Conditions Precedent to the Initial Advances and Letter of Credit.
The Lender’s obligation to make the initial Advances or to cause any Letters of
Credit to be issued shall be subject to the condition precedent that the Lender
shall have received all of the following, each properly executed by the
appropriate party and in form and substance satisfactory to the Lender:

 

(a) This Agreement.

 

(b) The Note.

 

(c) A Standby Letter of Credit Agreement and L/C Application for each Letter of
Credit that the Borrower wishes to have issued thereunder.

 

(d) The Letter of Credit Reimbursement Agreement and all documents related
thereto, including any opinions of counsel requested by Lender.

 

(e) The Deed of Trust.

 

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(f) A true and correct copy of any and all leases pursuant to which the Borrower
is leasing the Premises, together with a landlord’s disclaimer and consent with
respect to each such lease.

 

(g) A true and correct copy of any and all mortgages pursuant to which the
Borrower has mortgaged the Premises, together with a mortgagee’s disclaimer and
consent with respect to each such mortgage.

 

(h) A true and correct copy of any and all agreements pursuant to which the
Borrower’s property is in the possession of any Person other than the Borrower,
together with, in the case of any goods held by such Person for resale, (i) a
consignee’s acknowledgment and waiver of Liens, (ii) UCC financing statements
sufficient to protect the Borrower’s and the Lender’s interests in such goods,
and (iii) UCC searches showing that no other secured party has filed a financing
statement against such Person and covering property similar to the Borrower’s
other than the Borrower, or if there exists any such secured party, evidence
that each such secured party has received notice from the Borrower and the
Lender sufficient to protect the Borrower’s and the Lender’s interests in the
Borrower’s goods from any claim by such secured party.

 

(i) An acknowledgment and waiver of Liens from each warehouse in which the
Borrower is storing Inventory.

 

(j) A true and correct copy of any and all agreements pursuant to which the
Borrower’s property is in the possession of any Person other than the Borrower,
together with, (i) an acknowledgment and waiver of Liens from each subcontractor
who has possession of the Borrower’s goods from time to time, (ii) UCC financing
statements sufficient to protect the Borrower’s and the Lender’s interests in
such goods, and (iii) UCC searches showing that no other secured party has filed
a financing statement covering such Person’s property other than the Borrower,
or if there exists any such secured party, evidence that each such secured party
has received notice from the Borrower and the Lender sufficient to protect the
Borrower’s and the Lender’s interests in the Borrower’s goods from any claim by
such secured party.

 

(k) The Wholesale Lockbox and Collection Account Agreement.

 

(l) Control agreements with each bank at which the Borrower maintains deposit
accounts.

 

(m) Pledge agreement executed by Borrower in favor of Lender with respect to the
money market investment account maintained by Wells Fargo Brokerage, LLC
together with a control agreement executed by Borrower and Wells Fargo
Brokerage, LLC in favor of Lender, all in form and substance satisfactory to
Lender.

 

(n) A Patent and Trademark Security Agreement.

 

(o) Current searches of appropriate filing offices showing that (i) no Liens
have been filed and remain in effect against the Borrower except Permitted Liens
or Liens held by Persons who have agreed in writing that upon receipt of
proceeds of the initial Advances, they will satisfy, release or terminate such
Liens in a manner satisfactory to the Lender, and (ii) the

 

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Lender has duly filed all financing statements necessary to perfect the Security
Interest, to the extent the Security Interest is capable of being perfected by
filing.

 

(p) A certificate of the Borrower’s Secretary or Assistant Secretary certifying
that attached to such certificate are (i) the resolutions of the Borrower’s
Directors and, if required, Owners, authorizing the execution, delivery and
performance of the Loan Documents, (ii) true, correct and complete copies of the
Borrower’s Constituent Documents, and (iii) examples of the signatures of the
Borrower’s Officers or agents authorized to execute and deliver the Loan
Documents and other instruments, agreements and certificates, including Advance
requests, on the Borrower’s behalf.

 

(q) A current certificate issued by the Secretary of State of California,
certifying that the Borrower is in compliance with all applicable organizational
requirements of the State of California.

 

(r) Evidence that the Borrower is duly licensed or qualified to transact
business in all jurisdictions where the character of the property owned or
leased or the nature of the business transacted by it makes such licensing or
qualification necessary.

 

(s) A certificate of an Officer of the Borrower confirming, in his personal
capacity, the representations and warranties set forth in Article V.

 

(t) A Validity Guaranty executed by Theodore Arena and Tom Mulroney in his
personal capacity in favor of the Lender.

 

(u) Certificates of the insurance required hereunder, with all hazard insurance
containing a lender’s loss payable endorsement in the Lender’s favor and with
all liability insurance naming the Lender as an additional insured.

 

(v) Payment of the fees and commissions due under Section 2.9 through the date
of the initial Advance or Letter of Credit and expenses incurred by the Lender
through such date and required to be paid by the Borrower under Section 8.5,
including all legal expenses incurred through the date of this Agreement.

 

(w) Evidence that after making the initial Revolving Advance, satisfying all
obligations owed to Comerica Bank, satisfying all trade payables older than 60
days from invoice date, book overdrafts and closing costs, Availability shall be
not less than $3,000,000.

 

(x) A Customer Identification Information form and such other forms and
verification as the Lender may need to comply with the U.S.A. Patriot Act.

 

(y) with respect to the real estate that is encumbered by the Deed of Trust(i)
an appraisal ordered by the Lender or its agent of said real property and all
improvements thereon, conforming to Uniform Standards of Professional Appraisal
Practice and issued by a real estate appraiser acceptable to the Lender,
reflecting values acceptable to the Lender in its discretion, (ii) an American
Land Title Association policy of title insurance, with such endorsements as the
Lender may require, issued by an insurer in such amounts as the Lender may
require, insuring the Lender’s first priority lien on said real estate, subject
only to such

 

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exceptions as the Lender in its discretion may approve, together with such
evidence relating to the payment of liens or potential liens as the Lender may
require, and (iii) an American Land Title Association survey certified to the
Lender and to the title company that is acceptable to the Lender.

 

(z) with respect to the real estate that is encumbered by the Deed of Trust
(i) a current environmental site assessment indicating that the real property is
subject to no “recognized environmental conditions”, as that term is defined by
the American Society for Testing and Materials, in its standards for
environmental due diligence, and is not in need of remedial action to avoid
subjecting its owner to any present or future liability or contingent liability
with respect to the release of toxic or hazardous wastes or substances.

 

(aa) with respect to the real estate that is encumbered by the Deed of Trust
(i) a flood hazard determination form, confirming whether or not the parcel is
in a flood hazard area and whether or not flood insurance must be obtained, and,
if the real estate is located in a flood hazard area, (ii) a policy of flood
insurance.

 

(bb) with respect to the real estate that is encumbered by the Deed of Trust,
copies of management services and maintenance contracts, fire, health and safety
reports, certificates of occupancy, leases and rent rolls, and such other
information relating to the real estate and the improvements thereon that the
Lender in its discretion deems necessary.

 

(cc) Such other documents as the Lender in its sole discretion may require.

 

Section 4.2 Conditions Precedent to All Advances and Letters of Credit. The
Lender’s obligation to make each Advance or to cause the issuance of a Letter of
Credit shall be subject to the further conditions precedent that:

 

(a) the representations and warranties contained in Article V are correct on and
as of the date of such Advance or issuance of a Letter of Credit as though made
on and as of such date, except to the extent that such representations and
warranties relate solely to an earlier date; and

 

(b) no event has occurred and is continuing, or would result from such Advance
or issuance of a Letter of Credit which constitutes a Default or an Event of
Default.

 

ARTICLE V

 

REPRESENTATIONS AND WARRANTIES

 

The Borrower represents and warrants to the Lender as follows:

 

Section 5.1 Existence and Power; Name; Chief Executive Office; Inventory and
Equipment Locations; Federal Employer Identification Number and Organizational
Identification Number. The Borrower is a corporation, duly organized, validly
existing and in good standing under the laws of the State of California and is
duly licensed or qualified to transact business in all jurisdictions where the
character of the property owned or leased or the nature of the business
transacted by it makes such licensing or qualification necessary. The Borrower
has all requisite

 

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power and authority to conduct its business, to own its properties and to
execute and deliver, and to perform all of its obligations under, the Loan
Documents. During its existence, the Borrower has done business solely under the
names set forth in Schedule 5.1. The Borrower’s chief executive office and
principal place of business is located at the address set forth in Schedule 5.1,
and all of the Borrower’s records relating to its business or the Collateral are
kept at that location. All Inventory and Equipment is located at that location
or at one of the other locations listed in Schedule 5.1. The Borrower’s federal
employer identification number and organization identification number are
correctly set forth in Section 3.6.

 

Section 5.2 Capitalization. Schedule 5.2 constitutes a correct and complete list
of all Persons holding ownership interests and rights to acquire ownership
interests which if fully exercised would cause such Person to hold more than
five percent (5%) of all ownership interests of the Borrower on a fully diluted
basis, and an organizational chart showing the ownership structure of all
Subsidiaries of the Borrower.

 

Section 5.3 Authorization of Borrowing; No Conflict as to Law or Agreements. The
execution, delivery and performance by the Borrower of the Loan Documents and
the borrowings from time to time hereunder have been duly authorized by all
necessary corporate action and do not and will not (i) require any consent or
approval of the Borrower’s Owners; (ii) require any authorization, consent or
approval by, or registration, declaration or filing with, or notice to, any
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign, or any third party, except such authorization, consent,
approval, registration, declaration, filing or notice as has been obtained,
accomplished or given prior to the date hereof; (iii) violate any provision of
any law, rule or regulation (including Regulation X of the Board of Governors of
the Federal Reserve System) or of any order, writ, injunction or decree
presently in effect having applicability to the Borrower or of the Borrower’s
Constituent Documents; (iv) result in a breach of or constitute a default under
any indenture or loan or credit agreement or any other material agreement, lease
or instrument to which the Borrower is a party or by which it or its properties
may be bound or affected; or (v) result in, or require, the creation or
imposition of any Lien (other than the Security Interest) upon or with respect
to any of the properties now owned or hereafter acquired by the Borrower.

 

Section 5.4 Legal Agreements. This Agreement constitutes and, upon due execution
by the Borrower, the other Loan Documents will constitute the legal, valid and
binding obligations of the Borrower, enforceable against the Borrower in
accordance with their respective terms.

 

Section 5.5 Subsidiaries. Except as set forth in Schedule 5.5 hereto, the
Borrower has no Subsidiaries.

 

Section 5.6 Financial Condition; No Adverse Change. The Borrower has furnished
to the Lender its audited financial statements for its fiscal year ended
December 31, 2004 and unaudited financial statements for the fiscal-year-to-date
period ended August 31, 2005, and those statements fairly present the Borrower’s
financial condition on the dates thereof and the results of its operations and
cash flows for the periods then ended and were prepared in accordance with GAAP.
Since the date of the most recent financial statements, there has been no

 

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change in the Borrower’s business, properties or condition (financial or
otherwise) which has had a Material Adverse Effect.

 

Section 5.7 Litigation. There are no actions, suits or proceedings pending or,
to the Borrower’s knowledge, threatened against or affecting the Borrower or any
of its Affiliates or the properties of the Borrower or any of its Affiliates
before any court or governmental department, commission, board, bureau, agency
or instrumentality, domestic or foreign, which, if determined adversely to the
Borrower or any of its Affiliates, would have a Material Adverse Effect on the
financial condition, properties or operations of the Borrower or any of its
Affiliates.

 

Section 5.8 Regulation U. The Borrower is not engaged in the business of
extending credit for the purpose of purchasing or carrying margin stock (within
the meaning of Regulation U of the Board of Governors of the Federal Reserve
System), and no part of the proceeds of any Advance will be used to purchase or
carry any margin stock or to extend credit to others for the purpose of
purchasing or carrying any margin stock.

 

Section 5.9 Taxes. The Borrower and its Affiliates have paid or caused to be
paid to the proper authorities when due all federal, state and local taxes
required to be withheld by each of them. The Borrower and its Affiliates have
filed all federal, state and local tax returns which to the knowledge of the
Officers of the Borrower or any Affiliate, as the case may be, are required to
be filed, and the Borrower and its Affiliates have paid or caused to be paid to
the respective taxing authorities all taxes as shown on said returns or on any
assessment received by any of them to the extent such taxes have become due.

 

Section 5.10 Titles and Liens. The Borrower has good and absolute title to all
Collateral free and clear of all Liens other than Permitted Liens. No financing
statement naming the Borrower as debtor is on file in any office except to
perfect only Permitted Liens.

 

Section 5.11 Intellectual Property Rights.

 

(a) Owned Intellectual Property. Schedule 5.11 is a complete list of all
patents, applications for patents, trademarks, applications to register
trademarks, service marks, applications to register service marks, mask works,
trade dress and copyrights for which the Borrower is the owner of record (the
“Owned Intellectual Property”). Except as disclosed on Schedule 5.11, (i) the
Borrower owns the Owned Intellectual Property free and clear of all restrictions
(including covenants not to sue a third party), court orders, injunctions,
decrees, writs or Liens, whether by written agreement or otherwise, (ii) no
Person other than the Borrower owns or has been granted any right in the Owned
Intellectual Property, (iii) all Owned Intellectual Property is valid,
subsisting and enforceable and (iv) the Borrower has taken all commercially
reasonable action necessary to maintain and protect the Owned Intellectual
Property.

 

(b) Agreements with Employees and Contractors. The Borrower has entered into a
legally enforceable agreement with each of its employees and subcontractors
obligating each such Person to assign to the Borrower, without any additional
compensation, any Intellectual Property Rights created, discovered or invented
by such Person in the course of such Person’s employment or engagement with the
Borrower (except to the extent prohibited by law),

 

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and further requiring such Person to cooperate with the Borrower, without any
additional compensation, in connection with securing and enforcing any
Intellectual Property Rights therein; provided, however, that the foregoing
shall not apply with respect to employees and subcontractors whose job
descriptions are of the type such that no such assignments are reasonably
foreseeable.

 

(c) Intellectual Property Rights Licensed from Others. Schedule 5.11 is a
complete list of all agreements under which the Borrower has licensed
Intellectual Property Rights from another Person (“Licensed Intellectual
Property”) other than readily available, non-negotiated licenses of computer
software and other intellectual property used solely for performing accounting,
word processing and similar administrative tasks (“Off-the-shelf Software”) and
a summary of any ongoing payments the Borrower is obligated to make with respect
thereto. Except as disclosed on Schedule 5.11 and in written agreements, copies
of which have been given to the Lender, the Borrower’s licenses to use the
Licensed Intellectual Property are free and clear of all restrictions, Liens,
court orders, injunctions, decrees, or writs, whether by written agreement or
otherwise. Except as disclosed on Schedule 5.11, the Borrower is not obligated
or under any liability whatsoever to make any payments of a material nature by
way of royalties, fees or otherwise to any owner of, licensor of, or other
claimant to, any Intellectual Property Rights.

 

(d) Other Intellectual Property Needed for Business. Except for Off-the-shelf
Software and as disclosed on Schedule 5.11, the Owned Intellectual Property and
the Licensed Intellectual Property constitute all Intellectual Property Rights
used or necessary to conduct the Borrower’s business as it is presently
conducted or as the Borrower reasonably foresees conducting it.

 

(e) Infringement. Except as disclosed on Schedule 5.11, the Borrower has no
knowledge of, and has not received any written claim or notice alleging, any
Infringement of another Person’s Intellectual Property Rights (including any
written claim that the Borrower must license or refrain from using the
Intellectual Property Rights of any third party) nor, to the Borrower’s
knowledge, is there any threatened claim or any reasonable basis for any such
claim.

 

Section 5.12 Plans. Except as disclosed to the Lender in writing prior to the
date hereof, neither the Borrower nor any ERISA Affiliate (i) maintains or has
maintained any Pension Plan, (ii) contributes or has contributed to any
Multiemployer Plan or (iii) provides or has provided post-retirement medical or
insurance benefits with respect to employees or former employees (other than
benefits required under Section 601 of ERISA, Section 4980B of the IRC or
applicable state law). Neither the Borrower nor any ERISA Affiliate has received
any notice or has any knowledge to the effect that it is not in full compliance
with any of the requirements of ERISA, the IRC or applicable state law with
respect to any Plan. No Reportable Event exists in connection with any Pension
Plan. Each Plan which is intended to qualify under the IRC is so qualified, and
no fact or circumstance exists which may have an adverse effect on the Plan’s
tax-qualified status. Neither the Borrower nor any ERISA Affiliate has (i) any
accumulated funding deficiency (as defined in Section 302 of ERISA and
Section 412 of the IRC) under any Plan, whether or not waived, (ii) any
liability under Section 4201 or 4243 of ERISA for any withdrawal, partial
withdrawal, reorganization or other event under any Multiemployer Plan or
(iii) any liability or knowledge of any facts or circumstances which could
result in any liability to

 

29

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the Pension Benefit Guaranty Corporation, the Internal Revenue Service, the
Department of Labor or any participant in connection with any Plan (other than
routine claims for benefits under the Plan).

 

Section 5.13 Default. The Borrower is in compliance with all provisions of all
agreements, instruments, decrees and orders to which it is a party or by which
it or its property is bound or affected, the breach or default of which could
have a Material Adverse Effect.

 

Section 5.14 Environmental Matters.

 

(a) Except as disclosed on Schedule 5.14, there are not present in, on or under
the Premises any Hazardous Substances in such form or quantity as to create any
material liability or obligation for either the Borrower or the Lender under the
common law of any jurisdiction or under any Environmental Law, and no Hazardous
Substances have ever been stored, buried, spilled, leaked, discharged, emitted
or released in, on or under the Premises in such a way as to create any such
material liability.

 

(b) Except as disclosed on Schedule 5.14, the Borrower has not disposed of
Hazardous Substances in such a manner as to create any material liability under
any Environmental Law.

 

(c) Except as disclosed on Schedule 5.14, there have not existed in the past,
nor are there any threatened or impending requests, claims, notices,
investigations, demands, administrative proceedings, hearings or litigation
relating in any way to the Premises or the Borrower, alleging material liability
under, violation of, or noncompliance with any Environmental Law or any license,
permit or other authorization issued pursuant thereto.

 

(d) Except as disclosed on Schedule 5.14, the Borrower’s businesses are and have
in the past always been conducted in accordance with all Environmental Laws and
all licenses, permits and other authorizations required pursuant to any
Environmental Law and necessary for the lawful and efficient operation of such
businesses are in the Borrower’s possession and are in full force and effect,
nor has the Borrower been denied insurance on grounds related to potential
environmental liability. No permit required under any Environmental Law is
scheduled to expire within 12 months and there is no threat that any such permit
will be withdrawn, terminated, limited or materially changed.

 

(e) Except as disclosed on Schedule 5.14, the Premises are not and never have
been listed on the National Priorities List, the Comprehensive Environmental
Response, Compensation and Liability Information System or any similar federal,
state or local list, schedule, log, inventory or database.

 

(f) The Borrower has delivered to the Lender all environmental assessments,
audits, reports, permits, licenses and other documents describing or relating in
any way to the Premises or the Borrower’s businesses.

 

Section 5.15 Submissions to Lender. All financial and other information provided
to the Lender by or on behalf of the Borrower in connection with the Borrower’s
request for the credit facilities contemplated hereby (i) is true and correct in
all material respects, (ii) does not

 

30

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omit any material fact necessary to make such information not misleading and,
(iii) as to projections, valuations or proforma financial statements, present a
good faith opinion as to such projections, valuations and proforma condition and
results.

 

Section 5.16 Financing Statements. The Borrower has authorized the filing of
financing statements sufficient when filed to perfect the Security Interest and
the other security interests created by the Security Documents. When such
financing statements are filed in the offices noted therein, the Lender will
have a valid and perfected security interest in all Collateral which is capable
of being perfected by filing financing statements. None of the Collateral is or
will become a fixture on real estate, unless a sufficient fixture filing is in
effect with respect thereto.

 

Section 5.17 Rights to Payment. Each right to payment and each instrument,
document, chattel paper and other agreement constituting or evidencing
Collateral is (or, in the case of all future Collateral, will be when arising or
issued) the valid, genuine and legally enforceable obligation, subject to no
defense, setoff or counterclaim, of the account debtor or other obligor named
therein or in the Borrower’s records pertaining thereto as being obligated to
pay such obligation.

 

Section 5.18 Financial Solvency. Both before and after giving effect to the
transactions contemplated in the Loan Documents, none of the Borrower or its
Affiliates:

 

(a) Was or will be insolvent, as that term is used and defined in
Section 101(32) of the United States Bankruptcy Code and Section 2 of the
Uniform Fraudulent Transfer Act;

 

(b) Has unreasonably small capital or is engaged or about to engage in a
business or a transaction for which any remaining assets of the Borrower or such
Affiliate are unreasonably small;

 

(c) By executing, delivering or performing its obligations under the Loan
Documents or other documents to which it is a party or by taking any action with
respect thereto, intends to, nor believes that it will, incur debts beyond its
ability to pay them as they mature;

 

(d) By executing, delivering or performing its obligations under the Loan
Documents or other documents to which it is a party or by taking any action with
respect thereto, intends to hinder, delay or defraud either its present or
future creditors; and

 

(e) At this time contemplates filing a petition in bankruptcy or for an
arrangement or reorganization or similar proceeding under any law of any
jurisdiction, nor, to the best knowledge of the Borrower, is the subject of any
actual, pending or threatened bankruptcy, insolvency or similar proceedings
under any law of any jurisdiction.

 

Section 5.19 No Merger. The Borrower has not consolidated with or merged into
any Person, or permitted any other Person to merge into it, or acquired (in a
transaction analogous in purpose or effect to a consolidation or merger) all or
substantially all the assets of any other Person at any time during the five
(5) year period immediately prior to the date hereof.

 

31

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ARTICLE VI

 

COVENANTS

 

So long as the Obligations shall remain unpaid, or the Credit Facility shall
remain outstanding, the Borrower will comply with the following requirements,
unless the Lender shall otherwise consent in writing:

 

Section 6.1 Reporting Requirements. The Borrower will deliver, or cause to be
delivered, to the Lender each of the following, which shall be in form and
detail acceptable to the Lender:

 

(a) Annual Financial Statements. As soon as available, and in any event within
90 days after the end of each fiscal year of the Borrower, the Borrower’s
audited financial statements with the unqualified opinion of independent
certified public accountants selected by the Borrower and acceptable to the
Lender, which annual financial statements shall include the Borrower’s balance
sheet as at the end of such fiscal year and the related statements of the
Borrower’s income, retained earnings and cash flows for the fiscal year then
ended, prepared, if the Lender so requests, on a consolidating and consolidated
basis to include any Affiliates, all in reasonable detail and prepared in
accordance with GAAP, together with (i) copies of all management letters
prepared by such accountants; (ii) a report signed by such accountants stating
that in making the investigations necessary for said opinion they obtained no
knowledge, except as specifically stated, of any Default or Event of Default and
all relevant facts in reasonable detail to evidence, and the computations as to,
whether or not the Borrower is in compliance with the Financial Covenants; and
(iii) a certificate of the Borrower’s chief financial officer stating that such
financial statements have been prepared in accordance with GAAP, fairly
represent the Borrower’s financial position and the results of its operations,
and whether or not such Officer has knowledge of the occurrence of any Default
or Event of Default and, if so, stating in reasonable detail the facts with
respect thereto.

 

(b) Monthly Financial Statements. As soon as available and in any event within
20 days after the end of each month, the unaudited/internal balance sheet and
statements of income and retained earnings of the Borrower as at the end of and
for such month and for the year to date period then ended, prepared, if the
Lender so requests, on a consolidating and consolidated basis to include any
Affiliates, in reasonable detail and stating in comparative form the figures for
the corresponding date and periods in the previous year, all prepared in
accordance with GAAP, subject to year-end audit adjustments and which fairly
represent the Borrower’s financial position and the results of its operations;
and accompanied by a certificate of the Borrower’s chief financial officer,
substantially in the form of Exhibit B hereto stating (i) that such financial
statements have been prepared in accordance with GAAP, subject to year-end audit
adjustments, and fairly represent the Borrower’s financial position and the
results of its operations, (ii) whether or not such Officer has knowledge of the
occurrence of any Default or Event of Default not theretofore reported and
remedied and, if so, stating in reasonable detail the facts with respect
thereto, and (iii) all relevant facts in reasonable detail to evidence, and the
computations as to, whether or not the Borrower is in compliance with the
Financial Covenants.

 

32

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(c) Collateral Reports. Within 20 days after the end of each month or more
frequently if the Lender so requires, the aging Borrower’s accounts receivable
and its accounts payable, a detailed inventory report, an inventory
certification report, and a calculation of the Borrower’s Accounts, Eligible
Accounts, Inventory and Eligible Inventory and Accounts reconciliation as at the
end of such month or shorter time period.

 

(d) Projections. No later than 30 days prior to the first day of each fiscal
year, the Borrower’s projected balance sheets, income statements, statements of
cash flow and projected Availability for each month of such fiscal year, each in
reasonable detail. Such items will be certified by the Officer who is the
Borrower’s chief financial officer as being the most accurate projections
available and identical to the projections used by the Borrower for internal
planning purposes and be delivered with a statement of underlying assumptions
and such supporting schedules and information as the Lender may in its
discretion require.

 

(e) Supplemental Reports. Weekly, or more frequently if the Lender so requires,
the Borrower’s collection reports, copies of invoices and bills of lading for
individual sales in excess of $65,000, sales reports, credit memos and Accounts
adjustments.

 

(f) Litigation. Immediately after the commencement thereof, notice in writing of
all litigation and of all proceedings before any governmental or regulatory
agency affecting the Borrower (i) of the type described in Section 5.14(c) or
(ii) which seek a monetary recovery against the Borrower in excess of $50,000.

 

(g) Defaults. When any Officer of the Borrower becomes aware of the probable
occurrence of any Default or Event of Default, and no later than 3 days after
such Officer becomes aware of such Default or Event of Default, notice of such
occurrence, together with a detailed statement by a responsible Officer of the
Borrower of the steps being taken by the Borrower to cure the effect thereof.

 

(h) Plans. As soon as possible, and in any event within 30 days after the
Borrower knows or has reason to know that any Reportable Event with respect to
any Pension Plan has occurred, a statement signed by the Officer who is the
Borrower’s chief financial officer setting forth details as to such Reportable
Event and the action which the Borrower proposes to take with respect thereto,
together with a copy of the notice of such Reportable Event to the Pension
Benefit Guaranty Corporation. As soon as possible, and in any event within 10
days after the Borrower fails to make any quarterly contribution required with
respect to any Pension Plan under Section 412(m) of the IRC, the Borrower will
deliver to the Lender a statement signed by the Officer who is the Borrower’s
chief financial officer setting forth details as to such failure and the action
which the Borrower proposes to take with respect thereto, together with a copy
of any notice of such failure required to be provided to the Pension Benefit
Guaranty Corporation. As soon as possible, and in any event within ten days
after the Borrower knows or has reason to know that it has or is reasonably
expected to have any liability under Sections 4201 or 4243 of ERISA for any
withdrawal, partial withdrawal, reorganization or other event under any
Multiemployer Plan, the Borrower will deliver to the Lender a statement of the
Borrower’s chief financial officer setting forth details as to such liability
and the action which the Borrower proposes to take with respect thereto.

 

33

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(i) Disputes. Promptly upon knowledge thereof, notice of (i) any disputes or
claims by the Borrower’s customers; (ii) credit memos; and (iii) any goods
returned to or recovered by the Borrower.

 

(j) Officers and Directors. Promptly upon knowledge thereof, notice of any
change in the persons constituting the Borrower’s Officers and Directors.

 

(k) Collateral. Promptly upon knowledge thereof, notice of any loss of or
material damage to any Collateral or of any substantial adverse change in any
Collateral or the prospect of payment thereof.

 

(l) Commercial Tort Claims. Promptly upon knowledge thereof, notice of any
commercial tort claims it may bring against any Person, including the name and
address of each defendant, a summary of the facts, an estimate of the Borrower’s
damages, copies of any complaint or demand letter submitted by the Borrower, and
such other information as the Lender may request.

 

(m) Intellectual Property.

 

(i) 30 days prior written notice of Borrower’s intent to acquire material
Intellectual Property Rights; except for transfers permitted under Section 6.18,
the Borrower will give the Lender 30 days prior written notice of its intent to
dispose of material Intellectual Property Rights and upon request shall provide
the Lender with copies of all proposed documents and agreements concerning such
rights.

 

(ii) Promptly upon knowledge thereof, notice of (A) any Infringement of its
Intellectual Property Rights by others, (B) claims that the Borrower is
Infringing another Person’s Intellectual Property Rights and (C) any threatened
cancellation, termination or material limitation of its Intellectual Property
Rights.

 

(iii) Promptly upon receipt, copies of all registrations and filings with
respect to its Intellectual Property Rights.

 

(n) Reports to Owners. Promptly upon their distribution, copies of all financial
statements, reports and proxy statements which the Borrower shall have sent to
its Owners.

 

(o) SEC Filings. Promptly after the sending or filing thereof, copies of all
regular and periodic reports which the Borrower shall file with the Securities
and Exchange Commission or any national securities exchange.

 

(p) Tax Returns of Borrower. As soon as possible, and in any event no later than
five days after they are due to be filed, copies of the state and federal income
tax returns and all schedules thereto of the Borrower.

 

(q) Violations of Law. Promptly upon knowledge thereof, notice of the Borrower’s
violation of any law, rule or regulation, the non-compliance with which could
have a Material Adverse Effect on the Borrower.

 

34

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(r) Other Reports. From time to time, with reasonable promptness, any and all
deposit records, equipment schedules, copies of invoices to account debtors,
shipment documents and delivery receipts for goods sold, and such other
material, reports, records or information as the Lender may request, including
but not limited to an updated listing of the Borrower’s Customers which shall be
delivered to Lender on a semi-annual basis.

 

Section 6.2 Financial Covenants.

 

(a) Minimum Book Net Worth. The Borrower will maintain, during each period
described below, its Book Net Worth, determined as of the end of each month, in
an amount not less than the amount set forth for each such period:

 

Period

--------------------------------------------------------------------------------

   Minimum Book
Net Worth

--------------------------------------------------------------------------------

August 1, 2005 through September 30, 2005

   $ 7,800,000

October 1, 2005 Through December 31, 2005

   $ 7,500,000

January 1, 2006 Through March 31, 2006

   $ 7,500,000

April 1 Through June 30, 2006

   $ 7,500,000

July 1, 2006 Through September 30, 2006

   $ 7,500,000

October 1, 2006 Through December 31, 2006

   $ 7,600,000

January 1, 2007 and each month thereafter

   $ 7,600,000

 

(b) Minimum Net Income/Maximum Net Loss. The Borrower will achieve, for each
period described below, measured on a year-to-date basis, Net Income/Net Loss of
not less or more (as the case may be) than the amount set forth for each such
period (numbers appearing between “( )” are negative):

 

Quarter

--------------------------------------------------------------------------------

  

Minimum Net Income/

Maximum Net Loss

--------------------------------------------------------------------------------

 

Quarter ending September 30, 2005

   $ (750,000 )

Quarter ending December 31, 2005

   $ (900,000 )

Quarter ending March 31, 2006

   $ (200,000 )

Quarter ending June 30, 2006

   $ (200,000 )

Quarter ending September 30, 2006

   $ (250,000 )

Quarter ending December 31, 2006

   $ (250,000 )

 

(c) Minimum Debt Service Coverage Ratio. The Borrower will maintain, during each
period described below, measured on a year-to-date basis, a Debt Service
Coverage Ratio, determined as at the end of each quarter, of not less than the
ratio set forth for each such period:

 

Quarter

--------------------------------------------------------------------------------

   Minimum Debt Service
Coverage Ratio

--------------------------------------------------------------------------------

Quarter ending June 30, 2006

   0.15 to 1.00

Quarter ending September 30, 2006

   0.20 to 1.00

Quarter ending December 31, 2006

   0.28 to 1.00

Quarter ending March 31, 2007

   1.00 to 1.00

 

35

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(d) Capital Expenditures. The Borrower will not incur or contract to incur
Capital Expenditures of more than $500,000 in the aggregate during any fiscal
year.

 

Section 6.3 Permitted Liens; Financing Statements.

 

(a) The Borrower will not create, incur or suffer to exist any Lien upon or of
any of its assets, now owned or hereafter acquired, to secure any indebtedness;
excluding, however, from the operation of the foregoing, the following (each a
“Permitted Lien”; collectively, “Permitted Liens”):

 

(i) In the case of any of the Borrower’s property which is not Collateral,
covenants, restrictions, rights, easements and minor irregularities in title
which do not materially interfere with the Borrower’s business or operations as
presently conducted;

 

(ii) Liens in existence on the date hereof and listed in Schedule 6.3 hereto,
securing indebtedness for borrowed money permitted under Section 6.4;

 

(iii) The Security Interest and Liens created by the Security Documents; and

 

(iv) Purchase money Liens relating to the acquisition of machinery and equipment
of the Borrower not exceeding the lesser of cost or fair market value thereof,
not exceeding $50,000 for any one purchase or $100,000 in the aggregate during
any fiscal year, and so long as no Default Period is then in existence and none
would exist immediately after such acquisition.

 

(b) The Borrower will not amend any financing statements in favor of the Lender
except as permitted by law. Any authorization by the Lender to any Person to
amend financing statements in favor of the Lender shall be in writing.

 

Section 6.4 Indebtedness. The Borrower will not incur, create, assume or permit
to exist any indebtedness or liability on account of deposits or advances or any
indebtedness for borrowed money or letters of credit issued on the Borrower’s
behalf, or any other indebtedness or liability evidenced by notes, bonds,
debentures or similar obligations, except:

 

(a) Indebtedness arising hereunder;

 

(b) Indebtedness of the Borrower in existence on the date hereof and listed in
Schedule 6.4 hereto; and

 

(c) Indebtedness relating to Permitted Liens.

 

36

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Section 6.5 Guaranties. The Borrower will not assume, guarantee, endorse or
otherwise become directly or contingently liable in connection with any
obligations of any other Person, except:

 

(a) The endorsement of negotiable instruments by the Borrower for deposit or
collection or similar transactions in the ordinary course of business; and

 

(b) Guaranties, endorsements and other direct or contingent liabilities in
connection with the obligations of other Persons, in existence on the date
hereof and listed in Schedule 6.4 hereto.

 

Section 6.6 Investments and Subsidiaries. The Borrower will not make or permit
to exist any loans or advances to, or make any investment or acquire any
interest whatsoever in, any other Person or Affiliate, including any partnership
or joint venture, nor purchase or hold beneficially any stock or other
securities or evidence of indebtedness of any other Person or Affiliate, except:

 

(a) Investments in direct obligations of the United States of America or any
agency or instrumentality thereof whose obligations constitute full faith and
credit obligations of the United States of America having a maturity of one year
or less, commercial paper issued by U.S. corporations rated “A-1” or “A-2” by
Standard & Poor’s Ratings Services or “P-1” or “P-2” by Moody’s Investors
Service or certificates of deposit or bankers’ acceptances having a maturity of
one year or less issued by members of the Federal Reserve System having deposits
in excess of $100,000,000 (which certificates of deposit or bankers’ acceptances
are fully insured by the Federal Deposit Insurance Corporation);

 

(b) Travel advances or loans to the Borrower’s Officers and employees not
exceeding at any one time an aggregate of $50,000;

 

(c) Prepaid rent not exceeding one month or security deposits; and

 

(d) Current investments in the Subsidiaries in existence on the date hereof and
listed in Schedule 5.5 hereto.

 

Section 6.7 Dividends and Distributions. The Borrower will not declare or pay
any dividends (other than dividends payable solely in stock of the Borrower) on
any class of its stock, or make any payment on account of the purchase,
redemption or other retirement of any shares of such stock, or other securities
or evidence of its indebtedness or make any distribution in respect thereof,
either directly or indirectly.

 

Section 6.8 Salaries. The Borrower will not pay excessive or unreasonable
salaries, bonuses, commissions, consultant fees or other compensation; or
increase the salary, bonus, commissions, consultant fees or other compensation
of any Director, Officer or consultant, or any member of their families, by more
than 10% in any one year, either individually or for all such persons in the
aggregate, or pay any such increase from any source other than profits earned in
the year of payment.

 

Section 6.9 [Intentionally Omitted].

 

37

--------------------------------------------------------------------------------

Section 6.10 Books and Records; Collateral Examination, Inspection and
Appraisals.

 

(a) The Borrower will keep accurate books of record and account for itself
pertaining to the Collateral and pertaining to the Borrower’s business and
financial condition and such other matters as the Lender may from time to time
request in which true and complete entries will be made in accordance with GAAP
and, upon the Lender’s request, will permit any officer, employee, attorney,
accountant or other agent of the Lender to audit, review, make extracts from or
copy any and all company and financial books and records of the Borrower at all
times during ordinary business hours, to send and discuss with account debtors
and other obligors requests for verification of amounts owed to the Borrower,
and to discuss the Borrower’s affairs with any of its Directors, Officers,
employees or agents.

 

(b) The Borrower hereby irrevocably authorizes all accountants and third parties
to disclose and deliver to the Lender or its designated agent, at the Borrower’s
expense, all financial information, books and records, work papers, management
reports and other information in their possession regarding the Borrower.

 

(c) The Borrower will permit the Lender or its employees, accountants, attorneys
or agents, to examine and inspect any Collateral or any other property of the
Borrower at any time during ordinary business hours.

 

Section 6.11 Account Verification.

 

(a) The Lender or its agent may at any time and from time to time send or
require the Borrower to send requests for verification of accounts or notices of
assignment to account debtors and other obligors. The Lender or its agent may
also at any time and from time to time telephone account debtors and other
obligors to verify accounts.

 

(b) The Borrower shall pay when due each account payable due to a Person holding
a Permitted Lien (as a result of such payable) on any Collateral.

 

Section 6.12 Compliance with Laws.

 

(a) The Borrower shall (i) comply, and cause each Subsidiary to comply, with the
requirements of applicable laws and regulations, the non-compliance with which
would materially and adversely affect its business or its financial condition
and (ii) use and keep the Collateral, and require that others use and keep the
Collateral, only for lawful purposes, without violation of any federal, state or
local law, statute or ordinance.

 

(b) Without limiting the foregoing undertakings, the Borrower specifically
agrees that it will comply, and cause each Subsidiary to comply, with all
applicable Environmental Laws and obtain and comply with all permits, licenses
and similar approvals required by any Environmental Laws, and will not generate,
use, transport, treat, store or dispose of any Hazardous Substances in such a
manner as to create any material liability or obligation under the common law of
any jurisdiction or any Environmental Law.

 

(c) The Borrower shall (i) ensure, and cause each Subsidiary to ensure, that no
Owner shall be listed on the Specially Designated Nationals and Blocked Person
List or other

 

38

--------------------------------------------------------------------------------

similar lists maintained by the Office of Foreign Assets Control (“OFAC”), the
Department of the Treasury or included in any Executive Orders, (ii) not use or
permit the use of the proceeds of the Credit Facility or any other financial
accommodation from the Lender to violate any of the foreign asset control
regulations of OFAC or other applicable law, (iii) comply, and cause each
Subsidiary to comply, with all applicable Bank Secrecy Act laws and regulations,
as amended from time to time, and (iv) otherwise comply with the USA Patriot Act
as required by federal law and the Lender’s policies and practices.

 

Section 6.13 Payment of Taxes and Other Claims. The Borrower will pay or
discharge, when due, (a) all taxes, assessments and governmental charges levied
or imposed upon it or upon its income or profits, upon any properties belonging
to it (including the Collateral) or upon or against the creation, perfection or
continuance of the Security Interest, prior to the date on which penalties
attach thereto, (b) all federal, state and local taxes required to be withheld
by it, and (c) all lawful claims for labor, materials and supplies which, if
unpaid, might by law become a Lien upon any properties of the Borrower;
provided, that the Borrower shall not be required to pay any such tax,
assessment, charge or claim whose amount, applicability or validity is being
contested in good faith by appropriate proceedings and for which proper reserves
have been made.

 

Section 6.14 Maintenance of Properties.

 

(a) The Borrower will keep and maintain the Collateral and all of its other
properties necessary or useful in its business in good condition, repair and
working order (normal wear and tear excepted) and will from time to time replace
or repair any worn, defective or broken parts; provided, however, that nothing
in this covenant shall prevent the Borrower from discontinuing the operation and
maintenance of any of its properties if such discontinuance is, in the
Borrower’s judgment, desirable in the conduct of the Borrower’s business and not
disadvantageous in any material respect to the Lender. The Borrower will take
all commercially reasonable steps necessary to protect and maintain its
Intellectual Property Rights.

 

(b) The Borrower will defend the Collateral against all Liens, claims or demands
of all Persons (other than the Lender) claiming the Collateral or any interest
therein. The Borrower will keep all Collateral free and clear of all Liens
except Permitted Liens. The Borrower will take all commercially reasonable steps
necessary to prosecute any Person Infringing its Intellectual Property Rights
and to defend itself against any Person accusing it of Infringing any Person’s
Intellectual Property Rights.

 

Section 6.15 Insurance. The Borrower will obtain and at all times maintain
insurance with insurers acceptable to the Lender, in such amounts, on such terms
(including any deductibles) and against such risks as may from time to time be
required by the Lender, but in all events in such amounts and against such risks
as is usually carried by companies engaged in similar business and owning
similar properties in the same general areas in which the Borrower operates.
Without limiting the generality of the foregoing, the Borrower will at all times
maintain business interruption insurance including coverage for force majeure
and keep all tangible Collateral insured against risks of fire (including
so-called extended coverage), theft, collision (for Collateral consisting of
motor vehicles) and such other risks and in such amounts as the Lender may
reasonably request, with any loss payable to the Lender to the extent of its

 

39

--------------------------------------------------------------------------------

interest, and all policies of such insurance shall contain a lender’s loss
payable endorsement for the Lender’s benefit. All policies of liability
insurance required hereunder shall name the Lender as an additional insured.

 

Section 6.16 Preservation of Existence. The Borrower will preserve and maintain
its existence and all of its rights, privileges and franchises necessary or
desirable in the normal conduct of its business and shall conduct its business
in an orderly, efficient and regular manner.

 

Section 6.17 Delivery of Instruments, etc. Upon request by the Lender, the
Borrower will promptly deliver to the Lender in pledge all instruments,
documents and chattel paper constituting Collateral, duly endorsed or assigned
by the Borrower.

 

Section 6.18 Sale or Transfer of Assets; Suspension of Business Operations. The
Borrower will not sell, lease, assign, transfer or otherwise dispose of (i) the
stock of any Subsidiary, (ii) all or a substantial part of its assets, or
(iii) any Collateral or any interest therein (whether in one transaction or in a
series of transactions) to any other Person other than the sale of Inventory in
the ordinary course of business and will not liquidate, dissolve or suspend
business operations. The Borrower will not transfer any part of its ownership
interest in any Intellectual Property Rights and will not permit any agreement
under which it has licensed Licensed Intellectual Property to lapse, except that
the Borrower may transfer such rights or permit such agreements to lapse if it
shall have reasonably determined that the applicable Intellectual Property
Rights are no longer useful in its business. If the Borrower transfers any
Intellectual Property Rights for value, the Borrower will pay over the proceeds
to the Lender for application to the Obligations. The Borrower will not license
any other Person to use any of the Borrower’s Intellectual Property Rights,
except that the Borrower may grant licenses in the ordinary course of its
business in connection with sales of Inventory or provision of services to its
customers.

 

Section 6.19 Consolidation and Merger; Asset Acquisitions. The Borrower will not
consolidate with or merge into any Person, or permit any other Person to merge
into it, or acquire (in a transaction analogous in purpose or effect to a
consolidation or merger) all or substantially all the assets of any other
Person.

 

Section 6.20 Sale and Leaseback. The Borrower will not enter into any
arrangement, directly or indirectly, with any other Person whereby the Borrower
shall sell or transfer any real or personal property, whether now owned or
hereafter acquired, and then or thereafter rent or lease as lessee such property
or any part thereof or any other property which the Borrower intends to use for
substantially the same purpose or purposes as the property being sold or
transferred.

 

Section 6.21 Restrictions on Nature of Business. The Borrower will not engage in
any line of business materially different from that presently engaged in by the
Borrower and will not purchase, lease or otherwise acquire assets not related to
its business.

 

Section 6.22 Accounting. The Borrower will not adopt any material change in
accounting principles other than as required by GAAP. The Borrower will not
adopt, permit or consent to any change in its fiscal year.

 

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Section 6.23 Discounts, etc. After notice from the Lender, the Borrower will not
grant any discount, credit or allowance to any customer of the Borrower or
accept any return of goods sold. The Borrower will not at any time modify,
amend, subordinate, cancel or terminate the obligation of any account debtor or
other obligor of the Borrower.

 

Section 6.24 Plans. Unless disclosed to the Lender pursuant to Section 5.12,
neither the Borrower nor any ERISA Affiliate will (i) adopt, create, assume or
become a party to any Pension Plan, (ii) incur any obligation to contribute to
any Multiemployer Plan, (iii) incur any obligation to provide post-retirement
medical or insurance benefits with respect to employees or former employees
(other than benefits required by law) or (iv) amend any Plan in a manner that
would materially increase its funding obligations.

 

Section 6.25 Place of Business; Name. The Borrower will not transfer its chief
executive office or principal place of business, or move, relocate, close or
sell any business location. The Borrower will not permit any tangible Collateral
or any records pertaining to the Collateral to be located in any state or area
in which, in the event of such location, a financing statement covering such
Collateral would be required to be, but has not in fact been, filed in order to
perfect the Security Interest. The Borrower will not change its name or
jurisdiction of organization.

 

Section 6.26 Constituent Documents; S Corporation Status. The Borrower will not
amend its Constituent Documents without the consent of Lender, which consent
will not be unreasonably withheld. The Borrower will not become an S
Corporation.

 

Section 6.27 Performance by the Lender. If the Borrower at any time fails to
perform or observe any of the foregoing covenants contained in this Article VI
or elsewhere herein, and if such failure shall continue for a period of ten
calendar days after the Lender gives the Borrower written notice thereof (or in
the case of the agreements contained in Section 6.13 and Section 6.15,
immediately upon the occurrence of such failure, without notice or lapse of
time), the Lender may, but need not, perform or observe such covenant on behalf
and in the name, place and stead of the Borrower (or, at the Lender’s option, in
the Lender’s name) and may, but need not, take any and all other actions which
the Lender may reasonably deem necessary to cure or correct such failure
(including the payment of taxes, the satisfaction of Liens, the performance of
obligations owed to account debtors or other obligors, the procurement and
maintenance of insurance, the execution of assignments, security agreements and
financing statements, and the endorsement of instruments); and the Borrower
shall thereupon pay to the Lender on demand the amount of all monies expended
and all costs and expenses (including reasonable attorneys’ fees and legal
expenses) incurred by the Lender in connection with or as a result of the
performance or observance of such agreements or the taking of such action by the
Lender, together with interest thereon from the date expended or incurred at the
Default Rate. To facilitate the Lender’s performance or observance of such
covenants of the Borrower, the Borrower hereby irrevocably appoints the Lender,
or the Lender’s delegate, acting alone, as the Borrower’s attorney in fact
(which appointment is coupled with an interest) with the right (but not the
duty) from time to time to create, prepare, complete, execute, deliver, endorse
or file in the name and on behalf of the Borrower any and all instruments,
documents, assignments, security agreements, financing statements, applications
for insurance and other agreements and writings required to be obtained,
executed, delivered or endorsed by the Borrower hereunder.

 

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Section 6.28 Engagement of Kibel Green Inc. Borrower shall hire and continue to
use the services of Kibel Green Inc. in order to identify key areas of
improvement in the Borrower’s business and to assist the Borrower in preparing
cash flow models and monthly projections, until Borrower has achieved a positive
Net Income for at least four (4) consecutive quarters.

 

ARTICLE VII

 

EVENTS OF DEFAULT, RIGHTS AND REMEDIES

 

Section 7.1 Events of Default. “Event of Default”, wherever used herein, means
any one of the following events:

 

(a) Default in the payment of any Obligations when they become due and payable;

 

(b) Default in the performance, or breach, of any covenant or agreement of the
Borrower contained in this Agreement or any Loan Document;

 

(c) An Overadvance arises as the result of any reduction in the Borrowing Base,
or arises in any manner on terms not otherwise approved of in advance by the
Lender in writing;

 

(d) A Change of Control shall occur;

 

(e) Any Financial Covenant shall become inapplicable due to the lapse of time
and the failure to amend any such covenant to cover future periods;

 

(f) The Borrower or any Guarantor shall be or become insolvent, or admit in
writing its or his inability to pay its or his debts as they mature, or make an
assignment for the benefit of creditors; or the Borrower or any Guarantor shall
apply for or consent to the appointment of any receiver, trustee, or similar
officer for it or him or for all or any substantial part of its or his property;
or such receiver, trustee or similar officer shall be appointed without the
application or consent of the Borrower or such Guarantor, as the case may be; or
the Borrower or any Guarantor shall institute (by petition, application, answer,
consent or otherwise) any bankruptcy, insolvency, reorganization, arrangement,
readjustment of debt, dissolution, liquidation or similar proceeding relating to
it or him under the laws of any jurisdiction; or any such proceeding shall be
instituted (by petition, application or otherwise) against the Borrower or any
such Guarantor; or any judgment, writ, warrant of attachment or execution or
similar process shall be issued or levied against a substantial part of the
property of the Borrower or any Guarantor;

 

(g) A petition shall be filed by or against the Borrower or any Guarantor under
the United States Bankruptcy Code naming the Borrower or such Guarantor as
debtor;

 

(h) Any representation or warranty made by the Borrower in this Agreement, by
any Guarantor in any guaranty delivered to the Lender, or by the Borrower (or
any of its Officers) or any Guarantor in any agreement, certificate, instrument
or financial statement or

 

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other statement contemplated by or made or delivered pursuant to or in
connection with this Agreement or any such guaranty shall prove to have been
incorrect in any material respect when deemed to be effective;

 

(i) The rendering against the Borrower of an arbitration award, final judgment,
decree or order for the payment of money in excess of $50,000 and the
continuance of such arbitration award, judgment, decree or order unsatisfied and
in effect for any period of 30 consecutive days without a stay of execution;

 

(j) A default under any bond, debenture, note or other evidence of material
indebtedness of the Borrower owed to any Person other than the Lender, or under
any indenture or other instrument under which any such evidence of indebtedness
has been issued or by which it is governed, or under any material lease or other
contract, and the expiration of the applicable period of grace, if any,
specified in such evidence of indebtedness, indenture, other instrument, lease
or contract;

 

(k) Any Reportable Event, which the Lender determines in good faith might
constitute grounds for the termination of any Pension Plan or for the
appointment by the appropriate United States District Court of a trustee to
administer any Pension Plan, shall have occurred and be continuing 30 days after
written notice to such effect shall have been given to the Borrower by the
Lender; or a trustee shall have been appointed by an appropriate United States
District Court to administer any Pension Plan; or the Pension Benefit Guaranty
Corporation shall have instituted proceedings to terminate any Pension Plan or
to appoint a trustee to administer any Pension Plan; or the Borrower or any
ERISA Affiliate shall have filed for a distress termination of any Pension Plan
under Title IV of ERISA; or the Borrower or any ERISA Affiliate shall have
failed to make any quarterly contribution required with respect to any Pension
Plan under Section 412(m) of the IRC, which the Lender determines in good faith
may by itself, or in combination with any such failures that the Lender may
determine are likely to occur in the future, result in the imposition of a Lien
on the Borrower’s assets in favor of the Pension Plan; or any withdrawal,
partial withdrawal, reorganization or other event occurs with respect to a
Multiemployer Plan which results or could reasonably be expected to result in a
material liability of the Borrower to the Multiemployer Plan under Title IV of
ERISA;

 

(l) An event of default shall occur under any Security Document;

 

(m) The Borrower shall liquidate, dissolve, terminate or suspend its business
operations or otherwise fail to operate its business in the ordinary course,
merge with another Person unless the Borrower is the surviving entity; or sell
or attempt to sell all or substantially all of its assets, without the Lender’s
prior written consent;

 

(n) Default in the payment of any amount owed by the Borrower to the Lender
other than any indebtedness arising hereunder;

 

(o) Any Person signing a validity guaranty in favor of the Lender shall
repudiate, purport to revoke or fail to perform any obligation under such
validity guaranty in favor of the Lender, any such Person shall die and no
replacement, acceptable to Lender, shall execute a validity guaranty within 60
days of the death of such Person;

 

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(p) Any event or circumstance with respect to the Borrower shall occur such that
the Lender shall believe in good faith that the prospect of payment of all or
any part of the Obligations or the performance by the Borrower under the Loan
Documents is impaired or any material adverse change in the business or
financial condition of the Borrower shall occur;

 

(q) Any breach, default or event of default by or attributable to any Affiliate
under any agreement between such Affiliate and the Lender shall occur; or

 

(r) The indictment of any Director, Officer, Guarantor, or any Owner of the
Borrower for a felony offence under state or federal law.

 

Section 7.2 Rights and Remedies. During any Default Period, the Lender may
exercise any or all of the following rights and remedies:

 

(a) The Lender may, by notice to the Borrower, declare the Commitment to be
terminated, whereupon the same shall forthwith terminate;

 

(b) The Lender may, by notice to the Borrower, declare the Obligations to be
forthwith due and payable, whereupon all Obligations shall become and be
forthwith due and payable, without presentment, notice of dishonor, protest or
further notice of any kind, all of which the Borrower hereby expressly waives;

 

(c) The Lender may, without notice to the Borrower and without further action,
apply any and all money owing by the Lender to the Borrower to the payment of
the Obligations;

 

(d) The Lender may exercise and enforce any and all rights and remedies
available upon default to a secured party under the UCC, including the right to
take possession of Collateral, or any evidence thereof, proceeding without
judicial process or by judicial process (without a prior hearing or notice
thereof, which the Borrower hereby expressly waives) and the right to sell,
lease or otherwise dispose of any or all of the Collateral (with or without
giving any warranties as to the Collateral, title to the Collateral or similar
warranties), and, in connection therewith, the Borrower will on demand assemble
the Collateral and make it available to the Lender at a place to be designated
by the Lender which is reasonably convenient to both parties;

 

(e) The Lender may make demand upon the Borrower and, forthwith upon such
demand, the Borrower will pay to the Lender in immediately available funds for
deposit in the Special Account pursuant to Section 2.5 an amount equal to the
aggregate maximum amount available to be drawn under all Letters of Credit then
outstanding, assuming compliance with all conditions for drawing thereunder;

 

(f) The Lender may exercise and enforce its rights and remedies under the Loan
Documents;

 

(g) The Lender may without regard to any waste, adequacy of the security or
solvency of the Borrower, apply for the appointment of a receiver of the
Collateral, to which appointment the Borrower hereby consents, whether or not
foreclosure proceedings have been

 

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commenced under the Security Documents and whether or not a foreclosure sale has
occurred; and

 

(h) The Lender may exercise any other rights and remedies available to it by law
or agreement.

 

Notwithstanding the foregoing, upon the occurrence of an Event of Default
described in Section 7.1(f) or (g), the Obligations shall be immediately due and
payable automatically without presentment, demand, protest or notice of any
kind. If the Lender sells any of the Collateral on credit, the Obligations will
be reduced only to the extent of payments actually received. If the purchaser
fails to pay for the Collateral, the Lender may resell the Collateral and shall
apply any proceeds actually received to the Obligations.

 

Section 7.3 Certain Notices. If notice to the Borrower of any intended
disposition of Collateral or any other intended action is required by law in a
particular instance, such notice shall be deemed commercially reasonable if
given (in the manner specified in Section 8.3) at least ten calendar days before
the date of intended disposition or other action.

 

ARTICLE VIII

 

MISCELLANEOUS

 

Section 8.1 No Waiver; Cumulative Remedies; Compliance with Laws. No failure or
delay by the Lender in exercising any right, power or remedy under the Loan
Documents shall operate as a waiver thereof; nor shall any single or partial
exercise of any such right, power or remedy preclude any other or further
exercise thereof or the exercise of any other right, power or remedy under the
Loan Documents. The remedies provided in the Loan Documents are cumulative and
not exclusive of any remedies provided by law. The Lender may comply with any
applicable state or federal law requirements in connection with a disposition of
the Collateral and such compliance will not be considered adversely to affect
the commercial reasonableness of any sale of the Collateral.

 

Section 8.2 Amendments, Etc. No amendment, modification, termination or waiver
of any provision of any Loan Document or consent to any departure by the
Borrower therefrom or any release of a Security Interest shall be effective
unless the same shall be in writing and signed by the Lender, 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
case shall entitle the Borrower to any other or further notice or demand in
similar or other circumstances.

 

Section 8.3 Notices; Communication of Confidential Information; Requests for
Accounting. Except as otherwise expressly provided herein, all notices,
requests, demands and other communications provided for under the Loan Documents
shall be in writing and shall be (a) personally delivered, (b) sent by first
class United States mail, (c) sent by overnight courier of national reputation,
(d) transmitted by telecopy, or (e) sent as electronic mail, in each case
delivered or sent to the party to whom notice is being given to the business
address, telecopier number, or e mail address set forth below next to its
signature or, as to each party, at such other

 

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business address, telecopier number, or e mail address as it may hereafter
designate in writing to the other party pursuant to the terms of this Section.
All such notices, requests, demands and other communications shall be deemed to
be an authenticated record communicated or given on (a) the date received if
personally delivered, (b) when deposited in the mail if delivered by mail,
(c) the date delivered to the courier if delivered by overnight courier, or
(d) the date of transmission if sent by telecopy or by e mail, except that
notices or requests delivered to the Lender pursuant to any of the provisions of
Article II shall not be effective until received by the Lender. All notices,
financial information, or other business records sent by either party to this
Agreement may be transmitted, sent, or otherwise communicated via such medium as
the sending party may deem appropriate and commercially reasonable; provided,
however, that the risk that the confidentiality or privacy of such notices,
financial information, or other business records sent by either party may be
compromised shall be borne exclusively by the Borrower. All requests for an
accounting under Section 9-210 of the UCC (i) shall be made in a writing signed
by a Person authorized under Section 2.2(b), (ii) shall be personally delivered,
sent by registered or certified mail, return receipt requested, or by overnight
courier of national reputation, (iii) shall be deemed to be sent when received
by the Lender and (iv) shall otherwise comply with the requirements of
Section 9-210. The Borrower requests that the Lender respond to all such
requests which on their face appear to come from an authorized individual and
releases the Lender from any liability for so responding. The Borrower shall pay
the Lender the maximum amount allowed by law for responding to such requests.

 

Section 8.4 Further Documents. The Borrower will from time to time execute,
deliver, endorse and authorize the filing of any and all instruments, documents,
conveyances, assignments, security agreements, financing statements, control
agreements and other agreements and writings that the Lender may reasonably
request in order to secure, protect, perfect or enforce the Security Interest or
the Lender’s rights under the Loan Documents (but any failure to request or
assure that the Borrower executes, delivers, endorses or authorizes the filing
of any such item shall not affect or impair the validity, sufficiency or
enforceability of the Loan Documents and the Security Interest, regardless of
whether any such item was or was not executed, delivered or endorsed in a
similar context or on a prior occasion).

 

Section 8.5 Costs and Expenses. The Borrower shall pay on demand all costs and
expenses, including reasonable attorneys’ fees, incurred by the Lender in
connection with the Obligations, this Agreement, the Loan Documents, any Letter
of Credit and any other document or agreement related hereto or thereto, and the
transactions contemplated hereby, including all such costs, expenses and fees
incurred in connection with the negotiation, preparation, execution, amendment,
administration, performance, collection and enforcement of the Obligations and
all such documents and agreements and the creation, perfection, protection,
satisfaction, foreclosure or enforcement of the Security Interest.

 

Section 8.6 Indemnity. In addition to the payment of expenses pursuant to
Section 8.6, the Borrower shall indemnify, defend and hold harmless the Lender,
and any of its participants, parent corporations, subsidiary corporations,
affiliated corporations, successor corporations, and all present and future
officers, directors, employees, attorneys and agents of the foregoing (the
“Indemnitees”) from and against any of the following (collectively, “Indemnified
Liabilities”):

 

(i) Any and all transfer taxes, documentary taxes, assessments or charges made
by any governmental authority by reason of the execution and delivery of the
Loan Documents or the making of the Advances;

 

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(ii) Any claims, loss or damage to which any Indemnitee may be subjected if any
representation or warranty contained in Section 5.14 proves to be incorrect in
any respect or as a result of any violation of the covenant contained in
Section 6.12(b) ; and

 

(iii) Any and all other liabilities, losses, damages, penalties, judgments,
suits, claims, costs and expenses of any kind or nature whatsoever (including
the reasonable fees and disbursements of counsel) in connection with the
foregoing and any other investigative, administrative or judicial proceedings,
whether or not such Indemnitee shall be designated a party thereto, which may be
imposed on, incurred by or asserted against any such Indemnitee, in any manner
related to or arising out of or in connection with the making of the Advances
and the Loan Documents or the use or intended use of the proceeds of the
Advances. Notwithstanding the foregoing, the Borrower shall not be obligated to
indemnify any Indemnitee for any Indemnified Liability caused by the gross
negligence or willful misconduct of such Indemnitee.

 

If any investigative, judicial or administrative proceeding arising from any of
the foregoing is brought against any Indemnitee, upon such Indemnitee’s request,
the Borrower, or counsel designated by the Borrower and satisfactory to the
Indemnitee, will resist and defend such action, suit or proceeding to the extent
and in the manner directed by the Indemnitee, at the Borrower’s sole costs and
expense. Each Indemnitee will use its best efforts to cooperate in the defense
of any such action, suit or proceeding. If the foregoing undertaking to
indemnify, defend and hold harmless may be held to be unenforceable because it
violates any law or public policy, the Borrower shall nevertheless make the
maximum contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law. The Borrower’s obligation
under this Section 8.6 shall survive the termination of this Agreement and the
discharge of the Borrower’s other obligations hereunder.

 

Section 8.7 Participants. The Lender and its participants, if any, are not
partners or joint venturers, and the Lender shall not have any liability or
responsibility for any obligation, act or omission of any of its participants.
All rights and powers specifically conferred upon the Lender may be transferred
or delegated to any of the Lender’s participants, successors or assigns.

 

Section 8.8 Execution in Counterparts; Telefacsimile Execution. This Agreement
and other Loan Documents may be executed in any number of counterparts, each of
which when so executed and delivered shall be deemed to be an original and all
of which counterparts, taken together, shall constitute but one and the same
instrument. Delivery of an executed counterpart of this Agreement by
telefacsimile shall be equally as effective as delivery of an original executed
counterpart of this Agreement. Any party delivering an executed counterpart of
this Agreement by telefacsimile also shall deliver an original executed
counterpart of this Agreement but the failure to deliver an original executed
counterpart shall not affect the validity, enforceability, and binding effect of
this Agreement.

 

Section 8.9 Retention of Borrower’s Records. The Lender shall have no obligation
to maintain any electronic records or any documents, schedules, invoices,
agings, or other papers

 

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delivered to the Lender by the Borrower or in connection with the Loan Documents
for more than 30 days after receipt by the Lender. If there is a special need to
retain specific records, the Borrower must inform the Lender of its need to
retain those records with particularity, which must be delivered in accordance
with the notice provisions of Section 8.3 within 30 days of the Lender taking
control of same.

 

Section 8.10 Binding Effect; Assignment; Complete Agreement; Sharing
Information. The Loan Documents 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 have the right to assign its rights
thereunder or any interest therein without the Lender’s prior written consent.
To the extent permitted by law, the Borrower waives and will not assert against
any assignee any claims, defenses or set-offs which the Borrower could assert
against the Lender. This Agreement shall also bind all Persons who become a
party to this Agreement as a borrower. This Agreement, together with the Loan
Documents, comprises the complete and integrated agreement of the parties on the
subject matter hereof and supersedes all prior agreements, written or oral, on
the subject matter hereof. To the extent that any provision of this Agreement
contradicts other provisions of the Loan Documents, this Agreement shall
control. Without limiting the Lender’s right to share information regarding the
Borrower and its Affiliates with the Lender’s participants, accountants, lawyers
and other advisors, the Lender may share any and all information they may have
in their possession regarding the Borrower and its Affiliates, and the Borrower
waives any right of confidentiality it may have with respect to such sharing of
information.

 

Section 8.11 Severability of Provisions. Any provision of this Agreement which
is prohibited or unenforceable shall be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions
hereof.

 

Section 8.12 Headings. Article, Section and subsection headings in this
Agreement are included herein for convenience of reference only and shall not
constitute a part of this Agreement for any other purpose.

 

Section 8.13 Governing Law; Jurisdiction, Venue. The Loan Documents shall be
governed by and construed in accordance with the substantive laws (other than
conflict laws) of the State of California. The parties hereto hereby (i) consent
to the personal jurisdiction of the state and federal courts located in the
State of California in connection with any controversy related to this
Agreement; (ii) waive any argument that venue in any such forum is not
convenient; (iii) agree that any litigation initiated by the Lender or the
Borrower in connection with this Agreement or the other Loan Documents may be
venued in either the state or federal courts located in the County of Los
Angeles, California and (iv) agree that a final judgment in any such suit,
action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.

 

Section 8.14 Arbitration.

 

(a) Arbitration. The parties hereto agree, upon demand by any party, to submit
to binding arbitration all claims, disputes and controversies between or among
them (and their respective employees, officers, directors, attorneys, and other
agents), whether in tort,

 

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contract or otherwise arising out of or relating to in any way this Agreement
and their negotiation, execution, modification, extension, substitution,
formation, inducement, enforcement, default or termination.

 

(b) Governing Rules. Any arbitration proceeding will (i) proceed in a location
in California selected by the American Arbitration Association (“AAA”); (ii) be
governed by the Federal Arbitration Act (Title 9 of the United States Code),
notwithstanding any conflicting choice of law provision in any of the documents
between the parties; and (iii) be conducted by the AAA, or such other
administrator as the parties shall mutually agree upon, in accordance with the
AAA’s commercial dispute resolution procedures, unless the claim or counterclaim
is at least $1,000,000.00 exclusive of claimed interest, arbitration fees and
costs in which case the arbitration shall be conducted in accordance with the
AAA’s optional procedures for large, complex commercial disputes (the commercial
dispute resolution procedures or the optional procedures for large, complex
commercial disputes to be referred to, as applicable, as the “Rules”). If there
is any inconsistency between the terms hereof and the Rules, the terms and
procedures set forth herein shall control. Any party who fails or refuses to
submit to arbitration following a demand by any other party shall bear all costs
and expenses incurred by such other party in compelling arbitration of any
dispute. Nothing contained herein shall be deemed to be a waiver by any party
that is a bank of the protections afforded to it under 12 U.S.C. §91 or any
similar applicable state law.

 

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

 

(d) Arbitrator Qualifications and Powers. Any arbitration proceeding will be
decided by a single arbitrator selected according to the Rules. The arbitrator
will be a neutral attorney licensed in the State of California or a neutral
retired judge of the state or federal judiciary of California, in either case
with a minimum of ten years experience in the substantive law applicable to the
subject matter of the dispute to be arbitrated. The arbitrator will determine
whether or not an issue is arbitratable and will give effect to the statutes of
limitation in determining any claim. In any arbitration proceeding the
arbitrator will decide (by documents only or with a hearing at the arbitrator’s
discretion) any pre-hearing motions which are similar to motions to dismiss for
failure to state a claim or motions for summary adjudication. The arbitrator
shall resolve all disputes in accordance with the substantive law of California
and may grant any remedy or relief that a court of such state could order or
grant within the scope hereof and such ancillary relief as is necessary to make
effective any award. The arbitrator shall also have the power to award recovery
of all costs and fees, to impose sanctions and to take such other action as the
arbitrator deems necessary to the same extent a judge could pursuant to the
Federal Rules of Civil Procedure, the California Rules of Civil Procedure or
other applicable law. Judgment upon the award rendered by the arbitrator may be
entered in any court having

 

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jurisdiction. The institution and maintenance of an action for judicial relief
or pursuit of a provisional or ancillary remedy shall not constitute a waiver of
the right of any party, including the plaintiff, to submit the controversy or
claim to arbitration if any other party contests such action for judicial
relief.

 

(e) Discovery. In any arbitration proceeding discovery will be permitted in
accordance with the Rules. All discovery shall be expressly limited to matters
directly relevant to the dispute being arbitrated and must be completed no later
than 20 days before the hearing date and within 180 days of the filing of the
dispute with the AAA. Any requests for an extension of the discovery periods, or
any discovery disputes, will be subject to final determination by the arbitrator
upon a showing that the request for discovery is essential for the party’s
presentation and that no alternative means for obtaining information is
available.

 

(f) Expert Witnesses and Reports. If either party chooses to present an expert
witness, Section 2034 of the Code of Civil Procedure of the State of California
or any successor provision shall be applicable to the arbitration whether or not
the California Arbitration Act is deemed to apply to the arbitration.

 

(g) Payment of Arbitration Costs and Fees. The arbitrator shall award all costs
and expenses of the arbitration proceeding.

 

(h) Real Property Collateral; Judicial Reference. Notwithstanding anything
herein to the contrary, no dispute shall be submitted to arbitration if the
dispute concerns indebtedness secured directly or indirectly, in whole or in
part, by any real property unless (i) the holder of the deed of trust, mortgage,
lien or security interest specifically elects in writing to proceed with the
arbitration, or (ii) all parties to the arbitration waive any rights or benefits
that might accrue to them by virtue of the single action rule statute of
California, thereby agreeing that all indebtedness and obligations of the
parties, and all deeds of trust, mortgages, liens and security interests
securing such indebtedness and obligations, shall remain fully valid and
enforceable. If any such dispute is not submitted to arbitration, the dispute
shall be referred to a referee in accordance with California Code of Civil
Procedure Section 638 et seq., and this general reference agreement is intended
to be specifically enforceable in accordance with said Section 638. A referee
with the qualifications required herein for arbitrators shall be selected
pursuant to the AAA’s selection procedures. Judgment upon the decision rendered
by a referee shall be entered in the court in which such proceeding was
commenced in accordance with California Code of Civil Procedure Sections 644 and
645.

 

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

 

50

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[Remainder of page intentionally left blank.]

 

51

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their respective officers thereunto duly authorized as of the date first
above written.

 

Provena Foods Inc.

5010 Eucalyptus Avenue

Chino, California 91710

      PROVENA FOODS INC.

Telecopier:

 

(909) 627-7315

     

By:

 

/s/ Thomas J. Mulroney

Attention: Thomas J. Mulroney

     

Name:

 

Thomas J. Mulroney

e-mail: provenafds@aol.com

     

Title:

 

Chief Financial Officer

Wells Fargo Business Credit

245 South Los Robles Avenue, Suite 700

Pasadena, California 91101

Telecopier: (626) 844-9063

Attention: Tony S. Lee

     

WELLS FARGO BANK, NATIONAL

ASSOCIATION, acting through its Wells

Fargo Business Credit operating division

e-mail: tony.s.lee@wellsfargo.com

     

By:

 

/s/ Angelo Samperisi

           

Name:

 

Angelo Samperisi

           

Title:

 

Vice President

 

S-1

--------------------------------------------------------------------------------

 

Table of Exhibits and Schedules

 

Exhibit A

   Form of Revolving Note

Exhibit B

   Compliance Certificate

Exhibit C

   Premises

Schedule 5.1

   Trade Names, Chief Executive Office, Principal Place of Business, and
Locations of Collateral

Schedule 5.2

   Capitalization and Organizational Chart

Schedule 5.5

   Subsidiaries

Schedule 5.7

   Litigation Matters

Schedule 5.11

   Intellectual Property Disclosures

Schedule 5.14

   Environmental Matters

Schedule 6.3

   Permitted Liens

Schedule 6.4

   Permitted Indebtedness and Guaranties

--------------------------------------------------------------------------------

 

Exhibit A to Credit and Security Agreement

 

REVOLVING NOTE

 

$6,000,000

   November 29, 2005

 

For value received, the undersigned, PROVENA FOODS, INC., a California
corporation (the “Borrower”), hereby promises to pay on the Termination Date
under the Credit Agreement (defined below), to the order of WELLS FARGO BANK,
NATIONAL ASSOCIATION (the “Lender”), acting through its Wells Fargo Business
Credit operating division, at its office in 245 South Los Robles Avenue, Suite
700, Pasadena, California 91101, or at any other place designated at any time by
the holder hereof, in lawful money of the United States of America and in
immediately available funds, the principal sum of Six Million Dollars
($6,000,000) or the aggregate unpaid principal amount of all Revolving Advances
made by the Lender to the Borrower under the Credit Agreement (defined below)
together with interest on the principal amount hereunder remaining unpaid from
time to time, computed on the basis of the actual number of days elapsed and a
360-day year, from the date hereof until this Note is fully paid at the rate
from time to time in effect under the Credit and Security Agreement dated the
same date as this Note (the “Credit Agreement”) by and between the Lender and
the Borrower. The principal hereof and interest accruing thereon shall be due
and payable as provided in the Credit Agreement. This Note may be prepaid only
in accordance with the Credit Agreement.

 

This Note is issued pursuant, and is subject, to the Credit Agreement, which
provides, among other things, for acceleration hereof. This Note is the
Revolving Note referred to in the Credit Agreement. This Note is secured, among
other things, pursuant to the Credit Agreement and the Security Documents as
therein defined, and may now or hereafter be secured by one or more other
security agreements, mortgages, deeds of trust, assignments or other instruments
or agreements.

 

The Borrower shall pay all costs of collection, including reasonable attorneys’
fees and legal expenses if this Note is not paid when due, whether or not legal
proceedings are commenced.

 

Presentment or other demand for payment, notice of dishonor and protest are
expressly waived.

 

PROVENA FOODS, INC.

By:

   

Name:

 

Thomas J. Mulroney

Its:

 

Chief Financial Officer

 

A-1

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Exhibit B to Credit and Security Agreement

 

COMPLIANCE CERTIFICATE

 

To:

   Wells Fargo Business Credit

Date:

   November 29, 2005

Subject:

   Financial Statements

 

In accordance with our Credit and Security Agreement dated as of November 29
2005 (the “Credit Agreement”), attached are the financial statements of Provena
Foods Inc. (the “Borrower”) as of and for November 29, 2005 (the “Reporting
Date”) and the year-to-date period then ended (the “Current Financials”). All
terms used in this certificate have the meanings given in the Credit Agreement.

 

I certify that the Current Financials have been prepared in accordance with
GAAP, subject to year-end audit adjustments, and fairly present the Borrower’s
financial condition as of the date thereof.

 

I further hereby certify as follows: Events of Default. (Check one):

 

  ¨ The undersigned does not have knowledge of the occurrence of a Default or
Event of Default under the Credit Agreement except as previously reported in
writing to the Lender.

 

  ¨ The undersigned has knowledge of the occurrence of a Default or Event of
Default under the Credit Agreement not previously reported in writing to the
Lender and attached hereto is a statement of the facts with respect to thereto.
The Borrower acknowledges that pursuant to 2.8(d) of the Credit Agreement, the
Lender may impose the Default Rate at any time during the resulting Default
Period.

 

Material Adverse Change in Litigation Matters of the Borrower. I further hereby
certify as follows (check one):

 

  ¨ The undersigned has no knowledge of any material adverse change to the
litigation exposure of the Borrower or any of its Guarantors or Affiliates.

 

  ¨ The undersigned has knowledge of material adverse changes to the litigation
exposure of the Borrower or any of its Guarantors or Affiliates not previously
disclosed in Schedule 5.7. Attached to this Certificate is a statement of the
facts with respect thereto.

 

Financial Covenants. I further hereby certify as follows (check and complete
each of the following):

 

1. Minimum Book Net Worth. Pursuant to Section 6.2(a) of the Credit Agreement,
as of the Reporting Date, the Borrower’s Book Net Worth was
$                    , which

 

B-1

--------------------------------------------------------------------------------

¨ satisfies ¨ does not satisfy the requirement that such amount be not less than
the applicable amount set forth in Section 6.2(a) of the Credit Agreement.

 

2. Minimum Net Income/Maximum Net Loss. Pursuant to Section 6.2(b) of the Credit
Agreement, the Borrower’s Net Income/Net Loss for the                     
period ending on the Reporting Date, was $                    , which ¨
satisfies ¨ does not satisfy the requirement that such amount be not less than
the applicable amount set forth in Section 6.2(b) of the Credit Agreement

 

3. Minimum Debt Service Coverage Ratio. Pursuant to Section 6.2(c) of the Credit
Agreement, as of the Reporting Date, the Borrower’s Debt Service Coverage Ratio
was                      to 1.00, which ¨ satisfies ¨ does not satisfy the
requirement that such ratio be no less than the applicable ratio set forth in
Section 6.2(c) of the Credit Agreement.

 

4. Capital Expenditures. Pursuant to Section 6.2(d) of the Credit Agreement, for
the year-to-date period ending on the Reporting Date, the Borrower has expended
or contracted to expend during the year ended                     , 200  , for
Capital Expenditures, $                     in the aggregate, which ¨ satisfies
¨ does not satisfy the requirement that such expenditures not exceed
$                     in the aggregate during such year.

 

5. Salaries. As of the Reporting Date, the Borrower has not paid excessive or
unreasonable salaries, bonuses, commissions, consultant fees or other
compensation, or increased the salary, bonus, commissions, consultant fees or
other compensation of any Director, Officer or consultant, or any member of
their families, by more than 10% over the amount paid in the Borrower’s previous
fiscal year, either individually or for all such persons in the aggregate, and
has not paid any increase from any source other than profits earned in the year
of payment, and as a consequence ¨ is ¨ is not in compliance with Section 6.8 of
the Credit Agreement.

 

Attached hereto are all relevant facts in reasonable detail to evidence, and the
computations of the financial covenants referred to above. These computations
were made in accordance with GAAP.

 

PROVENA FOODS INC.

By:

   

Its

 

Chief Financial Officer

 

B-2

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Exhibit C to Credit and Security Agreement

 

PREMISES

 

The Premises referred to in the Credit and Security Agreement are legally
described as follows:

 

Locations where the Borrower conducts its business or has any rights of
possession:

 

5010 Eucalyptus Ave., Chino, CA 91710

 

5060 Eucalyptus Ave., Chino, CA 91710

 

251 Darcy Parkway, Lathrop, CA 95330

 

C-1

--------------------------------------------------------------------------------

 

Schedule 5.1 to Credit and Security Agreement

 

TRADE NAMES, CHIEF EXECUTIVE OFFICE, PRINCIPAL PLACE OF BUSINESS,

AND LOCATIONS OF COLLATERAL

 

TRADE NAMES

 

Swiss American Sausage Co.

 

Royal Angelus Macaroni Co.

 

Economy Services, Inc.

 

Sav-On Food Co., Inc.

 

Royal Brands, Inc.

 

Provena Foods Inc.

 

CHIEF EXECUTIVE OFFICE/PRINCIPAL PLACE OF BUSINESS

 

5010 Eucalyptus Ave., Chino, CA 91710

 

OTHER INVENTORY AND EQUIPMENT LOCATIONS

 

5010 Eucalyptus Ave., Chino, Ca 91710

 

5060 Eucalyptus Ave., Chino, CA 91710

 

251 Darcy Parkway, Lathrop, CA 95330

 

S-5.1-1

--------------------------------------------------------------------------------

 

Schedule 5.2 to Credit and Security Agreement

 

CAPITALIZATION AND ORGANIZATIONAL CHART

 

Holder

--------------------------------------------------------------------------------

   Type of Rights/Stock

--------------------------------------------------------------------------------

   No. of shares (after
exercise of all rights
to acquire shares)

--------------------------------------------------------------------------------

   Percent interest on a
fully diluted basis

--------------------------------------------------------------------------------

                                 

 

Attach organizational chart showing the ownership structure of all Subsidiaries
of the Borrower.

 

S-5.2-1

--------------------------------------------------------------------------------

 

Schedule 5.5 to Credit and Security Agreement

 

SUBSIDIARIES

 

None

 

S-5.5-1

--------------------------------------------------------------------------------

 

Schedule 5.7 to Credit and Security Agreement

 

LITIGATION MATTERS IN EXCESS OF $10,000.00

 

None other than Workers’ Compensation claims which are covered by insurance.

 

S-5.7-1

--------------------------------------------------------------------------------

 

Schedule 5.11 to Credit and Security Agreement

 

INTELLECTUAL PROPERTY DISCLOSURES

 

None

 

S-5.11-1

--------------------------------------------------------------------------------

 

Schedule 5.14 to Credit and Security Agreement

 

ENVIRONMENTAL MATTERS

 

None as evidenced by Phase I site assessments:

 

251 Darcy Parkway, Lathrop, CA dated June 20, 2005

 

5101 & 5060 Eucalyptus Ave., Chino, CA dated July 21, 1998

 

S-5.14-1

--------------------------------------------------------------------------------

 

Schedule 6.3 to Credit and Security Agreement

 

PERMITTED LIENS

 

Creditor

--------------------------------------------------------------------------------

  

Collateral

--------------------------------------------------------------------------------

   Jurisdiction

--------------------------------------------------------------------------------

   Filing Date

--------------------------------------------------------------------------------

   Filing No.

--------------------------------------------------------------------------------

GE Capital Public Finance, Inc.

   Pavan long good line.         October 31, 2003     

 

S-6.3-1

--------------------------------------------------------------------------------

 

Schedule 6.4 to Credit and Security Agreement

 

Permitted Indebtedness and Guaranties

 

INDEBTEDNESS

 

Creditor

--------------------------------------------------------------------------------

   Principal
Amount

--------------------------------------------------------------------------------

   Maturity Date

--------------------------------------------------------------------------------

   Monthly
Payment

--------------------------------------------------------------------------------

   Collateral

--------------------------------------------------------------------------------

GE Capital Public Finance, Inc.

   $ 866,750    November 1, 2008    16,221.97    Pavan T.H.T. “Inox” very
high temperature long-
cut pasta line.

 

GUARANTIES

 

Primary Obligor

--------------------------------------------------------------------------------

   Amount and Description
of Obligation Guaranteed

--------------------------------------------------------------------------------

   Beneficiary of Guaranty

--------------------------------------------------------------------------------

None

         

 

S-6.4-1