Exhibit 10.1
 
 
AURIGA LABORATORIES, INC.
LOAN AND SECURITY AGREEMENT
 
 

 

 

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

 

This LOAN AND SECURITY AGREEMENT is entered into as of May 18, 2007, by and
between COMERICA BANK (“Bank”) and AURIGA LABORATORIES, INC. (“Borrower”).
RECITALS
Borrower wishes to obtain credit from time to time from Bank, and Bank desires
to extend credit to Borrower. This Agreement sets forth the terms on which Bank
will advance credit to Borrower, and Borrower will repay the amounts owing to
Bank.
AGREEMENT
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION.
1.1 Definitions. As used in this Agreement, the following terms shall have the
following definitions:
“Accounts” means all presently existing and hereafter arising accounts, contract
rights, payment intangibles, and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods (including, without
limitation, the licensing of software and other technology) or the rendering of
services by Borrower, whether or not earned by performance, and any and all
credit insurance, guaranties, and other security therefor, as well as all
merchandise returned to or reclaimed by Borrower and Borrower’s Books relating
to any of the foregoing.
“Advance” or “Advances” means a cash advance or cash advances made by Bank to
Borrower under the Revolving Line pursuant to the Loan Documents.
“Affiliate” means, with respect to any Person, any Person that owns or controls
directly or indirectly such Person, any Person that controls or is controlled by
or is under common control with such Person, and each of such Person’s senior
executive officers, directors, and partners.
“Bank Expenses” means all reasonable costs or expenses (including reasonable
attorneys’ fees and expenses, whether generated in-house or by outside counsel)
incurred in connection with the preparation, negotiation, administration, and
enforcement of the Loan Documents; reasonable Collateral audit fees; and Bank’s
reasonable attorneys’ fees and expenses (whether generated in-house or by
outside counsel) incurred in amending, enforcing or defending the Loan Documents
(including fees and expenses of appeal), incurred before, during and after an
Insolvency Proceeding, whether or not suit is brought.
“Borrower State” means Delaware, the state under whose laws Borrower is
organized.
“Borrower’s Books” means all of Borrower’s books and records including: ledgers;
records concerning Borrower’s assets or liabilities, the Collateral, business
operations or financial condition; and all computer programs, or tape files, and
the equipment, containing such information.
“Borrowing Base” means an amount equal to sixty five percent (65%) of Eligible
Accounts, as determined by Bank with reference to the most recent Borrowing Base
Certificate delivered by Borrower.
“Business Day” means any day that is not a Saturday, Sunday, or other day on
which banks in the State of California are authorized or required to close.
“Cash” means unrestricted cash and cash equivalents.

 

-1-

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

 

“Change in Control” shall mean a transaction in which any “person” or “group”
(within the meaning of Section 13(d) and 14(d)(2) of the Securities Exchange Act
of 1934) becomes the “beneficial owner” (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934), directly or indirectly, of a sufficient number
of shares of all classes of stock then outstanding of Borrower ordinarily
entitled to vote in the election of directors, empowering such “person” or
“group” to elect a majority of the Board of Directors of Borrower, who did not
have such power before such transaction.
“Chief Executive Office State” means California, where Borrower’s chief
executive office is located.
“Closing Date” means the date of this Agreement.
“Code” means the California Uniform Commercial Code, as amended or supplemented
from time to time.
“Collateral” means the property described on Exhibit A attached hereto and all
Negotiable Collateral and Intellectual Property Collateral to the extent not
described on Exhibit A, except to the extent any such property (i) is
nonassignable by its terms without the consent of the licensor thereof or
another party (but only to the extent such prohibition on transfer is
enforceable under applicable law, including, without limitation, Sections 9406
and 9408 of the Code), or (ii) the granting of a security interest therein is
contrary to applicable law, provided that upon the cessation of any such
restriction or prohibition, such property shall automatically become part of the
Collateral; provided that in no case shall the definition of “Collateral”
exclude any Accounts, proceeds of the disposition of any property, or general
intangibles consisting of rights to payment.
“Collateral State” means the state or states where the Collateral is located,
which are California, Tennessee and Georgia.
“Contingent Obligation” means, as applied to any Person, any direct or indirect
liability, contingent or otherwise, of that Person with respect to (i) any
indebtedness, lease, dividend, letter of credit or other obligation of another,
including, without limitation, any such obligation directly or indirectly
guaranteed, endorsed, co-made or discounted or sold with recourse by that
Person, or in respect of which that Person is otherwise directly or indirectly
liable; (ii) any obligations with respect to undrawn letters of credit,
corporate credit cards, or merchant services issued for the account of that
Person; and (iii) all obligations arising under any interest rate, currency or
commodity swap agreement, interest rate cap agreement, interest rate collar
agreement, or other agreement or arrangement designated to protect a Person
against fluctuation in interest rates, currency exchange rates or commodity
prices; provided, however, that the term “Contingent Obligation” shall not
include endorsements for collection or deposit in the ordinary course of
business. The amount of any Contingent Obligation shall be deemed to be an
amount equal to the stated or determined amount of the primary obligation in
respect of which such Contingent Obligation is made or, if not stated or
determinable, the maximum reasonably anticipated liability in respect thereof as
determined by such Person in good faith; provided, however, that such amount
shall not in any event exceed the maximum amount of the obligations under the
guarantee or other support arrangement.
“Copyrights” means any and all copyright rights, copyright applications,
copyright registrations and like protections in each work or authorship and
derivative work thereof, whether published or unpublished and whether or not the
same also constitutes a trade secret, now or hereafter existing, created,
acquired or held.
“Credit Card Services Sublimit” means a sublimit for corporate credit cards and
e-commerce or merchant account services under the Revolving Line not to exceed
Two Hundred Fifteen Thousand Dollars ($215,000).
“Credit Extension” means each Advance, Letter of Credit, use of Credit Card
Services, or any other extension of credit by Bank to or for the benefit of
Borrower hereunder.

 

-2-

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

 

“Eligible Accounts” means those Accounts that arise in the ordinary course of
Borrower’s business that comply with all of Borrower’s representations and
warranties to Bank set forth in Section 5.3; provided, that Bank may change the
standards of eligibility by giving Borrower thirty (30) days prior written
notice. Unless otherwise agreed to by Bank, Eligible Accounts shall not include
the following:
(a) Accounts that the account debtor has failed to pay in full within ninety
(90) days of invoice date;
(b) Credit balances over ninety (90) days;
(c) Accounts with respect to an account debtor, twenty-five percent (25%) of
whose Accounts the account debtor has failed to pay within ninety (90) days of
invoice date;
(d) Accounts with respect to an account debtor, including Subsidiaries and
Affiliates, whose total obligations to Borrower exceed twenty five percent (25%)
of all Accounts, to the extent such obligations exceed the aforementioned
percentage (the “Concentration Limit”), except as approved in writing by Bank
and provided that the Concentration Limit for Accounts where McKesson Corp. and
Cardinal Health, Inc. are the account debtor shall be forty percent (40%);
(e) Accounts with respect to which the account debtor does not have its
principal place of business in the United States, except for Eligible Foreign
Accounts;
(f) Accounts with respect to which the account debtor is the United States or
any department, agency, or instrumentality of the United States, except for
Accounts of the United States if the payee has assigned its payment rights to
Bank and the assignment has been acknowledged under the Assignment of Claims Act
of 1940 (31 U.S.C. 3727);
(g) Accounts with respect to which Borrower is liable to the account debtor for
goods sold or services rendered by the account debtor to Borrower, but only to
the extent of any amounts owing to the account debtor against amounts owed to
Borrower;
(h) Accounts with respect to which goods are placed on consignment, guaranteed
sale, sale or return, sale on approval, bill and hold, demo or promotional, or
other terms by reason of which the payment by the account debtor may be
conditional;
(i) Accounts with respect to which the account debtor is an officer, employee,
agent or Affiliate of Borrower;
(j) Accounts that have not yet been billed to the account debtor or that relate
to deposits (such as good faith deposits) or other property of the account
debtor held by Borrower for the performance of services or delivery of goods
which Borrower has not yet performed or delivered;
(k) Accounts with respect to which the account debtor disputes liability or
makes any claim with respect thereto as to which Bank believes, in its sole
reasonable discretion, that there may be a basis for dispute (but only to the
extent of the amount subject to such dispute or claim), or is subject to any
Insolvency Proceeding, or becomes insolvent, or goes out of business;
(l) Accounts the collection of which Bank reasonably determines after inquiry
and consultation with Borrower to be doubtful; and
(m) Retentions and hold-backs.
“Eligible Foreign Accounts” means Accounts with respect to which the account
debtor does not have its principal place of business in the United States and
that are (i) supported by one or more letters of credit in an amount and of a
tenor, and issued by a financial institution, acceptable to Bank, (ii) insured
by the Export Import Bank of the United States, (iii) generated by an account
debtor with its principal place of business in Canada, provided that the Bank
has perfected its security interest in the appropriate Canadian province, or
(iv) approved by Bank on a case-by-case basis. All Eligible Foreign Accounts
must be calculated in U.S. Dollars.

 

-3-

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

 

“Environmental Laws” means all laws, rules, regulations, orders and the like
issued by any federal state, local foreign or other governmental or
quasi-governmental authority or any agency pertaining to the environment or to
any hazardous materials or wastes, toxic substances, flammable, explosive or
radioactive materials, asbestos or other similar materials.
“Equipment” means all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments in
which Borrower has any interest.
“ERISA” means the Employee Retirement Income Security Act of 1974, as amended,
and the regulations thereunder.
“Event of Default” has the meaning assigned in Article 8.
“GAAP” means generally accepted accounting principles, consistently applied, as
in effect from time to time.
“Guarantor” means each of Auriga Pharmaceuticals, LLC, a Delaware limited
liability company, Auriga Operations, Inc., a Delaware corporation and Stesso
Pharmaceuticals, LLC, a Delaware limited liability company.
“Indebtedness” means (a) all indebtedness for borrowed money or the deferred
purchase price of property or services, including without limitation
reimbursement and other obligations with respect to surety bonds and letters of
credit, (b) all obligations evidenced by notes, bonds, debentures or similar
instruments, (c) all capital lease obligations, and (d) all Contingent
Obligations, and (e) all obligations arising under the Credit Card Services
Sublimit.
“Insolvency Proceeding” means any proceeding commenced by or against any Person
or entity under any provision of the United States Bankruptcy Code, as amended,
or under any other bankruptcy or insolvency law, including assignments for the
benefit of creditors, formal or informal moratoria, compositions, extension
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.
“Intellectual Property Collateral” means all of Borrower’s right, title, and
interest in and to the following:
(a) Copyrights, Trademarks and Patents;
(b) Any and all trade secrets, and any and all intellectual property rights in
computer software and computer software products now or hereafter existing,
created, acquired or held;
(c) Any and all design rights which may be available to Borrower now or
hereafter existing, created, acquired or held;
(d) Any and all claims for damages by way of past, present and future
infringement of any of the rights included above, with the right, but not the
obligation, to sue for and collect such damages for said use or infringement of
the intellectual property rights identified above;
(e) All licenses or other rights to use any of the Copyrights, Patents or
Trademarks, and all license fees and royalties arising from such use to the
extent permitted by such license or rights;
(f) All amendments, renewals and extensions of any of the Copyrights, Trademarks
or Patents; and

 

-4-

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

 

(g) All proceeds and products of the foregoing, including without limitation all
payments under insurance or any indemnity or warranty payable in respect of any
of the foregoing.
“Inventory” means all present and future inventory in which Borrower has any
interest.
“Investment” means any beneficial ownership of (including stock, partnership or
limited liability company interest other securities) any Person, or any loan,
advance or capital contribution to any Person.
“IRC” means the Internal Revenue Code of 1986, as amended, and the regulations
thereunder.
“Letter of Credit” means a commercial or standby letter of credit or similar
undertaking issued by Bank at Borrower’s request in accordance with
Section 2.1(b)(iii).
“Letter of Credit Sublimit” means a sublimit for Letters of Credit under the
Revolving Line not to exceed Two Hundred Thousand Dollars ($200,000).
“Lien” means any mortgage, lien, deed of trust, charge, pledge, security
interest or other encumbrance.
“Loan Documents” means, collectively, this Agreement, any note or notes executed
by Borrower, and any other document, instrument or agreement entered into by
Borrower or a Guarantor in connection with this Agreement, all as amended or
extended from time to time.
“Material Adverse Effect” means a material adverse effect on (i) the business
operations, condition (financial or otherwise) or prospects of Borrower and its
Subsidiaries taken as a whole, (ii) the ability of Borrower to repay the
Obligations or otherwise perform its obligations under the Loan Documents or
(iii) Borrower’s interest in, or the value, perfection or priority of Bank’s
security interest in the Collateral.
“Negotiable Collateral” means all of Borrower’s present and future letters of
credit of which it is a beneficiary, drafts, instruments (including promissory
notes), securities, documents of title, and chattel paper, and Borrower’s Books
relating to any of the foregoing.
“Obligations” means all debt, principal, interest, Bank Expenses and other
amounts owed to Bank by Borrower pursuant to this Agreement or any other
agreement, whether absolute or contingent, due or to become due, now existing or
hereafter arising, including any interest that accrues after the commencement of
an Insolvency Proceeding and including any debt, liability, or obligation owing
from Borrower to others that Bank may have obtained by assignment or otherwise.
“Patents” means all patents, patent applications and like protections including
without limitation improvements, divisions, continuations, renewals, reissues,
extensions and continuations-in-part of the same.
“Periodic Payments” means all installments or similar recurring payments that
Borrower may now or hereafter become obligated to pay to Bank pursuant to the
terms and provisions of any instrument, or agreement now or hereafter in
existence between Borrower and Bank.
“Permitted Indebtedness” means:
(a) Indebtedness of Borrower in favor of Bank arising under this Agreement or
any other Loan Document;
(b) Indebtedness existing on the Closing Date and disclosed in the Schedule;

 

-5-

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

 

(c) Indebtedness not to exceed One Hundred Thousand Dollars ($100,000) in the
aggregate in any fiscal year of Borrower secured by a lien described in clause
(c) of the defined term “Permitted Liens;” provided such Indebtedness does not
exceed the lesser of the cost or fair market value of the equipment financed
with such Indebtedness;
(d) Subordinated Debt;
(e) Indebtedness to trade creditors incurred in the ordinary course of business;
and
(f) Extensions, refinancings and renewals of any items of Permitted
Indebtedness, provided that the principal amount is not increased or the terms
modified to impose more burdensome terms upon Borrower or its Subsidiary, as the
case may be.
“Permitted Investment” means:
(a) Investments existing on the Closing Date disclosed in the Schedule;
(b) (i) Marketable direct obligations issued or unconditionally guaranteed by
the United States of America or any agency or any State thereof maturing within
one (1) year from the date of acquisition thereof, (ii) commercial paper
maturing no more than one (1) year from the date of creation thereof and
currently having rating of at least A-2 or P-2 from either Standard & Poor’s
Corporation or Moody’s Investors Service, (iii) Bank’s certificates of deposit
maturing no more than one year from the date of investment therein, and
(iv) Bank’s money market accounts;
(c) Repurchases of stock from former employees or directors of Borrower under
the terms of applicable repurchase agreements (i) in an aggregate amount not to
exceed One Hundred Thousand Dollars ($100,000) in any fiscal year, provided that
no Event of Default has occurred, is continuing or would exist after giving
effect to the repurchases, or (ii) in any amount where the consideration for the
repurchase is the cancellation of indebtedness owed by such former employees to
Borrower regardless of whether an Event of Default exists;
(d) Investments accepted in connection with Permitted Transfers;
(e) Investments of Subsidiaries in or to other Subsidiaries or Borrower and
Investments by Borrower in Subsidiaries not to exceed One Hundred Thousand
Dollars ($100,000) in the aggregate in any fiscal year;
(f) Investments not to exceed One Hundred Thousand Dollars ($100,000) in the
aggregate in any fiscal year consisting of (i) travel advances and employee
relocation loans and other employee loans and advances in the ordinary course of
business, and (ii) loans to employees, officers or directors relating to the
purchase of equity securities of Borrower or its Subsidiaries pursuant to
employee stock purchase plan agreements approved by Borrower’s Board of
Directors;
(g) Investments (including debt obligations) received in connection with the
bankruptcy or reorganization of customers or suppliers and in settlement of
delinquent obligations of, and other disputes with, customers or suppliers
arising in the ordinary course of Borrower’s business;
(h) Investments consisting of notes receivable of, or prepaid royalties and
other credit extensions, to customers and suppliers who are not Affiliates, in
the ordinary course of business, provided that this subparagraph (h) shall not
apply to Investments of Borrower in any Subsidiary; and
(i) Joint ventures or strategic alliances in the ordinary course of Borrower’s
business consisting of the non-exclusive licensing of technology, the
development of technology or the providing of technical support, provided that
any cash Investments by Borrower do not exceed Five Hundred Thousand Dollars
($500,000) in the aggregate in any fiscal year.

 

-6-

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

 

“Permitted Liens” means the following:
(a) Any Liens existing on the Closing Date and disclosed in the Schedule
(excluding Liens to be satisfied with the proceeds of the Advances) or arising
under this Agreement or the other Loan Documents;
(b) Liens for taxes, fees, assessments or other governmental charges or levies,
either not delinquent or being contested in good faith by appropriate
proceedings and for which Borrower maintains adequate reserves, provided the
same have no priority over any of Bank’s security interests;
(c) Liens not to exceed One Hundred Thousand Dollars ($100,000) in the aggregate
(i) upon or in any Equipment (other than Equipment financed by an Equipment
Advance) acquired or held by Borrower or any of its Subsidiaries to secure the
purchase price of such Equipment or indebtedness incurred solely for the purpose
of financing the acquisition or lease of such Equipment, or (ii) existing on
such Equipment at the time of its acquisition, provided that the Lien is
confined solely to the property so acquired and improvements thereon, and the
proceeds of such Equipment;
(d) Liens incurred in connection with the extension, renewal or refinancing of
the indebtedness secured by Liens of the type described in clauses (a) through
(c) above, provided that any extension, renewal or replacement Lien shall be
limited to the property encumbered by the existing Lien and the principal amount
of the indebtedness being extended, renewed or refinanced does not increase; and
(e) Liens arising from judgments, decrees or attachments in circumstances not
constituting an Event of Default under Sections 8.5 or 8.9.
“Permitted Transfer” means the conveyance, sale, lease, transfer or disposition
by Borrower or any Subsidiary of:
(a) Inventory in the ordinary course of business;
(b) licenses and similar arrangements for the use of the property of Borrower or
its Subsidiaries in the ordinary course of business;
(c) worn-out or obsolete Equipment not financed with the proceeds of Equipment
Advances; or
(d) other assets of Borrower or its Subsidiaries that do not in the aggregate
exceed One Hundred Thousand Dollars ($100,000) during any fiscal year.
“Person” means any individual, sole proprietorship, partnership, limited
liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or government agency.
“Prime Rate” means the variable rate of interest, per annum, most recently
announced by Bank, as its “prime rate,” whether or not such announced rate is
the lowest rate available from Bank.
“Profitability” means net income after tax.
“Responsible Officer” means each of the Chief Executive Officer, the Chief
Operating Officer, the Chief Financial Officer and the Vice President, Finance
of Borrower.
“Revolving Line” means a Credit Extension of up to Two Million Dollars
($2,000,000) (inclusive of any amounts outstanding under the Letter of Credit
Sublimit and the Credit Card Services Sublimit)
“Revolving Maturity Date” means May ___, 2008. [not later than May 31, 2008]

 

-7-

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

 

“Schedule” means the schedule of exceptions attached hereto and approved by
Bank, if any.
“Shares” means (i) sixty-five percent (65%) of the issued and outstanding
capital stock, membership units or other securities owned or held of record by
Borrower in any Subsidiary of Borrower which is not an entity organized under
the laws of the United States or any territory thereof, and (ii) one hundred
percent (100%) of the issued and outstanding capital stock, membership units or
other securities owned or held of record by Borrower in any Subsidiary of
Borrower which is an entity organized under the laws of the United States or any
territory thereof.
“SOS Reports” means the official reports from the Secretaries of State of each
Collateral State, Chief Executive Office State and the Borrower State and other
applicable federal, state or local government offices identifying all current
security interests filed in the Collateral and Liens of record as of the date of
such report.
“Subordinated Debt” means any debt incurred by Borrower that is subordinated in
writing to the debt owing by Borrower to Bank on terms reasonably acceptable to
Bank (and identified as being such by Borrower and Bank).
“Subsidiary” means any corporation, partnership or limited liability company or
joint venture in which (i) any general partnership interest or (ii) more than
fifty percent (50%) of the stock, limited liability company interest or joint
venture of which by the terms thereof has the ordinary voting power to elect the
Board of Directors, managers or trustees of the entity, at the time as of which
any determination is being made, is owned by Borrower, either directly or
through an Affiliate.
“Trademarks” means any trademark and servicemark rights, whether registered or
not, applications to register and registrations of the same and like
protections, and the entire goodwill of the business of Borrower connected with
and symbolized by such trademarks.
1.2 Accounting Terms. Any accounting term not specifically defined herein shall
be construed in accordance with GAAP and all calculations shall be made in
accordance with GAAP. The term “financial statements” shall include the
accompanying notes and schedules.
2. LOAN AND TERMS OF PAYMENT.
2.1 Credit Extensions.
(a) Promise to Pay. Borrower promises to pay to Bank, in lawful money of the
United States of America, the aggregate unpaid principal amount of all Credit
Extensions made by Bank to Borrower, together with interest on the unpaid
principal amount of such Credit Extensions at rates in accordance with the terms
hereof.
(b) Advances Under Revolving Line.
(i) Amount. Subject to and upon the terms and conditions of this Agreement (1)
Borrower may request Advances in an aggregate outstanding amount not to exceed
the lesser of (A) the Revolving Line or (B) the Borrowing Base, less any amounts
outstanding under the Letter of Credit Sublimit and the Credit Card Services
Sublimit, and (2) amounts borrowed pursuant to this Section 2.1(b) may be repaid
and reborrowed at any time prior to the Revolving Maturity Date, at which time
all Advances under this Section 2.1(b) shall be immediately due and payable.
Borrower may prepay any Advances without penalty or premium.

 

-8-

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

 

(ii) Form of Request. Whenever Borrower desires an Advance, Borrower will notify
Bank by facsimile transmission or telephone no later than 3:00 p.m. Pacific time
(1:00 p.m. Pacific time for wire transfers), on the Business Day that the
Advance is to be made. Each such notification shall be promptly confirmed by a
Payment/Advance Form in substantially the form of Exhibit B hereto. Bank is
authorized to make Advances under this Agreement, based upon instructions
received from a Responsible Officer or a designee of a Responsible Officer, or
without instructions if in Bank’s reasonable discretion such Advances are
necessary to meet Obligations which have become due and remain unpaid. Bank
shall be entitled to rely on any telephonic notice given by a person who Bank
reasonably believes to be a Responsible Officer or a designee thereof, and
Borrower shall indemnify and hold Bank harmless for any damages or loss suffered
by Bank as a result of such reliance. Bank will credit the amount of Advances
made under this Section 2.1(b) to Borrower’s deposit account.
(iii) Letter of Credit Sublimit. Subject to the availability under the Revolving
Line, and in reliance on the representations and warranties of Borrower set
forth herein, at any time and from time to time from the date hereof through the
Business Day immediately prior to the Revolving Maturity Date, Bank shall issue
for the account of Borrower such Letters of Credit as Borrower may request by
delivering to Bank a duly executed letter of credit application on Bank’s
standard form; provided, however, that the outstanding and undrawn amounts under
all such Letters of Credit (i) shall not at any time exceed the Letter of Credit
Sublimit, and (ii) shall be deemed to constitute Advances for the purpose of
calculating availability under the Revolving Line. Any drawn but unreimbursed
amounts under any Letters of Credit shall be charged as Advances against the
Revolving Line. All Letters of Credit shall be in form and substance acceptable
to Bank in its sole reasonable discretion and shall be subject to the terms and
conditions of Bank’s form application and letter of credit agreement. Borrower
will pay any standard issuance and other fees that Bank notifies Borrower it
will charge for issuing and processing Letters of Credit.
(iv) Credit Card Services Sublimit. Subject to the terms and conditions of this
Agreement, Borrower may request corporate credit cards and standard and
e-commerce merchant account services from Bank (collectively, the “Credit Card
Services”). The aggregate limit of the corporate credit cards and merchant
credit card processing reserves shall not exceed the Credit Card Services
Sublimit, provided that availability under the Revolving Line shall be reduced
by the aggregate limits of the corporate credit cards issued to Borrower and
merchant credit card processing reserves. In addition, Bank may, in its sole
reasonable discretion, charge as Advances any amounts that become due or owing
to Bank in connection with the Credit Card Services. The terms and conditions
(including repayment and fees) of such Credit Card Services shall be subject to
the terms and conditions of the Bank’s standard forms of application and
agreement for the Credit Card Services, which Borrower hereby agrees to execute.
(v) Collateralization of Obligations Extending Beyond Maturity. If Borrower has
not secured to Bank’s satisfaction its obligations with respect to any Letters
of Credit or Credit Card Services by the Revolving Maturity Date, then,
effective as of such date, the balance in any deposit accounts held by Bank and
the certificates of deposit or time deposit accounts issued by Bank in
Borrower’s name (and any interest paid thereon or proceeds thereof, including
any amounts payable upon the maturity or liquidation of such certificates or
accounts), shall automatically secure such obligations to the extent of the then
continuing or outstanding and undrawn Letters of Credit and Credit Card
Services. Borrower authorizes Bank to hold such balances in pledge and to
decline to honor any drafts thereon or any requests by Borrower or any other
Person to pay or otherwise transfer any part of such balances for so long as the
Letters of Credit or Credit Card Services are outstanding or continue.
2.2 Overadvances. If the aggregate amount of the outstanding Advances exceeds
the lesser of the Revolving Line or the Borrowing Base at any time, Borrower
shall immediately pay to Bank, in cash, the amount of such excess.
2.3 Interest Rates, Payments, and Calculations.
(a) Interest Rates.
(i) Advances. Except as set forth in Section 2.3(b), the Advances shall bear
interest, on the outstanding daily balance thereof, at a variable rate equal to
one percent (1.00%) above the Prime Rate.
(b) Late Fee; Default Rate. If any payment is not made within ten (10) days
after the date such payment is due, Borrower shall pay Bank a late fee equal to
the lesser of (i) five percent (5%) of the amount of such unpaid amount or
(ii) the maximum amount permitted to be charged under applicable law. All
Obligations shall bear interest, from and after the occurrence and during the
continuance of an Event of Default, at a rate equal to five (5) percentage
points above the interest rate applicable immediately prior to the occurrence of
the Event of Default.

 

-9-

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

 

(c) Payments. Interest hereunder shall be due and payable on the last calendar
day of each month during the term hereof. Bank shall, at its option, charge such
interest, all Bank Expenses, and all Periodic Payments against any of Borrower’s
deposit accounts or against the Revolving Line, in which case those amounts
shall thereafter accrue interest at the rate then applicable hereunder. Any
interest not paid when due shall be compounded by becoming a part of the
Obligations, and such interest shall thereafter accrue interest at the rate then
applicable hereunder.
(d) Computation. In the event the Prime Rate is changed from time to time
hereafter, the applicable rate of interest hereunder shall be increased or
decreased, effective as of the day the Prime Rate is changed, by an amount equal
to such change in the Prime Rate. All interest chargeable under the Loan
Documents shall be computed on the basis of a three hundred sixty (360) day year
for the actual number of days elapsed.
2.4 Crediting Payments. Prior to the occurrence of an Event of Default, Bank
shall credit a wire transfer of funds, check or other item of payment to such
deposit account or Obligation as Borrower specifies, except that to the extent
Borrower uses the Advances to purchase Collateral, Borrower’s repayment of the
Advances shall apply on a “first-in-first-out” basis so that the portion of the
Advances used to purchase a particular item of Collateral shall be paid in the
chronological order the Borrower purchased the Collateral. After the occurrence
of an Event of Default, Bank shall have the right, in its sole reasonable
discretion, to immediately apply any wire transfer of funds, check, or other
item of payment Bank may receive to conditionally reduce Obligations, but such
applications of funds shall not be considered a payment on account unless such
payment is of immediately available federal funds or unless and until such check
or other item of payment is honored when presented for payment. Notwithstanding
anything to the contrary contained herein, any wire transfer or payment received
by Bank after 12:00 noon Pacific time shall be deemed to have been received by
Bank as of the opening of business on the immediately following Business Day.
Whenever any payment to Bank under the Loan Documents would otherwise be due
(except by reason of acceleration) on a date that is not a Business Day, such
payment shall instead be due on the next Business Day, and additional fees or
interest, as the case may be, shall accrue and be payable for the period of such
extension.
2.5 Fees. Borrower shall pay to Bank the following:
(a) Facility Fee. On the Closing Date, a fee equal to Ten Thousand Dollars
($10,000), which shall be nonrefundable; and
(b) Bank Expenses. On the Closing Date, all Bank Expenses incurred through the
Closing Date (provided that legal fees shall not exceed $20,000 on the Closing
Date so long as there are no more than two (2) sets of revisions to the Loan
Documents), and, after the Closing Date, all Bank Expenses as and when they
become due.
2.6 Term. This Agreement shall become effective on the Closing Date and, subject
to Section 13.7, shall continue in full force and effect for so long as any
Obligations remain outstanding or Bank has any obligation to make Credit
Extensions under this Agreement. Notwithstanding the foregoing, Bank shall have
the right to terminate its obligation to make Credit Extensions under this
Agreement immediately and without notice upon the occurrence and during the
continuance of an Event of Default.
3. CONDITIONS OF LOANS.
3.1 Conditions Precedent to Initial Credit Extension. The obligation of Bank to
make the initial Credit Extension is subject to the condition precedent that
Bank shall have received, in form and substance satisfactory to Bank, the
following:

 

-10-

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

 

(a) this Agreement;
(b) an officer’s certificate of Borrower with respect to incumbency and
resolutions authorizing the execution and delivery of this Agreement;
(c) UCC National Form Financing Statement;
(d) an intellectual property security agreement from Borrower and each
Guarantor;
(e) a guaranty executed by each Guarantor;
(f) a third party security agreement from each Guarantor;
(g) the certificate(s) for the Shares, together with Assignment(s) Separate from
Certificate, duly executed in blank;
(h) current SOS Reports indicating that except for Permitted Liens, there are no
other security interests or Liens of record in the Collateral;
(i) agreement to provide insurance;
(j) payment of the fees and Bank Expenses then due specified in Section 2.5
hereof;
(k) current financial statements, including audited statements for Borrower’s
most recently ended fiscal year, together with an unqualified opinion, company
prepared consolidated and consolidating balance sheets and income statements for
the most recently ended month in accordance with Section 6.2, and such other
updated financial information as Bank may reasonably request;
(l) current Compliance Certificate in accordance with Section 6.2;
(m) an audit of the Collateral, the results of which shall be reasonably
satisfactory to Bank; and
(n) such other documents or certificates, and completion of such other matters,
as Bank may reasonably deem necessary or appropriate.
3.2 Conditions Precedent to all Credit Extensions. The obligation of Bank to
make each Credit Extension, including the initial Credit Extension, is further
subject to the following conditions:
(a) timely receipt by Bank of the Payment/Advance Form as provided in
Section 2.1; and
(b) the representations and warranties contained in Section 5 shall be true and
correct in all material respects on and as of the date of such Payment/Advance
Form and on the effective date of each Credit Extension as though made at and as
of each such date, and no Event of Default shall have occurred and be
continuing, or would exist after giving effect to such Credit Extension
(provided, however, that those representations and warranties expressly
referring to another date shall be true, correct and complete in all material
respects as of such date). The making of each Credit Extension shall be deemed
to be a representation and warranty by Borrower on the date of such Credit
Extension as to the accuracy of the facts referred to in this Section 3.2.
4. CREATION OF SECURITY INTEREST.
4.1 Grant of Security Interest. Borrower grants and pledges to Bank a continuing
security interest in the Collateral to secure prompt repayment of any and all
Obligations and to secure prompt performance by Borrower of each of its
covenants and duties under the Loan Documents. Except as set forth in the
Schedule, such security interest constitutes a valid, first priority security
interest in the presently existing Collateral, and will constitute a valid,
first priority security interest in later-acquired Collateral. Notwithstanding
any termination, Bank’s Lien on the Collateral shall remain in effect for so
long as any Obligations are outstanding.

 

-11-

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

 

4.2 Perfection of Security Interest. Borrower authorizes Bank to file at any
time financing statements, continuation statements, and amendments thereto that
(i) either specifically describe the Collateral or describe the Collateral as
all assets of Borrower of the kind pledged hereunder, and (ii) contain any other
information required by the Code for the sufficiency of filing office acceptance
of any financing statement, continuation statement, or amendment, including
whether Borrower is an organization, the type of organization and any
organizational identification number issued to Borrower, if applicable. Any such
financing statements may be signed by Bank on behalf of Borrower, as provided in
the Code, and may be filed at any time in any jurisdiction whether or not
Revised Article 9 of the Code is then in effect in that jurisdiction. Borrower
shall from time to time endorse and deliver to Bank, at the request of Bank, all
Negotiable Collateral and other documents that Bank may reasonably request, in
form reasonably satisfactory to Bank, to perfect and continue perfected Bank’s
security interests in the Collateral and in order to fully consummate all of the
transactions contemplated under the Loan Documents. Borrower shall have
possession of the Collateral, except where expressly otherwise provided in this
Agreement or where Bank chooses to perfect its security interest by possession
in addition to the filing of a financing statement. Where Collateral is in
possession of a third party bailee, Borrower shall take such steps as Bank
reasonably requests for Bank to (i) obtain an acknowledgment, in form and
substance reasonably satisfactory to Bank, of the bailee that the bailee holds
such Collateral for the benefit of Bank, and (ii) obtain “control” of any
Collateral consisting of investment property, deposit accounts, letter-of-credit
rights or electronic chattel paper (as such items and the term “control” are
defined in Revised Article 9 of the Code) by causing the securities intermediary
or depositary institution or issuing bank to execute a control agreement in form
and substance satisfactory to Bank. Borrower will not create any chattel paper
without placing a legend on the chattel paper acceptable to Bank indicating that
Bank has a security interest in the chattel paper. Borrower from time to time
may deposit with Bank specific cash collateral to secure specific Obligations;
Borrower authorizes Bank to hold such specific balances in pledge and to decline
to honor any drafts thereon or any request by Borrower or any other Person to
pay or otherwise transfer any part of such balances for so long as the specific
Obligations are outstanding.
4.3 Right to Inspect. Bank (through any of its officers, employees, or agents)
shall have the right, upon reasonable prior notice, from time to time during
Borrower’s usual business hours but no more than twice a year (unless an Event
of Default has occurred and is continuing), to inspect Borrower’s Books and to
make copies thereof and to check, test, and appraise the Collateral in order to
verify Borrower’s financial condition or the amount, condition of, or any other
matter relating to, the Collateral.
4.4 Pledge of Collateral. Borrower hereby pledges, assigns and grants to Bank a
security interest in all the Shares, together with all proceeds and
substitutions thereof, all cash, stock and other moneys and property paid
thereon, all rights to subscribe for securities declared or granted in
connection therewith, and all other cash and noncash proceeds of the foregoing,
as security for the performance of the Obligations. On the Closing Date, the
certificate or certificates for the Shares will be delivered to Bank,
accompanied by an instrument of assignment duly executed in blank by Borrower.
To the extent required by the terms and conditions governing the Shares,
Borrower shall cause the books of each entity whose Shares are part of the
Collateral and any transfer agent to reflect the pledge of the Shares. Upon the
occurrence of an Event of Default hereunder, Bank may effect the transfer of any
securities included in the Collateral (including but not limited to the Shares)
into the name of Bank and cause new certificates representing such securities to
be issued in the name of Bank or its transferee. Borrower will execute and
deliver such documents, and take or cause to be taken such actions, as Bank may
reasonably request to perfect or continue the perfection of Bank’s security
interest in the Shares. Unless an Event of Default shall have occurred and be
continuing, Borrower shall be entitled to exercise any voting rights with
respect to the Shares and to give consents, waivers and ratifications in respect
thereof, provided that no vote shall be cast or consent, waiver or ratification
given or action taken which would be inconsistent with any of the terms of this
Agreement or which would constitute or create any violation of any of such
terms. All such rights to vote and give consents, waivers and ratifications
shall terminate upon the occurrence and continuance of an Event of Default.

 

-12-

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

 

5. REPRESENTATIONS AND WARRANTIES.
Borrower represents and warrants as follows:
5.1 Due Organization and Qualification. Borrower and each Subsidiary is duly
existing under the laws of the state in which it is organized and qualified and
licensed to do business in any state in which the conduct of its business or its
ownership of property requires that it be so qualified, except where the failure
to do so could not reasonably be expected to cause a Material Adverse Effect.
5.2 Due Authorization; No Conflict. The execution, delivery, and performance of
the Loan Documents are within Borrower’s powers, have been duly authorized, and
are not in conflict with nor constitute a breach of any provision contained in
Borrower’s Certificate of Incorporation or Bylaws, nor will they constitute an
event of default under any material agreement by which Borrower is bound.
Borrower is not in default under any agreement by which it is bound, except to
the extent such default could not reasonably be expected to cause a Material
Adverse Effect.
5.3 Collateral. Borrower has rights in or the power to transfer the Collateral,
and its title to the Collateral is free and clear of Liens, adverse claims, and
restrictions on transfer or pledge except for Permitted Liens. All Collateral is
located solely in the Collateral States. The Eligible Accounts are bona fide
existing obligations. The property or services giving rise to such Eligible
Accounts has been delivered or rendered to the account debtor or its agent for
immediate shipment to and unconditional acceptance by the account debtor.
Borrower has not received notice of actual or imminent Insolvency Proceeding of
any account debtor whose accounts are included in any Borrowing Base Certificate
as an Eligible Account. All Inventory is in all material respects of good and
merchantable quality, free from all material defects, except for Inventory for
which adequate reserves have been made. Except as set forth in the Schedule,
none of the Collateral is maintained or invested with a Person other than Bank
or Bank’s Affiliates.
5.4 Intellectual Property Collateral. Borrower is the sole owner of the
Intellectual Property Collateral, except for licenses granted by Borrower to its
customers in the ordinary course of business. To the best of Borrower’s
knowledge, each of the Copyrights, Trademarks and Patents is valid and
enforceable, and no part of the Intellectual Property Collateral has been judged
invalid or unenforceable, in whole or in part, and no claim has been made to
Borrower that any part of the Intellectual Property Collateral violates the
rights of any third party except to the extent such claim could not reasonably
be expected to cause a Material Adverse Effect. Except as set forth in the
Schedule, Borrower’s rights as a licensee of intellectual property do not give
rise to more than five percent (5%) of its gross revenue in any given month,
including without limitation revenue derived from the sale, licensing, rendering
or disposition of any product or service.
5.5 Name; Location of Chief Executive Office. Except as disclosed in the
Schedule, Borrower has not done business under any name other than that
specified on the signature page hereof, and its exact legal name is as set forth
in the first paragraph of this Agreement. The chief executive office of Borrower
is located in the Chief Executive Office State at the address indicated in
Section 10 hereof.
5.6 Litigation. Except as set forth in the Schedule, to Borrower’s knowledge,
there are no actions or proceedings pending by or against Borrower or any
Subsidiary before any court or administrative agency in which a likely adverse
decision could reasonably be expected to have a Material Adverse Effect.
5.7 No Material Adverse Change in Financial Statements. All consolidated and
consolidating financial statements related to Borrower and any Subsidiary that
are delivered by Borrower to Bank fairly present in all material respects
Borrower’s consolidated and consolidating financial condition as of the date
thereof and Borrower’s consolidated and consolidating results of operations for
the period then ended. There has not been a material adverse change in the
consolidated or in the consolidating financial condition of Borrower since the
date of the most recent of such financial statements submitted to Bank.
5.8 Solvency, Payment of Debts. Borrower is able to pay its debts (including
trade debts) as they mature; the fair saleable value of Borrower’s assets
(including goodwill minus disposition costs) exceeds the fair value of its
liabilities; and Borrower is not left with unreasonably small capital after the
transactions contemplated by this Agreement.

 

-13-

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

 

5.9 Compliance with Laws and Regulations. Borrower and each Subsidiary have met
the minimum funding requirements of ERISA with respect to any employee benefit
plans subject to ERISA. No event has occurred resulting from Borrower’s failure
to comply with ERISA that is reasonably likely to result in Borrower’s incurring
any liability that could have a Material Adverse Effect. Borrower is not an
“investment company” or a company “controlled” by an “investment company” within
the meaning of the Investment Company Act of 1940. Borrower is not engaged
principally, or as one of the important activities, in the business of extending
credit for the purpose of purchasing or carrying margin stock (within the
meaning of Regulations T and U of the Board of Governors of the Federal Reserve
System). Borrower has complied in all material respects with all the provisions
of the Federal Fair Labor Standards Act. Borrower is in compliance with all
environmental laws, regulations and ordinances except where the failure to
comply is not reasonably likely to have a Material Adverse Effect. Borrower has
not violated any statutes, laws, ordinances or rules applicable to it, the
violation of which could reasonably be expected to have a Material Adverse
Effect. Borrower and each Subsidiary have filed or caused to be filed all tax
returns required to be filed, and have paid, or have made adequate provision for
the payment of, all taxes reflected therein except those being contested in good
faith with adequate reserves under GAAP or where the failure to file such
returns or pay such taxes could not reasonably be expected to have a Material
Adverse Effect.
5.10 Subsidiaries. Borrower does not own any stock, partnership interest or
other equity securities of any Person, except for Permitted Investments.
5.11 Government Consents. Borrower and each Subsidiary have obtained all
consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all governmental authorities that are necessary
for the continued operation of Borrower’s business as currently conducted,
except where the failure to do so could not reasonably be expected to cause a
Material Adverse Effect.
5.12 Inbound Licenses. Except as disclosed on the Schedule, Borrower is not a
party to, nor is bound by, any license or other agreement that prohibits or
otherwise restricts Borrower from granting a security interest in Borrower’s
interest in such license or agreement or any other property.
5.13 Shares. Borrower has full power and authority to create a first lien on the
Shares and no disability or contractual obligation exists that would prohibit
Borrower from pledging the Shares pursuant to this Agreement. To Borrower’s
knowledge, there are no subscriptions, warrants, rights of first refusal or
other restrictions on transfer relative to, or options exercisable with respect
to the Shares. The Shares have been and will be duly authorized and validly
issued, and are fully paid and non-assessable. To Borrower’s knowledge, the
Shares are not the subject of any present or threatened suit, action,
arbitration, administrative or other proceeding, and Borrower knows of no
reasonable grounds for the institution of any such proceedings.
5.14 Full Disclosure. No representation, warranty or other statement made by
Borrower in any certificate or written statement furnished to Bank taken
together with all such certificates and written statements furnished to Bank
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained in such certificates or
statements not misleading, it being recognized by Bank that the projections and
forecasts provided by Borrower in good faith and based upon reasonable
assumptions are not to be viewed as facts and that actual results during the
period or periods covered by any such projections and forecasts may differ from
the projected or forecasted results.
6. AFFIRMATIVE COVENANTS.
Borrower covenants and agrees that, until payment in full of all outstanding
Obligations, and for so long as Bank may have any commitment to make a Credit
Extension hereunder, Borrower shall do all of the following:

 

-14-

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

 

6.1 Good Standing and Government Compliance. Borrower shall maintain its and
each of its Subsidiaries’ corporate existence and good standing in the Borrower
State, shall maintain qualification and good standing in each other jurisdiction
in which the failure to so qualify could have a Material Adverse Effect, and
shall furnish to Bank the organizational identification number issued to
Borrower by the authorities of the state in which Borrower is organized, if
applicable. Borrower shall meet, and shall cause each Subsidiary to meet, the
minimum funding requirements of ERISA with respect to any employee benefit plans
subject to ERISA. Borrower shall comply in all material respects with all
applicable Environmental Laws, and maintain all material permits, licenses and
approvals required thereunder where the failure to do so could have a Material
Adverse Effect. Borrower shall comply, and shall cause each Subsidiary to
comply, with all statutes, laws, ordinances and government rules and regulations
to which it is subject, and shall maintain, and shall cause each of its
Subsidiaries to maintain, in force all licenses, approvals and agreements, the
loss of which or failure to comply with which could reasonably be expected to
have a Material Adverse Effect.
6.2 Financial Statements, Reports, Certificates. Borrower shall deliver the
following to Bank: (i) as soon as available, but in any event within thirty
(30) days after the end of each calendar month, a company prepared consolidated
and consolidating balance sheet and income statement covering Borrower’s
operations during such period, in a form reasonably acceptable to Bank and
certified by a Responsible Officer; (ii) as soon as available, but in any event
within ninety (90) days after the end of Borrower’s fiscal year, audited
consolidated and consolidating financial statements of Borrower prepared in
accordance with GAAP, consistently applied, together with an opinion which is
unqualified or otherwise consented to in writing by Bank on such financial
statements of an independent certified public accounting firm reasonably
acceptable to Bank; (iii) if applicable, copies of all statements, reports and
notices sent or made available generally by Borrower to its security holders or
to any holders of Subordinated Debt and all reports on Forms 10-K and 10-Q filed
with the Securities and Exchange Commission; (iv) promptly upon receipt of
notice thereof, a report of any legal actions pending or threatened against
Borrower or any Subsidiary that could result in damages or costs to Borrower or
any Subsidiary of One Hundred Thousand Dollars ($100,000) or more; (v) promptly
upon receipt, each management letter prepared by Borrower’s independent
certified public accounting firm regarding Borrower’s management control
systems; (vi) such budgets, sales projections, operating plans or other
financial information generally prepared by Borrower in the ordinary course of
business as Bank may reasonably request from time to time; (vii) as soon as
available, but in any event within thirty (30) days prior to the end of
Borrower’s fiscal year an annual financial forecast including balance sheet and
income statement; and (viii) within thirty (30) days of the last day of each
fiscal quarter, a report signed by Borrower, in form reasonably acceptable to
Bank, listing any applications or registrations that Borrower has made or filed
in respect of any Patents, Copyrights or Trademarks and the status of any
outstanding applications or registrations, as well as any material change in
Borrower’s Intellectual Property Collateral, including but not limited to any
subsequent ownership right of Borrower in or to any Trademark, Patent or
Copyright not specified in Exhibits A, B, and C of any Intellectual Property
Security Agreement delivered to Bank by Borrower in connection with this
Agreement.
(a) Within thirty (30) days after the last day of each month, Borrower shall
deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in
substantially the form of Exhibit C hereto, together with aged listings by
invoice date of accounts receivable and accounts payable.
(b) Within thirty (30) days after the last day of each month, Borrower shall
deliver to Bank with the monthly financial statements, a Compliance Certificate
certified as of the last day of the applicable month and signed by a Responsible
Officer in substantially the form of Exhibit D hereto.
(c) As soon as possible and in any event within three (3) calendar days after
becoming aware of the occurrence or existence of an Event of Default hereunder,
a written statement of a Responsible Officer setting forth details of the Event
of Default, and the action which Borrower has taken or proposes to take with
respect thereto.
(d) Bank shall have a right from time to time hereafter to audit Borrower’s
Accounts and appraise Collateral at Borrower’s expense, provided that such
audits will be conducted no more often than every six (6) months unless an Event
of Default has occurred and is continuing.
Borrower may deliver to Bank on an electronic basis any certificates, reports or
information required pursuant to this Section 6.2, and Bank shall be entitled to
rely on the information contained in the electronic files, provided that Bank in
good faith believes that the files were delivered by a Responsible Officer. If
Borrower delivers this information electronically, it shall also deliver to Bank
by U.S. Mail, reputable overnight courier service, hand delivery, facsimile or
.pdf file within five (5) Business Days of submission of the unsigned electronic
copy the certification of monthly financial statements, the intellectual
property report, the Borrowing Base Certificate and the Compliance Certificate,
each bearing the physical signature of the Responsible Officer.

 

-15-

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

 

6.3 Inventory; Returns. Borrower shall keep all Inventory in good and
merchantable condition, free from all material defects except for Inventory for
which adequate reserves have been made. Returns and allowances, if any, as
between Borrower and its account debtors shall be on the same basis and in
accordance with the usual customary practices of Borrower, as they exist on the
Closing Date. Borrower shall promptly notify Bank of all returns and recoveries
and of all disputes and claims involving more than One Hundred Thousand Dollars
($100,000).
6.4 Taxes. Borrower shall make, and cause each Subsidiary to make, due and
timely payment or deposit of all material federal, state, and local taxes,
assessments, or contributions required of it by law, including, but not limited
to, those laws concerning income taxes, F.I.C.A., F.U.T.A. and state disability,
and will execute and deliver to Bank, on demand, proof reasonably satisfactory
to Bank indicating that Borrower or a Subsidiary has made such payments or
deposits and any appropriate certificates attesting to the payment or deposit
thereof; provided that Borrower or a Subsidiary need not make any payment if the
amount or validity of such payment is contested in good faith by appropriate
proceedings and is reserved against (to the extent required by GAAP) by
Borrower.
6.5 Insurance.
(a) Borrower, at its expense, shall keep the Collateral insured against loss or
damage by fire, theft, explosion, sprinklers, and all other hazards and risks,
and in such amounts, as ordinarily insured against by other owners in similar
businesses conducted in the locations where Borrower’s business is conducted on
the date hereof. Borrower shall also maintain liability and other insurance in
amounts and of a type that are customary to businesses similar to Borrower’s.
(b) All such policies of insurance shall be in such form, with such companies,
and in such amounts as reasonably satisfactory to Bank. All policies of property
insurance shall contain a lender’s loss payable endorsement, in a form
reasonably satisfactory to Bank, showing Bank as an additional loss payee, and
all liability insurance policies shall show Bank as an additional insured and
specify that the insurer must give at least 20 days notice to Bank before
canceling its policy for any reason. Upon Bank’s request, Borrower shall deliver
to Bank certified copies of the policies of insurance and evidence of all
premium payments. If no Event of Default has occurred and is continuing,
proceeds payable under any casualty policy will, at Borrower’s option, be
payable to Borrower to replace the property subject to the claim, provided that
any such replacement property shall be deemed Collateral in which Bank has been
granted a first priority security interest. If an Event of Default has occurred
and is continuing, all proceeds payable under any such policy shall, at Bank’s
option, be payable to Bank to be applied on account of the Obligations.
6.6 Accounts. Borrower shall maintain its primary depository and operating
accounts with Bank, and its primary investment accounts with Bank or Bank’s
Affiliates.
6.7 Financial Covenants. Borrower shall at all times maintain the following
financial ratios and covenants:
(a) Liquidity Ratio. A ratio of (i) Cash (to be at least $500,000 at Bank at all
times) plus net trade accounts to (ii) all Indebtedness to Bank of at least 1.50
to 1.00.
(b) Cumulative Net Losses. Cumulative net losses (determined in accordance with
GAAP but excluding non-cash compensation charges associated with FASB 123-R)
shall not exceed Five Hundred Thousand Dollars ($500,000) at any time during
Borrower’s 2007 fiscal year.
(c) Profitability. A Profitability of not less than One Million Five Hundred
Thousand Dollars ($1,500,000) for the fiscal year ending December 31, 2007.

 

-16-

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

 

Bank and Borrower shall mutually agree upon covenant levels for subsequent
fiscal years upon receipt of updated forecasts in accordance with Section 6.2
hereof.
6.8 Intellectual Property Rights.
(a) Borrower shall register or cause to be registered on an expedited basis (to
the extent not already registered) with the United States Patent and Trademark
Office or the United States Copyright Office, as the case may be, those
registrable intellectual property rights now owned or hereafter developed or
acquired by Borrower, to the extent that Borrower, in its reasonable business
judgment, deems it appropriate to so protect such intellectual property rights.
(b) Borrower shall promptly give Bank written notice of any applications or
registrations of intellectual property rights filed with the United States
Patent and Trademark Office, including the date of such filing and the
registration or application numbers, if any.
(c) Borrower shall (i) give Bank not less than thirty (30) days prior written
notice of the filing of any applications or registrations with the United States
Copyright Office, including the title of such intellectual property rights to be
registered, as such title will appear on such applications or registrations, and
the date such applications or registrations will be filed; (ii) prior to the
filing of any such applications or registrations, execute such documents as Bank
may reasonably request for Bank to maintain its perfection in such intellectual
property rights to be registered by Borrower; (iii) upon the request of Bank,
either deliver to Bank or file such documents simultaneously with the filing of
any such applications or registrations; (iv) upon filing any such applications
or registrations, promptly provide Bank with a copy of such applications or
registrations together with any exhibits, evidence of the filing of any
documents requested by Bank to be filed for Bank to maintain the perfection and
priority of its security interest in such intellectual property rights, and the
date of such filing.
(d) Borrower shall execute and deliver such additional instruments and documents
from time to time as Bank shall reasonably request to perfect and maintain the
perfection and priority of Bank’s security interest in the Intellectual Property
Collateral.
(e) Borrower shall (i) protect, defend and maintain the validity and
enforceability of the trade secrets, Trademarks, Patents and Copyrights,
(ii) use commercially reasonable efforts to detect infringements of the
Trademarks, Patents and Copyrights and promptly advise Bank in writing of
material infringements detected and (iii) not allow any material Trademarks,
Patents or Copyrights to be abandoned, forfeited or dedicated to the public
without the written consent of Bank, which shall not be unreasonably withheld.
(f) Bank may audit Borrower’s Intellectual Property Collateral to confirm
compliance with this Section, provided such audit may not occur more often than
twice per year, unless an Event of Default has occurred and is continuing. Bank
shall have the right, but not the obligation, to take, at Borrower’s sole
expense, any actions that Borrower is required under this Section to take but
which Borrower fails to take, after fifteen (15) days’ notice to Borrower.
Borrower shall reimburse and indemnify Bank for all reasonable costs and
reasonable expenses incurred in the reasonable exercise of its rights under this
Section.
6.9 Consent of Inbound Licensors. Prior to entering into or becoming bound by
any license or agreement, Borrower shall: (i) provide written notice to Bank of
the material terms of such license or agreement with a description of its likely
impact on Borrower’s business or financial condition; and (ii) in good faith use
commercially reasonable efforts to obtain the consent of, or waiver by, any
person whose consent or waiver is necessary for Borrower’s interest in such
licenses or contract rights to be deemed Collateral and for Bank to have a
security interest in it that might otherwise be restricted by the terms of the
applicable license or agreement, whether now existing or entered into in the
future, provided, however, that the failure to obtain any such consent or waiver
shall not constitute a default under this Agreement.

 

-17-

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

 

6.10 Creation/Acquisition of Subsidiaries. In the event Borrower or any
Subsidiary creates or acquires any Subsidiary, Borrower and such Subsidiary
shall promptly notify Bank of the creation or acquisition of such new Subsidiary
and take all such action as may be reasonably required by Bank to cause such
Subsidiary to guarantee the Obligations of Borrower under the Loan Documents and
grant a continuing pledge and security interest in and to the collateral of such
Subsidiary (substantially as described on Exhibit A hereto), and Borrower shall
grant and pledge to Bank a perfected security interest in the stock, units or
other evidence of ownership of such Subsidiary.
6.11 Further Assurances. At any time and from time to time Borrower shall
execute and deliver such further instruments and take such further action as may
reasonably be requested by Bank to effect the purposes of this Agreement.
7. NEGATIVE COVENANTS.
Borrower covenants and agrees that, so long as any credit hereunder shall be
available and until the outstanding Obligations are paid in full or for so long
as Bank may have any commitment to make any Credit Extensions, Borrower will not
do any of the following without Bank’s prior written consent, which shall not be
unreasonably withheld:
7.1 Dispositions. Convey, sell, lease, license, transfer or otherwise dispose of
(collectively, to “Transfer”), or permit any of its Subsidiaries to Transfer,
all or any part of its business or property, or move cash balances on deposit
with Bank to accounts opened at another financial institution, other than
Permitted Transfers.
7.2 Change in Name, Location, Executive Office, or Executive Management; Change
in Business; Change in Fiscal Year; Change in Control. Change its name or the
Borrower State or relocate its chief executive office without thirty (30) days
prior written notification to Bank; replace its chief executive officer or chief
financial officer without thirty (30) days prior written notification to Bank;
engage in any business, or permit any of its Subsidiaries to engage in any
business, other than or reasonably related or incidental to the businesses
currently engaged in by Borrower; change its fiscal year end; suffer or permit a
Change in Control.
7.3 Mergers or Acquisitions. Merge or consolidate, or permit any of its
Subsidiaries to merge or consolidate, with or into any other business
organization (other than mergers or consolidations of a Subsidiary into another
Subsidiary or into Borrower), or acquire, or permit any of its Subsidiaries to
acquire, all or substantially all of the capital stock or property of another
Person except where (i) cash expenditures made in connection with such
transactions do not in the aggregate exceed One Million Dollars ($1,000,000)
during any fiscal year, (ii) no Event of Default has occurred, is continuing or
would exist after giving effect to such transactions, (iii) such transactions do
not result in a Change in Control, and (iv) Borrower is the surviving entity.
7.4 Indebtedness. Create, incur, assume, guarantee or be or remain liable with
respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness, or prepay any Indebtedness or take any actions which
impose on Borrower an obligation to prepay any Indebtedness, except Indebtedness
to Bank.
7.5 Encumbrances. Create, incur, assume or allow any Lien with respect to any of
its property, or assign or otherwise convey any right to receive income,
including the sale of any Accounts, or permit any of its Subsidiaries so to do,
except for Permitted Liens, or covenant to any other Person that Borrower in the
future will refrain from creating, incurring, assuming or allowing any Lien with
respect to any of Borrower’s property.
7.6 Distributions. Pay any dividends or make any other distribution or payment
on account of or in redemption, retirement or purchase of any capital stock,
except that Borrower may (i) repurchase the stock of former employees pursuant
to stock repurchase agreements as long as an Event of Default does not exist
prior to such repurchase or would not exist after giving effect to such
repurchase, and (ii) repurchase the stock of former employees pursuant to stock
repurchase agreements by the cancellation of indebtedness owed by such former
employees to Borrower regardless of whether an Event of Default exists.
7.7 Investments. Directly or indirectly acquire or own, or make any Investment
in or to any Person, or permit any of its Subsidiaries so to do, other than
Permitted Investments, or maintain or invest any of its property with a Person
other than Bank or Bank’s Affiliates or permit any Subsidiary to do so unless
such Person has entered into a control agreement with Bank, in form and
substance reasonably satisfactory to Bank, or suffer or permit any Subsidiary to
be a party to, or be bound by, an agreement that restricts such Subsidiary from
paying dividends or otherwise distributing property to Borrower.

 

-18-

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

 

7.8 Transactions with Affiliates. Directly or indirectly enter into or permit to
exist any material transaction with any Affiliate of Borrower except for
transactions that are in the ordinary course of Borrower’s business, upon fair
and reasonable terms that are no less favorable to Borrower than would be
obtained in an arm’s length transaction with a non-affiliated Person.
7.9 Subordinated Debt. Make any payment in respect of any Subordinated Debt, or
permit any of its Subsidiaries to make any such payment, except in compliance
with the terms of such Subordinated Debt, or amend any provision affecting
Bank’s rights contained in any documentation relating to the Subordinated Debt
without Bank’s prior written consent, which consent shall not be unreasonably
withheld.
7.10 Inventory and Equipment. Store the Inventory or the Equipment with a
bailee, warehouseman, or similar third party unless the third party has been
notified of Bank’s security interest and Bank (a) has received an acknowledgment
from the third party that it is holding or will hold the Inventory or Equipment
for Bank’s benefit or (b) is in possession of the warehouse receipt, where
negotiable, covering such Inventory or Equipment. Except for Inventory sold in
the ordinary course of business and except for such other locations as Bank may
approve in writing, Borrower shall keep the Inventory and Equipment only at the
location set forth in Section 10 and such other locations of which Borrower
gives Bank prior written notice and as to which Bank files a financing
statement, or takes other action, where needed to perfect its security interest.
7.11 No Investment Company; Margin Regulation. Become or be controlled by an
“investment company,” within the meaning of the Investment Company Act of 1940,
or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Credit Extension for such
purpose.
7.12 Negative Pledge Agreements. Permit the inclusion in any contract to which
it or a Subsidiary becomes a party of any provisions that could restrict or
invalidate the creation of a security interest in any of Borrower’s or such
Subsidiary’s property.
8. EVENTS OF DEFAULT.
Any one or more of the following events shall constitute an Event of Default by
Borrower under this Agreement:
8.1 Payment Default. If Borrower fails to pay any of the Obligations when due;
8.2 Covenant Default.
(a) If Borrower fails to perform any obligation under Sections 6.2, 6.4, 6.5,
6.6 or 6.7 or violates any of the covenants contained in Article 7 of this
Agreement; or
(b) If Borrower fails or neglects to perform or observe any other material term,
provision, condition, covenant contained in this Agreement, in any of the Loan
Documents, or in any other present or future agreement between Borrower and Bank
and as to any default under such other term, provision, condition or covenant
that can be cured, has failed to cure such default within ten (10) days after
Borrower receives notice thereof or any officer of Borrower becomes aware
thereof; provided, however, that if the default cannot by its nature be cured
within the ten (10) day period or cannot after diligent attempts by Borrower be
cured within such ten (10) day period, and such default is likely to be cured
within a reasonable time, then Borrower shall have an additional reasonable
period (which shall not in any case exceed thirty (30) days) to attempt to cure
such default, and within such reasonable time period the failure to have cured
such default shall not be deemed an Event of Default but no Credit Extensions
will be made;

 

-19-

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

 

8.3 Defective Perfection. If Bank shall receive at any time following the
Closing Date an SOS Report indicating that except for Permitted Liens, Bank’s
security interest in the Collateral is not prior to all other security interests
or Liens of record reflected in such SOS Report;
8.4 Material Adverse Effect. If there occurs any circumstance or circumstances
that could have a Material Adverse Effect;
8.5 Attachment. If any material portion of Borrower’s assets is attached,
seized, subjected to a writ or distress warrant, or is levied upon, or comes
into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within ten (10) days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of
Borrower’s assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower’s assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within ten (10) days
after Borrower receives notice thereof, provided that none of the foregoing
shall constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by Borrower (provided
that no Credit Extensions will be made during such cure period);
8.6 Insolvency. If Borrower becomes insolvent, or if an Insolvency Proceeding is
commenced by Borrower, or if an Insolvency Proceeding is commenced against
Borrower and is not dismissed or stayed within thirty (30) days (provided that
no Credit Extensions will be made prior to the dismissal of such Insolvency
Proceeding);
8.7 Other Agreements. If there is a default or other failure to perform in any
agreement to which Borrower is a party with a third party or parties resulting
in a right by such third party or parties, whether or not exercised, to
accelerate the maturity of any Indebtedness in an amount in excess of One
Hundred Thousand Dollars ($100,000) or that could have a Material Adverse
Effect;
8.8 Subordinated Debt. If Borrower makes any payment on account of Subordinated
Debt, except to the extent such payment is allowed under any subordination
agreement entered into with Bank;
8.9 Judgments. If a judgment or judgments for the payment of money in an amount,
individually or in the aggregate, of at least One Hundred Thousand Dollars
($100,000) shall be rendered against Borrower and shall remain unsatisfied and
unstayed for a period of ten (10) days (provided that no Credit Extensions will
be made prior to the satisfaction or stay of such judgment); or
8.10 Misrepresentations. If any material misrepresentation or material
misstatement exists now or hereafter in any warranty or representation set forth
herein or in any certificate delivered to Bank by any Responsible Officer
pursuant to this Agreement or to induce Bank to enter into this Agreement or any
other Loan Document.
9. BANK’S RIGHTS AND REMEDIES.
9.1 Rights and Remedies. Upon the occurrence and during the continuance of an
Event of Default, Bank may, at its election, without notice of its election and
without demand, do any one or more of the following, all of which are authorized
by Borrower:
(a) Declare all Obligations, whether evidenced by this Agreement, by any of the
other Loan Documents, or otherwise, immediately due and payable (provided that
upon the occurrence of an Event of Default described in Section 8.6, all
Obligations shall become immediately due and payable without any action by
Bank);
(b) Demand that Borrower (i) deposit cash with Bank in an amount equal to the
amount of any Letters of Credit remaining undrawn, as collateral security for
the repayment of any future drawings under such Letters of Credit, and (ii) pay
in advance all Letter of Credit fees scheduled to be paid or payable over the
remaining term of the Letters of Credit, and Borrower shall promptly deposit and
pay such amounts;

 

-20-

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

 

(c) Cease advancing money or extending credit to or for the benefit of Borrower
under this Agreement or under any other agreement between Borrower and Bank;
(d) Settle or adjust disputes and claims directly with account debtors for
amounts, upon terms and in whatever order that Bank reasonably considers
advisable;
(e) Make such payments and do such acts as Bank considers necessary or
reasonable to protect its security interest in the Collateral. Borrower agrees
to assemble the Collateral if Bank so requires, and to make the Collateral
available to Bank as Bank may designate. Borrower authorizes Bank to enter the
premises where the Collateral is located, to take and maintain possession of the
Collateral, or any part of it, and to pay, purchase, contest, or compromise any
encumbrance, charge, or lien which in Bank’s determination appears to be prior
or superior to its security interest and to pay all expenses incurred in
connection therewith. With respect to any of Borrower’s owned premises, Borrower
hereby grants Bank a license to enter into possession of such premises and to
occupy the same, without charge, in order to exercise any of Bank’s rights or
remedies provided herein, at law, in equity, or otherwise;
(f) Set off and apply to the Obligations any and all (i) balances and deposits
of Borrower held by Bank, and (ii) indebtedness at any time owing to or for the
credit or the account of Borrower held by Bank;
(g) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale,
advertise for sale, and sell (in the manner provided for herein) the Collateral.
Bank is hereby granted a license or other right, solely pursuant to the
provisions of this Section 9.1, to use, without charge, Borrower’s labels,
patents, copyrights, rights of use of any name, trade secrets, trade names,
trademarks, service marks, and advertising matter, or any property of a similar
nature, as it pertains to the Collateral, in completing production of,
advertising for sale, and selling any Collateral and, in connection with Bank’s
exercise of its rights under this Section 9.1, Borrower’s rights under all
licenses and all franchise agreements shall inure to Bank’s benefit;
(h) Sell the Collateral at either a public or private sale, or both, by way of
one or more contracts or transactions, for cash or on terms, in such manner and
at such places (including Borrower’s premises) as Bank determines is
commercially reasonable, and apply any proceeds to the Obligations in whatever
manner or order Bank deems appropriate. Bank may sell the Collateral without
giving any warranties as to the Collateral. Bank may specifically disclaim any
warranties of title or the like. This procedure will not be considered adversely
to affect the commercial reasonableness of any sale of the Collateral. If Bank
sells any of the Collateral upon credit, Borrower will be credited only with
payments actually made by the purchaser, received by Bank, and applied to the
indebtedness of the purchaser. If the purchaser fails to pay for the Collateral,
Bank may resell the Collateral and Borrower shall be credited with the proceeds
of the sale;
(i) Bank may credit bid and purchase at any public sale;
(j) Apply for the appointment of a receiver, trustee, liquidator or conservator
of the Collateral, without notice and without regard to the adequacy of the
security for the Obligations and without regard to the solvency of Borrower, any
guarantor or any other Person liable for any of the Obligations; and
(k) Any deficiency that exists after disposition of the Collateral as provided
above will be paid immediately by Borrower.
Bank may comply with any applicable state or federal law requirements in
connection with a disposition of the Collateral and compliance will not be
considered adversely to affect the commercial reasonableness of any sale of the
Collateral.

 

-21-

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

 

9.2 Power of Attorney. Effective only upon the occurrence and during the
continuance of an Event of Default, Borrower hereby irrevocably appoints Bank
(and any of Bank’s designated officers, or employees) as Borrower’s true and
lawful attorney to: (a) send requests for verification of Accounts or notify
account debtors of Bank’s security interest in the Accounts; (b) endorse
Borrower’s name on any checks or other forms of payment or security that may
come into Bank’s possession; (c) sign Borrower’s name on any invoice or bill of
lading relating to any Account, drafts against account debtors, schedules and
assignments of Accounts, verifications of Accounts, and notices to account
debtors; (d) dispose of any Collateral; (e) make, settle, and adjust all claims
under and decisions with respect to Borrower’s policies of insurance; (f) settle
and adjust disputes and claims respecting the accounts directly with account
debtors, for amounts and upon terms which Bank determines to be reasonable;
(g) to modify, in its sole discretion, any intellectual property security
agreement entered into between Borrower and Bank without first obtaining
Borrower’s approval of or signature to such modification by amending Exhibits A,
B, and C, thereof, as appropriate, to include reference to any right, title or
interest in any Copyrights, Patents or Trademarks acquired by Borrower after the
execution hereof or to delete any reference to any right, title or interest in
any Copyrights, Patents or Trademarks in which Borrower no longer has or claims
to have any right, title or interest; and (h) to file, in its sole discretion,
one or more financing or continuation statements and amendments thereto,
relative to any of the Collateral without the signature of Borrower where
permitted by law; provided Bank may exercise such power of attorney to sign the
name of Borrower on any of the documents described in clauses (g) and (h) above,
regardless of whether an Event of Default has occurred. The appointment of Bank
as Borrower’s attorney in fact, and each and every one of Bank’s rights and
powers, being coupled with an interest, is irrevocable until all of the
Obligations have been fully repaid and performed and Bank’s obligation to
provide Credit Extensions hereunder is terminated.
9.3 Accounts Collection. At any time after the occurrence and during the
continuance of an Event of Default, Bank may notify any Person owing funds to
Borrower of Bank’s security interest in such funds and verify the amount of such
Account. Borrower shall collect all amounts owing to Borrower for Bank, receive
in trust all payments as Bank’s trustee, and immediately deliver such payments
to Bank in their original form as received from the account debtor, with proper
endorsements for deposit.
9.4 Bank Expenses. If Borrower fails to pay any amounts or furnish any required
proof of payment due to third persons or entities, as required under the terms
of this Agreement, then Bank may do any or all of the following after reasonable
notice to Borrower: (a) make payment of the same or any part thereof; (b) set up
such reserves under the Revolving Line as Bank deems necessary to protect Bank
from the exposure created by such failure; or (c) obtain and maintain insurance
policies of the type discussed in Section 6.5 of this Agreement, and take any
action with respect to such policies as Bank deems prudent. Any amounts so paid
or deposited by Bank shall constitute Bank Expenses, shall be immediately due
and payable, and shall bear interest at the then applicable rate hereinabove
provided, and shall be secured by the Collateral. Any payments made by Bank
shall not constitute an agreement by Bank to make similar payments in the future
or a waiver by Bank of any Event of Default under this Agreement.
9.5 Bank’s Liability for Collateral. Bank has no obligation to clean up or
otherwise prepare the Collateral for sale. All risk of loss, damage or
destruction of the Collateral shall be borne by Borrower.
9.6 No Obligation to Pursue Others. Bank has no obligation to attempt to satisfy
the Obligations by collecting them from any other Person liable for them and
Bank may release, modify or waive any collateral provided by any other Person to
secure any of the Obligations, all without affecting Bank’s rights against
Borrower. Borrower waives any right it may have to require Bank to pursue any
other Person for any of the Obligations.
9.7 Remedies Cumulative. Bank’s rights and remedies under this Agreement, the
Loan Documents, and all other agreements shall be cumulative. Bank shall have
all other rights and remedies not inconsistent herewith as provided under the
Code, by law, or in equity. No exercise by Bank of one right or remedy shall be
deemed an election, and no waiver by Bank of any Event of Default on Borrower’s
part shall be deemed a continuing waiver. No delay by Bank shall constitute a
waiver, election, or acquiescence by it. No waiver by Bank shall be effective
unless made in a written document signed on behalf of Bank and then shall be
effective only in the specific instance and for the specific purpose for which
it was given. Borrower expressly agrees that this Section may not be waived or
modified by Bank by course of performance, conduct, estoppel or otherwise.

 

-22-

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

 

9.8 Demand; Protest. Except as otherwise provided in this Agreement, Borrower
waives demand, protest, notice of protest, notice of default or dishonor, notice
of payment and nonpayment and any other notices relating to the Obligations.
10. NOTICES.
Unless otherwise provided in this Agreement, all notices or demands by any party
relating to this Agreement or any other agreement entered into in connection
herewith shall be in writing and (except for financial statements and other
informational documents which may be sent by first-class mail, postage prepaid)
shall be personally delivered or sent by a recognized overnight delivery
service, certified mail, postage prepaid, return receipt requested, or by
telefacsimile to Borrower or to Bank, as the case may be, at its addresses set
forth below:

     
If to Borrower:
  AURIGA LABORATORIES, INC.
2029 Century Park East
Los Angeles, CA 90067
Attn: Chief Financial Officer
FAX: (310) 556-0026
 
   
If to Bank:
  Comerica Bank
75 East Trimble Road, M/C 4770
San Jose, California 95131
Attn: Manager
FAX: (408) 556-5091

 
   
with a copy to:
  Comerica Bank
611 Anton Blvd., Ste 400, MC 4457
Costa Mesa, CA 92626
Attn: Wayne Liao — Corporate Banking Officer
FAX: (714) 433-3280

The parties hereto may change the address at which they are to receive notices
hereunder, by notice in writing in the foregoing manner given to the other.
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.
This Agreement shall be governed by, and construed in accordance with, the
internal laws of the State of California, without regard to principles of
conflicts of law. Each of Borrower and Bank hereby submits to the exclusive
jurisdiction of the state and Federal courts located in the State of California.
THE UNDERSIGNED ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL
ONE, BUT THAT IT MAY BE WAIVED UNDER CERTAIN CIRCUMSTANCES. TO THE EXTENT
PERMITTED BY LAW, EACH PARTY, AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO
CONSULT) WITH COUNSEL OF ITS, HIS OR HER CHOICE, KNOWINGLY AND VOLUNTARILY, AND
FOR THE MUTUAL BENEFIT OF ALL PARTIES, WAIVES ANY RIGHT TO TRIAL BY JURY IN THE
EVENT OF LITIGATION ARISING OUT OF OR RELATED TO THIS AGREEMENT OR ANY OTHER
DOCUMENT, INSTRUMENT OR AGREEMENT BETWEEN THE UNDERSIGNED PARTIES.
12. REFERENCE PROVISION.
In the event the Jury Trial Waiver set forth above is not enforceable, the
parties elect to proceed under this Judicial Reference Provision.

 

-23-

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

 

12.1 Mechanics.
(a) With the exception of the items specified in clause (b), below, any
controversy, dispute or claim (each, a “Claim”) between the parties arising out
of or relating to this Agreement or any other document, instrument or agreement
between the undersigned parties (collectively in this Section, the “Comerica
Documents”), will be resolved by a reference proceeding in California in
accordance with the provisions of Sections 638 et seq. of the California Code of
Civil Procedure (“CCP”), or their successor sections, which shall constitute the
exclusive remedy for the resolution of any Claim, including whether the Claim is
subject to the reference proceeding. Except as otherwise provided in the
Comerica Documents, venue for the reference proceeding will be in the state or
federal court in the county or district where the real property involved in the
action, if any, is located or in the state or federal court in the county or
district where venue is otherwise appropriate under applicable law (the
“Court”).
(b) The matters that shall not be subject to a reference are the following:
(i) nonjudicial foreclosure of any security interests in real or personal
property, (ii) exercise of self-help remedies (including, without limitation,
set-off), (iii) appointment of a receiver and (iv) temporary, provisional or
ancillary remedies (including, without limitation, writs of attachment, writs of
possession, temporary restraining orders or preliminary injunctions). This
reference provision does not limit the right of any party to exercise or oppose
any of the rights and remedies described in clauses (i) and (ii) or to seek or
oppose from a court of competent jurisdiction any of the items described in
clauses (iii) and (iv). The exercise of, or opposition to, any of those items
does not waive the right of any party to a reference pursuant to this reference
provision as provided herein.
(c) The referee shall be a retired judge or justice selected by mutual written
agreement of the parties. If the parties do not agree within ten (10) days of a
written request to do so by any party, then, upon request of any party, the
referee shall be selected by the Presiding Judge of the Court (or his or her
representative). A request for appointment of a referee may be heard on an ex
parte or expedited basis, and the parties agree that irreparable harm would
result if ex parte relief is not granted. Pursuant to CCP § 170.6, each party
shall have one peremptory challenge to the referee selected by the Presiding
Judge of the Court (or his or her representative).
(d) The parties agree that time is of the essence in conducting the reference
proceedings. Accordingly, the referee shall be requested, subject to change in
the time periods specified herein for good cause shown, to (i) set the matter
for a status and trial-setting conference within fifteen (15) days after the
date of selection of the referee, (ii) if practicable, try all issues of law or
fact within one hundred twenty (120) days after the date of the conference and
(iii) report a statement of decision within twenty (20) days after the matter
has been submitted for decision.
(e) The referee will have power to expand or limit the amount and duration of
discovery. The referee may set or extend discovery deadlines or cutoffs for good
cause, including a party’s failure to provide requested discovery for any reason
whatsoever. Unless otherwise ordered based upon good cause shown, no party shall
be entitled to “priority” in conducting discovery, depositions may be taken by
either party upon seven (7) days written notice, and all other discovery shall
be responded to within fifteen (15) days after service. All disputes relating to
discovery which cannot be resolved by the parties shall be submitted to the
referee whose decision shall be final and binding.
12.2 Procedures. Except as expressly set forth herein, the referee shall
determine the manner in which the reference proceeding is conducted including
the time and place of hearings, the order of presentation of evidence, and all
other questions that arise with respect to the course of the reference
proceeding. All proceedings and hearings conducted before the referee, except
for trial, shall be conducted without a court reporter, except that when any
party so requests, a court reporter will be used at any hearing conducted before
the referee, and the referee will be provided a courtesy copy of the transcript.
The party making such a request shall have the obligation to arrange for and pay
the court reporter. Subject to the referee’s power to award costs to the
prevailing party, the parties will equally share the cost of the referee and the
court reporter at trial.

 

-24-

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

 

12.3 Application of Law. The referee shall be required to determine all issues
in accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in the State
of California will be applicable to the reference proceeding. The referee shall
be empowered to enter equitable as well as legal relief, enter equitable orders
that will be binding on the parties and rule on any motion which would be
authorized in a court proceeding, including without limitation motions for
summary judgment or summary adjudication. The referee shall issue a decision at
the close of the reference proceeding which disposes of all claims of the
parties that are the subject of the reference. Pursuant to CCP § 644, such
decision shall be entered by the Court as a judgment or an order in the same
manner as if the action had been tried by the Court and any such decision will
be final, binding and conclusive. The parties reserve the right to appeal from
the final judgment or order or from any appealable decision or order entered by
the referee. The parties reserve the right to findings of fact, conclusions of
laws, a written statement of decision, and the right to move for a new trial or
a different judgment, which new trial, if granted, is also to be a reference
proceeding under this provision.
12.4 Repeal. If the enabling legislation which provides for appointment of a
referee is repealed (and no successor statute is enacted), any dispute between
the parties that would otherwise be determined by reference procedure will be
resolved and determined by arbitration. The arbitration will be conducted by a
retired judge or justice, in accordance with the California Arbitration Act
§1280 through §1294.2 of the CCP as amended from time to time. The limitations
with respect to discovery set forth above shall apply to any such arbitration
proceeding.
12.5 THE PARTIES RECOGNIZE AND AGREE THAT ALL CONTROVERSIES, DISPUTES AND CLAIMS
RESOLVED UNDER THIS REFERENCE PROVISION WILL BE DECIDED BY A REFEREE AND NOT BY
A JURY. AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL
OF ITS, HIS OR HER OWN CHOICE, EACH PARTY KNOWINGLY AND VOLUNTARILY, AND FOR THE
MUTUAL BENEFIT OF ALL PARTIES, AGREES THAT THIS REFERENCE PROVISION WILL APPLY
TO ANY CONTROVERSY, DISPUTE OR CLAIM BETWEEN OR AMONG THEM ARISING OUT OF OR IN
ANY WAY RELATED TO, THIS AGREEMENT OR THE OTHER COMERICA DOCUMENTS.
13. GENERAL PROVISIONS.
13.1 Successors and Assigns. This Agreement shall bind and inure to the benefit
of the respective successors and permitted assigns of each of the parties and
shall bind all Persons who become bound as a debtor to this Agreement; provided,
however, that neither this Agreement nor any rights hereunder may be assigned by
Borrower without Bank’s prior written consent, which consent may be granted or
withheld in Bank’s sole discretion. Bank shall have the right without the
consent of or notice to Borrower to sell, transfer, negotiate, or grant
participation in all or any part of, or any interest in, Bank’s obligations,
rights and benefits hereunder.
13.2 Indemnification. Borrower shall defend, indemnify and hold harmless Bank
and its officers, employees, and agents against: (a) all obligations, demands,
claims, and liabilities claimed or asserted by any other party in connection
with the transactions contemplated by this Agreement; and (b) all losses or Bank
Expenses in any way suffered, incurred, or paid by Bank, its officers, employees
and agents as a result of or in any way arising out of, following, or
consequential to transactions between Bank and Borrower whether under this
Agreement, or otherwise (including without limitation reasonable attorneys’ fees
and expenses incurred by Bank), except for losses caused by Bank’s gross
negligence or willful misconduct.
13.3 Time of Essence. Time is of the essence for the performance of all
obligations set forth in this Agreement.
13.4 Severability of Provisions. Each provision of this Agreement shall be
severable from every other provision of this Agreement for the purpose of
determining the legal enforceability of any specific provision.
13.5 Amendments in Writing, Integration. All amendments to or terminations of
this Agreement or the other Loan Documents must be in writing and signed by the
parties hereto. All prior agreements, understandings, representations,
warranties, and negotiations between the parties hereto with respect to the
subject matter of this Agreement and the other Loan Documents, if any, are
merged into this Agreement and the Loan Documents.

 

-25-

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

 

13.6 Counterparts. This Agreement may be executed in any number of counterparts
and by different parties on separate counterparts, each of which, when executed
and delivered, shall be deemed to be an original, and all of which, when taken
together, shall constitute but one and the same Agreement.
13.7 Survival. All covenants, representations and warranties made in this
Agreement shall continue in full force and effect so long as any Obligations
remain outstanding or Bank has any obligation to make any Credit Extension to
Borrower. The obligations of Borrower to indemnify Bank with respect to the
expenses, damages, losses, costs and liabilities described in Section 13.2 shall
survive until all applicable statute of limitations periods with respect to
actions that may be brought against Bank have run.
[Balance of Page Intentionally Left Blank]

 

-26-

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

 

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the date first above written.

            AURIGA LABORATORIES, INC.
      By:   Philip S. Pesin,         Title: CEO                COMERICA BANK
      By:           Title:             

[Signature Page to Loan and Security Agreement]

 

 

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

 

     
DEBTOR
  AURIGA LABORATORIES, INC.
 
   
SECURED PARTY:
  COMERICA BANK

EXHIBIT A
COLLATERAL DESCRIPTION ATTACHMENT
TO LOAN AND SECURITY AGREEMENT
All personal property of Borrower (herein referred to as “Borrower” or “Debtor”)
whether presently existing or hereafter created or acquired, and wherever
located, including, but not limited to:
(a) all accounts (including health-care-insurance receivables), chattel paper
(including tangible and electronic chattel paper), deposit accounts, documents
(including negotiable documents), equipment (including all accessions and
additions thereto), general intangibles (including payment intangibles and
software), goods (including fixtures), instruments (including promissory notes),
inventory (including all goods held for sale or lease or to be furnished under a
contract of service, and including returns and repossessions), investment
property (including securities and securities entitlements), letter of credit
rights, money, and all of Debtor’s books and records with respect to any of the
foregoing, and the computers and equipment containing said books and records;
(b) all common law and statutory copyrights and copyright registrations,
applications for registration, now existing or hereafter arising, in the United
States of America or in any foreign jurisdiction, obtained or to be obtained on
or in connection with any of the foregoing, or any parts thereof or any
underlying or component elements of any of the foregoing, together with the
right to copyright and all rights to renew or extend such copyrights and the
right (but not the obligation) of Secured Party to sue in its own name and/or in
the name of the Debtor for past, present and future infringements of copyright;
(c) all trademarks, service marks, trade names and service names and the
goodwill associated therewith, together with the right to trademark and all
rights to renew or extend such trademarks and the right (but not the obligation)
of Secured Party to sue in its own name and/or in the name of the Debtor for
past, present and future infringements of trademark;
(d) all (i) patents and patent applications filed in the United States Patent
and Trademark Office or any similar office of any foreign jurisdiction, and
interests under patent license agreements, including, without limitation, the
inventions and improvements described and claimed therein, (ii) licenses
pertaining to any patent whether Debtor is licensor or licensee, (iii) income,
royalties, damages, payments, accounts and accounts receivable now or hereafter
due and/or payable under and with respect thereto, including, without
limitation, damages and payments for past, present or future infringements
thereof, (iv) right (but not the obligation) to sue in the name of Debtor and/or
in the name of Secured Party for past, present and future infringements thereof,
(v) rights corresponding thereto throughout the world in all jurisdictions in
which such patents have been issued or applied for, and (vi) reissues,
divisions, continuations, renewals, extensions and continuations-in-part with
respect to any of the foregoing; and
(e) any and all cash proceeds and/or noncash proceeds of any of the foregoing,
including, without limitation, insurance proceeds, and all supporting
obligations and the security therefor or for any right to payment. All terms
above have the meanings given to them in the California Uniform Commercial Code,
as amended or supplemented from time to time, including revised Division 9 of
the Uniform Commercial Code-Secured Transactions, added by Stats. 1999, c.991
(S.B. 45), Section 35, operative July 1, 2001.

 

 

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

 

EXHIBIT B
TECHNOLOGY & LIFE SCIENCES DIVISION
LOAN ANALYSIS
LOAN ADVANCE/PAYDOWN REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS [3:00* P.M., Pacific Time/ 3:30 P.M. Eastern
Time]
FORMULA BASED LINES: DEADLINE FOR NEXT DAY PROCESSING IS [3:00* P.M., Pacific
Time/ 3:30 P.M. Eastern Time]
DEADLINE FOR WIRE TRANSFERS IS [1:30 P.M., Pacific Time/ 3:30 P.M. Eastern Time]
[*At month end and the day before a holiday, the cut off time is 1:30 P.M.,
Pacific Time]

                 
To: Loan Analysis
  DATE:       TIME:    
 
               
FAX #: (650) 846-6840
               

         
FROM:
  AURIGA LABORATORIES, INC.   TELEPHONE REQUEST (For Bank Use Only):
 
       
 
  Borrower’s Name    
FROM:
      The following person is authorized to request the loan payment
transfer/loan advance on the designated account and is known to me.
 
     
 
  Authorized Signer’s Name  
FROM:
     
 
       
 
  Authorized Signer’s Name   Authorized Request & Phone #
PHONE #:
       
 
       
 
      Received by (Bank) & Phone # FROM ACCOUNT#:     (please include Note
number, if applicable)     TO ACCOUNT #:   Authorized Signature (Bank) (please
include Note number, if applicable)    

             
REQUESTED TRANSACTION TYPE
  REQUESTED DOLLAR AMOUNT   For Bank Use Only
 
           
PRINCIPAL INCREASE* (ADVANCE)
    $     Date Rec’d:
 
           
PRINCIPAL PAYMENT (ONLY)
    $     Time:
 
           
 
          Comp. Status:       YES       NO
OTHER INSTRUCTIONS:
          Status Date:
 
          Time:      
 
          Approval:      

All representations and warranties of Borrower stated in the Loan Agreement are
true, correct and complete in all material respects as of the date of the
telephone request for and advance confirmed by this Borrowing Certificate;
provided, however, that those representations and warranties the date expressly
referring to another date shall be true, correct and complete in all material
respects as of such date.
*IS THERE A WIRE REQUEST TIED TO THIS LOAN ADVANCE? (PLEASE CIRCLE ONE       YES
      NO
If YES, the Outgoing Wire Transfer Instructions must be completed below.

         
OUTGOING WIRE TRANSFER INSTRUCTIONS
  Fed Reference Number   Bank Transfer Number
 
       
 
       

The items marked with an asterisk (*) are required to be completed.

         
*Beneficiary Name
       
 
       
*Beneficiary Account Number
       
 
       
*Beneficiary Address
       
 
       
Currency Type
  US DOLLARS ONLY
 
       
*ABA Routing Number (9 Digits)
       
 
       
*Receiving Institution Name
       
 
       
*Receiving Institution Address
       
 
       
*Wire Account
    $  
 
       

 

 

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

 

EXHIBIT C
BORROWING BASE CERTIFICATE

      Borrower: AURIGA LABORATORIES, INC.   Lender: Comerica Bank      
Commitment Amount: $2,000,000    

                 
ACCOUNTS RECEIVABLE
               
1. Accounts Receivable Book Value as of ___
          $    
 
             
2. Additions (please explain on reverse)
          $    
 
             
3. TOTAL ACCOUNTS RECEIVABLE
          $    
 
             
 
               
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
               
4. Amounts over 90 days due
  $            
 
             
5. Balance of 25% over 90 day accounts
  $            
 
             
6. Concentration Limits
  $            
 
             
7. Foreign Accounts
  $            
 
             
8. Governmental Accounts
  $            
 
             
9. Contra Accounts
  $            
 
             
10. Demo Accounts
  $            
 
             
11. Intercompany/Employee Accounts
  $            
 
             
12. Other (please explain on reverse)
  $            
 
             
13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS
          $    
 
             
14. Eligible Accounts (#3 minus #13)
          $    
 
             
15. LOAN VALUE OF ACCOUNTS (65% of #14)
          $    
 
             
 
               
BALANCES
               
16. Maximum Loan Amount
          $ 2,000,000  
17. Total Funds Available [Lesser of #16 or #15]
          $    
 
             
18. Present balance owing on Line of Credit
          $    
 
             
19. Outstanding under Sublimits (e.g., Letters of Credit)
          $    
 
             
20. RESERVE POSITION (#17 minus #18 and #19)
          $    
 
             

The undersigned represents and warrants that the foregoing is true, complete and
correct, and that the information reflected in this Borrowing Base Certificate
complies with the representations and warranties set forth in the Loan and
Security Agreement between the undersigned and Comerica Bank.

          AURIGA LABORATORIES, INC.    
 
       
By:
       
 
       
 
  Authorized Signer    

 

 

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

 

EXHIBIT D
COMPLIANCE CERTIFICATE

TO:   COMERICA BANK

FROM:   AURIGA LABORATORIES, INC.

The undersigned authorized officer of AURIGA LABORATORIES, INC. hereby certifies
that in accordance with the terms and conditions of the Loan and Security
Agreement between Borrower and Bank (the “Agreement”), (i) Borrower is in
complete compliance for the period ending __________ with all required covenants
except as noted below and (ii) all representations and warranties of Borrower
stated in the Agreement are true and correct as of the date hereof. Attached
herewith are the required documents supporting the above certification. The
Officer further certifies that these are prepared in accordance with Generally
Accepted Accounting Principles (GAAP) and are consistently applied from one
period to the next except as explained in an accompanying letter or footnotes.
Please indicate compliance status by circling Yes/No under “Complies” column.

              Reporting Covenant   Required   Complies
 
           
Monthly financial statements
  Monthly within 30 days   Yes   No
Annual (CPA Audited)
  FYE within 90 days   Yes   No
10K and 10Q
  (as applicable)   Yes   No
A/R & A/P Agings, Borrowing Base Cert.
  Monthly within 30 days   Yes   No
Compliance Cert.
  Monthly within 30 days   Yes   No
A/R Audit
  Initial and Semi-Annual   Yes   No
IP Report
  Quarterly within 30 days   Yes   No
Total amount of Borrower’s cash and investments maintained with Bank
  Amount: At least $500,000   Yes   No

                                          Financial Covenant           Required
    Actual     Complies  
 
                                       
Measured on a Monthly Basis:
                                       
Minimum Liquidity Ratio
            1.50:1.00       _____:1.00     Yes   No
Maximum net losses
                                       
Measured on a Yearly Basis
          $ 500,000     $       Yes   No
 
                                     
Minimum Profitability
          $ 1,500,000     $       Yes   No
 
                                     

Comments Regarding Exceptions: See Attached.
Sincerely,
 

 
SIGNATURE
 

 
TITLE
 

 
DATE
BANK USE ONLY

     
Received by:
   
 
   
 
  AUTHORIZED SIGNER

     
Date:
   
 
   

     
 
Verified:
   
 
   
 
  AUTHORIZED SIGNER

     
Date:
   
 
   

      Compliance Status   Yes       No

 

 

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

 

SCHEDULE OF EXCEPTIONS
Permitted Indebtedness (Section 1.1)
Permitted Investments (Section 1.1)
Permitted Liens (Section 1.1)
Prior Names (Section 5.5)
MULTI-LINK TELECOMMUNICATIONS, INC.
Litigation (Section 5.6)
Inbound Licenses (Section 5.12)

 

 

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

 

Corporation Resolutions and Incumbency Certification
Authority to Procure Loans
I certify that I am the duly elected and qualified Secretary of AURIGA
LABORATORIES, INC. (the “Corporation”); that the following is a true and correct
copy of resolutions duly adopted by the Board of Directors of the Corporation in
accordance with its bylaws and applicable statutes.
Copy of Resolutions:
Be it Resolved, That:

1.   Any one (1) of the following officers (insert titles only) of the
Corporation are/is authorized, for, on behalf of, and in the name of the
Corporation to:

  (a)   Negotiate and procure loans, letters of credit and other credit or
financial accommodations from Comerica Bank (“Bank”), a Michigan banking
corporation, including, without limitation, that certain Loan and Security
Agreement dated as of May 18, 2007, as may subsequently be amended from time to
time.

  (b)   Discount with the Bank, commercial or other business paper belonging to
the Corporation made or drawn by or upon third parties, without limit as to
amount;

  (c)   Purchase, sell, exchange, assign, endorse for transfer and/or deliver
certificates and/or instruments representing stocks, bonds, evidences of
Indebtedness or other securities owned by the Corporation, whether or not
registered in the name of the Corporation;

  (d)   Give security for any liabilities of the Corporation to the Bank by
grant, security interest, assignment, lien, deed of trust or mortgage upon any
real or personal property, tangible or intangible of the Corporation; and

  (e)   Execute and deliver in form and content as may be required by the Bank
any and all notes, evidences of Indebtedness, applications for letters of
credit, guaranties, subordination agreements, loan and security agreements,
financing statements, assignments, liens, deeds of trust, mortgages, trust
receipts and other agreements, instruments or documents to carry out the
purposes of these Resolutions, any or all of which may relate to all or to
substantially all of the Corporation’s property and assets.

2.   Said Bank be and it is authorized and directed to pay the proceeds of any
such loans or discounts as directed by the persons so authorized to sign,
whether so payable to the order of any of said persons in their individual
capacities or not, and whether such proceeds are deposited to the individual
credit of any of said persons or not;

3.   Any and all agreements, instruments and documents previously executed and
acts and things previously done to carry out the purposes of these Resolutions
are ratified, confirmed and approved as the act or acts of the Corporation.

4.   These Resolutions shall continue in force, and the Bank may consider the
holders of said offices and their signatures to be and continue to be as set
forth in a certified copy of these Resolutions delivered to the Bank, until
notice to the contrary in writing is duly served on the Bank (such notice to
have no effect on any action previously taken by the Bank in reliance on these
Resolutions).

5.   Any person, corporation or other legal entity dealing with the Bank may
rely upon a certificate signed by an officer of the Bank to effect that these
Resolutions and any agreement, instrument or document executed pursuant to them
are still in full force and effect and binding upon the Corporation.

 

-1-

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

 

6.   The Bank may consider the holders of the offices of the Corporation and
their signatures, respectively, to be and continue to be as set forth in the
Certificate of the Secretary of the Corporation until notice to the contrary in
writing is duly served on the Bank.

I further certify that the above Resolutions are in full force and effect as of
the date of this Certificate; that these Resolutions and any borrowings or
financial accommodations under these Resolutions have been properly noted in the
corporate books and records, and have not been rescinded, annulled, revoked or
modified; that neither the foregoing Resolutions nor any actions to be taken
pursuant to them are or will be in contravention of any provision of the
articles of incorporation or bylaws of the Corporation or of any agreement,
indenture or other instrument to which the Corporation is a party or by which it
is bound; and that neither the articles of incorporation nor bylaws of the
Corporation nor any agreement, indenture or other instrument to which the
Corporation is a party or by which it is bound require the vote or consent of
shareholders of the Corporation to authorize any act, matter or thing described
in the foregoing Resolutions.
I further certify that the following named persons have been duly elected to the
offices set opposite their respective names, that they continue to hold these
offices at the present time, and that the signatures which appear below are the
genuine, original signatures of each respectively:
(PLEASE SUPPLY GENUINE SIGNATURES OF AUTHORIZED SIGNERS BELOW)

          NAME (Type or Print)   TITLE   SIGNATURE           Philip S. Pesin  
CEO                                                                            
                                     

In Witness Whereof, I have affixed my name as Secretary and have caused the
corporate seal (where available) of said Corporation to be affixed on May 18,
2007.
 
 
Secretary
The Above Statements are Correct.
 
SIGNATURE OF OFFICER OR DIRECTOR OR, IF NONE. A SHAREHOLDER OTHER THAN SECRETARY
WHEN SECRETARY IS AUTHORIZED TO SIGN ALONE.
Failure to complete the above when the Secretary is authorized to sign alone
shall constitute a certification by the Secretary that the Secretary is the sole
Shareholder, Director and Officer of the Corporation.

 

-2-

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

 

ATTN: AURIGA LABORATORIES, INC.
USA PATRIOT ACT
NOTICE
OF
CUSTOMER IDENTIFICATION
IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING A NEW ACCOUNT
To help the government fight the funding of terrorism and money laundering
activities, Federal law requires all financial institutions to obtain, verify,
and record information that identifies each person who opens an account.
WHAT THIS MEANS FOR YOU: when you open an account, we will ask your name,
address, date of birth, and other information that will allow us to identify
you. We may also ask to see your driver’s license or other identifying
documents.

 

 

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

 

COMERICA BANK
Member FDIC
ITEMIZATION OF AMOUNT FINANCED
DISBURSEMENT INSTRUCTIONS
(Revolver)

      Name(s): AURIGA LABORATORIES, INC.   Date: May 18, 2007

          $      
credited to deposit account No. ___________ when Advances are requested by
Borrower

Amounts paid to others on your behalf:

          $      
to Comerica Bank for Loan Fee
       
 
$      
to Comerica Bank for Document Fee
       
 
$      
to Comerica Bank for accounts receivable audit (estimate)
       
 
$      
to Bank counsel fees and expenses
       
 
$      
to _______________
       
 
$      
to _______________
       
 
$      
TOTAL (AMOUNT FINANCED)

Upon consummation of this transaction, this document will also serve as the
authorization for Comerica Bank to disburse the loan proceeds as stated above.

     
 
          Signature   Signature

 

 

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

 

AGREEMENT TO PROVIDE INSURANCE

         
TO:
  COMERICA BANK   Date: May 18, 2007
 
  Attn: Lead Insurance Reviewer    
 
  75 E. Trimble Road    
 
  San Jose, CA 95131   Borrower: AURIGA LABORATORIES, INC.

In consideration of a loan in the amount of $2,000,000, secured by all tangible
personal property including inventory and equipment.
I/We agree to obtain adequate insurance coverage to remain in force during the
term of the loan.
I/We also agree to advise the below named agent to add Comerica Bank as lender’s
loss payable on the new or existing insurance policy, and to furnish Bank at
above address with a copy of said policy/endorsements and any subsequent renewal
policies.
I/We understand that the policy must contain:
1. Fire and extended coverage in an amount sufficient to cover:
(a) The amount of the loan, OR
(b) All existing encumbrances, whichever is greater,
But not in excess of the replacement value of the improvements on the real
property.
2. Lender’s “Loss Payable” Endorsement Form 438 BFU in favor of Comerica Bank,
or any other form acceptable to Bank.
INSURANCE INFORMATION

     
Insurance Co./Agent
  Telephone No.:

Agent’s Address:

         
 
  Signature of Obligor:    
 
     
 
 
       
 
  Signature of Obligor:    
 
     
 

FOR BANK USE ONLY
INSURANCE VERIFICATION: Date:
Person Spoken to:
Policy Number:
Effective From: ____________ To:
Verified by:
 

 

 

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

 

COMERICA BANK

      Member FDIC   AUTOMATIC DEBIT AUTHORIZATION

To: Comerica Bank
Re: Loan # ___________________________
You are hereby authorized and instructed to charge account No. ________________
in the name of AURIGA LABORATORIES, INC.
for principal interest and other payments due on above referenced loan as set
forth below and credit the loan referenced above.
þ   Debit each interest payment as it becomes due according to the terms of the
Loan and Security Agreement and any renewals or amendments thereof.
þ   Debit each principal payment as it becomes due according to the terms of the
Loan and Security Agreement and any renewals or amendments thereof.
þ   Debit each payment for Bank Expenses as it becomes due according to the
terms of the Loan and Security Agreement and any renewals or amendments thereof.
This Authorization is to remain in full force and effect until revoked in
writing.

     
Borrower Signature
  Date
 
   
 
  May ___, 2007
 
   
 
   
 
  May ___, 2007
 
   

 

 

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

 

COMERICA BANK

      Member FDIC   AUTOMATIC DEBIT AUTHORIZATION

To: Comerica Bank
Re: Loan # ___________________________
You are hereby authorized and instructed to charge account No. ________________
in the name of AURIGA LABORATORIES, INC.
for principal and interest payments due on above referenced loan as set forth
below and credit the loan referenced above.
þ   Debit each interest payment as it becomes due according to the terms of the
Loan and Security Agreement and any renewals or amendments thereof.
þ   Debit each principal payment as it becomes due according to the terms of the
Loan and Security Agreement and any renewals or amendments thereof.
þ   Debit each payment for Bank Expenses as it becomes due according to the
terms of the Loan and Security Agreement and any renewals or amendments thereof.
This Authorization is to remain in full force and effect until revoked in
writing.

     
Borrower Signature
  Date
 
   
 
  May 18, 2007
 
   
Philip S. Pesin, CEO
   
 
   
 
  May ___, 2007
 
   

 

 

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

 

COMERICA BANK
COMERICA BANK
CLIENT AUTHORIZATION
Fax (714) 433-3280
General Authorization
I hereby authorize Comerica Bank to use my company name, logo, and information
relating to our banking relationship in its marketing and advertising campaigns
which is intended for Comerica Bank’s customers, prospects and shareholders.
Comerica Bank will forward any advertising or article including Borrower for
prior review and approval.

                 
 
      Signature      
 
       
 
Philip S. Pesin   CEO  
 
      Printed Name   Title  
 
       
 
Auriga Laboratories, Inc           Company            
 
2029 Century Park East, Suite 1130           Mailing Address            
 
Los Angeles, California 90067           City, State, Zip Code            
 
310-461-3600           Phone Number            
 
310-556-0026           Fax Number            
 
ppesin@aurigalabs.com / cbearchell@aurigalabs.com           E-Mail    

May 18, 07
Date

 

 

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

 

      DEBTOR:  
AURIGA LABORATORIES, INC.
   
 
SECURED PARTY:  
COMERICA BANK

EXHIBIT A
COLLATERAL DESCRIPTION ATTACHMENT
TO UCC NATIONAL FORM FINANCING STATEMENT
All personal property of Borrower (herein referred to as “Borrower” or “Debtor”)
whether presently existing or hereafter created or acquired, and wherever
located, including, but not limited to:
(a) all accounts (including health-care-insurance receivables), chattel paper
(including tangible and electronic chattel paper), deposit accounts, documents
(including negotiable documents), equipment (including all accessions and
additions thereto), general intangibles (including payment intangibles and
software), goods (including fixtures), instruments (including promissory notes),
inventory (including all goods held for sale or lease or to be furnished under a
contract of service, and including returns and repossessions), investment
property (including securities and securities entitlements), letter of credit
rights, money, and all of Debtor’s books and records with respect to any of the
foregoing, and the computers and equipment containing said books and records;
(b) all common law and statutory copyrights and copyright registrations,
applications for registration, now existing or hereafter arising, in the United
States of America or in any foreign jurisdiction, obtained or to be obtained on
or in connection with any of the foregoing, or any parts thereof or any
underlying or component elements of any of the foregoing, together with the
right to copyright and all rights to renew or extend such copyrights and the
right (but not the obligation) of Secured Party to sue in its own name and/or in
the name of the Debtor for past, present and future infringements of copyright;
(c) all trademarks, service marks, trade names and service names and the
goodwill associated therewith, together with the right to trademark and all
rights to renew or extend such trademarks and the right (but not the obligation)
of Secured Party to sue in its own name and/or in the name of the Debtor for
past, present and future infringements of trademark;
(d) all (i) patents and patent applications filed in the United States Patent
and Trademark Office or any similar office of any foreign jurisdiction, and
interests under patent license agreements, including, without limitation, the
inventions and improvements described and claimed therein, (ii) licenses
pertaining to any patent whether Debtor is licensor or licensee, (iii) income,
royalties, damages, payments, accounts and accounts receivable now or hereafter
due and/or payable under and with respect thereto, including, without
limitation, damages and payments for past, present or future infringements
thereof, (iv) right (but not the obligation) to sue in the name of Debtor and/or
in the name of Secured Party for past, present and future infringements thereof,
(v) rights corresponding thereto throughout the world in all jurisdictions in
which such patents have been issued or applied for, and (vi) reissues,
divisions, continuations, renewals, extensions and continuations-in-part with
respect to any of the foregoing; and
(e) any and all cash proceeds and/or noncash proceeds of any of the foregoing,
including, without limitation, insurance proceeds, and all supporting
obligations and the security therefor or for any right to payment. All terms
above have the meanings given to them in the California Uniform Commercial Code,
as amended or supplemented from time to time, including revised Division 9 of
the Uniform Commercial Code-Secured Transactions, added by Stats. 1999, c.991
(S.B. 45), Section 35, operative July 1, 2001.