Exhibit 10.1

 

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AMENDED AND RESTATED LOAN AND SECURITY

 

 

AGREEMENT (ACCOUNTS AND INVENTORY)

 

OBLIGOR #

NOTE #

AGREEMENT DATE

3762180432

18

AUGUST 12, 2005

CREDIT LIMIT

INTEREST RATE

OFFICER NO./INITIALS

$15,000,000.00

BASE RATE + 0.00% OR THE APPLICABLE LIBOR RATE

49841 / TOMAS SCHMIDT

 

THIS AGREEMENT is entered into on August 12, 2005, between COMERICA BANK
(“Bank”) as secured party, whose headquarters office is 333 West Santa Clara
Street, San Jose, CA 95113 and INFOSONICS CORPORATION, a Maryland corporation,
(“Borrower”), whose sole place of business (if it has only one), chief executive
office (if it has more than one place of business) or residence (if an
individual) is located at the address set forth below its name on the signature
page to this Agreement. This Agreement amends and restates that certain Loan and
Security Agreement (Accounts and Inventory) dated August 20, 2002, as such may
be modified or amended from time to time.  The parties agree as follows:

 

1.     DEFINITIONS.

 

1.1           “Accounts” shall mean and includes all presently existing and
hereafter arising accounts, including without limitation all accounts
receivable, contract rights and other forms of right to payment for monetary
obligations or receivables for property sold or to be sold, leased, licensed,
assigned or otherwise disposed of, or for services rendered or to be rendered
(including without limitation all health-care-insurance receivables) owing to
Borrower, and any supporting obligations, credit insurance, guaranties or
security therefor, irrespective of whether earned by performance.

 

1.2           “Agreement” shall mean and includes this Loan and Security
Agreement (Accounts and Inventory), any concurrent or subsequent rider to this
Loan and Security Agreement (Accounts and Inventory) and any extensions,
supplements, amendments or modifications to this Loan and Security Agreement
(Accounts and Inventory) and/or to any such rider.

 

1.3           “Bank Expenses” shall mean and includes: all costs or expenses
required to be paid by Borrower under this Agreement which are paid or advanced
by Bank; taxes and insurance premiums of every nature and kind of Borrower paid
by Bank; filing, recording, publication and search fees, appraiser fees, auditor
fees and costs, and title insurance premiums paid or incurred by Bank in
connection with Bank’s transactions with Borrower; costs and expenses incurred
by Bank in collecting the Accounts (with or without suit) to correct any default
or enforce any provision of this Agreement, or in gaining possession of,
maintaining, handling, preserving, storing, shipping, selling, disposing of,
preparing for sale and/or advertising to sell the Collateral, whether or not a
sale is consummated; costs and expenses of suit incurred by Bank in enforcing or
defending this Agreement or any portion hereof, including, but not limited to,
expenses incurred by Bank in attempting to obtain relief from any stay,
restraining order, injunction or similar process which prohibits Bank from
exercising any of its rights or remedies; and reasonable attorneys’ fees and
expenses incurred by Bank in advising, structuring, drafting, reviewing,
amending, terminating, enforcing, defending or concerning this Agreement, or any
portion hereof or any agreement related hereto, whether or not suit is brought. 
Bank Expenses shall include Bank’s in-house legal charges at reasonable rates.

 

1.4           “Base Rate” shall mean that variable rate of interest so announced
by Bank at its headquarters office in San Jose, California as its “Base Rate”
from time to time and which serves as the basis upon which effective rates of
interest are calculated for those loans making reference thereto.

 

1.5           “Borrower’s Books” shall mean and includes all of Borrower’s books
and records including but not limited to minute+ books; ledgers; records
indicating, summarizing or evidencing Borrower’s assets, (including, without
limitation, the Accounts) liabilities, business operations or financial
condition, and all information relating thereto, computer programs; computer
disk or tape files; computer printouts; computer runs; and other computer
prepared information and equipment of any kind.

 

1.6           “Borrowing Base” shall mean the lesser of: (1) Eighty percent
(80%) of the eligible domestic receivables not covered by insurance; plus
(2) Eighty-five percent (85%) of eligible insured domestic and foreign
receivables.  Advances against domestic accounts specifically declined by
insurance are limited to One Million and 00/100 Dollars ($1,000,000.00) in
aggregate and a maximum of Five Hundred Thousand and 00/100 Dollars
($500,000.00) per any one account.  There shall be a Twenty percent (20%)
concentration limit for uninsured accounts and no concentration limit for
insured accounts.  No cross age is ineligible for insured accounts.  Anything
contained in the foregoing to the contrary notwithstanding, Bank may adjust the
Borrowing Base percentage(s) and the definition of Eligible Accounts and
Eligible Inventory, in each case as provided for under subsection 6.7 hereof.

 

1.7           “Cash Flow” shall mean, for any applicable period of
determination, the Net Income (after deduction for income taxes and other taxes
of such Person, or its subsidiaries, determined by reference to income or
profits of such Person, or its subsidiaries) for such period, plus, to the
extent deducted in computation of such Net Income, the amount of depreciation
and amortization expense and the amount of deferred tax liability during such
period, all as determined in accordance with GAAP.

 

1.8           “Cash Flow Coverage Ratio” shall mean the ratio, as of any
applicable period of determination, the ratio of Cash Flow to the sum of
(i) Current Maturities of Long Term Indebtedness plus (ii) any and all interest
paid or payable with respect to Long Term Indebtedness and Subordinated Debt,
determined on the basis of the four fiscal quarters immediately preceding the
date of determination.

 

1.9           “Collateral” shall mean and includes all personal property of
Borrower, including without limitation each and all of the following: the
Accounts; the Inventory; the General Intangibles; the Negotiable Collateral;
Borrower’s Books; all Borrower’s deposit accounts; all Borrower’s investment
property (including without limitation securities and securities entitlements);
all goods, instruments, documents, policies and certificates of insurance,
deposits, money or other personal property of Borrower in which Bank receives a
security interest and which now or later come into the possession, custody or
control of Bank; all Borrower’s equipment and fixtures; all additions,
accessions, attachments, parts, replacements, substitutions, renewals, interest,
dividends, distributions or rights of any kind for or with respect to any of the
foregoing (including without limitation any stock splits, stock rights, voting
rights and preferential rights); any supporting obligations for any of the
foregoing; and the products and proceeds of any of the foregoing, including, but
not limited to, proceeds of insurance covering the Collateral, and any and all
Accounts, General Intangibles, Negotiable Collateral, Inventory, equipment,
money, deposit accounts, investment property, equipment, fixtures or other
tangible and intangible property of Borrower resulting from the sale or other
disposition of the Collateral and the proceeds thereof and any supporting
obligations or security therefor and any right to payment thereunder, and
including, without limitation, cash or other property which were proceeds and
are recovered by a bankruptcy trustee or otherwise as a preferential transfer by
Borrower.  Notwithstanding anything to the contrary contained herein, Collateral
shall not include any waste or other materials which have been or may be
designated as toxic or hazardous by Bank.

 

1.10         “Credit” shall mean all Indebtedness, except that Indebtedness
arising pursuant to any other separate contract, instrument, note or other
separate agreement which, by its terms, provides for a specified interest rate
and term.

 

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1.11         “Credit Limit” shall mean Fifteen Million Dollars ($15,000,000.00).

 

1.12         “Current Assets” shall mean, in respect of a Person and as of any
applicable date of determination, all current assets of such Person determined
in accordance with GAAP.

 

1.13         “Current Liabilities” shall mean, in respect of a Person and as of
any applicable date of determination, all liabilities of such Person that should
be classified as current in accordance with GAAP.

 

1.14         “Current Maturities of Long Term Indebtedness” shall mean, in
respect of a Person and as of any applicable date of determination thereof, that
portion of Long Term Indebtedness that should be classified as current in
accordance with GAAP.

 

1.15         “Current Ratio” shall mean, in respect of a Person and as of any
applicable date of determination, Current Assets divided by Current Liabilities.

 

1.16         “Daily Balance” shall mean the amount determined by taking the
amount of the Credit owed at the beginning of a given day, adding any new Credit
advanced or incurred on such date, and subtracting any payments or collections
which are deemed to be paid and are applied by Bank in reduction of the Credit
on that date under the provisions of this Agreement.

 

1.17         “Debt” shall mean, as of any applicable date of determination, all
items of indebtedness, obligation or liability of a Person, whether matured or
unmatured, liquidated or unliquidated, direct or indirect, absolute or
contingent, joint or several, that should be classified as liabilities in
accordance with GAAP.  In the case of Borrower, the term “Debt” shall include,
without limitation, the Indebtedness.

 

1.18         “Eligible Accounts” shall mean and includes those Accounts of
Borrower which are due and payable within ninety (90) days, or less, from the
date of invoice, have been validly assigned to Bank and strictly comply with all
of Borrower’s warranties and representations to Bank; but Eligible Accounts
shall not include the following: (a) Accounts with respect to which the account
debtor is an officer, employee, partner, joint venturer or agent of Borrower;
(b) Accounts with respect to which goods are placed on consignment, guaranteed
sale or other terms by reason of which the payment by the account debtor may be
conditional; (c) Accounts with respect to which the account debtor is not a
resident of the United States, unless covered by credit insurance satisfactory
to Bank (“Insured Accounts”); (d) Accounts with respect to which the account
debtor is the United States or any department, agency or instrumentality of the
United States; (e) Accounts with respect to which the account debtor is any
State of the United States or any city, county, town, municipality or division
thereof; (f) Accounts with respect to which the account debtor is a subsidiary
of, related to, affiliated or has common shareholders, officers or directors
with Borrower; (g) Accounts with respect to which Borrower is or may become
liable to the account debtor for goods sold or services rendered by the account
debtor to Borrower; (h) Accounts not paid by an account debtor within ninety
(90) days from the date of the invoice; (i) Accounts with respect to which
account debtors dispute liability or make any claim, or have any defense,
crossclaim, counterclaim, or offset; (j) Accounts with respect to which any
Insolvency Proceeding is filed by or against the account debtor, or if an
account debtor becomes insolvent, fails or goes out of business; (k) Accounts,
other than Insured Accounts, owed by any single account debtor which exceed
twenty percent (20%) of all of the Eligible Accounts; and (I) Accounts with a
particular account debtor on which over twenty-five percent (25%) of the
aggregate amount owing is greater than ninety (90) days from the date of the
invoice.

 

1.19         “Eligible Insured Accounts” shall mean Accounts covered by credit
insurance acceptable to Bank.

 

1.20         “Event of Default” shall mean one or more of those events described
in Section 7 contained herein below.

 

1.21         “GAAP” shall mean, as of any applicable period, generally accepted
accounting principles in effect during such period.

 

1.22         “General Intangibles” shall mean and includes all of Borrower’s
present and future general intangibles and other personal property (including
without limitation all payment intangibles, electronic chattel paper, contract
rights, rights arising under common law, statutes, or regulations, choses or
things in action, goodwill, patents, trade names, trademarks, servicemarks,
copyrights, blueprints, drawings, plans, diagrams, schematics, purchase orders,
customer lists, monies due or recoverable from pension funds, route lists,
rights to payment (including without limitation, rights to payment evidenced by
chattel paper, documents or instruments) and other rights under any royalty or
licensing agreements, infringement claims, software (including without
limitation any computer program that is embedded in goods that consist solely of
the medium in which the program is embedded), information contained on computer
disks or tapes, literature, reports, catalogs, insurance premium rebates, tax
refunds, and tax refund claims), other than goods, Accounts, Inventory,
Negotiable Collateral, and Borrowers Books.

 

1.23         “Indebtedness” shall mean and includes any and all loans, advances,
Letter of Credit Obligations, overdrafts, debts, liabilities (including, without
limitation, any and all amounts charged to Borrower’s loan account pursuant to
any agreement authorizing Bank to charge Borrower’s loan account), obligations,
lease payments, guaranties, covenants and duties owing by Borrower to Bank of
any kind and description whether advanced pursuant to or evidenced by this
Agreement; by any note or other Instrument; or by any other agreement between
Bank and Borrower and whether or not for the payment of money, whether direct or
indirect, absolute or contingent, due or to become due now existing or hereafter
arising, including, without limitation, any interest, fees, expenses, costs and
other amounts owed to Bank that but for the provisions of the United States
Bankruptcy Code would have accrued after the commencement of any Insolvency
Proceeding, and including, without limitation, any debt, liability, or
obligations owing from Borrower to others which Bank may have obtained by
assignment, participation, purchase or otherwise, and further including, without
limitation, all interest not paid when due and all Bank Expenses which Borrower
is required to pay or reimburse by this Agreement, by law, or otherwise.

 

1.24         “Insolvency Proceeding” shall mean and includes any proceeding or
case commenced by or against Borrower, or any guarantor of Borrower’s
Indebtedness, or any of Borrower’s account debtors, under any provisions of the
United States Bankruptcy Code, as amended, or any other bankruptcy or insolvency
law, including, but not limited to assignments for the benefit of creditors,
formal or informal moratoriums, composition or extensions with some or all
creditors, any proceeding seeking a reorganization, arrangement or any other
relief under the United States Bankruptcy Code, as amended, or any other
bankruptcy or insolvency law.

 

1.25         “Inventory” shall mean and includes all present and future
inventory in which Borrower has any interest, including, but not limited to,
goods held by Borrower for sale or lease or to be furnished under a contract of
service and all of Borrower’s present and future raw materials, work in process,
finished goods (including without limitation any computer program embedded in
any of the foregoing goods and any supporting information provided in connection
therewith that (i) is associated with the goods in such a manner that the
program customarily is considered part of the goods or that (ii) by becoming the
owner of the goods, a person acquires a right to use the program in connection
with the goods), together with any advertising materials and packing and
shipping materials, wherever located and any documents of title representing any
of the above, and any equipment, fixtures or other property used in the storing,
moving, preserving, identifying, accounting for and shipping or preparing for
the shipping of inventory, and any and all other items hereafter acquired by
Borrower by way of substitution, replacement, return, repossession or otherwise,
and all additions and accessions thereto, and the resulting product or mass, and
any documents of title respecting any of the above.

 

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1.26         “Letter of Credit Obligations” shall mean, as of any applicable
date of determination, the sum of the undrawn amount of any letter(s) of credit
issued by Bank upon the application of and/or for the account of Borrower, plus
any unpaid reimbursement obligations owing by Borrower to Bank in respect of any
such letter(s) of credit.

 

1.27         “Net Income” shall mean the net income (or loss) of a person for
any period of determination, determined in accordance with GAAP but excluding in
any event:

 

a.             any gains or losses on the sale or other disposition, not in the
ordinary course of business, of investments or fixed or capital assets, and any
taxes on the excluded gains and any tax deductions or credits on account on any
excluded losses; and

 

b.             in the case of Borrower, net earnings of any Person in which
Borrower has an ownership interest, unless such net earnings shall have actually
been received by Borrower in the form of cash distributions.

 

1.28         “Negotiable Collateral” shall mean and include all of Borrower’s
present and future letters of credit, advises of credit, letter-of-credit
rights, certificates of deposit, notes, drafts, money, documents (including
without limitation all negotiable documents), instruments (including without
limitation all promissory notes), tangible chattel paper or any other similar
property.

 

1.29         “Judicial Officer or Assignee” shall mean and includes any trustee,
receiver, controller, custodian, assignee for the benefit of creditors or any
other person or entity having powers or duties like or similar to the powers and
duties of trustee, receiver, controller, custodian or assignee for the benefit
of creditors.

 

1.30         “Person” or “person” shall mean and includes any individual,
corporation, partnership, joint venture, firm, association, trust,
unincorporated association, joint stock company, government, municipality,
political subdivision or agency or other entity.

 

1.31         “Quick Assets” shall mean, as of any applicable date of
determination, unrestricted cash, certificates of deposit or marketable
securities and net accounts receivable arising from the sale of goods and
services, and United States government securities and/or claims against the
United States government of Borrower and its subsidiaries.

 

1.32         “Quick Ratio” shall mean, as of an applicable date of
determination, Quick Assets divided by Current Liabilities, excluding
Subordinated Debt.

 

1.33         “Subordinated Debt” shall mean indebtedness of the Borrower to
third parties which has been subordinated to the Indebtedness pursuant to a
subordination agreement in form and content satisfactory to Bank.

 

1.34         “Subordination Agreement” shall mean a subordination agreement in
form satisfactory to Bank making all present and future indebtedness of Borrower
N/A subordinate to the Indebtedness.

 

1.35         “Tangible Effective Net Worth” shall mean, with respect to any
Person and as of any applicable date of determination, Tangible Net Worth plus
Subordinated Debt.

 

1.36         “Tangible Net Worth” shall mean, with respect to any Person and as
of any applicable date of determination, the excess of:

 

a.             the net book value of all assets of such Person (excluding
affiliate receivables, patents, patent rights, trademarks, trade names,
franchises, copyrights, licenses, goodwill, and all other intangible assets of
such Person) after all appropriate deductions in accordance with GAAP
(including, without limitation, reserves for doubtful receivables, obsolescence,
depreciation and amortization), less

 

b.             all Debt of such Person at such time.

 

1.37         “Working Capital” shall mean, as of any applicable date of
determination, Current Assets less Current Liabilities.

 

Any and all terms used in the foregoing definitions and elsewhere in this
Agreement shall be construed and defined in accordance with the meaning and
definition of such terms under and pursuant to the California Uniform Commercial
Code (hereinafter referred to as the “Uniform Commercial Code”) as amended,
revised or replaced from time to time. Notwithstanding the foregoing, the
parties intend that the terms used herein which are defined in the Uniform
Commercial Code have, at all times, the broadest and most inclusive meanings
possible. Accordingly, if the Uniform Commercial Code shall in the future be
amended or held by a court to define any term used herein more broadly or
inclusively than the Uniform Commercial Code in effect on the date of this
Agreement, then such term, as used herein, shall be given such broadened
meaning.  If the Uniform Commercial Code shall in the future be amended or held
by a court to define any term used herein more narrowly, or less inclusively,
than the Uniform Commercial Code in effect on the date of this Agreement, such
amendment or holding shall be disregarded in defining terms used in this
Agreement.

 

2.     LOAN AND TERMS OF PAYMENT.

 

For value received, Borrower promises to pay to the order of Bank such amount,
as provided for below, together with interest, as provided for below.

 

2.1           Upon the request of Borrower, made at any time and from time to
time during the term hereof, and so long as no Event of Default has occurred,
Bank shall lend to Borrower an amount equal to the Borrowing Base; provided,
however, that the Daily Balance shall not exceed the lesser of either the Credit
Limit or the Borrowing Base, minus all amounts under the sublimits for Usance
Letters of Credit.  If at any time for any reason, the amount of Indebtedness
owed by Borrower to Bank pursuant to this Section 2.1 and Section 2.3 of this
Agreement is greater than the aggregate amount available to be drawn under this
Section 2.1, Borrower shall immediately pay to Bank, in cash, the amount of such
excess.

 

2.2           Except as hereinbelow provided, the Credit shall bear interest, on
the Daily Balance owing, at a fluctuating rate of interest equal to the Base
Rate plus zero (0.00%) percentage points per annum; or at the LIBOR Rate plus
2.25% on each LIBOR issued as determined in accordance with the LIBOR Addendum
attached hereto.

 

All interest chargeable under this Agreement that is based upon a per annum
calculation shall be computed on the basis of a three hundred sixty (360) day
year for actual days elapsed.  The Base Rate as of the date of this Agreement is
Six and one-half percent (6.500%) per annum.  In the event that the Base Rate
announced is, from time to time hereafter, changed, adjustment in the Base Rate
shall be made and based on the Base Rate in effect on the date of such change. 
The Base Rate, as adjusted, shall apply to the Credit until the Base Rate is
adjusted again.  The minimum interest payable by Borrower under this Agreement
shall in no event be less than N/A per month.

 

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All interest payable by Borrower under the Credit shall be due and payable on
the first day of each calendar month during the term of this Agreement.  A late
payment charge equal to five percent (5%) of each late payment may be charged on
any payment not received by Bank within ten (10) calendar days after the payment
due date, but acceptance of payment of this charge shall not waive any Event of
Default under this Agreement.  Upon the occurrence of an Event of Default
hereunder, and without constituting a waiver of any such Event of Default, then
during the continuation thereof, at Bank’s option, the Credit shall bear
interest, on the Daily Balance owing, at a rate equal to three percent (3%) per
year in excess of the rate applicable immediately prior to the occurrence of the
Event of Default, and such rate of interest shall fluctuate thereafter from time
to time at the same time and in the same amount as any fluctuation in the date
of interest applicable immediately prior to any such occurrence.

 

2.3           Subject to the terms and conditions of this Agreement and during
the term of this Agreement, Bank agrees to issue or cause to be issued for the
account of Borrower letters of credit payable at a specified time after
negotiation (each a “Usance Letter of Credit” and collectively the “Usance
Letters of Credit” and collectively with any other Letter of Credit issued by
the Bank for the Account of Borrower the “Letters of Credit” and each
individually a “Letter of Credit”), in the aggregate outstanding face amount not
to exceed (i) the lesser of the Credit Limit or the Borrowing Base, minus
(ii) the then outstanding advances under this Agreement, provided that the
outstanding and undrawn amounts under all such Letters of Credit Obligations
shall not in any case exceed Three Million Dollars ($3,000,000.00).  The tenor
of each Usance Letter of Credit shall not exceed ninety (90) days, and all
Usance Letters of Credit shall expire on or before that day that is after the
end of the term of this Agreement.  All letters of credit shall be, in form and
substance, acceptable to Bank in its sole discretion and shall be subject to the
terms and conditions of Bank’s form of standard Letter of Credit Application and
Agreement.

 

The obligation of Borrower to immediately reimburse Bank for drawings made under
letters of credit shall be absolute, unconditional and irrevocable in accordance
with the terms of this Agreement and the Letter of Credit Application and
Agreement with respect to each such letter of credit.  Borrower shall indemnify,
defend, protect and hold Bank harmless from any loss, cost, expense, or
liability, including, without limitation, reasonable attorney’s fees incurred by
Bank, whether in-house or outside counsel is used, arising out of or in
connection with any letters of credit.

 

2.4           Subject to the terms and conditions of this Agreement and during
the term of this Agreement, Borrower shall be assessed a fee on the unused
portion of this facility in an amount equal to one-quarter of one percent
(0.25%) of the daily average unused portion of the line facility which Bank
shall collect from Borrower on a quarterly basis.

 

3.     TERM.

 

3.1           This Agreement shall remain in full force and effect until
July 15, 2006, or until terminated by notice by either.  Notice of such
termination shall be effectuated by mailing of a registered or certified letter
not less than thirty (30) days prior to the effective date of such termination,
addressed to the other party at the address set forth herein and the termination
shall be effective as of the date so fixed in such notice.

 

Notwithstanding the foregoing, should Borrower be in default of one or more of
the provisions of this Agreement, Bank may terminate this Agreement at any time
without notice.  Notwithstanding the foregoing, should either Bank or Borrower
become insolvent or unable to meet its debts as they mature, or fail, suspend,
or go out of business, the other party shall have the right to terminate this
Agreement at any time without notice.  On the date of termination all
Indebtedness shall become immediately due and payable without notice or demand;
no notice of termination by Borrower shall be effective until Borrower shall
have paid all Indebtedness to Bank in full.  Notwithstanding termination, until
all Indebtedness has been fully satisfied, Bank shall retain its security
interest in all existing Collateral and Collateral arising thereafter, and
Borrower shall continue to perform all of its obligations.

 

3.2           After termination and when Bank has received payment in full of
Borrower’s Indebtedness to Bank, Bank shall reassign to Borrower all Collateral
held by Bank, and shall execute a termination of all security agreements and
security interests given by Borrower to Bank.

 

4.     CREATION OF SECURITY INTEREST.

 

4.1           Borrower hereby grants to Bank a continuing security interest in
all presently existing and hereafter arising Collateral in order to secure
prompt repayment of any and all Indebtedness owed by Borrower to Bank and in
order to secure prompt performance by Borrower of each and all of its covenants
and obligations under this Agreement and otherwise created. Bank’s security
interest in the Collateral shall attach to all Collateral without further act on
the part of Bank or Borrower.  In the event that any Collateral, including
proceeds, is evidenced by or consists of Negotiable Collateral, Borrower,
immediately upon the request of Bank, shall (a) endorse or assign such
Negotiable Collateral to Bank, (b) deliver actual physical possession of such
Negotiable Collateral to Bank, and (c) mark conspicuously all of its records
pertaining to such Negotiable Collateral with a legend, in form and substance
satisfactory to Bank (and in the case of Negotiable Collateral consisting of
tangible chattel paper, immediately mark all such tangible chattel paper with a
conspicuous legend in form and substance satisfactory to Bank), indicating that
the Negotiable Collateral is subject to the security interest granted to Bank
hereunder.

 

4.2           Bank’s security interest in the Accounts shall attach to all
Accounts without further act on the part of Bank or Borrower. Upon request from
Bank, Borrower shall provide Bank with schedules describing all Accounts created
or acquired by Borrower (including without limitation agings listing the names
and addresses of, and amounts owing by date by account debtors), and shall
execute and deliver written assignments of all Accounts to Bank all in a form
acceptable to Bank; provided, however, Borrower’s failure to execute and deliver
such schedules and/or assignments shall not affect or limit Bank’s security
interest and other rights in and to the Accounts. Together with each schedule,
Borrower shall furnish Bank with copies of Borrower’s customers’ invoices or the
equivalent, and original shipping or delivery receipts for all merchandise sold,
and Borrower warrants the genuineness thereof. Upon the occurrence of an Event
of Default, Bank or Bank’s designee may notify customers or account debtors of
Bank’s security interest in the Collateral and direct such customers or account
debtors to make payments directly to Bank, but unless and until Bank does so or
gives Borrower other written instructions, Borrower shall collect all Accounts
for Bank, receive in trust all payments thereon as Bank’s trustee, and, if so
requested to do so from Bank, Borrower shall immediately deliver said payments
to Bank in their original form as received from the account debtor and all
letters of credit, advices of credit, instruments, documents, chattel paper or
any similar property evidencing or constituting Collateral. Notwithstanding
anything to the contrary contained herein, if sales of Inventory are made for
cash, Borrower shall immediately deliver to Bank, in identical form, all such
cash, checks, or other forms of payment which Borrower receives. The receipt of
any check or other item of payment by Bank shall not be considered a payment on
account until such check or other item of payment is honored when presented for
payment, in which event, said check or other item of payment shall be deemed to
have been paid to Bank two (2) calendar days after the date Bank actually
receives such check or other item of payment.  Notwithstanding anything to the
contrary contained herein, Borrower agrees that payment of the Indebtedness
shall be on remittance basis and that, effective immediately, Borrower shall:
(a) set up cash collateral account with the Bank (including, without limitation,
execution of any and all documents to effectuate the set up); (b) direct all
electronic funds transfer payments to the cash collateral account; and
(c) immediately turn over to the Bank for deposit to the cash collateral account
any check(s) or other payment(s) Borrower receives.

 

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4.3           Bank’s security interest in Inventory shall attach to all
Inventory without further act on the part of Bank or Borrower.  Borrower will at
Borrower’s expense pledge, assemble and deliver such Inventory to Bank or to a
third party as Bank’s bailee; or hold the same in trust for Bank’s account or
store the same in a warehouse in Bank’s name; or deliver to Bank documents of
title representing said Inventory; or evidence of Bank’s security interest in
some other manner acceptable to Bank. Until a default by Borrower under this
Agreement or any other Agreement between Borrower and Bank, Borrower may,
subject to the provisions hereof and consistent herewith, sell the Inventory,
but only in the ordinary course of Borrower’s business. A sale of Inventory in
Borrower’s ordinary course of business does not include an exchange or a
transfer in partial or total satisfaction of a debt owing by Borrower.

 

4.4           Concurrently with Borrower’s execution of this Agreement, and at
any time or times hereafter at the request of Bank, Borrower shall (a) execute
and deliver to Bank security agreements, mortgages, assignments, certificates of
title, affidavits, reports, notices, schedules of accounts, letters of authority
and all other documents that Bank may reasonably request, in form satisfactory
to Bank, to perfect and maintain perfected Bank’s security interest in the
Collateral and in order to fully consummate all of the transactions contemplated
under this Agreement, (b) cooperate with Bank in obtaining a control agreement
in form and substance satisfactory to Bank with respect to all deposit accounts,
electronic chattel paper, investment property, and letter-of-credit rights, and
(c) in the event that any Collateral is in the possession of a third party,
Borrower shall join with Bank in notifying such third party of Bank’s security
interest and obtaining an acknowledgment from such third party that it is
holding such Collateral for the benefit of Bank.  By authenticating or becoming
bound by this Agreement, Borrower authorizes the filing of initial financing
statement(s), and any amendment(s) covering the Collateral to perfect and
maintain perfected Bank’s security interest in the Collateral.  Upon the
occurrence of an Event of Default, Borrower hereby irrevocably makes,
constitutes and appoints Bank (and any of Bank’s officers, employees or agents
designated by Bank) as Borrower’s true and lawful attorney-in-fact with power to
sign the name of Borrower on any security agreement, mortgage, assignment,
certificate of title, affidavit, letter of authority, notice of other similar
documents which must be executed and/or filed in order to perfect or continue
perfected Bank’s security interest in the Collateral, and to take such actions
in its own name or in Borrower’s name as Bank, in its sole discretion, deems
necessary or appropriate to establish exclusive possession or control (as
defined in the Uniform Commercial Code) over any Collateral of such nature that
perfection of Bank’s security interest may be accomplished by possession or
control.

 

4.5           Borrower shall make appropriate entries in Borrower’s Books
disclosing Bank’s security interest in the Accounts. Bank (through any of its
officers, employees or agents) shall have the right at any time or times
hereafter, provided that reasonable notice is provided, during Borrower’s usual
business hours, or during the usual business hours of any third party having
control over the records of Borrower, to inspect and verify Borrower’s Books in
order to verify the amount or condition of, or any other matter, relating to,
said Collateral and Borrower’s financial condition.

 

4.6           Effective only upon the occurrence of an Event of Default,
Borrower appoints Bank or any other person whom Bank may designate as Borrower’s
attorney-in-fact, with power: to endorse Borrower’s name on any checks, notes,
acceptances, money order, drafts or other forms of payment or security that may
come into Bank’s possession; to sign Borrower’s name on any invoice or bill of
lading relating to any Accounts, on drafts against account debtors, on schedules
and assignments of Accounts, on verifications of Accounts and on notices to
account debtors; to establish a lock box arrangement and/or to notify the post
office authorities to change the address for delivery of Borrower’s mail
addressed to Borrower to an address designated by Bank, to receive and open all
mail addressed to Borrower, and to retain all mail relating to the Collateral
and forward all other mail to Borrower; to send, whether in writing or by
telephone, requests for verification of Accounts; and to do all things necessary
to carry out this Agreement. Borrower ratifies and approves all acts of the
attorney-in-fact.  Neither Bank nor its attorney-in-fact will be liable for any
acts or omissions or for any error of judgment or mistake of fact or law.  This
power being coupled with an interest, is irrevocable so long as any Accounts in
which Bank has a security interest remain unpaid and until the Indebtedness has
been fully satisfied.

 

4.7           In order to protect or perfect any security interest which Bank is
granted hereunder, Bank may, in its sole discretion, discharge any lien or
encumbrance or bond the same, pay any insurance, maintain guards, warehousemen,
or any personnel to protect the Collateral, pay any service bureau, or, obtain
any records, and all costs for the same shall be added to the Indebtedness and
shall be payable on demand.

 

4.8           Borrower agrees that Bank may provide information relating to this
Agreement or relating to Borrower to Bank’s parent, affiliates, subsidiaries and
service providers.

 

5.     CONDITIONS PRECEDENT.

 

5.1           As conditions precedent to the making of the loans and the
extension of the financial accommodations hereunder, Borrower shall execute, or
cause to be executed, and deliver to Bank, in form and substance satisfactory to
Bank and its counsel, the following:

 

a.             This Agreement and other documents, instruments and agreements
required by Bank;

 

b.             If Borrower is a corporation, limited liability company, limited
partnership or other such entity, certified copies of all actions taken by
Borrower, any grantor of a security interest to Bank to secure the Indebtedness,
and any guarantor of the Indebtedness, authorizing the execution, delivery and
performance of this Agreement and any other documents, instruments or agreements
entered into in connection herewith, and authorizing specific officers to
execute and deliver any such documents, instruments and agreements;

 

c.             If Borrower is a corporation, limited liability company, limited
partnership or other such entity, then a certificate of good standing showing
that Borrower is in good standing under the laws of the state of its
incorporation or formation and certificates indicating that Borrower is
qualified to transact business and is in good standing in any other state in
which it conducts business;

 

d.             If Borrower is a partnership, then a copy of Borrower’s
partnership agreement certified by each general partner of Borrower.

 

e.             UCC searches and financing statements, tax lien and litigation
searches, fictitious business statement filings, insurance certificates, notices
or other similar documents which Bank may require and in such form as Bank may
require, in order to reflect, perfect or protect Bank’s first priority security
interest in the Collateral and in order to fully consummate all of the
transactions contemplated under this Agreement;

 

f.              Evidence that Borrower has obtained insurance and acceptable
endorsements;

 

g.             Such control agreements from each Person as Bank may require;

 

h.             Duly executed certificates of title with respect to that portion
of the Collateral that is subject to certificates of title;

 

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i.              Such collateral access agreements from each lessor,
warehouseman, bailee, and other Person as Bank may require, duly executed by
each such Person; and

 

j.              Warranties and representations of officers.

 

6.     WARRANTIES. REPRESENTATIONS AND COVENANTS.

 

6.1           If so requested by Bank, Borrower shall, at such intervals
designated by Bank, during the term hereof execute and deliver a Report of
Accounts Receivable or similar report, in form customarily used by Bank. The
aggregate amount of the Borrowing Base at all times during the effectiveness of
this Agreement shall not be less than the advances made hereunder. Bank shall
have the right to recompute the Borrowing Base in conformity with this
Agreement.

 

6.2           If any warranty is breached as to any Account, or any Account is
not paid in full by an account debtor within ninety (90) days from the date of
invoice, or an account debtor disputes liability or makes any claim with respect
thereto, or a petition in bankruptcy or other application for relief under the
Bankruptcy Code or any other insolvency law is filed by or against an account
debtor, or an account debtor makes an assignment for the benefit of creditors,
becomes insolvent, fails or goes out of business, then Bank may deem ineligible
any and all Accounts owing by that account debtor, and reduce the Borrowing Base
by the amount thereof. Bank shall retain its security interest in all Accounts,
whether eligible or ineligible, until all Indebtedness has been fully paid and
satisfied. Returns and allowances, if any, as between Borrower and its
customers, will be on the same basis and in accordance with the usual customary
practices of Borrower, as they exist at this time. Any merchandise which is
returned by an account debtor or otherwise recovered shall be set aside, marked
with Bank’s name, and Bank shall retain a security interest therein. Borrower
shall promptly notify Bank of all disputes and claims and settle or adjust them
on terms approved by Bank. After default by Borrower hereunder, no discount,
credit or allowance shall be granted to any account debtor by Borrower and no
return of merchandise shall be accepted by Borrower without Bank’s consent. Bank
may, after default by Borrower, settle or adjust disputes and claims directly
with account debtors for amounts and upon terms which Bank considers advisable,
and in such cases Bank will credit Borrower’s loan account with only the net
amounts received by Bank in payment of the Accounts, after deducting all Bank
Expenses in connection therewith.

 

6.3           Borrower warrants, represents, covenants and agrees that:

 

a.             Borrower has good and marketable title to the Collateral. Bank
has and shall continue to have a first priority perfected security interest in
and to the Collateral. The Collateral shall at all times remain free and clear
of all liens, encumbrances and security interests (except those in favor of
Bank);

 

b.             All Accounts are and will, at all times pertinent hereto, be bona
fide existing obligations created by the sale and delivery of merchandise or the
rendition of services to account debtors in the ordinary course of business,
free of liens, claims, encumbrances and security interests (except as held by
Bank and except as may be consented to, in writing, by Bank) and are
unconditionally owed to Borrower without defenses, disputes, offsets
counterclaims, rights of return or cancellation, and Borrower shall have
received no notice of actual or imminent bankruptcy or insolvency of any account
debtor at the time an Account due from such account debtor is assigned to Bank;
and

 

c.             At the time each Account is assigned to Bank, all property giving
rise to such Account shall have been delivered to the account debtor or to the
agent for the account debtor for immediate shipment to, and unconditional
acceptance by, the account debtor. Borrower shall deliver to Bank, as Bank may
from time to time require, delivery receipts, customer’s purchase orders,
shipping instructions, bills of lading and any other evidence of shipping
arrangements. Absent such a request by Bank, copies of all such documentation
shall be held by Borrower as custodian for Bank.

 

6.4           At the time each eligible Account is assigned to Bank, all such
Eligible Accounts will be due and payable on terms set forth in Section 1.18, or
on such other terms approved in writing by Bank in advance of the creation of
such Accounts and which are expressly set forth on the face of all invoices,
copies of which shall be held by Borrower as custodian for Bank, and no such
Eligible Account will then be past due.

 

6.5           Borrower shall keep the Inventory only at the following locations:
N/A and the owner or mortgagees of the respective locations are: N/A.

 

a.             Borrower, immediately upon demand by Bank therefor, shall now and
from time to time hereafter, at such intervals as are reasonably requested by
Bank, deliver to Bank, designations of Inventory specifying Borrower’s cost of
Inventory, the wholesale market value thereof and such other matters and
information relating to the Inventory as Bank may request;

 

b.             Borrower’s Inventory, valued at the lower of Borrower’s cost or
the wholesale market value thereof, at all times pertinent hereto shall not be
less than N/A Dollars ($ N/A) of which no less than N/A Dollars ($ N/A) shall be
in raw materials and finished goods;

 

c.             All of the Inventory is and shall remain free from all purchase
money or other security interests, liens or encumbrances, except as held by
Bank;

 

d.             Borrower does now keep and hereafter at all times shall keep
correct and accurate records itemizing and describing the kind, type, quality
and quantity of the Inventory, its cost therefor and selling price thereof, and
the daily withdrawals therefrom and additions thereto, all of which records
shall be available upon demand to any of Bank’s officers, agents and employees
for inspection and copying;

 

e.             All Inventory, now and hereafter at all times, shall be new
Inventory of good and merchantable quality free from material defects;

 

f.              Inventory is not now and shall not at any time or times
hereafter be located or stored with a bailee, warehouseman or other third party
without Bank’s prior written consent, and, in such event, Borrower will
concurrently therewith cause any such bailee, warehouseman or other third party
to issue and deliver to Bank, warehouse receipts in Bank’s name evidencing the
storage of Inventory and/or an acknowledgment by such bailee of Bank’s prior
rights in the Inventory, in each case in form and substance acceptable to Bank.
In any event, Borrower shall instruct any third party to hold all such Inventory
for Bank’s account subject to Bank’s security interests and its instructions;
and

 

g.             Bank shall have the right upon demand now and/or at all times
hereafter, during Borrower’s usual business hours, after reasonable notice, to
inspect and examine the Inventory and to check and test the same as to quality,
quantity, value and condition and Borrower agrees to reimburse Bank for Bank’s
reasonable costs and expenses in so doing.

 

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6.6           Borrower represents, warrants and covenants with Bank that
Borrower will not, without Bank’s prior written consent:

 

a.             Grant a security interest in or permit a lien, claim or
encumbrance upon any of the Collateral to any person, association, firm,
corporation, entity or governmental agency or instrumentality;

 

b.             Permit any levy, attachment or restraint to be made affecting any
of Borrower’s assets;

 

c.             Permit any Judicial Officer or Assignee to be appointed or to
take possession of any or all of Borrower’s assets;

 

d.             Other than sales of Inventory in the ordinary course of
Borrower’s business, to sell, lease, or otherwise dispose of, move, or transfer,
whether by sale or otherwise, any of Borrower’s assets;

 

e.             Change its name, the location of its sole place of business,
chief executive office or residence, business structure, corporate identity or
structure, form of organization or the state in which it has been formed or
organized; add any new fictitious names, liquidate, merge or consolidate with or
into any other business organization;

 

f.              Move or relocate any Collateral;

 

g.             Acquire any other business organization in any fiscal year
resulting in cash contribution per transaction in excess of $500,000.00, or
$1,000,000.00 in the aggregate, and / or stock contribution in excess of
$1,000,000.00 per transaction, or $2,000,000.00 in the aggregate;

 

h.             Enter into any transaction not in the usual course of Borrower’s
business;

 

i.              Make any change in Borrower’s financial structure or in any of
its business objectives, purposes or operations which would materially adversely
affect the ability of Borrower to repay Borrower’s Indebtedness;

 

j.              Incur any debts outside the ordinary course of Borrower’s
business except renewals or extensions of existing debts and interest thereon;

 

k.             Make loans, advances or extensions of credit to any Person in an
aggregate amount greater than Two Hundred Fifty Thousand ($250,000.00) Dollars,
except in the ordinary course of business;

 

l.              Guarantee or otherwise, directly or indirectly, in any way be or
become responsible for obligations of any other Person, whether by agreement to
purchase the indebtedness of any other Person, agreement for the furnishing of
funds to any other Person through the furnishing of goods, supplies or services,
by way of stock purchase, capital contribution, advance or loan, for the purpose
of paying or discharging (or causing the payment or discharge of) the
indebtedness of any other Person, or otherwise, except for the endorsement of
negotiable instruments by Borrower in the ordinary course of business for
deposit or collection;

 

m.            Make any payment on account of any Subordinated Debt except for
regularly scheduled payments of interest and principal in accordance with the
provisions of any Subordination Agreement executed by Bank and the subordinated
debt holder, or amend any provision contained in any documentation relating to
any such Subordinated Debt without Bank’s prior written consent;

 

n.             (a) Sell, lease, transfer or otherwise dispose of properties and
assets (whether in one transaction or in a series of transactions) except as to
the sale of Inventory in the ordinary course of business; (b) change its name,
consolidate with or merge into any other corporation, permit another corporation
to merge into it, acquire all or substantially all the properties or assets of
any other Person, enter into any reorganization or recapitalization or
reclassify its capital stock, or (c) enter into any sale-leaseback transaction;

 

o.             Purchase or hold beneficially any stock or other securities of,
or make any investment or acquire any securities or other interest whatsoever
in, any other Person, except for the common stock of the Subsidiaries owned by
Borrower on the date of this Agreement and except for certificates of deposit
with maturities of one year or less of United States commercial banks with
capital, surplus and undivided profits in excess of One Hundred Million Dollars
($100,000,000.00) and the securities or other direct obligations of the United
States Government maturing within one year from the date of acquisition thereof;

 

p.             Allow any fact, condition or event to occur or exist with respect
to any employee pension or profit sharing plans established or maintained by it
which might constitute grounds for termination of any such plan or for the court
appointment of a trustee to administer any such plan; and

 

q.             Borrower shall not without Bank’s prior written consent acquire
or expend for or commit itself to acquire or expend for fixed assets by lease,
purchase or otherwise in an aggregate amount that exceeds N/A Dollars ($ N/A) in
any fiscal year.

 

r.              Allow for intercompany credit extension from Borrower to foreign
subsidiaries in the form of Accounts Payable and / or loan advances in excess of
$5,000,000.00.

 

6.7           Borrower shall permit representatives of Bank to conduct audits of
Borrower’s Books relating to the Accounts and other Collateral and make extracts
therefrom, with results satisfactory to Bank, provided that Bank shall use its
best efforts to not interfere with the conduct of Borrower’s business, and to
the extent possible to arrange for verification of the Accounts directly with
the account debtors obligated thereon or otherwise, all under reasonable
procedures acceptable to Bank and at Borrower’s sole expense; provided, however,
that, prior to an Event of Default, Borrower shall not be responsible for more
than one (1) such audit in each calendar year.  Notwithstanding any of the
provisions contained in Section 2.1 of this Agreement or otherwise, Borrower
hereby acknowledges and agrees that upon completion of any such audit Bank shall
have the right to adjust the Borrowing Base percentage or the definition of
Eligible Accounts and Eligible Inventory, in its sole and reasonable discretion,
based on its review of the results of such audit.

 

6.8           Borrower represents, warrants, covenants and agrees that:

 

a.             Borrower’s true and correct legal name is that set forth on the
signature page to this Agreement.  Except as disclosed in writing to Bank on or
before the date of this Agreement, Borrower has not done business under any name
other than that set forth on the signature page to this Agreement;

 

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b.             If Borrower is an individual, the location (as determined
pursuant to the Uniform Commercial Code) of Borrower’s principal residence is
that set forth following Borrower’s name on the signature page to this
Agreement;

 

c.             If Borrower is a registered organization that is organized under
the laws of any one of the states comprising the United States (e.g.
corporation, limited partnership, registered limited liability partnership or
limited liability company), and is located (as determined pursuant to the
Uniform Commercial Code) in the state under the laws of which it was organized,
Borrower’s form of organization and the state in which it has been organized are
those set forth immediately following Borrower’s name on the signature page to
this Agreement;

 

d.             If Borrower is a registered organization organized under the laws
of the United States, and Borrower is located in the state that United States
law designates as its location or, if United States law authorizes Borrower to
designate the state for its location, the state designated by Borrower, or if
neither of the foregoing are applicable, at the District of Columbia (in each
case as determined in accordance with the Uniform Commercial Code), Borrower’s
form of organization and the state or district in which it is located are those
set forth immediately following Borrower’s name on the signature page to this
Agreement;

 

e.             If Borrower is a domestic organization that is not a registered
organization under the laws of the United States or any state thereof (e.g.
general partnership, joint venture, trust, estate or association), and Borrower
is located (as determined pursuant to the Uniform Commercial Code) at its sole
place of business or, if it has more than one place of business, at its chief
executive office, Borrower’s form of organization and the address of that
location are those set forth on the signature page to this Agreement; and

 

f.              If Borrower is a foreign individual or foreign organization or a
branch or agency of a bank that is not organized under the laws of the United
States or a state thereof, Borrower is located (as determined pursuant to the
Uniform Commercial Code) at the address set forth following Borrower’s name on
the signature page to this Agreement.

 

6.9           If Borrower is a corporation, Borrower represents, warrants and
covenants as follows:

 

a.             Borrower will not make any distribution or declare or pay any
dividend (in stock or in cash) to any shareholder or on any of its capital
stock, of any class, whether now or hereafter outstanding, or purchase, acquire,
repurchase, or redeem or retire any such capital stock; provided, however, so
long as no Event of Default has or is continuing hereunder, to the extent that
and so long as Borrower is an entity that is not directly subject to Federal
income taxation and with respect to which any earnings are attributable ratably
to each Person with an ownership interest in Borrower, Borrower may make
distributions to each such Person in an amount necessary to pay each such
Person’s income tax resulting from such ownership interest in Borrower,
provided, further, that, promptly upon request of Bank, Borrower shall cause
each such Person to provide Bank with copies of its tax return to substantiate
any such distribution;

 

b.             Borrower is and shall at all times hereafter be a corporation
duly organized and existing in good standing under the laws of the state of its
incorporation and qualified and licensed to do business in California or any
other state in which it conducts its business;

 

c.             Borrower has the right and power and is duly authorized to enter
into this Agreement; and

 

d.             The execution by Borrower of this Agreement shall not constitute
a breach of any provision contained in Borrower’s articles of incorporation or
by-laws.

 

6.10         The execution of and performance by Borrower of all of the terms
and provisions contained in this Agreement shall not result in a breach of or
constitute an event of default under any agreement to which Borrower is now or
hereafter becomes a party.

 

6.11         Borrower shall promptly notify Bank in writing of its acquisition
by purchase, lease or otherwise of any after acquired property of the type
included in the Collateral, with the exception of purchases of Inventory in the
ordinary course of business.

 

6.12         All assessments and taxes, whether real, personal or otherwise, due
or payable by, or imposed, levied or assessed against, Borrower or any of its
property have been paid, and shall hereafter be paid in full, before
delinquency. Borrower shall make due and timely payment or deposit of all
federal, state and local taxes, assessments or contributions required of it by
law, and will execute and deliver to Bank, on demand, appropriate certificates
attesting to the payment or deposit thereof. Borrower will make timely payment
or deposit of all F.I.C.A. payments and withholding taxes required of it by
applicable laws, and will upon request furnish Bank with proof satisfactory to
it that Borrower has made such payments or deposit. If Borrower fails to pay any
such assessment, tax, contribution, or make such deposit, or furnish the
required proof, Bank may, in its sole and absolute discretion and without notice
to Borrower, (i) make payment of the same or any part thereof, or (ii) set up
such reserves in Borrower’s loan account as Bank deems necessary to satisfy the
liability therefor, or both. Bank may conclusively rely on the usual statements
of the amount owing or other official statements issued by the appropriate
governmental agency. Each amount so paid or deposited by Bank shall constitute a
Bank Expense and an additional advance to Borrower.

 

6.13         There are no actions or proceedings pending by or against Borrower
or any guarantor of Borrower before any court or administrative agency and
Borrower has no knowledge of any pending, threatened or imminent litigation,
governmental investigations or claims, complaints, actions or prosecutions
involving Borrower or any guarantor of Borrower, except as heretofore
specifically disclosed in writing to Bank. If any of the foregoing arise during
the term of the Agreement, Borrower shall immediately notify Bank in writing.

 

6.14         Insurance.

 

a.             Borrower, at its expense, shall keep and maintain its assets
insured against loss or damage by fire, theft, explosion, sprinklers and all
other hazards and risks ordinarily insured against by other owners who use such
properties in similar businesses for the full insurable value thereof. Borrower
shall also keep and maintain business interruption insurance and public
liability and property damage insurance relating to Borrower’s ownership and use
of the Collateral and its other assets. All such policies of insurance shall be
in such form, with such companies, and in such amounts as may be satisfactory to
Bank. Borrower shall deliver to Bank certified copies of such policies of
insurance and evidence of the payments of all premiums therefor.  All such
policies of insurance (except those of public liability and property damage)
shall contain an endorsement in a form satisfactory to Bank showing Bank as a
loss payee thereof, with a waiver of warranties satisfactory to Bank, and all
proceeds payable thereunder shall be payable to Bank and, upon receipt by Bank,
shall be applied on account of the Indebtedness owing to Bank. To secure the
payment of the Indebtedness, Borrower grants Bank a security interest in and to
all such policies of insurance (except those of public liability and property
damage) and the proceeds thereof, and Borrower shall direct all insurers under
such policies of insurance to pay all proceeds thereof directly to Bank.

 

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b.             Borrower hereby irrevocably appoints Bank (and any of Bank’s
officers, employees or agents designated by Bank) as Borrower’s attorney for the
purpose of making, selling and adjusting claims under such policies of
insurance, endorsing the name of Borrower on any check, draft, instrument or
other item of payment for the proceeds of such policies of insurance and for
making all determinations and decisions with respect to such policies of
insurance. Borrower will not cancel any of such policies without Bank’s prior
written consent. Each such insurer shall agree by endorsement upon the policy or
policies of insurance issued by it to Borrower as required above, or by
independent instruments furnished to Bank, that it will give Bank at least ten
(10) days written notice before any such policy or policies of insurance shall
be altered or canceled, and that no act or default of Borrower, or any other
person, shall affect the right of Bank to recover under such policy or policies
of insurance required above or to pay any premium in whole or in part relating
thereto. Bank, without waiving or releasing any Indebtedness or any Event of
Default, may, but shall have no obligation to do so, obtain and maintain such
policies of insurance and pay such premiums and take any other action with
respect to such policies which Bank deems advisable. All sums so disbursed by
Bank, as well as reasonable attorneys’ fees incurred by Bank, whether in-house
or outside counsel is used, court costs, expenses and other charges relating
thereto, shall constitute Bank Expenses and are payable on demand.

 

6.15         All financial statements and information relating to Borrower which
have been or may hereafter be delivered by Borrower to Bank are true and correct
and have been prepared in accordance with GAAP consistently applied and there
has been no material adverse change in the financial condition of Borrower since
the submission of such financial information to Bank.

 

6.16         Financial Reporting.

 

a.             Borrower at all times hereafter shall maintain a standard and
modern system of accounting in accordance with GAAP consistently applied with
ledger and account cards and/or computer tapes and computer disks, computer
printouts and computer records pertaining to the Collateral which contain
information as may from time to time be requested by Bank, not modify or change
its method of accounting or enter into, modify or terminate any agreement
presently existing, or at any time hereafter entered into with any third party
accounting firm and/or service bureau for the preparation and/or storage of
Borrower’s accounting records without the written consent of Bank first obtained
and without said accounting firm and/or service bureau agreeing to provide
information regarding the Accounts and Inventory and Borrower’s financial
condition to Bank; permit Bank and any of its employees, officers or agents,
upon demand, during Borrower’s usual business hours, or the usual business hours
of third persons having control thereof, to have access to and examine all of
Borrower’s Books relating to the Collateral, Borrower’s Indebtedness to Bank,
Borrower’s financial condition and the results of Borrower’s operations and in
connection therewith, permit Bank or any of its agents, employees or officers to
copy and make extracts therefrom.

 

b.             Borrower shall deliver to Bank within thirty (30) days after the
end of each month, a company prepared balance sheet and profit and loss
statement covering Borrower’s operations and deliver to Bank within one hundred
twenty (120) days after the end of each of Borrower’s fiscal years a CPA audited
statement of the financial condition of Borrower for each such fiscal year,
including but not limited to, a balance sheet and profit and loss statement and
any other report requested by Bank relating to the Collateral and the financial
condition of Borrower, and a certificate signed by an authorized employee of
Borrower to the effect that all reports, statements, computer disk or tape
files, computer printouts, computer runs, or other computer prepared information
of any kind or nature relating to the foregoing or documents delivered or caused
to be delivered to Bank under this subparagraph are complete, correct and
thoroughly present the financial condition of Borrower and that there exists on
the date of delivery to Bank no condition or event which constitutes a breach or
Event of Default under this Agreement.

 

c.             Cause each Guarantor to submit to Bank such Guarantor’s financial
statement, confirmed as to its correctness by Guarantor’s signature, either on
Bank’s form or prepared by an independent certified public accountant within 120
days of the end of each fiscal year of Borrower; and a completed copy of such
Guarantor’s federal income tax return same calendar year, no later than 30 days
after filing of the same with the Internal Revenue Service.

 

d.             In addition to the financial statements requested above, Borrower
agrees to provide Bank with the following schedules:

 

1.             Accounts Receivable and Accounts Payable Agings within fifteen
(15) days of each month end.

 

2.             Inventory Activity Reports within fifteen (15) days of each month
end.

 

3.             Transaction Reports each time Borrowing Base Certificate is
required.

 

4.             Borrowing Base Certificate on a monthly basis.  Where Borrower
has received advances against Inventory, Borrowing Base Certificate on a weekly
basis.

 

5.             Compliance Certification within 120 days of each fiscal year end.

 

6.             An alphabetized listing of Customers on a quarterly basis or more
frequently (as requested by Bank) including addresses.

 

7.             Credit Insurance Reports on Accounts Receivables from Export
Insurance Agency as Requested by Bank evidencing Borrower is in good standing.

 

6.17         Borrower shall maintain the following financial ratios and
covenants on a consolidated and non-consolidated basis, which shall be monitored
on a monthly basis, except as noted below:

 

a.             Working Capital in an amount not less than N/A

 

b.             Tangible Effective Net Worth in an amount not less than
$12,000,000.00

 

c.             a Current Ratio of not less than N/A

 

d.             a Quick Ratio of not less than 1.00:1.00

 

e.             a Debt-to-Tangible Effective Net Worth of not more than 2.00:1.00

 

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f.              Cash Flow Coverage Ratio of not less than N/A

 

g.             Minimum Net Income after taxes of at least $150,000.00 on a
quarterly basis

 

h.            

 

All financial covenants shall be computed in accordance with GAAP consistently
applied except as otherwise specifically set forth in this Agreement. All monies
due from affiliates (including officers, directors and shareholders) shall be
excluded from Borrower’s assets for all purposes hereunder.

 

6.18         Borrower shall promptly supply Bank (and cause any guarantor to
supply Bank) with such other information (including tax returns) concerning its
financial affairs (or that of any guarantor) as Bank may request from time to
time hereafter, and shall promptly notify Bank of any material adverse change in
Borrower’s financial condition and of any condition or event which constitutes a
breach of or an event which constitutes an Event of Default under this
Agreement.

 

6.19         Borrower is now and shall be at all times hereafter solvent and
able to pay its debts (including trade debts) as they mature.

 

6.20         Borrower shall immediately and without demand reimburse Bank for
all sums expended by Bank in connection with any action brought by Bank to
correct any default or enforce any provision of this Agreement, including all
Bank Expenses; Borrower authorizes and approves all advances and payments by
Bank for items described in this Agreement as Bank Expenses.

 

6.21         Each warranty, representation and agreement contained in this
Agreement shall automatically be deemed repeated with each advance and shall
conclusively be presumed to have been relied on by Bank regardless of any
investigation made or information possessed by Bank.  The warranties,
representations and agreements set forth herein shall be cumulative and in
addition to any and all other warranties, representations and agreements which
Borrower shall give, or cause to be given, to Bank, either now or hereafter.

 

6.22         Borrower shall keep all of its principal bank accounts with Bank
and shall notify Bank immediately in writing of the existence of any other bank
account, deposit account, or any other account into which money can be
deposited.

 

6.23         Borrower shall furnish to Bank:  (a) as soon as possible, but in no
event later than thirty (30) days after Borrower knows or has reason to know
that any reportable event with respect to any deferred compensation plan has
occurred, a statement of the chief financial officer of Borrower setting forth
the details concerning such reportable event and the action which Borrower
proposes to take with respect thereto, together with a copy of the notice of
such reportable event given to the Pension Benefit Guaranty Corporation, if a
copy of such notice is available to Borrower; (b) promptly after the filing
thereof with the United States Secretary of Labor or the Pension Benefit
Guaranty Corporation, copies of each annual report with respect to each deferred
compensation plan; (c) promptly after receipt thereof, a copy of any notice
Borrower may receive from the Pension Benefit Guaranty Corporation or the
Internal Revenue Service with respect to any deferred compensation plan;
provided, however, this subparagraph shall not apply to notice of general
application issued by the Pension Benefit Guaranty Corporation or the Internal
Revenue Service; and (d) when the same is made available to participants in the
deferred compensation plan, all notices and other forms of information from time
to time disseminated to the participants by the administrator of the deferred
compensation plan.

 

6.24         Borrower is now and shall at all times hereafter remain in
compliance with all federal, state and municipal laws, regulations and
ordinances relating to the handling, treatment and disposal of toxic substances,
wastes and hazardous material and shall maintain all necessary authorizations
and permits.

 

6.25         Borrower shall maintain insurance on the life of N/A in an amount
not to be less than              Dollars ($           ) under one or more
policies issued by insurance companies satisfactory to Bank, which policies
shall be assigned to Bank as security for the Indebtedness and on which Bank
shall be named as sole beneficiary.

 

6.26         Borrower shall limit direct and indirect compensation paid to the
following employees: N/A, N/A,                  to an aggregate of N/A Dollars
($ N/A) per          .

 

7.     EVENTS OF DEFAULT.

 

Any one or more of the following events shall constitute an Event of Default by
Borrower under this Agreement:

 

a.             If Borrower fails or neglects to perform, keep or observe any
term, provision, condition, covenant, agreement, warranty or representation
contained in this Agreement, or any other present or future document, instrument
or agreement between Borrower and Bank:

 

b.             If any representation, statement, report or certificate made or
delivered by Borrower, or any of its officers, employees or agents to Bank is
not true and correct;

 

c.             If Borrower fails to pay when due and payable or declared due and
payable, all or any portion of Borrower’s Indebtedness (whether of principal,
interest, taxes, reimbursement of Bank Expenses, or otherwise);

 

d.             If there is a material impairment of the prospect of repayment of
all or any portion of Borrower’s Indebtedness or a material impairment of the
value or priority of Bank’s security interest in the Collateral;

 

e.             If all or any of Borrower’s assets are attached, seized, subject
to a writ or distress warrant, or are levied upon, or come into the possession
of any Judicial Officer or Assignee and the same are not released, discharged or
bonded against within ten (10) days thereafter;

 

f.              If any Insolvency Proceeding is filed or commenced by or against
Borrower without being dismissed within ten (10) days thereafter;

 

g.             If any proceeding is filed or commenced by or against Borrower
for its dissolution or liquidation;

 

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h.             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;

 

i.              If a notice of lien, levy or assessment is filed of record with
respect to any or all of Borrower’s assets by the United States Government, or
any department, agency or instrumentality thereof, or by any state, county,
municipal or other government agency, or if any taxes or debts owing at any time
hereafter to any one or more of such entities becomes a lien, whether inchoate
or otherwise, upon any or all of Borrower’s assets and the same is not paid on
the payment date thereof;

 

j.              If a judgment or other claim becomes a lien or encumbrance upon
any or all of Borrower’s assets and the same is not satisfied, dismissed or
bonded against within ten (10) days thereafter;

 

k.             If Borrower’s records are prepared and kept by an outside
computer service bureau at the time this Agreement is entered into or during the
term of this Agreement such an agreement with an outside service bureau is
entered into, and at any time thereafter, without first obtaining the written
consent of Bank, Borrower terminates, modifies, amends or changes its
contractual relationship with said computer service bureau or said computer
service bureau fails to provide Bank with any requested information or financial
data pertaining to Bank’s Collateral, Borrower’s financial condition or the
results of Borrower’s operations;

 

l.              If Borrower permits a default in any material agreement to which
Borrower is a party with third parties so as to result in an acceleration of the
maturity of Borrower’s indebtedness to others, whether under any indenture,
agreement or otherwise;

 

m.            If Borrower makes any payment on account of indebtedness which has
been subordinated to Borrower’s Indebtedness to Bank except as otherwise
permitted under the terms of this Agreement;

 

n.             If any misrepresentation exists now or thereafter in any warranty
or representation made to Bank by any officer or director of Borrower, or if any
such warranty or representation is withdrawn by any officer or director;

 

o.             If any party subordinating its claims to that of Bank’s or any
guarantor of Borrower’s Indebtedness dies, terminates its subordination or
guaranty, violates the terms of the subordination or guaranty, becomes
insolvent, or an Insolvency Proceeding is commenced by or against any such
subordinating party or guarantor;

 

p.             If Borrower is an individual and Borrower dies;

 

q.             If there is a change of ownership or control of fifty-one percent
(51%) or more of the issued and outstanding stock of Borrower; or

 

r.              Cancellation of any insurance policy;

 

s.             If any reportable event, which Bank determines constitutes
grounds for the termination of any deferred compensation plan by the Pension
Benefit Guaranty Corporation or for the appointment by the appropriate United
States District Court of a trustee to administer any such plan, shall have
occurred and be continuing thirty (30) days after written notice of such
determination shall have been given to Borrower by Bank, or any such Plan shall
be terminated within the meaning of Title IV of the Employment Retirement Income
Security Act (“ERISA”), or a trustee shall be appointed by the appropriate
United States District Court to administer any such plan, or the Pension Benefit
Guaranty Corporation shall institute proceedings to terminate any plan and in
case of any event described in this Section 7, the aggregate amount of
Borrower’s liability to the Pension Benefit Guaranty Corporation under Sections
4062, 4063 or 4064 of ERISA shall exceed five percent (5%) of Borrower’s
Tangible Effective Net Worth.

 

Notwithstanding anything contained in Section 7 to the contrary, Bank shall
refrain from exercising its rights and remedies and Event of Default shall
thereafter not be deemed to have occurred by reason of the occurrence of any of
the events set forth in Sections 7.e, 7.f or 7.j of this Agreement if, within
ten (10) days from the date thereof, the same is released, discharged,
dismissed, bonded against or satisfied; provided, however, if the event is the
institution of Insolvency Proceedings against Borrower, Bank shall not be
obligated to make advances to Borrower during such cure period.

 

8.     BANK’S RIGHTS AND REMEDIES.

 

8.1           Upon the occurrence of an Event of Default by Borrower under this
Agreement, 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 Borrower’s Indebtedness, whether evidenced by this
Agreement, installment notes, demand notes or otherwise, immediately due and
payable to Bank;

 

b.             Cease advancing money or extending credit to or for the benefit
of Borrower under this Agreement, or any other agreement between Borrower and
Bank;

 

c.             Terminate this Agreement as to any future liability or obligation
of Bank, but without affecting Bank’s rights and security interests in the
Collateral, and the Indebtedness of Borrower to Bank;

 

d.             Without notice to or demand upon Borrower or any guarantor, 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, take and maintain possession of the Collateral and the
premises (at no charge to Bank), or any part thereof, and to pay, purchase,
contest or compromise any encumbrance, charge or lien which in the opinion of
Bank appears to be prior or superior to its security interest and to pay all
expenses incurred in connection therewith;

 

e.             Without limiting Bank’s rights under any security interest, Bank
is hereby granted a license or other right to use, without charge, Borrower’s
labels, patents, copyrights, rights of use of any name, trade secrets, trade
names, trademarks and advertising matter, or any property or a similar nature as
it pertains to the Collateral, in completing production of, advertising for sale
and selling any Collateral and Borrower’s rights under all licenses and all
franchise agreements shall inure to Bank’s benefit, and Bank shall have the
right and power to enter into sublicense agreements with respect to all such
rights with third parties on terms acceptable to Bank;

 

f.              Ship, reclaim, recover, store, finish, maintain, repair, prepare
for sale, advertise for sales and sell (in the manner provided for herein) the
Inventory;

 

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g.             Sell or dispose 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 is
commercially reasonable in the opinion of Bank. It is not necessary that the
Collateral be present at any such sale. At any sale or other disposition of the
Collateral pursuant to this Section, Bank disclaims all warranties which would
otherwise be given under the Uniform Commercial Code, including without
limitation a disclaimer of any warranty relating to title, possession, quiet
enjoyment or the like, and Bank may communicate these disclaimers to a purchaser
at such disposition.  This disclaimer of warranties will not render the sale
commercially unreasonable;

 

h.             Bank shall give notice of the disposition of the Collateral as
follows:

 

(1)           Bank shall give Borrower and each holder of a security interest in
the Collateral who has filed with Bank a written request for notice, a notice in
writing of the time and place of public sale, or, if the sale is a private sale
or some disposition other than a public sale is to be made of the Collateral,
the time on or after which the private sale or other disposition is to be made;

 

(2)           The notice shall be personally delivered or mailed, postage
prepaid, to Borrower’s address appearing in this Agreement, at least ten
(10) calendar days before the date fixed for the sale, or at least ten
(10) calendar days before the date on or after which the private sale or other
disposition is to be made, unless the Collateral is perishable or threatens to
decline speedily in value. Notice to persons other than Borrower claiming an
interest in the Collateral shall be sent to such addresses as have been
furnished to Bank or as otherwise determined in accordance with Section 9611 of
the Uniform Commercial Code; and

 

(3)           If the sale is to be a public sale, Bank shall also give notice of
the time and place by publishing a notice one time at least ten (10) calendar
days before the date of the sale in a newspaper of general circulation in the
county in which the sale is to be held; and

 

(4)           Bank may credit bid and purchase at any public sale.

 

i.              Borrower shall pay all Bank Expenses incurred in connection with
Bank’s enforcement and exercise of any of its rights and remedies as herein
provided, whether or not suit is commenced by Bank;

 

j.              Any deficiency which exists after disposition of the Collateral
as provided above will be paid immediately by Borrower. Any excess will be
returned, without interest and subject to the rights of third parties, to
Borrower by Bank, or, in Bank’s discretion, to any party who Bank believes, in
good faith, is entitled to the excess;

 

k.             Without constituting a retention of Collateral in satisfaction of
an obligation within the meaning of 9620 of the Uniform Commercial Code or an
action under California Code of Civil Procedure 726, apply any and all amounts
maintained by Borrower as deposit accounts (as that term is defined under 9102
of the Uniform Commercial Code) or other accounts that Borrower maintains with
Bank against the Indebtedness;

 

l.              The proceeds of any sale or other disposition of Collateral
authorized by this Agreement shall be applied by Bank first upon all expenses
authorized by the Uniform Commercial Code and all reasonable attorney fees and
legal expenses incurred by Bank, whether in-house or outside counsel is used,
the balance of the proceeds of the sale or other disposition shall be applied in
the payment of the Indebtedness, first to interest, then to principal, then to
remaining Indebtedness and the surplus, if any, shall be paid over to Borrower
or to such other person(s) as may be entitled to it under applicable law. 
Borrower shall remain liable for any deficiency, which it shall pay to Bank
immediately upon demand.  Borrower agrees that Bank shall be under no obligation
to accept any noncash proceeds in connection with any sale or disposition of
Collateral unless failure to do so would be commercially unreasonable.  If Bank
agrees in its sole discretion to accept noncash proceeds (unless the failure to
do so would be commercially unreasonable), Bank may ascribe any commercially
reasonable value to such proceeds.  Without limiting the foregoing, Bank may
apply any discount factor in determining the present value of proceeds to be
received in the future or may elect to apply proceeds to be received in the
future only as and when such proceeds are actually received in cash by Bank; and

 

m.            The following shall be the basis for any finder of fact’s
determination of the value of any Collateral which is the subject matter of a
disposition giving rise to a calculation of any surplus or deficiency under
Section 9615(f) of the Uniform Commercial Code: (i) The Collateral which is the
subject matter of the disposition shall be valued in an “as is” condition as of
the date of the disposition, without any assumption or expectation that such
Collateral will be repaired or improved in any manner; (ii) the valuation shall
be based upon an assumption that the transferee of such Collateral desires a
resale of the Collateral for cash promptly (but no later than 30 days) following
the disposition; (iii) all reasonable closing costs customarily borne by the
seller in commercial sales transactions relating to property similar to such
Collateral shall be deducted including, without limitation, brokerage
commissions, tax prorations, attorney’s fees, whether in-house or outside
counsel is used, and marketing costs; (iv) the value of the Collateral which is
the subject matter of the disposition shall be further discounted to account for
any estimated holding costs associated with maintaining such Collateral pending
sale (to the extent not accounted for in (iii) above), and other maintenance,
operational and ownership expenses; and (v) any expert opinion testimony given
or considered in connection with a determination of the value of such Collateral
must be given by persons having at least 5 years experience in appraising
property similar to the Collateral and who have conducted and prepared a
complete written appraisal of such Collateral taking into consideration the
factors set forth above.  The “value” of any such Collateral shall be a factor
in determining the amount of proceeds which would have been realized in a
disposition to a transferee other than a secured party, a person related to a
secured party or a secondary obligor under Section 9615(f) of the Uniform
Commercial Code.

 

8.2           In addition to any and all other rights and remedies available to
Bank under or pursuant to this Agreement or any other documents, instrument or
agreement contemplated hereby, Borrower acknowledges and agrees that (i) at any
time following the occurrence and during the continuance of any Event of
Default, and/or (ii) termination of Bank’s commitment or obligation to make
loans or advances or otherwise extent credit to or in favor of Borrower
hereunder, in the event that and to the extent that there are any Letter of
Credit Obligations outstanding at such time, upon demand of Bank, Borrower shall
deliver to Bank, or cause to be delivered to Bank, cash collateral in an amount
not less than such Letter of Credit Obligations, which cash collateral shall be
held and retained by Bank as cash collateral for the repayment of such Letter of
Credit Obligations, together with any and all other Indebtedness of Borrower to
Bank remaining unpaid, and Borrower pledges to Bank and grants to Bank a
continuing first priority security interest in such cash collateral so delivered
to Bank.  Alternatively, Borrower shall cause to be delivered to Bank an
irrevocable standby letter of credit issued in favor of Bank by a bank
acceptable to Bank, in its sole discretion, in an amount not less than such
Letter of Credit Obligations, and upon terms acceptable to Bank, in its sole
discretion.

 

8.3           Bank’s rights and remedies under this Agreement and all other
agreements shall be cumulative. Bank shall have all other rights and remedies
not inconsistent herewith as provided 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
default on Borrower’s part shall be deemed a continuing waiver. No delay by Bank
shall constitute a waiver, election or acquiescence by Bank.

 

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9.     TAXES AND EXPENSES REGARDING BORROWER’S PROPERTY.  If Borrower fails to
pay promptly when due to another person or entity, monies which Borrower is
required to pay by reason of any provision in this Agreement, Bank may, but need
not, pay the same and charge Borrower’s loan account therefor, and Borrower
shall promptly reimburse Bank. All such sums shall become additional
Indebtedness owing to Bank, shall bear interest at the rate hereinabove
provided, and shall be secured by all Collateral. Any payments made by Bank
shall not constitute (i) an agreement by it to make similar payments in the
future, or (ii) a waiver by Bank of any default under this Agreement. Bank need
not inquire as to, or contest the validity of, any such expense, tax, security
interest, encumbrance or lien and the receipt of the usual official notice of
the payment thereof shall be conclusive evidence that the same was validly due
and owing.  Such payments shall constitute Bank Expenses and additional advances
to Borrower.

 

10.   WAIVERS.

 

10.1         Borrower agrees that checks and other instruments received by Bank
in payment or on account of Borrower’s Indebtedness constitute only conditional
payment until such items are actually paid to Bank and Borrower waives the right
to direct the application of any and all payments at any time or times hereafter
received by Bank on account of Borrower’s Indebtedness and Borrower agrees that
Bank shall have the continuing exclusive right to apply and reapply such
payments in any manner as Bank may deem advisable, notwithstanding any entry by
Bank upon its books.

 

10.2         Borrower waives demand, protest, notice of protest, notice of
default or dishonor, notice of payment and nonpayment, notice of any default,
nonpayment at maturity, release, compromise, settlement, extension or renewal of
any or all commercial paper, accounts, documents, instruments, chattel paper,
and guarantees at any time held by Bank on which Borrower may in any way be
liable.

 

10.3         Bank shall not in any way or manner be liable or responsible for
(a) the safekeeping of the Inventory; (b) any loss or damage thereto occurring
or arising in any manner or fashion from any cause; (c) any diminution in the
value thereof; or (d) any act or default of any carrier, warehouseman, bailee,
forwarding agency or other person whomsoever. All risk of loss, damage or
destruction of Inventory shall be borne by Borrower.

 

10.4         Borrower waives the right and the right to assert a confidential
relationship, if any, it may have with any accountant, accounting firm and/or
service bureau or consultant in connection with any information requested by
Bank pursuant to or in accordance with this Agreement, and agrees that a Bank
may contact directly any such accountants, accounting firm and/or service bureau
or consultant in order to obtain such information.

 

10.5         Co-Borrowers.  Each Borrower agrees as follows:

 

a.             Each Borrower agrees that it is jointly and severally, directly,
and primarily liable to Bank for payment in full of the Indebtedness and that
such liability is independent of the duties, obligations and liabilities of the
other Borrower.  The Agreement and each other document, instrument and agreement
entered into by any one or more of the Borrowers in connection therewith
(collectively, hereinafter, the “Loan Documents”) are a primary and original
obligation of each Borrower, are not the creation of a surety relationship, and
are an absolute, unconditional, and continuing promise of payment and
performance which shall remain in full force and effect without respect to
future changes in conditions, including any change of law or any invalidity or
irregularity with respect to the Loan Documents.  Each Borrower acknowledges
that the obligations of such Borrower undertaken herein might be construed to
consist, at least in part, of the guaranty of obligations of persons or entities
other than such Borrower (including any other Borrower party hereto) and, in
full recognition of that fact, each Borrower consents and agrees that Bank may,
at any time and from time to time, without notice or demand, whether before or
after any actual or purported termination, repudiation, or revocation of the
Agreement and the other Loan Documents by any one or more Borrowers, and without
affecting the enforceability or continuing effectiveness hereof as to each
Borrower: (a) supplement, restate, modify, amend, increase, decrease, extend,
renew, accelerate, or otherwise change the time for payment or the terms of the
Indebtedness or any part thereof, including any increase or decrease of the
rate(s) of interest thereon; (b) supplement, restate, modify, amend, increase,
decrease or waive, or enter into or give any agreement, approval, or consent
with respect to, the Indebtedness or any part thereof, or any of the Loan
Documents or any additional security or guaranties, or any condition, covenant,
default, remedy, right, representation or term thereof or thereunder; (c) accept
new or additional instruments, documents or agreements in exchange for or
relative to any of the Loan Documents or the Indebtedness or any part thereof;
(d) accept partial payments on the Indebtedness; (e) receive and hold additional
security or guaranties for the Indebtedness or any part thereof; (f) release,
reconvey, terminate, waive, abandon, fail to perfect, subordinate, exchange,
substitute, transfer, or enforce any security or guaranties, and apply any
security and direct the order or manner of sale thereof as Bank in its sole and
absolute discretion may determine; (g) release any Person from any personal
liability with respect to the Indebtedness or any part thereof; (h) settle,
release on terms satisfactory to Bank or by operation of applicable laws, or
otherwise liquidate or enforce any Indebtedness and any security therefor or
guaranty thereof in any manner, consent to the transfer of any security and bid
and purchase at any sale; or (i) consent to the merger, change, or any other
restructuring or termination of the corporate or partnership existence of any
Borrower or any other Person, and correspondingly restructure the Indebtedness,
and any such merger, change, restructuring, or termination shall not affect the
liability of any Borrower or the continuing effectiveness hereof, or the
enforceability hereof with respect to all or any part of the Indebtedness.

 

b.             Upon the occurrence and during the continuance of any Event of
Default, Bank may enforce the Agreement and the other Loan Documents
independently as to each Borrower and independently of any other remedy or
security Bank at any time may have or hold in connection with the Indebtedness,
and it shall not be necessary for Bank to marshal assets in favor of any
Borrower or any other Person or to proceed upon or against or exhaust any
security or remedy before proceeding to enforce the Agreement and the other Loan
Documents.  Each Borrower expressly waives any right to require Bank to marshal
assets in favor of any Borrower or any other Person or to proceed against any
other Borrower or any Collateral provided by any Person, and agrees that Bank
may proceed against Borrowers or any Collateral in such order as it shall
determine in its sole and absolute discretion.

 

c.             Bank may file a separate action or actions against any Borrower,
whether action is brought or prosecuted with respect to any security or against
any other person, or whether any other person is joined in any such action or
actions.  Each Borrower agrees that Bank and any Borrower and any affiliate of
any Borrower may deal with each other in connection with the Indebtedness or
otherwise, or alter any contracts or agreements now or hereafter existing
between any of them, in any manner whatsoever, all without in any way altering
or affecting the continuing efficacy of the Agreement or the other Loan
Documents.

 

d.             Bank’s rights under the Loan Documents shall be reinstated and
revived, and the enforceability of the Agreement and the other Loan Documents
shall continue, with respect to any amount at any time paid on account of the
Indebtedness which thereafter shall be required to be restored or returned by
Bank, all as though such amount had not been paid.  The rights of Bank created
or granted herein and the enforceability of the Agreement and the other Loan
Documents at all times shall remain effective to cover the full amount of all
the Indebtedness even though the Indebtedness, including any part thereof or any
other security or guaranty therefor, may be or hereafter may become invalid or
otherwise unenforceable as against any Borrower and whether or not any other
Borrower shall have any personal liability with respect thereto.

 

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e.             To the maximum extent permitted by applicable law and to the
extent that a Borrower is deemed a guarantor, each Borrower expressly waives any
and all defenses now or hereafter arising or asserted by reason of (a) any
disability or other defense of any other Borrower with respect to the
Indebtedness, (b) the unenforceability or invalidity of any security or guaranty
for the Indebtedness or lack of perfection or continuing perfection or failure
of priority of any security for the Indebtedness, (c) the cessation for any
cause whatsoever of the liability of any other Borrower (other than by reason of
the full payment and performance of all Indebtedness), (d) any failure of the
Bank to marshal assets in favor of Bank or any Borrower or any other person,
(e) any failure of Bank to give notice of sale or other disposition of
collateral to any Borrower or any other Person or any defect in any notice that
may be given in connection with any sale or disposition of collateral, (f) any
failure of Bank to comply with applicable law in connection with the sale or
other disposition of any collateral or other security for any Obligation,
including any failure of Bank to conduct a commercially reasonable sale or other
disposition of any collateral or other security for any Obligation, (g) any act
or omission of Bank or others that directly or indirectly results in or aids the
discharge or release of any Borrower or the Indebtedness or any security or
guaranty therefor by operation of law or otherwise, (h) any law which provides
that the obligation of a surety or guarantor must neither be larger in amount
nor in other respects more burdensome than that of the principal or which
reduces a surety’s or guarantor’s obligation in proportion to the principal
obligation, (i) any failure of Bank to file or enforce a claim in any bankruptcy
or other proceeding with respect to any Person, (j) the election by Bank of the
application or non-application of Section 1111(b)(2) of the United States
Bankruptcy Code, (k) any extension of credit or the grant of any lien under
Section 364 of the United States Bankruptcy Code, (1) any use of cash collateral
under Section 363 of the United States Bankruptcy Code, (m) any agreement or
stipulation with respect to the provision of adequate protection in any
bankruptcy proceeding of any Person, (n) the avoidance of any lien in favor of
Bank for any reason, or (o) any action taken by Bank that is authorized by the
Agreement or any other provision of any Loan Document.  Until such time as all
of the Indebtedness have been fully, finally, and indefeasibly paid in full in
cash: (i) each Borrower hereby waives and postpones any right of subrogation it
has or may have as against any other Borrower respect to the Indebtedness; and
(ii) in addition, each Borrower also hereby waives and postpones any right to
proceed or to seek recourse against or with respect to any property or asset of
any other Borrower.  Each Borrower expressly waives all setoffs and
counterclaims and all presentments, demands for payment or performance, notices
of nonpayment or nonperformance, protests, notices of protest, notices of
dishonor and all other notices or demands of any kind or nature whatsoever with
respect to the Indebtedness, and all notices of acceptance of the Agreement or
the other Loan Documents or of the existence, creation or incurring of new or
additional Indebtedness.

 

f.              In the event that all or any part of the Indebtedness at any
time are secured by any one or more deeds of trust or mortgages or other
instruments creating or granting liens on any interests in real property, each
Borrower authorizes Bank, upon the occurrence of and during the continuance of
any Event of Default, at its sole option, without notice or demand and without
affecting the obligations of any Borrower, the enforceability of the Agreement
and the other Loan Documents, or the validity or enforceability of any liens of
Bank, to foreclose any or all of such deeds of trust or mortgages or other
instruments by judicial or nonjudicial sale.

 

g.             Without limiting the generality of any other waiver or other
provision set forth in this Agreement, each Borrower waives all rights and
defenses that such Borrower may have because the Indebtedness is secured by real
property.  This means, among other things:

 

(1)           Bank may collect from any Borrower without first foreclosing on
any real or personal property pledged as Collateral by any other Borrower to
secure the Indebtedness.

 

(2)           If Bank forecloses on any real property pledged as Collateral by
any Borrower:

 

(a)           the amount of the debt may be reduced only by the price for which
that Collateral is sold at the foreclosure sale, even if the collateral is worth
more than the sale price.

 

(b)           Bank may collect from any Borrower even if Bank, by foreclosing on
the real property pledged as Collateral, has destroyed any right that Borrower
may have to collect from any other Borrower.

 

This is an unconditional and irrevocable waiver of any rights and defenses each
Borrower may have because the Indebtedness is secured by Real Property.  These
rights and defenses include, but are not limited to, any rights or defenses
based upon Section 580a, 580b, 580d, or 726 of the California Code of Civil
Procedure.

 

h.             To the fullest extent permitted by applicable law, to the extent
that a Borrower is deemed a guarantor, each Borrower expressly waives any
defenses to the enforcement of the Agreement and the other Loan Documents or any
rights of Bank created or granted hereby or to the recovery by Bank against any
Borrower or any other Person liable therefor of any deficiency after a judicial
or nonjudicial foreclosure or sale, even though such a foreclosure or sale may
impair the subrogation rights of Borrowers and may preclude Borrowers from
obtaining reimbursement or contribution from other Borrowers.  To the fullest
extent permitted by applicable law, each Borrower expressly waives any
suretyship defenses or benefits that it otherwise might or would have under
applicable law.  WITHOUT LIMITING THE GENERALITY OF ANY OTHER WAIVER OR OTHER
PROVISION SET FORTH IN THIS AGREEMENT, TO THE FULLEST EXTENT PERMITTED BY
APPLICABLE LAW, EACH BORROWER WAIVES ALL RIGHTS AND DEFENSES ARISING OUT OF AN
ELECTION OF REMEDIES BY BANK, EVEN THOUGH THAT ELECTION OF REMEDIES, SUCH AS A
NONJUDICIAL FORECLOSURE WITH RESPECT TO SECURITY FOR THE INDEBTEDNESS, HAS
DESTROYED SUCH BORROWER’S RIGHTS OF SUBROGATION AND REIMBURSEMENT AGAINST THE
OTHER BORROWERS BY OPERATION OF LAW, INCLUDING BUT NOT LIMITED TO SECTION 580d
OF THE CALIFORNIA CODE OF CIVIL PROCEDURE, OR OTHERWISE.

 

10.6         THE UNDERSIGNED AND THE BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY
JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER
CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR
CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT, WAIVES ANY
RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE OR
ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS AGREEMENT OR THE INDEBTEDNESS.

 

10.7         In the event that Bank elects to waive any rights or remedies
hereunder, or compliance with any of the terms hereof, or delays or fails to
pursue or enforce any term, such waiver, delay or failure to pursue or enforce
shall only be effective with respect to that single act and shall not be
construed to affect any subsequent transactions or Bank’s right to later pursue
such rights and remedies.

 

11.   ONE CONTINUING LOAN TRANSACTION.  All loans and advances heretofore, now
or at any time or times hereafter made by Bank to Borrower under this Agreement
or any other agreement between Bank and Borrower, shall constitute one loan
secured by Bank’s security interests in the Collateral and by all other security
interests, liens, encumbrances heretofore, now or from time to time hereafter
granted by Borrower to Bank.

 

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Notwithstanding the above, (i) to the extent that any portion of the
Indebtedness is a consumer loan, that portion shall not be secured by any deed
of trust or mortgage on or other security interest in Borrower’s principal
dwelling which is not a purchase money security interest as to that portion,
unless expressly provided to the contrary in another place, or (ii) if Borrower
(or any of them) has (have) given or give(s) Bank a deed of trust or mortgage
covering real property, that deed of trust or mortgage shall not secure the loan
and any other Indebtedness of Borrower (or any of them), unless expressly
provided to the contrary in another place.

 

12.   NOTICES.  Unless otherwise provided in this Agreement, all notices or
demands by either party on the other relating to this Agreement shall be in
writing and sent by regular United States mail, postage prepaid, properly
addressed to Borrower or to Bank at the addresses stated in this Agreement, or
to such other addresses as Borrower or Bank may from time to time specify to the
other in writing. Requests for information made to Borrower by Bank from time to
time hereunder may be made orally or in writing, at Bank’s discretion.

 

13.   AUTHORIZATION TO DISBURSE.  Bank is hereby authorized to make loans and
advances hereunder upon telephonic or other instructions received from anyone
purporting to be an officer, employee, or representative of Borrower, or at the
discretion of Bank if said loans and advances are necessary to meet any
Indebtedness of Borrower to Bank. Bank shall have no duty to make inquiry or
verify the authority of any such party, and Borrower shall hold Bank harmless
from any damage, claims or liability by reason of Bank’s honor of, or failure to
honor, any such instructions.

 

14.   PAYMENTS.  Borrower hereby authorizes Bank to deduct the full amount of
any interest, fees, costs, or Bank Expenses due under this Agreement and not
paid or collected when due in accordance with the terms and conditions hereof
from any account maintained by Borrower with Bank.  Should there be insufficient
funds in any such account to pay all such sums when due, the full amount of such
deficiency shall be immediately due and payable by Borrower; provided, however,
that Bank shall not be obligated to advance funds to cover any such payment.

 

15.   DESTRUCTION OF BORROWER’S DOCUMENTS.  Any documents, schedules, invoices
or other papers delivered to Bank, may be destroyed or otherwise disposed of by
Bank six (6) months after they are delivered to or received by Bank, unless
Borrower requests, in writing, the return of the said documents, schedules,
invoices or other papers and makes arrangements, at Borrower’s expense, for
their return.

 

16.   CHOICE OF LAW.  The validity of this Agreement, its construction,
interpretation and enforcement, and the rights of the parties hereunder and
concerning the Collateral, shall be determined according to the laws of the
State of California. The parties agree that all actions or proceedings arising
in connection with this Agreement shall be tried and litigated only in the state
and federal courts in the Northern District of California or the County of Santa
Clara.

 

17.   GENERAL PROVISIONS.

 

17.1         This Agreement shall be binding and deemed effective when executed
by Borrower and accepted and executed by Bank at its headquarters office.

 

17.2         This Agreement shall bind and inure to the benefit of the
respective successors and assigns of each of the parties; provided, however,
that Borrower may not assign this Agreement or any rights hereunder without
Bank’s prior written consent and any prohibited assignment shall be absolutely
void.  No consent to an assignment by Bank shall release Borrower or any
guarantor from their obligations to Bank.  Bank may assign this Agreement and
its rights and duties hereunder.  Bank reserves the right to sell, assign,
transfer, negotiate or grant participations in all or any part of, or any
interest in Bank’s rights and benefits hereunder.  In connection therewith, Bank
may disclose all documents and information which Bank now or hereafter may have
relating to Borrower or Borrower’s business.

 

17.3         Paragraph headings and paragraph numbers have been set forth herein
for convenience only; unless the contrary is compelled by the context,
everything contained in each paragraph applies equally to this entire Agreement.
Unless the context of this Agreement clearly requires otherwise, references to
the plural include the singular, references to the singular include the plural,
and the term “including” is not limiting.  The words “hereof”, “herein”,
“hereby”, “hereunder”, and similar terms in this Agreement refer to this
Agreement as a whole and not to any particular provision of this Agreement.

 

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

 

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

 

17.6         This Agreement cannot be changed or terminated orally. This
Agreement contains the entire agreement of the parties hereto and supersedes all
prior agreements, understandings, representations, warranties and negotiations,
if any, related to the subject matter hereof, and none of the parties shall be
bound by anything not expressed in writing.

 

17.7         The parties intend and agree that their respective rights, duties,
powers, liabilities, obligations and discretions shall be performed, carried
out, discharged and exercised reasonably and in good faith.

 

17.8         In addition, if this Agreement is secured by a deed of trust or
mortgage covering real property, then the trustor or mortgagor shall not
mortgage or pledge the mortgaged premises as security for any other indebtedness
or obligations.  This Agreement, together with all other indebtedness secured by
said deed of trust or mortgage, shall become due and payable immediately,
without notice, at the option of Bank, (a) if said trustor or mortgagor shall
mortgage or pledge the mortgaged premises for any other indebtedness or
obligations or shall convey, assign or transfer the mortgaged premises by deed,
installment sale contract or other instrument; (b) if the title to the mortgaged
premises shall become vested in any other person or party in any manner
whatsoever, or (c) if there is any disposition (through one or more
transactions) of legal or beneficial title to a controlling interest of said
trustor or mortgagor.

 

17.9         Each undersigned Borrower hereby agrees that it is jointly and
severally, directly, and primarily liable to Bank for payment and performance in
full of all duties, obligations and liabilities under this Agreement and each
other document, instrument and agreement entered into by Borrower with or in
favor of Bank in connection herewith, and that such liability is independent of
the duties, obligations and liabilities of any other Borrower or any other
guarantor of the Indebtedness, as applicable.  Each reference herein to Borrower
shall mean each and every Borrower party hereto, individually and collectively,
jointly and severally.

 

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IN WITNESS WHEREOF, the parties hereto have caused this Loan and Security
Agreement (Accounts and Inventory) to be executed as of the date first
hereinabove written.

 

 

Accepted and effective as of                                          at Bank’s
Headquarters Office

 

 

COMERICA BANK

INFOSONICS CORPORATION

 

a Maryland corporation

 

 

 

 

By:

 

 

By:

 

 

 

Tomas Schmidt

 

 

 

Vice President – Western Division

 

Name:

 

 

 

 

 

Title:

 

 

 

 

 

 

 

By:

 

 

 

 

 

Name:

 

 

 

 

 

Title:

 

 

 

 

 

 

Address for Notices:

Address for Notices:

 

 

Comerica Bank

InfoSonics Corporation

75 East Trimble Road

5880 Pacific Center Boulevard

Mail Code 4770

San Diego, CA 92121

San Jose, CA 95131

(858) 373-1680

 

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