EXHIBIT 10.38**BUSINESSLOAN AND SECURITY AGREEMENT**THIS BUSINESS LOAN AND SECURITY AGREEMENT (this “Agreement”), dated as of September 28, 2005, isentered into between PREFERRED BANK, a Californiabanking corporation (“Lender”), and SYNTAX GROUPS CORPORATION, a California corporation (“SGC”) andSYNTAX CORPORATION, a Nevada corporation, formerly known as Syntax Groups Nevada, Inc. (“SC,” SGCand SC are individually and collectively the “Borrower”).**RECITALS**     A. Borrower has requested that Lender provide it with certain loan facilities as moreparticularly set forth in this Agreement.     B. Lender has agreed to provide Borrower with the requested credit facilities on the terms andconditions set forth herein.     C. The obligations of Borrower to Lender under this Agreement or otherwise shall be securedby, among other things, a lien and security interest in and to all of Borrower’s present and futureassets.     NOW, THEREFORE, Lender and Borrower hereby agree as follows:**SECTION 1. Definitions.**     1.1. Definitions.“Account Debtor” means any Person who is or who may become obligated under, with respect to, or onaccount of, an Account, chattel paper, or a General Intangible.“Accounts” means all of Borrower’s now owned or hereafter acquired right, title, and interest withrespect to “accounts” (as that term is defined in the Code), and any and all supporting obligationsin respect thereof.“Advance” means a disbursement of proceeds by Lender under Section 2.1.“Affiliate” means, as applied to any Person, any other Person who, directly or indirectly,controls, is controlled by, or is under common control with, such Person. For purposes of thisdefinition, “control” means the possession, directly or indirectly, of the power to direct themanagement and policies of a Person, whether through the ownership of stock, by contract orotherwise; provided, however, that, in any event: (a) any Person which owns directly or indirectly5% or more of the securities having ordinary voting power for the election of directors or othermembers of the governing body of a Person or 5% or more of the partnership or other ownershipinterests of a Person (other than as a limited
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partner of such Person) shall be deemed to control such Person, (b) each director (or comparablemanager) of a Person shall be deemed to be an Affiliate of such Person, and (c) each partnership orjoint venture in which a Person is a partner or joint venturer shall be deemed to be an Affiliateof such Person.“Agreement” is defined in the preamble.“Borrower” is defined in the preamble.“Borrowing Base” means the sum of: (a) 80% of the Factor Payments Due, plus (b) the lesser of (i)40% of the value of Eligible Inventory or (ii) Ten Million Dollars ($10,000,000).“Books” means Borrower’s now owned or hereafter acquired books and records, including, withoutlimitation, all of its records indicating, summarizing or evidencing its assets, liabilities,business operations and financial condition.“Business Day” means any day other than Saturday or Sunday on which Lender is open for business inLos Angeles, California.“Closing Date” means the time and date as shall be mutually acceptable to Borrower and Lender.“Code” means the California Uniform Commercial Code, as in effect from time to time.“Collateral” means all of Borrower’s now owned or hereafter acquired right, title, and interest inand to each of the following:     (a) Accounts,     (b) Books,     (c) Equipment,     (d) General Intangibles,     (e) Inventory,     (f) Investment Property,     (g) Negotiable Collateral,     (h) Money or other assets of Borrower that now or hereafter come into the possession, custody,or control of Bank, and
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     (i) The proceeds and products, whether tangible or intangible, of any of the foregoing, includingproceeds of insurance covering any or all of the foregoing, and any and all Accounts, Books,Equipment, General Intangibles, Inventory, Investment Property, Negotiable Collateral, money, deposit accounts, or other tangible or intangibleproperty resulting from the sale, exchange, collection, or other disposition of any of theforegoing, or any portion thereof or interest therein, and the proceeds thereof.“Commercial Letter of Credit” means a Letter of Credit, used in connection with the purchase ofInventory by Borrower, under which drafts could be payable at sight or up to ninety (90) days aftersight.“Credit Facility” is defined in Section 2.1.“Default” means any event or circumstance which, with the giving of notice or the passage of time(or both) would become an Event of Default.“Default Rate” means the per annum rate of interest equal to the Prime-Based Rate in effect fromtime to time plus 5.0%.“Drawing” means the presentation of a draft(s) together with any accompanying documents by abeneficiary under a Letter of Credit seeking payment under suchLetter of Credit.“Eligible Inventory” means inventory which satisfies the following requirements:          (a) The inventory is owned by the Borrower free of any title defects or any liens orinterests of others except the security interest in favor of the Lender.          (b) The inventory is located at locations which the Borrower has disclosed to theLender and which are acceptable to the Lender. If the inventoryis covered by a negotiable document of title (such as a warehouse receipt), thatdocument must be delivered to the Lender. Inventory which is in transit is not acceptableunless it is covered by a Commercial Letter of Credit issued byLender, the seller of the inventory is required to present shipping or title documentsto the Lender, or a bailee for the Lender, as a condition to obtaining payment, and thefinal destination of such inventory is a location acceptable to the Lender.          (c) The inventory is held for sale or use in the ordinary course of the Borrower’sbusiness and is of good and merchantable quality. Display items, work-in-process, samples,and packing and shipping materials are not acceptable. Inventory which is obsolete,unsalable, damaged, defective, discontinued or slow-moving, or which has been returned by the buyer, is not acceptable.
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          (d) The inventory has not been manufactured to the specifications of a particularaccount debtor which would restrict in any way the ability of the Lender to sell theinventory to third parties.          (e) The inventory is not subject to any licensing agreements which would prohibit orrestrict in any way the ability of the Lender to sell the inventory to third parties.          (f) The inventory has been produced in compliance with the requirements of the U.S.Fair Labor Standards Act (29 U.S.C. §§201 et seq.).          (g) The inventory is not placed on consignment.          (h) The inventory is otherwise acceptable to the Lender.“Environmental Laws” means all environmental, land use, zoning, and chemical use, statutes,ordinances, and codes of the United States of America, any state of the United States of America,and any locality thereof, relating to the protection of the environment and/or governing the use,storage, treatment, generation, transportation, processing, handling, production or disposal ofHazardous Materials and the rules, regulations, policies, guidelines, interpretations, decisions,orders and directives of federal, sate and local governmental agencies and authorities with respectthereto.“Equipment” means all of Borrower’s now owned or hereafter acquired right, title, and interest withrespect to equipment, machinery, machine tools, motors, furniture, furnishings, fixtures, vehicles(including motor vehicles), tools, parts, goods (other than consumer goods, farm products, orInventory), wherever located, including all attachments, accessories, accessions, replacements,substitutions. additions, and improvements to any of the foregoing.“ERISA” means the Employee Retirement Income Security Act of 1974, as amended, and any successorstatute thereto.“Event of Default” is defined in Section 12.“Expiration Date” means Maturity Date or the date of termination of the Lender’s commitment to lendunder this Agreement pursuant to Section 13, which ever shall occur first.“Extension of Credit” means the Lender’s issuance of a Letter of Credit or the making of anAdvance.“Factor” means The CIT Group/Commercial Services, Inc.
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“Factoring Agreement” means that certain Factoring Agreement dated as of July 27, 2004 betweenBorrower and Factor, and any amendments, supplements, modifications, extensions and renewalsthereof.“Factor Intercreditor Agreement” means that certain Amended and Restated Assignment andIntercreditor Agreement dated July 1, 2005, among Borrower, Lender and Factor, and any amendments,supplements, modifications, extensions and renewals thereof.“Factor Payments Due” means, at any date, all amounts payable by Factor to Borrower pursuant to theFactoring Agreement.“Factored Receivables” means Receivables purchased by Factor from Borrower, which Receivables havebeen credit approved by Factor pursuant to the Factoring Agreement.“GAAP” means generally accepted accounting principles in the United States of America in effectfrom time to time, applied on a consistent basis both as to classification of items and amounts.“General Intangibles” means all of Borrower’s now owned or hereafter acquired right, title, andinterest with respect to general intangibles (including payment intangibles, contract rights,rights to payment, rights arising under common law, statutes, or regulations, chooses or things inaction, goodwill, patents, trade names, trademarks, servicemarks, copyrights, blueprints, drawings,purchase orders, customer lists, monies due or recoverable from pension funds, route lists, rightsto payment and other rights under any royalty or licensing agreements, infringement claims,computer programs, information contained on computer disks or tapes, software, literature, reports,catalogs, money, deposit accounts, insurance premium rebates, tax refunds, and tax return claims),and any and all supporting obligations in respect thereof, and any other personal property otherthan goods, Accounts, Investment Property, and Negotiable Collateral.“Governmental Authority” means any federal, state, local, or other governmental or administrativebody, instrumentality, department, or agency or any court, tribunal, administrative hearing body,arbitration panel, commission, or other similar dispute resolving panel or body.“Guarantor” means individually and collectively, James Ching Hua Li, Thomas Man Kit Chow, TonyTzu-Ping Ho, Roger Kao, and Michael K. Chan.“Guaranty” means the continuing guaranty of Guarantor, guarantying the obligations and indebtednessof Borrower to Lender, in form and content satisfactory to Lender.“Hazardous Materials” means, without limitation, any flammable explosive, radon, radioactivematerials, asbestos, urea formaldehyde foam insulation, hazardous or toxic substances or relatedmaterials as defined in the Compensation Environmental Response, Compensation and Liability Act of1980, as amended (42 U.S.C. Section 9601, et seq.), the Hazardous Materials Transportation Act, asamended (49 U.S.C. Section 1801, et
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seq.), or any other applicable Environmental Law and in the regulations adopted pursuant thereto.“HIB” means Hsinchu International Bank.“Inventory” means all of Borrower’s now owned or hereafter acquired right, title and interest withrespect to inventory, including goods held for sale or lease or to be furnished under a contract ofservice, goods that are leased by Borrower as lessor, goods that are furnished by Borrower under acontract of service, and raw materials, work in process, or materials used or consumed inBorrower’s business.“Investment Property” means all of Borrower’s now owned or hereafter acquired right, title, andinterest with respect to “investment property” as that termis defined in the Code, and any and all supporting obligations in respect thereof.“Lender” shall mean PREFERRED BANK, a California banking corporation.“Letter of Credit” means a Commercial Letter of Credit or Usance Letter of Credit issued by Lenderpursuant to Section 2.1.“Letter of Credit Application” shall have the meaning set forth in Section 3.1(a).“Letter of Credit Obligations” means, at any time, the aggregate obligations of Borrower thenoutstanding, or which may thereafter arise in respect of Letters of Credit issued by Lender thenoutstanding, to reimburse the amount paid or to be paid by the Lender with respect to a past,present or future Drawing under Letters of Credit.“Loans” means the aggregate principal amount of all outstanding Advances.“Loan Documents” means, collectively, this Agreement, the Note, the Guaranty, and all financingstatements and other documents, instruments and agreements executed and delivered from time to timein connection with the Credit Facility and this Agreement.“Material Adverse Effect” means any change or changes or effect or effects that individually or inthe aggregate are or are likely to be materially adverse to (i) the assets, business, operations,income, prospects or condition (financial or otherwise) of Borrower, taken as a whole, (ii) theLoans, (iii) the ability of Borrower to perform its obligations under any Loan Document to which itis a party or (iv) the validity or enforceability of any of the Loan Documents.“Maturity Date” means September 5, 2006.“Maximum Credit Amount” means Twenty Million Dollars ($20,000,000).“Negotiable Collateral” means all of Borrower’s now owned and hereafter acquired right, title, andinterest with respect to letters of credit, letter of credit rights, instruments,
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promissory notes, drafts, documents, and chattel paper (including electronic chattel paper andtangible chattel paper), and any and all supporting obligations in respect thereof.“Note” means that certain Promissory Note Variable Rate in the principal sum of Twenty MillionDollars ($20,000,000).“Obligations” means all present and future obligations (monetary or otherwise) of Borrower toLender however and whenever arising, whether arising under or in connection with this Agreement,the Note and each other Loan Document or otherwise.“Ordinary Course of Business” means, in respect of any transaction involving Borrower, the ordinarycourse of Borrower’s business as conducted by Borrower in accordance with past practice andundertaken by Borrower in good faith and not for purposes of evading any covenant or restriction inany Loan Document.“Person” means any natural person, corporation, partnership, limited liability company, firm,association, trust, government, governmental agency or any other entity, whether acting in anindividual, fiduciary or other capacity.“Prime-BasedRate” means 0.5% in excess of the Prime Rate. The Prime-Based Rate shall be calculated on the basis of a 360 day year for actual days elapsed.“Prime Rate” means the variable rate of interest per annum announced, declared and/or publishedfrom time to time by Lender as its “Prime Rate” with the understanding that Lender’s “Prime Rate”is one of its base rates and serves as a basis upon which effective rates of interest arecalculated for loans making reference thereto and may not be the lowest of Lender’s base rates.“Principal Balance” means the outstanding principal balance of the Note from time to time.“Request” is defined in Section 4.2.“Reserves” means Lender’s determination of Lender’s cost of reserves required by, arising out of,and/or pursuant to any laws, rules and/or regulations established by or promulgated by anyauthority and/or agency having jurisdiction over Lender, including but not limited to the Board ofGovernors of the Federal Reserve System of the United States, The cost and actual amount of suchReserves shall be determined by Lender, and such determination of such costs and Reserves shall bebinding and conclusive upon Borrower, and all such costs and Reserves shall be rounded up thenearest 1/8 of 1%.“UCC”means the Uniform Commercial Code as in effect from time to time in the State of California.“Usance Letter of Credit” means a Commercial Letter of Credit under which drafts are payable otherthan at sight.
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     1.2. Accounting Terms. All accounting terms not specifically defined herein shall be constituted in accordance withGAAP. When used herein, the term “financial statements” shall include the notes and schedulesthereto.     1.3. Code. Any terms used in this Agreement that are defined in the Codeshall be construed and defined as set forth in the Code unless otherwise defined herein.     1.4. Construction. Unless the context of this Agreement or any other Loan Documentclearly requires otherwise, references to the plural include the singular, references to thesingular include the plural, the term “including” is not limiting, and the term “or” has, exceptwhere otherwise indicated, the inclusive meaning represented buy the phrase “and/or.” The words“hereof,” “herein,” “hereby,” “hereunder,” and similar terms in this Agreement or any other LoanDocument refer to this Agreement or such other Loan Document, as the case may be, as a whole andnot to any particular provision of this Agreement or such other Loan Document, as the case may be.Section, subsection, clause, schedule, and exhibit references herein are to this Agreement unlessotherwise specified. Any reference in this Agreement or in the other Loan Documents to anyagreement, instrument, or document shall include all alternations, amendments, changes, extensions,modifications, renewals, replacements, substitutions, joinders, and supplements, thereto, andthereof, as applicable (subject to any restrictions on such alterations, amendments, changes,extensions, modifications, renewals, replacements, substitutions, joinders, and supplements setforth herein). Any reference herein to any Person shall be construed to include such Person’ssuccessors and assigns. Any requirement of a writing contained herein or in the other LoanDocuments shall be satisfied by the transmission of a Record and any Record transmitted shallconstitute a representation and warranty as to the accuracy and completeness of the informationcontained therein.     1.5. Schedules and Exhibits. All of the schedules and exhibits attached to thisAgreement shall be deemed incorporated herein by reference.**SECTION 2. The Credit Facility.**     2.1. Credit Facility. As long as no Event of Default has occurred, Lender will provideto Borrower a revolving line of credit (“Credit Facility”) in the maximum principal amountoutstanding at any one time not to exceed the lesser of (i) the Maximum Credit Limit or (ii) theBorrowing Base (the “Commitment”), which shall be evidencedby the Note (together with all amendments, renewals, extensions, substitutions andreplacements thereof). The Credit Facility shall be utilized as follows:          (a) Letters of Credit. Lender shall issue Commercial Letters of Credit, and UsanceLetters of Credit for the account of Borrower, in accordance with Section 3of this Agreement, provided that the aggregate amount thereof outstanding at any onetime shall not exceed Ten Million Dollars ($10,000,000).
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          (b) Drawings. Lender shall make Advances to Borrower, inaccordance with Section 3.2 of this Agreement, to repay Drawings under any Letter of Creditprovided the aggregate amount of all such Advances outstanding at any one time shall not exceed TenMillion Dollars ($10,000,000). Each Advance shall be used by Borrower to pay for Drawings under anyLetter of Credit issued pursuant to this Section 2.1. Borrower shall repay the aggregate amount ofeach Advance within 90 days from the date of the making of any such Advance and each Advance for aUsance Letter of Credit shall be repaid in not more than 90 days less the number of days financedby vendor.          (c) Documentary Collection. Lender shall make Advances toBorrower, in accordance with Section 2.2 of this Agreement, to refinance payments made byLender against the presentation of Documents under Payment pursuant to instructions from Borroweror against Documents under Acceptance provided the aggregate amount outstanding at any one time ofall such Advances shall not exceed Five Million Dollars ($5,000,000). Borrower shall repay theaggregate amount of each Advance to Lender within 90 days in respect of payments made by Lenderagainst the presentation of Documents under Payment, and with respect to Advances against Documentsunder Acceptance within 90 days of the advance less the number of days financed by vendor.          (d) Working Capital Advances. Lender shall make Advances to Borrower, in accordancewith Section 2.2 of this Agreement for general corporate purposes, provided that the aggregateamount thereof outstanding at any one time shallnot exceed Ten Million Dollars ($10,000,000).          (f) Trust Receipts. Lender shall make Advances to Borrower for financing the purchaseof Inventory by Borrower which Inventory is subject to a trust receipt, provided that the aggregateamount thereof outstanding at any one time shall not exceed Five Million Dollars ($5,000,000) Suchtrust receipts are subject to Lender’s express approval and must be in form and contentsatisfactory to Lender. Borrower shall repay each trust receipt Advance within ninety (90) days ofthe making of such Advance.          (g) Maximum Advances.   (i) Borrower agrees not to permit the outstanding principal balance of Advances(including working capital and trust receipt Advances) hereunder plus the outstandingamounts of any Letters of Credit, including amounts drawn on Letters of Credit and not yetreimbursed, to exceed the lesser of (x) the Maximum Credit Amount, or (y) the BorrowingBase.   (ii) Borrower agrees not to permit the outstanding amounts of any Letters of Credit,including amounts drawn on Letters of Credit and not yet reimbursed, plus the amount ofoutstanding trust receipt Advances to exceed Ten Million Dollars ($10,000,000).   (iii) Borrower agrees not to permit the amount of outstanding Advances under thisAgreement to exceed Fifteen Million Dollars ($15,000,000).
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     (iv) If the Borrower exceeds these limits, the Borrower will pay theexcess to Lender within fifteen (15) days of demand from Lender.     2.2. Advance Procedure. Advances shall be made in accordance with a written requesttherefor executed by Thomas Man Kit Chow, Chief Financial Officer to the Borrower, in original formor by facsimile, and delivered to Lender, or an oral telephone request made by Thomas Man Kit Chow.Any telephonic notice is to be confirmed in writing within 24 hours of the giving of such notice.Advances shall be conclusively deemed to have been made at the request of and for the benefit ofthe Borrower (i) when credited to any deposit account of Borrower maintained with Lender or (ii)when paid in accordance with Borrower’s written or oral instructions. Subject to the conditionsprecedent contained in Section 5.1, Advances shall be made by Lender if such request shall bereceived not later than 1:00 p.m. (California time) on the date specified for such Advance, whichdate shall be a Business Day. Requests for Advances received after such time may, at Lender’soption, be deemed to be a request for an Advance to be made on the next succeeding Business Day. NoAdvances will be made after the Maturity Date.     2.3. Monthly Billings. Lender shall provide Borrower with monthly statements ofamounts due, which statement shall be considered to be correct and conclusively binding on Borrowerunless Borrower notifies Lender to the contrary within 30 days after the Borrower’s receipt of anysuch statement which it deems to be incorrect.**SECTION 3. Letters of Credit.**     3.1.Letter of Credit General Conditions.          (a) Pursuant to the terms of this Agreement, Borrower may request Lender to issue Letters ofCredit by delivery to Lender of Lender’s standard forms of Letter of Credit and Security Agreementtogether with Lender’s standard form of Letterof Credit Application (collectively, the “Letter of Credit Application”), completed to thesatisfaction of Lender; and, such other certificates, documents and other papers and information asLender may request as a condition precedent to Lender’s obligation to issue any Letter of Credithereunder. The Letter of Credit Application may be deliveredin original form or by facsimile, and Borrower hereby agrees that Lender may accept and relyupon any facsimile Letter of Credit Application, including a facsimile signature in issuing aLetter of Credit. Borrower agrees to promptly pay, upon request, such fees, commissions, costs andany out-of-pocket expenses charges or incurred by the Lender with respect to any Letter of Creditas set forth in Exhibit A.          (b) The commitment by Lender to issue Letters of Credit shall, unless earlier terminated inaccordance with the terms of the Agreement, automaticallyterminate on the Expiration Date and no Letter of Credit shall expire on a date which is morethan 90 days after the Maturity Date, and no draft under a Letter of Credit shall be payable on adate which is more than 90 days after the Maturity Date.
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          (c) Each Letter of Credit shall be denominated in U.S. Dollars, shall be in form and substancesatisfactory to Lender, shall require as a condition of payment the consignment of non-negotiablebills of lading in favor of Lender or presentment of negotiable bills of lading payable to theorder of Lender, and shall be in favor of beneficiaries satisfactory to Lender, provided thatLender may refuse to issue a Letter of Credit due to the nature of the transaction or its terms orin connection with any transaction where Lender, due to the beneficiary or nationality or residenceof the beneficiary, would be prohibited by any applicable law, regulation or order from issuingsuch Letter of Credit.          (d) Prior to the issuance of each Letter of Credit, but in no event later than 11:30 a.m.(California time) on the day such Letter of Credit is to be issued (which shall be a Business Day),Borrower shall deliver to Lender the Lender’s standard form of application for issuance of a letterof credit with proper insertions, duly executed by Borrower.          (e) Letters of Credit shall not have a term which exceeds 90 days.          (f) Each Letter of Credit Application and each Letter of Credit shallbe subject to the Uniform Customs and Practice for Documentary Credits (1993 Revision),International Chamber of Commerce Publication No. 500, and any amendments or revisions thereof (or,in the event Issuer has elected to follow the International Standby Practices 1998 (“ISP”), then bythe ISP and any amendments or revisions thereto), and, to the extent not inconsistent therewith,the laws of the State of California.          (g) In connection with all Letters of Credit issued or created by Lender under this Agreement,Borrower hereby appoints Lender, or its designee, as its attorney-in-fact, with full power andauthority at any time following the occurrence of an Event of Default (i) to sign and/or endorseBorrower’s name upon any warehouse or other receipts, letter of credit applications andacceptances; (ii) to sign Borrower’s name on bills of lading; (iii) to clear Inventory throughUnited States Customs (“Customs”) in the namesof Borrower or Lender or Lender’s designee, and to sign and deliver to Customs officialspowers of attorney in the name of Borrower for such purpose; and (iv) to complete in Borrower’s orLender’s name, or in the name of Lender’s designee, any order, sale or transaction, obtain thenecessary documents in connection therewith, and collect the proceeds thereof. Neither Lender,Lender’s designee, nor Lender’s attorneys will beliable for any acts or omissions nor for any error of judgment or mistakes of fact or law,except for Lender’s, Lender’s designee or Lender’s attorney’s willful misconduct or grossnegligence. This power, being coupled with an interest, is irrevocable as long as any Letters ofCredit remain outstanding.          (h) BORROWER ACKNOWLEDGES THAT BOTH SIDES OF THE LETTER OF CREDIT APPLICATION ARE TO BEEXECUTED BY BORROWER, AND BORROWER’S FAILURE TO SO EXECUTE THE BACK SIDE OF ANY LETTER OF CREDITAPPLICATION SHALL NOT 1N ANY WAY AFFECT THE ENFORCEABILITY OF SUCH LETTER OF CREDIT APPLICATION OR
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BORROWER’S OBLIGATIONS TO REPAY ANY DRAWING (AS DEFINED BELOW) UNDER THE LETTER OF CREDIT.     3.2. Drawings. Upon receipt from any beneficiary under a Letter of Credit of a demandfor payment under such Letter of Credit (each a “Drawing”), Lender shall promptly notify Borrower.Each Drawing shall be payable in full by Borrower on the date thereof, without demand or notice ofany kind. If Borrower desires to repay a Drawing from the proceeds of an Advance, Borrower mayrequest an Advance in accordance with the terms and conditions of this Agreement and, if disbursed,shall be applied in payment of such obligation by the Borrower. If any Drawing shall not be paidwhen due in accordance with the terms of this Agreement, Borrower shall reimburse Lender for eachDrawing together with interest thereon until paid at the Default Rate. Lender shall have the rightat its discretion to charge all amounts due it hereunder to Borrower’s accounts maintained withLender. In the event a Letter of Credit is outstanding as of the Maturity Date, Borrower shall berequired to deposit with Lender as cash collateral an amount equal to the outstanding Letter ofCredit to secure repayment of such Letter of Credit, in the event of a Drawing. The obligation ofBorrower to reimburse Lender for Drawings shall be absolute, irrevocable and unconditional underany and all circumstances whatsoever and irrespective of any set-off, counterclaim or defense topayment which Borrower may have or have had against Lender (except such as may arise out ofLender’s gross negligence or willful misconduct) or any other Person, including, withoutlimitation, and set-off, counterclaim or defense based upon or arising out of:          (a) any lack of validity or enforceability of this Agreement or any of the other LoanDocuments;          (b) any amendment or waiver of or consent to departure from the terms of any Letter of Credit;          (c) the existence of any claim, set-off, defense or other right which Borrower or any otherperson may have at any time against beneficiary or any transferee of any Letter of Credit (or anyPerson for whom any beneficiary or any such transferee may be acting);          (d) any allegation that any demand, statement or any other document presented under any Letterof Credit is forged, fraudulent, invalid or insufficient in any respect, or any statement thereinbeing untrue or inaccurate in any respect whatsoever or any variations in punctuation,capitalization, spelling or format of the drafts or any statement presented in connection with anyDrawing;          (e) any exchange, release or non-perfection of any Collateral;          (f) any delay or loss in transit of any messages, letters or documents, any delay,interruption, mutilation or other error in the transmission of any telecommunications, or any errorin the translation or interpretation of any technical terms or any messages or documents relatingto the Letter of Credit; and
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          (g) any other circumstance or happening whatsoever, whether or not similar to any of theforegoing, including any other circumstance that might otherwise constitute a defense available to,or discharge of Borrower.     3.3. Indemnity. Borrower hereby agrees to indemnify, save, defend, and hold Lenderharmless from any loss, cost, expense, or liability, and reasonable attorneys fees incurred byLender arising out of or in connection with any Letter of Credit, including,but not limited to Lender’s compliance with any instructions, directions, Letter of CreditApplication, or authorization delivered to Lender by Borrower via facsimile. Borrower agrees to bebound by Lender’s interpretations of any Letter of Credit issued by Lender to or for its account,even though this interpretation may be different from Borrower’s own, and Borrower understands andagrees that Lender shall not be liable for any error, negligence, or mistake, whether of omissionor commission, in following Borrower’s instructions or those contained in the Letter of Credit orany modifications, amendments, or supplements thereto.     3.4. Change in Law. If by reason of (i) any change in any applicable law,treaty, rule, or regulation or any change in the interpretation or application thereof, byany Governmental Authority, or (ii) compliance by Lender with any direction, request, orrequirement (irrespective of whether having the force of law) of any Governmental Authority ormonetary authority including, Regulation D of the Federal Reserve Board as from time to time ineffect (and any successor thereto):          (a) any reserve, deposit, or similar requirement is or shall be imposed or modified in respectto any Letter of Credit issued hereunder, or          (b) there shall be imposed on Lender any other condition regardingany Letter of Credit issued pursuant hereto.and the result of the foregoing is to increase, directly or indirectly, the cost to Lender ofissuing, making, guaranteeing, or maintaining any Letter of Credit or to reduce theamount receivable in respect thereof by Lender, then, and in any such case, Lender may, at any timeafter the additional cost is incurred or the amount received is reduced, notify Borrower, andBorrower shall pay on demand such amounts as Lender may specify to be necessary to compensateLender for such additional cost of reduced receipt together with interest on such amount from thedate of such demand until payment in full thereof at Prime-Based Rate. The determination by Lenderof any amount due pursuant to this Section, as set forth in a certificate setting forth thecalculation thereof in reasonable detail, shall, in the absence of manifest or demonstrable error,be final and conclusive and binding upon all of the parties hereto.**SECTION 4. Conditions Precedent.**
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     4.1. Conditions to Initial Funding. The obligation of Lender to issue the initial Letter ofCredit or make the initial Advance is subject to the fulfillment, to thesatisfaction of Lender and its counsel, of each of the following conditions:          (a) All corporate and other proceedings taken or to be taken in connection with thetransactions contemplated hereby and all documents incident thereto shall be reasonablysatisfactory in form and substance to Lender and its counsel, and Lender and its counsel shall havereceived all such counterpart originals or certified or other copies of such documents as they mayreasonably request.          (b) Borrower shall have executed and delivered to Lender the Loan Documents.          (c) The representations and warranties contained this Agreement and the other Loan Documentsshall be true and correct, on and as of the Closing Date with the same effect as if suchrepresentations and warranties had been made on and as of the Closing Date. Borrower shall haveperformed all material agreements on their part required to be performed under this Agreement andthe other Loan Documents on or prior to the Closing Date.          (d) Since the delivery of Borrower’s financial statements, no change or changes or event orevents shall have occurred which, in the opinion of Lender, constitutes or is likely to have aMaterial Adverse Effect.          (e) All necessary consents, approvals and authorizations of, and declarations, registrationsand filings with, governmental bodies and nongovernmental Persons required in order to consummatethe Loans shall have been obtained or made and shall be in full force and effect.          (f) There shall not be pending or, to the knowledge of Borrower, threatened, any action, suit,proceeding, governmental investigation or arbitration against or affecting Borrower or any of theirrespective assets or properties which Lenderbelieves is likely to have a Material Adverse Effect. No order of any court, arbitrator orGovernmental Authority shall be in effect which Lender believes constitutes or is likelyto have a Material Adverse Effect.          (g) Borrower shall have delivered to Lender a standby letter of credit issued by HIB in thestated amount of Ten Million Dollars ($10,000,000), naming Lender as Beneficiary, on termsacceptable to the Lender.          (h) On or prior to the Closing Date, Lender shall file UCC financing statements identifyingBorrower as “debtor” and Lender as “secured party” andcontaining an adequate description of all Collateral in which a security interest may beproperly perfected under the UCC, which financing statements shall have been filed in all placesdeemed necessary or desirable by Lender in order to perfect the security interest granted pursuantto this Agreement, subject to no prior liens. In addition, Lender shall
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have received such assignments, endorsements or other interests as may be necessary to perfectLender’s security interest in any Collateral.          (i) Lender shall have received copies of (i) the Articles of Incorporation of Borrower,certified as of a recent date by the Secretary of State of the State of formation of Borrower; and(ii) a current good standing certificate with respect to Borrower.          (j) Lender shall have received certified resolutions of the Board of Directors of Borrowerwith respect to this Agreement and the other Loan Documents, together with a certificateidentifying each such Person’s incumbent officers and setting for specimen signatures of suchofficers.          (k) Lender shall have received a written borrowing request, setting forth the amount ofAdvances requested to be disbursed on the Closing Date and containing instructions for thedisbursement of such funds.          (l) Lender shall have received policies or certificates of insurance satisfactory to Lenderdemonstrating that Borrower has obtained insurance as required by this Agreement and the LoanDocuments.          (m) Such additional assignments, agreements, landlord waivers, certificates, reports,approvals, instruments, documents, financing statements, consents, and opinions as Lender mayrequest.     4.2. Conditions to Subsequent Extensions of Credit.          (a) Both before and after giving effect to any request hereunder for an Extension of Creditunder the Credit Facility, (i) each of the representations and warranties set forth in Section 8shall be true and correct in all material respects, except to the extent that they expressly relate to an earlier date, (ii) there shall exist no Defaultor Event of Default, and (iii) no condition shall exist and no event shall have occurred which hashad or could have a Material Adverse Effect.          (b) Lender shall have received a written borrowing request setting forth the amount of suchAdvance and instructions for the disbursement of such Advance. The delivery of each BorrowingRequest, required by Section 2.2, shall constitute a representation and warranty by Borrower thaton the date of such Advance (both immediately before and after giving effect to such Advance) thestatements made in the foregoing subsection (a) are true and correct.          (c) All documents executed or submitted pursuant hereto in connection with such Advance by oron behalf of Borrower shall be satisfactory in form and substance to Lender and its counsel; Lenderand its counsel shall have received all information, approvals, opinions, documents or instrumentsas they may request.
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**SECTION 5. Fees and Deposits.**     5.1. Fees. Borrower shall pay Lender its fees and other trade finance chargesin connection with any Letters of Credit or Advances issued by Lender as set forth in ScheduleA hereto.**SECTION 6. Security Interest.**     6.1. Grant of Security Interest. Borrower hereby grants to Lender a continuingsecurity interest in all of its right, title, and interest in all currently existing and hereafteracquired or arising Collateral in order to secure prompt repayment of any and all of theObligations in accordance with the terms and conditions of the Loan Documents and in order tosecure prompt performance by Borrower of each of its covenants and dutiesunder the Loan Documents. The Lender’s security interest in and to the Collateral shall attachto all Collateral without further act on the part of Lender or Borrower. Except as otherwiseprovided in this Agreement or any other Loan Document, Borrower has no authority, express orimplied, to dispose of any item or portion of the Collateral.     6.2. Negotiable Collateral. In the event that any Collateral, includingproceeds, is evidenced by or consists of Negotiable Collateral, and if and to the extentthat perfection of priority of Lender’s security interest is dependent on or enhanced bypossession, Borrower, immediately upon the request of Lender, shall endorse and deliver physicalpossession of such Negotiable Collateral to Lender.     6.3. Collection of Accounts, General Intangibles, and Negotiable Collateral.At any time after the occurrence and during the continuation of an Event of Default, Lender orLender’s designee may (a) notify Account Debtors of Borrower that the Accounts, chattel paper, orGeneral Intangibles have been assigned to Lender or that Lender has a security interest therein, or(b) collect the Accounts, chattel paper, orGeneral Intangibles directly and charge the collection costs and expenses to the Loan Account.Borrower agrees that it will hold in trust for Lender, as Lender’s trustee, any collections that itreceives and immediately will deliver said collections to Lender in their original form as receivedby Borrower.     6.4. Delivery of Additional Documentation Required. At any time upon the request ofLender, Borrower shall execute and deliver to Lender any and all financing statements, originalfinancing statements in lieu of continuation statements, fixturefilings, security agreements, pledges, assignments, endorsements of certificates of title,and all other documents (the “Additional Documents”) that Lender may request in its solediscretion, in form and substance satisfactory to Lender, to perfect and continue perfected orbetter perfect Lender’s security interest in the Collateral (whether now owned or hereafter arisingor acquired), and in order to fully consummate all of the transactions contemplated hereby andunder the other Loan Documents. To the maximum extent permitted by applicable law, Borrowerauthorizes Lender to execute any such Additional Documents in Borrower’s name and authorizes Lenderto file such executed Additional Documents in any appropriate filing office. In addition, on suchperiodic basis as Lender
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shall require, Borrower shall (a) provide Lender with a report of all material new patentable,copyrightable, or trademarkable materials acquired or generated by Borrower during the priorperiod, (b) cause all material patents, copyrights, and trademarksacquired or generated by Borrower that are not already the subject of a registration with theappropriate filing office (or an application therefor diligently prosecuted) to be registered withsuch appropriate filing office in a manner sufficient to impart constructive notice of Borrower’sownership thereof, and (c) cause to be prepared, executed, and delivered to Lender supplementalschedules to the applicable Loan Documents to identify such material patents, copyrights, andtrademarks as being subject to the security interests created thereunder.     6.5. Right to Inspect. Lender and its officers, employees, or agents shall have theright, from time to time hereafter to inspect the Books and to check, test, and appraise theCollateral in order to verify Borrower’s financial condition or the amount, quality, value,condition of, or any other matter relating to, the Collateral.**SECTION 7. Power of Attorney.**     Borrower hereby irrevocably constitutes and appoints Lender and any agent or representativethereof, with full power of substitution, as its true and lawful attorney-in-fact with fullirrevocable power and authority in the place and stead of Borrower and in the name of Borrower orin its own name, from time to time in Lender’s sole discretion, for the purpose of carrying out theterms of this Agreement, to take any and allappropriate action and to execute and deliver any and all documents and instruments which maybe necessary, or desirable to accomplish the purposes of this Agreement, and, without limiting thegenerality of the foregoing, hereby gives Lender the power and right, on behalf of Borrower,without notice to or assent by Borrower to do the following: (i) to ask, demand, collect, receiveand give acquittances and receipts for any and all moneys due and to become due under anyCollateral and, in the name of Borrower or its own name or otherwise, to take possession of andendorse and collect any checks, drafts,notes, acceptances or other instruments for the payment of moneys due under any Collateral andto file any claim or to take any other action or proceeding in any court of law or equity orotherwise deemed appropriate by Lender for the purpose of collectingany and all such moneys due under any Collateral whenever payable; (ii) to direct any partyliable for any payment under any of the Collateral to make payment of any and all moneys due, andto become due thereunder, directly to Lender or as Lender shall direct; (iii) to receive payment ofand receipt for any and all moneys, claims and other amounts due, and to become due at any time, inrespect of or arising out of any Collateral; and (iv) generally to sell, transfer, pledge, make anyagreement with respect or otherwise dealwith any of the Collateral as fully and completely as though Lender were the absolute ownerthereof for all purposes, and to do, at Lender’s option and Borrower’s expense, at any time, orfrom time to time, all acts and things which Lender reasonably deems necessary to protect, preserveor realize upon the Collateral and Lender’s lien therein, in order to effect the intent of thisAgreement, all as fully and effectively as Borrower might do. Borrower hereby ratifies, to theextent permitted by law, all that said attorneys shalllawfully do or cause to be done by virtue hereof. The power of attorney granted pursuant
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to this Section 7 is a power coupled with an interest and shall be irrevocable until the Obligationsare indefeasibly paid in full.**SECTION 8. Representations and Warranties**. Each Borrower hereby makes the following representationsand warranties to Lender:     (a) Borrower is a corporation duly organized, validly existing and in good standing under thelaws of the jurisdiction of its organization and is duly qualified to do business in eachadditional jurisdiction where the failure to so qualify would have a Material Adverse Effect, andhas all requisite power and authority to own its assets and to carry on its business as now beingconducted and as proposed to be conducted, and to execute, deliver and perform its obligationsunder this Agreement and the other Loan Documents to which it is a party.     (b) The execution, delivery and performance by Borrower of the Loan Documents to which it is aparty are within its powers and have been duly authorized by all necessary corporate or otheraction by or on behalf of Borrower. Each Loan Document to which Borrower is a party has been dulyexecuted and delivered by it and constitutes a legal, valid and binding obligations of Borrower,enforceable in accordance with itsterms, subject to the effect of bankruptcy, insolvency, reorganization, moratorium, fraudulentconveyance and other similar laws relating to or affecting creditors’ rights generally, or theavailability of equitable remedies.     (c) The execution, delivery and performance by Borrower of the Loan Documents to which it is aparty (i) have been duly authorized by all requisite action; (ii) do not require governmentalapproval; (iii) will not result (with or without notice and/or the passage of time) in any conflictwith or breach or violation of or default under, any provision of law, the articles ofincorporation, bylaws or other governing document of Borrower, any provision of any indenture,agreement or other instrument to which Borrower, or by which it or any of its properties or assetsare bound; and (iv) will not result in the creation or imposition of any lien, charge orencumbrance of any nature whatsoever upon any of the properties or assets of Borrower, except asmay be permitted by the Loan Documents.     (d) The financial statements of Borrower and Guarantor as provided to Lender in connectionwith Borrower’s application for the Credit Facility fairly present the financial condition ofBorrower and Guarantor as of the date thereof.     (e) There is not pending or, to the best of Borrower’s knowledge, threatened, any litigation,proceeding or governmental investigation to which Borrower is a party and in which the claim orpotential liability could exceed $500,000 or to which any of its assets is subject which could havea Material Adverse Effect.     (f) No part of the proceeds of the Loans will be used directly or indirectly, for the purposeof buying or carrying any margin stock within the meaning of Regulation Uof the Board of Governors of the Federal Reserve System (12 CFR 207), or for the
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purpose of buying or carrying or trading in any securities under such circumstances as to involveany Borrower in a violation of Regulation X of said Board (12 CFR 224) or to involve any broker ordealer in a violation of Regulation T of said Board (12 CFR 220). As used in this Section, the term“purpose of buying or carrying” has the meaning assigned thereto in the aforesaid Regulation U.     (g) Borrower is not an “investment company” or a “person directly or indirectly controlled byor acting on behalf of an investment company” within the meaning of the Investment Company Act of1940, as amended, or a “holding company”, or a “subsidiary company” of a “holding company”, or an“affiliate” of a “holding company” or of a “subsidiary company” of a “holding company”, within themeaning of the Public Utility Company Holding Act of 1935, as amended.     (h) The principal places of business and the chief executive offices of SGC is located at20480 E. Business Parkway, City of Industry, California 91789. The Books of SGC are located at suchaddress. The federal employee identification number of SGC is 56-2351327. The principal place ofbusiness and the chief executive offices of SC is located at 20480 E. Business Parkway, City ofIndustry, California 91789. The Booksand Records of SC are located at such address. The federal employee identification number ofSC is 20-2827178.     (i) Borrower is in possession of all material permits, licenses or other authorizations ofgovernmental bodies required for the conduct of its business and the ownership of its properties(including all licenses and certificates of occupancy which are material to the ownership oroperation of any real property) has been obtained and are usable by it, and its businesses is beingconducted in accordance with the material requirements of such permits, licenses or otherauthorizations of governmental bodies subject to such exceptions as would not have, individually orin the aggregate, a Material Adverse Effect.     (j) Borrower’s property is free from contamination from Hazardous Materials (as defined inSection 10(h)) and each of them is in compliance with all applicable Environmental Laws (as definedin Section 10(h)) subject to such exceptions as wouldnot have, individually or in the aggregate, a Material Adverse Effect.     (k) Borrower is in compliance with all applicable laws and regulations with respect toemployment and labor practices and employee benefits subject to such exceptions as would not have,individually or in the aggregate, a Material Adverse Effect.     (l) SC is a wholly owned subsidiary of SGC.     (m) Borrower has good and marketable title to all Collateral, and such Collateral is free andclear of all liens other than the lien of the Factor or as otherwise. approved by Lender inwriting.
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     (n) Borrower does not maintain or contribute to any Defined Benefit Pension Plan under ERISA.     (o) Borrower is solvent, able to pay its debts as they mature, and the realizable value of itsassets exceed its liabilities.     (p) All factual information (taken as a whole) furnished by or on behalf of Borrower inwriting to Lender (including all information contained in the other Loan Documents) for purposes ofor in connection with this Agreement, the other Loan Documents, or any transaction contemplatedherein or therein is, and all other suchfactual information (taken as a whole) hereafter furnished by or on behalf of Borrower inwriting to Lender will be, true and accurate, in all material respects, on the date as of whichsuch information (taken as a whole) not misleading in any material respect at such time in light ofthe circumstances under which such information was provided.**SECTION 9. Financial Reporting.**     Borrower promises and agrees, during the term of this Agreement and until full payment of allBorrower’s Obligations hereunder, to deliver or cause to be delivered to Lender in form and detailsatisfactory to the Lender:     (a) as soon as available, but in any event within 120 days of the end of each fiscal year,annual audited financial statements of Borrower prepared on a consolidated basis, such audit havingbeen made by an independent certified public accounting firm reasonably acceptable to Lender;     (b) as soon as available, but in any event within 60 days of the end of each fiscal quarter,quarterly financial statements of Borrower prepared by Borrower on a consolidated basis;     (c) On the first (1st) and sixteenth (16th) day of each month, an Inventory report;     (d) On the first (1st) and sixteenth (16th) day of each month, a receivable report concerningall Accounts;     (e) Upon request of Lender, annual personal financial statements of each Guarantor; and     (f) Upon request of Lender, federal tax returns of Borrower and each Guarantor including allschedule K-1’s.**SECTION 10. Affirmative Covenants**. Until all Obligations are paid in full, Borrower covenants andagrees to do the following:
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     (a) Promptly inform Lender of the occurrence of any Default or Event of Default or of any eventwhich could have a Materially Adverse Effect upon Borrower’s business, properties, financialcondition or ability to comply with its Obligations to Lender, including without limitation itsability to pay the Obligation;     (b) Furnish such other information regarding any Borrower, any Guarantor, or the Collateral,as Lender may reasonably request;     (c) Keep in full force and effect its corporate existence in good standing, continue toconduct and operate its business substantially as presently conducted and operated and maintain andprotect all material franchises and material trade names and preserve all the remainder of itsmaterial property used or useful in the conduct of its business and keep the same in good repairand condition;     (d) Maintain a standard and modern system of accounting in accordance with GAAP consistentlyapplied with ledger and account cards and/or computer tapes and computer disks, computer printoutsand computer records pertaining to the Collateral which contain information as may from time totime be requested by Lender, not modify or change its method of accounting without the writtenconsent of Lender first obtained. Borrower will permit Lender and any of its employees, officers,or agents, upon demand, during Borrower’s usual business hours, or the usual business hours of anythird person having control thereof, to have access to and examine all of Borrower’s recordsrelating to the Collateral, Borrower’s financial condition and the results of Borrower’s operationsand in connection therewith, and to permit Lender to conduct audits and appraisals of theCollateral, and permit Lender or any of its agents, employees, or officer to copy andmake extracts therefrom, should Lender determine in its sole discretion that there are changesin Borrower’s financial condition that may indicate a deterioration;     (e) Maintain the principal place of business or chief executive office at the address setforth in Section 8(h) unless Borrower shall have given Lender 30 days’ prior written notice of anychange thereof;     (f) Maintain its primary depository banking relationship at Lender;     (g) At Borrower’s own cost and expense in amounts and with carrier acceptable to Lender,Borrower shall (i) keep all it insurable properties and properties in which borrower has aninterest insured against the hazards of fire, flood, sprinkler leakage, those hazards covered byextended coverage insurance and such other hazards, and for such amounts, as is customary in thecase of companies engaged in businesses similar to Borrower’s including, without limitation;business interruption insurance; (ii) maintain a bond in such amounts as is customary in the caseof companies engaged in business similar to Borrower’s insuring against larceny, embezzlement orother criminal misappropriation of insured’s officers and employees who may either singly orjointly with others at any time have access to the assets or funds of Borrower either directly orthrough authority to draw upon such funds or to direct generally the disposition of such assets;(iii) maintain public and product liability insurance against claims for personal
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injury, death or property damage suffered by others; (iv) maintain all such workers’ compensationor similar insurance as may be required under the laws of any state or jurisdiction in whichBorrower is engaged in business; (v) furnish Lender with (A) copies of all policies and evidence ofthe maintenance of such policies by the renewal thereof at least thirty (30) days before anyexpiration date, and (B) appropriate loss payable endorsements in form and substance satisfactoryto Lender, naming Lender as loss payee as its interests may appear with respect to all insurancecoverage referred to in clauses (i) and (ii) above, and providing (1) that all proceeds thereundershall be payable to Lender, (2) no such insurance shall be affected by any act or neglect of theinsured or owner ofthe property described in such policy, and (3) that such policy and loss payable clauses may not becanceled, amended or terminated unless at least thirty (30) days’ prior written notice is given toLender. In the event of any loss thereunder, the carriers named therein hereby are directed byLender and Borrower to make payment for such loss to Lenderand not to Borrower and Lender jointly. If any insurance losses are paid by check draftor other instrument payable to Borrower and Lender jointly, Lender may endorse Borrower’s namethereon and do such other things as Lender may deem advisable to reduce the same to cash. Lender ishereby authorized to adjust and compromise claims under insurance coverage referred to in clauses(i) and (ii) above. All loss recoveries received by Lender upon any such insurance may be appliedto the Obligations, in such order as Lender in its reasonable discretion shall determine. Anysurplus shall be paid by Lender to Borrower or applied as may be otherwise required by law. Anydeficiency thereon shall be paid by Borrower to Lender on demand. If Borrower fails to obtaininsurance as hereinabove provided, or to keep the same in force, Lender, if Lender so elects andupon notice to Borrower, may obtain such insurance and pay the premium therefor for Borrower’saccount, and charge Borrower’s account therefor and such expenses so paid shall be part of theObligation;     (h) Borrower will not possess or cause to be located any Hazardous Materials on, in or underany real or personal property now or at any time hereafter owned,occupied or operated by Borrower which in any manner violate any Environmental Law;     (i) Borrower shall maintain positive annual taxable net income.     (j) Borrower will confine its business operations to the import and export business and complywith all laws, rules, regulations, orders, writs, judgments, injunctions, decrees, determinationsor otherwise presently in effect and having application to the Borrower and its business.     (k) Borrower shall notify the Lender within 10 days of service upon the Borrower or the filingby the Borrower of any legal action involving a claim in excess of $500,000.     (l) Borrower shall maintain on-line Factored Receivables tracking with Factor.
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     (m) So long as no Default or Event of Default has occurred and is continuing, Borrower shall usethe cash proceeds received from Factor as follows: (i) 25% of such cash proceeds to pay down existing trust receiptAdvances on a first in, first out basis;  (ii) 60% of such cash proceeds to pay down Borrower’s workingcapital line with Lender, and upon Borrower’s request, Borrower’s accountpayable to Taiwan Kolin Company, Ltd. for like amount; and  (iii) the balance of such cash proceeds to Borrower’s operatingaccount for operating purposes.     (n) Borrower acknowledges receipt from Lender of the Notice of Insurance Requirements datedJune 30, 2005. Borrower reaffirms that all terms and conditions ofthe Agreement to Provide Insurance executed by Borrower dated June 13, 2005, remains in fullforce and effect and Borrower further agrees to abide by all terms thereof.**SECTION 11. Negative Covenants**. Borrower shall not do any of the following:     (a) Grant a security interest in or permit a lien, claim or encumbrance upon any of its assetsto any Person other than Lender, Factor, or as otherwise approved by Lender in writing;     (b) Permit any levy, attachment or restraint to be made affecting any of its assets;     (c) Permit any judicial officer or assignee to be appointed or to take possession of any ofthe assets of Borrower;     (d) Change its name, business or financial structure or corporate identity or add any newfictitious name in each case without giving prior written notice thereof and taking such steps asmay be necessary to preserve and continue Lender’s security interests prior to effecting suchchange, or liquidate, merge or consolidate with or into any other business organization;     (e) Move or relocate any Collateral except in the Ordinary Course of Business, and in any caseonly to the extent that Lender’s security interest is unimpaired;     (f) Acquire any other Person;     (g) Enter into any transaction not in the Ordinary Course of Business;     (h) Make any change in its business objects, purposes or operations;
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     (i) Incur any debt other than the Obligations and trade payables incurred in the OrdinaryCourse of Business and outstanding debt disclosed on financial statements for the fiscal year endedJune 30, 2004 or as otherwise disclosed in writing to Lender;     (j) Make loans, advances, distributions, dividends or extensions of credit to any Person,including, but not limited to, directors, officers, shareholders, partners, employees and any andall Affiliates except for credit extended in the Ordinary Course of Business as conducted byBorrower in accordance with past practices and undertaken by Borrower in good faith and not for thepurposes of evading the intent of this covenant or any other covenant or restriction of the Loans;     (k) Guaranty or otherwise, directly or indirectly, in any way be or become responsible forobligations of any other Person, whether by agreement to purchase the indebtedness of any otherPerson, 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 thepurpose of paying and discharging (or causing the payment or discharge of) the indebtedness of anyother Person, or otherwise, except for the endorsement of negotiable instruments in the OrdinaryCourse of Business for deposit or collection;     (l) Sell, lease, transfer or otherwise dispose of any assets, except for the sale of theinventory in the Ordinary Course of Business, acquire all or substantially all of the properties orassets of any other Person, enter into any reorganization or recapitalization, reclassify itscapital stock, or enter into any sale-lease back transaction;     (m) Purchase or hold beneficially any stock or other securities of, or make any investment oracquire any interest whatsoever in, any other Person, except for certificates of deposit withmaturities of one year or less of a United States commercial bank with capital, surplus andundivided profits in excess of Five Hundred Million Dollars ($500,000,000), direct obligations ofthe United States government maturing within one (1) year from the date of acquisition thereof, andcommercial paper maturing within 180 days after the issuance thereof which is rated A-1 or betterby Standard & Poor’s Corporation or B-1 or better by Moody’s Investors Service, Inc.;     (n) Make dividends, distributions or advances of any kind, or otherwise give value to, or makeinvestments or capital contributions in or to, any other Person without the prior written consentof Lender; and     (o) Allow any fact, condition or event to occur or exist with respect to any employee, pensionor profit sharing plan established or maintained by it which might constitute grounds fortermination of any such plan or for the court appointment of a trustee to administer any such plan.     (p) Sell, contract for sale, transfer, convey, assign, lease or sublet any asset in theOrdinary Course of Business which violates any provision of law, rule, regulation,
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order, writ, judgment, induction, decree, determination or otherwise presently in effect and havingapplication to Borrower.     (q) Change management or ownership of Borrower without the prior written consent of theLender.**SECTION 12. Events of Default**. An “Event of Default” shall mean, for all purposes under the LoanDocuments, any one or more of the following:     (a) If Borrower (i) fails to pay all or any portion of the Obligations (whetherof principal, interest, taxes, reimbursement of Lender expenses or otherwise) when due(whether as scheduled, by acceleration or otherwise) or (ii) fails or neglects to perform, keep orobserve any term, provision, condition, covenant, agreement, warranty or representation containedin this Agreement, any other Loan Document or any other present or future agreement betweenBorrower and Lender;     (b) If any representation, statement, report or certificate made or delivered by Borrower orany of its officers, employees or agents to Lender is not true and correct inall material respects;     (c) If there is a material impairment of the prospect of repayment of all or any portion ofBorrower’s obligations. including without limitation the Loans, or a material impairment of theCollateral or of Lender’s security interest therein;     (d) If all or any of the assets of Borrower become subject to a writ or distress warrant, orare levied upon, or come into the possession of any judicial officer orassignee and the same are not released, discharged or bonded against within ten (10) days;     (e) If any bankruptcy, insolvency, receivership or other proceeding is filed or commenced byor against Borrower or Guarantor for its reorganization, dissolution or liquidation but which ifcommenced against Borrower or Guarantor is not dismissed within sixty (60) days of filing;     (f) If Borrower is enjoined, restrained or in any way prevented by court order from continuingto conduct all or any material part of its business affairs;     (g) If Borrower for whatever reason is unable to conduct its Ordinary Course of Business for aperiod of fourteen (14) consecutive Business Days;     (h) If a notice of lien, levy or assessment is filed of record with respect to any or all ofthe assets of Borrower by any Governmental Authority, or if any taxes or debts owing at any timehereafter to any one or more of such entities becomes a lien, whether choate or otherwise, upon anyor all of Borrower’s assets and the same is not paid on the payment date thereof, unless the sameis being contested in good faith by appropriate
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proceedings, execution is stayed during such proceedings and Borrower has taken appropriatereserves therefore in accordance with GAAP;     (i) If a judgment or other claim in excess of $100,000 individually or in the aggregatebecomes a lien or encumbrance upon any or all of the assets of Borrower and the same is notsatisfied, dismissed or bonded against within thirty (30) days thereafter;     (j) If Borrower permits a default in any material agreement to which it is a party with thirdparties so as to result in an acceleration of the maturity of Borrower’s indebtedness to others,whether under any indenture, agreement or otherwise;     (k) If Borrower makes any payment on account of indebtedness which has been subordinated toit’s obligations to Lender;     (l) a default by Guarantor under the terms of the Guaranty, or Guarantor revokes or attemptsto revoke the Guaranty.**SECTION 13. Lender’s Rights and Remedies.**     13.1.Rights and Remedies. Upon the occurrence, and during the continuation,of an Event of Default, Lender (at its election but without notice of its election and withoutdemand) may do any one or more of the following, all of which are authorized by Borrower:          (a) Declare all Obligations, whether evidenced by this Agreement, by any of the other LoanDocuments, or otherwise, immediately due and payable;          (b) Cease advancing money or extending credit to or for the benefit of Borrower under thisAgreement, under any of the Loan Documents, or under any other agreement between Borrower andLender;          (c) Terminate this Agreement and any of the other Loan Documents as to any future liability orobligation of Lender, but without affecting any of the Lender’s liens in the Collateral and withoutaffecting the Obligations;          (d) Settle or adjust disputes and claims directly with Account Debtors for amounts and uponterms which Lender considers advisable, and in such cases, Lender will credit the Obligations withonly the net amounts received by Lender in payment of such disputed Accounts after deducting all ofLender’s fees and costs, including attorney’s fees, incurred or expended in connection therewith;          (e) Cause Borrower to hold all returned Inventory in trust for Lender, segregate all returnedInventory from all other assets of Borrower or in Borrower’s possession and conspicuously labelsaid returned Inventory as the property of Lender;
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          (f) Without notice to or demand upon Borrower, make such payments and do such acts as Lenderconsiders necessary or reasonable to protect its security interests in the Collateral. Borroweragrees to assemble the Collateral if Lender so requires, and to make the Collateral available toLender at a place that Lender may designate. Borrower authorizes Lender to enter the premises wherethe Collateral is located, to take and maintain possession of the Collateral, or any part of it,and to pay, purchase, contest, or compromise any lien that in Lender’s determination appears toconflict with Lender’s security interests in the Collateral and to pay all expenses incurred inconnection therewith and to charge Borrower therefor. With respect to any of Borrower’s owned orleased premises, Borrower hereby grants Lender a license to enter into possession of such premisesand to occupy the same, without charge, in order to exercise any of Lender’s rights or remediesprovided herein, at law, in equity, or otherwise;          (g) Without notice to Borrower (such notice being expressly waived), and without constitutinga retention of any Collateral in satisfaction of an obligation (within the meaning of the Code),set off and apply to the Obligations any and all (i) balances and deposits of Borrower held byLender, or (ii) indebtedness at any time owing to or for the credit or the account of Borrower heldby Lender;          (h) Hold, as cash collateral, any and all balances and deposits of Borrower held by Lender tosecure the full and final repayment of all of the Obligations. Further Borrower will, upon demandby Lender, cause cash to be deposited with Lender, as cash collateral to secure all Obligations, inan amount equal to outstanding Letters of Credit and Borrower hereby irrevocably authorizes Lender,in its sole discretion, on Borrower’s behalf and in Borrower’s name, to open such an account and tomake and maintain deposits therein, or in an account opened by Borrower, in the amounts required tobe made by Borrower, out of the proceeds of Collateral or out of any other funds of Borrower cominginto Lender’s possession at any time. Borrower may not withdraw amounts credited to any suchaccount except upon payment and performance in full of all Obligations and termination of thisAgreement;          (i) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise forsale, and sell (in the manner provided for herein) the Collateral. Borrower hereby grants to Lendera license or other right to use, without charge, Borrower’s labels, patents, copyrights, tradesecrets, trade-names, trademarks, service marks, and advertising matter, or any property of asimilar nature, as it pertains to the Collateral, in completing production of, advertising forsale, and selling any Collateraland Borrower’s rights under all licenses and all franchise agreements shall inure to Lender’sbenefit;          (j) Sell the Collateral at either a public or private sale, or both, by way of one or morecontracts or transactions, for cash or on terms, in such manner and at such places (includingBorrower’s premises) as Lender determines is commercially reasonable. It is not necessary that theCollateral be present at any such sale;
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          (k) Lender shall give notice of the disposition of the Collateral as follows:               (i) Lender shall give Borrower a notice in writing of the time and place of public sale, or,if the sale is a private sale or some other disposition otherthan a public sale is to be made of the Collateral, then the time on or after which theprivate sale or other disposition is to be made; and               (ii) The notice shall be personally delivered or mailed, postage prepaid, to Borrower asprovided in Section 15, at least 10 days before the earliest time of disposition set forth in thenotice; no notice needs to be given prior to the disposition of any portion of the Collateral thatis perishable or threatens to decline speedily in value or that is of a type customarily sold on arecognized market;          (l) Lender may credit bid and purchase at any public sale;          (m) Lender may seek the appointment of a receiver or keeper to take possession of all or anyportion of the Collateral or to operate same and, to the maximum extent permitted by law, may seekthe appointment of such a receiver without the requirement of prior notice or a hearing;          (n) Lender shall have all other rights and remedies available at law or in equity or pursuantto any other Loan Document; and          (o) Any deficiency that exists after disposition of the Collateral as provided above will bepaid immediately by Borrower. Any excess will be returned, without interest and subject to therights of third Persons, by Lender to Borrower.     13.2. Remedies Cumulative. The rights and remedies of Lender under this Agreement, theother Loan Documents, and all other agreements shall be cumulative. Lender shall have all otherrights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. Noexercise by Lender of one right or remedy shall be deemed an election, and no waiver by Lender ofany Event of Default shall be deemed a continuing waiver. No delay by Lender shall constitute awaiver, election, or acquiescence by it.**SECTION 14. Survival of Covenants, Agreements, Representations and Warranties**. All covenants,agreements, representations and warranties (a) previously. made (except as specificallysubsequently modified); (b) made in connection herewith or with the Note and/or the Loan Documentsand/or any document contemplated hereby; or (c) executed hereafter (unless such document expresslystates that this Agreement does not apply thereto) shall survive the borrowing hereunder andthereunder and the repayment in full of the Notes and/or the Loan Documents and any amendments,renewals or extensions thereof and shall be deemed to have been relied upon by Lender. Allstatements contained in any certificate or other document delivered to Lender at any
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time by or on behalf of Borrower shall constitute representations and warranties by Borrower.**SECTION 15. Notices**. All communications provided for hereunder shall be in writing and delivered byhand or sent by registered or certified mail or sent by facsimile (with such facsimile to beconfirmed promptly in writing sent by first class mail), sent (i) if to Lender, to:PREFERRED BANK