Unassociated Document


    
      

      

    

     

    


    LOAN
      AND SECURITY AGREEMENT

    


    


    Dated
      as of May 30, 2008

    


    


    Between

    


    


    REED’S,
      INC.

    


    


    (Borrower)

    


    and

    


    


    FIRST
      CAPITAL WESTERN REGION, LLC

    


    


    (Lender)

     

     

    


    
      

    

    
      

    

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    
      TABLE
        OF CONTENTS

       

      
        
          	 	 	
                  Page

                
	 	 	 
	
                  1.

                	
                  Definitions

                	
                  1

                
	 	 	 
	
                  2.

                	
                  Borrowing

                	
                  8

                
	 	 	 
	
                  3.

                	
                  Interest
                    and Fees

                	
                  10

                
	 	 	 
	
                  4.

                	
                  Representations
                    and Warranties of Borrower

                	
                  12

                
	 	 	 
	
                  5.

                	
                  Collateral

                	
                  13

                
	 	 	 
	
                  6.

                	
                  Financial
                    Covenants

                	
                  14

                
	 	 	 
	
                  7.

                	
                  Collateral
                    Covenants

                	
                  14

                
	 	 	 
	
                  8.

                	
                  Negative
                    Covenants

                	
                  16

                
	 	 	 
	
                  9.

                	
                  Reporting
                    and Information

                	
                  18

                
	 	 	 
	
                  10.

                	
                  Inspection
                    Rights; Expenses; Etc

                	
                  19

                
	 	 	 
	
                  11.

                	
                  Rights
                    of Setoff, Application of Payments, Etc

                	
                  20

                
	 	 	 
	
                  12.

                	
                  Attorney-in-Fact

                	
                  20

                
	 	 	 
	
                  13.

                	
                  Defaults
                    and Remedies

                	
                  21

                
	 	 	 
	
                  14.

                	
                  Indemnification

                	
                  23

                
	 	 	 
	
                  15.

                	
                  General
                    Provisions

                	
                  24

                


        

      


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    TABLE
      OF CONTENTS

    (continued)

    

      
        	 	
                Page

              
	 	 
	
                Attachments:

                 

                Schedule

              	 
	
                Exhibit
                  A - Form of Borrowing Base Certificate

              	
                 

              
	
                Exhibit
                  B - Form of Compliance Certificate

              	
                 

              
	
                Exhibit
                  C - Form of Deed of Trust

              	
                 

              
	
                Exhibit
                  D - Real Property Description

              	
                 

              


      

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

    


    LOAN
      AND SECURITY AGREEMENT

    


    


    This
      LOAN
      AND SECURITY AGREEMENT (this “Agreement”)
      is
      entered into as of this 30th day of May, 2008 between REED’S, INC., a Delaware
      corporation (“Borrower”),
      and
      FIRST CAPITAL WESTERN REGION, LLC (“Lender”).

    


    RECITALS:

    


    WHEREAS,
      Borrower has requested that Lender provide Borrower with a secured lending
      facility; and

    


    WHEREAS,
      Lender is willing to provide a secured lending facility to Borrower on the
      terms
      set forth in this Agreement.

    


    NOW,
      THEREFORE, Borrower and Lender hereby agree as follows:

     

    1. Definitions.
      For
      purposes of this Agreement:

    


    “Accounts”
means
      all presently existing or hereafter arising accounts (as that term is defined
      in
      the UCC) of Borrower, accounts receivable due to Borrower (including medical
      and
      health-care-insurance receivables), book debts, notes, drafts and acceptances
      and other forms of obligations now or hereafter owing to Borrower, including,
      without limitation, those arising from the sale or lease of goods or the
      rendition of services by Borrower, all of Borrower’s rights in, to and under all
      purchase orders now or hereafter received by Borrower for goods and services,
      all proceeds from the sale of Inventory, all monies due or to become due to
      Borrower under all contracts for the sale or lease of goods, the licensing
      of
      intellectual property or the rendition of services by Borrower (whether or
      not
      yet earned) (including the right to receive the proceeds of said purchase orders
      and contracts), all collateral security, guarantees and supporting obligations
      of any kind given by any obligor with respect to any of the foregoing, and
      all
      goods returned to or reclaimed by Borrower that correspond to any of the
      foregoing.

    


    “Affiliate”
means,
      with respect to a Person, (a) any family member, officer, director, employee
      or
      managing agent of such Person, and (b) any other Person (i) that, directly
      or
      indirectly, through one or more intermediaries, controls, or is controlled
      by,
      or is under common control with, such given Person, (ii) that, directly or
      indirectly beneficially owns or holds 10% or more of any class of voting stock
      or partnership or other interest of such Person or any subsidiary of such
      Person, or (iii) 10% or more of the voting stock, membership interests or
      partnership or other interest of which is directly or indirectly beneficially
      owned or held by such Person or a subsidiary of such Person. The term “control”
means the possession, directly or indirectly, of the power to direct or cause
      the direction of the management and policies of a Person, whether through
      ownership of voting securities or partnership or other interests, by contract
      or
      otherwise.

    


    “Agreement
      Date”
means
      the date as of which this Agreement is dated.

    


    “Borrowing
      Base”
has
      the
      meaning set forth in Item
      1 of the Schedule.

     

    
      
        
        

      

      
        1

        
          

        

      

      
        
        

      

    

     

    “Borrowing
      Base Certificate”
means
      the certificate, substantially in the form of Exhibit A,
      with
      appropriate insertions, to be submitted to Lender by Borrower pursuant to this
      Agreement and certified as true and correct by the Chief Executive Officer
      or
      the Chief Financial Officer of Borrower.

    


    “Business
      Day”
      means
      any
      day excluding Saturday, Sunday, and any day which is a legal holiday under
      the
      laws of the State of California or which is a day on which Lender is otherwise
      closed for transacting business with the public.

    


    “Collateral”
has
      the
      meaning set forth in Section
      5(a).

    


    “Customer”
means
      any customer or accounts debtor who is obligated on an Account, chattel paper
      or
      a General Intangible.

    


    “Deed
      of Trust”
means
      that certain Deed of Trust, Assignment of Rents, Security Agreement and Fixture
      Filing, of even date herewith, substantially in the form of Exhibit
      C,
      executed by Borrower for the benefit of Lender. 

    


    “Default”
has
      the
      meaning set forth in Section
      13(a).

    


    “Dilution”
means,
      at the time it is being calculated, a percentage, based upon the experience
      of
      the immediately prior 30 days, that is the result of dividing the dollar amount
      of (a) bad debt write-downs, discounts, advertising allowances, credits, or
      other non-cash reductions with respect to the outstanding Accounts, by (b)
      the
      Accounts created by Borrower during such period.

    


    “Dilution
      Reserve”
means,
      as of any date of determination, an amount sufficient to reduce the advance
      rate
      against Eligible Accounts by two percentage points for each percentage point,
      calculated by rounding off partial percentage points using conventional rounding
      rules as determined by Lender, by which Dilution is in excess of
      10.00%.

    


    “Election
      Notice”
has
      the
      meaning set forth in Item 1(a)(ii)(B)
      of the Schedule.

    


    “Eligible
      Accounts”
means
      those Accounts arising from the sale of Inventory or performance of services
      in
      the ordinary course of Borrower’s business; provided,
      however,
      that
      Eligible Accounts shall
      not
      include
      the following:

    


    (a) any
      Account which has remained unpaid for more than the number of days specified
      in
Item 2(a)
      of the Schedule;

    


    (b) Accounts
      with respect to which the Customer is an Affiliate of Borrower;

    


    (c) Accounts
      with respect to which services or goods are placed on consignment, guaranteed
      sale, or other terms by reason of which the payment by the Customer may be
      conditional;

     

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

     

    (d) Accounts
      with respect to which the Customer (i) does not maintain its chief executive
      office in the United States, or (ii) is not organized under the laws of the
      United States of America or any state thereof; or (iii) is the government of
      any
      foreign country or of any state, province, municipality, or other political
      subdivision thereof; except to the extent that such Account is secured or
      payable by a letter of credit satisfactory to Lender in its
      discretion;

    


    (e) any
      and
      all Accounts as to which the perfection, enforceability, or validity of Lender’s
      Collateral or security interest in such Account, or Lender’s right or ability to
      obtain direct payment to Lender of the proceeds of such Account, is governed
      by
      any federal or state statutory requirements other than those of the Uniform
      Commercial Code, including any Account subject to the Federal Assignment of
      Claims Act of 1940; provided, however, that an Account shall not be deemed
      ineligible by reason of this clause (e) if Borrower has completed all of the
      steps necessary, in the discretion of Lender, to comply with the Federal
      Assignment of Claims Act of 1940 with respect to such Account;

    


    (f) Accounts
      with respect to which the Customer is any state of the United States or any
      city, town, municipality, county or division thereof;

    


    (g) Accounts
      which may be subject to offset or recoupment by the Customer, whether as the
      result of goods sold or services rendered by the Customer to Borrower, any
      contractual arrangement between the Customer and Borrower (including any lease)
      or otherwise;

    


    (h) those
      Accounts where Lender, in Lender’s discretion, has notified Borrower that the
      Account or Customer is not acceptable to Lender;

    


    (i) all
      of
      the Accounts owed by a Customer if the aggregate outstanding dollar amount
      of
      such Accounts not considered as Eligible Accounts under clause (a) above as
      a
      percentage of all outstanding accounts then owing by such Customer, is equal
      to
      or greater than the Cross Aging Percentage specified in Item 2(b)
      of the Schedule;

    


    (j) Accounts
      for which services have not yet been rendered to the Customer or the goods
      sold
      have not yet been delivered to the Customer (commonly referred to as “pre-billed
      accounts”);

    


    (k) Accounts
      owed by a Customer not previously approved in writing by Lender where the dollar
      value for the aggregate amount of outstanding Accounts then owing by such
      Customer as a percentage of the dollar value of all outstanding Accounts then
      owing to Borrower is greater than the Concentration Limit specified in
Item 2(c)
      of the Schedule,
      but
      only to the extent of such excess;

    


    (l) any
      Account with respect to all or part of which a check, promissory note, draft,
      trade acceptance, or other instrument for the payment of money has been
      received, presented for payment, and returned uncollected for any
      reason;

    


    (m) any
      Account with respect to which Borrower has extended the time for payment without
      the consent of Lender;

     

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

     

    (n) any
      Account with respect to which any one or more of the following events has
      occurred to the Customer on such Account: death or judicial declaration of
      incompetency of a Customer who is an individual; the filing by or against the
      Customer of a request or petition for liquidation, reorganization, arrangement,
      adjustment of debts, adjudication as a bankrupt, winding-up, or other relief
      under the bankruptcy, insolvency, or similar laws of the United States, any
      state or territory thereof, or any foreign jurisdiction, now or hereafter in
      effect; the making of any general assignment by the Customer for the benefit
      of
      creditors; the appointment of a receiver or trustee for the Customer or for
      any
      of the assets of the Customer, including, without limitation, the appointment
      of
      or taking possession by a “custodian,” as defined in the Bankruptcy Code; the
      institution by or against the Customer of any other type of insolvency
      proceeding (under the bankruptcy laws of the United States or otherwise) or
      of
      any formal or informal proceeding for the dissolution or liquidation of,
      settlement of claims against, or winding up of affairs of, the Customer; the
      sale, assignment, or transfer of all or any material part of the assets of
      the
      Customer; the nonpayment generally by the Customer of its debts as they become
      due; or the cessation of the business of the Customer as a going
      concern;

    


    (o) any
      Account which arises out of finance or similar charges;

    


    (p) any
      Account in which Lender does not have a duly perfected, first-priority security
      interest, subject to no other Lien;

    


    (q) any
      Account which arises under a contract or arrangement covered by a performance
      or
      surety bond on behalf of Borrower, unless the Person providing such performance
      or surety bond has delivered an acceptable Lien waiver to Lender;
      or

    


    (r) any
      Account which is evidenced by a note, draft, trade acceptance, or other
      instrument for the payment of money where such instrument, document, chattel
      paper, note, draft, trade acceptance or other instrument has not been endorsed
      and delivered by Borrower to Lender.

    


    “Eligible
      Inventory”
means
      and includes that Inventory (other than packaging materials, labels and
      supplies) located in the continental United States which Lender, in its
      discretion, deems to be Eligible Inventory. Without limiting the generality
      of
      the foregoing, no Inventory shall be Eligible Inventory unless:

    


    (a) it
      is raw
      materials or finished goods;

    


    (b) at
      all
      times it strictly complies with all of Borrower’s warranties, covenants and
      representations to Lender;

    


    (c) it
      is in
      good, new and salable condition;

    


    (d) it
      is not
      slow moving, obsolete or unmerchantable, in Lender’s discretion;

    


    (e) it
      meets
      all standards imposed by any governmental agency or authority;

     

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

     

    (f) it
      is at
      all times subject to Lender’s duly perfected, first-priority security interest
      and there exists no other Lien thereon;

    


    (g) it
      is in
      Borrower’s possession and control situated at a location disclosed to Lender in
      compliance with this Agreement, the Inventory is not in-transit, Borrower’s
      books reflect the Inventory, the Inventory is insured to the full value thereof,
      and the insurance policy lists Lender as lender loss payee;

    


    (h) it
      is not
      in the hands of any third party, including a warehouseman, finisher, consignee,
      bailor, or processor, unless such arrangement is fully disclosed to Lender
      in
      writing and Borrower shall have provided to Lender such waivers, acknowledgments
      and other items requested by Lender in its discretion;

    


    (i) it
      is not
      subject to any license or other agreement that limits, conditions, or restricts
      Borrower’s or Lender’s right to sell or otherwise dispose of such
      Inventory;

    


    (j) Borrower
      owns such Inventory and such Inventory is not in Borrower’s possession based
      upon any consignment, guaranteed sale, or similar basis; and

    


    (k) it
      is not
      of a type that Lender, in its discretion, has determined is not Eligible
      Inventory.

    


    “Equipment”
means
      all of Borrower’s presently owned and hereafter acquired machinery, apparatus,
      equipment, motor vehicles, tractors, trailers, rolling stock, fittings, fixtures
      and other tangible personal property of every kind and description, together
      with all parts, accessories and special tools and all increases and accessions
      thereto and substitutions and replacements therefor.

    


    “GAAP”
means
      generally accepted accounting principles set forth in the opinions and
      pronouncements of the Accounting Principles Board of the American Institute
      of
      Certified Public Accountants and statements and pronouncements of the Financial
      Accounting Standards Board that are applicable to the circumstances as of the
      date of determination and applied on a consistent basis.

    


    “General
      Intangibles”
means
      all of Borrower’s present and future general intangibles and all other presently
      owned or hereafter acquired intangible personal property of Borrower (including
      payment intangibles and any and all choses or things in action, goodwill,
      patents and patent applications, tradenames, servicemarks, trademarks and
      trademark applications, copyrights, blueprints, drawings, purchase orders,
      customer lists, monies due or recoverable from pension funds, route lists,
      infringement claims, software, computer programs, computer discs, computer
      tapes, literature, reports, catalogs, deposit accounts, tax refunds and tax
      refund claims) other than Goods and Accounts, and all supporting obligations
      relating to any of the foregoing, as well as Borrower’s books and records
      relating to any of the foregoing.

    


    “Goods”
means
      all of Borrower’s present and hereafter acquired goods, as defined in the UCC,
      wherever located, including imbedded software to the extent included in “goods”
as defined in the UCC, manufactured homes, and standing timber that is cut
      and
      removed for sale.

     

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

     

    “Guarantor”
means
      individually, and “Guarantors” means collectively, Christopher Reed and any
      other Person that has guaranteed all or any part of the
      Obligations.

    


    “Inventory”
means
      all present and future inventory (as defined in the UCC) of Borrower, including
      goods held 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, shelving and racking upon which the inventory is stored and packing
      and
      shipping materials, wherever located, and any documents of title representing
      any of the above.

    


    “Lien”
means
      any security interest, security title, mortgage, deed to secure debt, deed
      of
      trust, lien, pledge, charge, conditional sale or other title retention
      agreement, or other encumbrance of any kind in respect of any property,
      including the interest of each lessor under any capitalized lease and the
      interest of any bondsman under any payment or performance bond, in, of or on
      any
      assets or properties of a Person, whether now owned or hereafter acquired and
      whether arising by agreement or operation of law.

    


    “Loan
      Documents”
means,
      collectively,
      this Agreement, the Deed of Trust, and each other agreements, instruments,
      certificates (including any Borrowing Base Certificate) or other documents
      entered into in connection with this Agreement, including collateral documents,
      letter of credit agreements, security agreements, pledges, guaranties,
      mortgages, deeds of trust, assignments and subordination agreements, and any
      other agreement executed by any Obligor or any Affiliate of any Obligor pursuant
      hereto or in connection herewith.

    


    “Maximum
      Credit Limit”
means
      $2,000,000.

    


    “Negotiable
      Collateral”
means
      all of Borrower’s present and future letters of credit, advises of credit,
      notes, drafts, instruments, and documents, including, without limitation, bills
      of lading, leases, and chattel paper, and Borrower’s books and records relating
      to any of the foregoing.

    


    “Obligations”
means
      all indebtedness, obligations and liabilities of Borrower to Lender and its
      Affiliates of every kind and description, direct or indirect, secured or
      unsecured, joint or several, absolute or contingent, due or to become due,
      including any overdrafts, whether for payment or performance, now existing
      or
      hereafter arising, whether presently contemplated or not, regardless of how
      the
      same arise, or by what instrument, agreement or book account they may be
      evidenced, or whether evidenced by any instrument, agreement or book account,
      including, but not limited to, all loans (including any loan by modification,
      renewal or extension), all indebtedness arising from any derivative
      transactions, all undertakings to take or refrain from taking any action, all
      indebtedness, liabilities or obligations owing from Borrower to others which
      Lender may have obtained by purchase, negotiation, discount, assignment or
      otherwise, and all interest, taxes, fees, charges, expenses and attorney’s fees
      (whether or not such attorney is a regularly salaried employee of Lender or
      any
      of its Affiliates) chargeable to Borrower or incurred by Lender under this
      Agreement or any other document or instrument delivered in connection
      herewith.

     

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    

     

    “Obligor”
means
      Borrower, Guarantor, any validity guarantor or any other Person primarily or
      secondarily, directly or indirectly, liable on any of the
      Obligations.

    


    “Permitted
      Liens”
means
      (a) Liens or charges for current taxes, assessments or other governmental
      charges which are not delinquent or remain payable without any penalty, or
      the
      validity of which is contested in good faith by appropriate proceedings upon
      stay of execution of the enforcement thereof and for which appropriate reserves
      have been established in accordance with GAAP; (b) deposits or pledges to secure
      (i) statutory obligations, (ii) surety or appeal bonds, or (iii) bonds for
      release of attachment, stay of execution or injunction; (c) statutory Liens
      on
      property arising in the ordinary course of business which, in the aggregate,
      do
      not materially impair the use of such property or materially detract from the
      value of such property; (d) Liens existing on the Agreement Date and described
      on Item 3
      of the Schedule;
      (e)
      Liens on Equipment securing all or part of the purchase price of such Equipment;
      provided,
      however,
      that
      (i) such Lien is created contemporaneously with the acquisition of such
      Equipment, (ii) such Lien attaches only to the specific items of Equipment
      so
      acquired, and (iii) such Lien secures only the indebtedness incurred to acquire
      such Equipment; and (f) Liens in favor of Lender.

    


    “Person”
means
      an individual, corporation, partnership, limited liability company, association,
      trust, unincorporated organization, government or any agency or political
      subdivision thereof, or any other entity.

    


    “Real
      Property”
means
      that certain real property commonly referred to as 12930 and 13000 South Spring
      Street, Los Angeles, California 90061 and more specifically described in
Exhibit
      D.
      

    


    “Subordinated
      Debt”
means
      all of the indebtedness owed by Borrower to any other Person, the repayment
      of
      which is subordinated to the repayment of the Obligations pursuant to the terms
      of a subordination agreement approved by Lender in its discretion.

    


    “UCC”
means
      the Uniform Commercial Code, as in effect from time to time, of the State of
      California or of any other state the laws of which are required as a result
      thereof to be applied in connection with the issue of perfection of security
      interests; provided,
      however,
      that to
      the extent that the UCC is used to define any term herein or in any other
      documents and such term is defined differently in different Articles of the
      UCC,
      the definition of such term contained in Article 9 shall govern. As used
      herein, references to an Article of the UCC shall be deemed to be references
      to
      Division of the UCC of the State of California.

    


    Other
      Definitional Provisions.
      References to the “Schedule” or any “Section” or “Exhibit” refer to the Schedule
      or a section or exhibit, respectively, of this Agreement unless otherwise
      specifically provided. Any of the terms defined in Section 1
      may,
      unless the context otherwise requires, be used in the singular or the plural
      depending on the reference. In this Agreement: words importing any gender
      include the other genders; the words “including”, “includes” and “include” shall
      be deemed to be followed by the words “without limitation”; references to
      agreements and other contractual instruments shall be deemed to include
      subsequent amendments, assignments, and other modifications thereto, but only
      to
      the extent such amendments, assignments and other modifications are not
      prohibited by the terms of this Agreement; references to any Person includes
      their respective permitted successors and assigns or people succeeding to the
      relevant functions of such Persons; any and all terms which are defined in
      the
      UCC and are not defined herein shall be construed and defined in accordance
      with
      the definition of such terms under the UCC; all references to statutes and
      related regulations shall include any amendments of same and any successor
      statutes and regulations; and all references to time of day shall refer to
      Los
      Angeles, California time.

     

    
      
        
        

      

      
        7

        
          

        

      

      
        
        

      

    

     

    2. Borrowing.

    


    (a) Amount
      Available to Be Borrowed.
      From
      time to time Borrower may request, and Lender will, subject to the other terms
      and conditions of this Agreement, lend to Borrower up to an amount equal to
      the
      Borrowing Base at any time. Borrowed amounts that are repaid may be reborrowed
      upon the terms and conditions of this Agreement.

    


    (b) Standards.
      Lender
      will determine eligibility and the loan value of Collateral, in its sole
      discretion, consistent with Lender’s experience, prudent business judgment and
      standards of commercial reasonableness applicable to asset-based credits and
      in
      good faith. Any loans requested by Borrower and made by Lender or at any time
      outstanding in excess of the Borrowing Base or any other limitation set forth
      in
      this Agreement will, nevertheless, be subject to the terms of this Agreement,
      will constitute Obligations for all purposes and be entitled to the benefits
      of
      the Collateral.

    


    (c) Persons
      Authorized to Request Loans.
      Borrower
      hereby authorizes and directs Lender to make loan advances to or for the benefit
      of Borrower upon receipt of instructions from any of the persons listed on
      Item 4
      of the Schedule.
      Lender
      shall have no liability whatsoever to Borrower or any other Person for acting
      upon any such instructions which Lender, in good faith, believes were given
      by
      any such person, and Lender shall have no duty to inquire as to the propriety
      of
      any disbursement. Lender is hereby authorized to make the loans provided for
      herein based on instructions received by facsimile, electronic mail, telephone
      or other method of communication from any of such persons. Although Lender
      shall
      make a reasonable effort to determine the person’s identity, Lender shall not be
      responsible for determining the authenticity of any such instructions, and
      Lender may act on the instructions of anyone it perceives to be one of the
      persons authorized to request loans hereunder. Lender shall have the right
      to
      accept the instructions of any of the foregoing persons unless and until Lender
      actually receives from Borrower (in accordance with the notice provisions of
      this Agreement) written notice of termination of the authority of that person.
      Borrower may change persons designated to give Lender borrowing instructions
      only by delivering to Lender written notice of such change. Borrower will ensure
      that each telephone instruction from any person designated in or pursuant to
      this section shall be followed by written confirmation of the request for
      disbursement in such form as Lender makes available to Borrower from time to
      time for such purpose; provided,
      however, that Borrower’s failure to provide written confirmation of any
      telephonic instruction shall not invalidate such telephonic
      instruction.

     

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    

     

    (d) Application
      of Remittances.
      Borrower will use only invoices in forms that Lender has approved, and
      Borrower’s billings on such invoices will be conclusive evidence of assignment
      and transfer hereunder to Lender of the Accounts represented thereby, whether
      or
      not Borrower executes any other instrument with regard to any specific Account.
      Borrower will cause the proceeds of Accounts to be forwarded by all Customers
      directly to a lockbox designated by Lender. Such lockbox shall be maintained
      by
      Wells Fargo Bank, N.A., and all payments received in such lockbox shall be
      deposited in a bank account in Lender’s name and owned by Lender at Wells Fargo
      Bank, N.A, for application to the Obligations. All checks or other remittances
      received by Borrower for application to Accounts will be received by Borrower
      in
      trust for Lender, and Borrower will turn over to Lender the identical
      remittances as speedily as possible, appropriately endorsed, if necessary.
      As
      compensation to Lender for delays in the collection and clearance of such
      checks, Borrower agrees to pay interest on each remittance, including wire
      transfers, from the date of Lender’s receipt thereof plus the number of days set
      forth on Item 5
      of the Schedule at
      the
      rate applicable to loans outstanding hereunder, as set forth in Section 3
      below.
      Borrower will account fully and faithfully for and promptly pay or turn over
      to
      Lender proceeds in whatever form received of the sale or other disposition
      of
      any Collateral, and Borrower agrees that the inclusion of proceeds in
“Collateral” will not be deemed to mean that Lender consents to Borrower’s
      disposition of Collateral other than in accordance with the terms of this
      Agreement.

    


    (e) Conditions
      to Obligation to Make Loans.
      Borrower acknowledges that Lender’s obligation to make loans to Borrower (or to
      issue or create or cause the issuance or creation by Lender or its Affiliates
      of
      letters of credit or acceptances for Borrower’s account) is subject to the
      following terms and conditions:

    


    (i) Lender
      has
      no
      obligation to make the initial loan to Borrower or to extend any other financial
      accommodation to Borrower unless and until each condition precedent specified
      on
Item 6
      of the Schedule
      has been
      fulfilled to Lender’s satisfaction.

    


    (ii) Lender’s
      obligation to make any loans to Borrower and extend other financial
      accommodations to Borrower (including the initial loans) is subject to the
      conditions that, as of the date of any such loan or other accommodation, no
      Default will have occurred and be continuing hereunder, there will have occurred
      no material adverse change in Borrower’s financial condition or operations or in
      Borrower’s business prospects as compared to the state of facts existing on the
      Agreement Date, and Borrower’s representations and warranties set forth in this
      Agreement (including any amendment, modification, supplement or extension
      hereof) will be true and correct as if made on and as of the date of each
      subsequent credit request. Each request for a borrowing or other financial
      accommodation by Borrower will be deemed to be a reaffirmation of each of
      Borrower’s warranties and representations hereunder.

    


    (f) Repayment
      of Loans.
      In the
      event of any breach by Borrower of any provision hereof or upon termination
      of
      this Agreement, Borrower will repay upon demand all of the Obligations. If
      no
      demand is earlier made, Borrower will repay all Obligations in full, without
      demand or notice, on the last day of the term of this Agreement (as provided
      in
      clause (g) below). If at any time for any reason, the aggregate outstanding
      principal amount of all loans exceeds the Borrowing Base or any other limitation
      on the amount available to be borrowed hereunder, Borrower will immediately,
      without notice or demand, repay the outstanding principal amount of the loans,
      together with accrued and unpaid interest on the amount repaid, in an amount
      equal to such excess. Borrower shall make each payment required hereunder or
      under any other Loan Document without setoff, deduction or
      counterclaim.

     

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

     

    (g) Maturity.
      This
      Agreement will continue in full force and effect from the Agreement Date until
      the termination date provided for in Item 7
      of the Schedule.

    


    (h) Voluntary
      Termination.
      Following the first six (6) months of the initial term of this Agreement,
      Borrower may terminate this Agreement at any time upon at least 60 days’ prior
      written notice to Lender. On the date specified in such notice, termination
      will
      be effective, so long as Borrower has paid to Lender, in same day funds, an
      amount equal to the aggregate principal amount of all loans outstanding on
      such
      date, together with accrued interest thereon, the originals of all letters
      of
      credit and bankers acceptances, if any, issued, created or guaranteed by Lender
      or any of its Affiliates for Borrower’s account have been returned for
      cancellation or have been presented and paid by Borrower or other arrangements
      satisfactory to Lender have been made, all other Obligations outstanding and
      unpaid have been paid in full in cash, and Borrower has provided Lender an
      indemnification agreement satisfactory to Lender with respect to returned and
      dishonored items and such other matters as Lender shall require.

    


    (i) Termination
      on Default.
      Notwithstanding the foregoing, should a Default occur and be continuing, Lender
      will have the right to terminate this Agreement at any time without
      notice.

    


    (j) Survival.
      Notwithstanding termination, all the terms, conditions, and provisions hereof
      (including Lender’s security interest in the Collateral, but excluding any
      obligations of Lender hereunder) will continue to be fully operative until
      all
      Obligations have been fully disposed of, concluded, paid, satisfied, and
      liquidated.

    


    (k) Payments
      as Loans.
      Borrower’s failure to pay any amount due from Borrower under this Agreement or
      any other Loan Document, whether for principal, interest, fees, premiums, costs,
      expenses or otherwise, shall be deemed to be a request by Borrower for a loan
      hereunder, and Lender may charge Borrower’s loan account for any such amount.
      Additionally, if Lender determines in its discretion that extensions of credit
      are necessary to protect the Collateral, Lender is hereby authorized to make
      such extensions of credit and charge them to Borrower’s loan
      account.

     

    3. Interest
      and Fees.

    


    (a) Interest
      on Loans.
      Borrower will pay Lender or, at Lender’s option, Lender may charge Borrower’s
      loan account with, interest on the average daily net principal amount of loans
      outstanding hereunder, calculated monthly and payable on the first day of each
      calendar month, at a rate (computed on the basis of the actual number of days
      elapsed over a year of 360 days) equal to the interest margin specified in
      Item 8
      of the Schedule,
      plus
      the greater of (i) 2.0%, per annum and
      (ii)
      the LIBOR Rate. The “LIBOR
      Rate”
is,
      at
      any time, the rate of interest noted in The
      Wall Street Journal,
      Money
      Rates section, as the “30 day LIBOR Rate”. In the event that The
      Wall Street Journal
      quotes
      more than one rate, or a range of rates, as the LIBOR Rate, then the LIBOR
      Rate
      shall mean the average of the quoted rates. In the event that The
      Wall Street Journal
      ceases
      to publish a LIBOR Rate, then the LIBOR Rate shall be the commercial lending
      rate that most closely replaces the LIBOR Rate, as determined by Lender in
      its
      reasonable discretion. The “LIBOR Rate” may not be the lowest or best rate at
      which Lender calculates interest or extends credit. Any change in the LIBOR
      Rate
      shall be effective for purposes of calculating interest hereunder as of the
      date
      of such change.

     

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

     

    (b) Default
      Interest.
      To the
      extent permitted by law and without limiting any other right or remedy of Lender
      hereunder, whenever there is a Default under this Agreement, the rate of
      interest on the unpaid principal balance of the Obligations shall, at the option
      of Lender, be increased by adding the default margin identified on Item 9
      of the Schedule
      to the
      interest rate otherwise in effect hereunder. Lender may charge such default
      interest rate retroactively beginning on the date the applicable Default first
      occurred or existed. Borrower acknowledges that: (i) such additional rate is
      a
      material inducement to Lender to make the loans described herein; (ii) Lender
      would not have made the loans in the absence of the agreement of Borrower to
      pay
      such additional rate; (iii) such additional rate represents compensation for
      increased risk to Lender that the loans will not be repaid; and (iv) such rate
      is not a penalty and represents a reasonable estimate of (A) the cost to Lender
      in allocating its resources (both personnel and financial) to the ongoing
      review, monitoring, administration and collection of the loans, and (B)
      compensation to Lender for losses that are difficult to ascertain. In the event
      of termination of this Agreement by either party hereto, Lender’s entitlement to
      this charge will continue until all Obligations are paid in full.

    


    (c) Fees.
      Borrower will pay to Lender the fees set forth in Item 10
      of the Schedule.

    


    (d) No
      Usury.
      Borrower acknowledges that Lender does not intend to reserve, charge or collect
      interest on money borrowed under this Agreement at any rate in excess of the
      rates permitted by applicable law and that, should any interest rate provided
      for in this Agreement exceed the legally permissible rate(s), the rate will
      automatically be reduced to the maximum rate permitted under applicable law.
      If
      Lender should collect any amount from Borrower which, if it were interest,
      would
      result in the interest rate charged hereunder exceeding the maximum rate
      permitted by applicable law, such amount will be applied to reduce principal
      of
      the Obligations or, if no Obligations remain outstanding, will be refunded
      to
      Borrower.

    


    (e) Monthly
      Statements. Lender
      will render a statement to Borrower each month for loans, payments, and other
      transactions pursuant to this Agreement, and such statement rendered by Lender
      will be binding upon Borrower unless Lender is notified in writing to the
      contrary within 30 days after the date such statement is rendered.

     

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

     

    4. Representations
      and Warranties of Borrower.

     

    (a) Authority,
      Compliance with Laws, Litigation, No Material Adverse Change,
      Etc.
      Borrower
      represents and warrants to Lender that: (i) Borrower’s exact legal name, type of
      organization, state of organization and organizational identification number
      are
      fully and accurately set forth on Item 11
      of the Schedule,
      and
      Borrower is duly organized and validly existing under the laws of such state
      of
      organization; (ii) the execution, delivery, and performance of this Agreement
      and the other Loan Documents are within Borrower’s corporate or other
      organizational powers, have been duly authorized, do not violate Borrower’s
      constituent documents, any law or regulation, including without limitation,
      any
      law or regulation relating to occupational health and safety or protection
      of
      the environment, applicable to Borrower, or any indenture, agreement, or
      undertaking to which Borrower is a party or by which Borrower or Borrower’s
      property is bound; (iii) this Agreement and the other Loan Documents to which
      Borrower is a party constitute valid, binding and enforceable obligations of
      Borrower in accordance with the terms hereof and thereof, except as
      enforceability may be limited by bankruptcy, insolvency, fraudulent conveyance,
      moratorium or other similar laws applicable to creditors’ rights generally or by
      generally applicable equitable principles affecting the enforcement of
      creditors’ rights; (iv) Borrower has no subsidiaries or other investments in
      other Persons, except as set forth on Item 12
      of the Schedule;
      (v)
      Borrower is in compliance in all material respects with all laws, rules and
      regulations applicable to Borrower, including laws, rules or regulations
      concerning the environment, occupational health and safety and pensions or
      other
      employee benefits; (vi) except as set forth on Item 13
      of the Schedule,
      there
      is no litigation or investigation pending against Borrower (or, so far as
      Borrower is aware, threatened) which, if it were decided adversely to Borrower,
      could reasonably be expected to have a material adverse effect on Borrower,
      Borrower’s financial or operational condition or Borrower’s prospects (taking
      into account any insurance coverage that has been acknowledged by the insurer);
      (vii) other than debt that is to be repaid from the proceeds of the first
      advance hereunder, Borrower is not indebted to any other Person for money
      borrowed nor has Borrower issued any guaranty of payment or performance by
      any
      other Person, except as set forth on Item 14
      of the Schedule;
      (viii)
      since the date of the financial statements of Borrower most recently delivered
      to Lender, there has been no material adverse change in Borrower’s business,
      Borrower’s financial or operational condition or Borrower’s business prospects;
      and (ix) Borrower is, and after giving effect to the initial loans under this
      Agreement and the application of the proceeds of such loans Borrower will be,
      solvent and has sufficient revenues to pay Borrower’s obligations as they come
      due and adequate capital with which to conduct Borrower’s business.

    


    (b) Title
      to Assets, Other Collateral Matters.
      Borrower represents and warrants to Lender that: (i) Borrower has good and
      marketable title to the Collateral, free of all Liens except for Permitted
      Liens, and no financing statement, mortgage, notice of Lien, deed of trust,
      security agreement, or any other agreement or instrument creating or giving
      notice of any Lien against any of the Collateral has been signed, authorized
      or
      delivered by Borrower, except in Lender’s favor or with respect to Permitted
      Liens; (ii) with regard to each Account as it arises, except as set forth on
      a
      Borrowing Base Certificate including such Account: (A) Borrower will have made
      delivery of the goods or will have rendered the services ordered; (B) the
      Customer will have accepted the goods and/or services; and (C) no Customer
      dispute will exist in any respect, including, without limitation, disputes
      as to
      price, terms, warranties, quantity or quality, and claims of set-off, release
      from liability or defense based upon any act of God or a public enemy or war
      or
      because of the requirements of law or of rules, orders, or regulations having
      the force of law; (iii) all Inventory is in good condition, meets all applicable
      governmental standards and is currently usable or saleable in the ordinary
      course of Borrower’s business for a price approximating at least Borrower’s cost
      thereof; (iv) all Equipment is in good condition and state of repair, ordinary
      wear and tear excepted; (v) all Collateral meets applicable government
      standards; (vi) in the past five years, except as set forth on Item 15
      of the Schedule
      (A)
      Borrower has not used any other legal, trade or fictitious names, and (B)
      Borrower has not been a party to any merger or purchased assets from any other
      Person other than in the ordinary course of business; and (vii) each of
      Borrower’s chief executive office and principal place of business, all
      Inventory, all Equipment and all other Collateral is located at the addresses
      (including the county) set forth on Item 16
      of the Schedule and
      has
      not been located at any other location during the five year period prior to
      the
      Agreement Date.

     

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

     

    (c) Ownership
      Structure. Borrower
      represents and warrants that (i) Item 17
      of the Schedule
      accurately describes the ownership of Borrower’s capital stock, membership
      interests or other equity interests, and (ii) the individual(s) listed on
Item 17
      of the Schedule
      have,
      directly or indirectly, voting and managerial control of Borrower. 

    


    (d) Additional
      Representations.
      Borrower represents and warrants to Lender that: (i) Borrower is not engaged
      as
      one of Borrower’s principal activities in owning, carrying or financing the
      purchase or ownership by others of “margin stock” (as defined in Regulation U of
      the Board of Governors of the Federal Reserve System); (ii) Borrower owns no
      real property and leases no real property other than as listed on Item 18
      of the Schedule;
      (iii) a
      true, correct and complete list of any warehousemen, processors, consignees
      or
      other bailees with possession or control of any Inventory is set forth on
Item 18
      of the Schedule;
      and
      (iv) a list and brief description of all bank accounts maintained by Borrower
      with any bank or financial institution is set forth on Item 19
      of the Schedule.

     

    5. Collateral.

    


    (a) Grant
      of Security Interest.
      To
      induce Lender to accept this Agreement and to make loans to Borrower from time
      to time pursuant to its terms, Borrower hereby grants to Lender, for itself
      and
      as agent for any Affiliate of Lender, a security interest in, and assigns,
      mortgages and pledges to Lender, for itself and as agent for any Affiliate
      of
      Lender, all of Borrower’s right, title and interest in and to all of Borrower’s
      property, whether real or personal, tangible or intangible, now owned or
      existing or hereafter acquired or arising, including all of the following
      (collectively, the “Collateral”):

    


    (i) all
      Accounts, Inventory,
      Equipment, Goods, General Intangibles and Negotiable Collateral;

    


    (ii) all
      investment property, securities and securities accounts and financial assets,
      as
      well as all bank and depository accounts;

    


    (iii) all
      chattel paper (whether tangible or electronic) and contract rights;

    


    (iv) all
      guaranties, collateral, Liens on real or personal property, leases, letters
      of
      credit, letter-of-credit rights, supporting obligations, and all other rights,
      agreements, and property securing or relating to payment of Accounts or any
      other Collateral;

    


    (v) all
      documents, books and records relating to any Collateral or to Borrower’s
      business;

     

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

     

    (vi) all
      other
      property of Borrower’s now or hereafter in the possession or control of Lender
      or any of Lender’s Affiliates (including cash, money, credits and balances of
      Borrower held by or on deposit with Lender or any Affiliate of
      Lender);

    


    (vii) all
      other
      assets of any Obligor in which Lender receives a security interest to secure
      all
      or part of the Obligations or which hereafter come into the possession, custody
      or control of Lender or any Affiliate of Lender;

    


    (viii) all
      of
      Borrower’s commercial tort claims listed on (A) Item 20
      of the Schedule
      (which
      Borrower represents and warrants is a true, accurate and complete list of all
      of
      Borrower’s commercial tort claims as of the Agreement Date) or (B) any other
      writing provided to Lender pursuant to Section 7(g);
      and

    


    (ix) all
      proceeds and products of all of the foregoing in any form, including amounts
      payable under any policies of insurance insuring all or any of the foregoing
      against loss or damage, all parts, accessories, attachments, special tools,
      additions, replacements, substitutions and accessions to or for all or any
      of
      the foregoing, all condemnation or requisition payments with respect to all
      or
      any of the foregoing and all increases and profits received from all or any
      of
      the foregoing.

    


    (b) Obligations.
      Such
      grant, assignment, mortgage and transfer is made for the purpose of securing
      and
      the Collateral secures and will continue to secure all of the
      Obligations.

     

    6. Financial
      Covenants.
      Borrower shall comply with each of the financial covenants set forth on
Item 21
      of the Schedule.

     

    7. Collateral
      Covenants.

    


    (a) Accounts.
      Borrower will notify Lender promptly of and settle all Customer disputes, but,
      if Lender so elects, Lender will have the right at all times to settle,
      compromise, adjust, or litigate all Customer disputes directly with the Customer
      or other complainant upon such terms and conditions as Lender deems advisable
      without incurring liability to Borrower for Lender’s performance of such acts.
      All of Borrower’s books and records concerning Accounts and a copy of Borrower’s
      general ledger will be maintained at the address of Borrower’s chief executive
      office set forth on Item 16
      of the Schedule.
      All
      Accounts included on any Borrowing Base Certificate will be, except as indicated
      on such Borrowing Base Certificate or subsequently in writing to Lender, bona
      fide and
      existing obligations of Customers arising out of the sale of goods and/or the
      rendering of services by Borrower in the ordinary course of Borrower’s business,
      owned by and owing to Borrower without defense, setoff or counterclaim, and
      will
      be subject to a perfected, first-priority security interest in Lender’s favor
      and will be free and clear of all other Liens.

    


    (b) Inventory.
      All
      Inventory will at all times be located at one of the Inventory locations set
      forth on Item 16
      of the Schedule
      as the
      current location of Borrower’s chief executive office or a current location of
      other Collateral, will be subject to a perfected, first-priority security
      interest in Lender’s favor and will be free and clear of all other Liens. Sales
      of Inventory will be made in compliance with all material requirements of
      applicable law.

     

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

     

    (c) Equipment.
      Borrower will maintain all Equipment used or useful in Borrower’s business in
      good and workable condition, ordinary wear and tear excepted, subject to a
      perfected, first-priority security interest in Lender’s favor and free and clear
      of all other Liens (other than Permitted Liens), at one of the locations set
      forth on Item 16
      of the Schedule
      as the
      current location of Borrower’s chief executive office or a current location of
      other Collateral.

    


    (d) Defense
      of Title.
      All
      Collateral will at all times be owned by Borrower, and Borrower will defend
      Borrower’s title to the Collateral against the claims of third parties. Borrower
      will at all times keep accurate and complete records of the
      Collateral.

    


    (e) Perfection;
      Further Assurances.
      Borrower will give Lender at least 30 days’ prior written notice of any change
      in Borrower’s name, state of organization or organizational identification
      number, any change in the location of Borrower’s principal place of business or
      chief executive office, any change in the locations of Borrower’s Inventory or
      Equipment and any acquisition by Borrower of any interest in real property.
      Borrower will, at Borrower’s expense, promptly execute and deliver from time to
      time at Lender’s request and pay the costs of filing such additional financing
      statements, mortgages, or other evidences of Liens as may be necessary or
      desirable to perfect or continue perfection of Lender’s security interest in
      Borrower’s property or, at Lender’s request, made in Lender’s sole and absolute
      discretion, to create and perfect a Lien on newly acquired personal or real
      property. Borrower will use all reasonable efforts to obtain from any landlord,
      warehouseman, processor or other third party operator of premises on which
      any
      Collateral is located an acceptable Lien waiver or subordination agreement
      in
      Lender’s favor with respect to such Collateral. Lender shall have the right to
      maintain rent reserves and other appropriate reserves against the availability
      under the Borrowing Base unless and until Lender has received all waivers or
      subordination agreements required by Lender and containing terms and conditions
      satisfactory to Lender in its sole discretion from such landlords, warehousemen,
      or other third party operators of premises where any Collateral is located.
      All
      Collateral is and will continue to be, except as expressly consented to by
      Lender, personal property and will not, by reason of attachment or connection
      to
      any realty, either become or be deemed to be a fixture or appurtenance to such
      realty and will at all times be readily removable without material damage to
      any
      realty. In the event that any Collateral, including proceeds, is evidenced
      by or
      consists of Negotiable Collateral, Borrower shall, immediately upon written
      request therefor from Lender, endorse and assign such Negotiable Collateral
      over
      to Lender and deliver actual physical possession of the Negotiable Collateral
      to
      Lender. Borrower shall at any time and from time to time take such steps as
      Lender may request for Lender (i) to obtain an acknowledgment, in form and
      substance satisfactory to Lender, of any bailee having possession of any of
      the
      Collateral that such bailee holds such Collateral for Lender, (ii) to obtain
      “control” of any investment property, deposit accounts, letter-of-credit rights
      or chattel paper (including electronic chattel paper) in accordance with Article
      9 of the UCC, with any agreements establishing control to be in form and
      substance satisfactory to Lender, and (iii) otherwise to insure the continued
      perfection and priority of Lender’s security interest in any of the Collateral
      and of the preservation of its rights therein.

     

    
      
        
        

      

      
        15

        
          

        

      

      
        
        

      

    

     

    (f) Insurance.
      Borrower will obtain and maintain in full force and effect insurance covering
      the Collateral against all risks to which the Collateral is exposed, including
      loss, damage, fire, theft, and all other such risks, in such amounts, with
      such
      companies, under such policies and in such form as will be satisfactory to
      Lender, which policies will name Lender as an additional insured and provide
      that loss thereunder will be payable to Lender as Lender’s interests may appear
      upon a loss payee endorsement acceptable to Lender. All proceeds of any such
      insurance will be paid over to Lender directly, and Lender may hold such
      proceeds as cash collateral, apply such proceeds to payment of the Obligations,
      whether or not due, in such order of application as Lender determines or, in
      Lender’s sole discretion, apply such proceeds, in whole or in part, to the
      replacement, restoration or rebuilding of the lost or damaged property. Borrower
      will provide to Lender from time to time certificates showing such coverage
      in
      effect and, at Lender’s request, the underlying policies.

    


    (g) Commercial
      Tort Claims.
      If
      Borrower shall at any time commence, assert or otherwise acquire a commercial
      tort claim, Borrower shall immediately notify Lender in a writing signed by
      Borrower of the details thereof and grant to Lender in such writing a security
      interest therein and in the proceeds thereof, all in accordance with and subject
      to the terms of this Agreement, with such writing to be in form and substance
      satisfactory to Lender.

    


    (h) Financing
      Statements.
      Lender
      may at any time and from time to time file financing statements, continuation
      statements and amendments thereto that describe the Collateral as “all assets”
of Borrower or words of similar effect and which contain any other information
      required by Part 5 of Article 9 of the UCC for the sufficiency or filing
      office acceptance of any financing statement, continuation statement or
      amendment, including whether Borrower is an organization, the type of
      organization and any organization identification number issued to Borrower.
      Borrower agrees to furnish any such information to Lender promptly upon request.
      Any such financing statements, continuation statements or amendments may be
      signed by Lender on behalf of Borrower or filed by Lender without the signature
      of Borrower and may be filed at any time in any jurisdiction. Borrower
      acknowledges that it is not authorized to file any financing statement or
      amendment or termination statement with respect to any financing statement
      naming Borrower as the debtor and Lender as the secured party without the prior
      written consent of Lender, and Borrower agrees that it shall not do so without
      the prior written consent of Lender.

     

    8. Negative
      Covenants.

    


    (a) No
      Merger.
      Borrower will not merge or consolidate with any other Person or sell, transfer,
      lease, abandon, or otherwise dispose of a substantial portion of Borrower’s
      assets or any of the Collateral or any interest therein, except that, so long
      as
      no Default has occurred and is continuing, Borrower may sell Inventory in the
      ordinary course of Borrower’s business.

    


    (b) No
      Debt or Liens; Taxes.
      Borrower will not obtain or attempt to obtain from any Person other than Lender
      any loans, advances, or other financial accommodations or indebtedness of any
      kind, nor will Borrower enter into any direct or indirect guaranty of any
      obligation of another Person, other than (i) Subordinated Debt, and (ii)
      indebtedness in connection with purchase money security interests constituting
      Permitted Liens (and capital leases) not to exceed, in aggregated principal
      amount, the amount set forth on Item 22
      of the Schedule
      at any
      one time outstanding. Borrower will not permit any of Borrower’s assets to be
      subject to any Lien other than Permitted Liens. Borrower shall pay when due
      (or
      before the expiration of any extension period) any tax or other assessment
      (including all required payments or deposits with respect to withholding taxes),
      and Borrower will, upon request by Lender, promptly furnish Lender with proof
      satisfactory to Lender that Borrower has made such payments and
      deposits.

     

    
      
        
        

      

      
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    (c) No
      Distributions.
      Borrower will not retire, repurchase or redeem any of Borrower’s capital stock
      or other ownership interest in Borrower, nor declare or pay any dividend in
      cash
      or other property (other than additional shares of capital stock or additional
      ownership interests) to any owner or holder of Borrower’s shares or other
      ownership interest.

    


    (d) No
      ERISA Liabilities.
      Borrower will make timely payments of all contributions required to meet the
      minimum funding standards for Borrower’s employee benefit plans subject to the
      Employee Retirement Income Security Act of 1974 (as amended, “ERISA”)
      and
      will promptly report to Lender the occurrence of any reportable event (as
      defined in ERISA) and any giving or receipt by Borrower of any governmental
      notice (other than routine requests for information) in respect of any such
      plan.

    


    (e) Transactions
      with Affiliates.
      Borrower will not engage in any transaction with any of Borrower’s officers,
      directors, employees, owners or other Affiliates, except for an “arms-length”
transaction on terms no less favorable to Borrower than would be granted to
      Borrower in a transaction with a Person who is not an Affiliate, which
      transaction shall be approved by Borrower’s disinterested directors and shall be
      disclosed in a timely manner to Lender prior to the consummation of the
      transaction.

    


    (f) Loans/Investments.
      Borrower will not make any loans or advances to or extend any credit to any
      Person except (i) the extension of trade credit in the ordinary course of
      business; and (ii) advances to employees not to exceed an aggregate outstanding
      amount of $10,000 at any one time outstanding for all employees. Borrower shall
      not purchase, acquire or otherwise invest in any Person except: (A) existing
      investments in Borrower’s subsidiaries described on Item 12
      of the Schedule;
      (B)
      direct obligations of the United States of America maturing within one year
      from
      the acquisition thereof; (C) certificates of deposit issued by, or investment
      accounts in, banks or financial institutions having a net worth of not less
      than
      $50,000,000; and (D) commercial paper rated A-1 by Standard & Poor’s Ratings
      Group or P-1 by Moody’s Investors Service, Inc. Upon the request of Lender,
      Borrower agrees to execute any agreement, endorsement, assignment, notice,
      or
      other document which Lender requires in order to perfect Lender’s security
      interest in the foregoing permitted investments. Without limiting the generality
      of the foregoing, Borrower shall not create any new subsidiary.

    


    (g) Capital
      Expenditures.
      Borrower shall not make or incur capital expenditures in excess of the amount
      set forth on Item 23
      of the Schedule
      during
      any fiscal year.

    


    (h) Compensation.
      Borrower shall not increase the total compensation paid to its officers or
      directors (or any of their relatives), including salaries, withdrawals, fees,
      bonuses, commissions, drawing accounts and other payments, whether directly
      or
      indirectly, in money or otherwise, during any fiscal year of Borrower during
      the
      term of this Agreement in an aggregate amount for all such officers and
      directors in excess of limit specified in Item 24
      of the Schedule.

     

    
      
        
        

      

      
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    (i) Amendments
      of Documents.
      Borrower shall not amend or modify any note, instrument or agreement in
      connection with any Subordinated Debt without the prior written consent of
      Lender.

    


    (j) Restricted
      Payments.
      Borrower shall not prepay any indebtedness or make any payments on Subordinated
      Debt; provided, however, that a Borrower may make payments that are specifically
      permitted under the applicable subordination agreement; provided further,
      however, that upon the occurrence of a Default and so long as it is continuing,
      Borrower shall not make any payment on Subordinated Debt.

     

    9. Reporting
      and Information.

    


    (a) Financial
      Statements.
      Borrower will submit to Lender as soon as available, and in any case not later
      than 30 days after the end of each month, a balance sheet, a detailed statement
      of profit and loss and a statement of cash flows, in each case prepared in
      accordance with GAAP and certified by Borrower’s chief financial or accounting
      officer as presenting fairly, in accordance with GAAP, Borrower’s financial
      condition as of the last day of such month and Borrower’s results of operations
      for such month and for the portion of Borrower’s fiscal year ending with such
      month. Borrower will also submit to Lender annual financial statements within
      90
      days after the end of each fiscal year, including a balance sheet, the related
      statement of profit and loss and stockholders’ equity and a statement of cash
      flows, in each case prepared in accordance with the requirements set forth
      on
Item 25
      of the Schedule.
      Borrower will also submit to Lender annually at least 60 days prior to
      Borrower’s fiscal year end forecasted financial statements for the upcoming
      fiscal year, containing a projected balance sheet and profit and loss statement.
      Together with each monthly and annual financial statement, Borrower will deliver
      to Lender the certification of Borrower’s chief financial or accounting officer
      in the form of Exhibit
      B
      attached
      hereto to the effect that Borrower is in compliance with the terms and
      conditions of this Agreement, and setting forth in detail the calculation of
      all
      financial covenants, or, if Borrower is not in compliance, describing the nature
      of any noncompliance and the steps Borrower is taking or proposes to take to
      remedy the same.

    


    (b) Collateral
      Reports.
      Concurrent with the execution of this Agreement by Borrower and concurrent
      with
      each request for a loan pursuant to Section 2(a),
      but no
      less frequently than as required by Item 26
      of the Schedule,
      Borrower shall deliver to Lender a fully completed Borrowing Base Certificate
      certified by the Chief Executive Officer or Chief Financial Officer of Borrower
      as being true and correct. Concurrent with the delivery of each such Borrowing
      Base Certificate, Borrower shall provide a written report to Lender of all
      materially significant returns, disputes and claims, together with sales and
      other reports relating to the Accounts and Inventory as required by Lender.
      Borrower shall deliver to Lender within ten (10) days after the end of each
      month a report, reflecting the status as of the end of each month and certified
      by the Chief Executive Officer or Chief Financial Officer of Borrower as being
      true and correct, containing (i) a current detailed aging, by total and by
      Customer, of Borrower’s Accounts, (ii) a current detailed aging, by total and by
      vendor, of Borrower’s accounts payable, and (iii) a detailed report of
      Borrower’s Inventory, setting forth the quantity, type and cost thereof, all of
      which shall be set forth in a form and shall contain such information as is
      acceptable to Lender. Borrower will also conduct a physical inventory count
      no
      less frequently than annually, adjust Borrower’s records to reflect the results
      of the count and deliver to Lender monthly a list of locations of Inventory
      and
      the types and values of Inventory at each such location, in such form as Lender
      may require. At Lender’s request, Borrower shall conduct such physical inventory
      counts and deliver such information more or less often than described above
      and
      such other information with respect to the Collateral, Borrower or Borrower’s
      business or financial condition as Lender may reasonably request.

     

    
      
        
        

      

      
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    (c) Obligor
      Financials.
      Within
      90 days after each fiscal year-end, Borrower will cause each Obligor (other
      than
      Borrower) to deliver to Lender a financial statement as of such year-end, in
      such form as Lender may reasonably request.

    


    (d) Other
      Information.
      Borrower will notify Lender as promptly as possible of any Default, any receipt
      by Borrower of notice from any governmental authority that Borrower has or
      may
      have violated any law, rule or regulation applicable to Borrower or the terms
      or
      conditions of any permit or license Borrower holds or is required to hold in
      connection with the conduct of Borrower’s business, any amendment to Borrower’s
      constituent documents and any change in Borrower’s management or ownership, and
      the commencement of any material litigation, claim or action against
      Borrower.

     

    10. Inspection
      Rights; Expenses; Etc.

    


    (a) Inspection.
      Lender
      may examine and make copies of Borrower’s records, the Collateral and all other
      assets of Borrower or any portion thereof, wherever located, and may enter
      upon
      Borrower’s premises for such purposes, without notice, during business hours.
      Borrower will assist Lender in whatever way necessary to make each such
      examination. Lender may discuss Borrower’s financial condition with Borrower’s
      independent accountants without liability to Lender or such
      accountants.

    


    (b) Performance
      by Lender.
      Lender
      may, from time to time at Lender’s option, perform any agreement of Borrower’s
      hereunder which Borrower fails to perform and take any other action which Lender
      deems necessary for the maintenance or preservation of any of the Collateral
      or
      Lender’s interest therein, and Borrower agrees to reimburse Lender immediately
      on demand for all of Lender’s expenses in connection with the foregoing
      (including, without being limited to, reasonable fees and expenses of legal
      counsel), together with interest thereon at the default rate of interest
      provided for herein from the date any such expense is incurred until reimbursed
      by Borrower.

    


    (c) Field
      Examinations; Inspections.
      Lender
      shall have the right without hindrance or delay to conduct field examinations
      to
      inspect the Collateral, Borrower’s books and records and all other aspects of
      Borrower’s business. Borrower agrees to pay for such examinations as more fully
      described on Item 27
      of the Schedule.
      Lender
      shall have full access to all records available to Borrower from any credit
      reporting service, bureau or similar service and shall have the right to examine
      and make copies of any such records. Lender may exhibit a copy of this Agreement
      to such service and such service shall be entitled to rely on the provisions
      hereof in providing access to Lender as provided herein.

     

    
      
        
        

      

      
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    11. Rights
      of Setoff, Application of Payments, Etc.
      Lender
      will be entitled to hold or set off all sums and all other property of Borrower
      at any time to Borrower’s credit or in Lender’s possession (or the possession of
      any of Lender’s Affiliates) by pledge or otherwise or upon or in which Lender
      may have a Lien, as security for any and all of the Obligations. Lender will
      have the right and is hereby irrevocably authorized and directed to charge
      to
      Borrower’s account the amounts of any and all such Obligations. Recourse to the
      Collateral or other security for the Obligations will not at any time be
      required and Borrower hereby waives any right of marshalling Borrower may have.
      Borrower’s obligation to pay or repay the Obligations is unconditional. Borrower
      agrees that Lender may take such action with regard to the custody and
      collection of Accounts assigned to Lender as Lender may deem necessary. Borrower
      agrees that failure to take any action with regard to any given Account will
      not
      be unreasonable until and unless Lender receives a written request for specific
      action from Borrower with regard thereto and fails to respond thereto within
      a
      commercially reasonable time. Borrower irrevocably waives the right to direct
      the application of any and all payments and collections at any time or times
      hereafter received by Lender from or on behalf of Borrower, and Borrower hereby
      irrevocably agrees that Lender shall have the continuing exclusive right to
      apply and reapply any and all such payments and collections received at any
      time
      or times hereafter by Lender or its agent against the Obligations, in such
      manner and in such order as Lender may deem advisable.

     

    12. Attorney-in-Fact.
      Borrower hereby appoints and constitutes Lender as Borrower’s attorney-in-fact:
      (a) at any time, (i) to endorse Borrower’s name upon any notes, acceptances,
      checks, drafts, money orders, and other evidences of payment that come into
      Lender’s possession and to deposit or otherwise collect the same; (ii) to send
      verifications of accounts to Customers; and (iii) to execute in Borrower’s name
      any financing statements, affidavits and notices with regard to any and all
      Lien
      rights; and (b) while any Default exists, (i) to receive, open, and dispose
      of
      all mail addressed to Borrower; (ii) to notify the postal authorities to change
      the address and delivery of mail addressed to Borrower to such address as Lender
      may designate; (iii) to sign Borrower’s name on any invoice or bill of lading
      relating to the Collateral, on drafts against Customers, and notices to
      Customers; and (iv) to do all other acts and things necessary to carry out
      this
      Agreement. All acts of said attorney-in-fact are hereby authorized, ratified
      and
      approved, and said attorney-in-fact will not be liable for any errors or mistake
      of fact or law unless caused solely by the gross negligence or willful
      misconduct of Lender. This power, being coupled with an interest, is irrevocable
      while any of the Obligations remain unpaid or Lender has any commitment to
      Borrower under this Agreement or otherwise.

     

    
      
        
        

      

      
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    13. Defaults
      and Remedies.

     

    (a) Defaults.
      For
      purposes of this Agreement, “Default”
means
      the occurrence of any of the following events: (i) non-payment when due of
      any
      amount payable on any of the Obligations or breach of any covenant or failure
      to
      perform any agreement or failure to meet any of Borrower’s or any other
      Obligor’s obligations contained herein, in any other Loan Document or in any
      other agreement out of which any of the Obligations arose; (ii) non-payment
      when
      due of the premium on any insurance policy required to be maintained hereunder;
      (iii) any statement, representation, or warranty made in writing in this
      Agreement or in any other writing or statement at any time furnished or made
      by
      Borrower or any other Obligor to Lender proves to have been untrue in any
      material respect as of the date furnished or made; (iv) Borrower’s default under
      any other agreement for borrowed money or any other agreement involving more
      than the amount set forth on Item 28
      of the Schedule;
      (v)
      suspension of the operation of Borrower’s present business; (vi) any Obligor
      becomes insolvent or unable to pay its debts as they mature, or admits in
      writing that it is insolvent or unable to pay its debts, makes an assignment
      for
      the benefit of creditors, makes a conveyance fraudulent as to creditors under
      any state or federal law, or a proceeding is instituted by or against any
      Obligor alleging that such Obligor is insolvent or unable to pay debts as they
      mature, or a petition under any provision of Title 11 of the United States
      Code,
      as amended, is filed by or against any Obligor, and in the case of any such
      involuntary proceeding, such proceeding continues undismissed or unstayed for
      30
      consecutive calendar days or any order granting the relief requested shall
      be
      entered; (vii) entry of any judgment in excess of the amount set forth on
Item 29
      of the Schedule
      against
      any Obligor or creation, assertion, or filing of any judgment or tax Lien
      against the property of any Obligor, in each case which remains undischarged
      for
      10 days after such entry or filing; (viii) death of any Obligor who was a
      natural person, or death or withdrawal of any partner of any Obligor which
      is a
      partnership, or dissolution, merger, or consolidation of any Obligor which
      is a
      corporation, partnership or limited liability company; (ix) transfer of a
      substantial part (determined by market value) of the property of any Obligor;
      (x) sale, transfer or exchange, either directly or indirectly, of a controlling
      stock or equity ownership interest of any Obligor (without limiting the
      generality of the foregoing, a Default shall exist if Christopher J. Reed shall
      cease to own, directly or indirectly, less than 25% of the capital stock or
      equity ownership interests of Borrower or cease to have direct or indirect
      voting control of Borrower); (xi) termination, unenforceability or withdrawal
      of
      any guaranty for the Obligations, or failure of any Obligor to perform any
      of
      its obligations under such a guaranty or assertion by any Obligor that it has
      no
      liability or obligation under such a guaranty; (xii) appointment of a receiver
      for the Collateral or for any other property in which Borrower has an interest;
      (xiii) seizure of any Collateral by any Person other than Lender; (xiv) any
      person identified on Item 30
      of the Schedule
      shall
      for any reason cease to hold the office of Borrower set forth opposite such
      person’s name on Item 30
      of the Schedule
      and a
      replacement satisfactory to Lender shall not be appointed within 60 days; (xv)
      the occurrence of any act, omission, event or circumstance which has or could
      reasonably be expected to have a materially adverse effect on Borrower or any
      other Obligor; (xvi) payment by Borrower on any Subordinated Debt in violation
      of the applicable subordination agreement; or (xvii) the Pension Benefit
      Guaranty Corporation or the Department of Labor commences proceedings under
      ERISA to terminate any of Borrower’s employee pension benefit
      plans.

    


    (b) Remedies.
      If a
      Default occurs and is continuing:

    


    (i) Lender
      may, without demand or notice to Borrower, terminate Lender’s commitment, if
      any, to make loans or to extend other financial accommodations to Borrower,
      and
      may declare the entire principal amount of all loans outstanding hereunder,
      all
      interest thereon, any unpaid fees (including prepayment fees due as a result
      of
      acceleration of the foregoing payment obligations) and all other Obligations
      of
      any kind or nature to be, and thereupon the same will immediately become, due
      and payable in full; and, in the event of a Default described under clause
      (vi)
      of Section 13(a),
      such
      termination and acceleration shall automatically occur without any notice,
      demand or presentment of any kind. Borrower agrees to deposit with Lender a
      cash
      sum equal to the amount of letters of credit and acceptances issued or
      guaranteed by Lender or any Affiliate of Lender which have not been drawn upon
      or matured, which funds will be used to reimburse Lender or such Affiliate
      of
      Lender upon drawing under any letter of credit or maturity of any
      acceptances.

     

    
      
        
        

      

      
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    (ii) Lender
      may decrease the advance rates set forth in the definition of “Borrowing Base”
in Lender’s discretion.

    


    (iii) Lender
      or
      Lender’s designee may notify Customers that the Accounts have been assigned to
      Lender and that Lender has a security interest therein, collect them directly,
      and charge the collection costs and expenses to Borrower’s loan
      account.

    


    (iv) Lender
      may (A) exercise any of its remedies under any other Loan Document, (B) apply
      any cash collateral to the Obligations (without limiting the foregoing, Lender
      may instruct any bank or other financial institution holding any cash,
      certificate of deposit or other Collateral to pay over such Collateral to
      Lender), and (C) draw on any letter of credit issued for the benefit of Lender
      in connection with this Agreement or any other Loan Document and apply the
      proceeds thereof to the Obligations, in each case without demand or notice
      to
      Borrower or any other Person.

    


    (v) Without
      notice to or demand upon Borrower or any other Person, Lender may make such
      payments and do such acts as Lender considers necessary or reasonable to protect
      its security interest in the Collateral. Borrower authorizes Lender to enter
      each premises where any Collateral is located, take and maintain possession
      of
      the Collateral, or any part of it, and to pay, purchase, contest or compromise
      any Lien which in Lender’s opinion appears to be prior or superior to its
      security interest and to pay all expenses incurred in connection
      therewith.

    


    (vi) Lender
      may ship, reclaim, recover, store, finish, maintain, repair, prepare for sale,
      advertise for sale and sell the Collateral. Any such sale may be either a public
      or private sale, or both, by way of one or more contracts or transactions,
      for
      cash or on terms. It is not necessary that the Collateral be present at any
      such
      sale.

    


    (vii) Lender
      may, without regard to any waste, adequacy of the security or solvency of
      Borrower, apply for the appointment of a receiver of the Collateral, to which
      appointment Borrower hereby consents, whether or not foreclosure proceedings
      have been commenced hereunder or under any other Loan Document and whether
      or
      not a foreclosure sale has occurred;

    


    (viii) Lender
      may, without notice to Borrower except as expressly provided herein, at Lender’s
      option, exercise any of the remedies available to Lender as a secured party
      under the Uniform Commercial Code as in effect in any applicable jurisdiction,
      or otherwise available to Lender under applicable law. Borrower agrees, upon
      Default, to cease the sale or other disposition of the Collateral, except with
      Lender’s prior written consent, and to assemble at Borrower’s expense all the
      Collateral at a convenient place acceptable to Lender. Lender may charge to
      Borrower’s loan account and Borrower will pay Lender upon demand all costs and
      expenses, including reasonable attorneys’ fees (including fees of attorneys that
      are regular salaried employees of Lender or any of its Affiliates), in
      connection with: (A) the liquidation of any Collateral; (B) obtaining or
      enforcing payment of the Obligations; (C) the settlement, adjustment,
      compromise, or litigation of Customer disputes; or (D) the prosecution or
      defense of any action or proceeding either against Lender or against Borrower
      concerning any matter growing out of or in connection with this Agreement and/or
      any Collateral and/or any Obligations. If at any time Lender pays any state,
      city, local, federal, or other tax or levy attributable to the Collateral,
      Borrower will repay to Lender the amount of tax so paid by Lender. Borrower
      agrees that Lender may apply any proceeds from disposition of the Collateral
      first to satisfy obligations secured by Liens prior to Lender’s security
      interest. Borrower will remain liable and will pay on demand any deficiencies
      arising upon the liquidation of any Collateral held by Lender.

     

    
      
        
        

      

      
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    (c) Notices.
      If any
      notice of intended disposition of the Collateral or of any other act by Lender
      is required by law and a specific time period is not stated therein, such
      notice, if given five days before such disposition or act, in accordance with
      the provisions of Section 15(a),
      will be
      deemed reasonably and properly given.

    


    (d) License.
      Borrower hereby grants to Lender 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 of
      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 Lender’s
      benefit.

    


    (e) Remedies
      Cumulative.
      Lender’s rights and remedies under this Agreement and all other Loan Documents
      shall be cumulative. Lender shall have all other rights and remedies not
      inconsistent herewith as provided under the UCC, by law, or in equity. No
      exercise by Lender of one right or remedy shall be deemed an election, and
      no
      waiver by Lender of any default on Borrower’s part shall be deemed a continuing
      waiver. No delay by Lender shall constitute a waiver, election or acquiescence
      by it.

     

    14. Indemnification.
      Borrower agrees to defend, indemnify, and hold harmless Lender and Lender’s
      directors, officers, employees, Affiliates, representatives, attorneys and
      agents (each an “Indemnified
      Person”)
      from
      and against any and all penalties, fines, liabilities, damages, costs, or
      expenses of whatever kind or nature asserted against any such Indemnified
      Person, arising out of, or in any way related to this Agreement or any other
      Loan Document, or the transactions contemplated hereby or thereby, including
      by
      reason of the violation of any law or regulation relating to the protection
      of
      the environment or the presence, generation, disposal, release, or threatened
      release of any hazardous materials in connection with Borrower’s business on, at
      or from any property at any time owned or operated by Borrower, including,
      without limitation, reasonable attorneys’ and consultants’ fees, investigation
      and laboratory fees, court costs, and litigation expenses actually incurred;
      provided,
      however,
      that
      the foregoing indemnity shall not apply to any penalties, fines, liabilities,
      damages, costs, or expenses that are caused solely by the gross negligence
      or
      willful misconduct of Lender. Without limiting the foregoing, Borrower
      represents and warrants that there has been no loan broker or investment banker
      involved in connection with the transactions contemplated hereby, and Borrower
      agrees to indemnify and hold Lender harmless from any claim of compensation
      payable to any loan broker or investment banker in connection with the
      transactions contemplated hereby.

     

    
      
        
        

      

      
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    15. General
      Provisions.

    


    (a) Notices.
      Except
      as specifically provided in this Agreement or in any of the other Loan
      Documents, all notices and communications hereunder and thereunder will be
      in
      writing or by telephone subsequently confirmed in writing. Notices in writing
      will be delivered personally or sent by overnight courier service, by certified
      or registered mail, postage pre-paid, or by facsimile transmission and will
      be
      deemed received, in the case of personal delivery, when delivered; in the case
      of overnight courier service, on the next Business Day after delivery to such
      service; in the case of mailing, on the fourth Business Day after mailing;
      and,
      in the case of facsimile transmission, upon transmittal if confirmed by the
      sender’s facsimile device; provided
      that in
      the case of notices to Lender, Lender will be charged with knowledge of the
      contents thereof only when such notice is actually received by Lender. A
      telephonic notice to Lender as understood by Lender will be deemed to be the
      controlling and proper notice in the event of a discrepancy with or failure
      to
      receive a confirming written notice. Notices to Lender or Borrower will be
      sent
      to the addresses set forth on Item 31
      of the Schedule,
      or any
      other address for either of Borrower or Lender of which the other is notified
      by
      like notice.

    


    (b) Governing
      Law.
      This
      Agreement will be governed by and construed and enforced according to the laws
      of the State of California.

    


    (c) No
      Waiver.
      No
      waiver hereunder will be valid unless in writing signed by Lender and then
      only
      to the extent therein stated. No delay or failure on Lender’s part in the
      exercise of any right or remedy hereunder will operate as a waiver thereof
      or of
      Lender’s right to exercise any other right or remedy.

    


    (d) Time
      of Essence.
      Time is
      of the essence of this Agreement.

    


    (e) Severability.
      Wherever possible, each provision of this Agreement will be interpreted in
      such
      manner as to be effective and valid under applicable law, but if any provision
      of this Agreement will be prohibited by or invalid under applicable law, such
      provision will be ineffective to the extent of such prohibition or invalidity,
      without invalidating the remainder of such provision or the remaining provisions
      of this Agreement.

    


    (f) Successors
      and Assigns.
      Borrower’s and Lender’s rights and obligations hereunder will inure to the
      benefit of Borrower’s and Lender’s respective successors and assigns,
provided
      that
      Borrower acknowledges and agrees that without Lender’s prior written consent,
      which may be withheld for any reason or no reason, Borrower may not assign
      Borrower’s rights or obligations or any part thereof hereunder to any other
      Person. Notwithstanding anything herein to the contrary, Lender may, without
      the
      consent of Borrower, grant a security interest in, sell or assign, grant or
      sell
      participations or otherwise transfer all or any portion of its rights and
      obligations hereunder to one or more Persons.

     

    
      
        
        

      

      
        24

        
          

        

      

      
        
        

      

    

     

    (g) Submission
      to Jurisdiction, Service, Etc. 

    


    (i) Borrower
      agrees that any suit, action or proceeding directly or indirectly arising out
      of
      or relating to this Agreement, any other Loan Documents, the Obligations, the
      relationship between Borrower and Lender created hereby, or arising out of
      any
      judgment against Borrower entered by any court or other tribunal of competent
      jurisdiction with respect to the enforcement of this Agreement, may be
      instituted in any state or federal court located in the County of Los Angeles,
      State of California or in any other court having subject matter jurisdiction,
      as
      Lender may select in Lender’s sole discretion. Borrower hereby expressly and
      irrevocably submits and consents to the non-exclusive jurisdiction of any such
      court in any such suit, action or proceeding, hereby waiving personal service
      of
      the summons and complaint, or other process or papers issued therein. Borrower
      hereby waives, to the fullest extent permitted by law, any objection Borrower
      may have to the venue of any such suit, action or proceeding. Further, Borrower
      hereby irrevocably waives, to the fullest extent Borrower may effectively do
      so,
      the defense of an inconvenient forum to the maintenance of such suit, action
      or
      proceeding. Borrower further agrees that a final judgment in any such suit,
      action or proceeding brought in any such court or tribunal will be conclusive
      and may be enforced in other jurisdictions by suit on the judgment or in any
      other manner provided by law.

    


    (ii) Borrower
      hereby agrees that service of process mailed or delivered to Borrower at
      Borrower’s address for notices provided herein will be deemed in every respect
      effective service of process upon Borrower in any such suit, action or
      proceeding in any such court or tribunal and will be taken and held to be valid,
      personal service on Borrower, irrespective of whether Borrower will then be
      doing, or at any time will have done, business within the State of
      California.

    


    (iii) Nothing
      in this Section
      15(g)
      will
      affect Lender’s right to serve legal process in any other manner permitted by
      law or affect Lender’s right to bring any action or proceeding against Borrower
      or Borrower’s property in the courts of any other jurisdiction.

    


    (h) Waiver
      of Jury Trial.
      TO THE
      FULLEST EXTENT PERMITTED BY APPLICABLE LAW, BORROWER AND LENDER HEREBY
      IRREVOCABLY AND EXPRESSLY WAIVE ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION,
      PROCEEDING, OR COUNTERCLAIM (WHETHER BASED UPON CONTRACT, TORT, OR OTHERWISE)
      ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT, THE
      OBLIGATIONS OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY OR EITHER
      PARTY’S ACTIONS IN THE NEGOTIATION, ADMINISTRATION, OR ENFORCEMENT HEREOF OR
      THEREOF. EACH OF BORROWER AND LENDER ACKNOWLEDGES THAT SUCH WAIVER IS MADE
      WITH
      FULL KNOWLEDGE AND UNDERSTANDING OF THE NATURE OF THE RIGHTS AND BENEFITS WAIVED
      HEREBY, AND WITH THE BENEFIT OF ADVICE OF COUNSEL OF ITS CHOOSING.

    


    (i) Judicial
      Reference.
      

    


    (i) The
      parties prefer that any dispute between them be resolved in litigation subject
      to a Jury Trial Waiver as set forth in Section
      15(h)
      herein,
      but the California Supreme Court has held that such pre-dispute jury trial
      waivers are unenforceable. This Section will be applicable until: (i) the
      California Supreme Court holds that a pre-dispute jury trial waiver provision
      similar to that contained in Section
      15(h)
      herein
      is valid or enforceable; or (ii) the California Legislature passes legislation
      and the governor of the State of California signs into law a statute authorizing
      pre-dispute jury trial waivers and as a result such waivers become
      enforceable.

     

    
      
        
        

      

      
        25

        
          

        

      

      
        
        

      

    

     

    (ii) Other
      than the exercise of provisional remedies (any of which may be initiated
      pursuant to applicable law), any controversy, dispute or claim (each, a “Claim”)
      between the parties arising out of or relating to this Agreement will be
      resolved by a reference proceeding in California in accordance with the
      provisions of Section 638 et seq. of the California Code of Civil Procedure
      (“CCP”), or their successor sections, which shall constitute the exclusive
      remedy for the resolution of any Claim, including whether the Claim is subject
      to the reference proceeding. Venue for the reference proceeding will be in
      the
      Superior Court or Federal District Court in Los Angeles County, California
      (the
“Court”).

    


    (iii) The
      referee shall be a retired Judge or Justice selected by mutual written agreement
      of the parties. If the parties do not agree, the referee shall be selected
      by
      the Presiding Judge of the Court (or his or her representative). A request
      for
      appointment of a referee may be heard on an ex
      parte
      or
      expedited basis, and the parties agree that irreparable harm would result if
      ex
      parte
      relief
      is not granted. The referee shall be appointed to sit with all the powers
      provided by law. Pending appointment of the referee, the Court has power to
      issue temporary or provisional remedies.

    


    (iv) The
      parties agree that time is of the essence in conducting the reference
      proceedings. Accordingly, the referee shall be requested, subject to change
      in
      the time periods specified herein for good cause shown, to (a) set the matter
      for a status and trial-setting conference within forty-five (45) days after
      the
      date of selection of the referee, (b) if practicable, try all issues of law
      or
      fact within one hundred twenty (120) days after the date of the conference
      and
      (c) report a statement of decision within twenty (20) days after the matter
      has
      been submitted for decision.

    


    (v) The
      referee will have power to expand or limit the amount and duration of discovery.
      The referee may set or extend discovery deadlines or cutoffs for good cause,
      including a party’s failure to provide requested discovery for any reason
      whatsoever. Unless otherwise ordered based upon good cause shown, no party
      shall
      be entitled to “priority” in conducting discovery, depositions may be taken by
      either party upon ten (10) days written notice, and all other discovery shall
      be
      responded to within twenty (20) days after service. All disputes relating to
      discovery which cannot be resolved by the parties shall be submitted to the
      referee whose decision shall be final and binding.

    


    (vi) Except
      as
      expressly set forth in this Agreement, the referee shall determine the manner
      in
      which the reference proceeding is conducted including the time and place of
      hearings, the order of presentation of evidence, and all other questions that
      arise with respect to the course of the reference proceeding. All proceedings
      and hearings conducted before the referee, except for trial, shall be conducted
      without a court reporter, except that when any party so requests, a court
      reporter will be used at any hearing conducted before the referee, and the
      referee will be provided a courtesy copy of the transcript. The party making
      such a request shall have the obligation to arrange for and pay the court
      reporter. Subject to the referee’s power to award costs to the prevailing party,
      the parties will equally share the cost of the referee and the court reporter
      at
      trial.

     

    
      
        
        

      

      
        26

        
          

        

      

      
        
        

      

    

     

    (vii) The
      referee shall be required to determine all issues in accordance with existing
      case law and the statutory laws of the State of California. The rules of
      evidence applicable to proceedings at law in the State of California will be
      applicable to the reference proceeding. The referee shall be empowered to enter
      equitable as well as legal relief, provide all temporary or provisional
      remedies, enter equitable orders that will be binding on the parties and rule
      on
      any motion which would be authorized in a trial, including without limitation
      motions for summary judgment or summary adjudication. The referee shall issue
      a
      decision pursuant to CCP Section 644 the referee’s decision shall be entered by
      the Court as a judgment or an order in the same manner as if the action had
      been
      tried by the Court. The final judgment or order or from any appealable decision
      or order entered by the referee shall be fully appealable as provided by law.
      The parties reserve the right to findings of fact, conclusions of laws, a
      written statement of decision, and the right to move for a new trial or a
      different judgment, which new trial, if granted, is also to be a reference
      proceeding under this provision.

    


    (viii) If
      the
      enabling legislation which provides for appointment of a referee is repealed
      (and no successor statute is enacted), any dispute between the parties that
      would otherwise be determined by reference procedure will be resolved and
      determined by arbitration. The arbitration will be conducted by a retired judge
      or Justice, in accordance with the California Arbitration Act Section 1280
      through Section 1294.2 of the CCP as amended from time to time. The limitations
      with respect to discovery set forth above shall apply to any such arbitration
      proceeding.

    


    (ix) THE
      PARTIES RECOGNIZE AND AGREE THAT ALL DISPUTES RESOLVED UNDER THIS REFERENCE
      PROVISION WILL BE DECIDED BY A REFEREE AND NOT BY A JURY. AFTER CONSULTING
      (OR
      HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR OWN CHOICE, EACH
      PARTY KNOWINGLY AND VOLUNTARILY AND FOR THEIR MUTUAL BENEFIT AGREES THAT THIS
      REFERENCE PROVISION WILL APPLY TO ANY DISPUTE BETWEEN THEM WHICH ARISES OUT
      OF
      OR IS RELATED TO THIS AGREEMENT.

    


    (j) Waiver
      of Hearing.
      BORROWER HEREBY KNOWINGLY, INTENTIONALLY AND VOLUNTARILY WAIVES ALL RIGHTS
      WHICH
      BORROWER HAS UNDER PROVISIONS OF APPLICABLE LAW TO NOTICE AND TO A JUDICIAL
      HEARING PRIOR TO THE ISSUANCE OF A WRIT OF POSSESSION ENTITLING LENDER, ITS
      SUCCESSORS AND ASSIGNS TO POSSESSION OF THE COLLATERAL UPON A DEFAULT. WITHOUT
      LIMITING THE GENERALITY OF THE FOREGOING AND WITHOUT LIMITING ANY OTHER RIGHT
      WHICH LENDER MAY HAVE, BORROWER CONSENTS THAT, IF LENDER FILES A PETITION FOR
      AN
      IMMEDIATE WRIT OF POSSESSION IN COMPLIANCE WITH APPLICABLE LAW AND THIS WAIVER
      OR A COPY HEREOF IS ALLEGED IN SUCH PETITION AND ATTACHED THERETO, THE COURT
      BEFORE WHICH SUCH PETITION IS FILED MAY DISPENSE WITH ALL RIGHTS AND PROCEDURES
      HEREIN WAIVED AND MAY ISSUE FORTHWITH AN IMMEDIATE WRIT OF POSSESSION IN
      ACCORDANCE WITH APPLICABLE LAW, WITHOUT THE NECESSITY OF AN ACCOMPANYING BOND
      AS
      MAY BE REQUIRED IN ACCORDANCE WITH ANY APPLICABLE LAW.

     

    
      
        
        

      

      
        27

        
          

        

      

      
        
        

      

    

     

    (k) Expenses.
      Borrower shall pay on demand all of Lender’s costs, fees (including the
      reasonable fees and out-of-pocket expenses of Lender’s counsel) and expenses in
      connection with this Agreement, the other Loan Documents, and the transaction
      contemplated by this Agreement and the other Loan Documents (in each case
      whether incurred on, prior or subsequent to the Agreement Date), including,
      but
      not limited to, costs, fees and expenses in connection with (i) underwriting
      and
      performing due diligence with respect to the transactions contemplated hereby,
      (ii) the preparation, reproduction, execution, delivery, administration and
      enforcement of this Agreement, any amendments, modifications or restatements
      of
      this Agreement or any of the other Loan Documents, (iii) auditing, inspecting
      and evaluating the Collateral and the Borrower’s business, and (iv) agreements
      between Lender and other Person which are related to the transactions
      contemplated by this Agreement. In addition, Borrowers shall pay any and all
      stamp and other taxes and recording and filing fees payable in connection with
      the execution and delivery of all other instruments and documents to be
      delivered hereunder. Such amounts may be charged by Lender to Borrower’s account
      as one or more loans hereunder. All provisions in this Agreement providing
      for
      the payment or reimbursement of Lender’s attorneys’ fees and expenses include,
      without limitation, such fees and expenses incurred pursuant to or in connection
      with proceedings brought under 11 U.S.C., the Federal Bankruptcy
      Code.

    


    (l) Execution
      in Counterparts; Execution by Fax; Waiver of Acceptance.
      This
      Agreement may be executed in separate counterparts, all of which shall
      constitute one and the same agreement. Delivery of an executed counterpart
      of
      this Agreement or any other Loan Document by facsimile shall be equally as
      effective as delivery of an original executed counterpart of this Agreement
      or
      such other Loan Document. Any party delivering an executed counterpart of this
      Agreement or any other Loan Document by facsimile also shall deliver an original
      executed counterpart of this Agreement or such other Loan Document, but the
      failure to deliver an original executed counterpart shall not affect the
      validity, enforceability, and binding effect of this Agreement or such other
      Loan Document. To the fullest extent permitted by applicable law, Borrower
      waives notice of Lender’s acceptance of this Agreement and the other Loan
      Documents.

    


    (m) Entire
      Agreement.
      This
      Agreement and the other Loan Documents embody the entire agreement and
      understanding between Lender and Borrower and supersede all prior agreements
      and
      understandings relating to the subject matter hereof.

    


    [REMAINDER
      OF PAGE INTENTIONALLY LEFT BLANK]

    


    
      
        
        

      

      
        28

        
          

        

      

      
        
        

      

    

     

    IN
      WITNESS WHEREOF, Borrower and Lender have executed this Agreement as of the
      day
      and year first above written.

    
 

    
      	 	
              REED’S,
                INC.,

              a
                Delaware corporation

              


              /s/
                Chris Reed, CEO

              


              


              FCC,
                LLC, a Florida limited liability company doing business as FIRST
                CAPITAL
                WESTERN REGION, LLC

              


              


              /s/
                Robert Yasuda, Sr. Vice President

            


    

    


    
      
        
        

      

      
        
          S-1

          Loan and Security Agreement

        

        
          

        

      

      
        
        

      

    

    
       

    

    NOTARY
      JURAT FOR EXECUTION OF

    WRITTEN
      OBLIGATIONS TO PAY MONEY

    


    


    On
      this
      the ____ day of May, 2008, before me, the undersigned, a Notary Public in and
      for the State of _____________, County of _________________,
      ___________________________ personally appeared, who is personally known to
      me
      or proved to me on the basis of satisfactory evidence to be the
      _______________________________ of REED’S, INC., a Delaware corporation, who,
      being by me first duly sworn, stated that:

    


    
      	
              1.

            	
              He
                executed the foregoing Loan and Security Agreement on behalf of such
                corporation pursuant to its by-laws or a resolution of its board
                of
                directors, said execution taking place in the State of California,
                County
                of Los Angeles; and

            


    

    


    
      	
              2.

            	
              He
                has this day delivered the foregoing Loan and Security Agreement
                to FIRST
                CAPITAL WESTERN REGION, LLC, at Los Angeles County, California
                [via
                personal delivery] [via overnight
                courier].

            


    

     

    
      	 	Signature of Borrower’s
              Officer:	 
	 	 	 	 	 
	 	 	 	 	 
	 	By:	   
	 
	 	Name:	  	 


    

    


    State
      of
      California

    County
      of
      Los Angeles

    


    Subscribed
      and sworn to (or affirmed) before me on this ______________ day of May, 2008,
      by
      _____________________, personally known to me or proven to me on the basis
      on
      satisfactory evidence to be the person(s) who appeared before me.

    


    __________________________________

    Notary
      Signature

    


    My
      Commission Expires:

    


    _________________________________


    [Affix
      Notarial Seal]

    


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


    AFFIDAVIT
      REGARDING DELIVERY

    


    


    I,
      _____________, have received delivery of the foregoing Loan and Security
      Agreement on behalf of FIRST CAPITAL WESTERN REGION, LLC.

     

    
      
        Date:
          May
          __, 2008

         

         

      

      
        	 	    
	 
	 	
                Signature
                  of Officer of FIRST CAPITAL 

                WESTERN
                  REGION, LLC

              	 


      

    

    


    


    State
      of
      California

    County
      of
      Los Angeles

    


    Subscribed
      and sworn to (or affirmed) before me on this _____ day of May, 2008, by
      __________, personally known to me or proven to me on the basis on satisfactory
      evidence to be the person(s) who appeared before me.

    


    __________________________________

    Notary
      Signature

    


    My
      Commission Expires:

    


    _________________________________


    [Affix
      Notarial Seal]

    


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    SCHEDULE

    


    


    This
      Schedule is a part of the foregoing Loan and Security Agreement dated as of
      May
      30, 2008, between REED’S, INC., as borrower (“Borrower”), and FIRST CAPITAL
      WESTERN REGION, LLC, as lender (“Lender”).

    


    1. Borrowing
      Base

    


    “Borrowing
      Base” means, at any time, an amount equal to:

    


    
      	 	
              (a)

            	
              the
                lesser of:

            


    

    


    
      	 	
              (i)

            	
              Maximum
                Credit Limit, and

            


    

    


    
      	 	
              (ii)

            	
              the
                sum of:

            


    

    


    (A) 80%
      of
      the dollar amount of Eligible Accounts; plus

    


    (B) As
      of the
      Closing Date, Eligible Inventory shall not be included in the Borrowing Base
      and
      the amount under this clause (B) shall be zero dollars ($0). Following the
      Closing Date Lender may, in its sole and absolute discretion, elect to include
      Eligible Inventory in the Borrowing Base. If Lender makes such an election,
      then
      effective upon the issuance by Lender of a written notice to Borrower of such
      election (an “Election
      Notice”)
      and if
      the conditions subsequent in Item
      6.2(b) and (c)
      of this
      Schedule
      have
      been satisfied, the amount under this clause (B) shall be determined by Lender,
      which amount may be calculated based on a formula. If Lender issues to Borrower
      an Election Notice and such notice does not specify an amount or formula to
      determine the amount of the Borrowing Base to attribute to the Eligible
      Inventory, then the amount attributed to the Eligible Inventory shall be equal
      to the
      lesser of:

    


    
      	 	
              (1)

            	
              $1,000,000,
                and

            


    

    


    
      	 	
              (2)

            	
              50%
                of the dollar value (determined at the lower of cost or market value)
                of
                Eligible Inventory, 

            


    

    


    minus

    


    
      	 	
              (b)

            	
              the
                sum of:

            


    

    


    
      	 	
              (i)

            	
              the
                Dilution Reserve and such other reserves as Lender may establish
                from time
                to time in its discretion, including, but not limited to, reserves
                for
                excessive and slow-moving Inventory and reserves for inaccuracies
                in
                Borrower’s perpetual Inventory records,
                plus

            


    

    


    
      	 	
              (ii)

            	
              the
                amount available to be drawn under, plus the amount of any unreimbursed
                draws with respect to, any letters of credit or acceptances which
                have
                been issued, created or guaranteed by Lender or any Affiliate of
                Lender
                for Borrower’s account.

            


    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    
      2.
        Accounts
        Eligibility

    

    


    (a) Accounts
      Age:
      Any
      Account with respect to which more than 90 days have elapsed since the date
      of
      the original invoice therefor or which is more than 60 days past due shall
      not
      constitute an Eligible Account.

    


    (b) Cross-Aging
      Percentage:
      25%

    


    (c) Concentration
      Limit:
      15% for
      all Customers other than (i) United Natural Foods, Inc., for which the
      Concentration Limit is 40%, and (ii) Trader Joe’s, for which the Concentration
      Limit is 20%.

    


    
      3.
        Permitted
        Liens

    

    


    Existing
      Liens and financing statements: none

    

      
        	
                Financing
                  Statement Number,

                Jurisdiction
                  and Filing Date

              	
                Secured
                  Party

              	
                Collateral

              


      

    

    


    
      4.
        Persons
        Authorized to Request Loans

    

    

      
        	
                Name:

              	
                Title:

              
	
                Christopher
                  J. Reed

              	
                President

              
	
                Vicki
                  Rhoades

              	
                Accounts
                  Receivable

              


      

       

    

    
      5.
        Collection
        Days: 2
        Business Days

    

    


    
      6.
        Conditions
        To Initial Loans

    

     

    6.1
      Conditions
      Precedent.
      Items
      listed below are required to be delivered, in form and substance satisfactory
      to
      Lender in its sole discretion, as a condition to Lender’s obligation to fund the
      initial loan or extend the first financial accommodation to Borrower under
      this
      Agreement.

    


    
      	 	
              (a)

            	
              Certified
                copy of Borrower’s articles of incorporation


            


    

    


    
      	 	
              (b)

            	
              Certificate
                of Secretary of Borrower as to constituent documents, bylaws, authorizing
                action (e.g., corporate resolutions) and incumbency of officers/status
                and
                specimen signatures of authorized
                signers

            


    

    


    
      	 	
              (c)

            	
              Good
                Standing Certificate (States of Delaware and California and all other
                states in which Borrower is qualified to do
                business)

            


    

    


    
      	 	
              (d)

            	
              The
                Deed of Trust properly executed and
                notarized

            


    

    


    
      	 	
              (e)

            	
              A
                commitment from a title insurance company acceptable to Lender to
                issue an
                ALTA title insurance policy, with endorsements required by Lender,
                insuring the lien of the Deed of Trust in an amount not less than
                $2,000,000 and subject to only those exceptions that have been approved
                in
                writing by Lender 

            


    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    
      	 	
              (f)

            	
              Lien
                search results confirming filing of UCC-1 in favor of Lender and
                priority
                of Lender’s security interest in the
                Collateral

            


    

    


    
      	 	
              (g)

            	
              Lien
                termination documents from Business Alliance Capital Company, Overnite
                Capital, LLC, and any other creditor whose filings are to be terminated,
                etc. 

            


    

    


    
      	 	
              (h)

            	
              Landlord,
                warehouseman or other bailee
                waivers

            


    

    


    
      	 	
              (i)

            	
              Unlimited
                Continuing Guaranty in favor of Lender by Christopher J. Reed and
                a
                validity guaranty in favor of Lender by the Chief Financial Officer
                of
                Borrower

            


    

    


    
      	 	
              (j)

            	
              [Intentionally
                omitted]

            


    

    


    
      	 	
              (k)

            	
              Lockbox,
                blocked account or agency account
                agreement(s)

            


    

    


    
      	 	
              (l)

            	
              Financial
                statements for Borrower including a pro forma statement certified
                by the
                Chief Financial Officer of Borrower demonstrating to the satisfaction
                of
                Lender that following the initial funding under this Agreement and
                the
                payment of all accounts payable past due beyond 90 days past the
                applicable due date, Borrower shall have unused borrowing availability,
                net of reserves, of not less than
                $500,000

            


    

    


    
      	 	
              (m)

            	
              Appraisal
                reports including an appraisal of the Real Property reflecting an
                equity
                value, net of Liens senior to the Lien of the Deed of Trust, of no
                less
                than $1,500,000

            


    

    


    
      	 	
              (n)

            	
              Borrowing
                Base Certificate, together with schedules of Accounts and Inventory
                and
                other supporting documentation, in each case as of a date acceptable
                to
                Lender

            


    

    


    
      	 	
              (o)

            	
              Evidence
                of the filing of Financing statements, including fixture filings
                regarding
                the Collateral

            


    

    


    
      	 	
              (p)

            	
              Officer’s
                certificate as to representations, warranties and no defaults issued
                by
                the Manager of Borrower

            


    

    


    
      	 	
              (q)

            	
              Solvency
                certificate with respect to
                Borrower

            


    

    


    
      	 	
              (r)

            	
              Opinion
                letter of Borrower’s legal counsel

            


    

    


    
      	 	
              (s)

            	
              All
                other items described on the Schedule of Closing Documents previously
                delivered by Lender or Lender’s counsel to Borrower or Borrower’s
                counsel

            


    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    6.2 Conditions
      Subsequent.
      Items
      listed below are required to be delivered, in form and substance satisfactory
      to
      Lender in its sole discretion, as a condition subsequent to Lender’s obligation
      to fund the initial loan or extend the first financial accommodation to Borrower
      under this Agreement. If the items listed below are not delivered to Lender
      within the applicable time period, then a Default shall be deemed to have
      occurred under this Agreement.

    


    (a) Within
      30
      calendar days following the Agreement Date, a deposit account control agreement
      executed by City National Bank and Borrower

    


    (b) Within
      45
      calendar days following the Agreement Date, a mortgagee waiver and consent
      agreement executed by Lehman Brothers

    


    (c) Within
      45
      calendar days following the Agreement Date, an ALTA title insurance policy,
      with
      endorsements required by Lender, insuring the lien of the Deed of Trust in
      an
      amount not less than $2,000,000 and subject to only those exceptions that have
      been approved in writing by Lender

    


    7. Termination
      Date

    


    This
      Agreement will terminate on the second anniversary of the Agreement
      Date;
      provided,
      however, that this Agreement will be renewed for succeeding one-year periods
      thereafter unless written notice of termination is provided by either party
      to
      the other at least 60 days prior to the then-effective termination
      date.

    


    8. Interest
      Margin: 5.75%

    


    9. Default
      Margin: 5%

    


    10. Fees

    


    (a) Upon
      execution of this Agreement, in consideration of Lender’s structuring, approving
      and committing to this Agreement, but without affecting Borrower’s obligation to
      reimburse Lender for costs associated with this Agreement and the transactions
      contemplated hereby as provided elsewhere in this Agreement, Borrower agrees
      to
      pay Lender a fee in the amount of $15,000, which will be fully earned on the
      Agreement Date and non-refundable when paid.

    


    (b) On
      each
      anniversary of the Agreement Date, as an annual fee for providing of financial
      accommodations pursuant to the terms of this Agreement, but without affecting
      Borrower’s obligation to reimburse Lender for costs associated with this
      Agreement and the transactions contemplated hereby as provided elsewhere in
      this
      Agreement, Borrower shall pay to Lender a fee in the amount one-half percent
      (0.50%) of the then prevailing Maximum Credit Limit, which will be fully earned
      on each such anniversary date and non-refundable when paid.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    (c) Lender
      shall be entitled to charge a monthly minimum interest charge for each calendar
      month during the term of this Agreement that the average outstanding principal
      balance of the advances made pursuant to Section 2(a) during such month was
      less
      than $1,000,000 (the “Minimum
      Average Monthly Loan Balance”);
      provided, however, that (i) if Lender has not issued an Election Notice and
      committed to provide a sublimit for advances against Eligible Inventory of
      not
      less than $300,000 within 60 calendar days following the Agreement Date, then
      effective on the 61st calendar day following the Agreement Date the Minimum
      Average Monthly Loan Balance shall be reduced to $700,000, and (ii) if the
      Minimum Average Monthly Loan Balance has been reduced to $700,000 pursuant
      to
      clause (i) and thereafter Lender issues an Election Notice and commits to
      provide a sublimit for advances against Eligible Inventory of not less than
      $300,000, then effective on the date Lender issues such Election Notice the
      Minimum Average Monthly Loan Balance shall be increased to $1,000,000. The
      monthly minimum interest charge shall be equal to the amount, if any, by which
      the interest charged for such month on the outstanding advances under Section
      2(a) was less than the amount of interest that would have been charged had
      the
      average outstanding principal balance for such month equaled the Minimum Average
      Monthly Loan Balance. The monthly minimum interest charge shall represent an
      unconditional payment to Lender in consideration of Lender’s agreement to extend
      financial accommodations to Borrower pursuant to this Agreement.

     

    (d) On
      the
      first day of each month during the term of this Agreement following the issuance
      of an Election Notice pursuant to this Agreement, an unused line fee in an
      amount equal to 0.50%, per annum, times the result of (i) the Maximum Credit
      Limit, less (ii) the average
      daily net principal amount of loans outstanding hereunder
      during
      the immediately preceding month.

    


    (e) In
      the
      event that Borrower terminates this Agreement (which termination shall be on
      not
      less than sixty (60) days prior written notice) for any reason after the date
      that is six months following the Agreement Date and termination is effective
      other than on a day which is the last day of the then current term of this
      Agreement, Borrower will pay to Lender on or prior to the effective date of
      such
      termination an early termination fee equal to: (i) if the date of termination
      is
      prior to the first anniversary of the Agreement Date, three
      percent (3%)
      of the
      amount set forth in Item
      1(a)(i)
      of this
      Schedule, and (ii) if the date of termination is after the first anniversary
      of
      the Agreement Date, two
      percent (2%)
      of the
      amount set forth in Item
      1(a)(i)
      of this
      Schedule, provided,
      however,
      that if
      (i) within 60 calendar days following the Agreement Date Lender has not issued
      an Election Notice and committed to provide a sublimit for advances against
      Eligible Inventory of not less than $300,000, or (ii) if Lender notifies
      Borrower in writing that Lender will not include Eligible Inventory in the
      Borrowing Base, then in either case so long as no Default has occurred and
      is
      continuing at the time Borrower terminates this Agreement, Borrower shall be
      obligated to pay Lender an early termination fee in connection with such
      termination equal to one-half
      percent (0.50%)
      of the
      amount set forth in Item
      1(a)(i)
      of this
      Schedule.

    


    All
      of
      the foregoing fees constitute compensation to Lender for services rendered
      and
      are not interest or a charge for the use of money. Each installment of such
      fees
      shall be fully earned when due and payable and shall not be subject to refund
      or
      rebate.

    


    
      11.
        Organizational
        Information

    

     

    
      
        	
                Exact
                  Legal Name of Borrower:

              	
                Reed’s,
                  Inc.

              
	
                State
                  of Organization:

              	
                Delaware

              
	
                Type
                  of Organization:

              	
                Corporation

              
	
                Organizational
                  Identification Number: 

              	
                3433903

              


      

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

    

    
      
        12.
          Subsidiaries
          and Investments in Other Persons:

      

    

     

    
      13.
        Pending
        Litigation:
        none

    

    


    
      14.
        Existing
        Debt and Guarantees:
        loan on building lehman brothers 1.7 million on real estate.


    

    


    
      15.
        Prior
        Legal Names:
        Original Beverage Corporation

    

    


    Prior
      or Current Trade or Fictitious Names:

    


    Mergers
      and Acquisitions:
      acquire Virgil’s Root Beer and China cola in two separate transactions in
      2000.

    


    
      16.
        Locations
        of Offices and Collateral

    

    

      
        	
                Current
                  Chief Executive Office:

              	
                1300
                  South Spring Street 

                Los
                  Angeles, California 90061

              


      

       

    

    Other
      Locations of Chief Executive Office in past five years:
      none

    


    Other
      Current Collateral Locations:
      none

    


    
      17.
        Ownership
        Structure:
        corporation common stock public shareholders symbol REED 8.9 million shares
        outstanding NASDAQ. 

    

    


    
      18.
        Owned
        Real Property:
        12930 and 13000 South Spring Street, Los Angeles, CA 90061.


    

    


    Leased
      Real Property (including legal name of landlord and monthly
      rent):
      none

    


    Warehousemen,
      processors, consignees or other bailees in possession or control of any
      Inventory (include name, address where Inventory is stored and description
      of
      the arrangement):

     

    
      	
              Warehouse

            	 	 	 	 	 	
              ext

            	 
	
              Valley
                Distribution

            	
              1
                Passin Dr.

            	
              Wilkes-Barre

            	
              PA

            	
              18702

            	
              570-654-2403

            	
              217

            	
              Kathey
                Engle

            
	
              Advanced
                Packing

            	
              660
                Spreckels Ave.

            	
              Manteca

            	
              CA

            	
              94587

            	
              209-825-7939

            	
              7792

            	
              Brandie
                Ramirez

            
	
              LaGrou
                

            	
              1800
                S. Wolf Rd.

            	
              Des
                Plaines

            	
              IL

            	
              60018

            	
              847-298-9185

            	
              227

            	
              Debbie
                Yingling

            
	
              United
                Warehouse

            	
              1750
                Occidental Ave.

            	
              Seattle

            	
              WA

            	
              98124

            	
              206-682-4535

            	
              210

            	
              Vicci
                

            
	
              Ronnybrook
                Farms

            	
              1
                Prospect Hill Rd.

            	
              Ancramdale

            	
              NY

            	
              12503

            	
              518-398-8000

            	
               

            	
              Kate

            
	
              United
                States Cold Storage

            	
              33400
                Dowe Ave.

            	
              Union
                City

            	
              CA

            	
              93718

            	
              510-489-8300

            	
               

            	
              Susan

            
	
              Cj
                Hendriks

            	
              Plimsollweg
                4 1042 AS

            	
              Amsterdam

            	
              NL

            	
               

            	
               

            	
               

            	
              Fred

            


    

    


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    
      
        19.
          Bank
          Accounts: [Intentionally
          omitted]

      

    

    


    
      20.
        Commercial
        Tort Claims:
        none

    

    


    
      21.
        Financial
        Covenants:

    

    


    (a) Commencing
      July 31, 2008, Borrower shall maintain, as of the last day of each month for
      three-month period then ended (but for the month ended July 31, 2008, for the
      one-month period then ended and for the month ended August 31, 2008, for the
      two-month period then ended), a ratio of Borrower’s (i) net income (excluding
      extraordinary gains) before provision for interest expense, taxes, depreciation
      and amortization, less cash taxes paid and unfinanced capital expenditures
      during such period, to (ii) interest expense, plus payments of principal
      actually made or scheduled to be made with respect to indebtedness (other than
      scheduled but unpaid payments on Subordinated Debt and principal payments on
      revolving loans under this Agreement), plus payments with respect to capitalized
      leases, plus dividends and distributions during such period, of at least 1.0
      to
      1.0.

    


    (b) As
      of
      June 30, 2008, Borrower shall have a Tangible Net Worth of at least $4,306,570.
      Thereafter, as of the last day of each month, Borrower’s required minimum
      Tangible Net Worth shall be increased by 50% of the Borrower’s net income for
      the calendar month then ended (without reduction for any losses during any
      such
      calendar month). As used herein, “Tangible
      Net Worth”
means,
      as of any date, the total assets of Borrower minus the total liabilities of
      Borrower calculated in conformity with GAAP, less all amounts due from
      Borrower’s Affiliates and the amount of all intangible items reflected
      therein.

    


    (c) The
      net
      loss from Borrower’s operations, as determined in accordance with GAAP, for the
      three month period ended June 30, 2008, shall not exceed $400,000.

    


    
      22.
        Permitted
        Purchase Money Debt: $450,000

    

    


    
      23.
        Permitted
        Capital Expenditures: $450,000
        during any fiscal year

    

     

    
      24.
        Maximum
        Annual Increase in Officers’ Compensation:
        Borrower
        represents and warrants to Lender that the aggregate compensation paid and
        to be
        paid to Borrower’s officers and directors for Borrower’s current fiscal year
        shall not be more than 110% of the aggregate amount paid during the fiscal
        year
        that ended December 31, 2007. Such compensation shall not increase by more
        than
        10% per fiscal year hereafter.

    

    


    
      25.
        Annual
        Financial Statements:
        To
        be
        audited by an independent practicing certified public accountant acceptable
        to
        Lender.

    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    
      26.
        Borrowing
        Base Certificates:
        Borrower
        shall deliver to Lender a Borrowing Base Certificate no less frequently than
        weekly by 10:30 a.m. on the first Business Day of each week and determined
        as of the close of business on the last Business Day of the immediately
        preceding week.

    

    


    27. Field
      Examinations:
      In
      connection with the first four (4) field examinations during each consecutive
      twelve (12) month period during the term of this Agreement, as well as in
      connection with any field examinations conducted during a period that a Default
      exists and is continuing hereunder,
      Borrower agrees to pay to Lender Lender’s customary fees and disbursements,
      based upon prevailing market rates, relating to field examinations of the
      Collateral, of Borrower’s business and Borrower’s books and records, which, as
      of the Agreement Date, are $900 per examiner per day plus all of the
      out-of-pocket examination costs and travel and other expenses incurred by such
      examiners.

    


    28. Cross
      Default Amount: $100,000

    


    29. Judgment
      Cross Default Amount: $100,000

    


    30. Change
      of Management Default:

     

    
      	
              Name

            	
              Office

            
	
              Christopher
                J. Reed

            	
              President

            
	
              Christopher
                J. Reed

            	
              Chief
                Financial Officer

            


    

     

    31. Notice
      Addresses:

    


    
      	If
              to Borrower:	
              [Intentionally
                Omitted]

            


    

    


    
      	
              If
                to Lender: 

            	
              [Intentional
                Omitted]

            


    

    


    
      	
              With
                a copy to:

            	
              [Intentional
                Omitted]