reeds_10qa-ex1003.htm


    
      
        

      
Exhibit 10.3


     

     

     

     

     

     

     

     

     

     

     

     

    
      
        

      

    

     

     

    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

            	
              11

            
	
              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

            	
              20

            
	
              14.

            	
              Indemnification

            	
              23

            
	
              15.

            	
              General
      Provisions

            	
              24

            


    

    


     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    TABLE
OF CONTENTS

    (continued)

     

    
       

      
        	 	Page
	 	 
	Attachments:	 
	 	 
	Schedule	 
	Exhibit A - Form of Borrowing
      Base Certificate	A-1
	Exhibit B - Form of Compliance
      Certificate	B-1
	Exhibit C - Form of Deed of
      Trust	C-1
	Exhibit D - Real Property
      Description	D-1


      

       

    

     

     

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    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;

     

    
      
        
        

      

      
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    (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;

     

    (1)  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;

     

    
      
        
        

      

      
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    (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;

     

    
      
        
        

      

      
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    (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.

     

    
      
        
        

      

      
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    "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.

     

    
      
        
        

      

      
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    (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.

     

    
      
        
        

      

      
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    (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.

     

    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 

     

    
      
        
        

      

      
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    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.

     

    
      
        
        

      

      
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    (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;

     

    
      
        
        

      

      
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    (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.

     

    
      
        
        

      

      
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    (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.

     

    
      
        
        

      

      
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    (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 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 an 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.

     

    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 

     

    
      
        
        

      

      
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    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.

     

    
      
        
        

      

      
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    (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.

     

    
      
        
        

      

      
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    (ii)           Other
than the exercise of provisional remedies (any of which may be initiated
pursuant to applicable )aw), 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 ENTI'T'LING 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 PETI'T'ION 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, WI I HOUT 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

            
	 	 
	 	By:  /s/ Chris
      Reed                                                  
      
	 	Name:   Chris
      Reed                                                  
      
	 	Title:     CEO                                                             
      
	 	 
	 	 
	 	
              FCC, LLC, a Florida limited
      liability company 

              doing business as FIRST CAPITAL
      WESTERN 

              REGION,
    LLC

            
	 	 
	 	By:  /s/ Robert
      Yasuda                                           
      
	 	Name:   Robert
      Yasuda                                          
      
	 	Title:     Senior 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  CA, County of     Los
Angeles    ,      Chris
Reed     personally appeared, who is personally known
to me or proved to me on the basis of satisfactory evidence to be the    
 CEO     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:  /s/ Chris
      Reed                                  
      
	 	Name:   Chris
      Reed                                  
      


    

     

     

    State of
California

    County of
Los Angeles

     

    Subscribed
and sworn to (or affirmed) before me on this    24th    day of
May, 2008, by    Chris
Reed   , personally known to me or proven to me on the basis on
satisfactory evidence to be the person(s) who appeared before me.

    


                      
/s/ Bob
Babanian                           


    Notary
Signature

     

    My
Commission Expires:

     

                          
July 10,
2010                              


     

    [Affix
Notarial Seal]

     

    

     

    Notary Jurat

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    
 

    
      	
              STATE
      OF CA

            	
              )

            
	
              COUNTY
      OF Los Angeles

            	
              )ss.

            
	 
      	
              )

            


    

    


     

    On
May   29 , 2008,
before me, the undersigned a Notary Public in and for said State, personally
appeared     Chris
Reed    personally known to me (or proved to me on the
basis of satisfactory evidence) to be the person(s) whose name(s) is/are
subscribed to the within instrument and acknowledged to me that he/she/they
executed the same in his/her/their authorized capacity(ies), and that by
his/her/their signature(s) on the instrument the person(s), or the entity upon
behalf of which the person(s) acted, executed the instrument.

     

    WITNESS
my hand and official seal.

     

                 
/s/ Bob
Babanian               
               
(SEAL)

    Notary
Public

     

    

     

     

     

    Notary

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    
AFFIDAVIT
REGARDING DELIVERY

     

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

     

    Date: May
30, 2008

     

     

    
    

     

    
      	 	/s/
      Robert Yasuda      
	 	Signature of Officer
      of FIRST CAPITALWESTERN REGION, LLC 
	 	 


    

     

     

     

     

     

    Affidavit
Regarding Delivery

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    CALIFORNIA JURAT
WITH AFFIANT STATEMENT

    


     

    State of
California

    County of
Los Angeles

    


    Subscribed
andsworn to (or affirmed) before me on this   30   day of
     May 
  , 2008, by     Robert Yasda   
 proved to me on the basis of satisfactory evidence to be the person
who appeared before me.

    


    


    Signature:       /s/ Veronica
Cantero            


    Sgnature
of Notary Public

     

    

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    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 ($)). 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 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.

            


    

     

     

    
      
        
        

      

      
        Schedule
1

        
          

        

      

      
        
        

      

    

     

    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

            


    

     

    
      
        
        

      

      
        Schedule
2

        
          

        

      

      
        
        

      

    

     

    
      	
               
      

            	
              (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)

            


    

     

    
      	
            	
              (1)

            	
              Financial
      statements for Borrower including a pro forma statement certified
      bythe
      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

            


    

    


    
      
        
        

      

      
        Schedule
3

        
          

        

      

      
        
        

      

    

     

    
      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.

       

      
        
          
          

        

        
          Schedule
4

          
            

          

        

        
          
          

        

      

       

      (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
S1,000,000. 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 on 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

              


      

       

      
        
          
          

        

        
          Schedule
5

          
            

          

        

        
          
          

        

      

       

      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

                


        

      

       

      
        
          
          

        

        
          Schedule
6

          
            

          

        

        
          
          



      

      
        	19.   Bank
      Accounts:	
                City
      National Bank

                Santa
      Monica, CA

                Acct.
      No.: 017-236482

                ABA
      No.: 122016066

              


      

       

      
        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.

       

      
        
          
          

        

        
          Schedule
7

          
            

          

        

        
          
          

        

      

       

      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:

                 

                 

                 

                 

                 

                If
      to Lender:

              	
                Reed's,
      Inc.

                13000
      South Spring Street 

                Los
      Angeles, California 90061 

                Attn:
      Christopher J. Reed

                Facsimile
      No.: 310-217-9411

                 

                First
      Capital Western Region, LLC 

                700
      S. Flower Street, Suite 2325 

                Los
      Angeles, California 90017 

                Attn:
      Robert Yasuda

                Facsimile
      No.: 213.417.0877

              


      

       

       

      
        
          
          

        

        
          Schedule
8

          
            

          

        

        
          
          

        

      

       

      With a
copy to: Buchalter Nemer

      1000
Wilshire Blvd., Suite 1500

      Los
Angeles, California 90017

      Attn:
William Schoenholz, Esq.

      Facsimile
No.: 213.630.5654

       

       

      
        
          
          

        

        
          Schedule
9

          
            

          

        

        
          
          

        

      

       

      Appendix 1

       

       

      
        
          	
                  A.

                	
                  Minimum
      Fixed Charge Coverage Ratio Requirement   1
      to 1

                


        

      

       

      
        
          	
                	
                  Fixed
      Charge Coverage Ratio

                	
                  (a)
      net income (excluding extraordinary gains), plus interest expense, plus
      taxes, plus depreciation and amortization, less cash taxes paid and
      unfinanced capital expenditures, divided by (b) interest expense, plus
      principal payments made or scheduled to be made with respect to
      indebtedness (other than scheduled but unpaid amounts on Subordinated Debt
      and principal repayments of the revolving loans under the Loan Agreement)
      plus payments on capitalized leases, plus dividends and
      distributions

                


        

      

       

      
        	 	
                Net
      Income

              	$___________
      ,
      plus	 
	 	
                Interest
      Expense

              	$___________
      ,
      plus	 
	 	
                Taxes

              	$___________
      ,
      plus	 
	 	
                Depreciation

              	$___________
      ,
      plus	 
	 	
                Amortization

              	$___________
      ,
      minus	 
	 	
                Cash
      Taxes

              	$___________
      ,
      minus	 
	 	
                Unfinanced
      Capital Expenditures

              	$___________
      ,
      equals	 
	 	
                Numerator

              	
                $___________

              	 
	 	 
      	 
      	 
	 	
                Interest
      Expense

              	$___________
      ,
      plus	 
	 	
                Principal
      Payments Made

              	$___________
      ,
      plus	 
	 	
                   and
      scheduled to be made

              	 
      	 
	 	
                   with
      respect to indebtedness

              	 
      	 
	 	
                Capitalized
      Lease Payments

              	$___________
      ,
      plus	 
	 	
                Dividends
      & Distributions

              	$___________
      ,
      equals	 
	 	 
      	 
      	 
	 	
                Denominator

              	 
      	 
	 	
                Actual
      Fixed Charge Coverage Ratio = ____________ to 1

              	 


      

       

      
        
          	
                  B.

                	
                  As
      of June 30, 2008, minimum Tangible Net Worth, plus Subordinated Debt
      requirement of $4,306,570, which minimum Tangible Net Worth shall be
      increased by 50% of Borrower's Net Income as of each calendar month ending
      thereafter (without reduction for any losses during any such calendar
      month).

                


        

      

       

      Tangible
Net Worth = Total Asses, minus Total Liabilities, minus amounts due from
Affiliates, minus Intangibles

       

      
        
          	 	
                  Total
      Assets 

                	$___________
      ,
      minus	 
	 	 	 	 
	 	
                  Total Liabilities

                	$___________
      ,
      minus	 
	 	 	 	 
	 	
                  Amounts
      due from Affiliates

                	$___________
      ,
      minus	 
	 	 
      	 
      	 
	 	
                  Intangible
      assets

                	$___________
      ,
      plus	 
	 	 	 	 
	 	
                  50%
      of Borrower's Net Income  

                	$___________
      ,	 
	 	 	 	 
	Actual
      Tangible Net Worth 	$___________ 	 


        

         

      

       

      
        
          
          

        

        
          Appendix
1

          
            

          

        

        
          
          

        

      

       

      EXHIBIT
A

       

      

       

       

      Exhibit
A

      
        
          
          

        

        
          A-1

          
            

          

        

        
          
          

        

      

       

      EXHIBIT
B

      FORM OF
COMPLIANCE CERTIFICATE

       

      [TO BE
PROVIDED ON BORROWER'S LETTERHEAD]

       

      _________________, 200_

       

       

      First
Capital Western Region, LLC

      700 S.
Flower Street,

      Suite
2325 Los Angeles, California 90017

      Attn.:
___________________

       

      The
undersigned, the ____________ of Reed's, Inc., a Delaware corporation
("Borrower"), gives this certificate to First Capital Western Region, LLC
("Lender"), in accordance with the requirements of that certain Loan and
Security Agreement dated as of May , 2008 between Borrower and Lender (as
amended from time to time, the "Loan Agreement"). Capitalized terms used in this
Certificate, unless otherwise defined herein, shall have the meanings ascribed
to them in the Loan Agreement.

       

      No
Default exists on the date hereof, other than:____________ [if none, so
state].

       

      As of the
date hereof, Borrower is current in its payment of all accrued rent and other
charges to Persons who own or lease any premises where any of the Collateral is
located, and there are no pending disputes or claims regarding Borrower's
failure to pay or delay in payment of any such rent or other
charges.

       

      Set forth
on Appendix 1 attached hereto is a true, accurate and complete calculation with
respect to the financial covenants of Borrower under the Loan
Agreement.

       

      
        	 	Yours
    truly,
	 	 
	 	Reed's,
    Inc.
	 	 
	 	 
	 	By:_____________________________ 
	 	Name:
      ___________________________ 
	 	Title:
      ____________________________


      

       

       

       

      Exhibit
B

      
        
          
          

        

        
          B-1

          
            

          

        

        
          
          

        

      

       

      Exhibit
"C"

       

      [See
attached]

       

       

       

       

       

       

       

       

       

      Exhibit C

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      
        	
                RECORDING
      REQUESTED BY AND 

                WHEN
      RECORDED RETURN TO:

                 

                BUCHALTER
      NEMER

                1000
      Wilshire Blvd., 15th Floor

                Los
      Angeles, California 90017

                Attn:
      Brandon J. Biegenzahn

              	
                 

                  

              


      

      


       

      APN:
6132-039-014 and 6132-039-015

       

      THIS
DOCUMENT TO IBE RECORDED BOTH AS

      A DEED OF
TRUST AND FIXTURE FILING

       

      THIS
DOCUMENT SECURES OBLIGATIONS WI-ITCH CONTAIN

      PROVISIONS
FOR A VARIABLE RATE OF INTEREST

      


      STATE OF
CALIFORNIA                         )

                                                                            
)

      COUNTY OF
LOS
ANGELES                   
)

       

      DEED OF
TRUST, ASSIGNMENT OF RENTS, SECURITY AGREEMENT and FIXTURE FILING made this 30th
day of May, 2008, by REED'S, INC., a Delaware corporation ("Trustor"),
having an address at 13000 S. Spring St., Los Angles, CA 90061, as trustor, to
FIDELITY NATIONAL TITLE COMPANY, a California corporation ("Trustee") for the benefit of FIRST
CAPITAL WESTERN REGION, LLC, whose address is 700 S. Flower Street, Suite 2325,
Los Angeles, CA 90017 ("Beneficiary").

       

      WITNESSETH

       

      THIS DEED
OF TRUST CONSTITUTES A FIXTURE FILING UNDER SECTION 9502 OF THE UNIFORM
COMMERCIAL CODE OF THE STATE OF CALIFORNIA. TO THE EXTENT THE GOODS ARE FIXTURES
UNDER THE LAWS OF THE STATE OF CALIFORNIA, THE FIXTURES ARE OR ARE TO BECOME
FIXTURES ON THE REAL PROPERTY LOCATED IN THE COUNTY OF LOS ANGELES, STATE OF
CALIFORNIA, MORE PARTICULARLY DESCRIBED ON EXHIBIT
"A" ATTACHED HERETO, COMMONLY KNOWN BY THE STREET ADDRESS: 12930 AND
13000 SOUTH SPRING STREET, LOS ANGELES, CALIFORNIA 90061. THE NAME OF THE RECORD
OWNER OF THE REAL PROPERTY IS REED'S, INC., A DELAWARE CORPORATION.

       

      
        
          
          

        

        
          C-1

          
            

          

        

        
          
          

        

      

       

      FOR THE
PURPOSE OF SECURING (a) the payment and performance of all indebtedness and
Obligations of Trustor arising under that certain Loan and Security Agreement
dated of even date herewith (the "Loan Agreement"; Initially capitalized terms
not otherwise defined herein shall have the meanings ascribed to them in the
Loan Agreement), between

      Trustor, as borrower, and
Beneficiary, as lender, and other agreements related to the Loan Agreement
(such other agreements, along with the Loan Agreement, arc collectively the
"Loan
Documents"), and
any extension, renewal, consolidation or replacement thereof; (b) the
payment
and
performance of all indebtedness and obligations of Trustor arising under this
Deed of Trust, including, without limitation, those contained in Section 1.27 hereof,
and other documents executed by Trustor
in connection herewith, and (c) payment of any money advanced by Beneficiary
to Trustor, or its successors, with interest thereon, evidenced by notes
(indicating that they
are so secured). executed by Trustor or its successor, Trustor has granted,
mortgaged, bargained, sold, alienated, enfeoffed, released, conveyed and
confirmed, and by these presents does grant, mortgage, bargain, sell., alienate,
enfeoff, release, convey and
confirm unto the Trustee, in trust, WITH POWER OF SALE, all its estate,
right, title and interest in, to and under any and all of the property located
in the City of Los Angeles, County of Los Angeles, State of California, and more
particularly described in Exhibit "A" attached
hereto and made a part hereof, including all easements, rights, privileges,
tenements, hereditaments and appurtenances thereunto belonging or in anywise
appertaining, and all of the estate, right, title, interest, claim, demand,
reversion or remainder whatsoever of Trustor therein or thereto, either at law
or in equity, in possession or expectancy, now or hereafter acquired, including,
without limitation, all and singular the ways, waters, water courses, water
rights and powers, liberties, privileges, sewers, pipes, conduits, wires and
other facilities furnishing utility or other services to the property
(collectively, the "Land");

       

      TOGETHER
with all of the right, title
and interest of Trustor in and to all buildings, structures and
improvements now or hereafter erected on the-Land including all plant equipment,
apparatus, machinery and fixtures of every kind and nature whatsoever now or
hereafter located on or forming part of said buildings, structures and
improvements (collectively, the "Improvements"; the
Land and Improvements being hereinafter collectively referred to as the "Premises");

       

      TOGETHER
with all of the
right, title and interest of Trustor in and to the land lying in the bed
of any street., road, highway or avenue in front of or adjoining the
Premises;

       

      TOGETHER
with all of the right, title and interest of Trustor in and to any and all award
and awards heretofore made or hereafter to be made by any governmental
authorities to the present and all subsequent owners of the Premises
which may be made with respect to the Premises as a result of the return of
excess taxes paid on the Mortgaged Property, the exercise of the right of eminent domain,
the alteration of the grade of any street or any other injury to or decrease of
value of the Premises, which said award or awards are hereby assigned to
Beneficiary and Beneficiary, at its option, is hereby authorized, directed and
empowered to collect and receive the proceeds of any such award or awards from
the authorities making the same and to give proper receipts and acquittances
therefor, and to apply the
same as hereinafter provided; and Trustor hereby covenants and agrees to
and with Beneficiary, upon request by Beneficiary, to make, execute and deliver,
at Trustor's expense, any and all assignments and other instruments sufficient
for the purpose of
assigning the aforesaid award or awards to
Beneficiary free, clear and discharged of any and all encumbrances of any
kind or nature whatsoever;

       

      
        
          
          

        

        
          C-2

          
            

          

        

        
          
          

        

      

       

      TOGETHER
with all of the right, title and interest of Trustor in and to all goods,
equipment, machinery, furniture, furnishings, fixtures, appliances, inventory,
..building, materials, chattels and articles of personal property (other than
personal property which is or at any time has become Hazardous Substances, as
hereinafter defined), including any interest therein, HOW
or at any time hereafter affixed to, attached to, or used in any way in
connection with or to be incorporated at any Limo into the Premises, or placed
on any part thereof but not attached or incorporated thereto, together with any
and all replacements thereof, appertaining and adapted to the complete and
compatible use, enjoyment, occupancy, operation or improvement
of the Premises (collectively, the "Chattels");

       

      TOGETHER
with all of the right, title and interest of Trustor in and to leases of the
Premises or the Chattels or any part thereof now or hereafter entered into and
all right, title and interest of Trustor thereunder, including, without
limitation, cash or securities deposited thereunder to secure performance by the
lessees of their obligations thereunder (whether such cash or securities are to
be held until the expiration of the terms of such leases or applied to one or
more of the installments of rent coming due immediately prior to the expiration
of such terms) and all rights to all insurance proceeds and unearned premiums
arising from or relating to the Premises and all other rights and easements of
Trustor now or hereafter existing pertaining to the use and enjoyment of the
Premises and all right, title and interest of Trustor in and to all declarations
of covenants, conditions and restrictions as may affect or otherwise relate to
the Premises;

       

      TOGETHER
with all of the right, title and interest of Trustor in and to all sales
agreements, deposit receipts, escrow agreements and other ancillary documents
and agreements entered into with respect to the sale to any purchasers of any
part of the Premises, and all deposits and other proceeds thereof;

       

      TOGETHER
with all of the right, title and interest of Trustor in and to all permits,
plans, licenses, specifications, subdivision rights, tentative tract maps, final
tract maps, security interests, contracts, contract rights or other rights as
may affect or otherwise relate to the Premises;

       

      TOGETHER
with all of the right, title and interest of Trustor in and to all rights of
Trustor in or to any fund„ program or trust monies and any reimbursement
therefrom directly or indirectly established, maintained or administered by any
governmental authority or any other individual or entity which is designed to or
has the effect of providing funds (whether directly or indirectly or as
reimbursement) for the repair or replacement of storage tanks (whether above or
below ground) located on the Premises or the remediation or cleanup of any
spill, leakage or contamination from any such tank or resulting from the ownership,
use or maintenance of any such tank or to compensate third parties for any
personal injury or property damage;

       

      TOGETHER
with all of the right, title and interest of Trustor in and to all Rents,
issues, profits, revenues, income and other benefits to which.
Trustor may now or
hereafter be entitled from the Premises or the Chattels (which Premises,
titles, interests, awards, Chattels, casements, Rents, income,
-benefits,-ways,-waters, rights,-powers, liberties, privileges, utilities,
tenements, .hereditaments, appurtenances, reversions, remainders, Rents, issues,
profits, estate, property, possession,
claims and demands, are hereinafter collectively referred to as die "Mortgaged
Property");

       

      
        
          
          

        

        
          C-3

          
            

          

        

        
          
          

        

      

       

      TO HAVE
AND TO BOLD the Mortgaged Property unto the Trustee, its successors and assigns
forever.

       

      ARTICLE
I

      


      COVENANTS

       

      And
Trustor further covenants with the Trustee and Beneficiary as
follows:

       

      SECTION
1.01  Trustor
has good and marketable title to an indefeasible fee estate in the Premises
subject to no lien, charge, or encumbrance except such as are approved by
Beneficiary in the title policy issued by First American Title Company
contemporaneous with the recording, of this Deed of Trust (such exceptions,
liens and encumbrances being referred to herein as the "Permitted
Encumbrances"); that it owns the Chattels free and clear of liens and
claims other than the Permitted Encumbrances; that this Deed of Trust is and.
will remain a valid and enforceable lien on the Mortgaged Property subject only
to the Permitted Encumbrances; and that neither the entry nor the performance of
and compliance with this Deed of Trust or the Loan Agreement has resulted or
will result in any violation of, or be in conflict with, or result in the
creation of any deed of trust, lien, encumbrance or charge (other than those
created by the execution and
delivery of, or permitted by, this Deed of Trust or the Loan Agreement) upon
any of the properties or assets of Trustor, or constitute a default under
any deed of trust, indenture, contract, agreement, instrument,
franchise, permit, judgment, decree, order, statute,
rule or regulation applicable to Trustor. Trustor has full power and
lawful authority to convey the Mortgaged Property
in the manner and form herein done or intended hereafter to be done and will
preserve such tide, and will forever preserve, warrant and defend the
same unto the Trustee and Beneficiary, and
will forever preserve,
warrant and defend the validity and priority of the lien hereof against
the claims of all persons and parties whomsoever.

       

      SECTION 1.02  (a)  Trustor will, at its sole cost
and expense, and without expense to the Trustee or Beneficiary, do, execute,
acknowledge and deliver all and every such further acts, deeds, conveyances,
deeds of trust, assignments, notices of assignments, transfers and assurances as
the Trustee or Beneficiary shall from time to time require, for the purpose of
better assuring, conveying, assigning, transferring, pledging, mortgaging,
warranting and confirming unto the Trustee the property and rights hereby
conveyed or assigned o.r intended now or hereafter so to be, or which Trustor
may be or may hereafter become bound to convey or assign to the Trustee, or For
carrying out the intention or facilitating the performance of the terms of this
Deed of Trust, or for filing, registering or recording this Deed of Trust and,
on demand, will execute and deliver, and hereby authorizes Beneficiary to
execute in the name of Trustor, to the extent it may lawfully do so, one or more
financing statements, chattel mortgages or comparable security instruments, to
evidence more effectively the lien hereof upon the Chattels.

       

      (b)           Trustor
will pay all filing, registration or recording fees, all federal, state, county
and municipal stamp taxes and other fees, taxes, duties, imposts, assessments
and all other charges incident to, arising out
of or in connection with the preparation, execution, delivery and enforcement of the Loan Agreement,
this Deed of Trust, any deed of trust supplemental hereto, any security instrument with
respect to the Chattels or any instrument of further assurance.

       

      
        
          
          

        

        
          C-4

          
            

          

        

        
          
          

        

      

       

      SECTION 1.03  Trustor will punctually
pay the principal and interest and all other sums to become due in respect of
the Loan Agreement at the time and place and in the manner specified therein,
all in any coin or currency of the United States of America which at the time of
such payment. shall be legal tender for the payment of public and private
debts.

       

      SECTION 1.04  Trustor will, so long as
it is owner of the Mortgaged Property, do all things necessary to preserve and keep in full force and
effect its existence, franchises, rights and privileges as a business or
partnership, as the case may be, under the laws of the state of its formation,
and will comply with all regulations, rules, ordinances, statutes, orders and
decrees of any governmental authority or court applicable to Trustor or to the
Mortgaged Property or any part thereof.

       

      SECTION 1.05  All right, title and
interest of Trustor in and to all extensions, improvements, betterments,
renewals, substitutes and replacements of, and all additions and appurtenances
to, the Mortgaged Property, hereafter acquired by, or released to, or
constructed, assembled or placed by Trustor on the Premises, and all conversions of the security
constituted thereby, immediately upon such acquisition, release, construction,
assembling, placement or conversion, as the case may be, and in each such case,
without any further grant, conveyance, assignment or other act by Trustor, shall
become subject to the lien and security interest of this Deed of Trust as fully
and completely, and with the same effect, as though now owned by Trustor
and specifically described in the granting clause hereof, but at any and all
times Trustor will execute
and deliver to Beneficiary any and all such farther assurances, deeds of
trust, conveyances or assignments thereof with respect thereto as Beneficiary
may reasonably require for the
purpose of expressly and specifically subjecting the same to the lien and
security- interest
of this
Deed of Trust.

       

      SECTION 1.06  (a)  Trustor, from time to time when the same
shall become due, will pay and discharge, or cause to be paid and discharged,
all taxes and governmental
charges of every kind and nature that may at any time be assessed or
levied against or with respect to the indebtedness secured by, and any other
amounts payable pursuant to, this Deed of Trust, or any part of such
indebtedness or amounts, the Mortgaged Properly or any part thereof including,
without limiting the generality of the foregoing, real and personal property
taxes and income, franchise, withholding, profits and gross receipts taxes, all
general and special assessments, levies, permits, inspection and license fees, all water
and sewer Rents and charges, and all other public or
governmental charges whether of a like or different nature, imposed upon
or assessed or levied against Trustor or the Mortgaged Property or any part
thereof or interest therein or upon the revenues, Rents, issues, income and
profits of the Mortgaged Property or arising in respect of the occupancy, use or possession thereof.
Trustor will, upon the request of Beneficiary, deliver to
Beneficiary receipts evidencing the payment, before any penalties
accrued thereon, of all such taxes, assessments, levies, fees, Rents and
other public charges imposed upon or assessed against it, this
Deed of
Trust, or the Mortgaged
Property or the revenues, Rents, issues, income or profits thereof.

       

      
        
          
          

        

        
          C-5

          
            

          

        

        
          
          

        

      

       

      (b)  Beneficiary
may, at its option, to be exercised by ten (10) days prior written notice
to Trustor (unless such notice is given at the time of the execution of this
Deed of
Trust),
require the deposit by Trustor, at the time that any payment is required to be
paid pursuant to the terms of the Loan Agreement of an additional amount
sufficient to (i) discharge Trustor's
obligations under subsection (a) hereof, and (ii) pay for premiums of insurance
required to
be maintained by Trustor pursuant to Section 1.07 hereof,
on a date which is thirty (30) days prior to the respective dates on
which the same or any of them would be payable. The determination of the
amount so payable and of the fractional part -thereof
to he deposited with Beneficiary, so that the
aggregate of the deposits shall be sufficient for this purpose, shall be
made
by Beneficiary in its sole discretion. Such amounts shall be held by
Beneficiary without interest. and applied to the payment of the items in respect
to which such amounts were deposited or, at the option of Beneficiary, to the
payment of said items in such order or priority as Beneficiary shall determine,
on or before the respective dates on which
the same or any of them would
become delinquent. All such amounts so deposited shall not be deemed to
be held by Beneficiary in escrow and may be commingled with the funds of
Beneficiary and applied pursuant hereto. If one (1) month prior to the due date
of the aforementioned amounts the amount. then on deposit therefor shall be
insufficient for the payment of such hem in full, Trustor within ten (10) days
after demand shall deposit the amount of the deficiency with Beneficiary. Upon
the occurrence of an Event of Default, Beneficiary shall be entitled to apply
all sums held by Beneficiary pursuant to this Section to the payment of the
indebtedness secured hereby, in such order as Beneficiary shall elect. Nothing
herein contained shall be deemed to affect any right or remedy of Beneficiary
under any provisions of this Deed of Trust or of any statute or rule or law to
pay any such amount to the extent the sums deposited by Trustor are not
sufficient therefor.

       

      (c)  Trustor will pay from
time to time when the same shall he-come due, all lawful claims and demands of
mechanics, materialmen, laborers, and others which, if unpaid, might result in,
or permit time creation of, a lien on the Mortgaged
Property or any part thereof, or on the revenues, Rents, issues, income
and profits arising therefrom and in general will do or cause to be clone
everything necessary so that the lien and security interest hereof shall be
fully preserved, at the cost of Trustor, without expense to
Beneficiary.

       

      SECTION 1.07  (a)  Trustor will obtain and maintain
(i) insurance of the type necessary to insure the Improvements and
Chattels, for the full replacement cost thereof, against any loss by fire,
lightning, windstorm, hail, explosion, aircraft, smoke damage, vehicle
damage, earthquakes, elevator collision, and other
risks from time to time included under "extended coverage" policies, in
such amounts as Beneficiary may require, but in any event in amounts sufficient
to prevent Tolstoy from becoming a co-insurer under such policies, (ii) combined
single limit bodily injury and property damage insurance against any loss,
liability or damage on, about or relating to the Premises, in an amount
acceptable to Beneficiary, (iii) if the properly is in an area that has been
identified by the Secretary of Housing and Urban Development as an area having
special flood hazards, the Improvements shall be insured by flood insurance that
is provided under the National Flood Insurance Program in an amount of at least
equal to either the outstanding
balance owing pursuant to the Loan Agreement or the 

       

      
        
          
          

        

        
          C-6

          
            

          

        

        
          
          

        

      

       

      maximum
balance of flood insurance under the National Flood Insurance Program that is
available, whichever is less - such flood insurance shall be maintained
during such time that the National Flood Insurance Program insurance is
available, and (iv) such other risks as Beneficiary may require. Replacement
cost shall, at Beneficiary's option, be redetermined by an insurance appraiser,
satisfactory to Beneficiary, not more frequently than once every twelve (12)
months, at Trustor's cost. Such insurance shall be written by companies of
recognized financial standing, satisfactory to Beneficiary, which are authorized
to do an insurance business in the State of California. Such insurance shall be
in form satisfactory to Beneficiary, shall with respect to hazard insurance and
such other insurance as Beneficiary shall specify, name as the loss payee
thereunder Trustor and Beneficiary, as their interests may appear, and shall
contain a California form 438 BFU (NS) mortgagee endorsement or its local
equivalent. Every policy of insurance referred to in this Section shall contain
an agreement by the insurer that it will not cancel such policy except after
thirty (30) days' prior written notice to Beneficiary and that any loss payable
thereunder shall be payable notwithstanding any act or negligence of Trustor or
Beneficiary which might, absent such agreement, result in a forfeiture of all or
a part of such insurance payment and notwithstanding (i) occupancy or use of the
Mortgaged Property for purposes more hazardous than permitted by the terms of
such policy, (ii) any foreclosure or other action or proceeding taken by the
Trustee or Beneficiary pursuant to this Deed of Trust upon the happening of an
Event of Default or (iii) any change in title or ownership of the Mortgaged
Property. Original policies or certificates thereof satisfactory to Beneficiary
evidencing such insurance shall be delivered to Beneficiary at least thirty (30)
days prior to the expiration of the existing policies. Trustor shall give
Beneficiary prompt notice of any loss covered by such insurance and Beneficiary
shall have the right to join Trustor in adjusting any loss. If there shall have
occurred an Event of Default, Beneficiary shall have the exclusive right to
adjust all losses payable under any such insurance policies without any
liability to Trustor whatsoever in respect of such adjustments. Any :monies
received as payment for any loss under any such insurance shall be paid over to
Beneficiary to be applied at the option of Beneficiary either to the payment of
any sums due pursuant to the terms of the Loan Agreement in such order as
Beneficiary may elect, or shall be disbursed to Trustor under stage payment
terms satisfactory to Beneficiary for application to the cost of repairs,
replacements or Restorations (collectively, "Restorations")
of the improvement or Chattel so damaged or destroyed. All Restorations of the
Improvement or Chattel so damaged or destroyed shall be effected with reasonable
promptness and shall be of a value at least equal to the value of the
Improvement or Chattel so damaged or destroyed prior to such damage or
destruction. Upon the occurrence of an Event of Default, all prepaid premiums
shall be the sole and; absolute property of Beneficiary to be applied by
Beneficiary to the payment of the indebtedness secured hereby, in such order as
Beneficiary shall elect

      


      (b)  Trustor shall not take
out separate insurance concurrent in form or contributing in the event of loss
with that required to be maintained under this Section 1.07, unless Beneficiary
is included thereon as named insured with loss payable to Beneficiary under a
standard California 438 BFU (NS) mortgagee endorsement, or its local equivalent.
Trustor shall immediately notify Beneficiary whenever any such separate
insurance is taken out, specifying the insurer thereunder and full particulars
as to the policies evidencing the same.

       

      
        
          
          

        

        
          C-7

          
            

          

        

        
          
          

        

      

       

      SECTION
1.08   In the event of the passage, after the
date of this Deed of Trust, of any law of the State of California
deducting from the value of the Mortgaged Property for the purpose of taxing the
amount of any lien thereon, or changing in any way the laws now in force
for the taxation of deeds
of trust, or debts secured thereby, for state or local purposes, or the
manner of operation of any
such taxes so as to adversely affect the interest of Beneficiary, then
and in such event, Trustor
shall bear and pay the full amount of such taxes, provided that if for
any reason payment by
Trustor of any such new or additional taxes would be unlawful or if the
payment thereof would
constitute usury or render the Loan Agreement or the indebtedness secured hereby wholly or partially
usurious under any of the terms or provisions of the Loan Agreement,
or this Deed
of Trust, or otherwise, Beneficiary
may, at its option, upon thirty (30) days' written notice to Trustor, (i)
declare the whole indebtedness secured by this Deed of Trust, with interest thereon, to be
_immediately
due and payable, or (ii) pay that amount or portion of such taxes as renders the Loan
Agreement, or the indebtedness secured hereby unlawful or usurious, in which
event Trustor shall concurrently therewith pay the remaining lawful
non-usurious portion or
balance of said taxes.

       

      SECTION
1.09   Trustor
will not (I) further encumber, sell, convey or transfer any interest in,
or any part of, the Mortgaged Property, or (ii) transfer the presently existing
ownership interests in Trustor (including, without limitation, partnership or
stock ownership interests, as the case may be) so as to effectively transfer
control of Trustor named herein to any other person, firm, corporation or other
entity, without the prior written consent of Beneficiary. Any such encumbrance,
sale, conveyance or transfer made without Beneficiary's prior written consent
shall be an Event of Default hereunder. At Beneficiary's option, Beneficiary's
consent to a further encumbrance or transfer shall be subject to an increase in
interest rate, modification of loan terms and/or the payment of a
fee.

       

      SECTION 1.10  Beneficiary and the
Trustee shall have access to and the right to inspect the Premises and Chattels
at all reasonable times.

       

      SECTION 1.11  Trustor shall comply with
all applicable restrictive covenants, zoning and subdivision ordinances and
building codes, all health and environmental laws and regulations and all other
applicable laws, rules, regulations, requirements, directions, orders and
notices of violations issued by any governmental agency, body or officer
relating to or affecting the Premises or the business or activity being
conducted thereon whether by Trustor or by any occupant thereof.

       

      SECTION 1.12  If Trustor shall fail to
perform any of the covenants contained herein on its part to be performed,
Beneficiary may, but shall not he required to, make advances to perform the
same, or cause the same to be performed, on Trustor's behalf, and all sums so
advanced shall bear interest, from and after the date advanced until repaid, at
the lower of (i) the maximum rate permitted by law or (ii) the default rate set
forth in the Loan Agreement, shall be a lien upon the Mortgaged Property and
shall, at Beneficiary's option, be added to the indebtedness secured hereby.
Trustor will repay on demand all sums so advanced on its behalf with interest at
the rate herein set forth. This Section 1.12 shall
not be construed as preventing any default by Trustor in the observance of any
covenant contained in this Deed of Trust from constituting an Event of Default
hereunder,

       

      
        
          
          

        

        
          C-8

          
            

          

        

        
          
          

        

      

       

      SECTION
1.13  [Intentionally Omitted].

       

      SECTION
1.14  Trustor
will riot commit any waste at or with respect to the Mortgaged
Property nor will Trustor do or
fail to do anything which will in any way increase the risk of fire or
other hazard to the Premises, Improvements or Chattels or to any part thereof.
Trustor
will, at all times, maintain the Improvements and Chattels in good order and
condition and
will promptly make, from time to time, all repairs, renewals,
replacements, additions and improvements in connection therewith which are needful
or desirable to such end. Improvements shall not be removed, demolished
or materially altered, nor shall any Chattels be removed without the prior
written consent of Beneficiary,
provided, however, that if-there
shall not have occurred an Event of Default, Trustor may make appropriate
replacements of Chattels, free of
superior title, liens and claims, provided such replacements are immediately
made and are of a value at least equal to the value of the Chattels
removed.

       

      SECTION
1.15  Trustor
will immediately notify Beneficiary of the institution of any proceeding for the
condemnation or taking by eminent domain of the Mortgaged Property, or any
portion thereof. The Trustee and Beneficiary may participate in any such
proceeding and Trustor from time to time will deliver to Beneficiary all
instruments requested by it to permit such participation. In the event of such
condemnation proceedings, or a conveyance in lieu of such taking, the award or
compensation payable is hereby assigned to and shall be paid to Beneficiary.
Beneficiary shall be under no obligation to question the amount of any such
award or compensation and may accept the same in the amount in which the same
shall be paid, but shall have no right to bind Trustor or to make settlement of
its claim, except to the extent of the interest of the Trustee and Beneficiary.
In any such condemnation proceedings the Trustee and Beneficiary may be
represented by counsel selected by Beneficiary. The proceeds of any award or
compensation so received after reimbursement of any expenses incurred by
Beneficiary in connection with such proceedings, shall, at the option of
Beneficiary, be applied, without premium, to the sums due under the Loan Agreement
in
such order as Beneficiary may in
Its sole discretion elect (regardless of interest payable on the award
by the condemning authority), or to the cost
of restoration of the Improvement or Chattel so taken and other terms as
shall be satisfactory to Beneficiary.

       

      SECTION 1.16   The
assignment of Rents, income and other benefits (collectively, "Rents")
contained in the granting clause of this Deed of Trust shall be fully operative
without any
further action on the part of Trustor or Beneficiary and specifically
Beneficiary shall be entitled, at its option, to all Rents from the
Mortgaged Property whether or not Beneficiary takes possession of the
Mortgaged Property. Trustor hereby further grants to Beneficiary
the right (i) to enter upon and take possession of the Mortgaged Property for
the purpose of collecting the Rents, (ii) to dispossess by the usual summary
proceedings any tenant defaulting in the payment thereof to Beneficiary, (iii)
in let the Mortgaged Property or any part thereof, and (iv) to apply the Rents,
after payment
of all necessary charges and expenses, on account of the indebtedness and
other sums secured hereby. Such assignment and
grant shall continue in effect until the indebtedness and other sums
secured hereby are paid, the execution of this Deed of Trust constituting and
evidencing the irrevocable consent of Trustor to the entry upon and taking
possession of the Mortgaged Property by Beneficiary pursuant to such grant,
whether or not sale or foreclosure has been instituted. Neither the exercise of
any rights under this Section by Beneficiary
nor the application of the Rents to the indebtedness and other stuns secured
hereby, shall cure or waive any Event of Default, or notice of default hereunder
or invalidate any act done pursuant hereto, but shall be cumulative of all other
rights and remedies.

       

      
        
          
          

        

        
          C-9

          
            

          

        

        
          
          

        

      

       

      The foregoing provisions hereof shall
constitute an absolute and present assignment of the Rents from the
Mortgaged Property, subject, however, to the conditional permission given to
Trustor to collect and use the
Rents until the occurrence of an Event of Default at which time such
conditional permission shall automatically terminate; and the existence or
exercise of such right of Trustor
shall not operate to subordinate this assignment, in whole or in part, to any
subsequent assignment by
Trustor permitted under the provisions of this Deed of Trust, and any
such subsequent assignment
by Trustor shall be subject to the rights of the Trustee and Beneficiary
hereunder.

       

      SECTION 1.17  (a)  Trustor will not (i) execute an
assignment of the Rents or any part thereof from the Mortgaged Property unless such
assignment shall provide that it is subject and subordinate to the assignment
contained in this Deed of Trust, and any additional or subsequent assignment
executed pursuant hereto, or (ii) except where the lessee is in default
thereunder, terminate or consent to the cancellation or surrender of any lease
of the Mortgaged Property or of any part thereof, now existing or hereafter to
be made or (iii) modify any such lease or give consent to any assignment or
subletting without Beneficiary's prior written consent, or (iv) accept
prepayments of any installments of rent or additional rent to become due under
such leases, except prepayments in the nature of security for the performance of
the lessee's obligations thereunder, or (v) in any other manner impair the value
of the Mortgaged Property or the security of the Trustee or Beneficiary for the
paymentof the indebtedness secured hereby, or (vi) enter into any lease
prohibited under the provisions of the Loan Agreement.

       

      (b)  Trustor will not execute any lease of
all or a substantial portion of the Mortgaged Property except for actual
occupancy by the lessee thereunder, and will at all times promptly and faithfully perform,
or cause to be performed, all of the covenants, conditions and agreements contained in all leases of
the Mortgaged Property now or hereafter existing, on the part of the lessor thereunder to
be kept and performed. if any such lease provides for the giving by the lessee of certificates with
respect to the status of such leases, Trustor shall exercise its right to
request such certificates within five (5) days of any demand therefor by
Beneficiary.

       

      (c)  Trustor shall furnish to Beneficiary,
within fifteen (15) days after a request by Beneficiary to do so, a
written statement containing the names of all lessees for the Mortgaged Property, the terms of
their respective leases, the spaces occupied, the rentals paid and any security
therefor.

       

      (d)  Trustor shall, from time
to time upon request of
Beneficiary, specifically assign to Beneficiary as additional security
hereunder., by an instrument in writing in such form as may be approved by
Beneficiary, all right, title and interest of Trustor in and to any and all
leases now or hereafter on or affecting the Mortgaged Property, together with
all security therefor and all monies payable thereunder, subject to the
conditional permission hereinabove given to Trustor to collect the rentals under
any such lease. Trustor shall also execute and deliver
to Beneficiary any notification, financing statement or other document
reasonably required by Beneficiary to perfect the foregoing assignment as to any
such lease.

       

      
        
          
          

        

        
          C-10

          
            

          

        

        
          
          

        

      

       

      SECTION
1.18   [Intentionally Omitted].

       

      SECTION
1.19    [intentionally
Omitted].

       

      SECTION
1.20   Trustor
represents, warrants and covenants that. neither Trustor nor any current
occupant of operator has used Hazardous Substances at or affecting the Premises
in any manner which violates any Act governing the use, storage. treatment,
transportation, manufacture,
refinement, handling, production or disposal of Hazardous Substances, or
that may make the owner of the Premises liable in tort under a common law public
or private nuisance action.

       

      SECTION
1.21  Trustor
represents that no prior owner, occupant or
operator of the Premises
has used Hazardous Substances at or affecting the Premises in any manner
which violates any Act governing the use, storage, treatment, transportation,
manufacture, refinement, handling, production or disposal of Hazardous
Substances, or that may make the owner of the Premises liable in tort under a
common law public or private nuisance action.

       

      SECTION
1.22   Trustor covenants that it shall keep or
cause the Premises to be kept free of Hazardous Substances and
not cause or permit the Premises to be used to generate, manufacture, refine, transport, treat,
store, handle, dispose, produce or process Hazardous Substances, except in compliance with all
applicable Acts.

       

      SECTION
1.23  Trustor
covenants to ensure compliance by all operators and occupants
of the. Premises with all applicable Acts and will ensure that all such
operators and occupants
obtain and comply with any and all required approvals, registration or
permits.

       

      SECTION
124  Trustor
shall, upon the reasonable request of Beneficiary, conduct and complete all
investigations, studies, sampling and testings relative to Hazardous Substances
at or affecting the Mortgaged Property.

       

      SECTION
1.25  Trustor,
promptly upon the written request of Beneficiary from time to time, shall.
provide Beneficiary, at Trustor's sole cost and expense and without any
liability to Beneficiary, with an environmental site assessment or environmental
audit report, Or an update of such assessment or report, by an environmental
engineering firm acceptable to Beneficiary, all in scope, form and content
satisfactory to Beneficiary, to assess with a reasonable degree of certainty the
presence or absence of Hazardous Substances and the potential costs in
connection with the Remediation (as defined below) of any Hazardous Substances
at or related to the Mortgaged Property.

       

      
        
          
          

        

        
          C-11

          
            

          

        

        
          
          

        

      

       

      SECTION
1.26  Notwithstanding the obligation of
Trustor to indemnify Beneficiary pursuant to this Deed of Trust, Trustor shall,
upon
demand of Beneficiary, and at Trustor's
sole cost and expense, promptly take all actions to Remediate (as defined
below) the
Mortgaged
Property
which are
required by any federal, state or local governmental agency or political
subdivision or which are reasonably necessary to mitigate a spill or a
violation of any Act or to
allow full economic use of the Mortgaged Property. "Remediate" and "Remediation" shall include, but not be
limited to, the investigation of the environmental condition of the Mortgaged
Property, the preparation of any feasibility studies, reports or remedial plans,
and the performance of any cleanup, abatement, removal, remediation,
containment, operation, maintenance, monitoring or restoration work, whether on
or off of the Mortgaged Property. Trustor
shall take all actions necessary to remove all Hazardous Substances from the
Mortgaged Property, notwithstanding any lesser standard of remediation
allowable under any Act. All such work shall be performed by one or more
contractors, selected
by Trustor and approved in advance and in writing by Beneficiary. Trustor
shall proceed continuously and diligently with such investigatory and
remedial actions, provided that in all cases such actions shall be in
accordance with all applicable requirements of all Acts. Any such actions
shall be performed in
a good,
safe and workmanlike manner and shall minimize any impact on the business
conducted at the Mortgaged Property. Trustor shall pay all costs in
connection with such investigatory and
remedial
activities, including but not limited to all power and utility costs, and any
and all taxes or fees that may be applicable to such activities. Trustor
shall promptly provide to Beneficiary copies of testing
results and reports that are generated in connection with the above
activities. Promptly upon completion of such investigation and remediation,
Trustor shall permanently seal or cap
all monitoring wells and test: holes to industrial standards in compliance with
all Acts, remove
all associated equipment, and restore the Mortgaged Property to the
condition existing prior to the commencement of Remediation,
which shall include, without limitation, the repair of any
surface damage, including paving, caused by such investigation or
remediation hereunder. Within
ten days of demand therefor, Trustor shall provide
Beneficiary with a bond, letter of credit or similar financial assurance
evidencing that the necessary funds are available to perform the obligations
established by this
paragraph.

       

      SECTION
1.27   "Indemnified
Persons" shall mean Beneficiary and its
parents, subsidiaries and
affiliates, attorneys and each of their officers, directors, agents, employees,
trustees, receivers, executors and administrators, and the heirs, successors and
assigns of all of the
foregoing. "Losses" shall mean any and all losses,
liabilities, contingent liabilities, damages, obligations, claims, contingent claims,
actions, suits, proceedings, disbursements, penalties, costs and expenses (including, without
limitation, actual attorneys' fees and costs of counsel retained by Beneficiary
to monitor the proceedings and actions of trustor in satisfying its obligations
hereunder, and to advise
and represent Beneficiary will respect to matters related hereto, including, without limitation, fees
incurred pursuant to 11 U.S.C. §101 et. seq. (the "Bankruptcy
Code") and all other professional or
consultants' fees and expenses), whether or not an action
or proceeding is commenced or threatened.

       

      Trustor
shall indemnify, protect, defend (with reputable counsel satisfactory to
Beneficiary)
and hold harmless all Indemnified Persons from and
against the full amount of any and
all Losses suffered or incurred by any 'Indemnified Person, regardless of
negligence, whether as holder of this Deed of Trust, us mortgagee in possession
or as successor in interest to Trustor as owner of the Mortgaged Property by
virtue of foreclosure or acceptance of a deed or other
transaction
in lieu of foreclosure, or after partial or total reconveyance of this Deed of
Trust, arising
from, in respect of, as a consequence of (whether foreseeable or
unforeseeable) or in connection
with any spill or with the presence, use, storage, disposal, generation,
transportation or
treatment of any Hazardous Substance at, under or related to the
Mortgaged Property, whether or not
originating or emanating from the Mortgaged 

       

      
        
          
          

        

        
          C-12

          
            

          

        

        
          
          

        

      

       

      Property,
including, without limitation, the following: (1) compliance with or
violation or claimed violation of any Act, (ii) claims asserted by any
person or entity (including, without limitation, any governmental agency or
quasi-governmental authority, board, bureau, commission, department.,
instrumentality or public body, court, or administrative tribunal), including,
but not limited to, claims under common law causes of action, and (iii) the
implementation of the recommendations set forth in any environmental audit of
the Mortgaged Property or the uses thereof. Trustor's agreement contained in
this Section shall not be limited in any manner by Trustor's date of acquisition
or time of ownership of the Mortgaged Property, or by the value of the Mortgaged
Property. Trustor shall not settle any claim or matter which is the subject of
the foregoing agreement of Trustor without Beneficiary's prior written consent,
which consent may be withheld by Beneficiary in Beneficiary's sole and absolute
discretion_ The provisions of this Section
1.27 are not intended to create--and do not create--any third party
beneficiary, except for Beneficiary, as defined herein.

      


      SECTION
1.28  In the
event of any spill or the presence of any Hazardous Substances at or related to
the Mortgaged Property, whether or not the same originates or emanates from the
Mortgaged Property or any contiguous real estate, and/or if Trustor shall fall
to comply with any of the requirements of any Act, Beneficiary may at its
election, but without the obligation so to do, give such notices and/or cause
such work to be performed at the Mortgaged Property and/or take any and all
other actions as Beneficiary shall deem necessary or advisable in order to
remedy said spill or Hazardous Substances or cure said failure of compliance,
and any amounts paid as a result thereof, together with interest thereon at the
default interest rate from the date of payment by Beneficiary, shall be
immediately due and payable by Trustor to Beneficiary, and until paid shall be
added to and become a part of the obligations secured hereby and shall have the
benefit of the lien hereby created as a part thereof.

       

      SECTION
1.29  Foreclosure shall not operate as
a discharge of Trustor's obligations to Beneficiary as to Hazardous Substances
and the Indemnity provisions in Section
1.27 hereof; and in the event Trustor tenders a deed in lieu of
foreclosure, Trustor shall deliver the Premises to Beneficiary (or its
designee) free of any and all Hazardous Materials or Substances. The
Indemnity provisions in Section
1.27 hereof shall not be discharged or affected in any way by foreclosure
or by Beneficiary's acceptance of
a deed in lieu thereof.

       

      SECTION
1.30   The term "Hazardous
Substances" shall
include:

       

      (a)  those substances as
defined as "hazardous substances," "hazardous materials," "toxic substances," or
"solid waste" in the Comprehensive Environmental Response, Compensation and
Liability Act, 42 U.S.C. §-9601 et seq.,
the Resource Conservation and Recovery Act, 42 -U.S.C.
§6901 et seq.
("RCRA"), or the Hazardous
Materials Transportation Act, 49Section 1801 et seq.,
and in the regulations promulgated pursuant thereto;

       

      (b)  those substances
designated as a "hazardous substance" under or pursuant to the Federal Water
Pollution Control Act, 33 U.S.C. §1257 et 5eg., or defined as a "hazardous
waste", under or pursuant to RCRA;

       

      
        
          
          

        

        
          C-13

          
            

          

        

        
          
          

        

      

       

      (c)  those substances or
substance defined or listed as "extremely hazardous waste" pursuant to
California
-Health
and Safety Code Section 25115; "hazardous waste" pursuant to California
Health and Safety Code Section 2511.7; "infectious waste" pursuant to California
Health and Safety Code Section 25117.5; "restricted hazardous waste" pursuant to
California Health and Safety Code Section 25122.7; "waste" pursuant to
California Health and Safety Code Section 25] 24; "recyclable materials"
pursuant to California Health and Safety Code Sections 25120.5, 2522.55,
25143.2, 25143.3; "solid waste" pursuant to California Health and Safety Code
Section 25148.5; "hazardous substance" pursuant to California Health and Safety
Code Sections 25316 through 25317; "hazardous material", "hazardous substance",
and "hazardous waste" pursuant to California Health and Safety Code Section
25501; "acutely hazardous material" pursuant to California Health and Safety
Code Section 25532; "waste"., "hazardous substance", "contamination", and
"nuisance" pursuant to California Water Code Section 13050; "hazardous material"
pursuant to California Vehicle Code Sections 353, 2402a; "hazardous
material" pursuant to 13 California Administrative Code Section 1160.3;
"discharge" pursuant to 22 California Administrative Code Section 66041;
"extremely hazardous material" pursuant to 22 California Administrative Code
Section 66060; "hazardous material"
pursuant to 22 California Administrative Code Section 66084; "special
waste" pursuant to 22 California Administrative Code Section 66195; those
materials listed as hazardous materials pursuant to 22 California Administrative
Code Section 66680; those items listed as 'special wastes" pursuant to 22
California Administrative Code Section 66740; "hazardous waste" pursuant to 23
California Administrative Code Section 2521; "designated waste" pursuant to 23
California Administrative Code Section 2522; "non-hazardous solid waste"
pursuant to 23 California Administrative Code Section 2523; "inert waste"
pursuant to 23 California Administrative Code Section 2524; and those matters
and materials regulated pursuant to 23 California Administrative Code Sections
257 through 2574;

       

      (d)  those substances listed
in the United States Department of Transportation Table (40 CFR 172.101 and
amendments thereto) or by the Environmental Protection Agency (or any successor
agency) as hazardous substances (40 CFR Part 302 and amendments thereto);
and

       

      (e)  such other substances,
materials and wastes which are regulated under any act, or which are
classified as hazardous or toxic under any act

       

      All of
the statutes, acts, codes, sections and tables listed above shall include all
amendments,
modifications and supplements thereto, together with all regulations promulgated
pursuant to such statutes, acts, codes, sections and tables.

       

      SECTION
1.31  The term
"Act"
shall include all present and future laws, regulations, statutes, common
law rules, ordinances, codes, licenses, permits; orders, approvals, plans,
authorizations, concessions, franchises, and similar items of any federal, state
or local government, instrumentality or body, as the same may be amended,
modified or supplemented from time to time related to Hazardous
Substances.

       

      SECTION
1.32  The
obligations of Trustor and the rights of Beneficiary under Section
1.20 through Section
131 are in addition to and not in substitution of the obligations of
Trustor and rights of Beneficiary under all applicable federal, state and local
laws, regulations and
ordinances relating to health and safety, and protection of the environment. The
obligations of Trustor and the rights of Beneficiary under Section
1.20 through Section
1.31 and such laws and regulations, notwithstanding anything contained
herein or in any other document or agreement which may be construed to the
contrary (i) shall not be subject to any antideficiency laws or protections, and
(ii) shall survive (a) a trustee's sale, judicial sale or deed or other transaction it, lieu of such sale
hereunder, (b) the repayment of the obligations secured hereunder and (c)
The termination of the Loan
Agreement. In the event Trustor does not timely perform any of the above obligations, Beneficiary may
perform said obligations at the expense of Trustor and such expense shall be added to
the amount secured by the lien of this Deed of Trust.

       

      
        
          
          

        

        
          C-14

          
            

          

        

        
          
          

        

      

       

      SECTION
1.33   Trustor hereby represents, covenants
and warrants to Beneficiary, its successors and assigns, as
follows:

       

      (a)  The Premises is presently
used as an administrative, office, manufacturing and distribution facility and
for other commercial purposes, and no portions of the Premises are used as or
for a "public accommodation," as described and defined in 42 U.S.C. §1210I, et. seq.,
and all applicable rules and regulations promulgated thereunder (the
"ADA").

       

      (b)  Trustor has made all
modifications and/or provided all accommodations which may be required to be
made or provided by Trustor to the Premises pursuant to the ADA in order to
accommodate the needs and requirements of any disabled employees of
Trustor.

       

      (c)  Trustor has received no
notice or complaint regarding any noncompliance with the
ADA of the Premises or of Trustor's employment practices and, to the best of
Trustor's knowledge, there has
been no
threatened litigation
alleging any such noncompliance by Trustor or the Premises.

       

      SECTION
1.34  Trustor
shall promptly provide Beneficiary with copies of all notices or claims which
may be received by Trustor and
involving claims made by any individual, entity or governmental agency as
to any alleged noncompliance of
the Premises with the requirements of the ADA.

       

      SECTION
1.35  (a)  Trustor shall observe and
comply in all material respects with all obligations and requirements of the ADA
as it applies to the
Premises, which shall include, without limitation, installing or
constructing all improvements or alterations which may be necessary to cause the
Premises to be accessible to all persons if the use of the Premises or any part
thereof becomes a
"public accommodation," as defined in the ADA, or in the event additional
building improvements are
added or incorporated into the existing improvements, and making any reasonable
accommodations which may be necessary to accommodate the needs or requirements
of any existing or future employee of Trustor.

       

      (b)  Without limiting the
generality of any other provision of this Deed of Trust, Trustor shall
indemnify, defend and hold harmless Beneficiary, its successors and assigns, and
the directors, officers, employees, agents and servants of the foregoing, from
any and all losses, costs, expenses (including court costs and attorneys' fees),
damages, demands, claims, suits,
proceedings, orders and judgments, penalties, fines and other sanctions arising
from any claim that the Premises is not in compliance with the requirements of
the ADA.

       

      (c)  Notwithstanding anything contained
herein, the provisions of the Sections
1.33
through 1.35 are solely for the benefit of
Beneficiary, and no other person is entitled to rely on the same.

       

      
        
          
          

        

        
          C-15

          
            

          

        

        
          
          

        

      

       

      ARTICLE
II

       

      EVENTS
OF DEFAULT AND REMEDIES

       

      SECTION 2.01  The occurrence of any one
or more of the following events shall constitute an event of default ("Event
of Default")
hereunder:

       

      (a)  If Trustor shall default
in (i) the payment of any amounts owing on the Loan Agreement as and when the
same shall have become due and payable, whether at any stated maturity or by
acceleration or otherwise, (ii) any other sums required to be paid by Trustor
pursuant to the Loan Agreement or this Deed of Trust on the date that such
payments are therein or herein
required to be made, or (iii) there shall occur a Default under the Loan
Agreement; or

       

      (b)  If Trustor and/or Guarantor, if any, shall breach,
or be in default of, any of the covenants or provisions
contained in the Loan Agreement, or this Deed of Trust, or of any chattel mortgage, other deed of trust,
security agreement or other document issued thereunder or in connection therewith or
herewith; or

       

      (c)  If Trustor and/or
Guarantor, if any, shall default in any obligation for borrowed money, whether
to
Beneficiary or otherwise, and whether or not such Obligations affect
the Property, for a period longer than any period of grace provided in
such obligation; or

       

      (d)  If Trustor shall execute
any chattel mortgage on any (i) materials, fixtures or articles used in the
construction or operation of an. Improvement or appurtenance thereto, or (ii)
articles of personal property
placed on the Premises, or should any such materials, fixtures or
articles be purchased on conditional bill of sale or otherwise so that the
ownership thereof will not vest unconditionally in Trustor free from
encumbrance, on delivery at the Premises; or should Trustor fail to furnish to
Beneficiary, if requested, the contracts, bills of sale, statements, receipted
vouchers and agreements, or any of them, under which Trustor claims title to
such materials, fixtures and articles; or

       

      (e)  If Trustor and/or Guarantor, if any,
shall make an assignment for the benefit of creditors, or shall admit in writing
its inability to pay its debts as they become due, or shall file a voluntary petition in
bankruptcy, or shall be adjudicated a bankrupt or insolvent, or shall file any petition or answer
seeking for itself any reorganization, arrangement, composition, readjustment,
liquidation, dissolution, or similar relief under any present or future statute,
law or regulation, or
shall file any answer admitting or shall fail to deny the material allegations
of a petition filed
against it for any such relief, or shall seek or consent to or acquiesce in the
appointment of any trustee, receiver
or liquidator of itself or of all or any substantial part of its
properties,
or if Trustor shall take any action looking to its dissolution or
liquidation, or it shall cease
doing business as a going concern; or

       

      
        
          
          

        

        
          C-16

          
            

          

        

        
          
          

        

      

       

      (f)  If, within 30 days after the
commencement of any proceeding against Trustor and/or Guarantor,
if any, seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution
or similar relief under any present or future statute, law or regulation, such
proceeding shall not have been dismissed, or if, within 30 days after
the appointment, without its consent or
acquiescence of any trustee, receiver or liquidator of itself or
of all or any substantial
part of its properties, such appointment shall not have been vacated,
provided, however, that
during the pendency of such proceeding Beneficiary shall not be obligated to make any
advance under the Loan Agreement; or

       

      (g)  If a final judgment for
the payment of money (exclusive of judgments insured against by adequate
liability insurance policies), shall be rendered against Trustor, and/or
Guarantor, if any, or any of its partners, if any, in any jurisdiction and if,
within 30 days after entry thereof, such judgment shall not have been discharged
or execution thereof stayed pending appeal, or if within 30 clays after the
expiration of any such stay, such judgment shall not have been discharged;
or

       

      (h)  If Trustor shall violate
the provisions of Section 1.09 hereof;
or

       

      (i)  If any representation or warranty made
by Trustor in any guaranty, the Loan Agreement, this Deed
of Trust or any deed of trust, security agreement, chattel mortgage or other document issued hereunder or in
connection therewith or herewith prove to be untrue, the effect of which is to
adversely
affect Beneficiary's security hereunder, or

       

      (j)  If an event of default
shall occur under any
permitted prior deed of trust, if any;
or

       

      (k)  If there shall he a
default under, or
revocation or attempted revocation under the Loan
Agreement.

       

      Upon
the occurrence of an Event of Default, and in every such
case:

       

      I.  During the continuance of
any Event of Default, Beneficiary personally, or by
its
agents or attorneys may enter into and upon all or any part of the
Mortgaged Property, and each and every part thereof, and may exclude the
party owning the beneficial interest in same, its agents and servants wholly
therefrom;
and having and holding the same, may use, operate, manage and control the
Mortgaged Property for any lawful purpose and conduct the business thereof,
either personally or by its superintendents, managers, agents, servants,
attorneys or receivers; and upon every such entry, Beneficiary, at the expense
of Trustor, from time to time, either by
purchase, repairs or construction, may maintain and restore the Mortgaged
Property, whereof it shall become possessed as aforesaid, may complete
the construction of the improvements and in the course of such completion may
make such changes in the contemplated Improvements as it may deem desirable; may
insure or reinsure the same as provided in Section 1.07
hereof, and likewise, from time to time, at the expense of Trustor, Beneficiary
may make all necessary
or proper repairs, renewals, replacements, alterations, additions,
betterments and improvements to the Mortgaged Property
or any part thereof and thereon as it may deem advisable; and in every such case
Beneficiary shall have the right to manage and operate the Mortgaged Property, possessed as
aforesaid, and to 

       

      
        
          
          

        

        
          C-17

          
            

          

        

        
          
          

        

      

       

      carry on the business thereof and
exercise all rights and
powers of the party owning such property with respect thereto either in the name
of such party or otherwise as it shall deem best; and Beneficiary shall be
entitled to collect and receive all earnings, revenues, Rents,
issues, profits and income of the :Mortgaged Property and every part thereof; and after deducting
the expenses of conducting the business thereof and of all maintenance, repairs, replacements,
alterations, additions, betterments and improvements and all payments which may be made for taxes,
assessments, insurance, in payment of any prior deed of trust and prior or other proper charges upon
lie Mortgaged Properly or
any part thereof, as well
as just and reasonable
compensation of Beneficiary for the services of Beneficiary and for all
attorneys, counsel,
agents, clerks, servants and other employees by it properly engaged and
employed, Beneficiary
shall apply the moneys arising as aforesaid, first, to the payment of any
sums, other than
interest and -principal due pursuant to
the Loan Agreement required to be paid by Trustor under this Deed
of Trust, second, to the
payment of interest due pursuant to the Loan Agreement, third, to the
payment of the principal due pursuant to the terms of the Loan Agreement when and
as the same shall become payable (whether by acceleration or
otherwise).

       

      II.  Beneficiary, at its option, may declare the entire unpaid
balance of the indebtedness secured hereby immediately
due and payable by delivery to Trustee of written declaration of default and demand for
sale and written notice of default and of election to cause the Mortgaged Property to be
sold, which notice Trustee shall cause to be duly filed for record. Beneficiary
shall also deposit
with the Trustee this Deed of Trust, the Loan Agreement and all documents
evidencing the expenditures secured hereby.

       

      III.  After the lapse of such
time as may then be required by law following the recordation of said notice of
default, and notice of sale having been given as then required by law, Trustee,
without demand on Trustor, shall sell the Mortgaged Property at the time and
place fixed by it in said notice of sale, either as a whole or in separate
parcels, and in such order as it may determine, at public auction to the highest
bidder for cash in lawful money of the -United States, payable at time of sale.
If the Mortgaged Property consists of several known lots or parcels, Beneficiary
may designate the order in which such parcels shall be sold or offered for sale.
Any person, including Trustor, Trustee or Beneficiary, may purchase at such
sale.

       

      IV.  Trustee may postpone sale
of all or any portion of the Mortgaged Property by public announcement
at such time and place of sale, and from time to time thereafter may postpone
such sale by public announcement
at the time
fixed by the preceding postponement.

       

      V.  On and after the
occurrence of an Event of Default, Trustor shall pay all Rents, issues and profits thereafter
received by Trustor from the Mortgaged Property to Beneficiary and to the extent
not paid shall hold such amounts as trust funds for the benefit of Beneficiary
and such Rents, issues and profits shall be deemed "cash collateral" of
Beneficiary under the Bankruptcy Code, as amended,

       

      
        
          
          

        

        
          C-18

          
            

          

        

        
          
          

        

      

       

      SECTION
2.02  (a)  Trustee, after making
such sale, and upon receipt of the purchase price, shall make, execute and
deliver to the purchaser or purchasers its deed or deeds conveying
the Mortgaged Property so sold, but without any covenant or warranty, express or
implied, and without any representation, express or implied, as to the
existence, or lack thereof, of Hazardous Substances on the Mortgaged Property,
and shall apply the proceeds of sale thereof to payment, FIRSTLY, of the
expenses of such sale, together with the reasonable expenses of this Trust,
including Trustee's fees and cost of evidence of title in connection with sale
and revenue stamps on Trustee's deed; SECONDLY, of all moneys paid, advanced or
expended by Beneficiary under the terms hereof, not then repaid, together with
the interest thereon as herein provided; THIRDLY, of the amount of the principal
and interest due under the Loan Agreement then remaining unpaid; FOURTHLY, in an
amount sufficient, as determined in the sole and absolute discretion of
Beneficiary, acting in good faith, to satisfy actual or contingent sums owing
pursuant to Section
1.27 hereof (“Impound Sum"), and,
if not actually incurred, to be held by Beneficiary (not in trust, without: the
accrual of interest thereon and without the obligation to segregate such funds)
for a period of seven (7) years from the date of foreclosure, thereafter to 'be
returned to the person or persons legally entitled thereto, upon satisfactory
proof of such right; and LASTLY, the balance or surplus, if any, of such
proceeds of sale to the person or persons legally entitled thereto, upon
satisfactory proof of such right.

       

      (b)  In the event of a sale of
the Mortgaged Property, or any part thereof, and the execution of a deed or deeds therefor under these
trusts, the recitals therein of any matters or facts shall be conclusive proof
of the truthfulness thereof and of the fact that said sale was regularly and
validly made in accordance with all requirements of the laws of the State of
California and of this Deed of Trust; and any such deed or deeds, with such
recitals therein, shall he effectual and conclusive against Trustor and all
other persons; and the receipt for the purchase money recited or contained in
any deed executed to the purchaser as aforesaid shall be sufficient discharge to
such purchaser from all obligations to see to the proper application of the
purchase money according to the trusts aforesaid.

       

      SECTION 2.03  After the happening of an
Event of Default by Trustor under this Deed of Trust and immediately upon the
commencement of any action, suit or other legal proceeding by Beneficiary to
obtain judgment: for the principal of, or interest due pursuant to the Loan
Agreement and other sums required to be paid by Trustor pursuant to any provisions of
this Deed of Trust, or of any other nature in aid of the enforcement of the Loan
Agreement, or of this Deed of Trust, Trustor will waive the issuance and service
of process and enter its voluntary appearance in such action, suit or
proceeding. Further, Trustor hereby consents to the appointment of a receiver or
receivers of the Mortgaged Property and of all the earnings, revenues, Rents,
issues, profits and income thereof. After the happening of any such default and
during its continuance or upon the commencement of any proceedings to foreclose
this Deed of Trust or to enforce the specific performance hereof or in aid
thereof or upon the commencement of any other judicial proceeding to enforce any
right of the Trustee or Beneficiary hereunder, Beneficiary shall be entitled.,
as a matter of right, if it shall so elect, without the giving of notice to any
other party and without regard to the adequacy or inadequacy of any security for
the Deed of Trust indebtedness, forthwith either before or after declaring all
sums due pursuant to the Loan Agreement to be due and payable, to the
appointment of such a receiver or receivers.

       

      
        
          
          

        

        
          C-19

          
            

          

        

        
          
          

        

      

       

      SECTION
2.04  During
the continuance of an Event of Default,
Beneficiary shall have the following rights and remedies:

       

      (a)  Beneficiary or its
employees, acting by themselves or through a court- appointed receiver, may
enter upon, possess, manage, operate, dispose of, and contract to dispose of the
Mortgaged Property or any part thereof; take custody of all accounts;
negotiate with governmental authorities with respect to the Mortgaged Property's
environmental compliance and remedial measures; take any
action necessary to enforce compliance with any Act, including but not
limited to spending Rents to
abate the problem; make, terminate, enforce or modify leases of the
Mortgaged Property upon such
terms and conditions as Beneficiary deems proper; contract for goods and
services, hire agents, employees, and counsel, make repairs, alterations, and
improvements to the Mortgaged
Property necessary, in Beneficiary's judgment, to protect or enhance the
security hereof; incur the risks and obligations ordinarily incurred by owners
of property (without any personal obligation on the pad. of
the receiver); anchor take any and all other actions which may be
necessary or desirable to comply with Trustor's obligations hereunder and under
the Loan Agreement. All sums realized by Beneficiary under this subparagraph,
less all costs and
expenses incurred by it under this subparagraph, including attorneys',
fees, and less such sums as Beneficiary deems appropriate as a reserve to meet
future expenses under the subparagraph, shall be applied on any indebtedness
secured hereby in such order as Beneficiary shall determine. Neither application
of said sums to said indebtedness, nor any other action taken by Beneficiary
under this subparagraph shall cure or waive any Event of .Default or notice of
default hereunder, or nullify the effect of any such notice of default.
Beneficiary, or any employee or agent of Beneficiary, or a receiver appointed by
a court, may take any action or proceeding hereunder without regard to (a) the
adequacy of
the security for the indebtedness secured hereunder, (b) the existence of
a declaration that the indebtedness secured hereby has been declared immediately
due and payable, or (c) the filing of a notice of default.

       

      (b)  With or without notice,
and without releasing Trustor from any obligation hereunder, to cure any default
of Trustor and, in connection therewith,
Beneficiary or its agents, acting by themselves or through a court
appointed receiver, may enter upon the Mortgaged Property
or any part thereof and perform such acts and things as Beneficiary deems
necessary ur desirable to inspect, investigate, assess, and protect the
security hereof, including without. limitation
of any of its other rights: (a) to obtain a court order to enforce
Beneficiary's right to enter and inspect the Mortgaged Properly under
California Civil Code Section 2929.5, to which the
decision of Beneficiary as to whether there exists a release or threatened
release of a Hazardous Substances onto the Mortgaged Property shall be
and deemed reasonable and conclusive
as between the parties hereto; and (b) to have a receiver appointed under
California Code of
Civil Procedure Section 564 to enforce Beneficiary's right to enter and
inspect the Mortgaged
Property for Hazardous Substances. All costs and expenses incurred by
Beneficiary with respect to the audits, tests, inspections, and
examinations which Beneficiary or its agents or employees may conduct, including
the fees of the engineers, laboratories, contractors, consultants, and
attorneys, shall be paid by Trustor. All costs and expenses incurred by the
Trustee
and Beneficiary pursuant to this subparagraph (including without
limitation court costs, consultant fees and attorneys' fees, whether incurred in
litigation or not and whether before or
after
judgment) shall bear interest at the default rate set forth in the Loan
Agreement from the date
they are incurred until said sums have been paid.

       

      
        
          
          

        

        
          C-20

          
            

          

        

        
          
          

        

      

       

      (c)  To seek a judgment that
Trustor has breached its covenants, representations and/or warranties with
respect to the environmental matters set forth above in Section 1.20 through
Section 1.29 by
commencing and maintaining an action or actions in any court of competent
jurisdiction for breach of contract pursuant to California Code of Civil
Procedure Section 736, whether commenced prior to or after foreclosure of the
Mortgaged Property, and to seek the recovery of any and all costs, damages,
expenses, fees, penalties, fines, judgments, indemnification payments to third
parties, and other out-of-pocket costs or expenses actually incurred by
Beneficiary (collectively, the "Environmental Costs")
incurred or advanced by Beneficiary relating to the cleanup, remediation or
other response action required by any Act or to which Beneficiary believes
necessary to protect the Mortgaged Property, it being conclusively presumed
between Beneficiary and Trustor that all such Environmental Costs incurred or
advanced by Beneficiary relating to the cleanup, remediation, or other response
action of or to the Mortgaged Property were made by Beneficiary in good faith.
All Environmental Costs incurred by Beneficiary under this subparagraph
(including without limitation court costs, consultant fees and attorneys' fees,
including, without limitation, fees incurred pursuant to the Bankruptcy Code,
whether incurred
in litigation or not and whether before or after judgment) shall bear
interest at the Default Rate from the date of expenditure until said sums
have been paid.
Beneficiary shall be entitled to bid, at the sale of the Mortgaged Property,
the amount of said costs, expenses and interest in addition to the amount
of the other obligations hereby secured as a credit bid, the equivalent of
cash.

       

      Trustor
acknowledges and agrees that notwithstanding any term or provision contained
herein or in the Loan Agreement or the Loan Agreement, the Environmental Costs
shall be exceptions to any nonrecourse or exculpatory provision of the Loan
Documents, and Trustor shall be fully and personally liable for the
Environmental Costs hereunder, and such liability shall not be limited to the
original.
principal amount of the Obligations secured by this Deed of Trust, and
Trustor's obligations shall survive the foreclosure, deed in lieu of
foreclosure, release, reconveyance, or any other transfer of the Mortgaged
Property or this Deed of Trust. For the purposes of any action brought under
this subparagraph, Trustor hereby waives the defense of 'aches and any
applicable statute of limitations.

       

      (d)  To waive its lien against
the Mortgaged
Property or any portion thereof, whether fixtures or personal property,
to the extent such property is found to be environmentally impaired in
accordance with California Code of Civil Procedure Section 726.5 and to exercise
any and all
rights and remedies of an unsecured creditor against Trustor and all of
Trustor's assets and property for the recovery of any deficiency and
Environmental Costs, including, but not limited to, seeking
an attachment order under California Code of Civil Procedure Section
481010. As between Beneficiary and Trustier, for purposes of California Code of
Civil Procedure Section 726.5, Trustor shall have the burden of proving that
Trustor or any
related party (or any affiliate or agent of Trustor or any related party)
was not in any way negligent in permitting the
release or threatened release of the Hazardous Substances. Trustor acknowledges
and agrees that notwithstanding any term or
provision contained herein or in the Loan Agreement, all judgments and
awards entered against Trustor shall be exceptions to any nonrecourse or
exculpatory provision of the Loan Agreement or the Loan Agreement, and Trustor
shall be fully and personally liable for all judgments and awards entered
against Trustor hereunder and such liability shall not be limited to the
original principal amount of the obligations
secured by this Deed of Trust and Trustor's obligations shall survive the
foreclosure, deed in lieu of foreclosure, release, reconvevance, or any other
transfer of the Mortgaged Property or this Deed of Trust. For the purposes of
any action brought under this subparagraph, Trustor hereby waives the defense of
Inches and any applicable statute of limitations.

       

      
        
          
          

        

        
          C-21

          
            

          

        

        
          
          

        

      

       

      (e)  Nothing contained herein
shall be construed to limit any and all rights that Beneficiary has at law or
pursuant hereto.

       

      SECTION 2.05  No remedy herein
conferred upon or reserved to the Trustee or Beneficiary is intended to be
exclusive of any other available remedy or remedies, but each and every such
remedy shall he cumulative and shall be in addition to every other remedy given
hereunder or now or hereafter existing at law or in equity or by statute. No
delay or omission of the Trustee or Beneficiary to exercise any right or power
occurring upon the Event of Default shall impair any such right or power or
shall be construed to be a waiver thereof or an acquiescence therein; and every
power and remedy given by this Deed of Trust to the Trustee or Beneficiary may
be exercised from time to time and as often as may be deemed expedient by the
Trustee or Beneficiary. Nothing in this Deed of Trust or in the Loan Agreement
shall affect the obligation of Trustor to pay the principal of, interest on, and
prepayment premium payable pursuant to the Loan Agreement in the manner and at
the time and place therein respectively expressed.

       

      SECTION 2.06  To the extent permitted
by law, Trustor will not at any time insist upon, or plead, or in any manner
whatever claim or take any benefit or advantage of, any stay or extension or
moratorium law, any exemption from execution or -sale of the Mortgaged Property
or any part thereof, wherever enacted, now or at any time hereafter in force,
which may affect the covenants and terms of performance of this Deed of Trust;
nor claim, take or insist upon any benefit or advantage of any law now or
hereafter in force providing for the marshalling of the Mortgaged Property or on
the valuation or appraisal of the Mortgaged Property, or any part thereof, prior
or subsequent to any sale Ur
sales thereof which may be made pursuant to any provision herein, or
pursuant to the decree, judgment or order of any court of competent
jurisdiction; nor, after any such final sale or sales, claim or exercise any
right under any statute or otherwise, to redeem the property so sold or any part
thereof; and Trustor hereby expressly waives all benefit or advantage of any
such law or laws, and covenants not to hinder, delay or impede the execution of
any power herein granted or delegated to the Trustee or Beneficiary, but to
suffer and permit the execution of every power as though no such law or laws had
been made or enacted. Trustor hereby waives the right to require any sale to be
made in parcels, or the right to select parcels to be so sold, and there shall
be no requirement for marshalling of assets Trustor hereby further waives any
rights it may have under applicable law relating to the prohibition of the
obtaining of a deficiency judgment by Beneficiary against Trustor.

       

      SECTION 2.07  During the continuance of
any Event of Default and pending the exercise by the Trustee or Beneficiary of
its right to exclude Trustor from all or any part of the Premises, Trustor
agrees to pay the fair and reasonable rental value for the use and occupancy of
the Mortgaged Property for such period and upon default of any such payment,
will vacate and surrender possession of the Premises to the Trustee or
Beneficiary or to a receiver, if any, and in default
thereof may he evicted by any summary action or proceeding for the recovery or
possession of Premises for non-payment of rent, however designated.

       

      
        
          
          

        

        
          C-22

          
            

          

        

        
          
          

        

      

       

      SECTION
2.08  Without
affecting the personal liability of any pursuit, firm, corporation or other
entity, including Trustor (other than any person released pursuant hereto), for
the payment of the
indebtedness secured hereby, and without affecting the lien of this Deed
of Trust for the full amount of the indebtedness remaining unpaid upon any
property not reconveyed pursuant hereto, Beneficiary and Trustee arc
respectively authorized and empowered as follows: Beneficiary may, at any time
and from time to time, either before or after the expiration of the Loan
Agreement, and without notice: (a) release any person liable for the
payment of any of the indebtedness, (b) make any agreement extending the time or
otherwise altering the terms of payment of any of the indebtedness, (c) accept
additional security therefor of any kind, (d) release any property, real or
personal, securing the indebtedness. Trustee may, without liability therefor and
without notice, at any time and from time to time so long as the lien or charge
hereof shall subsist, but only upon the written request of Beneficiary and
presentation of this Deed of Trust-
and the Loan Agreement for endorsement: (a) consent to the making of any map or
plat of the Land, (b) join in granting any easement thereon or in. creating any
covenants restricting use or occupancy thereof, (c) reconvey, without warranty,
any part of the Mortgaged Property, (d) join in any extension agreement or in
any agreement subordinating the lien or charge hereof.

       

      SECTION
2.09  This
Deed of Trust constitutes a Security Loan Agreement under the laws of the State
of California so that Beneficiary shall have and may endorse a security interest
in any or all of the Mortgaged Property which may or might now or hereafter be
or be deemed to be personal property, fixtures or property other than real
estate (collectively, "Personal
Property")
and Trustor agrees to execute, as debtor, such financing statement or statements
as Beneficiary may now or hereafter reasonably request in order that such
security interest or interests may be perfected pursuant to such laws. This Deed
of Trust further constitutes a fixture filing under Sections 9502 of the Code
(as defined below), as amended or recodified from time to time; provided,
however that the execution and/or filing hereof does not imply that the items of
Personal Property included in the Mortgaged Property are or are to become
fixtures. The filing hereof as a fixture filing is intended to protect the
parties from unwarranted assertions by third parties.

       

      Notwithstanding
any release of any or all of the property included in the Premises which
is deemed "real property", any proceedings to foreclose this Deed of Trust, or
its satisfaction of record, the terms hereof shall survive as a
security agreement with respect to the security interest created hereby
and referred to above until the repayment or satisfaction in full of the
obligations of Trustor as are now or hereafter evidenced by the Loan
Agreement.

       

      SECTION
2.10  During
the continuance of any Event of Default, Beneficiary have all of the rights
and remedies of a secured party under the Uniform Commercial Code (the
"Code")
of the State of California, and specifically the right to direct notice and
collections of any obligation owing to Trustor by any lessee. in addition to its
rights to foreclose this Deed of Trust, Beneficiary shall have the right to sell
the Personal Property or any part thereof, or any further, or additional, or
substituted Personal Property, at one or more times, and from time to
time, at public sale or sales or at
private sale or sales, on such terms as to cash or credit, or partly
for cash and partly on
credit, as Beneficiary may deem proper. Beneficiary shall have the right to
become the purchaser at any such public sale or sales, free and clear of any and
all claims, rights of
equity of redemption in Trustor, all of which are hereby waived and released.
Trustor shall not be
credited with the amount of any part of such purchase price, unless, until and
only to the extent that
such payment is actually received in cash. 

       

      
        
          
          

        

        
          C-23

          
            

          

        

        
          
          

        

      

       

      Notice of public sale, if given, shall
be sufficiently given, for all purposes, if published not less than seven days
prior to any sale, in any newspaper of general circulation
distributed in the city in which the property to be sold is located or as otherwise required by the Code.
The net proceeds of any sale of the Personal Property may remain after the deduction
of all costs, fees and
expenses incurred in connection therewith, including, but not limited
to, all advertising expenses, broker's or brokerage commissions, documentary
stamps, recording fees, foreclosure costs, stamp taxes and counsel lees, shall be credited by Beneficiary
against the liabilities, obligations and indebtedness of Trustor to Beneficiary secured by
this Deed of Trust and evidenced by the Loan Agreement. Any portion of the Personal Property which
may remain unsold after the full payment, satisfaction and discharge
of all of the liabilities, obligations and indebtedness of Trustor to
Beneficiary shall be
returned to the respective parties which delivered the same to Beneficiary.
If at any
time Trustor or any other party shall become entitled to the return of any of
the Personal Properly
hereunder, any transfer or assignment thereof by Beneficiary shall be, and shall
recite that the. same is,
made wholly without representation or warranty whatsoever by,
or recourse whatsoever against Beneficiary.

       

      SECTION
2.11   All rights, remedies and
powers provided by Sections 2.01-2.10 hereof may be
exercised only to the extent that the exercise thereof does not violate any
applicable provision of law in the jurisdiction in which the Premises are
located, and all such provisions are intended to be subject to all applicable
provisions of law which may be controlling in such jurisdiction and to be
limited to the extent necessary so that they will not render this Mortgage
invalid, illegal or unenforceable under the provisions of any applicable
law.

       

      ARTICLE
III

       

      MISCELLANEOUS

       

      SECTION
3.01  In the
event any one or more of the provisions
contained in this Deed of
Trust shall for any reason be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect
any other provision of this Deed of Trust, but this Deed of Trust
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein.

       

      SECTION
3.02  All
notices or
demands by any party relating to this Deed of Trust or any other agreement entered into in
connection herewith shall he in the Form and manner set forth in the Loan
Agreement.

       

      SECTION
3.03   Whenever in this Deed of Trust the giving
of notice by mail or
otherwise is required, the
giving of such notice may be waived in writing by the person or persons
entitled to receive such notice.

       

      
        
          
          

        

        
          C-24

          
            

          

        

        
          
          

        

      

       

      SECTION 3.04  All of the grants,
covenants, terms, obligations, provisions and conditions herein contained shall
run with the land and shall apply to, bind and inure to the benefit of, the
successors and assigns of Trustor and Beneficiary and to the successors of the
Trustee.

       

      SECTION
3.05   This Deed of Trust. may be executed in any number of counterparts
and each of such
counterparts shall for all purposes be deemed to be an original; and all such
counterparts
shall together constitute
but one and
the same Deed of Trust.

       

      SECTION
3.06  It shall
be lawful for the Trustee, or Beneficiary, at its election, upon the occurrence
of an Event of Default, to sue out forthwith a complaint in foreclosure upon
this Deed of Trust: and to proceed thereon to judgment and execution for the
recovery of all sums payable by Trustor pursuant to the terms of this Deed of
Trust without further stay, any law, usage or custom to the contrary
notwithstanding.

       

      SECTION 3.07  Notwithstanding the
appointment of any receiver, liquidator or trustee of Trustor, or of any obits
property, or of the Mortgaged Property, or any part thereof, the Trustee shall
be entitled to retain possession and control of all property now or hereafter
held under this Deed of Trust.

       

      SECTION 3.08  If Trustor shall default
in the payment of any sums due pursuant to the terms of the Loan Agreement or
this Deed of Trust such default shall be, and be deemed to be, an attempt by
Trustor to avoid the
prepayment prenduat payable by Trustor pursuant to the terms of the Loan
Agreement and consequently, upon such default Beneficiary shall be entitled to
collect such prepayment
premium from Trustor with the same effect as
if Trustor had voluntarily elected to prepay the principal sum evidenced
by the Loan Agreement.

       

      SECTION 3.09  Trustor hereby waives
and
relinquishes unto, and in favor of Beneficiary,
all benefit under all laws, now in effect or hereafter passed, to relieve
Trustor in any manner from the obligations assumed and the obligation for which
this Deed of Trust is security or to reduce the amount of the said obligation to
any greater extent than the amount actually paid for the Mortgaged Property, in
any judicial proceedings upon the said obligation, or upon this Deed of
Trust.

       

      SECTION 3.10  Neither Trustor nor any
other person now or hereafter obligated for payment for all or any part of the
indebtedness secured hereby shall be relieved of such obligation by reason of
the failure of Beneficiary to comply with any request of Trustor or of any other
person so obligated to take action to foreclose on this Deed of Trust or
otherwise enforce any provisions hereof or under the Loan Agreement or by reason
of the release, regardless of consideration, of all or any part of the security
held for the indebtedness secured hereby, or by reason of any agreement of
stipulation between any subsequent owner of the Mortgaged Property and
Beneficiary extending the time of payment or modifying the terms hereof without
first having obtained the consent of Trustor or such other person; and in the
latter event Trustor and all other such persons shall continue to be liable to
make payment according to the terms of any such extension or modification
agreement, unless expressly released and discharged in writing by
Beneficiary.

       

      
        
          
          

        

        
          C-25

          
            

          

        

        
          
          

        

      

       

      SECTION
3.11  By
accepting or approving anything required to be observed, performed or fulfilled or to be given
to Beneficiary pursuant to this Deed of Trust, including (but not limited
to) any certificate, balance sheet, statement of profit and loss or other
financial statement, survey,
appraisal or insurance policy, Beneficiary shall not be deemed to have warranted
or represented the sufficiency,
legality, effectiveness or legal effect of the same, or of any term, provision or condition
thereof, and such acceptance or approval thereof shall not be or
constitute any warranty or representation with respect thereto by
Beneficiary.

       

      SECTION
3.12  Beneficiary may from rime to
time, without notice to
Trustor or to the Trustee, and with or without cause and with or
without the resignation of the Trustee substitute a successor or
successors to the Trustee named herein or acting hereunder to execute this
trust. Upon such appointment and without conveyance to the successor Trustee;
the latter shall be vested
with all title, powers and duties conferred upon the Trustee herein named or
acting hereunder. Each such appointment and substitution shall be made by
written document executed by Beneficiary, containing reference to this Deed of
Trust and its place of record, which when duly filed for record in the proper
office, shall be conclusive proof of proper appointment of the successor
Trustee. The procedure herein provided for substitution of the Trustee shall be
conclusive of all other provisions for substitution, statutory or
otherwise.

       

      [Signature
page(s) to follow]

       

       

       

       

      
        
          
          

        

        
          C-26

          
            

          

        

        
          
          

        

      

      


      IN
WITNESS WHEREOF, Trustor has caused this Deed of Trust to be executed as of the
day and year first above written.

       

       

      
        	 
      	
                "TRUSTOR"

              
	 	 
	 
      	
                REED'S,
      INC.,

              
	 
      	
                a
      Delaware corporation

                 

              
	 	 
	 
      	
                By:  /s/ Chris
      Reed                                   
      

              
	 
      	
                Name:   Chris
      Reed                                   
      

              
	 
      	
                Title:    
      CEO                                               
      

              


      

      


       

      
 

      


      
        
          
          

        

        
          
            S-1

            Deed of
Trust

          

          
            

          

        

        
          
          

        

      

      


      EXHIBIT
A

      (Legal
Description)

       

      All that
certain real property situated in the County of Los Angeles, Stale of
California, described as follows:

       

      Parcel
1:

       

      Lot 15 of
Tract No. 20853, in the County of Los Angeles, State of California, as per Map
recorded in Book 597, Pages 80 and 81 of Maps, in the office of the County
Recorder of said County.

       

      Except
therefrom all oil, gas, minerals, and other hydrocarbons, below a depth of 500
feet, without the right of surface entry, as reserved and/or granted in the
document(s) recorded December 29, 1961-
as Instrument No. 887, Official Records.

       

      Parcel
2:

       

      Lot 14 of
Tract No. 20853, in the County of Los Angeles, State of California, as per Map
recorded in Book 597, Pages 80 and 81 of _Maps, in the office of the County
Recorder of said County.

       

      Except
therefrom said Lot 14 all oil, gas, other hydrocarbons and other minerals in and
under said real
property together with the-right hereinafter limited. to drill, redrill,
deepen, complete and maintain well holes under , through beyond and to drill
for, produce, extract, take and remove oil, gas and other hydrocarbon substances
(and water necessary therefor) and other minerals from and through said
real property together with the rights of way and easement for any and all of
the above
mentioned purposes, with no right of entry upon or through said real
property-as reserved by Fitz B. Burns, in deed recorded May 23, 1958 in
Book D108, Page(s) 788, of Official Records.

       

       

      
        
          
          

        

        
          EXHIBIT A

          
            

          

        

        
          
          

        

      

       

      Exhibit
"D"

       

      [See
attached]

       

       

       

       

       

       

       

       

       

      Exhibit D

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      (Legal
Description)

       

      All that
certain real property situated in the County of Los Angeles, State of
California, described as follows:

       

      Parcel
1:

       

      Lot 15 of
Tract No. 20853, in the County of Los Angeles, State of California, as per Map
recorded in Book 597, Pages 80 and 81 of Maps, in the office of the County
Recorder of said County.

       

      
        Except
therefrom all oil, gas, minerals, and other hydrocarbons, below a
depth of 500 feet, without the right of surface entry, as reserved and/or
granted in the document(s) recorded December 29, 1961. as Instrument No. 887,
Official Records.

      

       

      Parcel
2:

       

      Lot. 14
of Tract No. 20853, in the County of Los Angeles, State of California, as per
Map recorded in Book 597, Pages 80 and 81 of Maps, in the office of the County
Recorder of said County.

       

      Except
therefrom said Lot 14 all oil, gas, other hydrocarbons and other minerals in and
under said real property together with the-right.
hereinafter limited. to drill, redrill, deepen, complete and maintain well holes
under, through beyond and to drill for, produce, extract, take and remove oil.,
gas and other hydrocarbon substances (and water necessary therefor) and other
minerals from and through said real property together with the rights of way and
easement for any and all of the above mentioned purposes, with no right of entry
upon or through said real property-as reserved by Fitz B. Burns, in deed
recorded May 23, 1958 in Book D108, Page(s) 788, of Official
Records.

       

       

       

      
        
          
          

        

        
          D-1