Exhibit 10.2


 


 




 





CREDIT AND SECURITY AGREEMENT


 


BY AND BETWEEN


 


GARDENBURGER, INC.


 


AND


 


GB RETAIL FUNDING, LLC


 


 


November 22,
2005




 





 





















 


	
  ARTICLE I. DEFINITIONS

  	
   

  
	
   

  	
   

  
	
  Section 1.1

  	
  Definitions

  	
   

  
	
  Section 1.2

  	
  Other
  Definitional Terms; Rules of Interpretation

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE II. AMOUNT AND TERMS OF THE
  CREDIT FACILITY

  	
   

  
	
   

  	
   

  
	
  Section 2.1

  	
  Term
  Advance

  	
   

  
	
  Section 2.2

  	
  Payment of
  Term Note

  	
   

  
	
  Section 2.3

  	
  Interest;
  Default Interest Rate; Application of Payments; Participations; Usury

  	
   

  
	
  Section 2.4

  	
  Fees

  	
   

  
	
  Section 2.5

  	
  Time for
  Interest Payments; Payment on Non-Business Days; Computation of Interest and
  Fees

  	
   

  
	
  Section 2.6

  	
  Lockbox and
  Collateral Account; Sweep of Funds

  	
   

  
	
  Section 2.7

  	
  Voluntary
  Prepayment; Termination of the Credit Facility by the Borrower

  	
   

  
	
  Section 2.8

  	
  Use of
  Proceeds

  	
   

  
	
  Section 2.9

  	
  Liability
  Records

  	
   

  
	
  Section 2.10

  	
  Payments
  to Lender

  	
   

  
	
  Section 2.11

  	
  Sale of IP
  Collateral

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE III. SECURITY INTEREST;
  OCCUPANCY; SETOFF

  	
   

  
	
   

  	
   

  
	
  Section 3.1

  	
  Grant of
  Security Interest

  	
   

  
	
  Section 3.2

  	
  Notification
  of Account Debtors and Other Obligors

  	
   

  
	
  Section 3.3

  	
  Assignment
  of Insurance

  	
   

  
	
  Section 3.4

  	
  Occupancy

  	
   

  
	
  Section 3.5

  	
  Financing
  Statement

  	
   

  
	
  Section 3.6

  	
  Setoff

  	
   

  
	
  Section 3.7

  	
  Collateral

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE IV. CONDITIONS OF LENDING

  	
   

  
	
   

  	
   

  
	
  Section 4.1

  	
  Conditions
  Precedent to the Issuance of the Term Advance

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE V. REPRESENTATIONS AND
  WARRANTIES

  	
   

  
	
   

  	
   

  
	
  Section 5.1

  	
  Existence
  and Power; Name; Chief Executive Office; Inventory and Equipment Locations;
  Federal Employer Identification Number and Organizational Identification
  Number

  	
   

  
	
  Section 5.2

  	
  Capitalization

  	
   

  
	
  Section 5.3

  	
  Authorization
  of Borrowing; No Conflict as to Law or Agreements

  	
   

  
	
  Section 5.4

  	
  Legal
  Agreements

  	
   

  
	
  Section 5.5

  	
  Subsidiaries

  	
   

  
	
  Section 5.6

  	
  Financial
  Condition; No Adverse Change

  	
   

  
	
  Section 5.7

  	
  Litigation

  	
   

  
	
  Section 5.8

  	
  Regulation U

  	
   

  
	
  Section 5.9

  	
  Taxes

  	
   

  
	
  Section 5.10

  	
  Titles and
  Liens

  	
   

  
	
  Section 5.11

  	
  Intellectual
  Property Rights

  	
   

  



 


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  Section 5.12

  	
  Plans

  	
   

  
	
  Section 5.13

  	
  Default

  	
   

  
	
  Section 5.14

  	
  Environmental Matters

  	
   

  
	
  Section 5.15

  	
  Submissions to Lender

  	
   

  
	
  Section 5.16

  	
  Financing Statements

  	
   

  
	
  Section 5.17

  	
  Rights to Payment

  	
   

  
	
  Section 5.18

  	
  Bankruptcy Case

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE VI. COVENANTS

  	
   

  
	
   

  	
   

  	
   

  
	
  Section 6.1

  	
  Reporting Requirements

  	
   

  
	
  Section 6.2

  	
  Financial Covenants

  	
   

  
	
  Section 6.3

  	
  Permitted Liens; Financing Statements

  	
   

  
	
  Section 6.4

  	
  Indebtedness

  	
   

  
	
  Section 6.5

  	
  Guaranties

  	
   

  
	
  Section 6.6

  	
  Investments and Subsidiaries

  	
   

  
	
  Section 6.7

  	
  Dividends and Distributions

  	
   

  
	
  Section 6.8

  	
  Salaries

  	
   

  
	
  Section 6.9

  	
  Books and Records; Collateral Examination,
  Inspection and Appraisals

  	
   

  
	
  Section 6.10

  	
  Account Verification

  	
   

  
	
  Section 6.11

  	
  Compliance with Laws

  	
   

  
	
  Section 6.12

  	
  Payment of Taxes and Other Claims

  	
   

  
	
  Section 6.13

  	
  Maintenance of Properties

  	
   

  
	
  Section 6.14

  	
  Insurance

  	
   

  
	
  Section 6.15

  	
  Preservation of Existence

  	
   

  
	
  Section 6.16

  	
  Delivery of Instruments, etc.

  	
   

  
	
  Section 6.17

  	
  Sale or Transfer of Assets; Suspension of
  Business Operations

  	
   

  
	
  Section 6.18

  	
  Consolidation and Merger; Asset
  Acquisitions

  	
   

  
	
  Section 6.19

  	
  Sale and Leaseback

  	
   

  
	
  Section 6.20

  	
  Restrictions on Nature of Business

  	
   

  
	
  Section 6.21

  	
  Accounting

  	
   

  
	
  Section 6.22

  	
  Discounts, etc.

  	
   

  
	
  Section 6.23

  	
  Plans

  	
   

  
	
  Section 6.24

  	
  Place of Business; Name

  	
   

  
	
  Section 6.25

  	
  Constituent Documents; S Corporation Status

  	
   

  
	
  Section 6.26

  	
  Performance by the Lender

  	
   

  
	
  Section 6.27

  	
  Amendment of Wells Fargo Credit Facility

  	
   

  
	
  Section 6.28

  	
  Termination of Wells Fargo Credit Facility

  	
   

  
	
  Section 6.29

  	
  Information for Exit Financing

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE VII. EVENTS OF DEFAULT, RIGHTS
  AND REMEDIES

  	
   

  
	
   

  	
   

  	
   

  
	
  Section 7.1

  	
  Events of Default

  	
   

  
	
  Section 7.2

  	
  Rights and Remedies

  	
   

  
	
  Section 7.3

  	
  Certain Notices

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE VIII. MISCELLANEOUS

  	
   

  
	
   

  	
   

  
	
  Section 8.1

  	
  No Waiver; Cumulative Remedies; Compliance
  with Laws

  	
   

  



 


ii





















 


	
  Section 8.2

  	
  Amendments, Etc.

  	
   

  
	
  Section 8.3

  	
  Notices; Communication of Confidential
  Information; Requests for Accounting

  	
   

  
	
  Section 8.4

  	
  Further Documents

  	
   

  
	
  Section 8.5

  	
  Costs and Expenses

  	
   

  
	
  Section 8.6

  	
  Indemnity

  	
   

  
	
  Section 8.7

  	
  Participants

  	
   

  
	
  Section 8.8

  	
  Execution in Counterparts; Telefacsimile
  Execution

  	
   

  
	
  Section 8.9

  	
  Retention of Borrower’s Records

  	
   

  
	
  Section 8.10

  	
  Binding Effect; Assignment; Complete
  Agreement; Sharing Information

  	
   

  
	
  Section 8.11

  	
  Severability of Provisions

  	
   

  
	
  Section 8.12

  	
  Headings

  	
   

  
	
  Section 8.13

  	
  Governing Law; Jurisdiction, Venue

  	
   

  
	
  Section 8.14

  	
  Exit Financing

  	
   

  
	
  Section 8.15

  	
  WAIVER OF JURY TRIAL

  	
   

  
	
  Section 8.16

  	
  Publicity

  	
   

  
	
  Section 8.17

  	
  Intercreditor Agreement

  	
   

  



 


iii





















 


CREDIT AND SECURITY AGREEMENT


 


Dated as of November 22,
2005


 


GARDENBURGER,
INC., an Oregon corporation (the “Borrower”), and GB RETAIL FUNDING, LLC, a
Delaware limited liability company (together with its successors and assigns,
the “Lender”) each hereby agree as follows:


 


ARTICLE I.



DEFINITIONS


 


Section 1.1                                      Definitions.  Except as otherwise expressly provided in
this Agreement, the following terms shall have the meanings given them in this
Section:


 


“Accounts”
shall have the meaning given it under the UCC.


 


“Affiliate” or
“Affiliates” means any other Person controlled by, controlling or under common
control with the Borrower, including any Subsidiary of the Borrower.  For purposes of this definition, “control,”
when used with respect to any specified Person, means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise.


 


“Agreement”
means this Credit and Security Agreement.


 


“Annex
Convertible Senior Subordinated Note” means the Convertible Senior Subordinated
Note, as amended and restated, currently held by Annex Holdings I  LP.


 


“Approved Plan
of Reorganization” means a plan of reorganization that is acceptable to the Lender in its sole
discretion, given all material changes in the Borrower’s operations and
providing for Exit Financing by the Lender and Wells Fargo, which plan of
reorganization is confirmed by the Bankruptcy Court within six months after the
Funding Date.


 


“Availability”
means the “Availability” as defined in the Wells Fargo Credit Agreement as in
effect as of the date hereof.


 


“Bankruptcy
Case” means the chapter 11 bankruptcy case in which the Borrower is a debtor
and debtor-in-possession, pending before the United States Bankruptcy Court for
the Central District of California, bearing case number 05-19539-JB.


 


“Bankruptcy
Code” means Title 11 United States Code and the Federal Rules of
Bankruptcy Procedure, as amended from time to time.


 


“Bankruptcy
Court” means the United States Bankruptcy Court for the Central District of
California, in which the Borrower’s Bankruptcy Case is pending.


 


“Business Day”
means a day on which the Federal Reserve Bank of New York is open for business.


 


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“Capital
Expenditures” means for a period, any expenditure of money during such period for
the purchase or construction of assets, or for improvements or additions
thereto, which are capitalized on the Borrower’s balance sheet.


 


“Change of Control” means that either Scott C. Wallace, James W.
Linford or Richard D. Werblin shall cease to actively manage the Borrower’s
day-to-day business activities.


 


“Collateral”
means all of the Borrower’s Accounts, chattel paper and electronic chattel
paper, commercial tort claims, deposit accounts, documents, Equipment, General
Intangibles (including payment intangibles), goods, instruments, Inventory,
Investment Property, letter-of-credit rights, letters of credit, software,
supporting obligations, and all sums on deposit in any Collateral Account, and
any items in any Lockbox; together with (i) all substitutions and
replacements for and products of any of the foregoing; (ii) in the case of
all goods, all accessions; (iii) all accessories, attachments, parts,
equipment and repairs now or hereafter attached or affixed to or used in
connection with any goods; (iv) all warehouse receipts, bills of lading
and other documents of title now or hereafter covering such goods; (v) all
collateral subject to the Lien of any Security Document; (vi) any money,
or other assets of the Borrower that now or hereafter come into the possession,
custody, or control of the Lender; (vii) proceeds of any and all of the
foregoing; (viii) books and records of the Borrower, including all mail or
electronic mail addressed to the Borrower; and all rights of access to such
books, records, and information, and all property in which such books, records,
and information are stored, recorded and maintained, (ix) all liens,
guaranties, rights, remedies, and privileges pertaining to any of the foregoing
((i) through (viii)), including the right of stoppage in transit, and
(x) all of the foregoing, whether now owned or existing or hereafter acquired
or arising or in which the Borrower now has or hereafter acquires any.


 


“Collateral
Account” means the “Lender Account” as defined in the Wholesale Lockbox and
Collection Account Agreement.


 


“Commitment”
means the Lender’s commitment to make the Term Loan for the account of the Borrower.


 


“Constituent
Documents” means with respect to any Person, as applicable, such Person’s
certificate of incorporation, articles of incorporation, by-laws, certificate
of formation, articles of organization, limited liability company agreement,
management agreement, operating agreement, shareholder agreement, partnership
agreement or similar document or agreement governing such Person’s existence,
organization or management or concerning disposition of ownership interests of
such Person or voting rights among such Person’s owners.


 


“Credit
Facility” means the credit facility under which the Term Loan is made available
to the Borrower by the Lender under Article II.


 


“Debt” means
of a Person as of a given date, all items of indebtedness or liability which in
accordance with GAAP would be included in determining total liabilities as
shown on the liabilities side of a balance sheet for such Person and shall also
include the aggregate payments 


 


2





















 


required to be
made by such Person at any time under any lease that is considered a
capitalized lease under GAAP.


 


“Default”
means an event that, with giving of notice or passage of time or both, would
constitute an Event of Default.


 


“Default
Period” means any period of time beginning on the day a Default or Event of
Default occurs and ending on the date identified by the Lender in writing as
the date that such Default or Event of Default has been cured or waived.


 


“Default Rate”
means an annual interest rate in effect during a Default Period or following
the Termination Date, which interest rate shall be equal to three percent (3%)
over the applicable Floating Rate, as such rate may change from time to time.


 


“Designated
Account” shall mean the account held by the Lender at Bank of America, N.A.
with the following wiring instructions: Bank of America – Boston, MA; Account
#942-9428385133; ABA #026 009 593; Re: Gardenburger.


 


“Director”
means a director if the Borrower is a corporation, a governor or manager if the
Borrower is a limited liability company, or a general partner if the Borrower
is a partnership.


 


“ERISA” means
the Employee Retirement Income Security Act of 1974, as amended from time to
time.


 


“ERISA
Affiliate” means any trade or business (whether or not incorporated) that is a
member of a group which includes the Borrower and which is treated as a single
employer under Section 414 of the IRC.


 


“Environmental
Law” means any federal, state, local or other governmental statute, regulation,
law or ordinance dealing with the protection of human health and the
environment.


 


“Equipment”
means all of the Borrower’s equipment, as such term is defined in the UCC,
whether now owned or hereafter acquired, including all present and future
machinery, vehicles, furniture, fixtures, manufacturing equipment, shop
equipment, office and recordkeeping equipment, parts, tools, supplies, and
including specifically the goods described in any equipment schedule or
list herewith or hereafter furnished to the Lender by the Borrower.


 


“Event of
Default” is defined in Section 7.1.


 


“Existing
Credit Facility” means that certain Revolving Credit and Term Loan Agreement
dated as of January 10, 2002, as amended, between the Borrower and
CapitalSource Finance LLC, as agent and lender.


 


“Exit
Financing” means the credit facility to be provided by the Lender to the
Borrower after the Bankruptcy Court confirms an Approved Plan of Reorganization
and pursuant to such Approved Plan of Reorganization the terms of such credit
facility to be substantially similar to 


 


3





















 


the terms set
forth in this Agreement as modified by the Exit Financing Commitment Letter
attached hereto as Exhibit D.


 


“Filing Date”
means October 14, 2005, the date of commencement of the Bankruptcy Case.


 


“Financial
Covenants” means the covenants set forth in Section 6.2.


 


“Final
Financing Order” means the order defined in Section 4.1(s).


 


“Floating Rate”
means an annual interest rate equal to the sum of the Prime Rate plus six and
three quarters percent (6.75%), which interest rate shall, in each case,
change when and as the Prime Rate changes.


 


“Funding Date”
is the date that all of the conditions set forth in Section 4.1 are
satisfied.


 


“GAAP” means
generally accepted accounting principles, applied on a basis consistent with
the accounting practices applied in the financial statements described in Section 5.6.


 


“General
Intangibles” shall have the meaning given it under the UCC.


 


“Hazardous
Substances” means pollutants, contaminants, hazardous substances, hazardous
wastes, petroleum and fractions thereof, and all other chemicals, wastes,
substances and materials listed in, regulated by or identified in any
Environmental Law.


 


“Indemnified
Liabilities” is defined in Section 8.6.


 


“Indemnitees”
is defined in Section 8.6.


 


“Infringement”
or “Infringing” when used with respect to Intellectual Property Rights means
any infringement or other violation of Intellectual Property Rights.


 


“Intellectual
Property Rights” means all actual or prospective rights arising in connection
with any intellectual property or other proprietary rights, including all
rights arising in connection with copyrights, patents, service marks, trade
dress, trade secrets, trademarks, trade names or mask works.


 


“Intellectual
Property Security Agreement” means each and every Intellectual Property
Security Agreement now or hereafter executed by the Borrower in favor of the
Lender dated the same date as this Agreement.


 


“Intercreditor
Agreement” means an intercreditor agreement between the Lender and Wells Fargo
in form and substance satisfactory to the Lender, which intercreditor agreement
shall include provisions for subordination of Wells Fargo’s Liens on the IP
Collateral to the Security Interest and such other provisions as the Lender
shall require in order to protect its rights with respect to the IP Collateral.


 


4





















 


“Interest
Expense” means for any period, the Borrower’s total gross interest expense
during such period (excluding interest income), and shall in any event include (i) interest
expensed (whether or not paid) on all Debt and (ii) the portion of any
capitalized lease obligation allocable to interest expense.


 


“Interest
Payment Date” is defined in Section 2.5(a).


 


“Inventory”
shall have the meaning given it under the UCC.


 


“Investment
Property” shall have the meaning given it under the UCC.


 


“IP Collateral”
such portion of the Collateral consisting of, without limitation, copyrights,
copyright licenses, licenses, patents, patent licenses, trademarks, trademark
licenses, all renewals of the foregoing, all General Intangibles (except
payment intangibles and proceeds therefrom), all income, all goodwill, recipes,
customer lists, Licensed Intellectual Property, Owned Intellectual Property,
royalties, damages and payments now and hereafter due and/or payable under and
with respect to any of the foregoing, including, without limitation, payments
under all licenses entered into in connection therewith and damages and
payments for past or future infringements or dilutions thereof; and the right
to sue for past, present and future infringements and dilutions of any of the
foregoing; and all of the Borrower’s rights corresponding to any of the
foregoing throughout the world.


 


“IRC” means
the Internal Revenue Code of 1986, as amended from time to time.


 


“Licensed
Intellectual Property” is defined in Section 5.11(c).


 


“Lien” means
any security interest, mortgage, deed of trust, pledge, lien, charge,
encumbrance, title retention agreement or analogous instrument or device,
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 subsequently
acquired and whether arising by agreement or operation of law.


 


“Loan
Documents” means this Agreement, the Note, the Intercreditor Agreement, and the Security Documents, together with
every other agreement, note, document, contract or instrument to which the
Borrower now or in the future may be a party and which is required by the
Lender.


 


“Lockbox”
means “Lockbox” as defined in the Wholesale Lockbox and Collection Account
Agreement.


 


“Maturity Date”
means the earliest to occur of (a) July 31, 2006, or (b) the
date on which the credit facilities under the Exit Financing are
effective.  Upon the effective date of an
Approved Plan of Reorganization in the Bankruptcy Case, the Maturity Date shall
mean 36 months from the Funding Date.


 


5





















 


“Multiemployer
Plan” means a multiemployer plan (as defined in Section 4001(a)(3) of
ERISA) to which the Borrower or any ERISA Affiliate contributes or is obligated
to contribute.


 


“Net Cash Flow”
means, for any period, (a) Borrower’s cash collections from account
debtors received during such period, minus (b) Borrower’s operating
disbursements made during such period, minus (c) all principal
payments on Borrower’s Debt paid or payable during such period, minus (d) Interest
Expense for such period.


 


“Net Cash
Proceeds” means in connection with any asset sale, the cash proceeds (including
any cash payments received by way of deferred payment whether pursuant to a
note, installment receivable or otherwise, but only as and when actually
received) from such asset sale, net of (i) attorneys’ fees, accountants’
fees, investment banking fees, brokerage commissions and amounts required to be
applied to the repayment of any portion of the Debt secured by a Lien not
prohibited hereunder on the asset which is the subject of such sale, and (ii) taxes
paid or reasonably estimated to be payable as a result of such asset sale.


 


“Net Forced
Liquidation Value” means a professional opinion of the estimated most probable
Net Cash Proceeds which could typically be realized at a properly advertised
and conducted public auction sale without reserve, held under forced sale conditions
and under economic trends current within 60 days of the appraisal.  The opinion may consider physical location,
difficulty of removal, adaptability, specialization, marketability, physical
condition, overall appearance and psychological appeal.


 


“Net Income”
means fiscal year-to-date after-tax net
income from continuing operations, including
extraordinary losses but excluding extraordinary
gains, all as determined in accordance with GAAP.


 


“Net Loss”
means fiscal year-to-date after-tax net loss from continuing operations as
determined in accordance with GAAP.


 


“Net Sales”
means, for any period, (a) Borrower’s gross sales, minus (b) Borrower’s  slotting distributions, minus (c) contractual
customer payments made by the Borrower, minus, (d) trade allowances
made by the Borrower, minus (e) coupon redemptions, minus (f) all
other offsets made or attributable to the Borrower’s gross sales.


 


“Obligations”
means the Term Note and each and every other debt, liability and obligation of
every type and description which the Borrower may now or at any time hereafter
owe to the Lender, whether such debt, liability or obligation now exists or is
hereafter created or incurred, whether it arises in a transaction involving the
Lender alone or in a transaction involving other creditors of the Borrower, and
whether it is direct or indirect, due or to become due, absolute or contingent,
primary or secondary, liquidated or unliquidated, or sole, joint, several or
joint and several, and including all indebtedness of the Borrower arising under
any Loan Document or guaranty between the Borrower and the Lender, whether now
in effect or subsequently entered into.


 


6





















 


“Officer”
means with respect to the Borrower, an officer if the Borrower is a
corporation, a manager if the Borrower is a limited liability company, or a
partner if the Borrower is a partnership.


 


“OFAC” is
defined in Section 6.11(c).


 


“Owned
Intellectual Property” is defined in Section 5.11(a).


 


“Owner” means
with respect to the Borrower, each Person having legal or beneficial title to
an ownership interest in the Borrower or a right to acquire such an interest.


 


“Pension Plan”
means a pension plan (as defined in Section 3(2) of ERISA) maintained
for employees of the Borrower or any ERISA Affiliate and covered by Title IV of
ERISA.


 


“Permitted
Lien” and “Permitted Liens” are defined in Section 6.3(a).


 


“Person” means
any individual, corporation, partnership, joint venture, limited liability
company, association, joint-stock company, trust, unincorporated organization
or government or any agency or political subdivision thereof.


 


“Plan” means
an employee benefit plan (as defined in Section 3(3) of ERISA)
maintained for employees of the Borrower or any ERISA Affiliate.


 


“Premises”
means all locations where the Borrower conducts its business or has any rights
of possession, including the locations legally described in Exhibit C
attached hereto.


 


“Prime Rate”
means at any time the rate of interest most recently announced by Wells Fargo
Bank, National Association at its principal office as its Prime Rate, with the
understanding that the Prime Rate is one of Wells Fargo Bank, National
Association’s base rates, and serves as the basis upon which effective rates of
interest are calculated for those loans making reference thereto, and is
evidenced by the recording thereof in such internal publication or publications
as the Lender may designate.  Each change
in the rate of interest shall become effective on the date each Prime Rate change
is announced by Wells Fargo Bank, National Association.


 


“Reportable
Event” means a reportable event (as defined in Section 4043 of ERISA),
other than an event for which the 30-day notice requirement under ERISA has
been waived in regulations issued by the Pension Benefit Guaranty Corporation.


 


“Security
Documents” means this Agreement, the Wholesale Lockbox and Collection Account
Agreement, the Intellectual Property Security Agreement and any other document
delivered to the Lender from time to time to secure the Obligations.


 


“Security
Interest” is defined in Section 3.1.


 


“Subsidiary”
means any Person of which more than 50% of the outstanding ownership interests
having general voting power under ordinary circumstances to elect a majority of
the 


 


7





















 


board of
directors or the equivalent of such Person, regardless of whether or not at the
time ownership interests of any other class or classes shall have or might have
voting power by reason of the happening of any contingency, is at the time
directly or indirectly owned by the Borrower, by the Borrower and one or more
other Subsidiaries, or by one or more other Subsidiaries.


 


“Term Advance”
is defined in Section 2.1.


 


“Term Loan
Amount” is $5,000,000.00.


 


“Term Note”
means the Borrower’s promissory note, payable to the order of the Lender in
substantially the form of Exhibit A hereto, as same may be renewed and
amended from time to time, and all replacements thereto.


 


“Termination
Date” means the earliest of (i) the Maturity Date, (ii) the date the
Borrower terminates the Credit Facility, (iii) the date of the sale of all
or substantially all of the Borrower’s assets pursuant to a sale under 11
U.S.C. Section 363, 1123 or 1129 or otherwise, (iv) the effective date
of a plan of reorganization in the Bankruptcy Case that is not an Approved Plan
of Reorganization, (v) conversion or dismissal of the Bankruptcy Case, (vi) appointment
of a trustee or examiner in the Bankruptcy Case or (vii) the date the
Lender demands payment of the Obligations, following an Event of Default,
pursuant to Section 7.2.


 


“UCC” means
the Uniform Commercial Code as in effect in the state designated in this
Agreement as the state whose laws shall govern this Agreement, or in any other
state whose laws are held to govern this Agreement or any portion of this
Agreement.


 


“Wells Fargo”
means Wells Fargo Bank, National Association acting through its Wells Fargo
Business Credit operating division.


 


“Wells Fargo
Credit Agreement” means that certain Credit and Security agreement of even date
herewith by and between Borrower as borrower thereunder and Wells Fargo as
lender thereunder.


 


“Wells Fargo
Credit Facility” consists of the Wells Fargo Revolving Loan and the Wells Fargo
Term Loan.


 


“Wells Fargo
Revolving Loan” means the revolving loan in an aggregate principal amount not
to exceed $7,500,000 made by Wells Fargo to the Borrower concurrently with the
closing of this Agreement.


 


“Wells Fargo
Revolving  Note” means the Borrower’s
revolving promissory note, payable to the order of Wells Fargo of even date
herewith.


 


“Wells Fargo
Term Loan” means the term loan in the amount of $2,238,000.00 made by Wells
Fargo to the Borrower concurrently with the closing of this Agreement.


 


8





















 


“Wells Fargo
Term Loan Note” means the Borrower’s term loan note, payable to the order of
Wells Fargo of even date herewith


 


“Wholesale
Lockbox and Collection Account Agreement” means the Wholesale Lockbox and
Collection Account Agreement by and among the Borrower, Lender, and Wells
Fargo, dated the same date as this Agreement.


 


“Yield
Maintenance Fee” is a fee equal to the difference between the total amount of
interest and fees payable to the Lender on the principal amount of the Term
Advance being prepaid from the date of such prepayment through the first
anniversary of the date of this Agreement, minus the total amount of
interest and fees theretofor actually received by Lender on the date of such
prepayment.


 


Section 1.2                                      Other Definitional
Terms; Rules of Interpretation. 
The words “hereof”, “herein” and “hereunder” and words of similar import
when used in this Agreement shall refer to this Agreement as a whole and not to
any particular provision of this Agreement. 
All accounting terms not otherwise defined herein have the meanings
assigned to them in accordance with GAAP. 
All terms defined in the UCC and not otherwise defined herein have the
meanings assigned to them in the UCC. 
References to Articles, Sections, subsections, Exhibits, Schedules and
the like, are to Articles, Sections and subsections of, or Exhibits or
Schedules attached to, this Agreement unless otherwise expressly provided.  The words “include”, “includes” and “including”
shall be deemed to be followed by the phrase “without limitation”.  Unless the context in which used herein
otherwise clearly requires, “or” has the inclusive meaning represented by the
phrase “and/or”.  Defined terms include
in the singular number the plural and in the plural number the singular.  Reference to any agreement (including the
Loan Documents), document or instrument means such agreement, document or
instrument as amended or modified and in effect from time to time in accordance
with the terms thereof (and, if applicable, in accordance with the terms hereof
and the other Loan Documents), except where otherwise explicitly provided, and
reference to any promissory note includes any promissory note which is an
extension or renewal thereof or a substitute or replacement therefor.  Reference to any law, rule, regulation,
order, decree, requirement, policy, guideline, directive or interpretation
means as amended, modified, codified, replaced or reenacted, in whole or in
part, and in effect on the determination date, including rules and regulations
promulgated thereunder.


 


ARTICLE II.



AMOUNT AND TERMS OF THE CREDIT FACILITY


 


Section 2.1                                      Term
Advance.  


 


(a)                                  The
Lender agrees, subject to the terms and conditions of this Agreement, to make a
single advance to the Borrower on the Funding Date (the “Term Advance”) in an
amount equal to the Term Loan Amount. 
The Borrower’s obligation to pay the Term Advance shall be evidenced by
the Term Note and shall be secured by the Collateral as provided in Article III.


 


9





















 


(b)                                 Upon
fulfillment of the applicable conditions set forth in Article IV, the
Lender shall deposit the proceeds of the Term Advance in the manner agreed to
in writing by the Lender and the Borrower.


 


Section 2.2                                      Payment of
Term Note.  The outstanding principal
balance of the Term Note shall be due and payable as follows:


 


(a)                                  In
equal monthly installments of $100,000.00, payable monthly in arrears,
beginning on November 30, 2005, and on the last day of each month
thereafter.


 


(b)                                 All
prepayments of principal with respect to the Term Note shall be applied to the
most remote principal installment or installments then unpaid.


 


(c)                                  On
the Termination Date, the entire unpaid principal balance of the Term Note, and
all unpaid interest accrued thereon, shall in any event be due and payable.


 


Section 2.3                                      Interest;
Default Interest Rate; Application of Payments; Participations; Usury.


 


(a)                                  Interest. 
Except as provided in Section 2.3(b) and Section 2.3(e),
all Obligations shall bear interest at the Floating Rate.


 


(b)                                 Default Interest Rate.  At any time during any Default Period or
following the Termination Date, in the Lender’s sole discretion and without
waiving any of its other rights or remedies, the principal of the Term Note
shall bear interest at the Default Rate or such lesser rate as the Lender may
determine, effective as of the first day of the month in which any Default
Period begins through the last day of such Default Period, or any shorter time
period that the Lender may determine. 
The decision of the Lender to impose a rate that is less than the
Default Rate or to not impose the Default Rate for the entire duration of the
Default Period shall be made by the Lender in its sole discretion and shall not
be a waiver of any of its other rights and remedies, including its right to
retroactively impose the full Default Rate for the entirety of any such Default
Period or following the Termination Date.


 


(c)                                  Application of Payments.  Payments shall be applied to the
Obligations on the Business Day of receipt by the Lender in the Lender’s
general account, but the amount of principal paid shall continue to accrue
interest at the interest rate applicable under the terms of this Agreement from
the calendar day the Lender receives the payment, and continuing through the
end of the first Business Day
following receipt of the payment.


 


(d)                                 Participations.  If any Person shall acquire a participation
in the Term Loan Advance, the Borrower shall be obligated to the Lender to pay
the full amount of all interest calculated under this Section 2.3, along
with all other fees, charges and other amounts due under this Agreement,
regardless if such Person elects to accept interest with respect to its
participation at a lower rate than that calculated under this Section 2.3,
or otherwise elects to accept less than its pro rata share of such fees,
charges and other amounts due under this Agreement.


 


10





















 


(e)                                  Usury. 
In any event no rate change shall be put into effect which would result
in a rate greater than the highest rate permitted by law.  Notwithstanding anything to the contrary
contained in any Loan Document, all agreements which either now are or which
shall become agreements between the Borrower and the Lender are hereby limited
so that in no contingency or event whatsoever shall the total liability for
payments in the nature of interest, additional interest and other charges
exceed the applicable limits imposed by any applicable usury laws.  If any payments in the nature of interest,
additional interest and other charges made under any Loan Document are held to
be in excess of the limits imposed by any applicable usury laws, it is agreed
that any such amount held to be in excess shall be considered payment of
principal hereunder, and the indebtedness evidenced hereby shall be reduced by
such amount so that the total liability for payments in the nature of interest,
additional interest and other charges shall not exceed the applicable limits
imposed by any applicable usury laws, in compliance with the desires of the
Borrower and the Lender.  This provision
shall never be superseded or waived and shall control every other provision of
the Loan Documents and all agreements between the Borrower and the Lender, or
their successors and assigns.


 


Section 2.4                                      Fees.


 


(a)                                  Origination Fee.  The Borrower shall pay the Lender a fully
earned and non-refundable origination fee of $100,000, due and payable
immediately upon the making of the Term Advance.


 


(b)                                 Prepayment Fees.  The Borrower may prepay the principal amount
of the Term Note at any time, whether voluntarily or by acceleration, subject
to the payment of fees as follows:


 


(i)                                     If the Term Note
is prepaid for any reason prior to the first anniversary of the date of this
Agreement, the Borrower shall pay to the Lender the Yield Maintenance Fee.


 


The Borrower
acknowledges that a prepayment may result in the Lender incurring additional
costs, expenses or liabilities, and that it is difficult to ascertain the full
extent of such costs, expenses or liabilities. 
The Borrower therefore agrees to pay the above-described prepayment fee
and agrees that said prepayment fee represents a reasonable estimate of the
prepayment costs, expenses or liabilities of the Lender.


 


(c)                                  Waiver of Prepayment Fees.  The Borrower, at the Lender’s discretion,
will be excused from the payment of prepayment fees if the prepayment is made
because of refinancing through another division of Lender.


 


(d)                                 Other Fees and Charges; Payment of Fees.  The Lender may from time to time impose
additional fees and charges for other events that constitute an Event of
Default or a Default hereunder, including fees and charges for the
administration of Collateral by the Lender, and fees and charges for the late
delivery of reports, which may be assessed in the 


 


11





















 


Lender’s sole discretion on
either an hourly, periodic, or flat fee basis, and in lieu of or in addition to
imposing interest at the Default Rate.


 


Section 2.5                                      Time for Interest
Payments; Payment on Non-Business Days; Computation of Interest and Fees.


 


(a)                                  Time For Interest Payments.  Accrued and unpaid interest accruing on the
Term Advance shall be due and payable in arrears on the last day of each month
and on the Termination Date (each an “Interest Payment Date”), or if any such
day is not a Business Day, on the next succeeding Business Day. Interest will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the date of advance to the Interest Payment
Date.  If an Interest Payment Date is not
a Business Day, payment shall be made on the next succeeding Business Day.


 


(b)                                 Payment on Non-Business Days.  Whenever any payment to be made hereunder
shall be stated to be due on a day which is not a Business Day, such payment
may be made on the next succeeding Business Day, and such extension of time
shall in such case be included in the computation of interest on the Term
Advance or the fees hereunder, as the case may be.


 


(c)                                  Computation of Interest and Fees.  Interest accruing on the outstanding
principal balance of the Term Advance and fees hereunder outstanding from time
to time shall be computed on the basis of actual number of days elapsed in a
year of 360 days.


 


Section 2.6                                      Lockbox and
Collateral Account; Sweep of Funds.  


 


(a)                                  Lockbox and Collateral Account.


 


(i)                                     The
Borrower shall instruct all account debtors to pay all Accounts directly to the
Lockbox.  If, notwithstanding such
instructions, the Borrower receives any payments on Accounts, the Borrower
shall deposit such payments into the Collateral Account.  The Borrower shall also deposit all other
cash proceeds of Collateral regardless of source or nature directly into the
Collateral Account.  Until so deposited,
the Borrower shall hold all such payments and cash proceeds in trust for and as
the property of the Lender and shall not commingle such property with any of
its other funds or property.  All
deposits in the Collateral Account shall constitute proceeds of Collateral and
shall not constitute payment of the Obligations.


 


(ii)                                  All
items deposited in the Collateral Account shall be subject to final
payment.  If any such item is returned
uncollected, the Borrower will immediately pay to Wells Fargo, (or upon the
termination of the Wells Fargo Credit Facility, to Lender) or, for items
deposited in the Collateral Account, the bank maintaining such account, the
amount of that item, or such bank at its discretion may charge any uncollected
item to the Borrower’s commercial account or other account.  The Borrower shall be liable as an endorser
on all items deposited in the Collateral Account, whether or not in fact
endorsed by the Borrower.


 


12





















 


(b)                                 Sweep of Funds.  Wells Fargo, (or, upon termination of the
Wells Fargo Facility, the Lender) shall daily, in accordance with the Wholesale
Lockbox and Collection Account Agreement, cause funds in the Collateral Account
to be transferred to Wells Fargo’s (or the Lender’s as applicable) general
account for payment of the Obligations. 
Amounts deposited in the Collateral Account shall not be subject to
withdrawal by the Borrower, except after payment in full and discharge of all
Obligations.


 


Section 2.7                                      Voluntary
Prepayment; Termination of the Credit Facility by the Borrower.  Except as otherwise provided herein, the
Borrower may prepay the Term Advance in whole at any time or from time to time
in part.  The Borrower may terminate the
Credit Facility at any time if it (i) gives the Lender at least 90 days
advance written notice prior to the proposed Termination Date, and (ii) pays
the Lender applicable termination and prepayment in accordance with Section 2.4(b) and
Section 2.4(c).  If the Borrower
terminates the Credit Facility, all Obligations shall be immediately due and
payable, and if the Borrower gives the Lender less than the required 90 days
advance written notice, then the interest rate applicable to the borrowing
evidenced by the Term Note shall be the Default Rate for the period of time
commencing 90 days prior to the proposed Termination Date through the date that
the Lender actually receives such written notice.  If the Borrower does not wish the Lender to
consider renewal of the Credit Facility on the next Maturity Date, then the Borrower
shall give the Lender at least 90 days written notice prior to the Maturity
Date that it will not be requesting renewal. 
If the Borrower fails to give the Lender such timely notice, then the
interest rate applicable to the borrowing evidenced by the Term Note shall be
the Default Rate for the period of time commencing 90 days prior to the
Maturity Date through the date that the Lender actually receives such written
notice


 


Section 2.8                                      Use of
Proceeds.  The Borrower shall use the
proceeds of the Term Advance to refinance the Existing Credit Facility, pay
bankruptcy administrative claims and professional fees, pay closing costs in
connection with the Credit Facility and the Wells Fargo Revolving Loan, and for
ordinary working capital purposes.


 


Section 2.9                                      Liability
Records.  The Lender may maintain
from time to time, at its discretion, records as to the Obligations.  All entries made on any such record shall be
presumed correct until the Borrower establishes the contrary.  Upon the Lender’s demand, the Borrower will
admit and certify in writing the exact principal balance of the Obligations
that the Borrower then asserts to be outstanding.  Any billing statement or accounting rendered
by the Lender shall be conclusive and fully binding on the Borrower unless the
Borrower gives the Lender specific written notice of exception within 30 days
after receipt.


 


Section 2.10                                Payments to Lender.  All payments to Lender shall be transferred
by Borrower to the Designated Account.


 


Section 2.11                                Sale of IP Collateral.  All proceeds from the sale of any of the IP
Collateral shall be immediately deposited into the Designated Account.


 


13





















 


ARTICLE III.



SECURITY INTEREST; OCCUPANCY; SETOFF


 


Section 3.1                                      Grant of
Security Interest. The Borrower hereby pledges, assigns and grants to the
Lender a lien and security interest (collectively referred to as the “Security
Interest”) in the Collateral, as security for the payment and performance of
the Obligations.  Upon request by the
Lender, the Borrower will grant the Lender a security interest in all
commercial tort claims that the Borrower may have against any Person.


 


Section 3.2                                      Notification
of Account Debtors and Other Obligors. 
The Lender may at any time (whether or not a Default Period then exists)
notify any account debtor or other Person obligated to pay the amount due that
such right to payment has been assigned or transferred to the Lender for
security and shall be paid directly to the Lender.  The Borrower will join in giving such notice
if the Lender so requests.  At any time
after the Borrower or the Lender gives such notice to an account debtor or
other obligor, the Lender may, but need not, in the Lender’s name or in the
Borrower’s name, demand, sue for, collect or receive any money or property at
any time payable or receivable on account of, or securing, any such right to
payment, or grant any extension to, make any compromise or settlement with or
otherwise agree to waive, modify, amend or change the obligations (including
collateral obligations) of any such account debtor or other obligor.  The Lender may, in the Lender’s name or in
the Borrower’s name, as the Borrower’s agent and attorney-in-fact, notify the
United States Postal Service to change the address for delivery of the Borrower’s
mail to any address designated by the Lender, otherwise intercept the Borrower’s
mail, and receive, open and dispose of the Borrower’s mail, applying all
Collateral as permitted under this Agreement and holding all other mail for the
Borrower’s account or forwarding such mail to the Borrower’s last known
address.


 


Section 3.3                                      Assignment of
Insurance.  As additional security
for the payment and performance of the Obligations, the Borrower hereby assigns
to the Lender any and all monies (including proceeds of insurance and refunds
of unearned premiums) due or to become due under, and all other rights of the
Borrower with respect to, any and all policies of insurance now or at any time
hereafter covering the Collateral or any evidence thereof or any business
records or valuable papers pertaining thereto, and the Borrower hereby directs
the issuer of any such policy to pay all such monies directly to the
Lender.  At any time, whether or not a
Default Period then exists, the Lender may (but need not), in the Lender’s name
or in the Borrower’s name, execute and deliver proof of claim, receive all such
monies, endorse checks and other instruments representing payment of such
monies, and adjust, litigate, compromise or release any claim against the
issuer of any such policy.  Any monies
received as payment for any loss under any insurance policy mentioned above
(other than liability insurance policies) or as payment of any award or
compensation for condemnation or taking by eminent domain, shall be paid over
to the Lender to be applied, at the option of the Lender, either to the
prepayment of the Obligations or shall be disbursed to the Borrower under
staged payment terms reasonably satisfactory to the Lender for application to
the cost of repairs, replacements, or restorations.  Any such repairs, replacements, or
restorations shall be effected with reasonable promptness and shall be of a
value at least equal to the value of the items or property destroyed prior to
such damage or destruction.


 


14





















 


Section 3.4                                      Occupancy.


 


(a)                                  The
Borrower hereby irrevocably grants to the Lender the right to take exclusive
possession of the Premises at any time during a Default Period without notice
or consent.


 


(b)                                 The
Lender may use the Premises only to hold, process, manufacture, sell, use,
store, liquidate, realize upon or otherwise dispose of goods that are
Collateral and for other purposes that the Lender may in good faith deem to be
related or incidental purposes.


 


(c)                                  The
Lender’s right to hold the Premises shall cease and terminate upon the earlier
of (i) payment in full and discharge of all Obligations and termination of
the Credit Facility, and (ii) final sale or disposition of all goods
constituting Collateral and delivery of all such goods to purchasers.


 


(d)                                 The
Lender shall not be obligated to pay or account for any rent or other
compensation for the possession, occupancy or use of any of the Premises; provided,
however, that if the Lender does pay or account for any rent or other
compensation for the possession, occupancy or use of any of the Premises, the
Borrower shall reimburse the Lender promptly for the full amount thereof.  In addition, the Borrower will pay, or reimburse
the Lender for, all taxes, fees, duties, imposts, charges and expenses at any
time incurred by or imposed upon the Lender by reason of the execution,
delivery, existence, recordation, performance or enforcement of this Agreement
or the provisions of this Section 3.4.


 


15





















 


Section 3.5                                      Financing
Statement.  The Borrower authorizes
the Lender to file from time to time, such financing statements against
collateral described as “all personal property” or “all assets” or describing
specific items of collateral including commercial tort claims as the Lender
deems necessary or useful to perfect the Security Interest.  All financing statements filed before the
date hereof to perfect the Security Interest were authorized by the Borrower
and are hereby re-authorized.  A carbon,
photographic or other reproduction of this Agreement or of any financing
statements signed by the Borrower is sufficient as a financing statement and
may be filed as a financing statement in any state to perfect the security interests
granted hereby.  For this purpose, the
Borrower represents and warrants that the following information is true and
correct:


 


Name and
address of Debtor:


 


Gardenburger, Inc.


15615 Alton Parkway, Suite 350


Irvine, California  92618


Federal Employer Identification No.  93-0886359


Organizational
Identification No. 208236-13


 


Name and
address of Secured Party:


 


GB Retail Funding, LLC


40 Broad Street,


Boston, MA 02109


Attn: Lawrence E. Klaff, Managing Director


Fax No.: (617)
210-7141


 


Section 3.6                                      Setoff.  The Lender may at any time or from time to
time, at its sole discretion and without demand and without notice to anyone,
setoff any liability owed to the Borrower by the Lender, whether or not due,
against any Obligation, whether or not due. 
In addition, each other Person holding a participating interest in any
Obligations shall have the right to appropriate or setoff any deposit or other
liability then owed by such Person to the Borrower, whether or not due, and
apply the same to the payment of said participating interest, as fully as if
such Person had lent directly to the Borrower the amount of such participating
interest.


 


Section 3.7                                      Collateral.  This Agreement does not contemplate a sale of
accounts, contract rights or chattel paper, and, as provided by law, the
Borrower is entitled to any surplus and shall remain liable for any
deficiency.  The Lender’s duty of care
with respect to Collateral in its possession (as imposed by law) shall be
deemed fulfilled if it exercises reasonable care in physically keeping such
Collateral, or in the case of Collateral in the custody or possession of a
bailee or other third Person, exercises reasonable care in the selection of the
bailee or other third Person, and the Lender need not otherwise preserve,
protect, insure or care for any Collateral. 
The Lender shall not be obligated to preserve any rights the Borrower
may have against prior parties, to realize on the Collateral at all or in any
particular manner or order or to apply any cash proceeds of the Collateral in any
particular order of application.  The
Lender has no obligation to 


 


16





















 


clean-up or otherwise prepare the Collateral for sale.  The Borrower waives any right it may have to
require the Lender to pursue any third Person for any of the Obligations.


 


ARTICLE IV.



CONDITIONS OF LENDING


 


Section 4.1                                      Conditions
Precedent to the Issuance of the Term Advance.  The Lender’s obligation to make the Term
Advance shall be subject to the condition precedent that the Lender shall have
received all of the following, each properly executed by the appropriate party
and in form and substance satisfactory to the Lender:


 


(a)                                  This Agreement.


 


(b)                                 The Term Note.


 


(c)                                  A true and correct
copy of any and all leases pursuant to which the Borrower is leasing the
Premises, together with a landlord’s disclaimer and consent with respect to
each such lease.


 


(d)                                 A true and correct
copy of any and all agreements pursuant to which the Borrower’s property is in
the possession of any Person other than the Borrower, together with, in the
case of any goods held by such Person for resale, (i) a consignee’s
acknowledgment and waiver of Liens, (ii) UCC financing statements
sufficient to protect the Borrower’s and the Lender’s interests in such goods,
and (iii) UCC searches showing that no other secured party has filed a
financing statement against such Person and covering property similar to the
Borrower’s other than the Borrower, or if there exists any such secured party,
evidence that each such secured party has received notice from the Borrower and
the Lender sufficient to protect the Borrower’s and the Lender’s interests in
the Borrower’s goods from any claim by such secured party.


 


(e)                                  An acknowledgment and
waiver of Liens from each warehouse in which the Borrower is storing Inventory.


 


(f)                                    A true and correct
copy of any and all agreements pursuant to which the Borrower’s property is in
the possession of any Person other than the Borrower, together with, (i) an
acknowledgment and waiver of Liens from each subcontractor who has possession
of the Borrower’s goods from time to time, (ii) UCC financing statements
sufficient to protect the Borrower’s and the Lender’s interests in such goods,
and (iii) UCC searches showing that no other secured party has filed a
financing statement covering such Person’s property other than the Borrower, or
if there exists any such secured party, evidence that each such secured party
has received notice from the Borrower and the Lender sufficient to protect the
Borrower’s and the Lender’s interests in the Borrower’s goods from any claim by
such secured party.


 


(g)                                 The Wholesale Lockbox
and Collection Agreement.


 


17





















 


(h)                                 The Intellectual
Property Security Agreement.


 


(i)                                     The Intercreditor
Agreement.


 


(j)                                     Current searches
of appropriate filing offices showing that (i) no Liens have been filed
and remain in effect against the Borrower except Permitted Liens or Liens held
by Persons who have agreed in writing that upon receipt of proceeds of the Term
Advance, they will satisfy, release or terminate such Liens in a manner
satisfactory to the Lender, and (ii) the Lender has duly filed all
financing statements necessary to perfect the Security Interest, to the extent
the Security Interest is capable of being perfected by filing.


 


(k)                                  The Lender’s Security
Interest must have been perfected to the satisfaction of the Lender and its
counsel.  The Final Financing Order from
the Bankruptcy Court shall provide that the Security Interests granted to the
Lender as security for all of the Obligations shall be effective and perfected
upon the date of the Final Financing Order and without the necessity of the
execution or recordation of mortgages, security agreements, financing
statements, notices of lien or similar instruments in any jurisdiction or of
the taking of any other action.


 


(l)                                     A certificate of
the Borrower’s President, Secretary or Assistant Secretary certifying that
attached to such certificate are (i) the resolutions of the Borrower’s
Directors and, if required, Owners, authorizing the execution, delivery and
performance of the Loan Documents, (ii) true, correct and complete copies
of the Borrower’s Constituent Documents, and (iii) examples of the
signatures of the Borrower’s Officers or agents authorized to execute and
deliver the Loan Documents and other instruments, agreements and certificates
on the Borrower’s behalf.


 


(m)                               A current certificate
issued by the Secretary of State of Oregon,
certifying that the Borrower is in compliance with all applicable
organizational requirements of the State of Oregon.


 


(n)                                 Evidence that the
Borrower is duly licensed or qualified to transact business in all
jurisdictions where the character of the property owned or leased or the nature
of the business transacted by it makes such licensing or qualification
necessary.


 


(o)                                 A certificate of an
Officer of the Borrower confirming, in his personal capacity, the
representations and warranties set forth in Article V.


 


(p)                                 Certificates of the
insurance required hereunder, with all hazard insurance containing a lender’s
loss payable endorsement in the Lender’s favor and with all liability insurance
naming the Lender as an additional insured.


 


(q)                                 Payment of the fees
and commissions due under Section 2.4 and expenses incurred by the Lender
through such date and required to be paid by the Borrower under Section 8.5,
including all legal expenses incurred through the date of this Agreement.


 


18





















 


(r)                                    Approval of the Wells
Fargo commitment letter in respect to the amendment or extension of the Wells
Fargo Credit Facility upon the effective date of an Approved Plan of
Reorganization.


 


(s)                                  The entry in form and
substance satisfactory to the Lender by the Bankruptcy Court of a final order
on notice to creditors which has determined to be adequate by the Court (i) approving
the Borrower’s motion on notice to creditors for order authorizing and
approving replacement post-petition financing facility and (ii) granting
security interests and liens pursuant to section 105(a) and 364(c)(2) and
(3) of the United States Bankruptcy Code, which order either has not been
reconsidered or appealed or has not been stayed pending reconsideration or
appeal.  Notwithstanding the foregoing,
if no objection has been presented to the Bankruptcy Court with respect to such
final order, the order will be deemed to be final on the date of entry and the
condition to lending set forth in this paragraph will be deemed to have been
satisfied on such date.


 


(t)                                    Evidence that the
Wells Fargo Credit Facility is closing and funding contemporaneously with the
closing of the Credit Facility.


 


(u)                                 Evidence of
satisfactory verification of the Accounts.


 


(v)                                 A Customer
Identification Information form and such other forms and verification as the
Lender may need to comply with the U.S.A. Patriot Act.


 


(w)                               Such other documents as
the Lender in its sole discretion may require.


 


(x)                                   The representations
and warranties contained in Article V are correct on and as of the date of
the Term Advance as though made on and as of such date, except to the extent
that such representations and warranties relate solely to an earlier date.


 


(y)                                 No event has occurred
and is continuing, or would result from the Term Advance which constitutes a
Default or an Event of Default.


 


(z)                                   Opinions of counsel
to the Borrower.


 


(aa)                            The absence of any
litigation or other proceeding (other than the Bankruptcy Case) the result of
which might have a material adverse effect on the assets, properties, business,
prospects, profitability, operations or condition (financial or otherwise) of
the Borrower, or on the value of the Collateral.


 


(bb)                          The absence of any material
adverse change in the assets, properties, business, prospects, profitability,
operations or condition (financial or otherwise) of the Borrower, or in the
value of the Collateral, since the date of the most recent financial
information delivered to the Lender.


 


19





















 


(cc)                            The absence of any material
changes in governmental regulations or policies affecting the Borrower or the
Lender.


 


(dd)                          The entry of a final order
(the “Final DIP Order”) by the Bankruptcy Court on terms acceptable to Lender
and its counsel, approving the Term Loan documents, granting super priority
claim status and liens in favor of Lender in accordance with the Term Sheet,
which Final DIP Order shall not have been appealed, stayed reversed or
modified.


 


ARTICLE V.



REPRESENTATIONS AND WARRANTIES


 


The Borrower
represents and warrants to the Lender as follows:


 


Section 5.1                                      Existence and
Power; Name; Chief Executive Office; Inventory and Equipment Locations; Federal
Employer Identification Number and Organizational Identification Number.  The Borrower is a corporation, duly organized,
validly existing and in good standing under the laws of the State of Oregon and
is duly licensed or qualified to transact business in all jurisdictions where
the character of the property owned or leased or the nature of the business
transacted by it makes such licensing or qualification necessary.  The Borrower has all requisite power and
authority to conduct its business, to own its properties and to execute and
deliver, and to perform all of its obligations under, the Loan Documents.  During its existence, the Borrower has done
business solely under the names set forth in Schedule 5.1.  The Borrower’s chief executive office and
principal place of business are located at the addresses set forth in Schedule 5.1,
and all of the Borrower’s records relating to its business or the Collateral
are kept at those locations.  All
Inventory and Equipment is located at those locations or at one of the other
locations listed in Schedule 5.1. 
The Borrower’s federal employer identification number and organization
identification number are correctly set forth in Section 3.5.


 


Section 5.2                                      Capitalization.  Schedule 5.2 constitutes a correct and
complete list of all Persons holding ownership interests and rights to acquire
ownership interests which if fully exercised would cause such Person to hold
more than five percent (5%) of all ownership interests of the Borrower on a
fully diluted basis, and an organizational chart showing the ownership
structure of all Subsidiaries of the Borrower.


 


Section 5.3                                      Authorization
of Borrowing; No Conflict as to Law or Agreements.  The execution, delivery and performance by
the Borrower of the Loan Documents and the borrowings from time to time
hereunder have been duly authorized by all necessary corporate action and do
not and will not (i) require any consent or approval of the Borrower’s
Owners; (ii) require any authorization, consent or approval by, or
registration, declaration or filing with, or notice to, any governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, or any third party, except such authorization, consent, approval,
registration, declaration, filing or notice as has been obtained, accomplished
or given prior to the date hereof; (iii) violate any provision of any law,
rule or regulation (including 


 


20





















 


Regulation X of the Board of Governors of the Federal Reserve
System) or of any order, writ, injunction or decree presently in effect having
applicability to the Borrower or of the Borrower’s Constituent Documents; (iv) result
in a breach of or constitute a default under any indenture or loan or credit
agreement or any other material agreement, lease or instrument to which the
Borrower is a party or by which it or its properties may be bound or affected
(provided that the Borrower is in default of terms under the Existing Credit
Facility and the Annex Convertible Senior Subordinated Note); or (v) result
in, or require, the creation or imposition of any Lien (other than the Security
Interest) upon or with respect to any of the properties now owned or hereafter
acquired by the Borrower.


 


Section 5.4                                      Legal
Agreements.  This Agreement
constitutes and, upon due execution by the Borrower and approval of the
Bankruptcy Court, the other Loan Documents will constitute the legal, valid and
binding obligations of the Borrower, enforceable against the Borrower in
accordance with their respective terms.


 


Section 5.5                                      Subsidiaries.  The Borrower has no Subsidiaries.


 


Section 5.6                                      Financial
Condition; No Adverse Change.  The
Borrower has furnished to the Lender its audited financial statements for its
fiscal year ended September 30, 2004 and
unaudited financial statements for the fiscal-year-to-date period ended August 31,
2005 and those statements fairly present the Borrower’s financial condition on
the dates thereof and the results of its operations and cash flows for the
periods then ended and were prepared in accordance with GAAP.  Since the date of the most recent financial
statements, there has been no material adverse change in the Borrower’s
business, properties or condition (financial or otherwise).


 


Section 5.7                                      Litigation.  There are no actions, suits or proceedings
pending or, to the Borrower’s knowledge, threatened against or affecting the
Borrower or any of its Affiliates or the properties of the Borrower or any of
its Affiliates before any court or governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, which, if determined
adversely to the Borrower or any of its Affiliates, would have a material
adverse effect on the financial condition, properties or operations of the
Borrower or any of its Affiliates.


 


Section 5.8                                      Regulation U.  The Borrower is not engaged in the business
of extending credit for the purpose of purchasing or carrying margin stock
(within the meaning of Regulation U of the Board of Governors of the Federal
Reserve System), and no part of the proceeds of any Advance will be used to
purchase or carry any margin stock or to extend credit to others for the
purpose of purchasing or carrying any margin stock.


 


Section 5.9                                      Taxes.  The Borrower and its Affiliates have paid or
caused to be paid to the proper authorities when due all federal, state and
local taxes required to be withheld by each of them.  The Borrower and its Affiliates have filed
all federal, state and local tax returns which to the knowledge of the Officers
of the Borrower or any Affiliate, as the case may be, are required to be filed,
and the Borrower and its Affiliates have paid or caused to be paid to the 


 


21





















 


respective taxing authorities all taxes as shown on said returns or on
any assessment received by any of them to the extent such taxes have become
due.


 


Section 5.10                                Titles and Liens.  The Borrower has good and absolute title to
all Collateral free and clear of all Liens other than (i) Permitted Liens
and (ii) Liens securing the Existing Credit Facility.  No financing statement naming the Borrower as
debtor is on file in any office except to perfect only Permitted Liens and
Liens securing the Existing Credit Facility.


 


Section 5.11                                Intellectual
Property Rights.


 


(a)                                  Owned Intellectual Property.  Schedule 5.11 is a complete list of all
patents, applications for patents, trademarks, applications to register
trademarks, service marks, applications to register service marks, mask works,
trade dress and copyrights for which the Borrower is the owner of record (the “Owned
Intellectual Property”).  Except as disclosed on Schedule 5.11,
(i) the Borrower owns the Owned Intellectual Property free and clear of
all restrictions (including covenants not to sue a third party), court orders,
injunctions, decrees, writs or Liens, whether by written agreement or
otherwise, (ii) no Person other than the Borrower or Wells Fargo owns or
has been granted any right in the Owned Intellectual Property, (iii) all
Owned Intellectual Property is valid, subsisting and enforceable and (iv) the
Borrower has taken all commercially reasonable action necessary to maintain and
protect the Owned Intellectual Property.


 


(b)                                 Agreements with Employees and Contractors.  The Borrower has entered into a legally
enforceable agreement with each of its senior management obligating each such
Person to assign to the Borrower, without any additional compensation, any
Intellectual Property Rights created, discovered or invented by such Person in
the course of such Person’s employment or engagement with the Borrower (except
to the extent prohibited by law), and further requiring such Person to
cooperate with the Borrower, without any additional compensation, in connection
with securing and enforcing any Intellectual Property Rights therein.


 


(c)                                  Intellectual Property Rights Licensed from Others.  Schedule 5.11 is a complete list of all
agreements under which the Borrower has licensed Intellectual Property Rights
from another Person (“Licensed Intellectual Property”) other than readily
available, non-negotiated licenses of computer software and other intellectual
property used solely for performing accounting, word processing and similar
administrative tasks (“Off-the-shelf Software”) and a summary of any ongoing
payments the Borrower is obligated to make with respect thereto.  Except
as disclosed on Schedule 5.11 and in written agreements, copies of which
have been given to the Lender, the Borrower’s licenses to use the Licensed
Intellectual Property are free and clear of all restrictions, Liens (other than
Liens on such Licensed Intellectual Property held by Wells Fargo), court
orders, injunctions, decrees, or writs, whether by written agreement or
otherwise.  Except as disclosed on Schedule 5.11,
the Borrower is not obligated or under any liability whatsoever to make
any payments of a material nature by way of royalties, fees or otherwise to any
owner of, licensor of, or other claimant to, any Intellectual Property Rights.


 


22





















 


(d)           Other
Intellectual Property Needed for Business.  Except for Off-the-shelf Software and as
disclosed on Schedule 5.11, the Owned Intellectual Property and the
Licensed Intellectual Property constitute all Intellectual Property Rights used
or necessary to conduct the Borrower’s business as it is presently conducted or
as the Borrower reasonably foresees conducting it.


 


(e)           Infringement.  Except as disclosed on Schedule 5.11,
the Borrower has no knowledge of, and has not received any written claim or notice
alleging, any Infringement of another Person’s Intellectual Property Rights
(including any written claim that the Borrower must license or refrain from
using the Intellectual Property Rights of any third party) nor, to the Borrower’s
knowledge, is there any threatened claim or any reasonable basis for any such
claim.


 


Section 5.12           Plans.  Except as disclosed to the Lender in writing
prior to the date hereof, neither the Borrower nor any ERISA Affiliate (i) maintains
or has maintained any Pension Plan, (ii) contributes or has contributed to
any Multiemployer Plan or (iii) provides or has provided post-retirement
medical or insurance benefits with respect to employees or former employees
(other than benefits required under Section 601 of ERISA, Section 4980B
of the IRC or applicable state law). 
Neither the Borrower nor any ERISA Affiliate has received any notice or
has any knowledge to the effect that it is not in full compliance with any of
the requirements of ERISA, the IRC or applicable state law with respect to any
Plan.  No Reportable Event exists in
connection with any Pension Plan.  Each
Plan which is intended to qualify under the IRC is so qualified, and no fact or
circumstance exists which may have an adverse effect on the Plan’s tax-qualified
status.  Neither the Borrower nor any
ERISA Affiliate has (i) any accumulated funding deficiency (as defined in Section 302
of ERISA and Section 412 of the IRC) under any Plan, whether or not
waived, (ii) any liability under Section 4201 or 4243 of ERISA for any
withdrawal, partial withdrawal, reorganization or other event under any
Multiemployer Plan or (iii) any liability or knowledge of any facts or
circumstances which could result in any liability to the Pension Benefit
Guaranty Corporation, the Internal Revenue Service, the Department of Labor or
any participant in connection with any Plan (other than routine claims for
benefits under the Plan).


 


Section 5.13           Default.  The Borrower is in compliance with all
provisions of all agreements, instruments, decrees and orders to which it is a
party or by which it or its property is bound or affected, the breach or
default of which could have a material adverse effect on the Borrower’s
financial condition, properties or operations. 
Notwithstanding the foregoing, the Borrower is in default of terms under
the Existing Credit Facility and the Annex Convertible Senior Subordinated
Note.


 


Section 5.14           Environmental
Matters.


 


(a)           Except as disclosed on Schedule 5.14,
there are not present in, on or under the Premises any Hazardous Substances in
such form or quantity as to create any material liability or obligation for
either the Borrower or the Lender under the common law of any jurisdiction or
under any Environmental Law, and no Hazardous Substances have ever been


 


23





















 


stored, buried, spilled, leaked, discharged, emitted or released in, on
or under the Premises in such a way as to create any such material liability.


 


(b)           Except as disclosed on Schedule 5.14,
the Borrower has not disposed of Hazardous Substances in such a manner as to
create any material liability under any Environmental Law.


 


(c)           Except as disclosed on Schedule 5.14,
there have not existed in the past, nor are there any threatened or impending
requests, claims, notices, investigations, demands, administrative proceedings,
hearings or litigation relating in any way to the Premises or the Borrower,
alleging material liability under, violation of, or noncompliance with any
Environmental Law or any license, permit or other authorization issued pursuant
thereto.


 


(d)           Except as disclosed on Schedule 5.14,
the Borrower’s businesses are and have in the past always been conducted in
accordance with all Environmental Laws and all licenses, permits and other
authorizations required pursuant to any Environmental Law and necessary for the
lawful and efficient operation of such businesses are in the Borrower’s
possession and are in full force and effect, nor has the Borrower been denied
insurance on grounds related to potential environmental liability.  No permit required under any Environmental
Law is scheduled to expire within 12 months and there is no threat that any
such permit will be withdrawn, terminated, limited or materially changed.


 


(e)           Except as disclosed on Schedule 5.14,
the Premises are not and never have been listed on the National Priorities
List, the Comprehensive Environmental Response, Compensation and Liability
Information System or any similar federal, state or local list, schedule, log,
inventory or database.


 


(f)            The Borrower has delivered to the
Lender all environmental assessments, audits, reports, permits, licenses and
other documents describing or relating in any way to the Premises or the
Borrower’s businesses.


 


Section 5.15           Submissions
to Lender.  All financial and other
information provided to the Lender by or on behalf of the Borrower in
connection with the Borrower’s request for the credit facilities contemplated
hereby (including, without limitation, the cash budget that was approved by the
Lender prior to the Lender setting the financial covenants contained herein) (i) is
true and correct in all material respects, (ii) does not omit any material
fact necessary to make such information not misleading and, (iii) as to
projections, valuations or proforma financial statements, present a good faith
opinion as to such projections, valuations and proforma condition and results.


 


Section 5.16           Financing
Statements.  The Borrower has
authorized the filing of financing statements sufficient when filed to perfect
the Security Interest and the other security interests created by the Security
Documents.  When such financing
statements are filed in the offices noted therein, the Lender will have a valid
and perfected security interest in all Collateral which is capable of being
perfected by filing financing statements. 
None of the Collateral is or


 


24





















 


will become a fixture on real
estate, unless a sufficient fixture filing is in effect with respect thereto.


 


Section 5.17           Rights
to Payment.  Each right to payment
and each instrument, document, chattel paper and other agreement constituting
or evidencing Collateral is (or, in the case of all future Collateral, will be
when arising or issued) the valid, genuine and legally enforceable obligation,
subject to no defense, setoff or counterclaim, of the account debtor or other
obligor named therein or in the Borrower’s records pertaining thereto as being
obligated to pay such obligation.


 


Section 5.18           Bankruptcy Case.  The Borrower does not at this time
contemplate converting or dismissing the Bankruptcy Case, or stipulating to the
appointment of a chapter 11 trustee or examiner.


 


ARTICLE VI.



COVENANTS


 


So long as the
Obligations shall remain unpaid, or the Credit Facility shall remain
outstanding, the Borrower will comply with the following requirements, unless
the Lender shall otherwise consent in writing:


 


Section 6.1             Reporting
Requirements.  The Borrower will
deliver, or cause to be delivered, to the Lender each of the following, which
shall be in form and detail acceptable to the Lender:


 


(a)           Annual Financial Statements.  As soon as available, and in any event within
90 days after the end of each fiscal year of the Borrower, the Borrower’s
audited financial statements with the unqualified opinion of independent
certified public accountants selected by the Borrower and acceptable to the
Lender, which annual financial statements shall include the Borrower’s balance
sheet as at the end of such fiscal year and the related statements of the
Borrower’s income, retained earnings and cash flows for the fiscal year then
ended, prepared, if the Lender so requests, on a consolidating and consolidated
basis to include any Affiliates, all in reasonable detail and prepared in
accordance with GAAP, together with (i) copies of all management letters
prepared by such accountants; (ii) a report signed by such accountants
stating that in making the investigations necessary for said opinion they
obtained no knowledge, except as specifically stated, of any Default or Event
of Default and all relevant facts in reasonable detail to evidence, and the
computations as to, whether or not the Borrower is in compliance with the
Financial Covenants; and (iii) a certificate of the Borrower’s chief financial
officer stating that such financial statements have been prepared in accordance
with GAAP, fairly represent the Borrower’s financial position and the results
of its operations, and whether or not such Officer has knowledge of the
occurrence of any Default or Event of Default and, if so, stating in reasonable
detail the facts with respect thereto. 
Notwithstanding the foregoing, it is understood that the opinion of
independent


 


25





















 


certified accountants referenced above in this paragraph with respect
to the Borrower’s fiscal year ending September 30, 2005 will be subject to
a “going concern” qualification.


 


(b)           Monthly Financial Statements.  As soon as available and in any event within
30 days after the end of each month, the unaudited/internal balance sheet and
statements of income and retained earnings of the Borrower as at the end of and
for such month and for the year to date period then ended, prepared, if the
Lender so requests, on a consolidating and consolidated basis to include any
Affiliates, in reasonable detail and stating in comparative form the figures
for the corresponding date and periods in the previous year, all prepared in
accordance with GAAP, subject to year-end audit adjustments and which fairly
represent the Borrower’s financial position and the results of its operations;
and accompanied by a certificate of the Borrower’s chief financial officer,
substantially in the form of Exhibit C hereto stating (i) that such
financial statements have been prepared in accordance with GAAP, subject to
year-end audit adjustments, and fairly represent the Borrower’s financial
position and the results of its operations, (ii) whether or not such
Officer has knowledge of the occurrence of any Default or Event of Default not
theretofore reported and remedied and, if so, stating in reasonable detail the
facts with respect thereto, and (iii) all relevant facts in reasonable
detail to evidence, and the computations as to, whether or not the Borrower is
in compliance with the Financial Covenants.


 


(c)           Collateral Reports.  Within 15 days after the end of each month or
more frequently if the Lender so requires, a detailed aging of the Borrower’s
accounts receivable and its accounts payable, detailed inventory reports by
inventory class and by inventory location, an inventory certification report,
and a calculation of the Borrower’s Accounts, Eligible Accounts, Inventory and
Eligible Inventory as at the end of such month or shorter time period.


 


(d)           Projections.  No later than 30 days prior to the first day
of each fiscal year, the Borrower’s projected balance sheets, income
statements, statements of cash flow and projected Availability for each month
of such fiscal year, each in reasonable detail. 
Such items will be  certified by
the Officer who is the Borrower’s chief financial officer as being the most
accurate projections available and identical to the projections used by the
Borrower for internal planning purposes and be delivered with a statement of
underlying assumptions and such supporting schedules and information as the
Lender may in its discretion require.


 


(e)           Weekly Reports.  Weekly (on or before Wednesday of each week),
or more frequently if the Lender so requires, the Borrower’s reports of gross
sales, collections and cash disbursements for the prior week and a report of
all variances between the cash budget and the actual budget for such week.


 


(f)            Daily Reports.  Daily, reports of the Borrower’s sales,
credit memos, cash collections and other adjustments with respect to the
Borrower’s Accounts, along with supporting documentation as requested by the
Lender from time to time (including,


 


26





















 


without limitation, invoice registers, cash receipts journals, copies
of invoices, bills of lading and customer remittances);


 


(g)           Customer Lists.  At the same time as delivery of the monthly
financial statements required under Section 6.1(b) for the months
ended March 31, June 30, September 30 and December 31 of
each year, an updated customer list, including contact names and addresses of
Borrower’s account debtors.


 


(h)           Bankruptcy Court Reporting.  Concurrently with the filing or service
thereof, copies of all reports, pleadings, motions, applications, financial
information and other documents filed by or on behalf of the Borrower with the
Bankruptcy Court or the U.S. trustee assigned to the Bankruptcy Case.


 


(i)            Cash Budget.  If an Approved Plan of Reorganization has not
been approved by the Bankruptcy Court in the Bankruptcy Case at least 45 days
prior to the expiration of the current approved cash budget of the Borrower, no
less than 45 days before the expiration of such approved cash budget, Borrower’s
cash budget for the period beginning after the expiration of such approved cash
budget and ending on July 31, 2006, which budget shall be acceptable to
the Lender in its sole discretion exercised in a commercially reasonable
manner.


 


(j)            Litigation. 
Immediately after the commencement thereof, notice in writing of all litigation
and of all proceedings before any governmental or regulatory agency affecting
the Borrower (i) of the type described in Section 5.14(c) or (ii) which
seek a monetary recovery against the Borrower in excess of $50,000.


 


(k)           Defaults. 
When any Officer of the Borrower becomes aware of the probable
occurrence of any Default or Event of Default, and no later than 3 days after
such Officer becomes aware of such Default or Event of Default, notice of such
occurrence, together with a detailed statement by a responsible Officer of the
Borrower of the steps being taken by the Borrower to cure the effect thereof.


 


(l)            Plans. 
As soon as possible, and in any event within 30 days after the
Borrower knows or has reason to know that any Reportable Event with respect to
any Pension Plan has occurred, a statement signed by the Officer who is the
Borrower’s chief financial officer setting forth details as to such Reportable
Event and the action which the Borrower proposes to take with respect thereto,
together with a copy of the notice of such Reportable Event to the Pension
Benefit Guaranty Corporation.  As soon as
possible, and in any event within 10 days after the Borrower fails to make
any quarterly contribution required with respect to any Pension Plan under Section 412(m)
of the IRC, the Borrower will deliver to the Lender a statement signed by the
Officer who is the Borrower’s chief financial officer setting forth details as
to such failure and the action which the Borrower proposes to take with respect
thereto, together with a copy of any notice of such failure required to be
provided to the Pension Benefit Guaranty Corporation.  As soon as possible, and in any event within
ten days after the Borrower knows or has reason to


 


27





















 


know that it has or is reasonably expected to have any liability under
Sections 4201 or 4243 of ERISA for any withdrawal, partial withdrawal,
reorganization or other event under any Multiemployer Plan, the Borrower will
deliver to the Lender a statement of the Borrower’s chief financial officer
setting forth details as to such liability and the action which the Borrower
proposes to take with respect thereto.


 


(m)          Disputes. 
Promptly upon knowledge thereof, notice of (i) any disputes or
claims by the Borrower’s customers  exceeding $10,000 individually or
$20,000 in the aggregate during any fiscal year; (ii) credit memos; and (iii) any
goods returned to or recovered by the Borrower.


 


(n)           Officers and Directors.  Promptly upon knowledge thereof, notice of
any change in the persons constituting the Borrower’s Officers and Directors.


 


(o)           Collateral. 
Promptly upon knowledge thereof, notice of any loss of or material
damage to any Collateral or of any substantial adverse change in any Collateral
or the prospect of payment thereof.


 


(p)           Commercial Tort Claims.  Promptly upon knowledge thereof, notice of
any commercial tort claims it may bring against any Person, including the name
and address of each defendant, a summary of the facts, an estimate of the
Borrower’s damages, copies of any complaint or demand letter submitted by the
Borrower, and such other information as the Lender may request.


 


(q)           Intellectual Property.


 


(i)            30 days prior written notice of Borrower’s intent to
acquire material Intellectual Property Rights; and upon request shall provide
the Lender with copies of all proposed documents and agreements concerning such
rights.


 


(ii)           Promptly upon knowledge thereof, notice of (A) any
Infringement of its Intellectual Property Rights by others, (B) claims
that the Borrower is Infringing another Person’s Intellectual Property Rights
and (C) any threatened cancellation, termination or material limitation of
its Intellectual Property Rights.


 


(iii)          Promptly upon receipt, copies of all registrations and
filings with respect to its Intellectual Property Rights.


 


(r)            Reports to Owners.  Promptly upon their distribution, copies of
all financial statements, reports and proxy statements which the Borrower shall
have sent to its Owners.


 


(s)           SEC Filings.  Promptly after the sending or filing thereof,
copies of all regular and periodic reports which the Borrower shall file with
the Securities and Exchange Commission or any national securities exchange.


 


28





















 


(t)            Tax Returns of Borrower.  As soon as possible, and in any event no
later than 30 days after they are filed, copies of the state and federal
income tax returns and all schedules thereto of the Borrower.


 


(u)           Violations of Law.  Promptly upon knowledge thereof, notice of
the Borrower’s violation of any law, rule or regulation, the
non-compliance with which could materially and adversely affect the financial
condition, properties or operations of the Borrower.


 


(v)           Other Reports.  From time to time, with reasonable
promptness, any and all receivables schedules, inventory reports, collection
reports, deposit records, equipment schedules, copies of invoices to account
debtors, shipment documents and delivery receipts for goods sold, and such
other material, reports, records or information as the Lender may request.


 


Section 6.2             Financial
Covenants.


 


(a)           Minimum
Availability.        The
Borrower shall maintain at all times Availability not less than the amounts set
forth for such date as follows:


 


	
  Dates

  	
   

  	
  Minimum Availability

  	
   

  
	
  Closing
  through 12/02/05

  	
   

  	
  $

  	
  2,000,000.00

  	
   

  
	
  12/3/05
  through 12/30/05

  	
   

  	
  $

  	
  1,750,000.00

  	
   

  
	
  12/31/05 and
  at all times thereafter

  	
   

  	
  $

  	
  1,500,000.00

  	
   

  



 


(b)           Minimum
Net Cash Flow.  The Borrower will achieve, for the test
periods set forth below, Net Cash Flow in an amount not less than the amount
set forth below:


 


	
  Test Period

  	
   

  	
  Minimum Net Cash Flow

  	
   

  
	
  10/1/05
  through 12/2/05

  	
   

  	
  $

  	
  (900,000

  	
  )

  
	
  10/29/05
  through 12/30/05

  	
   

  	
  $

  	
  (600,000

  	
  )

  
	
  12/3/05
  through 1/27/06

  	
   

  	
  $

  	
  (1,800,000

  	
  )

  
	
  12/31/05
  through 2/24/06

  	
   

  	
  $

  	
  200,000

  	
   

  



 


(c)           Minimum
Gross Sales.      The Borrower
will achieve, for each period described below, gross sales of not less than the
amount set forth for each such period:


 


	
  Period

  	
   

  	
  Minimum Gross Sales

  	
   

  
	
  10/1/05
  through 10/31/05

  	
   

  	
  $

  	
  3,600,000

  	
   

  
	
  11/1/05
  through 11/30/05

  	
   

  	
  $

  	
  3,000,000

  	
   

  
	
  12/1/05
  through 12/31/05

  	
   

  	
  $

  	
  3,600,000

  	
   

  
	
  1/1/06
  through 1/31/06

  	
   

  	
  $

  	
  4,300,000

  	
   

  
	
  2/1/06
  through 2/28/06

  	
   

  	
  $

  	
  3,900,000

  	
   

  
	
  3/1/06
  through 3/31/06

  	
   

  	
  $

  	
  5,100,000

  	
   

  
	
  4/1/06
  through 4/30/06

  	
   

  	
  $

  	
  4,500,000

  	
   

  
	
  5/1/05
  through 5/31/06

  	
   

  	
  $

  	
  5,200,000

  	
   

  
	
  6/1/05
  through 6/30/06

  	
   

  	
  $

  	
  5,200,000

  	
   

  
	
  7/1/06
  through 7/31/06

  	
   

  	
  $

  	
  4,700,000

  	
   

  



 


29





















 


(d)           Minimum
Net Sales.           In the
event that the Borrower fails to achieve the minimum gross sales required by Section 6.2(c) for
any period set forth above, the Borrower will achieve, for the period set forth
below ending on the same end date as the period for which the Borrower failed
such minimum gross sales covenant, cumulative Net Sales of not less than the
amount set forth for the period ending on such date set forth below:


 


	
  Period

  	
   

  	
  Minimum Net Sales

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  10/1/05
  through 10/31/05

  	
   

  	
  $

  	
  3,100,000

  	
   

  
	
  10/1/05
  through 11/30/05

  	
   

  	
  $

  	
  5,700,000

  	
   

  
	
  10/1/05
  through 12/31/05

  	
   

  	
  $

  	
  8,600,000

  	
   

  
	
  10/1/05
  through 1/31/06

  	
   

  	
  $

  	
  12,100,000

  	
   

  
	
  10/1/05 through
  2/28/06

  	
   

  	
  $

  	
  15,500,000

  	
   

  
	
  10/1/05
  through 3/31/06

  	
   

  	
  $

  	
  19,700,000

  	
   

  
	
  10/1/05
  through 4/30/06

  	
   

  	
  $

  	
  23,700,000

  	
   

  
	
  10/1/05
  through 5/31/06

  	
   

  	
  $

  	
  27,800,000

  	
   

  
	
  10/1/05
  through 6/30/06

  	
   

  	
  $

  	
  32,000,000

  	
   

  
	
  10/1/05
  through 7/31/06

  	
   

  	
  $

  	
  36,000,000

  	
   

  



 


(e)           New
Covenants.    On or before February 24,
2006, the Lender shall set new covenant levels for Section 6.2(b) for
periods after such date.  The new
covenant levels will be based upon the Borrower’s projections and cash budget
for such periods received by the Lender pursuant to Sections 6.1(d) and
6.1(i) and shall be no less stringent than the present levels; provided
that with respect to Section 6.2(b), the new covenant levels will be based
on a $500,000 negative variance based upon the projections and updated cash
flow budget for such periods.


 


Section 6.3             Permitted
Liens; Financing Statements.


 


(a)           The Borrower will not create, incur
or suffer to exist any Lien (other than Liens in connection with the Existing
Credit Facility, which Liens shall be terminated promptly upon the repayment of
the Existing Credit Facility with the proceeds of the Term Advance and those
advances made pursuant to the Wells Fargo Credit Facility) or of any of its
assets, now owned or hereafter acquired, to secure any indebtedness; excluding,
however, from the operation of the foregoing, the following (each a “Permitted
Lien”; collectively, “Permitted Liens”):


 


(i)            In
the case of any of the Borrower’s property which is not Collateral, covenants,
restrictions, rights, easements and minor irregularities in title which


 


30





















 


do not materially interfere with the Borrower’s business or operations
as presently conducted;


 


(ii)           Liens
in existence on the date hereof and listed in Schedule 6.3 hereto,
securing indebtedness for borrowed money permitted under Section 6.4;


 


(iii)          The
Security Interest and Liens created by the Security Documents;


 


(iv)          Liens
in favor of Wells Fargo that are subject to the terms of the Intercreditor
Agreement;


 


(v)           Purchase
money security interests for pre-existing financed personal property and leases
of equipment;


 


(vi)          The
Carveout (as defined in the Final Financing Order); and


 


(vii)         Liens
to secure indebtedness permitted by Section 6.4(b) but solely with
respect to premiums so financed.


 


(b)           The Borrower will not amend any
financing statements in favor of the Lender except as permitted by law.  Any authorization by the Lender to any Person
to amend financing statements in favor of the Lender shall be in writing.


 


Section 6.4             Indebtedness.  The Borrower will not incur, create, assume
or permit to exist any indebtedness or liability on account of deposits or
advances or any indebtedness for borrowed money or letters of credit issued on
the Borrower’s behalf, or any other indebtedness or liability evidenced by
notes, bonds, debentures or similar obligations, except:


 


(a)           Indebtedness
arising hereunder;


 


(b)           Insurance
premium financing in an amount not to exceed $700,000.00 per calendar year.


 


(c)           Indebtedness
of the Borrower in existence on the date hereof and listed in Schedule 6.4
hereto; and


 


(d)           Indebtedness
relating to Permitted Liens.


 


Section 6.5             Guaranties.  The Borrower will not assume, guarantee,
endorse or otherwise become directly or contingently liable in connection with
any obligations of any other Person, except:


 


(a)           The
endorsement of negotiable instruments by the Borrower for deposit or collection
or similar transactions in the ordinary course of business; and


 


31





















 


(b)           Guaranties,
endorsements and other direct or contingent liabilities in connection with the
obligations of other Persons, in existence on the date hereof and listed in Schedule 6.4
hereto.


 


Section 6.6             Investments
and Subsidiaries.  The Borrower will
not make or permit to exist any loans or advances to, or make any investment or
acquire any interest whatsoever in, any other Person or Affiliate, including
any partnership or joint venture, nor purchase or hold beneficially any stock
or other securities or evidence of indebtedness of any other Person or
Affiliate, except:


 


(a)           Investments
in direct obligations of the United States of America or any agency or
instrumentality thereof whose obligations constitute full faith and credit
obligations of the United States of America having a maturity of one year or
less, commercial paper issued by U.S. 
corporations rated “A-1” or “A-2” by Standard & Poor’s Ratings
Services or “P-1” or “P-2” by Moody’s Investors Service or certificates of
deposit or bankers’ acceptances having a maturity of one year or less issued by
members of the Federal Reserve System having deposits in excess of $100,000,000
(which certificates of deposit or bankers’ acceptances are fully insured by the
Federal Deposit Insurance Corporation);


 


(b)           Travel
advances or loans to the Borrower’s Officers and employees not exceeding at any
one time an aggregate of $25,000;


 


(c)           Prepaid
rent not exceeding one month (except that, with respect to the Borrower’s
leases of Premises in Irvine, California and in Clearfield, Utah, prepaid rent
may not exceed two months) or security deposits, in each case, except as
approved by order of the Bankruptcy Court in the Bankruptcy Case; and


 


(d)           Current
investments in the Subsidiaries in existence on the date hereof and listed in Schedule 5.5
hereto.


 


Section 6.7             Dividends
and Distributions.  The Borrower will not declare or pay any
dividends (other than dividends payable solely in stock of the Borrower) on any
class of its stock, or make any payment on account of the purchase, redemption
or other retirement of any shares of such stock, or other securities or
evidence of its indebtedness or make any distribution in respect thereof,
either directly or indirectly, without the prior written consent of the Lender.


 


Section 6.8             Salaries.  The Borrower will not pay excessive or
unreasonable salaries, bonuses, commissions, consultant fees or other
compensation.


 


Section 6.9             Books
and Records; Collateral Examination, Inspection and Appraisals.


 


(a)           The Borrower will keep accurate books
of record and account for itself pertaining to the Collateral and pertaining to
the Borrower’s business and financial condition and such other matters as the
Lender may from time to time request in which true and complete entries will be
made in accordance with GAAP and, upon the Lender’s request, and at


 


32





















 


Borrower’s expense,  will permit
any officer, employee, attorney, accountant or other agent of the Lender to
audit, review, make extracts from or copy any and all company and financial
books and records of the Borrower at all times during ordinary business hours,
to send and discuss with account debtors and other obligors requests for
verification of amounts owed to the Borrower, and to discuss the Borrower’s
affairs with any of its Directors, Officers, employees or agents.


 


(b)           The Borrower hereby irrevocably
authorizes all accountants and third parties to disclose and deliver to the
Lender or its designated agent, at the Borrower’s expense, all financial
information, books and records, work papers, management reports and other
information in their possession regarding the Borrower.


 


(c)           The Borrower will permit the Lender
or its employees, accountants, attorneys or agents, to examine and inspect any
Collateral or any other property of the Borrower at any time during ordinary
business hours.


 


(d)           The Lender may also, from time to
time, no more than one time each calendar year, obtain at the Borrower’s
expense an appraisal of Inventory and Equipment by an appraiser acceptable to
the Lender in its sole discretion; provided that if at any time an Event
of Default has occurred and is continuing, the Lender may obtain at the
Borrower’s expense as many appraisals of Inventory and Equipment as the Lender
deems appropriate in its sole discretion.


 


Section 6.10           Account
Verification.  


 


(a)           The Lender or its agent may at any
time and from time to time send or require the Borrower to send requests for
verification of accounts or notices of assignment to account debtors and other
obligors.  The Lender or its agent may
also at any time and from time to time telephone account debtors and other
obligors to verify accounts.


 


(b)           The Borrower shall pay when due each
account payable due to a Person holding a Permitted Lien (as a result of such
payable) on any Collateral.


 


Section 6.11           Compliance
with Laws.


 


(a)           The Borrower shall (i) comply
with the requirements of applicable laws and regulations, the non-compliance
with which would materially and adversely affect its business or its financial
condition and (ii) use and keep the Collateral, and require that others
use and keep the Collateral, only for lawful purposes, without violation of any
federal, state or local law, statute or ordinance.


 


(b)           Without limiting the foregoing
undertakings, the Borrower specifically agrees that it will comply with all
applicable Environmental Laws and obtain and comply with all permits, licenses
and similar approvals required by any Environmental Laws, and will not
generate, use, transport, treat, store or dispose of any Hazardous Substances
in such a manner as to create any material liability or obligation under the
common law of any jurisdiction or any Environmental Law.


 


33





















 


(c)           The Borrower shall (i) ensure that no Owner shall be listed on the
Specially Designated Nationals and Blocked Person List or other similar lists
maintained by the Office of Foreign Assets Control (“OFAC”), the Department of
the Treasury or included in any Executive Orders, (ii) not use or permit
the use of the proceeds of the Credit Facility or any other financial
accommodation from the Lender to violate any of the foreign asset control
regulations of OFAC or other applicable law, (iii) comply with all
applicable Bank Secrecy Act laws and regulations, as amended from time to time,
and (iv) otherwise comply with the USA Patriot Act as required by federal
law and the Lender’s policies and practices.


 


Section 6.12           Payment
of Taxes and Other Claims.  The
Borrower will pay or discharge, when due, (a) all taxes, assessments and
governmental charges levied or imposed upon it or upon its income or profits,
upon any properties belonging to it (including the Collateral) or upon or
against the creation, perfection or continuance of the Security Interest, prior
to the date on which penalties attach thereto, (b) all federal, state and
local taxes required to be withheld by it, and (c) all lawful claims for
labor, materials and supplies which, if unpaid, might by law become a Lien upon
any properties of the Borrower; provided, that the Borrower shall not be
required to pay any such tax, assessment, charge or claim whose amount,
applicability or validity is being contested in good faith by appropriate
proceedings and for which proper reserves have been made.


 


Section 6.13           Maintenance
of Properties.


 


(a)           The Borrower will keep and maintain
the Collateral and all of its other properties necessary or useful in its
business in good condition, repair and working order (normal wear and tear
excepted) and will from time to time replace or repair any worn, defective or
broken parts; provided, however, that nothing in this covenant
shall prevent the Borrower from discontinuing the operation and maintenance of
any of its properties if such discontinuance is, in the Borrower’s judgment,
desirable in the conduct of the Borrower’s business and not disadvantageous in
any material respect to the Lender.  The
Borrower will take all commercially reasonable steps necessary to protect and
maintain its Intellectual Property Rights.


 


(b)           The Borrower will defend the
Collateral against all Liens, claims or demands of all Persons (other than
Wells Fargo) claiming the Collateral or any interest therein.  The Borrower will keep all Collateral free
and clear of all Liens except Permitted Liens. 
The Borrower will take all commercially reasonable steps necessary to
prosecute any Person Infringing its Intellectual Property Rights and to defend
itself against any Person accusing it of Infringing any Person’s Intellectual
Property Rights.


 


Section 6.14           Insurance.  The Borrower will obtain and at all times
maintain insurance with insurers acceptable to the Lender, in such amounts, on
such terms (including any deductibles) and against such risks as may from time
to time be required by the Lender, but in all events in such amounts and
against such risks as is usually carried by companies engaged in similar
business and owning similar properties in the same general areas in which the
Borrower operates.  Without limiting the
generality of the foregoing, the Borrower will at all times maintain business
interruption insurance and keep all tangible Collateral insured against risks
of


 


34





















 


fire (including so-called
extended coverage), theft, collision (for Collateral consisting of motor
vehicles) and such other risks and in such amounts as the Lender may reasonably
request, with any loss payable to the Lender to the extent of its interest, and
all policies of such insurance shall contain a lender’s loss payable
endorsement for the Lender’s benefit, in form and substance satisfactory to
Lender.  All policies of liability
insurance required hereunder shall name the Lender as an additional insured.


 


Section 6.15           Preservation
of Existence.  The Borrower will
preserve and maintain its existence and all of its rights, privileges and
franchises necessary or desirable in the normal conduct of its business and
shall conduct its business in an orderly, efficient and regular manner.


 


Section 6.16           Delivery
of Instruments, etc.  Upon request by
the Lender, the Borrower will promptly deliver to the Lender in pledge all
instruments, documents and chattel paper constituting Collateral, duly endorsed
or assigned by the Borrower.


 


Section 6.17           Sale
or Transfer of Assets; Suspension of Business Operations.  The Borrower will not sell, lease, assign,
transfer or otherwise dispose of (i) the stock of any Subsidiary, (ii) all
or a substantial part of its assets, or (iii) any Collateral or any
interest therein (whether in one transaction or in a series of transactions) to
any other Person other than the sale of Inventory in the ordinary course of
business and will not liquidate, dissolve or suspend business operations.  The Borrower will not transfer any part of
its ownership interest in any Intellectual Property Rights and will not permit
any agreement under which it has licensed Licensed Intellectual Property to
lapse.  If the Borrower transfers any
Intellectual Property Rights with the written consent of the Lender for value,
then Borrower will pay over the proceeds to the Lender for application to the
Obligations.  The Borrower will not
license any other Person to use any of the Borrower’s Intellectual Property
Rights.


 


Section 6.18           Consolidation
and Merger; Asset Acquisitions.  The
Borrower will not consolidate with or merge into any Person, or permit any
other Person to merge into it, or acquire (in a transaction analogous in
purpose or effect to a consolidation or merger) all or substantially all the
assets of any other Person.


 


Section 6.19           Sale
and Leaseback.  The Borrower will not
enter into any arrangement, directly or indirectly, with any other Person
whereby the Borrower shall sell or transfer any real or personal property,
whether now owned or hereafter acquired, and then or thereafter rent or lease
as lessee such property or any part thereof or any other property which the
Borrower intends to use for substantially the same purpose or purposes as the
property being sold or transferred.


 


Section 6.20           Restrictions
on Nature of Business.  The Borrower
will not engage in any line of business materially different from that
presently engaged in by the Borrower and will not purchase, lease or otherwise
acquire assets not related to its business.


 


35





















 


Section 6.21           Accounting.  The Borrower will not adopt any material
change in accounting principles other than as required by GAAP.  The Borrower will not adopt, permit or
consent to any change in its fiscal year.


 


Section 6.22           Discounts, etc.  After the occurrence and during the
continuation of an Event of Default, after notice from the Lender, the Borrower
will not grant any discount, credit or allowance to any customer of the
Borrower or accept any return of goods sold. 
Prior to the occurrence of an Event of Default, the Borrower will not
grant any discount, credit or allowance to any customer of the Borrower or
accept any return of goods sold except in the ordinary course of Borrower’s
business in accordance with past practices of the Borrower.  The Borrower will not at any time modify,
amend, subordinate, cancel or terminate the obligation of any account debtor or
other obligor of the Borrower.


 


Section 6.23           Plans.  Unless disclosed to the Lender pursuant to Section 5.12,
neither the Borrower nor any ERISA Affiliate will (i) adopt, create,
assume or become a party to any Pension Plan, (ii) incur any obligation to
contribute to any Multiemployer Plan, (iii) incur any obligation to
provide post-retirement medical or insurance benefits with respect to employees
or former employees (other than benefits required by law) or (iv) amend
any Plan in a manner that would materially increase its funding obligations.


 


Section 6.24           Place
of Business; Name.  The Borrower will
not transfer its chief executive office or principal place of business, or
move, relocate, close or sell any business location.  The Borrower will not permit any tangible
Collateral or any records pertaining to the Collateral to be located in any
state or area in which, in the event of such location, a financing statement
covering such Collateral would be required to be, but has not in fact been,
filed in order to perfect the Security Interest.  The Borrower will not change its name or
jurisdiction of organization other than conversion into a Delaware corporation
pursuant to the terms of an Approved Plan of Reorganization confirmed by the
Bankruptcy Court.


 


Section 6.25           Constituent
Documents; S Corporation Status.  The
Borrower will not amend its Constituent Documents.  The Borrower will not become an
S Corporation.


 


Section 6.26           Performance
by the Lender.  If the Borrower at
any time fails to perform or observe any of the foregoing covenants contained
in this Article VI or elsewhere herein, and if such failure shall continue
for a period of ten calendar days after the Lender gives the Borrower written
notice thereof (or in the case of the agreements contained in Section 6.13
and Section 6.15, immediately upon the occurrence of such failure, without
notice or lapse of time), the Lender may, but need not, perform or observe such
covenant on behalf and in the name, place and stead of the Borrower (or, at the
Lender’s option, in the Lender’s name) and may, but need not, take any and all
other actions which the Lender may reasonably deem necessary to cure or correct
such failure (including the payment of taxes, the satisfaction of Liens, the
performance of obligations owed to account debtors or other obligors, the
procurement and maintenance of insurance, the execution of assignments, security
agreements and financing statements, and the endorsement of instruments); and
the Borrower shall thereupon pay to the Lender on demand the amount of all
monies expended and all costs and expenses (including reasonable attorneys’
fees


 


36





















 


and legal expenses) incurred by
the Lender in connection with or as a result of the performance or observance
of such agreements or the taking of such action by the Lender, together with
interest thereon from the date expended or incurred at the Default Rate.  To facilitate the Lender’s performance or
observance of such covenants of the Borrower, the Borrower hereby irrevocably
appoints the Lender, or the Lender’s delegate, acting alone, as the Borrower’s
attorney in fact (which appointment is coupled with an interest) with the right
(but not the duty) from time to time to create, prepare, complete, execute,
deliver, endorse or file in the name and on behalf of the Borrower any and all
instruments, documents, assignments, security agreements, financing statements,
applications for insurance and other agreements and writings required to be
obtained, executed, delivered or endorsed by the Borrower hereunder.


 


Section 6.27           Amendment
of Wells Fargo Credit Facility.  The
Borrower shall not amend, modify, or revise any term or provision of the Wells
Fargo Credit Agreement without the prior written consent of Lender.


 


Section 6.28           Termination
of Wells Fargo Credit Facility.  Subject
to Sections 2.7(b) and 2.13 of the Wells Fargo Credit Agreement, the
Borrower shall not terminate, repay, or refinance the Wells Fargo Credit
Facility until it has contemporaneously paid to Lender the outstanding
principal balance of the Term Note.


 


Section 6.29           Information
for Exit Financing.  The Borrower
shall deliver to the Lender any information requested by the Lender which is
necessary for setting financial covenants for the Exit Financing.


 


ARTICLE VII.



EVENTS OF DEFAULT, RIGHTS AND REMEDIES


 


Section 7.1             Events of Default.  “Event of Default”, wherever used herein,
means any one of the following events:


 


(a)           Default
in the payment of any Obligations when they become due and payable;


 


(b)           Default
in the performance, or breach, of any covenant or agreement of the Borrower
contained in this Agreement or any Loan Document;


 


(c)           A
Change of Control shall occur;


 


(d)           Any
Financial Covenant shall become inapplicable due to the lapse of time and the
failure to amend any such covenant to cover future periods;


 


(e)           Other
than in connection with the Bankruptcy Case, the Borrower shall admit in
writing its or his inability to pay its or his debts as they mature, or make an
assignment for the benefit of creditors; or the Borrower shall apply for or
consent to the appointment of any receiver, trustee, or similar officer for it
or him or for all or any


 


37





















 


substantial part of its or his property; or such receiver, trustee or
similar officer shall be appointed without the application or consent of the
Borrower; or any judgment, writ, warrant of attachment or execution or similar
process shall be issued or levied against a substantial part of the property of
the Borrower;


 


(f)            Any
Event of Default under the Final Financing Order;


 


(g)           Any
representation or warranty made by the Borrower in this Agreement, by any
guarantor in any guaranty delivered to the Lender, or by the Borrower (or any
of its Officers) or any guarantor in any agreement, certificate, instrument or
financial statement or other statement contemplated by or made or delivered
pursuant to or in connection with this Agreement or any such guaranty shall
prove to have been incorrect in any material respect when deemed to be
effective;


 


(h)           The
rendering against the Borrower of an arbitration award, final judgment, decree
or order for the payment of money in excess of $50,000 and the continuance of
such arbitration award, judgment, decree or order unsatisfied and in effect for
any period of 30 consecutive days without a stay of execution (it being
understood that an order of the Bankruptcy Court in the Bankruptcy Case
allowing a pre-petition claim shall not be an Event of Default under this subsection 7.1(h));


 


(i)            A
default under any bond, debenture, note or other evidence of material
indebtedness of the Borrower incurred after the Filing Date to any Person other
than the Lender (including, without limitation, the Wells Fargo Credit Facility
and without regard to any waiver granted by Wells Fargo to Borrower
thereunder), or under any indenture or other instrument under which any such
evidence of indebtedness has been issued or by which it is governed, or under
any material lease or other contract incurred after the Filing Date, and the
expiration of the applicable period of grace, if any, specified in such
evidence of indebtedness, indenture, other instrument, lease or contract;


 


(j)            Any
Reportable Event, which the Lender determines in good faith might constitute
grounds for the termination of any Pension Plan or for the appointment by the
appropriate United States District Court of a trustee to administer any Pension
Plan, shall have occurred and be continuing 30 days after written notice
to such effect shall have been given to the Borrower by the Lender; or a
trustee shall have been appointed by an appropriate United States District
Court to administer any Pension Plan; or the Pension Benefit Guaranty
Corporation shall have instituted proceedings to terminate any Pension Plan or
to appoint a trustee to administer any Pension Plan; or the Borrower or any
ERISA Affiliate shall have filed for a distress termination of any Pension Plan
under Title IV of ERISA; or the Borrower or any ERISA Affiliate shall have
failed to make any quarterly contribution required with respect to any Pension
Plan under Section 412(m) of the IRC, which the Lender determines in good
faith may by itself, or in combination with any such failures that the Lender
may determine are likely to occur in the future, result in the imposition of a
Lien on the Borrower’s assets in favor of the Pension Plan; or any withdrawal,
partial withdrawal, reorganization or other event occurs with respect to a


 


38





















 


Multiemployer Plan which results or could reasonably be expected to
result in a material liability of the Borrower to the Multiemployer Plan under
Title IV of ERISA;


 


(k)           An
event of default shall occur under any Security Document;


 


(l)            The
Borrower shall liquidate, dissolve, terminate or suspend its business
operations or otherwise fail to operate its business in the ordinary course,
merge with another Person unless the Borrower is the surviving entity; or sell
or attempt to sell all or substantially all of its assets, without the Lender’s
prior written consent;


 


(m)          Default
in the payment of any amount owed by the Borrower to the Lender other than any
indebtedness arising hereunder;


 


(n)           Any
guarantor (if any) shall repudiate, purport to revoke or fail to perform any
obligation under such guaranty in favor of the Lender;


 


(o)           The
Borrower shall take or participate in any action which would be prohibited
under the provisions of the Intercreditor Agreement;


 


(p)           Any
event or circumstance with respect to the Borrower shall occur such that the
Lender shall believe in good faith that the prospect of payment of all or any
part of the Obligations or the performance by the Borrower under the Loan
Documents is impaired or any material adverse change in the business or
financial condition of the Borrower shall occur;


 


(q)           Any
breach, default or event of default by or attributable to any Affiliate under
any agreement between such Affiliate and the Lender shall occur;


 


(r)            The
indictment of any Director, Officer, guarantor (if any), or any Owner of at
least 20% of the issued and outstanding common stock of the Borrower for a felony
offence under state or federal law;


 


(i)            any
challenge by or on behalf of the Borrower to the validity of any Loan Document
or the applicability or enforceability of any Loan Document strictly in
accordance with the subject Loan Document’s terms or which seeks to void,
avoid, limit, or otherwise adversely affect any security interest created by or
in any Loan Document or any payment made pursuant thereto.


 


(ii)           any
challenge by or on behalf of any other Person to the validity of any Loan
Document or the applicability or enforceability of any Loan Document strictly
in accordance with the subject Loan Document’s terms or which seeks to void,
avoid, limit, or otherwise adversely affect any security interest created by or
in any Loan Document or any payment made pursuant thereto, in each case, as to
which an order or judgment has been entered adverse to the Lender.


 


39





















 


(iii)          any
Lien purported to be created under any Security Document shall cease to be, or
shall be asserted by the Borrower not to be, a valid and perfected Lien on any
Collateral, with the priority required by the applicable Security Document,
except as a result of the sale or other disposition of the applicable
Collateral in a transaction permitted under the Loan Documents;


 


(s)           Except
as permitted under Section 6.17 hereof, the determination by the Borrower
to suspend the operation of the Borrower’s business in the ordinary course,
liquidate all or a material portion of the Borrower’s assets or store
locations, or employ an agent or other third party to conduct any so-called
store closing, store liquidation or “Going-Out-Of-Business” sales; or


 


(t)            The
entry of an order confirming a plan of reorganization other than an Approved
Plan of Reorganization that does not require repayment in full of all
Obligations on the effective date of such plan of reorganization.


 


Section 7.2             Rights
and Remedies.  During any Default
Period, the Lender may exercise any or all of the following rights and
remedies:


 


(a)           The
Lender may, by notice to the Borrower, declare the Commitment to be terminated,
whereupon the same shall forthwith terminate;


 


(b)           The
Lender may, by notice to the Borrower, declare the Obligations to be forthwith
due and payable, whereupon all Obligations shall become and be forthwith due
and payable, without presentment, notice of dishonor, protest or further notice
of any kind, all of which the Borrower hereby expressly waives;


 


(c)           The
Lender may, without notice to the Borrower and without further action, apply
any and all money owing by the Lender to the Borrower to the payment of the
Obligations;


 


(d)           The
Lender may exercise and enforce any and all rights and remedies available upon
default to a secured party under the UCC, including the right to take
possession of Collateral, or any evidence thereof, proceeding without judicial
process or by judicial process (subject only to the notice requirements of the
Final Financing Order, to which the Borrower hereby expressly agrees) and the
right to sell, lease or otherwise dispose of any or all of the Collateral (with
or without giving any warranties as to the Collateral, title to the Collateral
or similar warranties), and, in connection therewith, the Borrower will on
demand assemble the Collateral and make it available to the Lender at a place
to be designated by the Lender which is reasonably convenient to both parties;


 


(e)           The
Lender may exercise and enforce its rights and remedies under the Loan
Documents or the Final Financing Order;


 


(f)            The
Lender may without regard to any waste, adequacy of the security or solvency of
the Borrower, apply for the appointment of a receiver of the Collateral, to


 


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which appointment the Borrower hereby consents, whether or not
foreclosure proceedings have been commenced under the Security Documents and
whether or not a foreclosure sale has occurred; and


 


(g)           The
Lender may exercise any other rights and remedies available to it by law or
agreement, subject to the terms of the Final Financing Order.


 


Notwithstanding
the foregoing, upon the occurrence of an Event of Default described in Section 7.1(e) or
(f), the Obligations shall be immediately due and payable automatically without
presentment, demand, protest or notice of any kind.  If the Lender sells any of the Collateral on
credit, the Obligations will be reduced only to the extent of payments actually
received.  If the purchaser fails to pay for
the Collateral, the Lender may resell the Collateral and shall apply any proceeds
actually received to the Obligations.


 


Section 7.3             Certain Notices.  If notice to the Borrower of any intended
disposition of Collateral or any other intended action is required by law in a
particular instance, such notice shall be deemed commercially reasonable if
given (in the manner specified in Section 8.3) at least ten calendar days
before the date of intended disposition or other action.


 


ARTICLE VIII.


 


MISCELLANEOUS


 


Section 8.1             No
Waiver; Cumulative Remedies; Compliance with Laws.  No failure or delay by the Lender in
exercising any right, power or remedy under the Loan Documents shall operate as
a waiver thereof; nor shall any single or partial exercise of any such right,
power or remedy preclude any other or further exercise thereof or the exercise
of any other right, power or remedy under the Loan Documents.  The remedies provided in the Loan Documents
are cumulative and not exclusive of any remedies provided by law.  The Lender may comply with any applicable
state or federal law requirements in connection with a disposition of the
Collateral and such compliance will not be considered adversely to affect the
commercial reasonableness of any sale of the Collateral.


 


Section 8.2             Amendments, Etc.  No amendment, modification, termination or
waiver of any provision of any Loan Document or consent to any departure by the
Borrower therefrom or any release of a Security Interest shall be effective
unless the same shall be in writing and signed by the Lender, and then such
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given.  No
notice to or demand on the Borrower in any case shall entitle the Borrower to
any other or further notice or demand in similar or other circumstances.


 


Section 8.3             Notices;
Communication of Confidential Information; Requests for Accounting.  Except as otherwise expressly provided
herein, all notices, requests, demands and other communications provided for
under the Loan Documents shall be in writing and shall be (a) personally
delivered, (b) sent by first class United States mail, (c) sent by
overnight courier of


 


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national reputation, (d) transmitted
by telecopy, or (e) sent as electronic mail, in each case delivered or
sent to the party to whom notice is being given to the business address,
telecopier number, or e mail address set forth below next to its signature or,
as to each party, at such other business address, telecopier number, or e mail
address as it may hereafter designate in writing to the other party pursuant to
the terms of this Section.  All such
notices, requests, demands and other communications shall be deemed to be an
authenticated record communicated or given on (a) the date received if
personally delivered, (b) when deposited in the mail if delivered by mail,
(c) the date delivered to the courier if delivered by overnight courier,
or (d) the date of transmission if sent by telecopy or by e mail, except
that notices or requests delivered to the Lender pursuant to any of the
provisions of Article II shall not be effective until received by the
Lender.  All notices, financial
information, or other business records sent by either party to this Agreement
may be transmitted, sent, or otherwise communicated via such medium as the
sending party may deem appropriate and commercially reasonable; provided,
however, that the risk that the confidentiality or privacy of such notices,
financial information, or other business records sent by either party may be
compromised shall be borne exclusively by the Borrower.  All requests for an accounting under Section 9-210
of the UCC (i) shall be made in a writing signed by an Officer of the
Borrower, (ii) shall be personally delivered, sent by registered or
certified mail, return receipt requested, or by overnight courier of national
reputation, (iii) shall be deemed to be sent when received by the Lender
and (iv) shall otherwise comply with the requirements of Section 9-210.  The Borrower requests that the Lender respond
to all such requests which on their face appear to come from an authorized
individual and releases the Lender from any liability for so responding.  The Borrower shall pay the Lender the maximum
amount allowed by law for responding to such requests.


 


Section 8.4             Further Documents.  The Borrower will from time to time execute,
deliver, endorse and authorize the filing of any and all instruments,
documents, conveyances, assignments, security agreements, financing statements,
control agreements and other agreements and writings that the Lender may
reasonably request in order to secure, protect, perfect or enforce the Security
Interest or the Lender’s rights under the Loan Documents (but any failure to
request or assure that the Borrower executes, delivers, endorses or authorizes
the filing of any such item shall not affect or impair the validity,
sufficiency or enforceability of the Loan Documents and the Security Interest,
regardless of whether any such item was or was not executed, delivered or
endorsed in a similar context or on a prior occasion).


 


Section 8.5             Costs and Expenses.  The Borrower shall pay on demand all costs
and expenses, including without limitation reasonable attorneys’ fees and
Lender’s travel expense, incurred by the Lender in connection with the
Obligations, this Agreement, the Loan Documents, and any other document or
agreement related hereto or thereto, and the transactions contemplated hereby,
including all such costs, expenses and fees incurred in connection with the
negotiation, preparation, execution, amendment, administration, performance,
collection and enforcement of the Obligations and all such documents and
agreements and the creation, perfection, protection, satisfaction, foreclosure
or enforcement of the Security Interest.


 


Section 8.6             Indemnity.  In addition to the payment of expenses
pursuant to Section 8.6, the Borrower shall indemnify, defend and hold
harmless the Lender, and any of its


 


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participants, parent
corporations, subsidiary corporations, affiliated corporations, successor
corporations, and all present and future officers, directors, employees,
attorneys and agents of the foregoing (the “Indemnitees”) from and against any
of the following (collectively, “Indemnified Liabilities”):


 


(i)            Any and all transfer taxes, documentary taxes,
assessments or charges made by any governmental authority by reason of the
execution and delivery of the Loan Documents or the making of the Term Advance;


 


(ii)           Any claims, loss or damage to which any Indemnitee may be
subjected if any representation or warranty contained in Section 5.14
proves to be incorrect in any respect or as a result of any violation of the
covenant contained in Section 6.11(b); and


 


(iii)          Any and all other liabilities, losses, damages, penalties,
judgments, suits, claims, costs and expenses of any kind or nature whatsoever
(including the reasonable fees and disbursements of counsel) in connection with
the foregoing and any other investigative, administrative or judicial proceedings,
whether or not such Indemnitee shall be designated a party thereto, which may
be imposed on, incurred by or asserted against any such Indemnitee, in any
manner related to or arising out of or in connection with the making of the
Term Advance and the Loan Documents or the use or intended use of the proceeds
of the Term Advance.


 


If any
investigative, judicial or administrative proceeding arising from any of the
foregoing is brought against any Indemnitee, upon such Indemnitee’s request,
the Borrower, or counsel designated by the Borrower and satisfactory to the
Indemnitee, will resist and defend such action, suit or proceeding to the
extent and in the manner directed by the Indemnitee, at the Borrower’s sole
costs and expense.  Each Indemnitee will
use its best efforts to cooperate in the defense of any such action, suit or
proceeding.  If the foregoing undertaking
to indemnify, defend and hold harmless may be held to be unenforceable because
it violates any law or public policy, the Borrower shall nevertheless make the
maximum contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law.  The Borrower’s obligation under this Section 8.6
shall survive the termination of this Agreement and the discharge of the
Borrower’s other obligations hereunder.


 


Section 8.7             Participants.  The Lender and its participants, if any, are
not partners or joint venturers, and the Lender shall not have any liability or
responsibility for any obligation, act or omission of any of its
participants.  All rights and powers
specifically conferred upon the Lender may be transferred or delegated to any
of the Lender’s participants, successors or assigns.


 


Section 8.8             Execution
in Counterparts; Telefacsimile Execution. 
This Agreement and other Loan Documents may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed to
be an original and all of which counterparts, taken together, shall constitute
but one and the same instrument. 
Delivery of an executed counterpart of this Agreement by telefacsimile
shall be equally as effective as delivery of an original


 


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executed counterpart of this
Agreement.  Any party delivering an executed
counterpart of this Agreement by telefacsimile also shall deliver an original
executed counterpart of this Agreement but the failure to deliver an original
executed counterpart shall not affect the validity, enforceability, and binding
effect of this Agreement.


 


Section 8.9             Retention
of Borrower’s Records.  The Lender
shall have no obligation to maintain any electronic records or any documents,
schedules, invoices, agings, or other papers delivered to the Lender by the
Borrower or in connection with the Loan Documents for more than 30 days after
receipt by the Lender.  If there is a
special need to retain specific records, the Borrower must inform the Lender of
its need to retain those records with particularity, which must be delivered in
accordance with the notice provisions of Section 8.3 within 30 days of the
Lender taking control of same.


 


Section 8.10           Binding
Effect; Assignment; Complete Agreement; Sharing Information.  The Loan Documents shall be binding upon and
inure to the benefit of the Borrower and the Lender and their respective
successors and assigns, except that the Borrower shall not have the right to
assign its rights thereunder or any interest therein without the Lender’s prior
written consent.  To the extent permitted
by law, the Borrower waives and will not assert against any assignee any
claims, defenses or set-offs which the Borrower could assert against the
Lender.  This Agreement shall also bind
all Persons who become a party to this Agreement as a borrower.  This Agreement, together with the Loan
Documents, comprises the complete and integrated agreement of the parties on
the subject matter hereof and supersedes all prior agreements, written or oral,
on the subject matter hereof.  To the extent
that any provision of this Agreement contradicts other provisions of the Loan
Documents, this Agreement shall control. Without limiting the Lender’s right to
share information regarding the Borrower and its Affiliates with the Lender’s
participants, accountants, lawyers and other advisors, the Lender may share any
and all information they may have in their possession regarding the Borrower
and its Affiliates, and the Borrower waives any right of confidentiality it may
have with respect to such sharing of information.


 


Section 8.11           Severability
of Provisions.  Any provision of this
Agreement which is prohibited or unenforceable shall be ineffective to the
extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof.


 


Section 8.12           Headings.  Article, Section and subsection headings
in this Agreement are included herein for convenience of reference only and
shall not constitute a part of this Agreement for any other purpose.


 


Section 8.13           Governing
Law; Jurisdiction, Venue.  The Loan
Documents shall be governed by and construed in accordance with the substantive
laws (other than conflict laws) of the State of New York.  The parties hereto hereby (i) consent to
the Bankruptcy Court having jurisdiction over the Bankruptcy Case in connection
with any controversy related to this Agreement; (ii) waive any argument
that venue in any such forum is not convenient; (iii) agree that any
litigation initiated by the Lender or the Borrower in connection with this
Agreement or the other Loan Documents may be venued in the Bankruptcy Court
having jurisdiction over the


 


44





















 


Bankruptcy Case; and (iv) agree
that a final judgment in any such suit, action or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on the judgment
or in any other manner provided by law.


 


Section 8.14           Exit Financing.  The Lender agrees that it shall provide the
Exit Financing conditioned upon (i) confirmation by the Bankruptcy Court
and the effective date of an Approved Plan of Reorganization (ii) the
satisfaction of conditions and with the terms set forth in the Exit Financing
Commitment Letter attached hereto as Exhibit D and (iii) the
satisfaction of the conditions for the extension or amendment of the Wells
Fargo Credit Facility in accordance with Wells Fargo’s commitment letter in the
form approved by Lender.  This document
does not supercede the terms and conditions of the Commitment Letter with
respect to the Exit Financing.


 


Section 8.15           WAIVER
OF JURY TRIAL.


 


EACH PARTY HERETO
HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT TO
A JURY IN ANY TRIAL OF ANY CASE OR CONTROVERSY IN WHICH THE BORROWER OR THE
LENDER OR ANY PARTICIPANT  IS OR BECOMES
A PARTY (WHETHER SUCH CASE OR CONTROVERSY IS INITIATED BY OR AGAINST THE
BORROWER OR THE LENDER OR PARTICIPANT OR IN WHICH THE BORROWER OR THE LENDER OR
PARTICIPANT, IS JOINED AS A PARTY LITIGANT), WHICH CASE OR CONTROVERSY ARISES
OUT OF OR IS IN RESPECT OF, ANY RELATIONSHIP AMONGST OR BETWEEN THE BORROWER OR
ANY OTHER PERSON AND THE LENDER OR PARTICIPANT. EACH PARTY HERETO (A) CERTIFIES
THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED,
EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF
LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT
IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT
BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.


 


Section 8.16           Publicity


 


The Lender may
issue a “tombstone” notice of the establishment of the credit facility
contemplated by this Agreement and may make reference to the Borrower (and may
utilize any logo or other distinctive symbol associated with the Borrower) in
connection with any advertising, promotion, or marketing undertaken by the
Lender.  The Borrower shall furnish to
the Lender copies of any press release or public announcement regarding this
Agreement or the transactions contemplated hereby prior to it being issued,
which press release or public announcement must be acceptable to the Lender in
its reasonable discretion.


 


Section 8.17           Intercreditor
Agreement(a)    .


 


The Borrower
and the Lender each acknowledge that the exercise of certain of the Lender’s
rights and remedies may be subject to, and restricted by, the provisions of the


 


45





















 


Intercreditor Agreement.  Except as specified herein, nothing contained
in the Intercreditor Agreement shall be deemed to modify any of the provisions
of this Agreement and the other Loan Documents, which, as among the Borrower
and the Lender shall remain in full force and effect.


 


 


[Remainder of page intentionally left blank.]


 


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IN WITNESS
WHEREOF, the parties hereto have caused this Agreement to be executed by their
respective officers thereunto duly authorized as of the date first above
written.


 


	
   

  	
  GARDENBURGER, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Scott C.
  Wallace

  
	
   

  	
   

  
	
   

  	
  Its

  	
  President
  and Chief Executive Officer

  
	
   

  	
   

  
	
   

  	
  GB RETAIL FUNDING, LLC

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Lawrence
  Klaff

  
	
   

  	
   

  
	
   

  	
  Its:

  	
  Managing
  Director

  
						



 


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