Document:

Exhibit 10.10

 

INDEMNITY AGREEMENT

 

This Indemnity Agreement,
dated as of           , 2005, is
made by and between MSO Holdings, Inc., a Delaware corporation (the “Company”),
and                
(the “Indemnitee”).

 

RECITALS

 

A.                                   The Company is aware that competent and
experienced persons are increasingly reluctant to serve as directors, officers
or agents of corporations unless they are protected by comprehensive liability
insurance or indemnification, due to increased exposure to litigation costs and
risks resulting from their service to such corporations, and due to the fact
that the exposure frequently bears no reasonable relationship to the
compensation of such directors, officers and other agents.

 

B.                                     The statutes and judicial decisions regarding
the duties of directors and officers are often difficult to apply, ambiguous,
or conflicting, and therefore fail to provide such directors, officers and
agents with adequate, reliable knowledge of legal risks to which they are
exposed or information regarding the proper course of action to take.

 

C.                                     Plaintiffs often seek damages in such large
amounts and the costs of litigation may be so enormous (whether or not the case
is meritorious), that the defense and/or settlement of such litigation is often
beyond the personal resources of directors, officers and other agents.

 

D.                                    The Company believes that it is unfair for
its directors, officers and agents and the directors, officers and agents of
its subsidiaries to assume the risk of huge judgments and other expenses which
may occur in cases in which the director, officer or agent received no personal
profit and in cases where the director, officer or agent was not culpable.

 

E.                                      The Company recognizes that the issues in
controversy in litigation against a director, officer or agent of a corporation
such as the Company or its subsidiaries are often related to the knowledge,
motives and intent of such director, officer or agent, that he is usually the
only witness with knowledge of the essential facts and exculpating circumstances
regarding such matters, and that the long period of time which usually elapses
before the trial or other disposition of such litigation often extends beyond
the time that the director, officer or agent can reasonably recall such
matters; and may extend beyond the normal time for retirement for such
director, officer or agent with the result that he, after retirement or in the
event of his death, his spouse, heirs, executors or administrators, may be
faced with limited ability and undue hardship in maintaining an adequate
defense, which may discourage such a director, officer or agent from serving in
that position.

 

F.                                      Based upon their experience as business
managers, the Board of Directors of the Company (the “Board”) has
concluded that, to retain and attract talented and experienced individuals to
serve as directors, officers and agents of the Company and its subsidiaries and
to encourage such individuals to take the business risks necessary for the
success of the Company and its subsidiaries, it is necessary for the Company to
contractually indemnify its directors, officers and agents and the directors,
officers and agents of its subsidiaries, and to assume for

 

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itself maximum liability for expenses and damages in connection with
claims against such directors, officers and agents in connection with their
service to the Company and its subsidiaries, and has further concluded that the
failure to provide such contractual indemnification could result in great harm
to the Company and its subsidiaries and the Company’s stockholders.

 

G.                                     Section 145 of the General Corporation
Law of Delaware, under which the Company is organized (“Section 145”),
empowers the Company to indemnify its directors, officers, employees and agents
by agreement and to indemnify persons who serve, at the request of the Company,
as the directors, officers, employees or agents of other corporations or
enterprises, and expressly provides that the indemnification provided by Section 145
is not exclusive.

 

H.                                    The Company desires and has requested the
Indemnitee to serve or continue to serve as a director, officer or agent of the
Company and/or one or more subsidiaries of the Company free from undue concern
for claims for damages arising out of or related to such services to the
Company and/or one or more subsidiaries of the Company.

 

I.                                         Indemnitee is willing to serve, or to
continue to serve, the Company and/or one or more subsidiaries of the Company,
provided that he is furnished the indemnity provided for herein.

 

AGREEMENT

 

NOW, THEREFORE, the parties
hereto, intending to be legally bound, hereby agree as follows:

 

1.                                       Definitions.

 

(a)                                  Agent.  For the purposes of this
Agreement, “agent” of the Company means any person who is or was a director,
officer, employee or other agent of the Company or a subsidiary of the Company;
or is or was serving at the request of, for the convenience of, or to represent
the interests of the Company or a subsidiary of the Company as a director,
officer, employee or agent of another foreign or domestic corporation,
partnership, joint venture, trust or other enterprise; or was a director,
officer, employee or agent of a foreign or domestic corporation which was a
predecessor corporation of the Company or a subsidiary of the Company, or was a
director, officer, employee or agent of another enterprise at the request of,
for the convenience of, or to represent the interests of such predecessor
corporation.

 

(b)                                 Expenses.  For purposes of this
Agreement, “expenses” include all out-of-pocket costs of any type or nature
whatsoever (including, without limitation, all attorneys’ fees and related
disbursements), actually and reasonably incurred by the Indemnitee in
connection with either the investigation, defense or appeal of a proceeding or
establishing or enforcing a right to indemnification under this Agreement or Section 145
or otherwise; provided, however, that “expenses” shall not include any
judgments.

 

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(c)                                  Proceeding.  For the purposes of this
Agreement, “proceeding” means any threatened, pending, or completed action,
suit or other proceeding, whether civil, criminal, administrative, or
investigative.

 

(d)                                 Subsidiary.  For purposes of this
Agreement, “subsidiary” means any corporation of which more than 50% of the
outstanding voting securities is owned directly or indirectly by the Company,
by the Company and one or more other subsidiaries, or by one or more other
subsidiaries.

 

2.                                       Agreement to Serve.  The
Indemnitee agrees to serve and/or continue to serve as agent of the Company, at
its will (or under separate agreement, if such agreement exists), in the
capacity Indemnitee currently serves as an agent of the Company, so long as he
is duly appointed or elected and qualified in accordance with the applicable
provisions of the Bylaws of the Company or any subsidiary of the Company or
until such time as he tenders his resignation in writing; provided, however,
that nothing contained in this Agreement is intended to create any right to
continued employment by Indemnitee.

 

3.                                       Liability Insurance.

 

(a)                                  Maintenance of D&O Insurance.  The
Company hereby covenants and agrees that, so long as the Indemnitee shall
continue to serve as an agent of the Company and thereafter so long as the
Indemnitee shall be subject to any possible proceeding by reason of the fact
that the Indemnitee was an agent of the Company, the Company, subject to Section 3(c),
shall promptly obtain and maintain in full force and effect directors’ and
officers’ liability insurance (“D&O Insurance”) in reasonable
amounts from established and reputable insurers.

 

(b)                                 Rights and Benefits.  In
all policies of D&O Insurance, the Indemnitee shall be named as an insured
in such a manner as to provide the Indemnitee the same rights and benefits as
are accorded to the most favorably insured of the Company’s directors, if the
Indemnitee is a director; or of the Company’s officers, if the Indemnitee is
not a director of the Company but is an officer; or of the Company’s key
employees, if the Indemnitee is not a director or officer but is a key
employee.

 

(c)                                  Limitation on Required Maintenance of D&O
Insurance.  Notwithstanding the foregoing, the Company
shall have no obligation to obtain or maintain D&O Insurance if the Company
determines in good faith that such insurance is not reasonably available, the
premium costs for such insurance are disproportionate to the amount of coverage
provided, the coverage provided by such insurance is limited by exclusions so
as to provide an insufficient benefit, or the Indemnitee is covered by similar
insurance maintained by a subsidiary of the Company.

 

4.                                       Mandatory Indemnification. 
Subject to Section 9 below, the Company shall indemnify the
Indemnitee as follows:

 

(a)                                  Successful Defense.  To
the extent the Indemnitee has been successful on the merits or otherwise in
defense of any proceeding (including, without limitation, an action by or in
the right of the Company) to which the Indemnitee was a party by reason of the
fact that he is or was an agent of the Company at any time, against all
expenses of any type whatsoever

 

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actually and reasonably incurred by him in connection with the
investigation, defense or appeal of such proceeding.

 

(b)                                 Third Party Actions.  If
the Indemnitee is a person who was or is a party or is threatened to be made a
party to any proceeding (other than an action by or in the right of the
Company) by reason of the fact that he is or was an agent of the Company, or by
reason of anything done or not done by him in any such capacity, the Company
shall indemnify the Indemnitee against any and all expenses and liabilities of
any type whatsoever (including, but not limited to, judgments, fines, ERISA
excise taxes and penalties, and amounts paid in settlement) actually and
reasonably incurred by him in connection with the investigation, defense,
settlement or appeal of such proceeding, provided the Indemnitee acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Company and its stockholders, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful.

 

(c)                                  Derivative Actions.  If
the Indemnitee is a person who was or is a party or is threatened to be made a
party to any proceeding by or in the right of the Company by reason of the fact
that he is or was an agent of the Company, or by reason of anything done or not
done by him in any such capacity, the Company shall indemnify the Indemnitee
against all expenses actually and reasonably incurred by him in connection with
the investigation, defense, settlement, or appeal of such proceeding, provided
the Indemnitee acted in good faith and in a manner he reasonably believed to be
in or not opposed to the best interests of the Company and its stockholders;
except that no indemnification under this subsection 4(c) shall be
made in respect to any claim, issue or matter as to which such person shall
have been finally adjudged to be liable to the Company by a court of competent
jurisdiction unless and only to the extent that the court in which such
proceeding was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such amounts
which the court shall deem proper.

 

(d)                                 Actions where Indemnitee is Deceased.  If
the Indemnitee is a person who was or is a party or is threatened to be made a
party to any proceeding by reason of the fact that he is or was an agent of the
Company, or by reason of anything done or not done by him in any such capacity,
and if prior to, during the pendency or after completion of such proceeding
Indemnitee becomes deceased, the Company shall indemnify the Indemnitee’s
heirs, executors and administrators against any and all expenses and
liabilities of any type whatsoever (including, but not limited to, judgments,
fines, ERISA excise taxes and penalties, and amounts paid in settlement)
actually and reasonably incurred to the extent Indemnitee would have been
entitled to indemnification pursuant to Sections 4(a), 4(b), or 4(c) above
were Indemnitee still alive.

 

(e)                                  Notwithstanding the foregoing, the Company
shall not be obligated to indemnify the Indemnitee for expenses or liabilities
of any type whatsoever (including, but not limited to, judgments, fines, ERISA
excise taxes and penalties, and amounts paid in settlement) for which payment
is actually made to or on behalf of Indemnitee under a valid and collectible
insurance policy of D&O Insurance, or under a valid and enforceable
indemnity clause, by-law or agreement.

 

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5.                                       Partial Indemnification.  If
the Indemnitee is entitled under any provision of this Agreement to
indemnification by the Company for some or a portion of any expenses or
liabilities of any type whatsoever (including, but not limited to, judgments,
fines, ERISA excise taxes and penalties, and amounts paid in settlement)
incurred by him in the investigation, defense, settlement or appeal of a
proceeding, but not entitled, however, to indemnification for all of the total
amount hereof, the Company shall nevertheless indemnify the Indemnitee for such
total amount except as to the portion hereof to which the Indemnitee is not
entitled.

 

6.                                       Mandatory Advancement of Expenses. 
Subject to Section 8(a) below, the Company shall advance all
expenses incurred by the Indemnitee in connection with the investigation,
defense, settlement or appeal of any proceeding to which the Indemnitee is a
party or is threatened to be made a party by reason of the fact that the
Indemnitee is or was an agent of the Company. 
Indemnitee hereby undertakes to repay such amounts advanced only if, and
to the extent that, it shall be determined ultimately that the Indemnitee is
not entitled to be indemnified by the Company as authorized hereby.  The advances to be made hereunder shall be
paid by the Company to the Indemnitee within twenty (20) days following
delivery of a written request therefor by the Indemnitee to the Company.  In the event that the Company fails to pay
expenses as incurred by the Indemnitee as required by this paragraph,
Indemnitee may seek mandatory injunctive relief from any court having
jurisdiction to require the Company to pay expenses as set forth in this
paragraph.  If Indemnitee seeks mandatory
injunctive relief pursuant to this paragraph, it shall not be a defense to
enforcement of the Company’s obligations set forth in this paragraph that
Indemnitee has an adequate remedy at law for damages.

 

7.                                       Notice and Other Indemnification Procedures.

 

(a)                                  Promptly after receipt by the Indemnitee of
notice of the commencement of or the threat of commencement of any proceeding,
the Indemnitee shall, if the Indemnitee believes that indemnification with
respect thereto may be sought from the Company under this Agreement, notify the
Company of the commencement or threat of commencement thereof.

 

(b)                                 If, at the time of the receipt of a notice of
the commencement of a proceeding pursuant to Section 7(a) hereof, the
Company has D&O Insurance in effect, the Company shall give prompt notice
of the commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies.  The Company shall thereafter take all
necessary or desirable action to cause such insurers to pay, on behalf of the
Indemnitee, all amounts payable as a result of such proceeding in accordance
with the terms of such policies.

 

(c)                                  In the event the Company shall be obligated
to pay the expenses of any proceeding against the Indemnitee, the Company, if
appropriate, shall be entitled to assume the defense of such proceeding, with
counsel approved by the Indemnitee, upon the delivery to the Indemnitee of
written notice of its election so to do. 
After delivery of such notice, approval of such counsel by the
Indemnitee and the retention of such counsel by the Company, the Company will
not be liable to the Indemnitee under this Agreement for any fees of counsel
subsequently incurred by the Indemnitee with respect to the same proceeding,
provided that (i) the Indemnitee shall have the right to employ his
counsel in any such proceeding at the Indemnitee’s expense; and (ii) if (A) the
employment of counsel by the Indemnitee has been previously authorized by

 

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the Company, (B) the Indemnitee shall have reasonably concluded
that there may be a conflict of interest between the Company and the Indemnitee
in the conduct of any such defense, or (C) the Company shall not, in fact,
have employed counsel to assume the defense of such proceeding, then the fees
and expenses of Indemnitee’s counsel shall be at the expense of the Company.

 

8.                                       Exceptions.  Any other provision herein to
the contrary notwithstanding, the Company shall not be obligated pursuant to
the terms of this Agreement:

 

(a)                                  Claims Initiated by Indemnitee.  To
indemnify or advance expenses to the Indemnitee with respect to proceedings or
claims initiated or brought voluntarily by the Indemnitee and not by way of
defense, unless (i) such indemnification is expressly required to be made
by law, (ii) the proceeding was authorized by the Board, (iii) such
indemnification is provided by the Company, in its sole discretion, pursuant to
the powers vested in the Company under the General Corporation Law of Delaware
or (iv) the proceeding is brought to establish or enforce a right to
indemnification under this Agreement or any other statute or law or otherwise
as required under Section 145;

 

(b)                                 Lack of Good Faith.  To
indemnify the Indemnitee for any expenses incurred by the Indemnitee with
respect to any proceeding instituted by the Indemnitee to enforce or interpret
this Agreement, if a court of competent jurisdiction determines that each of
the material assertions made by the Indemnitee in such proceeding was not made
in good faith or was frivolous; or

 

(c)                                  Unauthorized Settlements.  To
indemnify the Indemnitee under this Agreement for any amounts paid in
settlement of a proceeding unless the Company consents to such settlement,
which consent shall not be unreasonably withheld.

 

9.                                       Non-exclusivity.  The
provisions for indemnification and advancement of expenses set forth in this
Agreement shall not be deemed exclusive of any other rights which the
Indemnitee may have under any provision of law, the Company’s Certificate of
Incorporation or Bylaws, the vote of the Company’s stockholders or
disinterested directors, other agreements, or otherwise, both as to action in
his official capacity and to action in another capacity while occupying his
position as an agent of the Company, and the Indemnitee’s rights hereunder
shall continue after the Indemnitee has ceased acting as an agent of the
Company and shall inure to the benefit of the heirs, executors and
administrators of the Indemnitee.

 

10.                                 Enforcement.  Any right to indemnification
or advances granted by this Agreement to Indemnitee shall be enforceable by or
on behalf of Indemnitee in any court of competent jurisdiction if (i) the
claim for indemnification or advances is denied, in whole or in part, or (ii) no
disposition of such claim is made within ninety (90) days of request therefor.
Indemnitee, in such enforcement action, if successful in whole or in part,
shall be entitled to be paid also the expense of prosecuting his claim.  It shall be a defense to any action for which
a claim for indemnification is made under this Agreement (other than an action
brought to enforce a claim for expenses pursuant to Section 6 hereof,
provided that the required undertaking has been tendered to the Company) that
Indemnitee is not entitled to indemnification because of the limitations set
forth in Sections 4 and 8 hereof. 
Neither the failure of the Corporation (including its Board of Directors
or its stockholders) to have made a determination prior to the

 

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commencement of such enforcement action that indemnification of
Indemnitee is proper in the circumstances, nor an actual determination by the
Company (including its Board of Directors or its stockholders) that such
indemnification is improper, shall be a defense to the action or create a
presumption that Indemnitee is not entitled to indemnification under this Agreement
or otherwise.

 

11.                                 Subrogation.  In the event of payment under
this Agreement, the Company shall be subrogated to the extent of such payment
to all of the rights of recovery of Indemnitee, who shall execute all documents
required and shall do all acts that may be necessary to secure such rights and
to enable the Company effectively to bring suit to enforce such rights.

 

12.                                 Survival of Rights.

 

(a)                                  All agreements and obligations of the Company
contained herein shall continue during the period Indemnitee is an agent of the
Company and shall continue thereafter so long as Indemnitee shall be subject to
any possible claim or threatened, pending or completed action, suit or
proceeding, whether civil, criminal, arbitrational, administrative or
investigative, by reason of the fact that Indemnitee was serving in the
capacity referred to herein.

 

(b)                                 The Company shall require any successor to
the Company (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business or assets of the
Company, expressly to assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform if
no such succession had taken place.

 

13.                                 Interpretation of Agreement.  It
is understood that the parties hereto intend this Agreement to be interpreted
and enforced so as to provide indemnification to the Indemnitee to the fullest
extent permitted by law including those circumstances in which indemnification
would otherwise be discretionary.

 

14.                                 Severability.  If
any provision or provisions of this Agreement shall be held to be invalid,
illegal or unenforceable for any reason whatsoever, (i) the validity,
legality and enforceability of the remaining provisions of the Agreement
(including without limitation, all portions of any paragraphs of this Agreement
containing any such provision held to be invalid, illegal or unenforceable,
that are not themselves invalid, illegal or unenforceable) shall not in any way
be affected or impaired thereby, and (ii) to the fullest extent possible,
the provisions of this Agreement (including, without limitation, all portions
of any paragraph of this Agreement containing any such provision held to be
invalid, illegal or unenforceable, that are not themselves invalid, illegal or
unenforceable) shall be construed so as to give effect to the intent manifested
by the provision held invalid, illegal or unenforceable and to give effect to Section 13
hereof.

 

15.                                 Modification and Waiver.  No
supplement, modification or amendment of this Agreement shall be binding unless
executed in writing by both of the parties hereto.  No waiver of any of the provisions of this
Agreement shall be deemed or shall constitute a waiver of any other provisions
hereof (whether or not similar) nor shall such waiver constitute a continuing
waiver.

 

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16.                                 Notice.  All notices, requests, demands
and other communications under this Agreement shall be in writing and shall be
deemed duly given (i) if delivered by hand and receipted for by the party
addressee or (ii) if mailed by certified or registered mail with postage
prepaid, on the third business day after the mailing date.  Addresses for notice to either party are as
shown on the signature page of this Agreement, or as subsequently modified
by written notice.

 

17.                                 Governing Law.  This
Agreement shall be governed exclusively by and construed according to the laws
of the State of Delaware as applied to contracts between Delaware residents
entered into and to be performed entirely within Delaware.

 

The parties hereto have
entered into this Indemnity Agreement effective as of the date first above
written.

 

	
   

  	
  COMPANY:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  MSO
  HOLDINGS, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Address:

  	
  2333 Waukegan Road,
  Suite 175

  
	
   

  	
   

  	
  Bannockburn, IL 60015

  
	
   

  	
   

  	
   

  
	
   

  	
  INDEMNITEE:

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Address:

  	
   

  
									

 

8Exhibit 10.1

 

 

	
   

  	
   

  	
  AMENDED AND RESTATED LOAN AND SECURITY

  
	
   

  	
   

  	
  AGREEMENT (ACCOUNTS AND INVENTORY)

  

 

	
  OBLIGOR #

  	
  NOTE #

  	
  AGREEMENT DATE

  
	
  3762180432

  	
  18

  	
  August 12,
  2005

  
	
  CREDIT LIMIT

  	
  INTEREST RATE

  	
  OFFICER NO./INITIALS

  
	
  $15,000,000.00

  	
  Base
  Rate + 0.00% or the applicable Libor Rate

  	
  49841
  / Tomas Schmidt

  
					

 

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

 

1.     DEFINITIONS.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

1

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

2

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

b.             all
Debt of such Person at such time.

 

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

 

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

 

2.     LOAN AND
TERMS OF PAYMENT.

 

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

 

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

 

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

 

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

 

3

 

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

 

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

 

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

 

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

 

3.     TERM.

 

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

 

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

 

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

 

4.     CREATION OF
SECURITY INTEREST.

 

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

 

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

 

4

 

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

 

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

 

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

 

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

 

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

 

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

 

5.     CONDITIONS
PRECEDENT.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

5

 

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

 

j.              Warranties
and representations of officers.

 

6.     WARRANTIES.
REPRESENTATIONS AND COVENANTS.

 

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

 

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

 

6.3           Borrower
warrants, represents, covenants and agrees that:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

6

 

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

 

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

 

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

 

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

 

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

 

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

 

f.              Move
or relocate any Collateral;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

6.8           Borrower
represents, warrants, covenants and agrees that:

 

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

 

7

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

6.14         Insurance.

 

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

 

8

 

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

 

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

 

6.16         Financial
Reporting.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

9

 

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

 

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

 

h.             

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

7.     EVENTS OF
DEFAULT.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

10

 

h.             If
Borrower is enjoined, restrained or in any way prevented by court order from
continuing to conduct all or any material part of its business affairs;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

p.             If
Borrower is an individual and Borrower dies;

 

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

 

r.              Cancellation
of any insurance policy;

 

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

 

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

 

8.     BANK’S RIGHTS
AND REMEDIES.

 

8.1           Upon the
occurrence of an Event of Default by Borrower under this Agreement, Bank may,
at its election, without notice of its election and without demand, do any one
or more of the following, all of which are authorized by Borrower:

 

a.             Declare
Borrower’s Indebtedness, whether evidenced by this Agreement, installment
notes, demand notes or otherwise, immediately due and payable to Bank;

 

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

 

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

 

d.             Without
notice to or demand upon Borrower or any guarantor, make such payments and do
such acts as Bank considers necessary or reasonable to protect its security
interest in the Collateral. Borrower agrees to assemble the Collateral if Bank
so requires and to make the Collateral available to Bank as Bank may designate.
Borrower authorizes Bank to enter the premises where the Collateral is located,
take and maintain possession of the Collateral and the premises (at no charge
to Bank), or any part thereof, and to pay, purchase, contest or compromise any
encumbrance, charge or lien which in the opinion of Bank appears to be prior or
superior to its security interest and to pay all expenses incurred in
connection therewith;

 

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

 

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

 

11

 

g.             Sell
or dispose the Collateral at either a public or private sale, or both, by way
of one or more contracts or transactions, for cash or on terms, in such manner
and at such places (including Borrower’s premises) as is commercially
reasonable in the opinion of Bank. It is not necessary that the Collateral be
present at any such sale. At any sale or other disposition of the Collateral
pursuant to this Section, Bank disclaims all warranties which would otherwise
be given under the Uniform Commercial Code, including without limitation a
disclaimer of any warranty relating to title, possession, quiet enjoyment or
the like, and Bank may communicate these disclaimers to a purchaser at such
disposition.  This disclaimer of warranties
will not render the sale commercially unreasonable;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

8.3           Bank’s
rights and remedies under this Agreement and all other agreements shall be
cumulative. Bank shall have all other rights and remedies not inconsistent
herewith as provided by law or in equity. No exercise by Bank of one right or
remedy shall be deemed an election, and no waiver by Bank of any default on
Borrower’s part shall be deemed a continuing waiver. No delay by Bank shall
constitute a waiver, election or acquiescence by Bank.

 

12

 

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

 

10.   WAIVERS.

 

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

 

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

 

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

 

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

 

10.5         Co-Borrowers.  Each Borrower agrees as follows:

 

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

 

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

 

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

 

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

 

13

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

14

 

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

 

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

 

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

 

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

 

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

 

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

 

17.   GENERAL
PROVISIONS.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

15

 

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

 

 

Accepted and effective as
of                                          at
Bank’s Headquarters Office

 

 

	
  COMERICA
  BANK

  	
  INFOSONICS
  CORPORATION

  
	
   

  	
  a Maryland
  corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Tomas Schmidt

  	
   

  	
   

  
	
   

  	
  Vice President – Western Division

  	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Address for Notices:

  	
  Address for
  Notices:

  
	
   

  	
   

  
	
  Comerica Bank

  	
  InfoSonics
  Corporation

  
	
  75
  East Trimble Road

  	
  5880
  Pacific Center Boulevard

  
	
  Mail Code 4770

  	
  San Diego, CA
  92121

  
	
  San Jose, CA
  95131

  	
  (858) 373-1680

  
										

 

16

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