Document:

ex10-1.htm

    Exhibit 10.1
 

     

     

     

    LOAN AND
SECURITY AGREEMENT

     

     

    Dated as
of June 24, 2008

     

     

    Between

     

     

    AEROGROW
INTERNATIONAL, INC.

     

     

    (Borrower)

     

     

    and

     

     

    FCC, LLC,
d/b/a First Capital

     

     

    (Lender)

     

     

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    TABLE OF CONTENTS

     

    Page

       

      
        	1.           DEFINITIONS	 	
                 3

              
	2.           BORROWING	 	
                 7

              
	3.           INTEREST AND FEES	 	
                 8

              
	4.           REPRESENTATIONS AND WARRANTIES OF BORROWER	 	
                 9

              
	5.           COLLATERAL	 	
                 10

              
	6.           FINANCIAL COVENANTS	 	
                 10

              
	7.           COLLATERAL COVENANTS	 	
                 10

              
	8.           NEGATIVE COVENANTS	 	
                 12

              
	9.           REPORTING AND INFORMATION	 	
                 13

              
	10.         INSPECTION
      RIGHTS; EXPENSES; ETC. 	 	
                 13

              
	11.         RIGHTS OF SETOFF, APPLICATION OF PAYMENTS,
    ETC	 	
                 14

              
	12.         ATTORNEY-IN-FACT	 	
                 14

              
	13.         DEFAULTS AND REMEDIES	 	
                 14

              
	14.         INDEMNIFICATION 	 	
                 15

              
	15.         GENERAL PROVISIONS	 	
                 16

              

      

       

    

    Attachments:

     

    Schedule

    Exhibit
A - Form of Borrowing Base Certificate

    Exhibit
B - Form of Compliance Certificate

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    LOAN
AND SECURITY AGREEMENT

     

     

     

    This LOAN
AND SECURITY AGREEMENT (this “Agreement”)
is entered into as of this 24th
day of June, 2008 between AEROGROW INTERNATIONAL, INC., a Nevada corporation
(“Borrower”),
and FCC, LLC, d/b/a FIRST CAPITAL, a Florida limited liability company (“Lender”).

     

    RECITALS:

     

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

     

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

     

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

     

    1.           Definitions.  For
purposes of this Agreement:

     

    “Accounts”
means all presently existing or hereafter arising accounts receivable due to
Borrower (including medical and health-care-insurance receivables), book debts,
notes, drafts and acceptances and other forms of obligations now or hereafter
owing to Borrower, whether arising from the sale or lease of goods or the
rendition of services by Borrower (including any obligation that might be
characterized as an account, contract right, general intangible or chattel paper
under the UCC), all of Borrower’s rights in, to and under all purchase orders
now or hereafter received by Borrower for goods and services, all proceeds from
the sale of Inventory, all monies due or to become due to Borrower under all
contracts for the sale or lease of goods or the rendition of services by
Borrower (whether or not yet earned) (including the right to receive the
proceeds of said purchase orders and contracts), all collateral security and
guarantees of any kind given by any obligor with respect to any of the
foregoing, and all goods returned to or reclaimed by Borrower that correspond to
any of the foregoing.

     

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

     

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

     

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

     

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

     

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

     

    “Certifying
Officer” means Jerry Perkins, Greg Clarke and any other Person that has
or will certify the validity of the Collateral.

     

    
      
        
        

      

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

     

    “Customer”
means any customer of Borrower.

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

    
      
        
        

      

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

     

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

     

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

     

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

     

    (s)           Linens
& Things Account, unless Borrower has credit insurance on this Account (only
up to the amount), acceptable and assigned to Lender.

     

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

     

    (a)           it
is finished goods;

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

    
      
        
        

      

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

     

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

     

    “Inventory”
means all of Borrower’s inventory as defined in the UCC, together with all of
Borrower’s present and future inventory, including goods held for sale or lease
or to be furnished under a contract of service and all of Borrower’s present and
future raw materials, work in process, finished goods, shelving and racking upon
which the inventory is stored and packing and shipping materials, wherever
located, and any documents of title representing any of the above.

     

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

     

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

     

    “Maximum
Loan Amount” means $12,000,000.

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

    
      
        
        

      

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

     

    2.            Borrowing.

     

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

     

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

     

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

     

    (d)           Application
of Remittances.  Borrower will use only invoices in forms that
Lender has approved, and Borrower’s billings on such invoices will be conclusive
evidence of assignment and transfer hereunder to Lender of the Accounts
represented thereby, whether or not Borrower executes any other instrument with
regard to any specific Account.  Borrower will cause the proceeds of
Accounts to be forwarded by all Customers directly to a lockbox designated by
Lender.  Such lockbox shall be maintained by First
National Bank, 1155 Canyon Blvd., Suite 100, Boulder, CO  80302
and all payments received in such lockbox shall be deposited in a bank
account in Lender’s name and owned by Lender at First
National Bank, 155 Canyon Blvd, Suite 100, Boulder, CO  80302
for application to the Obligations.  All checks or other
remittances received by Borrower for application to Accounts will be received by
Borrower in trust for Lender, and Borrower will turn over to Lender the
identical remittances as speedily as possible, appropriately endorsed, if
necessary.  As compensation to Lender for delays in the collection and
clearance of such checks, Borrower agrees to pay interest on each remittance,
including wire transfers, from the date of Lender’s receipt thereof plus the
number of days set forth on Item
5 of
the Schedule at
the rate applicable to loans outstanding hereunder, as set forth in Section
3 below.  Borrower will account fully and faithfully for and
promptly pay or turn over to Lender proceeds in whatever form received of the
sale or other disposition of any Collateral, and Borrower agrees that the
inclusion of proceeds in “Collateral” will not be deemed to mean that Lender
consents to Borrower’s disposition of Collateral other than in accordance with
the terms of this Agreement.  In the event there are no outstanding
Obligations, the amount of proceeds from Accounts received by Lender will be
forwarded promptly to Borrower.

     

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

     

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

     

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

     

    
      
        
        

      

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

     

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

     

    (h)          
Voluntary
Termination.  Borrower may terminate this Agreement at any time
after the first anniversary of the Agreement Date upon at least 90 days’ prior
written notice to Lender.  On the date specified in such notice,
termination will be effective, so long as Borrower has paid to Lender, in same
day funds, an amount equal to the aggregate principal amount of all loans
outstanding on such date, together with accrued interest thereon, the originals
of all letters of credit and bankers acceptances, if any, issued, created or
guaranteed by Lender or any of its Affiliates for Borrower’s account have been
returned for cancellation or have been presented and paid by Borrower or other
arrangements satisfactory to Lender have been made, all other Obligations
outstanding and unpaid have been paid in full in cash, and Borrower has provided
Lender an indemnification agreement satisfactory to Lender with respect to
returned and dishonored items and such other matters as Lender shall reasonably
require.

     

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

     

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

     

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

     

    (l)           Reimbursement
for Amounts Due to Benefactor.  Borrower hereby acknowledges
and agrees that all amounts paid or payable by Lender to Benefactor Funding
Corp. (together with its successors and assigns, “Benefactor”) pursuant to that
certain Agreement dated on or about the Agreement Date among Benefactor,
Borrower and Lender constitute “Obligations” hereunder and are secured by the
Collateral.  Borrower shall pay to Lender all such amounts paid or
payable to Benefactor within two Business Days of Lender’s demand therefor, or,
alternatively, Lender may charge such amounts to Borrower’s loan account as a
loan hereunder contemporaneously with Lender’s payment to
Benefactor.

     

    3.           Interest
and Fees.

     

    (a)         Interest
on Loans.  Borrower will pay Lender or, at Lender’s option,
Lender may charge Borrower’s loan account with, interest on the average daily
net principal amount of loans outstanding hereunder, calculated monthly and
payable on the first day of each calendar month, at the Interest Rate (computed
on the basis of the actual number of days elapsed over a year of 360
days).  Any change in the Interest Rate shall be effective for
purposes of calculating interest hereunder as of the date of such
change.

     

    Definitions:

     

    “Interest
Rate” means a rate equal to the Prime Rate plus
the interest margin specified in Item
8 of the Schedule, but in no event shall the Interest Rate be less than
the greater of x) the sum of LIBOR plus 2.5.0% or (y) the Prime Rate, plus the
interest margin specified in Item
8 of the Schedule.  Such Interest Rate is subject to change
based on any change in the Prime Rate or LIBOR Rate, as applicable.

     

    “Prime
Rate” means, at any time, the greater of (i) the rate of interest noted
in The
Wall Street Journal, Money Rates section, as the “Prime Rate” (currently
defined as the base rate on corporate loans posted by at least 75% of the
nation’s thirty (30) largest banks) and (ii) the sum of the LIBOR Rate plus 250
basis points.  In the event that The
Wall Street Journal quotes more than one rate, or a range of rates, as
the Prime Rate, then the Prime Rate shall mean the average of the quoted
rates.  In the event that The
Wall Street Journal ceases to publish a Prime Rate, then the Prime Rate
shall be the average of the three (3) largest U.S. money center commercial
banks, as determined by Lender.  If applicable, the calculations
required in the two immediately preceding sentences will determine the
applicable rate of interest in clause (i) (i.e., prior to determining whether
clause (i) or clause (ii) is the greater rate of interest). The “Prime Rate” may
not be the lowest or best rate at which Lender calculates interest or extends
credit.

     

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    

     

     “LIBOR
Rate” means, at any time, an interest rate per annum equal to the
interest rate per annum (rounded upwards, if necessary, to the nearest
1/100th
of 1%) reported at such time on Reuters Screen LIBOR1 Page (or otherwise on the
Reuters screen) at 11:00 a.m. London time (or, if not appearing, as published in
the “Money Rates” section of the Wall
Street Journal or another national publication selected by the Lender) as
the London Interbank Offered Rate for United States dollar deposits having a
term of thirty (30) days and in a principal amount of $1,000,000.00 or more (or,
if such page shall cease to be publicly available or, if the information
contained on such page, in Lender’s sole judgment, shall cease to be accurately
reflect such London Interbank Offered Rate, such rate as reported by any
publicly available recognized source of similar market data selected by Lender
that, in the Lender’s reasonable judgment, accurately reflects such London
Interbank Offered Rate).

     

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

     

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

     

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

     

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

     

    4.       
     Representations
and Warranties of Borrower.

     

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

     

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

     

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

     

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

     

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

     

    5.      
     Collateral.

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

    7.           Collateral
Covenants.

     

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

     

    8.      
     Negative
Covenants.

     

    (a)           No
Merger.  Without Lender’s prior written consent, which will not
be unreasonably withheld, Borrower will not merge or consolidate with any other
Person or sell, transfer, lease, abandon, or otherwise dispose of a substantial
portion of Borrower’s assets or any of the Collateral or any interest therein,
except that, so long as no Default has occurred and is continuing, Borrower may
sell Inventory in the ordinary course of Borrower’s business

     

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

     

    (c)           No
Distributions.  Borrower will not retire, repurchase or redeem
any of Borrower’s capital stock or other ownership interest in Borrower, nor
declare or pay any dividend in cash or other property (other than additional
shares of capital stock or additional ownership interests) to any owner or
holder of Borrower’s shares or other ownership interest; provided, that i) so
long as no Default exists hereunder or would be caused by any such transaction,
and ii) sufficient availability exists under the Borrowing Base to effect such
transaction, Borrower may acquire up to Five Hundred Thousand and No/100 Dollars
($500,000) of its capital stock or equity interests without any additional
consent from Lenders.  In addition, provided that i) so long as no
Default exists hereunder or would be caused by any such transaction, and ii)
sufficient availability exists under the Borrowing Base to effect such
transaction, Borrower may request Lender’s consent to purchases by Borrower of
more than Five Hundred Thousand and No/100Dollars ($500,000) of its capital
stock or equity interests, which consent shall not be unreasonably
withheld.  Additionally, so long as Borrower is effectively treated as
a Subchapter S corporation under the Internal Revenue Code, Borrower may make
distributions or pay dividends to its shareholders in an amount not to exceed
the federal and state income tax liability of such shareholders which is
directly attributable to Borrower’s operations and financial
results.

     

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

     

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

     

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

     

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

     

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

     

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

     

    (j)           Use
of Proceeds.  Borrower shall not use the proceeds of any Loans
for any purpose other than general working capital purposes.

     

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

     

    9.         
  Reporting
and Information.

     

    (a)           Financial
Statements.  Borrower will submit to Lender as soon as
available, and in any case not later than 30 days after the end of each month,
an internally prepared balance sheet and statement of profit and loss certified
by Borrower’s chief financial or accounting officer as presenting fairly,
Borrower’s financial condition as of the last day of such month and Borrower’s
results of operations for such month and for the portion of Borrower’s fiscal
year ending with such month. The foregoing statements may not include all of the
adjustments as required by GAAP.  Borrower will also submit quarterly
to Lender with 45 days after the end of each quarter a copy of its Form 10Q
which shall include a condensed balance sheet, income statement and statement of
cash flow prepared in accordance with GAAP. Borrower will also submit to Lender
annual financial statements within 90 days after the end of each fiscal year,
including a balance sheet, the related statement of profit and loss and
stockholders’ equity and a statement of cash flows, in each case prepared in
accordance with the requirements set forth on Item
25 of the Schedule.  Borrower will also submit to Lender
annually at least 30 days prior to Borrower’s fiscal year end forecasted
financial statements for the upcoming fiscal year, containing a projected
balance sheet and profit and loss statement.  Together with each
monthly and annual financial statement, Borrower will deliver to Lender the
certification of Borrower’s chief financial or accounting officer in the form of
Exhibit
B attached hereto to the effect that Borrower is in compliance with the
terms and conditions of this Agreement, and setting forth in detail the
calculation of all financial covenants, or, if Borrower is not in compliance,
describing the nature of any noncompliance and the steps Borrower is taking or
proposes to take to remedy the same.

     

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

     

      (c)
Intentionally left blank

     

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

     

    10.           Inspection
Rights; Expenses; Etc.

     

    (a)           Inspection.  So
long as a Default has not occurred and with reasonable notice, Lender may
examine and make copies of Borrower’s records, the Collateral and all other
assets of Borrower or any portion thereof, wherever located, and may enter upon
Borrower’s premises for such purposes, during business
hours.  However, if a Default has occurred then Lender may enter
Borrower’s premises for examination of Borrower’s records, the Collateral and
all of assets of Borrower or any portion thereof, wherever located, and may
enter upon Borrower’s premises for such purposes, without notice, during
business hours.  Borrower will assist Lender in whatever way necessary
to make each such examination.  Lender may discuss Borrower’s
financial condition with Borrower’s independent accountants without liability to
Lender or such accountants.

     

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

     

    (c)           Field
Examinations; Inspections.  Lender shall have the right without
hindrance or delay to conduct field examinations to inspect the Collateral,
Borrower’s books and records and all other aspects of Borrower’s business (with
reasonable notice as long as no Default has occurred, but no notice to Borrower
shall be required following a Default). .Borrower agrees to pay for such
examinations as more fully described on Item
27 of the Schedule.  Lender shall have full access to all
records available to Borrower from any credit reporting service, bureau or
similar service and shall have the right to examine and make copies of any such
records.  Lender may exhibit a copy of this Agreement to such service
and such service shall be entitled to rely on the provisions hereof in providing
access to Lender as provided herein.

     

    
      
        
        

      

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

     

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

     

    13.           Defaults
and Remedies.

     

    (a)           Defaults.  For
purposes of this Agreement, “Default”
means the occurrence of any of the following events:  (i) non-payment
when due of any amount payable on any of the Obligations or breach of any
covenant or failure to perform any agreement or failure to meet any of
Borrower’s obligations contained herein, in any other Loan Document or in any
other agreement out of which any of the Obligations arose; (ii) any intentional
misstatement or misrepresentation of a material fact by Borrower or any other
Obligor made to the Lender in writing in this Agreement, any other Loan
Document, or in any other writing relied upon by Lender in making any Loan
pursuant to Section 2 of this Agreement or in connection with any forbearance of
any right Lender may have pursuant to this Agreement; (iii) any intentional act
by the Borrower resulting in the diversion of funds in breach of the Lenders
rights set forth in any lockbox, blocked account or agency account agreement
referred to in Item
6 of the Schedule; (iv) Borrower admits in writing that it is insolvent
or unable to pay its debts, makes an assignment for the benefit of creditors, or
makes a conveyance fraudulent as to creditors under any state or federal law, or
a proceeding is instituted by the Borrower alleging that such Borrower is
insolvent or unable to pay debts as they mature, or a petition under any
provision of Title 11 of the United States Code, as amended, is filed by
Borrower;  (v) other than the intentional misstatements or
misrepresentations specified in subsection (ii) of this Section 13, any material
statement, representation, or warranty made in writing in this Agreement, any
other Loan Document or in any other writing or statement at any time furnished
or made by Borrower or any other Obligor to Lender proves to have been untrue in
any material respect as of the date furnished or made or deemed furnished or
made; (vi) non-payment when due of the premium on any insurance policy required
to be maintained hereunder; (vii) Borrower’s default (and expiration of any
applicable cure period) under any other agreement for borrowed money or any
other agreement involving more than the amount set forth on Item
28 of the Schedule; (viii) suspension of the operation of Borrower’s
present business; (ix) the Borrower becomes insolvent or unable to pay its debts
as they mature,  or an involuntary proceeding is instituted against
the Borrower alleging that such Borrower is insolvent or unable to pay debts as
they mature, or an involuntary petition under any provision of Title 11 of the
United States Code, as amended, is filed against the Borrower (provided,
however, that Borrower shall have 30 days to cause the dismissal of an
involuntary petition filed against it); (x) entry of any judgment in excess of
the amount set forth on Item
29 of the Schedule against the Borrower or creation, assertion, or filing
of any judgment or tax Lien against the property of the Borrower, in each case
which remains undischarged for 10 days after such entry or filing; (xi)
dissolution, merger, or consolidation of any Obligor which is a corporation,
partnership or limited liability company except as approved by Lender; (xii)
transfer of a substantial part (determined by market value) of the property of
the Borrower except as approved by Lender; (xiii) appointment of a receiver for
the Collateral or for any other property in which Borrower has an interest,
which appointment remains in effect for 10 days; (xiv) seizure of any material
portion of the Collateral by any Person other than Lender; (xv) any person
identified on Item
30 of the Schedule shall for any reason cease to hold the office of
Borrower set forth opposite such person’s name on Item
30  of the Schedule (or any such person shall cease to perform
the duties generally associated with such office) and a replacement reasonably
satisfactory to Lender shall not be appointed within 90 days; (xvi) the
occurrence of any act, omission, event or circumstance which has or could
reasonably be expected to affect the Borrower’s ability to pay any of the
Obligations or to affect the Borrower’s ability to continue its operations as a
going concern; (xvii) payment by Borrower on any Subordinated Debt in violation
of the applicable subordination agreement; or (xviii) the Pension Benefit
Guaranty Corporation or the Department of Labor commences proceedings under
ERISA to terminate any of Borrower’s employee pension benefit plans, provided,
however, that no default under subsections (v) through (xviii) inclusive
shall occur unless the event specified therein shall have continued for a period
of three (3) Business Days after written notice has been given by Lender to
Borrower of Lender’s intent to declare Borrower in default under this Section
13.

     

    (a)           Remedies.  If
a Default occurs and is continuing, in each case without demand or notice to
Borrower, any other Obligor or any other Person (unless such notice is expressly
required hereunder or under applicable law):

     

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

     

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

     

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

     

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

     

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

     

    (v)                      
Lender may make such payments and do such acts as Lender considers necessary or
reasonable to protect its security interest in the
Collateral.  Borrower authorizes Lender to enter each premises where
any Collateral is located, take and maintain possession of the Collateral, or
any part of it, and to pay, purchase, contest or compromise any Lien which in
Lender’s opinion appears to be prior or superior to its security interest and to
pay all expenses incurred in connection therewith.

     

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

     

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

     

    (viii)                    Lender
may cancel any insurance policy of Borrower’s in exchange for a refund of the
unearned premium with respect thereto, and Borrower hereby authorizes any
insurance company which has issued any such policy to make such payment directly
to Lender for application to the Obligations with the exception of Borrower’s
director and officer liability insurance.

     

    (ix)                      Lender
may, at Lender’s option, exercise any of the remedies available to Lender as a
secured party under the Uniform Commercial Code as in effect in any applicable
jurisdiction, or otherwise available to Lender under applicable
law.  Borrower agrees, upon Default, to cease the sale or other
disposition of the Collateral, except with Lender’s prior written consent, and
to assemble at Borrower’s expense all the Collateral at a convenient place
acceptable to Lender.  Lender may charge to Borrower’s loan account
and Borrower will pay Lender upon demand all costs and expenses, including
reasonable attorneys’ fees (including fees of attorneys that are regular
salaried employees of Lender or any of its Affiliates), in connection
with:  (A) the liquidation of any Collateral; (B) obtaining or
enforcing payment of the Obligations; (C) the settlement, adjustment,
compromise, or litigation of Customer disputes; or (D) the prosecution or
defense of any action or proceeding either against Lender or against Borrower
concerning any matter growing out of or in connection with this Agreement and/or
any Collateral and/or any Obligations.  If at any time Lender pays any
state, city, local, federal, or other tax or levy attributable to the
Collateral, Borrower will repay to Lender the amount of tax so paid by
Lender.  Borrower agrees that Lender may apply any proceeds from
disposition of the Collateral first to satisfy obligations secured by Liens
prior to Lender’s security interest.  Borrower will remain liable and
will pay on demand any deficiencies arising upon the liquidation of any
Collateral held by Lender.

     

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

     

    (c)           License.  Borrower
hereby grants to Lender a license or other right to use, without charge,
Borrower’s labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks and advertising matter, or any property of a
similar nature, as it pertains to the Collateral, in completing production of,
advertising for sale and selling any Collateral and Borrower’s rights under all
licenses, and all franchise agreements shall inure to Lender’s
benefit.

     

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

     

    14.           Indemnification.  Borrower
agrees to defend, indemnify, and hold harmless Lender and Lender’s directors,
officers, employees, Affiliates, representatives, attorneys and agents (each an
“Indemnified
Person”) from and against any and all penalties, fines, liabilities,
damages, costs, or expenses of whatever kind or nature asserted against any such
Indemnified Person, arising out of, or in any way related to this Agreement or
any other Loan Document, or the transactions contemplated hereby or thereby,
including by reason of the violation of any law or regulation relating to the
protection of the environment or the presence, generation, disposal, release, or
threatened release of any hazardous materials in connection with Borrower’s
business on, at or from any property at any time owned or operated by Borrower,
including, without limitation, reasonable attorneys’ and consultants’ fees,
investigation and laboratory fees, court costs, and litigation expenses actually
incurred.  Without limiting the foregoing, Borrower represents and
warrants that there has been no loan broker or investment banker involved in
connection with the transactions contemplated hereby, and Borrower agrees to
indemnify and hold Lender harmless from any claim of compensation payable to any
loan broker or investment banker in connection with the transactions
contemplated hereby.

     

    
      
        
        

      

      
        15

        
          

        

      

      
        
        

      

    

     

    15.           General
Provisions.

     

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

     

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

     

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

     

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

     

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

     

    (f)           Governing
Law; Submission
to Jurisdiction; Service; Etc.  This Agreement and the other
Loan Documents shall be governed by and construed in accordance with the
substantive laws (other than conflict of law provisions and principles) of the
State of Oklahoma.  Borrower hereby consents to the non-exclusive
jurisdiction of any United States Federal Court sitting in or with direct or
indirect jurisdiction over the Western District of Oklahoma or any Oklahoma
state court sitting in Oklahoma County, Oklahoma, in any action, suit or other
proceeding arising out of or relating to this Agreement or any of the other Loan
Documents, and Borrower irrevocably agrees that all claims and demands in
respect of any such action, suit or proceeding may be heard and determined in
any such court and irrevocably waives any objection it may now or hereafter have
as to the venue of any such action, suit or proceeding brought in any such court
or that such court is an inconvenient forum.  Borrower waives personal
service of any and all process upon it and consents that all such service of
process may be made by registered mail (return receipt requested) directed to
Borrower at Borrower’s address for notices pursuant to this Agreement, and
service so made shall be deemed to be completed five (5) days after the same
shall have been so deposited in the United States mails.  Nothing
herein shall limit the right of Lender to bring proceedings against Borrower or
any of its Affiliates in the courts of any other jurisdiction.  Any
judicial proceeding commenced by Borrower against Lender or any other holder of
any Obligations, or any Affiliate of Lender or any other holder of any
Obligations, involving, directly or indirectly, any matter in any way arising
out of, related to or connected with any Loan Document shall be brought only in
a United States Federal Court sitting in or with direct jurisdiction over the
Western District of Oklahoma or any Oklahoma state court sitting in Oklahoma
County, Oklahoma.  Nothing in this Agreement shall be deemed or
operate to affect the right of the Lender to serve legal process in any other
manner permitted by law or to preclude the enforcement by Lender of any judgment
or order obtained in such forum or the taking of any action under this Agreement
to enforce same in any other appropriate forum or jurisdiction.

     

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

     

     

    
      
        
        

      

      
        16

        
          

        

      

      
        
        

      

    

     

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

     

    (i)           Expenses.  Borrower
shall pay on demand all of Lender’s reasonable costs and expenses in connection
with underwriting and performing due diligence with respect to the transactions
contemplated hereby and the preparation, reproduction, execution, delivery,
administration and enforcement of this Agreement, including the reasonable fees
and out-of-pocket expenses of Lender’s counsel, in each case whether incurred
on, prior or subsequent to the Agreement Date.  In addition, Borrower
shall pay any and all stamp and other taxes and recording and filing fees
payable in connection with the execution and delivery of all other instruments
and documents to be delivered hereunder.  Such amounts may be charged
by Lender to Borrower’s account as one or more loans hereunder.  All
provisions in this Agreement providing for the payment or reimbursement of
Lender’s attorneys’ fees and expenses include, without limitation, such fees and
expenses incurred pursuant to or in connection with proceedings brought under 11
U.S.C., the Federal Bankruptcy Code.

     

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

     

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

     

    [REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK]

     

     

    
      
        
        

      

      
        17

        
          

        

      

      
        
        

      

    

     

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

     

     

    AEROGROW
INTERNATIONAL, INC.

     

     

    By: /s/
Jervis B.
Perkins               

    Name: Jervis
B. Perkins

    Title:   Chief Executive
Officer

     

     

    FCC, LLC, d/b/a FIRST
CAPITAL

     

    By:  /s/
Lee E.
Elmore                      

          
Lee E. Elmore, Senior Vice President

     

     

    
      
        
        

      

      
        18

        
          

        

      

      
        
        

      

    

     

    NOTARY
JURAT FOR EXECUTION OF

    WRITTEN
OBLIGATIONS TO PAY MONEY

     

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

     

    
      	
              1.  

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

            

    

     

    
      	
              2.  

            	
              He
      has this day delivered the foregoing Loan and Security Agreement to FCC,
      LLC, d/b/a FIRST CAPITAL, at Oklahoma City, Oklahoma[via
      personal delivery] [via overnight
  courier].

            

    

     

     

    Signature of Borrower’s
Officer:

     

     

    By:                                                      

    Name:                                                                

     

     

    Sworn to
and subscribed before me this ___ day of _______________, 2008:

     

    __________________________________

            Notary
Signature

     

    My
Commission Expires:

     

    _________________________________

     

         [Affix
Notarial Seal]

     

     

    
      
        
        

      

      
        19

        
          

        

      

      
        
        

      

    

     

    AFFIDAVIT
REGARDING DELIVERY

     

    On this the ____ day of
_______________, 2008, before me, the undersigned, a Notary Public in and for
the State of Oklahoma, County of _______________, _______________________
personally appeared, personally known to me or proved to me on the basis of
satisfactory evidence to be the ________________________ of FCC, LLC, d/b/a
FIRST CAPITAL, who, being by me first duly sworn, stated that he/she has
received delivery of the foregoing Loan and Security Agreement on behalf of FCC,
LLC, d/b/a FIRST CAPITAL in the State of Oklahoma, County of
Oklahoma.

     

    
      	
              Signature
      of Officer of FCC, LLC, d/b/a First
Capital

            

    

     

    Sworn to
and subscribed before me this ___ day of _______________, 2008:

     

    __________________________________

            Notary
Signature

     

    My
Commission Expires:

     

    _________________________________

     

         [Affix
Notarial Seal]

     

     

    
      
        
        

      

      
        20

        
          

        

      

      
        
        

      

    

     

    SCHEDULE

     

    This Schedule is a part of
the foregoing Loan and Security Agreement dated as of __________________, 2008,
between AEROGROW INTERNATIONAL, INC., as borrower (“Borrower”), and FCC, LLC,
d/b/a FIRST CAPITAL, as lender (“Lender”).

     

    1.           Borrowing
Base

     

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

     

    (a)           the
lesser of:

     

    (i)           The
Maximum Loan Amount, and

     

    (ii)           the
sum of:

     

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

     

    (B)           the
lesser of:

     

    (1)           $5,000,000,

     

    
      	
               
      

            	
              (2)

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

            

    

    
 

    provided,
however, that the aggregate principal amount available to be borrowed
against Eligible Inventory under this clause (B) shall not exceed 40% of the
Obligations outstanding at any time and in the months of July, August and
September shall not exceed 60% of the Obligations;

    minus

     

    (b)           the
sum of:

     

    
      	
               
      

            	
              (i)

            	
              such reserves as
      Lender may establish from time to time in its discretion, plus

            

    

     

    
      	
               
      

            	
              (ii)

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

            

    

     

     

    
      
        
        

      

      
        21

        
          

        

      

      
        
        

      

    

     

    2.           Accounts
Eligibility

     

    (a)           Accounts
Age:  Any Account with respect to which more than ninety (90)
days have elapsed since the date of the original invoice
therefor.

     

    (b)           Cross-Aging
Percentage:  50%

     

    (c)           Concentration
Limit:  10% unless otherwise approved by Lender in
writing

     

    3.           Permitted
Liens

     

    Existing
Liens and financing statements:

     

    Financing Statement
Number,                                               

     

    
      	 	Jurisdiction
      and Filing Date	Secured
      Party	Collateral
	 	#2007028523-6
      filed 8/30/07 with 	Leasing
      Technologies	Lease
      Equipment
	 	the Nevada Secretary
      of State	International,
      Inc.	 
	 	 	 	Lease
      Equipment
	 	#2007028524-8 filed
      8/30/07 with	Leasing
      Technologies	 
	 	the Nevada Secretary
      of State	International,
      Inc.	 
	 	 	 	 
	 	#2007004036-5 filed
      2/07/07 with	Benefactor Funding
      Corp.	All
  Assets
	 	the Nevada Secretary
      of State	 	 
	 	 	 	 
	 	
              #2007018604-6 filed
      6/11/07 with

              the
      Nevada Secretary of State

            	Dell Financial
      Services L.P.	All Computer
      Equipment and
      Peripherals pursuant to
      #68794502080000348180 dated June 6,
      2007
	 	 	 	       
	 	#2007028522-4 filed
      8/30/07 with	Leasing
      Technologies 	Lease
      Equipment
	 	the Nevada Secretary
      of State	International,
      Inc.	 
	 	 	 	 
	 	#2007039784-1 filed
      12/03/07 with	Leasing
      Technologies  	Lease
      Equipment
	 	the Nevada Secretary
      of State	International,
      Inc.	 

    

     

    4.           Persons
Authorized to Request Loans

     

    Name:                                                                Title:

    Jerry
Perkins                                                    CEO

    Greg
Clarke                                                      CFO

    Grey
Gibbs                                                      Controller

     

     

    
      
        
        

      

      
        22

        
          

        

      

      
        
        

      

    

     

    5.           Collection
Days:                                           Three
(3) Business Days

     

    6.           Conditions
To Initial Loans

     

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

     

    Certified
copy of articles/certificate of incorporation

     

    Bylaws

     

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

     

    Good
Standing Certificate (state of organization and all other states in which
Borrower is qualified to do business)

     

    Lien
search results

     

    Payoff
letter from any lender whose loans are to be refinanced from proceeds of loans
made under this Agreement

     

    Lien
termination documents from existing lender, any other creditor whose filings are
to be terminated, etc.

     

    Landlord,
warehouseman or other bailee waivers

     

    Guaranty
of Validity of Collateral of Jerry Perkins and Greg Clarke

     

    Subordination
Agreements of First National Bank and Jack Walker

     

    Lockbox,
blocked account or agency account agreement(s)

     

    Financial
statements

     

    Appraisal
reports

     

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

     

    Financing
statements, including fixture filings

     

    Officer’s
certificate as to representations, warranties and no defaults

     

    Solvency
certificates

     

    Opinion
letter of Borrower’s legal counsel

     

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

     

     

    
      
        
        

      

      
        23

        
          

        

      

      
        
        

      

    

     

    7.           Termination
Date This
Agreement will terminate on the second anniversary of the Agreement Date; provided,
however, that this Agreement will be renewed for succeeding one-year periods
thereafter unless written notice of termination is provided by Borrower to
Lender at least 90 days prior to the then-effective termination date or by
Lender to Borrower at least 30 days prior to the then-effective termination
date.

     

    8.           Interest
Margin:   2.0%;
provided, however, if Borrower is in not in Default and is in compliance with
all terms and conditions of the Agreement as of 12/31/08, the Interest Margin
will reduce to 1.50%.  The 12/31/08 adjustment, in Lender’s sole
discretion, shall be based on preliminary year-end financial statements provided
by Borrower.  Should the results of Borrower’s year-end audited
financial statements show that Borrower is not in compliance with all terms and
conditions of the Agreement, the Interest Margin shall immediately and
automatically revert to 2.0% as of 1/1/09 and Borrower will repay to Lender, on
demand, all amounts due thereon.

     

    9.           Default
Margin:     3.0%

     

    10.          Fees

     

    a.          
In consideration of the maintenance of Lender’s commitment hereunder, Borrower
will pay Lender a fee, payable monthly in arrears on the first day of each
calendar month and on the termination date of this Agreement, beginning on the
first such date following the Agreement Date, in an amount equal to (if a
positive number): (i) the amount of interest for which Borrower would have been
liable had the average outstanding principal balance of the Loans been
$3,000,000 for the immediately preceding month or part thereof, less (ii) the
actual amount of interest accrued on the Loans during the immediately preceding
month or part thereof.

     

    b.           Borrower
agrees to pay to Lender a facility fee of one percent (1.0%) of the total
Maximum Loan Amount at closing.  Borrower agrees to pay to Lender a
facility fee of three-quarters of one percent (0.75%) of the Maximum Loan Amount
payable in twelve equal monthly installments on the first day of each month
beginning with the thirteenth month and for eleven subsequent months thereafter;
provided, however, that in the event that this Agreement shall terminate (for
any reason, whether voluntarily or involuntarily) prior to the payment in full
of the fees described in this Item 10(b), then all remaining and unpaid fees
shall be accelerated and shall become due and payable as of the date of such
termination of this Agreement.

     

    c.           Borrower
shall pay Lender, monthly, a collateral management fee equal to two-tenths of
one percent (0.20%) of Borrower's average loan balance. Such fee shall be due
and payable on the first day of each month.

     

    d.           In
the event that this Agreement is terminated for any reason after the first
anniversary of the Agreement Date and prior to the then-effective maturity date,
Borrower will pay to Lender on or prior to the effective date of such
termination an early termination fee of (i) 2% of the Maximum Loan Amount in the
second year and (ii) 1% of the Maximum Loan Amount in the third year (if
applicable) and thereafter.  If such termination occurs as a result of
financing provided to Borrower by First National Bank, no early termination fee
will be charged after the end of the first year of this Agreement.  No
early termination is allowed during the first year of this
Agreement.

     

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

     

          

    
       

      
        	11.     	Organizational
      Information	 
	 	Exact
      Legal Name of Borrower:  	AeroGrow International,
      Inc.
	 	State
      of Organization:    	Nevada
	 	Type
      of Organization:	Corporation
	 	Organizational
      Identification Number:  	C7324-2002
	 	 	 
	12. 	Subsidiaries and Investments in
      Other Persons:    	None
	 	 	 
	13.	Pending Litigation:  	None
	 	 	 
	14.      	Existing Debt and
      Guarantees:	 
	 	 	 
	 	Benefactor Funding
      Corporation has a lien on all assets	 

      

    

     

                              

     

    
      
        
        

      

      
        24

        
          

        

      

      
        
        

      

    

     

    
      	 15.    	Prior Legal Names:	Magneticare,
      Inc.
	 	 	 
	 	Prior or Current Trade or Fictitious
      Names:	 
	 	 	 
	 	Mergers and
      Acquisitions:	 
	 	 	 
	 	Wentworth I, Inc.
      merged into AeroGrow International, Inc. on February 24,
    2006	 
	 	 	 
	 16.    	Locations of Offices and
      Collateral	 
	 	 	 
	 	Current Chief Executive
      Office:   	6075 Longbow Drive,
      Suite 200
	 	 	Boulder,
      Colorado 80301
	 	 	 
	 	Other Locations of Chief
      Executive Office in past five years:	 
	 	 	 
	 	900 28th
      Street, Suite
      201                                                           	4940 Pearl East
      Circle, Suite 104
	 	Boulder, Colorado
      80303                                                                	Boulder,
      Colorado  80301
	 	 	 
	 	Other Current Collateral
      Locations:	 
	 	 	 
	 	6810 Bickmore
      Ave.                                                                     .	2950 Colorful
      Ave
	 	Chino, CA
      91708                                                                       	Longmont, CO
      80504
	 	 	 
	 	15820 Euclid
      Ave.                                                                           	5102-5160 W. 76th
      St.
	 	Chino, CA
      91708                                                                             	Indianapolis, IN
      46268
	 	 	 
	 17.     	Ownership Structure:
      Borrower will provide a list and percentage of
      ownership for all officers and directors.	 
	 	 	 
	 18.   	Owned
      Real Property:                                                  	None
	 	 	 
	 	Leased Real Property (including
      legal name of landlord and monthly rent):	 
	 	 	 
	 	Pawnee Properties,
      LLC                                                               	Concepts Direct,
      Inc.
	 	Location: 
       6075 Longbow Dr, Suite
      200                                     	Location:  
      2950 Colorful Ave.
	 	
              Boulder, CO
      80301

            	
              Longmont, CO
      80504

            
	 	
              Rent: $17,510

            	
              Rent:  $24,965

            
	
               

            	 	 
	 	Sublease from
      Coleman Cable, Inc.	 
	 	 	 
	 	Location: 
       5102-5160 W. 76th
      St.	 
	 	
              Indianapolis, IN
      46268

            	 
	 	
              Rent: $16,950

            	 
	 	 	 
	 	Warehousemen, processors,
      consignees or other bailees in possession or control of any Inventory
      (include name, address where Inventory is stored and description of the
      arrangement):	 
	 	 	 
	 	Motivational
      Fulfillment & Logistics Services	 
	 	 	 
	 	Locations:  6810
      Bickmore
      Ave.                                            	15820 Euclid
      Ave.
	 	
              Chino, CA
      91708

            	Chino, CA
      91708
	 	 	 
	 	Motiviational
      Fulfillment & Logistics provides warehousing and fulfillment services
      for our retail customers and individual consumers.	 
	 	 	 
	 19.   	Bank
      Accounts:	 
	 	 	 
	
            	Wells
      Fargo      	#173-6272897
      (Checking/Main Account)
	 	 	#318-9274230 (Direct
      Response Credit Card)
	 	 	#318-9281847 (Rebate
      Account)
	 	
            	#318-9281912 (Retail
      Credit Card)
	 	
            	#341-8182188 (Money
      Market Account)
	 	 	 
	         	First National                             	#43054607 (Operating
      Account)
	 	 	#43054586 (Rebate
      Account)

    

     

     

    
      
        
        

      

      
        25

        
          

        

      

      
        
        

      

    

     

    
    

    20.           Commercial
Tort Claims:  None

     

    21.           Financial
Covenants:

     

    (a)                      Beginning
with the month ending December 31, 2008, and for each month thereafter, Borrower
shall maintain, as of the last day of each month, a ratio of Borrower’s (i) net
income (excluding extraordinary gains) before provision for interest expense,
taxes, depreciation and amortization, to (ii) interest expense, plus payments of
principal actually made or scheduled to be made with respect to indebtedness
(other than scheduled but unpaid payments on Subordinated Debt and principal
payments on revolving loans under this Agreement), plus payments with respect to
capitalized leases, plus taxes, plus dividends and distributions, plus
unfinanced capital expenditures, of at least 1.0 to 1. Such ratio shall be
measured as of the last day of each calendar month (A) with respect to each
calendar month end beginning with the December 31, 2008 month end through and
including the August 31, 2009 month end, for the period from October 31, 2008
through the calendar month most recently ended, and (B) with respect to any
calendar month ending on or after September 30, 2009, for the twelve-month
period most recently ended.

     

    (b)                      Borrower
shall maintain a Tangible Net Worth, plus the outstanding principal balance of
Subordinated Debt, as follows:

     

    
      	
              Month
      Ending

            	
              Amount

            
	
              06/30/08

            	
              $3,000,000

            
	
              09/30/08

            	
              $3,000,000

            
	
              12/31/08
      and Thereafter

            	
              $6,500,000

            

    

     

     As
used herein, “Tangible Net Worth” means, as of any date, the total assets of
Borrower minus the total liabilities of Borrower calculated in conformity with
GAAP, less all amounts due from Borrower’s Affiliates and the amount of all
intangible items reflected therein, including all unamortized debt discount and
expense, unamortized research and development expense, unamortized deferred
charges, goodwill, intellectual property, unamortized excess cost of
invest­ments in subsidiaries over equity at dates of acquisition, and all
similar items which should properly be treated as intan­gi­bles in
accordance with GAAP.

     

    (c)           Borrower
shall maintain  an  Indebtedness to Tangible Net Worth ratio
of less than or equal to the following:

     

    
      	
              Month
      Ending

            	
              Ratio

            
	
              06/30/08

            	
              2.75x

            
	
              09/30/08

            	
              5.75x

            
	
              12/31/08

            	
              3.0x

            
	
              03/31/09
      and Thereafter

            	
              2.25x

            

    

    

     

    
      
        
        

      

      
        26

        
          

        

      

      
        
        

      

    

     

    22.           Permitted
Purchase Money Debt: $500,000

     

    23.           Permitted
Capital Expenditures:  $500,000
during any fiscal year [excludes tooling in the normal course of
business]

    
       

    

    
      24.     
    Maximum Annual
Increase in Officers’ Compensation:    Except
as previously disclosed to Lender, Borrower may not
make any
loans or other advances of money  (other than
salary) to officers, directors, stockholders,
Affiliates of Borrower or any Persons,  or  permit the
annual salary and all other direct and indirect remuneration to its officers to
increase.  Notwithstanding the foregoing, salaries paid to officers
may increase at a rate of twenty percent (20%) per year. In addition, year-end
bonuses will continue to be paid pursuant to employment
contracts. Compensation paid to members of the Board of Directors shall
not, in the aggregate, exceed $100,000.

    

     

    25.           Annual
Financial Statements:    To
be audited and certified without qualification by an independent practicing
certified public accountant acceptable to Lender.

     

    26.           Borrowing
Base Certificates:    Borrower
shall deliver to Lender a Borrowing Base Certificate no less frequently than
weekly by 10:30 a.m. CST, prepared as of the close of business on the
immediately preceding Business Day.

     

    27.           Field
Examinations:  Borrower
agrees to pay to Lender Lender’s
customary fees and disbursements relating to quarterly field examinations of the
Collateral, Borrower, Borrower’s business and Borrower’s books and records,
which, as of the Agreement Date, are $750 per examiner per day plus all of the
out-of-pocket examination costs and travel and other expenses incurred by such
examiners.

     

    28.           Cross
Default Amount:   $75,000

     

    29.           Judgment
Cross Default Amount:  $75,000

     

    30.           Change
of Management Default:

     

    Name                                                      Office

    Michael
Bissonnette                            Chairman

    Jerry
Perkins                                          CEO

     

    31.         
 Notice
Addresses:

     

    
      	 If to
      Borrower:   	AeroGrow
      International, Inc.
	 	6075 Longbow Drive,
      Suite 200
	 	Boulder,
      Colorado  80301
	 	Attn.: Greg
      Clarke
	 	Facsimile No.:(303)
      350-4770
	 	 
	 If to Lender
      :	FCC, LLC, d/b/a
      First Capital
	 	3520 NW 58th
      Street
	 	Oklahoma City,
      Oklahoma 73112
	 	Facsimile
      No.:  405-917-9660
	 	Attention:  Lee
      E. Elmore
	 	Senior Vice
      President

    

     

                                                                                                   

     

     

    
      
        
        

      

      
        27

        
          

        

      

      
        
        

      

    

     

    EXHIBIT  A

     

    FCC, LLC
d/b/a First Capital – Online Asset Based Lending

     

     

    Certificate
#                                                                Client:

     

    
      Certificate
Date:                                                         User:

    

     

    Loan # -
Type

     

    Collateral
Balance

     

    Sales/Additions

     

    +
Adjustments

     

    Cash
(Memo)/Removals

     

    Discounts

     

    Returns
& Allowances

     

    Non-AR
Cash

     

    Bad Debt
Write-Offs

     

    -
Adjustments

     

    New
Collateral Balance

     

    Ineligibles

     

    Advance
Rate

     

    Reserves

     

    Collateral
Limit

     

    New Net
Collateral

     

    Revolving
Limit

     

    Total
Line Limit

     

    Total
Collateral

     

    Loan
Balance

     

    Advance
Request

     

    DDA
Account

     

    Collections
(Memo)

     

    New Loan
Balance

     

    New
Availability

     

     

    
      
        
        

      

      
        28

        
          

        

      

      
        
        

      

    

     

    
      EXHIBIT
B

      

      FORM
OF COMPLIANCE CERTIFICATE

      

      [to
be provided on borrower’s letterhead]

      

      __________________,
2008

      

      FCC, LLC,
d/b/a First Capital

      3520 NW
58th
Street

      Oklahoma
City, Oklahoma 73112

      Attn.:

      

      The
undersigned, the                                                                                     
of AEROGROW
INTERNATIONAL, INC., a Nevada corporation (“Borrower”), gives this
certificate to FCC, LLC,
d/b/a First Capital, a
Florida limited liability company (“Lender”), in
accordance with the requirements of that certain Loan and Security Agreement
dated as of , 2008 between Borrower and Lender (as amended from time to time,
the “Loan Agreement”).  Capitalized terms used in this Certificate,
unless otherwise defined herein, shall have the meanings ascribed to them in the
Loan Agreement.

      

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

      

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

      

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

       

      Yours
truly,

       

      AEROGROW
INTERNATIONAL, INC.

      

      

      By:                                                     

      Name:                                                

      Title:                                                  

    

     

    
      
        
        

      

      
        29

        
          

        

      

      
        
        

      

    

     

     

    Appendix
1

     

    A.                 [Minimum
Tangible Net Worth Plus Subordinated Debt Requirement of
$______________.

     

    Tangible
Net Worth = Net Worth, plus Subordinated Debt less Intangibles

     

    Net
Worth                                           $_________________,
plus

     

    Subordinated
Debt                            $_________________,
less

     

    Intangible
assets                                $_________________

     

    Actual
Tangible Net
Worth                                      $___________________]

     

    B.                 [Minimum
Fixed Charge Coverage Ratio Requirement ___ to 1

     

    
      	
              Fixed
      Charge Coverage Ratio

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

            

    

     

    
      Net
Income                                     
   $______________________,
plus

    

    
      Interest
Expense                          
     $______________________,
plus

    

    
      Taxes                                      
            $______________________,
plus

    

    
      Depreciation                            
          $______________________,
plus

    

    
      Amortization                            
          $______________________
equals

    

     

    
      Numerator                                       
   $______________________

    

     

     

    
      Interest
Expense                                
$______________________,
plus

    

    
      Principal
Payments
made                 
$______________________,
plus

    

    
      and
scheduled to be made

    

    
      with
respect to indebtedness

    

    
      Capitalized
Lease
Payments            
$______________________,
plus

    

    
      Taxes                                                 
  $______________________,
plus

    

    
      Dividends
&
Distributions              
$______________________,
plus

    

    
      Unfinanced
capital expenditures     $______________________
equals

    

     

    
      Denominator                                      
$______________________

    

     

    Actual Fixed
Charge    =   __________ to
1]

      Coverage
Ratio

     

    C.                 Debt/TNW
Ratio                                                       _____
to 1

     

    Actual TNW (per
above)   ________________________, divided by

    Total Company’s
Indebtedness   ________________________,
equals

    Actual Debt/TNW
Ratio   ___________ to 1.

     

     [INSERT
OR REVISE FINANCIAL COVENANT CALCULATIONS AS APPROPRIATE.]

     

     

     

    
      
        
        

      

      
        30ex10-2.htm

    Exhibit 10.2

     

    VALIDITY
AGREEMENT

     

    THIS
VALIDITY AGREEMENT (this “Agreement”) is made as of the ____ day of _____, 2008,
by and between Jervis B. Perkins (the “Principal”), AEROGROW INTERNATIONAL,
INC., a Nevada corporation (“Company”), and FCC, LLC, d/b/a First Capital
(“Secured Party”).

     

    RECITALS

     

    A. The
Principal is part of top-level management of Company and has considerable
expertise and familiarity in the management of Company's business.

     

    B. Company
and Secured Party are parties to a Loan and Security Agreement dated the same
date as this Agreement (as amended, modified, restated, substituted, extended
and renewed at any time and from time to time, the “Loan
Agreement”).  Capitalized terms not otherwise defined in this
Agreement shall have the meanings set forth in the  Loan
Agreement.

     

    C. Under the
Loan Agreement, Company has obtained and is currently indebted under, and may
obtain in the future, certain loans which are part of the “Obligations” (as that
term is defined in the Loan Agreement) of Company to Secured
Party.  The Obligations are secured by the “Collateral” (as that term
is defined in the Loan Agreement) as set forth in various agreements between
Company and Secured Party.

     

    D. A
condition of the making of the Loans was that the Principal and Company enter
into this Agreement.

     

    AGREEMENTS

     

    NOW,
THEREFORE, IN CONSIDERATION of the premises, and for other good and valuable
consideration, receipt of which is hereby acknowledged, and intending to be
legally bound, Secured Party, the Principal and Company hereby agree as
follows:

     

    1. Recitals.

     

    The
parties hereto hereby acknowledge and agree that to the best of their knowledge
the Recitals are true and accurate in all material respects.

     

    2. Assurances By
Principals.

     

    (a) The
Principal covenants and agrees for the benefit of the Secured Party that the
Principal will not willfully and intentionally (i) make any untrue statement
of  a material fact to Secured Party relating to the Collateral that
would constitute a fraud under the laws of the State of Colorado, (ii) make any
untrue statement of  a material fact to Secured Party relating to the
Loans that would constitute a fraud under the laws of the State of Colorado, or
(iii) fail or refuse to turn over any Collateral or proceeds thereof to the
Secured Party or otherwise take any action that would constitute a fraud or
conversion under the laws of the State of Colorado.

     

    (b) If there
occurs a breach or violation of any of the obligations of the Principal in
subsection (a) above, to the maximum extent permitted by applicable law, Secured
Party shall only be entitled to recover direct pecuniary losses on the Loans
caused by the breach or violation of any of the obligations of Principal in
subsection (a) above, and Principal shall not be liable for any other loss of
profits or any special, incidental, consequential or punitive
damages.

     

    (c) Any
action by Secured Party for a breach or violation of any of the obligations of
Principal in subsection (a) above must be brought (i) within six (6) months from
any termination under Section 4 below,  (ii) the applicable Colorado
statute of limitations for a breach of a written contract, or (iii) the
applicable Colorado statute of limitations for civil fraud, which ever is the
shorter time period.

     

    (d) The
provisions of subsections (b) and (c) shall survive the termination of this
Agreement.

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    3. Default; Waiver;
Etc.

     

     

    (a) Any
default by the Principal or Company under Section 2 of this Agreement will cause
immediate and irreparable injury to Secured Party and will authorize recourse
against the defaulting party by Secured Party, to include injunction, specific
performance and all other legal or equitable remedies.

     

    (b) Company
agrees to pay all of Secured Party's attorney's reasonable fees and expenses
relating to a default by the Principal or Company under this
Agreement.

     

    (c) Neither
Secured Party's entering into this Agreement, nor any failure on the part of
Secured Party in exercising any right, power, or privilege under one or more of
the instruments, security agreements or other loan documents relating to the
Loans shall operate as a waiver thereof, nor shall a single or partial exercise
thereof preclude any other or further exercise of any other right, power or
privilege.  Secured Party's acceptance of this Agreement shall in no
way be deemed to obligate Secured Party to make any Loans.  This
Agreement is intended solely for the benefit of Secured Party, its successors
and assigns to be used in the exercise of its absolute discretion from time to
time and shall not be interpreted to place on it directly or indirectly any
obligation or duty whatsoever to enforce the obligations of the Principal or
Company hereunder.

     

    4. Termination.

     

    This
Agreement shall terminate upon the earliest of (a) the date on which Secured
Party has received payment of all amounts due and owing under the Loan
Agreement, including all fees and expenses of Secured Party due and owing under
any agreement relating to the Loan Agreement, and all commitments of Secured
Party to provide loans or other credit accommodations to Borrower have
terminated, or (b) the date on which the assets of Company shall have been
completely liquidated, with insubstantial exceptions, or (c) Principal’s
voluntary or involuntary termination of employment with the
Company.  Notwithstanding the foregoing, Principal’s liabilities, if
any, under this Agreement shall continue and survive past any termination
related to subsections (b) or (c) of the foregoing sentence with respect to any
statements, actions or omissions of Principal prior to such
termination.

     

    5. Entire
Agreement.

    

    Principal and Company and Secured Party
acknowledge that this written agreement represents the final agreement between
the parties and may not be contradicted by evidence of prior, contemporaneous or
subsequent oral agreements of the parties.  There is no unwritten oral
agreements between the parties.

    

    6.  Governing
Law.

     

    THIS
AGREEMENT SHALL BE INTERPRETED AND THE RIGHTS AND LIABILITIES OF THE PARTIES
HERETO DETERMINED IN ACCORDANCE WITH THE LAWS OF THE STATE OF COLORADO,
APPLICABLE TO AGREEMENTS EXECUTED, DELIVERED AND PERFORMED WITHIN SUCH STATE,
AND PRINCIPAL AND COMPANY HEREBY AGREES TO THE JURISDICTION OF ANY STATE OR
FEDERAL COURT LOCATED WITHIN DENVER, COLORADO. SECURED PARTY, PRINCIPAL AND
COMPANY WAIVES ANY OBJECTION BASED ON FORUM NON CONVENIENS, AND ANY OBJECTION TO
VENUE OF ANY ACTION INSTITUTED HEREUNDER AND CONSENTS TO THE GRANTING OF SUCH
LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY THE COURT.

    

     

    

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    IN WITNESS WHEREOF, the parties hereto have
executed this Agreement as of the date and year first written
above.

     

     

    COMPANY

     

    AEROGROW INTERNATIONAL, INC.

     

    

    By:_____________________________                                                                

          Jervis B.
Perkins, President
and Chief
Executive Officer

    

    

    PRINCIPAL

    

    _______________________________

    Jervis B. Perkins

    Address:                                                       

                                                           

    

    SECURED PARTY

    

    FCC, LLC d/b/a First
Capital

    A Florida limited liability
company

    

    

    By:_____________________________

          Lee E.
Elmore, Senior Vice President

    

    

    FCC, LLC

    3520 NW 58th
Street

    Oklahoma City, OK 73112

    Attn.:  Lee E. Elmore,
Senior Vice President

    Facsimile
No.:  405-917-9660

    

    

    

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    
      STATE OF
___________________

      

      COUNTY OF
_________________

    

    
 

    Before
me, the undersigned authority, on this date personally appeared Jervis B.
Perkins, President and Chief Executive Officer of Aerogrow International, Inc.,
known to me to be the person whose name is subscribed to the foregoing
instrument, and acknowledged to me that he executed the same for the purposes
and consideration therein expressed, in the capacity stated, and as the act and
deed of said corporation.

    

    Given
under my hand and seal this ______ day of __________________, 2008.

    

    

    

    ______________________________________

    Notary
Public

    

    ( S E A L
)

    

    

    

    My
Commission Expires:

    

    _____________________

    

    

    

    

    STATE OF
___________________

    

    COUNTY OF
_________________

    

    

    Before
me, the undersigned authority, on this date personally appeared Lee E. Elmore,
Senior Vice President of FCC, LLC, a Florida limited liability company, known to
me to be the person whose name is subscribed to the foregoing instrument, and
acknowledged to me that he executed the same for the purposes and consideration
therein expressed, in the capacity stated, and as the act and deed of said
limited liability company.

    

    Given
under my hand and seal this ______ day of __________________, 2008.

     

    

    ______________________________________

    Notary
Public

    ( S E A L
)

     

    

    My
Commission Expires:

    

    _____________________

    

     

    STATE OF
___________________

    

    COUNTY OF
_________________

    

    Before
me, the undersigned authority, on this date personally appeared Jervis B.
Perkins, known to me to be the person whose name is subscribed to the foregoing
instrument, and acknowledged to me that he executed the same for the purposes
and consideration therein expressed.

    

    Given
under my hand and seal this ______ day of __________________, 2008.

    

    

    

    ______________________________________

    Notary
Public

    ( S E A L
)

     

    

    My
Commission Expires:

    

    _____________________

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