Document:

Exhibit 10.1

 

 

CREDIT AND SECURITY AGREEMENT

 

BY AND BETWEEN

 

 

GARDENBURGER, INC.

 

 

AND

 

 

WELLS FARGO BANK, NATIONAL ASSOCIATION

 

Acting through its WELLS FARGO BUSINESS CREDIT operating division

 

 

November 22,
2005

 

 

 

TABLE OF
CONTENTS

 

	
  ARTICLE I.

  	
  DEFINITIONS

  	
   

  
	
  Section 1.1

  	
   

  	
  Definitions

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE II.

  	
  AMOUNT AND TERMS OF THE
  CREDIT FACILITY

  	
   

  
	
  Section 2.1

  	
   

  	
  Revolving Advances

  	
   

  
	
  Section 2.2

  	
   

  	
  Procedures for Requesting Advances

  	
   

  
	
  Section 2.3

  	
   

  	
  LIBOR Advances

  	
   

  
	
  Section 2.4

  	
   

  	
  Letters of Credit

  	
   

  
	
  Section 2.5

  	
   

  	
  Special Account

  	
   

  
	
  Section 2.6

  	
   

  	
  Term Advance

  	
   

  
	
  Section 2.7

  	
   

  	
  Payment of Term Note

  	
   

  
	
  Section 2.8

  	
   

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

  	
   

  
	
  Section 2.9

  	
   

  	
  Fees

  	
   

  
	
  Section 2.10

  	
   

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

  	
   

  
	
  Section 2.11

  	
   

  	
  Lockbox and Collateral
  Account; Sweep of Funds

  	
   

  
	
  Section 2.12

  	
   

  	
  Voluntary Prepayment; Reduction of the Maximum Line
  Amount; Termination of the Credit Facility by the Borrower

  	
   

  
	
  Section 2.13

  	
   

  	
  Mandatory Prepayment

  	
   

  
	
  Section 2.14

  	
   

  	
  Revolving Advances to Pay
  Obligations

  	
   

  
	
  Section 2.15

  	
   

  	
  Use of Proceeds

  	
   

  
	
  Section 2.16

  	
   

  	
  Liability Records

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE III.

  	
  SECURITY INTEREST;
  OCCUPANCY; SETOFF

  	
   

  
	
  Section 3.1

  	
   

  	
  Grant of Security Interest.

  	
   

  
	
  Section 3.2

  	
   

  	
  Notification of Account
  Debtors and Other Obligors

  	
   

  
	
  Section 3.3

  	
   

  	
  Assignment of Insurance

  	
   

  
	
  Section 3.4

  	
   

  	
  Occupancy

  	
   

  
	
  Section 3.5

  	
   

  	
  License

  	
   

  
	
  Section 3.6

  	
   

  	
  Financing Statement

  	
   

  
	
  Section 3.7

  	
   

  	
  Setoff

  	
   

  
	
  Section 3.8

  	
   

  	
  Collateral

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE IV.

  	
  CONDITIONS OF LENDING

  	
   

  

 

i

 

	
  Section 4.1

  	
   

  	
  Conditions Precedent to the
  Initial Advances and Letters of Credit

  	
   

  
	
  Section 4.2

  	
   

  	
  Conditions
  Precedent to All Advances and Letters of Credit

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE V.

  	
  REPRESENTATIONS AND WARRANTIES

  	
   

  
	
  Section 5.1

  	
   

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

  	
   

  
	
  Section 5.2

  	
   

  	
  Capitalization

  	
   

  
	
  Section 5.3

  	
   

  	
  Authorization of Borrowing; No
  Conflict as to Law or Agreements

  	
   

  
	
  Section 5.4

  	
   

  	
  Legal Agreements

  	
   

  
	
  Section 5.5

  	
   

  	
  Subsidiaries

  	
   

  
	
  Section 5.6

  	
   

  	
  Financial Condition; No Adverse
  Change

  	
   

  
	
  Section 5.7

  	
   

  	
  Litigation

  	
   

  
	
  Section 5.8

  	
   

  	
  Regulation U

  	
   

  
	
  Section 5.9

  	
   

  	
  Taxes

  	
   

  
	
  Section 5.10

  	
   

  	
  Titles and Liens

  	
   

  
	
  Section 5.11

  	
   

  	
  Intellectual Property Rights

  	
   

  
	
  Section 5.12

  	
   

  	
  Plans

  	
   

  
	
  Section 5.13

  	
   

  	
  Default

  	
   

  
	
  Section 5.14

  	
   

  	
  Environmental Matters

  	
   

  
	
  Section 5.15

  	
   

  	
  Submissions to Lender

  	
   

  
	
  Section 5.16

  	
   

  	
  Financing Statements

  	
   

  
	
  Section 5.17

  	
   

  	
  Rights to Payment

  	
   

  
	
  Section 5.18

  	
   

  	
  Bankruptcy Case

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE VI.

  	
  COVENANTS

  	
   

  
	
  Section 6.1

  	
   

  	
  Reporting Requirements

  	
   

  
	
  Section 6.2

  	
   

  	
  Financial Covenants

  	
   

  
	
  Section 6.3

  	
   

  	
  Permitted Liens; Financing
  Statements

  	
   

  
	
  Section 6.4

  	
   

  	
  Indebtedness

  	
   

  
	
  Section 6.5

  	
   

  	
  Guaranties

  	
   

  
	
  Section 6.6

  	
   

  	
  Investments and Subsidiaries

  	
   

  

 

ii

 

	
  Section 6.7

  	
   

  	
  Dividends and Distributions

  	
   

  
	
  Section 6.8

  	
   

  	
  Salaries

  	
   

  
	
  Section 6.9

  	
   

  	
  Books and Records; Collateral
  Examination, Inspection and Appraisals

  	
   

  
	
  Section 6.10

  	
   

  	
  Account
  Verification

  	
   

  
	
  Section 6.11

  	
   

  	
  Compliance with Laws

  	
   

  
	
  Section 6.12

  	
   

  	
  Payment of Taxes and Other Claims

  	
   

  
	
  Section 6.13

  	
   

  	
  Maintenance of Properties

  	
   

  
	
  Section 6.14

  	
   

  	
  Insurance

  	
   

  
	
  Section 6.15

  	
   

  	
  Preservation of Existence

  	
   

  
	
  Section 6.16

  	
   

  	
  Delivery of Instruments, etc

  	
   

  
	
  Section 6.17

  	
   

  	
  Sale or Transfer of Assets;
  Suspension of Business Operations

  	
   

  
	
  Section 6.18

  	
   

  	
  Consolidation and Merger; Asset
  Acquisitions

  	
   

  
	
  Section 6.19

  	
   

  	
  Sale and Leaseback

  	
   

  
	
  Section 6.20

  	
   

  	
  Restrictions on Nature of
  Business

  	
   

  
	
  Section 6.21

  	
   

  	
  Accounting

  	
   

  
	
  Section 6.22

  	
   

  	
  Discounts,
  etc

  	
   

  
	
  Section 6.23

  	
   

  	
  Plans

  	
   

  
	
  Section 6.24

  	
   

  	
  Place of
  Business; Name

  	
   

  
	
  Section 6.25

  	
   

  	
  Constituent
  Documents; S Corporation Status

  	
   

  
	
  Section 6.26

  	
   

  	
  Performance
  by the Lender

  	
   

  
	
  Section 6.27

  	
   

  	
  Information for Exit Financing

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE VII.

  	
  EVENTS OF DEFAULT, RIGHTS AND
  REMEDIES

  	
   

  
	
  Section 7.1

  	
   

  	
  Events of Default

  	
   

  
	
  Section 7.2

  	
   

  	
  Rights and Remedies

  	
   

  
	
  Section 7.3

  	
   

  	
  Certain Notices

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE VIII.

  	
  MISCELLANEOUS

  	
   

  
	
  Section 8.1

  	
   

  	
  No Waiver;
  Cumulative Remedies; Compliance with Laws

  	
   

  
	
  Section 8.2

  	
   

  	
  Amendments,
  Etc

  	
   

  
	
  Section 8.3

  	
   

  	
  Notices;
  Communication of Confidential Information; Requests for Accounting

  	
   

  
	
  Section 8.4

  	
   

  	
  Further
  Documents

  	
   

  

 

iii

 

	
  Section 8.5

  	
   

  	
  Costs and Expenses

  	
   

  
	
  Section 8.6

  	
   

  	
  Indemnity

  	
   

  
	
  Section 8.7

  	
   

  	
  Participants

  	
   

  
	
  Section 8.8

  	
   

  	
  Execution
  in Counterparts; Telefacsimile Execution

  	
   

  
	
  Section 8.9

  	
   

  	
  Retention
  of Borrower’s Records

  	
   

  
	
  Section 8.10

  	
   

  	
  Binding
  Effect; Assignment; Complete Agreement; Sharing Information

  	
   

  
	
  Section 8.11

  	
   

  	
  Severability
  of Provisions

  	
   

  
	
  Section 8.12

  	
   

  	
  Headings

  	
   

  
	
  Section 8.13

  	
   

  	
  Governing
  Law; Jurisdiction, Venue

  	
   

  
	
  Section 8.14

  	
   

  	
  Exit
  Financing

  	
   

  
	
  Section 8.15

  	
   

  	
  Arbitration

  	
   

  

 

iv

 

CREDIT AND SECURITY AGREEMENT

 

Dated as of November 22,
2005

 

GARDENBURGER,
INC., an Oregon corporation (the “Borrower”), and WELLS FARGO BANK, NATIONAL
ASSOCIATION acting through its WELLS FARGO BUSINESS CREDIT operating division
(together with its successors and assigns, the “Lender”) hereby agree as
follows:

 

ARTICLE I.

DEFINITIONS

 

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

 

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

 

“Accounts
Advance Rate” means up to eighty-five percent (85%), or such lesser rate as the
Lender in its sole discretion may deem appropriate from time to time.

 

“Advance”
means a Revolving Advance or a Term Advance.

 

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

 

“Agreement”
means this Credit and Security Agreement.

 

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

 

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

 

“Availability”
means the amount, if any, by which the Borrowing Base exceeds the sum of (i) the
outstanding principal balance of the Revolving Note and (ii) the L/C
Amount.

 

“Availability
Reserve” means a reserve in the amount of $500,000.

 

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

 

 

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

 

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

 

“Borrowing
Base” means at any time the lesser of:

 

(a)                                  The
Maximum Line Amount; or

 

(b)                                 Subject
to change from time to time in the Lender’s sole discretion, the sum of:

 

(i)                                     The
product of the Accounts Advance Rate times Eligible Accounts, plus

 

(ii)                                  The
lesser of (A) the lesser of (1) the sum of (x) the product of the
Inventory Advance Rate applicable to raw materials times Eligible Inventory
constituting raw materials plus (y) the product of the Inventory Advance Rate
applicable to finished goods times Eligible Inventory constituting finished
goods or (2) 85% of the Net Orderly Liquidation Value of Eligible
Inventory or (B) $4,500,000, less

 

(iii)                               All
Reserves, less

 

(iv)                              Obligations
that the Borrower owes to the Lender that have not yet been advanced on the
Revolving Note, and the dollar amount that the Lender in its reasonable
discretion then determines to be a reasonable determination of the Borrower’s
credit exposure with respect to Wells Fargo Bank Affiliate Obligations.

 

“Business Day”
means a day on which the Federal Reserve Bank of New York is open for business
and, if such day relates to a LIBOR Advance, a day on which dealings are
carried on in the London interbank eurodollar market.

 

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

 

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

 

“Collateral”
means all of the Borrower’s Accounts, chattel paper and electronic chattel
paper, commercial tort claims, deposit accounts, documents, Equipment, General
Intangibles (including payment intangibles), goods, instruments, Inventory,
Investment Property, letter-of-credit rights, letters of credit, software,
supporting obligations, and all sums on deposit in any Collateral Account, and
any items in any Lockbox; together with (i) all substitutions and
replacements for and products of any of the foregoing; (ii) in the case of
all goods, all accessions; (iii) all accessories, attachments, parts,
equipment and repairs now or hereafter attached or affixed to or used in
connection with any goods; (iv) all warehouse receipts, bills of lading
and other documents of title now or hereafter covering such goods; (v) all
collateral subject to the Lien of any Security Document; (vi) any money,
or other assets of the Borrower that now or

 

2

 

hereafter come into the possession, custody, or control of the Lender; (vii) all
sums on deposit in the Special Account; (viii) proceeds of any and all of
the foregoing; (ix) books and records of the Borrower, including all mail
or electronic mail addressed to the Borrower and all rights of access to such
books, records and information, and all property in which such books, records
and information are stored, recorded and maintained; (x) all liens, guaranties,
rights, remedies and privileges pertaining to any of the foregoing ((i) through
(ix), including the right of stoppage in transit; and (xi) all of the
foregoing, whether now owned or existing or hereafter acquired or arising or in
which the Borrower now has or hereafter acquires any rights.

 

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

 

“Commercial
Letter of Credit Agreement” means an agreement governing the issuance of
documentary letters of credit by the Lender entered into between the Borrower
as applicants and the Lender as issuer.

 

“Commitment”
means the Lender’s commitment to make Advances to, and to issue Letters of
Credit for the account of, the Borrower.

 

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

 

“Credit
Facility” means the credit facility under which Revolving Advances and Letters
of Credit may be made available to the
Borrower by the Lender under Article II.

 

“Cut-off Time”
means 10:00 a.m. Pasadena,
California time; provided, however, with respect to December 24th,
December 31st (if such dates are Business Days), and the last
Business Day of any calendar month, “Cut-off Time” shall mean 9:30 a.m.
Pasadena, California time.

 

“Debt” means
of a Person as of a given date, all items of indebtedness or liability which in
accordance with GAAP would be included in determining total liabilities as
shown on the liabilities side of a balance sheet for such Person and shall also
include the aggregate payments required to be made by such Person at any time
under any lease that is considered a capitalized lease under GAAP.

 

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

 

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

 

“Default Rate”
means an annual interest rate in effect during a Default Period or following
the Termination Date, which interest rate shall be equal to three percent (3%)
over the

 

3

 

applicable Floating Rate or the LIBOR Advance Rate, as the case may be,
as such rate may change from time to time.

 

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

 

“Eligible
Accounts” means all unpaid Accounts arising from the sale or lease of goods or
the performance of services, net of any credits, but excluding any such
Accounts having any of the following characteristics:

 

(i)                                     That
portion of Accounts unpaid 60 days or more after the invoice date to the
extent not otherwise reserved in the Borrower’s allowance for Accounts
deductions;

 

(ii)                                  That
portion of Accounts related to goods or services with respect to which the
Borrower has received notice of a claim or dispute, which are subject to a
claim of offset or a contra account, or which reflect a reasonable reserve for
warranty claims or returns;

 

(iii)                               That
portion of Accounts not yet earned by the final delivery of goods or rendition
of services, as applicable, by the Borrower to the customer, including progress
billings, and that portion of Accounts for which an invoice has not been sent
to the applicable account debtor;

 

(iv)                              Accounts
constituting (i) proceeds of copyrightable material unless such
copyrightable material shall have been registered with the United States Copyright
Office, or (ii) proceeds of patentable inventions unless such patentable
inventions have been registered with the United States Patent and Trademark
Office;

 

(v)                                 Accounts
owed by any unit of government, whether foreign or domestic (provided, however,
that there shall be included in Eligible Accounts that portion of Accounts owed
by such units of government for which the Borrower has provided evidence
satisfactory to the Lender that (A) the Lender has a first priority
perfected security interest and (B) such Accounts may be enforced by the
Lender directly against such unit of government under all applicable laws);

 

(vi)                              Accounts
denominated in any currency other than United States dollars;

 

(vii)                           Accounts
owed by an account debtor located outside the United States and Canada which
are not (A) backed by a bank letter of credit naming the Lender as
beneficiary or assigned to the Lender, in the Lender’s possession or control,
and with respect to which a control agreement concerning the letter-of-credit
rights is in effect, and acceptable to the Lender in all respects, in its sole
discretion, or (B) covered by a foreign receivables insurance policy
acceptable to the Lender in its sole discretion;

 

(viii)                        Accounts
owed by an account debtor that is insolvent, the subject of bankruptcy
proceedings or has gone out of business;

 

4

 

(ix)                                Accounts
owed by an Owner, Subsidiary, Affiliate, Officer or employee of the Borrower;

 

(x)                                   Accounts
not subject to a duly perfected security interest in the Lender’s favor or
which are subject to any Lien in favor of any Person other than the Lender
(other than the Lien in favor of Gordon Brothers securing the Gordon Brothers
Term Loan);

 

(xi)                                That
portion of Accounts that has been restructured, extended, amended or modified;

 

(xii)                             That
portion of Accounts that constitutes advertising, finance charges, service
charges or sales or excise taxes;

 

(xiii)                          Accounts
owed by (A) either DOT Foods, Inc. and C&S Wholesale Grocers, Inc.,
regardless of whether otherwise eligible, to the extent that the aggregate
balance of Accounts owing by such account debtor exceeds 30% of the aggregate
amount of all Accounts, or (B) any other account debtor, regardless of
whether otherwise eligible, to the extent that the aggregate balance of
Accounts owing by such account debtor exceeds 15% of the aggregate amount of
all Accounts; provided that the Lender shall have the ability after the Funding
Date to adjust concentration limits applicable to individual account debtors of
the Borrower in the Lender’s sole discretion;

 

(xiv)                         Accounts
owed by an account debtor, regardless of whether otherwise eligible, if 25% or
more of the total amount of Accounts due from such debtor is ineligible under
clauses (i), (ii), or (x) above; and

 

(xv)                            Accounts,
or portions thereof, otherwise deemed ineligible by the Lender in its sole
discretion.

 

“Eligible
Equipment” means that Equipment designated by the Lender as eligible from time
to time in its sole discretion.

 

“Eligible
Inventory” means all Inventory of the Borrower, valued at the lower of cost or
market in accordance with GAAP; but excluding any Inventory having any of the
following characteristics:

 

(i)                                     Inventory
that is: in-transit; located at any warehouse, job site or other premises not
approved by the Lender in writing; not subject to a duly perfected first
priority security interest in the Lender’s favor; subject to any lien or
encumbrance that is subordinate to the Lender’s first priority security
interest; covered by any negotiable or non-negotiable warehouse receipt, bill
of lading or other document of title; on consignment from any Person; on
consignment to any Person or subject to any bailment unless such consignee or
bailee has executed an agreement with the Lender;

 

(ii)                                  Supplies,
packaging, maintenance parts or sample Inventory, or customer
supplied parts or Inventory;

 

(iii)                               Work-in-process
Inventory;

 

5

 

(iv)                              Inventory
that is damaged, defective, obsolete, slow moving or not currently saleable in
the normal course of the Borrower’s operations, or the amount of such Inventory
that has been reduced by shrinkage (“slow moving” refers to Inventory that has
been on hand with the Borrower for more than six (6) months);

 

(v)                                 Inventory
that the Borrower has returned, has attempted to return, is in the process of
returning or intends to return to the vendor thereof;

 

(vi)                              Inventory
that is perishable or live;

 

(vii)                           Inventory
manufactured by the Borrower pursuant to a license unless the applicable
licensor has agreed in writing to permit the Lender to exercise its rights and
remedies against such Inventory;

 

(viii)                        Inventory
that is subject to a Lien in favor of any Person other than the Lender (other
than the Lien in favor of Gordon Brothers securing the Gordon Brothers Term
Loan);

 

(ix)                                Inventory
stored at locations holding less than 5% of the aggregate value of Borrower’s
Inventory, provided that, with respect to Inventory that is stored at
any location that is under the control of either Millard Refrigerated Services, Inc.
or AmeriCold Logistics, LLC, such Inventory shall only be deemed ineligible
under this clause (ix) in the event that the Inventory stored in any such
location has a book value of less than $100,000; and

 

(x)                                   Inventory
otherwise deemed ineligible by the Lender in its sole discretion.

 

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

 

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

 

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

 

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

 

“Event of
Default” is defined in Section 7.1.

 

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

 

6

 

“Exit
Financing” means the credit facility to be provided by the Lender to the
Borrower after the Bankruptcy Court confirms an Approved Plan of Reorganization
and pursuant to such Approved Plan of Reorganization; the terms of such credit
facility to be substantially similar to the terms set forth in this Agreement
as modified by the Exit Financing Commitment Letter attached hereto as Exhibit E.

 

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

 

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

 

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

 

“Floating Rate”
means (i) with respect to Revolving Advances evidenced by the Revolving
Note, an annual interest rate equal to the sum of the Prime Rate plus one half
of one percent (0.50%), and (ii) with respect to Term Advances evidenced
by the Term Note, an annual interest rate equal to the sum of the Prime Rate
plus one percent (1.00%), which interest rate shall, in each case, change
when and as the Prime Rate changes.

 

“Floating Rate
Advance” means an Advance bearing interest at the Floating Rate.

 

“Funding Date”
is defined in Section 2.1.

 

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

 

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

 

“Gordon
Brothers” means GB Retail Funding, LLC, a Delaware limited liability company.

 

“Gordon
Brothers Credit Agreement” means that certain Credit and Security Agreement of
even date herewith by and between the Borrower as borrower thereunder and
Gordon Brothers as lender thereunder.

 

“Gordon
Brothers Term Loan” means the term loan in an aggregate principal amount not to
exceed $5,000,000 made by Gordon Brothers to the Borrower concurrently with the
closing of this Agreement.

 

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

 

“Indemnified
Liabilities” is defined in Section 8.6.

 

“Indemnitees”
is defined in Section 8.6.

 

7

 

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

 

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

 

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

 

“Intercreditor
Agreement” means an intercreditor agreement between the Lender and Gordon
Brothers in form and substance satisfactory to the Lender, which intercreditor
agreement shall include provisions for subordination of Gordon Brothers’ Liens
on the Collateral (other than the IP Collateral) to the Security Interest, a
license for the Lender to use the intellectual property collateral in
connection with any liquidation by the Lender of the Collateral (other than the
IP Collateral) and such other provisions as the Lender shall require in order
to protect its rights with respect to the Collateral (other than the IP
Collateral).

 

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

 

“Interest
Payment Date” is defined in Section 2.10(a).

 

“Interest
Period” means the period that commences on (and includes) the Business Day on
which either a LIBOR Advance is made or continued pursuant to Sections 2.2(a) or
2.3(b), or on which a Floating Rate Advance is converted to a LIBOR Advance
pursuant to Section 2.3(a), and ending on (but excluding) the Business Day
numerically corresponding to such date that is one, three or six months thereafter as designated by the Borrower,
during which period the outstanding principal balance of the LIBOR Advance
shall bear interest at the LIBOR Advance Rate; provided, however,
that:

 

(a)                                  No
Interest Period may be selected for an Advance for a principal amount less than
Five Hundred Thousand Dollars ($500,000), and no more than three (3) different
Interest Periods may be outstanding at any one time;

 

(b)                                 If
an Interest Period would otherwise end on a day which is not a Business Day,
then the Interest Period shall end on the next Business Day thereafter, unless
that Business Day is the first Business Day of a month, in which case the
Interest Period shall end on the last Business Day of the preceding month);

 

(c)                                  No
Interest Period applicable to a Revolving Advance may end later than the
Maturity Date; and

 

8

 

(d)                                 In
no event shall the Borrower select Interest Periods with respect to Advances
which, in the aggregate, would require payment of a contracted funds breakage
fee under Section 2.9(h) in order to make required principal
payments.

 

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

 

“Inventory
Advance Rate” means (a) with respect to Inventory constituting raw
materials, up to forty-four and nine-tenths of one percent (44.9%), or such lesser rate as the Lender in its
sole discretion may deem appropriate from time to time, and (b) with
respect to Inventory constituting finished goods, up to sixty-three and
four-tenths of one percent (63.4%), or such lesser
rate as the Lender in its sole discretion may deem appropriate from time to
time.

 

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

 

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

 

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

 

“L/C Amount”
means the sum of (i) the aggregate face amount of any issued and
outstanding Letters of Credit and (ii) the unpaid amount of the Obligation
of Reimbursement.

 

“L/C
Application” means an application for the issuance of standby or documentary letters of credit pursuant to the terms of a Standby Letter
of Credit Agreement or a Commercial Letter of Credit Agreement, in form acceptable to the Lender.

 

“Letter of
Credit” is defined in Section 2.4(a).

 

“LIBOR” means
the rate per annum (rounded upward, if necessary, to the nearest whole 1/8 of
1%) determined pursuant to the following formula:

 

	
   

  	
  LIBOR =

  	
  Base LIBOR

  	
   

  
	
   

  	
   

  	
  100% - LIBOR
  Reserve Percentage

  	
   

  

 

(i)                                     “Base
LIBOR” means the rate per annum for United States dollar deposits quoted by the
Lender as the Inter-Bank Market Offered Rate, with the understanding that such
rate is quoted by the Lender for the purpose of calculating effective rates of
interest for loans making reference thereto, on the first day of a Interest
Period for delivery of funds on said date for a period of time approximately
equal to the number of days in such Interest Period and in an amount
approximately equal to the principal amount to which such Interest Period
applies.  The

 

9

 

Borrower understands and agrees that the Lender may base its quotation
of the Inter-Bank Market Offered Rate upon such offers or other market
indicators of the Inter-Bank Market as the Lender in its discretion deems
appropriate including the rate offered for U.S. dollar deposits on the London
Inter-Bank Market.

 

(ii)                                  “LIBOR
Reserve Percentage” means the reserve percentage prescribed by the Board of
Governors of the Federal Reserve System (or any successor) for “Eurocurrency
Liabilities” (as defined in Regulation D of the Federal Reserve Board, as
amended), adjusted by the Lender for expected changes in such reserve
percentage during the applicable Interest Period.

 

“LIBOR Advance”
means an Advance bearing interest at the LIBOR Advance Rate.

 

“LIBOR Advance
Rate” means (i) with respect to Revolving Advances evidenced by the
Revolving Note, an annual interest rate equal to the sum of LIBOR plus three
and one quarter of one percent (3.25%), and (ii) with respect to Term
Advances evidenced by the Term Note, an annual interest rate equal to the sum
of LIBOR plus three and three quarters of one percent (3.75%).

 

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

 

“Lien” means
any security interest, mortgage, deed of trust, pledge, lien, charge,
encumbrance, title retention agreement or analogous instrument or device,
including the interest of each lessor under any capitalized lease and the
interest of any bondsman under any payment or performance bond, in, of or on
any assets or properties of a Person, whether now owned or subsequently
acquired and whether arising by agreement or operation of law.

 

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

 

“Loan Year” is
defined in Section 2.8(c).

 

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

 

“Maturity Date”
means the earliest to occur of (a) July 31, 2006, or (b) the
date on which the credit facilities under the Exit Financing are effective.

 

“Maximum Line
Amount” means $7,500,000.

 

“Minimum
Interest Charge” is defined in Section 2.8(b).

 

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

 

“Net Cash Flow”
means, for any period, (a) Borrower’s cash collections from account
debtors received during such period, minus (b) Borrower’s operating
disbursements made during

 

10

 

such period, minus (c) all principal payments on Borrower’s
Debt paid or payable during such period, minus (d) Interest Expense
for such period.

 

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

 

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

 

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

 

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

 

“Net Orderly
Liquidation Value” means a professional opinion of the estimated most probable
Net Cash Proceeds which could typically be realized at a properly advertised
and professionally managed liquidation sale, conducted under orderly sale
conditions for an extended period of time (usually six to nine months), under
the economic trends existing at the time of the appraisal.

 

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

 

“Note” means
the Revolving Note or the Term Note, and “Notes” means the Revolving Note and
the Term Note.

 

“Obligation of
Reimbursement” means the obligation of the Borrower to reimburse the Lender
pursuant to the terms of the Standby Letter of Credit Agreement or the
Commercial Letter of Credit Agreement and any applicable L/C Application.

 

“Obligations”
means each Note, the Obligation of Reimbursement and each and every other debt,
liability and obligation of every type and description which the Borrower may
now or at any time hereafter owe to the Lender, whether such debt, liability or
obligation now exists or is hereafter created or incurred, whether it arises in
a transaction involving the Lender alone or in a transaction involving other
creditors of the Borrower, and whether it is direct or indirect, due or

 

11

 

to become due, absolute or contingent, primary or secondary, liquidated
or unliquidated, or sole, joint, several or joint and several, and including
all indebtedness of the Borrower arising under any Loan Document or guaranty
between the Borrower and the Lender, whether now in effect or subsequently
entered into, and all Wells Fargo Bank Affiliate Obligations.

 

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

 

“OFAC” is
defined in Section 6.12(c).

 

“Overadvance”
means the amount, if any, by which the outstanding principal balance of the
Revolving Note, plus the L/C Amount, is in excess of the then-existing
Borrowing Base.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

“Reserves” means, as of any date of determination, such amounts
(expressed as either a specified amount or as a percentage of a specified
category or item) as the Lender may from time to time establish and adjust in
reducing Availability (a) to reflect events, conditions,

 

12

 

contingencies or risks which, as determined
by the Lender, do or may affect (i) the Collateral or its value, (ii) the
assets, business or prospects of the Borrower, or (iii) the security
interests and other rights of the Lender in the Collateral (including the
enforceability, perfection and priority thereof), or (b) to reflect the
Lender’s judgment that any collateral report or financial information furnished
by or on behalf of the Borrower to the Lender is or may have been incomplete,
inaccurate or misleading in any material respect, or (c) in respect of any
state of facts that the Lender determines constitutes a Default or an Event of
Default.  Reserves will include, without
limitation, (A) the Availability Reserve, (B) reserves for budgeted
Third Party Service Provider fees and expenses (provided that the Lender may
release proportionate amounts of such reserves at such time and to the extent
that the Borrower pays such fees and expenses pursuant to Bankruptcy Court
approval), (C) reserves for
bankruptcy carve-outs approved by the Bankruptcy Court, (D) reserves for
post-petition trade payables not paid within 30 days after the due date
thereof, and (E) reserves for goods reclaimed under section 546(c) of
the Bankruptcy Code (unless such goods have been returned).

 

“Revolving
Advance” is defined in Section 2.1.

 

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

 

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

 

“Security
Interest” is defined in Section 3.1.

 

“Special
Account” means a specified cash collateral account maintained with Lender or
another financial institution acceptable to the Lender in connection with
Letters of Credit, as contemplated by Section 2.5.

 

“Standby
Letter of Credit Agreement” means an agreement governing the issuance of
standby letters of credit by Lender entered into between the Borrower as
applicant and Lender as issuer.

 

“Subsidiary”
means any Person of which more than 50% of the outstanding ownership interests
having general voting power under ordinary circumstances to elect a majority of
the board of directors or the equivalent of such Person, regardless of whether
or not at the time ownership interests of any other class or classes shall have
or might have voting power by reason of the happening of any contingency, is at
the time directly or indirectly owned by the Borrower, by the Borrower and one
or more other Subsidiaries, or by one or more other Subsidiaries.

 

“Term Advance”
is defined in Section 2.6.

 

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

 

13

 

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

 

“Third Party Service Provider” means any person or entity which
provides professional services, including legal, consulting, accounting, or
management which are compensable by the Borrower’s estate after approval by the
Bankruptcy Court in the Bankruptcy Case.

 

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

 

“Unused Amount”
is defined in Section 2.9(c).

 

“Wells Fargo
Bank Affiliate Obligations” means all obligations, liabilities, contingent
reimbursement obligations, fees, and expenses owing by the Borrower or its
Subsidiaries to any Person that is owned in material part by the Lender, and
that relates to any service or facility extended to the Borrower or its
Subsidiaries, including: (a) credit cards, (b) credit card processing
services, (c) debit cards, and (d) purchase cards, as well as any
other services or facilities from time to time specified by the Lender, whether
direct or indirect, absolute or contingent, due or to become due, and whether
existing now or in the future.

 

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

 

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

 

14

 

rule, regulation, order, decree, requirement, policy, guideline, directive
or interpretation means as amended, modified, codified, replaced or reenacted,
in whole or in part, and in effect on the determination date, including rules and
regulations promulgated thereunder.

 

ARTICLE II.

 

AMOUNT AND TERMS OF THE CREDIT FACILITY

 

Section 2.1                                      Revolving
Advances.  The Lender agrees, subject
to the terms and conditions of this Agreement, to make advances (“Revolving
Advances”) to the Borrower from time to time from the date that all of the
conditions set forth in 4.1 are satisfied (the “Funding Date”) to and until
(but not including) the Termination Date in an amount not in excess of the
Maximum Line Amount.  The Lender shall
have no obligation to make a Revolving Advance to the extent that the amount of
the requested Revolving Advance exceeds Availability.  The Borrower’s obligation to pay the
Revolving Advances shall be evidenced by the Revolving Note and shall be
secured by the Collateral.  Within the
limits set forth in this Section 2.1, the Borrower may borrow, prepay
pursuant to Section 2.12, and reborrow.

 

Section 2.2                                      Procedures for
Requesting Advances.  The Borrower
shall comply with the following procedures in requesting Revolving Advances:

 

(a)                                  Type of Advances. 
Each Advance shall be funded as either a Floating Rate Advance or a
LIBOR Advance, as the Borrower shall specify in a request delivered to the
Lender conforming to the requirements of Section 2.2(b); Floating Rate
Advances and LIBOR Advances may be outstanding at the same time.  Each request for a LIBOR Advance shall be in
multiples of $100,000, with a minimum request of at least $500,000.  LIBOR Advances shall not be available during
Default Periods.

 

(b)                                 Time for Requests.  The Borrower shall request each Advance not
later than the Cut-off Time on the Business Day on which the Advance is to be made.  Each request that
conforms to the terms of this Agreement shall be effective upon receipt by the
Lender, shall be in writing or by telephone or telecopy transmission, and shall
be confirmed in writing by the Borrower if so requested by the Lender, by (i) an Officer of the Borrower;
or (ii) a Person designated as the Borrower’s agent by an Officer of the
Borrower in a writing delivered to the Lender; or (iii) a Person whom the
Lender reasonably believes to be an Officer of the Borrower or such a
designated agent, which confirmation shall specify whether the Advance shall be
a Floating Rate Advance or a LIBOR Advance and, with respect to any LIBOR
Advance, shall specify the principal amount of the LIBOR Advance and the Interest
Period applicable thereto.  The Borrower shall repay all Advances even if
the Lender does not receive such confirmation and even if the Person requesting
an Advance was not in fact authorized to do so. 
Any request for an Advance, whether written or telephonic, shall be
deemed to be a representation by the Borrower that the conditions set forth in Section 4.2
have been satisfied as of the time of the request.

 

(c)                                  Disbursement. 
Upon fulfillment of the applicable conditions set forth in Article IV,
the Lender shall disburse the proceeds of the requested Advance by crediting
the

 

15

 

same to the
Borrower’s demand deposit account maintained with the Lender unless the Lender
and the Borrower shall agree in writing to another manner of disbursement.

 

Section 2.3                                      LIBOR Advances.

 

(a)                                  Converting Floating Rate Advances to LIBOR Advances; Procedures.  So long as no Default Period is in effect,
the Borrower may convert all or any part of the principal amount of any outstanding
Floating Rate Advance into a LIBOR Advance by requesting that the Lender
convert same no later than the Cut-off Time on the Business Day on which the
Borrower wishes the conversion to become effective.  Each request that conforms to the terms of
this Agreement shall be effective upon receipt by the Lender and shall be
confirmed in writing by the Borrower if the Lender so requests by any Officer
or designated agent identified in Section 2.2(b) or Person reasonably
believed by the Lender to be such an Officer or designated agent, which request
shall specify the Business Day on which the conversion is to occur (which
Business Day shall be at least three (3) Business Days after the date that
the Lender receives such request), the total amount of the Floating Rate
Advance to be converted, and the applicable Interest Period.  Each such conversion shall occur on a
Business Day, and the aggregate amount of Floating Rate Advances converted to
LIBOR Advances shall be in  multiples of
$100,000, with a minimum conversion amount of at least $500,000.

 

(b)                                 Procedures at End of an Interest Period.  Unless the Borrower requests a new LIBOR
Advance in accordance with the procedures set forth below, or prepays the
principal of an outstanding LIBOR Advance at the expiration of an Interest
Period, the Lender shall automatically and without request of the Borrower
convert each LIBOR Advance to a Floating Rate Advance on the last day of the
relevant Interest Period.  So long as no Default
exists, the Borrower may cause all or any part of any maturing LIBOR Advance to
be renewed as a new LIBOR Advance by requesting that the Lender continue the
maturing Advance as a LIBOR Advance no later than the Cut-off Time on the
Business Day constituting the first day of the new Interest Period.  Each such request shall be confirmed in
writing by the Borrower upon the Lender’s request by any Officer or designated
agent identified in Section 2.2(b), which confirmation shall be effective
upon receipt by the Lender, and which shall specify the amount of the expiring
LIBOR Advance to be continued and the applicable Interest Period.  Each new Interest Period shall begin on a
Business Day and the amount of each LIBOR Advance shall be in multiples of $100,000,
with a minimum Advance of at least $500,000.

 

(c)                                  Setting and Notice of Rates.  The Lender shall, with respect to any request
for a LIBOR Advance under Section 2.2 or a conversion or renewal of a
LIBOR Advance under this Section 2.3, provide the Borrower with a LIBOR
quote for each Interest Period identified by the Borrower on the Business Day
on which the request was made, if the request is received by the Lender prior
to the Cut-off Time, or for requests received by the Lender after the Cut-off
Time, on the next Business Day or on the Business Day on which the Borrower has
requested that the LIBOR Advance be made effective. If the Borrower does not
immediately accept a LIBOR quote, the quoted rate shall expire and any
subsequent request from Borrower for a LIBOR quote shall be subject to redetermination
by the Lender of the applicable LIBOR for the LIBOR Advance.

 

16

 

(d)                                 Taxes and Regulatory Costs. 
The Borrower shall pay the Lender with respect to any Advance, upon
demand and in addition to any other amounts due or to become due hereunder, any
and all (i) withholdings, interest equalization taxes, stamp taxes or
other taxes (except income and franchise taxes) imposed by any domestic or
foreign governmental authority and related in any manner to LIBOR, and (ii) future,
supplemental, emergency or other changes in the LIBOR Reserve Percentage,
assessment rates imposed by the Federal Deposit Insurance Corporation, or
similar requirements or costs imposed by any domestic or foreign governmental
authority or resulting from compliance by the Lender with any request or
directive (whether or not having the force of law) from any central bank or
other governmental authority and related in any manner to LIBOR to the extent
they are not included in the calculation of LIBOR.  In determining which of the foregoing are
attributable to any LIBOR option available to the Borrower hereunder, any
reasonable allocation made by the Lender among its operations shall be
conclusive and binding upon the Borrower.

 

Section 2.4                                      Letters of
Credit.

 

(a)                                  The
Lender agrees, subject to the terms and conditions of this Agreement, to issue,
at any time after the Funding Date and prior to the Termination Date, one or
more irrevocable standby or documentary letters of credit (each, a “Letter of
Credit”) for the Borrower’s account.  The
Lender will not issue any Letter of Credit if the face amount of the Letter of
Credit to be issued would exceed the lesser of:

 

(i)                                     $1,000,000
less the L/C Amount, or

 

(ii)                                  Availability.

 

Each Letter of
Credit, if any, shall be issued pursuant to a separate L/C Application made by
the Borrower to the Lender, which must be completed in a manner satisfactory to
the Lender.  The terms and conditions set
forth in each such L/C Application shall supplement the terms and conditions of
the Standby Letter of Credit Agreement or the Commercial Letter of Credit
Agreement, as applicable.

 

(b)                                 No
Letter of Credit shall be issued with an expiry date later than one (1) year
from the date of issuance or the Maturity Date in effect as of the date of
issuance, whichever is earlier.

 

(c)                                  Any
request for issuance of a Letter of Credit shall be deemed to be a
representation by the Borrower that the conditions set forth in Section 4.2
have been satisfied as of the date of the request.

 

(d)                                 If
a draft is submitted under a Letter of Credit when the Borrower is unable,
because a Default Period exists or for any other reason, to obtain a Revolving
Advance to pay the Obligation of Reimbursement, the Borrower shall pay to the
Lender on demand and in immediately available funds, the amount of the
Obligation of Reimbursement together with interest, accrued from the date of
the draft until payment in full at the Default Rate.  Notwithstanding the Borrower’s inability to
obtain a Revolving Advance for any reason, the Lender is irrevocably
authorized, in its sole discretion, to make a Revolving Advance in an amount
sufficient to discharge the Obligation of Reimbursement and all accrued but
unpaid interest thereon.

 

17

 

Section 2.5                                      Special
Account.  If the Credit Facility is
terminated for any reason while any Letter of Credit is outstanding, the
Borrower shall thereupon pay the Lender in immediately available funds for
deposit in the Special Account an amount equal to the L/C Amount plus any
anticipated fees and costs.  If the
Borrower fails to promptly make any such payment in the amount required
hereunder, then the Lender may make a Revolving Advance against the Credit
Facility in an amount sufficient to fulfill this obligation and deposit the
proceeds to the Special Account.  The
Special Account shall be an interest bearing account either maintained with the
Lender or with a financial institution acceptable to the Lender.  Any interest earned on amounts deposited in
the Special Account shall be credited to the Special Account.  The Lender may apply amounts on deposit in
the Special Account at any time or from time to time to the Obligations in the
Lender’s sole discretion.  The Borrower
may not withdraw any amounts on deposit in the Special Account as long as the
Lender maintains a security interest therein. 
The Lender agrees to transfer any balance in the Special Account to the
Borrower when the Lender is required to release its security interest in the
Special Account under applicable law.

 

Section 2.6                                      Term Advance.

 

(a)                                  The
Lender agrees, subject to the terms and conditions of this Agreement, to make a
single advance to the Borrower on the Funding Date (the “Term Advance”) in the
amount of $2,238,000.  The Borrower’s obligation to pay the Term
Advance shall be evidenced by the Term Note and shall be secured by the
Collateral as provided in Article III.

 

(b)                                 Upon
fulfillment of the applicable conditions set forth in Article IV, the
Lender shall deposit the proceeds of the Term Advance by crediting the same to
the Borrower’s demand deposit account specified in Section 2.2(c) unless
the Lender and the Borrower shall agree in writing to another manner of
disbursement.

 

Section 2.7                                      Payment of
Term Note.  The outstanding principal
balance of the Term Note shall be due and payable as follows:

 

(a)                                  In
equal monthly installments of $37,300, beginning on December 1, 2005, and
on the first day of each month thereafter.

 

(b)                                 If
the Lender at any time obtains an appraisal of the Equipment as permitted under
Section 6.8(d) herein, and the appraisal shows the aggregate
outstanding principal balance of the Term Note to exceed 100% of the Net Forced
Liquidation Value of Eligible Equipment, then the Borrower, upon demand by the
Lender, shall immediately prepay the Term Note in the amount of such excess.

 

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

 

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

 

Section 2.8                                      Interest; Minimum Interest Charge; Default Interest Rate; Application
of Payments; Participations; Usury.

 

18

 

(a)                                  Interest. 
Except as provided in Section 2.3, Section 2.8(c) and Section 2.8(f),
the principal amount of each Advance shall bear interest as a Floating Rate
Advance.

 

(b)                                 Minimum Interest Charge.  Notwithstanding any other terms of this
Agreement to the contrary, the Borrower shall pay, in arrears, to the Lender
interest of not less than $15,000 per calendar month on the Revolving Advances
(the “Minimum Interest Charge”) during the term of this Agreement, and the
Borrower shall pay, in arrears, any deficiency between the Minimum Interest
Charge and the amount of interest otherwise calculated under Section 2.8(a) on
the first day of each month and on the Termination Date.  When calculating this deficiency, the Default
Rate, if applicable, shall be disregarded.

 

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

 

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

 

(e)                                  Participations. 
If any Person shall acquire a participation in the Advances or the
Obligation of Reimbursement, the Borrower shall be obligated to the Lender to
pay the full amount of all interest calculated under this Section 2.8,
along with all other fees, charges and other amounts due under this Agreement,
regardless if such Person elects to accept interest with respect to its
participation at a lower rate than that calculated under this Section 2.8,
or otherwise elects to accept less than its pro rata share of such fees,
charges and other amounts due under this Agreement.

 

(f)                                    Usury. 
In any event no rate change shall be put into effect which would result
in a rate greater than the highest rate permitted by law.  Notwithstanding anything to the contrary
contained in any Loan Document, all agreements which either now are or which
shall become agreements between the Borrower and the Lender are hereby limited
so that in no contingency or event whatsoever shall the total liability for
payments in the nature of interest, additional interest and other charges
exceed the applicable limits imposed by any applicable usury laws.  If any payments in the nature of interest,
additional interest and other charges made under any Loan Document are held to
be in excess of the limits imposed by any applicable usury laws, it is agreed
that any such amount held to be in excess shall be considered payment of
principal hereunder, and the indebtedness evidenced hereby shall be reduced by
such amount so that the total liability for payments in the nature of interest,
additional interest and other charges shall not

 

19

 

exceed the
applicable limits imposed by any applicable usury laws, in compliance with the
desires of the Borrower and the Lender. 
This provision shall never be superseded or waived and shall control
every other provision of the Loan Documents and all agreements between the
Borrower and the Lender, or their successors and assigns.

 

Section 2.9                                      Fees.

 

(a)                                  Proposal Fee.  The
Borrower has paid to the Lender a fully earned and non-refundable proposal fee
of $50,000, which fee was due and payable upon the execution of the proposal
letter between the Borrower and the Lender.

 

(b)                                 Origination Fee.  The Borrower shall pay the Lender a fully
earned and non-refundable origination fee of $175,000, due and payable at the
time the initial Advances are available under this Agreement.

 

(c)                                  Unused Line Fee.  For the purposes of this Section 2.9(c),
“Unused Amount” means the Maximum Line Amount reduced by outstanding Revolving
Advances and the L/C Amount.  The Borrower agrees to pay to the Lender an
unused line fee at the rate of one-half of one percent (0.50%) per annum on the
average daily Unused Amount from the date of this Agreement to and including
the Termination Date, due and payable monthly in arrears on the first day of
the month and on the Termination Date.

 

(d)                                 Collateral Exam Fees.  The Borrower shall pay the Lender  fees in connection with any collateral exams,
audits or inspections conducted by or on behalf of the Lender of any Collateral
or the Borrower’s operations or business at the rates established from time to
time by the Lender as its collateral exam fees (which fees are currently $95
per hour per collateral examiner), together with all actual out-of-pocket costs
and expenses incurred in conducting any such collateral examination or
inspection.

 

(e)                                  Letter of Credit Fees.  The Borrower shall pay to the Lender a fee
with respect to each Letter of Credit, if any, accruing on a daily basis and
computed at an annual rate of one and one-half of one percent (1.50%) of the aggregate amount that may then be
drawn, assuming compliance with all conditions for drawing (the “Aggregate Face
Amount”), from and including the date of issuance of such Letter of Credit
until such date as such Letter of Credit shall terminate by its terms or be
returned to the Lender, due and payable monthly in arrears on the first day of
each month and on the date that the Letter of Credit shall terminate by its
terms or be returned to the Lender; provided, however, effective
as of the first day of the month
in which any Default Period begins through the last day of such Default Period,
or any shorter time period that the Lender may determine, in the Lender’s sole
discretion and without waiving any of its other rights and remedies, such fee
shall increase to four and one-half of
one percent (4.50%) of
the Aggregate Face Amount.  The foregoing
fee shall be in addition to any and all fees, commissions and charges imposed
by Lender with respect to or in connection with such Letter of Credit.

 

(f)                                    Letter of Credit Administrative Fees.  The Borrower shall pay all administrative
fees charged by Lender in connection with the honoring of drafts under any
Letter of Credit, amendments thereto, transfers thereof and all other activity
with respect to the Letters

 

20

 

of Credit at the
then-current rates published by Lender for such services rendered on behalf of
customers of Lender generally.

 

(g)                                 Termination Fee.   If (i) the Lender terminates the Credit
Facility during a Default Period, or if (ii) the Borrower terminates the
Credit Facility on a date other than the Maturity Date, then the Borrower shall
pay the Lender as liquidated damages a termination fee in an amount equal to
one percent (1.00%) of the Maximum Line Amount.

 

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

 

(i)                                     If
the Term Note is prepaid for any reason, the Borrower shall pay to the Lender a
prepayment fee in an amount equal to one percent (1.00%) of the amount prepaid.

 

(ii)                                  If
the principal amount of any Revolving Note or Term Note LIBOR Advance is
prepaid, the Borrower shall pay to the Lender immediately upon demand a
contracted funds breakage fee equal to the sum of the discounted monthly
differences for each month from the month of prepayment through the month in
which such Interest Period matures, calculated as follows for each such month:

 

(A)                              Determine
the amount of interest which would have accrued each month on the amount
prepaid at the interest rate applicable to such amount had it remained
outstanding until the last day of the applicable Interest Period.

 

(B)                                Subtract
from the amount determined in (A) above the amount of interest which would
have accrued for the same month on the amount prepaid for the remaining term of
such Interest Period at LIBOR in effect on the date of prepayment for new loans
made for such term and in a principal amount equal to the amount prepaid.

 

(C)                                If
the result obtained in (B) for any month is greater than zero, discount
that difference by LIBOR used in (B) above.

 

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

 

(i)                                     Waiver of Termination and Prepayment Fees.  The Borrower, at the Lender’s discretion,
will be excused from the payment of termination and prepayment fees otherwise
due under Section 2.9(g) and 2.9(h) if such termination or
prepayment is made because of refinancing through another division of Lender.

 

(j)                                     Overadvance Fees.  The Borrower shall pay an Overadvance fee in
the amount of $500.00 for each day or portion thereof during which an
Overadvance exists, regardless of how the Overadvance arises or whether or not
the Overadvance has been agreed to in advance by

 

21

 

the Lender. The
acceptance of payment of an Overadvance fee by the Lender shall not be deemed
to constitute either consent to the Overadvance or a waiver of the resulting
Event of Default, unless the Lender specifically consents to the Overadvance in
writing and waives the Event of Default on whatever conditions the Lender deems
appropriate.

 

(k)                                  Collateral Monitoring Fee. 
The Borrower shall pay to the Lender a collateral monitoring fee in the
amount of $2,000, due and payable monthly in arrears on the first day of each
month and on the Termination Date.

 

(l)                                     Other Fees and Charges; Payment of Fees.  The Lender may from time to time impose
additional fees and charges as consideration for Advances made in excess of
Availability or for other events that constitute an Event of Default or a
Default hereunder, including fees and charges for the administration of
Collateral by the Lender, and fees and charges for the late delivery of
reports, which may be assessed in the Lender’s sole discretion on either an
hourly, periodic, or flat fee basis, and in lieu of or in addition to imposing
interest at the Default Rate.

 

Section 2.10                                Time
for Interest Payments; Payment on Non-Business Days; Computation of Interest
and Fees.

 

(a)                                  Time For Interest Payments.  Accrued and unpaid interest accruing on
Floating Rate Advances shall be due and payable on the first day of each month
and on the Termination Date (each an “Interest Payment Date”), or if any such
day is not a Business Day, on the next succeeding Business Day. Interest will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the date of advance to the Interest Payment
Date.  If an Interest Payment Date is not
a Business Day, payment shall be made on the next succeeding Business Day.  Interest accruing on
each LIBOR Advance shall be due and payable on the last day of the applicable
Interest Period; provided, however, for Interest Periods that are
longer than one month, interest shall nevertheless be due and payable monthly
on the last day of each month, and on the last day of the Interest Period.

 

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

 

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

 

Section 2.11                                Lockbox
and Collateral Account; Sweep of Funds.

 

(a)                                  Lockbox and Collateral Account.

 

(i)                                     The
Borrower shall instruct all account debtors to pay all Accounts directly to the
Lockbox.  If, notwithstanding such
instructions, the Borrower receives any payments on Accounts, the Borrower
shall deposit such payments into the Collateral Account.  The Borrower shall also deposit all other
cash proceeds of Collateral regardless of source or nature directly into the
Collateral Account.  Until so deposited,
the Borrower

 

22

 

shall hold all such payments and cash proceeds in
trust for and as the property of the Lender and shall not commingle such
property with any of its other funds or property.  All deposits in the Collateral Account shall
constitute proceeds of Collateral and shall not constitute payment of the Obligations.

 

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

 

(b)                                 Sweep of Funds.  The Lender shall from time to time, in
accordance with the Wholesale Lockbox and Collection Account Agreement, cause
funds in the Collateral Account to be transferred to the Lender’s general
account for payment of the Obligations. 
Amounts deposited in the Collateral Account shall not be subject to
withdrawal by the Borrower, except after payment in full and discharge of all
Obligations.

 

Section 2.12                                Voluntary
Prepayment; Reduction of the Maximum Line Amount; Termination of the Credit
Facility by the Borrower.  Except as
otherwise provided herein, the Borrower may prepay the Advances in whole at any
time or from time to time in part.  The
Borrower may terminate the Credit Facility or reduce the Maximum Line Amount at
any time if it (i) gives the Lender at least 90 days advance written
notice prior to the proposed Termination Date, and (ii) pays the Lender
applicable termination, prepayment and
contracted funds breakage fees in accordance with Section 2.9(g) and Section 2.9(h).  If the Borrower terminates the Credit
Facility or reduces the Maximum Line Amount to zero, all Obligations shall be
immediately due and payable, and if the Borrower gives the Lender less than the
required 90 days advance written notice, then the interest rate applicable to
borrowings evidenced by Revolving Note shall be the Default Rate for the period
of time commencing 90 days prior to the proposed Termination Date through the
date that the Lender actually receives such written notice.  If the Borrower does not wish the Lender to
consider renewal of the Credit Facility on the next Maturity Date, then the
Borrower shall give the Lender at least 90 days written notice prior to the
Maturity Date that it will not be requesting renewal.  If the Borrower fails to give the Lender such
timely notice, then the interest rate applicable to borrowings evidenced by the
Revolving Note shall be the Default Rate for the period of time commencing 90
days prior to the Maturity Date through the date that the Lender actually receives
such written notice.

 

Section 2.13                                Mandatory
Prepayment.  Without notice or
demand, if the sum of the outstanding principal balance of the Revolving
Advances plus the L/C Amount shall at any
time exceed the Borrowing Base, the Borrower shall (i) first, immediately
prepay the Revolving Advances to the extent necessary to eliminate such excess;
and (ii) if prepayment in full of the Revolving Advances is insufficient
to eliminate such excess, pay to the Lender in immediately available funds for
deposit in the Special Account an amount equal to the remaining excess.  Any payment received by the Lender hereunder
or under Section 2.12 may be applied to the Obligations, in such order and
in such amounts as the Lender in its sole discretion may determine from time to
time.

 

23

 

Section 2.14                                Revolving
Advances to Pay Obligations. 
Notwithstanding the terms of Section 2.1, the Lender may, in its
discretion at any time or from time to time, without the Borrower’s request and
even if the conditions set forth in Section 4.2 would not be satisfied,
make a Revolving Advance in an amount equal to the portion of the Obligations
from time to time due and payable, and may deliver the proceeds of any such
Revolving Advance to any affiliate of the Lender in satisfaction of any Wells
Fargo Bank Affiliate Obligations.

 

Section 2.15                                Use
of Proceeds.  The Borrower shall use
the initial proceeds of Advances and each Letter of Credit to refinance the
Existing Credit Facility, pay bankruptcy administrative claims and professional
fees, pay closing costs in connection with the Credit Facility and the Gordon
Brothers Term Loan and for ordinary working capital purposes.  Subsequent proceeds of Advances and each
Letter of Credit shall be used by the Borrower for ordinary working capital
purposes (including, without limitation, making payments with respect to the
Gordon Brothers Term Loan).

 

Section 2.16                                Liability
Records.  The Lender may maintain
from time to time, at its discretion, records as to the Obligations.  All entries made on any such record shall be
presumed correct until the Borrower establishes the contrary.  Upon the Lender’s demand, the Borrower will
admit and certify in writing the exact principal balance of the Obligations that
the Borrower then asserts to be outstanding. 
Any billing statement or accounting rendered by the Lender shall be
conclusive and fully binding on the Borrower unless the Borrower gives the
Lender specific written notice of exception within 30 days after receipt.

 

ARTICLE III.

 

SECURITY INTEREST; OCCUPANCY; SETOFF

 

Section 3.1                                      Grant
of Security Interest. The Borrower hereby pledges, assigns and grants to
the Lender, for the benefit of itself and as agent for any affiliate of the
Lender that may provide credit or services to the Borrower that constitute
Wells Fargo Bank Affiliate Obligations, a lien and security interest
(collectively referred to as the “Security Interest”) in the Collateral, as
security for the payment and performance of the Obligations.  Upon request by the Lender, the Borrower will
grant the Lender, for the benefit of itself and as agent for any affiliate of
the Lender that may provide credit or services to the Borrower that constitute
Wells Fargo Bank Affiliate Obligations, a security interest in all commercial
tort claims that the Borrower may have against any Person.

 

Section 3.2                                      Notification
of Account Debtors and Other Obligors. 
The Lender may at any time (whether or not a Default Period then exists)
notify any account debtor or other Person obligated to pay the amount due that
such right to payment has been assigned or transferred to the Lender for
security and shall be paid directly to the Lender.  The Borrower will join in giving such notice if
the Lender so requests.  At any time after
the Borrower or the Lender gives such notice to an account debtor or other
obligor, the Lender may, but need not, in the Lender’s name or in the Borrower’s
name, demand, sue for, collect or receive any money or property at any time
payable or receivable on account of, or securing, any such right to payment, or
grant any extension to, make any compromise or settlement with or otherwise
agree to waive, modify, amend or change the obligations (including collateral
obligations) of any such account debtor or

 

24

 

other
obligor.  The Lender may, in the Lender’s
name or in the Borrower’s name, as the Borrower’s agent and attorney-in-fact,
notify the United States Postal Service to change the address for delivery of
the Borrower’s mail to any address designated by the Lender, otherwise
intercept the Borrower’s mail, and receive, open and dispose of the Borrower’s
mail, applying all Collateral as permitted under this Agreement and holding all
other mail for the Borrower’s account or forwarding such mail to the Borrower’s
last known address.

 

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

 

Section 3.4                                      Occupancy.

 

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

 

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

 

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

 

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

 

25

 

Lender by reason
of the execution, delivery, existence, recordation, performance or enforcement
of this Agreement or the provisions of this Section 3.4.

 

Section 3.5                                      License.
 Without limiting the generality of any
other Security Document, the Borrower hereby grants to the Lender a
non-exclusive, worldwide and royalty-free license to use or otherwise exploit
all Intellectual Property Rights of the Borrower for the purpose of:  (a) completing the manufacture of any
in-process materials during any Default Period so that such materials become
saleable Inventory, all in accordance with the same quality standards
previously adopted by the Borrower for its own manufacturing and subject to the
Borrower’s reasonable exercise of quality control; and (b) selling,
leasing or otherwise disposing of any or all Collateral during any Default
Period.

 

Section 3.6                                      Financing
Statement.  The Borrower authorizes
the Lender to file from time to time, such financing statements against
collateral described as “all personal property” or “all assets” or describing
specific items of collateral including commercial tort claims as the Lender
deems necessary or useful to perfect the Security Interest.  All financing statements filed before the
date hereof to perfect the Security Interest were authorized by the Borrower
and are hereby re-authorized.  A carbon,
photographic or other reproduction of this Agreement or of any financing
statements signed by the Borrower is sufficient as a financing statement and
may be filed as a financing statement in any state to perfect the security
interests granted hereby.  For this
purpose, the Borrower represents and warrants that the following information is
true and correct:

 

Name and
address of Debtor:

Gardenburger, Inc.

15615 Alton Parkway, Suite 350

Irvine, California  92618

Federal Employer Identification No.  93-0886359

Organizational Identification No.  208236-13

 

Name and
address of Secured Party:

 

Wells Fargo
Bank, National Association,

acting through
its Wells Fargo Business Credit operating division

245 S. Los
Robles Ave., Suite 700

Pasadena, California  91101

 

Section 3.7                                      Setoff.  The Lender may at any time or from time to
time, at its sole discretion and without demand and without notice to anyone,
setoff any liability owed to the Borrower by the Lender, whether or not due,
against any Obligation, whether or not due. 
In addition, each other Person holding a participating interest in any
Obligations shall have the right to appropriate or setoff any deposit or other
liability then owed by such Person to the Borrower, whether or not due, and
apply the same to the payment of said participating interest, as fully as if
such Person had lent directly to the Borrower the amount of such participating
interest.

 

26

 

Section 3.8                                      Collateral.  This Agreement does not contemplate a sale of
accounts, contract rights or chattel paper, and, as provided by law, the
Borrower is entitled to any surplus and shall remain liable for any
deficiency.  The Lender’s duty of care
with respect to Collateral in its possession (as imposed by law) shall be
deemed fulfilled if it exercises reasonable care in physically keeping such
Collateral, or in the case of Collateral in the custody or possession of a
bailee or other third Person, exercises reasonable care in the selection of the
bailee or other third Person, and the Lender need not otherwise preserve,
protect, insure or care for any Collateral. 
The Lender shall not be obligated to preserve any rights the Borrower
may have against prior parties, to realize on the Collateral at all or in any
particular manner or order or to apply any cash proceeds of the Collateral in
any particular order of application.  The
Lender has no obligation to clean-up or otherwise prepare the Collateral for
sale.  The Borrower waives any right it
may have to require the Lender to pursue any third Person for any of the
Obligations.

 

ARTICLE IV.

CONDITIONS OF LENDING

 

Section 4.1                                      Conditions
Precedent to the Initial Advances and Letters of Credit.  The Lender’s obligation to make the initial
Advances or to cause any Letters of Credit to be issued shall be subject to the
condition precedent that the Lender shall have received all of the following,
each properly executed by the appropriate party and in form and substance
satisfactory to the Lender:

 

(a)                                  This
Agreement.

 

(b)                                 The
Notes.

 

(c)                                  A
Standby Letter of Credit Agreement and a Commercial Letter of Credit Agreement,
and L/C Application for each Letter of Credit that the Borrower wishes to have
issued thereunder.

 

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

 

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

 

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

 

27

 

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

 

(h)                                 The
Wholesale Lockbox and Collection Account Agreement.

 

(i)                                     A
Intellectual Property Security Agreement.

 

(j)                                     The
Intercreditor Agreement.

 

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

 

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

 

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

 

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

 

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

 

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

 

28

 

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

 

(r)                                    Payment
of the fees and commissions due under Section 2.9 through the date of the
initial Advance or Letter of Credit and expenses incurred by the Lender through
such date and required to be paid by the Borrower under Section 8.5,
including all legal expenses incurred through the date of this Agreement.

 

(s)                                  Approval
of the Gordon Brothers’ commitment letter in respect to the amendment or
extension of the Gordon Brothers Term Loan upon the effective date of an
Approved Plan of Reorganization.

 

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

 

(u)                                 Evidence
that after (A) making the initial Revolving Advance, (B) satisfying
all obligations owed to the Borrower’s prior lender, CapitalSource Finance LLC,
as agent and lender, (C) reserving for all carve-outs approved by the
Bankruptcy Court and for post-petition trade payables not paid within 30 days
after the due date thereof and for goods reclaimed under section 546(c) of
the Bankruptcy Code (unless such goods have been returned), (D) paying the
origination fee set forth in Section 2.9(b) and the origination fee
payable to Gordon Brothers upon the closing of the Gordon Brothers Term Loan,
and (E) satisfying all closing costs, Availability shall be not less than
$2,400,000.

 

(v)                                 Evidence
that the Gordon Brothers Term Loan is closing and funding contemporaneously
with the closing of the Credit Facility.

 

(w)                               Evidence
of satisfactory verification of the Borrower’s Accounts.

 

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

 

(y)                                 Opinions
of counsel to the Borrower.

 

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

 

29

 

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

 

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

 

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

 

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

 

Section 4.2                                      Conditions
Precedent to All Advances and Letters of Credit.  The Lender’s obligation to make each Advance
or to cause the issuance of a Letter of Credit shall be subject to the further
conditions precedent that:

 

(a)                                  the
representations and warranties contained in Article V are correct on and
as of the date of such Advance or issuance of a Letter of Credit as though made
on and as of such date, except to the extent that such representations and
warranties relate solely to an earlier date; and

 

(b)                                 no
event has occurred and is continuing, or would result from such Advance or
issuance of a Letter of Credit which constitutes a Default or an Event of
Default.

 

ARTICLE V.

 

REPRESENTATIONS AND WARRANTIES

 

The Borrower
represents and warrants to the Lender as follows:

 

Section 5.1                                      Existence and
Power; Name; Chief Executive Office; Inventory and Equipment Locations; Federal
Employer Identification Number and Organizational Identification Number.  The Borrower is a corporation, duly organized, validly existing and in good standing
under the laws of the State of Oregon and is duly licensed or qualified to
transact business in all jurisdictions where the character of the property
owned or leased or the nature of the business transacted by it makes such
licensing or qualification necessary.  The
Borrower has all requisite power and authority to conduct its business, to own
its properties and to execute and deliver, and to perform all of its
obligations under, the Loan Documents. 
During its existence, the Borrower has done business solely under the
names set forth in Schedule 5.1.  The
Borrower’s chief executive office and principal place of business are located
at the addresses set forth in Schedule 5.1, and all of the Borrower’s
records relating to its business or the Collateral are kept at those
locations.  All Inventory and Equipment
is located at those locations or at one of the other locations listed in Schedule 5.1.  The Borrower’s federal employer
identification number and organization identification number are correctly set
forth in Section 3.6.

 

30

 

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

 

Section 5.3                                      Authorization
of Borrowing; No Conflict as to Law or Agreements.  The execution, delivery and performance by
the Borrower of the Loan Documents and the borrowings from time to time
hereunder have been duly authorized by all necessary corporate action and do not and will not (i) require any
consent or approval of the Borrower’s Owners; (ii) require any
authorization, consent or approval by, or registration, declaration or filing
with, or notice to, any governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, or any third party, except such
authorization, consent, approval, registration, declaration, filing or notice
as has been obtained, accomplished or given prior to the date hereof; (iii) violate
any provision of any law, rule or regulation (including Regulation X
of the Board of Governors of the Federal Reserve System) or of any order, writ,
injunction or decree presently in effect having applicability to the Borrower
or of the Borrower’s Constituent Documents; (iv) result in a breach of or
constitute a default under any indenture or loan or credit agreement or any
other material agreement, lease or instrument to which the Borrower is a party
or by which it or its properties may be bound or affected (provided that
the Borrower is in default of terms under the Existing Credit Facility and the
Annex Convertible Senior Subordinated Note); or (v) result in, or require,
the creation or imposition of any Lien (other than the Security Interest) upon
or with respect to any of the properties now owned or hereafter acquired by the
Borrower.

 

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

 

Section 5.5                                      Subsidiaries.  The Borrower has no Subsidiaries.

 

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

 

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

 

31

 

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

 

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

 

Section 5.10                                Titles and Liens.  The Borrower has good and absolute title to
all Collateral free and clear of all Liens other than (i) Permitted Liens
and (ii) Liens securing the Existing Credit Facility (which Liens shall be
terminated upon repayment of the Existing Credit Agreement with the proceeds of
the initial Advances hereunder).  No
financing statement naming the Borrower as debtor is on file in any office
except to perfect only Permitted Liens and Liens securing the Existing Credit
Facility.

 

Section 5.11                                Intellectual
Property Rights.

 

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

 

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

 

(c)                                  Intellectual Property Rights Licensed from
Others.  Schedule 5.11 is
a complete list of all agreements under which the Borrower has licensed
Intellectual Property Rights from another Person (“Licensed Intellectual
Property”) other than readily available, non-negotiated licenses of computer
software and other intellectual property used solely for

 

32

 

performing accounting, word
processing and similar administrative tasks (“Off-the-shelf Software”) and a
summary of any ongoing payments the Borrower is obligated to make with respect
thereto. 
Except as disclosed on Schedule 5.11 and in written
agreements, copies of which have been given to the Lender, the Borrower’s
licenses to use the Licensed Intellectual Property are free and clear of all
restrictions, Liens, court orders, injunctions, decrees, or writs, whether by
written agreement or otherwise.  Except
as disclosed on Schedule 5.11, the Borrower is not obligated or under
any liability whatsoever to make any payments of a material nature by way of
royalties, fees or otherwise to any owner of, licensor of, or other claimant
to, any Intellectual Property Rights.

 

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

 

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

 

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

 

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

 

33

 

Section 5.14                                Environmental
Matters.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Section 5.16                                Financing Statements.  The Borrower has authorized the filing of
financing statements sufficient when filed to perfect the Security Interest and
the other security

 

34

 

interests created by the
Security Documents.  When such financing
statements are filed in the offices noted therein, the Lender will have a valid
and perfected security interest in all Collateral which is capable of being
perfected by filing financing statements. 
None of the Collateral is or will become a fixture on real estate,
unless a sufficient fixture filing is in effect with respect thereto.

 

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

 

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

 

ARTICLE VI.

 

COVENANTS

 

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

 

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

 

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

 

35

 

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

 

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

 

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

 

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

 

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

 

(f)                                    Daily Reports.  Daily,
reports of the Borrower’s sales, credit memos, cash collections and other
adjustments with respect to the Borrower’s Accounts, along with supporting
documentation as requested by the Lender from time to time (including, without
limitation, invoice registers, cash receipts journals, copies of invoices,
bills of lading and customer remittances);

 

(g)                                 Customer Lists.  At
the same time as delivery of the monthly financial statements required under Section 6.1(b) for
the months ended March 31, June 30, September 30

 

36

 

and December 31 of each
year, an updated customer list, including contact names and addresses of
Borrower’s account debtors.

 

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

 

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

 

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

 

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

 

(l)                                     Plans.  As soon as possible, and in any event within
30 days after the Borrower knows or has reason to know that any Reportable
Event with respect to any Pension Plan has occurred, a statement signed by the
Officer who is the Borrower’s chief financial officer setting forth details as
to such Reportable Event and the action which the Borrower proposes to take
with respect thereto, together with a copy of the notice of such Reportable
Event to the Pension Benefit Guaranty Corporation.  As soon as possible, and in any event within
10 days after the Borrower fails to make any quarterly contribution
required with respect to any Pension Plan under Section 412(m) of the IRC,
the Borrower will deliver to the Lender a statement signed by the Officer who
is the Borrower’s chief financial officer setting forth details as to such
failure and the action which the Borrower proposes to take with respect
thereto, together with a copy of any notice of such failure required to be
provided to the Pension Benefit Guaranty Corporation.  As soon as possible, and in any event within
ten days after the Borrower knows or has reason to know that it has or is
reasonably expected to have any liability under Sections 4201 or 4243 of ERISA
for any withdrawal, partial withdrawal, reorganization or other event under any
Multiemployer Plan, the Borrower will deliver to the Lender a statement of the
Borrower’s chief financial officer setting forth details as to such liability
and the action which the Borrower proposes to take with respect thereto.

 

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

 

37

 

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

 

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

 

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

 

(q)                                 Intellectual Property.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

38

 

Section 6.2                                      Financial
Covenants.

 

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

 

	
  Dates

  	
   

  	
  Minimum Availability

  	
   

  
	
  Closing through 12/02/05

  	
   

  	
  $

  	
  2,000,000

  	
   

  
	
  12/03/05 through 12/30/05

  	
   

  	
  $

  	
  1,750,000

  	
   

  
	
  12/31/05 and at all times thereafter

  	
   

  	
  $

  	
  1,500,000

  	
   

  

 

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

 

	
  Test Period

  	
   

  	
  Minimum Net Cash Flow

  	
   

  
	
  10/01/05 through 12/02/05

  	
   

  	
  $

  	
  (900,000

  	
  )

  
	
  10/29/05 through 12/30/05

  	
   

  	
  $

  	
  (600,000

  	
  )

  
	
  12/03/05 through 01/27/05

  	
   

  	
  $

  	
  (1,800,000

  	
  )

  
	
  12/31/05 through 02/24/06

  	
   

  	
  $

  	
  200,000

  	
   

  

 

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

 

	
  Period

  	
   

  	
  Minimum Gross Sales

  	
   

  
	
  10/01/05 through 10/31/05

  	
   

  	
  $

  	
  3,600,000

  	
   

  
	
  11/01/05 through 11/30/05

  	
   

  	
  $

  	
  3,000,000

  	
   

  
	
  12/01/05 through 12/31/05

  	
   

  	
  $

  	
  3,600,000

  	
   

  
	
  01/01/06 through 01/31/06

  	
   

  	
  $

  	
  4,300,000

  	
   

  
	
  02/01/06 through 02/28/06

  	
   

  	
  $

  	
  3,900,000

  	
   

  
	
  03/01/06 through 03/31/06

  	
   

  	
  $

  	
  5,100,000

  	
   

  
	
  04/01/06 through 04/30/06

  	
   

  	
  $

  	
  4,500,000

  	
   

  
	
  05/01/06 through 05/31/06

  	
   

  	
  $

  	
  5,200,000

  	
   

  
	
  06/01/06 through 06/30/06

  	
   

  	
  $

  	
  5,200,000

  	
   

  
	
  07/01/06 through 07/31/06

  	
   

  	
  $

  	
  4,700,000

  	
   

  

 

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

 

	
  Period

  	
   

  	
  Minimum Net Sales

  	
   

  
	
  10/01/05 through 10/31/05

  	
   

  	
  $

  	
  3,100,000

  	
   

  
	
  10/01/05 through 11/30/05

  	
   

  	
  $

  	
  5,700,000

  	
   

  
	
  10/01/05 through 12/31/05

  	
   

  	
  $

  	
  8,600,000

  	
   

  
	
  10/01/05 through 01/31/06

  	
   

  	
  $

  	
  12,100,000

  	
   

  
	
  10/01/05 through 02/28/06

  	
   

  	
  $

  	
  15,500,000

  	
   

  
	
  10/01/05 through 03/31/06

  	
   

  	
  $

  	
  19,700,000

  	
   

  
	
  10/01/05 through 04/30/06

  	
   

  	
  $

  	
  23,700,000

  	
   

  
	
  10/01/05 through 05/31/06

  	
   

  	
  $

  	
  27,800,000

  	
   

  
	
  10/01/05 through 06/30/06

  	
   

  	
  $

  	
  32,000,000

  	
   

  
	
  10/01/05 through 07/31/06

  	
   

  	
  $

  	
  36,000,000

  	
   

  

 

39

 

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

 

Section 6.3                                      Permitted
Liens; Financing Statements.

 

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

 

(i)                                     In
the case of any of the Borrower’s property which is not Collateral, covenants,
restrictions, rights, easements and minor irregularities in title which do not
materially interfere with the Borrower’s business or operations as presently
conducted;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Section 6.4                                      Indebtedness.  The Borrower will not incur, create, assume
or permit to exist any indebtedness or liability on account of deposits or
advances or any indebtedness for

 

40

 

borrowed money or letters of
credit issued on the Borrower’s behalf, or any other indebtedness or liability
evidenced by notes, bonds, debentures or similar obligations, except:

 

(a)                                  Indebtedness
arising hereunder;

 

(b)                                 Insurance
premium financing in an amount not to exceed $700,000;

 

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

 

(d)                                 Indebtedness
relating to Permitted Liens.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

41

 

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

 

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

 

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

 

(a)                                  The
Borrower will keep accurate books of record and account for itself pertaining
to the Collateral and pertaining to the Borrower’s business and financial
condition and such other matters as the Lender may from time to time request in
which true and complete entries will be made in accordance with GAAP and, upon
the Lender’s request, and at the Borrower’s expense, will permit any officer,
employee, attorney, accountant or other agent of the Lender to audit, review,
make extracts from or copy any and all company and financial books and records
of the Borrower at all times during ordinary business hours, to send and
discuss with account debtors and other obligors requests for verification of
amounts owed to the Borrower, and to discuss the Borrower’s affairs with any of
its Directors, Officers, employees or agents.

 

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

 

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

 

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

 

Section 6.10                                Account
Verification.

 

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

 

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

 

42

 

Section 6.11                                Compliance with Laws.

 

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

 

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

 

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

 

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

 

Section 6.13                                Maintenance of
Properties.

 

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

 

(b)                                 The
Borrower will defend the Collateral against all Liens, claims or demands of all
Persons (other than the Lender) claiming the Collateral or any interest
therein.  The Borrower will keep all
Collateral free and clear of all Liens except Permitted Liens.  The Borrower will

 

43

 

take all commercially
reasonable steps necessary to prosecute any Person Infringing its Intellectual
Property Rights and to defend itself against any Person accusing it of
Infringing any Person’s Intellectual Property Rights.

 

Section 6.14                                Insurance.  The Borrower will obtain and at all times
maintain insurance with insurers acceptable to the Lender, in such amounts, on
such terms (including any deductibles) and against such risks as may from time
to time be required by the Lender, but in all events in such amounts and
against such risks as is usually carried by companies engaged in similar
business and owning similar properties in the same general areas in which the
Borrower operates.  Without limiting the
generality of the foregoing, the Borrower will at all times maintain business interruption insurance and
keep all tangible Collateral insured against risks of fire (including so-called
extended coverage), theft, collision (for Collateral consisting of motor
vehicles) and such other risks and in such amounts as the Lender may reasonably
request, with any loss payable to the Lender to the extent of its interest, and
all policies of such insurance shall contain a lender’s loss payable
endorsement for the Lender’s benefit, in form and substance satisfactory to the
Lender.  All policies of liability
insurance required hereunder shall name the Lender as an additional insured.

 

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

 

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

 

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

 

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

 

Section 6.19                                Sale and Leaseback.  The Borrower will not enter into any
arrangement, directly or indirectly, with any other Person whereby the Borrower
shall sell or transfer any real

 

44

 

or personal property, whether
now owned or hereafter acquired, and then or thereafter rent or lease as lessee
such property or any part thereof or any other property which the Borrower
intends to use for substantially the same purpose or purposes as the property
being sold or transferred.

 

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

 

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

 

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

 

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

 

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

 

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

 

Section 6.26                                Performance
by the Lender.  If the Borrower at
any time fails to perform or observe any of the foregoing covenants contained
in this Article VI or elsewhere herein, and if such failure shall continue
for a period of ten calendar days after the Lender gives the Borrower written
notice thereof (or in the case of the agreements contained in Section 6.13
and Section 6.15, immediately upon the occurrence of such failure, without
notice or lapse of time), the Lender may, but need not, perform or observe such
covenant on behalf and in the name, place

 

45

 

and stead of the Borrower (or,
at the Lender’s option, in the Lender’s name) and may, but need not, take any
and all other actions which the Lender may reasonably deem necessary to cure or
correct such failure (including the payment of taxes, the satisfaction of
Liens, the performance of obligations owed to account debtors or other
obligors, the procurement and maintenance of insurance, the execution of
assignments, security agreements and financing statements, and the endorsement
of instruments); and the Borrower shall thereupon pay to the Lender on demand
the amount of all monies expended and all costs and expenses (including
reasonable attorneys’ fees and legal expenses) incurred by the Lender in
connection with or as a result of the performance or observance of such
agreements or the taking of such action by the Lender, together with interest
thereon from the date expended or incurred at the Default Rate.  To facilitate the Lender’s performance or
observance of such covenants of the Borrower, the Borrower hereby irrevocably
appoints the Lender, or the Lender’s delegate, acting alone, as the Borrower’s
attorney in fact (which appointment is coupled with an interest) with the right
(but not the duty) from time to time to create, prepare, complete, execute,
deliver, endorse or file in the name and on behalf of the Borrower any and all
instruments, documents, assignments, security agreements, financing statements,
applications for insurance and other agreements and writings required to be
obtained, executed, delivered or endorsed by the Borrower hereunder.

 

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

 

Section 6.28                                Termination
of Gordon Brothers Credit Agreement.                  The
Borrower shall not terminate, repay, or refinance the Gordon Brothers Credit
Agreement until it has contemporaneously paid to the Lender the outstanding
principal balance of the Term Note and terminated the Credit Facility.

 

Section 6.28                                Information
for Exit Financing.  The Borrower
shall deliver to the Lender any information requested by the Lender which is necessary
for setting financial covenants for the Exit Financing.

 

ARTICLE VII.

 

EVENTS OF DEFAULT, RIGHTS AND
REMEDIES

 

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

 

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

 

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

 

(c)                                  An
Overadvance arises as the result of any reduction in the Borrowing Base, or
arises in any manner on terms not otherwise approved of in advance by the
Lender in writing;

 

(d)                                 A
Change of Control shall occur;

 

46

 

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

 

(f)                                    Other
than in connection with the Bankruptcy Case, the Borrower shall admit in
writing its or his inability to pay its or his debts as they mature, or make an
assignment for the benefit of creditors; or the Borrower shall apply for or
consent to the appointment of any receiver, trustee, or similar officer for it
or him or for all or any substantial part of its or his property; or such
receiver, trustee or similar officer shall be appointed without the application
or consent of the Borrower; or any judgment, writ, warrant of attachment or
execution or similar process shall be issued or levied against a substantial
part of the property of the Borrower;

 

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

 

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

 

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

 

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

 

(k)                                  Any
Reportable Event, which the Lender determines in good faith might constitute
grounds for the termination of any Pension Plan or for the appointment by the
appropriate United States District Court of a trustee to administer any Pension
Plan, shall have occurred and be continuing 30 days after written notice
to such effect shall have been given to the Borrower by the Lender; or a
trustee shall have been appointed by an appropriate United States District
Court to administer any Pension Plan; or the Pension Benefit Guaranty
Corporation shall have instituted proceedings to terminate any Pension Plan or
to appoint a trustee to administer any Pension Plan; or the Borrower or any
ERISA Affiliate shall have filed for a distress termination of any Pension Plan
under Title IV of ERISA; or the Borrower or any ERISA Affiliate shall have
failed to make any quarterly contribution required with respect to any Pension
Plan under Section 412(m) of the IRC, which the Lender determines in good
faith may

 

47

 

by itself, or in combination
with any such failures that the Lender may determine are likely to occur in the
future, result in the imposition of a Lien on the Borrower’s assets in favor of
the Pension Plan; or any withdrawal, partial withdrawal, reorganization or
other event occurs with respect to a Multiemployer Plan which results or could
reasonably be expected to result in a material liability of the Borrower to the
Multiemployer Plan under Title IV of ERISA;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

(t)                                    Any
challenge by or on behalf of the Borrower to the validity of any Loan Document
or the applicability or enforceability of any Loan Document strictly in
accordance with the subject Loan Document’s terms or which seeks to void,
avoid, limit, or otherwise adversely affect any security interest created by or
in any Loan Document or any payment made pursuant thereto;

 

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

 

48

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

(e)                                  The
Lender may make demand upon the Borrower and, forthwith upon such demand, the
Borrower will pay to the Lender in immediately available funds for deposit in
the Special Account pursuant to Section 2.5 an amount equal to the
aggregate maximum amount available to be drawn under all Letters of Credit then
outstanding, assuming compliance with all conditions for drawing thereunder;

 

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

 

49

 

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

 

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

 

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

 

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

 

ARTICLE VIII.

 

MISCELLANEOUS

 

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

 

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

 

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

 

50

 

national reputation, (d) transmitted
by telecopy, or (e) sent as electronic mail, in each case delivered or
sent to the party to whom notice is being given to the business address,
telecopier number, or e mail address set forth below next to its signature or,
as to each party, at such other business address, telecopier number, or e mail
address as it may hereafter designate in writing to the other party pursuant to
the terms of this Section.  All such
notices, requests, demands and other communications shall be deemed to be an
authenticated record communicated or given on (a) the date received if
personally delivered, (b) when deposited in the mail if delivered by mail,
(c) the date delivered to the courier if delivered by overnight courier,
or (d) the date of transmission if sent by telecopy or by e mail, except
that notices or requests delivered to the Lender pursuant to any of the
provisions of Article II shall not be effective until received by the
Lender.  All notices, financial
information, or other business records sent by either party to this Agreement
may be transmitted, sent, or otherwise communicated via such medium as the
sending party may deem appropriate and commercially reasonable; provided,
however, that the risk that the confidentiality or privacy of such notices,
financial information, or other business records sent by either party may be
compromised shall be borne exclusively by the Borrower.  All requests for an accounting under Section 9-210
of the UCC (i) shall be made in a writing signed by a Person authorized
under Section 2.2(b), (ii) shall be personally delivered, sent by
registered or certified mail, return receipt requested, or by overnight courier
of national reputation, (iii) shall be deemed to be sent when received by
the Lender and (iv) shall otherwise comply with the requirements of Section 9-210.  The Borrower requests that the Lender respond
to all such requests which on their face appear to come from an authorized
individual and releases the Lender from any liability for so responding.  The Borrower shall pay the Lender the maximum
amount allowed by law for responding to such requests.

 

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

 

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

 

Section 8.6                                      Indemnity.  In addition to the payment of expenses
pursuant to Section 8.6, the Borrower shall indemnify, defend and hold
harmless the Lender, and any of its participants, parent corporations,
subsidiary corporations, affiliated corporations, successor

 

51

 

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

 

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

 

(ii)                                  Any
claims, loss or damage to which any Indemnitee may be subjected if any
representation or warranty contained in Section 5.14 proves to be
incorrect in any respect or as a result of any violation of the covenant
contained in Section 6.12(b) ; and

 

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

 

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

 

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

 

Section 8.8                                      Execution
in Counterparts; Telefacsimile Execution. 
This Agreement and other Loan Documents may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed to
be an original and all of which counterparts, taken together, shall constitute
but one and the same instrument. 
Delivery of an executed counterpart of this Agreement by telefacsimile
shall be equally as effective as delivery of an original executed counterpart
of this Agreement.  Any party delivering
an executed counterpart of this Agreement by telefacsimile also shall deliver an
original executed counterpart of this Agreement but the failure to deliver an
original executed counterpart shall not affect the validity, enforceability,
and binding effect of this Agreement.

 

52

 

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

 

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

 

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

 

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

 

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

 

Section 8.14                                Exit
Financing.  The Lender agrees that it
shall provide the Exit Financing conditioned upon (i) confirmation by the
Bankruptcy Court and the effective date of an Approved Plan of Reorganization (ii) the
satisfaction of conditions and with the terms set forth in

 

53

 

the Exit Financing Commitment
Letter attached hereto as Exhibit E and (iii) the satisfaction of the
conditions for the extension or amendment of the Gordon Brothers Term Loan in
accordance with Gordon Brothers commitment letter in the form approved by
Lender.  This document does not supercede
the terms and conditions of the Commitment Letter with respect to the Exit
Financing.

 

Section 8.15                                Arbitration.

 

(a)                                  Arbitration.  The
parties hereto agree that following dismissal of the Bankruptcy Case, upon
demand by any party, to submit to binding arbitration all claims, disputes and
controversies between or among them (and their respective employees, officers,
directors, attorneys, and other agents), whether in tort, contract or otherwise
arising out of or relating to in any way (i) this Agreement and the Loan
Documents and any credit facilities established thereunder, and their
negotiation, execution, collateralization, administration, repayment, modification,
extension, substitution, formation, inducement, enforcement, default or
termination; or (ii) requests for additional credit.

 

(b)                                 Governing Rules.  Any
arbitration proceeding will (i) proceed in a location in California
selected by the American Arbitration Association (“AAA”); (ii) be governed
by the Federal Arbitration Act (Title 9 of the United States Code),
notwithstanding any conflicting choice of law provision in any of the documents
between the parties; and (iii) be conducted by the AAA, or such other
administrator as the parties shall mutually agree upon, in accordance with the
AAA’s commercial dispute resolution procedures, unless the claim or
counterclaim is at least $1,000,000.00 exclusive of claimed interest,
arbitration fees and costs in which case the arbitration shall be conducted in
accordance with the AAA’s optional procedures for large, complex commercial
disputes (the commercial dispute resolution procedures or the optional
procedures for large, complex commercial disputes to be referred to, as
applicable, as the “Rules”).  If there is
any inconsistency between the terms hereof and the Rules, the terms and
procedures set forth herein shall control. 
Any party who fails or refuses to submit to arbitration following a
demand by any other party shall bear all costs and expenses incurred by such
other party in compelling arbitration of any dispute.  Nothing contained herein shall be deemed to
be a waiver by any party that is a bank of the protections afforded to it under
12 U.S.C. §91 or any similar applicable state law.

 

(c)                                  No Waiver of Provisional Remedies, Self-Help and Foreclosure.  The arbitration requirement does not limit
the right of any party to (i) foreclose against Collateral or real estate
collateral; (ii) exercise self-help remedies relating to Collateral or
proceeds of Collateral such as setoff or repossession; or (iii) obtain
provisional or ancillary remedies such as replevin, injunctive relief,
attachment or the appointment of a receiver, before during or after the
pendency of any arbitration proceeding. 
This exclusion does not constitute a waiver of the right or obligation
of any party to submit any dispute to arbitration or reference hereunder,
including those arising from the exercise of the actions detailed in sections (i),
(ii) and (iii) of this paragraph.

 

(d)                                 Arbitrator Qualifications and Powers.  Any arbitration proceeding in which the
amount in controversy is $5,000,000.00 or less will be decided by a single
arbitrator selected according to the Rules, and who shall not render an award
of greater than $5,000,000.00.  Any

 

54

 

dispute in which the amount in
controversy exceeds $5,000,000.00 shall be decided by majority vote of a panel
of three arbitrators; provided however, that all three arbitrators must
actively participate in all hearings and deliberations.  The arbitrator will be a neutral attorney
licensed in the State of California or a neutral retired judge of the state or
federal judiciary of California, in either case with a minimum of ten years
experience in the substantive law applicable to the subject matter of the
dispute to be arbitrated.  The arbitrator
will determine whether or not an issue is arbitratable and will give effect to
the statutes of limitation in determining any claim.  In any arbitration proceeding the arbitrator
will decide (by documents only or with a hearing at the arbitrator’s
discretion) any pre-hearing motions which are similar to motions to dismiss for
failure to state a claim or motions for summary adjudication.  The arbitrator shall resolve all disputes in
accordance with the substantive law of California and may grant any remedy or
relief that a court of such state could order or grant within the scope hereof
and such ancillary relief as is necessary to make effective any award.  The arbitrator shall also have the power to
award recovery of all costs and fees, to impose sanctions and to take such
other action as the arbitrator deems necessary to the same extent a judge could
pursuant to the Federal Rules of Civil Procedure, the California Rules of
Civil Procedure or other applicable law. 
Judgment upon the award rendered by the arbitrator may be entered in any
court having jurisdiction.  The
institution and maintenance of an action for judicial relief or pursuit of a
provisional or ancillary remedy shall not constitute a waiver of the right of
any party, including the plaintiff, to submit the controversy or claim to
arbitration if any other party contests such action for judicial relief.

 

(e)                                  Discovery.  In any
arbitration proceeding discovery will be permitted in accordance with the
Rules.  All discovery shall be expressly
limited to matters directly relevant to the dispute being arbitrated and must
be completed no later than 20 days before the hearing date and within 180 days
of the filing of the dispute with the AAA. 
Any requests for an extension of the discovery periods, or any discovery
disputes, will be subject to final determination by the arbitrator upon a
showing that the request for discovery is essential for the party’s
presentation and that no alternative means for obtaining information is
available.

 

(f)                                    Class Proceedings and Consolidations.  The resolution of any dispute arising
pursuant to the terms of this Agreement shall be determined by a separate
arbitration proceeding and such dispute shall not be consolidated with other
disputes or included in any class proceeding.

 

(g)                                 Payment Of Arbitration Costs And Fees.  The arbitrator shall award all costs and
expenses of the arbitration proceeding.

 

(h)                                 Real Property Collateral; Judicial Reference.  Notwithstanding anything herein to the
contrary, no dispute shall be submitted to arbitration if the dispute concerns
indebtedness secured directly or indirectly, in whole or in part, by any real
property unless (i) the holder of the deed of trust, mortgage, lien or
security interest specifically elects in writing to proceed with the
arbitration, or (ii) all parties to the arbitration waive any rights or
benefits that might accrue to them by virtue of the single action rule statute
of California, thereby agreeing that all indebtedness and obligations of the
parties, and all deeds of trust, mortgages, liens and security interests
securing such indebtedness and obligations, shall remain fully valid and
enforceable.  If any such dispute is not
submitted to arbitration, the dispute shall be referred to a referee in
accordance with California Code of Civil Procedure Section 638 et seq.,
and this general

 

55

 

reference agreement is intended
to be specifically enforceable in accordance with said Section 638.  A referee with the qualifications required
herein for arbitrators shall be selected pursuant to the AAA’s selection
procedures.  Judgment upon the decision
rendered by a referee shall be entered in the court in which such proceeding
was commenced in accordance with California Code of Civil Procedure Sections
644 and 645.

 

(i)                                     Miscellaneous.  To the
maximum extent practicable, the AAA, the arbitrators and the parties shall take
all action required to conclude any arbitration proceeding within 180 days of
the filing of the dispute with the AAA. 
No arbitrator or other party to an arbitration proceeding may disclose
the existence, content or results thereof, except for disclosures of
information by a party required in the ordinary course of its business or by
applicable law or regulation.  If more
than one agreement for arbitration by or between the parties potentially
applies to a dispute, the arbitration provision most directly related to the
Loan Documents or the subject matter of the dispute shall control.  This arbitration provision shall survive
termination, amendment or expiration of any of the Loan Documents or any
relationship between the parties.

 

Section 8.16                                Publicity.  The Lender may issue a “tombstone” notice of
the establishment of the credit facility contemplated by this Agreement and may
make reference to the Borrower (and may utilize any logo or other distinctive
symbol associated with the Borrower) in connection with any advertising,
promotion, or marketing undertaken by the Lender.  The Borrower shall furnish to the Lender
copies of any press release or public announcement regarding this Agreement or
the transactions contemplated hereby prior to it being issued, which press
release or public announcement must be acceptable to the Lender in its
reasonable discretion.

 

Section 8.17                                Intercreditor
Agreement.  The Borrower and the
Lender each acknowledge that the exercise of certain of the Lender’s rights and
remedies may be subject to, and restricted by, the provisions of the
Intercreditor Agreement.  Except as
specified herein, nothing contained in the Intercreditor Agreement shall be
deemed to modify any of the provisions of this Agreement and the other Loan
Documents, which, as among the Borrower and the Lender shall remain in full
force and effect.

 

56

 

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

 

	
  Gardenburger, Inc.

  	
   

  	
  GARDENBURGER,
  INC.

  
	
  15615 Alton
  Parkway, Suite 350

  	
   

  	
   

  
	
  Irvine,
  California 92618

  	
   

  	
  By:

  	
  /s/ Scott C.
  Wallace

  	
   

  
	
  Telecopier:
  (949) 255-2015

  	
   

  	
   

  
	
  Attention:
  Scott Wallace

  	
   

  	
  Its 

  	
  President
  and Chief Executive Officer

  	
   

  
	
  e-mail:
  swallace@gardenburger.com

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Wells Fargo
  Bank, National Association,

  acting through its Wells Fargo Business Credit

  operating division

  	
   

  	
  WELLS FARGO
  BANK, NATIONAL

  ASSOCIATION, acting through its Wells

  Fargo Business Credit operating division,

  
	
   

  	
   

  	
   

  
	
  MAC
  E2006-070

  	
   

  	
   

  
	
  245 South
  Los Robles Avenue

  	
   

  	
  By:

  	
  /s/ Harry L.
  Joe

  	
   

  
	
  Suite 700

  	
   

  	
   

  
	
  Pasadena,
  California 91101-3638

  	
   

  	
   

  	
  Harry L. Joe

  	
   

  
	
  Telecopier:
  (626) 844-9063

  	
   

  	
   

  	
  Its Assistant
  Vice President

  
	
  Attention:
  Harry Joe

  	
   

  	
   

  
	
  e-mail:
  joeharry@wellsfargo.comExhibit 10.2

 

 

 

CREDIT AND SECURITY AGREEMENT

 

BY AND BETWEEN

 

GARDENBURGER, INC.

 

AND

 

GB RETAIL FUNDING, LLC

 

 

November 22,
2005

 

 

 

	
  ARTICLE I. DEFINITIONS

  	
   

  
	
   

  	
   

  
	
  Section 1.1

  	
  Definitions

  	
   

  
	
  Section 1.2

  	
  Other
  Definitional Terms; Rules of Interpretation

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE II. AMOUNT AND TERMS OF THE
  CREDIT FACILITY

  	
   

  
	
   

  	
   

  
	
  Section 2.1

  	
  Term
  Advance

  	
   

  
	
  Section 2.2

  	
  Payment of
  Term Note

  	
   

  
	
  Section 2.3

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

  	
   

  
	
  Section 2.4

  	
  Fees

  	
   

  
	
  Section 2.5

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

  	
   

  
	
  Section 2.6

  	
  Lockbox and
  Collateral Account; Sweep of Funds

  	
   

  
	
  Section 2.7

  	
  Voluntary
  Prepayment; Termination of the Credit Facility by the Borrower

  	
   

  
	
  Section 2.8

  	
  Use of
  Proceeds

  	
   

  
	
  Section 2.9

  	
  Liability
  Records

  	
   

  
	
  Section 2.10

  	
  Payments
  to Lender

  	
   

  
	
  Section 2.11

  	
  Sale of IP
  Collateral

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE III. SECURITY INTEREST;
  OCCUPANCY; SETOFF

  	
   

  
	
   

  	
   

  
	
  Section 3.1

  	
  Grant of
  Security Interest

  	
   

  
	
  Section 3.2

  	
  Notification
  of Account Debtors and Other Obligors

  	
   

  
	
  Section 3.3

  	
  Assignment
  of Insurance

  	
   

  
	
  Section 3.4

  	
  Occupancy

  	
   

  
	
  Section 3.5

  	
  Financing
  Statement

  	
   

  
	
  Section 3.6

  	
  Setoff

  	
   

  
	
  Section 3.7

  	
  Collateral

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE IV. CONDITIONS OF LENDING

  	
   

  
	
   

  	
   

  
	
  Section 4.1

  	
  Conditions
  Precedent to the Issuance of the Term Advance

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE V. REPRESENTATIONS AND
  WARRANTIES

  	
   

  
	
   

  	
   

  
	
  Section 5.1

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

  	
   

  
	
  Section 5.2

  	
  Capitalization

  	
   

  
	
  Section 5.3

  	
  Authorization
  of Borrowing; No Conflict as to Law or Agreements

  	
   

  
	
  Section 5.4

  	
  Legal
  Agreements

  	
   

  
	
  Section 5.5

  	
  Subsidiaries

  	
   

  
	
  Section 5.6

  	
  Financial
  Condition; No Adverse Change

  	
   

  
	
  Section 5.7

  	
  Litigation

  	
   

  
	
  Section 5.8

  	
  Regulation U

  	
   

  
	
  Section 5.9

  	
  Taxes

  	
   

  
	
  Section 5.10

  	
  Titles and
  Liens

  	
   

  
	
  Section 5.11

  	
  Intellectual
  Property Rights

  	
   

  

 

i

 

	
  Section 5.12

  	
  Plans

  	
   

  
	
  Section 5.13

  	
  Default

  	
   

  
	
  Section 5.14

  	
  Environmental Matters

  	
   

  
	
  Section 5.15

  	
  Submissions to Lender

  	
   

  
	
  Section 5.16

  	
  Financing Statements

  	
   

  
	
  Section 5.17

  	
  Rights to Payment

  	
   

  
	
  Section 5.18

  	
  Bankruptcy Case

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE VI. COVENANTS

  	
   

  
	
   

  	
   

  	
   

  
	
  Section 6.1

  	
  Reporting Requirements

  	
   

  
	
  Section 6.2

  	
  Financial Covenants

  	
   

  
	
  Section 6.3

  	
  Permitted Liens; Financing Statements

  	
   

  
	
  Section 6.4

  	
  Indebtedness

  	
   

  
	
  Section 6.5

  	
  Guaranties

  	
   

  
	
  Section 6.6

  	
  Investments and Subsidiaries

  	
   

  
	
  Section 6.7

  	
  Dividends and Distributions

  	
   

  
	
  Section 6.8

  	
  Salaries

  	
   

  
	
  Section 6.9

  	
  Books and Records; Collateral Examination,
  Inspection and Appraisals

  	
   

  
	
  Section 6.10

  	
  Account Verification

  	
   

  
	
  Section 6.11

  	
  Compliance with Laws

  	
   

  
	
  Section 6.12

  	
  Payment of Taxes and Other Claims

  	
   

  
	
  Section 6.13

  	
  Maintenance of Properties

  	
   

  
	
  Section 6.14

  	
  Insurance

  	
   

  
	
  Section 6.15

  	
  Preservation of Existence

  	
   

  
	
  Section 6.16

  	
  Delivery of Instruments, etc.

  	
   

  
	
  Section 6.17

  	
  Sale or Transfer of Assets; Suspension of
  Business Operations

  	
   

  
	
  Section 6.18

  	
  Consolidation and Merger; Asset
  Acquisitions

  	
   

  
	
  Section 6.19

  	
  Sale and Leaseback

  	
   

  
	
  Section 6.20

  	
  Restrictions on Nature of Business

  	
   

  
	
  Section 6.21

  	
  Accounting

  	
   

  
	
  Section 6.22

  	
  Discounts, etc.

  	
   

  
	
  Section 6.23

  	
  Plans

  	
   

  
	
  Section 6.24

  	
  Place of Business; Name

  	
   

  
	
  Section 6.25

  	
  Constituent Documents; S Corporation Status

  	
   

  
	
  Section 6.26

  	
  Performance by the Lender

  	
   

  
	
  Section 6.27

  	
  Amendment of Wells Fargo Credit Facility

  	
   

  
	
  Section 6.28

  	
  Termination of Wells Fargo Credit Facility

  	
   

  
	
  Section 6.29

  	
  Information for Exit Financing

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE VII. EVENTS OF DEFAULT, RIGHTS
  AND REMEDIES

  	
   

  
	
   

  	
   

  	
   

  
	
  Section 7.1

  	
  Events of Default

  	
   

  
	
  Section 7.2

  	
  Rights and Remedies

  	
   

  
	
  Section 7.3

  	
  Certain Notices

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE VIII. MISCELLANEOUS

  	
   

  
	
   

  	
   

  
	
  Section 8.1

  	
  No Waiver; Cumulative Remedies; Compliance
  with Laws

  	
   

  

 

ii

 

	
  Section 8.2

  	
  Amendments, Etc.

  	
   

  
	
  Section 8.3

  	
  Notices; Communication of Confidential
  Information; Requests for Accounting

  	
   

  
	
  Section 8.4

  	
  Further Documents

  	
   

  
	
  Section 8.5

  	
  Costs and Expenses

  	
   

  
	
  Section 8.6

  	
  Indemnity

  	
   

  
	
  Section 8.7

  	
  Participants

  	
   

  
	
  Section 8.8

  	
  Execution in Counterparts; Telefacsimile
  Execution

  	
   

  
	
  Section 8.9

  	
  Retention of Borrower’s Records

  	
   

  
	
  Section 8.10

  	
  Binding Effect; Assignment; Complete
  Agreement; Sharing Information

  	
   

  
	
  Section 8.11

  	
  Severability of Provisions

  	
   

  
	
  Section 8.12

  	
  Headings

  	
   

  
	
  Section 8.13

  	
  Governing Law; Jurisdiction, Venue

  	
   

  
	
  Section 8.14

  	
  Exit Financing

  	
   

  
	
  Section 8.15

  	
  WAIVER OF JURY TRIAL

  	
   

  
	
  Section 8.16

  	
  Publicity

  	
   

  
	
  Section 8.17

  	
  Intercreditor Agreement

  	
   

  

 

iii

 

CREDIT AND SECURITY AGREEMENT

 

Dated as of November 22,
2005

 

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

 

ARTICLE I.

DEFINITIONS

 

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

 

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

 

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

 

“Agreement”
means this Credit and Security Agreement.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

1

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

2

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

“Event of
Default” is defined in Section 7.1.

 

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

 

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

 

3

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

“Indemnified
Liabilities” is defined in Section 8.6.

 

“Indemnitees”
is defined in Section 8.6.

 

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

 

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

 

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

 

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

 

4

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

“Lien” means
any security interest, mortgage, deed of trust, pledge, lien, charge,
encumbrance, title retention agreement or analogous instrument or device,
including the interest of each lessor under any capitalized lease and the
interest of any bondsman under any payment or performance bond, in, of or on
any assets or properties of a Person, whether now owned or subsequently
acquired and whether arising by agreement or operation of law.

 

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

 

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

 

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

 

5

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

6

 

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

 

“OFAC” is
defined in Section 6.11(c).

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

“Security
Interest” is defined in Section 3.1.

 

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

 

7

 

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

 

“Term Advance”
is defined in Section 2.1.

 

“Term Loan
Amount” is $5,000,000.00.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

8

 

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

 

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

 

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

 

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

 

ARTICLE II.

AMOUNT AND TERMS OF THE CREDIT FACILITY

 

Section 2.1                                      Term
Advance.  

 

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

 

9

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

10

 

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

 

Section 2.4                                      Fees.

 

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

 

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

 

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

 

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

 

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

 

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

 

11

 

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

 

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

 

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

 

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

 

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

 

Section 2.6                                      Lockbox and
Collateral Account; Sweep of Funds.  

 

(a)                                  Lockbox and Collateral Account.

 

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

 

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

 

12

 

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

 

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

 

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

 

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

 

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

 

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

 

13

 

ARTICLE III.

SECURITY INTEREST; OCCUPANCY; SETOFF

 

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

 

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

 

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

 

14

 

Section 3.4                                      Occupancy.

 

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

 

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

 

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

 

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

 

15

 

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

 

Name and
address of Debtor:

 

Gardenburger, Inc.

15615 Alton Parkway, Suite 350

Irvine, California  92618

Federal Employer Identification No.  93-0886359

Organizational
Identification No. 208236-13

 

Name and
address of Secured Party:

 

GB Retail Funding, LLC

40 Broad Street,

Boston, MA 02109

Attn: Lawrence E. Klaff, Managing Director

Fax No.: (617)
210-7141

 

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

 

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

 

16

 

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

 

ARTICLE IV.

CONDITIONS OF LENDING

 

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

 

(a)                                  This Agreement.

 

(b)                                 The Term Note.

 

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

 

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

 

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

 

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

 

(g)                                 The Wholesale Lockbox
and Collection Agreement.

 

17

 

(h)                                 The Intellectual
Property Security Agreement.

 

(i)                                     The Intercreditor
Agreement.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

18

 

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

 

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

 

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

 

(u)                                 Evidence of
satisfactory verification of the Accounts.

 

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

 

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

 

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

 

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

 

(z)                                   Opinions of counsel
to the Borrower.

 

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

 

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

 

19

 

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

 

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

 

ARTICLE V.

REPRESENTATIONS AND WARRANTIES

 

The Borrower
represents and warrants to the Lender as follows:

 

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

 

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

 

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

 

20

 

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

 

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

 

Section 5.5                                      Subsidiaries.  The Borrower has no Subsidiaries.

 

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

 

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

 

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

 

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

 

21

 

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

 

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

 

Section 5.11                                Intellectual
Property Rights.

 

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

 

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

 

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

 

22

 

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

 

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

 

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

 

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

 

Section 5.14           Environmental
Matters.

 

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

 

23

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

24

 

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

 

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

 

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

 

ARTICLE VI.

COVENANTS

 

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

 

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

 

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

 

25

 

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

 

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

 

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

 

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

 

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

 

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

 

26

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

27

 

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

 

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

 

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

 

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

 

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

 

(q)           Intellectual Property.

 

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

 

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

 

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

 

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

 

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

 

28

 

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

 

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

 

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

 

Section 6.2             Financial
Covenants.

 

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

 

	
  Dates

  	
   

  	
  Minimum Availability

  	
   

  
	
  Closing
  through 12/02/05

  	
   

  	
  $

  	
  2,000,000.00

  	
   

  
	
  12/3/05
  through 12/30/05

  	
   

  	
  $

  	
  1,750,000.00

  	
   

  
	
  12/31/05 and
  at all times thereafter

  	
   

  	
  $

  	
  1,500,000.00

  	
   

  

 

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

 

	
  Test Period

  	
   

  	
  Minimum Net Cash Flow

  	
   

  
	
  10/1/05
  through 12/2/05

  	
   

  	
  $

  	
  (900,000

  	
  )

  
	
  10/29/05
  through 12/30/05

  	
   

  	
  $

  	
  (600,000

  	
  )

  
	
  12/3/05
  through 1/27/06

  	
   

  	
  $

  	
  (1,800,000

  	
  )

  
	
  12/31/05
  through 2/24/06

  	
   

  	
  $

  	
  200,000

  	
   

  

 

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

 

	
  Period

  	
   

  	
  Minimum Gross Sales

  	
   

  
	
  10/1/05
  through 10/31/05

  	
   

  	
  $

  	
  3,600,000

  	
   

  
	
  11/1/05
  through 11/30/05

  	
   

  	
  $

  	
  3,000,000

  	
   

  
	
  12/1/05
  through 12/31/05

  	
   

  	
  $

  	
  3,600,000

  	
   

  
	
  1/1/06
  through 1/31/06

  	
   

  	
  $

  	
  4,300,000

  	
   

  
	
  2/1/06
  through 2/28/06

  	
   

  	
  $

  	
  3,900,000

  	
   

  
	
  3/1/06
  through 3/31/06

  	
   

  	
  $

  	
  5,100,000

  	
   

  
	
  4/1/06
  through 4/30/06

  	
   

  	
  $

  	
  4,500,000

  	
   

  
	
  5/1/05
  through 5/31/06

  	
   

  	
  $

  	
  5,200,000

  	
   

  
	
  6/1/05
  through 6/30/06

  	
   

  	
  $

  	
  5,200,000

  	
   

  
	
  7/1/06
  through 7/31/06

  	
   

  	
  $

  	
  4,700,000

  	
   

  

 

29

 

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

 

	
  Period

  	
   

  	
  Minimum Net Sales

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  10/1/05
  through 10/31/05

  	
   

  	
  $

  	
  3,100,000

  	
   

  
	
  10/1/05
  through 11/30/05

  	
   

  	
  $

  	
  5,700,000

  	
   

  
	
  10/1/05
  through 12/31/05

  	
   

  	
  $

  	
  8,600,000

  	
   

  
	
  10/1/05
  through 1/31/06

  	
   

  	
  $

  	
  12,100,000

  	
   

  
	
  10/1/05 through
  2/28/06

  	
   

  	
  $

  	
  15,500,000

  	
   

  
	
  10/1/05
  through 3/31/06

  	
   

  	
  $

  	
  19,700,000

  	
   

  
	
  10/1/05
  through 4/30/06

  	
   

  	
  $

  	
  23,700,000

  	
   

  
	
  10/1/05
  through 5/31/06

  	
   

  	
  $

  	
  27,800,000

  	
   

  
	
  10/1/05
  through 6/30/06

  	
   

  	
  $

  	
  32,000,000

  	
   

  
	
  10/1/05
  through 7/31/06

  	
   

  	
  $

  	
  36,000,000

  	
   

  

 

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

 

Section 6.3             Permitted
Liens; Financing Statements.

 

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

 

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

 

30

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

(a)           Indebtedness
arising hereunder;

 

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

 

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

 

(d)           Indebtedness
relating to Permitted Liens.

 

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

 

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

 

31

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

32

 

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

 

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

 

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

 

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

 

Section 6.10           Account
Verification.  

 

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

 

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

 

Section 6.11           Compliance
with Laws.

 

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

 

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

 

33

 

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

 

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

 

Section 6.13           Maintenance
of Properties.

 

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

 

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

 

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

 

34

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

35

 

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

 

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

 

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

 

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

 

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

 

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

 

36

 

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

 

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

 

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

 

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

 

ARTICLE VII.

EVENTS OF DEFAULT, RIGHTS AND REMEDIES

 

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

 

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

 

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

 

(c)           A
Change of Control shall occur;

 

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

 

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

 

37

 

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

 

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

 

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

 

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

 

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

 

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

 

38

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

39

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

40

 

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

 

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

 

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

 

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

 

ARTICLE VIII.

 

MISCELLANEOUS

 

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

 

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

 

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

 

41

 

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

 

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

 

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

 

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

 

42

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

43

 

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

 

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

 

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

 

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

 

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

 

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

 

44

 

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

 

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

 

Section 8.15           WAIVER
OF JURY TRIAL.

 

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

 

Section 8.16           Publicity

 

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

 

Section 8.17           Intercreditor
Agreement(a)    .

 

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

 

45

 

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

 

 

[Remainder of page intentionally left blank.]

 

46

 

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

 

	
   

  	
  GARDENBURGER, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Scott C.
  Wallace

  
	
   

  	
   

  
	
   

  	
  Its

  	
  President
  and Chief Executive Officer

  
	
   

  	
   

  
	
   

  	
  GB RETAIL FUNDING, LLC

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Lawrence
  Klaff

  
	
   

  	
   

  
	
   

  	
  Its:

  	
  Managing
  Director

  
						

 

47

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