Document:

Exhibit
10.13

 

EXECUTION VERSION

 

PLEDGE AND SECURITY AGREEMENT

 

THIS PLEDGE AND SECURITY AGREEMENT (as it may
be amended or modified from time to time, the “Security Agreement”) is
entered into as of May 12, 2010 by and between KOSS CORPORATION, a Delaware
corporation (the “Grantor”), as debtor, and JPMorgan Chase Bank, N.A.
(the “Lender”), as secured party.

 

PRELIMINARY
STATEMENT

 

The Grantor and the Lender are entering into
a Credit Agreement dated as of the date hereof (as it may be amended or
modified from time to time, the “Credit Agreement”).  The Grantor is entering into this Security
Agreement in order to induce the Lender to enter into and extend credit to the
Grantor under the Credit Agreement.

 

ACCORDINGLY, the Grantor and the Lender,
hereby agree as follows:

 

ARTICLE I

DEFINITIONS

 

1.1.         Terms Defined in Credit Agreement.  All capitalized terms used herein and not
otherwise defined shall have the meanings assigned to such terms in the Credit
Agreement.

 

1.2.         Terms Defined in UCC.  Terms defined in the UCC which are not
otherwise defined in this Security Agreement are used herein as defined in the
UCC.

 

1.3.         Definitions of Certain Terms Used
Herein.  As used in this Security
Agreement, in addition to the terms defined in the Preliminary Statement, the
following terms shall have the following meanings:

 

“Accounts” shall have the meaning set
forth in Article 9 of the UCC.

 

“Article” means a numbered article of
this Security Agreement, unless another document is specifically referenced.

 

“Chattel Paper” shall have the meaning
set forth in Article 9 of the UCC.

 

“Collateral” shall have the meaning
set forth in Article II.

 

“Collateral Access Agreement” means
any landlord waiver or other agreement, in form and substance satisfactory to
the Lender, between the Lender and any third party (including any bailee,
consignee, customs broker, or other similar Person) in possession of any
Collateral or any landlord of the Grantor for any real property where any
Collateral is located, as such landlord waiver or other agreement may be
amended, restated, or otherwise modified from time to time.

 

“Collateral Deposit Account” shall
have the meaning set forth in Section 7.1.

 

 

“Collateral Report” means any
certificate (including any Borrowing Base Certificate), report or other
document delivered by the Grantor to the Lender with respect to the Collateral
pursuant to any Loan Document.

 

“Commercial Tort Claims” means the
existing commercial tort claims of the Grantor set forth on Exhibit A.

 

“Control” shall have the meaning set
forth in Article 8 or, if applicable, in Section 9-104, 9-105, 9-106
or 9-107 of Article 9 of the UCC.

 

“Copyrights” means, with respect to
any Person, all of such Person’s right, title, and interest in and to the
following:  (a) all copyrights, rights
and interests in copyrights, works protectable by copyright, copyright
registrations, and copyright applications; (b) all renewals of any of the
foregoing; (c) all income, royalties, damages, and payments now or
hereafter due and/or payable under any of the foregoing, including, without
limitation, damages or payments for past or future infringements for any of the
foregoing; (d) the right to sue for past, present, and future
infringements of any of the foregoing; and (e) all rights corresponding to
any of the foregoing throughout the world.

 

“Default” means any event or condition
which constitutes an Event of Default or which upon notice, lapse of time or
both would, unless cured or waived, become an Event of Default.

 

“Deposit Account Control Agreement”
means an agreement, in form and substance satisfactory to the Lender, among
Grantor, a banking institution holding Grantor’s funds, and the Lender with
respect to collection and control of all deposits and balances held in a
deposit account maintained by Grantor with such banking institution.

 

“Deposit Accounts” shall have the
meaning set forth in Article 9 of the UCC.

 

“Documents” shall have the meaning set
forth in Article 9 of the UCC.

 

“Effective Date” shall have the
meaning set forth in the Credit Agreement.

 

“Equipment” shall have the meaning set
forth in Article 9 of the UCC.

 

“Event of Default” means an event
described in Section 5.1.

 

“Exhibit” refers to a specific exhibit
to this Security Agreement, unless another document is specifically referenced.

 

“Fixtures” shall have the meaning set
forth in Article 9 of the UCC.

 

“General Intangibles” shall have the
meaning set forth in Article 9 of the UCC.

 

“Goods” shall have the meaning set
forth in Article 9 of the UCC.

 

“Instruments” shall have the meaning
set forth in Article 9 of the UCC.

 

“Inventory” shall have the meaning set
forth in Article 9 of the UCC.

 

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“Investment Property” shall have the
meaning set forth in Article 9 of the UCC.

 

“Letter-of-Credit Rights” shall have
the meaning set forth in Article 9 of the UCC.

 

“Licenses” means, with respect to any
Person, all of such Person’s right, title, and interest in and to (a) any
and all licensing agreements or similar arrangements in and to its Patents,
Copyrights, or Trademarks, (b) all income, royalties, damages, claims, and
payments now or hereafter due or payable under and with respect thereto,
including, without limitation, damages and payments for past and future
breaches thereof, and (c) all rights to sue for past, present, and future
breaches thereof.

 

“Patents” means, with respect to any
Person, all of such Person’s right, title, and interest in and to:  (a) any and all patents and patent
applications; (b) all inventions and improvements described and claimed
therein; (c) all reissues, divisions, continuations, renewals, extensions,
and continuations-in-part thereof; (d) all income, royalties, damages,
claims, and payments now or hereafter due or payable under and with respect
thereto, including, without limitation, damages and payments for past and
future infringements thereof; (e) all rights to sue for past, present, and
future infringements thereof; and (f) all rights corresponding to any of
the foregoing throughout the world.

 

“Pledged Collateral” means all
Instruments, Securities and other Investment Property of the Grantor, whether
or not physically delivered to the Lender pursuant to this Security Agreement.

 

“Receivables” means the Accounts,
Chattel Paper, Documents, Investment Property, Instruments and any other rights
or claims to receive money which are General Intangibles or which are otherwise
included as Collateral.

 

“Section” means a numbered section of
this Security Agreement, unless another document is specifically referenced.

 

“Security” has the meaning set forth
in Article 8 of the UCC.

 

“Stock Rights” means all dividends,
instruments or other distributions and any other right or property which the
Grantor shall receive or shall become entitled to receive for any reason whatsoever
with respect to, in substitution for or in exchange for any Equity Interest
constituting Collateral, any right to receive an Equity Interest and any right
to receive earnings, in which the Grantor now has or hereafter acquires any
right, issued by an issuer of such Equity Interest.

 

“Supporting Obligations” shall have
the meaning set forth in Article 9 of the UCC.

 

“Trademarks” means, with respect to
any Person, all of such Person’s right, title, and interest in and to the
following:  (a) all trademarks
(including service marks), trade names, trade dress, and trade styles and the
registrations and applications for registration thereof and the goodwill of the
business symbolized by the foregoing; (b) all licenses of the foregoing,
whether as licensee or licensor; (c) all renewals of the foregoing; (d) all
income, royalties, damages, and payments now or hereafter due or payable with
respect thereto, including, without limitation, damages, claims, and payments
for past and future infringements thereof; (e) all rights to sue for 

 

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past, present, and future
infringements of the foregoing, including the right to settle suits involving
claims and demands for royalties owing; and (f) all rights corresponding
to any of the foregoing throughout the world.

 

“UCC” means the Uniform Commercial
Code, as in effect from time to time, of the State of Wisconsin or of any other
state the laws of which are required as a result thereof to be applied in
connection with the attachment, perfection or priority of, or remedies with
respect to, Lender’s Lien on any Collateral.

 

The foregoing definitions shall be equally
applicable to both the singular and plural forms of the defined terms.

 

ARTICLE II

GRANT OF SECURITY INTEREST

 

The Grantor hereby pledges, assigns and
grants to the Lender, a security interest in all of its right, title and
interest in, to and under all personal property and other assets, whether now
owned by or owing to, or hereafter acquired by or arising in favor of the
Grantor (including under any trade name or derivations thereof), and whether
owned or consigned by or to, or leased from or to, the Grantor, and regardless
of where located (all of which will be collectively referred to as the “Collateral”),
including:

 

(i)            all Accounts;

 

(ii)           all Chattel Paper;

 

(iii)          all Copyrights,
Patents and Trademarks;

 

(iv)          all Documents;

 

(v)           all Equipment;

 

(vi)          all Fixtures;

 

(vii)         all General
Intangibles;

 

(viii)        all Goods;

 

(ix)          all Instruments;

 

(x)           all Inventory;

 

(xi)          all Investment
Property;

 

(xii)         all cash or cash
equivalents;

 

(xiii)        all letters of
credit, Letter-of-Credit Rights and Supporting Obligations;

 

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(xiv)        all Deposit Accounts
with any bank or other financial institution;

 

(xv)         all Commercial Tort
Claims;

 

(xvi)        and all accessions
to, substitutions for and replacements, proceeds (including Stock Rights),
insurance proceeds and products of the foregoing, together with all books and
records, customer lists, credit files, computer files, programs, printouts and
other computer materials and records related thereto and any General
Intangibles at any time evidencing or relating to any of the foregoing;

 

to secure the prompt and
complete payment and performance of the Secured Obligations.

 

ARTICLE III

REPRESENTATIONS AND WARRANTIES

 

The Grantor represents and warrants to the
Lender that:

 

3.1.         Title, Perfection and Priority.  The Grantor has good and valid rights in or
the power to transfer the Collateral and title to the Collateral with respect
to which it has purported to grant a security interest hereunder, free and
clear of all Liens except for Liens permitted under Section 4.1(e), and
has full power and authority to grant to the Lender the security interest in
such Collateral pursuant hereto.  When
financing statements have been filed in the appropriate offices against the
Grantor in the locations listed on Exhibit H, the Lender will have
a fully perfected first priority security interest in that Collateral in which
a security interest may be perfected by filing, subject only to Liens permitted
under Section 4.1(e).

 

3.2.         Type and Jurisdiction of
Organization, Organizational and Identification Numbers.  The type of entity of the Grantor, its state
of organization, the organizational number issued to it by its state of
organization and its federal employer identification number are set forth on Exhibit A.

 

3.3.         Principal Location.  The Grantor’s mailing address and the
location of its place of business (if it has only one) or its chief executive
office (if it has more than one place of business), are disclosed in Exhibit A;
the Grantor has no other places of business except those set forth in Exhibit A.

 

3.4.         Collateral Locations.  All of Grantor’s locations where Collateral
is located are listed on Exhibit A. 
All of said locations are either (i) leased by the Grantor as
lessee and designated in Part VII(b) of Exhibit A,
or (ii) locations at which Inventory is held in a public warehouse or
is otherwise held by a bailee or on consignment as designated in Part VII(c) of
Exhibit A.

 

3.5.         Deposit Accounts.  All of the Grantor’s Deposit Accounts are
listed on Exhibit B.

 

3.6.         Exact Names.  The Grantor’s name in which it has executed
this Security Agreement is the exact name as it appears in the Grantor’s
organizational documents, as amended, as filed with the Grantor’s jurisdiction
of organization.  The Grantor has not,
during 

 

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the past five years, been
known by or used any other corporate or fictitious name, or been a party to any
merger or consolidation, or been a party to any acquisition.

 

3.7.         Letter-of-Credit Rights and Chattel
Paper.  Exhibit C lists
all Letter-of-Credit Rights and Chattel Paper of the Grantor.  All action by the Grantor necessary or
desirable to protect and perfect the Lender’s Lien on each item listed on Exhibit C
(including the delivery of all originals and the placement of a legend on all
Chattel Paper as required hereunder) has been duly taken. The Lender will have
a fully perfected first priority security interest in the Collateral listed on Exhibit C,
subject only to Liens permitted under Section 4.1(e).

 

3.8.         Accounts and Chattel Paper.

 

(a)           The names of the obligors, amounts
owing, due dates and other information with respect to the Accounts and Chattel
Paper are and will be correctly stated in all records of the Grantor relating
thereto and in all invoices and Collateral Reports with respect thereto
furnished to the Lender by the Grantor from time to time.  As of the time when each Account or each item
of Chattel Paper arises, the Grantor shall be deemed to have represented and
warranted that such Account or Chattel Paper, as the case may be, and all
records relating thereto, are genuine and in all respects what they purport to
be.

 

(b)           Intentionally Deleted.

 

(c)           In addition, with respect to all
Accounts, (i) the amounts shown on all invoices, statements and Collateral
Reports with respect thereto are actually and absolutely owing to the Grantor
as indicated thereon and are not in any way contingent; and  (ii) to the Grantor’s knowledge, all
Account Debtors have the capacity to contract.

 

3.9.         Inventory.  With respect to any Inventory scheduled or
listed on the most recent Collateral Report, (a) such Inventory (other
than Inventory in transit) is located at one of the Grantor’s locations set
forth on Exhibit A, (b) no Inventory  (other than Inventory in transit) is now, or
shall at any time or times hereafter be stored at any other location except as
permitted by Section 4.1(g), (c) the Grantor has good, indefeasible
and merchantable title to such Inventory and such Inventory is not subject to
any Lien or security interest or document whatsoever except for the Lien
granted to the Lender, and except for Liens permitted by Section 6.02 of
the Credit Agreement, (d) except as specifically disclosed in the most
recent Collateral Report, such Inventory is Eligible Inventory of good and
merchantable quality, free from any defects, (e) such Inventory is not
subject to any licensing, patent, royalty, trademark, trade name or copyright
agreements with any third parties which would require any consent of any third
party upon sale or disposition of that Inventory or the payment of any monies
to any third party upon such sale or other disposition, (f) such Inventory
has been produced in accordance with the Federal Fair Labor Standards Act of
1938, as amended, and all rules, regulations and orders thereunder and (g) the
completion of manufacture, sale or other disposition of such Inventory by the
Lender following an Event of Default shall not require the consent of any
Person and shall not constitute a breach or default under any contract or
agreement to which the Grantor is a party or to which such property is subject.

 

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3.10.       Intellectual Property. This
Security Agreement is effective to create a valid and continuing Lien and, upon
filing of appropriate financing statements in the offices listed on Exhibit H,
fully perfected first priority security interests in favor of the Lender on the
Grantor’s Patents, Trademarks and Copyrights, such perfected security interests
are enforceable as such as against any and all creditors of and purchasers from
the Grantor; and all action necessary or desirable to protect and perfect the
Lender’s Lien on the Grantor’s Patents, Trademarks or Copyrights shall have
been duly taken.  Without limiting the
foregoing, Grantor will take such actions as the Lender may require for the
purpose of recording its interest in the Grantor’s Patents and Trademarks with
the United States Patent and Trademark Office from time to time upon Lender’s
receipt of the initial schedule of Borrower’s Patents and Trademarks, and any
updates thereto, each as required pursuant to the terms of the Credit
Agreement.

 

3.11.       Filing Requirements.  None of the Equipment is covered by any
certificate of title, except for the vehicles described in Part I of Exhibit E.  None of the Collateral is of a type for which
security interests or liens may be perfected by filing under any federal
statute or any state statute other than Article 9 of the Uniform
Commercial Code as in effect in the relevant state except for the vehicles
described in Part II of Exhibit E.  The legal description, county and street
address of each property on which any Fixtures are located is set forth in Exhibit F
together with the name and address of the record owner of each such property.

 

3.12.       No Financing Statements, Security
Agreements.  No financing statement
or security agreement describing all or any portion of the Collateral which has
not lapsed or been terminated naming the Grantor as debtor has been filed or is
of record in any jurisdiction except (a) for financing statements or
security agreements naming the Lender as the secured party and (b) as
permitted by Section 4.1(e).

 

3.13.       Pledged Collateral.

 

(a)           Exhibit G sets forth a
complete and accurate list of all of the Pledged Collateral.  The Grantor is the direct, sole beneficial
owner and sole holder of record of the Pledged Collateral listed on Exhibit G
as being owned by it, free and clear of any Liens, except for the security
interest granted to the Lender hereunder and as otherwise permitted by Section 6.02
of the Credit Agreement.  The Grantor further
represents and warrants that (i) all Pledged Collateral constituting an
Equity Interest has been (to the extent such concepts are relevant with respect
to such Pledged Collateral) duly authorized, validly issued, are fully paid and
non-assessable, (ii) with respect to any certificates delivered to the
Lender representing an Equity Interest, either such certificates are Securities
as defined in Article 8 of the UCC as a result of actions by the issuer or
otherwise, or, if such certificates are not Securities, the Grantor has so
informed the Lender so that the Lender may take steps to perfect its security
interest therein as a General Intangible, (iii) all Pledged Collateral
held by a securities intermediary is covered by a control agreement among the Grantor,
the securities intermediary and the Lender pursuant to which the Lender has
Control and (iv) all Pledged Collateral which represents Indebtedness owed
to the Grantor has been duly authorized, authenticated or issued and delivered
by the issuer of such Indebtedness, is the legal, valid and binding obligation
of such issuer and such issuer is not in default thereunder.

 

7

 

(b)           In addition, (i) none of the
Pledged Collateral has been issued or transferred in violation of the
securities registration, securities disclosure or similar laws of any
jurisdiction to which such issuance or transfer may be subject, (ii) there
are existing no options, warrants, calls or commitments of any character
whatsoever relating to the Pledged Collateral or which obligate the issuer of
any Equity Interest included in the Pledged Collateral to issue additional
Equity Interests, and (iii) no consent, approval, authorization, or other
action by, and no giving of notice, filing with, any governmental authority or
any other Person is required for the pledge by the Grantor of the Pledged
Collateral pursuant to this Security Agreement or for the execution, delivery
and performance of this Security Agreement by the Grantor, or for the exercise
by the Lender of the voting or other rights provided for in this Security
Agreement or for the remedies in respect of the Pledged Collateral pursuant to
this Security Agreement, except as may be required in connection with such
disposition by laws affecting the offering and sale of securities generally.

 

(c)           Except as set forth in Exhibit G,
the Grantor owns 100% of the issued and outstanding  Equity Interests which constitute Pledged
Collateral and none of the Pledged Collateral which represents Indebtedness
owed to the Grantor is subordinated in right of payment to other Indebtedness
or subject to the terms of an indenture.

 

ARTICLE IV

COVENANTS

 

From the date of this Security Agreement, and
thereafter until this Security Agreement is terminated, the Grantor agrees
that:

 

4.1.         General.

 

(a)           Collateral Records.  The Grantor will maintain complete and
accurate books and records with respect to the Collateral, and furnish to the
Lender, such reports relating to the Collateral as the Lender shall from time
to time request.

 

(b)           Authorization to File Financing
Statements; Ratification.  The
Grantor hereby authorizes the Lender to file, and if requested will deliver to
the Lender, all financing statements and other documents and take such other
actions as may from time to time be requested by the Lender in order to
maintain a first perfected security interest in and, if applicable, Control of,
the Collateral.  Any financing statement
filed by the Lender may be filed in any filing office in any UCC jurisdiction
and may (i) indicate the Collateral (1) as all assets of the Grantor
or words of similar effect, regardless of whether any particular asset
comprised in the Collateral falls within the scope of Article 9 of the UCC
or such jurisdiction, or (2) by any other description which reasonably
approximates the description contained in this Security Agreement, and (ii) contain
any other information required by part 5 of Article 9 of the UCC for the
sufficiency or filing office acceptance of any financing statement or
amendment, including (a) whether the Grantor is an organization, the type
of organization and any organization identification number issued to the
Grantor, and (b) in the case of a financing statement filed as a fixture
filing or indicating Collateral as as-extracted collateral or timber to be cut,
a sufficient description of real property to which the Collateral relates.  The Grantor also agrees to furnish any such
information to the Lender promptly upon request.  The Grantor also ratifies its 

 

8

 

authorization for the Lender
to have filed in any UCC jurisdiction any initial financing statements or
amendments thereto if filed prior to the date hereof.

 

(c)           Further Assurances.  The Grantor will, if so requested by the
Lender, furnish to the Lender, as often as the Lender requests, statements and
schedules further identifying and describing the Collateral and such other
reports and information in connection with the Collateral as the Lender may
reasonably request, all in such detail as the Lender may specify.  The Grantor also agrees to take any and all
actions necessary to defend title to the Collateral against all persons and to
defend the security interest of the Lender in the Collateral and the priority thereof
against any Lien not expressly permitted hereunder.

 

(d)           Disposition of Collateral.  The Grantor will not sell, lease or otherwise
dispose of the Collateral except for dispositions specifically permitted
pursuant to the Credit Agreement.

 

(e)           Liens.  The Grantor will not create, incur, or suffer
to exist any Lien on the Collateral except (i) the security interest
created by this Security Agreement, and (ii) other Liens permitted under Section 6.02
of the Credit Agreement.

 

(f)            Other Financing Statements.  The Grantor will not authorize the filing of
any financing statement naming it as debtor covering all or any portion of the
Collateral, except as permitted by Section 4.1(e). The Grantor
acknowledges that it is not authorized to file any financing statement or
amendment or termination statement with respect to any financing statement
naming the Lender as secured party or that is not expressly permitted by Section 6.02
of the Credit Agreement without the prior written consent of the Lender,
subject to the Grantor’s rights under Section 9-509(d)(2) of the UCC.

 

(g)           Locations. The Grantor will
not (i) maintain any Collateral at any location other than those locations
listed on Exhibit A, (ii) otherwise change, or add to, such
locations without the Lender’s prior written consent as required by the Credit
Agreement (and if the Lender gives such consent, the Grantor will concurrently
therewith obtain a Collateral Access Agreement for each such location to the
extent required by the Credit Agreement), or (iii) change its principal
place of business or chief executive office from the location identified on Exhibit A,
other than as permitted by the Credit Agreement.

 

(h)           Compliance with Terms.  The Grantor will perform and comply in all
material respects with all obligations in respect of the Collateral and all
agreements to which it is a party or by which it is bound relating to the
Collateral.

 

4.2.         Receivables.

 

(a)           Certain Agreements on Receivables.  The Grantor will not make or agree to make
any discount, credit, rebate or other reduction in the original amount owing on
a Receivable or accept in satisfaction of a Receivable less than the original
amount thereof, except that, prior to the occurrence of an Event of Default,
the Grantor may reduce the amount of Accounts arising from the sale of
Inventory in accordance with its present policies and in the ordinary course of
business.

 

9

 

(b)           Collection of Receivables.  Except for write-offs of Receivables deemed
unrecoverable in accordance with its present policies and in the ordinary
course of business or as otherwise provided in this Security Agreement, the
Grantor will collect and enforce, at the Grantor’s sole expense, all amounts
due or hereafter due to the Grantor under the Receivables.

 

(c)           Delivery of Invoices.  The Grantor will deliver to the Lender
immediately upon its request after the occurrence and during the continuation
of an Event of Default duplicate invoices with respect to each Account bearing
such language of assignment as the Lender shall specify.

 

(d)           Intentionally Deleted.

 

(e)           Electronic Chattel Paper.  The Grantor shall take all steps necessary to
grant the Lender Control of all electronic chattel paper in accordance with the
UCC and all “transferable records” as defined in each of the Uniform Electronic
Transactions Act and the Electronic Signatures in Global and National Commerce
Act.

 

4.3.         Inventory and Equipment.

 

(a)           Maintenance of Goods.  The Grantor will do all things necessary to
maintain, preserve, protect and keep the Inventory and the Equipment in good
repair and working and saleable condition, except for damaged or defective
goods arising in the ordinary course of the Grantor’s business and except for
ordinary wear and tear in respect of the Equipment.

 

(b)           Returned Inventory.  In the event any Account Debtor returns
Inventory to the Grantor when an Event of Default exists, the Grantor, upon the
request of the Lender, shall: (i) hold the returned Inventory in trust for
the Lender; (ii) segregate all returned Inventory from all of its other
property; (iii) dispose of the returned Inventory solely according to the
Lender’s written instructions; and (iv) not issue any credits or
allowances with respect thereto without the Lender’s prior written
consent.  All returned Inventory shall be
subject to the Lender’s Liens thereon. 
Whenever any Inventory is returned, the related Account shall be deemed
ineligible to the extent of the amount owing by the Account Debtor with respect
to such returned Inventory and such returned Inventory shall not be Eligible
Inventory.

 

(c)           Inventory Count.  The Grantor will conduct a physical count of
the Inventory at least once per Fiscal Year, and after and during the
continuation of an Event of Default, at such other times as the Lender
requests. The Grantor, at its own expense, shall deliver to the Lender the
results of each physical verification, which the Grantor has made, or has
caused any other Person to make on its behalf, of all or any portion of its
Inventory.

 

(d)           Equipment.  The Grantor shall promptly inform the Lender
of any additions to or deletions from the Equipment which individually exceed
$250,000.  The Grantor shall not permit
any Equipment to become a fixture with respect to real property or to become an
accession with respect to other personal property with respect to which real or
personal property the Lender either does not have a Lien or has not otherwise
entered into a Collateral Access Agreement. 
The Grantor will not, without the Lender’s prior written consent, alter
or remove any identifying symbol or number on any of the Grantor’s Equipment
constituting Collateral.

 

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(e)           Titled Vehicles.  The Grantor will give the Lender notice of
its acquisition of any vehicle covered by a certificate of title with a value
in excess of $50,000, and deliver to the Lender, upon request, the original of
any vehicle title certificate and provide and/or file all other documents or
instruments necessary to have the Lien of the Lender noted on any such
certificate or with the appropriate state office.

 

4.4.          Delivery of Instruments,
Securities, Chattel Paper and Documents. The Grantor will (a) deliver
to the Lender immediately upon execution of this Security Agreement the
originals of all Chattel Paper, certificated Securities and Instruments
constituting Collateral (if any then exist), (b) hold in trust for the
Lender upon receipt and immediately thereafter deliver to the Lender any
Chattel Paper, certificated Securities and Instruments constituting Collateral,
(c) upon the Lender’s request, deliver to the Lender (and thereafter hold
in trust for the Lender upon receipt and immediately deliver to the Lender) any
Document evidencing or constituting Collateral and (d) upon the Lender’s
request, deliver to the Lender a duly executed amendment to this Security
Agreement, in the form of Exhibit I hereto (the “Amendment”),
pursuant to which the Grantor will pledge such additional Collateral.  The Grantor hereby authorizes the Lender to
attach each Amendment to this Security Agreement and agrees that all additional
Collateral set forth in such Amendments shall be considered to be part of the
Collateral.

 

4.5.          Uncertificated Pledged Collateral.
The Grantor will permit the Lender  from
time to time to cause the appropriate issuers (and, if held with a securities
intermediary, such securities intermediary) of uncertificated securities or
other types of Pledged Collateral not represented by certificates to mark their
books and records with the numbers and face amounts of all such uncertificated
securities or other types of Pledged Collateral not represented by certificates
and all rollovers and replacements therefor to reflect the Lien of the Lender
granted pursuant to this Security Agreement. 
The Grantor will take any actions necessary to cause (a) the
issuers of uncertificated securities which are Pledged Collateral and (b) any
securities intermediary which is the holder of any Pledged Collateral, to cause
the Lender to have and retain Control over such Pledged Collateral.  Without limiting the foregoing, the Grantor
will, with respect to Pledged Collateral held with a securities intermediary,
cause such securities intermediary to enter into a control agreement with the
Lender, in form and substance satisfactory to the Lender, giving the Lender
Control.

 

4.6.          Pledged Collateral.

 

(a)           Changes in Capital Structure of
Issuers. Except as expressly permitted or required by the Credit Agreement,
the Grantor will not (i) permit or suffer any issuer of an Equity Interest
constituting Pledged Collateral to dissolve, merge, liquidate, retire any of
its Equity Interests or other Instruments or Securities evidencing ownership,
reduce its capital, sell or encumber all or substantially all of its assets
(except for Liens permitted under Section 6.02 of the Credit Agreement and
sales of assets permitted pursuant to Section 4.1(d)) or merge or
consolidate with any other entity, or (ii) vote any Pledged Collateral in
favor of any of the foregoing.

 

(b)           Issuance of Additional Securities.  The Grantor will not permit or suffer the
issuer of an Equity Interest constituting Pledged Collateral to issue
additional Equity Interests, any right to receive the same or any right to
receive earnings, except to the Grantor.

 

11

 

(c)           Registration of Pledged Collateral.  During the continuation of an Event of
Default, Grantor will permit any registerable Pledged Collateral to be
registered in the name of the Lender or its nominee at any time at the option
of the Lender.

 

(d)           Exercise of Rights in Pledged
Collateral.

 

(i)            Without in any way
limiting the foregoing and subject to clause (ii) below, the Grantor shall
have the right to exercise all voting rights or other rights relating to the
Pledged Collateral for all purposes not inconsistent with this Security
Agreement, the Credit Agreement or any other Loan Document; provided however, that no vote or other right shall be
exercised or action taken which would have the effect of impairing the rights
of the Lender in respect of the Pledged Collateral.

 

(ii)           The Grantor will
permit the Lender or its nominee at any time after the occurrence of an Event
of Default, without notice, to exercise all voting rights or other rights
relating to Pledged Collateral, including, without limitation, exchange,
subscription or any other rights, privileges, or options pertaining to any
Equity Interest or Investment Property constituting Pledged Collateral as if it
were the absolute owner thereof.

 

(iii)          The Grantor shall
be entitled to collect and receive for its own use all cash dividends and
interest paid in respect of the Pledged Collateral to the extent not in violation
of the Credit Agreement other than any of the following distributions
and payments (collectively referred to as the “Excluded Payments”): (a) dividends
and interest paid or payable other than in cash in respect of any Pledged
Collateral, and instruments and other property received, receivable or
otherwise distributed in respect of, or in exchange for, any Pledged
Collateral;  (b) dividends and other
distributions paid or payable in cash in respect of any Pledged Collateral in
connection with a partial or total liquidation or dissolution or in connection
with a reduction of capital, capital surplus or paid-in capital of an issuer;
and (c) cash paid, payable or otherwise distributed, in respect of
principal of, or in redemption of, or in exchange for, any Pledged Collateral; provided however, that until actually paid, all rights to
such distributions shall remain subject to the Lien created by this Security
Agreement; and

 

(iv)          All Excluded
Payments and all other distributions in respect of any of the Pledged
Collateral, whenever paid or made, shall be delivered to the Lender to hold as
Pledged Collateral and shall, if received by the Grantor, be received in trust
for the benefit of the Lender, be segregated from the other property or funds
of the Grantor, and be forthwith delivered to the Lender as Pledged Collateral
in the same form as so received (with any necessary endorsement).

 

4.7.          Intellectual Property.

 

(a)           The Grantor will use its best efforts
to secure all consents and approvals necessary or appropriate for the
assignment to or benefit of the Lender of any License held by the Grantor and
to enforce the security interests granted hereunder.  Within 30 days of the date hereof, the
Grantor will deliver to the Lender a schedule of any interest in, or any title
to, any

 

12

 

registered Patent, Trademark
or Copyright in the form of Exhibit D.  The Grantor further agrees to provide the
Lender, within 30 days hereof, such Patent, Trademark, and/or Copyright Security
Agreements as the Lender may require to be filed with the United States Patent
and Trademark Office to evidence the Lien granted herein.

 

(b)           The Grantor shall notify the Lender
immediately if it knows or has reason to know that any application or
registration relating to any Patent, Trademark or Copyright (now or hereafter
existing) that is material to the conduct of Grantor’s business may become
abandoned or dedicated, or of any adverse determination or development
(including the institution of, or any such determination or development in, any
proceeding in the United States Patent and Trademark Office, the United States
Copyright Office or any court) regarding the Grantor’s ownership of any Patent,
Trademark or Copyright, its right to register the same, or to keep and maintain
the same.

 

(c)           Upon the filing of an application for
the registration of any Patent, Trademark or Copyright with the United States
Patent and Trademark Office, the United States Copyright Office or any similar
office or agency, the Grantor shall execute and deliver any and all security
agreements as the Lender may request to evidence the Lender’s first priority
security interest on such Patent, Trademark or Copyright, and the General
Intangibles of the Grantor relating thereto or represented thereby.

 

(d)           The Grantor shall take all actions
necessary or requested by the Lender to maintain and pursue each application,
to obtain the relevant registration and to maintain the registration of each of
the Patents, Trademarks and Copyrights (now or hereafter existing), including
the filing of applications for renewal, affidavits of use, affidavits of
noncontestability and opposition and interference and cancellation proceedings,
unless the Grantor shall determine that such Patent, Trademark or Copyright is
not material to the conduct of its business.

 

(e)           The Grantor shall, unless it shall
reasonably determine that such Patent, Trademark or Copyright is in no way
material to the conduct of its business or operations, promptly sue for infringement,
misappropriation or dilution and to recover any and all damages for such
infringement, misappropriation or dilution, and shall take such other actions
as the Lender shall deem appropriate under the circumstances to protect such
Patent, Trademark or Copyright.  In the
event that the Grantor institutes suit because any of the Patents, Trademarks
or Copyrights constituting Collateral is infringed upon, or misappropriated or
diluted by a third party, the Grantor shall comply with Section 4.8.

 

4.8.          Commercial Tort Claims.  The Grantor shall promptly, and in any event
within two Business Days after the same is acquired by it, notify the Lender of
any commercial tort claim (as defined in the UCC) acquired by it and, unless
the Lender otherwise consents, the Grantor shall enter into an amendment to
this Security Agreement, in the form of Exhibit I hereto, granting
to Lender a first priority security interest in such commercial tort claim.

 

4.9.          Letter-of-Credit Rights.  If the Grantor is or becomes the beneficiary
of any letters of credit with an aggregate face amount in excess of $50,000,
the Grantor shall promptly, and in any event within two Business Days after
becoming a beneficiary, notify the Lender thereof and,

 

13

 

upon Lender’s request, cause
the issuer and/or confirmation bank to consent to the assignment of any
Letter-of-Credit Rights to the Lender.

 

4.10.        Federal, State or Municipal Claims.  The Grantor will promptly notify the Lender
of any Collateral which constitutes a claim against the United States
government or any state or local government or any instrumentality or agency
thereof, the assignment of which claim is restricted by federal, state or
municipal law.

 

4.11.        No Interference.  The Grantor agrees that it will not interfere
with any right, power and remedy of the Lender provided for in this Security
Agreement or now or hereafter existing at law or in equity or by statute or
otherwise, or the exercise or beginning of the exercise by the Lender of any
one or more of such rights, powers or remedies.

 

4.12.        Insurance.

 

(a)           All insurance policies required
hereunder or under Section 5.09 of the Credit Agreement shall name the
Lender as an additional insured or as loss payee, as applicable, and shall
contain loss payable clauses or mortgagee clauses, through endorsements in form
and substance satisfactory to the Lender, which provide that: (i) all
proceeds thereunder with respect to any Collateral shall be payable to the
Lender; (ii) no such insurance shall be affected by any act or neglect of
the insured or owner of the property described in such policy; and (iii) that
the insurer will endeavor to provide at least thirty days prior written notice
to the Lender that any such policy and loss payable or mortgagee clauses may be
canceled, amended or terminated; provided, that, in the event that any insurer
fails to give such thirty days prior written notice, the Borrower shall be
required to give such notice..

 

(b)           All premiums on such insurance shall
be paid when due by the Grantor, and copies of the policies delivered to the
Lender promptly upon Lender’s request. 
If the Grantor fails to obtain any insurance as required by this
Section, the Lender may obtain such insurance at the Grantor’s expense.  By purchasing such insurance, the Lender
shall not be deemed to have waived any Default arising from the Grantor’s
failure to maintain such insurance or pay any premiums therefor.

 

4.13.        Collateral Access Agreements.  The Grantor shall use commercially reasonable
efforts to obtain a Collateral Access Agreement, from the lessor of each leased
property, mortgagee of owned property or bailee or consignee with respect to
any warehouse, processor or converter facility or other location where
Collateral is stored or located, which agreement or letter shall provide access
rights, contain a waiver or subordination of all Liens or claims that the
landlord, mortgagee, bailee or consignee may assert against the Collateral at
that location, and shall otherwise be reasonably satisfactory in form and
substance to the Lender. With respect to such locations or warehouse space
leased as of the Effective Date and thereafter, if the Lender has not received
a Collateral Access Agreement as of the Effective Date (or, if later, as of the
date such location is acquired or leased), Grantor’s Eligible Inventory at that
location shall be excluded from the Borrowing Base.  After the Effective Date, no real property or
warehouse space shall be leased by the Grantor and no Inventory shall be
shipped to a processor or converter under arrangements established after the
Effective Date,  unless and until a
satisfactory Collateral Access Agreement shall first have been obtained with
respect to such location and if it

 

14

 

has not been obtained,
Grantor’s Eligible Inventory at that location shall be excluded from the
Borrowing Base.  The Grantor shall timely
and fully pay and perform its obligations under all leases and other agreements
with respect to each leased location or third party warehouse where any
Collateral is or may be located.

 

4.14.        Deposit Account Control Agreements.  The Grantor will provide to the Lender upon
the Lender’s request, a Deposit Account Control Agreement duly executed on behalf
of each financial institution holding a deposit account of the Grantor as set
forth in the Security Agreement.

 

4.15.        Change of Name or Location; Change of
Fiscal Year.  The Grantor shall not (a) change
its name as it appears in official filings in the state of its incorporation or
organization, (b) change its chief executive office, principal place of
business, mailing address, corporate offices or warehouses or locations at
which Collateral is held or stored, or the location of its records concerning
the Collateral as set forth in the Security Agreement, (c) change the type
of entity that it is, (d) change its organization identification number,
if any, issued by its state of incorporation or other organization, or (e) change
its state of incorporation or organization, in each case, unless the Lender
shall have received at least thirty days prior written notice of such change
and the Lender shall have acknowledged in writing that either (1) such
change will not adversely affect the validity, perfection or priority of the
Lender’s security interest in the Collateral, or (2) any reasonable action
requested by the Lender in connection therewith has been completed or taken
(including any action to continue the perfection of any Liens in favor of the
Lender in any Collateral), provided that, any new location shall be in the
continental U.S.  The Grantor shall not
change its fiscal year which currently ends on June 30.

 

ARTICLE
V

EVENTS OF DEFAULT AND REMEDIES

 

5.1.          Events of Default.  The occurrence of any one or more of the
following events shall constitute an Event of Default hereunder:

 

(a)           Any representation or warranty made
by or on behalf of the Grantor under or in connection with this Security
Agreement shall be materially false as of the date on which made.

 

(b)           The breach by the Grantor of any of
the terms or provisions of Article IV or Article VII.

 

(c)           The breach by the Grantor (other than
a breach which constitutes an Event of Default under any other Section of
this Article V) of any of the terms or provisions of this Security
Agreement which is not remedied within ten days after such breach.

 

(d)           The occurrence of any “Event of
Default” under, and as defined in, the Credit Agreement.

 

15

 

5.2.          Remedies.

 

(a)           Upon the occurrence of an Event of
Default, the Lender may exercise any or all of the following rights and
remedies:

 

(i)            those rights and
remedies provided in this Security Agreement, the Credit Agreement, or any
other Loan Document; provided that,
this Section 5.2(a) shall not be understood to limit any rights or
remedies available to the Lender prior to an Event of Default;

 

(ii)           those rights and
remedies available to a secured party under the UCC (whether or not the UCC
applies to the affected Collateral) or under any other applicable law
(including, without limitation, any law governing the exercise of a bank’s
right of setoff or bankers’ lien) when a debtor is in default under a security
agreement;

 

(iii)          give notice of sole
control or any other instruction under any Deposit Account Control Agreement or
and other control agreement with any securities intermediary and take any
action therein with respect to such Collateral;

 

(iv)          without notice
(except as specifically provided in Section 8.1 or elsewhere herein),
demand or advertisement of any kind to Grantor or any other Person, enter the
premises of the Grantor where any Collateral is located (through self-help and
without judicial process) to collect, receive, assemble, process, appropriate,
sell, lease, assign, grant an option or options to purchase or otherwise
dispose of, deliver, or realize upon, the Collateral or any part thereof in one
or more parcels at public or private sale or sales (which sales may be
adjourned or continued from time to time with or without notice and may take
place at the Grantor’s premises or elsewhere), for cash, on credit or for
future delivery without assumption of any credit risk, and upon such other
terms as the Lender may deem commercially reasonable; and

 

(v)           concurrently with
written notice to the Grantor, transfer and register in its name or in the name
of its nominee the whole or any part of the Pledged Collateral, to exchange
certificates or instruments representing or evidencing Pledged Collateral for
certificates or instruments of smaller or larger denominations, to exercise the
voting and all other rights as a holder with respect thereto, to collect and
receive all cash dividends, interest, principal and other distributions made
thereon and to otherwise act with respect to the Pledged Collateral as though
the Lender was the outright owner thereof.

 

(b)           The Lender may comply with any
applicable state or federal law requirements in connection with a disposition
of the Collateral and compliance will not be considered to adversely affect the
commercial reasonableness of any sale of the Collateral.

 

(c)           The Lender shall have the right upon
any such public sale or sales and, to the extent permitted by law, upon any
such private sale or sales, to purchase for the benefit of the Lender, the
whole or any part of the Collateral so sold, free of any right of equity
redemption, which equity redemption the Grantor hereby expressly releases.

 

16

 

(d)           Until the Lender is able to effect a
sale, lease, or other disposition of Collateral, the Lender shall have the
right to hold or use Collateral, or any part thereof, to the extent that it
deems appropriate for the purpose of preserving Collateral or its value or for
any other purpose deemed appropriate by the Lender. The Lender may, if it so
elects, seek the appointment of a receiver or keeper to take possession of
Collateral and to enforce any of the Lender’s remedies, with respect to such
appointment without prior notice or hearing as to such appointment.

 

(e)           If, after the Credit Agreement has
terminated by its terms and all of the Obligations have been paid in full,
there remain Swap Obligations outstanding, the Lender may exercise the remedies
provided in this Section 5.2 upon the occurrence of any event which would
allow or require the termination or acceleration of any Swap Obligations
pursuant to the terms of the Swap Agreement.

 

(f)            Notwithstanding the foregoing, the
Lender shall not be required to (i) make any demand upon, or pursue or
exhaust any of their rights or remedies against, the Grantor, any other
obligor, guarantor, pledgor or any other Person with respect to the payment of
the Secured Obligations or to pursue or exhaust any of their rights or remedies
with respect to any Collateral therefor or any direct or indirect guarantee
thereof, (ii) marshal the Collateral or any guarantee of the Secured
Obligations or to resort to the Collateral or any such guarantee in any
particular order, or (iii) effect a public sale of any Collateral.

 

(g)           The Grantor recognizes that the
Lender may be unable to effect a public sale of any or all the Pledged
Collateral and may be compelled to resort to one or more private sales thereof
in accordance with clause (a) above.  The Grantor also acknowledges that any
private sale may result in prices and other terms less favorable to the seller
than if such sale were a public sale and, notwithstanding such circumstances,
agrees that any such private sale shall not be deemed to have been made in a
commercially unreasonable manner solely by virtue of such sale being
private.  The Lender shall be under no
obligation to delay a sale of any of the Pledged Collateral for the period of
time necessary to permit the Grantor or the issuer of the Pledged Collateral to
register such securities for public sale under the Securities Act of 1933, as
amended, or under applicable state securities laws, even if the Grantor and the
issuer would agree to do so.

 

5.3.          Grantor’s Obligations Upon Default.  Upon the request of the Lender after the
occurrence of a Default, the Grantor will:

 

(a)           assemble and make available to the
Lender the Collateral and all books and records relating thereto at any place
or places specified by the Lender, whether at the Grantor’s premises or
elsewhere;

 

(b)           permit the Lender, by the Lender’s
representatives and agents, to enter, occupy and use  any premises where all or any part of the
Collateral, or the books and records relating thereto, or both, are located, to
take possession of all or any part of the Collateral or the books and records
relating thereto, or both, to remove all or any part of the Collateral or the
books and records relating thereto, or both, and to conduct sales of the
Collateral, without any obligation to pay the Grantor for such use and
occupancy;

 

17

 

(c)           prepare and file, or cause an issuer
of Pledged Collateral to prepare and file, with the Securities and Exchange
Commission or any other applicable government agency, registration statements,
a prospectus and such other documentation in connection with the Pledged
Collateral as the Lender may request, all in form and substance satisfactory to
the Lender, and furnish to the Lender, or cause an issuer of Pledged Collateral
to furnish to the Lender, any information regarding the Pledged Collateral in
such detail as the Lender may specify;

 

(d)           take, or cause an issuer of Pledged
Collateral to take, any and all actions necessary to register or qualify the
Pledged Collateral to enable the Lender to consummate a public sale or other
disposition of the Pledged Collateral; and

 

(e)           at its own expense, cause the
independent certified public accountants then engaged by the Grantor to prepare
and deliver to the Lender, at any time, and from time to time, promptly upon
the Lender’s request, the following reports with respect to the Grantor: (i) a
reconciliation of all Accounts; (ii) an aging of all Accounts; (iii) trial
balances; and (iv) a test verification of such Accounts.

 

5.4.          Grant of Intellectual Property
License.  For the purpose of enabling
the Lender to exercise the rights and remedies under this Article V
at such time as the Lender shall be lawfully entitled to exercise such rights
and remedies, the Grantor hereby (a) grants to the Lender an irrevocable,
nonexclusive license (exercisable without payment of royalty or other
compensation to the Grantor) to use, license or sublicense any Intellectual
Property Rights now owned or hereafter acquired by the Grantor, and wherever the
same may be located, and including in such license access to all media in which
any of the licensed items may be recorded or stored and to all computer
software and programs used for the compilation or printout thereof and (b) irrevocably
agrees that the Lender may sell any of the Grantor’s Inventory directly to any
person, including without limitation persons who have previously purchased the
Grantor’s Inventory from the Grantor and in connection with any such sale or
other enforcement of the Lender’s rights under this Security Agreement, may
sell Inventory which bears any Trademark owned by or licensed to the Grantor
and any Inventory that is covered by any Copyright owned by or licensed to the
Grantor and the Lender may finish any work in process and affix any Trademark
owned by or licensed to the Grantor and sell such Inventory as provided herein.

 

ARTICLE
VI

ACCOUNT VERIFICATION; ATTORNEY IN FACT; PROXY

 

6.1.          Account Verification.  The Lender may, at any time after an Event of
Default, in the Lender’s own name, in the name of a nominee of the Lender, or
in the name of the Grantor communicate (by mail, telephone, facsimile or
otherwise) with the Account Debtors of such Grantor, parties to contracts with
the Grantor and obligors in respect of Instruments of the Grantor to verify
with such Persons, to the Lender’s satisfaction, the existence, amount, terms
of, and any other matter relating to, Accounts, Instruments, Chattel Paper,
payment intangibles and/or other Receivables.

 

18

 

6.2.          Authorization for Secured Party to
Take Certain Action.

 

(a)           The Grantor irrevocably authorizes
the Lender at any time and from time to time in the sole discretion of the
Lender and appoints the Lender as its attorney in fact (i) to execute on
behalf of the Grantor as debtor and to file financing statements necessary or
desirable in the Lender’s sole discretion to perfect and to maintain the
perfection and priority of the Lender’s security interest in the Collateral, (ii) to
endorse and collect any cash proceeds of the Collateral, (iii) to file a
carbon, photographic or other reproduction of this Security Agreement or any
financing statement with respect to the Collateral as a financing statement and
to file any other financing statement or amendment of a financing statement
(which does not add new collateral or add a debtor) in such offices as the
Lender in its sole discretion deems necessary or desirable to perfect and to
maintain the perfection and priority of the Lender’s security interest in the
Collateral, (iv) to contact and enter into one or more agreements with the
issuers of uncertificated securities which are Pledged Collateral or with
securities intermediaries holding Pledged Collateral as may be necessary or
advisable to give the Lender Control over such Pledged Collateral, (v) to
apply the proceeds of any Collateral received by the Lender to the Secured
Obligations as provided in Section 7.3, (vi) to discharge past due
taxes, assessments, charges, fees or Liens on the Collateral (except for such
Liens as are specifically permitted hereunder), (vii) during the
continuation of an Event of Default to contact Account Debtors for any reason, (viii) to
demand payment or enforce payment of the Receivables in the name of the Lender
or the Grantor and to endorse any and all checks, drafts, and other instruments
for the payment of money relating to the Receivables, (ix) to sign the
Grantor’s name on any invoice or bill of lading relating to the Receivables,
drafts against any Account Debtor of the Grantor, assignments and verifications
of Receivables, (x) to exercise all of the Grantor’s rights and remedies
with respect to the collection of the Receivables and any other Collateral,
(xi) to settle, adjust, compromise, extend or renew the Receivables, (xii) to
settle, adjust or compromise any legal proceedings brought to collect
Receivables, (xiii) to prepare, file and sign the Grantor’s name on a proof of
claim in bankruptcy or similar document against any Account Debtor of the
Grantor, (xiv) to prepare, file and sign the Grantor’s name on any notice of
Lien, assignment or satisfaction of Lien or similar document in connection with
the Receivables, (xv) to change the address for delivery of mail addressed to
the Grantor to such address as the Lender may designate and to receive, open
and dispose of all mail addressed to the Grantor, and (xvi) to do all other
acts and things necessary to carry out this Security Agreement; and the Grantor
agrees to reimburse the Lender on demand for any payment made or any expense
incurred by the Lender in connection with any of the foregoing; provided that, this authorization shall not relieve the
Grantor of any of its obligations under this Security Agreement or under the
Credit Agreement.

 

(b)           All acts of said attorney or designee
made in accordance herewith are hereby ratified and approved. The powers
conferred on the Lender, under this Section 6.2 are solely to protect the
Lender’s interests in the Collateral and shall not impose any duty upon the
Lender to exercise any such powers.  The
Lender agrees that, except for the powers granted in Section 6.2(a)(i)-(vi) and
Section 6.2(a)(xvi), it shall not exercise any power or authority granted
to it unless an Event of Default has occurred and is continuing.

 

6.3.          Proxy. THE GRANTOR HEREBY
IRREVOCABLY CONSTITUTES AND APPOINTS THE LENDER AS THE PROXY AND
ATTORNEY-IN-FACT (AS SET FORTH IN SECTION 6.2 ABOVE) OF THE GRANTOR WITH
RESPECT TO THE PLEDGED COLLATERAL, INCLUDING THE RIGHT TO VOTE SUCH PLEDGED
COLLATERAL IN 

 

19

 

ACCORDANCE HEREWITH, WITH
FULL POWER OF SUBSTITUTION TO DO SO. IN ADDITION TO THE RIGHT TO VOTE ANY SUCH
PLEDGED COLLATERAL, THE APPOINTMENT OF THE LENDER AS PROXY AND ATTORNEY-IN-FACT
SHALL INCLUDE THE RIGHT TO EXERCISE ALL OTHER RIGHTS, POWERS, PRIVILEGES AND
REMEDIES TO WHICH A HOLDER OF SUCH PLEDGED COLLATERAL WOULD BE ENTITLED
(INCLUDING GIVING OR WITHHOLDING WRITTEN CONSENTS OF SHAREHOLDERS, CALLING
SPECIAL MEETINGS OF SHAREHOLDERS AND VOTING AT SUCH MEETINGS). SUCH PROXY SHALL
BE EFFECTIVE, AUTOMATICALLY AND WITHOUT THE NECESSITY OF ANY ACTION (INCLUDING
ANY TRANSFER OF ANY SUCH PLEDGED COLLATERAL ON THE RECORD BOOKS OF THE ISSUER
THEREOF) BY ANY PERSON (INCLUDING THE ISSUER OF SUCH PLEDGED COLLATERAL OR ANY
OFFICER OR AGENT THEREOF), UPON THE OCCURRENCE OF A DEFAULT.

 

6.4.          Nature of Appointment; Limitation
of Duty.  THE APPOINTMENT OF THE
LENDER AS PROXY AND ATTORNEY-IN-FACT IN THIS ARTICLE VI IS COUPLED WITH AN
INTEREST AND SHALL BE IRREVOCABLE UNTIL THE DATE ON WHICH THIS SECURITY
AGREEMENT IS TERMINATED IN ACCORDANCE WITH SECTION 8.14. NOTWITHSTANDING
ANYTHING CONTAINED HEREIN, NEITHER THE LENDER NOR ANY OF ITS RESPECTIVE
AFFILIATES, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS OR REPRESENTATIVES SHALL
HAVE ANY DUTY TO EXERCISE ANY RIGHT OR POWER GRANTED HEREUNDER OR OTHERWISE OR
TO PRESERVE THE SAME AND SHALL NOT BE LIABLE FOR ANY FAILURE TO DO SO OR FOR
ANY DELAY IN DOING SO, EXCEPT  IN RESPECT
OF DAMAGES ATTRIBUTABLE SOLELY TO THEIR OWN GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT AS FINALLY DETERMINED BY A COURT OF COMPETENT JURISDICTION; PROVIDED
THAT, IN NO EVENT SHALL THEY BE LIABLE FOR ANY PUNITIVE, EXEMPLARY, INDIRECT OR
CONSEQUENTIAL DAMAGES.

 

ARTICLE
VII

COLLECTION AND APPLICATION OF COLLATERAL PROCEEDS; DEPOSIT ACCOUNTS

 

7.1.          Collection of Receivables.  If required by Lender after an Event of
Default, the Grantor shall execute and deliver to the Lender Deposit Account
Control Agreements for each Deposit Account maintained by the Grantor into
which all cash, checks or other similar payments relating to or constituting
payments made in respect of Receivables will be deposited (a “Collateral
Deposit Account”), which Collateral Deposit Accounts are identified as such
on Exhibit B.

 

7.2.          Covenant Regarding New Deposit
Accounts.  After the occurrence of an
Event of Default, the Grantor shall (a) obtain the Lender’s consent in
writing before opening or replacing any Collateral Deposit Account or other
Deposit Account to the opening of such Deposit Account, and (b) cause each
bank or financial institution in which it seeks to open a Deposit Account, to
enter into a Deposit Account Control Agreement with the Lender in order to give
the Lender Control of such Deposit Account.

 

20

 

7.3.                              Application of
Proceeds; Deficiency.  The Lender
may require, at any time after the occurrence of an Event of Default, that all
cash proceeds of the Collateral which are not required to be applied to the
Obligations pursuant to Section 2.10 of the Credit Agreement be deposited
in a special non-interest bearing cash collateral account with the Lender and
held there as security for the Secured Obligations.  The Grantor shall have no control whatsoever
over said cash collateral account.  Any
such proceeds of the Collateral shall be applied in the order set forth in Section 2.17
of the Credit Agreement unless a court of competent jurisdiction shall
otherwise direct.  The balance, if any,
after all of the Secured Obligations have been satisfied, shall be deposited by
the Lender into the Grantor’s general operating account with the Lender. The
Grantor shall remain liable for any deficiency if the proceeds of any sale or
disposition of the Collateral are insufficient to pay all Secured Obligations,
including any attorneys’ fees and other expenses incurred by the Lender or any
Lender to collect such deficiency.

 

ARTICLE
VIII

GENERAL PROVISIONS

 

8.1.                              Waivers.  The Grantor hereby waives notice of the time
and place of any public sale or the time after which any private sale or other
disposition of all or any part of the Collateral may be made.  To the extent such notice may not be waived
under applicable law, any notice made shall be deemed reasonable if sent to the
Grantor, addressed as set forth in Article IX, at least ten days prior to (i) the
date of any such public sale or (ii) the time after which any such private
sale or other disposition may be made. 
To the maximum extent permitted by applicable law, the Grantor waives
all claims, damages, and demands against the Lender arising out of the
repossession, retention or sale of the Collateral, except such as arise solely
out of the gross negligence or willful misconduct of the Lender as finally
determined by a court of competent jurisdiction. To the extent it may lawfully
do so, the Grantor absolutely and irrevocably waives and relinquishes the
benefit and advantage of, and covenants not to assert against the Lender, any
valuation, stay, appraisal, extension, moratorium, redemption or similar laws
and any and all rights or defenses it may have as a surety now or hereafter
existing which, but for this provision, might be applicable to the sale of any
Collateral made under the judgment, order or decree of any court, or privately
under the power of sale conferred by this Security Agreement, or
otherwise.  Except as otherwise
specifically provided herein, the Grantor hereby waives presentment, demand,
protest or any notice (to the maximum extent permitted by applicable law) of
any kind in connection with this Security Agreement or any Collateral.

 

8.2.                              Limitation on
the Lender’s Duty with Respect to the Collateral.  The Lender shall have no obligation to
clean-up or otherwise prepare the Collateral for sale. The Lender shall use
reasonable care with respect to the Collateral in its possession or under its
control.  The Lender shall not have any
other duty as to any Collateral in its possession or control or in the
possession or control of any agent or nominee of the Lender, or any income
thereon or as to the preservation of rights against prior parties or any other
rights pertaining thereto. To the extent that applicable law imposes duties on
the Lender to exercise remedies in a commercially reasonable manner, the
Grantor acknowledges and agrees that it is commercially reasonable for the
Lender (i) to fail to incur expenses deemed significant by the Lender to
prepare Collateral for disposition or otherwise to transform raw material or
work in process into finished goods or other finished products for disposition,
(ii) to fail to obtain third party consents for access to Collateral to be
disposed of, or to obtain or, if not required by other law, to fail to obtain
governmental or third 

 

21

 

party consents for the collection or
disposition of Collateral to be collected or disposed of, (iii) to fail to
exercise collection remedies against Account Debtors or other Persons obligated
on Collateral or to remove Liens on or any adverse claims against Collateral, (iv) to
exercise collection remedies against Account Debtors and other Persons
obligated on Collateral directly or through the use of collection agencies and
other collection specialists, (v) to advertise dispositions of Collateral
through publications or media of general circulation, whether or not the
Collateral is of a specialized nature, (vi) to contact other Persons,
whether or not in the same business as the Grantor, for expressions of interest
in acquiring all or any portion of such Collateral, (vii) to hire one or
more professional auctioneers to assist in the disposition of Collateral,
whether or not the Collateral is of a specialized nature, (viii) to
dispose of Collateral by utilizing internet sites that provide for the auction
of assets of the types included in the Collateral or that have the reasonable
capacity of doing so, or that match buyers and sellers of assets, (ix) to
dispose of assets in wholesale rather than retail markets, (x) to disclaim
disposition warranties, such as title, possession or quiet enjoyment, (xi) to
purchase insurance or credit enhancements to insure the Lender against risks of
loss, collection or disposition of Collateral or to provide to the Lender a
guaranteed return from the collection or disposition of Collateral, or (xii) to
the extent deemed appropriate by the Lender, to obtain the services of other
brokers, investment bankers, consultants and other professionals to assist the
Lender in the collection or disposition of any of the Collateral.  The Grantor acknowledges that the purpose of
this Section 8.2 is to provide non-exhaustive indications of what actions
or omissions by the Lender would  be
commercially reasonable in the Lender’s exercise of remedies against the
Collateral and that other actions or omissions by the Lender shall not be
deemed commercially unreasonable solely on account of not being indicated in
this Section 8.2.  Without
limitation upon the foregoing, nothing contained in this Section 8.2 shall
be construed to grant any rights to the Grantor or to impose any duties on the
Lender that would not have been granted or imposed by this Security Agreement
or by applicable law in the absence of this Section 8.2.

 

8.3.                              Compromises and
Collection of Collateral.  The
Grantor and the Lender recognize that setoffs, counterclaims, defenses and
other claims may be asserted by obligors with respect to certain of the
Receivables, that certain of the Receivables may be or become uncollectible in
whole or in part and that the expense and probability of success in litigating
a disputed Receivable may exceed the amount that reasonably may be expected to
be recovered with respect to a Receivable. 
In view of the foregoing, the Grantor agrees that the Lender may at any
time and from time to time, if an Event of Default has occurred and is continuing,
compromise with the obligor on any Receivable, accept in full payment of any
Receivable such amount as the Lender in its sole discretion shall determine or
abandon any Receivable, and any such action by the Lender shall be commercially
reasonable so long as the Lender acts in good faith based on information known
to it at the time it takes any such action.

 

8.4.                              Secured Party
Performance of Debtor Obligations.  Without having any obligation to do so, the
Lender may perform or pay any obligation which the Grantor has agreed to
perform or pay in this Security Agreement and the Grantor shall reimburse the
Lender for any amounts paid by the Lender pursuant to this Section 8.4.  The Grantor’s obligation to reimburse the
Lender pursuant to the preceding sentence shall be a Secured Obligation payable
on demand.

 

8.5.                              Specific
Performance of Certain Covenants.  The Grantor acknowledges and agrees that a
breach of any of the covenants contained in Sections 4.1(d), 4.1(e), 4.4, 4.6,
4.7, 

 

22

 

4.8, 4.9, 4.10, 4.12, 4.13, 4.14, 4.15, 5.3,
or 8.7 or in Article VII will cause irreparable injury to the Lender, that
the Lender has no adequate remedy at law in respect of such breaches and
therefore agrees, without limiting the right of the Lender to seek and obtain
specific performance of other obligations of the Grantor contained in this
Security Agreement, that the covenants of the Grantor contained in the Sections
referred to in this Section 8.5 shall be specifically enforceable against
the Grantor.

 

8.6.                              Dispositions
Not Authorized.  The Grantor
is not authorized to sell or otherwise dispose of the Collateral except as set
forth in Section 4.1(d) and notwithstanding any course of dealing
between the Grantor and the Lender or other conduct of the Lender, no
authorization to sell or otherwise dispose of the Collateral (except as set
forth in Section 4.1(d)) shall be binding upon the Lender unless such
authorization is in writing signed by the Lender.

 

8.7.                              No Waiver; Amendments;
Cumulative Remedies. No delay or omission of the Lender to exercise any
right or remedy granted under this Security Agreement shall impair such right
or remedy or be construed to be a waiver of any Default or an acquiescence
therein, and any single or partial exercise of any such right or remedy shall
not preclude any other or further exercise thereof or the exercise of any other
right or remedy. No waiver, amendment or other variation of the terms,
conditions or provisions of this Security Agreement whatsoever shall be valid
unless in writing signed by the Lender and then only to the extent in such
writing specifically set forth.  All
rights and remedies contained in this Security Agreement or by law afforded
shall be cumulative and all shall be available to the Lender until the Secured
Obligations have been paid in full.

 

8.8.                              Limitation by
Law; Severability of Provisions.  All rights, remedies and powers provided in
this Security Agreement may be exercised only to the extent that the exercise
thereof does not violate any applicable provision of law, and all the
provisions of this Security Agreement are intended to be subject to all
applicable mandatory provisions of law that may be controlling and to be
limited to the extent necessary so that they shall not render this Security
Agreement invalid, unenforceable or not entitled to be recorded or registered,
in whole or in part.  Any provision in
any this Security Agreement that is held to be inoperative, unenforceable, or
invalid in any jurisdiction shall, as to that jurisdiction, be inoperative,
unenforceable, or invalid without affecting the remaining provisions in that
jurisdiction or the operation, enforceability, or validity of that provision in
any other jurisdiction, and to this end the provisions of this Security
Agreement are declared to be severable.

 

8.9.                              Reinstatement.  This Security Agreement shall remain in full
force and effect and continue to be effective should any petition be filed by
or against the Grantor for liquidation or reorganization, should the Grantor
become insolvent or make an assignment for the benefit of any creditor or
creditors or should a receiver or trustee be appointed for all or any
significant part of the Grantor’s assets, and shall continue to be effective or
be reinstated, as the case may be, if at any time payment and performance of
the Secured Obligations, or any part thereof, is, pursuant to applicable law,
rescinded or reduced in amount, or must otherwise be restored or returned by
any obligee of the Secured Obligations, whether as a “voidable preference,” “fraudulent
conveyance,” or otherwise, all as though such payment or performance had not
been made.  In the event that any
payment, or any part thereof, is rescinded, reduced, restored or 

 

23

 

returned, the Secured Obligations shall be
reinstated and deemed reduced only by such amount paid and not so rescinded,
reduced, restored or returned.

 

8.10.                        Benefit of
Agreement.  The terms
and provisions of this Security Agreement shall be binding upon and inure to
the benefit of the Grantor, the Lender and their respective successors and
assigns (including all persons who become bound as a debtor to this Security
Agreement), except that the Grantor shall not have the right to assign its
rights or delegate its obligations under this Security Agreement or any
interest herein, without the prior written consent of the Lender.  No sales of participations, assignments,
transfers, or other dispositions of any agreement governing the Secured
Obligations or any portion thereof or interest therein shall in any manner
impair the Lien granted to the Lender hereunder.

 

8.11.                        Survival of
Representations.  All
representations and warranties of the Grantor contained in this Security Agreement
shall survive the execution and delivery of this Security Agreement.

 

8.12.                        Taxes and
Expenses.  Any taxes
(including income taxes) payable or ruled payable by Federal or State authority
in respect of this Security Agreement shall be paid by the Grantor, together
with interest and penalties, if any.  The
Grantor shall reimburse the Lender for any and all out-of-pocket expenses and
internal charges (including reasonable attorneys’, auditors’ and accountants’
fees and reasonable time charges of attorneys, paralegals, auditors and
accountants who may be employees of the Lender) paid or incurred by the Lender
in connection with the preparation, execution, delivery, administration,
collection and enforcement of this Security Agreement and, subject to the terms
and conditions set forth in the Credit Agreement, in the audit, analysis,
administration, collection, preservation or sale of the Collateral (including
the expenses and charges associated with any periodic or special audit of the
Collateral).  Any and all costs and
expenses incurred by the Grantor in the performance of actions required
pursuant to the terms hereof shall be borne solely by the Grantor.

 

8.13.                        Headings.  The title of and section headings in this
Security Agreement are for convenience of reference only, and shall not govern
the interpretation of any of the terms and provisions of this Security
Agreement.

 

8.14.                        Termination.  This Security Agreement shall continue in
effect (notwithstanding the fact that from time to time there may be no Secured
Obligations outstanding) until (i) the Credit Agreement has terminated
pursuant to its express terms and (ii) all of the Secured Obligations have
been indefeasibly paid and performed in full (except with respect to any
outstanding Letters of Credit for which a cash deposit or Supporting Letter of
Credit has been delivered to the Lender as required by the Credit Agreement or
with respect to any other contingent obligations that survive termination of
the Credit Agreement) and no commitments of the Lender which would give rise to
any Secured Obligations are outstanding.

 

8.15.                        Entire
Agreement.  This
Security Agreement embodies the entire agreement and understanding between the
Grantor and the Lender relating to the Collateral and supersedes all prior
agreements and understandings between the Grantor and the Lender relating to
the Collateral.

 

24

 

8.16.                        CHOICE
OF LAW.  THIS
SECURITY AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF WISCONSIN, BUT
GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS.

 

8.17.                        CONSENT
TO JURISDICTION.  THE
GRANTOR HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY
U.S. FEDERAL OR WISCONSIN STATE COURT SITTING IN WISCONSIN IN ANY ACTION OR
PROCEEDING ARISING OUT OF OR RELATING TO THIS SECURITY AGREEMENT OR ANY OTHER
LOAN DOCUMENT AND THE GRANTOR HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN
RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY
SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER
HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A
COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM.  NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE
LENDER TO BRING PROCEEDINGS AGAINST THE GRANTOR IN THE COURTS OF ANY OTHER
JURISDICTION.  ANY JUDICIAL PROCEEDING BY
THE GRANTOR AGAINST THE LENDER OR ANY AFFILIATE OF THE LENDER INVOLVING,
DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR
CONNECTED WITH THIS SECURITY AGREEMENT OR ANY OTHER LOAN DOCUMENT SHALL BE
BROUGHT ONLY IN A COURT IN MILWAUKEE, WISCONSIN.

 

8.18.                        WAIVER
OF JURY TRIAL. THE GRANTOR AND THE LENDER HEREBY WAIVE
TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY
MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT
OF, RELATED TO, OR CONNECTED WITH THIS SECURITY AGREEMENT OR ANY OTHER LOAN
DOCUMENT OR THE RELATIONSHIP ESTABLISHED THEREUNDER.

 

8.19.                        Indemnity.  The Grantor hereby agrees to indemnify the
Lender, and its successors, assigns, agents and employees, from and against any
and all liabilities, damages, penalties, suits, costs, and expenses of any kind
and nature (including, without limitation, all expenses of litigation or
preparation therefor whether or not the Lender is a party thereto) imposed on,
incurred by or asserted against the Lender, or its successors, assigns, agents
and employees, in any way relating to or arising out of this Security
Agreement, or the manufacture, purchase, acceptance, rejection, ownership,
delivery, lease, possession, use, operation, condition, sale, return or other
disposition of any Collateral (including, without limitation, latent and other
defects, whether or not discoverable by the Lender or the Grantor, and any
claim for Patent, Trademark or Copyright infringement).

 

8.20.                        Counterparts.  This Security Agreement may be executed in
any number of counterparts, all of which taken together shall constitute one
agreement, and any of the parties hereto may execute this Security Agreement by
signing any such counterpart.

 

25

 

ARTICLE
IX

NOTICES

 

9.1.                              Sending Notices.  Any notice required or permitted to be given
under this Security Agreement shall be sent in 
accordance with Section 8.01 of the Credit Agreement.

 

9.2.                              Change in
Address for Notices.  Each of the
Grantor and the Lender may change the address for service of notice upon it by
a notice in writing to the other parties.

 

 

[Signatures appear on
following page]

 

26

 

IN WITNESS WHEREOF, the Grantor and the Lender have
executed this Security Agreement as of the date first above written.

 

	
   

  	
  GRANTOR:

  
	
   

  	
   

  
	
   

  	
  KOSS CORPORATION

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  JPMORGAN CHASE BANK, N.A., as Lender

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  

 

[Signature
Page to Security Agreement]

 

 

EXHIBIT A

(See Sections 3.2, 3.3, 3.4, 3.9 and 9.1 of
Security Agreement)

 

GRANTOR’S INFORMATION AND
COLLATERAL LOCATIONS

 

I.                                         Name of
Grantor:

 

II.                                     State
of Incorporation or Organization:

 

III.                                 Type of
Entity:

 

IV.                                 Organizational
Number assigned by State of Incorporation or Organization:

 

V.                                     Federal
Identification Number:

 

VI.                                 Place
of Business (if it has only one) or Chief
Executive Office (if more than one place of business) and Mailing Address:

 

 

 

 

Attention:

 

VII.                             Locations
of Collateral:

 

(a)                                  Properties Owned by the
Grantor:

 

None.

 

(b)                                 Properties Leased by the
Grantor (Include Landlord’s Name):

 

(c)                                  Public Warehouses or other
Locations pursuant to Bailment or Consignment Arrangements (include name
of Warehouse Operator or other Bailee or Consignee):

 

VIII.                         Commercial
Tort Claims:

 

(a)

 

(b)

 

 

EXHIBIT B

(See Section 3.5 of Security Agreement)

 

DEPOSIT ACCOUNTS

 

	
  Name
  of Institution

  	
   

  	
  Account Number

  	
   

  	
  Check here if Deposit

  Account is a Collateral

  Deposit Account

  	
   

  	
  Description of Deposit 

  Account if not a

  Collateral Deposit

  Account

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

 

EXHIBIT C

(See Section 3.7 of Security Agreement)

 

LETTER OF CREDIT RIGHTS

 

 

CHATTEL PAPER

 

 

EXHIBIT
D

(See Section 3.10 and 3.11 of Security
Agreement)

 

INTELLECTUAL PROPERTY RIGHTS

 

PATENTS

 

	
  Patent Description

  	
   

  	
  Patent Number

  	
   

  	
  Issue Date

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

PATENT APPLICATIONS

 

	
  Patent Application

  	
   

  	
  Application Filing Date

  	
   

  	
  Application Serial Number

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

TRADEMARKS

 

	
  Trademark

  	
   

  	
  Registration Date

  	
   

  	
  Registration Number

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

TRADEMARKS APPLICATIONS

 

	
  Trademark Application

  	
   

  	
  Application Filing Date

  	
   

  	
  Application Serial Number

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

COPYRIGHTS

 

	
  Copyright

  	
   

  	
  Registration Date

  	
   

  	
  Registration Number

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

COPYRIGHT APPLICATIONS

 

	
  Copyright Application

  	
   

  	
  Application Filing Date

  	
   

  	
  Application Serial Number

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

INTELLECTUAL PROPERTY
LICENSES

 

	
  Name of Agreement

  	
   

  	
  Date of Agreement

  	
   

  	
  Parties to Agreement

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

 

EXHIBIT
E

(See Section 3.11 of Security Agreement)

 

TITLE DOCUMENTS

I.                                         Vehicles
subject to certificates of title:

 

	
  Description

  	
   

  	
  Title Number

  	
   

  	
  State Where Issued

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

II.                                     Aircraft/engines/parts,
ships, railcars and other vehicles governed by federal statute:

 

	
  Description

  	
   

  	
  Registration Number

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  

 

 

EXHIBIT
F

(See Section 3.11 of Security Agreement)

 

FIXTURES

 

III.                                 Legal
description, county and street address of property on which Fixtures are
located:

 

 

 

IV.                                 Name and
Address of Record Owner:

 

 

 

 

 

 

EXHIBIT
G

(See Section 3.13 of Security Agreement
and Definition of “Pledged Collateral”)

 

LIST OF PLEDGED COLLATERAL,
SECURITIES AND OTHER INVESTMENT PROPERTY

 

STOCKS

 

	
  Issuer

  	
   

  	
  Certificate

  Number(s)

  	
   

  	
  Number of Shares

  	
   

  	
  Class of Stock

  	
   

  	
  Percentage of

  Outstanding

  Shares

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

BONDS

 

	
  Issuer

  	
   

  	
  Number

  	
   

  	
  Face Amount

  	
   

  	
  Coupon Rate

  	
   

  	
  Maturity

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

GOVERNMENT SECURITIES

 

	
  Issuer

  	
   

  	
  Number

  	
   

  	
  Type

  	
   

  	
  Face Amount

  	
   

  	
  Coupon Rate

  	
   

  	
  Maturity

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

OTHER SECURITIES OR OTHER
INVESTMENT PROPERTY

(CERTIFICATED AND UNCERTIFICATED)

 

	
  Issuer

  	
   

  	
  Description of Collateral

  	
   

  	
  Percentage Ownership Interest

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

[Add
description of custody accounts or arrangements with securities intermediary,
if applicable]

 

 

EXHIBIT
H

(See Section 3.1 of Security Agreement)

 

OFFICES IN WHICH FINANCING
STATEMENTS HAVE BEEN FILED

 

 

EXHIBIT
I

(See Section 4.4 and 4.8 of Security
Agreement)

 

AMENDMENT

 

This Amendment, dated                            ,
      is delivered pursuant to Section 4.4 of the
Security Agreement referred to below. 
All defined terms herein shall have the meanings ascribed thereto or
incorporated by reference in the Security Agreement.  The undersigned hereby certifies that the
representations and warranties in Article III of the Security Agreement
are and continue to be true and correct. 
The undersigned further agrees that this Amendment may be attached to
that certain Pledge and Security Agreement, dated                     
    ,        , between
the undersigned, as the Grantor, and JPMorgan Chase Bank, N.A., as the Lender,
(the “Security Agreement”) and that the Collateral listed on Schedule
I to this Amendment shall be and become a part of the Collateral referred
to in said Security Agreement and shall secure all Secured Obligations referred
to in said Security Agreement.

 

 

	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  

 

 

SCHEDULE
I TO AMENDMENT

 

STOCKS

 

	
  Issuer

  	
   

  	
  Certificate

  Number(s)

  	
   

  	
  Number of Shares

  	
   

  	
  Class of Stock

  	
   

  	
  Percentage of

  Outstanding

  Shares

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

BONDS

 

	
  Issuer

  	
   

  	
  Number

  	
   

  	
  Face Amount

  	
   

  	
  Coupon Rate

  	
   

  	
  Maturity

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

GOVERNMENT SECURITIES

 

	
  Issuer

  	
   

  	
  Number

  	
   

  	
  Type

  	
   

  	
  Face Amount

  	
   

  	
  Coupon Rate

  	
   

  	
  Maturity

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

OTHER SECURITIES OR OTHER
INVESTMENT PROPERTY

(CERTIFICATED AND UNCERTIFICATED)

 

	
  Issuer

  	
   

  	
  Description of Collateral

  	
   

  	
  Percentage Ownership Interest

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

[Add description of custody accounts or arrangements
with securities intermediary, if applicable]

 

COMMERCIAL TORT CLAIMS

 

	
  Description of Claim

  	
   

  	
  Parties

  	
   

  	
  Case Number; Name of Court

  where Case was FiledEXHIBIT 10.1

 

SECOND
AMENDMENT TO CREDIT AGREEMENT

 

THIS SECOND
AMENDMENT TO CREDIT AGREEMENT, dated as of the 17th day of February,
2010 (this “Amendment”), is made by and between BROTMAN MEDICAL CENTER,
INC., a California corporation, as borrower (the “Borrower”) and GEMINO
HEALTHCARE FINANCE, LLC, a Delaware limited liability company, as lender (“Lender”).

 

BACKGROUND
STATEMENT

 

A.            The Borrower and Lender are parties
to a Credit Agreement, dated as of April 14, 2009, as amended by that
certain First Amendment to Credit Agreement and Wavier, dated as of December 11,
2009 (as amended, restated, supplemented or otherwise modified from time to
time, the “Credit Agreement”). 
Capitalized terms used herein without definition shall have the meanings
given to them in the Credit Agreement.

 

B.            The Borrower has requested that
Lender agree to (i) increase the loan commitment by $1,000,000.00 and (ii) make
certain revisions to the Credit Agreement. Lender has agreed to make the
following amendments to the Credit Agreement, subject to the terms and
conditions set forth herein.

 

STATEMENT
OF AGREEMENT

 

The
parties hereto, in consideration of the mutual covenants and agreements set
forth herein, agree as follows:

 

ARTICLE
I

 

AMENDMENTS

 

1.1           Amendment to Recitals. The first
paragraph of the Recitals of the Credit Agreement is hereby amended by deleting
it in its entirety and replacing it with the following:

 

“WHEREAS, Borrowers have requested that Lender make available to them,
on a joint and several basis, a Credit Facility in the maximum amount of
$7,000,000.00 which will be secured by a first priority perfected security
interest in the Collateral (as defined below); and”

 

1.2           Amendment to Definition of “Maximum
Credit Limit”. The definition of “Maximum Credit Limit” in Annex I
of the Credit Agreement is hereby amended by deleting it in its entirety and
replacing it with the following:

 

“Maximum Credit Limit means an amount, from time to time, equal to
the Revolving Loan Commitment, not to exceed at any time Seven Million and No/100
Dollars ($7,000,000.00) in the aggregate.”

 

 

1.3           Amendment to Definition of “Revolving
Loan Commitment”. The definition of “Revolving Loan Commitment” in Annex
I Agreement is hereby amended by deleting it in its entirety and replacing
it with the following:

 

“Revolving
Loan Commitment” means an amount equal to Seven Million and No/Dollars
($7,000,000.00).

 

ARTICLE II

 

REPRESENTATIONS AND WARRANTIES

 

The Borrower hereby represents and warrants as
follows:

 

2.1           Representations
and Warranties. After giving effect to this Amendment, each of the
representations and warranties of the Borrower contained in the Credit
Agreement and in the other Loan Documents is true and correct on and as of the
date hereof with the same effect as if made on and as of the date hereof
(except to the extent any such representation or warranty is expressly stated
to have been made as of a specific date, in which case such representation or
warranty is true and correct as of such date).

 

2.2           No Default. After giving
effect to this Amendment, no Default or Event of Default has occurred and is
continuing.

 

2.3           Enforceability. This Amendment
has been duly executed and delivered by the Borrower and constitutes the Borrower’s
legal, valid and binding obligation, enforceable in accordance with its terms,
except as such enforceability may be limited (x) by general principles of
equity and conflicts of laws or (y) by bankruptcy, reorganization,
insolvency, moratorium or other laws of general application relating to or
affecting the enforcement, of Lender’s rights.

 

2.4           No Conflicts. No consent,
approval, authorization or order of, or filing, registration or qualification
with, any court or governmental authority or third party is required in
connection with the execution, delivery or performance by the Borrower of this
Amendment.

 

2.5           Obligations. The execution and
delivery of this Amendment does not diminish or reduce the Borrower’s
obligations under the Loan Documents, except as modified by this Amendment.

 

2.6           No Claims. No Borrower has any
claims, counterclaims, offsets or defenses to the Loan Documents and the
performance of its obligations thereunder, or if any Borrower has any such
claims, counterclaims, offsets, or defenses to the Loan Documents or any
transaction related to the Loan Documents, the same are hereby waived,
relinquished and released in consideration of Lender’s execution and delivery
of this Amendment.

 

2

 

ARTICLE
III

 

CONDITIONS
TO EFFECTIVENESS

 

The
effectiveness of the amendments to the Credit Agreement and of the waivers and
consents set forth in this Amendment is subject to the satisfaction of the
following conditions:

 

3.1           Executed Amendment and Other
Documents. This Amendment, the Amended and Restated Revolving Note and any other
documents required by Lender in its sole discretion shall have been duly executed
and delivered by Borrower in form and substance satisfactory to Lender in its
sole discretion.

 

3.2           Fees.  Upon Closing, Borrower shall have paid to
Lender (i) all Expenses (including without limitation the reasonable fees
and expenses of counsel to Lender) associated with this Amendment, and (ii) Twenty
Thousand and No/100 Dollars ($20,000.00) to Lender as an additional commitment
fee.

 

3.3           No Material Adverse Change. No
Material Adverse Effect has occurred and is continuing, and no Borrower knows
of any event, condition or state of facts that could reasonably be expected to
have a Material Adverse Effect.

 

ARTICLE
IV

 

MISCELLANEOUS

 

4.1           Effect of Amendment. From and
after the Effective Date (as defined below), all references to the Credit
Agreement set forth in any other Loan Document or other agreement or instrument
shall, unless otherwise specifically provided, be references to the Credit
Agreement as amended by this Amendment and as may be further amended, modified,
restated or supplemented from time to time. This Amendment is limited as
specified and shall not constitute or be deemed to constitute an amendment,
modification or waiver of any provision of the Credit Agreement or of any other
Loan Document except as expressly set forth herein. Except as expressly amended
hereby, the Credit Agreement shall remain in full force and effect in
accordance with its terms.

 

4.2           Governing Law. This Amendment
shall be governed by and construed and enforced in accordance with the laws of
the Commonwealth of Pennsylvania (without regard to the conflicts of law
provisions thereof).

 

4.3           Expenses. Borrower agrees to
pay upon demand all out-of-pocket costs and expenses of Lender (including,
without limitation, the reasonable fees and expenses of counsel to Lender) in
connection with the preparation, negotiation, execution and delivery of this
Amendment.

 

4.4           Severability. To the extent
any provision of this Amendment is prohibited by or invalid under the
applicable law of any jurisdiction, such provision shall be ineffective only to
the extent of such prohibition or invalidity and only in any such jurisdiction,
without prohibiting 

 

3

 

or invalidating such provision in any other jurisdiction or the
remaining provisions of this Amendment in any jurisdiction.

 

4.5           Successors and Assigns.  This Amendment shall be binding upon, inure
to the benefit of and be enforceable by the respective successors and assigns
of the parties hereto.

 

4.6           Construction. The headings of
the various sections and subsections of this Amendment have been inserted for
convenience only and shall not in any way affect the meaning or construction of
any of the provisions hereof.

 

4.7           Counterparts; Effectiveness.
This Amendment may be executed in any number of counterparts and by different
parties hereto on separate counterparts, each of which when so executed and
delivered shall be an original, but all of which shall together constitute one
and the same instrument. This Amendment shall become effective upon the
execution and delivery of a counterpart hereof by the Borrower and Lender and
the satisfaction of the conditions set forth in Article III hereof (such
date, the “Effective Date”). 
Signatures of the parties to this Amendment transmitted by facsimile or
via other electronic format shall be deemed to be their original signatures for
all purposes.

 

[Signatures
on following page.]

 

4

 

IN WITNESS WHEREOF, this Amendment has been duly executed as of the day
and year first above written.

 

BORROWER:

 

	
  Address
  for notices to Borrower:

  	
  BROTMAN
  MEDICAL CENTER, INC.

  
	
   

  	
   

  
	
  Brotman Medical
  Center, Inc.

  	
   

  
	
  3828 Delmas Terrace

  	
   

  
	
  Culver City, CA 90231

  	
   

  
	
  Attn: Von Crockett,
  Chief Executive Officer

  	
  By: 

  	
  /s/ Von Crockett

  
	
  Fax: (310) 202-4125

  	
  Name: 

  	
  Von Crockett

  
	
   

  	
  Title: 

  	
  Chief Executive Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
  LENDER:

  	
   

  
	
   

  	
   

  
	
  Address
  for notices to Lender:

  	
  GEMINO
  HEALTHCARE FINANCE, LLC

  
	
   

  	
   

  
	
  Gemino Healthcare Finance, LLC

  	
   

  
	
  1 International Plaza,
  Suite 220

  	
  By: 

  	
  /s/ Miriam P. Gallagher

  
	
  Philadelphia, PA 19113

  	
  Name: 

  	
  Miriam P. Gallagher

  
	
  Attn: Miriam Gallagher

  	
  Title: 

  	
  Senior Portfolio
  Manager

  
	
  Fax: (610) 870-5401

  	
   

  
	
   

  	
   

  
	
  With a copy to (which
  shall not constitute notice):

  	
   

  
	
   

  	
   

  
	
  Waller
  Lansden Dortch & Davis, LLP

  	
   

  
	
  511 Union Street,
  Suite 2700

  	
   

  
	
  Nashville City Center

  	
   

  
	
  Nashville, TN 37219

  	
   

  
	
  Attn: Robert L. Harris

  	
   

  
	
  Fax: (615) 244-6804

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