Loan & Security Agreement

LOAN AND SECURITY AGREEMENT


by and between


CONGRESS FINANCIAL CORPORATION
as Lender


and


ECOGEN INC.
as Borrower


Dated: August 20, 1998


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TABLE OF CONTENTS
Page
---- SECTION 1. DEFINITIONS.................................................................................... 1


SECTION 2. CREDIT FACILITIES.............................................................................. 8


2.1 Revolving Loans................................................................................ 8


2.2 Letter of Credit Accommodations................................................................ 9


2.3 Availability Reserves..........................................................................11


SECTION 3. INTEREST AND FEES..............................................................................11


3.1 Interest.......................................................................................11


3.2 Closing Fee....................................................................................12


3.3 Servicing Fee..................................................................................12


3.4 Unused Line Fee................................................................................12


3.5 Facility Fee...................................................................................12


SECTION 4. CONDITIONS PRECEDENT...........................................................................12


4.1 Conditions Precedent to Initial Loans and Letter of Credit Accommodations......................12


4.2 Conditions Precedent to All Loans and Letter of Credit Accommodations..........................14


SECTION 5. GRANT OF SECURITY INTEREST.....................................................................14


SECTION 6. COLLECTION AND ADMINISTRATION..................................................................15


6.1 Borrower's Loan Account........................................................................15


6.2 Statements.....................................................................................15


6.3 Collection of Accounts.........................................................................15


6.4 Payments.......................................................................................16


6.5 Authorization to Make Loans....................................................................17


6.6 Use of Proceeds................................................................................17


SECTION 7. COLLATERAL REPORTING AND COVENANTS.............................................................17


7.1 Collateral Reporting...........................................................................17


7.2 Accounts Covenants.............................................................................17


7.3 Inventory Covenants............................................................................19


7.4 Equipment Covenants............................................................................19


7.5 Power of Attorney..............................................................................20


7.6 Right to Cure..................................................................................20


7.7 Access to Premises.............................................................................20


3 SECTION 8. REPRESENTATIONS AND WARRANTIES.................................................................21


8.1 Corporate Existence, Power and Authority; Subsidiaries.........................................21


8.2 Financial Statements; No Material Adverse Change...............................................21


8.3 Chief Executive Office; Collateral Locations...................................................21


8.4 Priority of Liens; Title to Properties.........................................................22


8.5 Tax Returns....................................................................................22


8.6 Litigation.....................................................................................22


8.7 Compliance with Other Agreements and Applicable Laws...........................................22


8.8 Bank Accounts..................................................................................22


8.9 Employee Benefits..............................................................................22


8.10 Environmental Compliance.......................................................................23


8.11 Accuracy and Completeness of Information.......................................................24


8.12 Survival of Warranties; Cumulative.............................................................24


9.1 Maintenance of Existence.......................................................................24


9.2 New Collateral Locations.......................................................................25


9.3 Compliance with Laws, Regulations, Etc.........................................................25


9.4 Payment of Taxes and Claims....................................................................26


9.5 Insurance......................................................................................26


9.6 Financial Statements and Other Information.....................................................27


9.7 Sale of Assets, Consolidation, Merger, Dissolution, Etc........................................27


9.8 Encumbrances...................................................................................28


9.9 Indebtedness...................................................................................28


9.10 Loans, Investments, Guarantees, Etc............................................................29


9.11 Dividends and Redemptions......................................................................29


9.12 Transactions with Affiliates...................................................................30


9.13 Additional Bank Accounts.......................................................................30


9.14 Working Capital................................................................................30


9.15 Adjusted Net Worth.............................................................................30


9.16 Compliance with ERISA..........................................................................30


9.17 Costs and Expenses.............................................................................31


9.18 Further Assurances.............................................................................31


SECTION 10. EVENTS OF DEFAULT AND REMEDIES.................................................................32


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10.1 Events of Default...............................................................................32


10.2 Remedies........................................................................................33


11.1 Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver...........................34


11.2 Waiver of Notices...............................................................................35


11.3 Amendments and Waivers..........................................................................35


11.4 Waiver of Counterclaims.........................................................................35


11.5 Indemnification.................................................................................35


SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS................................................................36


12.1 Term............................................................................................36


12.2 Notices.........................................................................................37


12.3 Partial Invalidity..............................................................................37


12.4 Successors......................................................................................37


12.5 Entire Agreement................................................................................37


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INDEX TO
EXHIBITS AND SCHEDULES


Exhibit A Information Certificate


Schedule 8.4 Existing Liens


Schedule 8.8 Bank Accounts


Schedule 8.10 Environmental Matters


Schedule 9.9 Existing Indebtedness


Schedule 9.10 Existing Loans, Advances and Guarantees


Schedule 9.12 Transactions with Affiliates


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LOAN AND SECURITY AGREEMENT


This Loan and Security Agreement dated August 20, 1998 is entered into by and between CONGRESS FINANCIAL CORPORATION, a Delaware corporation ("Lender"),and ECOGEN INC., a Delaware corporation ("Borrower").


W I T N E S S E T H:


WHEREAS, Borrower has requested that Lender enter into certain financing arrangements with Borrower pursuant to which Lender may make loans and provide other financial accommodations to Borrower; and


WHEREAS, Lender is willing to make such loans and provide such financial accommodations on the terms and conditions set forth herein;


NOW, THEREFORE, in consideration of the mutual conditions and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:


SECTION 1. DEFINITIONS


All terms used herein which are defined in Article 1 or Article 9 of the Uniform Commercial Code as in effect in the State of New York shall have the meanings given therein unless otherwise defined in this Agreement. All references to the plural herein shall also mean the singular and to the singular shall also mean the plural unless the context otherwise requires. All references to Borrower and Lender pursuant to the definitions set forth in the recitals hereto, or to any other person herein, shall include their respective successors and assigns. The words "hereof", "herein", "hereunder", "this Agreement" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not any particular provision of this Agreement and as this Agreement now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. The word "including" when used in this Agreement shall mean "including, without limitation". An Event of Default shall exist or continue or be continuing until such Event of Default is waived in accordance with Section 11.3 or is cured in a manner satisfactory to Lender. Any accounting term used herein unless otherwise defined in this Agreement shall have the meanings customarily given to such term in accordance with GAAP. For purposes of this Agreement, the following terms shall have the respective meanings given to them below:


1.1 "Accounts" shall mean all present and future rights of Borrower to payment for goods sold or leased or for services rendered, which are not evidenced by instruments or chattel paper, and whether or not earned by performance.


1.2 "Adjusted Net Worth" shall mean as to any Person, at any time, in accordance with GAAP (except as otherwise specifically set forth below), on a consolidated basis for such Person and its subsidiaries (if any), the amount equal to: (a) the difference between: (i) the aggregate net book value of all assets of such Person and its subsidiaries, calculating the book value of inventory for this purpose on an average cost basis, after deducting from such book values all appropriate reserves in accordance with


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GAAP (including all reserves for doubtful receivables, obsolescence, depreciation and amortization) and (ii) the aggregate amount of the indebtedness and other liabilities of such Person and its subsidiaries (including tax and other proper accruals) plus (b) indebtedness of such Person and its subsidiaries which is subordinated in right of payment to the full and final payment of all of the Obligations on terms and conditions reasonably acceptable to Lender.


1.3 "Availability Reserves" shall mean, as of any date of determination, such amounts as Lender may from time to time establish and revise in accordance with its credit judgment exercised in good faith reducing the amount of Revolving Loans and Letter of Credit Accommodations which would otherwise be available to Borrower under the lending formula(s) provided for herein: (a) to reflect events, conditions, contingencies or risks which, as determined by Lender in good faith, do or may adversely affect either (i) the Collateral or any other property which is security for the Obligations or its value, (ii) the assets, business or prospects of Borrower or any Obligor or (iii) the security interests and other rights of Lender in the Collateral (including the enforceability, perfection and priority thereof) or (b) to reflect Lender's good faith belief that any collateral report or financial information furnished by or on behalf of Borrower or any Obligor to Lender is or may have been incomplete, inaccurate or misleading in any material respect or (c) to reflect outstanding Letter of Credit Accommodations as provided in Section 2.2 hereof or (d) in respect of any state of facts which Lender determines in good faith constitutes an Event of Default or may, with notice or passage of time or both, constitute an Event of Default.


1.4 "Blocked Account Event" shall mean the occurrence of any of the following events: (a) an Event of Default, or (b) Borrower has Loans outstanding at any one time in excess of $2,000,000, or (c) the aggregate amount of Excess Availability plus any of Borrower's cash on hand shall equal less than $1,500,000.


1.5 "Blocked Accounts" shall have the meaning set forth in Section 6.3 hereof.


1.6 "Change of Control" shall mean (a) any merger or consolidation of Borrower with or into any person or any sale, transfer or other conveyance, whether direct or indirect, of all or substantially all of the assets of Borrower in one transaction or a series of related transactions, if, immediately after giving effect to such transaction, any "person" or "group" (as such terms are used for purposes of Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not applicable), is or becomes the "beneficial owner" (as such term is used for purposes of Sections 13(d) and 14(d) of the Exchange Act, whether or not applicable), directly or indirectly, of more than 35% of the total voting power in the aggregate normally entitled to vote in the election of directors, managers, or trustees, as applicable, of the transferee or surviving entity, (ii) any "person" or "group" is or becomes the "beneficial owner", directly or indirectly, of more than 35% of the total voting power in the aggregate of all classes of capital stock of Borrower then outstanding normally entitled to vote in elections of directors, or (iii) during any period of 12 consecutive months after the date hereof, individuals who at the beginning of any such 12-month period constituted the board of directors of Borrower (together, in each case, with any new directors whose election to such board or whose nomination for election by the shareholders of Borrower was approved by a vote of a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the board of directors of Borrower then in office.


1.7 "Code" shall mean the Internal Revenue Code of 1986, as the same now exists or may from time to time hereafter be amended, modified, recodified or supplemented, together with all rules, regulations and interpretations thereunder or related thereto.


1.8 "Collateral" shall have the meaning set forth in Section 5 hereof.


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1.9 "Convertible Note" shall mean Borrower's 8% Convertible Note due October 31, 2002.


1.10 "Cotton Market Products" shall mean Condor XL bioinsecticide, each product that replaces or constitutes a new version of Condor XL bioinsecticide, and any other product sold by Borrower to the cotton growing market as complementary to Condor XL and such replacements or new versions.


1.11 "Eligible Accounts" shall mean Accounts created by Borrower which are and continue to be acceptable to Lender based on the criteria set forth below. In general, Accounts shall be Eligible Accounts if:


(a) such Accounts arise from the actual and bona fide sale and delivery of goods by Borrower or rendition of services by Borrower in the ordinary course of its business which transactions are completed in accordance with the terms and provisions contained in any documents related thereto;


(b) such Accounts are not unpaid more than ninety (90) days after the date of the original invoice for them (or one-hundred twenty (120) days in the case of Accounts representing sales to the cotton growing market of Borrower's Cotton Market Products) or more than sixty (60) days after the due date therefor;


(c) such Accounts comply with the terms and conditions contained in Section 7.2(c) of this Agreement;


(d) such Accounts, other than Accounts arising from Cotton Market Products, do not arise from sales on consignment, guaranteed sale, sale and return, sale on approval, or other terms under which payment by the account debtor may be conditional or contingent;


(e) the chief executive office of the account debtor with respect to such Accounts is located in the United States of America, or, at Lender's option, if either: (i) the account debtor has delivered to Borrower an irrevocable letter of credit issued or confirmed by a bank satisfactory to Lender and payable only in the United States of America and in U.S. dollars, sufficient to cover such Account, in form and substance satisfactory to Lender and, if required by Lender, the original of such letter of credit has been delivered to Lender or Lender's agent and the issuer thereof notified of the assignment of the proceeds of such letter of credit to Lender, or (ii) such Account is subject to credit insurance payable to Lender issued by an insurer and on terms and in an amount acceptable to Lender, or (iii) such Account is otherwise acceptable in all respects to Lender (subject to such lending formula with respect thereto as Lender may determine);


(f) such Accounts do not consist of progress billings, license royalties, research and development contract payments, bill and hold invoices or retainage invoices, except as to bill and hold invoices, if Lender shall have received an agreement in writing from the account debtor, in form and substance satisfactory to Lender, confirming the unconditional obligation of the account debtor to take the goods related thereto and pay such invoice;


(g) the account debtor with respect to such Accounts has not asserted a counterclaim, defense or dispute and does not have, and does not engage in transactions which may give rise to, any right of setoff against such Accounts (but the portion of the Accounts of such account debtor in excess of the amount at any time and from time to time owed by Borrower to such account debtor or claimed owed by such account debtor may be deemed Eligible Accounts);


(h) there are no facts, events or occurrences which would impair the validity, enforceability or collectability of such Accounts or delay payment thereunder or reduce the amount


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payable (but the portion of the Accounts in excess of the amount of any such reduction that is capable of being quantified to Lender's satisfaction may be deemed Eligible Accounts);


(i) such Accounts are subject to the first priority, valid and perfected security interest of Lender and any goods giving rise thereto are not, and were not at the time of the sale thereof, subject to any liens except those permitted in this Agreement;


(j) neither the account debtor nor any officer or employee of the account debtor with respect to such Accounts is an officer, employee or agent of or affiliated with Borrower directly or indirectly by virtue of family membership, ownership, control, management or otherwise;


(k) the account debtors with respect to such Accounts are not any foreign government, the United States of America, any State, political subdivision, department, agency or instrumentality thereof, unless, if the account debtor is the United States of America, any State, political subdivision, department, agency or instrumentality thereof, upon Lender's request, the Federal Assignment of Claims Act of 1940, as amended or any similar State or local law, if applicable, has been complied with in a manner satisfactory to Lender;


(l) there are no proceedings or actions which are threatened or pending against the account debtors with respect to such Accounts which might result in any material adverse change in any such account debtor's financial condition;


(m) such Accounts of a single account debtor or its affiliates do not constitute more than thirty-five (35%) percent of all otherwise Eligible Accounts (but the portion of the Accounts not in excess of such percentage may be deemed Eligible Accounts);


(n) such Accounts are not owed by an account debtor who has Accounts ineligible pursuant to subsection (b) of this Section which constitute more than fifty (50%) percent of the total Accounts of such account debtor;


(o) such Accounts are owed by account debtors whose total indebtedness to Borrower does not exceed the credit limit with respect to such account debtors as determined by Lender from time to time in accordance with its credit judgment exercised in good faith out of Borrower has been notified (but the portion of the Accounts not in excess of such credit limit may be deemed Eligible Accounts); and


(p) such Accounts are owed by account debtors deemed creditworthy at all times by Lender, as determined by Lender in accordance with its credit judgment exercised in good faith.


General criteria for Eligible Accounts may be established and revised from time to time by Lender in accordance with its credit judgment exercised in good faith. Any Accounts which are not Eligible Accounts shall nevertheless be part of the Collateral.


1.12 "Eligible Inventory" shall mean Inventory consisting of finished goods held for resale in the ordinary course of the business of Borrower which are acceptable to Lender based on the criteria set forth below. In general, Eligible Inventory shall not include (a) raw materials (including, without limitation, technical powders) or work-in-process; (b) components which are not part of finished goods; (c) spare parts for equipment; (d) packaging and shipping materials; (e) supplies used or consumed in Borrower's business; (f) Inventory at premises other than those owned and controlled by Borrower, except if Lender shall have received an agreement in writing from the person in possession of such Inventory and/or the owner or operator of such premises in form and substance satisfactory to Lender acknowledging Lender's first priority security interest in the Inventory, waiving security interests and claims by such person against the Inventory and permitting Lender access to, and the right to remain on,


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the premises so as to exercise Lender's rights and remedies and otherwise deal with the Collateral; (g) Inventory subject to a security interest or lien in favor of any person other than Lender except those permitted in this Agreement; (h) bill and hold goods; (i) unserviceable, obsolete or slow moving Inventory; (j) Inventory which is not subject to the first priority, valid and perfected security interest of Lender; (k) returned, damaged and/or defective Inventory, except for Cotton Market Products, in unopened, original packaging, returned by customers in the cotton growing market which is in saleable condition; and (l) Inventory purchased or sold on consignment. General criteria for Eligible Inventory may be established and revised from time to time by Lender in accordance with its credit judgment exercised in good faith. Any Inventory which is not Eligible Inventory shall nevertheless be part of the Collateral.


1.13 "Environmental Laws" shall mean all foreign, Federal, State and local laws (including common law), legislation, rules, codes, licenses, permits (including any conditions imposed therein), authorizations, judicial or administrative decisions, injunctions or agreements between Borrower and any governmental authority: (a) relating to pollution and the protection, preservation or restoration of the environment (including air, water vapor, surface water, ground water, drinking water, drinking water supply, surface land, subsurface land, plant and animal life or any other natural resource), or to human health or safety, (b) relating to the exposure to, or the use, storage, recycling, treatment, generation, manufacture, processing, distribution, transportation, handling, labeling, production, release or disposal, or threatened release, of Hazardous Materials, or (c) relating to all laws with regard to recordkeeping, notification, disclosure and reporting requirement respecting Hazardous Materials. The term "Environmental Laws" includes (i) the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Federal Superfund Amendments and Reauthoriz ...