Loan And Security Agreement

LOAN AND SECURITY AGREEMENT


Between


TEXTRON FINANCIAL CORPORATION


As Lender


and


GALAXY NUTRITIONAL FOODS, INC.


As Borrower


Dated as of May 27, 2003


TABLE OF CONTENTS


DEFINITIONS ........................................................... 1-15


ARTICLE I - LOANS, RENEWAL AND TERMINATION ............................ 16
1.1 Revolving Loan Advances ..................................... 16
1.2 Borrowing Procedures ........................................ 16
1.3 Interest .................................................... 16-17
1.4 Charges to Loan Account ..................................... 17
1.5 Allocation of Payments and Limit of Interest ................ 17
1.6 Renewal and Termination .................................... 17-18


ARTICLE II - FEES .................................................... 18
2.1 Closing Fee ................................................ 18
2.2 Facility Fee ............................................... 18
2.3 Field Examination Fee ...................................... 18
2.4 Wire Transfer Fee .......................................... 18
2.5 Early Termination Fee ...................................... 18-19
2.6 Costs and Expenses ......................................... 19
2.7 Unused Line Fee.............................................. 19
2.8 Collateral Monitoring Fee ................................... 19


ARTICLE III - GRANT OF SECURITY INTEREST .............................. 19
3.1 Grant of Security Interest ................................. 19
3.2 Continued Priority of Security Interest .................... 20-21


ARTICLE IV - PROCEEDS OF COLLATERAL, RECEIVABLES
AND COLLECTIONS ......................................... 21
4.1 Borrower's Proceeds of Collateral .......................... 21
4.2 Collection of Receivables and other Collateral .............. 22


ARTICLE V - REPRESENTATIONS AND WARRANTIES ........................... 22
5.1 Existence, Power and Authority; Borrower Affiliates ......... 22-23
(a) Organization; Qualification ........................... 22
(b) Power ................................................. 23
(c) Borrower Affiliates ................................... 23
(d) Capitalization ........................................ 23
(e) Business ............................................... 23
5.2 Compliance with Other Agreements and Applicable Law ........ 23
5.3 Absence of Litigation ...................................... 23
5.4 Taxes and Returns .......................................... 23
5.5 Lien and Priority and Nature of Certain Collateral .......... 23-24
(a) Liens ................................................. 23-24
(b) Title ................................................. 24
(c) Receivables ........................................... 24
(d) Inventory ............................................. 24


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(e) Equipment .............................................. 24 (f) Real Estate ..................................................... 24
(g) Corporate and Fictitious Names ........................ 24
5.6 Principal Place of Business ................................ 24
5.7 Environmental Compliance ................................... 25
5.8 Proprietary Rights ......................................... 25
5.9 Trade Names ................................................ 25
5.10 Employee Relations ......................................... 25-26
5.11 Employee Pension Benefit Plans ............................. 26
5.12 Bank Accounts .............................................. 26
5.13 Accuracy and Completeness of Information ................... 26
5.14 Software License Compliance ................................ 26
5.15 Investment Company Act; Other Regulations.................... 26
5.17 Survival of Warranties; Cumulative ......................... 26


ARTICLE VI - AFFIRMATIVE COVENANTS ................................... 27
6.1 Financial Statements ....................................... 27-28
6.2 Books and Records .......................................... 28
6.3 Additional Documentation ................................... 28
6.4 Existence, Name, Organization and Chief Executive
Office ..................................................... 28
6.5 Compliance with Laws and Taxes ............................. 28
6.6 Performance of Obligations ................................. 28-29
6.7 Reporting as to Revenues, Receivables and Inventory ......... 29-30
6.8 Over-Advance ............................................... 30
6.9 Breach or Default .......................................... 30
6.10 Maintenance of Assets ...................................... 30
6.11 Insurance .................................................. 30-31
6.12 Use of Proceeds ............................................ 31
6.13 Disclosure .................................................. 31
6.14 Further Assurances .......................................... 31
6.15 Brokerage Commissions ....................................... 31
6.16 FDA and Other Regulatory Bodies Compliance .................. 32


ARTICLE VII - BORROWER'S NEGATIVE COVENANTS .......................... 32
7.1 Business, Management and Organization ...................... 32
7.2 Disposition of Assets ...................................... 32
7.3 Loans and Guarantees ....................................... 32
7.4 Capital Expenditures and Investments ....................... 32-33
7.5 Distributions and Salaries ................................. 33
7.6 Financial Covenants ........................................ 33-34
7.7 Change of Control .......................................... 34
7.8 Limitation on Indebtedness for Money Borrowed .............. 34
7.9 Mergers; Consolidations; Acquisitions ...................... 34
7.10 Subsidiaries ............................................... 34
7.11 Fiscal Year ................................................ 34


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7.12 Affiliate Transactions ...................................... 34-35


ARTICLE VIII - CONDITIONS PRECEDENT .................................. 35
8.1 Initial Credit ............................................. 35-37
8.2 Initial and Subsequent Credit ............................... 37


ARTICLE IX - EVENTS OF DEFAULT; REMEDIES ............................. 37
9.1 Events of Default .......................................... 37-39
9.2 Lender's Remedies .......................................... 39-40


ARTICLE X - JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS;
AND GOVERNING LAW ........................................ 40
10.1 Governing Law; Choice of Forum; Services of Process;
Jury Trial Waiver .......................................... 40-41
10.2 Waiver of Certain Claims and Counterclaims ................. 41-42
10.3 Indemnification ............................................ 42


ARTICLE XI - MISCELLANEOUS ........................................... 42
11.1 Power of Attorney .......................................... 42
11.2 Outstanding Revolving Loan Advances ........................ 42
11.3 Modifications and Course of Dealing ........................ 42-43
11.4 Assignment and Participation ............................... 43
11.5 Delegation of Duties ....................................... 43
11.6 Notices .................................................... 43
11.7 Expenses ................................................... 43
11.8 Assignment of Receivables and Inventory .................... 43-44
11.9 Binding Effect; Severability ............................... 44
11.10 Final Agreement ........................................... 44
11.11 Counterparts .............................................. 44
11.12 Captions .................................................. 44
11.13 Borrower's Representative ................................. 44


Signatures ........................................................... 45-46


ATTACHMENTS TO LOAN AND SECURITY AGREEMENT: EXHIBIT A - FORM OF COVENANT COMPLIANCE CERTIFICATE


SCHEDULE 5.1(a) Organization; Qualification SCHEDULE 5.1(c) Affiliates SCHEDULE 5.1(d) Capitalization SCHEDULE 5.1(e) Business of Borrower SCHEDULE 5.2 Compliance with Other Agreements and Applicable Law SCHEDULE 5.3 Litigation SCHEDULE 5.4 Taxes and Returns SCHEDULE 5.5(a) Permitted Liens SCHEDULE 5.5(b) Title


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SCHEDULE 5.5(d) Inventory SCHEDULE 5.5(e) Equipment SCHEDULE 5.5(f) Real Property SCHEDULE 5.5(g) Corporate and Fictitious Names SCHEDULE 5.6 Principal Places of Business; Chief Executive Office SCHEDULE 5.7 Environmental Compliance SCHEDULE 5.8 Registered Proprietary Rights SCHEDULE 5.9 Trade Names SCHEDULE 5.10 Employee Relations SCHEDULE 7.8 Permitted Indebtedness SCHEDULE 7.12 Affiliated/Interest Party Agreements


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LOAN AND SECURITY AGREEMENT


Dated as of May 27, 2003


GALAXY NUTRITIONAL FOODS, INC., a Delaware corporation ("Borrower") and TEXTRON FINANCIAL CORPORATION, a Delaware corporation ("Lender"), agree as follows:


DEFINITIONS


As used in this Agreement:


"Account" or "Accounts" means all now owned or hereafter acquired right, title and interest in all accounts, as such term is defined in the UCC, and any and all supporting obligations with respect to any of the foregoing.


"Account Debtor" means a Person to whom Borrower sells inventory, goods or services in the ordinary course of business, including without limitation, each Person who is obligated on a Receivable.


"Additional Documents" has the meaning set forth in Section 3.2(d).


"Adjusted Tangible Net Worth" means, with respect to Borrower, the sum of (i) stockholder's equity, including preferred stock, determined in accordance with GAAP and (ii) subordinated indebtedness (if any), minus the sum of (a) Intangible Assets, (b) all loans or advances to any Person, and (c) prepaid expenses.


"Affiliate" means, with respect to a Person, any Person which, directly or indirectly, is in control of, is controlled by, or is under common control with such Person. For purposes of this definition, control of a Person shall mean the power, direct or indirect, (x) to vote 10% or more of the securities having ordinary voting power for the election of directors of such Person, or (y) the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities or partnership or other voting interest, by contract or otherwise.


"Agreement" means this Loan and Security Agreement, including all Schedules, exhibits and other attachments hereto, as the same may be amended, supplemented, extended or restated from time to time.


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


"Annual Facility Fee" means the fee referred to in Section 2.2.


"Applicable Law" means all applicable provisions of constitutions, statutes, rules, regulations and orders of governmental bodies and orders and decrees of courts and arbitrators.


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"Asset Disposition" means the disposition of any asset owned by Borrower or any of its Subsidiaries, other than sales of Inventory in the ordinary course of business.


"Availability" means at any time (a) the amount of the Borrowing Base at such time minus (b) the aggregate principal amount of Revolving Loan Advances.


"Availability Reserve" means a reserve based on the requirement that excess Availability under the Revolving Credit Facility be in an amount of not less than $100,000.00.


"Bankruptcy Code" means the United States Bankruptcy Code, as in effect from time to time.


"Board" means the duly elected and serving members of the Board of Directors of Borrower.


"Borrower" means Borrower as defined in the preamble.


"Borrower's Incorporation Certificate" means Borrower's Restated Certificate of Incorporation filed December 23, 2002 with the Secretary of State, State of Delaware.


"Borrowing" means a borrowing of Revolving Loan Advances.


"Borrowing Base" means, with respect to Borrower, an amount in dollars equal to the lesser of (a) the Revolving Credit Limit, or (b) the sum, without duplication, of: (i) up to eight-five percent (85%) of the net amount of the Eligible Receivables; plus (ii) up to sixty percent (60%) of the Eligible Inventory not to exceed $3,500,000.00; minus (iii) the Availability Reserve; minus (iv) the Dilution Reserve, and minus (v) other Reserves, if any.


"Borrowing Base Certificate" means the Borrowing Base Certificate referred to in Section 1.2.


"Business Day" means any day other than a Saturday, Sunday or other day on which banks in Providence, Rhode Island are authorized or required to close.


"Capital Expenditures" means the aggregate of all expenditures made and liabilities incurred that, in accordance with GAAP, are required to be included in or reflected by the property, plant, equipment or similar fixed assets accounts.


"Capitalized Lease" means a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP.


"Change of Control" means the occurrence of any of the following events: (i) the sale or transfer of all or substantially all of the assets of Borrower as an entirety to any Person or related group of Persons other than an Affiliate or Affiliates of Borrower; or (ii) Borrower is liquidated, dissolved, or adopts a plan of liquidation pursuant to the Bankruptcy Code or any other bankruptcy law.


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"Closing Date" means the date of the funding of an initial Revolving Loan Advance under this Agreement.


"Closing Fee" means the fee referred to in Section 2.1.


"Collateral" means all of Borrower's assets, including, without limitation, all of the following property and interests in property of Borrower, wherever located and whether now or hereafter existing or now owned or hereafter acquired or arising: (i) all Receivables; (ii) all Inventory; (iii) all Equipment; (iv) all Contract Rights; (v) all General Intangibles; (vi) all Investment Property; (vii) each Deposit Account and all certificates of deposit maintained with a bank, savings and loan association, credit union or like organization, other than an account evidenced by a certificate of deposit that is an instrument under the UCC; (viii) all goods and other property, whether or not delivered, (a) the sale or lease of which gives or purports to give rise to any Receivable, including, but not limited to, all merchandise returned or rejected by or repossessed from customers, or (b) securing any Receivable, including, without limitation, all rights as an unpaid vendor or lienor (including, without limitation, stoppage in transit, replevin and reclamation) with respect to such goods and other property; (ix) all mortgages, deeds to secure debt and deeds of trust on real or personal property, guaranties, leases, security agreements, and other agreements and property which secure or relate to any Receivable or other Collateral, or are acquired for the purpose of securing and enforcing any item thereof; (x) all documents of title, policies and certificates of insurance, securities, chattel paper (including electronic chattel paper and tangible chattel paper) and other documents and instruments; (xi) all other goods and personal property, whether tangible or intangible, wherever located, including money, supporting obligations, letters of credit, and each Letter-of-credit right; (xii) all files, correspondence, computer programs, tapes, discs and related data processing software which contain information identifying or pertaining to any of the Receivables, or any Account Debtor, or showing the amounts thereof or payments thereon or otherwise necessary or helpful in the realization thereon or the collection thereof; (xii) any "commercial tort claims" as that term is defined in the UCC (as identified by the parties in writing from time to time) and (xiv) any and all products and proceeds of the foregoing (including, but not limited to, any claim to any item referred to in this definition, and any claim against any third party for loss of, damage to or destruction of any or all of, the Collateral or for proceeds payable under, or unearned premiums with respect to, policies of insurance) in whatever form, including, but not limited to, cash, negotiable instruments and other instruments for the payment of money, chattel paper, security agreements and other documents.


"Contaminant" means any waste, pollutant, hazardous substance, toxic substance, hazardous waste, special waste, petroleum or petroleum-derived substance or waste, or any constituent of any such substance or waste.


"Contract Rights" means any rights under contracts not yet earned by performance and not evidenced by an instrument or chattel paper.


"Covenant Compliance Certificate" means the Covenant Compliance Certificate referred to in Section 6.1.


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"Default" shall mean an event or condition the occurrence of which would, with the lapse of time or the giving of notice, or both, become an Event of Default.


"Deposit Account" has the meaning given to it in the UCC.


"Deposit Account Control Agreement" means each Deposit Account Control Agreement among Borrower, Lender and the bank named therein, pursuant to which Lender shall have been granted a first priority lien and security interest in the deposit account more particularly described therein.


"Dilution Reserve" means the reserve established by Lender in an amount not greater than the amount by which credits, returns, discounts and allowances related to the Receivables exceed five percent (5%) of the Receivables, which shall be effective upon receipt by Lender of the most recently completed report of the field examination of the books, records and other assets of Borrowers conducted pursuant to Section 3.2 or under any other provision of this Agreement.


"Dollar" and "$" means freely transferable United States dollars.


"Early Termination Fee" means the fee referred to in Section 2.5.


"EBITDA" means, for any period, the sum of the amounts for such period of (a) Net Income, (b) Interest Expense, (c) taxes imposed on or measured by income or excess profits (for such period and without regard to any prior periods), (d) the amount of all depreciation and amortization allowances and (e) other non- cash stock compensation expenses and benefits of Borrower.


"Eligible Inventory" means that portion of Borrower's Inventory on which Lender has a first and exclusive perfected security interest and that Lender determines in its sole discretion from time to time, based on credit policies, market conditions, Borrower's business and financial condition and other matters, is eligible for use in calculating the Borrowing Base. For purposes of determining the Borrowing Base, Eligible Inventory shall not include: (a) work in process, (b) slow- moving, obsolete, or discontinued Inventory, (c) supply items, pallets or packaging, (d) Inventory in the control of a third person for processing, storage or otherwise unless the Borrower shall have obtained and delivered to Lender a bailee or other appropriate waiver, in form and substance satisfactory to Lender, the original documents or other instruments evidencing such Inventory, or such other agreements or other documents as Lender shall require in its sole and absolute discretion, (e) Inventory of an age within ninety (90) days of its respective expiration dates; (f) consigned Inventory, (g) Inventory in transit, (h) Inventory held by Borrower for lease or to be furnished under a contract of service, (i) Inventory associated with any contract of which Borrower has knowledge that the same may be subject to cancellation or a material adverse development, (j) Inventory located other than at the Orlando Warehouses, (k) Inventory associated with any contract to the extent that progress or advance payments are received from the Account Debtor such that Inventory is identified to such contract, or (l) Inventory the value of which may be otherwise impaired as determined by Lender in its sole discretion. For purposes of this definition, Inventory that at any time is or becomes Eligible Inventory, but which subsequently fails to meet any of the requirements of this definition shall


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cease to be Eligible Inventory (but shall continue to be part of the Collateral) for so long as the same fails to meets such requirements.


"Eligible Receivable" means any Receivable of Borrower that consists of the unpaid portion of the obligation stated on the invoice issued to an Account Debtor with respect to Inventory sold and shipped to or services performed for such Account Debtor in the ordinary course of business that Lender determines in its sole and good faith discretion, based on credit policies, market conditions, Borrower's business and other criteria, is eligible. A Receivable shall not be an Eligible Receivable unless such Receivable (i) is subject to Lender's perfected first priority security interest and no other Lien, (ii) is evidenced by an invoice or other documentary evidence satisfactory to Lender that has been sent to the Account Debtor, (iii) is unconditionally due and payable in Dollars or Canadian currency, and (iv) conforms to the warranties regarding Accounts and Receivables contained in this Agreement. Eligible Receivables shall not include any of the following:


(a) a Receivable that is unpaid more than ninety (90) days after the original invoice date thereof or is Receivable with payment terms of more than sixty (60) days from the original invoice date;


(b) a Receivable where fifty percent (50%) or more of all Receivables of the Account Debtor or an affiliated group of Account Debtors (in dollar value) are not Eligible Receivables pursuant to clause (a) above;


(c) a Receivable owed by an Account Debtor, or affiliated group of Account Debtors, which is obligated to Borrower respecting Receivables, the aggregate unpaid balance of which exceeds fifteen percent (15%) (unless otherwise agreed to in writing by Lender) of the aggregate unpaid balance of all otherwise Eligible Receivables owed to Borrower at such time by such Account Debtors, but only to the extent of such excess;


(d) a Receivable that (i) arises from uncompleted performance on the part of Borrower, (ii) constitutes a progress billing, advance billing, any retention amount, or retainage, (iii) is a guaranteed sale, a sale and return, or other repurchase or return basis; or (iv) is a "bill and hold" or involves a sale of goods, and all such goods have not been lawfully shipped and invoiced to the Account Debtor (or if requested by Lender, copies of all invoices, together with all shipping documents and delivery receipts evidencing such shipment have not been delivered to Lender), unless such Account Debtor enters into a "bill and hold" agreement or similar agreement with Borrower acceptable to Lender in its discretion;


(e) a Receivable with respect to which the Account Debtor is either (i) the United States or any department, agency, or instrumentality of the United States (other than Receivables with respect to which Borrower has complied, to the satisfaction of Lender, with the Assignment of Claims Act of 1940, as amended), or (ii) any state of the United States (other than (y) Receivables owed by any state that does not have a statutory counterpart to the Assignment of Claims Act or (z) Receivables owed by any state that has a statutory counterpart to the Assignment of Claims Act as to which Borrower has complied to Lender's satisfaction);


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(f) a Receivable that arises from an Account Debtor that is a creditor of Borrower, has threatened or asserted a right of setoff, has disputed its liability or has made any claim with respect to its obligation to pay, or a Receivable that is subject to a levy, prior assignment, claim, Lien, subrogation right or security interest, except that, if such Account Debtor enters into a written set off agreement with Borrower acceptable to Lender in its sole discretion, then, in such case, the amount by which such Receivable excess the amount of such offset will be considered eligible;


(g) a Receivable that is subject to any credit or contra provided, however, that if the amount of such Receivable exceeds the amount of such credit or contra, such excess may be considered for eligibility;


(h) a Receivable that arises from an Affiliate of Borrower or an Interested Party;


(i) a Receivable that arises from an Account Debtor (i) that is subject to an Insolvency Proceeding, is not solvent or has gone out of business; (ii) to whom goods are being shipped on a "cash on delivery" or C.O.D. basis; or (iii) as to which Lender or Borrower are aware of an imminent Insolvency Proceeding or a material impairment of the financial condition;


(j) a Receivable with respect to which the Account Debtor is located in the states of New Jersey, Minnesota, or West Virginia (or any other state that requires a creditor to file a business activity report or similar document in order to bring suit or enforce its remedies against such Account Debtor in the courts or through any judicial process of such state), unless Borrower (i) has qualified to do business in New Jersey, Minnesota, West Virginia, or such other states, (ii) has filed a business activities report with the applicable division of taxation, the department of revenue, or with such other state offices, as appropriate, for the then-current year, or (iii ...