Exhibit 10.1

 

LOAN AND SECURITY AGREEMENT

 

THIS LOAN AND SECURITY AGREEMENT (this “Agreement”) dated as of the Effective
Date between SILICON VALLEY BANK, a California corporation (“Bank”), and
Intrusion, Inc., a Delaware corporation (“Borrower”), provides the terms on
which Bank shall lend to Borrower and Borrower shall repay Bank. The parties
agree as follows:

 

1.                                      ACCOUNTING AND OTHER TERMS

 

Accounting terms not defined in this Agreement shall be construed following
GAAP. Calculations and determinations must be made following GAAP. The term
“financial statements” includes the notes and schedules. The terms “including”
and “includes” always mean “including (or includes) without limitation” in this
or any Loan Document. Capitalized terms not otherwise defined in this Agreement
shall have the meanings set forth in Section 13. All other terms contained in
this Agreement, unless otherwise indicated, shall have the meanings provided by
the Code to the extent such terms are defined therein.

 

2.                                      LOAN AND TERMS OF PAYMENT

 

2.1.                            PROMISE TO PAY. BORROWER HEREBY UNCONDITIONALLY
PROMISES TO PAY BANK THE OUTSTANDING PRINCIPAL AMOUNT OF ALL CREDIT EXTENSIONS
AND ACCRUED AND UNPAID INTEREST THEREON AS AND WHEN DUE IN ACCORDANCE WITH THIS
AGREEMENT.

 

2.1.1.                  REVOLVING ADVANCES.

 

(A)                                  AVAILABILITY. SUBJECT TO THE TERMS AND
CONDITIONS OF THIS AGREEMENT, BANK SHALL MAKE ADVANCES NOT EXCEEDING THE
AVAILABILITY AMOUNT. AMOUNTS BORROWED UNDER THE REVOLVING LINE MAY BE REPAID
AND, PRIOR TO THE REVOLVING LINE MATURITY DATE, REBORROWED, SUBJECT TO THE
APPLICABLE TERMS AND CONDITIONS PRECEDENT HEREIN.

 

(B)                                 TERMINATION; REPAYMENT. THE REVOLVING LINE
TERMINATES ON THE REVOLVING LINE MATURITY DATE, WHEN THE PRINCIPAL AMOUNT OF ALL
ADVANCES, THE UNPAID INTEREST THEREON, AND ALL OTHER OBLIGATIONS RELATING TO THE
REVOLVING LINE SHALL BE IMMEDIATELY DUE AND PAYABLE.

 

2.2.                            OVERADVANCES. IF, AT ANY TIME, THE CREDIT
EXTENSIONS UNDER SECTION 2.1.1 EXCEED THE LESSER OF EITHER (A) THE REVOLVING
LINE OR (B) THE BORROWING BASE, BORROWER SHALL IMMEDIATELY PAY TO BANK IN CASH
SUCH EXCESS.

 

2.3.                            PAYMENT OF INTEREST ON THE CREDIT EXTENSIONS.

 

(A)                                  INTEREST RATE. SUBJECT TO SECTION 2.3(B),
THE PRINCIPAL AMOUNT OUTSTANDING UNDER THE REVOLVING LINE SHALL ACCRUE INTEREST
AT A FLOATING PER ANNUM RATE EQUAL TO ONE PERCENT (1%) ABOVE THE PRIME RATE,
WHICH INTEREST SHALL BE PAYABLE MONTHLY IN ACCORDANCE WITH SECTION 2.3(F) BELOW.

 

(B)                                 DEFAULT RATE. AFTER AN EVENT OF DEFAULT,
OBLIGATIONS ACCRUE INTEREST AT THE DEFAULT RATE. THE DEFAULT RATE IS, AT THE
BANK’S OPTION, (I) THE MAXIMUM LAWFUL RATE, IF THE MAXIMUM LAWFUL RATE IS
ESTABLISHED BY APPLICABLE LAW, (II) THE INTEREST RATE APPLICABLE IMMEDIATELY
PRIOR TO THE OCCURRENCE OF THE EVENT OF DEFAULT PLUS FIVE PERCENT (5.00%), IF NO
MAXIMUM LAWFUL RATE LAW HAS BEEN ESTABLISHED BY APPLICABLE LAW; (III) EIGHTEEN
PERCENT (18.00%) PER ANNUM; OR (IV) SUCH LESSER RATE OF INTEREST AS BANK IN ITS
SOLE DISCRETION MAY CHOOSE TO CHARGE; BUT IN NO EVENT MORE THAN THE MAXIMUM
LAWFUL RATE. BANK WILL NOT COMPUTE THE INTEREST IN A MANNER THAT WOULD CAUSE
BANK TO CONTRACT FOR, CHARGE OR RECEIVE INTEREST THAT WOULD EXCEED THE MAXIMUM
LAWFUL RATE OR THE MAXIMUM LAWFUL AMOUNT.

 

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(C)                                  ADJUSTMENT TO INTEREST RATE. CHANGES TO THE
INTEREST RATE OF ANY CREDIT EXTENSION BASED ON CHANGES TO THE PRIME RATE SHALL
BE EFFECTIVE ON THE EFFECTIVE DATE OF ANY CHANGE TO THE PRIME RATE AND TO THE
EXTENT OF ANY SUCH CHANGE.

 

(D)                                 360-DAY YEAR. INTEREST SHALL BE COMPUTED ON
THE BASIS OF A 360-DAY YEAR FOR THE ACTUAL NUMBER OF DAYS ELAPSED.

 

(E)                                  DEBIT OF ACCOUNTS. BANK MAY DEBIT ANY OF
BORROWER’S DEPOSIT ACCOUNTS, INCLUDING THE DESIGNATED DEPOSIT ACCOUNT, FOR
PRINCIPAL AND INTEREST PAYMENTS OR ANY OTHER AMOUNTS BORROWER OWES BANK WHEN
DUE. THESE DEBITS SHALL NOT CONSTITUTE A SET-OFF.

 

(F)                                    PAYMENTS. UNLESS OTHERWISE PROVIDED,
INTEREST IS PAYABLE MONTHLY ON THE FIRST CALENDAR DAY OF EACH MONTH. PAYMENTS OF
PRINCIPAL AND/OR INTEREST RECEIVED AFTER 12:00 P.M. PACIFIC TIME ARE CONSIDERED
RECEIVED AT THE OPENING OF BUSINESS ON THE NEXT BUSINESS DAY. WHEN A PAYMENT IS
DUE ON A DAY THAT IS NOT A BUSINESS DAY, THE PAYMENT IS DUE THE NEXT BUSINESS
DAY AND ADDITIONAL FEES OR INTEREST, AS APPLICABLE, SHALL CONTINUE TO ACCRUE.

 

(G)                                 SPREADING OF INTEREST. DUE TO IRREGULAR
PERIODIC BALANCES OF PRINCIPAL, THE VARIABLE NATURE OF THE INTEREST RATE, OR
PREPAYMENT, THE TOTAL INTEREST THAT WILL ACCRUE UNDER THIS AGREEMENT CANNOT BE
DETERMINED IN ADVANCE. BANK DOES NOT INTEND TO CONTRACT FOR, CHARGE OR RECEIVE
MORE THAN THE MAXIMUM LAWFUL RATE OR MAXIMUM LAWFUL AMOUNT PERMITTED BY
APPLICABLE STATE OR FEDERAL LAW, AND TO PREVENT SUCH AN OCCURRENCE BANK AND
BORROWER AGREE THAT ALL AMOUNTS OF INTEREST, WHENEVER CONTRACTED FOR, CHARGED OR
RECEIVED BY BANK, WITH RESPECT TO THE OBLIGATIONS, WILL BE SPREAD, PRORATED OR
ALLOCATED OVER THE FULL PERIOD OF TIME THE OBLIGATIONS ARE UNPAID, INCLUDING THE
PERIOD OF ANY RENEWAL OR EXTENSION THEREOF. IF THE MATURITY OF THE OBLIGATIONS
IS ACCELERATED FOR ANY REASON WHETHER AS A RESULT OF AN EVENT OF DEFAULT OR
OTHERWISE PRIOR TO THE FULL STATED TERM, THE TOTAL AMOUNT OF INTEREST CONTRACTED
FOR, CHARGED OR RECEIVED TO THE TIME OF SUCH DEMAND SHALL BE SPREAD, PRORATED OR
ALLOCATED ALONG WITH ANY INTEREST THEREAFTER ACCRUING OVER THE FULL PERIOD OF
TIME THAT THE OBLIGATIONS THEREAFTER REMAIN UNPAID FOR THE PURPOSE OF
DETERMINING IF SUCH INTEREST EXCEEDS THE MAXIMUM LAWFUL AMOUNT.

 

(H)                                 EXCESS INTEREST. AT MATURITY (WHETHER BY
ACCELERATION OR OTHERWISE) OR ON EARLIER FINAL PAYMENT OF THE OBLIGATIONS, BANK
SHALL COMPUTE THE TOTAL AMOUNT OF INTEREST THAT HAS BEEN CONTRACTED FOR, CHARGED
OR RECEIVED BY BANK OR PAYABLE BY BORROWER HEREUNDER AND COMPARE SUCH AMOUNT TO
THE MAXIMUM LAWFUL AMOUNT THAT COULD HAVE BEEN CONTRACTED FOR, CHARGED OR
RECEIVED BY BANK. IF SUCH COMPUTATION REFLECTS THAT THE TOTAL AMOUNT OF INTEREST
THAT HAS BEEN CONTRACTED FOR, CHARGED, RECEIVED BY BANK, OR PAYABLE BY BORROWER
EXCEEDS THE MAXIMUM LAWFUL AMOUNT, THEN BANK SHALL APPLY SUCH EXCESS TO THE
REDUCTION OF THE PRINCIPAL BALANCE, AND ANY SUCH EXCESS REMAINING THEREAFTER
SHALL BE REFUNDED TO BORROWER. THIS PROVISION CONCERNING THE CREDITING OR REFUND
OF EXCESS INTEREST SHALL CONTROL AND TAKE PRECEDENCE OVER ALL OTHER AGREEMENTS
BETWEEN BORROWER AND BANK SO THAT UNDER NO CIRCUMSTANCES SHALL THE TOTAL
INTEREST CONTRACTED FOR, CHARGED OR RECEIVED BY BANK EXCEED THE MAXIMUM LAWFUL
AMOUNT.

 

2.4.                            FEES. BORROWER SHALL PAY TO BANK:

 

(A)                                  A FULLY EARNED, NON-REFUNDABLE COMMITMENT
FEE OF $5,000.00 IS DUE ON THE EFFECTIVE DATE, AND PAYABLE AS FOLLOWS:
(I) $2,500 SHALL BE PAID ON THE EFFECTIVE DATE, AND (II) $2,500 SHALL BE PAID ON
THE DATE THE REVOLVING LINE INCREASES TO $2,000,000; AND

 

(B)                                 BANK EXPENSES. ALL BANK EXPENSES INCURRED
THROUGH AND AFTER THE EFFECTIVE DATE, WHEN DUE.

 

3.                                      CONDITIONS OF LOANS

 

3.1.                            CONDITIONS PRECEDENT TO INITIAL ADVANCE. BANK’S
OBLIGATION TO MAKE THE INITIAL ADVANCE IS SUBJECT TO THE CONDITION PRECEDENT
THAT BANK SHALL HAVE RECEIVED, IN FORM AND SUBSTANCE SATISFACTORY TO BANK, SUCH
DOCUMENTS, AND COMPLETION OF SUCH OTHER MATTERS, AS BANK MAY REASONABLY DEEM
NECESSARY OR APPROPRIATE, INCLUDING, WITHOUT LIMITATION:

 

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(A)                                  BORROWER SHALL HAVE DELIVERED DULY EXECUTED
ORIGINAL SIGNATURES TO THE LOAN DOCUMENTS TO WHICH IT IS A PARTY;

 

(B)                                 BORROWER SHALL HAVE DELIVERED DULY EXECUTED
ORIGINAL SIGNATURES TO THE CONTROL AGREEMENTS;

 

(C)                                  BORROWER SHALL HAVE DELIVERED ITS OPERATING
DOCUMENTS AND A GOOD STANDING CERTIFICATE OF BORROWER CERTIFIED BY THE SECRETARY
OF STATE OF THE STATE OF DELAWARE AS OF A DATE NO EARLIER THAN THIRTY (30) DAYS
PRIOR TO THE EFFECTIVE DATE;

 

(D)                                 BORROWER SHALL HAVE DELIVERED DULY EXECUTED
ORIGINAL SIGNATURES TO THE COMPLETED BORROWING RESOLUTIONS FOR BORROWER;

 

(E)                                  BANK SHALL HAVE RECEIVED CERTIFIED COPIES,
DATED AS OF A RECENT DATE, OF FINANCING STATEMENT SEARCHES, AS BANK SHALL
REQUEST, ACCOMPANIED BY WRITTEN EVIDENCE (INCLUDING ANY UCC TERMINATION
STATEMENTS) THAT THE LIENS INDICATED IN ANY SUCH FINANCING STATEMENTS EITHER
CONSTITUTE PERMITTED LIENS OR HAVE BEEN OR, IN CONNECTION WITH THE INITIAL
ADVANCE, WILL BE TERMINATED OR RELEASED;

 

(F)                                    BORROWER SHALL HAVE DELIVERED THE
PERFECTION CERTIFICATE(S) EXECUTED BY BORROWER;

 

(G)                                 BORROWER SHALL HAVE DELIVERED A LANDLORD’S
CONSENT EXECUTED BY BORROWER’S LANDLORD IN FAVOR OF BANK;

 

(H)                                 BORROWER SHALL HAVE DELIVERED THE INSURANCE
POLICIES AND/OR ENDORSEMENTS REQUIRED PURSUANT TO SECTION 6.5 HEREOF;

 

(I)                                     BORROWER SHALL HAVE PAID THE FEES AND
BANK EXPENSES THEN DUE AS SPECIFIED IN SECTION 2.4 HEREOF; AND

 

(J)                                     BANK SHALL HAVE RECEIVED AND APPROVED AN
AUDIT OF BORROWER’S COLLATERAL.

 

3.2.                            CONDITIONS PRECEDENT TO ALL CREDIT EXTENSIONS.
BANK’S OBLIGATIONS TO MAKE EACH CREDIT EXTENSION, INCLUDING THE INITIAL CREDIT
EXTENSION, IS SUBJECT TO THE FOLLOWING:

 

(A)                                  EXCEPT AS OTHERWISE PROVIDED IN
SECTION 3.4(A), TIMELY RECEIPT OF AN EXECUTED PAYMENT/ADVANCE FORM;

 

(B)                                 THE REPRESENTATIONS AND WARRANTIES IN
SECTION 5 SHALL BE TRUE IN ALL MATERIAL RESPECTS ON THE DATE OF THE
PAYMENT/ADVANCE FORM AND ON THE FUNDING DATE OF EACH CREDIT EXTENSION; PROVIDED,
HOWEVER, THAT SUCH MATERIALITY QUALIFIER SHALL NOT BE APPLICABLE TO ANY
REPRESENTATIONS AND WARRANTIES THAT ALREADY ARE QUALIFIED OR MODIFIED BY
MATERIALITY IN THE TEXT THEREOF; AND PROVIDED, FURTHER THAT THOSE
REPRESENTATIONS AND WARRANTIES EXPRESSLY REFERRING TO A SPECIFIC DATE SHALL BE
TRUE, ACCURATE AND COMPLETE IN ALL MATERIAL RESPECTS AS OF SUCH DATE, AND NO
DEFAULT OR EVENT OF DEFAULT SHALL HAVE OCCURRED AND BE CONTINUING OR RESULT FROM
THE CREDIT EXTENSION. EACH CREDIT EXTENSION IS BORROWER’S REPRESENTATION AND
WARRANTY ON THAT DATE THAT THE REPRESENTATIONS AND WARRANTIES IN SECTION 5
REMAIN TRUE IN ALL MATERIAL RESPECTS; PROVIDED, HOWEVER, THAT SUCH MATERIALITY
QUALIFIER SHALL NOT BE APPLICABLE TO ANY REPRESENTATIONS AND WARRANTIES THAT
ALREADY ARE QUALIFIED OR MODIFIED BY MATERIALITY IN THE TEXT THEREOF; AND
PROVIDED, FURTHER THAT THOSE REPRESENTATIONS AND WARRANTIES EXPRESSLY REFERRING
TO A SPECIFIC DATE SHALL BE TRUE, ACCURATE AND COMPLETE IN ALL MATERIAL RESPECTS
AS OF SUCH DATE; AND

 

(C)                                  IN BANK’S SOLE DISCRETION, ANY MATERIAL
IMPAIRMENT IN THE GENERAL AFFAIRS, MANAGEMENT, RESULTS OF OPERATION, FINANCIAL
CONDITION OR THE PROSPECT OF REPAYMENT OF THE OBLIGATIONS, OR THERE HAS NOT BEEN
ANY MATERIAL ADVERSE DEVIATION BY BORROWER FROM THE MOST RECENT BUSINESS PLAN OF
BORROWER PRESENTED TO AND ACCEPTED BY BANK.

 

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3.3.                            COVENANT TO DELIVER. BORROWER AGREES TO DELIVER
TO BANK EACH ITEM REQUIRED TO BE DELIVERED TO BANK UNDER THIS AGREEMENT AS A
CONDITION TO ANY CREDIT EXTENSION. BORROWER EXPRESSLY AGREES THAT THE EXTENSION
OF A CREDIT EXTENSION PRIOR TO THE RECEIPT BY BANK OF ANY SUCH ITEM SHALL NOT
CONSTITUTE A WAIVER BY BANK OF BORROWER’S OBLIGATION TO DELIVER SUCH ITEM, AND
ANY SUCH EXTENSION IN THE ABSENCE OF A REQUIRED ITEM SHALL BE IN BANK’S SOLE
DISCRETION.

 

3.4.                            PROCEDURES FOR BORROWING. SUBJECT TO THE PRIOR
SATISFACTION OF ALL OTHER APPLICABLE CONDITIONS TO THE MAKING OF AN ADVANCE SET
FORTH IN THIS AGREEMENT, TO OBTAIN AN ADVANCE, BORROWER SHALL NOTIFY BANK (WHICH
NOTICE SHALL BE IRREVOCABLE) BY ELECTRONIC MAIL, FACSIMILE, OR TELEPHONE BY
12:00 P.M. PACIFIC TIME ON THE FUNDING DATE OF THE ADVANCE. TOGETHER WITH ANY
SUCH ELECTRONIC OR FACSIMILE NOTIFICATION, BORROWER SHALL DELIVER TO BANK BY
ELECTRONIC MAIL OR FACSIMILE A COMPLETED PAYMENT/ADVANCE FORM EXECUTED BY A
RESPONSIBLE OFFICER OR HIS OR HER DESIGNEE. BANK MAY RELY ON ANY TELEPHONE
NOTICE GIVEN BY A PERSON WHOM BANK BELIEVES IS A RESPONSIBLE OFFICER OR
DESIGNEE. BANK SHALL CREDIT ADVANCES TO THE DESIGNATED DEPOSIT ACCOUNT. BANK
MAY MAKE ADVANCES UNDER THIS AGREEMENT BASED ON INSTRUCTIONS FROM A RESPONSIBLE
OFFICER OR HIS OR HER DESIGNEE OR WITHOUT INSTRUCTIONS IF THE ADVANCES ARE
NECESSARY TO MEET OBLIGATIONS WHICH HAVE BECOME DUE.

 

4.                                      CREATION OF SECURITY INTEREST

 

4.1.                            GRANT OF SECURITY INTEREST. BORROWER HEREBY
GRANTS BANK, TO SECURE THE PAYMENT AND PERFORMANCE IN FULL OF ALL OF THE
OBLIGATIONS, A CONTINUING SECURITY INTEREST IN, AND PLEDGES TO BANK, THE
COLLATERAL, WHEREVER LOCATED, WHETHER NOW OWNED OR HEREAFTER ACQUIRED OR
ARISING, AND ALL PROCEEDS AND PRODUCTS THEREOF. BORROWER REPRESENTS, WARRANTS,
AND COVENANTS THAT THE SECURITY INTEREST GRANTED HEREIN IS AND SHALL AT ALL
TIMES CONTINUE TO BE A FIRST PRIORITY PERFECTED SECURITY INTEREST IN THE
COLLATERAL (SUBJECT ONLY TO PERMITTED LIENS THAT MAY HAVE SUPERIOR PRIORITY TO
BANK’S LIEN UNDER THIS AGREEMENT). IF BORROWER SHALL ACQUIRE A COMMERCIAL TORT
CLAIM, BORROWER SHALL PROMPTLY NOTIFY BANK IN A WRITING SIGNED BY BORROWER OF
THE GENERAL DETAILS THEREOF AND GRANT TO BANK IN SUCH WRITING A SECURITY
INTEREST THEREIN AND IN THE PROCEEDS THEREOF, ALL UPON THE TERMS OF THIS
AGREEMENT, WITH SUCH WRITING TO BE IN FORM AND SUBSTANCE REASONABLY SATISFACTORY
TO BANK.

 

If this Agreement is terminated, Bank’s Lien in the Collateral shall continue
until the Obligations (other than inchoate indemnity obligations) are repaid in
full in cash. Upon payment in full in cash of the Obligations and at such time
as Bank’s obligation to make Credit Extensions has terminated, Bank shall, at
Borrower’s sole cost and expense, release its Liens in the Collateral and all
rights therein shall revert to Borrower.

 

4.2.                            AUTHORIZATION TO FILE FINANCING STATEMENTS.
BORROWER HEREBY AUTHORIZES BANK TO FILE FINANCING STATEMENTS, WITHOUT NOTICE TO
BORROWER, WITH ALL APPROPRIATE JURISDICTIONS TO PERFECT OR PROTECT BANK’S
INTEREST OR RIGHTS HEREUNDER.

 

5.                                      REPRESENTATIONS AND WARRANTIES

 

Borrower represents and warrants as follows:

 

5.1.                            DUE ORGANIZATION AND AUTHORIZATION. BORROWER AND
EACH OF ITS SUBSIDIARIES ARE DULY EXISTING AND IN GOOD STANDING IN THEIR
RESPECTIVE JURISDICTIONS OF FORMATION AND ARE QUALIFIED AND LICENSED TO DO
BUSINESS AND ARE IN GOOD STANDING IN ANY JURISDICTION IN WHICH THE CONDUCT OF
THEIR BUSINESS OR THEIR OWNERSHIP OF PROPERTY REQUIRES THAT THEY BE QUALIFIED
EXCEPT WHERE THE FAILURE TO DO SO COULD NOT REASONABLY BE EXPECTED TO HAVE A
MATERIAL ADVERSE EFFECT ON BORROWER’S BUSINESS. IN CONNECTION WITH THIS
AGREEMENT, BORROWER HAS DELIVERED TO BANK A COMPLETED CERTIFICATE SUBSTANTIALLY
IN THE FORM ATTACHED HERETO AS EXHIBIT E SIGNED BY BORROWER, ENTITLED
“PERFECTION CERTIFICATE”. BORROWER REPRESENTS AND WARRANTS TO BANK THAT
(A) BORROWER’S EXACT LEGAL NAME IS THAT INDICATED ON THE PERFECTION CERTIFICATE
AND ON THE SIGNATURE PAGE HEREOF; (B) BORROWER IS AN ORGANIZATION OF THE TYPE
AND IS ORGANIZED IN THE JURISDICTION SET FORTH IN THE PERFECTION CERTIFICATE;
(C) THE PERFECTION CERTIFICATE ACCURATELY SETS FORTH BORROWER’S ORGANIZATIONAL
IDENTIFICATION NUMBER OR ACCURATELY STATES THAT BORROWER HAS NONE; (D) THE
PERFECTION CERTIFICATE ACCURATELY SETS FORTH BORROWER’S PLACE OF BUSINESS, OR,
IF MORE THAN ONE, ITS CHIEF EXECUTIVE OFFICE AS WELL AS BORROWER’S MAILING
ADDRESS (IF DIFFERENT THAN ITS CHIEF EXECUTIVE OFFICE); (E) BORROWER (AND EACH
OF ITS PREDECESSORS) HAS NOT, IN THE PAST FIVE (5) YEARS, CHANGED ITS STATE OF
FORMATION, ORGANIZATIONAL STRUCTURE OR TYPE, OR ANY ORGANIZATIONAL NUMBER
ASSIGNED BY ITS JURISDICTION; AND (F) ALL OTHER INFORMATION SET FORTH ON THE
PERFECTION CERTIFICATE PERTAINING TO BORROWER AND EACH OF ITS SUBSIDIARIES IS
ACCURATE AND COMPLETE. IF BORROWER IS NOT NOW A

 

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REGISTERED ORGANIZATION BUT LATER BECOMES ONE, BORROWER SHALL PROMPTLY NOTIFY
BANK OF SUCH OCCURRENCE AND PROVIDE BANK WITH BORROWER’S ORGANIZATIONAL
IDENTIFICATION NUMBER.

 

The execution, delivery and performance of the Loan Documents have been duly
authorized, and do not conflict with Borrower’s organizational documents, nor
constitute an event of default under any material agreement by which Borrower is
bound. Borrower is not in default under any agreement to which it is a party or
by which it is bound in which the default could have a material adverse effect
on Borrower’s business.

 

5.2.                            COLLATERAL. BORROWER HAS GOOD TITLE TO, HAS
RIGHTS IN, AND THE POWER TO TRANSFER EACH ITEM OF THE COLLATERAL UPON WHICH IT
PURPORTS TO GRANT A LIEN HEREUNDER, FREE AND CLEAR OF ANY AND ALL LIENS EXCEPT
PERMITTED LIENS. BORROWER HAS NO DEPOSIT ACCOUNTS OTHER THAN THE DEPOSIT
ACCOUNTS WITH BANK, THE DEPOSIT ACCOUNTS, IF ANY, DESCRIBED IN THE PERFECTION
CERTIFICATE DELIVERED TO BANK IN CONNECTION HEREWITH, OR OF WHICH BORROWER HAS
GIVEN BANK NOTICE AND TAKEN SUCH ACTIONS AS ARE NECESSARY TO GIVE BANK A
PERFECTED SECURITY INTEREST THEREIN. THE ACCOUNTS ARE BONA FIDE, EXISTING
OBLIGATIONS OF THE ACCOUNT DEBTORS.

 

THE COLLATERAL IS NOT IN THE POSSESSION OF ANY THIRD PARTY BAILEE (SUCH AS A
WAREHOUSE) EXCEPT AS OTHERWISE PROVIDED IN THE PERFECTION CERTIFICATE. NONE OF
THE COMPONENTS OF THE COLLATERAL SHALL BE MAINTAINED AT LOCATIONS OTHER THAN AS
PROVIDED IN THE PERFECTION CERTIFICATE OR AS BORROWER HAS GIVEN BANK NOTICE
PURSUANT TO SECTION 7.2. IN THE EVENT THAT BORROWER, AFTER THE DATE HEREOF,
INTENDS TO STORE OR OTHERWISE DELIVER ANY PORTION OF THE COLLATERAL TO A BAILEE,
THEN BORROWER WILL FIRST RECEIVE THE WRITTEN CONSENT OF BANK AND SUCH BAILEE
MUST EXECUTE AND DELIVER A BAILEE AGREEMENT IN FORM AND SUBSTANCE SATISFACTORY
TO BANK IN ITS SOLE DISCRETION.

 

ALL INVENTORY IS IN ALL MATERIAL RESPECTS OF GOOD AND MARKETABLE QUALITY, FREE
FROM MATERIAL DEFECTS.

 

BORROWER IS THE SOLE OWNER OF ITS INTELLECTUAL PROPERTY, EXCEPT FOR INTELLECTUAL
PROPERTY LICENSED FROM THIRD PARTIES OR NON-EXCLUSIVE LICENSES GRANTED TO ITS
CUSTOMERS IN THE ORDINARY COURSE OF BUSINESS. TO THE BEST OF THE KNOWLEDGE OF
BORROWER, EACH PATENT IS VALID AND ENFORCEABLE. NO PART OF THE INTELLECTUAL
PROPERTY HAS BEEN JUDGED INVALID OR UNENFORCEABLE, IN WHOLE OR IN PART, AND TO
THE BEST OF BORROWER’S KNOWLEDGE, NO CLAIM HAS BEEN MADE THAT ANY PART OF THE
INTELLECTUAL PROPERTY VIOLATES THE RIGHTS OF ANY THIRD PARTY EXCEPT TO THE
EXTENT SUCH CLAIM COULD NOT REASONABLY BE EXPECTED TO HAVE A MATERIAL ADVERSE
EFFECT ON BORROWER’S BUSINESS. EXCEPT AS NOTED ON THE PERFECTION CERTIFICATE,
BORROWER IS NOT A PARTY TO, NOR IS BOUND BY, ANY LICENSE OR OTHER AGREEMENT WITH
RESPECT TO WHICH BORROWER IS THE LICENSEE THAT PROHIBITS OR OTHERWISE RESTRICTS
BORROWER FROM GRANTING A SECURITY INTEREST IN BORROWER’S INTEREST IN SUCH
LICENSE OR AGREEMENT OR ANY OTHER PROPERTY. BORROWER SHALL PROVIDE WRITTEN
NOTICE TO BANK WITHIN TEN (10) DAYS OF ENTERING OR BECOMING BOUND BY ANY SUCH
LICENSE OR AGREEMENT WHICH IS REASONABLY LIKELY TO HAVE A MATERIAL IMPACT ON
BORROWER’S BUSINESS OR FINANCIAL CONDITION (OTHER THAN OVER-THE-COUNTER SOFTWARE
THAT IS COMMERCIALLY AVAILABLE TO THE PUBLIC). BORROWER SHALL TAKE SUCH STEPS AS
BANK REQUESTS TO OBTAIN THE CONSENT OF, OR WAIVER BY, ANY PERSON WHOSE CONSENT
OR WAIVER IS NECESSARY FOR ALL SUCH LICENSES OR CONTRACT RIGHTS TO BE DEEMED
“COLLATERAL” AND FOR BANK TO HAVE A SECURITY INTEREST IN IT THAT MIGHT OTHERWISE
BE RESTRICTED OR PROHIBITED BY LAW OR BY THE TERMS OF ANY SUCH LICENSE OR
AGREEMENT (SUCH CONSENT OR AUTHORIZATION MAY INCLUDE A LICENSOR’S AGREEMENT TO A
CONTINGENT ASSIGNMENT OF THE LICENSE TO BANK IF BANK DETERMINES THAT IS
NECESSARY IN ITS GOOD FAITH JUDGMENT), WHETHER NOW EXISTING OR ENTERED INTO IN
THE FUTURE.

 

5.3.                            ACCOUNTS RECEIVABLE. FOR ANY ELIGIBLE ACCOUNT IN
ANY BORROWING BASE CERTIFICATE, ALL STATEMENTS MADE AND ALL UNPAID BALANCES
APPEARING IN ALL INVOICES, INSTRUMENTS AND OTHER DOCUMENTS EVIDENCING SUCH
ELIGIBLE ACCOUNT ARE AND SHALL BE TRUE AND CORRECT AND ALL SUCH INVOICES,
INSTRUMENTS AND OTHER DOCUMENTS, AND ALL OF BORROWER’S BOOKS ARE GENUINE AND IN
ALL RESPECTS WHAT THEY PURPORT TO BE. ALL SALES AND OTHER TRANSACTIONS
UNDERLYING OR GIVING RISE TO EACH ELIGIBLE ACCOUNT SHALL COMPLY IN ALL MATERIAL
RESPECTS WITH ALL APPLICABLE LAWS AND GOVERNMENTAL RULES AND REGULATIONS.
BORROWER HAS NO KNOWLEDGE OF ANY ACTUAL OR IMMINENT INSOLVENCY PROCEEDING OF ANY
ACCOUNT DEBTOR WHOSE ACCOUNTS ARE AN ELIGIBLE ACCOUNT IN ANY BORROWING BASE
CERTIFICATE. TO THE BEST OF BORROWER’S KNOWLEDGE, ALL SIGNATURES AND
ENDORSEMENTS ON ALL DOCUMENTS, INSTRUMENTS, AND AGREEMENTS RELATING TO ALL
ELIGIBLE ACCOUNT ARE GENUINE, AND ALL SUCH DOCUMENTS, INSTRUMENTS AND AGREEMENTS
ARE LEGALLY ENFORCEABLE IN ACCORDANCE WITH THEIR TERMS.

 

5.4.                            LITIGATION. THERE ARE NO ACTIONS OR PROCEEDINGS
PENDING OR, TO THE KNOWLEDGE OF THE RESPONSIBLE OFFICERS, THREATENED IN WRITING
BY OR AGAINST BORROWER OR ANY OF ITS SUBSIDIARIES INVOLVING MORE THAN $25,000.

 

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5.5.                            NO MATERIAL DEVIATION IN FINANCIAL STATEMENTS.
ALL CONSOLIDATED FINANCIAL STATEMENTS FOR BORROWER AND ANY OF ITS SUBSIDIARIES
DELIVERED TO BANK FAIRLY PRESENT IN ALL MATERIAL RESPECTS BORROWER’S
CONSOLIDATED FINANCIAL CONDITION AND BORROWER’S CONSOLIDATED RESULTS OF
OPERATIONS. THERE HAS NOT BEEN ANY MATERIAL DETERIORATION IN BORROWER’S
CONSOLIDATED FINANCIAL CONDITION SINCE THE DATE OF THE MOST RECENT FINANCIAL
STATEMENTS SUBMITTED TO BANK.

 

5.6.                            SOLVENCY. BORROWER IS ABLE TO PAY ITS DEBTS
(INCLUDING TRADE DEBTS) AS THEY MATURE.

 

5.7.                            REGULATORY COMPLIANCE. BORROWER IS NOT AN
“INVESTMENT COMPANY” OR A COMPANY “CONTROLLED” BY AN “INVESTMENT COMPANY” UNDER
THE INVESTMENT COMPANY ACT. BORROWER IS NOT ENGAGED AS ONE OF ITS IMPORTANT
ACTIVITIES IN EXTENDING CREDIT FOR MARGIN STOCK (UNDER REGULATIONS T AND U OF
THE FEDERAL RESERVE BOARD OF GOVERNORS). BORROWER HAS COMPLIED IN ALL MATERIAL
RESPECTS WITH THE FEDERAL FAIR LABOR STANDARDS ACT. BORROWER HAS NOT VIOLATED
ANY LAWS, ORDINANCES OR RULES, THE VIOLATION OF WHICH COULD REASONABLY BE
EXPECTED TO HAVE A MATERIAL ADVERSE EFFECT ON ITS BUSINESS. NONE OF BORROWER’S
OR ANY OF ITS SUBSIDIARIES’ PROPERTIES OR ASSETS HAS BEEN USED BY BORROWER OR
ANY SUBSIDIARY OR, TO THE BEST OF BORROWER’S KNOWLEDGE, BY PREVIOUS PERSONS, IN
DISPOSING, PRODUCING, STORING, TREATING, OR TRANSPORTING ANY HAZARDOUS SUBSTANCE
OTHER THAN LEGALLY. BORROWER AND EACH OF ITS SUBSIDIARIES HAVE OBTAINED ALL
CONSENTS, APPROVALS AND AUTHORIZATIONS OF, MADE ALL DECLARATIONS OR FILINGS
WITH, AND GIVEN ALL NOTICES TO, ALL GOVERNMENT AUTHORITIES THAT ARE NECESSARY TO
CONTINUE ITS BUSINESS AS CURRENTLY CONDUCTED.

 

5.8.                            SUBSIDIARIES; INVESTMENTS. BORROWER DOES NOT OWN
ANY STOCK, PARTNERSHIP INTEREST OR OTHER EQUITY SECURITIES EXCEPT FOR PERMITTED
INVESTMENTS.

 

5.9.                            TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS.
BORROWER HAS TIMELY FILED ALL REQUIRED TAX RETURNS AND REPORTS, AND BORROWER HAS
TIMELY PAID ALL FOREIGN, FEDERAL, STATE AND LOCAL TAXES, ASSESSMENTS, DEPOSITS
AND CONTRIBUTIONS OWED BY BORROWER. BORROWER MAY DEFER PAYMENT OF ANY CONTESTED
TAXES, PROVIDED THAT BORROWER (A) IN GOOD FAITH CONTESTS ITS OBLIGATION TO PAY
THE TAXES BY APPROPRIATE PROCEEDINGS PROMPTLY AND DILIGENTLY INSTITUTED AND
CONDUCTED, (B) NOTIFIES BANK IN WRITING OF THE COMMENCEMENT OF, AND ANY MATERIAL
DEVELOPMENT IN, THE PROCEEDINGS, (C) POSTS BONDS OR TAKES ANY OTHER STEPS
REQUIRED TO PREVENT THE GOVERNMENTAL AUTHORITY LEVYING SUCH CONTESTED TAXES FROM
OBTAINING A LIEN UPON ANY OF THE COLLATERAL THAT IS OTHER THAN A “PERMITTED
LIEN”. BORROWER HAS NO KNOWLEDGE OF ANY CLAIMS OR ADJUSTMENTS PROPOSED FOR ANY
OF BORROWER’S PRIOR TAX YEARS WHICH COULD RESULT IN ADDITIONAL TAXES BECOMING
DUE AND PAYABLE BY BORROWER. BORROWER HAS PAID ALL AMOUNTS NECESSARY TO FUND ALL
PRESENT PENSION, PROFIT SHARING AND DEFERRED COMPENSATION PLANS IN ACCORDANCE
WITH THEIR TERMS, AND BORROWER HAS NOT WITHDRAWN FROM PARTICIPATION IN, AND HAS
NOT PERMITTED PARTIAL OR COMPLETE TERMINATION OF, OR PERMITTED THE OCCURRENCE OF
ANY OTHER EVENT WITH RESPECT TO, ANY SUCH PLAN WHICH COULD REASONABLY BE
EXPECTED TO RESULT IN ANY LIABILITY OF BORROWER, INCLUDING ANY LIABILITY TO THE
PENSION BENEFIT GUARANTY CORPORATION OR ITS SUCCESSORS OR ANY OTHER GOVERNMENTAL
AGENCY.

 

5.10.                     USE OF PROCEEDS. BORROWER SHALL USE THE PROCEEDS OF
THE CREDIT EXTENSIONS SOLELY AS WORKING CAPITAL, AND TO FUND ITS GENERAL
BUSINESS REQUIREMENTS AND NOT FOR PERSONAL, FAMILY, HOUSEHOLD OR AGRICULTURAL
PURPOSES.

 

5.11.                     FULL DISCLOSURE. NO WRITTEN REPRESENTATION, WARRANTY
OR OTHER STATEMENT OF BORROWER IN ANY CERTIFICATE OR WRITTEN STATEMENT GIVEN TO
BANK, AS OF THE DATE SUCH REPRESENTATIONS, WARRANTIES, OR OTHER STATEMENTS WERE
MADE, TAKEN TOGETHER WITH ALL SUCH WRITTEN CERTIFICATES AND WRITTEN STATEMENTS
GIVEN TO BANK, CONTAINS ANY UNTRUE STATEMENT OF A MATERIAL FACT OR OMITS TO
STATE A MATERIAL FACT NECESSARY TO MAKE THE STATEMENTS CONTAINED IN THE
CERTIFICATES OR STATEMENTS NOT MISLEADING (IT BEING RECOGNIZED BY BANK THAT THE
PROJECTIONS AND FORECASTS PROVIDED BY BORROWER IN GOOD FAITH AND BASED UPON
REASONABLE ASSUMPTIONS ARE NOT VIEWED AS FACTS AND THAT ACTUAL RESULTS DURING
THE PERIOD OR PERIODS COVERED BY SUCH PROJECTIONS AND FORECASTS MAY DIFFER FROM
THE PROJECTED OR FORECASTED RESULTS).

 

6.                                      AFFIRMATIVE COVENANTS

 

Borrower shall do all of the following:

 

6.1.                            GOVERNMENT COMPLIANCE. BORROWER SHALL, AND SHALL
CAUSE EACH OF ITS SUBSIDIARIES TO, MAINTAIN ITS LEGAL EXISTENCE AND GOOD
STANDING IN ITS JURISDICTION OF FORMATION AND EACH JURISDICTION IN WHICH THE
NATURE OF ITS

 

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BUSINESS REQUIRES THEM TO BE SO QUALIFIED, EXCEPT WHERE THE FAILURE TO TAKE SUCH
ACTION WOULD NOT REASONABLY BE EXPECTED TO HAVE A MATERIAL ADVERSE EFFECT ON
BORROWER’S AND ITS SUBSIDIARIES’ BUSINESS OR OPERATIONS, TAKEN AS A WHOLE;
PROVIDED, THAT (A) THE LEGAL EXISTENCE OF ANY SUBSIDIARY THAT IS NOT A GUARANTOR
MAY BE TERMINATED OR PERMITTED TO LAPSE, AND ANY QUALIFICATION OF SUCH
SUBSIDIARY TO DO BUSINESS MAY BE TERMINATED OR PERMITTED TO LAPSE, IF, IN THE
GOOD FAITH JUDGMENT OF BORROWER, SUCH TERMINATION OR LAPSE IS IN THE BEST
INTERESTS OF BORROWER AND ITS SUBSIDIARIES, TAKEN AS A WHOLE, AND (B) BORROWER
MAY NOT PERMIT ITS QUALIFICATION TO DO BUSINESS IN THE JURISDICTION OF ITS CHIEF
EXECUTIVE OFFICE TO TERMINATE OR LAPSE; AND PROVIDED, FURTHER, THAT THIS
SECTION 6.2 SHALL NOT BE CONSTRUED TO PROHIBIT ANY OTHER TRANSACTION THAT IS
OTHERWISE PERMITTED IN SECTION 7 OF THIS AGREEMENT.

 

BORROWER SHALL COMPLY, AND SHALL HAVE EACH SUBSIDIARY COMPLY, WITH ALL LAWS,
ORDINANCES AND REGULATIONS TO WHICH IT IS SUBJECT, NONCOMPLIANCE WITH WHICH
COULD HAVE A MATERIAL ADVERSE EFFECT ON BORROWER’S BUSINESS

 

6.2.                            FINANCIAL STATEMENTS, REPORTS, CERTIFICATES.

 

(A)                                  DELIVER TO BANK:  (I) AS SOON AS AVAILABLE,
BUT NO LATER THAN THIRTY (30) DAYS AFTER THE LAST DAY OF EACH MONTH, A COMPANY
PREPARED CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT COVERING BORROWER’S
CONSOLIDATED OPERATIONS DURING THE PERIOD CERTIFIED BY A RESPONSIBLE OFFICER AND
IN A FORM ACCEPTABLE TO BANK; (II) AS SOON AS AVAILABLE, BUT NO LATER THAN
ONE-HUNDRED TWENTY (120) DAYS AFTER THE LAST DAY OF BORROWER’S FISCAL YEAR,
AUDITED CONSOLIDATED FINANCIAL STATEMENTS PREPARED UNDER GAAP, CONSISTENTLY
APPLIED, TOGETHER WITH AN UNQUALIFIED OPINION ON THE FINANCIAL STATEMENTS FROM
AN INDEPENDENT CERTIFIED PUBLIC ACCOUNTING FIRM ACCEPTABLE TO BANK IN ITS
REASONABLE DISCRETION; (III) WITHIN FIVE (5) DAYS OF DELIVERY, COPIES OF ALL
STATEMENTS, REPORTS AND NOTICES MADE AVAILABLE TO BORROWER’S SECURITY HOLDERS OR
TO ANY HOLDERS OF SUBORDINATED DEBT; (IV) WITHIN FIVE (5) DAYS OF FILING, ALL
REPORTS ON FORM 10-K, 10-Q AND 8-K FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION OR A LINK THERETO ON BORROWER’S OR ANOTHER WEBSITE ON THE INTERNET;
(V) A PROMPT REPORT OF ANY LEGAL ACTIONS PENDING OR THREATENED AGAINST BORROWER
OR ANY OF ITS SUBSIDIARIES THAT COULD RESULT IN DAMAGES OR COSTS TO BORROWER OR
ANY OF ITS SUBSIDIARIES OF TWENTY-FIVE THOUSAND DOLLARS ($25,000) OR MORE;
(VI) PROMPT NOTICE OF AN EVENT THAT MATERIALLY AND ADVERSELY AFFECTS THE VALUE
OF THE INTELLECTUAL PROPERTY; (VII) A PROMPT REPORT OF ANY COMPLAINTS FILED WITH
THE TEXAS WORKFORCE COMMISSION (“TWC”) AGAINST BORROWER IN THE AGGREGATE OF
$25,000 OR MORE; AND (VIII) BUDGETS, SALES PROJECTIONS, OPERATING PLANS AND
OTHER FINANCIAL INFORMATION REASONABLY REQUESTED BY BANK.

 

(B)                                 BORROWER’S 10K, 10Q, AND 8K REPORTS REQUIRED
TO BE DELIVERED PURSUANT TO SECTION 6.2(A)(IV) SHALL BE DEEMED TO HAVE BEEN
DELIVERED ON THE DATE ON WHICH BORROWER POSTS SUCH REPORT OR PROVIDES A LINK
THERETO ON BORROWER’S OR ANOTHER WEBSITE ON THE INTERNET; PROVIDED, THAT
BORROWER SHALL PROVIDE PAPER COPIES TO BANK WITH THE COMPLIANCE CERTIFICATE
REQUIRED BY SECTION 6.2(D).

 

(C)                                  WITHIN THIRTY (30) DAYS AFTER THE LAST DAY
OF EACH MONTH, DELIVER TO BANK A DULY COMPLETED BORROWING BASE CERTIFICATE
SIGNED BY A RESPONSIBLE OFFICER, WITH (I) AGED LISTINGS OF ACCOUNTS RECEIVABLE
AND ACCOUNTS PAYABLE (BY INVOICE DATE) AND (II) PERPETUAL INVENTORY REPORTS FOR
THE INVENTORY VALUED ON A FIRST-IN, FIRST-OUT BASIS AT THE LOWER OF COST OR
MARKET (IN ACCORDANCE WITH GAAP) OR SUCH OTHER INVENTORY REPORTS AS ARE
REQUESTED BY BANK IN ITS GOOD FAITH BUSINESS JUDGMENT.

 

(D)                                 WITHIN THIRTY (30) DAYS AFTER THE LAST DAY
OF EACH MONTH, DELIVER TO BANK WITH THE MONTHLY FINANCIAL STATEMENTS, A DULY
COMPLETED COMPLIANCE CERTIFICATE SIGNED BY A RESPONSIBLE OFFICER SETTING FORTH
CALCULATIONS SHOWING COMPLIANCE WITH THE FINANCIAL COVENANTS SET FORTH IN THIS
AGREEMENT.

 

(E)                                  ALLOW BANK TO AUDIT BORROWER’S COLLATERAL
AT BORROWER’S EXPENSE, SUCH EXPENSE NOT TO EXCEED $3,500 PER YEAR, UPON
REASONABLE NOTICE TO BORROWER; PROVIDED, THAT BORROWER SHALL BE OBLIGATED TO PAY
NOT MORE THAN ONE (1) AUDIT PER YEAR. NOTWITHSTANDING THE FOREGOING, DURING THE
CONTINUANCE OF AN EVENT OF DEFAULT, BANK MAY, IN BANK’S SOLE DISCRETION, AUDIT
BORROWER’S COLLATERAL AT BORROWER’S EXPENSE.

 

6.3.                            INVENTORY; RETURNS. KEEP ALL INVENTORY IN GOOD
AND MARKETABLE CONDITION, FREE FROM MATERIAL DEFECTS. RETURNS AND ALLOWANCES
BETWEEN BORROWER AND ITS ACCOUNT DEBTORS SHALL FOLLOW BORROWER’S CUSTOMARY
PRACTICES AS THEY EXIST AT THE EFFECTIVE DATE. BORROWER MUST PROMPTLY NOTIFY
BANK OF ALL RETURNS, RECOVERIES, DISPUTES AND CLAIMS THAT INVOLVE MORE THAN
TWENTY-FIVE THOUSAND DOLLARS ($25,000).

 

7

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6.4.                            TAXES; PENSIONS. MAKE, AND CAUSE EACH OF ITS
SUBSIDIARIES TO MAKE, TIMELY PAYMENT OF ALL FOREIGN, FEDERAL, STATE, AND LOCAL
TAXES OR ASSESSMENTS (OTHER THAN TAXES AND ASSESSMENTS WHICH BORROWER IS
CONTESTING PURSUANT TO THE TERMS OF SECTION 5.9 HEREOF) AND SHALL DELIVER TO
BANK, ON DEMAND, APPROPRIATE CERTIFICATES ATTESTING TO SUCH PAYMENTS, AND PAY
ALL AMOUNTS NECESSARY TO FUND ALL PRESENT PENSION, PROFIT SHARING AND DEFERRED
COMPENSATION PLANS IN ACCORDANCE WITH THEIR TERMS.

 

6.5.                            INSURANCE. KEEP ITS BUSINESS AND THE COLLATERAL
INSURED FOR RISKS AND IN AMOUNTS STANDARD FOR COMPANIES IN BORROWER’S INDUSTRY
AND LOCATION AND AS BANK MAY REASONABLY REQUEST. INSURANCE POLICIES SHALL BE IN
A FORM, WITH COMPANIES, AND IN AMOUNTS THAT ARE SATISFACTORY TO BANK. ALL
PROPERTY POLICIES SHALL HAVE A LENDER’S LOSS PAYABLE ENDORSEMENT SHOWING BANK AS
LENDER LOSS PAYEE AND WAIVE SUBROGATION AGAINST BANK, AND ALL LIABILITY POLICIES
SHALL SHOW, OR HAVE ENDORSEMENTS SHOWING, BANK AS AN ADDITIONAL INSURED. ALL
POLICIES (OR THE LOSS PAYABLE AND ADDITIONAL INSURED ENDORSEMENTS) SHALL PROVIDE
THAT THE INSURER MUST GIVE BANK AT LEAST TWENTY (20) DAYS NOTICE BEFORE
CANCELING, AMENDING, OR DECLINING TO RENEW ITS POLICY. AT BANK’S REQUEST,
BORROWER SHALL DELIVER CERTIFIED COPIES OF POLICIES AND EVIDENCE OF ALL PREMIUM
PAYMENTS. PROCEEDS PAYABLE UNDER ANY POLICY SHALL, AT BANK’S OPTION, BE PAYABLE
TO BANK ON ACCOUNT OF THE OBLIGATIONS. IF BORROWER FAILS TO OBTAIN INSURANCE AS
REQUIRED UNDER THIS SECTION 6.5 OR TO PAY ANY AMOUNT OR FURNISH ANY REQUIRED
PROOF OF PAYMENT TO THIRD PERSONS AND BANK, BANK MAY MAKE ALL OR PART OF SUCH
PAYMENT OR OBTAIN SUCH INSURANCE POLICIES REQUIRED IN THIS SECTION 6.5, AND TAKE
ANY ACTION UNDER THE POLICIES BANK DEEMS PRUDENT.

 

6.6.                            OPERATING ACCOUNTS.

 

(A)                                  MAINTAIN ITS DEPOSITORY AND OPERATING
ACCOUNTS AND SECURITIES ACCOUNTS WITH BANK AND BANK’S AFFILIATES.

 

(B)                                 IN ADDITION, FOR EACH COLLATERAL ACCOUNT
THAT BORROWER AT ANY TIME MAINTAINS, BORROWER SHALL CAUSE THE APPLICABLE BANK OR
FINANCIAL INSTITUTION (OTHER THAN BANK) AT OR WITH WHICH ANY COLLATERAL ACCOUNT
IS MAINTAINED TO EXECUTE AND DELIVER A CONTROL AGREEMENT OR OTHER APPROPRIATE
INSTRUMENT WITH RESPECT TO SUCH COLLATERAL ACCOUNT TO PERFECT BANK’S LIEN IN
SUCH COLLATERAL ACCOUNT IN ACCORDANCE WITH THE TERMS HEREUNDER. THE PROVISIONS
OF THE PREVIOUS SENTENCE SHALL NOT APPLY TO DEPOSIT ACCOUNTS EXCLUSIVELY USED
FOR PAYROLL, PAYROLL TAXES AND OTHER EMPLOYEE WAGE AND BENEFIT PAYMENTS TO OR
FOR THE BENEFIT OF BORROWER’S EMPLOYEES AND IDENTIFIED TO BANK BY BORROWER AS
SUCH.

 

6.7.                            FINANCIAL COVENANTS.

 

Borrower shall maintain at all times, to be tested as of the last day of each
month, unless otherwise noted, on a consolidated basis with respect to Borrower
and its Subsidiaries:

 

(A)                                  LIQUIDITY COVERAGE. A RATIO OF UNRESTRICTED
CASH ON DEPOSIT WITH BANK PLUS THE AMOUNT EQUAL TO 80% OF BORROWER’S ELIGIBLE
ACCOUNTS TO THE AMOUNT OF THE OBLIGATIONS OF NOT LESS THAN 1.25:1.00.

 

(B)                                 EBITDA. BEGINNING ON THE DATE THE REVOLVING
LINE INCREASES TO $2,000,000 AND MEASURED THEREAFTER ON A ROLLING THREE
(3) MONTH BASIS AS OF THE END OF EACH MONTH, EBITDA, LESS THE AGGREGATE AMOUNT
OF PERMITTED DIVIDENDS, OF AT LEAST $0.00.

 

6.8.                            PROTECTION AND REGISTRATION OF INTELLECTUAL
PROPERTY RIGHTS. BORROWER SHALL:  (A) PROTECT, DEFEND AND MAINTAIN THE VALIDITY
AND ENFORCEABILITY OF ITS INTELLECTUAL PROPERTY MATERIAL TO BORROWER’S BUSINESS;
(B) PROMPTLY ADVISE BANK IN WRITING OF MATERIAL INFRINGEMENTS OF ITS
INTELLECTUAL PROPERTY; AND (C) NOT ALLOW ANY INTELLECTUAL PROPERTY MATERIAL TO
BORROWER’S BUSINESS TO BE ABANDONED, FORFEITED OR DEDICATED TO THE PUBLIC
WITHOUT BANK’S WRITTEN CONSENT. IF BORROWER DECIDES TO REGISTER ANY COPYRIGHTS
OR MASK WORKS IN THE UNITED STATES COPYRIGHT OFFICE, BORROWER SHALL: (X) PROVIDE
BANK WITH AT LEAST FIFTEEN (15) DAYS PRIOR WRITTEN NOTICE OF ITS INTENT TO
REGISTER SUCH COPYRIGHTS OR MASK WORKS TOGETHER WITH A COPY OF THE APPLICATION
IT INTENDS TO FILE WITH THE UNITED STATES COPYRIGHT OFFICE (EXCLUDING EXHIBITS
THERETO); (Y) EXECUTE AN INTELLECTUAL PROPERTY SECURITY AGREEMENT OR SUCH OTHER
DOCUMENTS AS BANK MAY REASONABLY REQUEST TO MAINTAIN THE PERFECTION AND PRIORITY
OF BANK’S SECURITY INTEREST IN THE COPYRIGHTS OR MASK WORKS INTENDED TO BE
REGISTERED WITH THE UNITED STATES COPYRIGHT OFFICE; AND (Z) RECORD SUCH
INTELLECTUAL PROPERTY SECURITY AGREEMENT WITH THE UNITED STATES COPYRIGHT OFFICE
CONTEMPORANEOUSLY WITH FILING

 

8

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THE COPYRIGHT OR MASK WORK APPLICATION(S) WITH THE UNITED STATES COPYRIGHT
OFFICE. BORROWER SHALL PROMPTLY PROVIDE TO BANK A COPY OF THE APPLICATION(S)
FILED WITH THE UNITED STATES COPYRIGHT OFFICE TOGETHER WITH EVIDENCE OF THE
RECORDING OF THE INTELLECTUAL PROPERTY SECURITY AGREEMENT NECESSARY FOR BANK TO
MAINTAIN THE PERFECTION AND PRIORITY OF ITS SECURITY INTEREST IN SUCH COPYRIGHTS
OR MASK WORKS. BORROWER SHALL PROVIDE WRITTEN NOTICE TO BANK OF ANY APPLICATION
FILED BY BORROWER IN THE UNITED STATES PATENT AND TRADEMARK OFFICE FOR A PATENT
OR TO REGISTER A TRADEMARK OR SERVICE MARK WITHIN 30 DAYS AFTER ANY SUCH FILING.

 

6.9.                            LITIGATION COOPERATION. FROM THE DATE HEREOF AND
CONTINUING THROUGH THE TERMINATION OF THIS AGREEMENT, MAKE AVAILABLE TO BANK,
WITHOUT EXPENSE TO BANK, BORROWER AND ITS OFFICERS, EMPLOYEES AND AGENTS AND
BORROWER’S BOOKS AND RECORDS, TO THE EXTENT THAT BANK MAY DEEM THEM REASONABLY
NECESSARY TO PROSECUTE OR DEFEND ANY THIRD-PARTY SUIT OR PROCEEDING INSTITUTED
BY OR AGAINST BANK WITH RESPECT TO ANY COLLATERAL OR RELATING TO BORROWER.

 

6.10.                     FURTHER ASSURANCES. BORROWER SHALL EXECUTE ANY FURTHER
INSTRUMENTS AND TAKE FURTHER ACTION AS BANK REASONABLY REQUESTS TO PERFECT OR
CONTINUE BANK’S LIEN IN THE COLLATERAL OR TO EFFECT THE PURPOSES OF THIS
AGREEMENT.

 

7.                                      NEGATIVE COVENANTS

 

Borrower shall not do any of the following without Bank’s prior written consent:

 

7.1.                            DISPOSITIONS. CONVEY, SELL, LEASE, TRANSFER OR
OTHERWISE DISPOSE OF (COLLECTIVELY, “TRANSFER”), OR PERMIT ANY OF ITS
SUBSIDIARIES TO TRANSFER, ALL OR ANY PART OF ITS BUSINESS OR PROPERTY, EXCEPT
FOR TRANSFERS (A) OF INVENTORY IN THE ORDINARY COURSE OF BUSINESS; (B) OF
WORN-OUT OR OBSOLETE EQUIPMENT; AND (C) IN CONNECTION WITH PERMITTED LIENS AND
PERMITTED INVESTMENTS.

 

7.2.                            CHANGES IN BUSINESS, MANAGEMENT, CONTROL, OR
BUSINESS LOCATIONS. (A) ENGAGE IN OR PERMIT ANY OF ITS SUBSIDIARIES TO ENGAGE IN
ANY BUSINESS OTHER THAN THE BUSINESSES CURRENTLY ENGAGED IN BY BORROWER AND SUCH
SUBSIDIARY, AS APPLICABLE, OR REASONABLY RELATED THERETO; (B) LIQUIDATE OR
DISSOLVE; OR (C) (I) HAVE A CHANGE IN THE CHIEF EXECUTIVE OFFICER OR CHIEF
FINANCIAL OFFICER, OR (II) PERMIT OR SUFFER ANY CHANGE IN CONTROL. BORROWER
SHALL NOT, WITHOUT AT LEAST THIRTY (30) DAYS PRIOR WRITTEN NOTICE TO BANK:
(1) ADD ANY NEW OFFICES OR BUSINESS LOCATIONS, INCLUDING WAREHOUSES (UNLESS SUCH
NEW OFFICES OR BUSINESS LOCATIONS CONTAIN LESS THAN TEN THOUSAND DOLLARS
($10,000) IN BORROWER’S ASSETS OR PROPERTY), (2) CHANGE ITS JURISDICTION OF
ORGANIZATION, (3) CHANGE ITS ORGANIZATIONAL STRUCTURE OR TYPE, (4) CHANGE ITS
LEGAL NAME, OR (5) CHANGE ANY ORGANIZATIONAL NUMBER (IF ANY) ASSIGNED BY ITS
JURISDICTION OF ORGANIZATION.

 

7.3.                            MERGERS OR ACQUISITIONS. MERGE OR CONSOLIDATE,
OR PERMIT ANY OF ITS SUBSIDIARIES TO MERGE OR CONSOLIDATE, WITH ANY OTHER
PERSON, OR ACQUIRE, OR PERMIT ANY OF ITS SUBSIDIARIES TO ACQUIRE, ALL OR
SUBSTANTIALLY ALL OF THE CAPITAL STOCK OR PROPERTY OF ANOTHER PERSON. A
SUBSIDIARY MAY MERGE OR CONSOLIDATE INTO ANOTHER SUBSIDIARY OR INTO BORROWER.

 

7.4.                            INDEBTEDNESS. CREATE, INCUR, ASSUME, OR BE
LIABLE FOR ANY INDEBTEDNESS, OR PERMIT ANY SUBSIDIARY TO DO SO, OTHER THAN
PERMITTED INDEBTEDNESS.

 

7.5.                            ENCUMBRANCE. CREATE, INCUR, OR ALLOW ANY LIEN ON
ANY OF ITS PROPERTY, OR ASSIGN OR CONVEY ANY RIGHT TO RECEIVE INCOME, INCLUDING
THE SALE OF ANY ACCOUNTS, OR PERMIT ANY OF ITS SUBSIDIARIES TO DO SO, EXCEPT FOR
PERMITTED LIENS, PERMIT ANY COLLATERAL NOT TO BE SUBJECT TO THE FIRST PRIORITY
SECURITY INTEREST GRANTED HEREIN.

 

7.6.                            MAINTENANCE OF COLLATERAL ACCOUNTS. MAINTAIN ANY
COLLATERAL ACCOUNT EXCEPT PURSUANT TO THE TERMS OF SECTION 6.6.(B) HEREOF.

 

7.7.                            DISTRIBUTIONS; INVESTMENTS. (A) DIRECTLY OR
INDIRECTLY ACQUIRE OR OWN ANY PERSON, OR MAKE ANY INVESTMENT IN ANY PERSON,
OTHER THAN PERMITTED INVESTMENTS, OR PERMIT ANY OF ITS SUBSIDIARIES TO DO SO; OR
(B) PAY ANY DIVIDENDS OR MAKE ANY DISTRIBUTION OR PAYMENT OR REDEEM, RETIRE OR
PURCHASE ANY CAPITAL STOCK OTHER THAN PERMITTED DISTRIBUTIONS.

 

9

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7.8.                            TRANSACTIONS WITH AFFILIATES. DIRECTLY OR
INDIRECTLY ENTER INTO OR PERMIT TO EXIST ANY MATERIAL TRANSACTION WITH ANY
AFFILIATE OF BORROWER, EXCEPT FOR TRANSACTIONS THAT ARE IN THE ORDINARY COURSE
OF BORROWER’S BUSINESS, UPON FAIR AND REASONABLE TERMS THAT ARE NO LESS
FAVORABLE TO BORROWER THAN WOULD BE OBTAINED IN AN ARM’S LENGTH TRANSACTION WITH
A NON-AFFILIATED PERSON.

 

7.9.                            SUBORDINATED DEBT. (A) MAKE OR PERMIT ANY
PAYMENT ON ANY SUBORDINATED DEBT, EXCEPT UNDER THE TERMS OF THE SUBORDINATION,
INTERCREDITOR, OR OTHER SIMILAR AGREEMENT TO WHICH SUCH SUBORDINATED DEBT IS
SUBJECT, OR (B) AMEND ANY PROVISION IN ANY DOCUMENT RELATING TO THE SUBORDINATED
DEBT WHICH WOULD INCREASE THE AMOUNT THEREOF OR ADVERSELY AFFECT THE
SUBORDINATION THEREOF TO OBLIGATIONS OWED TO BANK.

 

7.10.                     COMPLIANCE. BECOME AN “INVESTMENT COMPANY” OR A
COMPANY CONTROLLED BY AN “INVESTMENT COMPANY”, UNDER THE INVESTMENT COMPANY ACT
OF 1940 OR UNDERTAKE AS ONE OF ITS IMPORTANT ACTIVITIES EXTENDING CREDIT TO
PURCHASE OR CARRY MARGIN STOCK (AS DEFINED IN REGULATION U OF THE BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM), OR USE THE PROCEEDS OF ANY CREDIT
EXTENSION FOR THAT PURPOSE; FAIL TO MEET THE MINIMUM FUNDING REQUIREMENTS OF
ERISA, PERMIT A REPORTABLE EVENT OR PROHIBITED TRANSACTION, AS DEFINED IN ERISA,
TO OCCUR; FAIL TO COMPLY WITH THE FEDERAL FAIR LABOR STANDARDS ACT OR VIOLATE
ANY OTHER LAW OR REGULATION, IF THE VIOLATION COULD REASONABLY BE EXPECTED TO
HAVE A MATERIAL ADVERSE EFFECT ON BORROWER’S BUSINESS, OR PERMIT ANY OF ITS
SUBSIDIARIES TO DO SO; WITHDRAW OR PERMIT ANY SUBSIDIARY TO WITHDRAW FROM
PARTICIPATION IN, PERMIT PARTIAL OR COMPLETE TERMINATION OF, OR PERMIT THE
OCCURRENCE OF ANY OTHER EVENT WITH RESPECT TO, ANY PRESENT PENSION, PROFIT
SHARING AND DEFERRED COMPENSATION PLAN WHICH COULD REASONABLY BE EXPECTED TO
RESULT IN ANY LIABILITY OF BORROWER, INCLUDING ANY LIABILITY TO THE PENSION
BENEFIT GUARANTY CORPORATION OR ITS SUCCESSORS OR ANY OTHER GOVERNMENTAL AGENCY.

 

8.                                      EVENTS OF DEFAULT

 

Any one of the following shall constitute an event of default (an “Event of
Default”) under this Agreement:

 

8.1.                            PAYMENT DEFAULT. BORROWER FAILS TO (A) MAKE ANY
PAYMENT OF PRINCIPAL OR INTEREST ON ANY CREDIT EXTENSION ON ITS DUE DATE, OR
(B) PAY ANY OTHER OBLIGATIONS WITHIN THREE (3) BUSINESS DAYS AFTER SUCH
OBLIGATIONS ARE DUE AND PAYABLE. DURING THE CURE PERIOD, THE FAILURE TO CURE THE
PAYMENT DEFAULT IS NOT AN EVENT OF DEFAULT (BUT NO CREDIT EXTENSION WILL BE MADE
DURING THE CURE PERIOD);

 

8.2.                            COVENANT DEFAULT.

 

(A)                                  BORROWER FAILS OR NEGLECTS TO PERFORM ANY
OBLIGATION IN SECTIONS 6.2, 6.6, 6.7 OR VIOLATES ANY COVENANT IN SECTION 7; OR

 

(B)                                 BORROWER FAILS OR NEGLECTS TO PERFORM, KEEP,
OR OBSERVE ANY OTHER TERM, PROVISION, CONDITION, COVENANT OR AGREEMENT CONTAINED
IN THIS AGREEMENT, ANY LOAN DOCUMENTS, AND AS TO ANY DEFAULT (OTHER THAN THOSE
SPECIFIED IN THIS SECTION 8) UNDER SUCH OTHER TERM, PROVISION, CONDITION,
COVENANT OR AGREEMENT THAT CAN BE CURED, HAS FAILED TO CURE THE DEFAULT WITHIN
TEN (10) DAYS AFTER THE OCCURRENCE THEREOF; PROVIDED, HOWEVER, THAT IF THE
DEFAULT CANNOT BY ITS NATURE BE CURED WITHIN THE TEN (10) DAY PERIOD OR CANNOT
AFTER DILIGENT ATTEMPTS BY BORROWER BE CURED WITHIN SUCH TEN (10) DAY PERIOD,
AND SUCH DEFAULT IS LIKELY TO BE CURED WITHIN A REASONABLE TIME, THEN BORROWER
SHALL HAVE AN ADDITIONAL PERIOD (WHICH SHALL NOT IN ANY CASE EXCEED THIRTY (30)
DAYS) TO ATTEMPT TO CURE SUCH DEFAULT, AND WITHIN SUCH REASONABLE TIME PERIOD
THE FAILURE TO CURE THE DEFAULT SHALL NOT BE DEEMED AN EVENT OF DEFAULT (BUT NO
CREDIT EXTENSIONS SHALL BE MADE DURING SUCH CURE PERIOD). GRACE PERIODS PROVIDED
UNDER THIS SECTION SHALL NOT APPLY, AMONG OTHER THINGS, TO FINANCIAL COVENANTS
OR ANY OTHER COVENANTS SET FORTH IN SUBSECTION (A) ABOVE;

 

8.3.                            MATERIAL ADVERSE CHANGE. A MATERIAL ADVERSE
CHANGE OCCURS;

 

8.4.                            ATTACHMENT. (A) ANY MATERIAL PORTION OF
BORROWER’S ASSETS IS ATTACHED, SEIZED, LEVIED ON, OR COMES INTO POSSESSION OF A
TRUSTEE OR RECEIVER AND THE ATTACHMENT, SEIZURE OR LEVY IS NOT REMOVED IN TEN
(10) DAYS; (B) THE SERVICE OF PROCESS UPON BANK SEEKING TO ATTACH, BY TRUSTEE OR
SIMILAR PROCESS, ANY FUNDS OF BORROWER OR OF ANY ENTITY UNDER CONTROL OF
BORROWER (INCLUDING A SUBSIDIARY) ON DEPOSIT WITH BANK ; (C) BORROWER IS
ENJOINED,

 

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RESTRAINED, OR PREVENTED BY COURT ORDER FROM CONDUCTING A MATERIAL PART OF ITS
BUSINESS; (D) A JUDGMENT OR OTHER CLAIM IN EXCESS OF FIFTY THOUSAND DOLLARS
($50,000) BECOMES A LIEN (OTHER THAN A PERMITTED LIEN) ON ANY OF BORROWER’S
ASSETS; OR (E) A NOTICE OF LIEN, LEVY, OR ASSESSMENT IS FILED AGAINST ANY OF
BORROWER’S ASSETS BY ANY GOVERNMENT AGENCY AND NOT PAID WITHIN TEN (10) DAYS
AFTER BORROWER RECEIVES NOTICE. THESE ARE NOT EVENTS OF DEFAULT IF STAYED OR IF
A BOND IS POSTED PENDING CONTEST BY BORROWER (BUT NO CREDIT EXTENSIONS SHALL BE
MADE DURING THE CURE PERIOD);

 

8.5.                            INSOLVENCY BORROWER IS UNABLE TO PAY ITS DEBTS
(INCLUDING TRADE DEBTS) AS THEY BECOME DUE OR OTHERWISE BECOMES INSOLVENT;
(B) BORROWER BEGINS AN INSOLVENCY PROCEEDING; OR (C) AN INSOLVENCY PROCEEDING IS
BEGUN AGAINST BORROWER AND NOT DISMISSED OR STAYED WITHIN THIRTY (30) DAYS (BUT
NO CREDIT EXTENSIONS SHALL BE MADE WHILE OF ANY OF THE CONDITIONS DESCRIBED IN
CLAUSE (A) EXIST AND/OR UNTIL ANY INSOLVENCY PROCEEDING IS DISMISSED);

 

8.6.                            OTHER AGREEMENTS. THERE IS A DEFAULT IN ANY
AGREEMENT TO WHICH BORROWER IS A PARTY WITH A THIRD PARTY OR PARTIES RESULTING
IN A RIGHT BY SUCH THIRD PARTY OR PARTIES, WHETHER OR NOT EXERCISED, TO
ACCELERATE THE MATURITY OF ANY INDEBTEDNESS IN AN AMOUNT IN EXCESS OF ONE
HUNDRED THOUSAND DOLLARS ($100,000) OR THAT COULD HAVE A MATERIAL ADVERSE EFFECT
ON BORROWER’S OR ANY GUARANTOR’S BUSINESS;

 

8.7.                            JUDGMENTS. A JUDGMENT OR JUDGMENTS FOR THE
PAYMENT OF MONEY IN AN AMOUNT, INDIVIDUALLY OR IN THE AGGREGATE, OF AT LEAST ONE
HUNDRED THOUSAND DOLLARS ($100,000) (NOT COVERED BY INDEPENDENT THIRD-PARTY
INSURANCE) SHALL BE RENDERED AGAINST BORROWER AND SHALL REMAIN UNSATISFIED AND
UNSTAYED FOR A PERIOD OF TEN (10) DAYS AFTER THE ENTRY THEREOF (PROVIDED THAT NO
CREDIT EXTENSIONS WILL BE MADE PRIOR TO THE SATISFACTION OR STAY OF SUCH
JUDGMENT);

 

8.8.                            MISREPRESENTATIONS. BORROWER OR ANY PERSON
ACTING FOR BORROWER MAKES ANY REPRESENTATION, WARRANTY, OR OTHER STATEMENT NOW
OR LATER IN THIS AGREEMENT, ANY LOAN DOCUMENT OR IN ANY WRITING DELIVERED TO
BANK OR TO INDUCE BANK TO ENTER THIS AGREEMENT OR ANY LOAN DOCUMENT, AND SUCH
REPRESENTATION, WARRANTY, OR OTHER STATEMENT IS INCORRECT IN ANY MATERIAL
RESPECT WHEN MADE;

 

8.9.                            TWC. IF A PRELIMINARY ORDER IS ISSUED BY THE
TEXAS WORKFORCE COMMISSION AGAINST BORROWER FOR AN AGGREGATE AMOUNT OF AT LEAST
TWENTY-FIVE THOUSAND DOLLARS ($25,000) ; OR

 

8.10.                     SUBORDINATED DEBT. A DEFAULT OR BREACH OCCURS UNDER
ANY AGREEMENT BETWEEN BORROWER AND ANY CREDITOR OF BORROWER THAT SIGNED A
SUBORDINATION, INTERCREDITOR, OR OTHER SIMILAR AGREEMENT WITH BANK, OR ANY
CREDITOR THAT HAS SIGNED SUCH AN AGREEMENT WITH BANK BREACHES ANY TERMS OF SUCH
AGREEMENT.

 

8.11.                     REDEMPTIONS. NOTWITHSTANDING ANYTHING CONTAINED HEREIN
TO THE CONTRARY, BORROWER REDEEMS SHARES OF ITS PREFERRED STOCK, AND ACCRUED
DIVIDENDS THEREON, FOR CASH IN AN AGGREGATE AMOUNT OF MORE THAN TWO HUNDRED
THOUSAND DOLLARS ($200,000) PER YEAR, BEGINNING ON THE EFFECTIVE DATE.

 

9.                                      BANK’S RIGHTS AND REMEDIES

 

9.1.                            RIGHTS AND REMEDIES. WHILE AN EVENT OF DEFAULT
OCCURS AND CONTINUES BANK MAY, WITHOUT NOTICE OR DEMAND, DO ANY OR ALL OF THE
FOLLOWING:

 

(A)                                  DECLARE ALL OBLIGATIONS IMMEDIATELY DUE AND
PAYABLE (BUT IF AN EVENT OF DEFAULT DESCRIBED IN SECTION 8.5 OR 8.11 OCCURS ALL
OBLIGATIONS ARE IMMEDIATELY DUE AND PAYABLE WITHOUT ANY ACTION BY BANK);

 

(B)                                 STOP ADVANCING MONEY OR EXTENDING CREDIT FOR
BORROWER’S BENEFIT UNDER THIS AGREEMENT OR UNDER ANY OTHER AGREEMENT BETWEEN
BORROWER AND BANK;

 

(C)                                  DEMAND THAT BORROWER (I) DEPOSITS CASH WITH
BANK IN AN AMOUNT EQUAL TO THE AGGREGATE AMOUNT OF ANY LETTERS OF CREDIT
REMAINING UNDRAWN, AS COLLATERAL SECURITY FOR THE REPAYMENT OF ANY FUTURE
DRAWINGS UNDER SUCH LETTERS OF CREDIT, AND BORROWER SHALL FORTHWITH DEPOSIT AND
PAY SUCH AMOUNTS, AND (II) PAY IN ADVANCE ALL LETTER OF CREDIT FEES SCHEDULED TO
BE PAID OR PAYABLE OVER THE REMAINING TERM OF ANY LETTERS OF CREDIT;

 

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(D)                                 TERMINATE ANY FX CONTRACTS;

 

(E)                                  SETTLE OR ADJUST DISPUTES AND CLAIMS
DIRECTLY WITH ACCOUNT DEBTORS FOR AMOUNTS ON TERMS AND IN ANY ORDER THAT BANK
CONSIDERS ADVISABLE, NOTIFY ANY PERSON OWING BORROWER MONEY OF BANK’S SECURITY
INTEREST IN SUCH FUNDS, AND VERIFY THE AMOUNT OF SUCH ACCOUNT;

 

(F)                                    MAKE ANY PAYMENTS AND DO ANY ACTS IT
CONSIDERS NECESSARY OR REASONABLE TO PROTECT THE COLLATERAL AND/OR ITS SECURITY
INTEREST IN THE COLLATERAL. BORROWER SHALL ASSEMBLE THE COLLATERAL IF BANK
REQUESTS AND MAKE IT AVAILABLE AS BANK DESIGNATES. BANK MAY ENTER PREMISES WHERE
THE COLLATERAL IS LOCATED, TAKE AND MAINTAIN POSSESSION OF ANY PART OF THE
COLLATERAL, AND PAY, PURCHASE, CONTEST, OR COMPROMISE ANY LIEN WHICH APPEARS TO
BE PRIOR OR SUPERIOR TO ITS SECURITY INTEREST AND PAY ALL EXPENSES INCURRED.
BORROWER GRANTS BANK A LICENSE TO ENTER AND OCCUPY ANY OF ITS PREMISES, WITHOUT
CHARGE, TO EXERCISE ANY OF BANK’S RIGHTS OR REMEDIES;

 

(G)                                 APPLY TO THE OBLIGATIONS ANY (I) BALANCES
AND DEPOSITS OF BORROWER IT HOLDS, OR (II) ANY AMOUNT HELD BY BANK OWING TO OR
FOR THE CREDIT OR THE ACCOUNT OF BORROWER;

 

(H)                                 SHIP, RECLAIM, RECOVER, STORE, FINISH,
MAINTAIN, REPAIR, PREPARE FOR SALE, ADVERTISE FOR SALE, AND SELL THE COLLATERAL.
BANK IS HEREBY GRANTED A NON-EXCLUSIVE, ROYALTY-FREE LICENSE OR OTHER RIGHT TO
USE, WITHOUT CHARGE, BORROWER’S LABELS, PATENTS, COPYRIGHTS, MASK WORKS, RIGHTS
OF USE OF ANY NAME, TRADE SECRETS, TRADE NAMES, TRADEMARKS, SERVICE MARKS, AND
ADVERTISING MATTER, OR ANY SIMILAR PROPERTY AS IT PERTAINS TO THE COLLATERAL, IN
COMPLETING PRODUCTION OF, ADVERTISING FOR SALE, AND SELLING ANY COLLATERAL AND,
IN CONNECTION WITH BANK’S EXERCISE OF ITS RIGHTS UNDER THIS SECTION, BORROWER’S
RIGHTS UNDER ALL LICENSES AND ALL FRANCHISE AGREEMENTS INURE TO BANK’S BENEFIT;

 

(I)                                     PLACE A “HOLD” ON ANY ACCOUNT MAINTAINED
WITH BANK AND/OR DELIVER A NOTICE OF EXCLUSIVE CONTROL, ANY ENTITLEMENT ORDER,
OR OTHER DIRECTIONS OR INSTRUCTIONS PURSUANT TO ANY CONTROL AGREEMENT OR SIMILAR
AGREEMENTS PROVIDING CONTROL OF ANY COLLATERAL;

 

(J)                                     DEMAND AND RECEIVE POSSESSION OF
BORROWER’S BOOKS; AND

 

(K)                                  EXERCISE ALL RIGHTS AND REMEDIES AVAILABLE
TO BANK UNDER THE LOAN DOCUMENTS OR AT LAW OR EQUITY, INCLUDING ALL REMEDIES
PROVIDED UNDER THE CODE (INCLUDING DISPOSAL OF THE COLLATERAL PURSUANT TO THE
TERMS THEREOF).

 

9.2.                            POWER OF ATTORNEY. BORROWER HEREBY IRREVOCABLY
APPOINTS BANK AS ITS LAWFUL ATTORNEY-IN-FACT, EXERCISABLE UPON THE OCCURRENCE
AND DURING THE CONTINUANCE OF AN EVENT OF DEFAULT, TO:  (A) ENDORSE BORROWER’S
NAME ON ANY CHECKS OR OTHER FORMS OF PAYMENT OR SECURITY; (B) SIGN BORROWER’S
NAME ON ANY INVOICE OR BILL OF LADING FOR ANY ACCOUNT OR DRAFTS AGAINST ACCOUNT
DEBTORS; (C) SETTLE AND ADJUST DISPUTES AND CLAIMS ABOUT THE ACCOUNTS DIRECTLY
WITH ACCOUNT DEBTORS, FOR AMOUNTS AND ON TERMS BANK DETERMINES REASONABLE;
(D) MAKE, SETTLE, AND ADJUST ALL CLAIMS UNDER BORROWER’S INSURANCE POLICIES;
(E) PAY, CONTEST OR SETTLE ANY LIEN, CHARGE, ENCUMBRANCE, SECURITY INTEREST, AND
ADVERSE CLAIM IN OR TO THE COLLATERAL, OR ANY JUDGMENT BASED THEREON, OR
OTHERWISE TAKE ANY ACTION TO TERMINATE OR DISCHARGE THE SAME; AND (F) TRANSFER
THE COLLATERAL INTO THE NAME OF BANK OR A THIRD PARTY AS THE CODE PERMITS.
BORROWER HEREBY APPOINTS BANK AS ITS LAWFUL ATTORNEY-IN-FACT TO SIGN BORROWER’S
NAME ON ANY DOCUMENTS NECESSARY TO PERFECT OR CONTINUE THE PERFECTION OF ANY
SECURITY INTEREST REGARDLESS OF WHETHER AN EVENT OF DEFAULT HAS OCCURRED UNTIL
ALL OBLIGATIONS HAVE BEEN SATISFIED IN FULL AND BANK IS UNDER NO FURTHER
OBLIGATION TO MAKE CREDIT EXTENSIONS HEREUNDER. BANK’S FOREGOING APPOINTMENT AS
BORROWER’S ATTORNEY IN FACT, AND ALL OF BANK’S RIGHTS AND POWERS, COUPLED WITH
AN INTEREST, ARE IRREVOCABLE UNTIL ALL OBLIGATIONS HAVE BEEN FULLY REPAID AND
PERFORMED AND BANK’S OBLIGATION TO PROVIDE CREDIT EXTENSIONS TERMINATES.

 

9.3.                            ACCOUNTS VERIFICATION; COLLECTION. WHETHER OR
NOT AN EVENT OF DEFAULT HAS OCCURRED AND IS CONTINUING, BANK MAY NOTIFY ANY
PERSON OWING BORROWER MONEY OF BANK’S SECURITY INTEREST IN SUCH FUNDS AND VERIFY
THE AMOUNT OF SUCH ACCOUNT. AFTER THE OCCURRENCE OF AN EVENT OF DEFAULT, ANY
AMOUNTS RECEIVED BY BORROWER SHALL BE HELD IN TRUST BY BORROWER FOR BANK, AND,
IF REQUESTED BY BANK, BORROWER SHALL IMMEDIATELY DELIVER SUCH RECEIPTS TO BANK
IN THE FORM RECEIVED FROM THE ACCOUNT DEBTOR, WITH PROPER ENDORSEMENTS FOR
DEPOSIT.

 

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9.4.                            PROTECTIVE PAYMENTS. IF BORROWER FAILS TO OBTAIN
THE INSURANCE CALLED FOR BY SECTION 6.5 OR FAILS TO PAY ANY PREMIUM THEREON OR
FAILS TO PAY ANY OTHER AMOUNT WHICH BORROWER IS OBLIGATED TO PAY UNDER THIS
AGREEMENT OR ANY OTHER LOAN DOCUMENT, BANK MAY OBTAIN SUCH INSURANCE OR MAKE
SUCH PAYMENT, AND ALL AMOUNTS SO PAID BY BANK ARE BANK EXPENSES AND IMMEDIATELY
DUE AND PAYABLE, BEARING INTEREST AT THE THEN HIGHEST APPLICABLE RATE, AND
SECURED BY THE COLLATERAL. BANK WILL MAKE REASONABLE EFFORTS TO PROVIDE BORROWER
WITH NOTICE OF BANK OBTAINING SUCH INSURANCE AT THE TIME IT IS OBTAINED OR
WITHIN A REASONABLE TIME THEREAFTER. NO PAYMENTS BY BANK ARE DEEMED AN AGREEMENT
TO MAKE SIMILAR PAYMENTS IN THE FUTURE OR BANK’S WAIVER OF ANY EVENT OF DEFAULT.

 

9.5.                            APPLICATION OF PAYMENTS AND PROCEEDS. UNLESS AN
EVENT OF DEFAULT HAS OCCURRED AND IS CONTINUING, BANK SHALL APPLY ANY FUNDS IN
ITS POSSESSION, WHETHER FROM BORROWER ACCOUNT BALANCES, PAYMENTS, OR PROCEEDS
REALIZED AS THE RESULT OF ANY COLLECTION OF ACCOUNTS OR OTHER DISPOSITION OF THE
COLLATERAL, FIRST, TO BANK EXPENSES, INCLUDING WITHOUT LIMITATION, THE
REASONABLE COSTS, EXPENSES, LIABILITIES, OBLIGATIONS AND ATTORNEYS’ FEES
INCURRED BY BANK IN THE EXERCISE OF ITS RIGHTS UNDER THIS AGREEMENT; SECOND, TO
THE INTEREST DUE UPON ANY OF THE OBLIGATIONS; AND THIRD, TO THE PRINCIPAL OF THE
OBLIGATIONS AND ANY APPLICABLE FEES AND OTHER CHARGES, IN SUCH ORDER AS BANK
SHALL DETERMINE IN ITS SOLE DISCRETION. ANY SURPLUS SHALL BE PAID TO BORROWER OR
OTHER PERSONS LEGALLY ENTITLED THERETO; BORROWER SHALL REMAIN LIABLE TO BANK FOR
ANY DEFICIENCY. IF AN EVENT OF DEFAULT HAS OCCURRED AND IS CONTINUING, BANK
MAY APPLY ANY FUNDS IN ITS POSSESSION, WHETHER FROM BORROWER ACCOUNT BALANCES,
PAYMENTS, PROCEEDS REALIZED AS THE RESULT OF ANY COLLECTION OF ACCOUNTS OR OTHER
DISPOSITION OF THE COLLATERAL, OR OTHERWISE, TO THE OBLIGATIONS IN SUCH ORDER AS
BANK SHALL DETERMINE IN ITS SOLE DISCRETION. ANY SURPLUS SHALL BE PAID TO
BORROWER OR OTHER PERSONS LEGALLY ENTITLED THERETO; BORROWER SHALL REMAIN LIABLE
TO BANK FOR ANY DEFICIENCY. IF BANK, IN ITS GOOD FAITH BUSINESS JUDGMENT,
DIRECTLY OR INDIRECTLY ENTERS INTO A DEFERRED PAYMENT OR OTHER CREDIT
TRANSACTION WITH ANY PURCHASER AT ANY SALE OF COLLATERAL, BANK SHALL HAVE THE
OPTION, EXERCISABLE AT ANY TIME, OF EITHER REDUCING THE OBLIGATIONS BY THE
PRINCIPAL AMOUNT OF THE PURCHASE PRICE OR DEFERRING THE REDUCTION OF THE
OBLIGATIONS UNTIL THE ACTUAL RECEIPT BY BANK OF CASH THEREFOR.

 

9.6.                            BANK’S LIABILITY FOR COLLATERAL. SO LONG AS BANK
COMPLIES WITH REASONABLE BANKING PRACTICES REGARDING THE SAFEKEEPING OF THE
COLLATERAL IN THE POSSESSION OR UNDER THE CONTROL OF BANK, BANK SHALL NOT BE
LIABLE OR RESPONSIBLE FOR: (A) THE SAFEKEEPING OF THE COLLATERAL; (B) ANY LOSS
OR DAMAGE TO THE COLLATERAL; (C) ANY DIMINUTION IN THE VALUE OF THE COLLATERAL;
OR (D) ANY ACT OR DEFAULT OF ANY CARRIER, WAREHOUSEMAN, BAILEE, OR OTHER PERSON.
BORROWER BEARS ALL RISK OF LOSS, DAMAGE OR DESTRUCTION OF THE COLLATERAL.

 

9.7.                            NO WAIVER; REMEDIES CUMULATIVE. BANK’S FAILURE,
AT ANY TIME OR TIMES, TO REQUIRE STRICT PERFORMANCE BY BORROWER OF ANY PROVISION
OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT SHALL NOT WAIVE, AFFECT, OR
DIMINISH ANY RIGHT OF BANK THEREAFTER TO DEMAND STRICT PERFORMANCE AND
COMPLIANCE HEREWITH OR THEREWITH. NO WAIVER HEREUNDER SHALL BE EFFECTIVE UNLESS
SIGNED BY BANK AND THEN IS ONLY EFFECTIVE FOR THE SPECIFIC INSTANCE AND PURPOSE
FOR WHICH IT IS GIVEN. BANK’S RIGHTS AND REMEDIES UNDER THIS AGREEMENT AND THE
OTHER LOAN DOCUMENTS ARE CUMULATIVE. BANK HAS ALL RIGHTS AND REMEDIES PROVIDED
UNDER THE CODE, BY LAW, OR IN EQUITY. BANK’S EXERCISE OF ONE RIGHT OR REMEDY IS
NOT AN ELECTION, AND BANK’S WAIVER OF ANY EVENT OF DEFAULT IS NOT A CONTINUING
WAIVER. BANK’S DELAY IN EXERCISING ANY REMEDY IS NOT A WAIVER, ELECTION, OR
ACQUIESCENCE.

 

9.8.                            DEMAND WAIVER. BORROWER WAIVES DEMAND, NOTICE OF
DEFAULT OR DISHONOR, NOTICE OF PAYMENT AND NONPAYMENT, NOTICE OF ANY DEFAULT,
NONPAYMENT AT MATURITY, RELEASE, COMPROMISE, SETTLEMENT, EXTENSION, OR RENEWAL
OF ACCOUNTS, DOCUMENTS, INSTRUMENTS, CHATTEL PAPER, AND GUARANTEES HELD BY BANK
ON WHICH BORROWER IS LIABLE.

 

10.                               NOTICES

 

All notices, consents, requests, approvals, demands, or other communication
(collectively, “Communication”) by any party to this Agreement or any other Loan
Document must be in writing and shall be deemed to have been validly served,
given, or delivered: (a) upon the earlier of actual receipt and three
(3) Business Days after deposit in the U.S. mail, first class, registered or
certified mail return receipt requested, with proper postage prepaid; (b) upon
transmission, when sent by electronic mail or facsimile transmission; (c) one
(1) Business Day after deposit with a reputable overnight courier with all
charges prepaid; or (d) when delivered, if hand-delivered by messenger, all of
which shall be addressed to the party to be notified and sent to the address,
facsimile number, or email address indicated below. Bank or Borrower may change
its address or facsimile number by giving the other party written notice thereof
in accordance with the terms of this Section 10.

 

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If to Borrower:                                         Intrusion Inc.

1101 East Arapaho Rd., Suite 100

Richardson, Texas 75081

Attn:  Michael Paxton

Fax:  972-301-3899

 

If to Bank:                                                              
Silicon Valley Bank

14185 North Dallas Parkway, Suite 780

Dallas, TX  75254

Attn:  Robert Sureck

Fax:  972-387-0782

 

11.                               CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER

 

Texas law governs the Loan Documents without regard to principles of conflicts
of law. Borrower and Bank each submit to the exclusive jurisdiction of the State
and Federal courts in Texas; provided, however, that nothing in this Agreement
shall be deemed to operate to preclude Bank from bringing suit or taking other
legal action in any other jurisdiction to realize on the Collateral or any other
security for the Obligations, or to enforce a judgment or other court order in
favor of Bank. Borrower expressly submits and consents in advance to such
jurisdiction in any action or suit commenced in any such court, and Borrower
hereby waives any objection that it may have based upon lack of personal
jurisdiction, improper venue, or forum non conveniens and hereby consents to the
granting of such legal or equitable relief as is deemed appropriate by such
court. Borrower hereby waives personal service of the summons, complaints, and
other process issued in such action or suit and agrees that service of such
summons, complaints, and other process may be made by registered or certified
mail addressed to Borrower at the address set forth in Section 10 of this
Agreement and that service so made shall be deemed completed upon the earlier to
occur of Borrower’s actual receipt thereof or three (3) days after deposit in
the U.S. mails, proper postage prepaid.

 

BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE
OF ACTION ARISING OUT OF OR BASED UPON THIS AGREEMENT, THE LOAN DOCUMENTS OR ANY
CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER
CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS
AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL AND, BY ITS
EXECUTION OF THIS AGREEMENT CONFIRMS THAT IT KNOWINGLY AND VOLUNTARILY WAIVES
ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH COUNSEL.

 

12.                               GENERAL PROVISIONS

 

12.1.                     SUCCESSORS AND ASSIGNS. THIS AGREEMENT BINDS AND IS
FOR THE BENEFIT OF THE SUCCESSORS AND PERMITTED ASSIGNS OF EACH PARTY. BORROWER
MAY NOT ASSIGN THIS AGREEMENT OR ANY RIGHTS OR OBLIGATIONS UNDER IT WITHOUT
BANK’S PRIOR WRITTEN CONSENT (WHICH MAY BE GRANTED OR WITHHELD IN BANK’S
DISCRETION). BANK HAS THE RIGHT, WITHOUT THE CONSENT OF OR NOTICE TO BORROWER,
TO SELL, TRANSFER, NEGOTIATE, OR GRANT PARTICIPATION IN ALL OR ANY PART OF, OR
ANY INTEREST IN, BANK’S OBLIGATIONS, RIGHTS, AND BENEFITS UNDER THIS AGREEMENT
AND THE OTHER LOAN DOCUMENTS.

 

12.2.                     INDEMNIFICATION. BORROWER WILL INDEMNIFY, DEFEND AND
HOLD HARMLESS BANK AND ITS OFFICERS, EMPLOYEES AND AGENTS AGAINST:  (A) ALL
OBLIGATIONS, DEMANDS, CLAIMS, AND LIABILITIES ASSERTED BY ANY OTHER PARTY IN
CONNECTION WITH THE TRANSACTIONS CONTEMPLATED BY THE LOAN DOCUMENTS; AND (B) ALL
LOSSES OR BANK EXPENSES INCURRED, OR PAID BY BANK FROM, FOLLOWING, OR
CONSEQUENTIAL TO TRANSACTIONS BETWEEN BANK AND BORROWER (INCLUDING REASONABLE
ATTORNEYS’ FEES AND EXPENSES), EXCEPT FOR LOSSES CAUSED BY BANK’S GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT. THE FOREGOING INDEMNITY BINDS BORROWER TO
INDEMNIFY BANK AND ITS OFFICERS, EMPLOYEES AND AGENTS FOR ITS OWN NEGLIGENCE
(WHETHER SOLE, COMPARATIVE, CONTRIBUTORY OR OTHERWISE, BUT NOT GROSS NEGLIGENCE
OR WILLFUL

 

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MISCONDUCT) AND THAT OF ITS OFFICERS, EMPLOYEES, AGENTS AND CONTRACTORS, AS WELL
AS ANY LIABILITY ARISING BY VIRTUE OF ANY SUCH PERSON’S STRICT LIABILITY.

 

12.3.                     LIMITATION OF ACTIONS. ANY CLAIM OR CAUSE OF ACTION BY
BORROWER AGAINST BANK, ITS DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ACCOUNTANTS,
ATTORNEYS, OR ANY OTHER PERSON AFFILIATED WITH OR REPRESENTING BANK BASED UPON,
ARISING FROM, OR RELATING TO THIS LOAN AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR
ANY OTHER TRANSACTION CONTEMPLATED HEREBY OR THEREBY OR RELATING HERETO OR
THERETO, OR ANY OTHER MATTER, CAUSE OR THING WHATSOEVER, OCCURRED, DONE, OMITTED
OR SUFFERED TO BE DONE BY BANK, ITS DIRECTORS, OFFICERS, EMPLOYEES, AGENTS,
ACCOUNTANTS OR ATTORNEYS, SHALL BE BARRED UNLESS ASSERTED BY BORROWER BY THE
COMMENCEMENT OF AN ACTION OR PROCEEDING IN A COURT OF COMPETENT JURISDICTION BY
(A) THE FILING OF A COMPLAINT WITHIN ONE YEAR FROM THE EARLIER OF (I) THE DATE
ANY OF BORROWER’S OFFICERS OR DIRECTORS HAD KNOWLEDGE OF THE FIRST ACT, THE
OCCURRENCE OR OMISSION UPON WHICH SUCH CLAIM OR CAUSE OF ACTION, OR ANY
PART THEREOF, IS BASED, OR (II) THE DATE THIS AGREEMENT IS TERMINATED, AND
(B) THE SERVICE OF A SUMMONS AND COMPLAINT ON AN OFFICER OF BANK, OR ON ANY
OTHER PERSON AUTHORIZED TO ACCEPT SERVICE ON BEHALF OF BANK, WITHIN THIRTY (30)
DAYS THEREAFTER. BORROWER AGREES THAT SUCH ONE-YEAR PERIOD IS A REASONABLE AND
SUFFICIENT TIME FOR BORROWER TO INVESTIGATE AND ACT UPON ANY SUCH CLAIM OR CAUSE
OF ACTION. THE ONE-YEAR PERIOD PROVIDED HEREIN SHALL NOT BE WAIVED, TOLLED, OR
EXTENDED EXCEPT BY THE WRITTEN CONSENT OF BANK IN ITS SOLE DISCRETION. THIS
PROVISION SHALL SURVIVE ANY TERMINATION OF THIS LOAN AGREEMENT OR ANY OTHER LOAN
DOCUMENT.

 

12.4.                     TIME OF ESSENCE. TIME IS OF THE ESSENCE FOR THE
PERFORMANCE OF ALL OBLIGATIONS IN THIS AGREEMENT.

 

12.5.                     SEVERABILITY OF PROVISIONS. EACH PROVISION OF THIS
AGREEMENT IS SEVERABLE FROM EVERY OTHER PROVISION IN DETERMINING THE
ENFORCEABILITY OF ANY PROVISION.

 

12.6.                     AMENDMENTS IN WRITING; INTEGRATION. ALL AMENDMENTS TO
THIS AGREEMENT MUST BE IN WRITING SIGNED BY BOTH BANK AND BORROWER. THIS
AGREEMENT AND THE LOAN DOCUMENTS REPRESENT THE ENTIRE AGREEMENT ABOUT THIS
SUBJECT MATTER AND SUPERSEDE PRIOR NEGOTIATIONS OR AGREEMENTS. ALL PRIOR
AGREEMENTS, UNDERSTANDINGS, REPRESENTATIONS, WARRANTIES, AND NEGOTIATIONS
BETWEEN THE PARTIES ABOUT THE SUBJECT MATTER OF THIS AGREEMENT AND THE LOAN
DOCUMENTS MERGE INTO THIS AGREEMENT AND THE LOAN DOCUMENTS.

 

12.7.                     COUNTERPARTS. THIS AGREEMENT MAY BE EXECUTED IN ANY
NUMBER OF COUNTERPARTS AND BY DIFFERENT PARTIES ON SEPARATE COUNTERPARTS, EACH
OF WHICH, WHEN EXECUTED AND DELIVERED, ARE AN ORIGINAL, AND ALL TAKEN TOGETHER,
CONSTITUTE ONE AGREEMENT.

 

12.8.                     SURVIVAL. ALL COVENANTS, REPRESENTATIONS AND
WARRANTIES MADE IN THIS AGREEMENT CONTINUE IN FULL FORCE UNTIL THIS AGREEMENT
HAS TERMINATED PURSUANT TO ITS TERMS AND ALL OBLIGATIONS (OTHER THAN INCHOATE
INDEMNITY OBLIGATIONS AND ANY OTHER OBLIGATIONS WHICH, BY THEIR TERMS, ARE TO
SURVIVE THE TERMINATION OF THIS AGREEMENT) HAVE BEEN SATISFIED. THE OBLIGATION
OF BORROWER IN SECTION 12.2 TO INDEMNIFY BANK SHALL SURVIVE UNTIL THE STATUTE OF
LIMITATIONS WITH RESPECT TO SUCH CLAIM OR CAUSE OF ACTION SHALL HAVE RUN.

 

12.9.                     CONFIDENTIALITY. IN HANDLING ANY CONFIDENTIAL
INFORMATION, BANK SHALL EXERCISE THE SAME DEGREE OF CARE THAT IT EXERCISES FOR
ITS OWN PROPRIETARY INFORMATION, BUT DISCLOSURE OF INFORMATION MAY BE MADE:
(A) TO BANK’S SUBSIDIARIES OR AFFILIATES; (B) TO PROSPECTIVE TRANSFEREES OR
PURCHASERS OF ANY INTEREST IN THE CREDIT EXTENSIONS (PROVIDED, HOWEVER, BANK
SHALL USE COMMERCIALLY REASONABLE EFFORTS TO OBTAIN SUCH PROSPECTIVE
TRANSFEREE’S OR PURCHASER’S AGREEMENT TO THE TERMS OF THIS PROVISION); (C) AS
REQUIRED BY LAW, REGULATION, SUBPOENA, OR OTHER ORDER; (D) TO BANK’S REGULATORS
OR AS OTHERWISE REQUIRED IN CONNECTION WITH BANK’S EXAMINATION OR AUDIT; AND
(E) AS BANK CONSIDERS APPROPRIATE IN EXERCISING REMEDIES UNDER THIS AGREEMENT.
CONFIDENTIAL INFORMATION DOES NOT INCLUDE INFORMATION THAT EITHER: (I) IS IN THE
PUBLIC DOMAIN OR IN BANK’S POSSESSION WHEN DISCLOSED TO BANK, OR BECOMES PART OF
THE PUBLIC DOMAIN AFTER DISCLOSURE TO BANK; OR (II) IS DISCLOSED TO BANK BY A
THIRD PARTY, IF BANK DOES NOT KNOW THAT THE THIRD PARTY IS PROHIBITED FROM
DISCLOSING THE INFORMATION. NOTWITHSTANDING ANYTHING CONTAINED HEREIN TO THE
CONTRARY, THE TERM “CONFIDENTIAL INFORMATION” SHALL NOT INCLUDE, AND BANK
MAY DISCLOSE WITHOUT LIMITATION OF ANY KIND, ANY INFORMATION WITH RESPECT TO THE
“TAX TREATMENT” AND “TAX STRUCTURE” (IN EACH CASE WITHIN THE MEANING OF TREASURY
REGULATION SECTION 1.6011-4) OF THE TRANSACTIONS CONTEMPLATED HEREBY AND ALL
MATERIALS OF ANY KIND (INCLUDING OPINIONS OR OTHER TAX ANALYSIS) THAT ARE
PROVIDED TO BANK RELATING TO SUCH TAX TREATMENT OR TAX STRUCTURE.

 

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12.10.              ATTORNEYS’ FEES, COSTS AND EXPENSES. IN ANY ACTION OR
PROCEEDING BETWEEN BORROWER AND BANK ARISING OUT OF OR RELATING TO THE LOAN
DOCUMENTS, THE PREVAILING PARTY SHALL BE ENTITLED TO RECOVER ITS REASONABLE
ATTORNEYS’ FEES AND OTHER REASONABLE COSTS AND EXPENSES INCURRED, IN ADDITION TO
ANY OTHER RELIEF TO WHICH IT MAY BE ENTITLED, WHETHER OR NOT A LAWSUIT IS FILED.

 

12.11.              QUALIFIED COMMERCIAL LOAN CERTIFICATION. BORROWER HEREBY
CERTIFIES TO BANK THAT:

 

(A)                                  BORROWER HAS BEEN ADVISED BY BANK TO SEEK
THE ADVICE OF AN ATTORNEY AND ACCOUNTANT IN CONNECTION WITH THE LOANS EVIDENCED
BY THIS AGREEMENT;

 

(B)                                 BORROWER HAS HAD THE OPPORTUNITY TO SEEK THE
ADVICE OF AN ATTORNEY AND ACCOUNTANT OF BORROWER’S CHOICE IN CONNECTION WITH THE
LOANS EVIDENCED BY THIS AGREEMENT.

 

13.                               DEFINITIONS

 

13.1.                     DEFINITIONS. AS USED IN THIS AGREEMENT, THE FOLLOWING
TERMS HAVE THE FOLLOWING MEANINGS:

 

“Account” is any “account” as defined in the Code with such additions to such
term as may hereafter be made, and includes, without limitation, all accounts
receivable and other sums owing to Borrower.

 

“Account Debtor” is any “account debtor” as defined in the Code with such
additions to such term as may hereafter be made.

 

“Advance” or “Advances” means an advance (or advances) under the Revolving Line.

 

“Affiliate” of any Person is a Person that owns or controls directly or
indirectly the Person, any Person that controls or is controlled by or is under
common control with the Person, and each of that Person’s senior executive
officers, directors, partners and, for any Person that is a limited liability
company, that Person’s managers and members.

 

“Agreement” is defined in the preamble hereof.

 

“Availability Amount” is the lesser of (a) the Revolving Line or (b) the
Borrowing Base.

 

“Bank” is defined in the preamble hereof.

 

“Bank Expenses” are all audit fees and expenses, costs, and expenses (including
reasonable attorneys’ fees and expenses) for preparing, negotiating,
administering, defending and enforcing the Loan Documents (including, without
limitation, those incurred in connection with appeals or Insolvency Proceedings)
or otherwise incurred with respect to Borrower.

 

“Bankruptcy-Related Defaults” is defined in Section 9.1.

 

“Borrower” is defined in the preamble hereof

 

“Borrower’s Books” are all Borrower’s books and records including ledgers,
federal and state tax returns, records regarding Borrower’s assets or
liabilities, the Collateral, business operations or financial condition, and all
computer programs or storage or any equipment containing such information.

 

“Borrowing Base” is (a) 80% of Eligible Accounts plus (b) subject to the
Inventory Advance Cap, the lesser of (i) 35% of the value of Borrower’s Eligible
Inventory (valued at the lower of cost or wholesale fair market value) or
(ii) $300,000, as determined by Bank from Borrower’s most recent Borrowing Base
Certificate; provided, that upon the date the Revolving Line increases to
$2,000,000, the amount in clause (ii) shall increase to $600,000; and provided
further, that Bank may decrease the foregoing percentages in its good faith
business judgment based on events, conditions, contingencies, or risks which, as
determined by Bank, may adversely affect Collateral.

 

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“Borrowing Base Certificate” is that certain certificate in the form attached
hereto as Exhibit C.

 

“Borrowing Resolutions” are, with respect to any Person, those resolutions
adopted by such Person’s Board of Directors and delivered by such Person to Bank
approving the Loan Documents to which such Person is a party and the
transactions contemplated thereby, together with a certificate executed by its
secretary on behalf of such Person certifying that (a) such Person has the
authority to execute, deliver, and perform its obligations under each of the
Loan Documents to which it is a party, (b) that attached as Exhibit A to such
certificate is a true, correct, and complete copy of the resolutions then in
full force and effect authorizing and ratifying the execution, delivery, and
performance by such Person of the Loan Documents to which it is a party, (c) the
name(s) of the Person(s) authorized to execute the Loan Documents on behalf of
such Person, together with a sample of the true signature(s) of such Person(s),
and (d) that Bank may conclusively rely on such certificate unless and until
such Person shall have delivered to Bank a further certificate canceling or
amending such prior certificate.

 

“Business Day” is any day that is not a Saturday, Sunday or a day on which Bank
is closed.

 

“Cash Equivalents” means (a) marketable direct obligations issued or
unconditionally guaranteed by the United States or any agency or any State
thereof having maturities of not more than one (1) year from the date of
acquisition; (b) commercial paper maturing no more than one (1) year after its
creation and having the highest rating from either Standard & Poor’s Ratings
Group or Moody’s Investors Service, Inc., and (c) Bank’s certificates of deposit
issued maturing no more than one (1) year after issue.

 

 “Change in Control” means any event, transaction, or occurrence as a result of
which (a) any “person” (as such term is defined in Sections 3(a)(9) and
13(d)(3) of the Securities Exchange Act of 1934, as an amended (the “Exchange
Act”)), other than a trustee or other fiduciary holding securities under an
employee benefit plan of Borrower, is or becomes a beneficial owner (within the
meaning Rule 13d-3 promulgated under the Exchange Act), directly or indirectly,
of securities of Borrower, representing twenty-five percent (25%) or more of the
combined voting power of Borrower’s then outstanding securities (other than as a
result of conversion of Borrower’s preferred stock); or (b) during any period of
twelve consecutive calendar months, individuals who at the beginning of such
period constituted the Board of Directors of Borrower (together with any new
directors whose election by the Board of Directors of Borrower was approved by a
vote of at least two-thirds of the directors then still in office who either
were directions at the beginning of such period  or whose election or nomination
for election was previously so approved) cease for any reason other than death
or disability to constitute a majority of the directors then in office.

 

“Code” is the Uniform Commercial Code, as the same may, from time to time, be
enacted and in effect in the State of Texas; provided, that, to the extent that
the Code is used to define any term herein or in any Loan Document and such term
is defined differently in different Articles or Divisions of the Code, the
definition of such term contained in Article or Division 9 shall govern;
provided further, that in the event that, by reason of mandatory provisions of
law, any or all of the attachment, perfection, or priority of, or remedies with
respect to, Bank’s Lien on any Collateral is governed by the Uniform Commercial
Code in effect in a jurisdiction other than the State of Texas, the term “Code”
shall mean the Uniform Commercial Code as enacted and in effect in such other
jurisdiction solely for purposes on the provisions thereof relating to such
attachment, perfection, priority, or remedies and for purposes of definitions
relating to such provisions.

 

“Collateral” is any and all properties, rights and assets of Borrower described
on Exhibit A.

 

“Collateral Account” is any Deposit Account, Securities Account, or Commodity
Account.

 

“Committed Availability” means, as the date of determination, an amount equal to
the sum of the Revolving Line minus all outstanding Credit Extensions.

 

“Commodity Account” is any “commodity account” as defined in the Code with such
additions to such term as may hereafter be made.

 

“Communication” is defined in Section 10.

 

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“Compliance Certificate” is that certain certificate in the form attached hereto
as Exhibit D.

 

“Contingent Obligation” is, for any Person, any direct or indirect liability,
contingent or not, of that Person for (a) any indebtedness, lease, dividend,
letter of credit or other obligation of another such as an obligation directly
or indirectly guaranteed, endorsed, co-made, discounted or sold with recourse by
that Person, or for which that Person is directly or indirectly liable; (b) any
obligations for undrawn letters of credit for the account of that Person; and
(c) all obligations from any interest rate, currency or commodity swap
agreement, interest rate cap or collar agreement, or other agreement or
arrangement designated to protect a Person against fluctuation in interest
rates, currency exchange rates or commodity prices; but “Contingent Obligation”
does not include endorsements in the ordinary course of business. The amount of
a Contingent Obligation is the stated or determined amount of the primary
obligation for which the Contingent Obligation is made or, if not determinable,
the maximum reasonably anticipated liability for it determined by the Person in
good faith; but the amount may not exceed the maximum of the obligations under
any guarantee or other support arrangement.

 

“Control Agreement” is any control agreement entered into among the depository
institution at which Borrower maintains a Deposit Account or the securities
intermediary or commodity intermediary at which Borrower maintains a Securities
Account or a Commodity account, Borrower, and Bank pursuant to which Bank
obtains control (within the meaning of the Code) over such Deposit Account,
Securities Account, or Commodity Account.

 

“Credit Extension” is any Advance, Equipment or any other extension of credit by
Bank for Borrower’s benefit.

 

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

 

“Default Rate” is defined in Section 2.3(b).

 

“Deposit Account” is any “deposit account” as defined in the Code with such
additions to such term as may hereafter be made.

 

“Designated Deposit Account” is Borrower’s deposit account, account number
                       , maintained with Bank.

 

“Dollars,” “dollars” and “$” each mean lawful money of the United States.

 

“EBITDA” shall mean for any period of determination (a) Net Income, plus
(b) Interest Expense, plus (c) to the extent deducted in the calculation of Net
Income, depreciation expense and amortization expense, plus (d) income tax
expense.

 

“Effective Date” is the date Bank executes this Agreement and as indicated on
the signature page hereof.

 

“Eligible Accounts” are Accounts which arise in the ordinary course of
Borrower’s business that meet all Borrower’s representations and warranties in
Section 5.3. Bank reserves the right at any time and from time to time after the
Effective Date, to adjust any of the criteria set forth below and to establish
new criteria in its good faith business judgment. Unless Bank agrees otherwise
in writing, Eligible Accounts shall not include:

 

(A)                                  ACCOUNTS FOR WHICH THE ACCOUNT DEBTOR HAS
NOT BEEN INVOICED;

 

(B)                                 ACCOUNTS THAT THE ACCOUNT DEBTOR HAS NOT
PAID WITHIN NINETY (90) DAYS OF INVOICE DATE;

 

(C)                                  ACCOUNTS OWING FROM AN ACCOUNT DEBTOR,
FIFTY PERCENT (50%) OR MORE OF WHOSE ACCOUNTS HAVE NOT BEEN PAID WITHIN NINETY
(90) DAYS OF INVOICE DATE;

 

(D)                                 CREDIT BALANCES OVER NINETY (90) DAYS FROM
INVOICE DATE;

 

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(E)                                  ACCOUNTS OWING FROM AN ACCOUNT DEBTOR,
INCLUDING AFFILIATES, WHOSE TOTAL OBLIGATIONS TO BORROWER EXCEED TWENTY-FIVE
(25%) OF ALL ACCOUNTS, EXCEPT FOR ELIGIBLE GOVERNMENT ACCOUNTS, FOR WHICH SUCH
PERCENTAGE IS 40% PRIOR TO THE SIX (6) MONTH ANNIVERSARY OF THE EFFECTIVE DATE
AND 35% THEREAFTER, FOR THE AMOUNTS THAT EXCEED THAT PERCENTAGE, UNLESS BANK
APPROVES IN WRITING;

 

(F)                                    ACCOUNTS OWING FROM AN ACCOUNT DEBTOR
WHICH DOES NOT HAVE ITS PRINCIPAL PLACE OF BUSINESS IN THE UNITED STATES;

 

(G)                                 ACCOUNTS OWING FROM AN ACCOUNT DEBTOR WHICH
IS A FEDERAL GOVERNMENT ENTITY OR ANY DEPARTMENT, AGENCY, OR INSTRUMENTALITY
THEREOF, EXCEPT FOR ELIGIBLE GOVERNMENT ACCOUNTS;

 

(H)                                 ACCOUNTS OWING FROM AN ACCOUNT DEBTOR TO THE
EXTENT THAT BORROWER IS INDEBTED OR OBLIGATED IN ANY MANNER TO THE ACCOUNT
DEBTOR (AS CREDITOR, LESSOR, SUPPLIER OR OTHERWISE - SOMETIMES CALLED “CONTRA”
ACCOUNTS, ACCOUNTS PAYABLE, CUSTOMER DEPOSITS OR CREDIT ACCOUNTS), WITH THE
EXCEPTION OF CUSTOMARY CREDITS, ADJUSTMENTS AND/OR DISCOUNTS GIVEN TO AN ACCOUNT
DEBTOR BY BORROWER IN THE ORDINARY COURSE OF ITS BUSINESS;

 

(I)                                     ACCOUNTS FOR DEMONSTRATION OR
PROMOTIONAL EQUIPMENT, OR IN WHICH GOODS ARE CONSIGNED, OR SOLD ON A “SALE
GUARANTEED”, “SALE OR RETURN”, “SALE ON APPROVAL”, “BILL AND HOLD”, OR OTHER
TERMS IF ACCOUNT DEBTOR’S PAYMENT MAY BE CONDITIONAL;

 

(J)                                     ACCOUNTS FOR WHICH THE ACCOUNT DEBTOR IS
BORROWER’S AFFILIATE, OFFICER, EMPLOYEE, OR AGENT;

 

(K)                                  ACCOUNTS IN WHICH THE ACCOUNT DEBTOR
DISPUTES LIABILITY OR MAKES ANY CLAIM (BUT ONLY UP TO THE DISPUTED OR CLAIMED
AMOUNT), OR IF THE ACCOUNT DEBTOR IS SUBJECT TO AN INSOLVENCY PROCEEDING, OR
BECOMES INSOLVENT, OR GOES OUT OF BUSINESS;

 

(L)                                     ACCOUNTS OWING FROM AN ACCOUNT DEBTOR
WITH RESPECT TO WHICH BORROWER HAS RECEIVED DEFERRED REVENUE (BUT ONLY TO THE
EXTENT OF SUCH DEFERRED REVENUE);

 

(M)                               ACCOUNTS FOR WHICH BANK IN ITS GOOD FAITH
BUSINESS JUDGMENT DETERMINES COLLECTION TO BE DOUBTFUL; AND

 

(N)                                 OTHER ACCOUNTS BANK DEEMS INELIGIBLE IN THE
EXERCISE OF ITS GOOD FAITH BUSINESS JUDGMENT.

 

“Eligible Government Accounts” are Accounts of the United States if Borrower has
assigned its payment rights to Bank and the assignment has been acknowledged
under the Federal Assignment of Claims Act of 1940, as amended.

 

“Eligible Inventory” means, at any time, the aggregate of Borrower’s Inventory
that (a) consists of finished goods, in good, new, and salable condition, which
is not perishable, returned, consigned, obsolete, not sellable, damaged, or
defective, and is not comprised of demonstrative or custom inventory, works in
progress, packaging or shipping materials, or supplies; (b) meets all applicable
governmental standards; (c) has been manufactured in compliance with the Fair
Labor Standards Act; (d) is not subject to any Liens, except the first priority
Liens granted or in favor of Bank under this Agreement or any of the other Loan
Documents; (e) is located at Borrower’s principal place of business (or any
location permitted under Section 7.2); and (f) is otherwise acceptable to Bank
in its good faith business judgment.

 

“Equipment” is all “equipment” as defined in the Code with such additions to
such term as may hereafter be made, and includes without limitation all
machinery, fixtures, goods, vehicles (including motor vehicles and trailers),
and any interest in any of the foregoing.

 

“ERISA” is the Employment Retirement Income Security Act of 1974, and its
regulations.

 

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“Event of Default” is defined in Section 8.

 

“GAAP” is generally accepted accounting principles set forth in the opinions and
pronouncements of the Accounting Principles Board of the American Institute of
Certified Public Accountants and statements and pronouncements of the Financial
Accounting Standards Board or in such other statements by such other Person as
may be approved by a significant segment of the accounting profession, which are
applicable to the circumstances as of the date of determination.

 

“General Intangibles” is all “general intangibles” as defined in the Code in
effect on the date hereof with such additions to such term as may hereafter be
made, and includes without limitation, all copyright rights, copyright
applications, copyright registrations and like protections in each work of
authorship and derivative work, whether published or unpublished, any patents,
trademarks, service marks and, to the extent permitted under applicable law, any
applications therefor, whether registered or not, any trade secret rights,
including any rights to unpatented inventions, payment intangibles, royalties,
contract rights, goodwill, franchise agreements, purchase orders, customer
lists, route lists, telephone numbers, domain names, claims, income and other
tax refunds, security and other deposits, options to purchase or sell real or
personal property, rights in all litigation presently or hereafter pending
(whether in contract, tort or otherwise), insurance policies (including without
limitation key man, property damage, and business interruption insurance),
payments of insurance and rights to payment of any kind.

 

“Indebtedness” is (a) indebtedness for borrowed money or the deferred price of
property or services, such as reimbursement and other obligations for surety
bonds and letters of credit, (b) obligations evidenced by notes, bonds,
debentures or similar instruments, (c) capital lease obligations, and
(d) Contingent Obligations.

 

“Insolvency Proceeding” is any proceeding by or against any Person under the
United States Bankruptcy Code, or any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, compositions, extensions
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.

 

“Interest Expense” means for any fiscal period, interest expense (whether cash
or non-cash) determined in accordance with GAAP for the relevant period ending
on such date, including, in any event, interest expense with respect to any
Credit Extension and other Indebtedness of Borrower and its Subsidiaries,
including, without limitation or duplication, all commissions, discounts, or
related amortization and other fees and charges with respect to letters of
credit and bankers’ acceptance financing and the net costs associated with
interest rate swap, cap, and similar arrangements, and the interest portion of
any deferred payment obligation (including leases of all types).

 

“Inventory” is all “inventory” as defined in the Code in effect on the date
hereof with such additions to such term as may hereafter be made, and includes
without limitation all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products, including without
limitation such inventory as is temporarily out of Borrower’s custody or
possession or in transit and including any returned goods and any documents of
title representing any of the above.

 

“Inventory Advance Cap” is the amount that is 35% of the value of the portion of
the Borrowing Base attributable to Borrower’s Eligible Accounts.

 

“Investment” is any beneficial ownership interest in any Person (including
stock, partnership interest or other securities), and any loan, advance or
capital contribution to any Person.

 

“IP Agreement” is that certain Intellectual Property Security Agreement executed
and delivered by Borrower to Bank dated of even date herewith.

 

“Lien” is a mortgage, lien, deed of trust, charge, pledge, security interest or
other encumbrance.

 

“Loan Amount” in respect of each Equipment Advance is the original principal
amount of such Equipment Advance.

 

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“Loan Documents” are, collectively, this Agreement, the Perfection Certificate,
the IP Agreement, any note, or notes or guaranties executed by Borrower or any
Guarantor, and any other present or future agreement between Borrower any
Guarantor and/or for the benefit of Bank in connection with this Agreement, all
as amended, restated, or otherwise modified.

 

“Material Adverse Change” is (a) a material impairment in the perfection or
priority of Bank’s Lien in the Collateral or in the value of such Collateral;
(b) a material adverse change in the business, operations, or condition
(financial or otherwise) of Borrower; (c) a material impairment of the prospect
of repayment of any portion of the Obligations; or (d) Bank determines, based
upon information available to it and in its reasonable judgment, that there is a
reasonable likelihood that Borrower shall fail to comply with one or more of the
financial covenants in Section 6 during the next succeeding financial reporting
period.

 

“Maximum Lawful Rate” is the maximum rate of interest and the term “Maximum
Lawful Amount” means the maximum amount of interest that is permissible under
applicable state or federal laws for the type of loan evidenced by the Loan
Documents. If the Maximum Lawful Rate is increased by statute or other
governmental action after the Effective Date, then the new Maximum Lawful Rate
will be applicable to the payments from the effective date of the rate change,
unless otherwise prohibited by law.

 

“Net Income” means, as calculated on a consolidated basis for Borrower and its
Subsidiaries for any period as at any date of determination, the net profit (or
loss), after provision for taxes, of Borrower and its Subsidiaries for such
period taken as a single accounting period.

 

“Obligations” are Borrower’s obligation to pay when due any debts, principal,
interest, Bank Expenses and other amounts Borrower owes Bank now or later,
whether under this Agreement, the Loan Documents, or otherwise, including,
without limitation, all obligations relating to letters of credit, cash
management services, and foreign exchange contracts, if any, and including
interest accruing after Insolvency Proceedings begin and debts, liabilities, or
obligations of Borrower assigned to Bank, and the performance of Borrower’s
duties under the Loan Documents.

 

“Operating Documents” are, for any Person, such Person’s formation documents, as
certified with the Secretary of State of such Person’s state of formation on a
date that is no earlier than 30 days prior to the Effective Date, and, (a) if
such Person is a corporation, its bylaws in current form, (b) if such Person is
a limited liability company, its limited liability company agreement (or similar
agreement), and (c) if such Person is a partnership, its partnership agreement
(or similar agreement), each of the foregoing with all current amendments or
modifications thereto.

 

“Payment/Advance Form” is that certain form attached hereto as Exhibit B.

 

“Perfection Certificate” is defined in Section 5.1.

 

“Permitted Distributions” are:

 

(a)                                  purchases of capital stock from former
employees, consultants and directors pursuant to repurchase agreements or other
similar agreements provided that at the time of such purchase no Default or
Event of Default has occurred and is continuing;

 

(b)                                 distributions or dividends consisting solely
of Borrower’s capital stock;

 

(c)                                  purchases for value of any rights
distributed in connection with any stockholder rights plan;

 

(d)                                 purchases of capital stock or options to
acquire such capital stock with the proceeds received from a substantially
concurrent issuance of capital stock or convertible securities;

 

(e)                                  purchases of capital stock pledged as
collateral for loans to employees;

 

(f)                                    purchases of capital stock in connection
with the exercise of stock options or stock appreciation rights by way of
cashless exercise or in connection with the satisfaction of withholding tax
obligations;

 

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(g)                                 purchases of fractional shares of capital
stock arising out of stock dividends, splits or combinations or business
combinations;

 

(h)                                 the settlement or performance of such
Person’s obligations under any equity derivative transaction, option contract or
similar transaction or combination of transactions;

 

(i)                                     Permitted Dividends; and

 

(j)            the redemption of shares of Borrower’s preferred stock, and
accrued dividends thereon, pursuant to the terms thereof.

 

“Permitted Dividends” are monthly cash dividends by Borrower to its preferred
shareholders in an amount not to exceed $15,000 in the aggregate in any month;
provided, that the amount of such Permitted Dividends may increase, with Bank’s
written consent, following the investment of additional equity in Borrower.

 

“Permitted Indebtedness” is:

 

(a)                                  Borrower’s Indebtedness to Bank under this
Agreement or any other Loan Document;

 

(b)                                 Indebtedness existing on the Effective Date
and shown on the Perfection Certificate;

 

(c)                                  Subordinated Debt;

 

(d)                                 unsecured Indebtedness to trade creditors
incurred in the ordinary course of business;

 

(e)                                  Indebtedness incurred as a result of
endorsing negotiable instruments received in the ordinary course of business;

 

(f)                                    Indebtedness secured by Permitted Liens;

 

(g)                                 Indebtedness of Borrower to any Subsidiary
and Contingent Obligations of any Subsidiary with respect to obligations of
Borrower (provided that the primary obligations are not prohibited hereby), and
Indebtedness of any Subsidiary to Borrower or any other Subsidiary and
Contingent Obligations of any Subsidiary with respect to obligations of any
other Subsidiary (provided that the primary obligations are not prohibited
hereby); and

 

(h)                                 extensions, refinancings, modifications,
amendments and restatements of any items of Permitted Indebtedness (a) through
(g) above, provided that the principal amount thereof is not increased or the
terms thereof are not modified to impose more burdensome terms upon Borrower or
its Subsidiary, as the case may be.

 

“Permitted Investments” are:

 

(a)                                  Investments existing on the Effective Date;

 

(b)                                 (i) marketable direct obligations issued or
unconditionally guaranteed by the United States or its agencies or any State
maturing within 1 year from its acquisition, (ii) commercial paper maturing no
more than 2 years after its creation and having the highest rating from either
Standard & Poor’s Corporation or Moody’s Investors Service, Inc., and
(iii) Bank’s certificates of deposit maturing no more than 2 years after issue;
and

 

(c)                                  Investments approved by the Borrower’s
Board of Directors or otherwise pursuant to a Board-approved investment policy.

 

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 “Permitted Liens” are:

 

(a)                                Liens existing on the Effective Date and
shown on the Perfection Certificate or arising under this Agreement and the
other Loan Documents;

 

(b)                                 Liens for taxes, fees, assessments or other
government charges or levies, either not delinquent or being contested in good
faith and for which Borrower maintains adequate reserves on its Books, if they
have no priority over any of Bank’s Liens;

 

(c)                                  purchase money Liens (i) on Equipment
acquired or held by Borrower incurred for financing the acquisition of the
Equipment securing no more than $50,000 in the aggregate amount outstanding, or
(ii) existing on Equipment when acquired, if the Lien is confined to the
property and improvements and the proceeds of the Equipment;

 

(d)                                 Liens incurred in the extension, renewal or
refinancing of the indebtedness secured by Liens described in (a) through (c),
but any extension, renewal or replacement Lien must be limited to the property
encumbered by the existing Lien and the principal amount of the indebtedness it
secures may not increase;

 

(e)                                  leases or subleases of real property
granted in the ordinary course of business, and leases, subleases, non-exclusive
licenses or sublicenses of property (other than real property or intellectual
property) granted in the ordinary course of Borrower’s business, if the leases,
subleases, licenses and sublicenses do not prohibit granting Bank a security
interest;

 

(f)                                    non-exclusive license of intellectual
property granted to third parties in the ordinary course of business;

 

(g)                                 leases or subleases granted in the ordinary
course of Borrower’s business, including in connection with Borrower’s leased
premises or leased property;

 

(h)                                 Liens arising from judgments, decrees or
attachments in circumstances not constituting an Event of Default under Sections
8.4 or 8.7;

 

(i)                                     Liens in favor of other financial
institutions arising in connection with Borrower’s deposit or securities
accounts held at such institutions;

 

(j)                                     carriers’, warehousemen’s, mechanics’,
materialmen’s, repairmen’s or other like Liens arising in the ordinary course of
business which are not overdue for a period of more than 30 days or which are
being contested in good faith and by appropriate proceeding if adequate reserves
with respect thereto are maintained on the books of the applicable Person;

 

(k)                                  pledges or deposits in the ordinary course
of business in connection with workers’ compensation, unemployment insurance and
compliance with other social security requirements applicable to Borrower;

 

(l)                                     such Liens are subordinate in priority
to Bank’s Lien hereunder.

 

“Person” is any individual, sole proprietorship, partnership, limited liability
company, joint venture, company, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or government agency.

 

“Prime Rate” is Bank’s most recently announced “prime rate,” even if it is not
Bank’s lowest rate.

 

“Registered Organization” is any “registered organization” as defined in the
Code with such additions to such term as may hereafter be made

 

“Responsible Officer” is any of the Chief Executive Officer, President, Chief
Financial Officer and Controller of Borrower.

 

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“Revolving Line” is an Advance or Advances in an aggregate amount of up to
$1,000,000 outstanding at any time, increasing to $2,000,000 upon Borrower
achieving two (2) consecutive fiscal quarters of EBITDA, less the aggregate
amount of any Permitted Dividends during such period, of not less than $200,000,
determined according to GAAP.

 

“Revolving Line Maturity Date” is the earliest of (a) the date which is three
hundred sixty-four (364) days from the Effective Date, or (b) the occurrence of
an Event of Default.

 

“Securities Account” is any “securities account” as defined in the Code with
such additions to such term as may hereafter be made.

 

“Subordinated Debt” is (a) Indebtedness incurred by Borrower subordinated to
Borrower’s Indebtedness owed to Bank and which is reflected in a written
agreement in a manner and form reasonably acceptable to Bank and approved by
Bank in writing, and (b)  to the extent the terms of subordination do not change
adversely to Bank, refinancings, refundings, renewals, amendments or extensions
of any of the foregoing.

 

“Subsidiary” means, with respect to any Person, any Person of which more than
50% of the voting stock or other equity interests is owned or controlled,
directly or indirectly, by such Person or one or more Affiliates of such Person.

 

“Total Liabilities” is on any day, obligations that should, under GAAP, be
classified as liabilities on Borrower’s consolidated balance sheet, including
all Indebtedness, and current portion of Subordinated Debt permitted by Bank to
be paid by Borrower, but excluding all other Subordinated Debt.

 

“Transfer” is defined in Section 7.1.

 

THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

 

[Signature page follows.]

 

24

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the Effective Date.

 

BORROWER:

 

INTRUSION INC.,

a Delaware corporation

 

By

/s/ Michael L. Paxton

 

 

 

Name:

Michael L. Paxton

 

 

 

Title:

Vice President & CFO

 

 

 

 

 

 

 

BANK:

 

 

 

 

 

 

 

SILICON VALLEY BANK

 

 

 

 

By

/s/ Brian Brown

 

 

 

Name:

Brian Brown

 

 

 

Title:

Deal Team Leader

 

 

 

 

--------------------------------------------------------------------------------

 

EXHIBIT A

 

The Collateral consists of all of Borrower’s right, title and interest in and to
the following personal property:

 

All goods, Accounts (including health-care receivables), Equipment, Inventory,
contract rights or rights to payment of money, leases, license agreements,
franchise agreements, General Intangibles, commercial tort claims, documents,
instruments (including any promissory notes), chattel paper (whether tangible or
electronic), cash, deposit accounts, fixtures, letters of credit rights (whether
or not the letter of credit is evidenced by a writing), securities, and all
other investment property, supporting obligations, and financial assets, whether
now owned or hereafter acquired, wherever located; and

 

all Borrower’s Books relating to the foregoing, and any and all claims, rights
and interests in any of the above and all substitutions for, additions,
attachments, accessories, accessions and improvements to and replacements,
products, proceeds and insurance proceeds of any or all of the foregoing.

 

1

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EXHIBIT B

 

Loan Payment/Advance Request Form

 

DEADLINE FOR SAME DAY PROCESSING IS NOON P.S.T. *

 

Fax To:

Date:

 

 

LOAN PAYMENT:

 

INTRUSION INC.

 

From Account #

 

 

To Account #

 

 

(Deposit Account #)

 

 

(Loan Account #)

 

 

 

 

 

Principal $

 

 

and/or Interest $

 

 

 

 

 

 

Authorized Signature:

 

 

 

Phone Number:

 

Print Name/Title:

 

 

 

 

 

 

 

LOAN ADVANCE:

 

Complete Outgoing Wire Request section below if all or a portion of the funds
from this loan advance are for an outgoing wire.

 

From Account #

 

 

To Account #

 

 

(Loan Account #)

 

 

(Deposit Account #)

 

 

 

 

 

Amount of Advance $

 

 

 

 

 

All Borrower’s representations and warranties in the Loan and Security Agreement
are true, correct and complete in all material respects on the date of the
request for an advance; provided, however, that such materiality qualifier shall
not be applicable to any representations and warranties that already are
qualified or modified by materiality in the text thereof; and provided, further
that those representations and warranties expressly referring to a specific date
shall be true, accurate and complete in all material respects as of such date:

 

Authorized Signature:

 

 

 

Phone Number:

 

Print Name/Title:

 

 

 

 

 

 

 

OUTGOING WIRE REQUEST:

Complete only if all or a portion of funds from the loan advance above is to be
wired.

Deadline for same day processing is noon, P.S.T.

 

Beneficiary Name:

 

 

Amount of Wire: $

 

Beneficiary Bank:

 

 

Account Number:

 

City and State:

 

 

 

 

 

 

 

 

 

 

Beneficiary Bank Transit (ABA) #:

 

 

Beneficiary Bank Code (Swift, Sort, Chip, etc.):

 

 

 

 

 

(For International Wire Only)

 

 

 

 

 

 

Intermediary Bank:

 

 

 

Transit (ABA) #:

 

For Further Credit to:

 

 

 

 

 

 

 

 

 

 

 

Special Instruction:

 

 

 

 

 

 

By signing below, I (we) acknowledge and agree that my (our) funds transfer
request shall be processed in accordance with and subject to the terms and
conditions set forth in the agreements(s) covering funds transfer service(s),
which agreements(s) were previously received and executed by me (us).

 

--------------------------------------------------------------------------------

* Unless otherwise provided for an Advance bearing interest at LIBOR.

 

1

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Authorized Signature:

 

 

 

2nd Signature (if required):

 

 

Print Name/Title:

 

 

 

Print Name/Title:

 

 

Telephone #:

 

 

 

Telephone #:

 

 

 

2

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EXHIBIT C

 

BORROWING BASE CERTIFICATE

 

Borrower: Intrusion Inc.

 

 

Lender:

Silicon Valley Bank

 

 

Commitment Amount:

$

 

 

 

 

 

ACCOUNTS RECEIVABLE

 

 

 

(1)                                  ACCOUNTS RECEIVABLE BOOK VALUE AS OF

$

 

 

(2)                                  ADDITIONS (PLEASE EXPLAIN ON REVERSE)

$

 

 

(3)                                  TOTAL ACCOUNTS RECEIVABLE

$

 

 

 

 

 

 

ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)

 

 

 

(4)                                  UN-INVOICED ACCOUNTS

$

 

 

(5)                                  AMOUNTS OVER 90 DAYS DUE

$

 

 

(6)                                  BALANCE OF 50% OVER 90 DAY ACCOUNTS

$

 

 

(7)                                  CREDIT BALANCES OVER 90 DAYS

$

 

 

(8)                                  CONCENTRATION LIMITS

$

 

 

(9)                                  FOREIGN ACCOUNTS

$

 

 

(10)                            GOVERNMENTAL ACCOUNTS

$

 

 

(11)                            CONTRA ACCOUNTS

$

 

 

(12)                            PROMOTION OR DEMO ACCOUNTS

$

 

 

(13)                            INTERCOMPANY/EMPLOYEE ACCOUNTS

$

 

 

(14)                            DISPUTED ACCOUNTS

$

 

 

(15)                            DEFERRED REVENUE

$

 

 

(16)                            OTHER (PLEASE EXPLAIN ON REVERSE)

$

 

 

(17)                            TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS

$

 

 

(18)                            ELIGIBLE ACCOUNTS (#3 MINUS #17)

$

 

 

(19)                            ELIGIBLE AMOUNT OF ACCOUNTS (80% OF #18)

$

 

 

 

 

 

 

INVENTORY

 

 

 

(20)                            ELIGIBLE INVENTORY VALUE AS OF

$

 

 

(21)                            ELIBIGLE AMOUNT OF INVENTORY (35% OF #20)

$

 

 

 

 

 

 

BALANCES

 

 

 

(22)                            MAXIMUM LOAN AMOUNT

$

 

 

(23)                            TOTAL FUNDS AVAILABLE [LESSER OF #22 OR (#19
PLUS LESSER OF #21 OR $300,000, NOT TO EXCEED 35% OF #19)]

$

 

 

(24)                            PRESENT BALANCE OWING ON LINE OF CREDIT

$

 

 

(25)                            OUTSTANDING UNDER SUBLIMITS

$

 

 

(26)                            RESERVE POSITION (#23 MINUS #24 AND #25)

$

 

 

 

The undersigned represents and warrants that this is true, complete and correct,
and that the information in this Borrowing Base Certificate complies with the
representations and warranties in the Loan and Security Agreement between the
undersigned and Silicon Valley Bank.

 

1

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COMMENTS:

 

BANK USE ONLY

 

 

 

 

 

 

 

 

 

Received by:

 

 

 

 

 

 

 

AUTHORIZED SIGNER

 

 

 

 

 

 

 

 

 

 

 

 

Date:

 

 

 

By:

 

 

 

Verified:

 

 

 

 

Authorized Signer

 

 

 

 

AUTHORIZED SIGNER

 

Date:

 

 

 

Date:

 

 

 

 

 

 

 

Compliance Status:

Yes

No

 

 

2

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EXHIBIT D

 

COMPLIANCE CERTIFICATE

 

TO:

SILICON VALLEY BANK

Date:

 

FROM:

INTRUSION INC.

 

 

 

The undersigned authorized officer of Intrusion Inc. (“Borrower”) certifies that
under the terms and conditions of the Loan and Security Agreement between
Borrower and Bank (the “Agreement”), (1) Borrower is in complete compliance for
the period ending                               with all required covenants
except as noted below, (2) there are no Events of Default, (3) all
representations and warranties in the Agreement are true and correct in all
material respects on this date except as noted below; provided, however, that
such materiality qualifier shall not be applicable to any representations and
warranties that already are qualified or modified by materiality in the text
thereof; and provided, further that those representations and warranties
expressly referring to a specific date shall be true, accurate and complete in
all material respects as of such date, (4) Borrower, and each of its
Subsidiaries, has timely filed all required tax returns and reports, and
Borrower has timely paid all foreign, federal, state and local taxes,
assessments, deposits and contributions owed by Borrower except as otherwise
permitted pursuant to the terms of Section 5. 9 of the Agreement, and (5) no
Liens have been levied or claims made against Borrower or any of its
Subsidiaries relating to unpaid employee payroll or benefits of which Borrower
has not previously provided written notification to Bank. Attached are the
required documents supporting the certification. The undersigned certifies that
these are prepared in accordance with generally GAAP consistently applied from
one period to the next except as explained in an accompanying letter or
footnotes. The undersigned acknowledges that no borrowings may be requested at
any time or date of determination that Borrower is not in compliance with any of
the terms of the Agreement, and that compliance is determined not just at the
date this certificate is delivered. Capitalized terms used but not otherwise
defined herein shall have the meanings given them in the Agreement.

 

Please indicate compliance status by circling Yes/No under “Complies” column.

 

Reporting Covenant

 

Required

 

Complies

 

 

 

 

 

Monthly financial statements with Compliance Certificate

 

Monthly within 30 days

 

Yes  No

Annual financial statement (CPA Audited) + CC

 

FYE within 120 days

 

Yes  No

10-Q, 10-K and 8-K

 

Within 5 days after filing with SEC

 

Yes  No

Borrowing Base Certificate A/R & A/P Agings

 

Monthly within 30 days

 

Yes  No

 

The following Intellectual Property was registered after the Effective Date (if
no registrations, state “None”)

 

Financial Covenant

 

Required

 

Actual

 

Complies

 

 

 

 

 

 

 

 

 

Maintain on a Monthly Basis:

 

 

 

 

 

 

 

Liquidity Coverage

 

1.25:1.0

 

     :1.0

 

Yes  No

 

EBITDA*

 

$

0.00

 

$

 

 

Yes  No

 

 

--------------------------------------------------------------------------------

*Tested only after the Revolving Line increases to $2,000,000.

 

1

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The following financial covenant analyses and information set forth in
Schedule 1 attached hereto are true and accurate as of the date of this
Certificate.

 

The following are the exceptions with respect to the certification above: (If no
exceptions exist, state “No exceptions to note.”)

 

 

INTRUSION INC.,

 

BANK USE ONLY

 

 

 

 

 

a Delaware corporation

 

 

 

 

 

 

 

 

 

Received by:

 

 

 

 

 

 

 

AUTHORIZED SIGNER

 

By:

 

 

 

Date:

 

 

 

Name:

 

 

 

 

 

 

 

Title:

 

 

 

Verified:

 

 

 

 

 

 

 

 

 

AUTHORIZED SIGNER

 

 

 

 

 

Date:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compliance Status:

Yes

No

 

 

2

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Schedule 1 to Compliance Certificate

 

Financial Covenants of Borrower

 

Dated:                                    

 

I.                                         Liquidity Coverage (Section 6.7 (a))

 

Required:                                             1.25:1.00

 

Actual:

 

A.

 

Unrestricted cash at SVB

 

$

 

 

 

 

 

 

 

B.

 

80% of Borrower’s Eligible Accounts

 

$

 

 

 

 

 

 

 

C.

 

Liquidity (line A plus line B)

 

$

 

 

 

 

 

 

 

D.

 

Aggregate value of Obligations to Bank

 

$

 

 

 

 

 

 

 

E.

 

Liquidity Coverage (line C divided by line D)

 

 

 

 

Is line E equal to or greater than 1.25:1:00?

 

 

No, not in compliance

 

 

Yes, in compliance

 

3

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II.                                     EBITDA (Section 6.7(b))

 

Required:                                             $0.00, following date on
which the Revolving Line increases to $2,000,000.

 

Actual:

 

A.

 

Net Income, less the aggregate amount of Permitted Dividends

 

$

 

 

 

 

 

 

 

B.

 

To the extent included in the determination of Net Income

 

 

 

 

 

 

 

 

 

 

 

1.

The provision for income taxes

 

$

 

 

 

 

 

 

 

 

 

 

2.

Depreciation expense

 

$

 

 

 

 

 

 

 

 

 

 

3.

Amortization expense

 

$

 

 

 

 

 

 

 

 

 

 

4.

Net Interest Expense

 

$

 

 

 

 

 

 

 

 

 

 

5.

All other charges which are both non-cash and non-recurring

 

$

 

 

 

 

 

 

 

 

 

 

6.

All non-cash income

 

$

 

 

 

 

 

 

 

 

 

 

7.

The sum of lines 1 through 5 minus line 6

 

$

 

 

 

 

 

 

 

 

C.

 

EBITDA (line A plus line B.7)

 

$

 

 

Is line C equal to or greater than $0.00?

 

 

No, not in compliance

 

 

Yes, in compliance

 

1

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EXHIBIT E

 

PERFECTION CERTIFICATE
OF
INTRUSION INC.

 

The undersigned,                                                          of
INTRUSION INC., a Delaware corporation (the “Company”), hereby certifies with
reference to the Loan and Security Agreement dated as of March      , 2006
between the Company and SILICON VALLEY BANK (the “Bank”) (terms defined therein
being used herein as therein defined), to the Bank as follows (for purposes of
this Perfection Certificate, those questions for which no response is completed
shall be deemed to read “None”):

 

1.                                       Names.

 

(a)                                  The exact legal name of the Company as it
appears in its certificate of incorporation as amended to date, is as follows:

 

 

(b)                                 The following is a list of all other names
(including trade names or similar appellations) used by the Company, or any of
its divisions or other business units, or any other business or organization to
which the Company became the successor by merger, consolidation, acquisition,
change in form, nature or jurisdiction of organization or otherwise, now or at
any time during the past five years together with the dates such names were
used:

 

 

(c)                                  The following is a list of all subsidiaries
of the Company (whether wholly owned, or where the Company has a controlling or
majority interest):

 

 

(d)                                 The following is the type of organization of
the Company:

 

(e)                                  The jurisdiction of organization of the
Company is as follows:

 

(f)                                    The following is the Company’s state
issued organizational identification number, if any:

 

(g)                                 The Company’s federal taxpayer
identification number is:

 

(h)                                 The Company currently maintains its bank and
investment accounts at:

 

(1)                                  Bank Accounts -

 

 

(2)                                  Investment Accounts -

 

1

--------------------------------------------------------------------------------

 

(3)                                  Payroll Accounts-

 

 

(4)                                  Other depository/operating accounts -

 

 

(i)                                     The Company currently has the following
commercial tort claims against other parties:

 

 

(j)                                     Attached hereto as Schedule A is the
information required above for any other business or organization to which the
Company became the successor by merger, consolidation, acquisition, change in
form, nature or jurisdiction of organization or otherwise, now or at any time
during the past five (5) years:

 

 

2.                                       Current Locations.

 

(a)                                  The following is the mailing address of the
Company:

 

Mailing Address

 

City

 

State

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(b)                                 If different from its mailing address, the
Company’s place of business, or if more than one, its chief executive office is
located at the following address:

 

Mailing Address

 

City

 

State

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(c)                                  If different from the addresses set forth
in subparagraphs (a) and (b) above, the following are all other locations in
which the Company maintains any books or records relating to any of the
Collateral consisting of accounts, instruments, chattel paper, general
intangibles or mobile goods:

 

Mailing
Address

 

City

 

State

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

--------------------------------------------------------------------------------

 

(d)                                 If different from the addresses set forth in
subparagraphs (a), (b) or (c) above, the following are all places of business of
the Company and/or locations maintained by the Company where any Collateral
consisting of equipment and/or inventory are located:

 

Mailing
Address

 

City

 

State

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(e)                                  The following are the names and addresses
of all persons or entities other than the Company (such as lessees, bailees,
consignees, warehousemen, or purchasers of chattel paper), which have possession
or are intended to have possession of any of the Collateral consisting of
instruments, chattel paper, inventory or equipment and the nature of such
party’s possession (such as lessee, bailee, consignee, warehouseman, purchaser
of chattel paper, or other):

 

Name

 

Mailing Address

 

City

 

State

 

Nature of Possession

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.                                       Prior Locations. (a) Set forth below is
the information required by subparagraphs (a), (b), (c) and (d) of paragraph 2
with respect to each location or place of business previously maintained by the
Company at any time during the past five (5) years in a state in which the
Company has previously maintained a location or place of business:

 

Mailing Address

 

City

 

State

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(b)                                 Set forth below is the information required
by subparagraph (e) of paragraph 2 with respect to each other location at which,
or other person or entity with which, any of the Collateral consisting of
instruments, chattel paper, inventory or equipment has been previously held at
any time during the past twelve months:

 

Name

 

Mailing Address

 

City

 

State

 

Nature of Possession

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4.                                       Attached hereto as Schedule B is the
information required by U.C.C. §9-502(b) or former U.C.C. §9-402(5) of each
state in which any of the Collateral consisting of fixtures are or are to be
located and the name and address of each real estate recording office where a
mortgage on the real estate on which such fixtures are or are to be located
would be recorded.

 

3

--------------------------------------------------------------------------------

 

5.                                       No Unusual Transactions. Except for
those purchases, acquisitions, and other transactions as set forth in Schedule A
or Schedule C attached hereto, all of the Collateral has been originated by the
Company in the ordinary course of the Company’s business or consists of goods
which have been acquired by the Company in the ordinary course from a person in
the business of selling goods of that kind.

 

6.                                       Registered Intellectual Property.

 

(a)                                  The following is a list of the Company’s
copyrights (including copyrights of software) which are registered with the
United States Copyright Office. (Please include name of the copyright and
registration number and attach a copy of the registration):

 

 

(b)                                 The following is a list of all software
which the Company sells, distributes or licenses to others, which is not
registered with the United States Copyright Office. (Please include versions
which are not registered):

 

 

(c)                                  The following is a list of all of the
Company’s patents which are registered with the United States Patent Office.
(Please include name of the patent and registration number and attach a copy of
the registration.):

 

 

(d)                                 The following is a list of all of the
Company’s patents which are pending with the United States Patent Office.
(Please include name of the patent and a copy of the application.):

 

 

(e)                                  The following is a list of all of the
Company’s registered trademarks. (Please include name of the trademark and a
copy of the registration.):

 

 

7.                                       Litigation. Actions or proceedings
pending or, to the knowledge of Borrower’s Responsible Officers, threatened by
or against Borrower or any Subsidiary in which an adverse decision could
reasonably be expected to cause a Material Adverse Change:

 

4

--------------------------------------------------------------------------------

 

The undersigned hereby acknowledges and agrees that the Bank is relying on the
representations and warranties made herein in connection with a loan transaction
or transactions to be entered into between the undersigned and the Bank.

 

IN WITNESS WHEREOF, I have hereunto set my hand this         day of
                      , 2006 and this document shall constitute a document under
seal under the laws of the county of Dallas County, Texas.

 

By:

 

 

 

(duly authorized)

 

 

Name:

 

 

 

5

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