Exhibit 10.1

LOAN AND SECURITY AGREEMENT

THIS LOAN AND SECURITY AGREEMENT (this “Agreement”) dated as of November 2, 2016
(the “Effective Date”) between SILICON VALLEY BANK, a California corporation
(“Bank”), and IRIDEX CORPORATION, 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 (except in
the case of unaudited financial statements, for the absence of footnotes and
subject to year-end audit adjustments); provided, however, that if at any time
any change in GAAP would affect the computation of any financial ratio or
requirement set forth in any Loan Document, and either Borrower or Bank shall so
request, Borrower and Bank shall negotiate in good faith to amend such ratio or
requirement to preserve the original intent thereof in light of such change in
GAAP; provided, further, that, until so amended, (a) such ratio or requirement
shall continue to be computed in accordance with GAAP prior to such change
therein and (b) Borrower shall provide Bank financial statements and other
documents required under this Agreement or as reasonably requested hereunder
setting forth a reconciliation between calculations of such ratio or requirement
made before and after giving effect to such change in GAAP; provided, further,
that any obligations of a Person under a lease (whether existing now or entered
into in the future) that is not (or would not be) a capital lease obligation
under GAAP as in effect on the Effective Date shall not be treated as a capital
lease obligation solely as a result of the adopting of changes in
GAAP.  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 meaning provided by the Code to the
extent such terms are defined therein.

2.LOAN AND TERMS OF PAYMENT

2.1Promise 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.

2.2Revolving Advances.

(a)Availability.  Subject to the terms and conditions of this Agreement and to
deduction of Reserves, Bank shall, after the completion of the Initial Audit,
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 accrued and unpaid
interest

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thereon, and all other Obligations relating to the Revolving Line shall be
immediately due and payable.

2.3Cash Management Services Sublimit.  Borrower may use up to One Million
Dollars ($1,000,000) of the Revolving Line for Bank’s cash management services
which may include merchant services, direct deposit of payroll, business credit
card, and check cashing services identified in Bank’s various cash management
services agreements (collectively, the “Cash Management Services”). Any amounts
Bank pays on behalf of Borrower for any Cash Management Services will be treated
as Advances under the Revolving Line and will accrue interest at the interest
rate applicable to Advances.

2.4Overadvances.  If, at any time, the outstanding principal amount of any
Advances (including any amounts used for Cash Management Services) exceeds the
lesser of either the Revolving Line or the Borrowing Base, Borrower shall
immediately pay to Bank in cash the amount of such excess (such excess, the
“Overadvance”). Without limiting Borrower’s obligation to repay Bank any
Overadvance, Borrower agrees to pay Bank interest on the outstanding amount of
any Overadvance, on demand, at the Default Rate.

2.5Payment of Interest on the Credit Extensions.

(a)Advances.  Subject to Section 2.5(b), the principal amount outstanding under
the Revolving Line shall accrue interest at a floating per annum rate equal to
the Prime Rate plus one and one half of one percent (1.50%), which interest
shall be payable monthly in accordance with Section 2.5(d) below.

(b)Default Rate.  Immediately upon the occurrence and during the continuance of
an Event of Default, Obligations shall bear interest at a rate per annum which
is five percent (5.0%) above the rate that is otherwise applicable thereto (the
“Default Rate”).  Fees and expenses which are required to be paid by Borrower
pursuant to the Loan Documents (including, without limitation, Bank Expenses)
but are not paid when due shall bear interest until paid at a rate equal to the
highest rate applicable to the Obligations.  Payment or acceptance of the
increased interest rate provided in this Section 2.5(b) is not a permitted
alternative to timely payment and shall not constitute a waiver of any Event of
Default or otherwise prejudice or limit any rights or remedies of Bank.

(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)Payment; Interest Computation.  Interest is payable monthly on the last
calendar day of each month and shall be computed on the basis of a 360-day year
for the actual number of days elapsed.  In computing interest, (i) all payments
received after 12:00 p.m. Pacific time on any day shall be deemed received at
the opening of business on the next Business Day, and (ii) the date of the
making of any Credit Extension shall be included and the date of payment shall
be excluded; provided, however, that if any Credit Extension is repaid on the
same day on which it is made, such day shall be included in computing interest
on such Credit Extension.

 

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2.6Fees.  Borrower shall pay to Bank:  

(a)Commitment Fee.  A fully earned, non refundable commitment fee of One Hundred
Twelve Thousand Five Hundred Dollars ($112,500) (the “Commitment Fee”), due as
follows: (i) Thirty Seven Thousand Five Hundred Dollars ($37,500) due on the
Effective Date, (ii) Thirty Seven Thousand Five Hundred Dollars ($37,500) due on
the earlier of (a) the first (1st) anniversary of the Effective Date or (b)
termination of the Revolving Line for any reason prior to the Revolving Line
Maturity Date, and (iii) Thirty Seven Thousand Five Hundred Dollars ($37,500)
due on the earlier of (a) the second (2nd) anniversary of the Effective Date or
(b) termination of the Revolving Line for any reason prior to the Revolving Line
Maturity Date.

(b)Termination Fee.  Upon termination of this Agreement for any reason prior to
the Revolving Line Maturity Date, in addition to the payment of any other
amounts then-owing, a termination fee in an amount equal to One Hundred Fifty
Thousand Dollars ($150,000) (the “Termination Fee”). Notwithstanding the
foregoing, Bank agrees to waive the Termination Fee if Bank closes on the
refinancing and re-documentation of the Revolving Line under this Agreement
under another division of Bank (in its sole and exclusive discretion).  

(c)Unused Revolving Line Facility Fee.  Payable quarterly in arrears on the last
day of each calendar quarter prior to the Revolving Line Maturity Date, and on
the Revolving Line Maturity Date, a fee (the “Unused Revolving Line Facility
Fee”) in an amount equal to three tenths of one percent (0.30%) per annum of the
average unused portion of the Revolving Line, as determined by Bank.  The unused
portion of the Revolving Line, for purposes of this calculation, shall be
calculated on a calendar year basis and shall equal the difference between
(A) the lesser of (i) the Revolving Line or (ii) the amount available under the
Borrowing Base, and (B) the average for the applicable quarter of the daily
closing balance of the Revolving Line outstanding.

(d)Good Faith Deposit. Borrower has paid to Bank a deposit of Fifteen Thousand
Dollars ($15,000) (the “Good Faith Deposit”) to initiate Bank’s due diligence
review process. Any portion of the Good Faith Deposit not utilized to pay Bank
Expenses will be applied to the portion of the Commitment Fee due on the
Effective Date.

(e)Bank Expenses.  All Bank Expenses (including reasonable attorneys’ fees and
expenses for documentation and negotiation of this Agreement) incurred through
and after the Effective Date, when due (or, if no stated due date, upon demand
by Bank).

(f)Fees Fully Earned.  Unless otherwise provided in this Agreement or in a
separate writing by Bank, Borrower shall not be entitled to any credit, rebate,
or repayment of any fees earned by Bank pursuant to this Agreement
notwithstanding any termination of this Agreement or the suspension or
termination of Bank’s obligation to make loans and advances hereunder.  Bank may
deduct amounts owing by Borrower under the clauses of this Section 2.6 pursuant
to the terms of Section 2.7(c).  Bank shall provide Borrower written notice of
deductions made from the Designated Deposit Account pursuant to the terms of the
clauses of this Section 2.6.

2.7Payments; Application of Payments; Debit of Accounts.

(a)All payments to be made by Borrower under any Loan Document shall be made in
immediately available funds in Dollars, without setoff or counterclaim, before
12:00 p.m.

 

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Pacific time on the date when due.  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 shall be due the next Business Day, and additional
fees or interest, as applicable, shall continue to accrue until paid.

(b)Bank has the exclusive right to determine, in its good faith business
judgment, the order and manner in which all payments with respect to the
Obligations may be applied.  Borrower shall have no right to specify the order
or the accounts to which Bank shall allocate or apply any payments required to
be made by Borrower to Bank or otherwise received by Bank under this Agreement
when any such allocation or application is not specified elsewhere in this
Agreement.

(c)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.

2.8Withholding.  Payments received by Bank from Borrower under this Agreement
will be made free and clear of and without deduction for any and all present or
future taxes, levies, imposts, duties, deductions, withholdings, assessments,
fees or other charges imposed by any Governmental Authority (including any
interest, additions to tax or penalties applicable thereto).  Specifically,
however, if at any time any Governmental Authority, applicable law, regulation
or international agreement requires Borrower to make any withholding or
deduction from any such payment or other sum payable hereunder to Bank, Borrower
hereby covenants and agrees that the amount due from Borrower with respect to
such payment or other sum payable hereunder will be increased to the extent
necessary to ensure that, after the making of such required withholding or
deduction, Bank receives a net sum equal to the sum which it would have received
had no withholding or deduction been required, and Borrower shall pay the full
amount withheld or deducted to the relevant Governmental Authority.  Borrower
will, upon request, furnish Bank with proof reasonably satisfactory to Bank
indicating that Borrower has made such withholding payment; provided, however,
that Borrower need not make any withholding payment if the amount or validity of
such withholding payment is contested in good faith by appropriate and timely
proceedings and as to which payment in full is bonded or reserved against by
Borrower.  The agreements and obligations of Borrower contained in this
Section 2.8 shall survive the termination of this Agreement.

3.CONDITIONS OF LOANS

3.1Conditions Precedent to Initial Credit Extension.  Bank’s obligation to make
the initial Credit Extension 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:

(a)duly executed signatures to the Loan Documents;

(b)duly executed signatures to the Control Agreements, if any;

(c)the Operating Documents and long-form good standing certificates of Borrower
certified by the Secretary of State (or equivalent agency) of Borrower’s
jurisdiction of

 

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organization or formation and each jurisdiction in which Borrower is qualified
to conduct business, each as of a date no earlier than thirty (30) days prior to
the Effective Date;

(d)duly executed signatures to the completed Borrowing Resolutions for Borrower;

(e)certified copies, dated as of a recent date, of financing statement searches,
as Bank may 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 Credit Extension, will be terminated or released;

(f)the Perfection Certificate of Borrower, together with the duly executed
signature thereto;

(g)evidence satisfactory to Bank that the insurance policies and endorsements
required by Section 6.7 hereof are in full force and effect, together with
appropriate evidence showing lender loss payable and/or additional insured
clauses or endorsements in favor of Bank; and

(h)payment of the fees and Bank Expenses then due as specified in Section 2.6
hereof.

3.2Conditions Precedent to all Credit Extensions.  Bank’s obligations to make
each Credit Extension, including the initial Credit Extension, is subject to the
following conditions precedent:

(a)timely receipt of an executed Transaction Report and a detailed general
ledger report;

(b)the representations and warranties in this Agreement shall be true, accurate,
and complete in all material respects on the date of the Transaction Report 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 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 this Agreement remain true, accurate, and
complete 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)Bank determines to its satisfaction that there has not been a Material
Adverse Change.

 

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3.3Covenant to Deliver. Borrower agrees to deliver to Bank each item required to
be delivered to Bank under this Agreement as a condition precedent to any Credit
Extension.  Borrower expressly agrees that a Credit Extension made 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 the making of any Credit
Extension in the absence of a required item shall be in Bank’s sole discretion.

3.4Procedures for Borrowing.  Subject to the prior satisfaction of all other
applicable conditions to the making of an Advance (other than Advances under
Section 2.3) set forth in this Agreement, to obtain an Advance, Borrower shall
notify Bank (which notice shall be irrevocable) by electronic mail by 12:00 p.m.
Pacific time on the Funding Date of the Advance.  In connection with such
notification, Borrower must promptly deliver to Bank by electronic mail a
completed Transaction Report executed by an Authorized Signer together with such
other reports and information, including without limitation, sales journals,
cash receipts journals, accounts receivable aging reports, as Bank may request
in its sole discretion.  Bank shall credit proceeds of an Advance to the
Designated Deposit Account.  Bank may make Advances under this Agreement based
on instructions from an Authorized Signer or without instructions if the
Advances are necessary to meet Obligations which have become due.

4.CREATION OF SECURITY INTEREST.  

4.1Grant 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 acknowledges that it previously has entered, and/or may in the future
enter, into Bank Services Agreements with Bank.  Regardless of the terms of any
Bank Services Agreement, Borrower agrees that any amounts Borrower owes Bank
thereunder shall be deemed to be Obligations hereunder and that it is the intent
of Borrower and Bank to have all such Obligations secured by the first priority
perfected security interest in the Collateral granted herein.  The Collateral
may also be subject to Permitted Liens.

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 (other than
inchoate indemnity obligations) and at such time as Bank’s obligation to make
Credit Extensions has terminated, Bank shall, at the sole cost and expense of
Borrower, release its Liens in the Collateral and all rights therein shall
revert to Borrower.  In the event (x) all Obligations (other than inchoate
indemnity obligations), except for Bank Services, are satisfied in full, and
(y) this Agreement is terminated, Bank shall terminate the security interest
granted herein upon Borrower providing cash collateral acceptable to Bank in its
good faith business judgment for Bank Services, if any.  In the event such Bank
Services consist of outstanding Letters of Credit, Borrower shall provide to
Bank cash collateral in an amount equal to (x) if such Letters of Credit are
denominated in Dollars, then at least one hundred five percent (105%); and
(y) if such Letters of Credit are denominated in a Foreign Currency, then at
least one hundred ten percent (110%), of the Dollar Equivalent of the face
amount of all such Letters of Credit plus all interest, fees, and costs due or
to become due in connection therewith (as estimated

 

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by Bank in its business judgment), to secure all of the Obligations relating  to
such Letters of Credit.

4.2Priority of Security Interest.  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.  The
Collateral may also be subject to Permitted Liens.  If Borrower shall acquire a
commercial tort claim in excess of Fifty Thousand Dollars ($50,000), 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.

4.3Authorization 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,
including a notice that any disposition of the Collateral, by either Borrower or
any other Person, shall be deemed to violate the rights of Bank under the Code.

5.REPRESENTATIONS AND WARRANTIES

Borrower represents and warrants as follows:

5.1Due Organization, Authorization; Power and Authority.  Borrower is duly
existing and in good standing as a Registered Organization in its jurisdiction
of formation and is qualified and licensed to do business and is in good
standing in any jurisdiction in which the conduct of its business or its
ownership of property requires that it 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 signed by Borrower, entitled “Perfection
Certificate”.  Borrower represents and warrants to Bank that, except as may have
been updated by a notification to Bank pursuant to Section 7.2, (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
jurisdiction 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 in all material respects (it
being understood and agreed that Borrower may from time to time update certain
information in the Perfection Certificate after the Effective Date to the extent
permitted by one or more specific provisions in this Agreement).  

The execution, delivery and performance by Borrower of the Loan Documents to
which it is a party have been duly authorized, and do not (i) conflict with any
of Borrower’s organizational documents, (ii) contravene, conflict with,
constitute a default under or violate any material

 

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Requirement of Law, (iii) contravene, conflict or violate any applicable order,
writ, judgment, injunction, decree, determination or award of any Governmental
Authority by which Borrower or any of its Subsidiaries or any of their property
or assets may be bound or affected, (iv) require any action by, filing,
registration, or qualification with, or Governmental Approval from, any
Governmental Authority (except such Governmental Approvals which have already
been obtained and are in full force and effect) or (v) conflict with,
contravene, constitute a default or breach under, or result in or permit the
termination or acceleration of, 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 reasonably be expected to have a
material adverse effect on Borrower’s business.

5.2Collateral.  Borrower has good title to, 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
Collateral Accounts at or with any bank or financial institution other than Bank
or Bank’s Affiliates except for the Collateral Accounts described in the
Perfection Certificate delivered to Bank in connection herewith and which
Borrower has taken such actions as are necessary to give Bank a perfected
security interest therein to the extent required by the terms of
Section 6.8(b).  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 or as
permitted pursuant to Section 7.2.  None of the components of the Collateral
shall be maintained at locations other than as provided in the Perfection
Certificate or as permitted pursuant to Section 7.2. All Inventory is in all
material respects of good and marketable quality, free from material defects.

Borrower is the sole owner of the Intellectual Property which it owns or
purports to own except for (a) non-exclusive licenses granted to its customers
in the ordinary course of business, (b) over-the-counter software that is
commercially available to the public, and (c) material Intellectual Property
licensed to Borrower and noted on the Perfection Certificate.  To Borrower’s
knowledge, each Patent which it owns or purports to own and which is material to
Borrower’s business is valid and enforceable, and no part of the Intellectual
Property which Borrower owns or purports to own and which is material to
Borrower’s business has been judged invalid or unenforceable, in whole or in
part.  To the best of Borrower’s knowledge, no claim has been made in writing
that any part of the Intellectual Property violates the rights of any third
party except to the extent such claim would not reasonably be expected to have a
material adverse effect on Borrower’s business. Except as noted on the
Perfection Certificate, or with respect to which notice is provided pursuant to
Section 6.10(b) hereof, Borrower is not a party to, nor is it bound by, any
Restricted License.

5.3Accounts Receivable.

(a)For each Account with respect to which Advances are requested, on the date
each Advance is requested and made, such Account shall be an Eligible Account.

(b)All statements made and all unpaid balances appearing in all invoices,
instruments and other documents evidencing the Eligible Accounts are and shall
be true and correct

 

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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 Eligible Accounts in any
Transaction Report.  To the best of Borrower’s knowledge, all signatures and
endorsements on all documents, instruments, and agreements relating to all
Eligible Accounts are genuine, and all such documents, instruments and
agreements are legally enforceable in accordance with their terms, except as may
be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws
relating to or limiting creditors’ rights generally or by equitable principles
relating to enforceability.

5.4Litigation.  Except as disclosed pursuant to Section 6.2(j), there are no
actions or proceedings pending or, to the knowledge of any Responsible Officer,
threatened in writing by or against Borrower or any of its Subsidiaries
involving more than, individually or in the aggregate, Two Hundred Thousand
Dollars ($200,000).

5.5Financial Statements; Financial Condition.  All consolidated financial
statements for Borrower and any of its Subsidiaries delivered to Bank by
submission to the Financial Statement Repository fairly present in all material
respects Borrower’s consolidated financial condition and Borrower’s consolidated
results of operations as of the dates and for the periods presented.  There has
not been any material deterioration in Borrower’s consolidated financial
condition since the date of the most recent financial statements submitted to
the Financial Statement Repository.

5.6Solvency.  The fair salable value of Borrower’s consolidated assets
(including goodwill minus disposition costs) exceeds the fair value of
Borrower’s liabilities; Borrower is not left with unreasonably small capital
after the transactions in this Agreement; and Borrower is able to pay its debts
(including trade debts) as they mature.

5.7Regulatory Compliance.  Borrower is not an “investment company” or a company
“controlled” by an “investment company” under the Investment Company Act of
1940, as amended.  Borrower is not engaged as one of its important activities in
extending credit for margin stock (under Regulations X, T and U of the Federal
Reserve Board of Governors).  Borrower (a) has complied in all material respects
with all Requirements of Law, and (b) has not violated any Requirements of Law
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 Governmental Authorities that are necessary to continue their respective
businesses as currently conducted, except as could not reasonably be expected to
cause a Material Adverse Change.

5.8Subsidiaries; Investments.  Borrower does not own any stock, partnership, or
other ownership interest or other equity securities except for Permitted
Investments.

 

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5.9Tax 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 except (a) to the extent such taxes are being contested in good faith
by appropriate proceedings promptly instituted and diligently conducted, so long
as such reserve or other appropriate provision, if any, as shall be required in
conformity with GAAP shall have been made therefor, or (b) if such taxes,
assessments, deposits and contributions do not, individually or in the
aggregate, exceed Twenty Thousand Dollars ($20,000).

To the extent Borrower defers payment of any contested taxes, Borrower shall (i)
notify Bank in writing of the commencement of, and any material development in,
the proceedings, and (ii) post bonds or take 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 is
unaware 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.

5.10Use of Proceeds.  Borrower shall use the proceeds of the Credit Extensions
solely as working capital and for other general corporate purposes and to fund
its general business requirements and not for personal, family, household or
agricultural purposes.

5.11Full Disclosure. No written representation, warranty or other statement of
Borrower in any certificate or written statement submitted to the Financial
Statement Repository or otherwise given to Bank, as of the date such
representation, warranty, or other statement was 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).

5.12Definition of “Knowledge.”  For purposes of the Loan Documents, whenever a
representation or warranty is made to Borrower’s knowledge or awareness, to the
“best of” Borrower’s knowledge, or with a similar qualification, knowledge or
awareness means the actual knowledge, after reasonable investigation, of any
Responsible Officer.

 

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6.AFFIRMATIVE COVENANTS

Borrower shall do all of the following:

6.1Government Compliance.

(a)Except as permitted by Sections 7.1 and 7.3, maintain its and all its
Subsidiaries’ legal existence and good standing in their respective
jurisdictions of formation and maintain qualification in each jurisdiction in
which the failure to so qualify would reasonably be expected to have a material
adverse effect on Borrower’s business or operations.  Borrower shall comply, and
have each Subsidiary comply, in all material respects, with all laws, ordinances
and regulations to which it is subject.

(b)Obtain all of the Governmental Approvals necessary for the performance by
Borrower of its obligations under the Loan Documents to which it is a party and
the grant of a security interest to Bank in all of its property.  Borrower shall
promptly provide copies of any such obtained Governmental Approvals to Bank.

6.2Financial Statements, Reports, Certificates.  Provide Bank with the
following  by posting to the Financial Statement Repository:

(a)a Transaction Report (and any schedules related thereto) (i) with each
request for an Advance, (ii) no later than Friday of each week when a Streamline
Period is not in effect while Obligations under the Revolving Line are
outstanding, and (iii) within thirty (30) days after the end of each month when
a Streamline Period is in effect or when no Obligations under the Revolving Line
are outstanding;

(b)a detailed general ledger report (and any schedules related thereto) (i) with
each request for an Advance, and (ii) within thirty (30) days after the end of
each month;

(c)within thirty (30) days after the end of each month, (A) monthly accounts
receivable agings, aged by invoice date, (B) monthly accounts payable agings,
aged by invoice date, and outstanding or held check registers, if any, and
(C) monthly reconciliations of accounts receivable agings (aged by invoice
date), and transaction reports;

(d)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 for such month certified
by a Responsible Officer and in a form reasonably acceptable to Bank (the
“Monthly Financial Statements”);

(e)within thirty (30) days after the last day of each month and together with
the Monthly Financial Statements, a completed Compliance Statement, confirming
that as of the end of such month, Borrower was in full compliance with all of
the terms and conditions of this Agreement, and setting forth calculations
showing compliance with the financial covenants set forth in this Agreement and
such other information as Bank may reasonably request, including, without
limitation, if requested by Bank, a statement that at the end of such month
there were no held checks;

 

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(f)within thirty (30) days of the later to occur of (i) approval by Borrower’s
Board of Directors, or (ii) the end of each fiscal year of Borrower, and more
frequently as updated, (A) annual operating budgets (including income
statements, balance sheets and cash flow statements, by month) for the upcoming
fiscal year of Borrower, and (B) annual financial projections for the following
fiscal year (on a quarterly basis) as approved by Borrower’s Board of Directors,
together with any related business forecasts used in the preparation of such
annual financial projections;

(g)(i) at all times that Borrower’s Board of Directors requires Borrower to
prepare audited financial statements, as soon as available, and in any event
within one hundred eighty (180) days following the end of Borrower’s fiscal
year, audited consolidated financial statements prepared under GAAP,
consistently applied, together with an unqualified opinion on the financial
statements from Burr Pilger Mayer, Inc. or such other independent certified
public accounting firm reasonably acceptable to Bank; and (ii) at all other
times, as soon as available, but no later than sixty (60) days following the end
of Borrower’s fiscal year, a company prepared consolidated balance sheet and
income statement covering Borrower’s consolidated operations for such fiscal
year certified by a Responsible Officer and in a form acceptable to Bank;

(h)Within five (5) days of filing, copies of all periodic and other reports,
proxy statements and other materials filed by Borrower with the SEC, any
Governmental Authority succeeding to any or all of the functions of the SEC or
with any national securities exchange, or distributed to its shareholders, as
the case may be.  Documents required to be delivered pursuant to the terms of
this Section 6.2 (to the extent any such documents are included in materials
otherwise filed with the SEC) may be delivered electronically and if so
delivered, shall be deemed to have been delivered on the date on which Borrower
posts such documents, or provides a link thereto, on Borrower’s website on the
Internet at Borrower’s website address; provided, however, Borrower shall
promptly notify Bank in writing (which may be by electronic mail) of the posting
of any such documents;

(i)within five (5) days of delivery, copies of all statements, reports and
notices made available to all of Borrower’s security holders or to any holders
of Subordinated Debt;

(j)prompt report of any legal actions pending or threatened in writing against
Borrower or any of its Subsidiaries that could result in damages or costs to
Borrower or any of its Subsidiaries of, individually or in the aggregate, Two
Hundred Thousand Dollars ($200,000) or more; and

(k)other financial information reasonably requested by Bank.

Any submission by Borrower of a Compliance Statement to the Financial Statement
Repository pursuant to this Section shall be deemed to be a representation by
Borrower that (a) as of the end of the compliance period forth in such
submission, Borrower is in complete compliance with all required covenants
except as noted in such Compliance Statement; (b) as of the date of such
submission, no Events of Default have occurred and are continuing; (c) all
representations and warranties other than any representations or warranties that
are made as of a specific date in Section 5 remain true and correct in all
material respects as of the date of such submission except as noted in such
Compliance Statement; (d) as of the date of such submission, Borrower and each

 

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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; and (e) as of the date of such
submission, 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 have not previously provided written notification to Bank.

6.3Accounts Receivable.

(a)Schedules and Documents Relating to Accounts.  Borrower shall deliver to Bank
Transaction Reports and schedules of collections, as provided in Section 6.2, on
Bank’s standard forms; provided, however, that Borrower’s failure to execute and
deliver the same shall not affect or limit Bank’s Lien and other rights in all
of Borrower’s Accounts, nor shall Bank’s failure to advance or lend against a
specific Account affect or limit Bank’s Lien and other rights therein.  If
requested by Bank, Borrower shall furnish Bank with copies (or, at Bank’s
request, originals) of all contracts, orders, invoices, and other similar
documents, and all shipping instructions, delivery receipts, bills of lading,
and other evidence of delivery, for any goods the sale or disposition of which
gave rise to such Accounts.  In addition, Borrower shall deliver to Bank, on its
request, the originals of all instruments, chattel paper, security agreements,
guarantees and other documents and property evidencing or securing any Accounts,
in the same form as received, with all necessary indorsements, and copies of all
credit memos.  

(b)Disputes.  Borrower shall promptly notify Bank of all disputes or claims
relating to Accounts to the extent they exceed Fifty Thousand Dollars ($50,000)
in the aggregate.  Borrower may forgive (completely or partially), compromise,
or settle any Account for less than payment in full, or agree to do any of the
foregoing so long as (i) Borrower does so in good faith, in a commercially
reasonable manner, in the ordinary course of business, in arm’s-length
transactions, and reports the same to Bank in the regular reports provided to
Bank; (ii) no Event of Default has occurred and is continuing; and (iii) after
taking into account all such discounts, settlements and forgiveness, the total
outstanding Advances will not exceed the lesser of the Revolving Line or the
Borrowing Base.

(c)Collection of Accounts.  Borrower shall have the right to collect all
Accounts, unless and until an Event of Default has occurred and is
continuing.  Bank shall require that Borrower direct Account Debtors to deliver
or transmit all proceeds of Accounts into a lockbox account, or via electronic
deposit capture into a “blocked account” as specified by Bank (either such
account, the “Cash Collateral Account”).  Whether or not an Event of Default has
occurred and is continuing, Borrower shall immediately deliver all payments on
and proceeds of Accounts to the Cash Collateral Account (i) to be applied to
immediately reduce the Obligations when a Streamline Period is not in effect, or
(ii) to be transferred on a daily basis to Borrower’s operating account with
Bank when a Streamline Period is in effect.

(d)Returns.  Provided no Event of Default has occurred and is continuing, if any
Account Debtor returns any Inventory to Borrower in excess of One Hundred Fifty
Thousand Dollars ($150,000) in the aggregate, Borrower shall promptly
(i) determine the reason for such return, (ii) issue a credit memorandum to the
Account Debtor in the appropriate amount, and (iii) provide a copy of such
credit memorandum to Bank, upon request from Bank.  In the event

 

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any attempted return occurs after the occurrence and during the continuance of
any Event of Default, Borrower shall hold the returned Inventory in trust for
Bank, and immediately notify Bank of the return of the Inventory.

(e)Verification.  Bank may, from time to time, verify directly with the
respective Account Debtors the validity, amount and other matters relating to
the Accounts, either in the name of Borrower or Bank or such other name as Bank
may choose, and notify any Account Debtor of Bank’s security interest in such
Account.

(f)No Liability.  Bank shall not be responsible or liable for any shortage or
discrepancy in, damage to, or loss or destruction of, any goods, the sale or
other disposition of which gives rise to an Account, or for any error, act,
omission, or delay of any kind occurring in the settlement, failure to settle,
collection or failure to collect any Account, or for settling any Account in
good faith for less than the full amount thereof, nor shall Bank be deemed to be
responsible for any of Borrower’s obligations under any contract or agreement
giving rise to an Account.  Nothing herein shall, however, relieve Bank from
liability for its own gross negligence or willful misconduct.

6.4Remittance of Proceeds.  Except as otherwise provided in Section 6.3(c),
deliver, in kind, all proceeds arising from the disposition of any Collateral to
Bank in the original form in which received by Borrower not later than the
following Business Day after receipt by Borrower, to be applied to the
Obligations (a) prior to an Event of Default, pursuant to the terms of
Section 2.7(b) hereof, and (b) after the occurrence and during the continuance
of an Event of Default, pursuant to the terms of Section 9.4 hereof; provided
that, if no Event of Default has occurred and is continuing, Borrower shall not
be obligated to remit to Bank the proceeds of (i) the sale of worn out or
obsolete Equipment disposed of by Borrower in good faith in an arm’s length
transaction for an aggregate purchase price of Twenty Five Thousand Dollars
($25,000) or less (for all such transactions in any fiscal year) and (ii) other
Transfers permitted by Section 7.1.  Borrower agrees that it will not commingle
proceeds of Collateral with any of Borrower’s other funds or property, but will
hold such proceeds separate and apart from such other funds and property and in
an express trust for Bank.  Nothing in this Section limits the restrictions on
disposition of Collateral set forth elsewhere in this Agreement.

6.5Taxes; Pensions.  Timely file, and require each of its Subsidiaries to timely
file, all required tax returns and reports and timely pay, and require each of
its Subsidiaries to timely pay, all foreign, federal, state and local taxes,
assessments, deposits and contributions owed by Borrower and each of its
Subsidiaries, except as otherwise permitted 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.

6.6Access to Collateral; Books and Records.  At reasonable times, on three (3)
Business Days’ notice (provided no notice is required if an Event of Default has
occurred and is continuing), Bank, or its agents, shall have the right to
inspect the Collateral and the right to audit and copy Borrower’s Books.  The
foregoing inspections and audits shall be conducted at Borrower’s expense and no
more often than once every twelve (12) months (or more frequently as conditions
warrant, as determined by Bank in its sole discretion) unless an Event of
Default has

 

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occurred and is continuing in which case such inspections and audits shall occur
as often as Bank shall determine is necessary.  The charge therefor shall be One
Thousand Dollars ($1,000) per person per day (or such higher amount as shall
represent Bank’s then-current standard charge for the same), plus reasonable
out-of-pocket expenses.  In the event Borrower and Bank schedule an audit more
than ten (10) days in advance, and Borrower cancels or seeks to reschedule the
audit with less than ten (10) days written notice to Bank, then (without
limiting any of Bank’s rights or remedies) Borrower shall pay Bank a fee of One
Thousand Dollars ($1,000) plus any out-of-pocket expenses incurred by Bank to
compensate Bank for the anticipated costs and expenses of the cancellation or
rescheduling. Borrower hereby acknowledges that the Initial Audit will be
conducted prior to the initial Credit Extension, but no later than one hundred
eighty (180) days after the Effective Date.

6.7Insurance.

(a)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 financially
sound and reputable insurance companies that are not Affiliates of Borrower, and
in amounts that are reasonably satisfactory to Bank.  All property policies
shall have a lender’s loss payable endorsement showing Bank as lender loss
payee.  All liability policies shall show, or have endorsements showing, Bank as
an additional insured.  Bank shall be named as lender loss payee and/or
additional insured with respect to any such insurance providing coverage in
respect of any Collateral.

(b)Ensure that proceeds payable under any property policy are, at Bank’s option,
payable to Bank on account of the Obligations. Notwithstanding the foregoing,
(x) so long as no Event of Default has occurred and is continuing, Borrower
shall have the option of applying the proceeds of any casualty policy up to One
Hundred Fifty Thousand Dollars ($150,000) in the aggregate for all losses under
all casualty policies in any one year, toward the replacement or repair of
destroyed or damaged property; provided that any such replaced or repaired
property (i) shall be of equal or like value as the replaced or repaired
Collateral and (ii) shall be deemed Collateral in which Bank has been granted a
first priority security interest (subject to Permitted Liens), and (y) after the
occurrence and during the continuance of an Event of Default, all proceeds
payable under such casualty policy shall, at the option of Bank, be payable to
Bank on account of the Obligations.

(c)At Bank’s request, Borrower shall deliver certified copies of insurance
policies and evidence of all premium payments.  Each provider of any such
insurance required under this Section 6.7 shall agree, by endorsement upon the
policy or policies issued by it or by independent instruments furnished to Bank,
that it will give Bank thirty (30) days prior written notice before any such
policy or policies shall be materially altered or canceled.  If Borrower fails
to obtain insurance as required under this Section 6.7 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 6.7, and take any action under the policies Bank deems prudent.

 

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6.8Operating Accounts.

(a)Maintain all of its and all of its Domestic Subsidiaries’ banking
relationship, including all operating and other deposit accounts, securities
accounts, and banking services (including without limitation, Cash Management
Services, foreign exchange activity, and investment management) with Bank and
Bank’s Affiliates.

(b)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 which Control Agreement may not be terminated without the prior
written consent of Bank.  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.

6.9Reserved.

6.10Protection of Intellectual Property Rights.

(a)(i) Protect, defend and maintain the validity and enforceability of its
Intellectual Property material to Borrower’s business; (ii) promptly advise Bank
in writing of material infringements or any other event that could reasonably be
expected to materially and adversely affect the value of its Intellectual
Property; and (iii) not allow any Intellectual Property material to Borrower’s
business to be abandoned, forfeited or dedicated to the public without Bank’s
written consent.

(b)Provide written notice to Bank concurrently with the required delivery of a
Compliance Statement pursuant to Section 6.2, of entering or becoming bound by
any Restricted License (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 (i) any Restricted License 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 Restricted License, whether now
existing or entered into in the future, and (ii) Bank to have the ability in the
event of a liquidation of any Collateral to dispose of such Collateral in
accordance with Bank’s rights and remedies under this Agreement and the other
Loan Documents.

6.11Litigation 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.

6.12Formation or Acquisition of Subsidiaries.  Notwithstanding and without
limiting the negative covenants contained in Sections 7.3 and 7.7 hereof, at the
time that Borrower forms any direct or indirect Subsidiary or acquires any
direct or indirect Subsidiary after the Effective

 

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Date, Borrower shall, at the request of Bank in its sole discretion, (a) cause
any such new Domestic Subsidiary to provide to Bank a (i) joinder to this
Agreement to become a co-borrower hereunder (each a “Co-Borrower”) or (ii)
Guaranty to become a Guarantor hereunder, together with such appropriate
financing statements and/or Control Agreements, all in form and substance
satisfactory to Bank (including being sufficient to grant Bank a first priority
Lien (subject to Permitted Liens) in and to the assets of such newly formed or
acquired Subsidiary), (b) provide to Bank appropriate certificates and powers
and financing statements, pledging all of the direct or beneficial ownership
interest in such new Subsidiary to the extent constituting Collateral, in form
and substance satisfactory to Bank, and (c) provide to Bank all other
documentation in form and substance satisfactory to Bank, which in its opinion
is appropriate with respect to the execution and delivery of the applicable
documentation referred to above.  Any document, agreement, or instrument
executed or issued pursuant to this Section 6.12 shall be a Loan Document.

6.13Further Assurances.  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.  Deliver to Bank, within five (5)
days after the same are sent or received, copies of all material correspondence,
reports, documents and other filings with any Governmental Authority regarding
compliance with or maintenance of Governmental Approvals or Requirements of Law
or that could reasonably be expected to have a material adverse effect on any of
the Governmental Approvals or otherwise on the operations of Borrower or any of
its Subsidiaries.

7.NEGATIVE COVENANTS

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

7.1Dispositions.  Convey, sell, lease, transfer, assign, 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 that
is, in the reasonable judgment of Borrower, no longer economically practicable
to maintain or useful in the ordinary course of business of Borrower;
(c) consisting of Permitted Liens and Permitted Investments; (d) consisting of
Borrower’s use or transfer of money or Cash Equivalents in a manner that is not
prohibited by the terms of this Agreement or the other Loan Documents; and (e)
other Transfers not to exceed One Hundred Fifty Thousand Dollars ($150,000) in
the aggregate in any fiscal year.

7.2Changes 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; (c) fail to provide
notice to Bank of any senior management departing from or ceasing to be employed
by Borrower within ten (10) days after their departure from Borrower; or (d)
permit or suffer any Change in Control.

Borrower shall not, without at least fifteen (15) days prior written notice to
Bank:  (1) add any new offices or business locations not already disclosed on
the Perfection Certificate, including warehouses (unless such new offices or
business locations contain less than Two Hundred Thousand Dollars ($200,000) in
Borrower’s assets or property) or deliver any portion of the

 

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Collateral valued, individually or in the aggregate, in excess of Two Hundred
Thousand Dollars ($200,000) to a bailee at a location other than to a bailee and
at a location already disclosed in the Perfection Certificate, (2) change its
jurisdiction of organization, (3) change its organizational type, (4) change its
legal name, or (5) change any organizational number (if any) assigned by its
jurisdiction of organization.  If Borrower intends to deliver any portion of the
Collateral valued, individually or in the aggregate, in excess of Two Hundred
Thousand Dollars ($200,000) to a bailee not already disclosed on the Perfection
Certificate, and Bank and such bailee are not already parties to a bailee
agreement governing both the Collateral and the location to which Borrower
intends to deliver the Collateral, then Borrower will first receive the written
consent of Bank, and such bailee shall execute and deliver a bailee agreement in
form and substance satisfactory to Bank.

7.3Mergers 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 (the “Target”) (including, without
limitation, by the formation of any Subsidiary) (an “Acquisition”), except that
(i) a Subsidiary may merge or consolidate into another Subsidiary or into
Borrower and (ii) Borrower and its Subsidiaries may consummate any Permitted
Acquisition.

7.4Indebtedness.  Create, incur, assume, or be liable for any Indebtedness, or
permit any Subsidiary to do so, other than Permitted Indebtedness.

7.5Encumbrance.  Create, incur, allow, or suffer 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, except for Permitted Liens, or enter into any
agreement, document, instrument or other arrangement (except with or in favor of
Bank) with any Person which directly or indirectly prohibits or has the effect
of prohibiting Borrower or any Subsidiary from assigning, mortgaging, pledging,
granting a security interest in or upon, or encumbering any of Borrower’s or any
Subsidiary’s Intellectual Property in favor of Bank, except as is otherwise
permitted in Section 7.1 hereof and the definition of “Permitted Liens” herein.

7.6Maintenance of Collateral Accounts.  Maintain any Collateral Account except
pursuant to the terms of Section 6.8(b) hereof.

7.7Distributions; Investments.  (a) Pay any dividends or make any distribution
or payment or redeem, retire or purchase any capital stock; provided that
(i) Borrower may convert any of its convertible securities into other securities
pursuant to the terms of such convertible securities or otherwise in exchange
thereof, (ii) Borrower may pay dividends solely in common stock; (iii) Borrower
may repurchase the stock of former employees or consultants pursuant to stock
repurchase agreements so long as an Event of Default does not exist at the time
of such repurchase and would not exist after giving effect to such repurchase,
provided that the aggregate amount of all such repurchases does not exceed One
Hundred Thousand Dollars ($100,000) per fiscal year; (iv) Borrower may pay cash
in lieu of issuing fractional shares so long as an Event of Default does not
exist at the time of such payment and would not exist after giving effect to
such payment; and (v) Borrower may make payments in connection with the
retention of equity securities in payment of withholding taxes in connection
with equity-based compensation plans to

 

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the extent that net share settlement arrangements are deemed to be repurchases
so long as an Event of Default does not exist at the time of such payment and
would not exist after giving effect to such payment and provided such payments
do not exceed One Hundred Thousand Dollars ($100,000) per fiscal year, or (b)
directly or indirectly make any Investment (including, without limitation, by
the formation of any Subsidiary) other than Permitted Investments, or permit any
of its Subsidiaries to do so.

7.8Transactions with Affiliates. Directly or indirectly enter into or permit to
exist any material transaction with any Affiliate of Borrower, except for (i)
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, (ii)
transactions permitted pursuant to Section 7.3 and 7.7, (iii) reasonable and
customary indemnification arrangements with regard to officers and directors
approved (if such approval is required) by the relevant board of directors,
board of managers or equivalent corporate body, (iv) reasonable and customary
employee agreements approved (if such approval is required) by the relevant
board of directors, board of managers or equivalent corporate body, (v)
reasonable and customary compensation arrangements (including equity based
compensation) with Borrower’s employees approved (if such approval is required)
by the relevant board of directors, board of managers or equivalent corporate
body, and (vi) reimbursement of expenses of current or former officers and
directors approved (if such approval is required) by the relevant board of
directors, board of managers or equivalent corporate body.

7.9Subordinated Debt.  Except under the terms of the subordination,
intercreditor, or other similar agreement to which such Subordinated Debt is
subject, (a) make or permit any payment on any Subordinated Debt, or (b) amend
any provision in any document relating to the Subordinated Debt which would
increase the amount thereof, provide for earlier or greater principal, interest,
or other payments thereon, or adversely affect the subordination thereof to
Obligations owed to Bank.

7.10Compliance.  Become an “investment company” or a company controlled by an
“investment company”, under the Investment Company Act of 1940, as amended, 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.

 

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8.EVENTS OF DEFAULT

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

8.1Payment Default.  Borrower fails to (a) make any payment of principal or
interest on any Credit Extension when due, or (b) pay any other Obligations
within three (3) Business Days after such Obligations are due and payable (which
three (3) Business Day cure period shall not apply to payments due on the
Revolving Line Maturity Date).  During the cure period, the failure to make or
pay any payment specified under clause (b) hereunder is not an Event of Default
(but no Credit Extension will be made during the cure period);

8.2Covenant Default.

(a)Borrower fails or neglects to perform any obligation in Sections 2.4, 6.2,
6.5, 6.7, 6.8, 6.9 (if applicable), 6.10(b), 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 or 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).  Cure periods provided under this section shall not
apply, among other things, to financial covenants or any other covenants set
forth in clause (a) above;

8.3Material Adverse Change.  A Material Adverse Change occurs;

8.4Attachment; Levy; Restraint on Business.

(a)(i) The service of process seeking to attach, by trustee or similar process,
any funds of Borrower or of any entity under the control of Borrower (including
a Subsidiary), or (ii) a notice of lien or levy is filed against any of
Borrower’s assets by any Governmental Authority, and the same under
subclauses (i) and (ii) hereof are not, within ten (10) days after the
occurrence thereof, discharged or stayed (whether through the posting of a bond
or otherwise); provided, however, no Credit Extensions shall be made during any
ten (10) day cure period; or

(b)(i) any material portion of Borrower’s assets is attached, seized, levied on,
or comes into possession of a trustee or receiver, or (ii) any court order
enjoins, restrains, or prevents Borrower from conducting all or any material
part of its business;

8.5Insolvency.  (a) Borrower or any of its Subsidiaries fails to be solvent as
described in Section 5.6 hereof; (b) Borrower or any of its Subsidiaries begins
an Insolvency Proceeding; or (c) an Insolvency Proceeding is begun against
Borrower or any of its Subsidiaries and is not

 

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dismissed or stayed within thirty (30) days (but no Credit Extensions shall be
made while any of the conditions described in clause (a) exist and/or until any
Insolvency Proceeding is dismissed);

8.6Other Agreements.  There is, under any agreement to which Borrower or any
Guarantor is a party with a third party or parties, (a) any default (upon formal
notification to Borrower of such default) resulting in a right by such third
party or parties, whether or not exercised, to accelerate the maturity of any
Indebtedness in an amount individually or in the aggregate in excess of One
Hundred Thousand Dollars ($100,000); or (b) any breach or default by Borrower or
Guarantor, the result of which could have a material adverse effect on
Borrower’s or any Guarantor’s business;

8.7Judgments; Penalties.  One or more fines, penalties or final judgments,
orders or decrees 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 as to which liability has been accepted by
such insurance carrier) shall be rendered against Borrower by any Governmental
Authority, and the same are not, within ten (10) days after the entry,
assessment or issuance thereof, discharged, satisfied, or paid, or after
execution thereof, stayed or bonded pending appeal, or such judgments are not
discharged prior to the expiration of any such stay (provided that no Credit
Extensions will be made prior to the satisfaction, payment, discharge, stay, or
bonding of such fine, penalty, judgment, order or decree);

8.8Misrepresentations.  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;

8.9Subordinated Debt.  Any subordination, intercreditor, or other similar
agreement evidencing any Subordinated Debt shall for any reason be revoked or
invalidated or otherwise cease to be in full force and effect, any Person shall
be in breach thereof or contest in any manner the validity or enforceability
thereof or deny that it has any further liability or obligation thereunder, or
the Obligations shall for any reason be subordinated or shall not have the
priority contemplated by this Agreement or subordination, intercreditor, or
other similar agreement evidencing any Subordinated Debt, except, in each case,
as may be permitted pursuant to the terms of such subordination, intercreditor,
or other similar agreement evidencing any Subordinated Debt;

8.10Guaranty.  (a) Any Guaranty terminates or ceases for any reason to be in
full force and effect other than in accordance with its terms; (b) any Guarantor
does not perform any obligation or covenant under any Guaranty; (c) any
circumstance described in Sections 8.3, 8.4, 8.5, 8.7, or 8.8 occurs with
respect to any Guarantor, or (d) a material impairment in the perfection or
priority of Bank’s Lien in the collateral provided by any Guarantor or in the
value of such collateral; or

8.11Governmental Approvals.  Any Governmental Approval shall have been (a)
revoked, rescinded, suspended, modified in an adverse manner or not renewed in
the ordinary course for a full term or (b) subject to any decision by a
Governmental Authority that designates a hearing with respect to any
applications for renewal of any of such Governmental Approval or that

 

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could result in the Governmental Authority taking any of the actions described
in clause (a) above, and such decision or such revocation, rescission,
suspension, modification or non-renewal cause, or could reasonably be expected
to cause, a Material Adverse Change.

9.BANK’S RIGHTS AND REMEDIES

9.1Rights and Remedies.  Upon the occurrence and during the continuance of an
Event of Default, 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 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)for any Letters of Credit, demand that Borrower (i) deposit cash with Bank in
an amount equal to at least one hundred five percent (105%) of the Dollar
Equivalent (or one hundred ten percent (110%) if the Dollar Equivalent is
denominated in Foreign Currency) of the aggregate face amount of all Letters of
Credit remaining undrawn (plus all interest, fees, and costs due or to become
due in connection therewith (as estimated by Bank in its good faith business
judgment)), to secure all of the Obligations relating to such Letters of Credit,
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;

(d)terminate any FX Contracts;

(e)verify the amount of, demand payment of and performance under, and collect
any Accounts and General Intangibles, settle or adjust disputes and claims
directly with Account Debtors for amounts on terms and in any order that Bank
considers advisable, and notify any Person owing Borrower money of Bank’s
security interest in such funds;

(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) 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, and advertising matter, or any

 

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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).

9.2Power 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 Bank’s security interest in the
Collateral regardless of whether an Event of Default has occurred until all
Obligations (other than inchoate indemnity obligations, and any other
obligations which, by their terms, are to survive the termination of this
Agreement, and any Obligations under Bank Services Agreements that are cash
collateralized in accordance with Section 4.1 of this Agreement) 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 (other than inchoate indemnity obligations,
and any other obligations which, by their terms, are to survive the termination
of this Agreement, and any Obligations under Bank Services Agreements that are
cash collateralized in accordance with Section 4.1 of this Agreement) have been
fully repaid and performed and Bank’s obligation to provide Credit Extensions
terminates.

9.3Protective Payments.  If Borrower fails to obtain the insurance called for by
Section 6.7 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 or which may be required to preserve the Collateral, 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
rate applicable to the Obligations, 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.

 

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9.4Application of Payments and Proceeds.  Bank shall have the right to apply in
any order 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.  Bank shall pay
any surplus to Borrower by credit to the Designated Deposit Account or to other
Persons legally entitled thereto; Borrower shall remain liable to Bank for any
deficiency.  If Bank, 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.

9.5Bank’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, except as set forth
in the previous sentence.

9.6No 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 the party
granting the waiver 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 shall not preclude Bank from exercising any other
remedy under this Agreement or other remedy available at law or in equity, 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.

9.7Demand 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 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 mailing or electronic mail 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:

Iridex Corporation

 

1212 Terra Bella Avenue

 

Mountain View, California 94043

 

Attn: Atabak Mokari, CFO

 

Email: AMokari@iridex.com

 

If to Bank:

Silicon Valley Bank

 

2400 Hanover Street

 

Palo Alto, California 94304

 

Attn: Shawn Parry

 

Email: SParry@svb.com

 

11.CHOICE OF LAW, VENUE, JURY TRIAL WAIVER AND JUDICIAL REFERENCE

Except as otherwise expressly provided in any of the Loan Documents, California
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 Santa Clara County, California; 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,
or subsequently provided by Borrower in accordance with, 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.

TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, 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

 

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PARTIES TO ENTER INTO THIS AGREEMENT.  EACH PARTY HAS REVIEWED THIS WAIVER WITH
ITS COUNSEL.

WITHOUT INTENDING IN ANY WAY TO LIMIT THE PARTIES’ AGREEMENT TO WAIVE THEIR
RESPECTIVE RIGHT TO A TRIAL BY JURY, if the above waiver of the right to a trial
by jury is not enforceable, the parties hereto agree that any and all disputes
or controversies of any nature between them arising at any time shall be decided
by a reference to a private judge, mutually selected by the parties (or, if they
cannot agree, by the Presiding Judge of the Santa Clara County, California
Superior Court) appointed in accordance with California Code of Civil Procedure
§ 638 (or pursuant to comparable provisions of federal law if the dispute falls
within the exclusive jurisdiction of the federal courts), sitting without a
jury, in Santa Clara County, California; and the parties hereby submit to the
jurisdiction of such court.  The reference proceedings shall be conducted
pursuant to and in accordance with the provisions of California Code of Civil
Procedure Sections 638 through 645.1, inclusive.  The private judge shall have
the power, among others, to grant provisional relief, including without
limitation, entering temporary restraining orders, issuing preliminary and
permanent injunctions and appointing receivers.  All such proceedings shall be
closed to the public and confidential and all records relating thereto shall be
permanently sealed.  If during the course of any dispute, a party desires to
seek provisional relief, but a judge has not been appointed at that point
pursuant to the judicial reference procedures, then such party may apply to the
Santa Clara County, California Superior Court for such relief.  The proceeding
before the private judge shall be conducted in the same manner as it would be
before a court under the rules of evidence applicable to judicial
proceedings.  The parties shall be entitled to discovery which shall be
conducted in the same manner as it would be before a court under the rules of
discovery applicable to judicial proceedings.  The private judge shall oversee
discovery and may enforce all discovery rules and orders applicable to judicial
proceedings in the same manner as a trial court judge.  The parties agree that
the selected or appointed private judge shall have the power to decide all
issues in the action or proceeding, whether of fact or of law, and shall report
a statement of decision thereon pursuant to California Code of Civil Procedure
Section 644(a).  Nothing in this paragraph shall limit the right of any party at
any time to exercise self-help remedies, foreclose against collateral, or obtain
provisional remedies.  The private judge shall also determine all issues
relating to the applicability, interpretation, and enforceability of this
paragraph.

This Section 11 shall survive the termination of this Agreement.

12.GENERAL PROVISIONS

12.1Termination Prior to Revolving Line Maturity Date; 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, and any
Obligations under Bank Services Agreements that are cash collateralized in
accordance with Section 4.1 of this Agreement) have been satisfied.  So long as
Borrower has satisfied the Obligations (other than inchoate indemnity
obligations, and any other obligations which, by their terms, are to survive the
termination of this Agreement, and any Obligations under Bank Services
Agreements that are cash collateralized in accordance with Section 4.1 of this
Agreement), this Agreement may be terminated prior to the Revolving Line
Maturity Date by Borrower, effective

 

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three (3) Business Days after written notice of termination is given to
Bank.  Those obligations that are expressly specified in this Agreement as
surviving this Agreement’s termination shall continue to survive notwithstanding
this Agreement’s termination.

12.2Successors 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, assign,
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.

12.3Indemnification.  Borrower agrees to indemnify, defend and hold Bank and its
directors, officers, employees, agents, attorneys, or any other Person
affiliated with or representing Bank (each, an “Indemnified Person”) harmless
against:  (i) all obligations, demands, claims, and liabilities (collectively,
“Claims”) claimed or asserted by any other party in connection with the
transactions contemplated by the Loan Documents; and (ii) all losses or expenses
(including Bank Expenses) in any way suffered, incurred, or paid by such
Indemnified Person as a result of, following from, consequential to, or arising
from transactions between Bank and Borrower (including reasonable attorneys’
fees and expenses), except in each case for Claims and/or losses directly caused
by such Indemnified Person’s gross negligence or willful misconduct. This
Section 12.3 shall survive until all statutes of limitation with respect to the
Claims, losses, and expenses for which indemnity is given shall have run.

12.4Time of Essence.  Time is of the essence for the performance of all
Obligations in this Agreement.

12.5Severability of Provisions.  Each provision of this Agreement is severable
from every other provision in determining the enforceability of any provision.

12.6Correction of Loan Documents.  Bank may correct patent errors and fill in
any blanks in the Loan Documents consistent with the agreement of the parties so
long as Bank provides Borrower with written notice of such correction and allows
Borrower at least ten (10) days to object to such correction.  In the event of
such objection, such correction shall not be made except by an amendment signed
by both Bank and Borrower.

12.7Amendments in Writing; Waiver; Integration.  No purported amendment or
modification of any Loan Document, or waiver, discharge or termination of any
obligation under any Loan Document, shall be enforceable or admissible unless,
and only to the extent, expressly set forth in a writing signed by the party
against which enforcement or admission is sought.  Without limiting the
generality of the foregoing, no oral promise or statement, nor any action,
inaction, delay, failure to require performance or course of conduct shall
operate as, or evidence, an amendment, supplement or waiver or have any other
effect on any Loan Document.  Any waiver granted shall be limited to the
specific circumstance expressly described in it, and shall not apply to any
subsequent or other circumstance, whether similar or dissimilar, or give rise
to, or evidence, any obligation or commitment to grant any further waiver.  The
Loan Documents represent the entire agreement about this subject matter and
supersede prior negotiations or agreements.  All

 

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prior agreements, understandings, representations, warranties, and negotiations
between the parties about the subject matter of the Loan Documents merge into
the Loan Documents.

12.8Counterparts.  This Agreement may be executed in any number of counterparts
and by different parties on separate counterparts, each of which, when executed
and delivered, is an original, and all taken together, constitute one Agreement.

12.9Confidentiality.  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 (such Subsidiaries and Affiliates, together with
Bank, collectively, “Bank Entities”); (b) to prospective transferees or
purchasers of any interest in the Credit Extensions (provided, however, that any
prospective transferee or purchaser shall have entered into an agreement
containing provisions substantially the same as those in this Section); (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; (e) as
Bank considers appropriate in exercising remedies under the Loan Documents; and
(f) to third-party service providers of Bank so long as such service providers
have executed a confidentiality agreement with Bank with terms no less
restrictive than those contained herein. Confidential information does not
include information that is either:  (i) in the public domain or in Bank’s
possession when disclosed to Bank, or becomes part of the public domain (other
than as a result of its disclosure by Bank in violation of this Agreement) after
disclosure to Bank; or (ii) disclosed to Bank by a third party on a
non-confidential basis, if Bank does not know that the third party is prohibited
from disclosing the information.

Bank Entities may use anonymous forms of confidential information for aggregate
datasets, for analyses or reporting, and for any other uses not expressly
prohibited in writing by Borrower. The provisions of the immediately preceding
sentence shall survive termination of this Agreement.

12.10Attorneys’ 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 costs and expenses incurred, in addition to any other relief to which it
may be entitled.

12.11Electronic Execution of Documents.  The words “execution,” “signed,”
“signature” and words of like import in any Loan Document shall be deemed to
include electronic signatures or the keeping of records in electronic form, each
of which shall be of the same legal effect, validity and enforceability as a
manually executed signature or the use of a paper-based recordkeeping systems,
as the case may be, to the extent and as provided for in any applicable law,
including, without limitation, any state law based on the Uniform Electronic
Transactions Act.

12.12Captions.  The headings used in this Agreement are for convenience only and
shall not affect the interpretation of this Agreement.

12.13Construction of Agreement.  The parties mutually acknowledge that they and
their attorneys have participated in the preparation and negotiation of this
Agreement.  In cases of

 

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uncertainty this Agreement shall be construed without regard to which of the
parties caused the uncertainty to exist.

12.14Relationship.  The relationship of the parties to this Agreement is
determined solely by the provisions of this Agreement.  The parties do not
intend to create any agency, partnership, joint venture, trust, fiduciary or
other relationship with duties or incidents different from those of parties to
an arm’s-length contract.

12.15Third Parties.  Nothing in this Agreement, whether express or implied, is
intended to:  (a) confer any benefits, rights or remedies under or by reason of
this Agreement on any persons other than the express parties to it and their
respective permitted successors and assigns; (b) relieve or discharge the
obligation or liability of any person not an express party to this Agreement; or
(c) give any person not an express party to this Agreement any right of
subrogation or action against any party to this Agreement.

13.DEFINITIONS

13.1Definitions.  As used in the Loan Documents, the word “shall” is mandatory,
the word “may” is permissive, the word “or” is not exclusive, the words
“includes” and “including” are not limiting, the singular includes the plural,
and numbers denoting amounts that are set off in brackets are negative.  As used
in this Agreement, the following capitalized 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 a revolving credit loan (or revolving credit
loans) under the Revolving Line.

“Affiliate” is, with respect to any Person, each other 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.

“Authorized Signer” is any individual listed in Borrower’s Borrowing Resolution
who is authorized to execute the Loan Documents, including any Advance request,
on behalf of Borrower.

“Availability Amount” is (a) the lesser of (i) the Revolving Line or (ii) the
amount available under the Borrowing Base minus (b) (i) any amounts used for
Cash Management Services, and (ii) the outstanding principal balance of any
Advances.

“Bank” is defined in the preamble hereof.

 

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“Bank Entities” is defined in Section 12.9.

“Bank Expenses” are all audit fees and expenses, costs, and expenses (including
reasonable attorneys’ fees and expenses) for preparing, amending, 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 or any Guarantor.

“Bank Services” are any products, credit services, and/or financial
accommodations previously, now, or hereafter provided to Borrower or any of its
Subsidiaries by Bank or any Bank Affiliate, including, without limitation, any
letters of credit, cash management services (including, without limitation,
merchant services, direct deposit of payroll, business credit cards, and check
cashing services), interest rate swap arrangements, and foreign exchange
services as any such products or services may be identified in Bank’s various
agreements related thereto (each, a “Bank Services Agreement”).

“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 eighty percent (80%) of Eligible Accounts, provided that the
portion of the Borrowing Base comprised of Eligible Foreign Accounts shall not
exceed fifty percent (50%) of the Borrowing Base, as determined by Bank from
Borrower’s most recent Transaction Report; provided, however, that Bank has the
right to decrease the foregoing percentages in its good faith business judgment
to mitigate the impact of events, conditions, contingencies, or risks which may
adversely affect the Collateral or its value, and Bank will endeavor to provide
Borrower notice of such changes, provided that the failure to do so shall not
give rise to any liability to Bank.

“Borrowing Resolutions” are, with respect to any Person, those resolutions
substantially in the form attached hereto as Exhibit C.

“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.; (c) Bank’s certificates of deposit
issued maturing no more than one (1) year after issue; ; and (d) money market
funds at least ninety-five percent (95%) of the assets of which constitute Cash
Equivalents of the kinds described in clauses (a) through (c) of this
definition.

“Cash Management Services” is defined in Section 2.3.

 

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“Change in Control” means (a) at any time, any “person” or “group” (as such
terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of
1934, as amended (the “Exchange Act”)), (other than BlueLine Partners, L.L.C.
and its affiliates) shall become, or obtain rights (whether by means or
warrants, options or otherwise) to become, the “beneficial owner” (as defined in
Rules 13(d)-3 and 13(d)-5 under the Exchange Act), directly or indirectly, of
forty percent (40%) or more of the ordinary voting power for the election of
directors of Borrower (determined on a fully diluted basis) other than by the
sale of Borrower’s equity securities in a public offering or to venture capital
or private equity investors so long as Borrower identifies to Bank the venture
capital or private equity investors at least seven (7) Business Days prior to
the closing of the transaction and provides to Bank a description of the
material terms of the transaction; (b) during any period of twelve (12)
consecutive months, a majority of the members of the board of directors or other
equivalent governing body of Borrower cease to be composed of individuals
(i) who were members of that board or equivalent governing body on the first day
of such period, (ii) whose election or nomination to that board or equivalent
governing body was approved by individuals referred to in clause (i) above
constituting at the time of such election or nomination at least a majority of
that board or equivalent governing body or (iii) whose election or nomination to
that board or other equivalent governing body was approved by individuals
referred to in clauses (i) and (ii) above constituting at the time of such
election or nomination at least a majority of that board or equivalent governing
body; or (c) at any time, Borrower shall cease to own and control, of record and
beneficially, directly or indirectly, one hundred percent (100%) of each class
of outstanding capital stock of each subsidiary of Borrower (other than
directors’ qualifying shares or other similar shares as required by applicable
law) free and clear of all Liens (except Liens created by this Agreement).

“Claims” is defined in Section 12.3.

“Code” is the Uniform Commercial Code, as the same may, from time to time, be
enacted and in effect in the State of California; 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 California, the term
“Code” shall mean the Uniform Commercial Code as enacted and in effect in such
other jurisdiction solely for purposes of 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.

“Commitment Fee” is defined in Section 2.6(a).

 

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

“Compliance Statement” is that certain certificate in the form attached hereto
as Exhibit B.

“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 Person such as an obligation, in
each case, 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.

“Copyrights” are any and all copyright rights, copyright applications, copyright
registrations and like protections in each work of authorship and derivative
work thereof, whether published or unpublished and whether or not the same also
constitutes a trade secret.

“Credit Extension” is any Advance, any Overadvance, any amount utilized for Cash
Management Services, or any other extension of credit by Bank for Borrower’s
benefit.

“Default Rate” is defined in Section 2.5(b).

“Deferred Revenue” is all amounts received or invoiced in advance of performance
under contracts and not yet recognized as revenue.

“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 the multicurrency account denominated in
Dollars, account number 8674 (last 4 digits only), maintained by Borrower with
Bank.

“Dollars,” “dollars” or use of the sign “$” means only lawful money of the
United States and not any other currency, regardless of whether that currency
uses the “$” sign to denote its currency or may be readily converted into lawful
money of the United States.

 

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“Dollar Equivalent” is, at any time, (a) with respect to any amount denominated
in Dollars, such amount, and (b) with respect to any amount denominated in a
Foreign Currency, the equivalent amount therefor in Dollars as determined by
Bank at such time on the basis of the then-prevailing rate of exchange in San
Francisco, California, for sales of the Foreign Currency for transfer to the
country issuing such Foreign Currency.

“Domestic Subsidiary” means a Subsidiary organized under the laws of the United
States or any state or territory thereof or the District of Columbia.

“Effective Date” is defined in the preamble hereof.

“Eligible Accounts” means 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 after the Effective Date to
adjust any of the criteria set forth below and to establish new criteria in its
good faith business judgment, and Bank will endeavor to provide Borrower notice
of such changes, provided that the failure to do so shall not give rise to any
liability to Bank.  Unless Bank otherwise agrees in writing, Eligible Accounts
shall not include:

(a)Accounts for which the Account Debtor is Borrower’s Affiliate, officer,
employee, or agent;

(b)Accounts that the Account Debtor has not paid within ninety (90) days of
invoice date regardless of invoice payment period terms;

(c)Accounts with credit balances over ninety (90) days from invoice date;

(d)Accounts owing from an Account Debtor if fifty percent (50%) or more of the
Accounts owing from such Account Debtor have not been paid within ninety (90)
days of invoice date;

(e)Accounts owing from an Account Debtor which does not have its principal place
of business in the United States except for Eligible Foreign Accounts;

(f)Accounts billed from and/or payable to Borrower outside of the United States
unless Bank has a first priority, perfected security interest or other
enforceable Lien in such Accounts under all applicable laws, including foreign
laws (sometimes called foreign invoiced accounts);

(g)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);

(h)Accounts owing from an Account Debtor which is a United States government
entity or any department, agency, or instrumentality thereof unless 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;

 

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(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”,
or other terms if Account Debtor’s payment may be conditional;

(j)Accounts owing from an Account Debtor where goods or services have not yet
been rendered to the Account Debtor (sometimes called memo billings or
pre-billings);

(k)Accounts subject to contractual arrangements between Borrower and an Account
Debtor where payments shall be scheduled or due according to completion or
fulfillment requirements where the Account Debtor has a right of offset for
damages suffered as a result of Borrower’s failure to perform in accordance with
the contract (sometimes called contracts accounts receivable, progress billings,
milestone billings, or fulfillment contracts);

(l)Accounts owing from an Account Debtor the amount of which may be subject to
withholding based on the Account Debtor’s satisfaction of Borrower’s complete
performance (but only to the extent of the amount withheld; sometimes called
retainage billings);

(m)Accounts subject to trust provisions, subrogation rights of a bonding
company, or a statutory trust;

(n)Accounts owing from an Account Debtor that has been invoiced for goods that
have not been shipped to the Account Debtor unless Bank, Borrower, and the
Account Debtor have entered into an agreement acceptable to Bank wherein the
Account Debtor acknowledges that (i) it has title to and has ownership of the
goods wherever located, (ii) a bona fide sale of the goods has occurred, and
(iii) it owes payment for such goods in accordance with invoices from Borrower
(sometimes called “bill and hold” accounts);

(o)Accounts for which the Account Debtor has not been invoiced;

(p)Accounts that represent non-trade receivables or that are derived by means
other than in the ordinary course of Borrower’s business;

(q)Accounts for which Borrower has permitted Account Debtor’s payment to extend
beyond ninety (90) days;

(r)Accounts arising from chargebacks, debit memos or other payment deductions
taken by an Account Debtor;

(s)Accounts arising from product returns and/or exchanges (sometimes called
“warranty” or “RMA” accounts);

(t)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;

(u)Accounts owing from an Account Debtor with respect to which Borrower has
received Deferred Revenue (but only to the extent of such Deferred Revenue);

 

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(v)Accounts owing from an Account Debtor, whose total obligations to Borrower
exceed twenty-five percent (25%) of all Accounts (but only to the extent of the
amounts that exceed that percentage), unless Bank approves in writing; and

(w)Accounts for which Bank in its good faith business judgment determines
collection to be doubtful, including, without limitation, accounts represented
by “refreshed” or “recycled” invoices.

“Eligible Foreign Accounts” are Accounts for which the Account Debtor does not
have its principal place of business in the United States and which (a)
otherwise satisfy the definition of Eligible Accounts, and (b) are billed and
collected in the United States from Account Debtors which do not have their
principal place of business in the United States and which Bank deems acceptable
in its sole discretion on a case-by-case basis.

“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 Employee Retirement Income Security Act of 1974, and its
regulations.

“Event of Default” is defined in Section 8.

“Exchange Act” is the Securities Exchange Act of 1934, as amended.

“Financial Statement Repository” is the Bank’s e-mail address specified in
Section 10 or such other means of collecting information approved and designated
by Bank after providing notice thereof to Borrower from time to time.

“Foreign Currency” means lawful money of a country other than the United States.

“Foreign Subsidiary” means any Subsidiary which is not a Domestic Subsidiary.

“Funding Date” is any date on which a Credit Extension is made to or for the
account of Borrower which shall be a Business Day.

“FX Contract” is any foreign exchange contract by and between Borrower and Bank
under which Borrower commits to purchase from or sell to Bank a specific amount
of Foreign Currency on a specified date.

“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 Intellectual Property, claims, income
and other tax refunds, security and other

 

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deposits, payment intangibles, contract rights, 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.

“Good Faith Deposit” is defined in Section 2.6(d).

“Governmental Approval” is any consent, authorization, approval, order, license,
franchise, permit, certificate, accreditation, registration, filing or notice,
of, issued by, from or to, or other act by or in respect of, any Governmental
Authority.

“Governmental Authority” is any nation or government, any state or other
political subdivision thereof, any agency, authority, instrumentality,
regulatory body, court, central bank or other entity exercising executive,
legislative, judicial, taxing, regulatory or administrative functions of or
pertaining to government, any securities exchange and any self-regulatory
organization.

“Guarantor” is any Person providing a Guaranty in favor of Bank.

“Guaranty” is any guarantee of all or any part of the Obligations, as the same
may from time to time be amended, restated, modified or otherwise supplemented.

“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.

“Indemnified Person” is defined in Section 12.3.

“Initial Audit” is Bank’s inspection and audit of Borrower’s Accounts, the
Collateral, and Borrower’s Books with results satisfactory to Bank in its sole
and absolute discretion.

“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.

“Intellectual Property” means, with respect to any Person, all of such Person’s
right, title, and interest in and to the following:

(a)its Copyrights, Trademarks and Patents;

(b)any and all trade secrets and trade secret rights, including, without
limitation, any rights to unpatented inventions, know-how, operating manuals;

(c)any and all source code;

(d)any and all design rights which may be available to such Person;

 

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(e)any and all claims for damages by way of past, present and future
infringement of any of the foregoing, with the right, but not the obligation, to
sue for and collect such damages for said use or infringement of the
Intellectual Property rights identified above; and

(f)all amendments, renewals and extensions of any of the Copyrights, Trademarks
or Patents.

“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.

“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.

“Letter of Credit” is a standby or commercial letter of credit issued by Bank
upon request of Borrower based upon an application, guarantee, indemnity, or
similar agreement.

“Lien” is a claim, mortgage, deed of trust, levy, charge, pledge, security
interest or other encumbrance of any kind, whether voluntarily incurred or
arising by operation of law or otherwise against any property.

“Loan Documents” are, collectively, this Agreement and any schedules, exhibits,
certificates, notices, and any other documents related to this Agreement, any
Bank Services Agreement, any Guaranty, any subordination agreement, any note, or
notes executed by Borrower or any Guarantor, and any other present or future
agreement by Borrower and/or any Guarantor with or for the benefit of Bank in
connection with this Agreement or Bank Services, all as amended, restated, or
otherwise modified.

“Loan Parties” shall mean Borrower and each Subsidiary that becomes a
Co-Borrower or Secured Guarantor.

“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; or (c) a material impairment of the
prospect of repayment of any portion of the Obligations.

“Monthly Financial Statements” is defined in Section 6.2(d).

“Net Cash” is, on any date, Borrower’s unrestricted cash maintained with Bank
and Bank’s Affiliates, minus all outstanding Obligations under the Revolving
Line.

“Obligations” are Borrower’s obligations to pay when due any debts, principal,
interest, fees, Bank Expenses, and other amounts Borrower owes Bank now or
later, whether under this Agreement, the other Loan Documents, or otherwise,
including, without limitation, all obligations

 

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relating to letters of credit (including reimbursement obligations for drawn and
undrawn 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
to perform Borrower’s duties under the Loan Documents.

“Operating Documents” are, for any Person, such Person’s formation documents, as
certified by the Secretary of State (or equivalent agency) of such Person’s
jurisdiction of organization on a date that is no earlier than thirty (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.

“Overadvance” is defined in Section 2.4.

“Patents” means all patents, patent applications and like protections including
without limitation improvements, divisions, continuations, renewals, reissues,
extensions and continuations-in-part of the same.

“Perfection Certificate” is defined in Section 5.1.

“Permitted Acquisition” means an Acquisition by Borrower provided (a) total cash
consideration for such Acquisition does not in the aggregate exceed Five Hundred
Thousand Dollars ($500,000); (b) the Target shall be in a similar line of
business as that of the Borrower; (c) the Target shall be a going concern (other
than in respect of the formation of a Subsidiary formed to effect the
Acquisition), not involved in any material litigation that is not fully covered
by reserves and/or insurance; (d) no Event of Default has occurred and is
continuing or would exist after giving effect to such Acquisition; (e) if such
Acquisition is in the form of a merger by Borrower into another Person, Borrower
is the surviving legal entity; (f) if such Acquisition is in the form of a
merger by a Subsidiary into another Person, one hundred percent (100%) of the
outstanding and issued equity of the surviving legal entity shall be owned by
Borrower or a Subsidiary; (g) no Indebtedness shall be assumed by any Borrower
in connection with such Acquisition; (h) the Acquisition is not a hostile
Acquisition; and (i) the credit risk to Bank, in its sole discretion, shall not
be increased as a result of such Acquisition.

“Permitted Indebtedness” is:

(a)Borrower’s Indebtedness to Bank under this Agreement and the other Loan
Documents;

(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;

 

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

(f)Indebtedness secured by Liens permitted under clauses (a) and (c) of the
definition of “Permitted Liens” hereunder;

(g)Indebtedness with respect to surety bonds and similar obligations arising in
the ordinary course of business not to exceed One Hundred Thousand Dollars
($100,000) in the aggregate in any fiscal year;

(h)Indebtedness consisting of interest rate, currency, or commodity swap
agreements, interest rate cap or collar agreements or arrangements entered into
in the ordinary course of business and designated to protect a Person against
fluctuations in interest rates, currency exchange rates, or commodity prices;

(i)Indebtedness that constitutes a Permitted Investment under clause (f) of the
definition of Permitted Investments;

(j)to the extent constituting Indebtedness, Indebtedness consisting of
installment payments owing for Borrower’s insurance policies;

(k)extensions, refinancings, modifications, amendments and restatements of any
items of Permitted Indebtedness (a) through (j) 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; and

(l)Indebtedness consisting of earn-out obligations arising from the acquisitions
of RetinaLabs, Inc. and Ocunetics, Inc. in the amounts as provided to and
accepted by Bank on the Effective Date.

“Permitted Investments” are:

(a)Investments (including, without limitation, Subsidiaries) existing on the
Effective Date and shown on the Perfection Certificate;

(b)Investments consisting of Cash Equivalents;

(c)Investments consisting of the endorsement of negotiable instruments for
deposit or collection or similar transactions in the ordinary course of
Borrower;

(d)Investments consisting of deposit and investment accounts in which Bank has a
perfected security interest to the extent required by Section 6.8;

(e)Investments accepted in connection with Transfers permitted by Section 7.1;

(f)Investments (i) by Loan Parties in any other Loan Parties, (ii) by
Subsidiaries that are not Loan Parties in Loan Parties or other Subsidiaries
that are not Loan Parties, and (iii) by

 

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Loan Parties in Subsidiaries that are not Loan Parties not to exceed Two Hundred
Thousand Dollars ($200,000) in the aggregate in any fiscal year;

(g)Investments consisting of (i) travel advances and employee relocation loans
and other employee loans and advances in the ordinary course of business, and
(ii) loans to employees, consultants, officers or directors relating to the
purchase of equity securities of Borrower or its Subsidiaries pursuant to
employee stock purchase plans or agreements approved by Borrower’s Board of
Directors;

(h)Investments (including debt obligations) received in connection with the
bankruptcy or reorganization of customers or suppliers and in settlement of
delinquent obligations of, and other disputes with, customers or suppliers
arising in the ordinary course of business;

(i)Investments consisting of notes receivable of, or prepaid royalties and other
credit extensions, to customers and suppliers who are not Affiliates, in the
ordinary course of business; provided that this paragraph (i) shall not apply to
Investments of Borrower in any Subsidiary;

(j)Permitted Acquisitions;

(k)Investments consisting of interest rate, currency, or commodity swap
agreements, interest rate cap or collar agreements or arrangements entered into
in the ordinary course of business and designated to protect a Person against
fluctuations in interest rates, currency exchange rates, or commodity prices;
and

(l)other Investments not otherwise permitted by Section 7.7 not exceeding One
Hundred Fifty Thousand Dollars ($150,000) in the aggregate outstanding at any
time.

“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 (i) not due and payable or (ii) being contested in good faith and for
which Borrower maintains adequate reserves on its Books, provided that no notice
of any such Lien has been filed or recorded under the Internal Revenue Code of
1986, as amended, and the Treasury Regulations adopted thereunder;

(c)purchase money Liens or capital leases (i) on Equipment acquired or held by
Borrower incurred for financing the acquisition of the Equipment securing no
more than One Hundred Thousand Dollars ($100,000) 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 of carriers, warehousemen, suppliers, or other Persons that are
possessory in nature arising in the ordinary course of business so long as such
Liens attach only to Inventory, securing liabilities in the aggregate amount not
to exceed One Hundred Thousand Dollars ($100,000) and which are not delinquent
or remain payable without penalty or which are being

 

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contested in good faith and by appropriate proceedings which proceedings have
the effect of preventing the forfeiture or sale of the property subject thereto;

(e)Liens to secure payment of workers’ compensation, employment insurance,
old-age pensions, social security and other like obligations incurred in the
ordinary course of business (other than Liens imposed by ERISA);

(f)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 may not increase;

(g)leases or subleases of real property granted in the ordinary course of
Borrower’s business (or, if referring to another Person, in the ordinary course
of such Person’s business), and leases, subleases, non-exclusive licenses or
sublicenses of personal property (other than Intellectual Property) granted in
the ordinary course of Borrower’s business (or, if referring to another Person,
in the ordinary course of such Person’s business), if the leases, subleases,
licenses and sublicenses do not prohibit granting Bank a security interest
therein;

(h)non-exclusive licenses of Intellectual Property granted to third parties in
the ordinary course of business;

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

(j)Liens of a collection bank arising under section 4-210 of the Uniform
Commercial Code on items in the course of collection;

(k)deposits to secure the performance of bids, trade contracts and leases (other
than for borrowed money), statutory obligations, surety and appeal bonds,
performance bonds and other obligations of a like nature incurred in the
ordinary course of business not to exceed One Hundred Thousand Dollars
($100,000) outstanding at any time;

(l)easements, rights-of-way, restrictions and other similar encumbrances
affecting real property which, in the aggregate, are not substantial in amount,
and which (i) do not in any case materially detract from the value of the
property subject thereto or materially interfere with the ordinary conduct of
the business of the applicable Person or (ii) are not reasonably likely to
result in a Material Adverse Change;

(m)to the extent constituting a Lien, Liens on insurance policies and the
proceeds thereof in favor of the insurer, solely to the extent such Liens secure
such installment payments due to such insurer with respect to such insurance
policies;

(n)Liens in favor of customs and revenue authorities arising as a matter of law
to secure payment of customs duties in connection with the importation of goods;
and

 

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(o)Liens in favor of other financial institutions arising in connection with
deposit and/or securities accounts held at such institutions, provided that Bank
has a perfected security interest in the amounts held in such deposit and/or
securities accounts.

“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 the rate of interest per annum from time to time published in
the money rates section of The Wall Street Journal or any successor publication
thereto as the “prime rate” then in effect; provided that, in the event such
rate of interest is less than zero, such rate shall be deemed to be zero for
purposes of this Agreement; and provided further that if such rate of interest,
as set forth from time to time in the money rates section of The Wall Street
Journal, becomes unavailable for any reason as determined by Bank, the “Prime
Rate” shall mean the rate of interest per annum announced by Bank as its prime
rate in effect at its principal office in the State of California (such Bank
announced Prime Rate not being intended to be the lowest rate of interest
charged by Bank in connection with extensions of credit to debtors).

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

“Requirement of Law” is as to any Person, the organizational or governing
documents of such Person, and any law (statutory or common), treaty, rule or
regulation or determination of an arbitrator or a court or other Governmental
Authority, in each case applicable to or binding upon such Person or any of its
property or to which such Person or any of its property is subject.

“Reserves” means, as of any date of determination, such amounts as Bank may from
time to time establish and revise in its good faith business judgment, reducing
the amount of Advances and other financial accommodations which would otherwise
be available to Borrower (a) to reflect events, conditions, contingencies or
risks which, as determined by Bank in its good faith business judgment, do or
may adversely affect (i) the Collateral or any other property which is security
for the Obligations or its value (including without limitation any increase in
delinquencies of Accounts), (ii) the assets, business or prospects of Borrower,
or (iii) the security interests and other rights of Bank in the Collateral
(including the enforceability, perfection and priority thereof); or (b) to
reflect Bank’s reasonable belief that any collateral report or financial
information furnished by or on behalf of Borrower to Bank is or may have been
incomplete, inaccurate or misleading in any material respect; or (c) in respect
of any state of facts which Bank determines constitutes an Event of Default or
may, with notice or passage of time or both, constitute an Event of Default.
Bank will endeavor to provide Borrower notice of such amounts, provided that the
failure to do so shall not give rise to any liability to Bank.

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

“Restricted License” is any material license or other material agreement with
respect to which Borrower is the licensee (other than over-the-counter software
that is commercially available to the public) (a) that prohibits or otherwise
restricts Borrower from granting a security

 

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interest in Borrower’s interest in such license or agreement or any other
property, or (b) for which a default under or termination of could interfere
with the Bank’s right to sell any Collateral.

“Revolving Line” is an aggregate principal amount equal to Fifteen Million
Dollars ($15,000,000).

“Revolving Line Maturity Date” is November 2, 2019.

“SEC” shall mean the Securities and Exchange Commission, any successor thereto,
and any analogous Governmental Authority.

“Secured Guarantor” is any Guarantor who has (a) executed and delivered to Bank
a Guaranty in form and substance reasonably satisfactory to Bank pursuant to
which such Guarantor has granted Bank a first priority perfected Lien (subject
to Permitted Liens) in the types of assets substantially similar to the
Collateral to secure the Obligations; (b) delivered to Bank such appropriate
Control Agreements in form and substance reasonably satisfactory to Bank if and
to the extent required under Section 6.8; and (c) provided to Bank all other
documentation in form and substance satisfactory to Bank in its reasonable
discretion which in its opinion is appropriate with respect to the execution and
delivery of the applicable documentation referred to above and which Bank has
reasonably requested.

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

“Streamline Period” is any period of time, on and after the Effective Date,
where Borrower has maintained Net Cash of at least Three Million Five Hundred
Thousand Dollars ($3,500,000) (the “Streamline Threshold”) at all times during
the prior two (2) consecutive calendar months and provided further that upon the
occurrence of an Event of Default any Streamline Period then in effect shall
immediately terminate and Borrower shall be required to maintain the Streamline
Threshold for two (2) consecutive calendar months thereafter before a new
Streamline Period begins.

“Subordinated Debt” is indebtedness incurred by Borrower subordinated to all of
Borrower’s now or hereafter indebtedness to Bank (pursuant to a subordination,
intercreditor, or other similar agreement in form and substance satisfactory to
Bank entered into between Bank and the other creditor), on terms acceptable to
Bank.

“Subsidiary” is, as to any Person, a corporation, partnership, limited liability
company or other entity of which shares of stock or other ownership interests
having ordinary voting power (other than stock or such other ownership interests
having such power only by reason of the happening of a contingency) to elect a
majority of the board of directors or other managers of such corporation,
partnership or other entity are at the time owned, or the management of which is
otherwise controlled, directly or indirectly through one or more intermediaries,
or both, by such Person.  Unless the context otherwise requires, each reference
to a Subsidiary herein shall be a reference to a Subsidiary of Borrower or
Guarantor.

“Target” is defined in Section 7.3.

 

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“Termination Fee” is defined in Section 2.6(b).

“Trademarks” means any trademark and servicemark rights, whether registered or
not, applications to register and registrations of the same and like
protections, and the entire goodwill of the business of Borrower connected with
and symbolized by such trademarks.

“Transaction Report” is that certain report of transactions and schedule of
collections in the form attached hereto as Exhibit D.

“Transfer” is defined in Section 7.1.

“Unused Revolving Line Facility Fee” is defined in Section 2.6(c).

[Signature page follows.]

 

 

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

BORROWER:

IRIDEX CORPORATION

By: /s/ Atabak Mokari

      Atabak Mokari

      Chief Financial Officer and

      Vice President of Corporate Development

 

 

BANK:

SILICON VALLEY BANK

By: /s/ Kevin Fleischman

      Kevin Fleischman

      Vice President

 

 

 

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EXHIBIT A- COLLATERAL DESCRIPTION

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 (except as provided below), 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.

Notwithstanding the foregoing, the Collateral does not include (a) more than
sixty-five percent (65%) of the presently existing and hereafter arising issued
and outstanding shares of capital stock owned by Borrower of any Foreign
Subsidiary which shares entitle the holder thereof to vote for directors or any
other matter; (b) any interest of Borrower as a lessee under an Equipment lease
if Borrower is prohibited by the terms of such lease from granting a security
interest in such lease or under which such an assignment or Lien would cause a
default to occur under such lease; provided, however, that upon termination of
such prohibition, such interest shall immediately become Collateral without any
action by Borrower or Bank; or (c) any Intellectual Property; provided, however,
the Collateral shall include all Accounts and all proceeds of Intellectual
Property.  If a judicial authority (including a U.S. Bankruptcy Court) would
hold that a security interest in the underlying Intellectual Property is
necessary to have a security interest in such Accounts and such property that
are proceeds of Intellectual Property, then the Collateral shall automatically,
and effective as of the Effective Date, include the Intellectual Property to the
extent necessary to permit perfection of Bank’s security interest in such
Accounts and such other property of Borrower that are proceeds of the
Intellectual Property.

Pursuant to the terms of a certain negative pledge arrangement with Bank,
Borrower has agreed not to encumber any of its Intellectual Property without
Bank’s prior written consent.

 

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Exhibit B

Compliance Statement

TO:SILICON VALLEY BANKDate:  

FROM:IRIDEX CORPORATION

Under the terms and conditions of the Loan and Security Agreement between
Borrower and Bank (the “Agreement”), Borrower is in complete compliance for the
period ending _______________ with all required covenants except as noted below.
Attached are the required documents evidencing such compliance, setting forth
calculations prepared in accordance with GAAP consistently applied from one
period to the next except (i) as explained in an accompanying letter or
footnotes, and (ii) with respect to unaudited financial statements, for the
absence of footnotes, subject to year-end audit adjustments.  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 Covenants

Required

Complies

 

 

 

Monthly financial statements with
Compliance Statement

Monthly within 30 days

Yes   No

Annual financial statement (CPA Audited if required by Board) + CC

FYE within 180 days if audited; FYE within 60 days if company prepared

Yes   No

10‑Q, 10‑K and 8-K

Within 5 days after filing with SEC

Yes   No

Detailed general ledger report

Monthly within 30 days and with each Advance

Yes   No

A/R & A/P Agings

Monthly within 30 days

Yes   No

Transaction Report

Monthly within 30 days if Streamline Period in effect or no Obligations under
the Revolving Line are outstanding; weekly if Streamline Period is not in effect
or Obligations under the Revolving Line are outstanding; and with each Advance

Yes   No

Board Projections

Within the later of 30 days of Board approval or FYE, and as updated

Yes   No

 

 

Streamline Period

Applies

Net Cash > $3,500,000 for prior 2 calendar months

 

Yes

Net Cash < $3,500,000 for prior 2 calendar months

 

No

 

Other Matters

 

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

 

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EXHIBIT C

CORPORATE BORROWING CERTIFICATE

Borrower:__________________________Date:  ________________

Bank:Silicon Valley Bank

I hereby certify as follows, as of the date set forth above:

1.I am the Secretary, Assistant Secretary or other officer of the Borrower.  My
title is as set forth below.

2.Borrower’s exact legal name is set forth above.  Borrower is a corporation
existing under the laws of the State of ________________________________.
[Print name of state]

3.Attached hereto are true, correct and complete copies of Borrower’s
Articles/Certificate of Incorporation (including amendments), as filed with the
Secretary of State of the state in which Borrower is incorporated as set forth
in paragraph 2 above.  Such Articles/Certificate of Incorporation have not been
amended, annulled, rescinded, revoked or supplemented, and remain in full force
and effect as of the date hereof.

4.The following resolutions were duly and validly adopted by Borrower’s Board of
Directors at a duly held meeting of such directors (or pursuant to a unanimous
written consent or other authorized corporate action).  Such resolutions are in
full force and effect as of the date hereof and have not been in any way
modified, repealed, rescinded, amended or revoked, and Bank may rely on them
until Bank receives written notice of revocation from Borrower.

Resolved, that any one of the following officers or employees of Borrower, whose
names and titles are below, may act on behalf of Borrower:

Name

Title

Authorized to Add or Remove Signatories

 

 

☐

 

 

☐

 

 

☐

 

 

☐

 

Resolved Further, that any one of the persons designated above with a checked
box beside his or her name may, from time to time, add or remove any individuals
to and from the above list of persons authorized to act on behalf of Borrower.

 

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Resolved Further, that such individuals may, on behalf of Borrower:

Borrow Money.  Borrow money from Silicon Valley Bank (“Bank”).

Execute Loan Documents.  Execute any loan documents Bank requires.

Grant Security.  Grant Bank a security interest in any of Borrower’s assets.

Negotiate Items.  Negotiate or discount all drafts, trade acceptances,
promissory notes, or other indebtedness in which Borrower has an interest and
receive cash or otherwise use the proceeds.

Letters of Credit.  Apply for letters of credit from Bank.

Foreign Exchange Contracts.  Execute spot or forward foreign exchange contracts.

Issue Warrants.  Issue warrants for Borrower’s capital stock.

Further Acts.  Designate other individuals to request advances, pay fees and
costs and execute other documents or agreements (including documents or
agreement that waive Borrower’s right to a jury trial) they believe to be
necessary to effectuate such resolutions.

Resolved Further, that all acts authorized by the above resolutions and any
prior acts relating thereto are ratified.

5.The persons listed above are Borrower’s officers or employees with their
titles shown next to their names.

6.On behalf of Borrower, I agree to execute this Certificate by electronic means
and I recognize and accept the use of electronic signatures and records by any
other party or addressee hereto in connection with the execution and storage
hereof.

By:

Name:

Title:

*** If the Secretary, Assistant Secretary or other certifying officer executing
above is designated by the resolutions set forth in paragraph 4 as one of the
authorized signing officers, this Certificate must also be signed by a second
authorized officer or director of Borrower.

I, the __________________________ of Borrower, hereby certify as to paragraphs 1
through 5 above, [print name] as of the date set forth above.

By:

Name:

Title:

 

 

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EXHIBIT D

Transaction Report

[EXCEL spreadsheet to be provided separately from lending officer.]