**Exhibit 10.1**

 

SECOND****AMENDMENTTO CREDIT****AGREEMENT

 

THIS SECONDAMENDMENT TO CREDIT AGREEMENT (this “Amendment”) is entered into as of August 1,2005, by and between ITERIS, INC., a Delaware corporation (“Borrower”), andWELLS FARGO BANK, NATIONAL ASSOCIATION (“Bank”).

 

RECITALS

 

A.                                   Borrower is currently indebted to Bankpursuant to the terms and conditions of that certain Credit Agreement dated asof May 27, 2004 (the “Agreement”) between Iteris, Inc. (“OriginalBorrower”) and Bank, as amended by that certain Assumption and AmendmentAgreement dated October 20, 2004 (the “Assumption Agreement”) betweenIteris Holdings, Inc. (“Second Original Borrower”) and Bank, pursuant towhich the Second Original Borrower assumed the obligations of the OriginalBorrower under the Agreement.  TheAgreement, together with the Assumption Agreement, each as amended from time totime, is hereinafter collectively referred to as the “Credit Agreement”.  The Second Original Borrower amended itscorporate name to Iteris, Inc. pursuant to that certain amended andrestated certificate of incorporation dated October 22, 2004, filed October 22,2004 with Secretary of State, State of Delaware and as such is the “Borrower”referred to herein and party hereto.

 

B.                                     Pursuant to theCredit Agreement, Borrower remains indebted to Bank under a line of credit inthe maximum principal amount of Five Million Dollars ($5,000,000.00) (the “PriorLine of Credit”), which is evidenced by that certain Revolving Line of CreditNote dated May 27, 2004 (as may have been amended from time to time, the “PriorLine of Credit Note”).  The Prior Line ofCredit Note matures and becomes due and payable in full on August 1, 2005and as of the date hereof, the outstanding principal balance under the PriorLine of Credit is $2,451,474.00, plus accrued but unpaid interest.

 

C.                                     Pursuant to theCredit Agreement, Borrower remains indebted to Bank under a term loan in theoriginal principal amount of Five Million Dollars ($5,000,000.00) (the “TermLoan”), which is evidenced by that certain Term Note dated May 27, 2004(as may be amended from time to time, the “Term Note”).  The Term Note shall mature and become due andpayable in full on May 27, 2008 and as of the date hereof, the outstandingprincipal balance under the Term Loan is $3,541,668.02, plus accrued but unpaidinterest.

 

D.                                    Bank and Borrowerhave agreed to certain changes in the terms and conditions set forth in theCredit Agreement and have agreed to amend the Credit Agreement to reflect saidchanges.

 

NOW, THEREFORE, for valuable consideration,the receipt and sufficiency of which are hereby acknowledged, subject to theterms and conditions described herein, the parties hereto agree that the CreditAgreement shall be amended as follows; provided, however, that nothingshall terminate any security interests, subordinations or other documents infavor of Bank, all of which shall remain in full force and effect unlessexpressly amended hereby:

 

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1.                                       Amendment to Section 1.1(a).   Section 1.1(a) of the CreditAgreement is hereby deleted in its entirety, and the following substitutedtherefor:

 

“(a)                            Lineof Credit.  Subject to the terms andconditions of this Agreement, Bank hereby agrees to make advances to Borrowerfrom time to time up to and including July 31, 2006, not to exceed at anytime the aggregate principal amount of Five Million Dollars ($5,000,000.00) (“Lineof Credit”), the proceeds of which shall be used to pay off the outstandingprincipal balance of the Prior Line of Credit and for Borrower’s workingcapital requirements.  Borrower’sobligation to repay advances under the Line of Credit shall be evidenced by apromissory note dated as of August 1, 2005 (“Line of Credit Note”), allterms of which are incorporated herein by this reference.”

 

2.                                       Amendment to Section 1.1(b).   The first sentence of Section 1.1(b) ofthe Credit Agreement is hereby deleted in its entirety, and the followingsubstituted therefor:

 

“(b)                           Limitationon Borrowings. Outstanding borrowings under the Line of Credit, to amaximum of the principal amount set forth above, shall not at any time exceedan aggregate of (i) eighty percent (80%) of Borrower’s eligible accountsreceivable (Non-Government/Non-Consulting), (ii) forty percent (40%) ofBorrower’s eligible accounts receivable (Government/Consulting), provided thatoutstanding borrowings against such accounts receivable shall not exceed SevenHundred Fifty Thousand and 00/100 Dollars ($750,000.00), and (iii) fiftypercent (50%) of the value of Borrower’s eligible inventory, (exclusive of workin process and inventory which is obsolete, unsaleable or damaged), with valuedefined as the lower cost or market value, provided however, that outstandingborrowings against inventory shall not at any time exceed  an aggregate of One Million and 00/100Dollars ($1,000,000.00), plus $1,500,000.00. Notwithstanding any other provision of this Agreement, the aggregateamount of all outstanding borrowings hereunder shall not at any time exceed thelesser of: (i) maximum amount ofthe Line of Credit plus the outstanding principal balance of the TermLoan; or (ii) the maximum borrowing base amount as set forth above.  If either of the above amounts are exceeded,the Line of Credit shall be considered overadvanced by any such excess amount,and the Borrower shall immediately repay such excess amount.  Failure to immediately repay such excessamounts shall constitute an Event of Default under Section 6.1(a) hereof.

 

3.                                       Amendment to Section 1.5.   The following is hereby added to the CreditAgreement as a new Section 1.5:

 

“SECTION 1.5                    COLLECTION OFPAYMENTS.  Borrower authorizes Bank tocollect all principal, interest and fees due under each credit subject heretoby charging Borrower’s deposit account number 4173283292 with Bank, or anyother deposit account maintained by Borrower with Bank, for the full amountthereof.  Should there be insufficientfunds in any such deposit account to pay all such sums when due, the full amountof such deficiency shall be immediately due and payable by Borrower.”

 

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4.                                       Amendmentto Section 2.5.   Section 2.5of the Credit Agreement is hereby amended by deleting “March 31, 2004” asthe date of Borrower’s most current financial statement delivered to Bank, andby substituting “June 30, 2005” for said date.

 

5.                                       Amendment to Section 4.3.   Section 4.3 of the Credit Agreement ishereby deleted in its entirety, and the following substituted therefor:

 

“SECTION 4.3.                 FINANCIALSTATEMENTS.  Provide to Bank all of thefollowing, in form and detail satisfactory to Bank:

 

(a)                                  notlater than 120 days after and as of the end of each fiscal year, an auditedfinancial statement of Borrower, prepared by a certified public accountantacceptable to Bank, to include balance sheet, statement of income and statementof cash flows; and within 120 days after filing, but in no event later thaneach October 31, copies of Borrower’s filed federal income tax returns forsuch year;

 

(b)                                 notlater than 45 days after and as of the end of each fiscal quarter, a financialstatement of Borrower, prepared by Borrower, to include balance sheet,statement of income and statement of cash flows;

 

(c)                                  notlater than 15 days after and as of the end of each month, a borrowing basecertificate, an inventory collateral report, an aged listing of accountsreceivable and accounts payable, and a reconciliation of accounts, and notlater than each June 30 and December 31, a list of the names,addresses and phone numbers of all Borrower’s account debtors;

 

(d)                                 fromtime to time such other information as Bank may reasonably request .”

 

6.                                       Amendment to Section 4.9.   Section 4.9 of the CreditAgreement is hereby deleted in its entirety, and the following substitutedtherefor:

 

“SECTION 4.9  FINANCIAL CONDITION.  Maintain Borrower’s financial condition asfollows using generally accepted accounting principles consistently applied andused consistently with prior practices (except to the extent modified by thedefinitions herein), with compliance determined commencing with Borrower’sfinancial statements for the period ending December 31, 2005:

 

(a)                                  Senior Funded Debt to EBITDA not greater than6.75 to 1.0 at December 31, 2005; not greater than 4.10 to 1.0 at March 31,2006 and thereafter, with “Senior Funded Debt” defined as the sum of allobligations for borrowed money plus all capital lease obligations lesssubordinated debt, and with “EBITDA” defined as net profit before taxes, plusinterest expense plus amortization of intangibles plus depreciation, plusdeferred finance expense amortization, plus debt discount amortization, plusdeferred gain on sale of property, plus amortization of non-cash stock basedcompensation expense, each to be measured on a year-to-date, annualized basis.

 

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(b)                                 Fixed Charge Coverage Ratio not less than .65to 1.0 for quarter ending December 31, 2005; not less than 1.25 to 1.0 forquarter ending March 31, 2006, and quarterly thereafter. “FixedCharge Coverage Ratio” shall mean consolidated EBITDA minus non-financedcapital expenditures divided by the aggregate sum of (i) all interest paidor payable on the Funded Debt, (ii) all installment of scheduled principalduring the period, (iii) all income taxes paid or payable, plus (iv) theamount of dividends declared or paid in cash, and “EBITDA” has the meaning toit given above. “Funded Debt” shall mean the sum of obligations for borrowedmoney plus all capital lease obligations.”

 

7.                                       The following ishereby added to the Credit Agreement as Section 4.11:

 

**“SECTION 4.11.  CREDITORS’ FORMATION DOCUMENTS.  On or before December 31, 2005, Borrowershall deliver to Bank copies of the filed formation documents for each of thebusiness entities or the trust entities identified as Subordinated Creditors onthe Acknowledgment and Consent of Subordinated Creditors attached to the SecondAmendment to Credit Agreement dated as of August 1, 2005 between Borrowerand Bank.”**

 

8.                                       Amendment to Section 7.2.   Section 7.2 of the Credit Agreement ishereby amended by deleting the existing address for Bank and replacing suchaddress with the following:  “Los AngelesOffice, 333 South Grand Avenue, 9th Floor, Los Angeles, CA  90071.”

 

9.                                       RestructuringFee.   In consideration of thechanges set forth herein and as a condition to the effectiveness hereof,immediately upon signing this Amendment Borrower shall pay to Bank anon-refundable fee of $50,000.00 (the “Restructuring Fee”).

 

10.                                 ConditionsPrecedent.   The obligation of Bankto amend the terms and conditions of the Credit Agreement as provided herein,is subject to the fulfillment to Bank’s satisfaction of all of the followingconditions by no later than November 28, 2005:

 

(a)                                  Bank shall havereceived, in form and substance satisfactory to Bank, each of the following,duly executed:

 

(i)                                     ThisAmendment.

(ii)                                  TheLine of Credit Note.

(iii)                               SubordinationAgreements (9).

(iv)                              Partnership,Joint Venture or Association Certificate: Subordination (3).

(v)                                 Acknowledgmentand Consent of Subordinated Creditors attached hereto.

(vi)                              Suchother documents as Bank may require under any other section of thisAmendment.

 

(b)                                 Restructuring Fee.   Bank shall have received the RestructuringFee in immediately available funds.

 

(c)                                  Other Fees andCosts.   In addition to Borrower’sobligations under the Credit Agreement and the other Loan Documents, Borrowershall have paid to Bank the full amount of all costs and expenses, includingreasonable attorneys’ fees (including the allocated costs of

 

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Bank’s in-house counsel) expended or incurred by Bank in connectionwith the negotiation and preparation of this Amendment, for which Bank has madedemand.

 

(d)                                 Subordinated Note.  Bankshall have received the original Secured Promissory Note dated July 1,2003, in the amount of $811,347.00 between Odetics, Inc., 1515 SouthManchester, LLC, Dartbrook-Twin Oaks, L.P., and William T. White, III, LLCand the original First Amendment to Secured Promissory Note dated November 1,2004 between Iteris, Inc., 1515 South Manchester, LLC, Dartbrook-TwinOaks, L.P., and William T. White, III, LLC, each notated with a legendsatisfactory to Bank to the effect that the holders of each such note are boundby the terms of a subordination agreement in favor of the Bank.

 

(e)                                  Interest.   Interest under the Prior Line of Credit Noteshall have been paid current.

 

(f)                                    Interest andPrincipal.   Interest and principalunder the Term Note shall have been paid current.

 

11.                                 General Release.  In consideration of the benefits provided toBorrower under the terms and provisions hereof, Borrower hereby agrees asfollows (“General Release”):

 

(a)                                  Borrower, for itselfand on behalf of its successors and assigns, does hereby release, acquit andforever discharge Bank, all of Bank’s predecessors in interest, and all of Bank’spast and present officers, directors, attorneys, affiliates, employees andagents, of and from any and all claims, demands, obligations, liabilities,indebtedness, breaches of contract, breaches of duty or of any relationship,acts, omissions, misfeasance, malfeasance, causes of action, defenses, offsets,debts, sums of money, accounts, compensation, contracts, controversies,promises, damages, costs, losses and expenses, of every type, kind, nature,description or character, whether known or unknown, suspected or unsuspected,liquidated or unliquidated, each as though fully set forth herein at length(each, a “Released Claim” and collectively, the “Released Claims”), thatBorrower now has or may acquire as of the later of:  (i) the date this Amendment becomeseffective through the satisfaction (or waiver by Bank) of all conditionshereto; or (ii) the date that Borrower has executed and delivered thisAmendment to Bank (hereafter, the “Release Date”), including withoutlimitation, those Released Claims in any way arising out of, connected with orrelated to any and all prior credit accommodations, if any, provided by Bank,or any of Bank’s predecessors in interest, to Borrower, and any agreements,notes or documents of any kind related thereto or the transactions contemplatedthereby or hereby, or any other agreement or document referred to herein ortherein.

 

(b)                                 Borrower herebyacknowledges, represents and warrants to Bank as follows:

 

(i)                                     Borrower understands the meaning andeffect of Section 1542 of the California Civil Code, which provides:

 

“Section 1542.  GENERAL RELEASE; EXTENT.  A GENERAL RELEASE DOES NOT EXTEND TO CLAIMSWHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIMEOF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTEDHIS SETTLEMENT WITH THE DEBTOR.”

 

(ii)                      With regardto Section 1542 of the California Civil Code, Borrower agrees to assumethe risk of any and all unknown, unanticipated or misunderstood defenses and

 

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ReleasedClaims which are released by the provisions of this General Release in favor ofBank, and Borrower hereby waives and releases all rights and benefits which itmight otherwise have under Section 1542 of the California Civil Code withregard to the release of such unknown, unanticipated or misunderstood defensesand Released Claims.

 

(c)                                  Each person signingbelow on behalf of Borrower acknowledges that he or she has read each of theprovisions of this General Release.  Eachsuch person fully understands that this General Release has important legalconsequences and each such person realizes that they are releasing any and allReleased Claims that Borrower may have as of the Release Date.  Borrower hereby acknowledges that it has hadan opportunity to obtain a lawyer’s advice concerning the legal consequences ofeach of the provisions of this General Release.

 

(d)                                 Borrower hereby specifically acknowledges andagrees that:  (i) none of theprovisions of this General Release shall be construed as or constitute anadmission of any liability on the part of Bank; (ii) the provisions ofthis General Release shall constitute an absolute bar to any Released Claim ofany kind, whether any such Released Claim is based on contract, tort, warranty,mistake or any other theory, whether legal, statutory or equitable; and (iii) anyattempt to assert a Released Claim barred by the provisions of this GeneralRelease shall subject Borrower to the provisions of applicable law settingforth the remedies for the bringing of groundless, frivolous or baseless claimsor causes of action.

 

12.                                 Miscellaneous.  Except as specifically provided herein, allterms and conditions of the Credit Agreement shall remain in full force andeffect, without waiver or modification. All terms defined in the Credit Agreement shall have the same meaningwhen used in this Amendment.  ThisAmendment and the Credit Agreement shall be read together, as one document.  This Amendment may be executed in any numberof counterparts, each of which when executed and delivered shall be deemed tobe an original, and all of which when taken together shall constitute one andthe same Amendment.

 

13.                                 Reaffirmation;Certification.  Borrower herebyremakes all representations and warranties contained in the Credit Agreementand reaffirms all covenants set forth therein. Borrower further certifies that as of the date of this Amendment thereexists no Event of Default as defined in the Credit Agreement, nor anycondition, act or event which with the giving of notice or the passage of timeor both would constitute an Event of Default. Borrower reaffirms and ratifies all Loan Documents executed by it or itspredecessors prior to the date hereof.

 

IN WITNESS WHEREOF, the parties hereto havecaused this Amendment to be executed as of the day and year first writtenabove.

 
|         | WELLS FARGO BANK, |
|--------------|-------------------|
| ITERIS, INC. |              | NATIONAL ASSOCIATION |
|         |              |
|         |              |
| By:          |              |   | By: |   |   |
|         |              | Darryl Hallie, Vice President/Principal |
| Title:       |              |   |   |
|         |              |
| By:          |              |   |   |
|         |              |
| Title:       |              |   |   |
|              |                   |  |  |  |  |  |  |  |  |  |  |  |  |

 

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ACKNOWLEDGMENT AND CONSENTOF SUBORDINATED CREDITORS

 

Theundersigned, Subordinated Creditors of Borrower, acknowledge and agree theyhave read the foregoing Amendment and that their respective Subordination Agreements heretofore executedby them, Borrower and Bank, shall continue in full force and effect(notwithstanding the lack of acknowledgment, if any, to any prior amendments toany of the Loan Documents between Borrower and bank), and that any indebtednessof Borrower to such Subordinated Creditor and the security interests, if any,granted to secure such debt remain junior and subordinated to (i) allindebtedness of Borrower to Bank, including without limitation, indebtednessevidenced by the foregoing Amendment and (ii) any security interests granted to Bank to secure suchindebtedness.

 
| SUBORDINATED CREDITORS:         |                              |
|---------------------------------|-----------------------------------|
|                            |                              |
| 1515 South Manchester, LLC      | Dartbrook-Twin Oaks, L.P.         |
|                            |                              |
| By:                             |                              |   | By: 1515 South Manchester, LLC, |
|                            |                              | its attorney-in-fact |
| Title:                          |                              |   |   |
|                            |                              | By: |   |   |
|                            |                              |   |
|                            |                              | Title: |   |   |
|                            |                              |
| William T. White, III, LLC |                              |
| By: 1515 South Manchester, LLC, |                              |
|                            | its attorney-in-fact              |   |
|                            |                              |
|                            | By:                               |   |   |   |
|                            |                              |   |   |
|                            | Title:                            |   |   | Lloyd I. Miller |
|                            |                              |
|                            |                              |   |   |
| Lloyd I. Miller, III       | Susan Riley                       |
|                            |                              |
|                            |                              |   |   |
| Abby Riley, aka Abigail Riley   | Eloise Riley                      |
|                            |                              |
|                            |                              |   |   |
| Stephen Edwin Rowe, aka         | Irv Kessler, aka Irvin R. Kessler |
| Stephen E. Rowe                 |                              |
|                            |                              |
|                            |                              |   |   |
| Abbas Mohaddes                  | Charlie Riley                     |
|                            |                              |
|                            |                              |   |
| Tom Kelleher                    |                              |
|                                 |                                   |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| Milfam II L.P.                                        | Milfam I L.P.                    |
|-------------------------------------------------------|----------------------------------|
|                                                  |                             |
| By: Milfam LLC, General Partner                       | By: Milfam LLC, General Partner  |
|                                                  |                             |
|                                                  | By:                              |   |   |   | By: |   |   |
|                                                  |                             |   |   |
|                                                  | Title:                           |   |   |   | Title: |   |   |
|                                                  |                             |
| Provident Premier Master Fund Ltd.                    | Bainbridge Partners, LLC         |
|                                                  |                             |
| By:                                                   |                             |   | By: |   |   |
|                                                  |                             | Edward G. Victor |
| Title:                                                |                             |   | Title: Manager |
|                                                  |                             |
| Potomac Capital International Ltd.                    | Potomac Capital Partners, LP     |
|                                                  |                             |
| By:                                                   |                             |   | By: |   |   |
|                                                  | Paul J. Solit                    |   | Paul J. Solit |
| Title:                                                |                             |   | Title: |   |   |
|                                                  |                             |
| Lloyd I. Miller Trust A-4                             |                             |
|                                                  |                             |
| By:                                                   |                             |   |   |
|                                                  |                             |
| Title:                                                |                             |   |   |
|                                                  |                             |
|                                                  |                             |   |   |
| Jon D. Gruber, Trustee of the                         | Linda W. Gruber, Trustee of the  |
| Jon D. and Linda W. Gruber Trust                      | Jon D. and Linda W. Gruber Trust |
|                                                  |                             |
| Lagunitas Partners, a California Limited  Partnership |                             |
|                                                  |                             |
| By: Gruber & McBaine Capital  Management     |                             |
|                                                  | General Partner                  |   |
|                                                  |                             |
|                                                  | By:                              |   |   |   |
|                                                  |                             | Eric B. Swergold |   |
|                                                  | Title:                           |   |   |   |
|                                                  |                             |
| Gruber & McBaine International               |                             |
|                                                  |                             |
| By:                                                   |                             |   |   |
|                                                  | Eric B. Swergold                 |   |
| Title:                                                |                             |   |   |
|                                                       |                                  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| Charles  Schwab, Inc., Custodian for Francis Memole IRA |
|--------------------------------------------------------------|
|                                                         |
| By:                                                          |   |   |
|                                                         |
| Title:                                                       |   |   |
|                                                         |
| Wachovia  Securities Custodian for Greg Miner IRA            |
|                                                         |
| By:                                                          |   |   |
|                                                         |
| Title:                                                       |   |   |
|                                                         |
| Charles  Schwab, Inc., Custodian for John Johnson IRA   |
|                                                         |
| By:                                                          |   |   |
|                                                         |
| Title:                                                       |   |   |
|                                                              |  |  |  |  |  |  |  |  |  |

 

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