**Exhibit 10.1**

 

Loan No. 0411094-9001

Loan No. 0411094-9002

 

**AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT**

 

THISLOAN AND SECURITY AGREEMENT (this “Agreement”) is entered into at Irvine,California, as of February 4, 2009, between Iteris, Inc., a Delawarecorporation, with its chief executive office located at 1700 Carnegie Avenue, Suite 100,Santa Ana, California 92705 (“Borrower”) and California Bank & Trust,a California banking corporation, with an address of Orange County CorporateBanking Office, 19200 Von Karman Avenue, Suite 140, Irvine, California92612 (“Bank”).

 

WHEREAS,Borrower and Bank are parties to that certain Business Loan Agreement, dated asof October 16, 2008 (the “OriginalAgreement”), pursuant to which Bank agreed to make a commercial loan and extendother financial accommodations to Borrower, including a revolving line ofcredit in the original principal amount of $12,000,000.00 and anon-revolving-to-term loan in the original principal amount of $7,500,000.00,in accordance with the terms and conditions set forth in the OriginalAgreement;

 

WHEREAS,Borrower desires and Bank will agree to amend and restate the OriginalAgreement in order to modify and amend the terms and conditions thereof,including without limitation extending of the term of commercial loans andother financial accommodations extended therein, all on the terms andconditions set forth herein;

 

FORVALUE RECEIVED, and in consideration of the granting by Bank of financialaccommodations to or for the benefit of Borrower, the Original Agreement ishereby amended and restated in its entirety, and Borrower represents and agreeswith Bank, as of the date hereof and as of the date of each loan, credit and/orother financial accommodation, as follows:

 

**1.****                                     ****THE LOANS**

 

1.1                                 Loans.            Subject to the terms and conditions of thisAgreement, Bank hereby agrees to make loans and extend financial accommodationsto or for the benefit of Borrower in the original aggregate principal amount ofup to Nineteen Million, Five Hundred Thousand and No/100 Dollars($19,500,000.00) (collectively, the “Loans”) as follows:

 

(a)                                  Revolving Loan. Bank agrees to make arevolving loan and advances thereunder (collectively, the “Revolving Loan”) toor for the account of Borrower, upon Borrower’s request therefor, in anaggregate amount of up to Twelve Million and No/100 Dollars ($12,000,000.00)(the “Revolving Loan Amount”), provided there is no continuing uncured Event ofDefault and subject to the terms and conditions set forth herein. The RevolvingLoan shall be evidenced by that certain Revolving Note, dated as of even dateherewith (the “Revolving Note”), by Borrower in favor of Bank in the faceamount of the Revolving Loan Amount. If not earlier terminated, Bank’sagreement to make any advances under the Revolving Loan pursuant to thisAgreement shall expire on October 1, 2010.

 

(i)                                     The proceeds of the Revolving Loan shall beused to support the working capital needs of Borrower.

 

(ii)                                  So long as the Revolving Loan shall beoutstanding or Bank shall have any obligation to lend thereunder, up to anaggregate amount of $6,000,000.00 of the Revolving Loan Amount may be used byBorrower for the acquisition of businesses, products, technologies andconsulting services that are complementary to the business or operations ofBorrower (each, an “Acquisition”), provided there is no continuing uncuredEvent of Default and subject to the terms and conditions set forth herein. Ifone or more advances are sought by Borrower for a single Acquisition exceed anaggregate amount of $1,500,000.00, such requests for advances must be approvedin writing by Bank, in its sole discretion, in advance based on the completionof a full and adequate due diligence review by Bank of the proposed Acquisitionand any and all documents, materials and information required by Bank withrespect to such Acquisition.

 

----

 

(b)                                 Non-Revolving-to-Term Loan. Bank agrees tomake a non-revolving-to-term loan (the “Non-Revolving-to-Term Loan”) forBorrower pursuant to which Bank agrees, in its sole discretion, to lend toBorrower, upon Borrower’s request, up to Seven Million, Five Hundred Thousandand No/100 Dollars ($7,500,000.00) (the “Term Loan Amount”), provided there isno continuing uncured Event of Default and subject to the terms and conditionsset forth herein, for the purpose of enabling Borrower to retire certaindebentures issued by Borrower. The Non-Revolving-to-Term Loan shall beevidenced by that certain Non-Revolving-to-Term Note, dated as of even dateherewith (the “Non-Revolving-to-Term Note”), by Borrower in favor of Bank inthe face amount of the Term Loan Amount. If not earlier terminated, Bank’sagreement to make any advances under the Non-Revolving-to-Term Loan pursuant tothis Agreement shall expire on May 1, 2009 (the “Conversion Date”).

 

(i)                                     On the Conversion Date, any and allindebtedness and other amounts outstanding under the Non-Revolving-to-Term Loanshall be converted into a fully amortizing term loan in accordance with theterms and conditions set forth in the Non-Revolving-to-Term Note.

 

(ii)                                  Beginning on November 1, 2009, and on November 1of each year thereafter, Borrower agrees to pay to Bank an amount equal tofifty percent (50%) of Borrower’s EBITDA for the immediately preceding fiscalyear, net of taxes, capital expenditures up to $1,500,000.00, interest paid andcurrent portion of long-term debt for such fiscal year (the “Excess Cash FlowRecapture Amount”), which payment shall be applied to the outstanding principalbalance of the Non-Revolving-to-Term Loan; *provided,however,*in no event shall Borrower’s obligation to pay the ExcessCash Flow Recapture Amount exceed $500,000.00 in any year. Attached as Exhibit Ais a form of Excess Cash Flow Recapture Amount Certificate showing how theExcess Cash Flow Recapture Amount is calculated, which shall be completed andsubmitted by Borrower together with Borrower’s payment of the Excess Cash FlowRecapture Amount no later than November 1 of each year.

 

TheRevolving Note and Non-Revolving-to-Term Note are hereinafter referred toindividually as a “Note” and collectively as the “Notes.” This Agreement, theNotes and any and all other documents, amendments or renewals executed anddelivered in connection with any of the foregoing are collectively hereinafterreferred to as the “Loan Documents.”

 

1.2                                 Revolving Loan Account. An account shall be opened on the books ofBank in which account a record will be kept of all advances and loans madeunder the Revolving Loan, all payments thereon and other appropriate debits andcredits as provided by this Agreement.

 

1.3                                 Interest. Interest respecting indebtedness under the Revolving Loan will becharged to Borrower on the principal amount from time to time outstanding atthe interest rate specified in the Revolving Note in accordance with the termsof the Revolving Note or as otherwise set forth in this Agreement with respectto any particular type of Revolving Credit, If not specified in the RevolvingNote or otherwise set forth in this Agreement, interest will be charged at thehighest rate per annum charged by Bank to Borrower on any other Obligationbased on a 360-day year and the actual number of days elapsed.

 

1.4                                 Repayment. All loans and advances made respecting the Revolving Loan and the Non-Revolving-to-TermLoan shall be payable to Bank on or before the maturity date of the RevolvingNote and the Non-Revolving-to-Term Note, respectively.

 

1.5                                 Overadvances. Any advances or loans that may be madeunder the Revolving Loan, at Bank’s sole discretion, in excess of the RevolvingLoan Amount shall not limit the obligations of Borrower or any of Bank’s rightsor remedies hereunder or under the Loan Documents or otherwise; all suchadvances, loans or other amounts shall be secured by the Collateral and shallbe due and payable to Bank in accordance with the terms of the Revolving Note,and shall bear interest at the rate set forth in the Revolving Note.

 

1.6                                 Notice of Borrowing. If Bank elects to require Borrower tosubmit any request for an advance hereunder in writing pursuant to Section 1.9,Borrower shall promptly provide Bank with such written request, in the form ofrequest specified by Bank, which shall specify, in addition to any otherinformation required by Bank, (A) the amount of the requested advance and (B) thedate on which such advance is to be made (which shall be a Business Day). Asused in this Agreement, “Business Day” shall mean any day other than aSaturday, Sunday or other day on which banks in Los Angeles, California, arerequired or permitted by law to close.

 

2

----

 

1.7                            Conditions to Lending.

 

(a)                                  Conditions Precedent to Initial Loan. Theobligation of Bank to make the Loans and the initial advances thereunder issubject to the satisfaction in full of the following conditions precedent:

 

(i)                                   Corporate Documents. Bank shall havereceived:

 

(A)                              a copy of the articles or certificate ofincorporation, articles of association or formation, certificate of limitedpartnership or other charter document (each, the “Charter Document”) of Borrower,certified on a recent date by the Secretary of State or other relevantgovernmental agency of Borrower’s jurisdiction of incorporation ororganization;

 

(B)                                a certificate of the secretary or other appropriate officer of Borrowerin the form required by Bank, dated the closing date, certifying (1) thatattached thereto is a true and complete copy of the resolutions adopted by theBoard of Directors (or equivalent governing body) of Borrower authorizing theexecution, delivery and performance of the Loan Documents and any otherdocuments contemplated thereunder and the grant of the security interests inthe Collateral and that such resolutions have not been altered, amended,rescinded, supplemented or superseded and remain in full force and effect and (2) asto the incumbency and specimen signature of each officer of Borrower executingany Loan Documents.

 

(ii)                                Loan Documents. Bank shall have received fully executed originals (or counterpartoriginals) of all of the Loan Documents.

 

(iii)                             Payment of Fees. All fees and expenses then due and payable by Borrowerto Bank in connection with the facility or facilities contemplated by thisAgreement shall have been paid.

 

(iv)                            Financial Statements. Bank shall have received the audited financialstatements of Borrower for the most recently completed fiscal year and incomestatements, balance sheets and statements of shareholders’ equity and cash flowfor Borrower’s current fiscal year through the most recently completed fiscalquarter.

 

(v)                               USA PATRIOT Act. Bank shall have received from Borrower any informationrequested by Bank and required under or in connection with the Uniting andStrengthening America by Providing Appropriate Tools Required to Intercept andObstruct Terrorism Act of 2001, Pub. L. No. 107-56 (the “USA PATRIOT Act”).

 

(vi)                            Bank shall have received such other closing documentation as Bank may reasonablyrequest.

 

(b)                                 Conditions Precedent to Each Advance. Theobligations of Bank to make each loan, advance or other credit under thisAgreement are subject to the following conditions precedent:

 

(i)                                   Notice. Bank shall have received a requestfor the loan, advance or other credit sought, which shall be in the form ofrequest specified by Bank, if any, as required by Section 1.9 hereof.

 

(ii)                                Representations and Warranties. The representations and warranties setforth in Section 3 hereof and in the other Loan Documents shall be true,correct and complete in all material respects on and as of the date of eachLoan.

 

3

----

 

(iii)                             No Event of Default. On the date of each loan, advance or other credit,no Event of Default shall have occurred and be continuing nor shall any suchevent occur by reason of the making of such loan, advance or other credit.

 

(iv)                            No Material Adverse Change. No event or events shall have occurredsince the date of the financial statements most recently delivered to Bank thatwould reasonably be expected to have a materially adverse effect on thebusiness, assets, properties, operations, financial condition, liabilities(including contingent liabilities) or material agreements of Borrower, taken asa whole, (b) materially impairs the legal right, power or authority ofBorrower, taken as a whole, to perform their obligations under the Loan Documentsor (c) materially impairs the validity or enforceability of the LoanDocuments or the rights, remedies or benefits available to Bank thereunder.

 

1.8                                 Increased Costs.

 

(a)                                  If any change in any law, rule orregulation or in the interpretation or application thereof by any governmentalauthority after the date of this Agreement or any compliance by Bank with anyrequest, guideline or directive (whether or not having the force of law) of anygovernmental authority after the date of this Agreement (collectively, a “Changein Law”) shall:

 

(i)                                   impose, modify or deem applicable anyreserve, special deposit or similar requirement against assets of, depositswith or for the******account of,or credit extended by, Bank or

 

(ii)                                impose on Bank or the London Interbank Market any other conditionaffecting this Agreement or the loans hereunder made by Bank or any letter ofcredit or participation therein and the result of any of the foregoing shall beto increase the cost to Bank of making or maintaining any loan (or of maintainingits obligation to make any such loan) or to increase the cost to Bank ofissuing or maintaining any letter of credit or to reduce the amount of any sumreceived or receivable by Bank hereunder (whether of principal, interest orotherwise), then Borrower will pay to Bank such additional amount or amounts aswill compensate Bank for such additional costs incurred or reduction suffered.

 

(b)                                 If Bank determines that any Change in Lawregarding capital requirements has or would have the effect of reducing therate of return on Bank’s capital or on the capital of Bank’s holding company asa consequence of this Agreement or the loans or letters of credit made orissued by Bank to a level below that which Bank or Bank’s holding company couldhave achieved but for such Change in Law (taking into consideration Bank’spolicies and the policies of Bank’s holding company with respect to capitaladequacy), then from time to time Borrower will pay to Bank such additionalamount or amounts as will compensate Bank or Bank’s holding company for anysuch reduction suffered.

 

(c)*                                 *A certificate of Bank setting forth inreasonable detail the amount or amounts necessary to compensate Bank or itsholding company, as the case may be, and the changes as a result of which suchamounts are due shall be delivered to Borrower and shall be conclusive absentmanifest error. Borrower shall pay Bank the amount shown as due on any suchcertificate within ten (10) Business Days after receipt thereof.

 

(d)                                 Failure or delay on the part of Bank todemand compensation pursuant to this section shall not constitute a waiver ofBank’s right to demand such compensation.

 

1.9                                 Authorized Persons; Advances. Any person duly authorized by a generalborrowing resolution of Borrower, or in the absence of such a resolution, thePresident, Chief Financial Officer or Controller of Borrower, or any personotherwise authorized in this paragraph, may request discretionary advances orloans hereunder, either orally or otherwise, but Bank at its option may requirethat all requests for loans hereunder shall be in writing. Bank shall incur noliability to Borrower in acting upon any request referred to herein which Bankbelieves in good faith to have been made by an authorized person or persons.Each loan hereunder may be credited by Bank to any deposit account of Borrowerwith Bank or with any other Bank with which Borrower maintains a depositaccount, or may be paid to Borrower (or as Borrower instructs) or may beapplied to any Obligations, as Bank may in each instance elect. The followingpersons currently are authorized to request advances and authorize paymentsrespecting the Revolving Loan until Bank receives from Borrower, at Bank’saddress, written notice of revocation of their authority: James S. Miele, ChiefFinancial Officer, and Abbas Mohaddes, Chief Executive Officer.

 

4

----

 

1.10                           Monthly Statement. At the option of Bank, after the end ofeach month, Bank will render to Borrower a statement of the Revolving Creditaccount, showing all applicable credits and debits. Each statement shall beconsidered correct and to have been accepted by Borrower and shall beconclusively binding upon Borrower in respect of all charges, debits andcredits of whatsoever nature contained therein respecting the Revolving Loan,and the closing balance shown therein, unless Borrower notifies Bank in writingof any discrepancy within twenty (20) days from the mailing by Bank to Borrowerof any such monthly statement.

 

**2.****                                     ****GRANT OF SECURITY INTEREST**

 

2.1                                 Grant of Security Interest. In consideration of Bank’s extending creditand other financial accommodations to or for the benefit of Borrower, Borrowerhereby grants to Bank a security interest in, a lien on and pledge andassignment of the Collateral. The security interest granted by this Agreementis given to and shall be held by Bank as security for the payment andperformance of all Obligations, including without limitation all amountsoutstanding pursuant to the Loan Documents.

 

2.2                                 Definitions. The following definitions shall apply:

 

(a)                                  “Affiliate” shall mean, with respect to any person, (a) any personwhich, directly or indirectly through one or more intermediaries, controls, iscontrolled by or is under common control with such person, or (b) anyperson who is a director or officer of (i) such person, (ii) anysubsidiary of such person, or (iii) any person described in clause (a) above.For purposes of this definition, “control” of a person shall mean the power,direct or indirect, (x) to vote 5% or more of the capital stock havingordinary voting power for the election of directors (or comparable equivalent)of such person, or (y) to direct or cause the direction of the managementand policies of such person whether by contract or otherwise. Control may be byownership, contract or otherwise.

 

(b)                                 “Bank Affiliate” shall mean any Affiliate ofBank or any lender acting as a participant under any loan arrangement betweenBank and Borrower.

 

(c)                                  “Change in Control” shall be deemed to haveoccurred at such time as any of the following events shall occur:

 

(i)                                   any sale, lease or other transfer (in onetransaction or a series of transactions) of all or substantially all of theconsolidated assets of Borrower to any Person, *provided,however,*that a transaction where the holders of all classes ofBorrower’s common stock immediately prior to such transaction own, directly orindirectly, more than 50% of all classes of the common stock of the continuingor surviving Person immediately after such transaction shall not be a Change inControl;

 

(ii)                                consummation of any share exchange, consolidation or merger of Borrowerpursuant to which the common stock will be converted into cash, securities orother property or any sale, lease or other transfer (in one transaction or aseries of transactions) of all or substantially all of Borrower’s consolidatedassets to any Person, *provided, however,*thata transaction where the holders of all classes of Borrower’s common stockimmediately prior to such transaction own, directly or indirectly, more than50% of all classes of common stock of the continuing or surviving corporationor transferee immediately after such event shall not be a Change in Control; or

 

(iii)                             a “person or “group” (within the meaning of Section 13(d) ofthe Exchange Act (other than Borrower, or Borrower’s employee benefit plans)files a Schedule 13D or a Schedule TO, disclosing that it has become the “beneficialowner” (as defined in Rule 13d-3 under the Exchange Act) of Borrower’scommon stock representing more than 50% of the voting power of common stock.

 

5

----

 

Forpurposes of defining a Change in Control:

 

(x)                                 whether a person is a “beneficial owner” willbe determined in accordance with Rule 13d-3 under the Exchange Act; and

 

(y)                               a “person” includes any syndicate or group that would be deemed to be aperson under Section 13(d)(3) of the Exchange Act.

 

(d)                                 “Code” shall mean the Commercial Code ofCalifornia, as amended from time to time.

 

(e)                                  “Collateral” shall mean all of Borrower’spresent and future right, title and interest in and to any and all of thepersonal property of Borrower whether such property is now existing orhereafter created, acquired or arising and wherever located from time to time,including without limitation:

 

(i)                                   accounts;

 

(ii)                                chattel paper;

 

(iii)                             goods;

 

(iv)                            inventory;

 

(v)                               equipment;

 

(vi)                            fixtures

 

(vii)                         farm products;

 

(viii)                      instruments;

 

(ix)                              investment property;

 

(x)                                 documents;

 

(xi)                              commercial tort claims;

 

(xii)                           deposit accounts;

 

(xiii)                        letter-of-credit rights;

 

(xiv)                       general intangibles;

 

(xv)                          supporting obligations; and

 

(xvi)                       records of, accession to and proceeds andproducts of the foregoing.

 

(f)                                    “Debtors” shall mean Borrower’s customers whoare indebted to Borrower.

 

(g)                                 “Material Adverse Change” means (i) amaterial adverse change in the business, operations, results of operations,assets, liabilities, or condition of Borrower and its subsidiaries taken as awhole, (ii) the impairment of Borrower’s ability to perform any of theObligations or of the Bank to enforce the Indebtedness or realize upon theCollateral, or (iii) a material adverse change in the value of theCollateral or the amount which the Bank would be likely to receive in theliquidation of the Collateral.

 

6

----

 

(h)                                 “Obligations” shall mean, without limitation,all loans, advances, indebtedness, notes, liabilities and amounts (includingunder Letters of Credit), liquidated or unliquidated, owing by Borrower to Bankor any Bank Affiliate at any time, of each and every kind, nature anddescription, whether arising under this Agreement or otherwise, and whethersecured or unsecured, direct or indirect (that is, whether the same are duedirectly by Borrower to Bank or any Bank Affiliate; or are due indirectly byBorrower to Bank or any Bank Affiliate as endorser, guarantor or other surety,or as borrower of obligations due third persons which have been endorsed orassigned to Bank or any Bank Affiliate, or otherwise), absolute or contingent,due or to become due, now existing or hereafter arising or contracted,including without limitation payment when due of all amounts outstandingrespecting any of the Loan Documents. “Obligations” shall also include allinterest and other charges chargeable to Borrower or due from Borrower to Bankor any Bank Affiliate from time to time and all costs and expenses referred toin this Agreement.

 

(i)                                “Permitted Indebtedness” shall mean (a) Borrower’sindebtedness to Bank under this Agreement or any other Loan Document; (b) indebtednessexisting on the date hereof in a principal amount not in excess of $125,000; (c) indebtednesssubordinated to the Obligations pursuant to an agreement in form and substanceacceptable to Bank in its good faith business judgment; (d) indebtednessincurred as a result of endorsing negotiable instruments received in theordinary course of business; (e) capitalized leases and purchase moneyIndebtedness secured by Permitted Liens in an aggregate amount not exceeding$250,000 at any time outstanding; (t) indebtedness arising in connectionwith the financing of insurance premiums in the ordinary course of business; (g) indebtednessowing to trade creditors arising in the ordinary course of business consistentwith past business practices; (h) indebtedness arising in connection withcorporate credit cards issued for employees and officers of Borrower in anaggregate amount not to exceed $50,000 at any time; and (i) extensions,refinancings, modifications, amendments and restatements of any items ofPermitted Indebtedness, *provided,*thatthe principal amount thereof is not increased and the terms thereof are notmodified to impose more burdensome terms upon Borrower.

 

(j)                                “Permitted Investments” shall mean, so longas no Event of Default shall have occurred and be continuing at the time ofsuch investments or immediately after as a result of such investments, (a) investmentsin subsidiaries that are secured guarantors in an aggregate amount not to exceed$500,000 in any fiscal year, *provided,*thatno such investment shall be made if an Event of Default is then occurring orwould otherwise arise upon the making thereof; (ii) repurchases of stockof Borrower of up to $100,000 per fiscal year from departing employees,officers or directors; (iii) purchases of shares of Borrower’s commonstock pursuant to any stock repurchase program approved by the Board ofDirectors of Borrower to repurchase in the market any of its stock during theoriginal term of the Revolving Loan (not including any extension or renewalperiods), which repurchased stock shall have an aggregate purchase price of nomore than $1,000,000 in any fiscal year and no more than a total of $2,000,000during the entire original term of the Revolving Loan; *provided,*that no proceeds from theRevolving Loan shall be used for any such repurchases and, *provided, further,*that Bank may elect, inits sole discretion to extend the period of such permitted repurchases for anyrenewal or extension periods of the Revolving Loan on terms acceptable to Bank;(iv) investments (including debt obligations) received in connection withthe bankruptcy or reorganization of customers or suppliers and in settlement ofdelinquent obligations of, and other disputes with, customers or suppliersarising in the ordinary course of Borrower’s business; (v) investmentsexisting on the date hereof as disclosed on Schedule PI attached hereto; and(vi)(A) marketable direct obligations issued or unconditionally guaranteedby the United States of America or any agency or any state thereof maturingwithin one (1) year from the date of acquisition thereof, (B) commercialpaper maturing no more than one year from the date of creation thereof andcurrently having rating of at least A-2 or P-2 from either Standard &Poor’s Corporation or Moody’s Investors Service, (C) Bank’s certificatesof deposit maturing no more than one year from the date of investment therein,and (D) a money market account with Bank, provided that in each of thecases set forth in this clause (vi) Bank is perfected therein.

 

(k)                             “Permitted Liens” shall mean (i) liensand security interests securing indebtedness owed by Borrower to Bank; (ii) liensfor taxes, assessments or similar charges either not yet due or being contestedin good faith; (iii) liens of materialmen, mechanics, warehousemen orcarriers, or other like liens arising in the ordinary course of business andsecuring obligations which are not yet delinquent or are being contested ingood faith by appropriate proceedings; (iv) purchase money liens orpurchase money security interest upon or in any property acquired or held byBorrower in the ordinary course of business to secure indebtedness outstandingon the date of this Agreement or permitted to be incurred under this Agreement;(v) liens and security interests which as of the date of this Agreement,have been disclosed to

 

7

----

 

andapproved by the Bank in writing; (vi) liens which constitute banker’sliens, rights of set-off or similar rights as to deposit accounts or otherfunds maintained with a bank or other financial institution; (vii) cashdeposits or pledges to secure the payment of worker’s compensation,unemployment insurance or other social security benefits or obligations, publicor statutory obligations, surety or appeal bonds, bid or performance bonds orother obligations of a like nature incurred in the ordinary course of business;(viii) liens arising from judgments, decrees or attachments that do notresult in an Event of Default; (ix) liens in favor of customs and revenueauthorities arising the ordinary course of business relating to obligationsthat are not delinquent; and (x) liens incurred in connection with theextension, renewal or refinancing of the indebtedness secured by PermittedLiens described above, provided that any extension, renewal or replacement lienshall be limited to the property encumbered by the existing lien and theprincipal amount of the indebtedness being extended, renewed or refinancedshall not increase.

 

(I)                                    “Person” or “party” shall mean individuals,partnerships, corporations, limited liability companies, trusts and all otherentities.

 

Allwords and terms used in this Agreement other than those specifically defined hereinshall have the meanings accorded to them in the Code.

 

2.3                                 Ordinary Course of Business. Bank hereby authorizes and permits Borrowerto hold, process, sell, use or consume in the manufacture or processing offinished goods, or otherwise dispose of inventory for fair consideration, allin the ordinary course of Borrower’s business, excluding, without limitation,sales to creditors or in bulk or sales or other dispositions occurring undercircumstances which would or could reasonably be expected to create any lien orinterest adverse to Bank’s security interest or other right hereunder in theproceeds resulting therefrom. Bank also hereby authorizes and permits Borrowerto receive from the Debtors all amounts due as proceeds of the Collateral atBorrower’s own cost and expense, and also liability, if any, subject to thedirection and control of Bank at all times; and Bank may at any time, withoutcause or notice, and whether or not an Event of Default has occurred or demandhas been**made, terminate all or any part of the authority andpermission herein or elsewhere in this Agreement granted to Borrower withreference to the Collateral, and notify Debtors to make all payments due asproceeds of the Collateral to Bank. Until Bank shall otherwise notify Borrower,all proceeds of and collections of Collateral shall be retained by Borrower andused solely for the ordinary and usual operation of Borrower’s business. Fromand after notice by Bank to Borrower, all proceeds of and collections of theCollateral shall be held in trust by Borrower for Bank and shall not be**commingled with Borrower’s otherfunds or deposited in any Bank account of Borrower; and Borrower agrees todeliver to Bank on the dates of receipt thereof by Borrower, duly endorsed toBank or to bearer, or assigned to Bank, as may be appropriate, all proceeds ofthe Collateral in the identical form received by Borrower.

 

2.4                                 Allowances. Absent an Event of Default, Borrower may grant such allowances orother adjustments to Debtors (exclusive of extending the time for payment ofany item which shall not be done without first obtaining Bank’s written consentin each instance) as Borrower may reasonably deem to accord with sound businesspractice, including, without limiting the generality of the foregoing,accepting the return of all or any part of the inventory (subject to theprovisions set forth in this Agreement with reference to returned inventory).

 

2.5                                 Records. Borrower shall hold its books and records relating to the Collateralsegregated from all Borrower’s other books and records in a manner satisfactoryto Bank; and shall deliver to Bank from time to time promptly at its requestall invoices, original documents of title, contracts, chattel paper,instruments and any other writings relating thereto, and other evidence ofperformance of contracts, or evidence of shipment or delivery of themerchandise or of the rendering of services; and Borrower will deliver to Bankpromptly at Bank’s request from time to time additional copies of any or all ofsuch papers or writings, and such other information with respect to any of theCollateral and such schedules of inventory, schedules of accounts and suchother writings as Bank may in its sole discretion deem to be necessary oreffectual to evidence any loan hereunder or Bank’s security interest in theCollateral.

 

2.6                                 Legends. Borrower shall promptly make, stamp or record such entries or legendson Borrower’s books and records or on any of the Collateral (including withoutlimitation chattel paper) as Bank shall request from time to time, to indicateand disclose that Bank has a security interest in such Collateral.

 

8

----

 

2.7                                 Inspection. Bank, or its representatives, at any time and from time to time,shall have the right at the sole cost and expense of Borrower, and Borrowerwill permit Bank and/or its representatives: (a) to examine, check, makecopies of or extracts from any of Borrower’s books, records and files(including without limitation orders and original correspondence); (b) toperform field exams or otherwise inspect and examine the Collateral and tocheck, test or appraise the same as to quality, quantity, value and condition;and (c) to verify the Collateral or any portion or portions thereof orBorrower’s compliance with the provisions of this Agreement. Unless an Event ofDefault shall have occurred and be continuing, Bank agrees to conduct not morethan one inspection as described herein during each fiscal year of Borrower.

 

2.8                                 Purchase Money Security Interests. To the extent Borrower uses proceeds of anyloans to purchase Collateral, the repayment of such loans shall be on a “first-in-first-out”basis so that the portion of the loan used to purchase a particular item ofCollateral shall be repaid in the order in which Borrower purchased such itemof Collateral.

 

2.9                                 Search Reports. Bank shall receive prior to the date ofthis Agreement UCC search results under all names used by Borrower during theprior five (5) years, from each jurisdiction where any Collateral islocated, from the state, if any, where Borrower is organized and registered (assuch terms are used in the Code), and the state where Borrower’s chiefexecutive office is located. The search results shall confirm that the securityinterest in the Collateral granted Bank hereunder is prior to all othersecurity interests in favor of any other person.

 

**3.****                                     ****REPRESENTATIONS AND WARRANTIES**

 

3.1                                 Organization and Qualification. Borrower is a duly organized and validlyexisting corporation under the laws of the state of its incorporation with theexact legal name set forth in the first paragraph of this Agreement. Borroweris in good standing under the laws of said state, has the power to own itsproperty and conduct its business as now conducted and as currently proposed tobe conducted, and is duly qualified to do business under the laws of each statewhere the nature of the business done or property owned requires suchqualification.

 

3.2                                 Subsidiaries. Borrower has no subsidiaries other thanthose listed on Schedule 3.2, if any, and Borrower has never consolidated,merged or acquired substantially all of the assets of any other entity orperson other than those listed on Schedule 3.2, if any.

 

3.3                                 Corporate Records. Borrower’s charter, articles or certificateof organization or incorporation and all amendments thereto have been dulyfiled and are in proper order. All outstanding capital stock issued by Borrowerwas and is properly and validly issued, fully paid and nonassessable and allbooks and records of Borrower, including but not limited to its minute books,bylaws and books of account, are accurate and up to date and will be somaintained.

 

3.4                                 Title to Properties; Absence of Liens. Borrower has good and clear record,equitable and marketable title to all of its properties and assets, includingwithout limitation to all of the Collateral, free and clear of all mortgages,liens, pledges, charges, encumbrances and setoffs, other than (a) thesecurity interest therein granted to Bank, (b) the mortgages, deeds of trust and security interests asset forth on Schedule 3.4, if any, (c) the leases of personal property asset forth on Schedule 3.4, if any, and (d) any other Permitted Liens.

 

3.5                                 Places of Business. Borrower’s chief executive office iscorrectly stated in the preamble to this Agreement, and Borrower shall, duringthe term of this Agreement, keep Bank currently and accurately informed inwriting of each of its other places of business, and shall not change thelocation of such chief executive office or open or close, move or change anyexisting or new place of business without giving Bank at least thirty (30) daysprior written notice thereof.

 

3.6                                 Valid Obligations. The execution, delivery and performance ofthe Loan Documents have been duly authorized by all necessary corporate actionand each represents a legal, valid and binding obligation of Borrower and isfully enforceable according to its terms, except as limited by laws relating tothe enforcement of creditors’ rights.

 

9

----

 

3.7                                 Conflicts. There is no provision in Borrower’s organizational or charterdocuments, if any, or in any indenture, contract or agreement to which Borroweris a party or by which it or any of its assets or properties are bound whichprohibits, limits or restricts the execution, delivery or performance of theLoan Documents.

 

3.8                                 Governmental Approvals. The execution, delivery and performance ofthe Loan Documents do not require any approval of or filing with anygovernmental agency or authority.

 

3.9                                 Litigation, etc. There are no actions, claims or proceedingspending or, to the knowledge of Borrower, threatened against Borrower whichcould reasonably be expected to result in a Material Adverse Change.

 

3.10                           Accounts and Contract Rights. All accounts arise out of legallyenforceable and existing contracts, and represent unconditional and undisputedbona fide indebtedness by a Debtor, and are not and will not be subject to anydiscount (except such cash or trade discount as may be shown on any invoice,contract or other writing delivered to Bank). No contract right, account,general intangible or chattel paper is or will be represented by any note orother instrument, and no contract right, account or general intangible is, or willbe represented by any conditional or installment sales obligation or otherchattel paper, except such instruments or chattel paper as have been orimmediately upon receipt by Borrower will be delivered to Bank (duly endorsedor assigned), such delivery, in the case of chattel paper, to include allexecuted copies except those in the possession of the installment buyer and anysecurity for or guaranty of any of the Collateral shall be delivered to Bankimmediately upon receipt thereof by Borrower, with such assignments andendorsements thereof as Bank may request.

 

3.11                           Title to Collateral. At the date hereof, Borrower is (and, as toCollateral that Borrower may acquire after the date hereof, will be) the lawfulowner of the Collateral, and the Collateral and each item thereof is, will andshall continue to be free of all restrictions, liens, encumbrances or otherrights, title or interests (other than the security interest therein granted toBank), credits, defenses, recoupments, set-offs or counterclaims whatsoever.Borrower has and will have full power and authority to grant to Bank a securityinterest in the Collateral and Borrower has not transferred, assigned, sold,pledged, encumbered, subjected to lien or granted any security interest in, andwill not transfer, assign, sell (except sales or other dispositions in theordinary course of business in respect to inventory as expressly permitted inthis Agreement), pledge, encumber, subject to lien or grant any securityinterest in any of the Collateral (or any of Borrower’s right, title orinterest therein), to any person other than Bank or as expressly permittedhereunder, including in connection with any Permitted Liens. The Collateral isand will be valid and genuine in all respects. Borrower will warrant and defendBank’s right to and interest in the Collateral against all claims and demandsof all persons whatsoever, except to the extent such claims or demands arisefrom any Permitted Liens.

 

3.12                           Location of Collateral. Except for sale, processing, use,consumption or other disposition in the ordinary course of business, Borrowerwill keep all inventory and equipment only at locations specified in thisAgreement or specified to Bank in writing.

 

3.13                           Third Parties. Bank shall not be deemed to have assumedany liability or responsibility to Borrower or any third person for thecorrectness, validity or genuineness of any instruments or documents that maybe released or endorsed to Borrower by Bank (which shall automatically bedeemed to be without recourse to Bank in any event) or for the existence,character, quantity, quality, condition, value or delivery of any goodspurporting to be represented by any such documents; and Bank, by accepting suchsecurity interest in the Collateral, or by releasing any Collateral toBorrower, shall not be deemed to have assumed any obligation or liability toany supplier or Debtor or to any other third party, and Borrower agrees toindemnify and defend Bank and hold it harmless in respect to any claim orproceeding arising out of any matter referred to in this paragraph.

 

3.14                           Status of Debtors. Borrower agrees to notify Bank promptlyupon learning of (a) the suspension of business, assignment or trustmortgage for the benefit of creditors, dissolution, petition in receivership orunder any chapter of the Bankruptcy Code, as amended from time to time, by oragainst any Debtor, (b) any Debtor’s insolvency or inability to pay itsdebts as they mature or (c) any other act of the same or different natureamounting to a Debtor’s business failure.

 

10

----

 

3.15                           Taxes.Borrower has filed all federal, state and other tax returns required to befiled (except for such returns for which current and valid extensions have beenfiled), and all taxes, assessments and other governmental charges due fromBorrower have been fully paid. Borrower has established on its books reservesadequate for the payment of all federal, state and other tax liabilities, ifany.

 

3.16                           Useof Proceeds. No portion of any loan is to be used for (i) the purposeof purchasing or carrying any “margin security” or “margin stock” as such termsare used in Regulations U and X of the Board of Governors of the FederalReserve System, 12 C.F.R. 221 and 224 or for any other purpose in violation ofsuch Regulations U or X (ii) primarily personal, family or householdpurposes. The Collateral is not used or acquired primarily for personal, familyor household purposes.

 

3.17                           Licenses, Consents. Borrower has obtained and holds infull force and effect all filings, registrations,franchises, licenses, permits, certificates, authorizations, qualifications,accreditations, easements, rights of way and other rights, consents andapprovals which are necessary for the operation of its businesses as presentlyconducted or proposed to be conducted and the failure of which to maintaincould reasonably be expected to result in a Material Adverse Change. No consentor approval, authorization or order of, or registration or filing with, orgiving of notice to, or obtaining of any license, certificate or permit from, ortaking any other action with respect to any third party is required to beobtained or provided in connection with (i) the due execution, deliveryand performance of any Loan Document or the consummation of any of thetransactions contemplated hereunder, (ii) the legality, validity, bindingeffect or enforceability of any Loan Document on Borrower and the exercise byBank of its rights and remedies thereunder, (iii) the grant of any liensor security interests by Borrower to Bank and the validity, perfection andpriority of such liens or security interests, or (v) the conduct byBorrower or any of its affiliates of any of their business as proposed to beconducted.

 

3.18                           Financial Statement Certifications. Borrower hereby certifies to Bank that allfinancial information (“financial information”) submitted to Bank now and atall times during the term of the Loan does and will fairly and accuratelyrepresent the financial condition of Borrower and any of its Affiliates.Financial information includes, but is not limited to, all business financialstatements (including interim and year-end financial statements that arecompany prepared and/or CPA prepared), business income tax returns, borrowingbase certificates, accounts payable and receivable agings, financial statementsand tax returns. Borrower understands that Bank will rely on all financialinformation, whenever provided, and that such information is a materialinducement to Bank to make, to continue to make, or otherwise extend creditaccommodations to Borrower. Borrower covenants and agrees to notify Bank inwriting of any Material Adverse Change. Borrower further understands andacknowledges that there are criminal penalties for giving false financialinformation to federally insured financial institutions.

 

3.19                           Environmental. As of the date hereof, neither Borrower norany of Borrower’s agents, employees or independent contractors (1) havecaused or are aware of a release or threat of release of Hazardous Materials onany of the premises or personal property owned or controlled by Borrower (“ControlledProperty”) or any property abutting Controlled Property (“Abutting Property”),which could give rise to liability under any Environmental Law or any otherfederal, state or local law, rule or regulation; (2) have arrangedfor the transport of or transported any Hazardous Materials in a manner as toviolate, or result in potential liabilities under, any Environmental Law; (3) havereceived any notice, order or demand from the Environmental Protection Agency orany other federal, state or local agency under any Environmental Law; (4) haveincurred any liability under any Environmental Law in connection with themismanagement, improper disposal or release of Hazardous Materials; or (5) areaware of any inspection or investigation of any Controlled Property or AbuttingProperty by any federal, state or local agency for possible violations of anyEnvironmental Law.

 

To the best of Borrower’s knowledge, neither Borrower, nor any priorowner, tenant or other occupant of any Controlled Property, committed oromitted any act which caused the release of Hazardous Materials on suchControlled Property which could give rise to a lien thereon by any federal,state or local government. No notice or statement of claim or lien affectingany Controlled Property has been recorded or filed in any public records by anyfederal, state or local government for costs, penalties, fines or other chargesas to such property. All notices, permits, licenses or similar authorizations,if any, required to be obtained or filed in connection with the ownership,operation, or use of the Controlled Property, including without limitation thepast or present generation, treatment, storage, disposal or release of anyHazardous Materials into the environment, have been duly obtained or filed.

 

11

----

 

Borrower agrees to indemnify and hold Bank and any Bank Affiliateharmless from all liability, loss, cost, damage and expense, including attorneyfees and costs of litigation, arising from any and all of its violations of anyEnvironmental Law (including those arising from any lien by any federal, stateor local government arising from the presence of Hazardous Materials) or fromthe presence of Hazardous Materials located on or emanating from any ControlledProperty or Abutting Property whether existing or not existing and whetherknown or unknown at the time of the execution hereof and regardless of whetheror not caused by, or within the control of Borrower. Borrower further agrees toreimburse Bank upon demand for any costs incurred by Bank in connection withthe foregoing. Borrower agrees that its obligations hereunder shall be continuous and shall survive therepayment of all debts to Bank and shall continue so long as a valid claim maybe lawfully asserted against Bank.

 

The term “Hazardous Materials” includes but is not limited to any andall substances (whether solid, liquid or gas) defined, listed, or otherwiseclassified as pollutants, hazardous wastes, hazardous substances, hazardousmaterials, extremely hazardous wastes, or words of similar meaning orregulatory effect under any present or future Environmental Law or that mayhave a negative impact on human health or the environment, including but notlimited to petroleum and petroleum products, asbestos and asbestos-containingmaterials, polychlorinated biphenyls, lead, radon, radioactive materials,flammables and explosives.

 

The term “Environmental Law” means any present and future federal, stateand local laws, statutes, ordinances, rules, regulations and the like, as wellas common law, relating to protection of human health or the environment,relating to Hazardous Materials, relating to liability for or costs ofremediation or prevention of releases of Hazardous Materials or relating toliability for or costs of other actual or threatened danger to human health orthe environment. The term “Environmental Law” includes, but is not limited to,the following statutes, as amended, any successor thereto, and any regulationspromulgated pursuant thereto, and any state or local statutes, ordinances,rules, regulations and the like addressing similar issues: the ComprehensiveEnvironmental Response, Compensation and Liability Act; the Emergency Planningand Community Right-to-Know Act; the Hazardous Materials Transportation Act;the Resource Conservation and Recovery Act (including but not limited toSubtitle I relating to underground storage tanks); the Solid Waste DisposalAct; the Clean Water Act; the Clean Air Act; the Toxic Substances Control Act;the Safe Drinking Water Act; the Occupational Safety and Health Act; theFederal Water Pollution Control Act; the Federal Insecticide, Fungicide andRodenticide Act; the Endangered Species Act; the National Environmental PolicyAct; and the River and Harbors Appropriation Act.

 

**4.****                                     ****AFFIRMATIVE COVENANTS**

 

4.1                                 Payments and Performance. Borrower will duly and punctually pay allObligations becoming due to Bank and will duly and punctually perform allObligations on its part to be done or performed under this Agreement.

 

4.2                                 Books and Records; Inspection. Borrower will at all times keep proper booksof account in which full, true and correct entries will be made of itstransactions in accordance with generally accepted accounting principles,consistently applied and which are, in the opinion of a Certified PublicAccountant acceptable to Bank, adequate to determine fairly the financialcondition and the results of operations of Borrower. Borrower will from time totime furnish Bank with such information and statements as Bank may request inits sole discretion with respect to the Obligations or Bank’s security interestin the Collateral. Borrower shall, during the term of this Agreement, keep Bankcurrently and accurately informed in writing of each location where Borrower’srecords relating to its accounts and contract rights are kept, and shall notremove such records to another location without giving Bank at least thirty(30) days prior written notice thereof.

 

12

----

 

4.3                                 Financial Statements. Borrower will furnish to Bank:

 

(a)                                  as soon as available to Borrower, but in anyevent within 30 days after the close of each fiscal quarter of Borrower, a fulland complete signed copy of financial statements, which shall include a balancesheet of Borrower as at the end of such quarter and statement of profit andloss of Borrower reflecting the results of its operations during such quarterand shall be prepared by Borrower and certified by Borrower’s chief financialofficer as to correctness in accordance with generally accepted accountingprinciples, consistently applied, subject to year-end adjustments;

 

(b)                                 as soon as available to Borrower, but in anyevent within 90 days after the close of each fiscal year, a full and completesigned copy of financial statements, prepared by certified public accountantsacceptable to Bank, which shall include a balance sheet of Borrower, as at theend of such year, statement of cash flows and statement of profit and loss ofBorrower reflecting the results of its operations during such year, bearing theopinion of such certified public accountants and prepared on an audited basisin accordance with generally accepted accounting principles, consistentlyapplied together with any so-called management letters;

 

(c)                                  within 30 days after the close of eachquarter, an accounts receivable aging report in form satisfactory to Bankshowing the total amount due from each Debtor, the month in which each accountreceivable was created, as**well as**an accounts payable aging reportand such other information as Bank shall request;

 

(d)                                 within 30 days after the close of each fiscalquarter of Borrower, an inventory report in form satisfactory to Bank showing alist of Borrower’s inventory, location of such inventory and such otherinformation as Bank shall request;

 

(e)                                  within 30 days after the close of each fiscalquarter of Borrower, a work-in-progress/backlog report in form satisfactory toBank and including such information as Bank shall request.

 

(f)                                    Borrower’s filed federal and state taxreturns, including all schedules thereto, for the prior year within 15 daysafter the date that Borrower’s tax returns are actually filed each year or bysuch other date approved by Bank;

 

(g)                                 from time to time, such other financial dataand information about Borrower as Bank may reasonably request.

 

4.4                                 Conduct of Business.Borrower will maintain its existence in good standing and comply with all lawsand regulations of the United States and of any state or states thereof and ofany political subdivision thereof, and of any governmental authority which maybe applicable to it or to its business; except to the extent thatnon-compliance with such laws or regulations (a) pertains to any tax,assessment or charge which is being contested in good faith and with respect towhich reserves have been established and are being maintained or (b) doesnot or could not reasonably be expected to result a Material Adverse Change.

 

4.5                                 Notice to Debtors.Borrower agrees, at the request of Bank, to notify all or any of the Debtors inwriting of Bank’s security interest in the Collateral in whatever manner Bankrequests and hereby authorizes Bank to notify all or any of the Debtors of Bank’ssecurity interest in Borrower’s accounts at Borrower’s expense.

 

4.6                                 Contact with Accountant. Borrower hereby authorizes Bank todirectly contact and obtain information from any accountant employed by**Borrowerin connection with the review or maintenance of Borrower’s books and records orpreparation of any financial reports delivered by or at the request of Borrowerto Bank.

 

4.7                                 Operating and Deposit Accounts. Borrower shall maintain its primaryoperating and deposit accounts with Bank for so long as any indebtedness orother amounts remain due and outstanding by Borrower to Bank hereunder or Banksshall have a commitment to lend under any of the Loans. At the option of Bank,all loan payments and fees will automatically be debited from Borrower’sprimary operating account and all advances will automatically be credited toBorrower’s primary operating account.

 

13

----

 

4.8                                 Taxes.Borrower will promptly pay all real and personal property taxes, assessmentsand charges and all franchise, income,unemployment, retirement benefits, withholding, sales and other taxes assessedagainst it or payable by it before delinquent; provided that this covenantshall not apply to any tax assessment or charge which is being contested in goodfaith and with respect to which reserves have been established and are beingmaintained. Bank may, at its option, from time to time, discharge any taxes,liens or encumbrances of any of the Collateral provided Bank gives notice toBorrower thereof, and Borrower will pay to Bank on demand or Bank in its solediscretion may charge to Borrower all amounts so paid or incurred by it.

 

4.9                                 Maintenance. Borrower will keep and maintain the Collateral and its otherproperties, if any, in good repair, working order and condition. Borrower willimmediately notify Bank of any loss or damage to or any occurrence which wouldadversely affect the value of any Collateral. Bank may, at its option, fromtime to time, take any other action that Bank may deem proper to repair,maintain or preserve any of the Collateral provided Bank gives notice toBorrower thereof, and Borrower will pay to Bank on demand or Bank in its solediscretion may charge to Borrower all amounts so paid or incurred by it.

 

4.10                           Insurance. Borrower will maintain in force property and casualty insurance on allCollateral and any other property of Borrower, if any, against riskscustomarily insured against by companies engaged in businesses similar to thatof Borrower containing such terms and written by such companies as may besatisfactory to Bank, such insurance to be payable to Bank as its interest mayappear in the event of loss and to name Bank as insured pursuant to a standardloss payee clause; no loss shall be adjusted thereunder without Bank’s approval;and all such policies shall provide that they may not be canceled without firstgiving at least ten (10) days written notice of cancellation to Bank. Inthe event that Borrower fails to provide evidence of such insurance, Bank may,at its option, secure such insurance and charge the cost thereof to Borrower.Upon the occurrence and during the continuation of an Event of Default, at theoption of Bank, all insurance proceeds received from any loss or damage to anyof the Collateral shall be applied either to the replacement or repair thereofor as a payment on account of the Obligations.

 

4.11                           Notificationof Default. Immediately upon becoming aware of the existence of anycondition or event which constitutes an Event of Default, or any condition or eventwhich would upon notice or lapse of time, or both, constitute an Event ofDefault, Borrower shall give Bank written notice thereof specifying the natureand duration thereof and the action being or proposed to be taken with respectthereto.

 

4.12                           Notification of Material Litigation. Borrower will immediately notify Bank inwriting of any litigation or of any investigative proceedings of a governmentalagency or authority commenced or threatened against it which would or might bematerially adverse to the financial condition of Borrower.

 

4.13                           USA PATRIOT Act. Borrower shall furnish or cause to befurnished to Bank, promptly upon request therefor, any information required byBank under or in connection with the USA PATRIOT Act.

 

4.14                           Pension Plans. With respect to any pension or benefit planmaintained by Borrower, or to which Borrower contributes (“Plan”), the benefitsunder which are guarantied, in whole or in part, by the Pension BenefitGuaranty Corporation created by the Employee Retirement Income Security Act of1974, P.L. 93-406, as amended (“ERISA”) or any governmentalauthority succeeding to any or all of the functions of the Pension BenefitGuaranty Corporation (“Pension Benefit Guaranty Corporation”), Borrower will (a) fundeach Plan as required by the provisions of Section 412 of the InternalRevenue Code of 1986, as amended; (b) cause each Plan to pay all benefitswhen due; (c) furnish Bank (i) promptly with a copy of any notice ofeach Plan’s termination sent to the Pension Benefit Guaranty Corporation (ii) nolater than the date of submission to the Department of Labor or to the InternalRevenue Service, as the case may be, a copy of any request for waiver from thefunding standards or extension of the amortization periods required by Section 412of the Internal Revenue Code of 1986, as amended and (iii) notice of anyReportable Event as such term is defined in ERISA; and (d) subscribe toany contingent liability insurance provided by the Pension Benefit GuarantyCorporation to protect against employer liability upon termination of aguarantied pension plan, if available to Borrower.

 

4.15                           Mid-TermReview. Borrower covenants and agrees that, on or around October 1,2009, Bank may, in its sole discretion, review the terms and conditionsrelating to the interest rates and other pricing terms for the Loans and thefinancial and other covenants hereunder.

 

14

----

 

**5.****                                      NEGATIVECOVENANTS**

 

5.1                                 FinancialCovenants. Borrower will not at any time or during any fiscal period (asapplicable) fail to be in compliance with any of the financial covenants inthis section.

 

(a)                                  Definitions.The following definitions shall apply to this Section:

 

(i)                                     “CurrentAssets” shall mean current assets as defined under GAAP.

 

(ii)                                  “CurrentLiabilities” shall mean current liabilities as defined under GAAP.

 

(iii)                               “Earnings”shall mean earnings as defined under GAAP.

 

(iv)                              “EBITDA” shall mean, forany period, Earnings from continuing operations before payment of federal,state and local income taxes, plus interest expense, depreciation andamortization, in each case for such period, calculated in accordance with GAAP.

 

(v)                                 “Funded Indebtedness”shall mean, as of the date of determination thereof, all short term and longterm debt, including debentures, plus capital leases.

 

(vi)                              “GAAP” shall meangenerally accepted accounting principles in effect from time to time in theUnited States.

 

(b)                                 CurrentRatio. Borrower shall maintain a ratio of Current Assets to CurrentLiabilities, measured as of the end of each fiscal quarter, of not less than of1.25 to 1.00 until June 30, 2009 and, thereafter, of not less than 1.50 to1.00.

 

(c)                                  MaximumFunded Debt to EBITDA. Borrower shall not permit the ratio of its Funded Indebtednessto EBITDA to be greater than 2.500 to 1.00, measured as of the end of eachfiscal quarter on a rolling four-quarter basis.

 

(d)                                 DebtService Coverage Ratio. Borrower shall maintain a Debt Service Coverage Ratio, measuredas of the end of each fiscal quarter on a rolling four-quarter basis, of notless than 1.40 to 1.00 until March 30, 2010 and, thereafter, of not lessthan 1.50 to 1.00. “Debt Service Coverage Ratio” shall mean, for any period, (i) thesum of EBITDA and other non-cash expenses of Borrower for such period, lesstaxes paid, taxes accrued and payable and unfinanced capital expenses for suchperiod, divided by (ii) the sum of current portion of long-term debt,current portion of long-term leases and interest paid, in each case for suchperiod.

 

(e)                                  Profitability.Borrower shall not have two consecutive quarters of net losses, measured as ofthe end of each fiscal quarter.

 

5.2                                 Limitationson Indebtedness. Borrower shall not issue any evidence of indebtedness orcreate, assume, guarantee, become contingently liable for or suffer to existindebtedness in addition to indebtedness to Bank, except Permitted Indebtednessor indebtedness or liabilities of Borrower, other than for money borrowed,incurred or arising in the ordinary course of business.

 

5.3                                 Saleof Interest. There shall not be any sale or transfer of ownership of anyinterest in Borrower without Bank’s prior written consent, unless such sale ortransfer shall not result in a Change in Control.

 

5.4                                 Loansor Advances. Borrower shall not make any loans or advances to any Person,including without limitation its officers and employees; *provided, however,*thatBorrower may make advances to its employees, including its officers, withrespect to expenses incurred or to be incurred by such employees in theordinary course of business which expenses are reimbursable by Borrower; and *provided, further,*thatBorrower may extend credit in the ordinary course of business in accordancewith customary trade practices.

 

15

----

 

5.5                                 Dividendsand Distributions. Borrower shall not, without prior written consent ofBank, pay any dividends on or make any distribution on account of any class ofsuch Borrower’s capital stock in cash or in property (other than additionalshares of such stock), or redeem, purchase or otherwise acquire, directly orindirectly, any of such stock, except to the extent such redemption, purchaseor other acquisition constitutes a Permitted Investment or, with the priorwritten consent of Bank in each instance and so long as such Borrower is not indefault hereunder, distributions to the stockholders of such Borrower in suchamounts as are necessary to pay the tax liability of such stockholders due as aresult of such stockholders’ interest in such Borrower or as otherwise approvedby Bank in its sole discretion.

 

5.6                                 Investments.Borrower shall not make investments in, or advances to, any Person, except for PermittedInvestments. Borrower will not purchase or otherwise invest in or holdsecurities, non-operating real estate or other non-operating assets or purchaseall or substantially all the assets of any entity, except for PermittedInvestments.

 

5.7                                 Merger.Borrower will not merge or consolidate or be merged or consolidated with orinto any other entity, unless Borrower is the surviving entity and such mergeror consolidation does not result in a Change in Control.

 

5.8                                 CapitalExpenditures. Borrower shall not, directly or indirectly, make or commit tomake capital expenditures by lease, purchase or otherwise, except (a) inthe ordinary and usual course of business up to an aggregate limit of$1,000,000.00 or (b) with Bank’s prior written consent.

 

5.9                                 Saleof Assets. Borrower shall not sell, lease or otherwise dispose of any ofits assets, except in the ordinary and usual course of business and except forthe purpose of replacing machinery, equipment or other personal property which,as a consequence of wear, duplication or obsolescence, is no longer used ornecessary in Borrower’s business, *provided*, thatfair consideration is received therefor.

 

5.10                           Restrictionon Liens. Borrower shall not encumber or grant any security interest orlien on or in or mortgage of any of its properties or assets, including withoutlimitation the Collateral, except for Permitted Liens. Borrower shall not enterinto any agreement with any person other than Bank that prohibits Borrower fromgranting any security interest in, or mortgage of, any of its properties orassets including the Collateral.

 

5.11                           OtherBusiness. Borrower shall not engage in any business other than the businessin which it is currently engaged or a business reasonably allied thereto.

 

5.12                           Changeof Name, etc. Borrower shall not change its legal name or the state or thetype of its organization, without giving Bank at least 30 days’ prior writtennotice thereof.

 

**6.****                                     ****STAND-BY LETTERS OF CREDITSUBLINE**

 

TheRevolving Loan shall include a subline facility (the “Stand-By Letter of CreditSubline”) for stand-by letters of credit (each, a “Stand-By Letter of Credit”and, collectively, “Stand-By Letters of Credit”) for the account of Borrower.So long as there is no Event of Default and subject to the terms and conditionsof this Agreement, Borrower may obtain Stand-By Letters of Credit from Bank ona revolving basis. The Stand-By Letter of Credit Subline may be used forobtaining Stand-By Letters of Credit with a maximum expiration date of October 1,2010.

 

(a)                                  Theamount of all issued, outstanding and unexpired Stand-By Letters of Credit,including amounts drawn on Stand-By Letters of Credit and not yet reimbursed byBorrower to Bank, may not exceed $1,500,000.00.

 

(b)                                 Theamount of all issued, outstanding and unexpired Stand-By Letters of Credit,including amounts drawn on Stand-By Letters of Credit and not yet reimbursed toBank, together with all other amounts outstanding under the Revolving Loan,shall not exceed $12,000,000.00.

 

16

----

 

(c)                                  Anysum drawn under a Stand-By Letter of Credit shall, at Borrower’s election,either be immediately reimbursed to Bank by Borrower or added to the principalamount outstanding under the RevolvingLoan and shall be governed by the terms and conditions regarding the RevolvingLoan set forth in this Agreement. Any sum drawn under a Stand-By Letterof Credit after the maturity of the Revolving Loan or after the occurrence ofan Event of Default shall be due with interest on demand and shall accrueinterest at the default rate of interest as provided in this Agreement.

 

(d)                                 Inthe event any Stand-By Letters of Credit are outstanding on October 1,2010, or upon the occurrence of an Event of Default, Borrower shall immediatelyprovide Bank with a written request for cancellation of the Stand-By Letter ofCredit from the beneficiary’s bank in form acceptable to Bank or deposit withBank, as cash collateral for the obligations of Borrower to reimburse Bank fordraws under such remaining outstanding Stand-By Letters of Credit, an amountequal to the face amount of all such outstanding Stand-By Letters of Credit tobe applied to repay draws under such Stand-By Letters of Credit as and whenmade. Borrower hereby grants to Bank a security interest in such cashcollateral.

 

(e)                                  Theissuance of any Stand-By Letter of Credit or any amendment to a Stand-By Letterof Credit is subject to Bank’s written approval and such Stand-By Letter ofCredit, or any amendment thereto, must be in form and content satisfactory toBank and in favor of a beneficiary acceptable to Bank. Borrower will completewith proper insertions, sign and deliver to Bank, Bank’s application andagreement for each requested Stand-By Letter of Credit. Bank may refuse toissue a Stand-By Letter of Credit or amendment to any Stand-By Letter of Creditdue to the nature or terms of the transaction for which the Stand-By Letter ofCredit is required or when applicable law, regulation or order prohibits theissuance of the Stand-By Letter of Credit or amendment.

 

(f)                                    Borroweragrees that Bank may automatically charge Borrower’s deposit accounts with Bankfor applicable fees, discounts and other charges relating to any Stand-ByLetters of Credit, as well as for any reimbursement obligation hereunder, andBorrower grants a security interest to Bank in any such accounts for suchpurposes.

 

(g)                                 Borrowerwill pay promptly Bank’s issuance, settlement and other fees (in accordancewith the prevailing California Bank & Trust Transaction Fee Scheduleas issued from time to time or such other current Bank publication) forStand-By Letters of Credit and all expenses incurred by Bank in connectiontherewith.

 

(h)                                 Bankshall have no obligation to enter a Stand-By Letter of Credit if there is anuncured breach of Event of Default by Borrower under this Agreement, anyStand-By Letter of Credit or any other Obligation of Borrower to Bank.

 

**7.****                                      DEFAULT**

 

7.1                                 Default.“Event of Default” shall mean the occurrence of one or more of any of thefollowing events:

 

(a)                                  failureto pay in full any installment of principal or interest under the Note or anyfee or other amount due and payable under the Loan Documents or a default byBorrower with respect to any covenant set forth in Section 5 herein or anyother negative covenant under the Loan Documents;

 

(b)                                 defaultor failure by Borrower to perform any covenant set forth in Section 4 hereinor any other term, liability, obligation, covenant or undertaking of Borrowerhereunder or under any of the other the Loan Documents (other than any defaultor failure described in Section 7.1(a)) and such default or failure shallcontinue for fifteen (15) days after Borrower becomes aware of such default orfailure or Bank gives Borrower written notice of such default or failure,whichever occurs first, or, if such default or failure is of a nature that itis not reasonably capable of being cured within such 15-day period, Borrowershall have commenced the cure within such 15-day period and shall diligentlypursue such cure until completion, which shall not exceed sixty (60) days afterthe cure has commenced;

 

(c)                                  failureof Borrower to maintain aggregate Collateral value to the extent such failure resultsin a Material Adverse Change;

 

17

----

 

(d)                                 anevent of default of any material liability, obligation or undertaking ofBorrower to any other party;

 

(e)                                  ifany statement, representation or warranty heretofore, now or hereafter made byBorrower in connection with this Agreement or in any supporting financialstatement of Borrower shall be determined by Bank to have been false ormisleading in any material respect when made;

 

(f)                                    (i) theliquidation, termination or dissolution of Borrower, (ii) the merger orconsolidation of Borrower into another entity, or the sale or transfer of anyownership interest in Borrower, resulting in a Change in Control, (iii) Borrower’sceasing to carry on actively its present business or (iv) the appointmentof a receiver for its property;

 

(g)                                 theinstitution by or against Borrower of any proceedings under the United StatesBankruptcy Code, 11 U.S.C. §§ 101, *et seq.,* or anyother law in which Borrower is alleged to be insolvent or unable to pay itsdebts as they mature, or the making by Borrower of an assignment for thebenefit of creditors or the granting by Borrower of a trust mortgage for thebenefit of creditors;

 

(h)                                 ajudgment or judgments for the payment of money in excess of $50,000 shall berendered against Borrower and any such judgment shall remain unsatisfied and ineffect for any period of thirty (30) consecutive days without a stay ofexecution;

 

(i)                                     anylevy, lien (including mechanics lien), seizure, attachment, execution orsimilar process shall be issued or levied on any of the property of Borrower inconnection with any liability or claim in an amount equal to $50,000.00 ormore; or

 

(j)                                     theoccurrence of any change in the condition or affairs (financial or otherwise)of Borrower or the occurrence of any other event or circumstance resulting in aMaterial Adverse Change.

 

7.2                                 Acceleration.If an Event of Default shall occur, at the election of Bank, all Obligations shallbecome immediately due and payable without notice or demand, except withrespect to Obligations payable on demand, which shall be due and payable ondemand, whether or not an Event of Default has occurred. In addition, Bank mayrequire that Borrower remit to Bank cash collateral in an amount equal to 110%of the aggregate undrawn amount of all outstanding Letters of Credit at suchtime, such cash collateral to be held by Bank in a cash collateral account onterms and conditions satisfactory to Bank.

 

Bank is hereby authorized, at its election, after an Event of Defaultor after demand, without any further demand or notice except to such extent asnotice may be required by applicable law, to take possession and/or sell orotherwise dispose of all or any of the Collateral at public or private sale;and Bank may also exercise any and all other rights and remedies of a securedparty under the Code or which are otherwise accorded to it in equity or at law,all as Bank may determine, and such exercise of rights in compliance with therequirements of law will not be considered adversely to affect the commercialreasonableness of any sale or other disposition of the Collateral. If notice ofa sale or other action by Bank is required by applicable law, unless theCollateral is perishable or threatens to decline speedily in value or is of atype customarily sold on a recognized market, Borrower agrees that ten (10) dayswritten notice to Borrower, or the shortest period of written notice permittedby such law, whichever is smaller, shall be sufficient notice; and that to theextent permitted by law, Bank, its officers, attorneys and agents may bid andbecome purchasers at any such sale, if public, and may purchase at any privatesale any of the Collateral that is of a type customarily sold on a recognizedmarket or which is the subject of widely distributed standard price quotations.Any sale (public or private) shall be without warranty and free from any rightof redemption, which Borrower shall waive and release after default upon Bank’srequest therefor, and may be free of any warranties as to the Collateral ifBank shall so decide. No purchaser at any sale (public or private) shall beresponsible for the application of the purchase money. Any balance of the netproceeds of sale remaining after paying all Obligations of Borrower to Bankshall be returned to such other party as may be legally entitled thereto; andif there is a deficiency, Borrower shall be responsible for repayment of thesame, with interest. Upon demand by Bank, Borrower shall assemble theCollateral and make it available to Bank at a place designated by Bank which isreasonably convenient to Bank and Borrower. Borrower hereby acknowledges thatBank has extended credit and other financial accommodations to Borrower uponreliance of Borrower’s granting Bank the rights and remedies contained in this Agreement includingwithout limitation the right to take immediate possession of the Collateralupon the occurrence of an Event of Default or after demand with respect toObligations payable on demand and Borrower hereby acknowledges that Bank isentitled to equitable and injunctive relief to enforce any of its rights andremedies hereunder or under the Code.

 

18

----

 

Bank shall not be required to marshal anypresent or future security for (including but not limited to this Agreement andthe Collateral subject to the security interest created hereby), or guaranteesof, the Obligations or any of them, or to resort to such security or guaranteesin any particular order; and all of its rights hereunder and in respect of suchsecurities and guaranties shall be cumulative and in addition to all otherrights, however existing or arising. To the extent that it lawfully may do so,Borrower hereby agrees that it will not invoke and irrevocably waives thebenefits of any law relating to the marshaling of collateral which might causedelay in or impede the enforcement of Bank’s rights under this Agreement orunder any other instrument evidencing any of the Obligations or under which anyof the Obligations is outstanding or by which any of the Obligations is securedor guaranteed. Except as required by applicable law, Bank shall have no duty asto the collection or protection of the Collateral or any income thereon, nor asto the preservation of rights against prior parties, nor as to the preservationof any rights pertaining thereto beyond the safe custody thereof.

 

7.3                                 Powerof Attorney. Borrower hereby irrevocably constitutes and appoints Bank asBorrower’s true and lawful attorney, with full power of substitution, at thesole cost and expense of Borrower but for the sole benefit of Bank, upon theoccurrence of an Event of Default or after demand with respect to Obligationspayable on demand, to convert the Collateral into cash, including withoutlimitation completing the manufacture or processing of work in process, and thesale (either public or private) of all or any portion or portions of theinventory and other Collateral; to enforce collection of the Collateral, eitherin its own name or in the name of Borrower, including without limitationexecuting releases or waivers, compromising or settling with any Debtors andprosecuting, defending, compromising or releasing any action relating to theCollateral; to receive, open and dispose of all mail addressed to Borrower andto take therefrom any remittances or proceeds of Collateral in which Bank has asecurity interest; to notify Post Office authorities to change the address fordelivery of mail addressed to Borrower to such address as Bank shall designate;to endorse the name of Borrower in favor of Bank upon any and all checks,drafts, money orders, notes, acceptances or other instruments of the same ordifferent nature; to sign and endorse the name of Borrower on and to receive assecured party any of the Collateral, any invoices, freight or express receipts,or bills of lading, storage receipts, warehouse receipts, or other documents oftitle of the same or different nature relating to the Collateral; to sign thename of Borrower on any notice of the Debtors or on verification of theCollateral; and to sign, if necessary, and file or record on behalf of Borrowerany financing or other statement in order to perfect or protect Bank’s securityinterest. Bank shall not be obliged to do any of the acts or exercise any ofthe powers hereinabove authorized, but if Bank elects to do any such act orexercise any such power, it shall not be accountable for more than it actuallyreceives as a result of such exercise of power, and it shall not be responsibleto Borrower except for its own gross negligence or willful misconduct. Allpowers conferred upon Bank by this Agreement, being coupled with an interest,shall be irrevocable so long as any Obligation of Borrower or any guarantor orsurety to Bank shall remain unpaid or Bank is obligated under this Agreement toextend any credit to Borrower.

 

7.4                                 NonexclusiveRemedies. All of Bank’s rights and remedies not only under the provisionsof this Agreement but also under any other agreement or transaction shall becumulative and not alternative or exclusive, and may be exercised by Bank atsuch time or times and in such order of preference as Bank in its solediscretion may determine.

 

7.5                                 Rightof Setoff. In addition to any rights now or hereafter granted, and not byway of limitation of any such rights,upon the occurrence and during the continuance of any Event of Default, Bank ishereby authorized at anytime or from time to time, to the extent permitted bylaw, without presentment, demand, protest or other notice of any kind toBorrower or to any other Person, any such notice being hereby expressly waived,to set off and to appropriate and apply any and all deposits (general orspecial, time or demand, provisional or final) and any other indebtedness atany time held or owing by Bank (including by branches and agencies of Bankwherever located) to or for the credit or the account of Borrower against andon account of the Obligations of Borrower to Bank under this Agreement or underany of the other Loan Documents and all other claims of any nature ordescription arising out of or connected with this Agreement or any other Loan Document,irrespective of whether or not Bank shall have made any demand hereunder andalthough said Obligations, liabilities or claims, or any of them, shall becontingent or unmatured.

 

19

----

 

7.6                                 Reassignmentto Borrower. Whenever Bank deems it desirable that any legal action be institutedwith respect to any Collateral or that any other action be taken in any attemptto effectuate collection of any Collateral, Bank may reassign the item inquestion to Borrower (and if Bank shall execute any such reassignment, it shallautomatically be deemed to be without recourse to Bank in any event) andrequire Borrower to proceed with such legal or other action at Borrower’s soleliability, cost and expense, in which event all amounts collected by Borroweron such item shall nevertheless be subject to Bank’s security interest.

 

**8.****                                      MISCELLANEOUS**

 

8.1                                 Waivers.Borrower waives notice of intent to accelerate, notice of acceleration, noticeof nonpayment, demand, presentment, protest or notice of protest of theObligations, and all other notices, consents to any renewals or extensions oftime of payment thereof, and generally waives any and all suretyship defensesand defenses in the nature thereof.

 

8.2                                 [Reserved]

 

8.3                                 Severability.If any provision of this Agreement or portion of such provision or theapplication thereof to any person or circumstance shall to any extent be heldinvalid or unenforceable, the remainder of this Agreement (or the remainder ofsuch provision) and the application thereof to other persons or circumstancesshall not be affected thereby.

 

8.4                                 DepositCollateral. Borrower hereby grants to Bank a continuing lien and securityinterest in any and all deposit accounts (including without limitation time,savings, checking and money market accounts and certificates of deposit) or othersums at any time credited by or due from Bank or any Bank Affiliate to Borrowerand any cash, securities, instruments or other property of Borrower in thepossession of Bank or any Bank Affiliate, whether for safekeeping or otherwise,or in transit to or from Bank or any Bank Affiliate (regardless of the reasonBank or Bank Affiliate had received the same or whether Bank or Bank Affiliatehas conditionally released the same) as security for the full and punctualpayment and performance of all of the liabilities and obligations of Borrowerto Bank or any Bank Affiliate and such deposits and other sums may be appliedagainst such liabilities and obligations of Borrower to Bank or any BankAffiliate at any time, whether or not such are then due, whether or not demandhas been made and whether or not other collateral is then available to Bank orany Bank Affiliate.

 

8.5                                 Indemnification.Borrower shall indemnify, defend and hold Bank and any Bank Affiliate and theirdirectors, officers, employees, shareholders, agents, authorizedrepresentatives and attorneys (each an “Indemnitee”) harmless from and againstany and all loss, liability or damages of claim brought or threatened againstany Indemnitee by Borrower, any guarantor or endorser of the Obligations, or anyother person (as well as from reasonable attorneys’ fees and expenses inconnection therewith) on account of Bank’s relationship with Borrower, or anyguarantor or endorser of the Obligations (each of which may be defended,compromised, settled or pursued by Bank with counsel of Bank’s election, but atthe expense of Borrower), except for any claim arising solely out of the grossnegligence or willful misconduct of Bank. The within indemnification shallsurvive the termination or expiration of this Agreement the payment of theObligations, and/or any termination, release or discharge executed by Bank infavor of Borrower.

 

8.6                                 Costsand Expenses. Whether or not the transactions contemplated hereby areconsummated, Borrower agrees to pay (i) all costs and expenses incurred byBank in connection with or arising from the performance of due diligence, thesyndication of the credit facilities contemplated hereby, the negotiation,preparation, execution, delivery, waiver or modification and administration ofthis Agreement, the other Loan Documents and any other documentationcontemplated hereby, the making of loans hereunder, including withoutlimitation the out-of-pocket costs and internally allocated charges of audit orfield examinations of Bank in connection with the administration of thisAgreement, and (ii) all costs and expenses incurred by Bank in themaintenance, enforcement or protection of the rights and remedies of

 

20

----

 

Bankin connection with this Agreement, the Note or the other Loan Documents or anyof Borrower’s obligations hereunder or thereunder or as a result of anytransaction, action or non-action arising from any of the foregoing, includingwithout limitation any and all such costs and expenses incurred or paid by Bankin defending Bank’s security interest in or right or title to the Collateral orin collecting or enforcing, or attempting to collect or enforce, payment of theObligations. Such costs and expenses shall include without limitation attorneys’fees and disbursements, court costs, litigation and other expenses. Paymentsfor any costs and expenses described in this section shall be made on the datethis Agreement is executed by Borrower and thereafter on demand by Bank.Borrower agrees that it shall indemnify Bank from and hold it harmless againstany documentary taxes, assessments or charges made by any governmentalauthority by reason of the execution and delivery of this Agreement, the Noteand any of the other Loan Documents or the issuance of any letters of credit.The obligations of Borrower under this section shall survive the termination ofthis Agreement, the payment of the loans and the expiration of any letters ofcredit issued hereunder.

 

8.7                                 Counterparts. This Agreement may be executed in two or more counterparts, each ofwhich shall be an original, but all of which, taken together, shall constitutebut one agreement.

 

8.8                                 Complete Agreement. This Agreement and the other Loan Documentsconstitute the entire agreement and understanding between and among the partieshereto relating to the subject matter hereof and supersedes all priorproposals, negotiations, agreements and understandings among the parties heretowith respect to such subject matter, including the Original Agreement and therelated Promissory Notes, Commercial Security Agreement, Corporate Resolutionto Borrow/Grant Collateral, Stand-By Letter of Credit Subline addendum andDisbursement Requests and Authorizations (together with any amendments,extensions or renewals executed and delivered in connection therewith)(collectively, the “Prior Loan Documents”). From and after the date ofexecution of this Agreement, the Prior Loan Documents shall be of no furtherforce or effect. Without limiting the generality of the foregoing and for theavoidance of doubt only, Borrower acknowledges and agrees that the Agreement toProvide Insurance and Notice of Insurance Requirements, dated October 16,2008, executed by Borrower remains in full force and effect as of the datehereof and that the statements set forth therein are true, correct and completeand Borrower is in**compliance with any and all covenants,requirements and agreements set forth therein as of the date hereof.

 

8.9                                 Binding Effect of Agreement. This Agreement shall be binding upon andinure to the benefit of the respective heirs, executors, administrators, legalrepresentatives, successors and assigns of the parties hereto, and shall remainin full force and effect (and Bank shall be entitled to rely thereon) untilreleased in writing by Bank. Bank may transfer and assign this Agreement andany Revolving Credit and deliver the Collateral to the assignee, who shallthereupon have all of the rights of Bank; and Bank shall then be relieved anddischarged of any responsibility or liability with respect to this Agreement,and any such Revolving Credit and the Collateral. Borrower may not assign ortransfer any of its rights or obligations under this Agreement. Except asexpressly provided herein or in the other Loan Documents, nothing, expressed orimplied, is intended to confer upon any party, other than the parties hereto,any rights, remedies, obligations or liabilities under or by reason of thisAgreement or the other Loan Documents.

 

8.10                           Further Assurances. Borrower will from time to time execute anddeliver to Bank such documents, and take or cause to be taken, all such otheror further action, as Bank may request in order to effect and confirm or vestmore securely in Bank all rights contemplated by this Agreement and the otherLoan Documents (including without limitation to correct clerical errors) or tovest more fully in or assure to Bank the security interest in the Collateralgranted to Bank by this Agreement or to comply with applicable statute or lawand to facilitate the collection of the Collateral (including withoutlimitation the execution of stock transfer orders and stock powers, endorsementof promissory notes and instruments and notifications to obligors on theCollateral). To the extent permitted by applicable law, Borrower authorizesBank to file financing statements, continuation statements or amendments, andany such financing statements, continuation statements or amendments may befiled at any time in any jurisdiction. Bank may at any time and from time totime file financing statements, continuation statements and amendments theretowhich contain any information required by the Code for the sufficiency orfiling office acceptance of any financing statement, continuation statement oramendment, including whether Borrower is an organization, the type oforganization and any organization identification number issued to

 

21

----

 

Borrower.Borrower agrees to furnish any such information to Bank promptly upon request.In addition, Borrower shall at any time and from time to time take such stepsas Bank may reasonably request for Bank (i) to obtain an acknowledgment,in form and substance satisfactory to Bank, of any bailee having possession ofany of the Collateral that the bailee holds such Collateral for Bank, (ii) toobtain “control” (as defined in the Code) of any Collateral comprised ofdeposit accounts, electronic chattel paper, letter of credit rights orinvestment property, with any agreements establishing control to be in form andsubstance satisfactory to Bank, and (iii) otherwise to insure thecontinued perfection and priority of Bank’s security interest in any of theCollateral and the preservation of its rights therein. Borrower herebyconstitutes Bank its attorney-in-fact to execute, if necessary, and file allfilings required or so requested for the foregoing purposes, all acts of suchattorney being hereby ratified and confirmed; and such power, being coupled withan interest, shall be irrevocable until this Agreement terminates in accordancewith its terms, all Obligations are irrevocably paid in full and the Collateralis released.

 

8.11                           Amendments and Waivers. This Agreement may be amended and Borrowermay take any action herein prohibited, or omit to perform any act hereinrequired to be performed by it, if Borrower shall obtain Bank’s prior writtenconsent to each such amendment, action or omission to act. No course of dealingand no delay or omission on the part of Bank in exercising any right hereundershall operate as a waiver of such right or any other right and waiver on anyone or more occasions shall not be construed as a bar to or waiver of any rightor remedy of Bank on any future occasion.

 

8.12                           Term of Agreement. This Agreement shall continue in full forceand effect so long as any Obligations or obligation of Borrower to Bank shallbe outstanding, or Bank shall have any obligation to extend any financialaccommodation hereunder, and is supplementary to each and every other agreementbetween Borrower and Bank and shall not be so construed as to limit orotherwise derogate from any of the rights or remedies of Bank or any of theliabilities, obligations or undertakings of Borrower under any such agreement,nor shall any contemporaneous or subsequent agreement between Borrower and**Bankbe construed to limit or otherwise derogate from any of the rights or remediesof Bank or any of the liabilities, obligations or undertakings of Borrowerhereunder, unless such other agreement specifically refers to this Agreementand expressly so provides.

 

8.13                           Notices. Any notice under or pursuant to this Agreement shall be a signedwriting or other authenticated record (within the meaning of Article 9 ofthe Code). Any notices under or pursuant to this Agreement shall be deemed dulyreceived and effective if delivered in hand to any officer or agent of Borroweror Bank, or if mailed by registered or certified mail, return receiptrequested, addressed to Borrower or Bank at the address set forth in thisAgreement or as any party may from time to time designate by written notice tothe other party.

 

8.14                           Governing Law. This Agreement has been executed orcompleted and is to be performed in California, and it and all transactionshereunder or pursuant hereto shall be governed as to interpretation, validity,effect, rights, duties and remedies of the parties hereunder and in all otherrespects by the internal laws of California without regard to principles ofconflict of laws.

 

8.15                           Reproductions. This Agreement and all documents which havebeen or may be hereinafter furnished by Borrower to Bank may be reproduced byBank by any photographic, photostatic, microfilm, xerographic or similarprocess, and any such reproduction shall be admissible in evidence as theoriginal itself in any judicial or administrative proceeding (whether or notthe original is in existence and whether or not such reproduction was made inthe regular course of business).

 

8.16                           Jurisdiction and Venue. Borrower irrevocably submits to thenonexclusive jurisdiction of any federal or state court sitting in California,over any suit, action or proceeding arising out of or relating to thisAgreement. Borrower irrevocably waives, to the fullest extent it may effectivelydo so under applicable law, any objection it may now or hereafter have to thelaying of the venue of any such suit, action or proceeding brought in any suchcourt and any claim that the same has been brought in an inconvenient forum.Borrower hereby consents to any and all process which may be served in any suchsuit, action or proceeding, (i) by mailing a copy thereof by registeredand certified mail, postage prepaid, return receipt requested, to Borrower’saddress shown in this Agreement or as notified to Bank and (ii) by servingthe same upon Borrower in any other manner otherwise permitted by law, andagrees that such service shall in every respect be deemed effective serviceupon Borrower

 

22

----

 

8.17                           Civil Code § 2822. In the event that, at any time, a surety isliable upon only a portion of Borrower’s obligations under the Loan Documentsand Borrower provides partial satisfaction of any such obligations, Borrowerhereby waives any right it would otherwise have under Section 2822 of theCalifornia Civil Code to designate the portion of the obligations to besatisfied. The designation of the portion of the obligation to be satisfiedshall, to the extent not expressly made by the terms of the Loan Documents, bemade by Bank rather than Borrower

 

8.18                      MUTUAL WAIVER OF RIGHT TO JURY TRIAL. SUBJECT TO SECTION 8.19 AND TO THEEXTENT THAT IN THE FUTURE SUCH WAIVERS ARE PERMITTED BY LAW IN THE MANNERPROVIDED IN SECTION 8.19(a), BORROWER AND BANK EACH HEREBY KNOWINGLY,VOLUNTARILY AND INTENTIONALLY, AND AFTER AN OPPORTUNITY TO CONSULT WITH LEGALCOUNSEL, (a) WAIVES ANY AND ALL RIGHTS TO A TRIAL BY JURY (a “Jury TrialWaiver”) IN ANY ACTION OR PROCEEDING IN CONNECTION WITH THIS AGREEMENT OR THELOAN DOCUMENTS, THE OBLIGATIONS OR ANY MATTERS CONTEMPLATED HEREBY OR DOCUMENTSEXECUTED IN CONNECTION HEREWITH AND (b) AGREES NOT TO SEEK TO CONSOLIDATEANY SUCH ACTION OR PROCEEDING WITH ANY OTHER ACTION OR PROCEEDING IN WHICH AJURY TRIAL CAN NOT BE OR HAS NOT BEEN WAIVED.

 

8.19                           Reference Provision.

 

(a)                             The parties prefer that any dispute betweenthem be resolved in litigation subject to a Jury Trial Waiver as set forth in Section 8.18herein, but the California Supreme Court has held that such pre-dispute jurytrial waivers are unenforceable. This section will be applicable until: (i) theCalifornia Supreme Court holds that a pre-dispute jury trial waiver provisionsimilar to that contained in Section 8.18 herein is valid or enforceable;or (ii) the California Legislature passes legislation and the governor ofthe State of California signs into law a statute authorizing pre-dispute jurytrial waivers and as a result such waivers become enforceable.

 

(b)                            Other than (i) non-judicial foreclosureof security interests in real or personal property, (ii) the appointmentof a receiver or (iii) the exercise of other provisional remedies (any ofwhich may be initiated pursuant to applicable law), any controversy, dispute orclaim (each, a “Claim”) between the parties arising out of or relating to thisAgreement or any other Loan Documents, will be resolved by a referenceproceeding in California in accordance with the provisions of Sections 638, at *seq.,*of the California Code of Civil Procedure (“CCP”),or their successor sections, which shall constitute the exclusive remedy forthe resolution of any Claim, including whether the Claim is subject to thereference proceeding. Except as otherwise provided in the LoanDocuments, venue for the reference proceeding will be in the superior court orfederal district court in the county or district where the real property, ifany, is located or in a county or district where venue is otherwise appropriateunder applicable law (the “Court”).

 

(c)                             The referee shall be a retired judge orjustice selected by mutual written agreement of the parties. If the parties donot agree, the referee shall be selected by the presiding judge of the Court(or his or her representative). A request for appointment of a referee may beheard on an ex parte or expedited basis, and the parties agree that irreparableharm would result if *ex parte*reliefis not granted. The referee shall be appointed to sit with all the powersprovided by law. Pending appointment of the referee, the Court has power toissue temporary or provisional remedies.

 

(d)                            The parties agree that time is of the essencein conducting the reference proceedings. Accordingly, the referee shall berequested, subject to change in the time periods specified herein for goodcause shown, to (i) set the matter for a status and trial-settingconference within fifteen (15) days after the date of selection of the referee,(ii) If practicable, try all issues of law or fact within ninety (90) daysafter the date of the conference and (iii) report a statement of decisionwithin twenty (20) days after the matter has been submitted for decision.

 

(e)                                  The referee will have power to expand or limitthe amount and duration of discovery. The referee may set or extend discoverydeadlines or cutoffs for good cause, including a party’s failure to providerequested discovery for any reason whatsoever. Unless otherwise ordered basedupon good cause shown, no party shall be entitled to “priority” in conductingdiscovery, depositions may be taken by either party upon seven (7) days writtennotice, and all other discovery shall be responded to within fifteen (15) daysafter service. All disputes relating to discovery which cannot be resolved bythe parties shall be submitted to the referee whose decision shall be final andbinding.

 

23

----

 

(f)                                    Except as expressly set forth in thisAgreement, the referee shall determine the manner in which the referenceproceeding is conducted including the time and place of hearings, the order ofpresentation of evidence, and all other questions that arise with respect tothe course of the reference proceeding. All proceedings and hearings conductedbefore the referee, except for trial, shall be conducted without a courtreporter, except that when any party so requests, a court reporter will be usedat any hearing conducted before the referee, and the referee will be provided acourtesy copy of the transcript. The party making such a request shall have theobligation to arrange for and pay the court reporter. Subject to the referee’spower to award costs to the prevailing party, the parties will equally sharethe cost of the referee and the court reporter at trial.

 

(g)                                 The referee shall be required to determine allissues in accordance with existing case law and the statutory laws of the Stateof California. The rules of evidence applicable to proceedings at law inthe State of California will be applicable to the reference proceeding. Thereferee shall be empowered to enter equitable as well as legal relief, provideall temporary or provisional remedies, enter equitable orders that will bebinding on the parties and rule on any motion which would be authorized ina trial, including without limitation motions for summary judgment or summaryadjudication . The referee shall issue a decision pursuant to CCP § 644 and thereferee’s decision shall be entered by the Court as a judgment or an order inthe same manner as if the action had been tried by the Court. The finaljudgment or order entered by the Court is fully appealable as provided by law.The parties reserve the right to findings of fact, conclusions of laws, awritten statement of decision, and the right to move for a new trial or adifferent judgment, which new trial, if granted, is also to be a reference proceedingunder this provision.

 

(h)                                 If the enabling legislation which provides forappointment of a referee is repealed (and no successor statute is enacted), anydispute between the parties that would otherwise be determined by referenceprocedure will be resolved and determined by arbitration. The arbitration willbe conducted by a retired judge or justice, in accordance with the CaliforniaArbitration Act, CCP §§ 1280 - § 1294.2, as amended from time to time. Thelimitations with respect to discovery set forth above shall apply to any sucharbitration proceeding.

 

(i)                                     THE PARTIES RECOGNIZE AND AGREE THAT ALLDISPUTES RESOLVED UNDER THIS REFERENCE PROVISION WILL BE DECIDED BY A REFEREEAND NOT BY A JURY, AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT)WITH COUNSEL OF THEIR OWN CHOICE, EACH PARTY KNOWINGLY AND VOLUNTARILY AND FORTHEIR MUTUAL BENEFIT AGREES THAT THIS REFERENCE PROVISION WILL APPLY TO ANYDISPUTE BETWEEN THEM WHICH ARISES OUT OF OR IS RELATED TO THIS AGREEMENT OR THELOAN DOCUMENTS.

 

8.20                           USA PATRIOT Act. Bank notifies Borrowerthat, pursuant to the requirements of the USA PATRIOT Act, it isrequired to obtain, verify and record information that identifies Borrower,which information includes the name and address of Borrower and otherinformation that will allow Bank to identify Borrower in accordance with theUSA PATRIOT Act.

 

8.21                           Waiver of Damages. Borrower acknowledgesand agrees that Bank has no fiduciary relationship with or fiduciary duty orobligation to Borrower arising out of or in connection with this Agreement orany other Loan Document and that the relationship between Bank and Borrower inconnection therewith is solely that of debtor and creditor. To the extentpermitted by applicable law, Borrower waives, and covenants and agrees it will not assert, any claims against Bank on any theoryof liability for special, indirect, consequential or punitive damages (asopposed to direct or actual damages) arising from or in connection with thisAgreement, any Loan Document, any agreement or instrument contemplated herebyor thereby or the transactions contemplated hereby or thereby.

 

8.22                           Participations.Bank may, without the consent of Borrower, sell participations to one or more banksor other entities in all or a portion of its rights and obligations under thisAgreement, including without limitation all or a portion of the Loans thenissued, outstanding and owing to Bank and the Note. Bank may, in connectionwith any assignment or participation or proposed assignment or participationpursuant to this section, disclose to the proposed assignee or participant anyinformation relating to Borrower furnished to Bank by or on behalf of Borrower,provided, that the proposed assignee or participant agrees to hold suchinformation confidential to the same extent Bank must hold such informationconfidential.

 

24

----

 

8.23                           Construction of Agreement. Defined terms in this Agreement (includingany schedules, exhibits and attachments hereto) shall include in the singularnumber the plural and in the plural number the singular. Whenever the contextmay require, any pronoun shall include the corresponding masculine, feminineand neuter forms.

 

8.24                           Confidentiality. Bank agrees to maintain the confidentialityof any and all proprietary, trade secret or confidential information providedto or received by Bank from Borrower that indicates it is confidential,including business plans and forecasts, non-public financial and otherinformation, confidential or secret processes, formulae, devices andcontractual information, customer lists and employee relation matters, providedthat Bank may disclose such information to its officers, directors, employees,attorneys, accountants, Affiliates, participants, prospective participants,assignees and prospective assignees and such other persons to whom Bank shallat any time be required to make such disclosure in accordance with applicablelaw or in the performance of its obligations in connection with the Loans, and providedthat the foregoing provisions shall not apply to disclosures made by Bank inits good faith business judgment in connection with the enforcement of itsrights or remedies after an Event of Default or to disclosures of informationthat is or becomes generally available to the public other than as a result ofa disclosure by Bank or that was received by Bank in good faith from a thirdparty who is not bound by an obligation of confidentiality or otherwiseprohibited from transmitting the information.

 

[Remainder of page intentionally left blank]

 

25

----

 

8.25                           *Force Majeure**.* Neither party hereto shall be required toperform, or shall be liable for any failure to perform, its obligationshereunder during any period in which such non-performance is caused by orarises from (i) war, national emergencies, hostilities or acts ofterrorism, (ii) natural disasters, weather conditions, mechanicalbreakdowns or power failure, (iii) strikes, work stoppages, labor shortagesor inability to procure labor, and (iv) causes beyond the control of theparty unable to perform; and any loss, damage, cost or expense arisingtherefrom or in connection therewith shall be excluded under this Agreement.

 

Executedas of February 4, 2009

 

 
|   | Borrower:               |
|--------|-------------------------|
|   |                    |   |
|   | Iteris, Inc.,      |
|   | a  Delaware corporation |
|   |                    |   |
|   | By:                     | /s/ James  S. Miele |
|   |                    | James  S. Miele, Chief Financial Officer  For Iteris, Inc. |
|   |                    |   |
|   | By:                     | /s/  Abbas Mohaddes |
|   |                    | Abbas  Mohaddes, Chief Executive Officer |

 

 

Accepted:

 

CaliforniaBank & Trust,a California banking corporation

 

 
| By:    | /s/ Sergio Alfonso              |   |
|--------|---------------------------------|--------|
|   | Sergio  Alfonso, Vice President |   |
|   |                            |

 

26

----

 

Schedule P1

 

Existing Permitted Investments

 

None

 

----

 

EXHIBIT A

 

Excess Cash Flow Recapture Certificate

 

Theundersigned, being the duly appointed, qualified and acting Chief FinancialOfficer of Iteris, Inc. (“Borrower”), hereby certifies that the followingcalculation of the Excess Cash Flow Recapture Amount pursuant to Section 1.1(b)(ii) ofthat certain Amended and Restated Loan and Security Agreement, dated as of February 4,2009 (the “Loan Agreement”), between Borrower and California Bank &Trust, a California banking corporation (“Bank”), is true, complete and correctfor Borrower’s fiscal year ended March 31, 20  , and that suchamount is to be applied to the outstanding principal balance of the Company’sindebtedness under the Loan Agreement.

 

Forfiscal year ended March 31, 20    :

 

 
| 1.     | EBITDA                                                                                                                                                  |                                                              |   |       | $      |   |    |   |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------|--------|------------|--------|--------|---------|--------|
| 2.     | Less:                                                                                                                                                   |                                                              | $      |       |   |   |    |   |
|   | a.                                                                                                                                                      | Taxes                                                             |   |       |   |   |    |   |
|   | b.                                                                                                                                                      | Lesser  of (i) $1,500,000 and (ii) capital expenditures |   |       |   |   |    |   |
|   | c.                                                                                                                                                      | Interest  paid                                                    |   |       |   |   |    |   |
|   | d.                                                                                                                                                      | Current  portion of long-term debt                                |   |       |   |   |    |   |
| 3.     | Deductions  from EBITDA                                                                                                                                 |                                                              |   | $          |   |   |    |
| 4.     | Excess  Cash Flow                                                                                                                                       |                                                              |   | $          |   |   |    |
| 5.     | Recapture  Amount (50% x Excess Cash Flow)                                                                                                              |                                                              |   |  x 50 | %      | $      |    |
| 6.     | Maximum  Excess Cash Flow Recapture Amount                                                                                                              |                                                              |   |       |   | $      | 500,000 |   |
| 7.     | Excess  Cash Flow Recapture Amount to be paid by Borrower and applied to balance of  Loan for fiscal year 20   (lesser of lines 5 and 6) |                                                              |   |       |   | $      |    |
|        |                                                                                                                                                         |                                                                   |        |            |        |        |         |        |  |  |

 

Capitalizedterms used but not otherwise defined herein shall have the respective meaningsascribed to them in the Loan Agreement.

 

INWITNESS WHEREOF, the undersigned has executed and delivered this Excess CashFlow Recapture Certificate as of March 31, 20  .

 

 
|   | /s/  James S. Miele                      |
|--------|------------------------------------------|
|   | James  S. Miele, Chief Financial Officer |
|   | For  Iteris, Inc.                   |

 

----

 

Loan No. 0411094-9001

 

**AMENDED AND RESTATED REVOLVING NOTE**

 

February 4, 2009
| $12,000,000.00 |   | Irvine, California |
|----------------|--------|--------------------|

 

Forvalue received, the undersigned, Iteris, Inc., a Delaware corporation,with an address of 1700 Carnegie Avenue, Suite 100, Santa Ana, California92705 (“Borrower”), promises to pay to the order of California Bank &Trust, a California banking corporation, with an address of Orange CountyCorporate Banking Office, 19200 Von Karman Avenue, Suite 140, Irvine, California92612 (together with its successors and assigns, “Bank”), the principal amountof Twelve Million and No/100 Dollars ($12,000,000.00) or, if less, such amountas may be the aggregate unpaid principal amount of all loans or advances madeby Bank to Borrower pursuant hereto, on or before October 1, 2010 (the “MaturityDate”), together with interest from the date hereof on the unpaid principalbalance from time to time outstanding until paid in full.

 

ThisNote amends and restates that certain Promissory Note dated October 16,2008, by Borrower in favor of Bank in the original principal amount of$12,000,000.00 and continues to evidence, and does not extinguish or satisfy,the indebtedness and other obligations of Borrower thereunder. Nothing in thisNote shall constitute or be deemed to constitute a novation.

 

Theaggregate principal balance outstanding shall bear interest, and interest shallbe payable, in accordance with that certain Interest Rate Election Riderattached hereto and made a part hereof (the “Interest Election Rider”).

 

ThisNote is secured by all collateral granted to Bank by Borrower or any endorseror guarantor hereof or by any other party and shall be secured by anyadditional collateral hereafter granted to Bank by Borrower or any endorser orguarantor hereof or by any other party.

 

Principaland interest shall be payable at Bank’s main office or at such other place asBank may designate in writing in immediately available funds in lawful money ofthe United States of America without set-off, deduction or counterclaim.Interest shall be calculated on the basis of actual number of days elapsed anda 360-day year.

 

ThisNote is a revolving note and, subject to the foregoing and in accordance withthe provisions hereof and of any and all other agreements between Borrower andBank related hereto, Borrower may, at its option, borrow, pay, prepay andreborrow hereunder at any time prior to the Maturity Date or such earlier dateas the obligations of Borrower to Bank under this Note, and any otheragreements between Bank and Borrower related hereto, shall become due andpayable, or the obligation of Bank to extend financial accommodations toBorrower shall terminate; *provided, however,*that in any event the principal balance outstanding hereunder shallat no time exceed the face amount of this Note. This Note shall continue infull force and effect until all obligations and liabilities evidenced by thisNote are paid in full and Bank is no longer obligated to extend financialaccommodations to Borrower, even if, from time to time, there are no amountsoutstanding respecting this Note.

 

Foras long as the credit facility evidenced by this Note remains in existence,Borrower shall pay to Bank a fee (“Unused Line Fee”) in the form of additionalinterest on that portion of the maximum principal amount of this Note that oneach day is not outstanding (“Unused Portion”), which interest shall accruedaily by multiplying the Unused Portion each day by a per diem rate equal to0.25% divided by 360. The Unused Line Fee shall be due and payable quarterly inarrears.

 

Atthe option of Bank, this Note shall become immediately due and payable withoutnotice or demand upon the occurrence at any time of any Event of Default, as defined in that certain Amendedand Restated Loan and Security Agreement, dated as of even date herewith,between Borrower and Bank (the “Loan Agreement”).

 

----

 

Anypayments received by Bank on account of this Note shall, at Bank’s option, beapplied, first, to accrued and unpaid interest; second, to the unpaid principalbalance hereof; and, third, to any costs, expenses or charges (includingwithout limitation late charges) then owed to Bank by Borrower. Notwithstandingthe foregoing, any payments received after the occurrence and during thecontinuance of an Event of Default shall be applied in such manner as**Bankmay determine. Borrower hereby authorizes Bank to charge any deposit accountwhich Borrower may maintain with Bank for any payment required hereunder, and,so long as no Event of Default shall have occurred and be continuing, Bankagrees to give Borrower written notice of any such charge.

 

Ifpursuant to the terms of this Note, Borrower is at any time obligated to payinterest on the principal balance at a rate in excess of the maximum interestrate permitted by applicable law for the loan evidenced by this Note, theapplicable interest rate shall be immediately reduced to such maximum rate andall previous payments in excess of the maximum rate shall be deemed to havebeen payments in reduction of principal and not on account of the interest duehereunder. More specifically, if from any circumstances whatsoever, fulfillmentof any provision of this Note or any other loan document executed and deliveredin connection with this Note, at the time performance of such provision becomesdue, would exceed the limit on interest then permitted by any applicable usurystatute or any other applicable law, Bank may, at its option, (a) reducethe obligations to be fulfilled to such limit on interest, or (b) applythe amount in excess of such limit on interest to the reduction of theoutstanding principal balance of the obligations, and not to the payment ofinterest, with the same force and effect as though Borrower had specificallydesignated such sums to be so applied to principal and Bank had agreed toaccept such extra payments as a premium-free prepayment, so that in no eventshall any exaction be possible under this Note or any other loan document thatis in excess of the applicable limit on interest. It is the intention ofBorrower and Bank that the total liability for payments in the nature ofinterest shall not exceed the limits imposed by any applicable state or federalinterest rate laws. The provisions of this paragraph shall control every otherprovision of this Note and any provision of any other loan document in conflictwith this paragraph.

 

Borrowerrepresents to Bank that the proceeds of this Note will not be used forpersonal, family or household purposes or for the purpose of purchasing orcarrying margin stock or margin securities within the meaning of Regulations Uand X of the Board of Governors of the Federal Reserve System, 12 C.F.R. Parts221 and 224.

 

Nodelay or omission on the part of Bank in exercising any right hereunder shalloperate as a waiver of such right or of any other right of Bank, nor shall anydelay, omission or waiver on any one occasion be deemed a bar to or waiver ofthe same or any other right on any future occasion. Borrower and every endorseror guarantor of this Note, regardless of the time, order or place of signing,waives presentment, demand, protest, notice of dishonor, notice of protest,notice of intent to accelerate, notice of acceleration and all other notices ofevery kind in connection with the delivery, acceptance, performance orenforcement of this Note and assents to any extension or postponement of thetime of payment or any other indulgence, to any substitution, exchange orrelease of collateral, and to the addition or release of any other party orperson primarily or secondarily liable and waives all recourse to suretyshipand guarantor defenses generally, including any defense based on impairment ofcollateral, and any right (whether now or hereafter existing) to require theholder hereof to first proceed against Borrower or any endorser or guarantorfor any security.

 

Borrowerand each endorser and guarantor of this Note agrees to pay, upon demand, costsof collection of all amounts under this Note, including without limitationprincipal and interest, or in connection with the enforcement of or realizationon any security for this Note, including without limitation, to the extentpermitted by applicable law, reasonable attorneys’ fees and expenses. Upon theoccurrence and during the continuance of an Event of Default, interest shallaccrue at a rate per annum equal to five percent (5.0%) plus the then-currentWall Street Journal Prime Rate or LIBOR Rate, as the case may be, applicable toadvances outstanding at such time. If any payment due under this Note is unpaidfor 15 days or more, Borrower shall pay, in addition to any other sums dueunder this Note (and without limiting Bank’s other remedies on accountthereof), a late charge equal to the lesser of $500 or 6.0% of such unpaidamount.

 

2

----

 

This Note shall be binding upon Borrower andeach endorser and guarantor hereof and upon their respective heirs, successors,assigns and legal representatives and shall inure to the benefit of Bank andits successors, endorsees and assigns.

 

Borrower and each endorser and guarantor, if any, hereby waivepresentment, demand, protest, notice of dishonor, notice of protest and allother notices and demands of every kind and all suretyship defenses of anykind, in each case that would otherwise be available in connection with thisNote, including without limitation any right (whether now or hereafterexisting) to require the holder hereof to first proceed against Borrower or anyendorser or guarantor for any security.

 

In the event that at any time, a surety is liable upon only a portion ofBorrower’s or any endorser’s or guarantor’s obligations under this Note andBorrower provides partial satisfaction of any such obligations, Borrower andeach endorser and guarantor hereof, if any, hereby waives any right it wouldotherwise have under Section 2822 of the California Civil Code todesignate the portion of the obligations to be satisfied. The designation ofthe portion of the obligation to be satisfied shall, to the extent notexpressly made by the terms of this Note, be made by Bank rather than Borrower.

 

The liabilities of Borrower and any endorser or guarantor of this Noteare joint and several; *provided, however,*therelease by Bank of Borrower or any one or more endorsers or guarantors shallnot release any other person obligated on account of this Note. Any and allpresent and future debts of Borrower to any endorser or guarantor of this Noteare subordinated to the full payment and performance of all present and futuredebts and obligations of Borrower to Bank. Each reference in this Note toBorrower, any endorser and any guarantor is to such person individually andalso to all such persons jointly. No person obligated on account of this Notemay seek contribution from any other person also obligated, unless and untilall liabilities, obligations and indebtedness to Bank of the person from whomcontribution is sought have been irrevocably satisfied in full. The release orcompromise by Bank of any collateral shall not release any person obligated onaccount of this Note.

 

Borrower and each endorser and guarantor hereof authorizes Bank tocomplete this Note if delivered incomplete in any respect. A photographic orother reproduction of this Note may be made by Bank, and any such reproductionshall be admissible in evidence with the same effect as the original itself inany judicial or administrative proceeding, whether or not the original is inexistence.

 

Borrower will from time to time**execute and deliver to Bank suchdocuments, and take or cause to be taken all**such other further action, as Bankmay request in order to effect and confirm or vest more securely in Bank allrights contemplated by this Note or any other loan documents related thereto(including without limitation to correct clerical errors) or to vest more fullyin or assure to Bank the security interest in any collateral securing this Noteor to comply with applicable statute or law.

 

This Note is delivered to Bank at one of its offices in California andshall be governed by the internal laws of the State of California withoutregard to principles of conflict of laws.

 

Any notices under or pursuant to this Note shall be deemed duly received and effective if delivered in hand toany officer or agent of Borrower or Bank, or if mailed by registered or certifiedmail, return receipt requested, addressed to Borrower or Bank at the addressset forth in this Note or as any party may from time to time designate bywritten notice to the other party.

 

The term “Bank Affiliate” as used in this Note shall mean any Affiliateof Bank or any lender acting as a participant under any loan arrangementbetween Bank and Borrower. The term “Affiliate” shall mean, with respect to anyperson, (a) any person which, directly or indirectly through one or moreintermediaries controls, is controlled by or is under common control with suchperson, or (b) any person who is a director or officer (i) of suchperson, (ii) of any subsidiary of such person, or (iii) any persondescribed in clause (a) above. For purposes of this definition, “control”of a person shall mean the power, direct or indirect, (x) to vote 5% ormore of the capital stock having ordinary voting power for the election ofdirectors (or comparable equivalent) of such person, or (y) to direct orcause the direction of the management and policies of such person, whether bycontract or otherwise. Control may be by ownership, contract or otherwise.

 

3

----

 

Borrower hereby grants to Bank a continuing lien and security interest inany and all deposit accounts (including without limitation time, savings,checking and money market accounts and certificates of deposit), whether nowexisting or hereafter opened and including without limitation any depositaccounts held jointly with a third party, or other sums at any time credited byor due from Bank or any Bank Affiliate to Borrower and any cash, securities,instruments or other property of Borrower in the possession of Bank or any BankAffiliate, whether for safekeeping or otherwise, or in transit to or from Bankor any Bank Affiliate (regardless of the reason Bank or Bank Affiliate hadreceived the same or whether Bank or Bank Affiliate has conditionally releasedthe same), as security for the full and punctual payment and performance of allof the liabilities and obligations of Borrower to Bank or any Bank Affiliate,and such deposits and other sums may be applied against such liabilities andobligations of Borrower to Bank or any Bank Affiliate at any time, whether ornot such are then due, whether or not demand has been made and whether or notother collateral is then available to Bank or any Bank Affiliate.

 

Borrower hereby certifies to Bank that all financial information (“financialinformation”) submitted to Bank now and at all times during the term of thisNote does and will fairly and accurately represent the financial condition of Borrower and each Bank Affiliate and eachendorser and guarantor of this Note. Financial information includes, but is notlimited to, all business financial statements (including interim and year-endfinancial statements that are company prepared and/or CPA prepared), businessincome tax returns, borrowing base certificates, accounts payable andreceivable agings, personal financial statements and personal tax returns.Borrower understands that Bank will rely on all information, whenever provided,and that such information is a material inducement to Bank to make, to continueto make, or otherwise extend credit accommodations to Borrower. Borrower covenantsand agrees to notify Bank in writing of any adverse material changes in itsfinancial condition in the future. Borrower further understands andacknowledges that there are criminal penalties for giving false information tofederally insured financial institutions.

 

Borrower and each endorser and guarantor of this Note each irrevocablysubmits to the nonexclusive jurisdiction of any federal or state court sittingin California, over any suit, action or proceeding arising out of or relatingto this Note. Borrower and each endorser and guarantor irrevocably waives, tothe fullest extent it may effectively do so under applicable law, any objectionit may now or hereafter have to the laying of the venue of any such suit,action or proceeding brought in any such court and any claim that the same hasbeen brought in an inconvenient forum. Borrower and each endorser and guarantorhereby consents to any and all process which may be served in any such suit,action or proceeding, (i) by mailing a copy thereof by registered orcertified mail, postage prepaid, return receipt requested, to Borrower’s,endorser’s or guarantor’s address shown below or as notified to Bank and (ii) byserving the same upon Borrower and any endorsers or guarantors in any othermanner otherwise permitted by law, and agrees that such service shall in everyrespect be deemed effective service upon Borrower or such endorser orguarantor.

 

4

----

 

BORROWER, EACH ENDORSER AND GUARANTOR AND BANK HEREBY AGREE THATSECTIONS 8.18 AND 8.19 OF THE LOAN AGREEMENT WITH RESPECT TO JURY WAIVER ANDJUDICIAL REFERENCE SHALL GOVERN IN ANY ACTION OR PROCEEDING IN CONNECTION WITHTHIS NOTE.

 
| Executed  as of February 4, 2009 |   |                    |
|---------------------------------------|--------|-------------------------|
|                                  |   |                    |
|                                  |   | Borrower:               |
|                                  |   |                    |
|                                  |   | Iteris, Inc.,      |
|                                  |   | a  Delaware corporation |
|                                  |   |                    |
|                                  |   |                    |
|                                  |   | By:                     | /s/  James S. Miele |
|                                  |   |                    | James  S. Miele, Chief Financial Officer |
|                                  |   |                    | For  Iteris, Inc. |
|                                  |   |                    |   |
|                                  |   | By:                     | /s/  Abbas Mohaddes |
|                                  |   |                    | Abbas  Mohaddes, Chief Executive Officer |
|                                  |   |                    |   |
|                                  |   | Address:                | 1700  Carnegie Avenue, Suite 100 |
|                                  |   |                    | Santa  Ana, California 92705 |
|                                       |        |                         |  |  |

 

5

----

** **

**INTERESTRATE ELECTION RIDER**

 

**1.**                                      **INTEREST RATES; PAYMENTS ANDPREPAYMENTS**

 

1.1                                 Interest Rates. So long as no Event of Default shall haveoccurred and be continuing and subject to the other terms of this Note, theoutstanding principal balance shall bear interest at a rate per annum for theInterest Periods which Borrower selects in accordance with this section and theother provisions of this Note equal to (a) a variable rate (the “VariableRate”) equal to the Wall Street Journal Prime Rate plus the Applicable Margin(a “Variable Rate Advance”); or (b) the LIBOR Rate for Interest Periods ofone, two or three months, but not longer than the remainder of the term of thisNote, plus the Applicable Margin (a “LIBOR Advance”).

 

1.2                                 Rate Selection. When Borrower desires to select an interestrate, Borrower shall give Bank three (3) days’ prior written noticespecifying the effective date thereof (which shall be a Banking Day), the typeof interest rate, the amount to which the interest rate shall apply and theduration of the first Interest Period therefor. Any such notice shall beirrevocable and shall be subject to other terms and conditions set forth inthis Note. If Bank does not receive timely notice of a requested LIBOR Advance,Borrower shall be deemed to have selected a Variable Rate Advance. Each LIBORAdvance may only be requested in increments of $500,000.00 and no more than two(2) LIBOR Advances may be outstanding at any one time. If any interestrate is selected, Bank shall record on the books and records of Bank anappropriate notation evidencing such selection, each repayment on account ofthe principal thereof and the amount of interest paid, and Borrower authorizesBank to maintain such records and make such notations and agrees that theamount shown on the books and records as outstanding from time to time shallconstitute the amount owing to Bank pursuant to this Note, absent manifesterror.

 

1.3                                 Payment of Interest. Interest on all amounts outstanding (exceptfor LIBOR Advances) shall be payable monthly in arrears on the first day ofeach month commencing the month following the date of this Note, and continuingthereafter on the same day of each succeeding month until the principal balanceshall be paid in full. Interest on all LIBOR Advances shall be payable, inarrears, on the first Banking Day following the expiration of the applicableInterest Period and, in respect of any LIBOR Advance of more than three (3) months’duration, interest shall also be payable, in arrears, on each earlier BankingDay which is three (3) months after the first day of the applicableInterest Period.

 

1.4                                 Interest Periods. Each Interest Period shall commence andshall end as set forth in Section 2.1(c) hereof; *provided, however,*that (a) anyInterest Period that would otherwise end on a day which is not a Banking Dayshall be extended to the next Banking Day unless such extension would carrysuch Interest Period into the next month, in which event such Interest Periodshall end on the preceding Banking Day; (b) any Interest Period thatbegins on the last Banking Day of a calendar month (or on a date for whichthere is no numerically corresponding day in the calendar month during whichsuch Interest Period is to end), shall (subject to clause (a) above) endon the last Banking Day of such calendar month; and (c) any InterestPeriod that would otherwise extend beyond the Maturity Date shall end on theMaturity Date.

 

1.5                                 Conversion of Outstanding Amounts. So long as no Event of Default shall haveoccurred and be continuing, Borrower may (a) on any Banking Day, convertany outstanding Variable Rate Advance to a LIBOR Advance in the same aggregateprincipal amount and (b) on the last Banking Day of the then currentinterest Period applicable to a LIBOR Advance, convert such LIBOR Advance to aVariable Rate Advance. If Borrower desires to convert an advance as set forthin the prior sentence, it shall give Bank three (3) Banking Days’ priorwritten notice, specifying the date of such conversion, the amount to beconverted and if the conversion is from a Variable Rate Advance to a LIBORAdvance, the duration of the Interest Period therefor.

 

1.6                                 End of Interest Period. Subject to all of the terms and conditions applicable to a request that a new interest rate selected bea LIBOR Advance, Borrower may elect to continue a LIBOR Advance as of the lastday of the applicable Interest Period to a new LIBOR Advance. If Borrower failsto notify Bank of the Interest Period for a subsequent LIBOR Advance at leastThree (3) Banking Days prior to the last day of the then current InterestPeriod, then, at Bank’s discretion, such outstanding LIBOR Advance shall becomea Variable Rate Advance at the end of the current Interest Period for suchoutstanding LIBOR Advance and shall accrue interest in accordance with theprovisions regarding Variable Rate Advances described herein.

 

----

 

1.7                                 Basis for Determining LIBOR Inadequate orUnfair. In the event thatBank shall determine that by reason of circumstances affecting the interbankEurodollar market, adequate and reasonable means do not exist for determiningthe LIBOR Rate, or Eurodollar deposits in the relevant amount and for therelevant maturity are not available to Bank in the interbank Eurodollar market,with respect to a proposed LIBOR Advance or a proposed conversion of anyVariable Rate Advance to a LIBOR Advance, Bank shall give Borrower promptnotice of such determination. If such notice is given, then: (a) anyrequested LIBOR Advance shall be made as**a Variable Rate Advance, unlessBorrower gives Bank one Banking Day’s prior written notice that its request forsuch borrowing is canceled; (b) any advance which was to have beenconverted to a LIBOR Advance shall be continued as a Variable Rate Advance; and(c) any outstanding LIBOR Advance shall be converted to a Variable RateAdvance on the last Banking Day of the then current Interest Period for suchLIBOR Advance. Until such notice has been withdrawn, Bank shall have no obligationto make LIBOR Advances or maintain outstanding LIBOR Advances and Borrowershall not have the right to request LIBOR Advances or convert advances to LIBORAdvances.

 

1.8                                 Illegality of LIBOR Rate. Notwithstanding any other provision of thisNote, if, after the date of this Note, any applicable law, treaty, regulationor directive, or any change therein or in the interpretation or applicationthereof, shall make it unlawful for Bank to make or maintain any LIBOR Advance,the obligation of Bank hereunder to make or maintain such LIBOR Advance shallforthwith be suspended for the duration of such illegality and Borrower shall,if any such LIBOR Advance is outstanding, promptly upon request from Bank,prepay such LIBOR Advance or convert such LIBOR Advance to another type ofadvance. If any such payment is made on a day that is not the last Banking Dayof the then current Interest Period applicable to such advance, Borrower shallpay Bank, upon Bank’s request, any amount required under Section 1.10 ofthis Note.

 

1.9                                 Termination of Pricing Option. After the occurrence of an Event of Default,Borrower’s right to select pricing options, if applicable, shall cease, and, ifBorrower would, but for the application of the preceding clause, have had theright to elect among interest rate options, notwithstanding anything to thecontrary in this Note, interest shall accrue at a rate per annum equal to fivepercent (5.0%) plus the then-current Wall Street Journal Prime Rate or LIBORRate, as the case may be, applicable to advances outstanding at such time.

 

1.10                                    Optional Prepayment.

 

(a)                                  Borrower has the right to pay before due theunpaid balance of any Variable Rate Advance or any part thereof without penaltyor premium, but with accrued interest on the principal being prepaid to thedate of such repayment.

 

(b)                                 At its option and upon prior written notice toBank, Borrower may prepay any LIBOR Advance in whole or in part from time totime without premium or penalty but with accrued interest on the principalbeing prepaid to the date of such repayment; *provided,however,*that such LIBOR Advance may only be prepaid on the lastBanking Day of the then current Interest Period applicable thereto.

 

(c)                                  In the event that any prepayment of a LIBORAdvance is required or permitted on a date other than the last Banking Day ofthe then current Interest Period applicable thereto, then so long as this Notehas not become due and payable in accordance with its terms, Borrower shallhave the right to prepay such LIBOR Advance in whole (but not in part), *provided,*that Borrower shall pay to Bankconcurrently with such prepayment a Yield Maintenance Fee in an amount computedas follows: The current rate for United States Treasury securities (bills on adiscounted basis shall be converted to a bond equivalent) with a maturity dateclosest to the maturity date of the term chosen pursuant to the Interest Periodas to which the prepayment is made, shall be subtracted from the “cost of funds”component of the LIBOR Advance in effect at the time of prepayment. If theresult is zero or a negative number, there shall be no Yield Maintenance Feepayable. If the result is a positive number, then the resulting percentageshall be multiplied by the amount of the principal balance being prepaid. Theresulting amount shall be divided by 360 and multiplied by the number of daysremaining in the term chosen pursuant to the Interest Period as to which theprepayment is made. Said amount shall be reduced to present value

 

R-2

----

 

calculatedby using the number of days remaining in the designated term and using theabove-referenced United States Treasury security rate and the number of daysremaining in the designated term chosen pursuant to the Interest Period as towhich the prepayment is made. The resulting amount shall be the YieldMaintenance Fee due to Bank upon prepayment of the LIBOR Advance. If this Noteshall become due and payable for any reason, then any Yield Maintenance Feewith respect to the Note shall become due and payable in the same manner asthough Borrower had exercised its right of prepayment. Borrower recognizes thatBank will incur substantial additional costs and expenses including loss ofyield and anticipated profitability in the event of prepayment of all or partof this Note and that the Yield Maintenance Fee compensates Bank for such costsand expenses. Borrower acknowledges that the Yield Maintenance Fee isbargained-for consideration and not a penalty.

 

(d)                                 All prepayments of any LIBOR Advance shall beapplied first to fees and expenses then due hereunder, then to interest on theunpaid principal balance accrued to the date of prepayment and last to theprincipal balance then due hereunder.

 

**2.****                                     ****DEFINITIONS**

 

2.1                                      Definitions. The following definitions are applicable to this Interest RateElection Rider:

 

(a)                                  “Applicable Margin” shall mean the ratedetermined based on the percentage of the average aggregate balance of alldemand deposit accounts (including without limitation time, savings, checkingand money market accounts) maintained by Borrower with Bank as compared to theaverage total loan or credit commitments by Bank to Borrower (the “DDAPercentage”), measured on a quarterly basis as of the end of each fiscalquarter, as follows:

 
| **DDA Percentage**         | ** ** | **Applicable Margin for  Variable Rate Advances** | ** ** | **Applicable Margin for  LIBOR Advances** | ** ** |
|---------------------------------|------------|-----------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| 25% or  greater                 |       | 0.00                                                                  | %          | 2.50                                                     | %          |
| 15% to (but  not including) 25% |       | 0.25                                                                  | %          | 2.75                                                     | %          |
| Less than 15%                   |       | 0.50                                                                  | %          | 3.00                                                     | %          |

 

Anychange in the Applicable Margin resulting from the measurement of the DDAPercentage as of the end of a fiscal quarter shall be effectivean the first day of the immediately following fiscal quarter.

 

(b)                                 “Banking Day” shall mean with respect to LIBORAdvances, a London Banking Day and with respect to all other advances, any dayother than a day on which commercial banks in California are required orpermitted by law to close.

 

(c)                                  “Interest Period” shall mean, with respect toany LIBOR Advance, the one, two or three month period selected by Borrower pursuantto Section 1.1. The actual length of such periods shall be calculated asset forth below. The initial Interest Period, unless commenced on the firstBanking Day of a month, shall, notwithstanding the length of the InterestPeriod selected by Borrower, (i) for Interest Periods beginning before the25th of each calendar month, end on the first Banking Day of the monthfollowing commencement of the initial Interest Period; and (ii) forInterest Periods beginning on or after the 25th of each calendar month, end onthe first Banking Day of the second month following commencement of the initialInterest Period. All subsequent Interest Periods for any particular LIBORAdvance shall commence on the first Banking Day of the relevant month and endof the first Banking Day of the month determined by the length of the InterestPeriod selected by Borrower pursuant to this provision. Bank’s calculation ofthe length of Interest Periods shall be in its sole and absolute discretion andshall conclusively bind Borrower absent manifest error.

 

(d)                                 “LIBOR Advance” shall have the meaning setforth in Section 1.1 above.

 

(e)                                  “LIBOR Rate” shall mean the rate per annum forthe relevant Interest Period determined as of the start of each Interest Periodas quoted by Bank as Bank’s LIBOR Rate based on quotes from the LondonInterbank Offered Rate from the British Bankers Association Interest SettlementRates, as quoted for U.S. Dollars by Bloomberg, or other comparable serviceselected by Bank. The Interest Period shall be Note N LIBOR Rate Period. Thisdefinition of LIBOR Rate is to be strictly interpreted and is not intended toserve any purpose other than providing an index to determine the interest rateused herein. The LIBOR Rate may not necessarily be the same as the quotedoffered side in the Eurodollar time deposit market by any particularinstitution or service applicable to any Interest Period. The effectiveinterest rate applicable to Borrower’s loans evidenced hereby shall change asof the beginning of each Interest Period if there is a change in the LIBOR Rateas of any such date.

 

R-3

----

 

(f)                                    “London Banking Day” shall mean with respectto LIBOR Advances, any day on which commercial banks are open for internationalbusiness (including dealings in U.S. Dollar ($) deposits) in London, Englandand California.

 

(g)                                 “Variable Rate Advance” shall have the meaningset forth in Section 1.1 above.

 

(h)                                 “Wall Street Journal Prime Rate” shall meanthe highest rate published from time to time by the *Wall**Street Journal*as the Prime Rate,or, in the event the *Wall Street Journal*ceasespublication of the Prime Rate, the base, reference or other rate thendesignated by Bank, in its sole discretion, for general commercial loanreference purposes, it being understood that such rate is a reference rate, notnecessarily the lowest, established from time to time, which serves as thebasis upon which effective interest rates are calculated for loans makingreference thereto.

 

2.2                                 Other Terms. Capitalized terms used but not otherwise defined in this Note(including without limitation this Interest Rate Election Rider) shall have therespective meanings ascribed to them in the Loan Agremeent.

 

R-4

----

 

Loan No. 0411094-9002

 

**AMENDED AND RESTATED NON-REVOLVING-TO-TERM NOTE**

 
| $7,500,000.00 |   | February 4, 2009 |
|---------------|--------|-----------------------|
|          |   | Irvine, California    |

 

For value received, the undersigned, Iteris, Inc., a Delawarecorporation, with an address of 1700 Carnegie Avenue, Suite 100, SantaAna, California 92705 (“Borrower”), promises to pay to the order of CaliforniaBank & Trust, a California banking corporation, with an address ofOrange County Corporate Banking Office, 19200 Von Karman Avenue, Suite 140,Irvine, California 92612 (together with its successors and assigns, “Bank”),the principal amount of Seven Million, Five Hundred Thousand and No/100 Dollars($7,500,000.00) or, if less, such amount as may be the aggregate unpaidprincipal amount of all loans or advances made by Bank to Borrower pursuanthereto, on or before May 1, 2013 (the “Maturity Date”) as set forth below,together with interest from the date hereof on the unpaid principal balancefrom time to time outstanding until paid in full.

 

ThisNote amends and restates that certain Promissory Note dated October 16,2008, by Borrower in favor of Bank in the original principal amount of$7,500,000.00 and continues to evidence, and does not extinguish or satisfy,the indebtedness and other obligations of Borrower thereunder. Nothing in thisNote shall constitute or be deemed to constitute a novation.

 

Theaggregate principal balance outstanding shall bear interest thereon at a rateper annum equal to the Wall Street Journal Prime Rate plus the ApplicableMargin. The current Wall Street Journal Prime Rate is Four Percent (4.0%) andthe initial Applicable Margin is One Percent (1.0%). Accordingly, the initialapplicable interest rate is equal to Five Percent (5.0%) until changed inaccordance with the terms of this Note.

 

“WallStreet Journal Prime Rate” means the highest rate published from time to timeby the *WallStreet Journal*as the PrimeRate or, in the event the *Wall Street Journal*ceases publication of the Prime Rate, the base, reference or other ratethen designated by Bank, in its sole discretion, for general commercial loanreference purposes, it being understood that such rate is a reference rate, notnecessarily the lowest, established from time to time, which serves as thebasis upon which effective interest rates are calculated for loans makingreference thereto. The effective interest rate applicable to Borrower’s loansevidenced hereby shall change on the date of each change in the Wall StreetJournal Prime Rate.

 

The“Applicable Margin” shall be determined by the percentage of the averageaggregate balance of all demand deposit accounts (including without limitationtime, savings, checking and money market accounts) maintained by Borrower withBank as compared to the average total loan or credit commitments by Bank to Borrower(the “DDA Percentage”), measured on a quarterly basis as of the end of eachfiscal quarter, as follows:

 
| **DDA Percentage**         | ** ** | **Applicable Margin** | ** ** |
|---------------------------------|------------|----------------------------|------------|
| 25% or  greater                 |       | 0.50                       | %          |
| 15% to (but  not including) 25% |       | 0.75                       | %          |
| Less than 15%                   |       | 1.00                       | %          |

 

Anychange in the Applicable Margin resulting from the measurement of the DDAPercentage as of the end of a fiscal quarter shall be effective on the firstday of the immediately following fiscal quarter.

 

ThisNote evidences a non-revolving-to-term loan for the purpose of retiringdebentures issued by Borrower. Advances may be made hereunder from time to timeuntil May 1, 2009 (the “Conversion Date”). Interest on the outstandingprincipal balance shall be due and payable in arrears monthly commencing themonth following the date of the first advance on the first day of each month.The outstanding principal balance on the Conversion Date shall be repaid inequal installments of principal based upon a 48-month amortization periodcommencing on the Conversion Date, except that the last installmentshall be due and payable on the Maturity Date and shall be in an amount equalto the aggregate outstanding balance on the Maturity Date.

 

----

 

Beginning on November 1, 2009, and on November 1 of each yearthereafter, Borrower agrees to pay to Bank an amount equal to fifty percent(50%) of Borrower’s EBITDA for the immediately preceding fiscal year, net oftaxes, capital expenditures up to $1,500,000.00, interest paid and currentportion of long-term debt for such fiscal year (the “Excess Cash Flow RecaptureAmount”), which payment shall be applied to the outstanding principal balanceunder this Note; *provided, however,*in no event shall Borrower’s obligation to pay the Excess Cash FlowRecapture Amount exceed $500,000.00 in any year. As used herein, “EBITDA” shallmean, for any period, earnings from continuing operations before payment offederal, state and local income taxes, plus interest expense, depreciation andamortization, in each case for such period, calculated in accordance withGenerally Accepted Accounting Principles in effect from time to time in theUnited States.

 

This Note is secured by all collateral granted to Bank by Borrower or anyendorser or guarantor hereof or by any other party and shall be secured by anyadditional collateral hereafter granted to Bank by Borrower or any endorser orguarantor hereof or by any other party.

 

Principal and interest shall be payable at Bank’s main office or at suchother place as Bank may designate in writing in immediately available funds inlawful money of the United States of America without set-off, deduction orcounterclaim. Interest shall be calculated on the basis of actual number ofdays elapsed and a 360-day year.

 

At the option of Bank, this Note shall become immediately due andpayable without notice or demand upon the occurrence at any time of any Eventof Default, as defined in that certain Amended and Restated Loan and SecurityAgreement, dated as of even date herewith, between Borrower and Bank (the “Loan Agreement”).

 

Any payments received by Bank on account of this Note shall, at Bank’soption, be applied, first, to accrued and unpaid interest; second, to theunpaid principal balance hereof; and, third, to any costs, expenses or charges(including without limitation late charges) then owed to Bank by Borrower.Notwithstanding the foregoing, any payments received after the occurrence andduring the continuance of an Event of Default shall be applied in such manneras Bank may determine. Borrower hereby authorizes Bank to charge any depositaccount which Borrower may maintain with Bank for any payment requiredhereunder, and, so long as no Event of Default shall have occurred and be continuing,Bank agrees to give Borrower written notice of any such charge.

 

If pursuant to the terms of this Note, Borrower is at any time obligatedto pay interest on the principal balance at a rate in excess of the maximuminterest rate permitted by applicable law for the loan evidenced by this Note,the applicable interest rate shall be immediately reduced to such maximum rateand all previous payments in excess of the maximum rate shall be deemed to havebeen payments in reduction of principal and not on account of the interest duehereunder. More specifically, if from any circumstances whatsoever, fulfillmentof any provision of this Note or any other loan document excuted and deliveredin connection with this Note, at the time performance of such provision becomesdue, would exceed the limit on interest then permitted by any applicable usurystatute or any other applicable law, Bank may, at its option, (a) reducethe obligations to be fulfilled to such limit on interest, or (b) applythe amount in excess of such**limit on interest to the reduction of the**outstanding principal balance of the obligations, and not to the paymentof interest, with the same force and effect as though Borrower had specificallydesignated such sums to be so applied to principal and Bank had agreed toaccept such extra payments as a premium-free prepayment, so that in no eventshall any exaction be possible under this Note or any other loan document thatis in excess of the applicable limit on interest. It is the intention of Borrowerand Bank that the total liability for payments in the nature of interest shallnot exceed the limits imposed by any applicable state or federal interest ratelaws. The provisions of this paragraph shall control every other provision ofthis Note and any provision of any other loan document in conflict with thisparagraph.

 

Borrower represents to Bank that the proceeds of this Note will not beused for personal, family or household purposes or for the purpose ofpurchasing or carrying margin stock or margin securities within the meaning ofRegulations U and X of the Board of Governors of the Federal Reserve System, 12C.F.R. Parts 221 and 224.

 

2

----

 

No delay or omission on the part of Bank in exercising any righthereunder shall operate as a waiver of such right or of any other right ofBank, nor shall any delay, omission or waiver on any one occasion be deemed abar to or waiver of the same or any other right on any future occasion.Borrower and every endorser or guarantor of this Note, regardless of the time,order or place of signing, waives presentment, demand, protest, notice ofdishonor, notice of protest, notice of intent to accelerate, notice ofacceleration and all other notices of every kind in connection with thedelivery, acceptance, performance or enforcement of this Note and assents toany extension or postponement of the time of payment or any other indulgence, to any substitution, exchange or release ofcollateral, and to the addition or release of any other party or personprimarily or secondarily liable and waives all recourse to suretyship andguarantor defenses generally, including any defense based on impairment ofcollateral, and any right (whether now or hereafter existing) to require the holderhereof to first proceed against Borrower or any endorser or guarantor for anysecurity.

 

Borrowerand each endorser and guarantor of this Note agrees to pay, upon demand, costsof collection of all amounts under this Note, including without limitationprincipal and interest, or in connection with the enforcement of or realizationon any security for this Note, including without limitation, to the extentpermitted by applicable law, reasonable attorneys’ fees and expenses. Upon theoccurrence and during the continuance of an Event of Default, interest shallaccrue at a rate per annum equal to five percent (5.0%) plus the then-currentWall Street Journal Prime Rate or LIBOR Rate, as the case may be, applicable toadvances outstanding at such time. If any payment due under this Note is unpaidfor 15 days or more, Borrower shall pay, in addition to any other sums dueunder this Note (and without limiting Bank’s other remedies on accountthereof), a late charge equal to the lesser of $500 or 6.0% of such unpaidamount.

 

ThisNote shall be binding upon Borrower and each endorser and guarantor hereof andupon their respective heirs, successors, assigns and legal representatives andshall inure to the benefit of Bank and its successors, endorsees and assigns.

 

Borrowerand each endorser and guarantor, if any, hereby waives presentment, demand,protest, notice of dishonor, notice of protest and all other notices anddemands of every kind, and all suretyship defenses of any kind, in each casethat would otherwise be available in connection with this Note includingwithout limitation any right (whether now or hereafter existing) to require theholder hereof to first proceed against Borrower, or any endorser or guarantor,for any security.

 

Inthe event that at any time, a surety is liable upon only a portion of Borrower’sor any endorser’s or guarantor’s obligations under this Note and Borrowerprovides partial satisfaction of any such obligations, each of Borrower andeach endorser and guarantor hereof, if any, hereby waives any right it wouldotherwise have under Section 2822 of the California Civil Code todesignate the portion of the obligations to be satisfied. The designation ofthe portion of the obligation to be satisfied shall, to the extent notexpressly made by the terms of this Note, be made by Bank rather than Borrower.

 

Theliabilities of Borrower and any endorser or guarantor of this Note are jointand several; *provided, however,*therelease by Bank of Borrower or any one or more endorsers or guarantors shallnot release any other person obligated on account of this Note. Any and all present and future debts ofBorrower to any endorser or guarantor of this Note are subordinated to the fullpayment and performance of all present and future debts and obligations ofBorrower to Bank. Each reference in this Note to Borrower, any endorser and anyguarantor is to such person individually and also to all such persons jointly.No person obligated on account of this Note may seek contribution from anyother person also obligated, unless and until all liabilities, obligations andindebtedness to Bank of the person from whom contribution is sought have beenirrevocably satisfied in full. The release or compromise by Bank of anycollateral shall not release any person obligated on account of this Note.

 

Borrowerand each endorser and guarantor hereof authorizes Bank to complete this Note ifdelivered incomplete in any respect. A photographic or other reproduction ofthis Note may be made by Bank, and any such reproduction shall be admissible inevidence with the same effect as the original itself in any judicial oradministrative proceeding, whether or not the original is in existence.

 

3

----

 

Borrower will from time to time execute and deliver to Bank suchdocuments, and take or cause to be taken all such other further action, as Bankmay request in order to effect and confirm or vest more securely in Bank allrights contemplated by this Note or any other loan documents related thereto(including without limitation to correct clerical errors) or to vest more fullyin or assure to Bank the security interest in any collateral securing this Noteor to comply with applicable statute or law.

 

This Note is delivered to Bank at one of its offices in California andshall be governed by the internal laws of the State of California withoutregard to principles of conflict of laws.

 

Any notices under or pursuant to this Note shall be deemed duly receivedand effective if delivered in hand to any officer or agent of Borrower or Bank,or if mailed by registered or certified mail, return receipt requested,addressed to Borrower or Bank at the address set forth in this Note or as anyparty may from time to time designate by written notice to the other party.

 

The term “Bank Affiliate” as used in this Note shall mean any Affiliateof Bank or any lender acting as a participant under any loan arrangementbetween Bank and Borrower. The term “Affiliate” shall mean, with respect to anyperson, (a) any person which, directly or indirectly through one or moreintermediaries controls, is controlled by or is under common control with suchperson, or (b) any person who is a director or officer (i) of suchperson, (ii) of any subsidiary of such person, or (iii) any persondescribed in clause (a) above. For purposes of this definition, “control”of a person shall mean the power, direct or indirect, (x) to vote 5% ormore of the capital stock having ordinary voting power for the election ofdirectors (or comparable equivalent) of such person, or (y) to direct orcause the direction of the management and policies of such person, whether bycontract or otherwise. Control may be by ownership, contract or otherwise.

 

Borrower hereby grants to Bank a continuing lien and security interestin any and all deposit accounts (including without limitation time, savings,checking and money market accounts or certificates of deposit), whether nowexisting or hereafter opened and including without limitation any depositaccounts held jointly with a third party, or other sums at any time credited byor due from Bank or any Bank Affiliate to Borrower and any cash, securities,instruments or other property of Borrower in the possession of Bank or any BankAffiliate, whether for safekeeping or otherwise, or in transit to or from Bank or any Bank Affiliate (regardless of the reason Bank or BankAffiliate had received the same or whether Bank or Bank Affiliate hasconditionally released the same), as security for the full and punctual paymentand**performance of all of the liabilities and obligations of Borrower toBank or any Bank Affiliate, and such deposits and other sums may be appliedagainst such liabilities and obligations of Borrower to Bank or any BankAffiliate at any time, whether or not such are then due, whether or not demandhas beenmade and whether or not othercollateral is then available to Bank or any Bank Affiliate.

 

Borrowerhereby certifies to Bank that all financial information (“financial information”)submitted to Bank now and at all times during the term of this Note does andwill fairly and accurately represent the financial condition of Borrower andeach Bank Affiliate and each endorser and guarantor of this Note. Financialinformation includes, but is not limited to, all business financial statements(including interim and year-end financial statements that are company preparedand/or CPA prepared), business income tax returns, borrowing base certificates,accounts payable and receivable agings, personal financial statements andpersonal tax returns. Borrower understands that Bank will rely on allinformation, whenever provided, and that such information is a materialinducement to Bank to make, to continue to make, or otherwise extend creditaccommodations to Borrower. Borrower covenants and agrees to notify Bank inwriting of any adverse material changes in its financial condition in thefuture. Borrower further understands and acknowledges that there are criminalpenalties for giving false information to federally insured financialinstitutions.

 

4

----

 

Borrower and each endorser and guarantor of this Note each irrevocablysubmits to the nonexclusive jurisdiction of any federal or state court sittingin California over any suit, action or proceeding arising out of or relating tothis Note. Borrower and each endorser and guarantor irrevocably waives, to thefullest extent it may effectively do so under applicable law, any objection itmay now or hereafter have to the laying of the venue of any such suit, actionor proceeding brought in any such court and any claim that the same has beenbrought in an inconvenient forum. Borrower and each endorser and guarantorhereby consents to any and all process which may be served in any such suit,action or proceeding, (i) by mailing a copy thereof by registered orcertified mail, postage prepaid, return receipt requested, to Borrower’s,endorser’s or guarantor’s address shown below or as notified to Bank and (ii) byserving the same upon Borrower and any endorsers or guarantors in any othermanner otherwise permitted by law, and agrees that such service shall in everyrespect be deemed effectiveservice upon Borrower or such endorser or guarantor.

 

BORROWER, EACH ENDORSER AND GUARANTOR AND BANK HEREBY AGREE THATSECTIONS 8.18 AND 8.19 OF THE LOAN AGREEMENT WITH RESPECT TO JURY WAIVER ANDJUDICIAL REFERENCE SHALL GOVERN IN ANY ACTION OR PROCEEDING IN CONNECTION WITHTHIS NOTE.

 

Executedas of February 4, 2009

 
|   | Borrower:              |
|--------|------------------------|
|   |                   |
|   | Iteris, Inc.,     |
|   | a Delaware corporation |
|   |                   |   |
|   |                   |   |
|   | By:                    | /s/ James S. Miele |
|   |                   | James S. Miele, Chief Financial Officer |
|   |                   | For Iteris, Inc. |
|   |                   |   |
|   | By:                    | /s/ Abbas Mohaddes |
|   |                   | Abbas Mohaddes, Chief Executive Officer |
|   |                   |   |
|   | Address:               | 1700 Carnegie Avenue, Suite 100   Santa Ana, California 92705 |
|        |                        |  |  |

 

5

----