Exhibit 10.1


 


FOCUS
ENHANCEMENTS, INC.


 


HERITAGE
BANK OF COMMERCE




LOAN AND SECURITY AGREEMENT


 

















 


This LOAN AND SECURITY AGREEMENT is entered into as of February 22,
2008, by and between HERITAGE BANK OF COMMERCE
(“Lender”) and FOCUS ENHANCEMENTS, INC. (“Borrower”).


 


RECITALS


 


Borrower
wishes to obtain credit from time to time from Lender, and Lender desires to
extend credit to Borrower.  This
Agreement sets forth the terms on which Lender will advance credit to Borrower,
and Borrower will repay the amounts owing to Lender.


 


AGREEMENT


 


The
parties agree as follows:


 


1.             DEFINITIONS
AND CONSTRUCTION.


 


1.1          Definitions.  As used in this Agreement, the following
terms shall have the following definitions:


 


“Accounts”
means all presently existing and hereafter arising accounts, contract rights,
payment intangibles, and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods (including, without limitation, the
licensing of software and other technology) or the rendering of services by
Borrower, whether or not earned by performance, and any and all credit
insurance, guaranties, and other security therefor, as well as all merchandise
returned to or reclaimed by Borrower and Borrower’s Books relating to any of
the foregoing.


 


“Advance”
or “Advances” means a cash advance or cash advances under the Revolving
Facility.


 


“Affiliate”
means, with respect to any Person, any Person that owns or controls directly or
indirectly such Person, any Person that controls or is controlled by or is under
common control with such Person, and each of such Person’s senior executive
officers, directors, and partners.


 


 “Borrower’s Books” means all of Borrower’s
books and records including:  ledgers;
records concerning Borrower’s assets or liabilities, the Collateral, business
operations or financial condition; and all computer programs, or tape files,
and the equipment, containing such information.


 


 “Business Day” means any day that is not a
Saturday, Sunday, or other day on which Lenders in the State of California are
authorized or required to close.


 


“Change
in Control” shall mean a transaction in which any “person” or “group” (within
the meaning of Section 13(d) and 14(d)(2) of the Securities
Exchange Act of 1934) becomes the “beneficial owner” (as defined in Rule 13d-3
under the Securities Exchange Act of 1934), directly or indirectly, of a
sufficient number of shares of all classes of stock then outstanding of
Borrower ordinarily entitled to vote in the election of directors, empowering
such “person” or “group” to elect a majority of the Board of Directors of
Borrower, who did not have such power before such transaction, except for
transfers of shares among Borrower’s shareholders existing as of the Closing
Date.


 


“Closing
Date” means the date of this Agreement.


 


“Code”
means the California Uniform Commercial Code.


 


“Collateral”
means the property described on Exhibit A
attached hereto.


 


“Contingent
Obligation” means, as applied to any Person, any direct or indirect liability,
contingent or otherwise, of that Person with respect to (i) any
indebtedness, lease, dividend, letter of credit or other obligation of another;
(ii) any obligations with respect to undrawn letters of credit, corporate
credit cards, or merchant services 


 


1

















 


issued or provided for the account of that Person; and
(iii) all obligations arising under any agreement or arrangement designed
to protect such Person against fluctuation in interest rates, currency exchange
rates or commodity prices; provided, however, that the term “Contingent
Obligation” shall not include endorsements for collection or deposit in the
ordinary course of business.  The amount
of any Contingent Obligation shall be deemed to be an amount equal to the
stated or determined amount of the primary obligation in respect of which such
Contingent Obligation is made or, if not stated or determinable, the maximum
reasonably anticipated liability in respect thereof as determined by Lender in
good faith; provided, however, that such amount shall not in any event exceed
the maximum amount of the obligations under the guarantee or other support
arrangement.


 


“Copyrights”
means any and all copyright rights, copyright applications, copyright
registrations and like protections in each work or authorship and derivative
work thereof.


 


“Credit
Extension” means each Advance or any other extension of credit by Lender for
the benefit of Borrower hereunder.


 


“Daily
Balance” means the amount of the Obligations owed at the end of a given day.


 


“Equipment”
means all present and future machinery, equipment, tenant improvements,
furniture, fixtures, vehicles, tools, parts and attachments in which Borrower
has any interest.


 


“ERISA”
means the Employee Retirement Income Security Act of 1974, as amended, and the
regulations thereunder.


 


“Event
of Default” has the meaning assigned in Article 8.


 


“GAAP”
means generally accepted accounting principles as in effect from time to time.


 


“Guarantor”
means Carl E. Berg.


 


“Indebtedness”
means (a) all indebtedness for borrowed money or the deferred purchase
price of property or services, including without limitation reimbursement and
other obligations with respect to surety bonds and letters of credit, (b) all
obligations evidenced by notes, bonds, debentures or similar instruments, (c) all
capital lease obligations and (d) all Contingent Obligations.


 


“Insolvency
Proceeding” means any proceeding commenced by or against any person or entity
under any provision of the United States Bankruptcy Code, as amended, or under
any other Bankruptcy or insolvency law, including assignments for the benefit
of creditors, formal or informal moratoria, compositions, extension generally
with its creditors, or proceedings seeking reorganization, arrangement, or
other relief.


 


“Intellectual
Property” means all of Borrower’s right, title, and interest in and to the
following: Copyrights, Trademarks and Patents; all trade secrets, all design
rights, claims for damages by way of past, present and future infringement of
any of the rights included above, all licenses or other rights to use any of
the Copyrights, Patents or Trademarks, and all license fees and royalties
arising from such use to the extent permitted by such license or rights; all
amendments, renewals and extensions of any of the Copyrights, Trademarks or
Patents; and all proceeds and products of the foregoing, including without
limitation all payments under insurance or any indemnity or warranty payable in
respect of any of the foregoing.


 


“Inventory”
means all inventory in which Borrower has or acquires any interest, including
work in process and finished products intended for sale or lease or to be
furnished under a contract of service, of every kind and description now or at
any time hereafter owned by or in the custody or possession, actual or
constructive, of Borrower, including such inventory as is temporarily out of
its custody or possession or in transit and including any returns upon any
accounts or other proceeds, including insurance proceeds, resulting from the
sale or disposition of any of the foregoing and any documents of title
representing any of the above, and Borrower’s Books relating to any of the
foregoing.


 


2

















 


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


 


“IRC”
means the Internal Revenue Code of 1986, as amended, and the regulations
thereunder.


 


“Lender
Expenses” means all:  reasonable costs or
expenses (including reasonable attorneys’ fees and expenses) incurred in
connection with the preparation, negotiation, administration, and enforcement
of the Loan Documents; reasonable Collateral audit fees; and Lender’s
reasonable attorneys’ fees and expenses incurred in amending, enforcing or
defending the Loan Documents (including fees and expenses of appeal), incurred
before, during and after an Insolvency Proceeding, whether or not suit is
brought.


 


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


 


“Loan
Documents” means, collectively, this Agreement, any note or notes executed by
Borrower, and any other agreement entered into in connection with this
Agreement, all as amended or extended from time to time.


 


“Material
Adverse Effect” means a material adverse effect on (i) the business
operations, condition (financial or otherwise) or prospects of Borrower and its
Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the
Obligations or otherwise perform its obligations under the Loan Documents or (iii) the
value or priority of Lender’s security interests in the Collateral.


 


“Negotiable
Collateral” means all letters of credit of which Borrower is a beneficiary,
notes, drafts, instruments, securities, documents of title, and chattel paper,
and Borrower’s Books relating to any of the foregoing.


 


“Obligations”
means all debt, principal, interest, Lender Expenses and other amounts owed to
Lender by Borrower pursuant to this Agreement or any other agreement, whether
absolute or contingent, due or to become due, now existing or hereafter
arising, including any interest that accrues after the commencement of an
Insolvency Proceeding and including any debt, liability, or obligation owing from
Borrower to others that Lender may have obtained by assignment or otherwise.


 


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


 


“Periodic
Payments” means all installments or similar recurring payments that Borrower
may now or hereafter become obligated to pay to Lender pursuant to the terms
and provisions of any instrument, or agreement now or hereafter in existence
between Borrower and Lender.


 


“Permitted
Indebtedness” means:


 


(a)           Indebtedness of
Borrower in favor of Lender arising under this Agreement or any other Loan
Document;


 


(b)           Indebtedness
existing on the Closing Date and disclosed in the Schedule;


 


(c)           Indebtedness
secured by a lien described in clause (1) of the defined term “Permitted Liens,”
provided (i) such Indebtedness does not exceed the lesser of the cost or
fair market value of the equipment financed with such Indebtedness and (ii) such
Indebtedness does not exceed $250,000 in the aggregate at any given time;


 


(d)           Subordinated Debt;


 


(e)           Accounts payable by
Borrower in the ordinary course of business; and


 


(f)            Indebtedness that
does not exceed $200,000 in the aggregate.


 


3

















 


“Permitted
Investment” means:


 


(g)           Investments
existing on the Closing Date disclosed in the Schedule;


 


(h)           (i) marketable
direct obligations issued or unconditionally guaranteed by the United States of
America or any agency or any State thereof maturing within one (1) year
from the date of acquisition thereof, (ii) commercial paper maturing no
more than one (1) year from the date of creation thereof and currently
having rating of at least A-2 or P-2 from either Standard & Poor’s
Corporation or Moody’s Investors Service, (iii) certificates of deposit
maturing no more than one (1) year from the date of investment therein
issued by Lender and (iv) Lender’s money market accounts; and


 


(i)            Investments in
Subsidiaries.


 


“Permitted
Liens” means the following:


 


(j)            Any Liens existing
on the Closing Date and disclosed in the Schedule or arising under this
Agreement or the other Loan Documents;


 


(k)           Liens for taxes,
fees, assessments or other governmental charges or levies, either not
delinquent or being contested in good faith by appropriate proceedings,
provided the same have no priority over any of Lender’s security interests;


 


(l)            Liens (i) upon
or in any equipment which was not financed by Lender acquired or held by Borrower
or any of its Subsidiaries to secure the purchase price of such equipment or
indebtedness incurred solely for the purpose of financing the acquisition of
such equipment, or (ii) existing on such equipment at the time of its
acquisition, provided that the Lien is confined solely to the property so
acquired and improvements thereon, and the proceeds of such equipment;


 


(m)          Liens incurred in
connection with the extension, renewal or refinancing of the indebtedness
secured by Liens of the type described in clauses (a) through (c) above,
provided that any extension, renewal or replacement Lien shall be limited to
the property encumbered by the existing Lien and the principal amount of the
indebtedness being extended, renewed or refinanced does not increase.


 


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


 


“Prime
Rate” means the variable rate of interest, per annum, that appears from time to
time in the Money Rates section of The Wall Street Journal, or such
successor rate if such rate is not published as Bank shall reasonably
determine, whether or not such announced rate is the lowest rate available from
Lender.


 


“Responsible
Officer” means each of the Chief Executive Officer, the Chief Operating
Officer, the Chief Financial Officer and the Controller of Borrower.


 


“Revolving
Facility” means the facility under which Borrower may request Lender to issue
Advances, as specified in Section 2.1(a) hereof.


 


“Revolving
Line” means a credit extension of up to Six Million Five Hundred Thousand
Dollars ($6,500,000).


 


“Revolving
Maturity Date” means February 21, 2009.


 


“Schedule”
means the schedule of exceptions attached hereto and approved by Lender, if
any.


 


“Subordinated
Debt” means any debt incurred by Borrower that is subordinated to the debt
owing by Borrower to Lender on terms acceptable to Lender (and identified as
being such by Borrower and Lender).


 


4

















 


“Subsidiary”
means any corporation, company or partnership in which (i) any general
partnership interest or (ii) more than 50% of the stock or other units of
ownership which by the terms thereof has the ordinary voting power to elect the
Board of Directors, managers or trustees of the entity, at the time as of which
any determination is being made, is owned by Borrower, either directly or
through an Affiliate.


 


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


 


1.2          Accounting Terms.  All accounting terms not specifically defined
herein shall be construed in accordance with GAAP and all calculations made
hereunder shall be made in accordance with GAAP.  When used herein, the terms “financial statements”
shall include the notes and schedules thereto.


 


2.             LOAN
AND TERMS OF PAYMENT.


 


2.1          Credit Extensions.


 


Borrower
promises to pay to the order of Lender, in lawful money of the United States of
America, the aggregate unpaid principal amount of all Credit Extensions made by
Lender to Borrower hereunder.  Borrower
shall also pay interest on the unpaid principal amount of such Credit
Extensions at rates in accordance with the terms hereof.


 


(a)           Revolving Advances.


 


(i)            Subject to and
upon the terms and conditions of this Agreement, Borrower may request Advances
in an aggregate outstanding amount not to exceed the Revolving Line.  Subject to the terms and conditions of this
Agreement, amounts borrowed pursuant to this Section 2.1(a) may be repaid and reborrowed
at any time prior to the Revolving Maturity Date, at which time all Advances
under this Section 2.1(a) shall be immediately due and payable.  Borrower may prepay any Advances without
penalty or premium.


 


(ii)           Whenever Borrower
desires an Advance, Borrower will notify Lender by facsimile transmission or
telephone no later than 3:00 p.m. Pacific time, on the Business Day that the Advance is to be made.  Each such notification shall be promptly
confirmed by a Payment/Advance Form in substantially the form of Exhibit B hereto. 
Lender is authorized to make Advances under this Agreement, based upon
instructions received from a Responsible Officer or a designee of a Responsible
Officer, or without instructions if in Lender’s discretion such Advances are necessary
to meet Obligations which have become due and remain unpaid.  Lender shall be entitled to rely on any
telephonic notice given by a person who Lender reasonably believes to be a
Responsible Officer or a designee thereof, and Borrower shall indemnify and
hold Lender harmless for any damages or loss suffered by Lender as a result of
such reliance.  Lender will credit the
amount of Advances made under this Section 2.1(a) to Borrower’s deposit
account.


 


2.2          Overadvances.  If the aggregate amount of the outstanding
Advances exceeds the Revolving Line at any time, Borrower shall immediately pay
to Lender, in cash, the amount of such excess.


 


2.3          Interest Rates, Payments, and
Calculations.


 


(a)           Interest Rates.  Except as set forth in Section 2.3(b), the Advances
shall bear interest, on the outstanding Daily Balance thereof, at a rate equal
to one percent (1.0%) above the Prime Rate.


 


(b)           Late Fee; Default Rate.  If any payment is not made within ten (10) days
after the date such payment is due, Borrower shall pay Lender a late fee equal
to the lesser of (i) five percent (5%) of the amount of such unpaid amount
or (ii) the maximum amount permitted to be charged under applicable law,
provided, however, no such late fee may be charged by Lender with respect to any
payment of principal due upon the 


 


5

















 


Revolving Maturity Date
or by reason of acceleration of the Credit Extensions.  All Obligations shall bear interest, from and
after the occurrence and during the continuance of an Event of Default, at a
rate equal to five (5) percentage points above the interest rate
applicable immediately prior to the occurrence of the Event of Default.


 


(c)           Payments.  Interest hereunder shall be due and payable
on the first calendar day of each month during the term hereof.  Lender shall, in the event Borrower does not
otherwise pay Lender when due, charge such interest, all Lender Expenses, and
all Periodic Payments against any of Borrower’s deposit accounts or against the
Revolving Line, in which case those amounts shall thereafter accrue interest at
the rate then applicable hereunder.  Any
interest not paid when due shall be compounded by becoming a part of the
Obligations, and such interest shall thereafter accrue interest at the rate
then applicable hereunder.  All payments
shall be free and clear of any taxes, withholdings, duties, impositions or
other charges, to the end that Lender will receive the entire amount of any
Obligations payable hereunder, regardless of source of payment.


 


(d)           Computation.  In the event the Prime Rate is changed from
time to time hereafter, the applicable rate of interest hereunder shall be
increased or decreased, effective as of the day the Prime Rate is changed, by
an amount equal to such change in the Prime Rate.  All interest chargeable under the Loan
Documents shall be computed on the basis of a three hundred sixty (360) day
year for the actual number of days elapsed.


 


2.4          Crediting Payments.  Prior to the occurrence of an Event of
Default, Lender shall credit a wire transfer of funds, check or other item of
payment to such deposit account or Obligation as Borrower specifies.  After the occurrence of an Event of Default,
the receipt by Lender of any wire transfer of funds, check, or other item of payment
shall be immediately applied to conditionally reduce Obligations, but shall not
be considered a payment on account unless such payment is of immediately
available federal funds or unless and until such check or other item of payment
is honored when presented for payment. 
Notwithstanding anything to the contrary contained herein, any wire
transfer or payment received by Lender after 12:00 noon Pacific time shall
be deemed to have been received by Lender as of the opening of business on the
immediately following Business Day. 
Whenever any payment to Lender under the Loan Documents would otherwise
be due (except by reason of acceleration) on a date that is not a Business Day,
such payment shall instead be due on the next Business Day, and additional fees
or interest, as the case may be, shall accrue and be payable for the period of
such extension.


 


2.5          Fees.  Borrower shall pay to Lender the following:


 


(a)           Facility Fee.  On the Closing Date, a Facility Fee equal to
$16,250, which shall be nonrefundable; and


 


(b)           Lender Expenses.  On the Closing Date, all Lender Expenses
incurred through the Closing Date, including reasonable attorneys’ fees and
expenses and, after the Closing Date, all Lender Expenses, including reasonable
attorneys’ fees and expenses, as and when they are incurred by Lender.


 


2.6          Term.  This Agreement shall become effective on the
Closing Date and, subject to Section 12.7, shall continue in full force and
effect for so long as any Obligations remain outstanding or Lender has any
obligation to make Credit Extensions under this Agreement.  Notwithstanding the foregoing, Lender shall
have the right to terminate its obligation to make Credit Extensions under this
Agreement immediately and without notice upon the occurrence and during the
continuance of an Event of Default. 
Notwithstanding termination, Lender’s Lien on the Collateral shall
remain in effect for so long as any Obligations are outstanding.


 


3.             CONDITIONS
OF LOANS.


 


3.1          Conditions Precedent to Initial Credit
Extension.  The obligation
of Lender to make the initial Credit Extension is subject to the condition
precedent that Lender shall have received, in form and substance satisfactory
to Lender, the following:


 


(a)           this Agreement;


 


6

















 


(b)           a certificate of
the Secretary of Borrower with respect to incumbency and resolutions
authorizing the execution and delivery of this Agreement;


 


(c)           UCC National Form Financing
Statement;


 


(d)           an intercreditor
agreement;


 


(e)           a warrant to
purchase stock;


 


(f)            insurance
certificate;


 


(g)           payment of the fees
and Lender Expenses then due specified in Section 2.5 hereof;


 


(h)           account control
agreement(s);


 


(i)            current financial
statements of Borrower;


 


(j)            an audit of the
Collateral, the results of which shall be satisfactory to Lender; and


 


(k)           such other
documents, and completion of such other matters, as Lender may reasonably deem
necessary or appropriate.


 


3.2          Conditions Precedent to all Credit
Extensions.  The
obligation of Lender to make each Credit Extension, including the initial
Credit Extension, is further subject to the following conditions:


 


(a)           timely receipt by
Lender of the Payment/Advance Form as provided in Section 2.1; and


 


(b)           the representations
and warranties contained in Section 5 shall be true and correct in all material
respects on and as of the date of such Payment/Advance Form and on the
effective date of each Credit Extension as though made at and as of each such
date, and no Event of Default shall have occurred and be continuing, or would
exist after giving effect to such Credit Extension.  The making of each Credit Extension shall be
deemed to be a representation and warranty by Borrower on the date of such
Credit Extension as to the accuracy of the facts referred to in this Section
3.2.


 


4.             CREATION
OF SECURITY INTEREST.


 


4.1          Grant of Security Interest.  Borrower grants and pledges to Lender a
continuing security interest in all presently existing and hereafter acquired
or arising Collateral in order to secure prompt repayment of any and all
Obligations and in order to secure prompt performance by Borrower of each of
its covenants and duties under the Loan Documents.  Except as set forth in the Schedule, such
security interest constitutes a valid, first priority security interest in the
presently existing Collateral, and will constitute a valid, first priority
security interest in Collateral acquired after the date hereof.


 


4.2          Delivery of Additional Documentation
Required.  Borrower
shall from time to time execute and deliver to Lender, at the request of
Lender, all Negotiable Collateral (if relating to the Collateral), all
financing statements and other documents that Lender may reasonably request, in
form satisfactory to Lender, to perfect and continue the perfection of Lender’s
security interests in the Collateral and in order to fully consummate all of
the transactions contemplated under the Loan Documents.  Borrower from time to time may deposit with
Lender specific time deposit accounts to secure specific Obligations. Borrower
authorizes Lender to hold such balances in pledge and to decline to honor any
drafts thereon or any request by Borrower or any other Person to pay or
otherwise transfer any part of such balances for so long as the Obligations are
outstanding.


 


7

















 


4.3          Right to Inspect.  Lender (through any of its officers,
employees, or agents) shall have the right, upon reasonable prior notice, from
time to time during Borrower’s usual business hours but no more than twice a year
(unless an Event of Default has occurred and is continuing), to inspect
Borrower’s Books and to make copies thereof and to check, test, and appraise
the Collateral in order to verify Borrower’s financial condition or the amount,
condition of, or any other matter relating to, the Collateral.


 


5.             REPRESENTATIONS AND WARRANTIES.


 


Borrower represents and warrants as follows:


 


5.1          Due Organization and Qualification.  Borrower and each Subsidiary is a corporation
duly existing under the laws of its state of incorporation and qualified and
licensed to do business in any state in which the conduct of its business or
its ownership of property requires that it be so qualified, except where the
failure to do so could not reasonably be expected to have a Material Adverse
Effect.


 


5.2          Due Authorization; No Conflict.  The execution, delivery, and performance of
the Loan Documents are within Borrower’s powers, have been duly authorized, and
are not in conflict with nor constitute a breach of any provision contained in
Borrower’s Articles of Incorporation or Bylaws, nor will they constitute an
event of default under any material agreement to which Borrower is a party or
by which Borrower is bound.  Borrower is
not in default under any material agreement to which it is a party or by which
it is bound.


 


5.3          No Prior Encumbrances.  Borrower has good and marketable title to its
property, free and clear of Liens, except for Permitted Liens.


 


5.4          Bona Fide Accounts.  The Accounts are bona fide existing
obligations.  The property and services
giving rise to such Accounts has been delivered or rendered to the account
debtor or to the account debtor’s agent for immediate and unconditional
acceptance by the account debtor.


 


5.5          Merchantable Inventory.  All Inventory is in all material respects of
good and marketable quality, free from all material defects, except for
Inventory for which adequate reserves have been made.


 


5.6          Intellectual Property.  [INTENTIONALLY OMIT THESE
REPS BECAUSE THIS IS NOT PART OF THE COLLATERAL]


 


5.7          Name; Location of Chief Executive
Office.  Except as
disclosed in the Schedule, Borrower has not done business under any name other
than that specified on the signature page hereof.  The chief executive office of Borrower is
located at the address indicated in Section 10 hereof.


 


5.8          Litigation.  Except as set forth in the Schedule, there
are no actions or proceedings pending by or against Borrower or any Subsidiary
before any court or administrative agency in which an adverse decision could
have a Material Adverse Effect, or a material adverse effect on Borrower’s
interest or Lender’s security interest in the Collateral.


 


5.9          No Material Adverse Change in
Financial Statements. 
All consolidated and consolidating financial statements related to
Borrower and any Subsidiary that Lender has received from Borrower fairly
present in all material respects Borrower’s financial condition as of the date
thereof and Borrower’s consolidated and consolidating results of operations for
the period then ended.  There has not
been a material adverse change in the consolidated or the consolidating
financial condition of Borrower since the date of the most recent of such
financial statements submitted to Lender.


 


5.10        Solvency, Payment of Debts.  Borrower is solvent and able to pay its debts
(including trade debts) as they mature.


 


8

















 


5.11        Regulatory Compliance.  Borrower and each Subsidiary have met the
minimum funding requirements of ERISA with respect to any employee benefit
plans subject to ERISA, and no event has occurred resulting from Borrower’s
failure to comply with ERISA that could result in Borrower’s incurring any
material liability.  Borrower is not an “investment
company” or a company “controlled” by an “investment company” within the
meaning of the Investment Company Act of 1940. 
Borrower is not engaged principally, or as one of the important
activities, in the business of extending credit for the purpose of purchasing
or carrying margin stock (within the meaning of Regulations T and U of the
Board of Governors of the Federal Reserve System).  Borrower has complied with all the provisions
of the Federal Fair Labor Standards Act. 
Borrower has not violated any statutes, laws, ordinances or rules applicable
to it, violation of which could have a Material Adverse Effect.


 


5.12        Environmental Condition.  Except as disclosed in the Schedule, none of
Borrower’s or any Subsidiary’s properties or assets has ever been used by
Borrower or any Subsidiary or, to the best of Borrower’s knowledge, by previous
owners or operators, in the disposal of, or to produce, store, handle, treat,
release, or transport, any hazardous waste or hazardous substance other than in
accordance with applicable law; to the best of Borrower’s knowledge, none of
Borrower’s properties or assets has ever been designated or identified in any
manner pursuant to any environmental protection statute as a hazardous waste or
hazardous substance disposal site, or a candidate for closure pursuant to any
environmental protection statute; no lien arising under any environmental
protection statute has attached to any revenues or to any real or personal
property owned by Borrower or any Subsidiary; and neither Borrower nor any
Subsidiary has received a summons, citation, notice, or directive from the
Environmental Protection Agency or any other federal, state or other
governmental agency concerning any action or omission by Borrower or any
Subsidiary resulting in the releasing, or otherwise disposing of hazardous
waste or hazardous substances into the environment.


 


5.13        Taxes.  Borrower and each Subsidiary have filed or
caused to be filed all tax returns required to be filed, and have paid, or have
made adequate provision for the payment of, all taxes reflected therein.


 


5.14        Subsidiaries.  Borrower does not own any stock, partnership
interest or other equity securities of any Person, except for Permitted
Investments.


 


5.15        Government Consents.  Borrower and each Subsidiary have obtained
all material consents, approvals and authorizations of, made all declarations
or filings with, and given all notices to, all governmental authorities that
are necessary for the continued operation of Borrower’s business as currently
conducted.


 


5.16        Accounts.  Except as set forth in the Schedule, none of
Borrower’s nor any Subsidiary’s property is maintained or invested with a
Person other than Lender.


 


5.17        Full Disclosure.  No representation, warranty or other
statement made by Borrower in any certificate or written statement furnished to
Lender (taken together with all such certificates and written statements
furnished to Lender) contains any untrue statement of a material fact or omits
to state a material fact necessary in order to make the statements contained in
such certificates or statements not misleading.


 


6.             AFFIRMATIVE
COVENANTS.


 


Borrower
shall do all of the following:


 


6.1          Good Standing.  Borrower shall maintain its and each of its
Subsidiaries’ corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which it is
required under applicable law.  Borrower
shall maintain, and shall cause each of its Subsidiaries to maintain, in force
all licenses, approvals and agreements, the loss of which could have a Material
Adverse Effect.


 


6.2          Government Compliance.  Borrower shall meet, and shall cause each
Subsidiary to meet, the minimum funding requirements of ERISA with respect to
any employee benefit plans subject to ERISA. 
Borrower shall comply, and shall cause each Subsidiary to comply, with
all statutes, laws, ordinances and government rules and regulations to
which it is subject, noncompliance with which could have a Material Adverse
Effect.


 


9

















 


6.3          Financial
Statements, Reports, Certificates.  Borrower shall deliver the following to
Lender:  (a) copies of all
statements, reports and notices sent or made available generally by Borrower to
its security holders or to any holders of Subordinated Debt; (b) within 5
days of the earlier of the due date or date of filing, all reports on
Forms 10-K and 10-Q filed with the Securities and Exchange Commission; (c) with
the filed 10-Q, a quarterly 12-month sales forecast; (d) promptly upon
receipt of notice thereof, a report of any legal actions pending or threatened
against Borrower or any Subsidiary that could result in damages or costs to
Borrower or any Subsidiary of Five Hundred Thousand Dollars ($500,000) or more;
(e) updated personal financial statements and tax returns for Guarantor
within 30 days of each anniversary of the Closing Date; and (f) such
budgets, sales projections, operating plans or other financial information as
Lender may reasonably request from time to time.


 


Borrower
shall deliver to Lender with the quarterly 10-Q report a Compliance Certificate
signed by a Responsible Officer in substantially the form of Exhibit C hereto.


 


Lender
shall have a right from time to time hereafter to audit Borrower’s Accounts and
appraise Collateral at Borrower’s expense, provided that such audits will be
conducted no more often than every twelve (12) months unless an Event of
Default has occurred and is continuing.


 


6.4          Inventory; Returns.  Borrower shall keep all Inventory in good and
marketable condition, free from all material defects except for Inventory for
which adequate reserves have been made. 
Returns and allowances, if any, as between Borrower and its account
debtors shall be on the same basis and in accordance with the usual customary
practices of Borrower, as they exist at the time of the execution and delivery
of this Agreement.  Borrower shall
promptly notify Lender of all returns and recoveries and of all disputes and
claims, where the return, recovery, dispute or claim involves more than Two Hundred
Fifty Thousand Dollars ($250,000).


 


6.5          Taxes.  Borrower shall make, and shall cause each
Subsidiary to make, due and timely payment or deposit of all material federal,
state, and local taxes, assessments, or contributions required of it by law,
and will execute and deliver to Lender, on demand, appropriate certificates
attesting to the payment or deposit thereof; and Borrower will make, and will
cause each Subsidiary to make, timely payment or deposit of all material tax
payments and withholding taxes required of it by applicable laws, including,
but not limited to, those laws concerning F.I.C.A., F.U.T.A., state disability,
and local, state, and federal income taxes, and will, upon request, furnish
Lender with proof satisfactory to Lender indicating that Borrower or a
Subsidiary has made such payments or deposits; provided that Borrower or a
Subsidiary need not make any payment if the amount or validity of such payment
is contested in good faith by appropriate proceedings and is reserved against
(to the extent required by GAAP) by Borrower.


 


6.6          Insurance.


 


(a)           Borrower, at its
expense, shall keep the Collateral insured against loss or damage by fire,
theft, explosion, sprinklers, and all other hazards and risks, and in such
amounts, as ordinarily insured against by other owners in similar businesses
conducted in the locations where Borrower’s business is conducted on the date
hereof.  Borrower shall also maintain
insurance relating to Borrower’s business, ownership and use of the Collateral
in amounts and of a type that are customary to businesses similar to Borrower’s.


 


(b)           All
such policies of insurance shall be in such form, with such companies, and in
such amounts as are reasonably satisfactory to Lender.  All such policies of property insurance shall
contain a lender’s loss payable endorsement, in a form satisfactory to Lender,
showing Lender as an additional loss payee thereof, and all liability insurance
policies shall show the Lender as an additional insured and shall specify that
the insurer must give at least twenty (20) days (or such other period as
required by law) notice to Lender before canceling its policy for any
reason.  Upon Lender’s request, Borrower
shall deliver to Lender certified copies of such policies of insurance and
evidence of the payments of all premiums therefor.  All proceeds payable under any such policy
shall, at the option of Lender, be payable to Lender to be applied on account
of the Obligations.


 


6.7          Accounts.  Except as set forth in the Schedule, Borrower
shall maintain and shall cause each of its Subsidiaries to maintain its
depository, operating, and investment accounts with Lender.


 


10






 












6.8          EBITDA.  Borrower shall maintain earnings before
interest, taxes, depreciation and amortization not less than 25% lower than
that set forth in the budget provided to Bank as of the Closing Date.


 


6.9          Further Assurances.  At any time and from time to time Borrower
shall execute and deliver such further instruments and take such further action
as may reasonably be requested by Lender to effect the purposes of this
Agreement.


 


7.             NEGATIVE
COVENANTS.


 


Borrower
will not do any of the following without the prior written consent of Lender
which shall not be unreasonably withheld, conditioned or delayed:


 


7.1          Dispositions.  Convey, sell, lease, transfer or otherwise
dispose of (collectively, a “Transfer”), or permit any of its Subsidiaries to
Transfer, all or any part of its business or property, other than:  (i) Transfers of Inventory in the
ordinary course of business; (ii) Transfers of non-exclusive licenses and
similar arrangements for the use of the property of Borrower or its
Subsidiaries in the ordinary course of business; (iii) Transfers of
worn-out or obsolete Equipment which was not financed by Lender; (iv) the
sale or other disposition of assets no longer used or useful in the conduct of
its business; (v) Transfers of assets of Borrower not exceeding a value of
$100,000; or (vi) Transfers to any unaffiliated third party except at fair
market value or other consideration determined at arms’ length; provided,
however, that regardless of the foregoing, upon ten days prior notice to Bank,
Borrower may Transfer all or any portion of its assets, including, without
limitation, Inventory  or Equipment or
other property, to a wholly owned subsidiary of Borrower.


 


7.2          Change in Business; Change in Control
or Executive Office. 
Engage in any business, or permit any of its Subsidiaries to engage in
any business, other than the businesses currently engaged in by Borrower and
any business substantially similar or related thereto (or incidental thereto);
or cease to conduct business in the manner conducted by Borrower as of the
Closing Date; or suffer or permit a Change in Control; or without thirty (30)
days prior written notification to Lender, relocate its chief executive office
or state of incorporation or change its legal name; or without Lender’s prior
written consent, change the date on which its fiscal year ends.


 


7.3          Mergers or Acquisitions.  Merge or consolidate, or permit any of its
Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person.


 


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


 


7.5          Encumbrances.  Create, incur, assume or suffer to exist any
Lien with respect to any of its property, or assign or otherwise convey any
right to receive income, including the sale of any Accounts, or permit any of
its Subsidiaries so to do, except for Permitted Liens, or agree with any Person
other than Lender not to grant a security interest in, or otherwise encumber,
any of its property, or permit any Subsidiary to do so.


 


7.6          Distributions.  And will not permit any Subsidiary to do so
without Lender’s prior written consent, (a) repurchase or redeem any class
of stock or other equity interest other than pursuant to employee, director or
consultant repurchase plans, stock incentive plans, or other similar
agreements, provided, however, in each case the repurchase or redemption price
does not exceed the original consideration paid for such stock or equity
interest, or (b) declare or pay any cash dividend or make a cash
distribution on any class of stock or other equity interest, or (c) lend
money to any employees, officers or directors or guarantee the payment of any
such loans granted by a third party in excess of $100,000 in the aggregate or (d) waive,
release or forgive any indebtedness owed by any employees, officers or
directors in excess of $100,000 in the aggregate.


 


7.7          Investments.  Directly or indirectly acquire or own, or
make any Investment in or to any Person, or permit any of its Subsidiaries so
to do, other than Permitted Investments; or maintain or invest any of its
property with a Person other than Lender or permit any of its Subsidiaries to
do so unless such Person has entered 


 


11

















 


into an account control
agreement with Lender in form and substance satisfactory to Lender; or suffer
or permit any Subsidiary to be a party to, or be bound by, an agreement that
restricts such Subsidiary from paying dividends or otherwise distributing
property to Borrower.


 


7.8          Transactions with Affiliates.  Directly or indirectly enter into or permit
to exist any material transaction with any Affiliate of Borrower except for
transactions that are in the ordinary course of Borrower’s business, upon fair
and reasonable terms that are no less favorable to Borrower than would be
obtained in an arm’s length transaction with a non-affiliated Person.


 


7.9          Subordinated Debt.  Make any payment in respect of any
Subordinated Debt, or permit any of its Subsidiaries to make any such payment,
except in compliance with the terms of such Subordinated Debt, or amend any
provision contained in any documentation relating to the Subordinated Debt
without Lender’s prior written consent.


 


7.10        Inventory and Equipment.
[Intentionally Omitted].


 


7.11        Compliance.  Become an “investment company” or be
controlled by an “investment company,” within the meaning of the Investment
Company Act of 1940, or become principally engaged in, or undertake as one of
its important activities, the business of extending credit for the purpose of
purchasing or carrying margin stock, or use the proceeds of any Credit
Extension for such purpose.  Fail to meet
the minimum funding requirements of ERISA, permit a Reportable Event or
Prohibited Transaction, as defined in ERISA, to occur, fail to comply with the
Federal Fair Labor Standards Act or violate any law or regulation, which
violation could have a Material Adverse Effect, or a material adverse effect on
the Collateral or the priority of Lender’s Lien on the Collateral, or permit
any of its Subsidiaries to do any of the foregoing.


 


8.             EVENTS
OF DEFAULT.


 


Any
one or more of the following events shall constitute an Event of Default by
Borrower under this Agreement:


 


8.1          Payment Default.  If Borrower fails to pay, when due, any of
the Obligations.


 


8.2          Covenant Default.


 


(a)           If Borrower fails
to perform any obligations under Article 6, and such failure if curable,
is not cured in fifteen (15) days, or violates any of the covenants contained
in Article 7 of this Agreement; or


 


(b)           If Borrower fails
or neglects to perform or observe any other material term, provision,
condition, covenant contained in this Agreement, in any of the Loan Documents,
or in any other present or future agreement between Borrower and Lender and as
to any default under such other term, provision, condition or covenant that can
be cured, has failed to cure such default within ten days after Borrower
receives notice thereof or any officer of Borrower becomes aware thereof;
provided, however, that if the default cannot by its nature be cured within the
ten day period or cannot after diligent attempts by Borrower be cured within
such ten day period, and such default is likely to be cured within a reasonable
time, then Borrower shall have an additional reasonable period (which shall not
in any case exceed 30 days) to attempt to cure such default, and within such
reasonable time period the failure to have cured such default shall not be
deemed an Event of Default but no Credit Extensions will be made.


 


8.3          Material Adverse Effect.  If there occurs any circumstance or
circumstances that could have a Material Adverse Effect;


 


12

















 


8.4          Attachment.  If any portion of Borrower’s assets is
attached, seized, subjected to a writ or distress warrant, or is levied upon,
or comes into the possession of any trustee, receiver or person acting in a
similar capacity and such attachment, seizure, writ or distress warrant or levy
has not been removed, discharged or rescinded within twenty (20) days, or if
Borrower is enjoined, restrained, or in any way prevented by court order from
continuing to conduct all or any material part of its business affairs, or if a
judgment or other claim becomes a lien or encumbrance upon any material portion
of Borrower’s assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower’s assets by the United States
Government, or any department, agency, or instrumentality thereof, or by any
state, county, municipal, or governmental agency, and the same is not paid
within twenty (20) days after Borrower receives notice thereof, provided that
none of the foregoing shall constitute an Event of Default where such action or
event is stayed or an adequate bond has been posted pending a good faith
contest by Borrower (provided that no Credit Extensions will be required to be
made during such cure period);


 


8.5          Insolvency.  If Borrower becomes insolvent, or if an
Insolvency Proceeding is commenced by Borrower, or if an Insolvency Proceeding
is commenced against Borrower and is not dismissed or stayed within sixty (60)
days (provided that no Credit Extensions will be made prior to the dismissal of
such Insolvency Proceeding);


 


8.6          Other Agreements.  If there is a default or other failure to
perform in any agreement to which Borrower is a party or by which it is bound
resulting in a right by a third party or parties, whether or not exercised, to
accelerate the maturity of any Indebtedness in an amount in excess of Five
Hundred Thousand Dollars ($500,000) or which could have a Material Adverse
Effect;


 


8.7          Judgments.  If a judgment or judgments for the payment of
money in an amount, individually or in the aggregate, of at least One Hundred
Thousand Dollars ($100,000) shall be rendered against Borrower and shall remain
unsatisfied and unstayed for a period of twenty (20) days (provided that no
Credit Extensions will be made prior to the satisfaction or stay of such
judgment); or


 


8.8          Misrepresentations.  If any material misrepresentation or material
misstatement exists now or hereafter in any warranty or representation set
forth herein or in any certificate delivered to Lender by any Responsible
Officer pursuant to this Agreement or to induce Lender to enter into this
Agreement or any other Loan Document.


 


8.9          Guaranty.  If any guaranty of all or a
portion of the Obligations (a “Guaranty”) ceases for any reason to be in full
force and effect, or any guarantor fails to perform any obligation under any
Guaranty or a security agreement securing any Guaranty (collectively, the “Guaranty
Documents”), or any event of default occurs under any Guaranty Document or any
guarantor revokes or purports to revoke a Guaranty, or any material
misrepresentation or material misstatement exists now or hereafter in any
warranty or representation set forth in any Guaranty Document or in any certificate
delivered to Lender in connection with any Guaranty Document, or if any of the
circumstances described in Sections 8.3 through 8.8 occur with respect to any
guarantor or any guarantor dies, or any circumstances arise causing Lender, in
good faith, to become insecure as to the satisfaction of any of any guarantor’s
obligations under the Guaranty Documents.


 


9.             LENDER’S
RIGHTS AND REMEDIES.


 


9.1          Rights and Remedies.  Upon the occurrence and during the
continuance of an Event of Default, Lender may, at its election, without notice
of its election and without demand, do any one or more of the following, all of
which are authorized by Borrower:


 


(a)           Declare all
Obligations, whether evidenced by this Agreement, by any of the other Loan
Documents, or otherwise, immediately due and payable (provided that upon the
occurrence of an Event of Default described in Section 8.5, all Obligations
shall become immediately due and payable without any action by Lender);


 


13

















 


(b)           Cease
advancing money or extending credit to or for the benefit of Borrower under
this Agreement or under any other agreement between Borrower and Lender;


 


(c)           Settle or adjust
disputes and claims directly with account debtors for amounts, upon terms and
in whatever order that Lender reasonably considers advisable;


 


(d)           Make such payments
and do such acts as Lender considers necessary or reasonable to protect its
security interest in the Collateral. 
Borrower agrees to assemble the Collateral if Lender so requires, and to
make the Collateral available to Lender as Lender may designate.  Borrower authorizes Lender to enter the
premises where the Collateral is located, to take and maintain possession of
the Collateral, or any part of it, and to pay, purchase, contest, or compromise
any encumbrance, charge, or lien which in Lender’s determination appears to be
prior or superior to its security interest and to pay all expenses incurred in
connection therewith.  With respect to
any of Borrower’s owned premises, Borrower hereby grants Lender a license to
enter into possession of such premises and to occupy the same, without charge,
in order to exercise any of Lender’s rights or remedies provided herein, at
law, in equity, or otherwise;


 


(e)           Set off and apply to
the Obligations any and all (i) balances and deposits of Borrower held by
Lender, or (ii) indebtedness at any time owing to or for the credit or the
account of Borrower held by Lender;


 


(f)            Ship, reclaim,
recover, store, finish, maintain, repair, prepare for sale, advertise for sale,
and sell (in the manner provided for herein) the Collateral.  Lender is hereby granted a license or other
right, solely pursuant to the provisions of this Section 9.1, to use, without
charge, Borrower’s labels, patents, copyrights, rights of use of any name,
trade secrets, trade names, trademarks, service marks, and advertising matter,
or any property of a similar nature, as it pertains to the Collateral, in
completing production of, advertising for sale, and selling any Collateral and,
in connection with Lender’s exercise of its rights under this Section  9.1,
Borrower’s rights under all licenses and all franchise agreements shall inure
to Lender’s benefit;


 


(g)           Dispose of the
Collateral by way of one or more contracts or transactions, for cash or on
terms, in such manner and at such places (including Borrower’s premises) as
Lender determines is commercially reasonable, and apply any proceeds to the
Obligations in whatever manner or order Lender deems appropriate;


 


(h)           Lender may credit
bid and purchase at any public sale; and


 


(i)            Any deficiency
that exists after disposition of the Collateral as provided above will be paid
immediately by Borrower.


 


9.2          Power of Attorney.  Effective only upon the
occurrence and during the continuance of an Event of Default, Borrower hereby
irrevocably appoints Lender (and any of Lender’s designated officers, or
employees) as Borrower’s true and lawful attorney to:  (a) send requests for verification of
Accounts or notify account debtors of Lender’s security interest in the
Accounts; (b) endorse Borrower’s name on any checks or other forms of
payment or security that may come into Lender’s possession; (c) sign
Borrower’s name on any invoice or bill of lading relating to any Account,
drafts against account debtors, schedules and assignments of Accounts,
verifications of Accounts, and notices to account debtors; (d) dispose of
any Collateral; (e) make, settle, and adjust all claims under and
decisions with respect to Borrower’s policies of insurance; (f) settle and
adjust disputes and claims respecting the accounts directly with account
debtors, for amounts and upon terms which Lender determines to be reasonable;
and (g) to file, in its sole discretion, one or more financing or
continuation statements and amendments thereto, relative to any of the
Collateral.  The appointment of Lender as
Borrower’s attorney in fact, and each and every one of Lender’s rights and
powers, being coupled with an interest, is irrevocable until all of the
Obligations have been fully repaid and performed and Lender’s obligation to
provide Credit Extensions hereunder is terminated.


 


14

















 


9.3          Accounts Collection.  At any time after the occurrence of an Event
of Default, Lender may notify any Person owing funds to Borrower of Lender’s
security interest in such funds and verify the amount of such Account.  Borrower shall collect all amounts owing to
Borrower for Lender, receive in trust all payments as Lender’s trustee, and
immediately deliver such payments to Lender in their original form as received
from the account debtor, with proper endorsements for deposit.


 


9.4          Lender Expenses.  If Borrower fails to pay any amounts or
furnish any required proof of payment due to third persons or entities, as
required under the terms of this Agreement, then Lender may do any or all of
the following after reasonable notice to Borrower:  (a) make payment of the same or any part
thereof; (b) set up such reserves under a loan facility in Section 2.1
as Lender deems necessary to protect Lender from the exposure created by such
failure; or (c) obtain and maintain insurance policies of the type
discussed in Section 6.6 of this Agreement, and take any action with respect to
such policies as Lender deems prudent. 
Any amounts so paid or deposited by Lender shall constitute Lender
Expenses, shall be immediately due and payable, and shall bear interest at the
then applicable rate hereinabove provided, and shall be secured by the
Collateral.  Any payments made by Lender
shall not constitute an agreement by Lender to make similar payments in the
future or a waiver by Lender of any Event of Default under this Agreement.


 


9.5          Lender’s Liability for Collateral.  So long as Lender complies with reasonable
banking practices, Lender shall not in any way or manner be liable or
responsible for:  (a) the
safekeeping of the Collateral; (b) any loss or damage thereto occurring or
arising in any manner or fashion from any cause; (c) any diminution in the
value thereof; or (d) any act or default of any carrier, warehouseman,
bailee, forwarding agency, or other person whomsoever.  All risk of loss, damage or destruction of
the Collateral shall be borne by Borrower.


 


9.6          Remedies
Cumulative.  Lender’s
rights and remedies under this Agreement, the Loan Documents, and all other
agreements shall be cumulative.  Lender
shall have all other rights and remedies not inconsistent herewith as provided
under the Code, by law, or in equity.  No
exercise by Lender of one right or remedy shall be deemed an election, and no
waiver by Lender of any Event of Default on Borrower’s part shall be deemed a
continuing waiver.  No delay by Lender
shall constitute a waiver, election, or acquiescence by it.  No waiver by Lender shall be effective unless
made in a written document signed on behalf of Lender and then shall be
effective only in the specific instance and for the specific purpose for which
it was given.


 


9.7          Demand; Protest.  Borrower waives demand, protest, notice of
protest, notice of default or dishonor, notice of payment and nonpayment,
notice of any default, nonpayment at maturity, release, compromise, settlement,
extension, or renewal of accounts, documents, instruments, chattel paper, and
guarantees at any time held by Lender on which Borrower may in any way be
liable.


 


10.          NOTICES.


 


Unless
otherwise provided in this Agreement, all notices or demands by any party
relating to this Agreement or any other agreement entered into in connection
herewith shall be in writing and (except for financial statements and other
informational documents which may be sent by first-class mail, postage prepaid)
shall be personally delivered or sent by a recognized overnight delivery
service, certified mail, postage prepaid, return receipt requested, or by telefacsimile
to Borrower or to Lender, as the case may be, at its addresses set forth below:


 


	
  If to Borrower:

  	
   

  	
  FOCUS ENHANCEMENTS,
  INC.

  
	
   

  	
   

  	
  1370 Dell Ave.

  
	
   

  	
   

  	
  Campbell, CA 95008

  
	
   

  	
   

  	
  Attn: Gary Williams

  
	
   

  	
   

  	
   

  
	
  If to Lender:

  	
   

  	
  HERITAGE BANK OF
  COMMERCE

  
	
   

  	
   

  	
  150 Almaden Blvd.

  
	
   

  	
   

  	
  San Jose, CA 95113

  
	
   

  	
   

  	
  Attn: Roxanne Vane

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  with a copy to:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  HERITAGE BANK OF
  COMMERCE

  
	
   

  	
   

  	
  150 Almaden Blvd.

  
	
   

  	
   

  	
  San Jose, CA  95113

  
	
   

  	
   

  	
  Attn:  Credit Administration

  



 


15

















 


The
parties hereto may change the address at which they are to receive notices
hereunder, by notice in writing in the foregoing manner given to the other.


 


11.          CHOICE
OF LAW AND VENUE; JURY TRIAL WAIVER.


 


This
Agreement shall be governed by, and construed in accordance with, the internal
laws of the State of California, without regard to principles of conflicts of
law.  Each of Borrower and Lender hereby
submits to the exclusive jurisdiction of the state and Federal courts located
in the County of Santa Clara, State of California.  BORROWER AND LENDER EACH HEREBY WAIVE THEIR
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS
CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY
CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS.  EACH PARTY RECOGNIZES AND AGREES THAT THE
FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS
AGREEMENT.  EACH PARTY REPRESENTS AND
WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT
KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION
WITH LEGAL COUNSEL.


 


If the
jury waiver set forth in Section is not enforceable, then any dispute,
controversy or claim arising out of or relating to this Agreement, the Loan
Documents or any of the transactions contemplated therein shall be settled by
judicial reference pursuant to Code of Civil Procedure Section 638 et seq.
before a referee sitting without a jury, such referee to be mutually acceptable
to the parties or, if no agreement is reached, by a referee appointed by the
Presiding Judge of the California Superior Court for Santa Clara County.  This Section shall not restrict a party
from exercising remedies under the Code or from exercising pre-judgment
remedies under applicable law.


 


12.          GENERAL
PROVISIONS.


 


12.1        Successors and Assigns.  This Agreement shall bind and inure to the
benefit of the respective successors and permitted assigns of each of the
parties; provided, however, that neither this Agreement nor any rights
hereunder may be assigned by Borrower without Lender’s prior written consent,
which consent may be granted or withheld in Lender’s sole discretion.  Lender shall have the right without the
consent of or notice to Borrower to sell, transfer, negotiate, or grant
participation (collectively, “Participation”) in all or any part of, or any
interest in, Lender’s obligations, rights and benefits hereunder, however
Borrower shall not be responsible for any costs or legal fees associated with
such Participation.


 


12.2        Indemnification.  Borrower shall defend, indemnify and hold
harmless Lender and its officers, employees, and agents against:  (a) all obligations, demands, claims,
and liabilities claimed or asserted by any other party in connection with the
transactions contemplated by this Agreement; and (b) all losses or Lender
Expenses in any way suffered, incurred, or paid by Lender as a result of or in
any way arising out of, following, or consequential to transactions between
Lender and Borrower whether under this Agreement, or otherwise (including
without limitation reasonable attorneys’ fees and expenses), except for losses
caused by Lender’s gross negligence or willful misconduct.


 


12.3        Time of Essence.  Time is of the essence for the performance of
all obligations set forth in this Agreement.


 


12.4        Severability of Provisions.  Each provision of this Agreement shall be
severable from every other provision of this Agreement for the purpose of
determining the legal enforceability of any specific provision.


 


16

















 


12.5        Amendments in Writing, Integration.  Neither this Agreement nor the Loan Documents
can be amended or terminated orally.  All
prior agreements, understandings, representations, warranties, and negotiations
between the parties hereto with respect to the subject matter of this Agreement
and the Loan Documents, if any, are merged into this Agreement and the Loan
Documents.


 


12.6        Counterparts.  This Agreement may be executed in any number
of counterparts and by different parties on separate counterparts, each of
which, when executed and delivered, shall be deemed to be an original, and all
of which, when taken together, shall constitute but one and the same Agreement.


 


12.7        Survival.  All covenants, representations and warranties
made in this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding or Lender has any obligation to make Credit
Extensions to Borrower.  The obligations
of Borrower to indemnify Lender with respect to the expenses, damages, losses,
costs and liabilities described in Section 12.2 shall survive until all
applicable statute of limitations periods with respect to actions that may be
brought against Lender have run.


 


12.8        Confidentiality.  In handling any confidential information
Lender and all employees and agents of Lender, including but not limited to
accountants, shall exercise the same degree of care that it exercises with
respect to its own proprietary information of the same types to maintain the
confidentiality of any non-public information thereby received or received
pursuant to this Agreement except that disclosure of such information may be
made (i) to the subsidiaries or affiliates of Lender in connection with
their present or prospective business relations with Borrower, (ii) to
prospective transferees or purchasers of any interest in the Loans, provided
that they have entered into a comparable confidentiality agreement in favor of
Borrower and have delivered a copy to Borrower, (iii) as required by law,
regulations, rule or order, subpoena, judicial order or similar order, (iv) as
may be required in connection with the examination, audit or similar
investigation of Lender and (v) as Lender may determine in connection with
the enforcement of any remedies hereunder. 
Confidential information hereunder shall not include information that
either:  (a) is in the public domain
or in the knowledge or possession of Lender when disclosed to Lender, or becomes
part of the public domain after disclosure to Lender through no fault of
Lender; or (b) is disclosed to Lender by a third party, provided Lender
does not have actual knowledge that such third party is prohibited from
disclosing such information.


 


12.9        Patriot Act.  To help the government fight the funding of
terrorism and money laundering activities, Federal law requires all financial
institutions to obtain, verify, and record information that identifies each
person who opens an account.  WHAT THIS
MEANS FOR YOU:  when you open an account,
we will ask your name, address, date of birth, and other information that will
allow us to identify you.  We may also
ask to see your driver’s license or other identifying documents.


 


IN WITNESS WHEREOF, the parties hereto have caused
this Agreement to be executed as of the date first above written.


 


	
   

  	
  FOCUS
  ENHANCEMENTS, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Brett Moyer

  
	
   

  	
   

  
	
   

  	
  Title:President &
  CEO

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  HERITAGE
  BANK OF COMMERCE  

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Roxanne Vane  

  
	
   

  	
   

  
	
   

  	
  Title:Senior
  Vice President

  



 


 


17