**EXHIBIT 10.2**

 

**CITIZENSBANK OF MASSACHUSETTSLOAN AND SECURITY AGREEMENTWITHVISION- SCIENCES, INC. AND****MACHIDA, INCORPORATED**

 

October 31,2005

 

**PREAMBLE**.  **VISION- SCIENCES, INC.**,  aDelaware corporation with offices at 9 Strathmore Road, Natick, Massachusetts01760 and **MACHIDA, INCORPORATED** aDelaware corporation with a principal place of business at 40 Ramland Road,Orangeburg, New York 10962 (collectively, the “Borrower”) has applied to **CITIZENS BANK OF MASSACHUSETTS**, a bankingcorporation organized under the laws of the Commonwealth of Massachusetts, witha banking office at 53 State Street, Boston, Massachusetts(“Bank”), for certainloans and other financial accommodations to be secured by security interests incertain property now or hereafter owned by the Borrower, or in which theBorrower now or hereafter has an interest. Proceeds of the financialaccommodations will refinance existing obligations of the Borrower and provideadditional working capital for the Borrower’s business.  The Bank has agreed to grant to the Borrowerthe financial accommodations described in this Loan and Security Agreement(this “Loan Agreement”) on the terms and conditions more fully set forth below.

 

1.**GRANT OFSECURITY INTEREST**.  Each  Borrower, in consideration of the foregoing,of the undertakings of the Bank and the Borrower under this Loan Agreement andfor other good and valuable consideration, the receipt and sufficiency of whichare hereby acknowledged, hereby grants to the Bank a continuing securityinterest in the Collateral owned by it or in which it may now or hereafter haveany interest or rights and in all of the products and proceeds thereof.  The security interests granted to the Bank bythe Borrower hereby are to secure payment and performance of all Obligations.In connection with the grant of security interest made hereby, Borrower herebyauthorizes Bank to file or cause to be filed one or more financing statements,amendments to financing statements and/or in lieu financing statements with anyfiling office for the purpose of perfecting or continuing the perfection of thesecurity interest in the Collateral.

 

2. **LOANS**.  Subject to the terms and conditions set forthherein, the Borrower has requested that the Bank make available to it arevolving line of credit ( the “Line of Credit”) for general working capitalpurposes of the Borrower and an equipment line for the acquisition of equipment(the “Equipment Line”).  Loans and otheradvances of credit under the Line of Credit are hereinafter referred to as the “RevolvingLoans” and the Equipment Line and the Revolving Loan(s) are collectivelyreferred to herein as the “Loans”.  TheBank has agreed to provide the Borrower with the Loans on the terms andconditions set forth herein, including but not limited to, the conditionsprecedent set forth in Section 4 hereof; provided that the Bank shall notbe obligated to make any Loans at any time that there is a Default or an Eventof Default.

 

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(a) **THE LINEOF CREDIT**.  Subject to all ofthe terms and conditions set forth in this Loan Agreement, the Bank herebyestablishes the Line of Credit in the Borrower’s favor pursuant to which Bankshall, at Borrower’s request from time to time made after the date hereof untilJuly 31, 2006 (the “Expiration Date”), make Revolving Loans (includingLetters of Credit and Banker’s Acceptances) to Borrower in an aggregate amountup to $250,000.00 (the “Credit Limit”). All Revolving Loans are due and payable on the Expiration Date and noLetter of Credit or other extension of credit may have an expiry after theExpiration Date.  Borrower acknowledgesthat all Revolving Loans are secured by the Collateral and constituteObligations, whether or not evidenced by promissory notes and, by reference tothis Loan Agreement, the face amount of any promissory note evidencing aRevolving Loan shall be deemed to have been automatically amended to conformwith any changes to the Credit Limit. Payments (and prepayments) of principal in full or in part may be madeat any time and from time to time without premium or penalty, and shall be madeon the Loans from time to time in accordance with the provisions of this LoanAgreement.  Unless extended by the Bankin writing, the Borrower’s ability to request Revolving Loans hereunder shallexpire on the Expiration Date. Until the Expiration Date or the termination ofthe Line of Credit pursuant to the provisions of this Loan Agreement, principalamounts of Revolving Loans repaid may be reborrowed hereunder in accordancewith the provisions of this Loan Agreement. All Revolving Loans shall be Prime Rate Loans and shall bear interest,calculated on the basis of actual days elapsed and a 360-day year and payablemonthly in arrears on the last Business Day of each month, at a fluctuating perannum rate of interest equal to the Prime Rate. The effective interest rate applicable to Borrower’s Loans shall changeon the date of each change in the Prime Rate. Borrower shall have the right toterminate the Line of Credit at any time on 2 days’ notice to Bank uponrepayment in full of all amounts advanced under the Line of Credit.

 

(b) **THEEQUIPMENT LINE**.  In additionto the Revolving Loans, the Bank has agreed, on the terms and conditions setforth herein to make a drawdown Equipment Line to the Borrower in the maximumamount of up to $750,000.00 to finance the acquisition of machinery andequipment by the Borrower.  Advancesunder the Equipment Line may be requested by the Borrower from the date hereofuntil July 31, 2006 (the “Conversion Date”), each advance to be in theminimum amount of $100,000.00 and in an amount no greater than 90.0% of theactual purchase price of machinery and Equipment purchased by Borrower.  The Bank requires that the Borrower provideit with copies of invoices or other evidence of the purchase price acceptableto Bank as a condition to an advance under the Equipment Line. The outstandingprincipal balance of the Equipment Line shall bear interest in arrears  at a fluctuating per annum rate equal to thePrime Rate and payable on a monthly basis on the last Business Day of eachmonth commencing October 31, 2005 until paid in full.  Payments of principal, each in the amount of1/36th of the outstanding principal balance of the Equipment Line on theConversion Date shall be paid monthly commencing August 31, 2006 and onthe last Business Day of each month thereafter through and including July 31,2009 (the “Maturity Date”) at which time all amounts outstanding shall be dueand payable.  The Equipment Line shall beevidenced by the Equipment Note in the form annexed (the “Equipment Note”).  Interest shall be calculated on the basis ofactual days elapsed and a 360-day year. The effective interest rate applicable to Borrower’s Loans shall changeon the date of each change in the Prime Rate. Borrower shall have the right toterminate

 

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the Equipment Line at any time on 2 days’notice to Bank upon repayment in full of all amounts advanced under the EquipmentLine.

 

(c) **PLACE OFPAYMENT**.  Principal, interestand all other amounts due to the Bank under this Loan Agreement shall bepayable at Bank’s office in Boston in lawful money of the United States ofAmerica without set-off, deduction or counterclaim.  Borrower authorizes Bank to charge itsdeposit account(s) with Bank for all payments hereunder.

 

(d) **COMMITMENTFEE- LINE OF CREDIT**. In addition to all other amounts due hereunder,so long as the Line of Credit remains available, the Borrower shall pay to theBank a Commitment Fee equal to one quarter percent per annum (.25%) of theunused Line of Credit.  For purposes ofcalculation of such fee, the “unused Line of Credit” shall mean the differencebetween the Credit Limit and the actual daily average of Revolving Loans(exclusive of Letters of Credit and Banker’s Acceptances) outstanding.  The Commitment Fee shall be payable inarrears on the last Business Day of each quarter for the immediately precedingquarter.

 

(e) **COMMITMENTFEE- EQUIPMENT LINE**. In addition to all other amounts due hereunder,so long as the Equipment Line remains available, the Borrower shall pay to theBank a Commitment Fee equal to one quarter percent per annum (.25%) of theunused Equipment Line.  For purposes ofcalculation of such fee, the “unused Equipment Line” shall mean the differencebetween the face amount of the Equipment Line and the actual daily averageEquipment Line balance outstanding.  TheCommitment Fee shall be payable in arrears on the last Business Day of eachquarter for the immediately preceding quarter, commencing December 31,2005 through and including the Conversion Date.

 

(f) **OTHERFEES AND CHARGES**. Any Letter of Credit issued under the Line ofCredit shall be subject to a letter of credit fee in the amount of 1/4% of theface amount of the Letter of Credit (minimum of $95.00) in addition to the Bank’scustomary set-up and processing fees. Any Banker’s Acceptance issued under the Line of Credit shall be subjectto a banker’s acceptance fee at the rate of 1.50% per annum above the Banker’sAcceptance rate of the Bank (minimum of $145.00) in addition to the Bank’scustomary set-up and processing fees.

 

(g) **LOANREQUESTS.** For ease of administration of the Loans, the Bank shallmake all Loans to the Borrower based upon the written, (or at Bank’s optionoral), request in accordance with the terms and conditions of this LoanAgreement of VISION- SCIENCES, INC. alone and each Borrower hereby confirmsthat any request for Loans or other advances of credit hereunder made byVISION- SCIENCES, INC. alone shall be binding upon all Borrowers. All Loansshall be credited by the Bank to the deposit account of VISION- SCIENCES, INC.unless another form of disbursement of Loans is expressly agreed in writing bythe Bank.

 

3. **CERTAINDEFINITIONS**.  Capitalizedterms used herein shall have the meanings set forth below or elsewhere in thisLoan Agreement, or if not defined herein, shall have the meanings ascribed to them in the Uniform Commercial Code,except that accounting and financial terms not otherwise defined herein shallhave the meanings ascribed to them in accordance with Generally AcceptedAccounting Principles (“GAAP”).

 

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**“Accounts****Receivable”**means all Borrower’s accounts, accountsreceivable, rental and lease payments receivable, contract rights, promissorynotes, bills, drafts, acceptances, instruments, documents, chattel paper andall other debts, obligations and liabilities in whatever form owing to Borrowerfrom any Person (as defined below) for goods sold by it or for servicesrendered by it, or however otherwise established or created, all guaranties andsecurity therefor, all right, title and interest of Borrower in the goods orservices which gave rise thereto, including rights to reclamation and stoppage intransit and all rights of an unpaid seller of goods or services; whether any ofthe foregoing be now existing or hereafter arising, now or hereafter receivedby or owing or belonging to Borrower.

 

**“Business Day”** means a day that banks in Boston,Massachusetts are open for the conduct of normal business. Any payments whichwould otherwise be due on a non-Business Day shall be adjusted to the firstfollowing day which is a Business Day.

 

**“Capital Expenditures”** means expenditures by the Borrower for thepurchase or lease of equipment and other goods which must be accounted for ascapital items, and not as expenses, pursuant to GAAP.

 

**“Collateral”** means all Accounts Receivable, Inventory,Equipment and Related Collateral and all other property (other than realproperty) of the Borrower or another Person, now owned or hereafter acquired,in which Bank is granted a Lien hereunder or under an agreement executed anddelivered in connection herewith, or which is designated as Collateral or inwhich Bank is granted a Lien to secure any of the Obligations hereunder, orpursuant to an agreement supplemental hereto or otherwise (whether or not suchagreement makes reference to this Loan Agreement or obligations of Borrowerhereunder).

 

**“Default”** meas an event or circumstance that with thepassing of time or giving of notice or both would become an Event of Default.

 

**“Disclosure Schedules”** means any of the schedules and exhibitsprovided by Borrower to Bank in connection with this Loan Agreement:

 

**“Equipment”** means Borrower’s machinery, equipment,furnishings, fixtures and other goods (as defined in Article 9 of theUniform Commercial Code) whether now owned or thereafter acquired by Borrowerand wherever located, all replacements and substitutions therefor or accessionsthereto and all proceeds thereof, and including, also without limitation, allproceeds of fire or other insurance covering the aforesaid property.

 

**“ERISA”** means the Employee Retirement IncomeSecurity Act of 1974, as amended.

 

**“Event of Default”** shall have the meaning ascribed to it in Section 12.

 

**“Indebtedness”** means,with respect to any Person: (i) all indebtedness for borrowed money or forthe deferred purchase price of property or services, and all obligations underleases

 

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which are or should be, under GAAP, recordedas capital leases, in respect of which such Person is directly or contingentlyliable as obligor, guarantor, endorser or otherwise, or in respect of whichsuch Person otherwise assures a creditor against loss, (ii) allindebtedness for borrowed money or for the deferred purchase price of propertyor services secured by (or for which the holder has an existing right,contingent or otherwise, to be secured by) any Lien upon property (includingwithout limitation accounts receivable and contract rights) owned by suchPerson, whether or not such Person has assumed or become liable for the paymentthereof, and (iii) all other liabilities or obligations which would, inaccordance with GAAP, be classified as liabilities of such Person.

 

**“Intangible Assets”** means intangible assets as defined inaccordance with GAAP.

 

**“Intellectual Property”** means any patents, trademarks and copyrightsand applications and pending registrations for any of the foregoing.

 

**“Inventory”** means all inventory of whatever name,nature, kind or description, all goods held for sale or lease or to befurnished under contracts of service, finished goods, work in process, rawmaterials, materials used or consumed by Borrower, parts, supplies, all wrapping, packaging, advertising,labeling, and shipping materials, devices, names and marks, all contractsrights and documents relating to any of the foregoing, whether any of theforegoing be now existing or hereafter arising, wherever located, now owned orhereafter acquired by  Borrower.

 

**“Lien”******means any mortgage, pledge, assignment, lien,charge, encumbrance or security interest of any kind whatsoever, or theinterest of a vendor or lessor under a conditional sale, title retention orcapital lease agreement.

 

**“Obligations”** means all loans, advances, debts,liabilities, obligations (including without limitation for reimbursement inconnection with guaranties and letters of credit), agreements, undertakings,covenants and duties owing or to be performed or observed by Borrower  to or in favor of Bank, of every kind anddescription (whether or not evidenced by any note or other instrument; for thepayment of money; arising out of this Loan Agreement or any other agreementbetween Bank and Borrower, or any other instrument of Borrower in favor ofBank; arising out of or relating to transactions described herein), direct orindirect, absolute or contingent, due or to become due, now existing or hereafterarising, including without limitation all interest, fees, charges, and amountschargeable to Borrower under Section 14; “Obligations” includes any swap transaction or other interest rateprotection transaction involving the Bank and the Borrower and all obligationsof the Borrower under any credit card line of credit or facility made availableto the Borrower and its employees and agents by the Bank.

 

**“PBGC”**** **means the Pension Benefit Guaranty Corporation.

 

**“Permitted Indebtedness”**means (i) Indebtedness of Borrower tothe Bank, (ii) subordinated debt, (iii) trade Indebtedness, customerdeposits and other unsecured liabilities, not including borrowed money,incurred in accordance with Borrower’s historical practices for goods andservices provided to the Borrower in the ordinary course of Borrower’sbusiness, (iv)

 

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Indebtedness for tax payments in the ordinarycourse, and accrued payroll items and reimbursable business expenses, (v) Indebtednesson account of borrowed money not to exceed at any time an aggregate amount of$250,000.00 (inclusive of Indebtedness described in (vi) of thisparagraph), and (vi) Indebtedness secured by Permitted Liens.

 

**“Permitted Liens”** means (i) landlord’s, carriers’, warehousemen’s,mechanics and other similar Liens arising by operation of law in the ordinarycourse of Borrower’s business and Liens arising by operation of law for taxesnot yet due and payable; (ii) Liens arising out of pledges or depositsunder workmen’s compensation, unemployment insurance, old age pension, socialsecurity, retirement benefits or other similar legislation; (iii) Liens infavor of the Bank in accordance with this Loan Agreement, (iv) purchasemoney Liens arising in the ordinary course of business up to an aggregate of$150,000.00 outstanding at any time (so long as the Indebtedness securedthereby does not exceed the lesser of the cost or fair market value of theproperty subject thereto and such Lien extends to no other property); and (v) Liensin existence on the date of this Loan Agreement to which the Bank has consentedand which are set forth in ***Schedule 5(g)***.

 

**“Person”** means any individual, partnership, firm,association, business enterprise, trust, estate, company, joint venture,limited liability company, governmental authority, corporation or other entity.

 

**“Plan”** means any employee plan subject toprovisions of Title IV of ERISA maintained for employees of Borrower, anysubsidiary of Borrower or any other trade or business under common control withBorrower within the meaning of Section 414(c)) of the Internal RevenueCode or the regulations thereunder.

 

**“Prime Rate”** means the rate per annum from time to timeannounced by Citizens Bank as its Prime Rate, it being understood that such rateis a reference rate, not necessarily the lowest, established from time to timewhich serves as the basis upon which effective interest rates are calculatedfor loans making reference thereto.

 

**“Related Collateral**” means all Borrower’s payment intangibles and general intangibles;(other than Intellectual Property); customer lists; goodwill; cash; depositaccounts; tax refunds, claims under insurance policies (whether or not proceedsof other Collateral); letter of credit rights; securities entitlements andinvestment property; rights of setoff; rights under judgments; commercial tortclaims and choses in action; computer programs and software; books and records,(including without limitation all electronically recorded data); contractrights; and all contracts and agreements to or of which it is a party orbeneficiary, whether any of the foregoing be now existing or hereafter arising,now or hereafter received by or belonging to Borrower.

 

**“Reportable Event”** means any reportable event as defined in Section 4043(c) ofERISA, other than an event as to which the 30 day notice period is waived byPBGC.

 

**“UCC” or “Uniform Commercial Code”** means the Uniform Commercial Code as ineffect in Massachusetts from time to time.

 

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4. **CONDITIONS PRECEDENT TO THE LOANS**.  The financing arrangements described in thisLoan Agreement shall not be effective and the Bank will have no obligation tomake any Loan until satisfaction by the Borrower and/or waiver in writing bythe Bank of the following conditions precedent:

 

(a)  Borrower shall have executed and deliveredthis Loan Agreement and the other loan documents and agreements contemplatedhereby and shall have opened its principal operating deposit accounts with theBank and executed.

 

(b) Borrower shall have executed and deliveredto the Bank a Revolving Note in the face amount of Two Hundred Fifty Thousandand 00/100 ($250,000.00) Dollars and an Equipment Note in the face amount of$750,000.00,each in form acceptable to the Bank.

 

(c) Borrower shall have provided the Bank witha listing of each of its business locations. Bank shall have confirmed the recording of UCC-1 financing statements ineach location where filing is required.

 

(d) Borrower shall have provided the Bank withevidence satisfactory to the Bank of the proper authorization of the financingtransactions and approval of the financing arrangements with the Bank by eachBorrower.

 

(e) Borrower shall have satisfied therequirements of this Loan Agreement with respect to maintenance of appropriateinsurance coverage.

 

(f) Borrower shall have provided the Bank withan Officer’s Certificate in form acceptable to the Bank confirming that allconditions precedent to the funding of the Loan have been satisfied and thatall of the representations and warranties in the Loan Agreement continue to betrue, correct and complete.

 

(g) Borrower shall have provided the Bank withan opinion as to the due existence of and authorization by each Borrower andenforceability of the Loan Documents against each Borrower from each Borrower’scounsel in form and substance acceptable to the Bank and its counsel.

 

5. **REPRESENTATIONSAND WARRANTIES**.  Each Borrowerrepresents and warrants (and at the time of each Loan hereunder shall be deemedto represent and warrant) to Bank that, except as provided in the DisclosureSchedules attached hereto:

 

(a) Borrower is a corporation duly organizedand validly existing in corporate good standing under the laws of thejurisdiction of its incorporation and is duly qualified to do business and isin good standing in every other state in which such qualification may benecessary by reason of the nature or location of Borrower’s assets oroperations, except where the failure to so qualify would not materially adverselyaffect the Borrower’s business or financial condition;

 

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(b) Borrowers’ exact legal names are as setforth in the preamble to this Loan Agreement. Borrower has not operated under any other name or used any other tradename in the last six years;

 

(c) The execution, delivery and performancehereof are within each Borrower’s corporate powers, have been duly authorizedby all necessary corporate action, require no action by or in respect of, orfiling (except for financing statements to be filed in connection with thisLoan Agreement) with, any governmental authority, and do not contravene orconstitute a default under any provision of applicable law or regulation or ofthe charter, by-laws or other constituent documents of such Borrower or of anyjudgment, order, decree, injunction or material agreement, except as to whichrequired waivers or consents have been received, or by which it or any of itsproperties may be bound, or result in creation or imposition of any Lien on anyof its assets except in favor of Bank;

 

(d) This Loan Agreement has been duly executedand delivered by and constitutes a valid and binding agreement of eachBorrower, enforceable against it in accordance with its terms, except asenforceability may be limited by (i) bankruptcy, insolvency or othersimilar law affecting creditors’ rights generally, or (ii) laws relatingto the availability of specific performance, injunctive relief or otherequitable remedies;

 

(e) Each Borrower’s audited financialstatements as of March 31, 2005 and interim financial statements through June 30,2005 which have been provided to the Bank have been prepared in accordance withGAAP; since the date of the interim financial statements, there has occurred nomaterial adverse change in the business or financial condition of the Borroweror its assets which would make the financial statements inaccurate ormisleading in any material manner;

 

(f) Each Borrower’s projections which have beenprovided to the Bank have been prepared by the Borrower based upon reasonablefinancial and business assumptions and in accordance with sound accountingpractices.  Since the date of theprojections, there has occurred no material adverse change in the assumptionsunderlying the projections or otherwise which would make the projectionsinaccurate or misleading in any material manner;

 

(g) Each Borrower’s financial statements whichshall be from time to time furnished to Bank have been and will be prepared inaccordance with GAAP applied on a basis consistent with that of prior financialperiods and are true and correct and fairly present in all material respectsits financial position as at the close of business for the date(s) thereof andthe results of its operations during the period(s) covered thereby, except forunaudited financial statements prepared by the Borrower where certaininformation and footnote disclosures normally contained in financial statementsprepared in accordance with GAAP have been omitted and where year-endadjustments may be necessary.  Borrowerhas no liabilities, contingent or otherwise, involving material amounts whichare not disclosed in said statements or the notes thereto, or described in ***Schedule 5(g)***;

 

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(h) Each Borrower owns, or at the closing shallown, all of the assets reflected in the financial statements provided to theBank and such assets together with any assets acquired since such date,including without limitation the Collateral, are subject to no Liens exceptPermitted Liens;

 

(i) Each Borrower’s charter documents have beenduly filed and are in proper order.  Allcapital stock issued by it and outstanding has been duly issued and is fullypaid and non-assessable. All such capital stock is owned by those individualsand entities listed in the Disclosure Schedules. All its books and records areaccurate and up-todate in all material respects;

 

(j) Each Borrower has made or filed all tax returns,reports and declarations relating to any material tax liability, or required byany jurisdiction to which they are subject; has paid all taxes shown ordetermined to be due thereon through the date of this Loan Agreement; and eachBorrower shall make adequate provision for the payment of all taxes andpreparation and filing of all tax returns in respect of subsequent periods;

 

(k) Each Borrower is (i) subject to no charteror other legal restriction, or any judgment, award, decree, order, governmentalrule or regulation or contractual restriction which could have a materialadverse effect on its financial condition, business or prospects, and (ii) incompliance with its charter documents, all material contracts by which it orany of its properties are, or may be bound and all applicable laws, rules andregulations (including without limitation those relating to environmentalprotection) other than laws, rules and regulations, the validity orapplicability of which it is contesting in good faith or provisions of any ofthe foregoing the failure to comply with which cannot reasonably be expected tomaterially adversely affect its financial condition, business or prospects orthe value of the Collateral;

 

(l) Except as disclosed in the financial statementspreviously provided to the Bank, there is no action, suit, proceeding orinvestigation pending or, to its knowledge, threatened against or affectingeither Borrower, or any of its  assetsbefore or by any court or other governmental authority which, if determinedadversely to such Borrower, would have a material adverse effect on itsfinancial condition, business or prospects or the value, title or extent of anyCollateral;

 

(m) Each Borrower is in compliance with ERISA in allmaterial respects and  maintains notax-qualified defined benefit plans which would give rise to any materialunfunded vested liability;

 

(n) Each Borrower’s principal executive office andthe office where it keeps its records concerning its Accounts Receivable andother assets is as set forth in the Preamble hereto.  It has no other office or place of businessor place where its tangible or intangible personal property is located;

 

(o) Each Borrower’s Inventory is (and has been sincethe date of this Loan Agreement) valued at the lower of its cost or marketvalue (i) for annual financial reporting purposes, on the basis of firstin first out consistent with the basis applied for prior financial periods, and(ii) for

 

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purposes of interim financial reporting, onthe basis of first in first out (adjusted to reflect the interim character ofthe information reported);

 

(p) Each Borrower has disclosed to the Bank itscurrent credit and refund policies, and it does now and will continue to applysuch policies consistently in the conduct of its business and agrees that itshall provide the Bank with prior written notice of any change in such policyor its implementation; and

 

(q) After giving effect to the transactionscontemplated hereby,  the aggregate valueof all assets and properties of each Borrower, at a fair valuation, will begreater than the total amount of its liability on claims, and the aggregatepresent fair salable value of its assets will be greater than the amount thatwill be required to pay its probable liability on its existing debts as theybecome absolute and mature; each Borrower has (and has no reason to believethey will not have) sufficient capital for the conduct of its businesses;neither Borrower intends to incur and does not believe it has incurred, debtsbeyond its ability to pay as they mature.

 

6.  **BORROWER’S REPORTS AND NOTICES**.

 

(a)  Borrower shall provide the Bank with copies of the Borrower’s 10-Qreports within 45 days of each fiscal quarter end of the Borrower and willprovide the Bank with a copy of its 10-K report within 90 days of Borrower’sfiscal year end, together with a compliance certificate at each quarter endcertifying Borrower’s compliance with the financial covenants and otherprovisions of this Loan Agreement and ancillary documents.

 

(b)   Borrowerwill deliver to Bank promptly, such other information concerning each Borrowerand guarantor, the Collateral, the operation of Borrower’s business or itsfinancial condition and copies of such governmental filings and otherdocumentation as Bank may from time to time reasonably request;

 

(c)   Borrowerwill deliver to Bank immediately, notice of: (i)  any Event of Default orany event which with the passage of time or giving of notice or both wouldconstitute an Event of Default as defined herein; (ii) any change of itskey officers or directors, change of location of its principal offices, changeof Borrower’s name or business structure, any sale or purchase out of theordinary course of  Borrower’s businessand any other material adverse change in the business or financial affairs ofBorrower or any change in the legal status of Borrower;  (iii) a change in a basis for valuingInventory from that shown herein; (iv) the institution or commencement ofany action, suit, proceeding or investigation against or affecting Borrower orany of its assets which, if determined adversely to Borrower, could have amaterial adverse effect on the financial condition, business or prospects ofBorrower or the value, title or extent of the Collateral;  (v) any judgment, award, decree, orderor determination relating thereto against Borrower in excess of $50,000.00 forwhich no insurance is available; (vi) the imposition or creation of anyLien, other than Permitted Liens against any asset of Borrower;  (vii) any known material release orthreat of material release of hazardous or toxic chemicals, materials or oilfrom any site owned or operated by Borrower or the incurrence of any expense orloss in connection therewith or upon Borrower’s obtaining knowledge of anyinvestigation, action or the

 

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incurrence of any expense or loss by anygovernmental authority in connection with the containment or removal of anyhazardous or toxic chemical, material or oil for which expense or loss Borrowermay be liable or potentially responsible; (viii) any material loss ordestruction of Collateral or other assets whether or not covered by insurance;and  (ix) any dispute with respectto or acceleration of Indebtedness involving an amount in excess of $50,000.00.

 

(d)  Borrower will deliver to Bank immediately after receipt or filing, acopy of (i) any notice Borrower may receive from the PBGC relating to thePBGC’s intention to terminate or appoint a trustee to administer any Plan and (ii) anyreport or notice relating to any Reportable Event which Borrower may file underERISA with the PBGC;

 

(e ) if requested by Bank, Borrower will deliver toBank within five (5) days after the accrual in accordance with applicablelaw of Borrower’s obligation to make deposits for FICA and withholding taxes,evidence satisfactory to Bank that such deposits have been made as required.

 

7. **BANK’S REPORTS**.After the end of each month,  Bank willrender to Borrower a statement of Borrower’s Loan accounts in accordance withthe Bank’s customary practices.  Absentmanifest error, each such statement shall be considered to be correct and tohave been accepted by Borrower and shall be presumptively binding upon Borrowerin respect of all charges, debits and credits of whatever nature containedtherein under this Loan Agreement, and the closing balance shown therein,unless Borrower notifies Bank in writing of any discrepancy within sixty (60)days from the date of any such statement.

 

8. **BORROWER’SAFFIRMATIVE COVENANTS**.  EachBorrower will, and will cause each of its subsidiaries to:

 

(a)  maintain property and liability insurancewith responsible insurance companies (and with deductibles) reasonablysatisfactory to Bank in such amounts and covering such risks as is usuallycarried by companies engaged in similar businesses and owning similarproperties in the same general areas as Borrower operates;

 

(b) maintain insurance naming Bank as losspayee with responsible insurance companies (and with deductibles) reasonablysatisfactory to Bank covering Borrower’s Inventory, Equipment and otherinsurable Related Collateral, in such amounts as is usually carried bycompanies engaged in similar businesses, and deliver to Bank copies of suchinsurance policies (and all renewals thereof) together with lender’s losspayable endorsements naming Bank as secured party, executed by the insurer(s),such policies to provide that coverage may not be decreased or terminatedwithout prior notice to the Bank;

 

(c) maintain its  existence in good standing, and itsqualification to do business in good standing in every state in which suchqualification is necessary by reason of the nature or location of its assets oroperations, except where the failure to so qualify would not have a materialadverse effect upon the Borrower’s business or financial condition, and complywith its charter documents, all contractual requirements by which it or any ofits properties may be bound and all

 

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applicable laws, rules and regulations(including without limitation ERISA and those relating to environmentalprotection) other than laws, rules or regulations the validity orapplicability of which the Borrower shall contest in good faith or provisionsof any of the foregoing the failure to comply with which cannot reasonably beexpected to materially adversely affect the financial condition, business orprospects of Borrower or the value, title or extent of the Collateral;

 

(d) continue to engage primarily in its presentbusiness and maintain and preserve all of its properties necessary for theconduct thereof in good working order and condition, ordinary wear and tearexcepted;

 

(e) maintain current and accurate stock, costand sales records of its Inventory, accurately and sufficiently itemizing anddescribing the kinds, type and quantities of Inventory and the cost and sellingprices, all of which records shall be continuously available to Bank forinspection;

 

(f) pay and discharge all taxes, assessments andgovernmental charges or levies imposed upon it or upon its income or property,including without limitation taxes, assessments, charges or levies relating toreal and personal property, the Collateral, franchises, income, unemployment,old age benefits, withholding, sales or use, prior to the date on whichpenalties attach thereto, and all lawful claims (whether or not relating to theforegoing), which if unpaid,  might giverise to a Lien upon any material property of Borrower, except any of theforegoing which is being contested in good faith and by appropriate proceedingsand for which Borrower has established adequate reserves; and

 

(g) maintain cash in deposit orinterest-bearing deposit accounts with the Bank in the amount of the greater of$2.0 million or 50% of Borrower’s total cash, cash equivalents and marketablesecurities.

 

9. **BORROWER’SNEGATIVE COVENANTS**.  EachBorrower will not, and will not permit its subsidiaries or guarantors to,without the prior written consent of Bank at any time:

 

(a) Sell, assign, exchange or otherwise disposeof any of the Collateral or any interest therein to any other Person (otherthan Collateral consisting of (i) scrap, waste, defective goods and thelike; (ii) obsolete goods; (iii) finished goods sold or leased in theordinary course of business; and (iv) other personal property of theBorrower, except in good faith, arm’s length, transactions in the ordinary andusual course of Borrower’s business in accordance with Borrower’s pastpractices);

 

(b) Create, permit to be created or suffer toexist any Lien upon any of the Collateral or any other property of Borrower(including without limitation thereof any Lien or other encumbrance of itsIntellectual Property) , now owned or hereafter acquired, except for PermittedLiens;

 

(c) Pay any dividends on or make anydistribution on account of any class of Borrower’s capital stock in cash or inproperty; or redeem, purchase or otherwise acquire, directly or indirectly, anyof such shares or equity interests;

 

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(d) Enter into any lease or other transactionwith any shareholder, officer or affiliate on terms any less favorable thanthose which might be obtained at the time from Persons who are not such ashareholder, officer or affiliate;

 

(e) Make any loans or advances to any Personother than advances to employees and officers for reimbursable businessexpenses in the ordinary course of business;

 

(f) Assume, guaranty, endorse or otherwisebecome directly or indirectly liable in respect of (including withoutlimitation, by way of agreement, contingent or otherwise, to purchase, providefunds to or otherwise invest in a debtor or otherwise to assure a creditoragainst loss), any Indebtedness (except guaranties by endorsement ofinstruments for deposit or collection in the ordinary course of business) ofany Person;

 

(g) Use any loan proceeds to purchase or carryany “margin stock” (as defined in Regulation U of the Board of Governors of theFederal Reserve System) or invest in or purchase any stock or securities of anyPerson, except: (i) readily marketable direct obligations of, orobligations guarantied by, the United States of America or any agency thereof, (ii) timedeposits with the Bank, (iii) certificates of deposit issued by the Bank, (iv) otherinvestments made available to the Borrower through the Bank;

 

(h) Incur any material contingent liabilitiesother than contingent liabilities in existence on the date of this LoanAgreement and disclosed in writing to the Bank

 

(i) Sell, transfer or otherwise dispose of anystock or other equity interests of, or all or any material portion of theassets of Borrower or of any subsidiary of Borrower;

 

(j) Merge or consolidate with or into anycorporation, or enter into any joint venture or partnership with any person,firm or corporation; convey, lease or transfer or otherwise dispose of anysubstantial part of its assets or business, other than sales and leases ofproperty in the ordinary course of business (whether in one or more transactions),or enter into any agreement to acquire the assets of business of any otherPerson;

 

(k) Incur any Indebtedness other than PermittedIndebtedness; or

 

(l) Create or organize any subsidiary or affiliatecorporation or other affiliated business entity to which the Borrower’sbusiness, property, resources, employees or directly related businessopportunities are loaned, diverted or otherwise transferred; or permit anychange of more than thirty (30.0%) percent in the equity ownership of eitherBorrower from the equity ownership on the date of this Loan Agreement; providedthat if Bank consents to the formation of any subsidiary, Bank may as acondition to such consent require that such subsidiary become a guarantor ofthe Obligations.

 

10. **FINANCIALCOVENANTS**.  None

 

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11. **ADDITIONALCOVENANTS AS TO FURTHER SECURITY AND ASSURANCES**.

 

(a) Borrower will notify Bank, at least thirty(30) days prior to any such event, of any change in Borrower’s exact legalname, any change in its place(s) of business or locations(s) of Inventory,Equipment or other Related Collateral as set forth in Section 5 orBorrower’s establishment of any new place of business or location of Inventory,Equipment or other Related Collateral or office where Borrower’s recordsconcerning Accounts Receivable and other assets are kept.

 

(b) At Bank’s request, each Borrower at itsexpense (i) will promptly and duly execute and deliver such documents andassurances and take such actions as may be necessary or desirable or as Bankmay reasonably request in order to correct any defect, error or omission whichmay at any time be discovered or in order to more effectively carry out theintent and purpose of this Loan Agreement and to establish, perfect and protectBank’s security interest, rights and remedies created or intended to be createdhereunder and (ii) without limiting the generality of the above, will joinwith Bank in executing notices appropriate under applicable Federal, state orapplicable foreign law in form reasonably satisfactory to Bank and filing samein all public offices and jurisdictions wherever and whenever reasonablyrequested by Bank. Each Borrower expressly authorizes the Bank to prepare andfile in any appropriate filing office Uniform Commercial Code financingstatements, continuation statements and amendments reflecting the securityinterests granted to the Bank hereunder or under any other documents,instrument or agreement.

 

(c) Each Borrower shall maintain all of its principaldepository accounts with the Bank and, if the Bank so requires after occurrenceof an Event of Default, shall enter into a lockbox agreement with theBank.  If a lockbox is required, allremittances and payments to the Borrower shall be made through thelockbox.  In addition, each Borrowerwill, immediately upon receipt of all checks, drafts, cash and otherremittances in payment of any Inventory sold or on account of such Borrower’sAccounts Receivable (including without limitation tax refunds, insuranceproceeds and notes), hold the same in trust for Bank and deliver the same toBank in the form received together with such Borrower’s endorsement thereon where necessary to permit collectionthereof.  Bank will credit all suchpayments (conditional upon final collection) against interest accrued on orprincipal of loans outstanding hereunder. The order and method of application shall be in Bank’s sole discretionand proceeds which in Bank’s discretion are not so applied shall be credited toBorrower’s deposit account(s) with Bank.

 

(d) Bank will, at any time after an Event ofDefault have the right to take physical possession of the Collateral and tomaintain such possession on Borrower’s premises or to remove the Collateral orany part thereof to such other places as Bank may desire.  If Bank exercises such right, each Borrowershall upon Bank’s request assemble the same and make it available to Bank at aplace reasonably convenient to Bank.  Ifany Inventory or Equipment is in the possession or control of any of Borrower’sagents or processors, Borrower shall at Bank’s request at any time whetherbefore or after an Event of Default notify them of Bank’s security interesttherein and, at Bank’s request, instruct them to hold the same for Bank’s accountand subject to Bank’s instructions.

 

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(e) Each Borrower shall perform any and allfurther steps reasonably requested by Bank to perfect Bank’s security interestin Inventory or Equipment, such as placing and maintaining signs, appointingcustodians, maintaining stock records and transferring Inventory towarehouses.  A physical listing of allInventory, wherever located, shall be taken by each Borrower at least annuallyand whenever requested by Bank.

 

(f) Bank may (i) at any time, using itscustomary practices and procedures with respect to secured loans, in its ownname or in the name of others communicate with account debtors in order toverify with them to Bank’s satisfaction the existence, amount and terms of anyAccounts Receivable and the absence of any reductions, discounts, defenses oroffsets with respect thereto or (ii) after an Event of Default, notifyaccount debtors that Collateral has been assigned to Bank and that payments bysuch debtors shall be made directly to Bank; at Bank’s request each Borrowerwill notify any or all such debtors of such assignment, give instructionsand/or indicate on billings to such debtors that its Accounts Receivable shallbe paid to Bank and/or supply such debtors with a copy of this Loan Agreement.

 

(g) Bank shall, after an Event of Default havefull power, in its own name or that of either Borrower, to collect, endorse, compromise, settle, sell or otherwisedeal with any or all of the Collateral or proceeds thereof.  Each Borrower hereby makes, constitutes andappoints any officer or agent of the Bank as its true and lawfulattorney-in-fact, with power of substitution, to endorse the name of Borroweror any of its officers or agents upon any notes, checks, drafts, money orders,or other instruments of payment (including under any policy of insurance onCollateral) or Collateral that may come into possession of Bank in full or partpayment of any amounts owing to Bank; to sign and endorse its name or any of itsofficers or agents upon any invoice, freight or express bill, bill of lading,storage or warehouse receipts, drafts against debtors, assignments,verifications and notices in connection with Accounts Receivable, and anyinstruments or documents relating thereto or to such Borrower’s rights therein;to give written notice to such offices and officials of the United StatesPostal Service to effect such change or changes of address so that all mailaddressed to Borrower may be delivered directly to Bank; to take any and allother actions necessary or appropriate to collect, compromise, settle, sell orotherwise deal with any or all of the Collateral or proceeds thereof; and toobtain, adjust, settle and cancel any insurance referred to herein; herebygranting to each said attorney-in-fact or his substitute full power to do anyand all things necessary or appropriate to be done in and about the premises asfully and effectually as either Borrower might or could do, and herebyratifying all that any said attorney-in-fact or his substitute shall lawfullydo or cause to be done by virtue hereof; provided, however, that except to theextent reasonably necessary in connection with Bank’s usual and good faithadministration of the Loans, the foregoing powers and appointment shall not beexercised until after the occurrence and during the continuance of an Event ofDefault.

 

(h) Each Borrower hereby assigns to Bank allsums, including without limitation return of premiums, which may become payableunder any policy of insurance on Collateral and shall direct each insurancecompany issuing any such policy to make payment thereof directly to Bank;provided that in the case of insurance proceeds as a result of a casualtyloss,  in the absence of a

 

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continuing Event of Default by the Bank, andprovided that such proceeds are adequate in the Bank’s judgment to repair orreplace the property damaged, each Borrower may use such proceeds to replace orrestore such property.

 

(i)  If any Accounts Receivable arise fromcontracts with the United States or any department, agency or instrumentalitythereof, each Borrower will immediately notify Bank thereof and execute anyinstruments and take any steps requested by Bank in order that all monies dueand to become due thereunder shall be assigned to Bank and notice thereof givento the Federal authorities under the Federal Assignment of Claims Act.

 

(j)  In itssole discretion, Bank may: (i) if either Borrower shall fail to do so,discharge taxes and Liens levied or placed on Collateral; (ii) if eitherBorrower shall fail to do so, pay for insurance thereon or the maintenance andpreservation thereof; or (iii) if either Borrower shall fail to makedeposits in respect of FICA and withholding taxes referred to in Section 5(j),make such deposits or pay such taxes, in whole or in part, or set up suchreserves as Bank shall in its sole discretion deem necessary in respect of suchBorrower’s liability therefor.  Anyamount so paid, deposited or reserved for shall constitute a Loan for allpurposes hereunder.  Nothing herein shallbe deemed to obligate Bank to do any of the foregoing and the making of any oneor more such payments, deposits or reserves shall not constitute an agreementby Bank to take any further or similar action or a waiver of any right of Bankhereunder.

 

(k) Each Borrower will at all times keep accuraterecords of the Collateral and will permit Bank or its agents or representativesat any reasonable time during normal business hours and upon reasonable noticeto the Borrower (other than during and after occurrence of an Event ofDefault  in which case no notice shall berequired), and from time to time to visit Borrower’s places of business,without hindrance or unreasonable delay, to inspect Inventory and examine,check, audit and make copies and abstracts from each Borrower’s records andbooks of account (including without limitation minutes, and records, journals,orders, receipts and correspondence relating to Collateral, account debtors,transactions unrelated to Collateral and each Borrower’s general financialcondition, business and affairs); to immediately provide Bank with copies andextracts of information from its books and records; to remove any of such booksand records temporarily for the purpose of having copies made, if eitherBorrower fails to promptly provide Bank with copies and extracts of informationfrom its books and records; and to discuss with any of either Borrower’sappropriate directors, officers and employees the Collateral and each Borrower’sgeneral financial condition, business and affairs.  In connection with any such audits by Bank orits representatives, each Borrower agrees to pay Bank its current audit fee,plus travel and other reasonable out of pocket expenses.

 

(1) Subject to the rights of landlords of anypremises occupied by Borrower, each Borrower hereby grants to Bank, for a termcommencing on the date of entry upon the premises of the Borrower for purposesof disposition of its Collateral following an Event of Default and continuingso long as any of the Obligations remain outstanding, at a rental of $1.00 forsuch entire term, the right to the use of all premises or places of business ofeach Borrower where any Collateral may be located. Borrower agrees to usecommercially reasonable efforts (but not including any obligation to pay moneytherefor) to obtain landlord’s consents and waivers

 

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(“Landlord Waivers”) for the premises at 40Ramloand Road, Orangeburg, New York and 9 Strathmore Road, Natick,Massachusetts; provided however, that the failure to obtain such LandlordWaivers after exercising such efforts shall not constitute an Event of Defaulthereunder.

 

(m) Each Borrower hereby grants to Bank for a termto commence on the date of this Loan Agreement and continuing thereafter untilall Obligations of any kind or character owed to Bank are fully paid anddischarged, a non-exclusive, irrevocable, royalty-free (to each Borrower andits affiliates) license in connection with the Bank’s exercise of its rightshereunder, to use, apply or affix any trademark, serviceman, tradename, logo orthe like and to use any patents, franchises, licenses, and goodwill in whicheither  Borrower now or hereafter hasrights, which license may be used by Bank, only after an Event of Default.  This license shall be in addition to, and notin lieu of, the inclusion of all of each Borrower’s trademarks, servicemarks,tradenames, logos, goodwill, patents, franchises and licenses in the RelatedCollateral.

 

(n) If any Accounts Receivable are at any timeevidenced by promissory notes, trade acceptances or other instruments for thepayment of money, Borrower will immediately deliver the same to Bankappropriately endorsed to Bank’s order and, regardless of the form of suchendorsement, each Borrower hereby waive presentment, demand, notice ofdishonor, protest, notice of protest and all other notices with respectthereto.

 

(o) If any of either Borrower’s Inventory is held byany customer on consignment, then such Borrower will promptly so notify theBank and will protect its (and Bank’s) interest therein by filing financingstatements against such customer and sending prior notification of theconsignment to such customer’s secured lenders (if any) and will furnish Bankwith copies of such filings and notices. Each Borrower shall make certain that any such consigned Inventory issegregated from such customer’s other property and is clearly designated as theproperty of the Borrower.  Each Borrowershall assign any such financing statements to the Bank promptly upon request ofthe Bank.

 

(p) In the event of the sale, exchange ordisposition of any of the Collateral or any interest therein (and no such sale,exchange or other disposition is hereby authorized or consented to, except asprovided in Section 9(a)), Bank’s security interest shall neverthelesscontinue in such****Collateral and inall proceeds thereof and the proceeds shall be paid over to Bank immediately,and shall be applied at Bank’s option to the payment of the Obligations; andBank’s receipt of any such proceeds shall not be deemed or construed to be anauthorization of or consent to any such sale, exchange or other disposition.

 

(q) Any and all deposits or other sums at anytimecredited by or due from Bank to either Borrower (other than accounts used for payroll purposes) shall at alltimes constitute security for obligations and may be set-off against the  Obligations at any time whether or not theyare then due or other security held by Bank is considered by Bank to beadequate.   Bank shall be entitled topresume, in the absence of clear and specific written notice to the contraryhereinafter provided by Borrower  to Bankthat any and all deposits maintained by each Borrower with Bank (other thanaccounts used for payroll purposes) are general accounts as to which no personor entity other than Borrower or has any legal or equitable interestwhatsoever.

 

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(r)  It isexpressly understood and agreed that all of the rights of Bank contained inthis Loan Agreement shall likewise apply, insofar as applicable, to anymodification of or supplement to this Loan Agreement and to any otheragreements between Bank and Borrower. Any default of this Loan Agreement by either Borrower or failure to curesuch default beyond any applicable grace or cure period, shall constitute,likewise, a default by either Borrower and/of any other existing agreement withBank, and any default by Borrower and/of any other agreement with Bank andfailure to cure such default beyond any applicable grace or cure period, shallconstitute a default of this Loan Agreement. All Obligations of each  Borrowerto Bank shall, at the option of the Bank,  become due and payable when payments becomedue and payable hereunder or upon termination of the Loan Agreement for anyreason.

 

12. **EVENTS OFDEFAULT**.  Each Borrower andBank acknowledge and agree that, in the discretion of the Bank, all Loans shallbe immediately due and payable after an Event of Default.  After the occurrence of one or more Events ofDefault, the Bank shall have all of the other rights and remedies set forth inthis Loan Agreement in addition to remedies otherwise available to a securedparty at law or in equity, provided that all Obligations shall automaticallybecome immediately due and payable without demand or notice on occurrence ofone of the events described in 12(f) or 12(g):

 

(a) non-payment when due of any of theObligations which continues for two (2) days;

 

(b) failure by Borrower to perform, discharge, observe or comply with any Obligation(other than payment Obligations and the other separately enumerated Events ofDefault contained in this Section 12) in accordance with the terms thereofand continuation of such failure for fifteen (15) days after sending of writtennotice by Bank;

 

(c) if any representation, warranty orstatement of  Borrower to Bankheretofore, now or hereafter made in connection with any Obligation (includingwithout limitation any made in any document, certificate or reporting providedby  Borrower hereunder) is found to havebeen false or misleading in any material respect as of the time when made;

 

(d) occurrence of any event of default beyondany applicable grace or cure period, under any other instrument evidencing orgoverning Indebtedness of  Borrower(other than Obligations) now or hereafter outstanding;

 

(e)  Borrower’s liquidation, termination,dissolution or ceasing to carry on actively any substantial part of its currentbusiness;

 

(f) commencement by  Borrower of a voluntary proceeding seekingrelief with respect to itself or its debts under any bankruptcy, insolvency orother similar law, or seeking appointment of a trustee, receiver, liquidator orother similar official for it or any substantial part of its assets; or itsconsent to any of the foregoing in an involuntary proceeding against it; or ifBorrower shall generally not be paying its debts as they become due or admit inwriting its inability to do so; or an assignment for the benefit of, or theoffering to or entering into by  Borrowerof any composition, extension, reorganization or other agreement or arrangementwith, its creditors;

 

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(g) commencement of an involuntary proceedingagainst  Borrower seeking relief withrespect to it or its debts under any bankruptcy, insolvency or other similarlaw, or seeking appointment of a trustee, receiver, liquidator or other similarofficial for it or any substantial part of its assets, which proceeding remainsundismissed and unstayed for forty-five (45) days; or entry of an order forrelief against  Borrower in any suchproceeding;

 

(h) service upon Bank of a writ naming Bank astrustee for  Borrower or of any othersimilar process of attachment in an amount in excess of $100,000.00;

 

(i) entry of any uninsured judgment orjudgments against  Borrower in an amountin excess of $100,000.00;

 

(j) attachment of any Lien, other than a PermittedLien, upon property of  Borrower withoutBank’s prior written consent, which Lien is not discharged or bonded overwithin thirty (30) days of its attachment in an amount in excess of$100,000.00;

 

(k) entry of any court order which enjoins,restrains or in any way prevents Borrower from conducting all or any material part of its business;

 

(l) any loss, theft, damage or destruction to or ofany material asset(s) of Borrower in an aggregate amount in excess of$100,000.00 not covered by insurance(above customary deductibles);

 

(m) reclamation or repossession of, or any action by a creditor to reclaimor repossess, any material asset(s) of Borrower in an aggregate amount in excess of $100,000.00 not dismissedor stayed within thirty (30) days;

 

(n) if there shall occur and be continuing for morethan sixty (60) days any Reportable Event which constitutes grounds fortermination of, or for appointment by a United States district court of atrustee to administer, any Plan; if the PBGC shall institute proceedings to terminateor to appoint a trustee to administer any Plan; if a United States districtcourt shall appoint a trustee to administer any Plan; or if any Plan shall beterminated, in each of the foregoing circumstances, giving rise to liabilitieshaving a material adverse effect on Borrower’s financial condition;

 

(o) termination of, failure to make any paymentrequired under or any other default under any guaranty of or other instrumentor agreement securing any of the Obligations, after expiration of any applicablegrace or cure periods; or

 

(p) if  thereshall occur a material adverse change in the business or financial conditionof  Borrower, its subsidiaries and/orproperties resulting in  the Bank’s goodfaith determination that the prospects for timely or full payment orperformance of any Obligation have been materially impaired or that the valueof its Collateral has been materially diminished.

 

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13. **BANK’S RIGHTSAND REMEDIES AFTER AN EVENT OF DEFAULT**.  (a) Following the occurrence and duringthe continuance of a Default or an Event of Default, Bank may decline to makeany additional Loans or other credits hereunder.  After an Event of Default, (i) allObligations shall become immediately due and payable at Bank’s option uponnotice to Borrower, except that such acceleration shall be automatic and shallnot require action or notice of any kind after occurrence of an Event ofDefault described in Section 12(f) or 12(g); (ii) each Borrowershall be obligated to deliver to Bank cash collateral in an amount equal to theaggregate amounts then undrawn on all letters of credit or outstanding onacceptances issued by Bank for such Borrower’s account; (iii) Bank mayproceed to enforce payment of any of the foregoing and shall have and mayexercise any and all rights under the Uniform Commercial Code or which areafforded to Bank herein or otherwise; and (iv) all Obligations shall bearinterest payable on demand at the rate per annum which is the sum of the PrimeRate plus Two percent (2.0%) (the “Default Rate”); and (v) Bank may sellall or any part of the Collateral in one or more public or private sales, atsuch times and prices and upon such terms as Bank deems advisable in its solediscretion.  Any requirement ofreasonable notice shall be met if such notice is mailed postage prepaid to eachBorrower at its address set forth herein at least ten (10) days before thetime of sale or other disposition.  Bankmay be the purchaser at any such sale, if it is public, and in such event Bankshall have all rights of a good faith, bona fide purchaser for value from asecured party after default.  Theproceeds of any sale may be applied (in whatever order and manner Bank electsin its sole discretion) to all costs and expenses of sale (including withoutlimitation reasonable attorneys’ fees and disbursements) and to the payment ofObligations, and any remaining proceeds shall be applied in accordance with Article 9of the Uniform Commercial Code.  EachBorrower shall remain jointly and severally liable to Bank for any deficiency.

 

(b)   In addition to all of the other rights andremedies available to the Bank, each Borrower expressly consents to theappointment of a receiver as requested by the Bank in its sole discretion for itsproperties and business in any state or federal court proceeding oradministrative proceeding, subject to court approval.  No Borrower will take action to contest,object to or otherwise interfere with the request for or appointment of areceiver (except that each Borrower will respond to questions of the Court andwill respond to lawful process in connection with any request to appoint areceiver) and each Borrower shall cooperate fully in making all of its booksand records available to a receiver and in giving such receiver dominion andcontrol over all of its properties, business records and business which aresubject to appointment of a receiver.  Ifthe Bank requests the appointment of a receiver for any Borrower, such Borrowerwill promptly execute all documents required by the Bank to evidence itsconsent to such appointment.

 

(c)   Inthe event that any Borrower shall: (i) file with any bankruptcy court ofcompetent jurisdiction or be the subject of any petition under the BankruptcyCode; or (ii) be the subject of any order for relief issued under theBankruptcy Code or similar relief under any present or future federal or stateact or law relating to bankruptcy, insolvency or other relief for debtors,then, subject to court approval, on two business days notice Bank shallthereupon, upon Bankruptcy Court approval and, subject to the right of othercreditors of such Borrower to object, be entitled to, and each Borrowerirrevocably consents to, relief from any automatic stay imposed by Section 362of the Bankruptcy Code, or otherwise, on or against the exercise of the rightsand remedies

 

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otherwise available to the Bank and eachBorrower hereby irrevocably waives its rights to object to such relief.

 

14. **ATTORNEYSFEES, INDEMNIFICATION, ETC**. (a) Borrower shall pay to Bank ondemand any and all reasonable counsel fees and other expenses incurred by theBank in connection with the preparation, interpretation, enforcement,administration, or amendment of this Loan Agreement, documents relating theretoor modifications thereof, and any and all expenses, including, but not limitedto, a collection charge on all Accounts collected, all reasonable attorneys’fees and expenses, and all other expenses of like or unlike nature which may beexpended by the Bank to obtain or enforce payment of any Account Receivableeither as against the account debtor, any Borrower or any guarantor or suretyof any Borrower or in the prosecution or defense of any action or concerningany matter growing out of or connected with the subject matter of this LoanAgreement, the Obligations or the Collateral or any of Bank’s rights orinterests therein or thereto, including, without limiting the generality of theforegoing, any counsel fees or expenses incurred in any bankruptcy orinsolvency proceedings, and all costs and expenses incurred or paid by Bank inconnection with the administration, supervision, protection or realization onany security held by Bank for the debt secured hereby, whether such securitywas granted by Borrower or by any other person primarily or secondarily liable(with or without recourse) with respect to such debt, and all costs andexpenses incurred by Bank in connection with the defense, settlement or satisfactionof any action, claim or demand asserted against Bank in connection with thedebt secured hereby, all of which amounts shall be considered advances toprotect Bank’s security, and shall be secured hereby.  At its option, and without limiting any otherrights or remedies, Bank may at any time, if either Borrower  fails to do so, pay or discharge any taxes,liens, security interests or other encumbrances at any time levied against orplaced on any of the Collateral, and may procure and pay any premiums on anyinsurance required to be carried by any Borrower and provide for themaintenance and preservation of any of the Collateral, and otherwise take anyaction reasonably deemed necessary to Bank to protect its security, and allamounts expended by Bank in connection with any of the foregoing matters,including reasonable attorneys, fees, shall be considered Obligations ofeach  Borrower and shall be securedhereby.

 

(b) Bank shall be authorized to make Loanshereunder by deposit of Loan proceeds into the Borrower’s operating accountwith the Bank, upon the written request in the name of Borrower by any of thePersons whom Borrower may from time to time designate in appropriatecertificates or resolutions delivered to the Bank.  All Loans shall be conclusively deemed tohave been authorized by each Borrower and to have been made pursuant to dulyauthorized requests therefor on its behalf. Bank shall be further entitled to rely on any communication, instrumentor document believed by it in good faith to be genuine and correct and to have been signed, sent or made by theproper Person(s), and with respect to all legal matters shall be entitled torely on advice of legal counsel.

 

(c) In the absence of the gross negligence ofor willful misconduct by the Bank as finally determined by a court of competentjurisdiction, neither Bank nor any attorney-in-fact appointed by any Borrowerpursuant to this Loan Agreement shall be liable to any Borrower or any other

 

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Person for any act or omission, any mistakeof fact or any error of judgment in exercising any right or remedy grantedherein.

 

(d) Bank shall be entitled to retain Collateralor require substitution therefor to the extent required to assure Bank ofsatisfaction of each Borrower’s Obligations under this Section 14.

 

15. **CAPITALADEQUACY**.  If after the datehereof, Bank determines in good faith that (i) the adoption, after thedate hereof, of any applicable law, rule, or regulation regarding capitalrequirements for banks or bank holding companies or the subsidiaries thereof, (ii) anychange, after the date hereof, in the interpretation or administration of anysuch law, rule or regulation by any governmental authority, central bank,or comparable agency charged with the interpretation or administration thereof,or (iii) compliance by Bank or its holding company with any request ordirective of any such governmental authority, central bank or comparable agencyregarding capital adequacy (whether or not having the force of law), has theeffect of reducing  by any materialamount the return on Bank’s capital to a level below that which Bank could haveachieved (taking into consideration Bank’s and its holding company’s policieswith respect to capital adequacy immediately before such adoption, change, orcompliance and assuming that Bank’s capital was fully utilized prior to suchadoption, change, or compliance) but for such adoption, change, or compliancesolely as a consequence of Bank’s making advances pursuant hereto:

 

(a) Bank shall promptly, after Bank’sdetermination of such occurrence, give notice thereof to Borrower.

 

(b) Provided that similar pricing adjustmentsare made by the Bank to other loans in the Bank’s loan portfolio, Borrower shall: (i) pay to Bank as anadditional fee from time to time, within thirty (30) days of demand therefor,such amount as Bank certifies to be the amount that will compensate Bank forsuch reduction, or (ii) pay all of its Obligations (except for theadditional fee referenced herein) within ninety (90) days of such notice.

 

(c) A certificate of Bank claiming entitlementto compensation as set forth above will be conclusive in the absence ofmanifest error in calculation.  Suchcertificate will set forth the nature of the occurrence giving rise to suchcompensation, the additional amount or amounts to be paid to Bank, and themethod by which such amounts were determined. In determining such amount, Bank may use any reasonable averaging and attributionmethod.

 

16. **MISCELLANEOUSPROVISIONS**.

 

 (a) Noticesby Bank under Section 2 may be in writing or by telephone (confirmed inwriting).  Unless otherwise specifiedherein, all notices hereunder shall be in writing; if to Borrower, addressed toBorrower at its address shown in the preamble to this Loan Agreement, and if toBank, at 53 State Street, Boston, Massachusetts, 02109, Attn: Mr. ScottHaskell, Sr. Vice President. Written notices and communications shall be effective and shall bedeemed received on the Business Day when delivered by hand or sent by confirmedfacsimile transmission; on the next Business Day, if by commercial courier, andon the third Business Day after sending, if by registered or certified mail,postage prepaid, return receipt requested.

 

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(b) No failure to exercise and no delay inexercising on the part of Bank, any right or remedy  hereunder shalloperate as a waiver thereof, nor shall any single or partial exercise thereofpreclude any other or further exercise thereof or the exercise of any otherright or remedy.  Waiver by Bank of anyright or remedy on any one occasion shall not be construed as a bar to orwaiver thereof or of any other right or remedy on any future occasion.  Without limiting the generality of theforegoing, each Borrower expressly agrees that no failure by Bank to detect orto communicate with any Borrower or take action in response to any failure byany Borrower to perform or observe any Obligation shall operate as a waiver ofany right or remedy of Bank; Bank’s rights and remedies hereunder, under anyagreement or instrument supplemental hereto or under any other agreement orinstrument shall be cumulative, may be exercised singly or concurrently and arenot exclusive of any rights or remedies provided by law.

 

(c) This Loan Agreement shall be binding uponand shall inure to the benefit of each Borrower and Bank and their respectivesuccessors and assigns; PROVIDED THAT Borrower may not assign or transfer anyrights or obligations hereunder without Bank’s prior written consent. Bank mayat any time pledge all or any portion of its rights under this Loan Agreementto any of the Federal Reserve Banks organized under Section 4 of theFederal Reserve Act.  No such pledge orenforcement thereof shall release the Bank from its obligations under this LoanAgreement.  Bank shall also have theright from time to time without consent of any Borrower or any guarantor toassign all or any portion of its rights hereunder to one or more banks orfinancial institutions having a combined capital and surplus of at least $100million  (any of the foregoing, an “Assignee”)and each Borrower and each guarantor agrees to execute such documents as Bankshall require to effect such assignment. In addition, at the request of the Bank and such Assignee, each Borrowershall execute and deliver one or more new promissory notes in replacement of,but not in discharge of, the liability evidenced by the promissory notes heldby the Bank prior to such assignment and shall reflect the amount of therespective commitments and loans held by such Assignee and Bank after givingeffect to such assignment. Upon the execution and delivery of appropriateassignment documentation, amendments and other documentation required by the Bankin connection with such assignment, and the payment by the Assignee of thepurchase price agreed to by Bank and such Assignee, such Assignee shall becomea party to this Loan Agreement and shall have all of the rights and obligationsof Bank hereunder and under all related documents to the extent that suchrights and obligations have been assigned by the Bank pursuant to theassignment documentation between the Bank and such Assignee, and Bank shall bereleased from its future obligations hereunder and thereunder to acorresponding extent.

 

(d) Bank shall have the unrestricted right atany time and from time to time, and without consent of or notice to anyBorrower or any guarantor or other surety, to grant to one or more banks orother financial institutions (each, a “Participant”), participating interestsin Bank’s agreement to make Loans hereunder and/or any of the Loans made byBank hereunder.  In the event of any suchgrant by the Bank of a participating interest to a Participant, whether or notupon notice to any Borrower, Bank shall remain responsible for the performanceof its agreements hereunder and each Borrower shall continue to deal solely anddirectly with the Bank in connection with the Bank’s rights and agreementshereunder.  Bank may furnish any

 

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information concerning any Borrower in itspossession from time to time to prospective Assignees and Participants,provided that Bank shall require such Assignee or Participant to agree inwriting to maintain the confidentiality of such information.

 

(e) The headings contained herein are forconvenience only and shall not affect the construction hereof.  If one or more provisions of this LoanAgreement (or the application thereof) shall be invalid, illegal orunenforceable in any respect in any jurisdiction, the same shall not, to thefullest extent permitted by applicable law, invalidate or render illegal orunenforceable such provision (or its application) in any other jurisdiction orany other provision of this Loan Agreement (or its application).  This Loan Agreement, together with allSchedules and Exhibits hereto and the other documents, instruments andagreements delivered in connection therewith, are the entire agreement of theparties with respect to the subject matter hereof and supersede any priorwritten or verbal communications or instruments relating to the Loans.

 

(f) All Agreements between each Borrower andBank are hereby expressly limited so that in no contingency or eventwhatsoever, whether by reason of acceleration of the maturity of theObligations or otherwise, shall the amount paid or agreed to be paid to theBank for the use or the forbearance of the Obligations evidenced hereby or bythe Notes, exceed the maximum permissible under applicable law.  As used herein, the term “applicable law”shall mean the law in effect as of the date hereof, provided however, that inthe event that there is a change in the law which results in a higherpermissible rate of interest, then this agreement and the Notes shall begoverned by such new law as of its effective date.  In this regard, it is expressly agreed thatit is the intent of each Borrower and Bank in the execution, delivery andacceptance of this agreement and the Notes to contract in strict compliancewith the laws of the Commonwealth of Massachusetts from time to time ineffect.  If under or from anycircumstances whatsoever, fulfillment of any provision hereof or of any of theloan documents at the time of performance of such provision shall be due, shallinvolve exceeding the limit of such validity prescribed by applicable law, thenthe obligation to be fulfilled shall automatically be reduced to the limits ofsuch validity, and if under any circumstances whatsoever Bank should ever receiveas interest an amount which would exceed the highest lawful rate, such amountwhich would be excessive interest shall be applied to the reduction ofprincipal and not to the payment of interest. This provision shall control every other provision of all documents,instruments and agreements between each Borrower and the Bank.

 

(g) This Loan Agreement shall continue in fullforce and effect so long as any of the Obligations remains outstanding or hasnot been fully and finally paid, performed or satisfied. Upon final payment andfull satisfaction of the Obligations and termination of the Bank’s agreement tomake Loans under this Loan Agreement, the Bank agrees to promptly provide toeach Borrower appropriate terminations of security interests, discharges ofmortgages, reassignments of trademarks and such other documents, instrumentsand agreements as are necessary to terminate the Bank’s interests in propertyof such Borrower.

 

(h) Each Borrower acknowledges that thetransactions contemplated hereby are commercial transactions and waives, to thefullest extent it may do so under applicable law, such rights as it may have orhereafter have to notices and/or hearings (except to the extent required

 

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under the Uniform Commercial Code) relatingto exercise of any of Bank’s rights under this Loan Agreement or underapplicable law.

 

17. **GOVERNING LAW;JURISDICTION; WAIVER OF JURY TRIAL**.

 

(a) This Loan Agreement shall take effect as asealed instrument and shall be governed by and construed in accordance with thelaws of the Commonwealth of Massachusetts.

 

(b) Each Borrower irrevocably submits to thenon-exclusive jurisdiction of any federal or state court sitting in Boston,Massachusetts over any suit, action or proceeding arising out of or relating tothis Loan Agreement.  Each Borrowerirrevocably waives, to the fullest extent it may effectively do so underapplicable law, any objection it may have or hereafter have to the laying ofthe venue of any such suit, action or proceeding brought in any such court andany claim that the same has been brought in an inconvenient forum.  Each Borrower agrees that any and all legalprocess which may be served in any suit, action or proceeding may be served bymailing a copy thereof by registered or certified mail, postage prepaid, returnreceipt requested, to such Borrower’s address shown herein and agrees that suchservice shall in every respect be deemed effective service upon such Borrower.

 

(c) EACH BORROWER AND BANK EACH HEREBY KNOWINGLY,VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT IT MAY HAVE OR HEREAFTERHAVE TO A TRIAL BY JURY IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING ARISINGOUT OF OR RELATING TO THIS LOAN AGREEMENT. Each Borrower hereby certifies that neither Bank nor any of itsrepresentatives, agents or counsel has represented, expressly or otherwise,that Bank would not, in the event of any such suit, action or proceeding, seekto enforce this waiver of right to trial by jury.  Each Borrower acknowledges that Bank has beeninduced to enter into this Loan Agreement by, among other things, thiswaiver.  Each Borrower acknowledges thatit has read the provisions of this Loan Agreement and in particular, this Section 17,has consulted legal counsel; understands the rights it is granting in this LoanAgreement and is making the waiver set forth in this Section 17 knowingly,voluntarily and intentionally.

 

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This Loan Agreement isexecuted as an agreement under seal within the Commonwealth of Massachusetts asof the date set forth on page one of this Loan Agreement.

 
| **WITNESS**               | **VISION- SCIENCES, INC.**         |
|---------------------------|------------------------------------|
|                      |                               |
|                      |                               |
| /s/Barbara G. Mork        |                               | By: | /s/ James A. Tracy |   |
|                      |                               |
|                      |                               |
|                      | **MACHIDA, INCORPORATED**          |
|                      | ** **                         |
|                      |                               |
| /s/Barbara G. Mork        |                               | By: | /s/ James A. Tracy |   |
|                      |                               |
|                      | **CITIZENS BANK OF MASSACHUSETTS** |
|                      |                               |
|                      |                               |
| /s/ William F. Granchelli |                               | By: | /s/ R. Scott Haskell |   |
|                           |                                    |  |  |  |  |  |  |  |  |  |

 

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ACKNOWLEDGMENT

 

Suffolk,ss:

 

On this          day of October, 2005 before me appeared                          and                                to me personally known, who, being by me duly sworn, did say that he is the                        of **VISION- SCIENCES, INC.**and****the                        of **MACHIDA, INCORPORATED**(theBorrower referred to in the foregoing instrument), and acknowledged saidinstrument to be his free act and deed and the free act and deed of saidBorrower.

 

 
|                    |          |   |
|-------------------------|---------------|--------|
|                    | Notary Public |
| My  commission expires: |

 

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**VISION-SCIENCES, INC.MACHIDA, INCORPORATEDSCHEDULE 5****(n)TO LOAN AND SECURITY AGREEMENTBUSINESS AND INVENTORY LOCATIONS**

 

**Locations**

 

9Strathmore Road, Natick, Massachusetts 01760

 

40Ramland Road, Orangeburg, New York 10962

 

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**VISION-SCIENCES, INC.MACHIDA, INCORPORATEDSCHEDULE 5****(k)TO LOAN AND SECURITY AGREEMENTEXCEPTIONS TO COMPLIANCE, REGULATIONS AND LIABILITIES**

 

None.

 

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**VISION- SCIENCES, INC.**

 

**MACHIDA,INCORPORATEDEXHIBIT 5TO LOAN AND SECURITY AGREEMENTCOMPLIANCE CERTIFICATE**

 

Mr. R.Scott Haskell

Sr.Vice President

TechnologyDivision

CitizensBank of Massachusetts

53State Street MBS 830

Boston,MA 02109

 

RE:                              **COMPLIANCE CERTIFICATE AS OFOctober 28, 2005**

 

The undersigned authorizedofficer of **VISION- SCIENCES, INC.**andof **MACHIDA, INCORPORATED**(collectively, the “Borrower”) hereby certifies, on behalf of the Borrower,that in accordance with the  Loan andSecurity Agreement between the Borrower and Citizens Bank of Massachusetts (“Citizens”),dated October 31, 2005,  as amendedfrom time to time (the “Loan Agreement”), (i) all financial statementsdelivered or caused to be delivered to Citizens in the Loan Agreement throughthe date of this Certificate have been prepared in accordance with GenerallyAccepted Accounting Principles (“GAAP”) and fairly present the consolidatedfinancial condition of Borrower as of such dates, (ii) the representationsand warranties of the Borrower contained in the Loan Agreement and any otherLoan Documents are true and correct in all material respects on and as of thedate of this Certificate, (iii) Borrowers are in compliance with all ofthe required covenants set forth the Loan Agreement, except as set forth below,and (iv) on the date of this Certificate, and except as disclosed herein,there does not exist any condition or event that would constitute an Event ofDefault under the Loan Agreement.

 

**AFFIRMATIVE COVENANTS**

 
| I. Total Cash,  Cash Equivalents and Marketable Securities     |   |                                                                                      | $      | 7,499,190.43 |   |
|----------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------|--------|--------------|--------|
|                                                           |   |                                                                                      |   |         |
| II. Cash in CBM  Demand Deposit Accounts                       |   |                                                                                      | $      | 7,811.00     |   |
|                                                           |   |                                                                                      |   |         |
| III. Cash in CBM  Interest-Bearing Deposit Accounts            |   |                                                                                      | $      | 3,741,784.21 |   |
|                                                           |   |                                                                                      |   |         |
| IV. Total Cash  in CBM Deposit Accounts                        |   |                                                                                      | $      | 3,749,595.21 |   |
|                                                           |   |                                                                                      |   |         |
| V. % of Cash in  CBM Deposit Accounts (Item IV / Item I above) |   |                                                                                      | 50     | %            |
|                                                           |   |                                                                                      |   |
| VI. Covenant  Requirement                                      |   | Greater of $2.0 million or 50% of total cash, cash  equivalents and marketable securities |   |
|                                                           |   |                                                                                      |   |
| VII. Compliance  (Yes / No)                                    |   | Yes                                                                                       |   |

 

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**Comments Regarding Exceptions:**

 

The undersigned certifies,on behalf of the Borrower, that the foregoing Certificate is true and correctas of October 28, 2005.

 

 
|   | **VISION- SCIENCES, INC.** |
|--------|----------------------------|
|   |                       |
|   |                       |
|   | By:                        | /s/ James A. Tracy |   |
|   |                       |
|   | **MACHIDA, INCORPORATED**  |
|   |                       |
|   |                       |
|   | By:                        | /s/ James A. Tracy |   |

 

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