Document:

Exhibit 10.4

 

UP TO 2,500,000 SHARES

OF

COMMON STOCK

OF

CONGAREE BANCSHARES, INC.

 

 

AGENCY AGREEMENT

 

 

           ,
2006

 

SAMCO
Capital Markets,

  a Division of Penson Financial Services, Inc.

1700
Pacific Avenue, Suite 2000

Dallas,
Texas 75201

 

Ladies
and Gentlemen:

 

                Congaree Bancshares, Inc., a
South Carolina corporation (the “Company”), and Congaree State Bank, a South
Carolina banking association in organization (the “Bank”), proposes, subject to
the terms and conditions stated herein, to engage SAMCO Capital Markets, a Division
of Penson Financial Services, Inc. (the “Agent” or “you”) to assist the Company
in structuring an offering of the Company’s common stock (the “Common Stock”)
and, as agent of the Company, to assist in the sale on a “best efforts” basis
of a minimum of 1,400,000 and up to a maximum of 2,500,000 shares of the Common
Stock, par value $0.01 per share (the “Shares”).

 

1.             The
Offering.  The Company is offering the
Shares, in connection with the Company’s initial public offering (the “Offering”)
and capitalization of the Bank, a de novo,
Federal Deposit Insurance Corporation (“FDIC”) insured South Carolina banking
association.

                The Company has
prepared and filed, in accordance with the provisions of the Securities Act of
1933, as amended, and the rules and regulations thereunder (collectively, the “1933
Act”), with the Securities and Exchange Commission (the “Commission”) a
registration statement on Form SB-2 (File No. 333-131931) under the 1933
Act, including a prospectus, relating to the Shares.  Except where the context otherwise requires, “Registration
Statement,” as used herein, means the registration statement, as amended at the
time of such registration statement’s effectiveness for purposes of
Section 11 of the 1933 Act (the “Effective Time”), including (i) all
documents filed as a part thereof, (ii) any information contained in a
prospectus subsequently filed with the Commission pursuant to Rule 424(b) under
the 1933 Act and deemed, pursuant to Rule 430A or Rule 430C under the 1933 Act,
to be part of the registration statement at the Effective Time, and
(iii) any registration statement filed to register the offer and sale of
the Shares pursuant to Rule 462(b) under the 1933 Act.

 

 

1

 

                Except where the
context otherwise requires, a “Preliminary Prospectus,” as used herein, means any
preliminary prospectus included in the Registration Statement or filed with the
Commission pursuant to Rule 424(a) under the 1933 Act.

 

                Except where the context otherwise requires, “Prospectus,” as used herein, means the prospectus in the form included in the Registration Statement at the Effective Time or, if Rule 430A under the 1933 Act is relied on, the term “Prospectus” shall also include the final prospectus filed with the Commission pursuant to Rule 424(b) under the 1933 Act.

 

     “Blue Sky Application,” as used herein,
means any instrument or document executed by the Company or the Bank or based
upon written information supplied by the Company or the Bank filed in any state
or jurisdiction to register or qualify any or all of the Shares or to claim an
exemption therefrom or provided to any state or jurisdiction to exempt the
Company as a broker-dealer or officers, directors or employees as broker-dealers
or agents under the securities laws thereof.

 

Any
reference herein to the Registration Statement, any Preliminary Prospectus, or the
Prospectus shall be deemed to refer to and include the documents, if any,
incorporated by reference, or deemed to be incorporated by reference, therein
(the “Incorporated Documents”), including, without limitation, unless the
context otherwise requires, the documents, if any, filed as exhibits to such
Incorporated Documents.  Any reference
herein to the terms “amend,” “amendment” or “supplement” with respect to the
Registration Statement, any Preliminary Prospectus, or the Prospectus shall be
deemed to refer to and include the filing of any document under the Securities
Exchange Act of 1934, as amended, and the rules and regulations thereunder (the
“Exchange Act”) on or after the Effective Time, or the date of such Preliminary
Prospectus or the Prospectus, as the case may be, and deemed to be incorporated
therein by reference.

 

                The Bank has filed
with the Office of the South Carolina Board of Financial Institutions (“BFI”)
for approval to form a de novo South
Carolina banking association, and with the FDIC for insurance of accounts, and
has filed amendments (as so amended, the “Applications”) thereto as required by
the BFI and the FDIC (the BFI and the FDIC are collectively referred to herein
as the “Regulatory Agencies”).

 

2.             Retention
of Agent; Compensation; Sale and Delivery of the Shares.  Subject to the terms and conditions herein
set forth, the Company and the Bank hereby appoint the Agent as their exclusive
placement agent (i) to utilize its “best efforts” to solicit subscriptions for
Shares and to assist the Company and the Bank with respect to the Company’s
sale of the Shares in the Offering, and (ii) to manage the sale of Shares
through a group of selected broker dealers, if necessary.

                On the basis of
the representations and warranties and subject to the terms and conditions of
this Agreement, the Agent accepts such appointment and agrees to consult with
and assist the Company and the Bank as to matters set forth in the letter
agreement dated January 5, 2006, between the Company and Agent (“Letter
Agreement”), a copy of which is attached hereto as Exhibit A. It is
acknowledged by the Company and the Bank that the Agent shall not be obligated
to purchase any Shares and shall not be obligated to take any action which Agent
deems to be inconsistent with any applicable law, regulation, decision or
order. Subscriptions

 

 

2

 

will be offered as described in the Prospectus.  Except as otherwise provided in this
Agreement, the appointment of the Agent will terminate upon completion of the
Offering.

 

                In the event the
Company is unable to sell a minimum of 1,320,000 Shares within the period
herein provided, this Agreement shall terminate and the Company shall cause the
Escrow Agent (as defined below) to refund to any persons who have subscribed
for any of the Shares the full amount it received from them, plus interest, as
set forth in the Prospectus; and none of the parties to this Agreement shall
have any obligation to the other parties hereunder, except as set forth in this
Section 2 and in Sections 6, and 8 hereof.

 

                In the event the
Offering is terminated and the Closing (as defined below) does not occur, then
in no event shall the Agent receive the fees set forth in subparagraphs (a) and
(b) below. Provided, however, regardless of whether
or not the Closing occurs, the Agent shall be entitled to reimbursement of its reasonable
and accountable out-of-pocket expenses, as set forth in subparagraph (c) below.

 

                If all conditions
precedent to the consummation of the Offering are satisfied, the Company agrees
to issue, or have issued, the Shares sold in the Offering and to release for
delivery certificates for such Shares on the Closing Date (as defined below)
against payment to the Company by any means authorized pursuant hereto; provided, however, that no funds shall be released to the
Company until the conditions specified in Section 7 hereof shall have been
complied with to the reasonable satisfaction of the Agent and its counsel. The
release of Shares against payment therefor shall be made on a date and at a
place mutually acceptable to the Company and the Agent (the “Closing”). Certificates
for Shares shall be delivered directly to the purchasers in accordance with
their directions. The date upon which the Company shall release or deliver the
Shares sold in the Offering, in accordance with the terms herein, is called the
“Closing Date.”  The Agent shall receive
the following compensation for its services hereunder:

 

(a)           The
Company will pay Agent a cash fee equal to $40,000 due upon commencement of the
Offering, which for purpose of this Section 2(a) shall be the date of the
Prospectus (the “Commencement Date”).  On
the 28th day after the Commencement Date and for each four week
period thereafter, the Company will pay Agent a fee equal to $20,000 (due at
the start of each new four week period) for the term of this Agreement; provided that Agent shall have been advised by the NASD that
the NASD has “no objection” to Agent’s compensation under this Agreement.

(b)           A
commission equal to four percent (4%) of the aggregate dollar amount of Shares
sold; provided, however, for purposes of
calculating the commission due to the Agent pursuant to this Section 2(b) shares
sold to current or proposed directors, officers or organizers shall be
excluded; and provided further, that commission
due to the Agent pursuant to this Section 2(b) shall be reduced by the
aggregate amount of fees paid to the Agent pursuant to Section 2(a) above.

(c)           Agent
shall be reimbursed for reasonable expenses as contemplated by Section 6 hereof,
regardless of whether the Offering is successfully completed.  Any management fee, out-of-pocket expenses or
commissions payable hereunder, shall be paid in next day funds on the

 

3

 

earlier of the Closing Date or a determination by the Company to
terminate or abandon the Offering.  

(d)           If
the Company elects to engage Agent as a Sponsoring Dealer, the Company shall
pay Agent an additional fee of $2,500 for the first state in which Agent serves
as Sponsoring Dealer and a fee of $1,000 for each additional state requiring a
Sponsoring Dealer.

(e)           The
Company and the Bank acknowledge and agree that in connection with the Offering,
sale of the Shares or any other services Agent may be deemed to be providing
hereunder, notwithstanding any preexisting relationship, advisory or otherwise,
between the parties or any oral representations or assurances previously or
subsequently made by Agent: (i) no fiduciary or agency relationship exists between
the Company, the Bank or any other person, on the one hand, and Agent, on the
other hand; (ii) Agent is not acting as advisor, expert or otherwise, to the
Company, including, without limitation, with respect to the determination of
the Offering price of the Shares, and such relationship between the Company or
the Bank, on the one hand, and Agent, on the other hand, is entirely and solely
commercial, based on arms-length negotiations; (iii) any duties and obligations
that Agent may have to the Company or the Bank shall be limited to those duties
and obligations specifically stated herein; and (iv) Agent and its respective
affiliates may have interests that differ from those of the Company or the Bank.
Each of the Company and the Bank hereby waives any claims that the Company and
the Bank may have against Agent with respect to any breach of fiduciary duty in
connection with the Offering.

3.                                       Representations
and Warranties of the Company.

                The Company represents and
warrants to, and agrees with, the Agent that:

 

(a)           The
Company has all such power, authority, authorizations, approvals and orders as
may be required to enter into this Agreement, to carry out the provisions and
conditions hereof and to issue and sell the Shares as provided herein and as
described in the Registration Statement, any Preliminary Prospectuses, and the Prospectus.  The consummation of the Offering, the
execution, delivery and performance of this Agreement and the consummation of
the transactions herein contemplated have been duly and validly authorized by
all necessary corporate action on the part of the Company and this Agreement
has been validly executed and delivered by the Company and is the valid, legal
and binding agreement of the Company enforceable in accordance with its terms,
except to the extent, if any, that the provisions of Section 8 hereof may be
unenforceable as against public policy, and except to the extent that such
enforceability may be limited by bankruptcy laws, insolvency laws, or other
laws affecting the enforcement of creditors’ rights generally, or the rights of
creditors of financial institutions insured by the FDIC (including the laws
relating to the rights of the contracting parties to equitable remedies).

(b)           The
Registration Statement has heretofore become effective under the 1933 Act; no
stop order of the Commission preventing or suspending the use of any
Preliminary Prospectus or the effectiveness of the Registration Statement has
been issued, and no proceedings for such purpose have been instituted or, to
the knowledge of the Company after due inquiry, are contemplated by the
Commission; the Registration Statement complied when it became effective,
complies as of the date hereof and, as amended or supplemented, at each time a

 

4

 

subscription agreement or funds are submitted by prospective investors
to the Company during the Offering period (each such time referred to as a “time
of delivery”), at the Closing Date and at all times during which a prospectus
is required by the 1933 Act to be delivered (whether physically or through
compliance with Rule 172 under the 1933 Act or any similar rule) in connection
with any sale of Shares, will comply, in all material respects, with the
requirements of the 1933 Act; each Preliminary Prospectus complied, at the time
it was filed with the Commission, and complies as of the date hereof, in all
material respects, with the requirements of the 1933 Act; at no time during the
period that begins on the earlier of the date of such Preliminary Prospectus
and the date such Preliminary Prospectus was filed with the Commission and ends
at the Closing Time (as defined herein) did or will any Preliminary Prospectus,
as then amended or supplemented, include an untrue statement of a material fact
or omit to state a material fact necessary in order to make the statements
therein, in light of the circumstances under which they were made, not misleading;
the Prospectus will comply, as of its date, the date that it is filed with the
Commission, each time of delivery, the Closing Date and at all times during
which a prospectus is required by the Act to be delivered (whether physically
or through compliance with Rule 172 under the 1933 Act or any similar rule) in
connection with any sale of Shares, in all material respects, with the
requirements of the 1933 Act (including, without limitation, Section 10(a)
of the 1933 Act); at no time during the period that begins on the earlier of
the date of the Prospectus and the date the Prospectus is filed with the
Commission and ends at the later of the Closing Time and the end of the period
during which a prospectus is required by the 1933 Act to be delivered (whether
physically or through compliance with Rule 172 under the 1933 Act or any
similar rule) in connection with any sale of Shares did or will the Prospectus,
as then amended or supplemented, include an untrue statement of a material fact
or omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that neither the
Company nor the Bank make any representation or warranty with respect to any
statement contained in the Registration Statement, any Preliminary Prospectus, or
the Prospectus in reliance upon and in conformity with information concerning the
Agent and furnished in writing by or on behalf of the Agent to the Company expressly
for use in the Registration Statement, such Preliminary Prospectus, or the
Prospectus, as applicable.

(c)           Prior
to the execution of this Agreement, the Company has not, directly or
indirectly, offered or sold any Shares by means of any “prospectus” (within the
meaning of the 1933 Act) or used any “prospectus” (within the meaning of the 1933
Act) in connection with the offer or sale of the Shares; each of the
Preliminary Prospectuses is a prospectus that, other than by reason of Rule 431
under the 1933 Act, satisfies the requirements of Section 10 of the 1933 Act,
including a price range where required by rule; the Company has not prepared or
used a “free writing prospectus” (as defined in Rule 405 under the 1933 Act) in
connection with the offering and sale of the Shares; the Company is not an “ineligible
issuer” (as defined in Rule 405 under the 1933 Act) as of the eligibility
determination date for purposes of Rules 164 and 433 under the 1933 Act with
respect to the offering of the Shares contemplated by the Registration
Statement.

(d)           No
Blue Sky Application includes an untrue statement of a material fact or omits
to state a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading; provided, however, that neither the Company nor the Bank
make any representation or warranty with respect to any statement

 

5

 

contained in a Blue Sky Application in reliance upon and in conformity
with information concerning the Agent and furnished in writing by or on behalf
of the Agent to the Company expressly for use in the Blue Sky Application.

(e)           The
Applications were approved on a preliminary basis by the BFI and the FDIC on                     
and                 ,
2006, respectively. At the time of the approval of the Applications by the Regulatory
Agencies and at all times subsequent thereto until the Closing Date, the
Applications will comply as to form in all material respects with all
applicable rules and regulations of the Regulatory Agencies (except as modified
or waived in writing by the applicable Regulatory Agencies).  The information in the Applications is true,
correct and complete in all material respects.

(f)            No
order has been issued by the Commission or any of the Regulatory Agencies (and
hereinafter reference to the FDIC shall include the Bank Insurance Fund (“BIF”)),
or any state regulatory authority, preventing or suspending the use of any
Preliminary Prospectus or the Prospectus and no action by or before any such
government entity to revoke any approval, authorization or order of
effectiveness related to the Offering or any of the Applications is, to the
knowledge of the Company, pending or threatened.

(g)           The
Offering has been duly authorized and approved by the Board of Directors of the
Company, and, following the Closing Date, the Company and the Bank will have
completed all conditions precedent to the Offering specified in the Applications
and approvals from the Regulatory Agencies, and the offer and sale of the
Shares will have been conducted in all material respects in compliance with all
applicable laws, regulations, decisions and orders, including all terms,
conditions, requirements and provisions precedent to the Offering imposed upon
the Company or the Bank by the Regulatory Agencies, the Commission or any
regulatory authority, and in the manner described in the Registration
Statement, the Preliminary Prospectuses, and the Prospectus. At the Closing
Date, to the best knowledge of the Company and the Bank, no person will have
sought to obtain review of the preliminary action of the Regulatory Agencies in
approving the Applications pursuant to any applicable state or federal statute
or regulation.

(h)           The
Company has been duly incorporated and is validly existing as a corporation in
good standing under the laws of State of South Carolina, and has corporate
power and authority to own, lease or operate its properties and to conduct its
business as described in the Registration Statement, the Preliminary
Prospectuses, and the Prospectus, and to enter into and perform its obligations
under this Agreement; subject to receipt of final approvals from the Regulatory
Agencies, the Bank is duly organized and validly existing under South Carolina
law and regulations promulgated by the BFI, with power and authority to own or
lease its properties and conduct its business as described in the Registration
Statement, the Preliminary Prospectuses, and the Prospectus; the Company and
the Bank do not conduct business in any jurisdiction other than the State of South
Carolina.

(i)            Except
for the Bank, the Company does not own equity interests of any other business
entities.

 

6

 

(j)            The
financial statements included in the Registration Statement, any Preliminary
Prospectuses, or the Prospectus, together with the related schedules and notes,
present fairly, in all material respects, the financial position of the Company
and its consolidated subsidiaries at the dates indicated and the statement of
operations, shareholder’s equity and cash flows of the Company and its
consolidated subsidiaries for the periods specified; such financial statements
have been prepared in conformity with generally accepted accounting principles
(“GAAP”) applied on a consistent basis throughout the periods involved.  The supporting schedules, if any, included in
the Registration Statement, any Preliminary Prospectuses, or the Prospectus present
fairly in accordance with GAAP the information required to be stated therein.

(k)           Since
the respective dates as of which information is given in the Registration
Statement, the Preliminary Prospectuses, and the Prospectus, except as
otherwise stated therein, (i) there has been no material adverse change in
the condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Company and the Bank considered as one enterprise,
whether or not arising in the ordinary course of business (a “Material Adverse
Effect”), (ii) there have been no transactions entered into by the Company
or the Bank, other than those in the ordinary course of business, which are
material with respect to the Company and the Bank considered as one enterprise,
and (iii) there has been no dividend or distribution of any kind declared,
paid or made by the Company on any class of its capital stock.

(l)            Each
of the Company and the Bank has good and marketable title to all real property
and good title to all other properties owned by it, in each case free and clear
of all mortgages, pledges, liens, security interests, restrictions, defects or encumbrances
of any kind except such as (i) are described in the Registration Statement, any
Preliminary Prospectus, or the Prospectus, or (ii) do not singly or in the
aggregate, materially affect the value of such property and do not interfere
with the use made and proposed to be made of such property by either the
Company or the Bank; and any real property and buildings held under lease by
either the Company or the Bank are held by it under valid, subsisting and
enforceable leases with such exceptions as are not material and do not
interfere with the use made and propose to be made of such property and
buildings by either the Company or the Bank.

(m)          The
Company has an authorized capitalization as set forth in the Registration
Statement, the Preliminary Prospectuses, and the Prospectus; all of the issued
shares of capital stock of the Company have been duly and validly authorized
and issued, are fully paid and nonassessable and conform to the description of
the capital stock of the Company contained in the Registration Statement, the
Preliminary Prospectuses, and the Prospectus; no holder of securities of the
Company will be subject to personal liability by reason of being such a holder;
there are no preemptive or other similar rights to subscribe for or to purchase
any securities of the Company; except as described in the Registration
Statement, there are no warrants, options or other rights to purchase any securities
of the Company; neither the filing of the Registration Statement nor the
offering or sale of the Shares as contemplated by this Agreement give rise to
any rights for or relating to the registration of any securities of the Company
with respect to such filing, offering or sale.

(n)           The
Shares have been duly and validly authorized and, when issued and delivered
against payment therefor as provided herein, will be duly and validly issued
and fully paid and

 

7

 

nonassessable and will conform to the description of the Shares
contained in the Registration Statement, the Preliminary Prospectuses, and the
Prospectus;

(o)           The
issuance and sale of the Shares being issued at the Closing Date by the Company
and the performance of this Agreement and the consummation by the Company of
the other transactions herein contemplated will not conflict with or result in
a breach or violation of any terms or provisions of, or constitute a default
under, any indenture, mortgage, deed of trust, loan agreement or other material
agreement or instrument to which the Company or the Bank is a party or by which
any of the property or assets of the Company or the Bank is bound or to which
any of the property or assets of the Company or the Bank is subject, nor will
such action result in any violation of the provisions of the Articles of
Incorporation or Association, as amended, or Bylaws, as amended, of the Company
or the Bank or any statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over the Company or the Bank or
any of their properties; and no consent, approval, authorization, order,
registration or qualification of or with any such court or governmental agency
or body is required for the issuance and sale of the Shares or the consummation
by the Company of the transactions contemplated by this Agreement, except such
consents, approvals, authorizations, registrations or qualifications as may be
required under the Act and under state securities or Blue Sky laws in
connection with the purchase and distribution of the Shares by the Agent.

(p)           There
is no action, suit, proceeding, inquiry or investigation before or brought by
any court or governmental agency or body, domestic or foreign, now pending, or,
to the knowledge of the Company or the Bank, threatened, against or affecting
the Company or the Bank, which is required to be disclosed in the Registration
Statement (other than as disclosed therein), or which might reasonably be
expected to result in a Material Adverse Effect, or which might reasonably be
expected to materially and adversely affect the properties or assets thereof or
the consummation of the transactions contemplated in this Agreement or the
performance by the Company or the Bank of its obligations hereunder; the
aggregate of all pending legal or governmental proceedings to which the Company
or the Bank is a party or of which any of their respective property or assets
is the subject which are not described in the Registration Statement, including
ordinary routine litigation incidental to the business, is not in the
reasonable judgment of the Company expected to result in a Material Adverse
Effect.

(q)           The
Company and the Bank own or possess, or can acquire on reasonable terms,
adequate patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable proprietary
or confidential information, systems or procedures), trademarks, service marks,
trade names or other intellectual property (collectively, “Intellectual
Property”) necessary to carry on the business now operated by them, and neither
the Company nor any of its subsidiaries has received any notice or is otherwise
aware of any infringement of or conflict with asserted rights of others with
respect to any Intellectual Property or of any facts or circumstances which
would render any Intellectual Property invalid or inadequate to protect the
interest of the Company or the Bank therein, and which infringement or conflict
(if the subject of any unfavorable decision, ruling or finding) or invalidity
or inadequacy, singly or in the aggregate, would result in a Material Adverse
Effect.

(r)            Elliott
Davis, LLC, which has certified certain financial statements and supporting
schedules of the Company included in the Registration Statement, the
Preliminary Prospectus,

 

8

 

and the Prospectus containing an audit report, are independent public
accountants as required by the Act and the rules and regulations of the
Commission thereunder.

(s)           All
employee benefit plans (as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended (“ERISA”)) established, maintained or
contributed to by the Company or the Bank (except any such plan for which the
principal sponsor or plan administrator is an affiliate other than the Company
or the Bank) comply in all material respects with the requirements of ERISA and
no employee pension benefit plan (as defined in Section 3(2) of ERISA) has
incurred or assumed an “accumulated funding deficiency” within the meaning of
Section 302 of ERISA or has incurred or assumed any material liability (other
than for the payment of premiums) to the Pension Benefit Guaranty Corporation.

(t)            The
Company and the Bank have timely filed all necessary federal, state and foreign
income, franchise and excise tax returns and have paid all taxes shown thereon
as due, and there is no tax deficiency that has been or, to the best knowledge
of the Company, might be asserted against the Company that might have a
material adverse effect on the business, properties, business prospects,
condition (financial or otherwise), earnings or results of operations of the
Company, and all tax liabilities are adequately provided for on the books of
the Company and the Bank.

(u)           The
Company is not in violation of any federal or state law, regulation, or treaty
relating to the storage, handling, transportation, treatment or disposal of
hazardous substances (as defined in 42 U.S.C. Section 9601) or hazardous
materials (as defined by any federal or state law or regulation) or other waste
products, which violation may have a material adverse effect on the financial
condition or business operations or properties of the Company; the Company has
received all permits, licenses or other approvals as may be required of it
under applicable federal and state environmental laws and regulations to
conduct its business as described in the Registration Statement, the
Preliminary Prospectuses, and the Prospectus, and the Company is in compliance
in all material respects with the terms and conditions of any such permit,
license or approval; the Company has not received any notices or claims that it
is a responsible party or a potentially responsible party in connection with
any claim or notice asserted pursuant to 42 U.S.C. Section 9601 et seq. or any
state superfund law; and the disposal of all of the Company’s hazardous
substances, hazardous materials and other waste products has been lawful.

(v)           No
material relationship, direct or indirect, exists between or among the Company
or the Bank, on the one hand, and the directors, officers, stockholders,
customers or suppliers of the Company or the Bank on the other hand, that is
required by the Act, or by the rules and regulations under such Act to be
described in the Registration Statement, the Preliminary Prospectuses, or the
Prospectus, that is not so described.

(w)          Neither
the Company nor the Bank has taken and neither of such entities will take,
directly or indirectly, any action which is designed to or which has
constituted or which might reasonably be expected to cause or result in
stabilization or manipulation of the price of any security of the Company to facilitate
the sale or resale of the Shares.

(x)            The
Company holds and is operating in compliance, in all material respects, with
all franchises, grants, authorizations, licenses, permits, easements, consents,
certificates and

 

9

 

orders of any governmental or self-regulatory body required for the
conduct of its business as presently being conducted (“licenses”) and all
licenses are valid and in full force and effect; and the Company is in compliance,
in all material respects, with all laws, regulations, orders and decrees
applicable to it.

(y)           Each
of the Company and the Bank maintains insurance of the types and in the amounts
that are reasonable or required for the business operated by it, all of which
insurance is in full force and effect.

(z)            The
Company maintains a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management’s general or specific authorization; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain
accountability for assets; (iii) access to assets is permitted only in accordance
with management’s general or specific authorization; and (iv) the recorded
accountability for assets is compared with existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.

(aa)         There
is no document or contract of a character required to be described in the Registration
Statement, the Preliminary Prospectuses, or the Prospectus or to be filed as an
exhibit to the Registration Statement which is not described or filed as required.
All such contracts to which the Company or the Bank is a party constitute valid
and binding agreements of the Company or the Bank and are enforceable against
the Company or the Bank in accordance with the terms thereof, except as may be
limited by bankruptcy, insolvency, fraudulent transfer or other similar laws
affecting the rights and remedies of creditors generally and subject to general
principles of equity, and except to the extent that any such contract contains
provisions for indemnification for liabilities under the Act.

(bb)         The
Company has not distributed, nor will it distribute, prior to the Closing Time,
any prospectus (as defined under the 1933 Act) in connection with the Offering
and sale of the Shares other than the Registration Statement, any Preliminary
Prospectuses, the Prospectus, or other materials, if any, permitted by the 1933
Act, including Rule 134 promulgated thereunder.

4.                                       Delivery and
Payment.

                An
escrow procedure shall be established which shall comply with Commission Rule 15c2-4,
promulgated under the Exchange Act, with The Bankers Bank as escrow agent (the “Escrow
Agent”).

 

                The Company and the Agent shall
transmit all funds received from subscribers to the Escrow Agent by noon of the
next business day following receipt thereof. The Company and the Agent shall jointly
direct the Escrow Agent to make payment for Shares sold hereunder by wire
transfer or certified or bank cashier’s check drawn to the order of the Company
in next day funds.  Such payment is to be
made at the offices of The Bankers Bank, 2410 Paces Ferry Road, 600 Paces
Summit, Atlanta, Georgia  30339-4098, at 10:00
a.m. local time, on the Closing Date. 
The time of such payment, as adjusted by the agreement of the parties,
is referred to herein as the “Closing Time”.  The Company shall direct the Escrow Agent to
deliver payment of the fees due

 

 

10

 

to
the Agent pursuant to Section 2 hereof (less any portion thereof previously
paid to the Agent) to the Agent by wire transfer or certified or bank cashier’s
check drawn to the order of the Agent in next day funds, to the Agent on the Closing
Date.

 

5.             Covenants of the
Company.  The Company hereby covenants,
and agrees to cause the Bank to covenant upon formation, to the Agent as
follows:

(a)           The
Company has filed the Registration Statement with the Commission.  The Company will not, at any time before or
after the date the Registration Statement is declared effective, file any
amendment or supplement to the Registration Statement without providing the
Agent and its counsel an opportunity to review such amendment or file any
amendment or supplement to which amendment the Agent or its counsel shall
reasonably object.

(b)           The
Company will not prepare or use a “free writing prospectuses” (as defined in
Rule 405 under the 1933 Act) in connection with the offering and sale of the
Shares.

(c)           The
Bank has filed the Applications with the Regulatory Agencies.  The Company has filed, or will file, an
application (the “Holding Company Application”) with the Board of Governors of
the Federal Reserve System (the “Federal Reserve”) to acquire the stock of the
Bank in accordance with the Bank Holding Company Act of 1956, as amended, and
the rules and regulations promulgated thereunder (the “BHCA”).

(d)           The
Company will use its best efforts to cause any post-effective amendment to the
Registration Statement to be declared effective by the Commission and any
amendment to an Application to be approved by the Regulatory Agencies, and will
immediately upon receipt of any information concerning the events listed below
notify the Agent (i) when the Registration Statement, as amended, has become
effective; (ii) when an Application or the Holding Company Application, as
amended, has been approved by a Regulatory Agency or the Federal Reserve; (iii)
of the receipt of any written comments from the Commission or any written
non-confidential communications from the Regulatory Agencies, the Federal
Reserve or any other governmental agency with respect to the Offering or the
transactions contemplated by this Agreement; (iv) of any request by the
Commission, a Regulatory Agency, the Federal Reserve or any other governmental
entity for any amendment or supplement to the Registration Statement; (v) of
the issuance by the Commission, a Regulatory Agency, the Federal Reserve or any
other governmental entity of any order or other action suspending the Offering
or the use of the Registration Statement, the Preliminary Prospectuses, or the
Prospectus, or any other filing of the Company and the Bank under applicable
regulations or other applicable law, or the threat of any such action; (vi) of
the issuance by the Commission, any Regulatory Agency, the Federal Reserve or
any state authority of any stop order suspending the effectiveness of the
Registration Statement or of the initiation or threat of initiation or threat
of any proceedings for that purpose; or (vii) of the occurrence of any event
mentioned in paragraph (g) below.  The
Company will make every reasonable effort to prevent the issuance by the Commission,
any Regulatory Agency, the Federal Reserve or any state authority of any such
order and, if any such order shall at any time be issued, to obtain the lifting
thereof at the earliest possible time.

(e)           The
Company will deliver to the Agent and to its counsel conformed copies of each
of the following documents, with all exhibits: 
(i) the Applications and the Holding

 

11

 

Company Application, as originally filed and of each amendment or
supplement thereto, and (ii) the Registration Statement, as originally filed
and each amendment thereto.  Further, the
Company will deliver such additional copies of the foregoing documents to
counsel to the Agent as may be required for any NASD filings.  The Company will also deliver to the Agent
such number of copies of the Prospectus, as amended or supplemented, as the
Agent may reasonably request.

(f)            The
Company and the Bank will comply in all material respects with any and all
terms, conditions, requirements and provisions with respect to the Offering and
the transactions contemplated thereby imposed by the Commission, by applicable
state law and regulations, and by the 1933 Act, the Exchange Act and the rules
and regulations of the Commission promulgated under such statutes, to be
complied with prior to or subsequent to the Closing Date; and when the
Prospectus is required to be delivered, the Company and the Bank will comply in
all material respects, at their own expense, with all material requirements
imposed upon them by the Regulatory Agencies, the Federal Reserve, the
Commission, by applicable state law and regulations and by the 1933 Act, the
Exchange Act and the rules and regulations of the Commission promulgated under
such statutes, in each case as from time to time in force, so far as necessary
to permit the continuance of sales or dealing in the Shares during such period
in accordance with the provisions hereof and the Prospectus.

(g)           If
any event relating to or affecting the Company or the Bank shall occur, as a
result of which it is necessary, in the reasonable opinion of counsel for the
Company for the Agent, to amend or supplement the Registration Statement, any
Preliminary Prospectus, or the Prospectus in order to make them not misleading
in light of the circumstances existing at the time of its use, the Company
will, at its expense, forthwith prepare, file with the Commission and the
Regulatory Agencies, and furnish to the Agent, a reasonable number of copies of
an amendment or amendments of, or a supplement or supplements to, the
Registration Statement, any Preliminary Prospectus, or the Prospectus (in form
and substance satisfactory to counsel for the Agent after a reasonable time for
review) which will amend or supplement the Registration Statement, Preliminary
Prospectus, or the Prospectus so that as amended or supplemented it will not
contain an untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in light of the
circumstances existing at the time, not misleading.  For the purpose of this subsection, the
Company will furnish such information with respect to itself and the Bank as
the Agent may from time to time reasonably request.

(h)           The
Company will endeavor in good faith, in cooperation with the Agent, to register
or to qualify the Shares for offering and sale under the applicable securities
laws of the jurisdictions in which the Offering will be conducted; provided, however, that the Company shall not be obligated
to file any general consent to service of process or to qualify to do business
in any jurisdiction in which it is not so qualified.

(i)            For
the period of three years from the date of this Agreement, the Company will
furnish to the Agent upon request a copy of (i) each report of the Company mailed
to holders of Shares if such report is not immediately available on the
Commission’s EDGAR website and (ii) from time to time, such other publicly
available information concerning the Company and the Bank as the Agent may
reasonably request.

 

12

 

(j)            The
Company and the Bank will use the net proceeds from the sale of the Shares in
the manner set forth in the Prospectus under the caption “Use of Proceeds,” and
to file such reports with the Commission with respect to the sale of the Shares
and the application of the proceeds therefrom as may be required by Rule 463
under the 1933 Act.

(k)           Prior
to the Closing Date, the Company will inform the Agent of any event or
circumstances of which it is aware as a result of which (A) the Registration
Statement, any Preliminary Prospectus, or the Prospectus as then supplemented
or amended, would include an untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements therein not
misleading, or (B) the information in the Applications would no longer be true,
correct and complete in all material respects.

(l)            The
Company will distribute the Prospectus or other offering materials in
connection with the offering and sale of the Shares only as set forth in the
Prospectus, and only in accordance with the 1933 Act and the Exchange Act and
the rules and regulations promulgated under such statutes, and the laws of any
state in which the Shares are qualified for sale.

(m)          The
Company will furnish to its shareholders such reports as may be required under
Section 15(d) of the Exchange Act.

(n)           The
Company will timely file such reports pursuant to the Exchange Act as are
necessary in order to make generally available to its security holders as soon
as practicable an earning statement for the purposes of, and to provide the
benefits contemplated by, the last paragraph of Section 11(a) of the 1933 Act.

(o)           The
Company will maintain appropriate arrangements with the Escrow Agent for
depositing all funds received from persons mailing subscriptions for or orders
to purchase Shares in the Offering as described in the Prospectus until the
Closing Date and satisfaction of all conditions precedent to the release of the
Company’s obligation to refund payments received from persons subscribing for
or ordering Shares in the Offering as described in the Prospectus.

(p)           The
Company and the Bank will conduct their businesses in compliance in all
material respects with all applicable federal and state laws, rules,
regulations, decisions, directives and orders including, all decisions,
directives and orders of the Commission, the BFI, the Federal Reserve and the
FDIC.

(q)           The
Company will not amend the terms of the Offering without notifying the Agent
prior thereto.

(r)            The
Company will not deliver the Shares until the Company and the Bank have
satisfied or caused to be satisfied each condition set forth in Section 7
hereof, unless such condition is waived in writing by the Agent.

6.             Payment of
Expenses.  The Company covenants and
agrees, and agrees to cause the Bank to covenant and agree upon formation with
the Agent that it will pay or cause to be paid the following: (i) the fees,
disbursements and expenses of counsel to the Company and the Bank and
accountants in connection with the registration of the Shares under the Act and
all other expenses

 

13

 

in connection with the preparation, printing and filing of the
Registration Statement, each Preliminary Prospectus, the Prospectus, and any
amendments or supplements thereto, and the mailing and delivering of copies
thereof to the Agent and dealers; (ii) the cost of printing or reproducing this
agreement, the Blue Sky Survey, any dealer agreements and any other documents
in connection with the offering, purchase, sale and delivery of the Shares;
(iii) all expenses in connection with the qualification of the Shares for
offering and sale under state securities laws as provided in Section 5(h)
hereof, including the reasonable fees and disbursements of counsel for the
Agent in connection with such qualification and in connection with the Blue Sky
Survey; (iv) the filing fees incident to securing any required review by the
National Association of Securities Dealers, Inc. of the terms of the sale of
the Shares; (v) the cost of preparing stock certificates; (vi) all expenses
related to road shows; (vii) the costs or expenses of any transfer agent or
registrar; (vii) all reasonable out-of-pocket fees and expenses of the Agent, including
the reasonable fees and expenses of counsel for the Agent related to the Offering
and not otherwise specifically provided for in this Section; (viii) the
expenses associated with the use of on-site consultants, which will not exceed
$5,000 per month for the use of one consultant and $8,000 per month for the use
of two consultants; and (ix) all other costs and expenses incident to the
performance of the Agent’s obligations hereunder which are not otherwise
specifically provided for in this Section.

7.             Conditions to
Obligations of the Agent. The obligations of the Agent hereunder and the
occurrence of the Closing of the Offering are subject, in its discretion, to
the condition that all representations and warranties and other statements of
the Company are, at and as of the commencement of the Offering and at and as of
the Closing Date, true and correct in all material respects and the condition
that the Company shall have performed in all material respects all of its obligations
hereunder theretofore to be performed, and the following additional conditions:

(a)           No
Prospectus or amendment or supplement to the Registration Statement or the
Prospectus shall have been filed to which the Agent shall have objected in
writing.

(b)           The
Registration Statement and any registration statement required to be filed,
prior to the sale of the Shares, under the Act pursuant to Rule 424(b) shall
have been filed and shall have become effective under the 1933 Act.

(c)           (i) No
stop order with respect to the effectiveness of the Registration Statement
shall have been issued under the Act or proceedings initiated under
Section 8(d) or 8(e) of the 1933 Act; (ii) the Registration Statement
and all amendments thereto shall not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; and (iii) none of
the Preliminary Prospectuses or the Prospectus, and no amendment or supplement
thereto, shall include an untrue statement of a material fact or omit to state
a material fact necessary in order to make the statements therein, in the light
of the circumstances under which they are made, not misleading.

(d)           Jenkens
& Gilchrist, P.C., counsel for the Agent, shall have furnished to the Agent
such opinion or opinions, dated the Closing Date, with respect to the
incorporation of the Company, the validity of the Shares being issued on the
Closing Date, the Registration Statement, the Prospectus, and other related
matters as the Agent may reasonably request, and

 

14

 

such counsel shall have received such papers and information as they
may reasonably request to enable them to pass upon such matters;

(e)           Nelson
Mullins Riley & Scarborough LLP, counsel for the Company, shall have furnished
to the Agent their written opinion, dated as of the Closing Date, in form and substance
satisfactory to the Agent, substantially to the effect set forth in Exhibit B
hereto; in rendering the opinions required by this section, such counsel, with
the consent of Agent’s counsel, may rely, as to matters of fact, upon
certificates and representations of officers of the Company and on certificates
of public officials.

(f)            At
the time of the execution of this Agreement, the Agent shall have received from
Elliott Davis, LLC a letter dated such date, in form and substance satisfactory
to the Agent to the effect that:

(i)            Elliot Davis, LLC are independent certified public
accountants with respect to the Company within the meaning of the 1933 Act and
the applicable published rules and regulations adopted by the Commission and
the PCAOB;

(ii)           In the opinion of Elliot Davis, LLC, the financial
statements audited by Elliot Davis, LLC and included in the Registration
Statement comply as to form in all material respects with the applicable
accounting requirements of the 1933 Act and the related rules and regulations
adopted by the Commission;

(iii)          For the purposes of providing such letter, Elliot Davis,
LLC has read the fiscal 2005 minutes of meetings of shareholders, the Board of
Directors and any committees of the Board of Directors of the Company, as set
forth in the minute books as of a date within five days of the Effective Time,
officials of the Company advising Elliot Davis, LLC that the minutes of all
such meetings through that date were set forth therein; and

(iv)          Such additional statements relating to the unaudited
quarterly financial statements of the Company subsequent to December 31, 2005
as the Agent may reasonably request.

(g)           The
Company shall have furnished or caused to be furnished to the Agent on the
Closing Date a certificate of officers of the Company, satisfactory to the
Agent as to the accuracy of the representations and warranties of the Company
herein at and as of the Closing Date, as to the performance by the Company of
all of its obligations hereunder to be performed at or prior to the Closing
Date, as to the matters set forth in subsections (a) and (l) of this Section
and as to such other matters as the Agent shall reasonably request.

(h)           The
Company or the Bank shall not have sustained since the date of the latest
audited financial statements included in the Registration Statement and
Prospectus, any material loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by insurance, or
from any labor dispute or court or governmental action, order or decree,
otherwise than as set forth in the Registration Statement and the Prospectus,
and since the respective dates as of which information are given in the
Registration Statement and the

 

15

 

Prospectus, there shall not have been any material change in the
long-term debt of the Company or the Bank or any material change, or any
development, involving a prospective material change in or affecting the
general affairs of the management, financial position, shareholder’s equity or
results of operations of the Company or the Bank, otherwise than as set forth
or contemplated in the Registration Statement and the Prospectus, the effect of
which, in any such case described above, is in the Agent’s reasonable judgment
sufficiently material and adverse as to make it impracticable or inadvisable to
proceed with the Offering or the delivery of the Shares on the terms and in the
manner contemplated in the Prospectus.

(i)            Prior
to and at the Closing Date:  (i) in the
reasonable opinion of the Agent, there shall have been no material adverse
change in the management, financial condition or in the earnings, capital,
properties or business affairs of the Company or the Bank independently, or of
the Company and the Bank, considered as one enterprise, from that as of the
latest dates as of which such condition is set forth in the Prospectus, except
as referred to therein; (ii) there shall have been no material transaction
entered into by the Company and the Bank, considered as one enterprise, from
the latest date as of which the financial condition of the Company or the Bank
is set forth in the Prospectus other than transactions referred to or
contemplated therein; (iii) the Company or the Bank shall not have received
from the BFI, the Federal Reserve or the FDIC any direction (oral or written)
to make any material change in the method of conducting their business with
which it has not complied in all material respects (which direction, if any,
shall have been disclosed to the Agent) and which would reasonably be expected
to have a material and adverse effect on the management, condition (financial
or otherwise) or on the earnings, capital, properties or business affairs of
the Company or the Bank considered as one enterprise; (iv) neither the Company
nor the Bank shall have been in default (nor shall an event have occurred
which, with notice or lapse of time or both, would constitute a default) under
any provision of any agreement or instrument relating to any material
outstanding indebtedness; (v) no action, suit or proceedings, at law or in
equity or before or by any federal or state commission, board or other
administrative agency, shall be pending or, to the knowledge of the Company or
the Bank, threatened against the Company or the Bank or affecting any of their
properties wherein an unfavorable decision, ruling or finding would reasonably
be expected to have a material and adverse effect on the management, financial
condition or on the earnings, capital, properties or business affairs of the
Company or the Bank, considered as one enterprise; and (vi) the Shares have been
qualified or registered for offering and sale under the securities or blue sky
laws of the jurisdictions as to which the Company and the Agent shall have
agreed.

(j)            At
or prior to the Closing Date, the Agent shall receive (i) a copy of the letters
from the Office of the South Carolina Board of Financial Institutions and the FDIC
granting preliminary approval of the Applications, (ii) a copy of the order
from the Commission declaring the Registration Statement effective, (iii) a
certificate of good standing from the State of South Carolina evidencing the
good standing of the Company and (iv) a copy of the letter from the Federal
Reserve granting preliminary approval of the Holding Company Application.

(k)           Subsequent
to the date hereof, there shall not have occurred any of the following:  (i) a suspension or limitation in trading in
securities generally on the New York Stock Exchange or American Stock Exchange
or in the over-the-counter market, or quotations halted generally on the Nasdaq
Stock Market, or minimum or maximum prices for trading have been fixed, or
maximum ranges for prices for securities have been required by either of such
exchanges or the

 

16

 

NASD or by order of the Commission or any other governmental authority;
(ii) a general moratorium on the operations of commercial banks or other
federally-insured financial institutions or general moratorium on the
withdrawal of deposits from commercial banks or other federally-insured
financial institutions declared by either federal or state authorities; (iii)
the engagement by the United States in hostilities which have resulted in the
declaration, on or after the date hereof, of a national emergency or war; or
(iv) a material decline in the price of equity or debt securities if the effect
of any of (i) through (iv) herein, in the Agent’s reasonable judgment, makes it
impracticable or inadvisable to proceed with the Offering or the delivery of
the Shares on the terms and in the manner contemplated in the Registration
Statement and the Prospectus.

(l)            The
NASD has confirmed that it has not raised any objection with respect to the
fairness and reasonableness of the terms of this Agreement and Agent’s
compensation hereunder.

8.                                       Indemnification
and Contribution.

(a)           The
Company agrees to indemnify and hold harmless the Agent and its affiliates and
their respective members, partners, directors, officers, employees, agents and
controlling persons (Agent and each such person being an “Indemnified Party”)
from and against any and all loss, claim, damage, judgment, assessment, cost
and other liability (each a “Claim”), joint or several, to which such
Indemnified Party may become subject under any applicable federal or state law,
or otherwise, and related to or arising out of any transaction contemplated by
this letter or the engagement of Agent pursuant to, and the performance by Agent
of the services contemplated by this letter and will reimburse any Indemnified
Party for all reasonable fees and expenses (including reasonable counsel fees
and expenses) as they are incurred in connection with the investigation of,
preparation for, or defense of any pending or threatened claim or any action or
proceeding arising therefrom, whether or not such Indemnified Party is a party
and whether or not such claim, action or proceeding is initiated or brought by
or on behalf of the Company.  The Company
will not be liable under the foregoing indemnification and reimbursement
provisions to the extent that any loss, claim, damage, judgment, assessment,
cost or any other liability, or related expense, is found in a final judgment
by a court of competent jurisdiction to have resulted from an Indemnified Party’s
willful misconduct, bad faith or gross negligence or the breach of this
Agreement.  The Company agrees that no
Indemnified Party will have any liability (whether direct or indirect, in
contract or tort or otherwise) to the Company or its security holders or
creditors related to or arising out of the engagement of Agent pursuant to, or
the performance by Agent of the services contemplated by, this Agreement except
to the extent that any loss, claim, damage, judgment, assessment, cost or any
other liability, or related expenses, is found in a final judgment by a court
of competent jurisdiction to have resulted from an Indemnified Party’s willful
misconduct, bad faith or gross negligence or the breach of this Agreement.

(b)           If
the indemnification of an Indemnified Party provided for in this Agreement is
for any reason held unenforceable (other than for a reason provided in the
prior paragraph), the Company agrees to contribute to the losses, claims,
damages, judgments, assessments, costs and other liabilities, and related
expenses, for which such indemnification is held unenforceable (i) in such
proportion as is appropriate to reflect the relative benefits to the Company and
its security holders, on the one hand, and Agent, on the other hand, of the
transaction as contemplated (whether or not the transaction is consummated) or
(ii) if (but only if) the allocation provided for

 

17

 

in clause (i) is for any reason held unenforceable, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) but also the relative fault of the Company on the one
hand, and Agent, on the other hand, as well as any other relevant equitable
considerations; provided, however, that, to the extent permitted by applicable
law, in no event will the Indemnified Parties be required to contribute an
aggregate amount in excess of the aggregate fees actually paid to Agent under
this Agreement.

(c)           The
Company agrees that, without Agent’s prior written consent, which consent will
not be unreasonably withheld, it will not settle, compromise or consent to the
entry of any judgment in any pending or threatened claim, action, or proceeding
in respect of which indemnification could be sought under the indemnification
provisions of this Agreement, whether or not Agent or any other Indemnified Party
is an actual or threatened party to such claim, action, or proceeding, unless
such settlement, compromise or consent includes an unconditional release of
each Indemnified Party from all liability arising out of such claim, action or
proceeding.  The Company shall not be
liable for any settlement of any litigation or proceeding effected without its
consent.

(d)           Upon
receipt by an Indemnified Party of actual notice of a Claim as to which
indemnification may be sought hereunder, such Indemnified Party shall promptly
notify the Company of the nature and basis of the Claim.  In addition, an Indemnified Party shall
promptly notify the Company after any action is commenced against the
Indemnified Party (by way of service with a summons or other legal process) and
shall transmit a copy to the business address of the Company.  The Company may, and shall, if requested by
any Indemnified Party, assume the defense of any Claim against such Indemnified
Party in respect of which indemnity may be sought hereunder, including, without
limitation, the employment of counsel reasonably satisfactory to such
Indemnified Party and the payment of the fees and expenses of such counsel and
necessary experts, in which event the Company shall not be liable for the fees
and expenses of any other counsel retained by such Indemnified Party in
connection with such litigation or proceeding.

(e)           The
reimbursement, indemnity and contribution obligations of the Company under the
preceding paragraphs shall be in addition to any liability that the Company may
otherwise have, and shall be binding upon and inure to the benefit of the
successors, assigns, heirs and personal representatives of any Indemnified
Party.

(f)            In
the event that an Indemnified Party is requested or required to appear as a
witness in any action brought by or on behalf of or against the Company or any
affiliate of the Company in a transaction contemplated by this Agreement in
which such Indemnified Party is not named as a defendant, the Company agrees to
reimburse Agent for all reasonable expenses incurred by it in connection with
such Indemnified Party’s appearing and preparing to appear as such a witness,
including, without limitation, the reasonable fees and disbursements of its
legal counsel.

9.             Representations
and Indemnities to Survive.  All
representations, warranties and agreements contained in this Agreement or in
certificates of officers of the Company or the Bank submitted pursuant hereto,
shall remain in full force and effect, regardless of any termination or cancellation
of this Agreement or any investigation (or any statement as to the results
thereof)

 

18

 

made by or on behalf of the Agent, or any controlling person of the
Agent, or the Company, or the Bank or any officer or director or controlling
person of the Company or the Bank, and shall survive delivery of and payment
for the Shares.

10.           Termination
and Payment of Expenses.  This Agreement shall become
effective on the date hereof and shall terminate on [•], 2006. This Agreement
may be extended upon the mutual agreement of the Agent and the Company.
However, (i) this Agreement may be terminated at any time, whether at the end
of its term or otherwise, at the option of the Agent or the Company upon ten
(10) days written notice to the other.  If
for any reason any Shares are not delivered by or on behalf of the Company as
provided herein, the Company will reimburse the Agent for all out-of-pocket
expenses, including fees and disbursements of counsel, reasonably incurred by
the Agent in making preparations for the purchase, sale and delivery of the
Shares not so delivered, and shall pay the Fee as defined in Section 2 of this
Agreement, but the Company shall then be under no further liability to the
Agent except as provided in Section 6 and Section 8 hereof.

11.           Notices.  All statements, requests, notices and
agreements hereunder shall be in writing and shall be sufficient in all
respects if delivered or sent by reliable courier, first class mail, or
facsimile transmission to:

	
  Agent:

  	
   

  	
  SAMCO
  Capital Markets, a Division of Penson Financial Services, Inc.

  
	
   

  	
   

  	
  1700
  Pacific Avenue, Suite 2000

  
	
   

  	
   

  	
  Dallas,
  Texas 75201

  
	
   

  	
   

  	
  Attention:
  Corporate Finance Department

  
	
   

  	
   

  	
  Facsimile:
  214-765-1499

  
	
   

  	
   

  	
   

  
	
  With
  a copy to:

  	
   

  	
  Jenkens
  & Gilchrist

  
	
   

  	
   

  	
  1445
  Ross Avenue, Suite 3700

  
	
   

  	
   

  	
  Dallas,
  Texas 75202

  
	
   

  	
   

  	
  Attention:
  Michael G. Keeley

  
	
   

  	
   

  	
  Facsimile:
  214-855-4300

  
	
   

  	
   

  	
   

  
	
  Company:

  	
   

  	
  Congaree
  Bancshares, Inc.

  
	
   

  	
   

  	
  3618
  Sunset Boulevard

  
	
   

  	
   

  	
  West
  Columbia, South Carolina 29169

  
	
   

  	
   

  	
  Attention:
  F. Harvin Ray, Jr., President

  
	
   

  	
   

  	
  Facsimile:
      -    -     

  
	
   

  	
   

  	
   

  
	
  With
  a copy to:

  	
   

  	
  Nelson
  Mullins Riley & Scarborough LLP

  
	
   

  	
   

  	
  999
  Peachtree Street, N.E., Suite 1400

  
	
   

  	
   

  	
  Atlanta,
  GA 30309

  
	
   

  	
   

  	
  Attention:
  J. Brennan Ryan

  
	
   

  	
   

  	
  Facsimile
  (404) 817-6047

  

 

Any such statements, requests, notices or
agreements shall take effect upon receipt thereof.

 

19

 

12.           Successors.  This Agreement shall be binding upon, and
inure solely to the benefit of, the Placement Agent and the Company and, to the
extent provided in Sections 8 and 9 hereof; the officers and directors of the
Company and each person who controls the Company, or the Placement Agent, and
their respective heirs, executors, administrators, successors and assigns, and
no other person shall acquire or have any right under or by virtue of this
agreement. No purchaser of any of the shares from the Placement Agent shall be
deemed a successor or assign by reason merely of such purchase.

13.           Time
of the Essence.  Time shall be of the
essence in this Agreement.

14.           Business
Day.  As used herein, the term “business
day” shall mean any day when the Commission’s office in Washington, D.C. is
open for business.

15.           Applicable
Law.  This Agreement shall be
construed in accordance with the laws of the State of Texas.

16.           Captions.  The captions included in this Agreement are
included solely for convenience of reference and shall not be deemed to be a
part of this Agreement.

17.           Counterparts.  This Agreement may be executed by any one or
more of the parties in any number of counterparts, each of which shall be
deemed to be an original, but all such counterparts shall together constitute
one and the same instrument.

18.           Pronouns.
All pronouns used herein shall be deemed to refer to the masculine, feminine or
neuter gender as the context requires.

 

20

 

If
the foregoing is in accordance with your understanding, please sign and return
to us two counterparts hereof, and upon the acceptance hereof by you, this
letter and such acceptance hereof shall constitute a binding agreement between
us.

 

Very
truly yours,

 

Congaree
Bancshares, Inc.

 

 

	
  By:

  	
   

  	
   

  	
   

  
	
  Name:F.
  Harvin Ray, Jr.

  
	
  Title:
  Chief Executive Officer

  

 

Accepted
as of the date hereof at Dallas, Texas:

 

SAMCO
Capital Markets, a Division of Penson Financial Services, Inc.

 

	
  By:

  	
   

  	
   

  	
   

  
	
  Name:
  Joseph R. Mannes

  
	
  Title:
  Managing Director

  

 

 

21Exhibit 10.1

 

LOAN AND SECURITY AGREEMENT

 

THIS LOAN AND SECURITY AGREEMENT
(this “Agreement”) dated as of the Effective
Date between SILICON VALLEY BANK, a California
corporation (“Bank”), and Intrusion, Inc.,
a Delaware corporation (“Borrower”),
provides the terms on which Bank shall lend to Borrower and Borrower shall
repay Bank. The parties agree as follows:

 

1.                                      ACCOUNTING AND OTHER TERMS

 

Accounting terms not
defined in this Agreement shall be construed following GAAP. Calculations and
determinations must be made following GAAP. The term “financial statements”
includes the notes and schedules. The terms “including” and “includes” always
mean “including (or includes) without limitation” in this or any Loan Document.
Capitalized terms not otherwise defined in this Agreement shall have the
meanings set forth in Section 13. All other terms contained in this
Agreement, unless otherwise indicated, shall have the meanings provided by the
Code to the extent such terms are defined therein.

 

2.                                      LOAN AND TERMS OF PAYMENT

 

2.1.                            Promise
to Pay. Borrower hereby unconditionally promises to pay Bank the
outstanding principal amount of all Credit Extensions and accrued and unpaid
interest thereon as and when due in accordance with this Agreement.

 

2.1.1.                  Revolving
Advances.

 

(a)                                  Availability.
Subject to the terms and conditions of this Agreement, Bank shall make Advances
not exceeding the Availability Amount. Amounts borrowed under the Revolving
Line may be repaid and, prior to the Revolving Line Maturity Date,
reborrowed, subject to the applicable terms and conditions precedent herein.

 

(b)                                 Termination;
Repayment. The Revolving Line terminates on the Revolving Line Maturity
Date, when the principal amount of all Advances, the unpaid interest thereon,
and all other Obligations relating to the Revolving Line shall be immediately
due and payable.

 

2.2.                            Overadvances.
If, at any time, the Credit Extensions under Section 2.1.1 exceed the
lesser of either (a) the Revolving Line or (b) the Borrowing Base,
Borrower shall immediately pay to Bank in cash such excess.

 

2.3.                            Payment
of Interest on the Credit Extensions.

 

(a)                                  Interest
Rate. Subject to Section 2.3(b), the principal amount outstanding
under the Revolving Line shall accrue interest at a floating per annum rate
equal to one percent (1%) above the Prime Rate, which interest shall be payable
monthly in accordance with Section 2.3(f) below.

 

(b)                                 Default
Rate. After an Event of Default, Obligations accrue interest at the Default
Rate. The Default Rate is, at the Bank’s option, (i) the Maximum Lawful
Rate, if the Maximum Lawful rate is established by applicable law, (ii) the
interest rate applicable immediately prior to the occurrence of the Event of
Default plus five percent (5.00%), if no Maximum Lawful Rate law has been
established by applicable law; (iii) eighteen percent (18.00%) per annum;
or (iv) such lesser rate of interest as Bank in its sole discretion may choose
to charge; but in no event more than the Maximum Lawful Rate. Bank will not
compute the interest in a manner that would cause Bank to contract for, charge
or receive interest that would exceed the Maximum Lawful Rate or the Maximum
Lawful Amount.

 

1

 

(c)                                  Adjustment
to Interest Rate. Changes to the interest rate of any Credit Extension
based on changes to the Prime Rate shall be effective on the effective date of
any change to the Prime Rate and to the extent of any such change.

 

(d)                                 360-Day
Year. Interest shall be computed on the basis of a 360-day year for the
actual number of days elapsed.

 

(e)                                  Debit
of Accounts. Bank may debit any of Borrower’s deposit accounts,
including the Designated Deposit Account, for principal and interest payments
or any other amounts Borrower owes Bank when due. These debits shall not
constitute a set-off.

 

(f)                                    Payments.
Unless otherwise provided, interest is payable monthly on the first calendar
day of each month. Payments of principal and/or interest received after 12:00 p.m.
Pacific time are considered received at the opening of business on the next
Business Day. When a payment is due on a day that is not a Business Day, the
payment is due the next Business Day and additional fees or interest, as
applicable, shall continue to accrue.

 

(g)                                 Spreading
of Interest. Due to irregular periodic balances of principal, the variable
nature of the interest rate, or prepayment, the total interest that will accrue
under this Agreement cannot be determined in advance. Bank does not intend to
contract for, charge or receive more than the Maximum Lawful Rate or Maximum
Lawful Amount permitted by applicable state or federal law, and to prevent such
an occurrence Bank and Borrower agree that all amounts of interest, whenever
contracted for, charged or received by Bank, with respect to the Obligations,
will be spread, prorated or allocated over the full period of time the
Obligations are unpaid, including the period of any renewal or extension
thereof. If the maturity of the Obligations is accelerated for any reason
whether as a result of an Event of Default or otherwise prior to the full
stated term, the total amount of interest contracted for, charged or received
to the time of such demand shall be spread, prorated or allocated along with
any interest thereafter accruing over the full period of time that the Obligations
thereafter remain unpaid for the purpose of determining if such interest
exceeds the Maximum Lawful Amount.

 

(h)                                 Excess
Interest. At maturity (whether by acceleration or otherwise) or on earlier
final payment of the Obligations, Bank shall compute the total amount of
interest that has been contracted for, charged or received by Bank or payable
by Borrower hereunder and compare such amount to the Maximum Lawful Amount that
could have been contracted for, charged or received by Bank. If such computation
reflects that the total amount of interest that has been contracted for,
charged, received by Bank, or payable by Borrower exceeds the Maximum Lawful
Amount, then Bank shall apply such excess to the reduction of the principal
balance, and any such excess remaining thereafter shall be refunded to Borrower.
This provision concerning the crediting or refund of excess interest shall
control and take precedence over all other agreements between Borrower and Bank
so that under no circumstances shall the total interest contracted for, charged
or received by Bank exceed the Maximum Lawful Amount.

 

2.4.                            Fees.
Borrower shall pay to Bank:

 

(a)                                  A
fully earned, non-refundable commitment fee of $5,000.00 is due on the
Effective Date, and payable as follows: (i) $2,500 shall be paid on the
Effective Date, and (ii) $2,500 shall be paid on the date the Revolving
Line increases to $2,000,000; and

 

(b)                                 Bank
Expenses. All Bank Expenses incurred through and after the Effective Date,
when due.

 

3.                                      CONDITIONS OF LOANS

 

3.1.                            Conditions
Precedent to Initial Advance. Bank’s obligation to make the initial Advance
is subject to the condition precedent that Bank shall have received, in form and
substance satisfactory to Bank, such documents, and completion of such other
matters, as Bank may reasonably deem necessary or appropriate, including,
without limitation:

 

2

 

(a)                                  Borrower
shall have delivered duly executed original signatures to the Loan Documents to
which it is a party;

 

(b)                                 Borrower
shall have delivered duly executed original signatures to the Control
Agreements;

 

(c)                                  Borrower
shall have delivered its Operating Documents and a good standing certificate of
Borrower certified by the Secretary of State of the State of Delaware as of a
date no earlier than thirty (30) days prior to the Effective Date;

 

(d)                                 Borrower
shall have delivered duly executed original signatures to the completed
Borrowing Resolutions for Borrower;

 

(e)                                  Bank
shall have received certified copies, dated as of a recent date, of financing
statement searches, as Bank shall request, accompanied by written evidence
(including any UCC termination statements) that the Liens indicated in any such
financing statements either constitute Permitted Liens or have been or, in connection
with the initial Advance, will be terminated or released;

 

(f)                                    Borrower
shall have delivered the Perfection Certificate(s) executed by Borrower;

 

(g)                                 Borrower
shall have delivered a landlord’s consent executed by Borrower’s landlord in
favor of Bank;

 

(h)                                 Borrower
shall have delivered the insurance policies and/or endorsements required
pursuant to Section 6.5 hereof;

 

(i)                                     Borrower
shall have paid the fees and Bank Expenses then due as specified in Section 2.4
hereof; and

 

(j)                                     Bank
shall have received and approved an audit of Borrower’s Collateral.

 

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

 

(a)                                  except
as otherwise provided in Section 3.4(a), timely receipt of an executed Payment/Advance
Form;

 

(b)                                 the
representations and warranties in Section 5 shall be true in all material
respects on the date of the Payment/Advance Form and on the Funding Date
of each Credit Extension; provided, however, that such materiality qualifier
shall not be applicable to any representations and warranties that already are
qualified or modified by materiality in the text thereof; and provided, further
that those representations and warranties expressly referring to a specific
date shall be true, accurate and complete in all material respects as of such
date, and no Default or Event of Default shall have occurred and be continuing
or result from the Credit Extension. Each Credit Extension is Borrower’s representation
and warranty on that date that the representations and warranties in Section 5
remain true in all material respects; provided, however, that such materiality
qualifier shall not be applicable to any representations and warranties that
already are qualified or modified by materiality in the text thereof; and
provided, further that those representations and warranties expressly referring
to a specific date shall be true, accurate and complete in all material
respects as of such date; and

 

(c)                                  in
Bank’s sole discretion, any material impairment in the general affairs,
management, results of operation, financial condition or the prospect of
repayment of the Obligations, or there has not been any material adverse
deviation by Borrower from the most recent business plan of Borrower presented
to and accepted by Bank.

 

3

 

3.3.                            Covenant
to Deliver. Borrower agrees to deliver to Bank each item required to be
delivered to Bank under this Agreement as a condition to any Credit Extension. Borrower
expressly agrees that the extension of a Credit Extension prior to the receipt
by Bank of any such item shall not constitute a waiver by Bank of Borrower’s
obligation to deliver such item, and any such extension in the absence of a
required item shall be in Bank’s sole discretion.

 

3.4.                            Procedures
for Borrowing. Subject to the prior satisfaction of all other applicable
conditions to the making of an Advance set forth in this Agreement, to obtain
an Advance, Borrower shall notify Bank (which notice shall be irrevocable) by
electronic mail, facsimile, or telephone by 12:00 p.m. Pacific time on the
Funding Date of the Advance. Together with any such electronic or facsimile
notification, Borrower shall deliver to Bank by electronic mail or facsimile a
completed Payment/Advance Form executed by a Responsible Officer or his or
her designee. Bank may rely on any telephone notice given by a person whom
Bank believes is a Responsible Officer or designee. Bank shall credit Advances
to the Designated Deposit Account. Bank may make Advances under this
Agreement based on instructions from a Responsible Officer or his or her
designee or without instructions if the Advances are necessary to meet
Obligations which have become due.

 

4.                                      CREATION OF SECURITY INTEREST

 

4.1.                            Grant
of Security Interest. Borrower hereby grants Bank, to secure the payment
and performance in full of all of the Obligations, a continuing security
interest in, and pledges to Bank, the Collateral, wherever located, whether now
owned or hereafter acquired or arising, and all proceeds and products thereof. Borrower
represents, warrants, and covenants that the security interest granted herein
is and shall at all times continue to be a first priority perfected security
interest in the Collateral (subject only to Permitted Liens that may have
superior priority to Bank’s Lien under this Agreement). If Borrower shall
acquire a commercial tort claim, Borrower shall promptly notify Bank in a
writing signed by Borrower of the general details thereof and grant to Bank in
such writing a security interest therein and in the proceeds thereof, all upon
the terms of this Agreement, with such writing to be in form and substance
reasonably satisfactory to Bank.

 

If this Agreement
is terminated, Bank’s Lien in the Collateral shall continue until the
Obligations (other than inchoate indemnity obligations) are repaid in full in
cash. Upon payment in full in cash of the Obligations and
at such time as Bank’s obligation to make Credit Extensions has terminated,
Bank shall, at Borrower’s sole cost and expense, release its Liens in the
Collateral and all rights therein shall revert to Borrower.

 

4.2.                            Authorization
to File Financing Statements. Borrower hereby authorizes Bank to file
financing statements, without notice to Borrower, with all appropriate
jurisdictions to perfect or protect Bank’s interest or rights hereunder.

 

5.                                      REPRESENTATIONS AND WARRANTIES

 

Borrower
represents and warrants as follows:

 

5.1.                            Due
Organization and Authorization. Borrower and each of its Subsidiaries are
duly existing and in good standing in their respective jurisdictions of
formation and are qualified and licensed to do business and are in good
standing in any jurisdiction in which the conduct of their business or their
ownership of property requires that they be qualified except where the failure
to do so could not reasonably be expected to have a material adverse effect on
Borrower’s business. In connection with this Agreement, Borrower has delivered
to Bank a completed certificate substantially in the form attached hereto
as Exhibit E signed by Borrower, entitled “Perfection Certificate”.
Borrower represents and warrants to Bank that (a) Borrower’s exact legal
name is that indicated on the Perfection Certificate and on the signature page hereof;
(b) Borrower is an organization of the type and is organized in the
jurisdiction set forth in the Perfection Certificate; (c) the Perfection
Certificate accurately sets forth Borrower’s organizational identification
number or accurately states that Borrower has none; (d) the Perfection
Certificate accurately sets forth Borrower’s place of business, or, if more
than one, its chief executive office as well as Borrower’s mailing address (if
different than its chief executive office); (e) Borrower (and each of its
predecessors) has not, in the past five (5) years, changed its state of
formation, organizational structure or type, or any organizational number
assigned by its jurisdiction; and (f) all other information set forth on
the Perfection Certificate pertaining to Borrower and each of its Subsidiaries
is accurate and complete. If Borrower is not now a 

 

4

 

Registered Organization but later becomes one,
Borrower shall promptly notify Bank of such occurrence and provide Bank with
Borrower’s organizational identification number.

 

The execution, delivery
and performance of the Loan Documents have been duly authorized, and do not
conflict with Borrower’s organizational documents, nor constitute an event of
default under any material agreement by which Borrower is bound. Borrower is
not in default under any agreement to which it is a party or by which it is
bound in which the default could have a material adverse effect on Borrower’s
business.

 

5.2.                            Collateral.
Borrower has good title to, has rights in, and the power to transfer each item
of the Collateral upon which it purports to grant a Lien hereunder, free and
clear of any and all Liens except Permitted Liens. Borrower has no deposit accounts
other than the deposit accounts with Bank, the deposit accounts, if any,
described in the Perfection Certificate delivered to Bank in connection
herewith, or of which Borrower has given Bank notice and taken such actions as
are necessary to give Bank a perfected security interest therein. The Accounts
are bona fide, existing obligations of the Account Debtors.

 

The Collateral is not in
the possession of any third party bailee (such as a warehouse) except as
otherwise provided in the Perfection Certificate. None of the components of the
Collateral shall be maintained at locations other than as provided in the
Perfection Certificate or as Borrower has given Bank notice pursuant to Section 7.2.
In the event that Borrower, after the date hereof, intends to store or
otherwise deliver any portion of the Collateral to a bailee, then Borrower will
first receive the written consent of Bank and such bailee must execute and
deliver a bailee agreement in form and substance satisfactory to Bank in
its sole discretion.

 

All Inventory is in all
material respects of good and marketable quality, free from material defects.

 

Borrower is the sole
owner of its intellectual property, except for intellectual property licensed
from third parties or non-exclusive licenses granted to its customers in the
ordinary course of business. To the best of the knowledge of Borrower, each patent
is valid and enforceable. No part of the intellectual property has been
judged invalid or unenforceable, in whole or in part, and to the best of Borrower’s
knowledge, no claim has been made that any part of the intellectual
property violates the rights of any third party except to the extent such claim
could not reasonably be expected to have a material adverse effect on Borrower’s
business. Except as noted on the Perfection Certificate, Borrower is not a
party to, nor is bound by, any license or other agreement with respect to which
Borrower is the licensee that prohibits or otherwise restricts Borrower from
granting a security interest in Borrower’s interest in such license or
agreement or any other property. Borrower shall provide written notice to Bank
within ten (10) days of entering or becoming bound by any such license or
agreement which is reasonably likely to have a material impact on Borrower’s
business or financial condition (other than over-the-counter software that is
commercially available to the public). Borrower shall take such steps as Bank
requests to obtain the consent of, or waiver by, any person whose consent or
waiver is necessary for all such licenses or contract rights to be deemed “Collateral”
and for Bank to have a security interest in it that might otherwise be
restricted or prohibited by law or by the terms of any such license or
agreement (such consent or authorization may include a licensor’s
agreement to a contingent assignment of the license to Bank if Bank determines
that is necessary in its good faith judgment), whether now existing or entered
into in the future.

 

5.3.                            Accounts
Receivable. For any Eligible Account in any Borrowing Base Certificate, all
statements made and all unpaid balances appearing in all invoices, instruments
and other documents evidencing such Eligible Account are and shall be true and
correct and all such invoices, instruments and other documents, and all of
Borrower’s Books are genuine and in all respects what they purport to be. All
sales and other transactions underlying or giving rise to each Eligible Account
shall comply in all material respects with all applicable laws and governmental
rules and regulations. Borrower has no knowledge of any actual or imminent
Insolvency Proceeding of any Account Debtor whose accounts are an Eligible
Account in any Borrowing Base Certificate. To the best of Borrower’s knowledge,
all signatures and endorsements on all documents, instruments, and agreements
relating to all Eligible Account are genuine, and all such documents,
instruments and agreements are legally enforceable in accordance with their
terms.

 

5.4.                            Litigation.
There are no actions or proceedings pending or, to the knowledge of the
Responsible Officers, threatened in writing by or against Borrower or any of
its Subsidiaries involving more than $25,000.

 

5

 

5.5.                            No
Material Deviation in Financial Statements. All consolidated financial
statements for Borrower and any of its Subsidiaries delivered to Bank fairly
present in all material respects Borrower’s consolidated financial condition
and Borrower’s consolidated results of operations. There has not been any
material deterioration in Borrower’s consolidated financial condition since the
date of the most recent financial statements submitted to Bank.

 

5.6.                            Solvency.
Borrower is able to pay its debts (including trade debts) as they mature.

 

5.7.                            Regulatory
Compliance. Borrower is not an “investment company” or a company “controlled”
by an “investment company” under the Investment Company Act. Borrower is not
engaged as one of its important activities in extending credit for margin stock
(under Regulations T and U of the Federal Reserve Board of Governors). Borrower
has complied in all material respects with the Federal Fair Labor Standards Act.
Borrower has not violated any laws, ordinances or rules, the violation of which
could reasonably be expected to have a material adverse effect on its business.
None of Borrower’s or any of its Subsidiaries’ properties or assets has been
used by Borrower or any Subsidiary or, to the best of Borrower’s knowledge, by
previous Persons, in disposing, producing, storing, treating, or transporting
any hazardous substance other than legally. Borrower and each of its
Subsidiaries have obtained all consents, approvals and authorizations of, made
all declarations or filings with, and given all notices to, all government
authorities that are necessary to continue its business as currently conducted.

 

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

 

5.9.                            Tax
Returns and Payments; Pension Contributions. Borrower has timely filed all
required tax returns and reports, and Borrower has timely paid all foreign,
federal, state and local taxes, assessments, deposits and contributions owed by
Borrower. Borrower may defer payment of any contested taxes, provided that
Borrower (a) in good faith contests its obligation to pay the taxes by
appropriate proceedings promptly and diligently instituted and conducted, (b) notifies
Bank in writing of the commencement of, and any material development in, the
proceedings, (c) posts bonds or takes any other steps required to prevent
the governmental authority levying such contested taxes from obtaining a Lien
upon any of the Collateral that is other than a “Permitted Lien”. Borrower has
no knowledge of any claims or adjustments proposed for any of Borrower’s prior
tax years which could result in additional taxes becoming due and payable by
Borrower. Borrower has paid all amounts necessary to fund all present pension,
profit sharing and deferred compensation plans in accordance with their terms,
and Borrower has not withdrawn from participation in, and has not permitted
partial or complete termination of, or permitted the occurrence of any other
event with respect to, any such plan which could reasonably be expected to
result in any liability of Borrower, including any liability to the Pension
Benefit Guaranty Corporation or its successors or any other governmental
agency.

 

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

 

5.11.                     Full
Disclosure. No written representation, warranty or other statement of
Borrower in any certificate or written statement given to Bank, as of the date
such representations, warranties, or other statements were made, taken together
with all such written certificates and written statements given to Bank,
contains any untrue statement of a material fact or omits to state a material
fact necessary to make the statements contained in the certificates or
statements not misleading (it being recognized by Bank that the projections and
forecasts provided by Borrower in good faith and based upon reasonable
assumptions are not viewed as facts and that actual results during the period
or periods covered by such projections and forecasts may differ from the
projected or forecasted results).

 

6.                                      AFFIRMATIVE COVENANTS

 

Borrower shall do all of
the following:

 

6.1.                            Government
Compliance. Borrower shall, and shall cause each of its Subsidiaries to,
maintain its legal existence and good standing in its jurisdiction of formation
and each jurisdiction in which the nature of its 

 

6

 

business requires them to be so qualified, except
where the failure to take such action would not reasonably be expected to have
a material adverse effect on Borrower’s and its Subsidiaries’ business or
operations, taken as a whole; provided, that (a) the legal
existence of any Subsidiary that is not a Guarantor may be terminated or
permitted to lapse, and any qualification of such Subsidiary to do business may be
terminated or permitted to lapse, if, in the good faith judgment of Borrower,
such termination or lapse is in the best interests of Borrower and its
Subsidiaries, taken as a whole, and (b) Borrower may not permit its
qualification to do business in the jurisdiction of its chief executive office
to terminate or lapse; and provided, further, that this Section 6.2
shall not be construed to prohibit any other transaction that is otherwise
permitted in Section 7 of this Agreement.

 

Borrower shall comply,
and shall have each Subsidiary comply, with all laws, ordinances and
regulations to which it is subject, noncompliance with which could have a
material adverse effect on Borrower’s business

 

6.2.                            Financial
Statements, Reports, Certificates.

 

(a)                                  Deliver
to Bank:  (i) as soon as available,
but no later than thirty (30) days after the last day of each month, a company
prepared consolidated balance sheet and income statement covering Borrower’s
consolidated operations during the period certified by a Responsible Officer
and in a form acceptable to Bank; (ii) as soon as available, but no
later than one-hundred twenty (120) days after the last day of Borrower’s
fiscal year, audited consolidated financial statements prepared under GAAP,
consistently applied, together with an unqualified opinion on the financial
statements from an independent certified public accounting firm acceptable to
Bank in its reasonable discretion; (iii) within five (5) days of
delivery, copies of all statements, reports and notices made available to
Borrower’s security holders or to any holders of Subordinated Debt; (iv) within
five (5) days of filing, all reports on Form 10-K, 10-Q and 8-K filed
with the Securities and Exchange Commission or a link thereto on Borrower’s or
another website on the Internet; (v) a prompt report of any legal actions
pending or threatened against Borrower or any of its Subsidiaries that could
result in damages or costs to Borrower or any of its Subsidiaries of
Twenty-five Thousand Dollars ($25,000) or more; (vi) prompt notice of an
event that materially and adversely affects the value of the intellectual
property; (vii) a prompt report of any complaints filed with the
Texas Workforce Commission (“TWC”) against Borrower in the aggregate of
$25,000 or more; and (viii) budgets, sales projections, operating plans
and other financial information reasonably requested by Bank.

 

(b)                                 Borrower’s
10K, 10Q, and 8K reports required to be delivered pursuant to Section 6.2(a)(iv) shall
be deemed to have been delivered on the date on which Borrower posts such
report or provides a link thereto on Borrower’s or another website on the
Internet; provided, that Borrower shall provide paper copies to Bank with
the Compliance Certificate required by Section 6.2(d).

 

(c)                                  Within
thirty (30) days after the last day of each month, deliver to Bank a duly
completed Borrowing Base Certificate signed by a Responsible Officer, with (i) aged
listings of accounts receivable and accounts payable (by invoice date) and (ii) perpetual
inventory reports for the Inventory valued on a first-in, first-out basis at
the lower of cost or market (in accordance with GAAP) or such other inventory
reports as are requested by Bank in its good faith business judgment.

 

(d)                                 Within
thirty (30) days after the last day of each month, deliver to Bank with the
monthly financial statements, a duly completed Compliance Certificate signed by
a Responsible Officer setting forth calculations showing compliance with the
financial covenants set forth in this Agreement.

 

(e)                                  Allow
Bank to audit Borrower’s Collateral at Borrower’s expense, such expense not to
exceed $3,500 per year, upon reasonable notice to Borrower; provided, that
Borrower shall be obligated to pay not more than one (1) audit per year. Notwithstanding
the foregoing, during the continuance of an Event of Default, Bank may, in Bank’s
sole discretion, audit Borrower’s Collateral at Borrower’s expense.

 

6.3.                            Inventory;
Returns. Keep all Inventory in good and marketable condition, free from
material defects. Returns and allowances between Borrower and its Account
Debtors shall follow Borrower’s customary practices as they exist at the Effective
Date. Borrower must promptly notify Bank of all returns, recoveries, disputes
and claims that involve more than Twenty-Five Thousand Dollars ($25,000).

 

7

 

6.4.                            Taxes;
Pensions. Make, and cause each of its Subsidiaries to make, timely payment
of all foreign, federal, state, and local taxes or assessments (other than
taxes and assessments which Borrower is contesting pursuant to the terms of Section 5.9
hereof) and shall deliver to Bank, on demand, appropriate certificates
attesting to such payments, and pay all amounts necessary to fund all present
pension, profit sharing and deferred compensation plans in accordance with
their terms.

 

6.5.                            Insurance.
Keep its business and the Collateral insured for risks and in amounts standard
for companies in Borrower’s industry and location and as Bank may reasonably
request. Insurance policies shall be in a form, with companies, and in amounts
that are satisfactory to Bank. All property policies shall have a lender’s loss
payable endorsement showing Bank as lender loss payee and waive subrogation
against Bank, and all liability policies shall show, or have endorsements
showing, Bank as an additional insured. All policies (or the loss payable and
additional insured endorsements) shall provide that the insurer must give Bank
at least twenty (20) days notice before canceling, amending, or declining to
renew its policy. At Bank’s request, Borrower shall deliver certified copies of
policies and evidence of all premium payments. Proceeds payable under any
policy shall, at Bank’s option, be payable to Bank on account of the
Obligations. If Borrower fails to obtain insurance as required under this Section 6.5
or to pay any amount or furnish any required proof of payment to third persons
and Bank, Bank may make all or part of such payment or obtain such
insurance policies required in this Section 6.5, and take any action under
the policies Bank deems prudent.

 

6.6.                            Operating
Accounts.

 

(a)                                  Maintain
its depository and operating accounts and securities accounts with Bank and
Bank’s affiliates.

 

(b)                                 In
addition, for each Collateral Account that Borrower at any time maintains,
Borrower shall cause the applicable bank or financial institution (other than
Bank) at or with which any Collateral Account is maintained to execute and
deliver a Control Agreement or other appropriate instrument with respect to
such Collateral Account to perfect Bank’s Lien in such Collateral Account in
accordance with the terms hereunder. The provisions of the previous sentence
shall not apply to deposit accounts exclusively used for payroll, payroll taxes
and other employee wage and benefit payments to or for the benefit of Borrower’s
employees and identified to Bank by Borrower as such.

 

6.7.                            Financial
Covenants.

 

Borrower shall
maintain at all times, to be tested as of the last day of each month, unless
otherwise noted, on a consolidated basis with respect to Borrower and its
Subsidiaries:

 

(a)                                  Liquidity
Coverage. A ratio of unrestricted cash on deposit with Bank plus the amount
equal to 80% of Borrower’s Eligible Accounts to the amount of the Obligations
of not less than 1.25:1.00.

 

(b)                                 EBITDA.
Beginning on the date the Revolving Line increases to $2,000,000 and measured thereafter
on a rolling three (3) month basis as of the end of each month, EBITDA,
less the aggregate amount of Permitted Dividends, of at least $0.00.

 

6.8.                            Protection
and Registration of Intellectual Property Rights. Borrower shall:  (a) protect, defend and maintain the
validity and enforceability of its intellectual property material to Borrower’s
business; (b) promptly advise Bank in writing of material infringements of
its intellectual property; and (c) not allow any intellectual property
material to Borrower’s business to be abandoned, forfeited or dedicated to the
public without Bank’s written consent. If Borrower decides to register any
copyrights or mask works in the United States Copyright Office, Borrower shall:
(x) provide Bank with at least fifteen (15) days prior written notice of its
intent to register such copyrights or mask works together with a copy of the
application it intends to file with the United States Copyright Office
(excluding exhibits thereto); (y) execute an intellectual property security
agreement or such other documents as Bank may reasonably request to
maintain the perfection and priority of Bank’s security interest in the
copyrights or mask works intended to be registered with the United States
Copyright Office; and (z) record such intellectual property security agreement
with the United States Copyright Office contemporaneously with filing 

 

8

 

the copyright or mask work application(s) with the
United States Copyright Office. Borrower shall promptly provide to Bank a copy
of the application(s) filed with the United States Copyright Office together
with evidence of the recording of the intellectual property security agreement
necessary for Bank to maintain the perfection and priority of its security
interest in such copyrights or mask works. Borrower shall provide written
notice to Bank of any application filed by Borrower in the United States Patent
and Trademark Office for a patent or to register a trademark or service mark
within 30 days after any such filing.

 

6.9.                            Litigation
Cooperation. From the date hereof and continuing through the termination of
this Agreement, make available to Bank, without expense to Bank, Borrower and
its officers, employees and agents and Borrower’s books and records, to the
extent that Bank may deem them reasonably necessary to prosecute or defend
any third-party suit or proceeding instituted by or against Bank with respect
to any Collateral or relating to Borrower.

 

6.10.                     Further
Assurances. Borrower shall execute any further instruments and take further
action as Bank reasonably requests to perfect or continue Bank’s Lien in the
Collateral or to effect the purposes of this Agreement.

 

7.                                      NEGATIVE COVENANTS

 

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

 

7.1.                            Dispositions.
Convey, sell, lease, transfer or otherwise dispose of (collectively, “Transfer”), or permit any of its Subsidiaries to Transfer,
all or any part of its business or property, except for Transfers (a) of
Inventory in the ordinary course of business; (b) of worn-out or obsolete
Equipment; and (c) in connection with Permitted Liens and Permitted
Investments.

 

7.2.                            Changes
in Business, Management, Control, or Business Locations. (a) Engage in
or permit any of its Subsidiaries to engage in any business other than the
businesses currently engaged in by Borrower and such Subsidiary, as applicable,
or reasonably related thereto; (b) liquidate or dissolve; or (c) (i) have
a change in the Chief Executive Officer or Chief Financial Officer, or (ii) permit
or suffer any Change in Control. Borrower shall not, without at least thirty
(30) days prior written notice to Bank: (1) add any new offices or
business locations, including warehouses (unless such new offices or business
locations contain less than Ten Thousand Dollars ($10,000) in Borrower’s assets
or property), (2) change its jurisdiction of organization, (3) change
its organizational structure or type, (4) change its legal name, or (5) change
any organizational number (if any) assigned by its jurisdiction of
organization.

 

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

 

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

 

7.5.                            Encumbrance.
Create, incur, or allow any Lien on any of its property, or assign or convey
any right to receive income, including the sale of any Accounts, or permit any
of its Subsidiaries to do so, except for Permitted Liens, permit any Collateral
not to be subject to the first priority security interest granted herein.

 

7.6.                            Maintenance
of Collateral Accounts. Maintain any Collateral Account except pursuant to
the terms of Section 6.6.(b) hereof.

 

7.7.                            Distributions;
Investments. (a) Directly or indirectly acquire or own any Person, or
make any Investment in any Person, other than Permitted Investments, or permit
any of its Subsidiaries to do so; or (b) pay any dividends or make any
distribution or payment or redeem, retire or purchase any capital stock other than Permitted
Distributions.

 

9

 

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. (a) Make or permit any payment on any Subordinated Debt, except
under the terms of the subordination, intercreditor, or other similar agreement
to which such Subordinated Debt is subject, or (b) amend any provision in
any document relating to the Subordinated Debt which would increase the amount
thereof or adversely affect the subordination thereof to Obligations owed to
Bank.

 

7.10.                     Compliance.
Become an “investment company” or a company controlled by an “investment
company”, under the Investment Company Act of 1940 or undertake as one of its
important activities extending credit to purchase or carry margin stock (as
defined in Regulation U of the Board of Governors of the Federal Reserve
System), or use the proceeds of any Credit Extension for that purpose; fail to
meet the minimum funding requirements of ERISA, permit a Reportable Event or
Prohibited Transaction, as defined in ERISA, to occur; fail to comply with the
Federal Fair Labor Standards Act or violate any other law or regulation, if the
violation could reasonably be expected to have a material adverse effect on
Borrower’s business, or permit any of its Subsidiaries to do so; withdraw or
permit any Subsidiary to withdraw from participation in, permit partial or
complete termination of, or permit the occurrence of any other event with
respect to, any present pension, profit sharing and deferred compensation plan
which could reasonably be expected to result in any liability of Borrower,
including any liability to the Pension Benefit Guaranty Corporation or its
successors or any other governmental agency.

 

8.                                      EVENTS OF DEFAULT

 

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

 

8.1.                            Payment
Default. Borrower fails to (a) make any payment of principal or interest
on any Credit Extension on its due date, or (b) pay any other Obligations
within three (3) Business Days after such Obligations are due and payable.
During the cure period, the failure to cure the payment default is not an Event
of Default (but no Credit Extension will be made during the cure period);

 

8.2.                            Covenant
Default.

 

(a)                                  Borrower
fails or neglects to perform any obligation in Sections 6.2, 6.6, 6.7 or
violates any covenant in Section 7; or

 

(b)                                 Borrower
fails or neglects to perform, keep, or observe any other term, provision,
condition, covenant or agreement contained in this Agreement, any Loan
Documents, and as to any default (other than those specified in this Section 8)
under such other term, provision, condition, covenant or agreement that can be
cured, has failed to cure the default within ten (10) days after the
occurrence thereof; provided, however, that if the default cannot by its nature
be cured within the ten (10) day period or cannot after diligent attempts
by Borrower be cured within such ten (10) day period, and such default is
likely to be cured within a reasonable time, then Borrower shall have an
additional period (which shall not in any case exceed thirty (30) days) to
attempt to cure such default, and within such reasonable time period the
failure to cure the default shall not be deemed an Event of Default (but no
Credit Extensions shall be made during such cure period). Grace periods
provided under this section shall not apply, among other things, to
financial covenants or any other covenants set forth in subsection (a) above;

 

8.3.                            Material
Adverse Change. A Material Adverse Change occurs;

 

8.4.                            Attachment.
(a) Any material portion of Borrower’s assets is attached, seized, levied
on, or comes into possession of a trustee or receiver and the attachment,
seizure or levy is not removed in ten (10) days; (b) the service of
process upon Bank seeking to attach, by trustee or similar process, any funds
of Borrower or of any entity under control of Borrower (including a Subsidiary)
on deposit with Bank ; (c) Borrower is enjoined, 

 

10

 

restrained, or prevented by court order from
conducting a material part of its business; (d) a judgment or other
claim in excess of Fifty Thousand Dollars ($50,000) becomes a Lien (other than
a Permitted Lien) on any of Borrower’s assets; or (e) a notice of lien,
levy, or assessment is filed against any of Borrower’s assets by any government
agency and not paid within ten (10) days after Borrower receives notice. These
are not Events of Default if stayed or if a bond is posted pending contest by
Borrower (but no Credit Extensions shall be made during the cure period);

 

8.5.                            Insolvency
Borrower is unable to pay its debts (including trade debts) as they become due
or otherwise becomes insolvent; (b) Borrower begins an Insolvency
Proceeding; or (c) an Insolvency Proceeding is begun against Borrower and
not dismissed or stayed within thirty (30) days (but no Credit Extensions shall
be made while of any of the conditions described in clause (a) exist
and/or until any Insolvency Proceeding is dismissed);

 

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

 

8.7.                            Judgments.
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) (not
covered by independent third-party insurance) shall be rendered against
Borrower and shall remain unsatisfied and unstayed for a period of ten (10) days
after the entry thereof (provided that no Credit Extensions will be made prior
to the satisfaction or stay of such judgment);

 

8.8.                            Misrepresentations.
Borrower or any Person acting for Borrower makes any representation, warranty,
or other statement now or later in this Agreement, any Loan Document or in any
writing delivered to Bank or to induce Bank to enter this Agreement or any Loan
Document, and such representation, warranty, or other statement is incorrect in
any material respect when made;

 

8.9.                            TWC. If a
preliminary order is issued by the Texas Workforce Commission against Borrower
for an aggregate amount of at least Twenty-Five Thousand Dollars ($25,000)
; or

 

8.10.                     Subordinated
Debt. A default or breach occurs under any agreement between Borrower and
any creditor of Borrower that signed a subordination, intercreditor, or other
similar agreement with Bank, or any creditor that has signed such an agreement
with Bank breaches any terms of such agreement.

 

8.11.                     Redemptions.
Notwithstanding anything contained herein to the contrary, Borrower redeems
shares of its preferred stock, and accrued dividends thereon, for cash in an
aggregate amount of more than Two Hundred Thousand Dollars ($200,000) per year,
beginning on the Effective Date.

 

9.                                      BANK’S RIGHTS AND REMEDIES

 

9.1.                            Rights
and Remedies. While an Event of Default occurs and continues Bank may,
without notice or demand, do any or all of the following:

 

(a)                                  declare
all Obligations immediately due and payable (but if an Event of Default
described in Section 8.5 or 8.11 occurs all Obligations are immediately
due and payable without any action by Bank);

 

(b)                                 stop
advancing money or extending credit for Borrower’s benefit under this Agreement
or under any other agreement between Borrower and Bank;

 

(c)                                  demand
that Borrower (i) deposits cash with Bank in an amount equal to the
aggregate amount of any Letters of Credit remaining undrawn, as collateral
security for the repayment of any future drawings under such Letters of Credit,
and Borrower shall forthwith deposit and pay such amounts, and (ii) pay in
advance all Letter of Credit fees scheduled to be paid or payable over the
remaining term of any Letters of Credit;

 

11

 

(d)                                 terminate
any FX Contracts;

 

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

 

(f)                                    make
any payments and do any acts it considers necessary or reasonable to protect
the Collateral and/or its security interest in the Collateral. Borrower shall
assemble the Collateral if Bank requests and make it available as Bank
designates. Bank may enter premises where the Collateral is located, take
and maintain possession of any part of the Collateral, and pay, purchase,
contest, or compromise any Lien which appears to be prior or superior to its
security interest and pay all expenses incurred. Borrower grants Bank a license
to enter and occupy any of its premises, without charge, to exercise any of
Bank’s rights or remedies;

 

(g)                                 apply
to the Obligations any (i) balances and deposits of Borrower it holds, or (ii) any
amount held by Bank owing to or for the credit or the account of Borrower;

 

(h)                                 ship,
reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise
for sale, and sell the Collateral. Bank is hereby granted a non-exclusive, royalty-free
license or other right to use, without charge, Borrower’s labels, patents,
copyrights, mask works, rights of use of any name, trade secrets, trade names,
trademarks, service marks, and advertising matter, or any similar property as
it pertains to the Collateral, in completing production of, advertising for
sale, and selling any Collateral and, in connection with Bank’s exercise of its
rights under this Section, Borrower’s rights under all licenses and all
franchise agreements inure to Bank’s benefit;

 

(i)                                     place
a “hold” on any account maintained with Bank and/or deliver a notice of
exclusive control, any entitlement order, or other directions or instructions
pursuant to any Control Agreement or similar agreements providing control of
any Collateral;

 

(j)                                     demand
and receive possession of Borrower’s Books; and

 

(k)                                  exercise
all rights and remedies available to Bank under the Loan Documents or at law or
equity, including all remedies provided under the Code (including disposal of
the Collateral pursuant to the terms thereof).

 

9.2.                            Power
of Attorney. Borrower hereby irrevocably appoints Bank as its lawful
attorney-in-fact, exercisable upon the occurrence and during the continuance of
an Event of Default, to:  (a) endorse
Borrower’s name on any checks or other forms of payment or security; (b) sign
Borrower’s name on any invoice or bill of lading for any Account or drafts
against Account Debtors; (c) settle and adjust disputes and claims about
the Accounts directly with Account Debtors, for amounts and on terms Bank
determines reasonable; (d) make, settle, and adjust all claims under
Borrower’s insurance policies; (e) pay, contest or settle any Lien,
charge, encumbrance, security interest, and adverse claim in or to the
Collateral, or any judgment based thereon, or otherwise take any action to
terminate or discharge the same; and (f) transfer the Collateral into the
name of Bank or a third party as the Code permits. Borrower hereby appoints
Bank as its lawful attorney-in-fact to sign Borrower’s name on any documents
necessary to perfect or continue the perfection of any security interest
regardless of whether an Event of Default has occurred until all Obligations
have been satisfied in full and Bank is under no further obligation to make
Credit Extensions hereunder. Bank’s foregoing appointment as Borrower’s
attorney in fact, and all of Bank’s rights and powers, coupled with an
interest, are irrevocable until all Obligations have been fully repaid and
performed and Bank’s obligation to provide Credit Extensions terminates.

 

9.3.                            Accounts
Verification; Collection. Whether or not an Event of Default has occurred
and is continuing, Bank may notify any Person owing Borrower money of Bank’s
security interest in such funds and verify the amount of such account. After
the occurrence of an Event of Default, any amounts received by Borrower shall
be held in trust by Borrower for Bank, and, if requested by Bank, Borrower
shall immediately deliver such receipts to Bank in the form received from
the Account Debtor, with proper endorsements for deposit.

 

12

 

9.4.                            Protective
Payments. If Borrower fails to obtain the insurance called for by Section 6.5
or fails to pay any premium thereon or fails to pay any other amount which Borrower
is obligated to pay under this Agreement or any other Loan Document, Bank may obtain
such insurance or make such payment, and all amounts so paid by Bank are Bank
Expenses and immediately due and payable, bearing interest at the then highest
applicable rate, and secured by the Collateral. Bank will make reasonable
efforts to provide Borrower with notice of Bank obtaining such insurance at the
time it is obtained or within a reasonable time thereafter. No payments by Bank
are deemed an agreement to make similar payments in the future or Bank’s waiver
of any Event of Default.

 

9.5.                            Application
of Payments and Proceeds. Unless an Event of Default has occurred and is
continuing, Bank shall apply any funds in its possession, whether from Borrower
account balances, payments, or proceeds realized as the result of any
collection of Accounts or other disposition of the Collateral, first, to Bank
Expenses, including without limitation, the reasonable costs, expenses,
liabilities, obligations and attorneys’ fees incurred by Bank in the exercise
of its rights under this Agreement; second, to the interest due upon any of the
Obligations; and third, to the principal of the Obligations and any applicable
fees and other charges, in such order as Bank shall determine in its sole
discretion. Any surplus shall be paid to Borrower or other Persons legally
entitled thereto; Borrower shall remain liable to Bank for any deficiency. If
an Event of Default has occurred and is continuing, Bank may apply any
funds in its possession, whether from Borrower account balances, payments,
proceeds realized as the result of any collection of Accounts or other
disposition of the Collateral, or otherwise, to the Obligations in such order
as Bank shall determine in its sole discretion. Any surplus shall be paid to
Borrower or other Persons legally entitled thereto; Borrower shall remain
liable to Bank for any deficiency. If Bank, in its good faith business
judgment, directly or indirectly enters into a deferred payment or other credit
transaction with any purchaser at any sale of Collateral, Bank shall have the
option, exercisable at any time, of either reducing the Obligations by the
principal amount of the purchase price or deferring the reduction of the
Obligations until the actual receipt by Bank of cash therefor.

 

9.6.                            Bank’s
Liability for Collateral. So long as Bank complies with reasonable banking
practices regarding the safekeeping of the Collateral in the possession or
under the control of Bank, Bank shall not be liable or responsible for: (a) the
safekeeping of the Collateral; (b) any loss or damage to the Collateral; (c) any
diminution in the value of the Collateral; or (d) any act or default of
any carrier, warehouseman, bailee, or other Person. Borrower bears all risk of
loss, damage or destruction of the Collateral.

 

9.7.                            No
Waiver; Remedies Cumulative. Bank’s failure, at any time or times, to
require strict performance by Borrower of any provision of this Agreement or
any other Loan Document shall not waive, affect, or diminish any right of Bank
thereafter to demand strict performance and compliance herewith or therewith. No
waiver hereunder shall be effective unless signed by Bank and then is only
effective for the specific instance and purpose for which it is given. Bank’s
rights and remedies under this Agreement and the other Loan Documents are
cumulative. Bank has all rights and remedies provided under the Code, by law,
or in equity. Bank’s exercise of one right or remedy is not an election, and
Bank’s waiver of any Event of Default is not a continuing waiver. Bank’s delay
in exercising any remedy is not a waiver, election, or acquiescence.

 

9.8.                            Demand
Waiver. Borrower waives demand, notice of default or dishonor, notice of
payment and nonpayment, notice of any default, nonpayment at maturity, release,
compromise, settlement, extension, or renewal of accounts, documents,
instruments, chattel paper, and guarantees held by Bank on which Borrower is
liable.

 

10.                               NOTICES

 

All notices, consents,
requests, approvals, demands, or other communication (collectively, “Communication”) by any party to this Agreement or any other
Loan Document must be in writing and shall be deemed to have been validly
served, given, or delivered: (a) upon the earlier of actual receipt and
three (3) Business Days after deposit in the U.S. mail, first class,
registered or certified mail return receipt requested, with proper postage
prepaid; (b) upon transmission, when sent by electronic mail or facsimile
transmission; (c) one (1) Business Day after deposit with a reputable
overnight courier with all charges prepaid; or (d) when delivered, if
hand-delivered by messenger, all of which shall be addressed to the party to be
notified and sent to the address, facsimile number, or email address indicated
below. Bank or Borrower may change its address or facsimile number by
giving the other party written notice thereof in accordance with the terms of
this Section 10.

 

13

 

If to Borrower:                                         Intrusion Inc.

1101 East Arapaho Rd., Suite 100

Richardson, Texas 75081

Attn:  Michael Paxton

Fax:  972-301-3899

 

If to Bank:                                                               Silicon
Valley Bank 

14185 North Dallas
Parkway, Suite 780

Dallas, TX  75254

Attn:  Robert Sureck

Fax:  972-387-0782

 

11.                               CHOICE OF LAW, VENUE AND JURY
TRIAL WAIVER

 

Texas law governs the
Loan Documents without regard to principles of conflicts of law. Borrower and
Bank each submit to the exclusive jurisdiction of the State and Federal courts
in Texas; provided, however, that nothing in this Agreement shall be deemed to
operate to preclude Bank from bringing suit or taking other legal action in any
other jurisdiction to realize on the Collateral or any other security for the
Obligations, or to enforce a judgment or other court order in favor of Bank. Borrower
expressly submits and consents in advance to such jurisdiction in any action or
suit commenced in any such court, and Borrower hereby waives any objection that
it may have based upon lack of personal jurisdiction, improper venue, or
forum non conveniens and hereby consents to the granting of such legal or
equitable relief as is deemed appropriate by such court. Borrower hereby waives
personal service of the summons, complaints, and other process issued in such
action or suit and agrees that service of such summons, complaints, and other
process may be made by registered or certified mail addressed to Borrower
at the address set forth in Section 10 of this Agreement and that service
so made shall be deemed completed upon the earlier to occur of Borrower’s
actual receipt thereof or three (3) days after deposit in the U.S. mails,
proper postage prepaid.

 

BORROWER AND BANK EACH WAIVE
THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF OR
BASED UPON THIS AGREEMENT, THE LOAN DOCUMENTS OR ANY CONTEMPLATED TRANSACTION,
INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS WAIVER
IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT. EACH
PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL AND, BY ITS EXECUTION OF THIS
AGREEMENT CONFIRMS THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL
RIGHTS FOLLOWING CONSULTATION WITH COUNSEL.

 

12.                               GENERAL PROVISIONS

 

12.1.                     Successors
and Assigns. This Agreement binds and is for the benefit of the successors
and permitted assigns of each party. Borrower may not assign this
Agreement or any rights or obligations under it without Bank’s prior written
consent (which may be granted or withheld in Bank’s discretion). Bank has
the right, without the consent of or notice to Borrower, to sell, transfer,
negotiate, or grant participation in all or any part of, or any interest
in, Bank’s obligations, rights, and benefits under this Agreement and the other
Loan Documents.

 

12.2.                     Indemnification. BORROWER
WILL INDEMNIFY, DEFEND AND HOLD HARMLESS BANK AND ITS OFFICERS, EMPLOYEES AND
AGENTS AGAINST:  (A) ALL
OBLIGATIONS, DEMANDS, CLAIMS, AND LIABILITIES ASSERTED BY ANY OTHER PARTY IN
CONNECTION WITH THE TRANSACTIONS CONTEMPLATED BY THE LOAN DOCUMENTS; AND (B) ALL
LOSSES OR BANK EXPENSES INCURRED, OR PAID BY BANK FROM, FOLLOWING, OR
CONSEQUENTIAL TO TRANSACTIONS BETWEEN BANK AND BORROWER (INCLUDING REASONABLE
ATTORNEYS’ FEES AND EXPENSES), EXCEPT FOR LOSSES CAUSED BY BANK’S GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT. THE FOREGOING INDEMNITY BINDS BORROWER TO
INDEMNIFY BANK AND ITS OFFICERS, EMPLOYEES AND AGENTS FOR ITS OWN NEGLIGENCE
(WHETHER SOLE, COMPARATIVE, CONTRIBUTORY OR OTHERWISE, BUT NOT GROSS NEGLIGENCE
OR WILLFUL

 

14

 

MISCONDUCT) AND THAT OF ITS OFFICERS, EMPLOYEES,
AGENTS AND CONTRACTORS, AS WELL AS ANY LIABILITY ARISING BY VIRTUE OF ANY SUCH
PERSON’S STRICT LIABILITY.

 

12.3.                     Limitation of
Actions. Any claim or cause of action by Borrower against Bank, its
directors, officers, employees, agents, accountants, attorneys, or any other
Person affiliated with or representing Bank based upon, arising from, or
relating to this Loan Agreement or any other Loan Document, or any other
transaction contemplated hereby or thereby or relating hereto or thereto, or
any other matter, cause or thing whatsoever, occurred, done, omitted or
suffered to be done by Bank, its directors, officers, employees, agents,
accountants or attorneys, shall be barred unless asserted by Borrower by the
commencement of an action or proceeding in a court of competent jurisdiction by
(a) the filing of a complaint within one year from the earlier of (i) the
date any of Borrower’s officers or directors had knowledge of the first act,
the occurrence or omission upon which such claim or cause of action, or any part thereof,
is based, or (ii) the date this Agreement is terminated, and (b) the
service of a summons and complaint on an officer of Bank, or on any other
person authorized to accept service on behalf of Bank, within thirty (30) days
thereafter. Borrower agrees that such one-year period is a reasonable and
sufficient time for Borrower to investigate and act upon any such claim or
cause of action. The one-year period provided herein shall not be waived,
tolled, or extended except by the written consent of Bank in its sole
discretion. This provision shall survive any termination of this Loan Agreement
or any other Loan Document.

 

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

 

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

 

12.6.                     Amendments in
Writing; Integration. All amendments to this Agreement must be in writing
signed by both Bank and Borrower. This Agreement and the Loan Documents
represent the entire agreement about this subject matter and supersede prior
negotiations or agreements. All prior agreements, understandings,
representations, warranties, and negotiations between the parties about the
subject matter of this Agreement and the Loan Documents merge into this
Agreement and the Loan Documents.

 

12.7.                     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, are an original, and all taken together, constitute one Agreement.

 

12.8.                     Survival.
All covenants, representations and warranties made in this Agreement continue
in full force until this Agreement has terminated pursuant to its terms and all
Obligations (other than inchoate indemnity obligations and any other
obligations which, by their terms, are to survive the termination of this
Agreement) have been satisfied. The obligation of Borrower in Section 12.2
to indemnify Bank shall survive until the statute of limitations with respect
to such claim or cause of action shall have run.

 

12.9.                     Confidentiality.
In handling any confidential information, Bank shall exercise the same degree
of care that it exercises for its own proprietary information, but disclosure
of information may be made: (a) to Bank’s Subsidiaries or Affiliates;
(b) to prospective transferees or purchasers of any interest in the Credit
Extensions (provided, however, Bank shall use commercially reasonable efforts
to obtain such prospective transferee’s or purchaser’s agreement to the terms
of this provision); (c) as required by law, regulation, subpoena, or other
order; (d) to Bank’s regulators or as otherwise required in connection
with Bank’s examination or audit; and (e) as Bank considers appropriate in
exercising remedies under this Agreement. Confidential information does not
include information that either: (i) is in the public domain or in Bank’s
possession when disclosed to Bank, or becomes part of the public domain
after disclosure to Bank; or (ii) is disclosed to Bank by a third party,
if Bank does not know that the third party is prohibited from disclosing the
information. Notwithstanding anything contained herein to the contrary, the
term “confidential information” shall not include, and Bank may disclose
without limitation of any kind, any information with respect to the “tax
treatment” and “tax structure” (in each case within the meaning of Treasury
Regulation Section 1.6011-4) of the transactions contemplated hereby and
all materials of any kind (including opinions or other tax analysis) that are
provided to Bank relating to such tax treatment or tax structure.

 

15

 

12.10.              Attorneys’ Fees,
Costs and Expenses. In any action or proceeding between Borrower and Bank
arising out of or relating to the Loan Documents, the prevailing party shall be
entitled to recover its reasonable attorneys’ fees and other reasonable costs
and expenses incurred, in addition to any other relief to which it may be
entitled, whether or not a lawsuit is filed.

 

12.11.              Qualified Commercial
Loan Certification. Borrower hereby certifies to Bank that:

 

(a)                                  Borrower
has been advised by Bank to seek the advice of an attorney and accountant in
connection with the loans evidenced by this Agreement;

 

(b)                                 Borrower
has had the opportunity to seek the advice of an attorney and accountant of
Borrower’s choice in connection with the loans evidenced by this Agreement.

 

13.                               DEFINITIONS

 

13.1.                     Definitions.
As used in this Agreement, the following terms have the following meanings:

 

“Account”
is any “account” as defined in the Code with such additions to such term as may hereafter
be made, and includes, without limitation, all accounts receivable and other
sums owing to Borrower.

 

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

 

“Advance”
or “Advances” means an advance (or
advances) under the Revolving Line.

 

“Affiliate”
of any Person is a Person that owns or controls directly or indirectly the
Person, any Person that controls or is controlled by or is under common control
with the Person, and each of that Person’s senior executive officers,
directors, partners and, for any Person that is a limited liability company,
that Person’s managers and members.

 

“Agreement”
is defined in the preamble hereof.

 

“Availability
Amount” is the lesser of (a) the Revolving Line or (b) the
Borrowing Base.

 

“Bank”
is defined in the preamble hereof.

 

“Bank
Expenses” are all audit fees and expenses, costs, and expenses
(including reasonable attorneys’ fees and expenses) for preparing, negotiating,
administering, defending and enforcing the Loan Documents (including, without
limitation, those incurred in connection with appeals or Insolvency
Proceedings) or otherwise incurred with respect to Borrower.

 

“Bankruptcy-Related
Defaults” is defined in Section 9.1.

 

“Borrower”
is defined in the preamble hereof

 

“Borrower’s
Books” are all Borrower’s books and records including ledgers,
federal and state tax returns, records regarding Borrower’s assets or
liabilities, the Collateral, business operations or financial condition, and
all computer programs or storage or any equipment containing such information.

 

“Borrowing
Base” is (a) 80% of Eligible Accounts plus (b) subject to
the Inventory Advance Cap, the lesser of (i) 35% of the value of Borrower’s
Eligible Inventory (valued at the lower of cost or wholesale fair market value)
or (ii) $300,000, as determined by Bank from Borrower’s most recent
Borrowing Base Certificate; provided, that upon the date the Revolving Line
increases to $2,000,000, the amount in clause (ii) shall increase to
$600,000; and provided further, that Bank may decrease the foregoing percentages
in its good faith business judgment based on events, conditions, contingencies,
or risks which, as determined by Bank, may adversely affect Collateral.

 

16

 

“Borrowing
Base Certificate” is that certain certificate in the form attached
hereto as Exhibit C.

 

“Borrowing
Resolutions” are, with respect to any Person, those resolutions
adopted by such Person’s Board of Directors and delivered by such Person to
Bank approving the Loan Documents to which such Person is a party and the
transactions contemplated thereby, together with a certificate executed by its secretary
on behalf of such Person certifying that (a) such Person has the authority
to execute, deliver, and perform its obligations under each of the Loan
Documents to which it is a party, (b) that attached as Exhibit A
to such certificate is a true, correct, and complete copy of the resolutions
then in full force and effect authorizing and ratifying the execution,
delivery, and performance by such Person of the Loan Documents to which it is a
party, (c) the name(s) of the Person(s) authorized to execute the Loan
Documents on behalf of such Person, together with a sample of the true
signature(s) of such Person(s), and (d) that Bank may conclusively
rely on such certificate unless and until such Person shall have delivered to
Bank a further certificate canceling or amending such prior certificate.

 

“Business Day”
is any day that is not a Saturday, Sunday or a day on which Bank is closed.

 

“Cash Equivalents”
means (a) marketable direct obligations issued or unconditionally
guaranteed by the United States or any agency or any State thereof having
maturities of not more than one (1) year from the date of acquisition; (b) commercial
paper maturing no more than one (1) year after its creation and having the
highest rating from either Standard & Poor’s Ratings Group or Moody’s
Investors Service, Inc., and (c) Bank’s certificates of deposit
issued maturing no more than one (1) year after issue.

 

 “Change in Control”
means any event, transaction, or occurrence as a result of which (a) any “person”
(as such term is defined in Sections 3(a)(9) and 13(d)(3) of the
Securities Exchange Act of 1934, as an amended (the “Exchange Act”)),
other than a trustee or other fiduciary holding securities under an employee
benefit plan of Borrower, is or becomes a beneficial owner (within the meaning Rule 13d-3
promulgated under the Exchange Act), directly or indirectly, of securities of
Borrower, representing twenty-five percent (25%) or more of the combined voting
power of Borrower’s then outstanding securities (other than as a result of
conversion of Borrower’s preferred stock); or (b) during any period of
twelve consecutive calendar months, individuals who at the beginning of such
period constituted the Board of Directors of Borrower (together with any new
directors whose election by the Board of Directors of Borrower was approved by
a vote of at least two-thirds of the directors then still in office who either
were directions at the beginning of such period 
or whose election or nomination for election was previously so approved)
cease for any reason other than death or disability to constitute a majority of
the directors then in office.

 

“Code”
is the Uniform Commercial Code, as the same may, from time to time, be
enacted and in effect in the State of Texas; provided, that, to the extent that
the Code is used to define any term herein or in any Loan Document and such
term is defined differently in different Articles or Divisions of the Code, the
definition of such term contained in Article or Division 9 shall govern;
provided further, that in the event that, by reason of mandatory provisions of
law, any or all of the attachment, perfection, or priority of, or remedies with
respect to, Bank’s Lien on any Collateral is governed by the Uniform Commercial
Code in effect in a jurisdiction other than the State of Texas, the term “Code” shall mean the Uniform Commercial Code as enacted
and in effect in such other jurisdiction solely for purposes on the provisions
thereof relating to such attachment, perfection, priority, or remedies and for
purposes of definitions relating to such provisions.

 

“Collateral”
is any and all properties, rights and assets of Borrower described on Exhibit A.

 

“Collateral
Account” is any Deposit Account, Securities Account, or Commodity
Account.

 

“Committed
Availability” means, as the date of determination, an amount equal
to the sum of the Revolving Line minus all outstanding Credit Extensions.

 

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

 

“Communication”
is defined in Section 10.

 

17

 

“Compliance
Certificate” is that certain certificate in the form attached
hereto as Exhibit D.

 

“Contingent
Obligation” is, for any Person, any direct or indirect liability,
contingent or not, of that Person for (a) any indebtedness, lease,
dividend, letter of credit or other obligation of another such as an obligation
directly or indirectly guaranteed, endorsed, co-made, discounted or sold with
recourse by that Person, or for which that Person is directly or indirectly
liable; (b) any obligations for undrawn letters of credit for the account
of that Person; and (c) all obligations from any interest rate, currency
or commodity swap agreement, interest rate cap or collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; but “Contingent
Obligation” does not include endorsements in the ordinary course of business. The
amount of a Contingent Obligation is the stated or determined amount of the
primary obligation for which the Contingent Obligation is made or, if not
determinable, the maximum reasonably anticipated liability for it determined by
the Person in good faith; but the amount may not exceed the maximum of the
obligations under any guarantee or other support arrangement.

 

“Control
Agreement” is any control agreement entered into among the
depository institution at which Borrower maintains a Deposit Account or the
securities intermediary or commodity intermediary at which Borrower maintains a
Securities Account or a Commodity account, Borrower, and Bank pursuant to which
Bank obtains control (within the meaning of the Code) over such Deposit
Account, Securities Account, or Commodity Account.

 

“Credit
Extension” is any Advance, Equipment or any other extension of
credit by Bank for Borrower’s benefit.

 

“Default”
means any event which with notice or passage of time or both, would constitute
an Event of Default.

 

“Default Rate”
is defined in Section 2.3(b).

 

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

 

“Designated
Deposit Account” is Borrower’s deposit account, account number                        ,
maintained with Bank.

 

“Dollars,” “dollars” and “$” each mean
lawful money of the United States.

 

“EBITDA”
shall mean for any period of determination (a) Net Income, plus (b) Interest
Expense, plus (c) to the extent deducted in the calculation of Net Income,
depreciation expense and amortization expense, plus (d) income tax
expense.

 

“Effective
Date” is the date Bank executes this Agreement and as indicated on
the signature page hereof.

 

“Eligible
Accounts” are Accounts which arise in the ordinary course of
Borrower’s business that meet all Borrower’s representations and warranties in Section 5.3.
Bank reserves the right at any time and from time to time after the Effective
Date, to adjust any of the criteria set forth below and to establish new
criteria in its good faith business judgment. Unless Bank agrees otherwise in
writing, Eligible Accounts shall not include:

 

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

 

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

 

(c)                                  Accounts owing from an Account Debtor, fifty percent
(50%) or more of whose Accounts have not been paid within ninety (90) days of
invoice date;

 

(d)                                 Credit
balances over ninety (90) days from invoice date;

 

18

 

(e)                                  Accounts
owing from an Account Debtor, including Affiliates, whose total obligations to
Borrower exceed twenty-five (25%) of all Accounts, except for Eligible
Government Accounts, for which such percentage is 40% prior
to the six (6) month anniversary of the Effective Date and 35% thereafter,
for the amounts that exceed that percentage, unless Bank approves in writing;

 

(f)                                    Accounts
owing from an Account Debtor which does not have its principal place of
business in the United States;

 

(g)                                 Accounts
owing from an Account Debtor which is a federal government entity or any
department, agency, or instrumentality thereof, except for Eligible Government
Accounts;

 

(h)                                 Accounts
owing from an Account Debtor to the extent that Borrower is indebted or
obligated in any manner to the Account Debtor (as creditor, lessor, supplier or
otherwise - sometimes called “contra” accounts, accounts payable, customer
deposits or credit accounts), with the exception of customary credits,
adjustments and/or discounts given to an Account Debtor by Borrower in the
ordinary course of its business;

 

(i)                                     Accounts
for demonstration or promotional equipment, or in which goods are consigned, or
sold on a “sale guaranteed”, “sale or return”, “sale on approval”, “bill and
hold”, or other terms if Account Debtor’s payment may be conditional;

 

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

 

(k)                                  Accounts
in which the Account Debtor disputes liability or makes any claim (but only up
to the disputed or claimed amount), or if the Account Debtor is subject to an
Insolvency Proceeding, or becomes insolvent, or goes out of business;

 

(l)                                     Accounts
owing from an Account Debtor with respect to which Borrower has received
deferred revenue (but only to the extent of such deferred revenue);

 

(m)                               Accounts
for which Bank in its good faith business judgment determines collection to be
doubtful; and

 

(n)                                 other
Accounts Bank deems ineligible in the exercise of its good faith business
judgment.

 

“Eligible Government
Accounts” are Accounts of the United States if Borrower has assigned
its payment rights to Bank and the assignment has been acknowledged under the
Federal Assignment of Claims Act of 1940, as amended.

 

“Eligible
Inventory” means, at any time, the aggregate of Borrower’s Inventory
that (a) consists of finished goods, in good, new, and salable condition,
which is not perishable, returned, consigned, obsolete, not sellable, damaged,
or defective, and is not comprised of demonstrative or custom inventory, works
in progress, packaging or shipping materials, or supplies; (b) meets all
applicable governmental standards; (c) has been manufactured in compliance
with the Fair Labor Standards Act; (d) is not subject to any Liens, except
the first priority Liens granted or in favor of Bank under this Agreement or
any of the other Loan Documents; (e) is located at Borrower’s principal
place of business (or any location permitted under Section 7.2); and (f) is
otherwise acceptable to Bank in its good faith business judgment.

 

“Equipment”
is all “equipment” as defined in the Code with such additions to such term as may hereafter
be made, and includes without limitation all machinery, fixtures, goods,
vehicles (including motor vehicles and trailers), and any interest in any of
the foregoing.

 

“ERISA”
is the Employment Retirement Income Security Act of 1974, and its regulations.

 

19

 

“Event of
Default” is defined in Section 8.

 

“GAAP”
is generally accepted accounting principles set forth in the opinions and
pronouncements of the Accounting Principles Board of the American Institute of
Certified Public Accountants and statements and pronouncements of the Financial
Accounting Standards Board or in such other statements by such other Person as may be
approved by a significant segment of the accounting profession, which are
applicable to the circumstances as of the date of determination.

 

“General
Intangibles” is all “general intangibles” as defined in the Code in
effect on the date hereof with such additions to such term as may hereafter
be made, and includes without limitation, all copyright rights, copyright
applications, copyright registrations and like protections in each work of
authorship and derivative work, whether published or unpublished, any patents,
trademarks, service marks and, to the extent permitted under applicable law, any
applications therefor, whether registered or not, any trade secret rights,
including any rights to unpatented inventions, payment intangibles, royalties,
contract rights, goodwill, franchise agreements, purchase orders, customer
lists, route lists, telephone numbers, domain names, claims, income and other
tax refunds, security and other deposits, options to purchase or sell real or
personal property, rights in all litigation presently or hereafter pending
(whether in contract, tort or otherwise), insurance policies (including without
limitation key man, property damage, and business interruption insurance),
payments of insurance and rights to payment of any kind.

 

“Indebtedness”
is (a) indebtedness for borrowed money or the deferred price of property
or services, such as reimbursement and other obligations for surety bonds and
letters of credit, (b) obligations evidenced by notes, bonds, debentures
or similar instruments, (c) capital lease obligations, and (d) Contingent
Obligations.

 

“Insolvency
Proceeding” is any proceeding by or against any Person under the
United States Bankruptcy Code, or any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, compositions, extensions
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.

 

“Interest
Expense” means for any fiscal period, interest expense (whether cash
or non-cash) determined in accordance with GAAP for the relevant period ending
on such date, including, in any event, interest expense with respect to any
Credit Extension and other Indebtedness of Borrower and its Subsidiaries,
including, without limitation or duplication, all commissions, discounts, or
related amortization and other fees and charges with respect to letters of credit
and bankers’ acceptance financing and the net costs associated with interest
rate swap, cap, and similar arrangements, and the interest portion of any
deferred payment obligation (including leases of all types).

 

“Inventory”
is all “inventory” as defined in the Code in effect on the date hereof with
such additions to such term as may hereafter be made, and includes without
limitation all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products, including without
limitation such inventory as is temporarily out of Borrower’s custody or
possession or in transit and including any returned goods and any documents of
title representing any of the above.

 

“Inventory
Advance Cap” is the amount that is 35% of the value of the portion
of the Borrowing Base attributable to Borrower’s Eligible Accounts.

 

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

 

“IP Agreement”
is that certain Intellectual Property Security Agreement executed and delivered
by Borrower to Bank dated of even date herewith.

 

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

 

“Loan Amount”
in respect of each Equipment Advance is the original principal amount of such
Equipment Advance.

 

20

 

“Loan
Documents” are, collectively, this Agreement, the Perfection
Certificate, the IP Agreement, any note, or notes or guaranties executed by
Borrower or any Guarantor, and any other present or future agreement between
Borrower any Guarantor and/or for the benefit of Bank in connection with this
Agreement, all as amended, restated, or otherwise modified.

 

“Material
Adverse Change” is (a) a material impairment in the perfection
or priority of Bank’s Lien in the Collateral or in the value of such Collateral;
(b) a material adverse change in the business, operations, or condition
(financial or otherwise) of Borrower; (c) a material impairment of the
prospect of repayment of any portion of the Obligations; or (d) Bank
determines, based upon information available to it and in its reasonable
judgment, that there is a reasonable likelihood that Borrower shall fail to
comply with one or more of the financial covenants in Section 6 during the
next succeeding financial reporting period.

 

“Maximum
Lawful Rate” is the maximum rate of interest and the term “Maximum Lawful Amount” means the maximum amount of interest
that is permissible under applicable state or federal laws for the type of loan
evidenced by the Loan Documents. If the Maximum Lawful Rate is increased by statute
or other governmental action after the Effective Date, then the new Maximum
Lawful Rate will be applicable to the payments from the effective date of the
rate change, unless otherwise prohibited by law.

 

“Net Income”
means, as calculated on a consolidated basis for Borrower and its Subsidiaries
for any period as at any date of determination, the net profit (or loss), after
provision for taxes, of Borrower and its Subsidiaries for such period taken as
a single accounting period.

 

“Obligations”
are Borrower’s obligation to pay when due any debts, principal, interest, Bank
Expenses and other amounts Borrower owes Bank now or later, whether under this
Agreement, the Loan Documents, or otherwise, including, without limitation, all
obligations relating to letters of credit, cash management services, and
foreign exchange contracts, if any, and including interest accruing after
Insolvency Proceedings begin and debts, liabilities, or obligations of Borrower
assigned to Bank, and the performance of Borrower’s duties under the Loan
Documents.

 

“Operating Documents”
are, for any Person, such Person’s formation documents, as certified with the
Secretary of State of such Person’s state of formation on a date that is no
earlier than 30 days prior to the Effective Date, and, (a) if such Person
is a corporation, its bylaws in current form, (b) if such Person is a
limited liability company, its limited liability company agreement (or similar
agreement), and (c) if such Person is a partnership, its partnership
agreement (or similar agreement), each of the foregoing with all current
amendments or modifications thereto.

 

“Payment/Advance
Form” is that certain form attached hereto as Exhibit B.

 

“Perfection
Certificate” is defined in Section 5.1.

 

“Permitted Distributions” are:

 

(a)                                  purchases
of capital stock from former employees, consultants and directors pursuant to
repurchase agreements or other similar agreements provided that at the time of
such purchase no Default or Event of Default has occurred and is continuing;

 

(b)                                 distributions
or dividends consisting solely of Borrower’s capital stock;

 

(c)                                  purchases
for value of any rights distributed in connection with any stockholder rights
plan;

 

(d)                                 purchases
of capital stock or options to acquire such capital stock with the proceeds
received from a substantially concurrent issuance of capital stock or
convertible securities;

 

(e)                                  purchases
of capital stock pledged as collateral for loans to employees;

 

(f)                                    purchases
of capital stock in connection with the exercise of stock options or stock
appreciation rights by way of cashless exercise or in connection with the
satisfaction of withholding tax obligations;

 

21

 

(g)                                 purchases
of fractional shares of capital stock arising out of stock dividends, splits or
combinations or business combinations;

 

(h)                                 the
settlement or performance of such Person’s obligations under any equity
derivative transaction, option contract or similar transaction or combination
of transactions;

 

(i)                                     Permitted
Dividends; and

 

(j)            the redemption of shares of Borrower’s
preferred stock, and accrued dividends thereon, pursuant to the terms thereof.

 

“Permitted Dividends” are monthly cash dividends by Borrower
to its preferred shareholders in an amount not to exceed $15,000 in the
aggregate in any month; provided, that the amount of such Permitted Dividends may increase,
with Bank’s written consent, following the investment of additional equity in
Borrower.

 

“Permitted Indebtedness” is:

 

(a)                                  Borrower’s
Indebtedness to Bank under this Agreement or any other Loan Document;

 

(b)                                 Indebtedness
existing on the Effective Date and shown on the Perfection Certificate;

 

(c)                                  Subordinated
Debt;

 

(d)                                 unsecured
Indebtedness to trade creditors incurred in the ordinary course of business;

 

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

 

(f)                                    Indebtedness
secured by Permitted Liens;

 

(g)                                 Indebtedness
of Borrower to any Subsidiary and Contingent Obligations of any Subsidiary with
respect to obligations of Borrower (provided that the primary obligations are
not prohibited hereby), and Indebtedness of any Subsidiary to Borrower or any
other Subsidiary and Contingent Obligations of any Subsidiary with respect to
obligations of any other Subsidiary (provided that the primary obligations are
not prohibited hereby); and

 

(h)                                 extensions,
refinancings, modifications, amendments and restatements of any items of
Permitted Indebtedness (a) through (g) above, provided that the principal
amount thereof is not increased or the terms thereof are not modified to impose
more burdensome terms upon Borrower or its Subsidiary, as the case may be.

 

“Permitted Investments” are:

 

(a)                                  Investments
existing on the Effective Date;

 

(b)                                 (i) marketable
direct obligations issued or unconditionally guaranteed by the United States or
its agencies or any State maturing within 1 year from its acquisition, (ii) commercial
paper maturing no more than 2 years after its creation and having the highest
rating from either Standard & Poor’s Corporation or Moody’s Investors
Service, Inc., and (iii) Bank’s certificates of deposit maturing no
more than 2 years after issue; and

 

(c)                                  Investments
approved by the Borrower’s Board of Directors or otherwise pursuant to a Board-approved
investment policy.

 

22

 

 “Permitted Liens”
are:

 

(a)                                Liens
existing on the Effective Date and shown on the Perfection Certificate or
arising under this Agreement and the other Loan Documents;

 

(b)                                 Liens
for taxes, fees, assessments or other government charges or levies, either not
delinquent or being contested in good faith and for which Borrower maintains
adequate reserves on its Books, if they have no priority over any of Bank’s
Liens;

 

(c)                                  purchase
money Liens (i) on Equipment acquired or held by Borrower incurred for
financing the acquisition of the Equipment securing no more than $50,000 in the
aggregate amount outstanding, or (ii) existing on Equipment when acquired,
if the Lien is confined to the property and improvements and the
proceeds of the Equipment;

 

(d)                                 Liens
incurred in the extension, renewal or refinancing of the indebtedness secured
by Liens described in (a) through (c), but any extension, renewal or
replacement Lien must be limited to the property encumbered by the existing
Lien and the principal amount of the indebtedness it secures may not
increase;

 

(e)                                  leases
or subleases of real property granted in the ordinary course of business, and
leases, subleases, non-exclusive licenses or sublicenses of property (other
than real property or intellectual property) granted in the ordinary course of
Borrower’s business, if the leases, subleases, licenses and sublicenses
do not prohibit granting Bank a security interest;

 

(f)                                    non-exclusive
license of intellectual property granted to third parties in the ordinary
course of business;

 

(g)                                 leases
or subleases granted in the ordinary course of Borrower’s business, including
in connection with Borrower’s leased premises or leased property;

 

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

 

(i)                                     Liens
in favor of other financial institutions arising in connection with Borrower’s
deposit or securities accounts held at such institutions;

 

(j)                                     carriers’,
warehousemen’s, mechanics’, materialmen’s, repairmen’s or other like Liens
arising in the ordinary course of business which are not overdue for a period
of more than 30 days or which are being contested in good faith and by
appropriate proceeding if adequate reserves with respect thereto are maintained
on the books of the applicable Person;

 

(k)                                  pledges
or deposits in the ordinary course of business in connection with workers’
compensation, unemployment insurance and compliance with other social security
requirements applicable to Borrower;

 

(l)                                     such
Liens are subordinate in priority to Bank’s Lien hereunder.

 

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

 

“Prime Rate”
is Bank’s most recently announced “prime rate,” even if it is not Bank’s lowest
rate.

 

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

 

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

 

23

 

“Revolving
Line” is an Advance or Advances in an aggregate amount of up to
$1,000,000 outstanding at any time, increasing to $2,000,000 upon Borrower
achieving two (2) consecutive fiscal quarters of EBITDA, less the
aggregate amount of any Permitted Dividends during such period, of not less
than $200,000, determined according to GAAP.

 

“Revolving
Line Maturity Date” is the
earliest of (a) the date which is three hundred sixty-four (364) days from
the Effective Date, or (b) the occurrence of an Event of Default.

 

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

 

“Subordinated
Debt” is (a) Indebtedness incurred by Borrower subordinated to
Borrower’s Indebtedness owed to Bank and which is reflected in a written
agreement in a manner and form reasonably acceptable to Bank and approved
by Bank in writing, and (b)  to the extent the terms of subordination do
not change adversely to Bank, refinancings, refundings, renewals, amendments or
extensions of any of the foregoing.

 

“Subsidiary”
means, with respect to any Person, any Person of which more than 50% of the
voting stock or other equity interests is owned or controlled, directly or
indirectly, by such Person or one or more Affiliates of such Person.

 

“Total
Liabilities” is on any day, obligations that should, under GAAP, be
classified as liabilities on Borrower’s consolidated balance sheet, including
all Indebtedness, and current portion of Subordinated Debt permitted by Bank to
be paid by Borrower, but excluding all other Subordinated Debt.

 

“Transfer”
is defined in Section 7.1.

 

THIS
AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN
THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

 

[Signature
page follows.]

 

24

 

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

 

	
  BORROWER:

  
	
   

  
	
  INTRUSION INC.,

  
	
  a Delaware corporation

  
	
   

  
	
  By 

  	
  /s/ Michael L.
  Paxton

  	
   

  	
   

  	
   

  
	
  Name:

  	
  Michael L. Paxton

  	
   

  	
   

  	
   

  
	
  Title:

  	
  Vice President & CFO

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  BANK:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  SILICON VALLEY BANK

  
	
   

  	
   

  	
   

  	
   

  
	
  By 

  	
  /s/ Brian Brown

  	
   

  	
   

  	
   

  
	
  Name:

  	
  Brian Brown

  	
   

  	
   

  	
   

  
	
  Title:

  	
  Deal Team Leader

  	
   

  	
   

  	
   

  
												

 

 

EXHIBIT A

 

The Collateral
consists of all of Borrower’s right, title and interest in and to the following
personal property:

 

All goods, Accounts
(including health-care receivables), Equipment, Inventory, contract rights or
rights to payment of money, leases, license agreements, franchise agreements,
General Intangibles, commercial tort claims, documents, instruments (including
any promissory notes), chattel paper (whether tangible or electronic), cash,
deposit accounts, fixtures, letters of credit rights (whether or not the letter
of credit is evidenced by a writing), securities, and all other investment
property, supporting obligations, and financial assets, whether now owned or
hereafter acquired, wherever located; and

 

all Borrower’s Books
relating to the foregoing, and any and all claims, rights and interests in any
of the above and all substitutions for, additions, attachments, accessories,
accessions and improvements to and replacements, products, proceeds and
insurance proceeds of any or all of the foregoing.

 

1

 

EXHIBIT B

 

Loan Payment/Advance Request Form

 

DEADLINE FOR SAME DAY PROCESSING IS NOON P.S.T. *

 

	
  Fax To:

  	
  Date: 

  	
   

  

 

LOAN
PAYMENT:

 

INTRUSION INC.

 

	
  From Account #

  	
   

  	
   

  	
  To Account #

  	
   

  
	
   

  	
  (Deposit Account #)

  	
   

  	
   

  	
  (Loan Account #)

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Principal $

  	
   

  	
   

  	
  and/or Interest
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Authorized
  Signature:

  	
   

  	
   

  	
   

  	
  Phone Number:

  	
   

  
	
  Print
  Name/Title:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
											

 

LOAN
ADVANCE:

 

Complete Outgoing Wire Request section below if all or a portion
of the funds from this loan advance are for an outgoing wire.

 

	
  From Account #

  	
   

  	
   

  	
  To Account #

  	
   

  
	
   

  	
  (Loan Account #)

  	
   

  	
   

  	
  (Deposit Account #)

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Amount of Advance
  $

  	
   

  	
   

  	
   

  	
   

  
							

 

All Borrower’s
representations and
warranties in the Loan and Security Agreement are true, correct and complete in
all material respects on the date of the request for an advance; provided,
however, that such materiality qualifier shall not be applicable to any
representations and warranties that already are qualified or modified by
materiality in the text thereof; and provided, further that those
representations and warranties expressly referring to a specific date shall be
true, accurate and complete in all material respects as of such date:

 

	
  Authorized
  Signature:

  	
   

  	
   

  	
   

  	
  Phone Number:

  	
   

  
	
  Print
  Name/Title:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
							

 

OUTGOING
WIRE REQUEST:

Complete
only if all or a portion of funds from the loan advance above is to be wired.

Deadline for same day processing
is noon, P.S.T.

 

	
  Beneficiary
  Name:

  	
   

  	
   

  	
  Amount of Wire:
  $

  	
   

  
	
  Beneficiary
  Bank:

  	
   

  	
   

  	
  Account Number:

  	
   

  
	
  City and State:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Beneficiary Bank
  Transit (ABA) #:

  	
   

  	
   

  	
  Beneficiary Bank
  Code (Swift, Sort, Chip, etc.):

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  (For
  International Wire Only)

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Intermediary
  Bank:

  	
   

  	
   

  	
   

  	
  Transit (ABA) #:

  	
   

  
	
  For Further
  Credit to:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Special
  Instruction:

  	
   

  	
   

  	
   

  	
   

  	
   

  
													

 

By
signing below, I (we) acknowledge and agree that my (our) funds transfer
request shall be processed in accordance with and subject to the terms and
conditions set forth in the agreements(s) covering funds transfer service(s),
which agreements(s) were previously received and executed by me (us).

 

*
Unless otherwise provided for an Advance bearing interest at LIBOR.

 

1

 

	
  Authorized
  Signature:

  	
   

  	
   

  	
   

  	
  2nd
  Signature (if required):

  	
   

  	
   

  
	
  Print
  Name/Title:

  	
   

  	
   

  	
   

  	
  Print
  Name/Title:

  	
   

  	
   

  
	
  Telephone #:

  	
   

  	
   

  	
   

  	
  Telephone #:

  	
   

  	
   

  
											

 

2

 

EXHIBIT C

 

BORROWING BASE CERTIFICATE

 

	
  Borrower: Intrusion
  Inc.

  	
   

  	
   

  
	
  Lender:

  	
  Silicon Valley Bank

  	
   

  	
   

  
	
  Commitment Amount:

  	
  $

  	
   

  	
   

  	
   

  	
   

  
							

 

	
  ACCOUNTS
  RECEIVABLE

  	
   

  	
   

  	
   

  
	
  (1)                                  Accounts Receivable
  Book Value as of 

  	
  $

  	
   

  	
   

  
	
  (2)                                  Additions (please
  explain on reverse)

  	
  $

  	
   

  	
   

  
	
  (3)                                  TOTAL ACCOUNTS
  RECEIVABLE

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ACCOUNTS
  RECEIVABLE DEDUCTIONS (without duplication)

  	
   

  	
   

  	
   

  
	
  (4)                                  Un-invoiced
  Accounts

  	
  $

  	
   

  	
   

  
	
  (5)                                  Amounts over 90
  days due

  	
  $

  	
   

  	
   

  
	
  (6)                                  Balance of 50% over
  90 day accounts

  	
  $

  	
   

  	
   

  
	
  (7)                                  Credit balances
  over 90 days

  	
  $

  	
   

  	
   

  
	
  (8)                                  Concentration
  Limits

  	
  $

  	
   

  	
   

  
	
  (9)                                  Foreign Accounts

  	
  $

  	
   

  	
   

  
	
  (10)                            Governmental Accounts

  	
  $

  	
   

  	
   

  
	
  (11)                            Contra Accounts

  	
  $

  	
   

  	
   

  
	
  (12)                            Promotion or Demo
  Accounts

  	
  $

  	
   

  	
   

  
	
  (13)                            Intercompany/Employee
  Accounts

  	
  $

  	
   

  	
   

  
	
  (14)                            Disputed Accounts

  	
  $

  	
   

  	
   

  
	
  (15)                            Deferred Revenue

  	
  $

  	
   

  	
   

  
	
  (16)                            Other (please explain on
  reverse)

  	
  $

  	
   

  	
   

  
	
  (17)                            TOTAL ACCOUNTS RECEIVABLE
  DEDUCTIONS

  	
  $

  	
   

  	
   

  
	
  (18)                            Eligible Accounts (#3
  minus #17)

  	
  $

  	
   

  	
   

  
	
  (19)                            ELIGIBLE AMOUNT OF
  ACCOUNTS (80% of #18)

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  INVENTORY

  	
   

  	
   

  	
   

  
	
  (20)                            Eligible Inventory Value
  as of 

  	
  $

  	
   

  	
   

  
	
  (21)                            ELIBIGLE AMOUNT OF
  INVENTORY (35% of #20)

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  BALANCES

  	
   

  	
   

  	
   

  
	
  (22)                            Maximum Loan Amount

  	
  $

  	
   

  	
   

  
	
  (23)                            Total Funds Available
  [Lesser of #22 or (#19 plus lesser of #21 or $300,000, not to exceed 35% of
  #19)]

  	
  $

  	
   

  	
   

  
	
  (24)                            Present balance owing on
  Line of Credit

  	
  $

  	
   

  	
   

  
	
  (25)                            Outstanding under
  Sublimits

  	
  $

  	
   

  	
   

  
	
  (26)                            RESERVE POSITION (#23
  minus #24 and #25)

  	
  $

  	
   

  	
   

  

 

The undersigned represents and
warrants that this is true, complete and correct, and that the information in
this Borrowing Base Certificate complies with the representations and
warranties in the Loan and Security Agreement between the undersigned and
Silicon Valley Bank.

 

1

 

	
  COMMENTS:

  	
   

  	
  BANK USE ONLY

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Received by: 

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  AUTHORIZED SIGNER

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Date:

  	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
   

  	
  Verified:

  	
   

  	
   

  	
   

  
	
   

  	
  Authorized Signer

  	
   

  	
   

  	
   

  	
   

  	
  AUTHORIZED SIGNER

  	
   

  
	
  Date:

  	
   

  	
   

  	
   

  	
  Date:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Compliance
  Status:

  	
  Yes

  	
  No

  	
   

  
													

 

2

 

EXHIBIT D

 

COMPLIANCE CERTIFICATE

 

	
  TO:

  	
  SILICON VALLEY
  BANK

  	
  Date:

  	
   

  
	
  FROM:

  	
  INTRUSION INC.

  	
   

  	
   

  

 

The undersigned
authorized officer of Intrusion Inc. (“Borrower”) certifies that under the
terms and conditions of the Loan and Security Agreement between Borrower and
Bank (the “Agreement”), (1) Borrower is in complete compliance for the
period ending                              
with all required covenants except as noted below, (2) there are no Events
of Default, (3) all representations and warranties in the Agreement are
true and correct in all material respects on this date except as noted below;
provided, however, that such materiality qualifier shall not be applicable to
any representations and warranties that already are qualified or modified by
materiality in the text thereof; and provided, further that those
representations and warranties expressly referring to a specific date shall be
true, accurate and complete in all material respects as of such date, (4) Borrower,
and each of its Subsidiaries, has timely filed all required tax returns and
reports, and Borrower has timely paid all foreign, federal, state and local
taxes, assessments, deposits and contributions owed by Borrower except as
otherwise permitted pursuant to the terms of Section 5. 9 of the
Agreement, and (5) no Liens have been levied or claims made against
Borrower or any of its Subsidiaries relating to unpaid employee payroll or
benefits of which Borrower has not previously provided written notification to
Bank. Attached are the required documents supporting the certification. The
undersigned certifies that these are prepared in accordance with generally GAAP
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes. The undersigned acknowledges that no
borrowings may be requested at any time or date of determination that
Borrower is not in compliance with any of the terms of the Agreement, and that
compliance is determined not just at the date this certificate is delivered. Capitalized
terms used but not otherwise defined herein shall have the meanings given them
in the Agreement.

 

Please
indicate compliance status by circling Yes/No under “Complies” column.

 

	
  Reporting Covenant

  	
   

  	
  Required

  	
   

  	
  Complies

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Monthly financial statements with Compliance
  Certificate

  	
   

  	
  Monthly within
  30 days

  	
   

  	
  Yes  No

  
	
  Annual financial statement (CPA Audited) + CC

  	
   

  	
  FYE within 120
  days

  	
   

  	
  Yes  No

  
	
  10-Q, 10-K and 8-K

  	
   

  	
  Within 5 days
  after filing with SEC

  	
   

  	
  Yes  No

  
	
  Borrowing Base Certificate A/R & A/P Agings

  	
   

  	
  Monthly within
  30 days

  	
   

  	
  Yes  No

  

 

The following Intellectual Property was registered
after the Effective Date (if no registrations, state “None”)

 

	
  Financial Covenant

  	
   

  	
  Required

  	
   

  	
  Actual

  	
   

  	
  Complies

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Maintain on a
  Monthly Basis:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Liquidity
  Coverage

  	
   

  	
  1.25:1.0

  	
   

  	
       :1.0

  	
   

  	
  Yes  No

  	
   

  
	
  EBITDA*

  	
   

  	
  $

  	
  0.00

  	
   

  	
  $

  	
   

  	
   

  	
  Yes  No

  	
   

  
										

 

*Tested
only after the Revolving Line increases to $2,000,000.

 

1

 

The following financial covenant analyses and
information set forth in Schedule 1 attached hereto are true and accurate
as of the date of this Certificate.

 

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

 

 

	
  INTRUSION INC.,

  	
   

  	
  BANK USE ONLY

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  a Delaware corporation

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Received by: 

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  AUTHORIZED
  SIGNER

  	
   

  
	
  By:

  	
   

  	
   

  	
   

  	
  Date:

  	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  	
   

  	
  Verified:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  AUTHORIZED SIGNER

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Date:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Compliance
  Status:

  	
  Yes

  	
  No

  	
   

  
																

 

2

 

Schedule 1 to Compliance Certificate

 

Financial Covenants of Borrower

 

Dated:                                    

 

I.                                         Liquidity Coverage (Section 6.7 (a))

 

Required:                                             1.25:1.00

 

Actual:

 

	
  A.

  	
   

  	
  Unrestricted
  cash at SVB

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  B.

  	
   

  	
  80% of Borrower’s
  Eligible Accounts

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  C.

  	
   

  	
  Liquidity (line
  A plus line B)

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  D.

  	
   

  	
  Aggregate value
  of Obligations to Bank

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  E.

  	
   

  	
  Liquidity
  Coverage (line C divided by line D)

  	
   

  	
   

  	
   

  

 

Is
line E equal to or greater than 1.25:1:00?

 

	
   

  	
  No,
  not in compliance

  	
   

  	
   

  	
  Yes,
  in compliance

  

 

3

 

II.                                     EBITDA (Section 6.7(b))

 

Required:                                             $0.00, following date on which the
Revolving Line increases to $2,000,000.

 

Actual:

 

	
  A.

  	
   

  	
  Net
  Income, less the aggregate amount of Permitted Dividends

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  B.

  	
   

  	
  To
  the extent included in the determination of Net Income

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  1.

  	
  The
  provision for income taxes

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  2.

  	
  Depreciation
  expense

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  3.

  	
  Amortization
  expense

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  4.

  	
  Net
  Interest Expense

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  5.

  	
  All
  other charges which are both non-cash and non-recurring

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  6.

  	
  All
  non-cash income

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  7.

  	
  The
  sum of lines 1 through 5 minus line 6

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  C.

  	
   

  	
  EBITDA (line A plus line B.7)

  	
   

  	
  $

  	
   

  

 

Is
line C equal to or greater than $0.00?

 

	
   

  	
  No,
  not in compliance

  	
   

  	
   

  	
  Yes,
  in compliance

  

 

1

 

EXHIBIT E

 

PERFECTION
CERTIFICATE

OF

INTRUSION INC.

 

The undersigned,                                                         
of INTRUSION INC., a Delaware corporation (the “Company”), hereby certifies
with reference to the Loan and Security Agreement dated as of March      ,
2006 between the Company and SILICON VALLEY BANK (the “Bank”) (terms defined
therein being used herein as therein defined), to the Bank as follows (for
purposes of this Perfection Certificate, those questions for which no response
is completed shall be deemed to read “None”):

 

1.                                       Names.

 

(a)                                  The
exact legal name of the Company as it appears in its certificate of
incorporation as amended to date, is as follows:

 

 

(b)                                 The
following is a list of all other names (including trade names or similar
appellations) used by the Company, or any of its divisions or other business
units, or any other business or organization to which the Company became the
successor by merger, consolidation, acquisition, change in form, nature or
jurisdiction of organization or otherwise, now or at any time during the past
five years together with the dates such names were used:

 

 

(c)                                  The
following is a list of all subsidiaries of the Company (whether wholly owned,
or where the Company has a controlling or majority interest):

 

 

(d)                                 The
following is the type of organization of the Company:

 

(e)                                  The
jurisdiction of organization of the Company is as follows:

 

(f)                                    The
following is the Company’s state issued organizational identification number,
if any:

 

(g)                                 The
Company’s federal taxpayer identification number is:

 

(h)                                 The
Company currently maintains its bank and investment accounts at:

 

(1)                                  Bank
Accounts -

 

 

(2)                                  Investment
Accounts -

 

1

 

(3)                                  Payroll
Accounts-

 

 

(4)                                  Other
depository/operating accounts -

 

 

(i)                                     The
Company currently has the following commercial tort claims against other
parties:

 

 

(j)                                     Attached
hereto as Schedule A is the information required above for any
other business or organization to which the Company became the successor by
merger, consolidation, acquisition, change in form, nature or jurisdiction of
organization or otherwise, now or at any time during the past five (5) years:

 

 

2.                                       Current
Locations.

 

(a)                                  The
following is the mailing address of the Company:

 

	
  Mailing Address

  	
   

  	
  City

  	
   

  	
  State

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

(b)                                 If
different from its mailing address, the Company’s place of business, or if more
than one, its chief executive office is located at the following address:

 

	
  Mailing Address

  	
   

  	
  City

  	
   

  	
  State

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

(c)                                  If
different from the addresses set forth in subparagraphs (a) and (b) above,
the following are all other locations in which the Company maintains any books
or records relating to any of the Collateral consisting of accounts,
instruments, chattel paper, general intangibles or mobile goods:

 

	
  Mailing

  Address

  	
   

  	
  City

  	
   

  	
  State

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

2

 

(d)                                 If
different from the addresses set forth in subparagraphs (a), (b) or (c) above,
the following are all places of business of the Company and/or locations maintained
by the Company where any Collateral consisting of equipment and/or inventory
are located:

 

	
  Mailing

  Address

  	
   

  	
  City

  	
   

  	
  State

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

(e)                                  The
following are the names and addresses of all persons or entities other than the
Company (such as lessees, bailees, consignees, warehousemen, or purchasers of
chattel paper), which have possession or are intended to have possession of any
of the Collateral consisting of instruments, chattel paper, inventory or
equipment and the nature of such party’s possession (such as lessee, bailee,
consignee, warehouseman, purchaser of chattel paper, or other):

 

	
  Name

  	
   

  	
  Mailing Address

  	
   

  	
  City

  	
   

  	
  State

  	
   

  	
  Nature of Possession

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

3.                                       Prior
Locations. (a) Set forth below is the information required by
subparagraphs (a), (b), (c) and (d) of paragraph 2 with respect to
each location or place of business previously maintained by the Company at any
time during the past five (5) years in a state in which the Company has
previously maintained a location or place of business:

 

	
  Mailing Address

  	
   

  	
  City

  	
   

  	
  State

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

(b)                                 Set
forth below is the information required by subparagraph (e) of paragraph 2
with respect to each other location at which, or other person or entity with
which, any of the Collateral consisting of instruments, chattel paper,
inventory or equipment has been previously held at any time during the past
twelve months:

 

	
  Name

  	
   

  	
  Mailing Address

  	
   

  	
  City

  	
   

  	
  State

  	
   

  	
  Nature of Possession

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

4.                                       Attached
hereto as Schedule B is the information required by U.C.C. §9-502(b) or
former U.C.C. §9-402(5) of each state in which any of the Collateral
consisting of fixtures are or are to be located and the name and address of
each real estate recording office where a mortgage on the real estate on which
such fixtures are or are to be located would be recorded.

 

3

 

5.                                       No
Unusual Transactions. Except for those purchases, acquisitions, and other
transactions as set forth in Schedule A or Schedule C attached
hereto, all of the Collateral has been originated by the Company in the
ordinary course of the Company’s business or consists of goods which have been
acquired by the Company in the ordinary course from a person in the business of
selling goods of that kind.

 

6.                                       Registered
Intellectual Property.

 

(a)                                  The
following is a list of the Company’s copyrights (including copyrights of
software) which are registered with the United States Copyright Office. (Please
include name of the copyright and registration number and attach a copy of the
registration):

 

 

(b)                                 The
following is a list of all software which the Company sells, distributes or
licenses to others, which is not registered with the United States Copyright
Office. (Please include versions which are not registered):

 

 

(c)                                  The
following is a list of all of the Company’s patents which are registered with
the United States Patent Office. (Please include name of the patent and
registration number and attach a copy of the registration.):

 

 

(d)                                 The
following is a list of all of the Company’s patents which are pending with the
United States Patent Office. (Please include name of the patent and a copy of
the application.):

 

 

(e)                                  The
following is a list of all of the Company’s registered trademarks. (Please
include name of the trademark and a copy of the registration.):

 

 

7.                                       Litigation.
Actions or proceedings pending or, to the knowledge of Borrower’s Responsible
Officers, threatened by or against Borrower or any Subsidiary in which an adverse
decision could reasonably be expected to cause a Material Adverse Change:

 

4

 

The undersigned
hereby acknowledges and agrees that the Bank is relying on the representations
and warranties made herein in connection with a loan transaction or
transactions to be entered into between the undersigned and the Bank.

 

IN WITNESS
WHEREOF, I have hereunto set my hand this        
day of                       ,
2006 and this document shall constitute a document under seal under the laws of
the county of Dallas County, Texas.

 

	
  By:

  	
   

  	
   

  
	
   

  
	
  (duly
  authorized)

  
	
   

  
	
   

  
	
  Name:

  	
   

  	
   

  
					

 

5

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00100-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00100-of-00352.parquet"}]]