Document:

Exhibit 10.3

 

XPLORE TECHNOLOGIES CORP.

 

(as the “Corporation”)

 

and

 

PHOENIX VENTURE FUND LLC

 

(“Phoenix”)

 

and

 

EACH OF THE LENDERS LISTED

ON SCHEDULE 1 ATTACHED HERETO

 

(collectively, the “Lenders”)

 

DECEMBER 2004 DEBENTURE PURCHASE AGREEMENT

 

December 17, 2004

 

 

DECEMBER 2004
DEBENTURE PURCHASE AGREEMENT

 

THIS AGREEMENT is made the 17th day of December, 2004,
by and among Xplore Technologies Corp., a
corporation incorporated under the laws of Canada (the “Corporation”),
Phoenix Venture Fund LLC, a limited
liability company organized under the laws of the State of Delaware (“Phoenix”) and each of the other lenders
listed on Schedule 1 attached to this Agreement (each such lender, a “Lender” and collectively, the “Lenders”).

 

WHEREAS the Corporation is in the business of
engineering, developing, integrating and marketing ruggedized mobile wireless
pen-based computing systems;

 

WHEREAS the Lenders agree to subscribe for and
purchase from the Corporation, and the Corporation agrees to issue to the
Lenders, units (the “Units”) each
consisting of (a) a senior secured convertible debenture of the Corporation in
the principal amount of $1,000 (each, a “Debenture”),
and (b) a share purchase warrant (each, a “Warrant”)
entitling the holder thereof to purchase up to 1,820 Common Shares of the
Corporation (“Common Shares”). The Debentures,
collectively held by all Lenders, will not exceed in the aggregate, the
principal amount of Five Million United States Dollars ($5,000,000) and the
Warrants, collectively as held by all Lenders, will be exercisable for an
aggregate of no more than 9,100,000 Common Shares (subject to the adjustments
provided by the terms of the Warrants);

 

WHEREAS the proceeds to the Corporation paid by the
Lenders for the Units will be used by the Corporation solely in accordance with
the terms of this Agreement;

 

NOW THEREFORE THIS AGREEMENT WITNESSES that in
consideration of the mutual covenants hereinafter contained, the parties hereto
agree as follows:

 

ARTICLE 1.

TRANSACTIONS

 

Section 1.1.                                   Issuance
of Debentures and Share Purchase Warrants to the Lenders.

 

On the terms and subject to the conditions hereof, on
the Closing Date each Lender will purchase from the Corporation and the
Corporation will issue and sell to each such Lender that number of Units as is
set forth opposite such Lender’s name on Schedule 1 hereto, each of
which shall consist of one Debenture in the principal amount of $1,000 and a
Warrant entitling the holder thereof to purchase up to 1,820 Common Shares. The
terms and conditions of the Debentures are as set forth herein and are
evidenced by the Debenture Certificates in the form attached hereto as Exhibit
A. The terms and conditions of the Warrants are as set forth in the Share
Purchase Warrant Certificate in the form attached hereto as Exhibit B.

 

Section 1.2.                                   Purchase
Price

 

On the terms and subject to the conditions hereof, on
the Closing Date, each Lender shall pay the amount set forth opposite its name
on Schedule 1, which amount has been calculated by multiplying the per
Unit purchase price of $1,000 (the “Purchase Price”)
by the number of Units being purchased by such Lender, to the Corporation by
way of certified check, bank draft

 

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or wire transfer, less in the case of Phoenix Fund as a Lender, (i) any
unpaid fees and expenses payable by the Corporation to Phoenix pursuant to
Section 1.3 hereof, and (ii) an amount equal to the aggregate principal amount
of the Fund Debenture plus all interest accrued thereon, which shall represent
payment-in-full of the Fund Debenture. The Corporation hereby irrevocably
directs Phoenix to withhold such fees and expenses from the payment of the
Purchase Price and Phoenix hereby agrees that the withholding of such fees and
expenses shall constitute Phoenix’s acknowledgement and agreement that the
Corporation shall not thereafter have any further obligation to Phoenix under
Section 1.3 hereof, except as set forth in Section 7.2(f).

 

Section 1.3.                                   Fees
and Expenses

 

(a)                                  The
Corporation acknowledges and agrees that it will be responsible for and will
pay or reimburse Phoenix forthwith on demand for all reasonable fees, expenses
and other out-of-pocket expenses paid or incurred by Phoenix, its
representatives and consultants relating to its investigation of the
Corporation, the Subsidiaries and its respective businesses, the negotiation,
preparation and review of this Agreement and the other Instruments and related
agreements and all other matters pertaining to the transactions hereby
contemplated, including, without limitation, all reasonable fees, expenses and
other out-of-pocket expenses paid or incurred by Phoenix for legal advice and
services in connection with such transactions.

 

(b)                                 The
Corporation acknowledges and agrees that it will be responsible for and will
pay all such reasonable fees (including, but not limited to, legal fees),
expenses and other out-of-pocket expenses whether or not the transactions
hereunder are completed and even if it is the Lenders who terminate this
Agreement pursuant to Section 7.2 hereof; provided,
that if this Agreement is terminated prior to Closing, the maximum amount the
Corporation will be required to pay or reimburse the Lenders for legal fees is
$100,000 (inclusive of outstanding and unpaid expenses of Phoenix’s counsel
incurred since February 2004).

 

Section 1.4.                                   Use
of Proceeds

 

The Corporation
hereby covenants, agrees, represents and warrants with and to the Lenders that
the Corporation will use the net proceeds from the issuance and sale of the
Units to the Lenders solely to finance its product development and for working
capital and general corporate purposes; provided,
that $2,686,109.59 from such net proceeds will be used to repay the CRAT
Debenture and the Fund Debenture in full, plus all interest accrued thereon,
and up to a maximum of $100,000 from such net proceeds will be used to pay a
portion of the legal expenses incurred in connection with the financing and
restructuring of the Corporation’s obligations and credit arrangements with
Wistron Corporation.

 

Section 1.5.                                   Closing
Arrangements

 

Subject to the terms and conditions hereof, the
transactions contemplated herein shall close (the “Closing”)
on the Closing Date at such place or places as may be mutually agreed upon by
the Corporation and Phoenix.

 

4

 

ARTICLE 2.

PAYMENT OBLIGATIONS

 

Section 2.1.                                   Principal
Sum

 

For value received, the Corporation, having its
principal business office at 14000 Summit Drive, Austin, Texas 78728, shall pay
to the order of each of the Lenders the principal amount of each Debenture held
by such Lender (as set forth opposite such Lender’s name on Schedule 1),
unless such Debenture has been prepaid or has been converted by the Lender,
plus all accrued and unpaid interest thereon in lawful money of the United
States on October 31, 2005 (the “Maturity Date”),
or such earlier date as the Obligations shall become due and payable hereunder,
at the offices of the respective Lenders identified on the signature pages
attached hereto or such other place as the Lenders may designate in writing not
less than two Business Days prior to the Maturity Date.

 

Section 2.2.                                   Interest

 

The principal outstanding on each Debenture from time
to time shall bear interest from and including the Closing Date to the date of
repayment in full at 10% per annum calculated and payable semi-annually, in
arrears (the “Interest Rate”), and payable in
cash or, at the option of the Lender with 30 days prior written notice to the
Company and subject to the approval of the Toronto Stock Exchange, that number
of Conversion Shares determined by dividing (a) the amount of the applicable
interest payment by (b) the volume weighted average trading price of the Common
Shares on the TSX for the 10 trading days preceding the applicable interest
payment date less the maximum discount permitted by the TSX, on June 30th and
December 31st in each year during which any Obligations are outstanding, the
first of such payments being due December 31, 2004. Interest on overdue interest
shall be calculated and payable at the same rate. After the occurrence of an
Event of Default and for so long as it continues, all Obligations shall bear
interest at a rate that is 5% per annum in excess of the interest rate
otherwise payable under this Agreement with respect to the Debentures (the “Default Interest Rate”).

 

This Agreement and the other Transaction Documents are
subject to the express condition that at no time shall the Corporation be
required to pay interest on the principal balance of the Debentures at a rate
which could subject Lenders to either civil or criminal liability as a result
of being in excess of the maximum amount permissible under applicable usury or
similar laws (the “Maximum Legal Rate”).
If by the terms of this Agreement or the other Transaction Documents, the
Corporation is at any time required or obligated to pay interest on the
principal balance due under the Debentures at a rate in excess of the Maximum
Legal Rate, the Interest Rate, or the Default Interest Rate, as the case may
be, shall be deemed to be immediately reduced to the Maximum Legal Rate and all
previous payments in excess of the Maximum Legal Rate shall be deemed to have
been payments in reduction of principal and not on account of the interest due
hereunder. All sums paid or agreed to be paid to Lenders for the use,
forbearance, or detention of the sums due under the Debentures, shall, to the
extent permitted by applicable law, be amortized, prorated, allocated and
spread throughout the full stated term of the Debentures until payment in full
so that the rate or amount of interest on account of the Debentures does not
exceed the Maximum Legal Rate from time to time in effect and applicable to the
Debentures for so long as the Debentures are outstanding.

 

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Section 2.3.                                   Repayments

 

The Corporation shall pay to each Lender the principal
amount, any accrued and unpaid interest (in cash or Conversion Shares at the
option of the Lender in accordance with Section 2.2) and any other monies owing
in respect of the Debentures in full on the Maturity Date or on such earlier
date as the Obligations shall become due and payable in full hereunder. Each
payment of principal amount of the Debentures hereunder (whether at maturity,
by way of prepayment of otherwise), and each payment of interest on the
Debentures shall be made and applied to the Lenders pro rata
(in cash or Conversion Shares, as the case may be) based on the ratio that each
Lender’s Debentures bears to the total number of Debentures issued to the
Lenders hereunder.

 

Section 2.4.                                   Prepayments

 

The Corporation may, upon at least fifteen (15) days
prior notice to the Lenders, prepay the Debentures (a “Voluntary
Prepayment”), without premium or penalty, in whole or in part at any
time (any such date, the “Prepayment Date”);
provided that upon any such prepayment all accrued and unpaid interest as of
the date immediately preceding the Prepayment Date shall be paid in cash.

 

Section 2.5.                                   Acceleration
Events/Mandatory Prepayments

 

(a)                                  Subject
to the terms of the Intercreditor Agreement and the Wistron Intercreditor
Agreement, the unpaid principal amount of the Debentures, together with any
accrued and unpaid interest thereon, shall become immediately due and payable
on a first priority basis prior to any repayment of the Existing Debentures,
but pari  passu with the CRAT Debenture, if then
outstanding, and the Fund Debenture, if then outstanding, and subject to the
rights of Wistron under the Wistron Intercreditor Agreement (an “Acceleration Event”), in whole or in part,
to the extent of fifty percent (50%) of the proceeds received by the
Corporation in any one or more financing transactions (a “Financing”)
involving the sale and issuance by the Corporation of equity or debt securities
of the Corporation (other than proceeds from the exercise of share options,
stock purchase warrants or other convertible securities of the Corporation
outstanding at or prior to the Closing or any Warrant). Subject to the terms of
the Intercreditor Agreement and the Wistron Intercreditor Agreement, any
remaining proceeds of any such Financing allocated to the repayment of Funded
Indebtedness of the Corporation shall first be applied to repayment of the
Debentures prior to any repayment of the Existing Debentures or any other
Funded Indebtedness of the Corporation, except for the CRAT Debenture, if still
outstanding, and the Fund Debenture, if then outstanding.

 

(b)                                 The
Corporation shall, subject to the terms of the Intercreditor Agreement and the
Wistron Intercreditor Agreement, promptly upon the consummation of a sale or
disposition of assets in bulk (other than as part of a bankruptcy or insolvency
proceeding or a liquidation of the Corporation or any Subsidiary) by the
Corporation or any Subsidiary in which the Corporation or Subsidiary, as
applicable, shall receive aggregate proceeds in excess of $5,000,000, prepay
the Debentures, on a first priority basis prior to any repayment of the
Existing Debentures (a “Mandatory Prepayment”),
to the extent of all such proceeds.

 

6

 

Section 2.6.                                   Payment
in US Dollars.

 

All payments made in cash by the Corporation shall be
made in U.S. Dollars in immediately available funds.

 

Section 2.7.                                   Taxes

 

Any and all payments or reimbursements made under the
Debentures shall be made free and clear of, and without deduction for, any and
all taxes, levies, deductions, charges or withholdings, and all liabilities
with respect thereto (all such taxes, deductions, charges or withholdings and
all liabilities with respect thereto, excluding such taxes imposed on net
income, “Tax Liabilities”),
excluding, however, (i) any taxes imposed on income or any franchise tax
imposed in lieu of a net income tax; (ii) any taxes imposed on any Lender (or
any Person or entity with an interest in Lender), and (iii) any taxes for which
any Lender (or any Person or entity with an interest in such Lender) would be
entitled to claim a credit against its income tax liability in the country in
which the Lender is organized or otherwise subject to taxation. If the
Corporation shall be required by law to deduct any such amounts from or in
respect of any sum payable hereunder to a Lender then, the Corporation shall
pay such amounts to the appropriate Governmental Body and provide such Lender
with satisfactory documentary evidence of such payment within ten (10) days
after such payment and the sum payable hereunder shall be increased as may be
necessary so that, after making all required deductions, such Lender receives
an amount equal to the sum it would have received had no such deductions been
made.

 

ARTICLE 3.

INTERPRETATION

 

Section 3.1.                                   Defined
Terms

 

As used herein the following expressions shall have
the following meanings:

 

“Accounts Receivable”
means all of the Corporation’s accounts, contract rights, chattel paper,
instruments, general intangibles and rights to payment of every kind, now or at
any time hereafter arising.

 

“Affiliate”
means, in respect of any corporation, any Person which, directly or indirectly,
controls or is controlled by or is under common control with the Corporation;
and for the purpose of this definition, “control” (including, with correlative
meanings, the terms “controlled by” and “under common control with”) means the
power to direct, or cause to be directed, the management and policies of a
Corporation whether through the ownership of Voting Shares or by contract or
otherwise.

 

“Aggregate Purchase Price”
means the total amount of up to $5,000,000 paid collectively by all Lenders to
the Corporation for Units, as more specifically set forth on Schedule 1 hereto.

 

“Applicable Law”
means, in respect of any Person, property, transaction or event, all applicable
laws, statutes, rules, by-laws and regulations, and all applicable official
directives, orders, judgments and decrees of Governmental Bodies.

 

7

 

“Business Day”
means any day other than Saturday, Sunday or a day on which chartered banks are
closed for business in New York, New York.

 

“Capital Lease Obligations”
means, as to any Person, the obligation of such Person to pay rent or other
liquidated amounts under a lease of (or other agreement conveying the right to
use) real or personal property, which obligations are required to be classified
and accounted for as a capital lease on a balance sheet of such Person under
generally accepted accounting principles and, for purposes of this Agreement,
the amount of such obligations shall in each case be the capitalized amount
thereof, determined in accordance with generally accepted accounting
principles.

 

“Cash Equivalents”
means: (i) marketable direct obligations issued or unconditionally guaranteed
by the United States or Canadian Government or issued by any agency thereof and
backed by the full faith and credit of the United States or Canada, in each
case maturing within one (1) year from the date of acquisition thereof; (ii)
commercial paper maturing no more than one (1) year from the date issued and,
at the time of acquisition, having a rating of at least A-1 from Standard &
Poor’s Rating Service or at least P-1 from Moody’s Investors Service, Inc.;
(iii) certificates of deposit or bankers’ acceptances maturing within one (1)
year from the date of issuance thereof issued by, or overnight reverse
repurchase agreements from, any commercial bank organized under the laws of
Canada or the United States of America or any state thereof or the District of
Columbia having combined capital and surplus of not less than $500,000,000; and
(iv) time deposits maturing no more than thirty (30) days from the date of
creation thereof with commercial banks having membership in the Federal Deposit
Insurance Corporation or the Canadian Deposit Insurance Corporation in amounts
at any one such institution not exceeding the lesser of $100,000 or the maximum
amount of insurance applicable to the aggregate amount of the Corporation’s
deposits at such institution.

 

“Change of Control”
means any of:

 

(i)                                     a
merger, consolidation, amalgamation or reorganization involving the
Corporation, unless such merger, consolidation, amalgamation or reorganization
is one in which the shareholders of the Corporation, immediately before such
merger, consolidation, amalgamation or reorganization, own, directly or
indirectly immediately following such merger, consolidation, amalgamation or
reorganization, at least fifty-one percent (51%) of the combined voting power
of the outstanding voting securities of the corporation resulting from such
merger or consolidation, amalgamation or reorganization in substantially the
same proportion as their ownership of the voting securities immediately before
such merger, consolidation, amalgamation or reorganization,

 

(ii)                                  the
individuals who, as of the date hereof, are members of the Board (the “Incumbent Board”), cease for any reason to constitute at
least two-thirds of the members of the Board; provided,
however, that (i) if the
election, or nomination for election by the Corporation’s common shareholders,
of any new director was approved by a vote of at least two-thirds of the
Incumbent Board or (ii) if any new director has been designated by the Lenders
pursuant to Section 6.5 or by the Existing Debenture Holders pursuant to the
November 2002 Debenture Agreement, the April 2003 Debenture Agreement or the
Second April 2003 Debenture Agreement, such new director shall, for purposes
hereof, be considered as a member

 

8

 

of the Incumbent Board; provided
further, however, that no individual (other than an
individual designated pursuant to Section 6.5 or pursuant to the rights of the
Existing Debenture Holders) shall be considered a member of the Incumbent Board
if such individual initially assumed office as a result of either an actual or
threatened election contest or other actual or threatened solicitation of
proxies or consents by or on behalf of a Person other than the Board (a “Proxy Contest”) including by reason of any
agreement intended to avoid or settle any election contest or Proxy Contest;

 

(iii)                               the
Corporation shall cease to own and control all of the economic and voting
rights associated with ownership of at least 100% of the outstanding shares of
all classes of the Subsidiaries on a fully diluted basis, other than pursuant
to the dissolution or winding-up of a Subsidiary pursuant to which all of the
assets of such Subsidiary are transferred or conveyed to the Corporation or a
Subsidiary; and

 

(iv)                              with
respect to any of the Corporation or Subsidiaries, the time when the
Corporation or such Subsidiary has sold, transferred, conveyed assigned or
otherwise disposed of all or substantially all of its assets, other than
pursuant to a transaction in which such assets are sold, transferred, conveyed,
assigned or disposed of to the Corporation or a Subsidiary.

 

“Closing Date”
means December 17, 2004 or such other date as Phoenix and the Corporation may
agree upon as the Closing Date.

 

“Contingent Liabilities”
means, as applied to any Person, any direct or indirect contingent liability of
that Person: (i) with respect to any indebtedness, lease, dividend or other
obligation of another Person if the primary purpose or intent of the Person
incurring such liability, or the primary effect thereof, is to provide
assurance to the obligee of such liability that such liability will be paid or
discharged, or that any agreements relating thereto will be complied with, or
that the holders of such liability will be protected (in whole or in part)
against loss with respect thereto; or (ii) with respect to any letter of credit
issued for the account of that Person or as to which that Person is otherwise
liable for reimbursement of drawings. Contingent Liabilities shall also include
(A) the direct or indirect guaranty, endorsement (other than for collection or
deposit in the ordinary course of business), co-making, discounting with
recourse or sale with recourse by such Person of the obligation of another, (B)
the obligation to make take-or-pay or similar payments if required regardless
of nonperformance by any other party or parties to an agreement, other than
pursuant to routine agreements entered into in the ordinary course of business,
and (C) any liability of such Person for the obligations of another through any
agreement to purchase, repurchase or otherwise acquire such obligation or any
property constituting security therefore, to provide funds for the payment or
discharge of such obligation or to maintain the solvency, financial condition
or any balance sheet item or level of income of another. The amount of any Contingent
Liabilities shall be equal to the amount of the obligation so guaranteed or
otherwise supported or, if not a fixed and determined amount, the maximum
amount so guaranteed.

 

“Conversion Shares”
means Common Shares issued to the Lenders in payment of interest on the
Debentures in lieu cash.

 

9

 

“CRAT”
means The Philip S. Sassower 1996 Charitable Remainder Annuity Trust, a trust
organized under the laws of the State of New York.

 

“CRAT Debenture”
means that debenture of the Corporation issued pursuant to that certain
Debenture Purchase Agreement, dated September 15, 2004, by and between the
Corporation (as Borrower) and The Philip S. Sassower 1996 Charitable Remainder
Annuity Trust  (the “September 2004 Debenture Agreement”).

 

“Default” means
any event which, but for the lapse of time, giving of notice or both, would
constitute an Event of Default.

 

“Encumbrance”
means any mortgage, lien, pledge, assignment, charge, security interest, title
retention agreement, hypothec, levy, execution, seizure, attachment,
garnishment, right of distress or other claim in respect of property of any
nature or kind whatsoever howsoever arising (whether consensual, statutory or
arising by operation of law or otherwise) and includes arrangements known as
sale and lease-back, sale and buy-back and sale with option to buy-back.

 

“Environmental Laws”
means all applicable federal, provincial, state, municipal or local laws,
statutes, regulations or ordinances relating to the environment, occupational
safety, health, product liability and transportation.

 

“Environmental Order”
means any prosecution, order, decision, notice, direction, report,
recommendation or request issued, rendered or made by any Governmental Body in
connection with Environmental Laws.

 

“Event of Default”
has the meaning ascribed to such term in Section 8.1.

 

“Existing Debentures”
means those debentures of the Corporation issued pursuant to (i) that certain
Debenture Purchase Agreement, dated November 5, 2002, by and among Xplore
Technologies Corp (as Borrower), Phoenix Enterprises LLC and the lenders listed
on Schedule 1 thereto, as amended (the “November
2002 Debenture Agreement”), (ii) that certain December 2002
Debenture Purchase Agreement, dated December 6, 2002, by and among Xplore
Technologies Corp (as Borrower), Phoenix Enterprises LLC and the lenders listed
on Schedule 1 thereto, as amended (the “December
2002 Debenture Agreement”), (iii) that certain April 2003 Debenture
Purchase Agreement, dated April 9, 2003, by and among Xplore Technologies Corp
(as Borrower), Phoenix Enterprises LLC and the lenders listed on Schedule 1
thereto, as amended (the “April 2003
Debenture Agreement”) and (iv) that certain Second April 2003
Debenture Purchase Agreement, dated April 28, 2003, by and among Xplore
Technologies Corp (as Borrower), Phoenix Enterprises LLC and the lenders listed
on Schedule 1 thereto, as amended (the “Second
April 2003 Debenture Agreement”).

 

“Existing Debenture
Agreements” means (i) the November 2002 Debenture Agreement, (ii)
the December 2002 Debenture Agreement, (iii) the April 2003 Debenture Agreement
and (iv) the Second April 2003 Debenture Agreement.

 

“Existing Debenture
Holders” means those Persons in their capacity as lenders under (i)
the November 2002 Debenture Agreement, (ii) the December 2002 Debenture
Agreement, (iii) the April 2003 Debenture Agreement and (iv) the Second April
2003 Debenture Agreement.

 

10

 

“Fund Debenture”
means that debenture of the Corporation issued pursuant to that certain
Debenture Purchase Agreement, dated November 23, 2004, by and between the
Corporation (as Borrower) and Phoenix (the “November
2004 Debenture Agreement”).

 

“Funded Indebtedness”
means, with respect to any Person at any particular time, the aggregate
(without duplication) of the following amounts determined in accordance with
generally accepted accounting principles on a consolidated basis at such time:

 

(i)                                     indebtedness
for money borrowed and indebtedness represented by notes payable and drafts
accepted representing extensions of credit (including, as regards any note or
draft issued at a discount, the face amount of such note or draft) and
including the face amount of bankers’ acceptances and letters of credit;

 

(ii)                                  all
obligations (whether or not with respect to the borrowing of money) which are
evidenced by bonds, debentures, notes or other similar instruments or not so
evidenced but which would be considered to be indebtedness for borrowed money
in accordance with generally accepted accounting principles;

 

(iii)                               all
indebtedness for borrowed money secured by an Encumbrance on any property of
such Person;

 

(iv)                              all
indebtedness upon which interest charges are customarily paid;

 

(v)                                 Capital
Lease Obligations and all other indebtedness issued or assumed as full or
partial payment for property or services or by way of capital contribution; and

 

(vi)                              any
of the foregoing amounts in respect of any Subsidiary of the Person whose
accounts are not required under generally accepted accounting principles to be
consolidated with the accounts of such Person, including (without limitation)
the aggregate outstanding amount of the Obligations at such time.

 

Notwithstanding the foregoing, trade payables,
expenses, costs and charges accrued in the ordinary course of business in
accordance with customary trade terms and not overdue for more than 90 days (or
which, if overdue for more than 90 days, are being and continue to be actively
and diligently contested in good faith or in respect of which no legal
proceedings for payment of any such amount have been commenced and are
continuing), customer advance payments and deposits received in the ordinary
course of business shall not constitute Funded Indebtedness.

 

“Governmental Body”
means any government, parliament, legislature, or any regulatory authority,
agency, commission or board of any government, parliament or legislature, or
any court or (without limitation to the foregoing) any other law, regulation or
rule-making entity (including, without limitation, any central bank, fiscal or
monetary authority or authority regulating banks), having or purporting to have
jurisdiction in the relevant circumstances, or any Person acting or purporting
to act under the authority of any of the foregoing (including, without
limitation, any arbitrator).

 

“Hazardous Substance”
means any substance or combination of substances which is or may become
hazardous, toxic, injurious or dangerous to persons, property, air, land,
water, flora, 

 

11

 

fauna or wildlife, and includes but is not limited to any contaminants,
pollutants, dangerous substances, liquid wastes, industrial wastes, hauled
liquid wastes, toxic substances, hazardous wastes, hazardous materials or
hazardous substances as defined in or pursuant to any Environmental Laws or
Environmental Orders pursuant thereto.

 

“Instrument”
means this Agreement, the Debenture Certificates and any other agreement or
instrument (whether now existing, presently arising or created in future)
delivered by or on behalf of the Corporation to the Lenders.

 

“Intellectual Property”
means all right, title, interest and benefit of the Corporation and its
Subsidiaries in and to any registered or unregistered world wide trade marks,
trade or brand names, service marks, copyrights, copyright applications,
designs, inventions, patents, patent applications, patent rights, licenses,
sub-licenses, franchises, formulas, processes, know-how, technology, computer
rights and other intellectual or industrial property of the Corporation or any
of its Subsidiaries or pertaining to the Corporation’s business.

 

“Intercreditor
Agreement” means that Amended and Restated Consent, Amendment and
Intercreditor Agreement, dated as of December 17, 2004, by and among the
Corporation, the U.S. Subsidiary, Phoenix Enterprises LLC, Phoenix and each of
those persons and entities listed on Schedule A attached thereto.

 

“Inventory”
means any and all goods, merchandise and other personal property located in the
United States, including, without limitation, goods representing returns upon
any accounts, and whether now owned or hereafter acquired by the Corporation
that is free and clear of all Encumbrances and is not unsellable, damaged,
obsolete or otherwise not readily saleable at market value in the ordinary
course of business, consistent with past practice.

 

“Material Adverse Effect” means
any change or effect that is materially adverse to (i) the business, financial
condition, or results of operations of such Person and its Subsidiaries, taken
as a whole, other than any change or effect relating to general political,
financial or economic conditions or the state of financial markets in general
or (ii) the rights, remedies and benefits available to, or conferred upon, the
Lenders under the Transaction Documents.

 

“Material Authorization”
means, with respect to any Person, any approval, permit, license or similar
authorization (including any trademark, trade name or patent) from, and any
filing or registration with, any Governmental Body or other Person required by
such Person to own its property and assets or to carry on its business as
presently carried on by it or as contemplated hereunder to be carried on by it
in each jurisdiction in which it does so or is contemplated to do so or where
the failure to have such approval, permit, license, authorization, filing or
registration would have a Material Adverse Effect upon such Person or upon its
ability to perform its obligations under any of the Instruments.

 

“Maturity Date”
shall mean October 31, 2005.

 

“Management
Committee” has the meaning ascribed to such term in Section 7.2(p).

 

“MC Operational
Procedures” has the meaning ascribed to such term in Section 7.2(p).

 

12

 

“Obligations”
means all monies now or at any time and from time to time hereafter owing or
payable by the Corporation to the Lenders and all obligations (whether now
existing, presently arising or created in the future) of the Corporation in favor
of the Lenders, and whether direct or indirect, absolute or contingent, matured
or not, each in connection with or relating to the Debentures, this Agreement
or any of the other Transaction Documents.

 

“Operating Expenses”
means, as of any date, the sum of the line items entitled “Sales and marketing”,
“Research, development and engineering”, “General and administrative” and “Depreciation
and amortization” on the Corporation’s consolidated statement of loss included
in the Corporation’s Financial Statements, and each such line item shall have
the value that such line item has on such statement of loss as of that date.

 

“Overhead Costs”
means Operating Expenses less (i) sales commissions and (ii) non-cash charges
as determined in accordance with GAAP.

 

“Order” means
any order, notice, direction, report, recommendation or decision rendered by
any Governmental Body or other regulatory agency.

 

“Permitted Encumbrances”
means:

 

(i)                                     Encumbrances
for taxes, assessments or governmental charges incurred in the ordinary course
of business that are not yet due and payable or the validity of which is being
actively and diligently contested in good faith by the Corporation or any
Subsidiary, as applicable, provided reserves reasonably deemed adequate
therefor by the Corporation or Subsidiary, as applicable, with respect thereto
are maintained on the books of the Corporation or the Subsidiary, as
applicable, in accordance with generally accepted accounting principles;

 

(ii)                                  construction,
mechanics’, carriers’, warehousemen’s and materialmen’s liens and liens in
respect of vacation pay, workers’ compensation, employment insurance or similar
statutory obligations, provided the obligations secured by such liens are not
yet due and payable and, in the case of construction liens, which have not yet
been filed or for which the applicable has not received written notice of an
Encumbrance;

 

(iii)                               Encumbrances
arising from court or arbitral proceedings, provided that the claims secured
thereby are being contested in good faith by the Corporation or any Subsidiary,
provided reserves reasonably deemed adequate by the Corporation or Subsidiary,
as applicable, with respect thereto are maintained on the books of the
Corporation or Subsidiary in accordance with generally accepted accounting
principles, execution thereon has been stayed and continues to be stayed and
such Encumbrances do not result in an Event of Default;

 

(iv)                              good
faith deposits made in the ordinary course of business to secure the
performance of bids, tenders, contracts (other than for the repayment of
borrowed money), leases, surety, customs, performance bonds and other similar
obligations;

 

(v)                                 deposits
to secure statutory obligations or in connection with any matter giving rise to
an Encumbrance described in (ii) above;

 

13

 

(vi)                              deposits
of cash or securities in connection with any appeal, review or contestation of
any Encumbrance or any matter giving rise to an Encumbrance described in (i) or
(iii) above;

 

(vii)                           zoning
restrictions, easements, rights of way, leases or other similar encumbrances or
privileges in respect of real property which in the aggregate do not materially
affect the value of such property and any related Security Document nor impair
the use of such property by the Corporation or any Subsidiary, in the operation
of its business, and which are not violated in any material respect by existing
or proposed structures or land use;

 

(viii)                        Encumbrances
in favor of (i) each Lender pursuant to this Agreement, (ii) the Existing
Debenture Holders pursuant to the Existing Debenture Agreements, (iii) the CRAT
pursuant to the September 2004 Debenture Agreement, and (iv) Phoenix pursuant
to the November 2004 Debenture Agreement;

 

(ix)                                Encumbrances
pursuant to Purchase Money Security Interests;

 

(x)                                   security
given by the Corporation or any Subsidiary to a public utility or any
Governmental Body, when required by such utility or Governmental Body in
connection with the operations of the Corporation or such Subsidiary, in the
ordinary course of its business, which singly or in the aggregate do not
materially detract from the value of the asset concerned or materially impair
its use in the operation of the business of the Corporation or such Subsidiary;

 

(xi)                                Encumbrances
granted to Wistron under to the Wistron Intercreditor Agreement;

 

(xii)                             any
other Encumbrance which Phoenix approves in writing as a Permitted Encumbrance
subsequent to the date hereof; and

 

(xiii)                          the
Encumbrances listed under the heading “Permitted Encumbrances” in Schedule
3.1.

 

“Person” means
a natural person, partnership, corporation, joint stock company, trust,
unincorporated association, joint venture or other entity or governmental
entity, and pronouns have a similarly extended meaning.

 

“Premises” means
any premises owned or occupied by the Corporation or its Subsidiaries from time
to time.

 

“Purchase Money Security Interest”
means an Encumbrance on any asset, other than accounts receivable or inventory,
of a Person which is assumed, created, guaranteed or reserved to secure the
unpaid purchase price of such asset, provided that any such Encumbrance is
limited to the asset so acquired and does not secure in excess of the purchase
price thereof, such purchase price not to exceed the fair market value of the
purchased asset.

 

“Receiver”
means one or more of a receiver, receiver-manager or receiver and manager of
all or a portion of the undertaking, property and assets of the Corporation
appointed by each 

 

14

 

Lender pursuant to this Agreement, any of the Security Documents or by
or under any judgment or order of a court.

 

“Release”
includes abandon, add, deposit, discharge, disperse, dispose, dump, emit,
empty, escape, leach, leak, migrate, pour, pump, release or spill.

 

“Secured Property”
means all property and assets of the Corporation subjected to the security
interest under Section 4.1, including without limitation all Intellectual
Property.

 

“Security Documents”
means, collectively, this Agreement and all other agreements and other
instruments delivered to each Lender by or on behalf of the Corporation or the
US Subsidiary (whether now existing or presently arising) for the purpose of
establishing, perfecting, preserving or protecting any security held by each
Lender in respect of any Obligations.

 

“Shareholders’ Equity”
of the Corporation at any particular time means the difference between (i) the
aggregate of Total Tangible Assets of the Corporation and (ii) the Total
Liabilities of the Corporation at such time.

 

“Subsidiary”
means a corporation controlled by the Corporation, as the term “control” is
defined in the Business Corporations Act
(Ontario) as in effect at the date hereof and without reference to any
amendments thereto after the date hereof and includes the corporations set out
in Schedule 5.1(q) hereto.

 

“Taxes” means
all taxes of any kind or nature whatsoever including, without limitation,
income taxes, sales or value-added taxes, levies, stamp taxes, royalties,
duties, and all fees, deductions, compulsory loans and withholdings imposed,
levied, collected, withheld or assessed as of the date hereof or at any time in
the future, by any Governmental Body of or within Canada or any other
jurisdiction whatsoever having power to tax, together with penalties, fines,
additions to tax and interest thereon.

 

“Total Tangible Assets”
of any Person means the aggregate book value amount of all tangible assets of
the Person which would, on a consolidated basis in accordance with generally
accepted accounting principles, be reflected on a balance sheet of the Person.

 

“Total Liabilities”
of any Person means the aggregate amount of all indebtedness and liabilities
determined on a consolidated basis, which would, in accordance with generally
accepted accounting principles, be reflected on a balance sheet of the Person
including, for greater certainty, deferred taxes, together with, without
duplication:

 

(i)                                     the
amount of all Funded Indebtedness and all Contingent Liabilities of the Person,
whether or not reflected on a balance sheet;

 

(ii)                                  the
amount for which any shares in the capital of the Person (if it is a
corporation) may be redeemed if the holders of such shares are entitled at any
time to require the Person to redeem such shares or if the Person has called such
shares for redemption; and

 

(iii)                               the
amount of all Capital Lease Obligations of the Person, provided that if the
rights and remedies of the lessor under such Capital Lease Obligations in the 

 

15

 

event of default are limited to repossession or sale of property, such
amount shall be deemed to be equal to the lesser of (A) the amount of the
Capital Lease Obligations and (B) the book value of such property.

 

“Transaction Documents” means
this Agreement, the Warrants, the Debenture Certificates, the Guaranty
Agreement dated the date hereof, by the U.S. Subsidiary for the benefit of the
Lenders, the Security Agreement, dated the date hereof, by the U.S. Subsidiary
for the benefit of the Lenders, and any other documents, instruments or
agreements entered into by the Corporation or the U.S. Subsidiary in connection
with any of the foregoing.

 

“Voting Shares”
means capital stock of any class of a corporation which carries voting rights
under any circumstances, provided that shares which carry the right to vote
conditionally upon the happening of an event shall not be considered Voting
Shares until the occurrence of such event and then only during the continuance
of such event.

 

“Wistron  Intercreditor  Agreement” means that Intercreditor, Trade Credit
Restructuring and Security Agreement, dated as of November 24, 2004 by and
among the Corporation, the U.S. Subsidiary, Phoenix Enterprises LLC, Phoenix,
the CRAT and Wistron Corporation (“Wistron”).

 

Section 3.2.                                   Interpretation

 

(a)                                  “This Agreement”,  “hereto”, “hereby”, “hereunder”, “herein”, and similar expressions refer to the whole of this
Agreement and not to any particular Article, Section, paragraph, clause,
subdivision or other portion hereof.

 

(b)                                 The
expression “Arm’s Length” has the meaning
ascribed to such term in the Income Tax Act
(Canada).

 

(c)                                  All
references herein to the Income Tax Act (Canada) shall refer to such act and
the regulations thereunder as the same may be amended or replaced from time to
time.

 

(d)                                 Except
as expressly provided herein, terms which are defined in the Personal Property Security Act (Ontario) shall have the same
meaning where used herein as the same may be amended or replaced from time to
time.

 

(e)                                  Words
importing the singular number only include the plural and vice versa
and words importing gender shall include all genders.

 

(f)                                    All
financial or accounting determinations, reports and statements provided for in
this Agreement shall be made or prepared in accordance with generally accepted
accounting principles applied in a consistent manner and shall be made and
prepared on a consolidated basis.

 

(g)                                 The
division of this Agreement into Articles and Sections and the insertion of
headings are for convenience of reference only and shall not affect the
construction or interpretation of this Agreement.

 

16

 

(h)                                 The
schedules and exhibits annexed hereto shall, for all purposes, form an integral
part of this Agreement.

 

(i)                                     References
to sums of money herein are to US dollars, unless otherwise specified.

 

(j)                                     Time
is of the essence hereof.

 

(k)                                  Where
the word “including” or “includes” is used in this Agreement, it means “including
(or includes) without limitation”.

 

(l)                                     Wherever
in this Agreement reference is made to generally accepted accounting principles
or GAAP, such reference shall be deemed to mean the generally accepted
accounting principles from time to time approved by the Canadian Institute of
Chartered Accountants, or any successor institute, applicable as at the date on
which a given calculation is made or required to be made in accordance with
generally accepted accounting principles.

 

Section 3.3.                                   Invalidity
of Provisions

 

Each of the provisions contained in this Agreement is
distinct and severable and a declaration of invalidity, illegality or
unenforceability of any such provision or part thereof by a court of competent
jurisdiction shall not affect the validity or enforceability of any other
provision hereof or thereof. Without limiting the generality of the foregoing,
if any amounts on account of fees or otherwise payable by the Corporation to
the Lenders hereunder or under the Debenture Certificates exceed the maximum
amount recoverable under applicable law, the amounts so payable hereunder shall
be reduced to the maximum amount recoverable under applicable law.

 

Section 3.4.                                   Day
Not A Business Day

 

In the event that any day on or before which any
action is required to be taken hereunder is not a Business Day, then such
action shall be required to be taken at or before the requisite time on the
next succeeding day that is a Business Day.

 

Section 3.5.                                   Governing
Law

 

This Agreement shall be governed by and interpreted
and enforced in accordance with the laws of the Province of Ontario and the
federal laws of Canada applicable therein. Each of the parties hereby agrees to
the non-exclusive jurisdiction of the courts of the Province of Ontario. For
the purpose of all legal proceedings, this Agreement will be deemed to have
been performed in the Province of Ontario and the courts of the Province of
Ontario will have non-exclusive jurisdiction to entertain any action arising
under this Agreement.

 

17

 

ARTICLE 4.

SECURITY

 

Section 4.1.                                   Charge

 

(a)                                  In
consideration of the sum of Ten Dollars ($10.00) now paid to it by each Lender
(receipt of which is hereby acknowledged), and to secure the due payment of the
Obligations hereunder, but subject to the exceptions set forth in Section 4.2,
the Corporation hereby grants to each Lender a security interest in, and
charges with payment to each Lender of all sums payable hereunder as and by way
of a fixed and a floating charge, the whole of the undertaking of the
Corporation and all of its property and assets, real and personal, movable and
immovable, tangible and intangible, of every nature and kind whatsoever,
whosesoever situate, both present and future.

 

(b)                                 The
Corporation and each Lender hereby acknowledge that (i) value has been given to
the Corporation by such Lender, (ii) the Corporation has rights in the Secured
Property (other than after-acquired property), and (iii) they have not agreed
to postpone the time of attachment of the security granted hereunder.

 

Section 4.2.                                   Exceptions
as to Leases

 

The last day of any term of years reserved by any
lease, verbal or written, or any agreement therefor, now held or hereafter
acquired by the Corporation is excepted out of the Secured Property, but the
Corporation shall stand possessed of any such reversion upon trust to assign
and dispose thereof as each Lender may direct. Where the giving of a charge or
security interest on any real or personal property held by the Corporation
under lease requires the consent of the lessor of such property, the giving of
the charge or security interest hereunder on such property shall not take
effect until such consent is obtained or legally dispensed with but the
suspension of the effect of the charge or security interest on such property
shall not affect the charge or security interest on any other property of the
Corporation.

 

Section 4.3.                                   Habendum

 

The Lenders shall have and hold the Secured Property
and all of the rights hereby conferred unto the Lenders, their successors and
assigns forever, but subject nevertheless to the provisions and with the powers
herein set forth.

 

Section 4.4.                                   Charge
Valid Irrespective of Advance of Money

 

The charges and security interests hereby created
shall have effect and be deemed to be effective whether or not the monies or
obligations hereby secured or any part thereof shall be advanced or owing or in
existence before or after or upon the date of this Agreement and neither the
giving of charges and security interests hereunder nor any advance of funds
shall oblige each Lender to advance any funds or any additional funds.

 

18

 

Section 4.5.                                   Supplemental
Indentures

 

The Corporation shall from time to time on demand by
each Lender and at the expense of the Corporation execute and deliver such
further deeds or indentures supplemental hereto, which shall thereafter form
part hereof, for the purpose of charging, or securing in favor of each Lender
any property now owned or hereafter acquired by the Corporation and falling
within the description of the Secured Property, for correcting or amplifying
the description of any property hereby charged or secured or intended so to be,
or for any other purpose not inconsistent with the terms of this Agreement.

 

Section 4.6.                                   Continuing
Security

 

Any and all payments made at any time in respect of
the Obligations and the proceeds realized from any securities held therefor
(including moneys realized from the enforcement of this Agreement) shall be
applied in accordance with the Intercreditor Agreement. Each Lender may hold as
additional security hereunder any increase or profits or other proceeds
realized from the Secured Property (including money) for such period of time as
each Lender sees fit. The Corporation shall be accountable for any deficiency.

 

Section 4.7.                                   Defeasance

 

If the Corporation, its successors or assigns or any
of them, make or cause to be made due payment or performance of all
Obligations, without any reduction or abatement, and all taxes, rates, levies,
charges or assessments payable by the Corporation upon the Secured Property or
in respect thereof no matter by whom or by what authority imposed which each
Lender shall have paid or shall have been rendered liable to pay, then, subject
to Article 8 and Sections 9.6 and 9.17 hereof, everything in this Agreement
shall be absolutely null and void and each Lender shall on request therefor by
the Corporation, and at the expense of the Corporation, at that time surrender
the Debenture Certificate to the Corporation, but until that time it shall
remain in full force and effect despite the repayment or satisfaction from time
to time of the whole or any part of the Obligations.

 

Section 4.8.                                   Guarantees

 

Contemporaneous with the execution and delivery
hereof, the Corporation shall cause Xplore Technologies Corporation of America
(the “US Subsidiary”) to execute and deliver
to each Lender unlimited guarantees of the Obligations to such Lender and a
general security agreement granting security over all of the US Subsidiary’s
property, assets and undertaking as security for the obligations of the US
Subsidiary. At the Lender’s request, the Corporation shall cause any
corporation that becomes a Subsidiary after the date hereof, from time to time,
to provide each Lender with an unlimited guarantee supported by such security
as each Lender may request, acting reasonably, in respect of the Obligations.

 

19

 

ARTICLE 5.

REPRESENTATIONS AND WARRANTIES

 

Section 5.1.                                   General
Representations and Warranties of the Corporation

 

The Corporation represents and warrants to each Lender
as follows and shall continue to represent and warrant to each Lender as
follows for so long as the Obligations are outstanding:

 

(a)                                  Incorporation and Status. Each of the Corporation and each
Subsidiary is duly incorporated and validly existing under the laws of its
jurisdiction of incorporation and has the corporate power and capacity to own
its properties and assets and to carry on its businesses as presently carried
on by it or as contemplated hereunder to be carried on by it and hold all
Material Authorizations.

 

(b)                                 Power and Capacity. Each of the Corporation and each
Subsidiary has the corporate power and capacity to enter into this Agreement
and each Instrument to which it is a party and to do all acts and things as are
required or contemplated hereunder or thereunder to be done, observed and
performed by it.

 

(c)                                  Due Authorization. Each of the Corporation and each
Subsidiary has taken all necessary corporate action to authorize the execution,
delivery and performance of each of this Agreement and each Instrument to which
it is a party.

 

(d)                                 No Contravention. The execution and delivery of this
Agreement and the other Instruments to which each of the Corporation and each
Subsidiary is a party and the performance by each of the Corporation and each
Subsidiary of their obligations hereunder or thereunder (i) does not and will
not contravene, breach or result in any default under (A) the articles,
memorandum of association, by-laws, constating documents or other
organizational documents of the Corporation or such Subsidiary, or (B) under
any mortgage, lease, agreement or other legally binding instrument, license,
permit or Applicable Law to which any of the Corporation or Subsidiary is a
party or by which any of the Corporation or Subsidiary or any of its properties
or assets may be bound, (ii) will not oblige any of the Corporation or
Subsidiary to grant any Encumbrance to any Person other than each Lender, and
(iii) will not result in or permit the acceleration of the maturity of any
indebtedness, liability or obligation of any of the Corporation or Subsidiary
under any mortgage, lease, agreement or other legally binding instrument of or
affecting any of the Corporation or Subsidiary.

 

(e)                                  No Senior or Pari Passu Indebtedness. Other than (i) an
amount of $1.05 million of the Corporation’s indebtedness to the CRAT plus
accrued and unpaid interest thereon, (ii) an amount of $1.6 million of the
Corporation’s indebtedness to Phoenix pursuant to the November 2004 Debenture
Agreement plus accrued and unpaid interest thereon, and (iii) and the
Corporation’s indebtedness to Wistron plus accrued and unpaid interest thereon,
the Corporation has no, and shall not have any, indebtedness which ranks senior
to or pari passu with the Debentures. Except
for Section 2.5, the Intercreditor Agreement and the Wistron Intercreditor
Agreement, nothing herein, including pursuant to Section 6.4(a), shall operate
to subordinate the security interest provided for in the Security Documents to
or in favor of any Encumbrance or Permitted Encumbrance, or to postpone any of
the Obligations to any of the

 

20

 

obligations, indebtedness or liabilities owed by the Corporation or its
Subsidiaries to the holder of any Permitted Encumbrances or Encumbrance.

 

(f)                                    No Consents Required. No authorization, consent or approval
of, or filing with or notice to, any Person (including any Governmental Body)
is required in connection with the execution, delivery or performance of this
Agreement by the Corporation or any other Instrument by the Corporation or any
Subsidiary, as applicable, other than (i) the consent of the CRAT, (ii) the consent of Phoenix as
holder of the Fund Debenture, (iii) the consent of the Existing Debenture Holders, (iv) the approval of the
Toronto Stock Exchange and the satisfaction of any conditions to such approval,
(v) the filings required by applicable securities laws, and (vi) the
registration of a financing statement under the Personal Property Security Act
(Ontario) and the UCC, (the consents and approvals in clauses (i) through (vi)
collectively, the “Required Consents”).

 

(g)                                 Enforceability. Each of this Agreement and the other
Instruments constitutes, or upon execution and delivery will constitute, a
valid and binding obligation of the Corporation and each Subsidiary which is a
party thereto (as applicable) enforceable against it in accordance with its
terms, except as enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium and other laws relating to or affecting the rights
of creditors generally and except as limited by the application of equitable
principles.

 

(h)                                 No Work Orders. As at the Closing Date, no work orders,
directions or notices have been issued and remain outstanding pursuant to any
Applicable Law relating to the business of the Corporation or any Subsidiary or
any part of the Secured Property or any environmental matters affecting the
foregoing, except such orders, directions and notices that would not have a
Material Adverse Effect. As at the Closing Date, neither the Corporation or any
Subsidiary have received any notification from any Governmental Body, that has
not been satisfied, that any work, repairs, construction or capital expenditures
are required to be made in respect of the Secured Property or any part thereof
as a condition of continued compliance with any Applicable Law or any Material
Authorization issued thereunder.

 

(i)                                     Permits. The Corporation and each Subsidiary has all licenses,
permits, approvals and franchises that it requires, or is required to have, to
own its properties and assets and to carry on its business as presently
conducted, except where the failure to have such license, permit approval or
franchise would not have a Material Adverse Effect. All such licenses, permits,
approvals and franchises are in good standing and no actions, proceedings,
investigations or other steps of any kind are in process, pending, or to the
knowledge of the Corporation, threatened, or would result in any such license,
permit, approval or franchise being terminated, revoked, withdrawn, suspended
or otherwise made unavailable to the Corporation or any Subsidiary for any
period of time, except where such termination, revocation, withdrawal,
suspension or unavailability would not have a Material Adverse Effect. The
Corporation and each Subsidiary is conducting its business in material
compliance with all applicable laws, regulations, by-laws and ordinances of
each jurisdiction in which its business is carried on.

 

(j)                                     Financial Statements. Phoenix, on behalf of the Lenders, has
been furnished with a copy of:

 

21

 

(i)                                     the
audited consolidated financial statements of the Corporation and its Subsidiaries
for its financial year ended March 31, 2004; and

 

(ii)                                  the
unaudited consolidated financial statements of the Corporation and its
Subsidiaries for the fiscal quarter ended September 30, 2004.

 

Such financial statements, including the notes thereto
(the “Financial Statements”) have been
prepared in accordance with generally accepted accounting principles and
fairly, completely and accurately present the financial condition of the
Corporation (including each Subsidiary) and the financial information presented
therein in all material respects for the periods and as at the dates thereof.
As at the Closing Date, the Corporation and each of the Subsidiaries has no
outstanding liabilities (including Funded Indebtedness, Contingent Liabilities
or otherwise) other than those disclosed in the Financial Statements and other
than the indebtedness owed by the Corporation to the Existing Debenture
Holders, to the CRAT, to Wistron, to Phoenix and trade or business obligations
subsequently incurred in the ordinary course of business, which such trade and
business obligations are currently in good standing in accordance with their
respective terms, except as previously disclosed in writing to Phoenix. Since
the date of the March 31, 2004 Financial Statements and except as set forth in
the September 30, 2004 Financial Statements, there has been no development
which has had or would reasonably be expected to have a Material Adverse Effect
upon the ability of the Corporation or any Subsidiary to perform its
obligations under this Agreement or any other Transaction Document to which it
is a party.

 

(k)                                  Non-Arm’s Length Transactions. During the period from March
31, 2004 through the Closing Date, none of the Corporation or Subsidiaries has
entered into any transaction or agreement with any Affiliate other than on
commercially reasonable terms and within the limitations of the other
provisions hereof, except as disclosed in the Financial Statements or in any
document filed by the Corporation with the Ontario Securities Commission that
is publicly available.

 

(l)                                     No Litigation. Except as has previously been disclosed in
writing by the Corporation or its counsel to Phoenix or in any document filed
by the Corporation with the Ontario Securities Commission that is publicly
available, (i) as at the Closing Date, there is no court, administrative,
regulatory or similar proceeding (whether civil, quasi-criminal, or criminal),
arbitration or other dispute settlement procedure, investigation or enquiry by
any Governmental Body, or any similar matter or proceeding (collectively “proceedings”) against or involving any of the Corporation
or any Subsidiary (whether in progress or threatened) which, if determined
adversely to the Corporation or Subsidiary would have or would reasonably be
expected to have a Material Adverse Effect or have a material adverse effect
upon its ability to perform any of the provisions of this Agreement or any
other Transaction Document to which it is a party or which purports to affect
the legality, validity and enforceability of this Agreement or any other
Transaction Document; and (ii) as at the Closing Date, no event has occurred
which would reasonably be expected to give rise to any proceedings and there is
no judgment decree, injunction, rule, award or order of any Governmental Body
outstanding against the Corporation or any Subsidiary which has or would
reasonably be likely to have a Material Adverse Effect.

 

22

 

(m)                               No Default. As at the Closing Date, neither the Corporation
nor any of the Subsidiaries are in default or breach (other than a breach for
which the Corporation has received a waiver from Phoenix Enterprises LLC) under
any material commitment or obligation (including, without limitation,
obligations in relation to Funded Indebtedness) or under the terms and
conditions relating to any Material Authorizations, except such defaults that
would not have a Material Adverse Effect, and, to the best knowledge of the
Corporation, as at the Closing Date, there exists no state of facts which,
after notice or the passage of time or both, would constitute such a default or
breach; and as at the Closing Date, there are no proceedings in progress,
pending or, to the knowledge of the Corporation, threatened which would result
in the revocation, cancellation suspension or any adverse modification of any
Material Authorization.

 

(n)                                 Hazardous Substances. Neither the Corporation nor any of the
Subsidiaries are aware of any Hazardous Substances located at, on or under the
Secured Property or the Premises, and the Secured Property, the Premises and
the operations conducted thereat are not and have not been in breach of
Environmental Law which has resulted or could result in the Secured Property
being materially adversely affected. Neither the Corporation nor any Subsidiary
has caused or permitted, nor has the Corporation or any Subsidiary the
knowledge of the Release of any Hazardous Substance on, from, under or to the
Secured Property or the Premises or of any Release from a facility owned or
operated by third parties, including previous owners, for which the Corporation
or any Subsidiary may have liability and which has resulted or could result in
the Secured Property or the Premises being adversely affected. Neither the
Corporation nor any of the Subsidiaries has been charged with or convicted of
an offence for non-compliance with any Environmental Law or has been fined or
otherwise sentenced or have settled any prosecution short of conviction; and
neither the Corporation nor any Subsidiary has received any notice of judgment
or commencement of proceedings of any nature or experienced any search and
seizure or are under investigation related to a breach or alleged breach of any
Environmental Law.

 

(o)                                 All Material Information Supplied. The Corporation has
provided to Phoenix all information which the Corporation, acting reasonably,
determined was material relating to the financial condition, business, assets
and results of operations (including forecasts and budgets) of the Corporation
and the Subsidiaries, taken as a whole, and all such information, taken as a
whole (other than forecasts and budgets) is true, accurate and complete in all
material respects and omits no material fact necessary to make such information
not misleading in light of the circumstances in which such information was made
and there has been no change in such information, taken as a whole, that would
have or would reasonably be likely to have a Material Adverse Effect. The
forecasts and budgets provided to Phoenix in connection with the entering into
of this Agreement were prepared prudently and upon reasonable assumptions
(which assumptions remain reasonable to the Closing Date), the forecasts and
budgets are, as at the Closing Date, reasonable and attainable as at the date
hereof, such forecasts and budgets have not, as of the date hereof, changed or
been amended or updated, and it would, as of the date hereof, be reasonable for
Phoenix to rely upon these forecasts and budgets.

 

(p)                                 Taxes and Claims. The Corporation has:

 

23

 

(i)                                     delivered
or caused to be delivered all required income tax returns, sales, property,
franchise and value-added tax returns and other tax returns to the appropriate
Governmental Body; and

 

(ii)                                  withheld
and collected all Taxes required to be withheld and collected by them and
remitted such Taxes when due to the appropriate Governmental Body,

 

and no material assessment, appeal or claim is, as far
as the Corporation is aware, being asserted or processed with respect to such
claim, Taxes or obligations, except as previously disclosed to Phoenix in
writing.

 

(q)                                 Authorized and Issued Capital. Schedule 5.1(q)
accurately describes the authorized and issued share capital of the Corporation
and each of the Subsidiaries, as at the Closing Date. As at the Closing Date,
the Corporation has no Subsidiaries except as set forth in Schedule 5.1(q).
Except as set out in Schedule 5.1(q), as at the Closing Date, there are
no agreements, options, warrants, rights of conversion or other rights pursuant
to which the Corporation or any of the Subsidiaries is or may become obligated
to issue any shares or any securities convertible into, or exchangeable for,
shares.

 

(r)                                    Insurance. The Corporation and each of the Subsidiaries
insures with reputable insurance companies all of its property and other assets
of an insurable nature against fire and other casualties in the same manner and
to the same extent as such insurance is carried by prudent corporations
carrying on a similar business and owning similar property and maintains with
reputable insurance corporations adequate insurance against business
interruption with respect to any rental properties or properties under
construction and liability on account of damage to persons or property, and
under all applicable worker’s compensation laws, in the same manner and to the
same extent as such insurance is carried by prudent corporations carrying on a
similar business and owning similar property.

 

(s)                                  Funded Indebtedness. Schedule
5.1(s) sets forth a complete and accurate list of all Funded Indebtedness
of each of the Corporation and the Subsidiaries at the Closing Date and
accurately describes the security therefor and the dollar amount thereof.

 

(t)                                    Directors and Officers Insurance. The
Corporation has a directors’ and officers’ insurance policy in place to the
same extent as such insurance is carried by prudent public corporations and the
premiums on such insurance policy are paid to date.

 

(u)                                 Solvency. None of the Corporation or any of the Subsidiaries
has committed an act of bankruptcy, proposed a compromise or arrangement to its
creditors generally, had any petition for a receiving order in bankruptcy filed
against it, taken any proceeding to have itself declared bankrupt or wound-up
or taken any proceeding to have a Receiver appointed over it or any part of its
assets.

 

(v)                                 Articles, Memorandum, By-Laws, Etc. True and complete copies
of the articles of incorporation (including all amendments thereto), memorandum
of association and by-laws and all other constating documents of the
Corporation in effect on the Closing Date have been delivered to Phoenix on
behalf of the Lenders. On the Closing Date are outstanding no applications or
filings which would alter in any way the constating documents or corporate
status

 

24

 

of any of the said corporations. As in effect on the Closing Date, the
minute books of the Corporation contain all by-laws and resolutions of the
directors and shareholders of the Corporation currently in effect and the
corporate and other records of the Corporation have been maintained in all
material respects in accordance with all Applicable Law.

 

(w)                               Location of Business and Assets. As of the Closing Date, the
only locations at which the Corporation and the Subsidiaries have any place of
business or assets are as set forth in Schedule 5.1(w).

 

(x)                                   Title. Subject only to the Permitted Encumbrances, the
Corporation and each Subsidiary has good and marketable title to all of its
undertaking, property and assets, free and clear of any Encumbrances and no
person has any agreement or right to acquire its interest in any of such
properties out of the ordinary course of business.

 

(y)                                 Employment Matters. As of the Closing Date, except as is
disclosed in Schedule 5.1(y) none of the Corporation nor any Subsidiary
is a party to or is bound by any:

 

(i)                                     written
or oral contract or commitment for the employment of any senior management
employee or officer;

 

(ii)                                  written
contract or commitment for the employment of any employee or officer providing
for an annual salary (including benefits) of in excess of $100,000 or a payment
on termination of in excess of six months salary and benefits;

 

(iii)                               oral
contract or commitment for the employment of any employee or officer, except
for contracts of indefinite hire terminable by the Corporation without cause on
reasonable notice;

 

(iv)                              contract
with or commitment to any trade union, council of trade unions, employee
bargaining agent or affiliated bargaining agent (collectively called “labor representatives”) and the Corporation has not
conducted negotiations with respect to any such future contracts or
commitments; no labor representatives, hold bargaining rights with respect to
any employees of the Corporation or any Subsidiary; no labor representatives
have applied to have the Corporation or any Subsidiary declared a related
employer pursuant to the applicable labor legislation; and, to the knowledge of
the Corporation, there are no current or threatened attempts to organize or
establish any trade union or employee association with respect to the
Corporation or any Subsidiary; or

 

(v)                                 except
as is disclosed in Schedule 5.1(y), there is no bonus, pension,
multi-employer, profit sharing, deferred compensation, retirement, disability,
health insurance or similar benefit plan, with respect to any of its employees
or others (including without limitation any agreements in respect of employee
share ownership plans), other than Canada Pension Plan, the Ontario Health
Insurance Plan and other similar health plans established and administered by
any other governmental authority or workers’ compensation insurance provided
pursuant to statute.

 

As of the Closing Date, the Corporation and each of the
Subsidiaries has paid all sums due to its employees and its independent
contractors and has observed in all material respects the 

 

25

 

provisions of (i) all agreements binding upon it or (ii) any pension,
bonus, profit sharing, compensation, retirement, deferred compensation, illness
or other plan, agreement, trust, fund or arrangement for the benefit of or with
its employees, directors, officers or shareholders and (iii) all applicable
laws and regulations respecting employment, including, but not limited to,
labor standards legislation and regulations and legislation and regulations
prohibiting discrimination; and there is no complaint, civil action or other
proceeding in process alleging a violation of any such agreement, plan, trust,
fund, arrangement, law or regulation.

 

As of the Closing Date, none of the Corporation nor
any Subsidiary has received any remedial order or notice of offence under any
applicable laws and regulations respecting employment, and each of the
Corporation and the Subsidiaries has performed all of its financial or monetary
obligations under such laws and regulations towards its employees and
independent contractors, and there are no facts which may give rise to a claim
for which the Corporation or any Subsidiary might be held liable under the
provisions of the said laws or regulations.

 

(z)                                   Intellectual Property. The Corporation and each Subsidiary
owns all right title and interest in or to, or have valid and enforceable
rights to use all of the Intellectual Property including the trade marks, trade
or brand names, corporate names and service marks set out in Schedule 5.1(z),
free and clear of all Encumbrances except Permitted Encumbrances. As of the
Closing Date, neither the Corporation nor any Subsidiary uses or owns any trade
marks, trade or brand names, corporate names or service marks except as set out
in Schedule 5.1(z). The conduct of the business of, and the use of the
Intellectual Property by the Corporation and the Subsidiaries does not, nor to
the Corporation’s knowledge, will the proposed conduct of the business and the
proposed use of the Intellectual Property, infringe (and neither the
Corporation nor any Subsidiary, except as previously disclosed to Phoenix in
writing, has received any notice, complaint, threat or claim alleging
infringement of), any patent, trade mark, trade name, copyright, industrial
design, trade secret or other propriety right of any other Person. The
Intellectual Property which is not owned by the Corporation or the Subsidiaries
is being used with the consent of, and in accordance with the consent or
license from, the rightful owner thereof. The Corporation and each of the
Subsidiaries has taken all commercially reasonable steps to establish, preserve
and protect its rights in the Intellectual Property which is material to the
Corporation or such Subsidiary.

 

(aa)                            Disclosure Restricted. Each of the statements contained in
Section 5.1 is true and correct except as set forth in the specific disclosure schedule
qualifying such statement or in any document filed by the Corporation with the
Ontario Securities Commission and that is publicly available. The disclosure in
any disclosure schedule shall qualify only the corresponding statement.

 

Section 5.2.                                   Representations
and Warranties of Lenders

 

Each of the Lenders, severally and not jointly,
represents and warrants to the Corporation as follows:

 

(a)                                  Authorization. Such Lender is an individual, corporation,
limited partnership or limited liability company duly organized, validly
existing and in good standing under the laws of its jurisdiction of formation,
and each Lender has full power and authority to

 

26

 

enter into the Agreements and has duly authorized, executed and
delivered the same. This Agreement, when executed and delivered by a Lender,
will constitute valid and legally binding obligations of such Lender,
enforceable in accordance with its terms, except (a) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and
any other laws of general application affecting enforcement of creditors’
rights generally, or (b) as limited by laws relating to the availability of a
specific performance, injunctive relief, or other equitable remedies.

 

(b)                                 Disclosure of Information. Each Lender has had an
opportunity to discuss the Corporation’s business, management, financial
affairs and the terms and conditions of the offering of the Debentures and
Warrants with the Corporation’s management and has had an opportunity to review
the Corporation’s facilities. Each Lender understands that such discussions, as
well as any other written information delivered by the Corporation to such
Lender, were intended to describe the aspects of the Corporation’s business
which it believes to be material. Each Lender has had all of its questions
related to the Corporation and the purchase of Debentures and Warrants (and the
Common Shares and Conversion Shares issuable upon exercise of the Warrants and
conversion of the principal and interest outstanding on the Debentures)
answered by the Corporation.

 

(c)                                  Experience; Speculative Nature of Investment. Each Lender
has substantial experience in evaluating and investing in private placement
transactions of securities in companies similar to the Corporation so that it
is capable of evaluating the merits and risks of its investment in the
Corporation and has the capacity to protect its own interests. Each Lender
acknowledges that its investment in the Corporation is highly speculative and
entails a substantial degree of risk and such Lender is in a position to lose
the entire amount of such investment.

 

(d)                                 Investment. The Lenders are acquiring the Debentures and
Warrants for investment for their own account, not as a nominee or agent, and
not with a view to, or for resale in connection with, any distribution thereof.
By executing this Agreement, each Lender further represents that it does not
presently have any contract, undertaking, agreement or arrangement with any
person to sell, transfer or grant participations to such person or to any third
person, with respect to any of the Debentures, Warrants, Conversion Shares or
Common Shares.

 

(e)                                  Restricted Securities. The Lenders understand that the
Debentures, Warrants, Conversion Shares and Common Shares issuable upon
exercise of the Warrants and conversion of the Debentures as contemplated
hereby have not been, and will not be, registered under the U.S. Securities Act
of 1933, as amended, (the “Securities Act”)
or qualified for distribution in any province or territory of Canada and are
issued pursuant to a specific exemption from the registration provisions of the
Securities Act and the registration and prospectus requirements of the
Securities Act (Ontario), the availability of which depends upon, among other
things, the bona fide nature of the investment intent and the accuracy of the
Lenders’ representations as expressed herein. Each Lender is an “accredited
investor” within the meaning of Section 1.1 of Rule 45-501 of the Ontario
Securities Commission and each Lender, which is resident in the United States,
is also an “accredited investor” within the meaning of Regulation D, Rule
501(a), promulgated by the U.S. Securities and Exchange Commission. If any Lender
is resident in or otherwise subject to the securities laws of a jurisdiction
other than

 

27

 

the Province of Ontario or the United States, the issuance by the
Corporation, and the acquisition by such Lender, of Debentures, Warrants,
Conversion Shares and Common Shares issuable upon exercise of the Warrants and
conversion of the principal and interest outstanding on the Debentures as
contemplated by this Agreement is in full compliance with all applicable securities
laws, statutes, regulations, policy statements and orders in such jurisdiction
and no authorization, consent of, or filing with or notice to, any person is
required in connection therewith.

 

(f)                                    Legends. The Lenders understand that the Debentures,
Warrants, Conversion Shares and Common Shares issuable upon exercise of the
Warrants and conversion of the principal and interest outstanding on the
Debentures (each, for purposes of this paragraph, a security) may bear the
following legend and any other legends that may be required by applicable
securities law and stock exchange rules:

 

THIS SECURITY HAS NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAS BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION
THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE
REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL (WHICH COUNSEL
SHALL BE BROWN RAYSMAN MILLSTEIN FELDER & STEINER LLP OR OTHER COUNSEL
REASONABLY SATISFACTORY TO THE CORPORATION) IN A FORM REASONABLY SATISFACTORY
TO THE CORPORATION, OR OTHER EVIDENCE REASONABLY SATISFACTORY TO THE
CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE
SECURITIES ACT OF 1933

 

(g)                                 No Public Market. The Lenders understand that no public
market now exists for any of the Debentures or Warrants issued by the
Corporation and that the Corporation has made no assurances that a public
market will ever exist for the Corporation’s securities.

 

Section 5.3.                                   Survival
of Representations and Warranties

 

The statements made in any certificate hereafter
delivered by the Corporation or any of the Subsidiaries to the Lenders shall be
deemed to constitute representations and warranties made by the party
delivering the same. The Corporation covenants that the representations and
warranties made by it in this Article 5, shall be true and correct on each day
that this Agreement or any other Transaction Document in favor of each Lender
remain in force and effect, with the same effect as if such representations and
warranties had been made and given on and as of such day, notwithstanding any
investigation made at any time by or on behalf of each Lender or its counsel
and notwithstanding any foreclosure or enforcement pursuant to any Security
Documents; except that if any such representation and warranty is specifically
given as of the date hereof or in respect of a particular date or particular
period of time and relates only to such date or period of time, then such
representation and warranty shall continue to be given as at such date or for
such period of time.

 

28

 

ARTICLE 6.

COVENANTS OF THE CORPORATION

 

Section 6.1.                                   General
Covenants

 

So long as this Agreement remains outstanding, the
Corporation covenants and agrees as follows:

 

(a)                                  Securities Compliance. The Corporation shall take all
necessary action and proceedings as may be required and permitted by applicable
law, rule and regulation for the legal and valid issuance of the Debentures and
the Warrants to be acquired by the Lenders from the Corporation hereunder and
the issuance of the Conversion Shares upon payment of interest and the issuance
of the Common Shares upon exercise of the Warrants and conversion of the
Debentures.

 

(b)                                 Books and Reserves. From the date hereof until the payment
in full of all Obligations (the “Termination
Date”), the Corporation shall (i) maintain, and cause its
Subsidiaries to maintain, at all times, true and complete books, records and
accounts in which true and correct entries shall be made of its transactions in
accordance with GAAP consistently applied and consistent with those applied in
the preparation of the Financial Statements (to the extent same are consistent
with GAAP), and (ii) by means of appropriate quarterly entries, reflect in its
accounts and in all financial statements, proper liabilities and reserves for
all taxes and proper reserves for depreciation, renewals and replacements,
obsolescence and amortization of its properties and bad debts, all in
accordance with GAAP consistently applied, as above described, and all subject
to normal year end adjustments.

 

(c)                                  Ordinary Course of Business. The Corporation shall operate
its business only in the ordinary course and will use its commercially
reasonable efforts to preserve the Corporation’s business, organization,
goodwill and relationships with Persons having business dealings with them.

 

(d)                                 To Use Proceeds. The Corporation shall use the net proceeds
from the sale of the Units in accordance with Section 1.4.

 

(e)                                  To Pay Costs. The Corporation shall pay all reasonable
costs, charges and expenses of or incurred by each Lender in inspecting the
Secured Property or in or about taking, recovering or keeping possession of any
of the Secured Property or in any other proceedings taken in enforcing the
remedies provided herein or otherwise in relation to this Agreement or the
Secured Property, or by reason of non-payment of the moneys hereby secured,
costs of any sale proceedings hereunder, whether such sale proceedings prove
abortive or not, and costs of any Receiver with respect to, and all
expenditures made by each Lender or any Receiver in the course of, doing
anything hereby permitted to be done by each Lender or such Receiver. All such
costs and expenses and other monies payable hereunder, together with interest
at the highest rate applicable to any Obligations, shall be payable on demand
and shall constitute a charge on the Secured Property. Without limiting the
generality of the foregoing, such reasonable costs shall extend to and include
any legal costs incurred by or on behalf of each Lender or the Receiver as
between attorney and his own client.

 

29

 

(f)                                    To Pay Certain Debts. The Corporation shall and shall cause
the Subsidiaries to punctually pay and discharge every obligation, the failure
to pay or discharge of which would reasonably be likely to result in any
Encumbrance or right of distress, forfeiture, termination or sale or any other
remedy being enforced against the Secured Property and provide to Phoenix, on
behalf of the Lenders, when required by Phoenix, on behalf of the Lenders,
acting reasonably, satisfactory evidence of such payment and discharge, but the
Corporation may, on giving the Lenders such security (if any) as Phoenix, on
behalf of the Lenders, may require, refrain from paying or discharging any
obligation the liability for which is being contested in good faith.

 

(g)                                 To Comply with Obligations and Maintain Corporate Existence and
Security. The Corporation shall and shall cause each Subsidiary to:

 

(i)                                     pay
or cause to be paid all Obligations falling due hereunder on the dates and in
the manner specified herein and comply with its obligations hereunder, under
the Security Documents and the other Instruments;

 

(ii)                                  create
an annual business plan, approved by the Board of Directors of the Corporation
and implemented by the Management Committee in accordance with the MC
Operational Procedures, for each year in which the Debentures remain
outstanding (the “Annual Business Plan”), and immediately notify Phoenix, on behalf
of the Lenders. of any material deviation from the Annual Business Plan;

 

(iii)                               maintain
its corporate existence;

 

(iv)                              use
commercially reasonable efforts to preserve all its rights, licenses, powers,
privileges, franchises and goodwill;

 

(v)                                 observe
and perform all of its obligations and comply with all conditions under leases,
licenses and other agreements to which it is a party or upon or under which any
of the Secured Property is held;

 

(vi)                              carry
on and conduct its business in a proper and efficient manner so as to preserve
and protect the Secured Property and income therefrom;

 

(vii)                           observe
and conform to all valid requirements of Applicable Law and of any Governmental
Body having jurisdiction over the Corporation or any Subsidiary;

 

(viii)                        repair and
keep in repair and good order and condition all property, including the Secured
Property, the use of which is necessary or advantageous in connection with its
business;

 

(ix)                                immediately
notify Phoenix, on behalf of the Lenders, in writing of any proposed change of
name of the Corporation or any Subsidiary or of chief place of business of any
of the foregoing;

 

(x)                                   keep
Phoenix, on behalf of the Lenders, regularly informed in writing as to the
location of the Secured Property and the books of account and other records of 

 

30

 

each of the Corporation and the Subsidiaries to the extent that the
Secured Property or such books of account are not located in Austin, Texas;

 

(xi)                                pay
all Taxes levied, assessed or imposed upon it or its property as and when the
same become due and payable save and except where it contests in good faith the
validity thereof;

 

(xii)                             forthwith
notify Phoenix, on behalf of the Lenders, of any default (or event, condition
or occurrence which with the giving of notice and/or the lapse of time would
constitute a default) in connection with any indebtedness, Funded Indebtedness
or Contingent Liability in an amount exceeding $300,000;

 

(xiii)                          advise
Phoenix, on behalf of the Lenders, forthwith upon becoming aware of any Default
or Event of Default hereunder with detailed particulars thereof and deliver to
Phoenix, on behalf of the Lenders, upon request a certificate in form and
substance satisfactory to Phoenix, on behalf of the Lenders, signed by a senior
officer of the Corporation certifying that no Default or Event of Default has
occurred or, if such is not the case, specifying all Default or Events of
Default and their nature and status;

 

(xiv)                         use
commercially reasonable efforts to collect all accounts receivable in the
ordinary course of business;

 

(xv)                            promptly
cure or cause to be cured any defects in the execution or delivery of any
Instrument and any defects in the validity or enforceability of any security
hereunder and at its expense duly execute and deliver or cause to be duly
executed and delivered all documents as the Lenders may consider necessary or
desirable for such purposes;

 

(xvi)                         retain
auditors nationally recognized in either the United States or Canada;

 

(xvii)                      at its cost
and expense, upon the request of Phoenix, on behalf of the Lenders, duly
execute and deliver, or cause to be duly executed and delivered, to Phoenix, on
behalf of the Lenders, such documents and do or cause to be done such acts as
may be necessary or desirable in the reasonable opinion of Phoenix, on behalf
of the Lenders, to carry out the purposes of this Agreement; and

 

(xviii)                   effect such
registrations as may be required by Phoenix, on behalf of the Lenders, from
time to time to protect the security hereof.

 

(h)                                 To Insure. The Corporation shall keep the Secured Property
insured in such amounts as is carried by prudent corporations carrying on a
similar business and owning similar property, and against loss or damage by
fire and such other risks as Phoenix, on behalf of the Lenders, may from time
to time specify, acting reasonably, with reputable insurers. The Corporation
shall, whenever from time to time requested by Phoenix, on behalf of the
Lenders, provide Phoenix, on behalf of the Lenders, satisfactory evidence of
such insurance and any renewal thereof which shall at all times be subject to
charging clauses in a form approved by Phoenix, on behalf of the Lenders, and
shall cause the Lenders to be shown as loss payees under the policy or policies.
Evidence satisfactory to Phoenix, on behalf of the Lenders, of the renewal

 

31

 

of every policy of insurance shall be left with Phoenix, on behalf of
the Lenders, at least seven (7) days before the termination thereof. Each
policy of insurance shall be in form and substance acceptable to Phoenix, on
behalf of the Lenders, acting reasonably, and shall not be subject to any co-insurance
clause.

 

(i)                                     Notice of Litigation and Damage. The Corporation will
promptly give written notice to Phoenix, on behalf of the Lenders, of (a) all
claims or proceedings pending or threatened against any of the Corporation or
Subsidiaries which may give rise to uninsured liability in excess of $300,000
or which may have a material adverse effect on the business or operations of
the Corporation or Subsidiaries and (b) all damage to or loss or destruction of
any property comprising part of the Secured Property which may give rise to an
insurance claim in excess of $300,000; and will supply Phoenix, on behalf of
the Lenders, with all information reasonably requested in respect of any such
claim.

 

(j)                                     To Furnish Proofs. The Corporation shall forthwith on the
happening of any loss or damage furnish or cause to be furnished at its own
expense all necessary proofs and do all necessary acts to enable each Lender to
obtain payment of the insurance monies, which, in the sole discretion of the
Lenders, may be applied in reinstating the insured property or be paid to the
Corporation or any Subsidiary or be applied in payment of the monies owing
hereunder, whether due or not then due, or paid partly in one way and partly in
another.

 

(k)                                  Reserve Shares. The Corporation shall, at the annual meeting
of its shareholders to be held on December 15, 2004, seek to obtain shareholder
approval to reserve 10,000,000 Common Shares (the “Reserve Pool”), to be issued to key management and employees
of the Corporation as performance awards.

 

(l)                                     Financial Statement Presentation. In
any  press release, or public disclosure
document required by securities regulatory authorities, that contains the
Corporation’s quarterly or annual financial statements, subject to compliance
with applicable securities law and other regulatory requirements, such
financial statements shall be prepared in accordance with Canadian GAAP and, if
requested by Phoenix, contain a note reconciliation to U.S. generally accepted
accounting principles (“US GAAP”).
At such time as the Corporate Migration has been completed, the Corporation’s
quarterly and annual financial statements shall be prepared in accordance with
US GAAP and shall also be prepared in accordance with, or reconciled to,
Canadian GAAP to the extent required by Applicable Law.

 

Section 6.2.                                   Specific
Covenants

 

So long as this Agreement remains outstanding, the
Corporation covenants and agrees as follows:

 

(a)                                  Cost Maintenance Program. The Corporation shall take all
commercially reasonable actions necessary to implement a cost-cutting program
(the “Cost Maintenance Program”)
satisfactory, in its sole discretion, to Phoenix. The Cost Maintenance Program
(A) shall result in (i) total quarterly recurring payroll costs of not more
than $1.4 million, and (ii) total quarterly recurring Overhead Costs of not
more than $2.4 million by no later than December 31, 2004, and (B) shall remain
in effect until (i) the Corporation has

 

32

achieved positive net income
and positive cash flow from operations for at least two (2) consecutive fiscal
quarters, and (ii) management of the Corporation then reasonably projects
continued positive net income and positive cash flow from operations for the
Corporation for at least the next four (4) following fiscal quarters.

 

(b)                                 Corporate Migration. The Corporation shall
take all commercially reasonable actions necessary, subject only to (i)
compliance with Applicable Law and stock exchange requirements, (ii) any
required approval of the Corporation’s shareholders, (iii) obtaining of any
required third-party consents, and (iv) avoidance of any material adverse tax
consequences, to re-incorporate, continue or otherwise cause the Corporation or
a successor thereof to be redomiciled, directory or indirectly, as a Delaware
corporation (the “Corporate Migration”),
by no later than June 30, 2005.

 

(c)                                  U.S. Listing. The Corporation shall use
reasonable commercial efforts to obtain a listing of the Common Shares on the
American Stock Exchange or other registered national stock exchange or
quotation system in the United States (the “U.S.
Listing”) by no later than June 30, 2005, subject to the
satisfaction or elimination of all regulatory, legal, tax and financial requirements
to such U.S. Listing. The U.S. Listing may be either in lieu of, or in addition
to, the Corporation’s current listing of the Common Shares on the Toronto Stock
Exchange. In the event a U.S. Listing is obtained, the Corporation shall
promptly enter into a registration rights agreement, with and for the benefit
of the Lenders and the Existing Debenture Holders, providing for the
registration for resale of the Common Shares underlying the Warrants and the
Debentures with the U.S. Securities and Exchange Commission and containing,
among other things, customary demand and piggy-back registration rights, and
all on terms satisfactory to the Corporation, the Lenders and the Existing
Debenture Holders, each acting reasonably and taking into consideration the
need for future free-transferability for the Common Shares underlying the
Warrants and the Debentures in the U.S. securities markets. In this Section
6.2(c), “Common Shares” includes any shares of voting common stock of any
corporation (a “Successor Corporation”)
carrying on the business of the Corporation and having a listing on the Toronto
Stock Exchange which are issued in exchange for the Common Shares of the
Corporation in connection with the Corporate Migration, and “Corporation”
includes any such Successor Corporation.

 

(d)                                 MC Operational Procedures. The Corporation
shall at all times conduct its day-to-day operations in strict compliance with
the MC Operational Procedures.

 

Section 6.3.                                   Financial
Covenants.

 

(a)                                  Budget. The Corporation shall not expend any funds nor incur
any expenses except as provided for in the budget delivered to Phoenix, on
behalf of the Lenders (the “Budget”),
which shall also included a detailed income statement, balance sheet and
statement of cash flows. The Corporation and Phoenix, on behalf of the Lenders,
hereby agree that aggregate expenditures, if any, exceeding the total budgeted
amount by 5% or less shall be deemed to be within the Budget.

 

(b)                                 Financial Statements and Other Reports. The Corporation will
maintain, and cause each of its Subsidiaries to maintain, a system of
accounting established and 

 

33

 

administered in accordance with
sound business practices to permit preparation of financial statements in
conformity with GAAP (it being understood that quarterly financial statements
are not required to have footnote disclosures). The Corporation will deliver or
cause to be delivered each of the financial statements and other reports
described below to Phoenix, on behalf of the Lenders and, if requested by a
Lender or Phoenix, to each Lender directly, in addition to copies of any other
financial statements prepared by the Corporation for filing with securities
commissions and other regulatory authorities.

 

(i)                                     Monthly Financials.  As
soon as available and in any event within forty-five (45) days after the end of
each month, the Corporation will deliver or cause to be delivered its
consolidated balance sheet, as at the end of such month, and the related
consolidated statements of loss and deficit and cash flows for such month, and
for the period from the beginning of the then current fiscal year of the
Corporation to the end of such month, along with a comparison to the operating
budget for such month.

 

(ii)                                  Quarterly Financials; Other Quarterly Reports. As soon as
available and in any event within forty-five (45) days after the end of each
fiscal quarter, the Corporation will deliver or cause to be delivered (A) its
consolidated balance sheet, as at the end of such fiscal quarter, and the
related consolidated statements of income, shareholders’ equity,  loss and deficit (or income) and cash flows
for such fiscal quarter and for the period from the beginning of the then
current fiscal year of the Corporation to the end of such quarter, (B) a copy
of its consolidating financial statements for such fiscal quarter, but only if
material to an understanding of the Corporation’s operations and financial
condition, and (C) a schedule of investments made by the Corporation or any of
its Subsidiaries since the date such information was last provided to Lenders.

 

(iii)                               Year-End Financials. As soon as available and in any event
within ninety (90) days after the end of each fiscal year of the Corporation,
the Corporation will deliver or cause to be delivered (A) its consolidated
balance sheet, as at the end of such year, and the related consolidated
statements of loss and deficit (or income), cash flows, and shareholders’
equity for such fiscal year, (B) a copy of its consolidating financial
statements for such fiscal year, but only if material to an understanding of
the Corporation’s operations and financial condition, and (C) a report with
respect to the financial statements received pursuant to this Subsection from
recognized certified public accountants nationally recognized in the United
States or Canada, selected by the Corporation.

 

(iv)                              Other Weekly/Monthly Reports. As soon as
available, and in any event within four (4) Business Days after the end of each
week, the Corporation will deliver or cause to be delivered (A) a report of
sales booked by the Corporation during such week, (B) a report of pending and
projected order activity as of the end of such week, and (C) a report providing
detailed accounts receivable as of the end of such week. As soon as available,
and in any event within ten (10) days after the end of each month, the
Corporation will deliver or cause to be delivered (A) a status report detailing
the progress made by the Corporation in implementing the Cost Maintenance
Program, until such time as the conditions set out in Section 6.2(a)(B)(i) and
(ii) have been satisfied, and (B) a report providing detailed accounts payable
aging information as of the end of such month.

 

34

 

(c)                                  Compliance Certificates.  Together
with each delivery of financial statements of the Corporation and its
Subsidiaries (other than those financial statements delivered pursuant to
Section 6.3(c)(iv)), the Corporation will deliver or cause to be delivered to
Phoenix, on behalf of the Lenders and, if requested by a Lender or Phoenix, to
each Lender directly (i) a fully and properly completed compliance certificate
substantially in the form attached hereto as Exhibit C (each, a “Compliance Certificate”) signed by the chief executive
officer, chief operating officer or chief financial officer of the Corporation.

 

Section 6.4.                                   Negative
Covenants

 

At all times, the Corporation hereby covenants and
agrees that, except as expressly contemplated by Section 6.2, for so long as
this Agreement is in force and any portion of the Obligations remains unpaid,
unfulfilled and/or unsatisfied, the Corporation shall not, nor shall the
Corporation permit any Subsidiary to:

 

(a)                                  Encumbrances. Create, grant, assume or suffer to exist any
Encumbrance upon any of their properties or assets other than Permitted
Encumbrances or enter into or assume any agreement (other than the documents
entered into in connection herewith, the Intercreditor Agreement or the Wistron
Intercreditor Agreement), prohibiting the creation or assumption of any
Encumbrance upon its or their respective properties or assets, whether now
owned or hereafter acquired.

 

(b)                                 Capital Expenditures. Incur or commit or agree to incur
capital expenditures in any fiscal year, including Capital Lease Obligations
and Purchase Money Security Interests, involving aggregate payments in any
twelve (12) month period in excess of 5% over the amount of capital
expenditures provided for in the Budget.

 

(c)                                  Sell. Remove, destroy, lease, transfer, assign, sell or
otherwise dispose of any of the Secured Property, except for sales in the
ordinary course of business.

 

(d)                                 Funded Indebtedness. Incur or become liable for any Funded
Indebtedness, other than the Obligations hereunder.

 

(e)                                  Indebtedness. Incur or repay any debts, liabilities or
obligations (including Funded Indebtedness and Contingent Liabilities) whether
direct or indirect, actual or contingent, material or not, other than those
specifically permitted hereunder (including indebtedness to the Existing
Debenture Holders) or under the Security Documents, except for normal trade
debts, liabilities or obligations to Persons dealing at Arm’s Length with the
Corporation arising in the ordinary course of business and with customary
payment terms; provided, however, that in the event any
indebtedness consists of trade payables, expenses, costs and charges accrued in
the ordinary course of business in accordance with customary trade terms which
are overdue for more than 180 days (the “Qualified Indebtedness”),
the aggregate amount of such Qualified Indebtedness shall not exceed
$1,500,000.

 

(f)                                    Executive Officers. Appoint, hire, remove
or change any executive officer of the Corporation without the prior written
consent of Phoenix, which consent will not be unreasonably withheld or delayed.

 

35

 

(g)                                 MC Operational Procedures Compliance. Take
any action, incur any expenses or incur any debts, liabilities or obligations,
unless duly and properly authorized by the Management Committee in strict
accordance with the MC Operational Procedures.

 

(h)                                 Make Certain Changes.

 

(i)                                     change
their financial year end;

 

(ii)                                  purchase,
establish or acquire in any manner any new business entity;

 

(iii)                               change
the nature of their business as presently carried on;

 

(iv)                              amalgamate,
consolidate or merge or enter into a partnership, joint venture (other than
joint business arrangements with the third parties for the sale of goods and
services in the ordinary course of business) or syndicate with any other
Person, except an amalgamation, consolidation or merger involving only the
Corporation and the US Subsidiary, unless otherwise consented to by Phoenix;

 

(v)                                 sell,
transfer, convey, assign or otherwise dispose of all or substantially all of
its assets, in the case of a Subsidiary, to the Corporation and in the case of
the Corporation, to a Subsidiary other than the US Subsidiary;

 

(vi)                              dissolve
or wind-up the Corporation or any Subsidiary, other than pursuant to the dissolution
or winding-up of the Corporation or Subsidiary pursuant to which all of the
assets of the Corporation or such Subsidiary are transferred or conveyed to the
Corporation or the US Subsidiary;

 

(vii)                           enter
into any transaction outside the ordinary course of business;

 

(viii)                        acquire or
invest in any securities or investments, other than Cash Equivalents;

 

(ix)                                make
any loans in any other Person other than the giving of trade credit or
consistent with the Business Plan;

 

(x)                                   engage
in any commercial transactions with Persons not dealing at Arm’s Length with
the Corporation or any Subsidiary, other than transactions relating to the
compensation of any employee or director of the Corporation or a Subsidiary in
the ordinary course of business, including the grant of stock under the Reserve
Pool or the grant of options pursuant to the Corporation’s stock option plan,
as in effect on the date hereof, approved by a majority of the Board of
Directors (including a majority of the non-participating directors);

 

(xi)                                engage
in any sale-leaseback or similar transactions;

 

(xii)                             remove
any of the Secured Property or any of the books of account or other records of
the Corporation or any Subsidiary from the jurisdiction where same are
presently located, except for inventory sold in the ordinary course of
business;

 

36

 

(xiii)                          make or
commit to any form of distribution or reduction of the profits of the
Corporation or any Subsidiary or of its capital including any (i) declaration
or payment of any dividend (including stock dividends) on any present or future
shares; (ii) payment to purchase, redeem, retire or acquire any of its shares,
or any option, warrant or other right to acquire any such shares, or apply or
set apart any of its assets therefor; (iii) bonuses to shareholders; (iv)
payment on account of loans made to shareholders of the Corporation or any of
its Subsidiaries; or (v) payment of any bonuses or management fees (other than
bonuses paid to employees in the ordinary course of business);

 

(xiv)                         other
than pursuant to any agreement, option, right, instrument or privilege set
forth on Schedule 5.1(q), create, allot or issue any shares in its
capital, or enter into any agreement, or grant any option, right or privilege,
whether pre-emptive, contractual or otherwise for the purchase of shares or
securities convertible into shares of the Corporation or any Subsidiary, amend
their articles, memorandum or association or by-laws, change their capital
structure, enter into any agreement, or make any offer, to do so; or

 

(xv)                            amend,
modify or change, or consent or agree to any amendment, modification or change
to, any of the terms of any Material Contracts, except to the extent such
change, amendment, modification or consent is not materially adverse to Lenders
and would not otherwise have a Material Adverse Effect.

 

Section 6.5.                                   Board
Membership

 

(a)                                  From
the Closing Date and for so long as the Obligations are outstanding, the
Lenders (along with the Existing Debenture Holders) shall have the right to
designate up to two (2) directors to the Corporation’s Board of Directors and
each committee thereof; provided,
that the Lenders shall exercise such rights and select individuals that will
not cause the Corporation to be in breach of Applicable Laws or stock exchange
rules. Upon such a designation the Board of Directors of the Corporation shall,
subject to Applicable Laws and applicable regulatory approval, take any and all
necessary action to appoint the two persons selected by the Lenders to the
Board of Directors and providing such persons with director’s liability
insurance then in effect for directors of the Corporation.

 

(b)                                 In
the event that the Lenders shall designate Philip S. Sassower as a member of
the Board of Directors of the Corporation, the Corporation shall, subject to
Applicable Laws, use commercially reasonable efforts to cause Mr. Sassower to
be elected as Chairman of the Board.

 

(c)                                  The
Lender’s right to appoint up to two (2) directors to the Corporation’s Board of
Directors and each committee thereof shall be in lieu of and in substitution of
the rights of the Existing Debenture Holders to appoint up to two (2) directors
to the Corporation’s Board of Directors upon an Appointment Event, as that term
is defined in the November 2002 Debenture Agreement, the April 2003 Debenture
Agreement and the Second April 2003 Debenture Agreement.

 

37

 

ARTICLE 7.

CONDITIONS TO CLOSING

 

Section 7.1.                                   Conditions
to Closing

 

The obligation of the Lenders and the Corporation to
effect Closing are subject to the satisfaction or waiver in writing in whole or
in part by Phoenix, on behalf of the Lenders, and the Corporation prior to
Closing of each of the following conditions:

 

(a)                                  Receipt of Consent of Existing Debenture Holders.
Phoenix, on behalf of the Lenders, shall have obtained and delivered to the
Corporation the consent of the Existing Debenture Holders, the holder of CRAT
Debenture and the holder of the Fund Debenture to the issuance of the
Debentures and security granted in respect thereof and waiver of certain rights
under the Existing Debentures.

 

(b)                                 Approval of the Toronto Stock Exchange. The
Corporation shall have obtained and delivered to Phoenix, on behalf of the
Lenders, the approval of the Toronto Stock Exchange (the “TSX”) and all other applicable regulatory
authorities.

 

(c)                                  Consent of the Shareholders. The
Corporation shall have obtained and delivered to Phoenix, on behalf of the
Lenders, written consents of the Corporation’s shareholders holding at least a
majority of the issued and outstanding Common Shares authorizing and approving
the Corporation’s issuance of the Debentures and Warrants.

 

Section 7.2.                                   Further
Conditions to Obligations of Lenders

 

Notwithstanding anything herein contained, the
obligation of each Lender to complete the transactions provided for herein and
to pay the Purchase Price will be subject to the fulfillment of the following
conditions at or prior to the Closing Date, and the Corporation covenants to
use its commercially reasonable efforts to ensure that such conditions are
fulfilled.

 

(a)                                  Accuracy of Representations and Warranties and Performance of
Covenants. The representations and warranties of the Corporation
contained herein or in any other Security Document shall be true and accurate
at the Closing Date. In addition, the Corporation shall have complied with all
covenants and agreements herein agreed to be performed or caused to be
performed by it at or prior to the Closing Date. At the Closing Date, the
Corporation shall have delivered to Phoenix, on behalf of the Lenders, a
certificate in form acceptable to Phoenix confirming the facts with respect to
each of the representations and warranties, confirming that all such covenants
and agreements have been performed and confirming that all conditions set forth
in this Section 7.2 have been satisfied or waived.

 

(b)                                 Continued Implementation of Cost Maintenance Program.
The Corporation shall have provided to Phoenix, on behalf of the Lenders, evidence
satisfactory to Phoenix, acting reasonably, that the Cost Maintenance Program
is continuing.

 

(c)                                  Default or Event of Default. No Default or Event of Default
shall have occurred and be continuing nor shall there be any Default or Event
of Default which will or will

 

38

 

likely occur as a result of the
transactions contemplated by this Agreement, the Debenture Certificates or the
Instruments.

 

(d)                                 Consents. All consents, permits, agreements, confirmations
and acknowledgements, determined by the Phoenix, on behalf of Lenders, to be
required or necessary to be obtained in order to effectively complete the
transactions contemplated herein, including without limitation, the Required
Consents, shall have been obtained.

 

(e)                                  Security Documents. Phoenix, on behalf of the Lenders, shall
have received duly executed and delivered originals of the Security Documents.

 

(f)                                    Payment of Fees. The Corporation shall have paid, by way of
a deduction from the Purchase Price in accordance with Section 1.2, to Phoenix
all fees and expenses referred to in Section 1.3, and shall have
unconditionally waived and released, in form and content satisfactory to
Phoenix, any right to contest the reasonableness of such agreement, fees and
expenses or otherwise challenge the entitlement of Phoenix thereto.
Notwithstanding such payment, the Corporation will remain liable for any other
fees and expenses referred to in Section 1.3 hereof which relate to the
transactions hereunder but which have not been invoiced to, paid or incurred by
Phoenix as of the Closing Date.

 

(g)                                 Perfection of Security. All steps necessary or desirable
(including without limitation, the registration of the security interests
created by the Security Documents in all public registries where such
registration is necessary or desirable to perfect the security interest granted
in favor of the Lenders) shall have been taken to constitute the Encumbrances
under the Security Documents as valid, enforceable and prior ranking to all
other Encumbrances, claims and interests in the Secured Property, subject only
to Permitted Encumbrances.

 

(h)                                 Receipt of Closing Documentation. All documentation relating
to the due authorization and completion of the issuance of the Debentures
provided for herein and the due execution and delivery of all the Security
Documents and other Instruments, and all actions and proceedings taken on or
prior to Closing Date in connection with the performance by the Corporation of
its obligations hereunder shall be satisfactory to Phoenix, on behalf of the
Lenders, and Phoenix, on behalf of the Lenders, shall have received copies of
all such documentation or other evidence as they may reasonably request in
order to establish the consummation of the transactions contemplated hereby and
the taking of all corporate proceedings in connection therewith in compliance
with these conditions, in form and substance satisfactory to Phoenix, on behalf
of the Lenders.

 

(i)                                     Deliveries.

 

(i)                                     The
Corporation shall have executed and delivered to the Lenders, such other
undertakings as it may reasonably request regarding the taking of actions and
delivery of documents following the Closing Date necessary or desirable to give
effect to the terms and conditions of this Agreement and the other Documents;

 

(ii)                                  The
Corporation shall have delivered to the Lenders a copy, certified by two
executive officers of the Corporation, of the Board resolution referred to in
Section 7.2(p); and

 

39

 

(iii)                               The
Corporation shall have executed and delivered to the Lenders the Share Purchase
Warrants and Debenture Certificates.

 

(j)                                     No Material Adverse Change. There shall have been no
Material Adverse Effect on the Corporation and the Subsidiaries taken as a
whole.

 

(k)                                  Due Diligence. The Lenders shall have been satisfied in
their absolute discretion with their due diligence review of the Corporation
and its prospects.

 

(l)                                     Time Frame. All of the conditions set out in this Section
7.2 shall have been satisfied, each in accordance with the provisions of this
Agreement, on or prior to the fifth Business Day following the execution by the
parties of this Agreement.

 

(m)                               Legal Opinion. The Lenders shall have
received a legal opinion of McCarthy Tétrault LLP substantially in the form
attached hereto as Exhibit D regarding the validity and enforceability
of this Agreement and the Transaction Documents (other than those relating to
the US Subsidiary) and the creation of the security interest created thereby
and regarding such other matters as Phoenix may reasonably require.

 

(n)                                 Wistron Agreement. The Corporation shall
have entered into a definitive binding agreement with Wistron with respect to
(i) the restructing of the Corporation’s trade credit debt with Wistron, (ii)
an increase the Corporation’s trade credit line with Wistron, and (iii) the
restructing of the Corporation’s NRE debt with Wistron, including the issuance
of Common Shares in partial conversion thereof.

 

(o)                                 Groh Relocation Agreement. The Corporation shall
have amended, to the reasonable satisfaction of Phoenix, that certain
Relocation Agreement by and between the Corporation and Brian Groh attached
hereto as Exhibit E.

 

(p)                                 Management Committee and Operational Procedures.
The Board of Directors of the Corporation shall have duly and validly
authorized by written resolution the establishment of an executive management
committee (the “Management Committee”)
to be comprised of two representatives of Phoenix (initially Philip S. Sassower
and Andrea Goren) and no more than eight executives of the Corporation, which
Management Committee shall, subject to oversight and review by the Board of
Directors, be responsible for oversight of day-to-day operations of the
Corporation, and shall have by such resolution authorized and directed the
officers of the Corporation to conduct the day-to-day operations and business
of the Corporation only in accordance with the operational procedures attached
hereto as Exhibit G (the “MC
Operational Procedures”).

 

Section 7.3.                                   Waiver
or Termination by the Lenders

 

Each of the conditions contained in Section 7.2 hereof
are inserted for the exclusive benefit of the Lenders and may be waived in
whole or in part by Phoenix, on behalf of the Lenders, at any time. The
Corporation acknowledges that the waiver by Phoenix, on behalf of the Lenders,
of any condition or any part of any condition shall constitute a waiver only of
such condition or such part of such condition, as the case may be, and shall
not constitute a waiver of any covenant, agreement, representation or warranty
made by the Corporation herein that

 

40

 

corresponds or is related to
such condition or such part of such condition, as the case may be. If any of
the conditions contained in Section 7.2 hereof are not fulfilled or complied
with as herein provided, the Lenders may, at or prior to the Closing Date at
their option, be released from any and all of their respective obligations,
covenants, agreements and liabilities pursuant to this Agreement by notice in
writing to the Corporation and in such event each Lender shall be released from
all of its obligations, covenants, agreements and liabilities hereunder and,
unless the condition or conditions which have not been fulfilled are reasonably
capable of being fulfilled or caused to be fulfilled by the Corporation, then
the Corporation shall also be released from all obligations hereunder, except
that the Corporation will remain liable for the payment of all fees and
expenses referred to in Sections 1.3 and 7.2(f) hereof which shall be payable
on demand.

 

ARTICLE 8.

EVENTS OF DEFAULT AND REMEDIES

 

Section 8.1.                                   Events
of Default

 

The occurrence of any of the following events shall
constitute an Event of Default under this Agreement:

 

(a)                                  If
default occurs in payment when due of any principal payable under this
Agreement.

 

(b)                                 If
default occurs in payment when due of any interest, fees or other amounts
payable under this Agreement and remains unremedied for a period of 10 days
after the receipt by the Corporation of notice of such default.

 

(c)                                  If
default occurs in payment or performance of any other Obligation (whether
arising herein or otherwise) and such default remains unremedied for a period
of 10 days after receipt by the Corporation of notice of such default.

 

(d)                                 If
default occurs in performance of any other covenant of the Corporation in favor
of any of the Lenders under this Agreement (excluding any of the covenants set
forth in any of Section 6.4 hereof) and remains unremedied for a period of 15
days after the receipt by the Corporation of notice of such default.

 

(e)                                  If
default occurs in performance of any covenant of the Corporation in favor of
the Lenders set forth in Section 6.4 of this Agreement.

 

(f)                                    If
an event of default occurs in payment or performance of any obligation in favor
of any Existing Debenture Holder or any person from whom the Corporation or any
Subsidiary has borrowed money aggregating in excess of $3000,000 which would
entitle the holder to accelerate repayment of the borrowed money, and such
default is not waived in writing within 10 days of the occurrence of such
default.

 

(g)                                 The
Corporation institutes proceedings to be adjudicated a bankrupt or insolvent,
or the consent by it to the institution of bankruptcy or insolvency proceedings
against it, or the filing by it of a petition or answer or consent seeking
reorganization or relief under any

 

41

 

applicable federal, provincial
or state law relating to bankruptcy, insolvency, reorganization or relief of
debtors, or the consent by it to the filing of any such petition or to the
appointment under any such law of a receiver, liquidator, assignee, trustee,
sequestrator (or other similar official) of the Corporation or of substantially
all of its property, or the making by it of a general assignment for the
benefit of creditors, or the admission by it in writing of its inability to pay
its debts generally as they become due.

 

(h)                                 If
there is the entry of a decree or order by a court having jurisdiction in the
premises adjudging the Corporation a bankrupt or insolvent, or approving as
properly filed a petition seeking reorganization, arrangement or adjustment of
or in respect of the Corporation under any applicable law relating to
bankruptcy, insolvency, reorganization or relief of debtors, or appointing
under any such law a receiver, liquidator, assignee, trustee, sequestrator (or
other similar official) of the Corporation or of substantially all of its
property, or ordering pursuant to any such law the winding-up or liquidation of
its affairs, and the continuance of any such decree, petition, appointment or
order unstayed and in effect for a period of 45 consecutive days.

 

(i)                                     If
any act, matter or thing is done toward, or any action or proceeding is
launched or taken to terminate the corporate existence of the Corporation or
any Subsidiary, whether by winding-up, surrender of charter or otherwise.

 

(j)                                     If
the Corporation or any Subsidiary ceases to carry on its business or makes or
proposes to make any sale of its assets in bulk or any sale of its assets out
of the usual course of its business.

 

(k)                                  If
any receiver, administrator or manager of the property, assets or undertaking
of the Corporation or any Subsidiary or a substantial part thereof is appointed
pursuant to the terms of any trust deed, trust indenture, debenture or similar
instrument or by or under any judgment or order of any court.

 

(l)                                     If
any balance sheet or other financial statement provided by the Corporation to
the Lenders pursuant to the provisions hereof is false or misleading in any
material respect.

 

(m)                               If
any proceedings are taken to enforce any Encumbrance affecting any of the
Secured Property or if a distress or any similar process be levied or enforced
against any of the Secured Property.

 

(n)                                 If
any judgment or order for the payment of money in excess of $200,000 shall be
rendered against the Corporation or any Subsidiary and either (i) enforcement
proceedings shall have been commenced by any creditor upon such judgment or
order, or (ii) there shall be any period of 10 consecutive days during which a
stay of enforcement of such judgment or order, by reason of a pending appeal or
otherwise, shall not be in effect.

 

(o)                                 If
any action is taken or power or right be exercised by any Governmental Body
which has a material adverse effect on the Corporation or any Subsidiary, its
business or operations, its properties or its prospects.

 

42

 

(p)                                 If
any representation or warranty made by the Corporation herein or in any other
Instrument or in any certificate, statement or report furnished in connection
herewith is found to be false or incorrect in any way so as to make it
materially misleading when made or when deemed to have been made.

 

(q)                                 If
any event occurs with respect to any Subsidiary which, if a like event had
occurred with respect to the Corporation, would have constituted an Event of
Default.

 

(r)                                    If
a Change of Control occurs with respect to the Corporation or any Subsidiary
and such Change of Control continues in effect for a period of 30 days.

 

(s)                                  If
there shall occur or arise any change (or any condition, event or development
involving a prospective change) in the business, operations, affairs, assets,
liabilities (including any contingent liabilities that may arise through
outstanding pending or threatened litigation or otherwise), capitalization,
financial condition, licenses, permits, rights or privileges, whether
contractual or otherwise, or prospects of the Corporation or any Subsidiary of
the which, in the judgment of Phoenix, on behalf of the Lenders, acting
reasonably, has or may have a material adverse effect on the Corporation or on
its ability to perform its obligations hereunder or under the Security
Documents.

 

(t)                                    Sixty
(60) days after the employment of any of the current Chief Executive Officer,
the Chief Financial Officer or the Chief Operating Officer is terminated by the
Corporation (other than a termination by the Corporation for “cause”), without
the prior consent of Phoenix, on behalf of the Lenders.

 

(u)                                 If
the Corporation commits an event of default pursuant to any other Transaction
Document and such default continues beyond any cure period provided for in such
Transaction Document.

 

Section 8.2.                                   Consequences
of an Event of Default

 

Upon the occurrence of any Event of Default, at the
option of the Lenders, all Obligations and all monies secured hereby shall
become forthwith due and payable, all of the rights and remedies hereby conferred
in respect of the Secured Property shall become immediately enforceable and any
and all additional and collateral security for payment of this Agreement shall
become immediately enforceable.

 

Section 8.3.                                   Enforcement

 

(a)                                  Upon
the happening of any Event of Default, the Lenders, may by instrument in
writing declare that the security hereof has become enforceable and the Lenders
shall have the following rights and powers:

 

(i)                                     to
enter into possession of all or any part of the Secured Property;

 

(ii)                                  to
preserve and maintain the Secured Property and make such replacements thereof
and additions thereto as it deems advisable;

 

43

 

(iii)                               to
collect any proceeds arising in respect of the Secured Property;

 

(iv)                              to
collect, realize upon or sell or otherwise deal with accounts;

 

(v)                                 to
institute proceedings in any court of competent jurisdiction for the
appointment of a Receiver of the Secured Property;

 

(vi)                              to
institute proceedings in any court of competent jurisdiction for sale or
foreclosure of the Secured Property;

 

(vii)                           to file
proofs of claim and other documents to establish claims in any proceeding
relating to the Corporation or any Subsidiary;

 

(viii)                        to
undertake any other remedy or proceeding authorized or permitted under the Personal Property Security Act (Ontario) or otherwise by law
or equity;

 

(ix)                                to
pay or otherwise satisfy in whole or in part any Encumbrances which, in the
Lenders’ opinion, may rank in priority to the security hereof;

 

(x)                                   after
entry by its officers or agents or without entry, to sell, lease or otherwise
dispose in any way whatsoever of all or any part of the Secured Property either
en bloc or separately at public auction
or by tender or by private agreement and at such time or times and on such
terms and conditions as the Lenders in their absolute discretion may determine
and without any notice to or concurrence of the Corporation except as may be
required by applicable law; and

 

(xi)                                by
instrument in writing, to appoint any person or persons (whether an officer or
officers of the Lenders or not) as a Receiver (as defined herein to include a
receiver and manager) of the Secured Property and to remove any Receiver so
appointed and appoint another or others in its stead.

 

(b)                                 The
security of this Agreement may be realized and the rights enforced by any
remedy or in any manner permitted by this Agreement or by law or equity and no
remedy for the realization of the security hereof shall be exclusive of or
dependent upon any other remedy and all or any remedies may from time to time
be exercised independently or in any combination.

 

(c)                                  In
addition to the remedies of the Lenders set forth above, the Lenders, may,
whenever an Event of Default has occurred:

 

(i)                                     require
the Corporation, at the Corporation’s expense, to assemble the Secured Property
at a place or places designated by notice in writing given by the Lenders to
the Corporation;

 

(ii)                                  require
the Corporation, by notice in writing given by the Lenders to the Corporation,
to disclose to the Lenders the location or locations of the Secured Property;

 

44

 

(iii)                               repair,
process, modify, complete or otherwise deal with the Secured Property and
prepare for the disposition of the Secured Property, whether on the premises of
the Corporation or otherwise;

 

(iv)                              carry
on all or any part of the business or businesses of the Corporation and, to the
exclusion of all others including the Corporation, enter upon, occupy and use
all or any of the premises, buildings, plant, undertaking and other property of
or used by the Corporation for such time as the Lenders see fit, free of
charge, and the Lenders shall not be liable to the Corporation for any act,
omission or negligence in so doing or for any rent, charges, depreciation or
damages incurred in connection therewith or resulting therefrom;

 

(v)                                 borrow
for the purpose of carrying on the business of the Corporation or for the
maintenance, preservation or protection of the Secured Property and mortgage,
charge, pledge or grant a security interest in the Secured Property, whether or
not in priority to the Security Documents, to secure repayment;

 

(vi)                              advance
the Lenders’ own money to the Corporation, in any case upon such terms as the
Lenders may deem reasonable and upon the security hereof; and

 

(vii)                           demand,
commence, continue or defend any judicial or administrative proceedings for the
purpose of protecting, seizing, collecting, realizing or obtaining possession
or payment of the Secured Property, and give valid and effectual receipts and
discharges therefor and compromise or give time for the payment or performance
of all or any part of the accounts or any other obligation of any third party
to the Corporation.

 

Section 8.4.                                   Disposition

 

(a)                                  Without
limiting the generality of the foregoing in connection with the exercise of
remedies under this Article 8, it shall be lawful for the Lenders:

 

(i)                                     to
make any sale, lease or other disposition of the Secured Property either for
cash or upon credit or partly for one and partly for the other upon such
conditions as to terms of payment as it in its absolute discretion may deem
proper;

 

(ii)                                  to
rescind or vary any contract for sale, lease or other disposition that the
Lenders may have entered into pursuant hereto and resell, release or redispose
of the Secured Property with or under any of the powers conferred herein; and

 

(iii)                               to
stop, suspend or adjourn any sale, lease or other disposition from time to time
and to hold the same adjourned without further notice.

 

(b)                                 Upon
any such sale, lease or other disposition the Lenders shall be accountable only
for money actually received by them. The Corporation shall be accountable for
any deficiency and the Lenders shall be accountable for any surplus. The
Lenders may deliver to the purchaser or purchasers of the Secured Property or
any part thereof good and sufficient conveyances or deeds for the same free and
clear of any claim by the Corporation. The purchaser or lessee receiving any
disposition of the Secured Property or any part thereof need not inquire
whether default under this Agreement has actually occurred but may as to this
and all 

 

45

 

other matters rely upon a
statutory declaration of an officer of Phoenix on behalf of the Lenders, which
declaration shall be conclusive evidence as between the Corporation and any
such purchaser or lessee, and the purchaser or lessee need not look to the
application of the purchase money, rent or other consideration given upon such
sale, lease or other disposition, which shall not be affected by any
irregularity of any nature or kind relating to the crystallizing or enforcing
of the security hereof or the taking of possession of the Secured Property or
the sale, lease or other disposition thereof.

 

Section 8.5.                                   Powers
of Receiver

 

(a)                                  Any
Receiver appointed as aforesaid shall have the power without legal process:

 

(i)                                     to
take possession of the Secured Property or any part thereof wherever the same
may be found;

 

(ii)                                  to
carry on the business of the Corporation or any part thereof in the name of the
Corporation or of the Receiver; and

 

(iii)                               to
exercise on behalf of each Lender all of the rights and remedies herein granted
to the Lenders,

 

and without in any way
limiting the foregoing, the Receiver shall have all the powers of a receiver
appointed by a court of competent jurisdiction. Any Receiver appointed by the
Lenders shall act as agent for the Lenders for the purposes of taking
possession of the Secured Property, but otherwise and for all other purposes
(except as provided below), as agent for the Corporation.

 

(b)                                 The
Receiver may sell, lease, or otherwise dispose of Secured Property as agent for
the Corporation or as agent for the Lenders, as the Lenders may determine in
their discretion. The Corporation agrees to ratify and confirm all actions of
the Receiver acting as agent for the Corporation, and to release and indemnify
the Receiver in respect of all such actions. The Lenders, in appointing or
refraining from appointing any Receiver shall not incur liability to the
Receiver, the Corporation or otherwise and shall not be responsible for any
misconduct or negligence of such Receiver or for any loss resulting therefrom.

 

Section 8.6.                                   Application
of Moneys

 

All moneys and non-cash proceeds actually received by
the Lenders or by the Receiver in enforcing the security of this Agreement,
shall be initially held in trust by such person and promptly thereafter shall
be applied, subject to the proper claims of any other person:

 

(a)                                  first,
to pay or reimburse each Lender and any Receiver the costs, charges, expenses
and advances payable by the Corporation in accordance herewith;

 

(b)                                 second,
in or toward the payment to each Lender of all Obligations or amounts secured
hereby which payment shall be made and applied to the Lenders pro rata based on
the ratio that the Lender’s Debentures bears to the total number of Debentures
issued to the Lenders hereunder; and

 

46

 

(c)                                  third,
any surplus shall be paid to the Corporation or its assigns or as a court of
competent jurisdiction may direct.

 

Section 8.7.                                   Care
and Custody of Secured Property

 

No Lender shall be bound to collect, dispose of,
realize, protect or enforce any of the Corporation’s right, title and interest
in and to the Secured Property or to institute proceedings for the purpose
thereof and, without limiting the generality of the foregoing, no Lender shall
be required to take any steps necessary to preserve rights against prior parties
in respect of any negotiable Secured Property. No Lender shall have any
obligation to keep Secured Property in its possession identifiable. Each Lender
may, after an Event of Default: (i) notify any person obligated on an account
or on chattel paper or any obligor on an instrument to make payment thereunder
to such Lender whether or not the Corporation was theretofore making
collections thereon; and (ii) assume control of any proceeds arising from the
Secured Property.

 

Section 8.8.                                   Dealing
with the Secured Property

 

No Lender shall be obliged to exhaust its recourse
against the Corporation or any other person or persons or against any other
security it may hold in respect of the Obligations before realizing upon or
otherwise dealing with the Secured Property in such manner as such Lender may
consider desirable. Each Lender may grant extensions or other indulgences, take
and give up securities, accept compositions, grant releases and discharges and
otherwise deal with the Corporation and with other parties, sureties or
securities as such Lender may see fit without prejudice to the Obligations or
the rights of such Lender in respect of the Secured Property. No Lender shall
be (i) liable or accountable for any failure to collect, realize or obtain
payment in respect of the Secured Property; (ii) bound to institute proceedings
for the purpose of collecting, enforcing, realizing or obtaining payment of the
Secured Property or for the purpose of preserving any rights of such Lender,
the Corporation or any other parties in respect thereof; (iii) responsible for
any loss occasioned by any sale or other dealing with the Secured Property or
by the retention of or failure to sell or otherwise deal therewith; or (iv)
bound to protect the Secured Property from depreciating in value or becoming
worthless.

 

Section 8.9.                                   Standards
of Sale

 

Without prejudice to the ability of the Lenders to
dispose of the Secured Property in any manner which is commercially reasonable,
the Corporation acknowledges that, subject to the terms of any Permitted
Encumbrance, the rights of the CRAT and the rights of Phoenix as holder of the
Fund Debenture, a disposition of Secured Property by the Lenders which takes
place substantially in accordance with the following provisions shall be deemed
to be commercially reasonable:

 

(a)                                  Secured
Property may be disposed of in whole or in part;

 

(b)                                 Secured
Property may be disposed of by public auction, public tender or private
contract, with or without advertising and without any other formality;

 

(c)                                  Any
purchaser or lessee of such Secured Property may be a customer of the Lenders;

 

47

 

(d)                                 A
disposition of Secured Property may be on such terms and conditions as to
credit or otherwise as the Lenders, in its sole discretion, may deem
advantageous;

 

(e)                                  The
Lenders or any other Person may be the purchaser of all or any portion of the
Secured Property and thereafter hold the same absolutely, free from any claim
or right of whatever kind; and

 

(f)                                    Each
Lender may establish an upset or reserve bid or price in respect of Secured
Property.

 

ARTICLE 9.

GENERAL

 

Section 9.1.                                   Waiver

 

No act or omission by any Lender in any manner
whatever shall extend to or be taken to affect any provision hereof or any
subsequent breach or default or the rights resulting therefrom save only
express waiver in writing. A waiver of default shall not extend to, or be taken
in any manner whatsoever to affect the rights of any Lender with respect to,
any subsequent default, whether similar or not. The Corporation waives every
defense based upon any or all indulgences that may be granted by the Lenders.

 

Section 9.2.                                   Other
Security

 

The rights of each Lender hereunder shall not be
prejudiced nor shall the liabilities of the Corporation or of any other Person
be reduced in any way by the taking of any other security of any nature or kind
whatsoever either at the time of execution of this Agreement or at any time
hereafter.

 

Section 9.3.                                   No
Merger or Novation

 

Neither the taking of any judgment nor the exercise of
any power of seizure or sale shall operate to extinguish the liability of the
Corporation to pay the moneys hereby secured nor shall the same operate as a
merger of any covenant herein contained or of any other Obligation, nor shall
the acceptance of any payment or other security constitute or create any
novation.

 

Section 9.4.                                   Power
of Attorney

 

The Corporation, for valuable consideration for and
after the occurrence of an Event of Default, irrevocably appoints Phoenix, on
behalf of the Lenders, and its officers from time to time or any of them to be
the attorneys of the Corporation in the name of and on behalf of the
Corporation to execute such deeds, transfers, conveyances, assignments,
assurances and things which the Corporation ought to execute and do under the
covenants and provisions herein contained and generally to use the name of the
Corporation in the exercise of all or any of the powers hereby conferred on the
Lenders.

 

48

 

Section 9.5.                                   License

 

The Corporation hereby grants to Phoenix, on behalf of
the Lenders, and its employees and agents an irrevocable and non-exclusive
license, subject to the rights of tenants, to enter any of the Premises, during
regular business hours and acting in a reasonable manner, to conduct audits,
testing and monitoring with respect to Hazardous Substances and to remove and
analyze any Hazardous Substance at the cost and expense of the Corporation
(which cost and expense shall be secured hereby).

 

Section 9.6.                                   Environmental
Indemnity

 

The Corporation shall indemnify each Lender and hold
each Lender harmless against and from all losses, costs, damages and expenses
which each Lender may sustain, incur or be or become liable at any time
whatsoever for by reason of or arising from the past, present or future
existence, clean-up, removal or disposal of any Hazardous Substance referred to
in this Agreement or compliance with Environmental Laws or Environmental Orders
relating thereto, including any clean-up, decommissioning, restoration or
remediation of the Premises and other affected lands or property (and this
indemnification shall survive the satisfaction, release or extinguishment of
the indebtedness secured hereby).

 

Section 9.7.                                   Amalgamation

 

The Corporation acknowledges that if it amalgamates
with any other corporation or corporations (a) the Secured Property and the
lien created hereby shall extend to and include all the property and assets of
each of the amalgamating corporations and the amalgamated corporation and to
any property or assets of the amalgamated corporation thereafter owned or
acquired, (b) the term, “Corporation”,
where used herein shall extend to and include each of the amalgamating
corporations and the amalgamated corporation, and (c) the term, “Obligations”, where used herein shall extend to and include
the Obligations of each of the amalgamating corporations and the amalgamated
corporation. Nothing is this Section 9.7 shall permit or authorize an
amalgamation that is otherwise prohibited by the provisions of this Agreement.
For purposes solely of this Section 9.7, the Corporate Migration shall be
deemed to constitute an amalgamation.

 

Section 9.8.                                   Holder
May Remedy Default

 

If the Corporation fails to do anything hereby
required to be done by it each Lender may, but shall not be obliged to, do such
thing and all reasonable sums thereby expended by such Lender shall be payable
forthwith by the Corporation, shall be secured hereby and shall have the
benefit of the Encumbrances hereby created, but no such performance by such
Lender shall be deemed to relieve the Corporation from any default hereunder.

 

Section 9.9.                                   Notices

 

Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed given and effective on the earlier of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified for notice prior to 5:00 p.m., (Austin,
Texas time), on a

 

49

 

Business Day, (ii) the Business
Day after the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified for notice
later than 5:00 p.m., (Austin, Texas time), on any date and earlier than 11:59
p.m., (Austin, Texas time), on such date, (iii) the Business Day following the
date of mailing, if sent by nationally recognized overnight courier service or
(iv) actual receipt by the party to whom such notice is required to be given.
The addresses for such communications shall be addressed:

 

	
  (a)

  	
  to the Lenders
  at:

  
	
   

  	
   

  
	
   

  	
  c/o Phoenix Venture Fund LLC

  
	
   

  	
  135 East 57th Street, 12th
  Floor

  
	
   

  	
  New York, NY 10022

  
	
   

  	
  Attention: Philip S. Sassower

  
	
   

  	
  Facsimile: (212) 319-4970

  
	
   

  	
   

  
	
   

  	
  with a copy to:

  
	
   

  	
  Brown Raysman Millstein Felder & Steiner LLP

  
	
   

  	
  900 Third Avenue

  
	
   

  	
  New York, NY 10022

  
	
   

  	
  Attention: David M. Warburg

  
	
   

  	
  Facsimile: (212) 895-2900

  
	
   

  	
   

  
	
  (b)

  	
  to the
  Corporation at:

  
	
   

  	
  Xplore Technologies Corp.

  
	
   

  	
  14000 Summit Drive, Suite 900

  
	
   

  	
  Austin, Texas 78728

  
	
   

  	
  Attention: Chief Financial Officer

  
	
   

  	
  Facsimile: (512) 336-7791

  
	
   

  	
   

  
	
   

  	
  with a copy to:

  
	
   

  	
  McCarthy Tétrault LLP

  
	
   

  	
  Suite 4700

  
	
   

  	
  Toronto Dominion Bank Tower

  
	
   

  	
  Toronto, ON M5K 1E6

  
	
   

  	
  Attention: Jonathan Grant

  
	
   

  	
  Fax: (416) 868-0673

  

 

Section 9.10.                             Further
Assurances

 

Each of the Corporation and the Lenders hereby
covenants and agrees that at any time and from time to time after the Closing
Date it will, upon the request of the other, do, execute, acknowledge and
deliver or cause to be done, executed, acknowledged and delivered all such
further acts, deeds, assignments, transfers, conveyances and assurances as may
be required for the better carrying out and performance of all the terms of
this Agreement including, without limitation, such further and other security
interests as the Lenders may reasonably request.

 

50

 

Section 9.11.                             Remedies
Cumulative

 

The rights and remedies of the parties under this
Agreement are cumulative and in addition to and not in substitution for any
rights or remedies provided by law. Any single or partial exercise by any party
hereto of any right or remedy for default or breach of any term, covenant or
condition of this Agreement does not waive, alter, affect or prejudice any
other right or remedy to which such party may be lawfully entitled for the same
default or breach.

 

Section 9.12.                             Announcements

 

No announcement with respect to this Agreement,
including any disclosure of the identity of the Lender, will be made by any
party hereto without the prior approval of the other party. The foregoing will
not apply to any announcement by any party required in order to comply with
laws pertaining to timely disclosure, provided that such party consults with
the other parties before making any such announcement.

 

Section 9.13.                             Time
of the Essence

 

Time shall be of the essence of this Agreement.

 

Section 9.14.                             Entire
Agreement

 

This Agreement, the schedules referred to herein, and
the other documents referenced herein constitute the entire agreement between
the parties hereto pertaining to the matters therein set forth and supersede
all prior agreements, representations, warranties, statements, promises,
information, arrangements and understandings, whether oral or written, express
or implied, with respect to the subject matter thereof. Neither party hereto
shall be bound or charged with any oral or written agreements, representations,
warranties, statements, promises, information, arrangements or understandings
not specifically set forth in this Agreement or the schedules or such other
documents. The parties hereto further acknowledge and agree that, in entering
into this Agreement and in delivering the schedules and such other documents,
they have not in any way relied, and will not in any way rely, upon any oral or
written agreements, representations, warranties, statements, promises,
information, arrangements or understandings, express or implied, not
specifically referenced or set forth in this Agreement or in such schedules or
such other documents.

 

Section 9.15.                             Receipt

 

The Corporation hereby acknowledges receipt of a true
copy of this Agreement and a copy of the financing statement registered under
the Personal Property Security Act
(Ontario) in respect of the security created hereby.

 

Section 9.16.                             Invalidity
of any Provisions

 

Any provision of this Agreement or any provisions of
the security contemplated hereunder which is prohibited by the laws of any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition without invalidating the remaining terms and 

 

51

 

provisions hereof or thereof
and no such invalidity shall affect the obligation of the Corporation to repay
the Obligations.

 

Section 9.17.                             Indemnification

 

The Corporation agrees to indemnify each Lender from
and against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements of any kind or
nature whatsoever (except by reason of the gross negligence or willful
misconduct or breach of applicable laws of such Lender or any of its employees)
which may be imposed on, incurred by, or asserted against such Lender and
arising by reason of any action (including any action referred to herein) or
inaction or omission to do any act legally required of the Corporation.

 

Section 9.18.                             Successors,
Assigns and Participation, etc.

 

(a)                                  The
Corporation shall not assign or transfer all or any part of its rights or
obligations hereunder or under any other Instrument, or permit or cause any
Subsidiary to assign or transfer all or any part of its rights or obligations
under any Instrument without the prior written consent of Phoenix.

 

(b)                                 Each
Lender may assign or grant participations in its Debentures or in all or part
of its rights in respect of this Agreement, the Obligations and the Instruments
and have its corresponding obligations hereunder assumed by any other Person
without the consent of the Corporation, on a private sale basis to other
“accredited investors” within the meaning of Regulation D, Rule 501(a),
promulgated by the U.S. Securities and Exchange Commission and within the
meaning of Section 1.1 of Rule 45-501 of the Ontario Securities Commission. An
assignment under this Section 9.18 shall become effective when the Corporation
has been notified thereof by the applicable Lender and has received from the
assignee an undertaking to be bound by this Agreement and the other Security
Documents and to perform the obligations, if any, assumed by it. Any such
assignee shall be treated as a party to this Agreement for all purposes of this
Agreement and the other Security Documents and shall be entitled to the full
benefit hereof and thereof and shall be subject to the obligations of the applicable
Lender to the same extent as if it were an original party in respect of the
rights assigned to it and obligations assumed by it and such Lender shall be
released and discharged accordingly. Any Person to whom a Lender grants
participations in all or part of its rights and obligations under this
Agreement and the Instruments shall not have any rights under this Agreement
and the Instruments in respect of its participation interest, and shall only
have, as against such Lender, as grantor, those rights and obligations in
respect of such participation interest as are set forth in the agreement or
agreements made between such Lender and such participant.

 

Section 9.19.                             Amendments

 

This Agreement may only be amended by a written
agreement signed by the Corporation and Phoenix, on behalf of the Lenders.
Notwithstanding anything to the contrary contained herein, any action to impose
additional obligations on the Lenders, or to amend Section 8.6 hereof or any
other provision hereof or in any of the Security Documents which would affect
the pro rata repayment, as 

 

52

 

among the Lenders, of the
Obligations or the pro rata disbursement, as among the Lenders, of moneys or
other proceeds received in the enforcement of the security interests created
hereby, shall require the consent of each Lender whose interests are adversely
affected by such action.

 

Section 9.20.                             Consent
of Phoenix Enterprises LLC as Agent for the Existing Debenture Holders; Consent
of CRAT

 

(a)                                  Phoenix
Enterprises LLC, for itself and as agent for the Existing Debenture Holders
under (i) Section 9.20 of the November 2002 Debenture Agreement, (ii) Section
9.21 of the December 2002 Debenture Agreement, (iii) Section 9.21 of the April
2003 Debenture Agreement, and (iv) Section 9.21 of the Second April 2003
Debenture Agreement, hereby acknowledges, agrees and gives its consent to the
Corporation’s entering into and performing its obligations under this Agreement
under the terms and conditions contained herein and the execution, delivery and
performance of the guaranty contemplated by Section 4.8 and of the Security
Documents and the issue and sale of the Warrants to the Lenders.

 

(b)                                 The
CRAT hereby acknowledges, agrees and gives its consent to the Corporation’s
entering into and performing its obligations under this Agreement under the
terms and conditions contained herein and the execution, delivery and
performance of the guaranty contemplated by Section 4.8 and of the Security
Documents and the issue and sale of the Warrants to the Lenders.

 

(c)                                  Phoenix,
as holder of the Fund Debenture, hereby acknowledges, agrees and gives its
consent to the Corporation’s entering into and performing its obligations under
this Agreement under the terms and conditions contained herein and the
execution, delivery and performance of the guaranty contemplated by Section 4.8
and of the Security Documents and the issue and sale of the Warrants to the
Lenders.

 

Section 9.21.                             Appointment
and Authorization of Phoenix as Agent

 

(a)                                  Each
Lender hereby irrevocably appoints and authorizes Phoenix to (A) hold the
Collateral (as defined in the Security Agreement entered into on the date
hereof by the US Subsidiary and Phoenix) and the Secured Property (as defined
herein) for its own benefit and the pro rata benefit of the Lenders, and (B) be
its attorney in its name and on its behalf to exercise such rights or powers
granted to Phoenix or the Lenders under this Agreement and the other
Transaction Documents to the extent and on the terms specifically provided
herein and therein, together with such powers as are reasonably incidental
thereto. As to any matters not expressly provided for by this Agreement,
Phoenix shall not be required to exercise any discretion or take any action,
but shall be required to act or to refrain from acting (and shall be fully
protected in so acting or refraining from acting) upon the instructions of the
holders of 51% of the aggregate principal amount of Debentures outstanding, and
such instructions shall be binding upon all Lenders; provided, however,
that Phoenix shall not be required to take any action which exposes Phoenix to
liability in such capacity, which could result in Phoenix incurring any costs
and expenses or which is contrary to this Agreement or applicable law.
Notwithstanding anything to the contrary contained herein, any action to impose
additional obligations on the Lenders, or to amend Section 8.6 hereof or any
other provision hereof or in any of the Security Documents which would affect
the pro rata repayment, as among the

 

53

 

Lenders, of the Obligations or
the pro rata disbursement, as among the Lenders, of moneys or other proceeds
received in the enforcement of the security interests created hereby, shall
require the consent of each Lender whose interests are adversely affected by
such action.

 

(b)                                 The
Corporation shall be entitled to rely upon any certificate, notice or other
document or other advice, statement or instruction provided to it by Phoenix
pursuant to this Agreement, and the Corporation shall generally be entitled to
deal with Phoenix with respect to matters under this Agreement which Phoenix is
authorized to deal with without any obligation whatsoever to satisfy itself as
to the authority of Phoenix to act on behalf of the Lenders and without any
liability whatsoever to the Lenders for relying upon any certificate, notice or
other document or other advice, statement or instruction provided to it by
Phoenix, notwithstanding any lack of authority of Phoenix to provide the same.

 

Section 9.22.                             Counterparts

 

This Agreement may be executed in separate
counterparts (including by facsimile), each of which when so executed and
delivered shall be deemed to be an original and all of such counterparts shall
together constitute one and the same instrument. Any party may execute this
Agreement by facsimile signature.

 

54

 

IN WITNESS WHEREOF
the parties have executed this Agreement.

 

	
   

  	
  XPLORE TECHNOLOGIES CORP.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Michael J. Rapisand

  	
   

  
	
   

  	
  Name: Michael J.
  Rapisand

  
	
   

  	
  Title: Chief Financial
  Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  PHOENIX
  VENTURE FUND LLC

  
	
   

  	
   

  
	
   

  	
  By:

  	
  SG
  PHOENIX VENTURES LLC, its

  
	
   

  	
   

  	
  Managing Member

  
	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ Andrea Goren

  	
   

  
	
   

  	
  Name: Andrea Goren

  
	
   

  	
  Title: Member

  
	
   

  	
   

  
	
   

  	
  PHOENIX
  ENTERPRISES LLC,
  solely for purposes of Section 9.20 hereof, in its capacity as Agent under
  (i) the Debenture Purchase Agreement, dated November 5, 2002, (ii) the
  December 2002 Debenture Purchase Agreement, dated December 6, 2002, (iii) the
  April 2003 Debenture Purchase Agreement, dated April 9, 2003, and (iv) the
  Second April 2003 Debenture Purchase Agreement, dated April 28, 2003

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ Philip S. Sassower

  	
   

  
	
   

  	
  Name: Philip S.
  Sassower

  
	
   

  	
  Title: Chief Executive
  Officer

  
	
   

  	
   

  
	
   

  	
  THE
  PHILIP S. SASSOWER 1996 

  CHARITABLE REMAINDER ANNUITY 

  TRUST, solely
  for purposes of Section 9.20 hereof

  
	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ Philip S. Sassower

  	
   

  
	
   

  	
  Name: Philip S.
  Sassower

  
	
   

  	
  Title: Trustee

  
						

 

55

 

DECEMBER
2004 DEBENTURE PURCHASE AGREEMENT

COUNTERPART EXECUTION PAGE

 

By
signing below, the undersigned agrees to the terms of the December 2004
Debenture Purchase Agreement and to purchase the number of Units set forth
below.

 

	
   

  	
   

  	
  LENDER:

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  PHOENIX
  VENTURE FUND LLC

  
	
   

  	
   

  	
   

  	
   

  
	
  Number of Units being purchased: 4,900

  	
   

  	
  By: SG Phoenix Ventures, LLC, its Managing
  Member

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ Andrea Goren

  	
   

  
	
   

  	
   

  	
   

  	
  Name: Andrea Goren

  
	
   

  	
   

  	
   

  	
  Title: Member

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Address:

  	
  135 East 57th Street, 12th
  Floor

  
	
   

  	
   

  	
   

  	
   

  	
  New York, New York 10022

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Facsimile:

  	
  (212) 202-7565

  
							

 

Please complete the following:

 

	
  1.

  	
   

  	
  The exact name that your Debentures are to
  be registered in (this is the name that will appear on your Debenture
  Certificate(s)). You may use a nominee name if appropriate:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2.

  	
   

  	
  The relationship between the Lender and the
  Registered Holder listed in response to item 1 above:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  3.

  	
   

  	
  The mailing address and facsimile number of
  the Registered Holder listed in response to item 1 above (if different from
  above):

  	
   

  	
  Facsimile: 

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  4.

  	
   

  	
  (For United
  States Investors:) The Social Security Number or Tax
  Identification Number of the Registered Holder listed in the response to item
  1 above:

  	
   

  	
   

  

 

56

 

DECEMBER
2004 DEBENTURE PURCHASE AGREEMENT

COUNTERPART EXECUTION PAGE

 

By
signing below, the undersigned agrees to the terms of the December 2004
Debenture Purchase Agreement and to purchase the number of Units set forth
below.

 

	
   

  	
   

  	
  LENDER:

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  795233 ONTARIO INC.

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Number of Units being purchased: 
  100

  	
   

  	
  By:

  	
  /s/ Jeff Green

  	
   

  
	
   

  	
   

  	
   

  	
  Name:  Jeff Green

  
	
   

  	
   

  	
   

  	
  Title: 

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Address: 

  	
  170 Roxborough St. East

  
	
   

  	
   

  	
   

  	
   

  	
  Toronto, Ontario M4W 1W2

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Facsimile:

  	
  (416) 361-6050

  
							

 

Please complete the following:

 

	
  1.

  	
   

  	
  The exact name that your Debentures are to be registered in (this is
  the name that will appear on your Debenture Certificate(s)). You may use a
  nominee name if appropriate:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2.

  	
   

  	
  The relationship between the Lender and the Registered Holder listed
  in response to item 1 above:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  3.

  	
   

  	
  The mailing address and facsimile number of the Registered Holder
  listed in response to item 1 above (if different from above):

  	
   

  	
  Facsimile: 

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  4.

  	
   

  	
  (For United States Investors:)  The Social Security Number or Tax
  Identification Number of the Registered Holder listed in the response to item
  1 above:

  	
   

  	
   

  

 

57Exhibit 10.4

 

Silicon Valley Bank

 

Loan and
Security Agreement

 

	
  Borrower:

  	
  XPLORE TECHNOLOGIES CORPORATION OF AMERICA

  
	
  Address:

  	
  14000 Summit Drive, Suite 900

  
	
   

  	
  Austin, Texas 78728

  
	
   

  	
  (FAX: 512-336-7791)

  
	
   

  	
   

  
	
  Date:

  	
  September 15, 2005

  

 

THIS LOAN AND SECURITY AGREEMENT is entered
into on the above date between SILICON VALLEY BANK (“Silicon” or “Bank”), whose
address is 3003 Tasman Drive, Santa Clara, California 95054 and the borrower(s)
named above (jointly and severally, the “Borrower”), whose chief executive office
is located at the above address (“Borrower’s Address”). The Schedule to
this Agreement (the “Schedule”) shall for all purposes be deemed to be a part of
this Agreement, and the same is an integral part of this Agreement. (Definitions
of certain terms used in this Agreement are set forth in Section 8 below.)

 

1.                                      LOANS.

 

1.1  Loans. Silicon will
make loans to Borrower (the “Loans”) up to the amounts (the “Maximum Credit
Limit”) shown on the Schedule, provided no Default or Event of Default has
occurred and is continuing, and subject to deduction of Reserves for accrued
interest and such other Reserves as Silicon deems proper from time to time in
its good faith business judgment.

 

1.2  Interest. All Loans
and all other monetary Obligations shall bear interest at the rate shown on the
Schedule, except where expressly set forth to the contrary in this Agreement. Interest
shall be payable monthly, on the last day of the month. Interest may, in
Silicon’s discretion, be charged to Borrower’s loan account, and the same shall
thereafter bear interest at the same rate as the other Loans. Silicon may, in
its discretion, charge interest to Borrower’s Deposit Accounts maintained with
Silicon. Regardless of the amount of Obligations that may be outstanding
from time to time, Borrower shall pay Silicon minimum monthly interest during
the term of this Agreement in the amount set forth on the Schedule (the “Minimum
Monthly Interest”).

 

1.3  Overadvances. If at any
time or for any reason the total of all outstanding Loans and all other
monetary Obligations exceeds the Maximum Credit Limit (an “Overadvance”),
Borrower shall immediately pay the amount of the excess to Silicon, without
notice or demand. Without limiting Borrower’s obligation to repay to Silicon
the amount of any Overadvance, Borrower agrees to pay Silicon interest on the
outstanding amount of any Overadvance, on demand, at the Default Rate.

 

1.4  Fees. Borrower
shall pay Silicon the fees shown on the Schedule, which are in addition to all
interest and other sums payable to Silicon and are not refundable.

 

1.5 Loan Requests. To obtain a Loan, Borrower shall make a
request to Silicon by facsimile or telephone. Loan requests received after
12:00 Noon (Pacific Standard Time) will not be considered by Silicon until the
next Business Day. Silicon may rely on any telephone request for a Loan
given by a person whom Silicon believes is an authorized representative of
Borrower, and Borrower will indemnify Silicon for any loss Silicon suffers as a
result of that reliance.

 

1.6  Letters of Credit. At the
request of Borrower, Silicon may, in its good faith business judgment, issue or
arrange for the issuance of letters of credit for the account of Borrower, in
each case in form and substance satisfactory to Silicon in its sole discretion
(collectively, “Letters of Credit”). The aggregate face amount of all Letters
of Credit from time to time outstanding shall not exceed the amount shown on
the Schedule (the “Letter of Credit Sublimit”), and shall be reserved
against Loans which would otherwise be available hereunder, and in the event at
any time there are insufficient Loans available to Borrower for such reserve,
Borrower shall deposit and maintain with Silicon cash collateral in an amount
at all

 

 

times equal to such deficiency, which
shall be held as Collateral for all purposes of this Agreement. Borrower shall
pay all bank charges (including charges of Silicon) for the issuance of Letters
of Credit, together with such additional fee as Silicon’s letter of credit
department shall charge in connection with the issuance of the Letters of
Credit. Any payment by Silicon under or in connection with a Letter of Credit
shall constitute a Loan hereunder on the date such payment is made. Each Letter
of Credit shall have an expiry date no later than thirty days prior to the
Maturity Date. Borrower hereby agrees to indemnify and hold Silicon harmless
from any loss, cost, expense, or liability, including payments made by Silicon,
expenses, and reasonable attorneys’ fees incurred by Silicon arising out of or
in connection with any Letters of Credit other than those arising from Silicon’s
gross negligence or willful misconduct. Borrower agrees to be bound by the
regulations and interpretations of the issuer of any Letters of Credit
guarantied by Silicon and opened for Borrower’s account or by Silicon’s
interpretations of any Letter of Credit issued by Silicon for Borrower’s
account, and Borrower understands and agrees that Silicon shall not be liable
for any error, negligence, or mistake, whether of omission or commission, in
following Borrower’s instructions or those contained in the Letters of Credit
or any modifications, amendments, or supplements thereto other than Silicon’s
gross negligence or willful misconduct. Borrower understands that Letters of
Credit may require Silicon to indemnify the issuing bank for certain costs
or liabilities arising out of claims by Borrower against such issuing bank. Borrower
hereby agrees to indemnify and hold Silicon harmless with respect to any loss,
cost, expense, or liability incurred by Silicon under any Letter of Credit as a
result of Silicon’s indemnification of any such issuing bank. The provisions of
this Loan Agreement, as it pertains to Letters of Credit, and any other Loan
Documents relating to Letters of Credit are cumulative.

 

2. SECURITY INTEREST.
To secure the payment and performance of all of the Obligations when due,
Borrower hereby grants to Silicon a security interest in all of the following
(collectively, the “Collateral”):  all
right, title and interest of Borrower in and to all of the following, whether
now owned or hereafter arising or acquired and wherever located: all Accounts;
all Inventory; all Equipment; all Deposit Accounts; all General Intangibles
(including without limitation all Intellectual Property); all Investment
Property; all Other Property; and any and all claims, rights and interests in
any of the above, and all guaranties and security for any of the above, and all
substitutions and replacements for, additions, accessions, attachments,
accessories, and improvements to, and proceeds (including proceeds of any
insurance policies, proceeds of proceeds and claims against third parties) of,
any and all of the above, and all Borrower’s books relating to any and all of
the above.

 

3. REPRESENTATIONS, WARRANTIES AND COVENANTS
OF BORROWER.

 

In
order to induce Silicon to enter into this Agreement and to make Loans,
Borrower represents and warrants to Silicon as follows, and Borrower covenants
that the following representations will continue to be true, and that Borrower
will at all times comply with all of the following covenants, throughout the
term of this Agreement and until all Obligations have been paid and performed
in full:

 

3.1  Corporate Existence and
Authority. Borrower is and will continue to be, duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation. Borrower is and will continue to be
qualified and licensed to do business in all jurisdictions in which any failure
to do so would result in a Material Adverse Change. The execution, delivery and
performance by Borrower of this Agreement, and all other documents contemplated
hereby (i) have been duly and validly authorized, (ii) are
enforceable against Borrower in accordance with their terms (except as
enforcement may be limited by equitable principles and by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to creditors’
rights generally), and (iii) do not violate Borrower’s articles or
certificate of incorporation, or Borrower’s by-laws, or any law or any material
agreement or instrument which is binding upon Borrower or its property, and (iv) do
not constitute grounds for acceleration of any material indebtedness or
obligation under any agreement or instrument which is binding upon Borrower or
its property.

 

3.2  Name; Trade Names and Styles.
The name of Borrower set forth in the heading to this
Agreement is its correct name. Listed in the Representations are all prior
names of Borrower and all of Borrower’s present and prior trade names. Borrower
shall give Silicon 30 days’ prior written notice before changing its name or
doing business under any other name. Borrower has complied, and will in the
future comply, in all material respects, with all laws relating to the conduct
of business under a fictitious business name, except where the failure to so
comply would not reasonably be expected to result in a Material Adverse Change.

 

3.3  Place of Business; Location
of Collateral. The address set forth in the heading to
this Agreement is Borrower’s chief executive office. In addition, Borrower has
places of business and Collateral is located only at the locations set forth in
the Representations. Borrower will give Silicon at least 30 days prior written
notice before opening any additional place of business, changing its chief
executive office, or moving any of the Collateral to a location other than
Borrower’s Address or

 

 

one of the locations set forth in the
Representations, except that Borrower may maintain sales offices in the
ordinary course of business at which not more than a total of $30,000 fair
market value of Equipment is kept at each location.

 

3.4  Title to Collateral;
Perfection; Permitted Liens.

 

(a)  Borrower is now, and will at
all times in the future be, the sole owner of all the Collateral, except for
items of Equipment which are leased to Borrower. The Collateral now is and will
remain free and clear of any and all liens, charges, security interests,
encumbrances and adverse claims, except for Permitted Liens. Silicon now has,
and will continue to have, a first-priority perfected and enforceable security
interest in all of the Collateral, subject only to the Permitted Liens, and
Borrower will at all times defend Silicon and the Collateral against all claims
of others.

 

(b)         Borrower has
set forth in the Representations all of Borrower’s Deposit Accounts, and
Borrower will give Silicon five Business Days advance written notice before
establishing any new Deposit Accounts and will cause the institution where any
such new Deposit Account is maintained to execute and deliver to Silicon a
control agreement in form sufficient to perfect Silicon’s security
interest in the Deposit Account and otherwise satisfactory to Silicon in its
good faith business judgment. Nothing herein limits any requirements which may be
set forth in the Schedule as to where Deposit Accounts will be maintained.

 

(c) In the event that Borrower shall
at any time after the date hereof have any commercial tort claims against others,
which it is asserting or intends to assert, and in which the potential recovery
exceeds $100,000, Borrower shall promptly notify Silicon thereof in writing and
provide Silicon with such information regarding the same as Silicon shall
request (unless providing such information would waive the Borrower’s
attorney-client privilege). Such notification to Silicon shall constitute a
grant of a security interest in the commercial tort claim and all proceeds
thereof to Silicon, and Borrower shall execute and deliver all such documents
and take all such actions as Silicon shall request in connection therewith.

 

(d)         None of the
Collateral now is or will be affixed to any real property in such a manner, or
with such intent, as to become a fixture. Borrower is not and will not become a
lessee under any real property lease pursuant to which the lessor may obtain
any non-statutory rights in any of the Collateral and no such lease now
prohibits, restrains, impairs or will prohibit, restrain or impair Borrower’s
right to remove any Collateral from the leased premises. Whenever any
Collateral is located upon premises in which any third party has an interest,
Borrower shall, whenever requested by Silicon, use its best efforts to cause
such third party to execute and deliver to Silicon, in form acceptable to
Silicon, such waivers and subordinations as Silicon shall specify in its good
faith business judgment. Borrower will keep in full force and effect, and will
comply with all material terms of, any lease of real property where any of the
Collateral now or in the future may be located.

 

3.5  Maintenance of Collateral. Borrower
will maintain the Collateral in good working condition (ordinary wear and tear
and damage due to casualty excepted), and Borrower will not use the Collateral
for any unlawful purpose. Borrower will immediately advise Silicon in writing
of any material loss or damage to the Collateral.

 

3.6  Books and Records. Borrower has
maintained and will maintain at Borrower’s Address complete and accurate books
and records, comprising an accounting system in accordance with GAAP.

 

3.7  Financial Condition,
Statements and Reports. With the exception of certain
restatements of Borrower’s financial statements for fiscal years 2002, 2003 and
2004 and certain interim periods for fiscal year 2005, all financial statements
now or in the future delivered to Silicon have been, and will be, prepared in
conformity with GAAP and now and in the future will fairly present the results
of operations and financial condition of Borrower, in accordance with GAAP, at
the times and for the periods therein stated. Between the last date covered by
any such statement provided to Silicon and the date hereof, there has been no
Material Adverse Change.

 

3.8  Tax Returns and Payments;
Pension Contributions. Borrower has timely filed, and will
timely file, all required tax returns and reports, and Borrower has timely
paid, and will timely pay, all foreign, federal, state and local taxes,
assessments, deposits and contributions now or in the future owed by Borrower. Borrower
may, however, defer payment of any contested taxes, provided that Borrower (i) in
good faith contests Borrower’s obligation to pay the taxes by appropriate
proceedings promptly and diligently instituted and conducted, (ii) notifies
Silicon in writing of the commencement of, and any material development in, the
proceedings, and (iii) posts bonds or takes any other steps required to
keep the contested taxes from becoming a lien upon any of the Collateral. Borrower
is unaware 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, and shall continue to pay all amounts necessary to
fund all present and future pension, profit sharing and deferred compensation
plans in accordance with their terms, and Borrower has not and will not
withdraw from participation in, permit partial or complete termination of, or
permit 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.

 

3.9  Compliance with Law. Borrower
has, to the best of its knowledge, complied, and will comply, in all material
respects, with all provisions of all foreign, federal, state and local laws and
regulations applicable to Borrower, including, but not limited to, those
relating to Borrower’s ownership of real or personal property, the conduct and
licensing of Borrower’s business, and all environmental matters.

 

3.10  Litigation. There is no
claim, suit, litigation, proceeding or investigation pending or (to best of
Borrower’s knowledge) threatened against or affecting Borrower in any court or
before any governmental agency (or any basis therefor known to Borrower) which
could reasonably be expected to result, either separately or in the aggregate,
in any Material Adverse Change. Borrower will promptly inform Silicon in
writing of any claim, proceeding, litigation or investigation in the future
threatened or instituted against Borrower involving any single claim of $50,000
or more, or involving $100,000  or more
in the aggregate.

 

3.11  Use of Proceeds. All proceeds
of all Loans shall be used solely for lawful business purposes. Borrower is not
purchasing or carrying any “margin stock” (as defined in Regulation U of the
Board of Governors of the Federal Reserve System) and no part of the
proceeds of any Loan will be used to purchase or carry any “margin stock” or to
extend credit to others for the purpose of purchasing or carrying any “margin
stock.”

 

4. ACCOUNTS.

 

4.1  Representations Relating to
Accounts. Borrower represents and warrants to
Silicon as follows:  Each Account with
respect to which Loans are requested by Borrower shall, on the date each Loan
is requested and made, (i) represent an undisputed bona fide existing
unconditional obligation of the Account Debtor created by the sale and delivery
of goods or the rendition of services, or the non-exclusive licensing of
Intellectual Property, in the ordinary course of Borrower’s business, and (ii) meet
the Minimum Eligibility Requirements set forth in Section 8 below.

 

4.2  Representations Relating to
Documents and Legal Compliance. Borrower
represents and warrants to Silicon as follows: 
All statements made and all unpaid balances appearing in all invoices,
instruments and other documents evidencing the Accounts are and shall be true
and correct and all such invoices, instruments and other documents and all of
Borrower’s books and records are and shall be genuine and in all respects what
they purport to be. All sales and other transactions underlying or giving rise
to each Account shall comply in all material respects with all applicable laws
and governmental rules and regulations. To the best of Borrower’s
knowledge, all signatures and endorsements on all documents, instruments, and
agreements relating to all Accounts are and shall be genuine, and all such
documents, instruments and agreements are and shall be legally enforceable in
accordance with their terms.

 

4.3  Schedules and Documents
relating to Accounts. Borrower shall deliver to Silicon
transaction reports and schedules of collections, as provided in the Schedule,
on Silicon’s standard forms; provided, however, that Borrower’s failure to
execute and deliver the same shall not affect or limit Silicon’s security
interest and other rights in all of Borrower’s Accounts, nor shall Silicon’s
failure to advance or lend against a specific Account affect or limit Silicon’s
security interest and other rights therein. If requested by Silicon, Borrower
shall furnish Silicon with copies (or, at Silicon’s request, originals) of all
contracts, orders, invoices, and other similar documents, and all shipping
instructions, delivery receipts, bills of lading, and other evidence of
delivery, for any goods the sale or disposition of which gave rise to such
Accounts, and Borrower warrants the genuineness of all of the foregoing. Borrower
shall also furnish to Silicon an aged accounts receivable trial balance as
provided in the Schedule. In addition, Borrower shall deliver to Silicon, on
its request, the originals of all instruments, chattel paper, security
agreements, guarantees and other documents and property evidencing or securing
any Accounts, in the same form as received, with all necessary
endorsements, and copies of all credit memos.

 

4.4  Collection of Accounts. Borrower
shall have the right to collect all Accounts, unless and until a Default or an
Event of Default has occurred and is continuing. Whether or not an Event of
Default has occurred and is continuing, subject to the terms provided in the
Schedule, Borrower shall hold all payments on, and proceeds of, Accounts in trust
for Silicon, and Borrower shall immediately deliver all such payments and
proceeds to Silicon in their original form, duly endorsed, to be applied to the
Obligations in such order as Silicon shall determine. Any proceeds in excess of
the Obligations shall be transferred to Borrower’s operating account with
Silicon. Silicon may, in its good faith business judgment, require that all
proceeds of Collateral be deposited by Borrower into a lockbox account, or such
other “blocked account” as Silicon may specify, pursuant to a blocked
account agreement in such form as Silicon may specify in its good
faith business judgment.

 

4.5. Remittance of Proceeds. All proceeds
arising from the disposition of any Collateral shall be delivered, in kind, by
Borrower to Silicon in the original form in which received by Borrower not
later than the following Business Day after

 

 

receipt by Borrower, to be applied to the
Obligations in such order as Silicon shall determine; provided that, if no
Default or Event of Default has occurred and is continuing, Borrower shall not
be obligated to remit to Silicon the proceeds of the sale of worn out or
obsolete Equipment disposed of by Borrower in good faith in an arm’s length
transaction for an aggregate purchase price of $25,000 or less (for all such
transactions in any fiscal year). Borrower agrees that it will not commingle
proceeds of Collateral with any of Borrower’s other funds or property, but will
hold such proceeds separate and apart from such other funds and property
and in an express trust for Silicon. Nothing in this Section limits the
restrictions on disposition of Collateral set forth elsewhere in this
Agreement.

 

4.6  Disputes. Borrower
shall notify Silicon promptly of all disputes or claims relating to Accounts. Borrower
shall not forgive (completely or partially), compromise or settle any Account
for less than payment in full, or agree to do any of the foregoing, except that
Borrower may do so, provided that: (i) Borrower does so in good
faith, in a commercially reasonable manner, in the ordinary course of business,
and in arm’s length transactions, which are reported to Silicon on the regular
reports provided to Silicon; (ii) no Default or Event of Default has
occurred and is continuing; and (iii) taking into account all such
discounts, settlements and forgiveness, the total outstanding Loans will not
exceed the Maximum Credit Limit.

 

4.7  Returns. Provided no
Event of Default has occurred and is continuing, if any Account Debtor returns
any Inventory to Borrower, Borrower shall promptly determine the reason for
such return and promptly issue a credit memorandum to the Account Debtor in the
appropriate amount. In the event any attempted return occurs after the
occurrence and during the continuance of any Event of Default, Borrower shall
hold the returned Inventory in trust for Silicon, and immediately notify
Silicon of the return of the Inventory.

 

4.8  Verification. Silicon may,
from time to time, verify directly with the respective Account Debtors the
validity, amount and other matters relating to the Accounts, by means of mail,
telephone or otherwise, either in the name of Borrower or Silicon or such other
name as Silicon may choose.

 

4.9  No Liability. Silicon
shall not be responsible or liable for any shortage or discrepancy in, damage
to, or loss or destruction of, any goods, the sale or other disposition of
which gives rise to an Account, or for any error, act, omission, or delay of
any kind occurring in the settlement, failure to settle, collection or failure
to collect any Account, or for settling any Account in good faith for less than
the full amount thereof, nor shall Silicon be deemed to be responsible for any
of Borrower’s obligations under any contract or agreement giving rise to an
Account. Nothing herein shall, however, relieve Silicon from liability for its
own gross negligence or willful misconduct.

 

5. ADDITIONAL DUTIES OF BORROWER.

 

5.1  Financial and Other
Covenants. Borrower shall at all times comply with
the financial and other covenants set forth in the Schedule.

 

5.2  Insurance. Borrower
shall, at all times insure all of the tangible personal property Collateral and
carry such other business insurance, with insurers reasonably acceptable to
Silicon, in such form and amounts as Silicon may reasonably require
and that are customary and in accordance with standard practices for Borrower’s
industry and locations, and Borrower shall provide evidence of such insurance
to Silicon. All such insurance policies shall name Silicon as an additional
loss payee, and shall contain a lenders loss payee endorsement in form reasonably
acceptable to Silicon. Upon receipt of the proceeds of any such insurance,
Silicon shall apply such proceeds in reduction of the Obligations as Silicon
shall determine in its good faith business judgment, except that, provided no
Default or Event of Default has occurred and is continuing, Silicon shall
release to Borrower insurance proceeds with respect to Equipment totaling less
than $100,000, which shall be utilized by Borrower for the replacement of the
Equipment with respect to which the insurance proceeds were paid. Silicon may require
reasonable assurance that the insurance proceeds so released will be so used. If
Borrower fails to provide or pay for any insurance, Silicon may, but is not obligated
to, obtain the same at Borrower’s expense. Borrower shall promptly deliver to
Silicon copies of all material reports made to insurance companies.

 

5.3  Reports. Borrower, at
its expense, shall provide Silicon with the written reports set forth in the
Schedule, and such other written reports with respect to Borrower (including
budgets, sales projections, operating plans and other financial documentation),
as Silicon shall from time to time specify in its good faith business judgment.

 

5.4  Access to Collateral, Books
and Records. At reasonable times, and on one Business
Day’s notice, Silicon, or its agents, shall have the right to inspect the
Collateral, and the right to audit and copy Borrower’s books and records. Silicon
shall take reasonable steps to keep confidential all information obtained in
any such inspection or audit, but Silicon shall have the right to disclose any
such information to its subsidiaries or affiliates in connection with their
business with Borrower and to its auditors, regulatory agencies, and attorneys,
and pursuant to any subpoena or other legal process. The foregoing inspections
and audits shall be at Borrower’s expense and the charge therefor shall be $750
per person per day (or such

 

 

higher amount as shall represent Silicon’s
then current standard charge for the same), plus reasonable out-of-pocket
expenses. In the event Borrower and Silicon schedule an audit more than 10
days in advance, and Borrower seeks to reschedules the audit with less than 10
days written notice to Silicon, then (without limiting any of Silicon’s rights
or remedies), Borrower shall pay Silicon a cancellation fee of the amount of
any actual out-of-pocket expenses incurred by Silicon, to compensate Silicon
for the anticipated costs and expenses of the cancellation.

 

5.5  Negative Covenants. Except as may be
permitted in the Schedule, Borrower shall not, without Silicon’s prior written
consent (which shall be a matter of its good faith business judgment), do any
of the following:  (i) merge or
consolidate with another corporation or entity; (ii) acquire any assets,
except in the ordinary course of business; (iii) enter into any other
transaction outside the ordinary course of business, except the
re-incorporation contemplated by Section 8(c) of the Schedule; (iv) sell
or transfer any Collateral, except for the sale of finished Inventory in the
ordinary course of Borrower’s business, the grant of non-exclusive licenses and
similar arrangements for the use of property of Borrower in the ordinary course
of business, and the sale of obsolete or unneeded Equipment in the ordinary
course of business; (v) store any Inventory or other Collateral with any
warehouseman or other third party unless Borrower obtains subordination
agreements acceptable to Silicon; (vi) sell any Inventory on a
sale-or-return, guaranteed sale, consignment, or other contingent basis; (vii) make
any loans of any money or other assets, other than Permitted Investments; (viii) incur
any debts, outside the ordinary course of business, which would result in a
Material Adverse Change, other than Permitted Indebtedness; (ix) guarantee
or otherwise become liable with respect to the obligations of another party or
entity, other than Permitted Indebtedness; (x) pay or declare any dividends on
Borrower’s stock (except for dividends payable solely in stock of Borrower);
(xi) redeem, retire, purchase or otherwise acquire, directly or indirectly, any
of Borrower’s stock; (xii) make any change in Borrower’s capital structure
which would result in a Material Adverse Change, except the sale of Borrower’s
equity securities in a public offering or to venture capital investors so long
as Borrower identifies to Bank the venture capital investors prior to the
closing of the investment; or (xiii) engage, directly or indirectly, in any
business other than the businesses currently engaged in by Borrower or
reasonably related thereto; or (xiv) dissolve or elect to dissolve; or (xv)
prepay any Subordinated Debt, except as permitted pursuant to the terms thereof
or the terms of the relevant subordination agreement governing such
Subordinated Debt. Transactions permitted by the foregoing provisions of this Section are
only permitted if no Default or Event of Default would occur as a result of
such transaction.

 

5.6  Litigation Cooperation. Should any
third-party suit or proceeding be instituted by or against Silicon with respect
to any Collateral or relating to Borrower, Borrower shall, without expense to
Silicon, make available Borrower and its officers, employees and agents and
Borrower’s books and records, to the extent that Silicon may deem them
reasonably necessary in order to prosecute or defend any such suit or
proceeding.

 

5.7  Further Assurances. Borrower
agrees, at its expense, on request by Silicon, to execute all documents and
take all actions as Silicon may in its good faith business judgment, deem
necessary or useful in order to perfect and maintain Silicon’s perfected
first-priority security interest in the Collateral (subject to Permitted
Liens), and in order to fully consummate the transactions contemplated by this
Agreement. Borrower authorizes Silicon to file such UCC-1 financing statements
under the Code as Silicon deems necessary.

 

6. TERM.

 

6.1  Maturity Date. This
Agreement shall continue in effect until the maturity date set forth on the Schedule (the
“Maturity Date”), subject to Section 6.3 below.

 

6.2  Early Termination. This
Agreement may be terminated prior to the Maturity Date as follows:  (i) by Borrower, effective three
Business Days after written notice of termination is given to Silicon; or (ii) by
Silicon at any time after the occurrence and during the continuance of an Event
of Default after any applicable cure period has expired, without notice,
effective immediately. If this Agreement is terminated by Borrower under this Section 6.2
(a) at any time within the first twelve (12) months after the date of this
Agreement, Borrower shall pay to Silicon a termination fee in an amount equal
to one percent (1.0%) of the Maximum Credit Limit; and, (b) at any time
after the first anniversary of the date of this Agreement but prior to the
Maturity Date, Borrower shall pay to Silicon a termination fee in an amount
equal to one-half of one percent (0.50%) of the Maximum Credit Limit; provided
that no termination fee shall be charged if the credit facility hereunder is
replaced with a new facility from Silicon or another division of Silicon. The
termination fee shall be due and payable on the effective date of any such
termination and thereafter shall bear interest at a rate equal to the highest
rate applicable to any of the Obligations.

 

6.3  Payment of Obligations. On the
Maturity Date or on any earlier effective date of termination, Borrower shall
pay and perform in full all Obligations, whether evidenced by installment
notes or otherwise, and whether or not all or any part of such Obligations
are otherwise then due and payable. Without limiting the generality of the
foregoing, if on the Maturity

 

 

Date, or on any earlier effective date of
termination, there are any outstanding Letters of Credit issued by Silicon or
issued by another institution based upon an application, guarantee, indemnity
or similar agreement on the part of Silicon, then on such date Borrower
shall provide to Silicon cash collateral in an amount equal to 105% of the face
amount of all such Letters of Credit plus all interest, fees and cost due or to
become due in connection therewith (as estimated by Silicon in its good faith
business judgment), to secure all of the Obligations relating to said Letters
of Credit, pursuant to Silicon’s then standard form cash pledge agreement.
Notwithstanding any termination of this Agreement, all of Silicon’s security
interests in all of the Collateral and all of the terms and provisions of this
Agreement shall continue in full force and effect until all Obligations have
been paid and performed in full; provided that Silicon may, in its sole
discretion, refuse to make any further Loans after termination. No termination
shall in any way affect or impair any right or remedy of Silicon, nor shall any
such termination relieve Borrower of any Obligation to Silicon, until all of
the Obligations have been paid and performed in full. Upon payment and
performance in full of all the Obligations and termination of this Agreement,
Silicon shall promptly terminate its financing statements with respect to the
Borrower and deliver to Borrower such other documents as may be required
to fully terminate Silicon’s security interests.

 

7. EVENTS OF DEFAULT AND REMEDIES.

 

7.1  Events of Default. The
occurrence of any of the following events shall constitute an “Event of Default”
under this Agreement, and Borrower shall give Silicon immediate written notice
thereof: (a) Any warranty, representation, statement, report or
certificate made or delivered to Silicon by Borrower or any of Borrower’s
officers, employees or agents, now or in the future, shall be untrue or
misleading in a material respect when made or deemed to be made; or (b) Borrower
shall fail to pay when due any Loan or any interest thereon or any other
monetary Obligation; or (c) the total Loans and other Obligations
outstanding at any time shall exceed the Maximum Credit Limit; or (d) Borrower
shall fail to comply with any of the financial covenants set forth in the Schedule,
or shall fail to perform any other non-monetary Obligation which by its
nature cannot be cured, or shall fail to permit Silicon to conduct an
inspection or audit as specified in Section 5.4 hereof; or (e) Borrower
shall fail to perform any other non-monetary Obligation, which failure is
not cured within five Business Days after the date due; or (f) any levy,
assessment, attachment, seizure, lien or encumbrance (other than a Permitted
Lien) is made on all or any part of the Collateral which is not cured
within 10 days after the occurrence of the same; or (g) any default or
event of default occurs under any obligation secured by a Permitted Lien, which
is not cured within any applicable cure period or waived in writing by the
holder of the Permitted Lien; or (h) Borrower breaches any material
contract or obligation, which has resulted or may reasonably be expected
to result in a Material Adverse Change; or (i) Dissolution, termination of
existence, insolvency or business failure of Borrower; or appointment of a
receiver, trustee or custodian, for all or any part of the property of,
assignment for the benefit of creditors by, or the commencement of any
proceeding by Borrower under any reorganization, bankruptcy, insolvency,
arrangement, readjustment of debt, dissolution or liquidation law or statute of
any jurisdiction, now or in the future in effect; or (j) the commencement of
any proceeding against Borrower or any guarantor of any of the Obligations
under any reorganization, bankruptcy, insolvency, arrangement, readjustment of
debt, dissolution or liquidation law or statute of any jurisdiction, now or in
the future in effect, which is not cured by the dismissal thereof within 30
days after the date commenced; or (k) revocation or termination of, or limitation
or denial of liability upon, any guaranty of the Obligations or any attempt to
do any of the foregoing, or commencement of proceedings by any guarantor of any
of the Obligations under any bankruptcy or insolvency law; or (l) revocation or
termination of, or limitation or denial of liability upon, any pledge of any
certificate of deposit, securities or other property or asset of any kind
pledged by any third party to secure any or all of the Obligations, or any
attempt to do any of the foregoing, or commencement of proceedings by or
against any such third party under any bankruptcy or insolvency law; or (m)
Borrower makes any payment on account of any indebtedness or obligation which
has been subordinated to the Obligations other than as permitted in the applicable
subordination agreement, or if any Person who has subordinated such
indebtedness or obligations terminates or in any way limits his subordination
agreement; or (n) there shall be a change in the record or beneficial ownership
of an aggregate of more than 20% of the outstanding shares of stock of
Borrower, in one or more transactions, compared to the ownership of outstanding
shares of stock of Borrower in effect on the date hereof, without the prior
written consent of Silicon; or (o) Borrower shall generally not pay its debts
as they become due, or Borrower shall conceal, remove or transfer any part of
its property, with intent to hinder, delay or defraud its creditors, or make or
suffer any transfer of any of its property which may be fraudulent under
any bankruptcy, fraudulent conveyance or similar law; or (p) a Material Adverse
Change shall occur. Silicon may cease making any Loans hereunder during
any of the above cure periods, and thereafter if an Event of Default has
occurred and is continuing.

 

7.2  Remedies. Upon the
occurrence and during the continuance of any Event of Default, Silicon, at its
option, and without notice or demand of any kind (all of which are hereby
expressly waived by Borrower), may do any one or more of the following: (a) Cease
making Loans or otherwise extending credit to Borrower under this Agreement or
any other Loan Document; (b) Accelerate and declare all or any part of
the Obligations to be immediately due, payable, and performable,

 

 

notwithstanding any deferred or installment
payments allowed by any instrument evidencing or relating to any Obligation; (c) Take
possession of any or all of the Collateral wherever it may be found, and
for that purpose Borrower hereby authorizes Silicon without judicial process to
enter onto any of Borrower’s premises without interference to search for, take
possession of, keep, store, or remove any of the Collateral, and remain on the
premises or cause a custodian to remain on the premises in exclusive control
thereof, without charge for so long as Silicon deems it necessary, in its good
faith business judgment, in order to complete the enforcement of its rights
under this Agreement or any other agreement; provided, however, that should
Silicon seek to take possession of any of the Collateral by court process,
Borrower hereby irrevocably waives: (i) any bond and any surety or
security relating thereto required by any statute, court rule or otherwise
as an incident to such possession; (ii) any demand for possession prior to
the commencement of any suit or action to recover possession thereof; and (iii) any
requirement that Silicon retain possession of, and not dispose of, any such
Collateral until after trial or final judgment; (d) Require Borrower to
assemble any or all of the Collateral and make it available to Silicon at
places designated by Silicon which are reasonably convenient to Silicon and
Borrower, and to remove the Collateral to such locations as Silicon may deem
advisable; (e) Complete the processing, manufacturing or repair of any
Collateral prior to a disposition thereof and, for such purpose and for the
purpose of removal, Silicon shall have the right to use Borrower’s premises,
vehicles, hoists, lifts, cranes, and other Equipment and all other property
without charge; (f) Sell, lease or otherwise dispose of any of the
Collateral, in its condition at the time Silicon obtains possession of it or
after further manufacturing, processing or repair, at one or more public and/or
private sales, in lots or in bulk, for cash, exchange or other property, or on
credit, and to adjourn any such sale from time to time without notice other
than oral announcement at the time scheduled for sale. Silicon shall have the
right to conduct such disposition on Borrower’s premises without charge, for
such time or times as Silicon deems reasonable, or on Silicon’s premises, or
elsewhere and the Collateral need not be located at the place of disposition. Silicon
may directly or through any affiliated company purchase or lease any
Collateral at any such public disposition, and if permissible under applicable
law, at any private disposition. Any sale or other disposition of Collateral
shall not relieve Borrower of any liability Borrower may have if any
Collateral is defective as to title or physical condition or otherwise at the
time of sale; (g) Demand payment of, and collect any Accounts and General
Intangibles comprising Collateral and, in connection therewith, Borrower
irrevocably authorizes Silicon to endorse or sign Borrower’s name on all
collections, receipts, instruments and other documents, to take possession of
and open mail addressed to Borrower and remove therefrom payments made with
respect to any item of the Collateral or proceeds thereof, and, in Silicon’s
good faith business judgment, to grant extensions of time to pay, compromise
claims and settle Accounts and the like for less than face value; (h) Offset
against any sums in any of Borrower’s general, special or other Deposit
Accounts with Silicon against any or all of the Obligations; and (i) Demand
and receive possession of any of Borrower’s federal and state income tax
returns and the books and records utilized in the preparation thereof or
referring thereto. All reasonable attorneys’ fees, expenses, costs, liabilities
and obligations incurred by Silicon with respect to the foregoing shall be
added to and become part of the Obligations, shall be due on demand, and
shall bear interest at a rate equal to the highest interest rate applicable to
any of the Obligations. Without limiting any of Silicon’s rights and remedies,
from and after the occurrence and during the continuance of any Event of
Default, the interest rate applicable to the Obligations shall be increased by
an additional four percent (4%) per annum (the “Default Rate”).

 

7.3  Standards for Determining
Commercial Reasonableness. Borrower and Silicon agree that a sale or
other disposition (collectively, “sale”) of any Collateral which complies with
the following standards will conclusively be deemed to be commercially
reasonable:  (i) written notice of
the sale is given to Borrower at least ten days prior to the sale, and, in the
case of a public sale, notice of the sale is published at least five days
before the sale in a newspaper of general circulation in the county where the
sale is to be conducted; (ii) written notice of the sale describes the
collateral in general, non-specific terms; (iii) The sale is conducted at
a place designated by Silicon, with or without the Collateral being present; (iv) The
sale commences at any time between 8:00 a.m. and 6:00 p.m;  (v) Payment of the purchase price in
cash or by cashier’s check or wire transfer is required; (vi) With respect
to any sale of any of the Collateral, Silicon may (but is not obligated
to) direct any prospective purchaser to ascertain directly from Borrower any
and all information concerning the same. Silicon shall be free to employ other
methods of noticing and selling the Collateral, in its discretion, if they are
commercially reasonable.

 

7.4  Power of Attorney. Upon the
occurrence and during the continuance of any Event of Default, without limiting
Silicon’s other rights and remedies, Borrower grants to Silicon an irrevocable
power of attorney coupled with an interest, authorizing and permitting Silicon
(acting through any of its employees, attorneys or agents) at any time, at its
option, but without obligation, with or without notice to Borrower, and at
Borrower’s expense, to do any or all of the following, in Borrower’s name or
otherwise, but Silicon agrees that if it exercises any right hereunder, it will
do so in good faith and in a commercially reasonable manner:  (a) Execute on behalf of Borrower any
documents that Silicon may, in its good faith business judgment, deem advisable
in order to perfect and maintain Silicon’s security interest in the Collateral,
or in order to exercise a right of Borrower or Silicon, or in order to fully
consummate all the transactions contemplated under this Agreement, and all
other Loan Documents; (b) Execute on behalf of Borrower, any invoices relating
to any Account, any

 

 

draft against any Account Debtor and any
notice to any Account Debtor, any proof of claim in bankruptcy, any Notice of
Lien, claim of mechanic’s, materialman’s or other lien, or assignment or
satisfaction of mechanic’s, materialman’s or other lien; (c) Take control
in any manner of any cash or non-cash items of payment or proceeds of
Collateral; endorse the name of Borrower upon any instruments, or documents,
evidence of payment or Collateral that may come into Silicon’s possession;
(d) Endorse all checks and other forms of remittances received by Silicon;
(e) Pay, contest or settle any lien, charge, encumbrance, security
interest and adverse claim in or to any of the Collateral, or any judgment
based thereon, or otherwise take any action to terminate or discharge the same;
(f) Grant extensions of time to pay, compromise claims and settle Accounts
and General Intangibles for less than face value and execute all releases and
other documents in connection therewith; (g) Pay any sums required on
account of Borrower’s taxes or to secure the release of any liens therefor, or
both; (h) Settle and adjust, and give releases of, any insurance claim
that relates to any of the Collateral and obtain payment therefor; (i) Instruct
any third party having custody or control of any books or records belonging to,
or relating to, Borrower to give Silicon the same rights of access and other
rights with respect thereto as Silicon has under this Agreement; and (j) Take
any action or pay any sum required of Borrower pursuant to this Agreement and
any other Loan Documents. Any and all reasonable sums paid and any and all
reasonable costs, expenses, liabilities, obligations and attorneys’ fees
incurred by Silicon with respect to the foregoing shall be added to and become part of
the Obligations, shall be payable on demand, and shall bear interest at a rate
equal to the highest interest rate applicable to any of the Obligations. In no
event shall Silicon’s rights under the foregoing power of attorney or any of
Silicon’s other rights under this Agreement be deemed to indicate that Silicon
is in control of the business, management or properties of Borrower.

 

7.5  Application of Proceeds. All proceeds
realized as the result of any sale of the Collateral shall be applied by
Silicon first to the reasonable costs, expenses, liabilities, obligations and
attorneys’ fees incurred by Silicon 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, in such order as Silicon shall determine in
its sole discretion. Any surplus shall be paid to Borrower or other persons
legally entitled thereto; Borrower shall remain liable to Silicon for any
deficiency. If, Silicon, 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, Silicon shall have the option, exercisable
at any time, in its good faith business judgment, of either reducing the
Obligations by the principal amount of purchase price or deferring the
reduction of the Obligations until the actual receipt by Silicon of the cash
therefor.

 

7.6  Remedies Cumulative. In addition
to the rights and remedies set forth in this Agreement, Silicon shall have all
the other rights and remedies accorded a secured party under the Code and under
all other applicable laws, and under any other instrument or agreement now or
in the future entered into between Silicon and Borrower, and all of such rights
and remedies are cumulative and none is exclusive. Exercise or partial exercise
by Silicon of one or more of its rights or remedies shall not be deemed an
election, nor bar Silicon from subsequent exercise or partial exercise of any
other rights or remedies. The failure or delay of Silicon to exercise any
rights or remedies shall not operate as a waiver thereof, but all rights and
remedies shall continue in full force and effect until all of the Obligations
have been fully paid and performed.

 

8.                                      DEFINITIONS.
As used in this Agreement, the following terms have the following
meanings:

 

“Account
Debtor” means the obligor on an Account.

 

“Accounts”
means all present and future “accounts” 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 accounts receivable and other sums owing to
Borrower.

 

 “Affiliate” means, with respect to any
Person, a relative, partner, shareholder, director, officer, or employee of
such Person, or any parent or subsidiary of such Person, or any Person
controlling, controlled by or under common control with such Person.

 

“Business
Day” means a day on which Silicon is open for business.

 

“Code”
means the Uniform Commercial Code as adopted and in effect in the State of
California from time to time.

 

“Collateral”
has the meaning set forth in Section 2 above.

 

“continuing”
and “during the continuance of” when used with reference to a Default or
Event of Default means that the Default or Event of Default has occurred and
has not been either waived in writing by Silicon or cured within any applicable
cure period.

 

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

 

“Default
Rate” has the meaning set forth in Section 7.2 above.

 

 

“Deposit
Accounts” means all present and future “deposit accounts” 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 general and special bank accounts,
demand accounts, checking accounts, savings accounts and certificates of
deposit.

 

“Eligible
Inventory” - Not Applicable

 

“Eligible
Accounts”  means Accounts and General
Intangibles arising in the ordinary course of Borrower’s business from the sale
of goods or the rendition of services, or the non-exclusive licensing of
Intellectual Property, for which an invoice has been issued, which Silicon, in
its good faith business judgment, shall deem eligible for borrowing. Without
limiting the fact that the determination of which Accounts are eligible for
borrowing is a matter of Silicon’s good faith business judgment, the following
(the “Minimum Eligibility Requirements”) are the minimum requirements
for an Account to be an Eligible Account: 
(i) the Account must not be outstanding for more than 90 days from
its invoice date (the “Eligibility Period”), (ii) the Account must
not represent progress billings, or be due under a fulfillment or requirements
contract with the Account Debtor, or be offsetting deferred revenue (iii) the
Account must not be subject to any contingencies (including Accounts arising
from sales on consignment, guaranteed sale or other terms pursuant to which
payment by the Account Debtor may be conditional), (iv) the Account
must not be owing from an Account Debtor with whom Borrower has any dispute
(whether or not relating to the particular Account), (v) the Account must
not be owing from an Affiliate of Borrower, (vi) the Account must not be
owing from an Account Debtor which is subject to any insolvency or bankruptcy
proceeding, or whose financial condition is not reasonably acceptable to
Silicon, or which, fails or goes out of a material portion of its business, (vii) the
Account must not be owing from the United States or any department, agency or
instrumentality thereof (unless there has been compliance, to Silicon’s
satisfaction, with the United States Assignment of Claims Act), (viii) the
Account must not be owing from an Account Debtor located outside the United
States or Canada (unless pre-approved by Silicon in its discretion in writing,
or backed by a letter of credit satisfactory to Silicon, or FCIA insured
satisfactory to Silicon), (ix) the Account must not be owing from an
Account Debtor to whom Borrower is or may be liable for goods purchased
from such Account Debtor or otherwise (but, in such case, the Account will be
deemed not eligible only to the extent of any amounts owed by Borrower to such
Account Debtor). Accounts owing from one Account Debtor will not be deemed
Eligible Accounts to the extent they exceed 25%
of the total Accounts outstanding. In addition, if more than 50% of the
Accounts owing from an Account Debtor are outstanding for a period longer than
their Eligibility Period (without regard to unapplied credits) or are otherwise
not eligible Accounts, then all Accounts owing from that Account Debtor will be
deemed ineligible for borrowing. Silicon may, from time to time, in its good
faith business judgment, revise the Minimum Eligibility Requirements, upon
written notice to Borrower, and, in the event that such revisions are material,
Borrower may prepay the outstanding Loans and terminate this Agreement
without payment of any early termination fee.

 

“Equipment”
means all present and future “equipment” 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 machinery, fixtures, goods, vehicles
(including motor vehicles and trailers), and any interest in any of the
foregoing.

 

“Event
of Default” means any of the events set forth in Section 7.1 of this
Agreement.

 

“GAAP”
means generally accepted accounting principles consistently applied.

 

“Guarantor”
means any present or future guarantor of the Obligations, including XPLORE
TECHNOLOGIES CORP.

 

“General
Intangibles” means all present and future “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 Intellectual Property, payment
intangibles, royalties, contract rights, goodwill, franchise agreements,
purchase orders, customer lists, route lists, telephone numbers, domain names,
claims, income 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.

 

“good
faith business judgment” means honesty in fact and good faith (as defined
in Section 1-201 of the Code) in the exercise of Silicon’s business
judgment.

 

“including”
means including (but not limited to).

 

 “Intellectual Property” means all
present and future (a) copyrights, copyright rights, copyright
applications, copyright registrations and like protections in each work of
authorship and derivative work thereof, whether published or unpublished, (b) trade
secret rights, including all rights to unpatented inventions and know-how, and
confidential information; (c) mask work or similar rights available for
the protection of semiconductor chips; (d) patents, patent applications
and like protections including without limitation improvements, divisions,
continuations, renewals, reissues, extensions and continuations-in-part

 

 

of the same; (e) trademarks,
servicemarks, trade styles, and trade names, whether or not any of the
foregoing are registered, and all applications to register and registrations of
the same and like protections, and the entire goodwill of the business of
Borrower connected with and symbolized by any such trademarks; (f) computer
software and computer software products; (g) designs and design rights; (h) technology;
(i) all claims for damages by way of past, present and future infringement
of any of the rights included above; and (j) all licenses or other rights to
use any property or rights of a type described above.

 

“Inventory”
means all present and future “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.

 

“Investment
Property” means all present and future investment property, securities,
stocks, bonds, debentures, debt securities, partnership interests, limited
liability company interests, options, security entitlements, securities
accounts, commodity contracts, commodity accounts, and all financial assets
held in any securities account or otherwise, and all options and warrants to
purchase any of the foregoing, wherever located, and all other securities of
every kind, whether certificated or uncertificated.

 

“Loan
Documents” means, collectively, this Agreement, the Representations, and
all other present and future documents, instruments and agreements between
Silicon and Borrower related to the Loans, including, but not limited to those
relating to this Agreement, and all amendments and modifications thereto and
replacements therefor.

 

“Material
Adverse Change” means any of the following: (i) a material adverse
change in the business, operations, or financial or other condition of the
Borrower, or (ii) a material impairment of the prospect of repayment of
any material portion of the Obligations; or (iii) a material impairment of
the value or priority of Silicon’s security interests in the Collateral.

 

“Obligations”
means all present and future Loans, advances, debts, liabilities, obligations,
guaranties, covenants, duties and indebtedness at any time owing by Borrower to
Silicon, whether evidenced by this Agreement or any note or other instrument or
document, or otherwise, whether arising from an extension of credit, opening of
a letter of credit, banker’s acceptance, loan, guaranty, indemnification or
otherwise, whether direct or indirect (including, without limitation, those
acquired by assignment and any participation by Silicon in Borrower’s debts
owing to others), absolute or contingent, due or to become due, including,
without limitation, all interest, charges, expenses, fees, attorney’s fees,
expert witness fees, audit fees, letter of credit fees, collateral monitoring
fees, closing fees, facility fees, termination fees, minimum interest charges
and any other sums chargeable to Borrower under this Agreement or under any
other Loan Documents.

 

“Other
Property” means the following as defined in the Code in effect on the date
hereof with such additions to such term as may hereafter be made, and all
rights relating thereto: all present and future “commercial tort claims”
(including without limitation any commercial tort claims identified in the
Representations), “documents”, “instruments”, “promissory notes”, “chattel
paper”, “letters of credit”, “letter-of-credit rights”, “fixtures”, “farm
products” and “money”; and all other goods and personal property of every kind,
tangible and intangible, whether or not governed by the Code.

 

“Payment”
means all checks, wire transfers and other items of payment received by Silicon
(including proceeds of Accounts and payment of the Obligations in full) for
credit to Borrower’s outstanding Loans or, if the balance of the Loans have
been reduced to zero, for credit to its Deposit Accounts.

 

“Permitted
Indebtedness” means the following:  (a) Borrower’s
indebtedness to Silicon under this Agreement or the Loan Documents; (b) indebtedness
existing on the date hereof which is disclosed in writing to Bank in the
Representations; (c) Subordinated Debt; (d) indebtedness incurred
after the date hereof not to exceed $50,000 in the aggregate in any fiscal year
of Borrower secured by a lien described in clause (i) of the defined term “Permitted
Liens;” (e) indebtedness to trade creditors incurred in the ordinary
course of business; (f) indebtedness secured by Permitted Liens; and (g) extensions,
refinancings and renewals of any items of Permitted Indebtedness, provided that
the principal amount is not increased or the terms modified to impose more
burdensome terms upon Borrower.

 

“Permitted
Investments” means the following: (a) (i) marketable direct
obligations issued or unconditionally guaranteed by the United States or its
agency or any state maturing within 1 year from its acquisition, (ii) commercial
paper maturing no more than 1 year after its creation and having the highest
rating from either Standard & Poor’s Corporation or Moody’s Investors
Service, Inc., (iii) Bank’s certificates of deposit issued maturing
no more than 1 year after issue, (iv) any other investments administered
through Bank; (b) Investments not to exceed $50,000 in the aggregate at
any one time consisting of (i) travel advances and employee relocation
loans and other employee loans and advances in the ordinary course of business,
and (ii) loans to employees, officers or directors relating to the
purchase of equity securities of Borrower or its Subsidiaries

 

 

pursuant to employee stock purchase plan
agreements approved by Borrower’s Board of Directors; (c) Investments
(including debt obligations) received in connection with the bankruptcy or
reorganization of customers or suppliers and in settlement of delinquent
obligations of, and other disputes with, customers or suppliers arising in the
ordinary course of Borrower’s business; and (d) Investments consisting of
notes receivable of, or prepaid royalties and other credit extensions to,
customers and suppliers who are not Affiliates, in the ordinary course of
Borrower’s business.

 

“Permitted
Liens” means the following:  (i) purchase
money security interests in specific items of Equipment; (ii) leases of
specific items of Equipment; (iii) liens for taxes not yet payable; (iv) additional
security interests and liens consented to in writing by Silicon, which consent may be
withheld in its good faith business judgment; (v) security interests being
terminated substantially concurrently with this Agreement; (vi) liens of
materialmen, mechanics, warehousemen, carriers, or other similar liens arising
in the ordinary course of business and securing obligations which are not
delinquent; (vii) liens incurred in connection with the extension, renewal
or refinancing of the indebtedness secured by liens of the type described above
in clauses (i) or (ii) above, provided that any extension, renewal or
replacement lien is limited to the property encumbered by the existing lien and
the principal amount of the indebtedness being extended, renewed or refinanced
does not increase; (viii) Liens in favor of customs and revenue authorities
which secure payment of customs duties in connection with the importation of
goods; (ix) leases or subleases and non-exclusive licenses or sublicenses
granted in the ordinary course of Borrower’s business, if the leases,
subleases, licenses and sublicenses permit granting Bank a security interest;
and (x) liens related to the Subordinated Debt, including the New Phoenix
Agreement referred to in the Schedule. Silicon will have the right to require,
as a condition to its consent under subparagraph (iv) above, that the
holder of the additional security interest or lien sign an intercreditor
agreement on Silicon’s then standard form, acknowledge that the security
interest is subordinate to the security interest in favor of Silicon, and agree
not to take any action to enforce its subordinate security interest so long as
any Obligations remain outstanding, and that Borrower agree that any uncured
default in any obligation secured by the subordinate security interest shall
also constitute an Event of Default under this Agreement.

 

“Person”
means any individual, sole proprietorship, partnership, joint venture, trust,
unincorporated organization, association, corporation, government, or any
agency or political division thereof, or any other entity.

 

“Representations”
means the written Representations and Warranties or Perfection Certificate
provided by Borrower to Silicon referred to in the Schedule.

 

“Reserves”
means, as of any date of determination, such amounts as Silicon may from
time to time establish and revise in its good faith business judgment, reducing
the amount of Loans, Letters of Credit and other financial accommodations which
would otherwise be available to Borrower under the lending formula(s) provided
in the Schedule:  (a) to reflect
events, conditions, contingencies or risks which, as determined by Silicon in
its good faith business judgment, do or may adversely affect (i) the
Collateral or any other property which is security for the Obligations or its
value (including without limitation any increase in delinquencies of Accounts),
(ii) the assets, business or prospects of Borrower or any Guarantor, or (iii) the
security interests and other rights of Silicon in the Collateral (including the
enforceability, perfection and priority thereof); or (b) to reflect
Silicon’s good faith belief that any collateral report or financial information
furnished by or on behalf of Borrower or any Guarantor to Silicon is or may have
been incomplete, inaccurate or misleading in any material respect; or (c) in
respect of any state of facts which Silicon determines in good faith
constitutes an Event of Default or may reasonably be expected to, with
notice or passage of time or both, constitute an Event of Default.

 

“Subordinated
Debt” means debt incurred by Borrower subordinated to Borrower’s
indebtedness owed to Silicon and which is reflected in a written agreement in a
manner and form acceptable to Silicon in its sole discretion and approved
by Silicon in writing, including the Subordination Agreement between Phoenix
Enterprises LLC and others and Bank, the Subordination Agreement between
Phoenix Venture Fund LLC and another and Bank, and the Subordination Agreement
between Guarantor and Bank, each dated as of April 22, 2005; the
Subordination Agreement between Phoenix Venture Fund LLC and others and Bank
dated the date hereof; and for purposes of this Agreement shall also include
the Intercreditor Agreement entered into between Wistron Corporation and Bank
dated as of April 22, 2005 and entered into in connection with the Prior
Agreement (defined below).

 

Other
Terms. All accounting terms used in this Agreement, unless
otherwise indicated, shall have the meanings given to such terms in accordance
with GAAP, consistently applied. 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.

 

9.                                      GENERAL
PROVISIONS.

 

9.1  Interest Computation; Float
Charge. In computing interest on the Obligations, all Payments received after
12:00 Noon (Pacific Standard Time) on any day shall be deemed received on the
next Business Day. In addition, Silicon shall be entitled to charge Borrower a “float”
charge in an amount equal to two Business Days interest, at the interest rate
applicable

 

 

to the Loans, on all Payments received by Silicon. Said float charge is
not included in interest for purposes of computing Minimum Monthly Interest (if
any) under this Agreement. The float charge for each month shall be payable on
the last day of the month. Silicon shall not, however, be required to credit
Borrower’s account for the amount of any item of payment, which is
unsatisfactory to Silicon in its good faith business judgment, and Silicon may charge
Borrower’s loan account for the amount of any item of payment which is returned
to Silicon unpaid.

 

9.2  Application of Payments. All payments
with respect to the Obligations may be applied, and in Silicon’s good
faith business judgment reversed and re-applied, to the Obligations, in such
order and manner as Silicon shall determine in its good faith business
judgment.

 

9.3  Charges to Accounts. Silicon may,
in its discretion, require that Borrower pay monetary Obligations in cash to
Silicon, or charge them to Borrower’s Loan account, in which event they will
bear interest at the same rate applicable to the Loans. Silicon may also,
in its discretion, charge any monetary Obligations to Borrower’s Deposit
Accounts maintained with Silicon.

 

9.4  Monthly Accountings. Silicon
shall provide Borrower monthly with an account of advances, charges, expenses
and payments made pursuant to this Agreement. Such account shall be deemed
correct, accurate and binding on Borrower and an account stated (except for
reverses and reapplications of payments made and corrections of errors
discovered by Silicon), unless Borrower notifies Silicon in writing to the
contrary within 60 days after such account is rendered, describing the nature
of any alleged errors or omissions.

 

9.5  Notices. All notices
to be given under this Agreement shall be in writing and shall be given either
personally or by reputable private delivery service or by regular first-class mail,
or certified mail return receipt requested, addressed to Silicon or Borrower at
the addresses shown in the heading to this Agreement, or at any other address
designated in writing by one party to the other party. Notices to Silicon shall
be directed to the Commercial Finance Division, to the attention of the
Division Manager or the Division Credit Manager. All notices shall be deemed to
have been given upon delivery in the case of notices personally delivered, or
at the expiration of one Business Day following delivery to the private
delivery service, or two Business Days following the deposit thereof in the
United States mail, with postage prepaid.

 

9.6  Severability. Should any
provision of this Agreement be held by any court of competent jurisdiction to
be void or unenforceable, such defect shall not affect the remainder of this
Agreement, which shall continue in full force and effect.

 

9.7  Integration. This
Agreement and such other written agreements, documents and instruments as may be
executed in connection herewith are the final, entire and complete agreement
between Borrower and Silicon and supersede all prior and contemporaneous
negotiations and oral representations and agreements, all of which are merged
and integrated in this Agreement. There are no oral understandings,
representations or agreements between the parties which are not set forth in
this Agreement or in other written agreements signed by the parties in
connection herewith.

 

9.8  Waivers; Indemnity. The failure
of Silicon at any time or times to require Borrower to strictly comply with any
of the provisions of this Agreement or any other Loan Document shall not waive
or diminish any right of Silicon later to demand and receive strict compliance
therewith. Any waiver of any default shall not waive or affect any other
default, whether prior or subsequent, and whether or not similar. None of the
provisions of this Agreement or any other Loan Document shall be deemed to have
been waived by any act or knowledge of Silicon or its agents or employees, but
only by a specific written waiver signed by an authorized officer of Silicon
and delivered to Borrower. Borrower waives the benefit of all statutes of
limitations relating to any of the Obligations or this Agreement or any other
Loan Document, and Borrower waives demand, protest, notice of protest and
notice of default or dishonor, notice of payment and nonpayment, release,
compromise, settlement, extension or renewal of any commercial paper,
instrument, account, General Intangible, document or guaranty at any time held
by Silicon on which Borrower is or may in any way be liable, and notice of
any action taken by Silicon, unless expressly required by this Agreement. Borrower
hereby agrees to indemnify Silicon and its affiliates, subsidiaries, parent,
directors, officers, employees, agents, and attorneys, and to hold them
harmless from and against any and all claims, debts, liabilities, demands,
obligations, actions, causes of action, penalties, costs and expenses
(including reasonable attorneys’ fees), of every kind, which they may sustain
or incur based upon or arising out of any of the Obligations, or any
relationship or agreement between Silicon and Borrower, or any other matter
relating to Borrower or the Obligations; provided that this indemnity shall not
extend to damages proximately caused by the indemnitee’s own gross negligence
or willful misconduct. Notwithstanding any provision in this Agreement to the
contrary, the indemnity agreement set forth in this Section shall survive
any termination of this Agreement and shall for all purposes continue in full
force and effect.

 

9.9  No Liability for Ordinary
Negligence. Neither Silicon, nor any of its
directors, officers, employees, agents, attorneys or any other Person
affiliated with or representing Silicon shall be liable for any claims,
demands, losses or damages, of any kind whatsoever, made, claimed, incurred or
suffered by Borrower or any other party through the ordinary negligence of

 

 

Silicon, or any of its directors,
officers, employees, agents, attorneys or any other Person affiliated with or
representing Silicon, but nothing herein shall relieve Silicon from liability
for its own gross negligence or willful misconduct.

 

9.10  Amendment. The terms
and provisions of this Agreement may not be waived or amended, except in a
writing executed by Borrower and a duly authorized officer of Silicon.

 

9.11  Time of Essence. Time is of
the essence in the performance by Borrower of each and every obligation under
this Agreement.

 

9.12  Attorneys Fees and Costs. Borrower
shall reimburse Silicon for all reasonable attorneys’ fees and all filing,
recording, search, title insurance, appraisal, audit, and other reasonable
costs incurred by Silicon, pursuant to, or in connection with, or relating to
this Agreement (whether or not a lawsuit is filed), including, but not limited
to, any reasonable attorneys’ fees and costs Silicon incurs in order to do the
following: prepare and negotiate this Agreement and all present and future
documents relating to this Agreement; obtain legal advice in connection with
this Agreement or Borrower; enforce, or seek to enforce, any of its rights;
prosecute actions against, or defend actions by, Account Debtors; commence,
intervene in, or defend any action or proceeding; initiate any complaint to be
relieved of the automatic stay in bankruptcy; file or prosecute any probate
claim, bankruptcy claim, third-party claim, or other claim; examine, audit,
copy, and inspect any of the Collateral or any of Borrower’s books and records;
protect, obtain possession of, lease, dispose of, or otherwise enforce Silicon’s
security interest in, the Collateral; and otherwise represent Silicon in any
litigation relating to Borrower. In satisfying Borrower’s obligation hereunder
to reimburse Silicon for attorneys fees, Borrower may, for convenience, issue
checks directly to Silicon’s attorneys, but Borrower acknowledges and agrees
that Silicon’s attorneys are representing only Silicon and not Borrower in
connection with this Agreement. If either Silicon or Borrower files any lawsuit
against the other predicated on a breach of this Agreement, the prevailing
party in such action shall be entitled to recover its reasonable costs and
attorneys’ fees, including (but not limited to) reasonable attorneys’ fees and
costs incurred in the enforcement of, execution upon or defense of any order,
decree, award or judgment. All attorneys’ fees and costs to which Silicon may be
entitled pursuant to this Paragraph shall immediately become part of
Borrower’s Obligations, shall be due on demand, and shall bear interest at a
rate equal to the highest interest rate applicable to any of the Obligations.

 

9.13  Benefit of Agreement. The
provisions of this Agreement shall be binding upon and inure to the benefit of
the respective successors, assigns, heirs, beneficiaries and representatives of
Borrower and Silicon; provided, however, that Borrower may not assign or
transfer any of its rights under this Agreement without the prior written
consent of Silicon, and any prohibited assignment shall be void. No consent by
Silicon to any assignment shall release Borrower from its liability for the
Obligations.

 

9.14  Joint and Several Liability.
If Borrower consists of more than one Person, their
liability shall be joint and several, and the compromise of any claim with, or
the release of, any Borrower shall not constitute a compromise with, or a
release of, any other Borrower.

 

9.15  Limitation of Actions. Any claim or
cause of action by Borrower against Silicon, its directors, officers,
employees, agents, accountants or attorneys, 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 Silicon, 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
the filing of a complaint within one year after Borrower has knowledge of the
first act, occurrence or omission upon which such claim or cause of action, or
any part thereof, is based, and the service of a summons and complaint on
an officer of Silicon, or on any other person authorized to accept service on
behalf of Silicon, 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 Silicon in its sole discretion. This provision shall survive any
termination of this Loan Agreement or any other Loan Document.

 

9.16  Paragraph Headings;
Construction. Paragraph headings are only used in this
Agreement for convenience. Borrower and Silicon acknowledge that the headings may not
describe completely the subject matter of the applicable paragraph, and the
headings shall not be used in any manner to construe, limit, define or
interpret any term or provision of this Agreement. This Agreement has been
fully reviewed and negotiated between the parties and no uncertainty or
ambiguity in any term or provision of this Agreement shall be construed
strictly against Silicon or Borrower under any rule of construction or
otherwise.

 

9.17  Governing Law;
Jurisdiction; Venue. This Agreement and all acts and
transactions hereunder and all rights and obligations of Silicon and Borrower
shall be governed by the laws of the State of California. As a material part of
the

 

 

consideration to Silicon to enter into
this Agreement, Borrower (i) agrees that all actions and proceedings
relating directly or indirectly to this Agreement shall, at Silicon’s option,
be litigated in courts located within California, and that the exclusive venue
therefor shall be the County of Santa Clara, California; (ii) consents to
the jurisdiction and venue of any such court and consents to service of process
in any such action or proceeding by personal delivery or any other method
permitted by law; and (iii) waives any and all rights Borrower may have
to object to the jurisdiction of any such court, or to transfer or change the
venue of any such action or proceeding.

 

9.18  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: (i) to Bank’s subsidiaries or affiliates in connection
with their business with Borrower; (ii) to prospective transferees or
purchasers of any interest in the Advances (provided, however, Bank shall use
commercially reasonable efforts in obtaining such prospective transferee’s or
purchaser’s agreement to the terms of this provision); (iii) as required
by law, regulation, subpoena, or other order, (iv) as required in connection
with Bank’s examination or audit; and (v) as Bank considers appropriate in
exercising remedies under this Agreement. Confidential information does not
include information that either: (a) 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 (b) is disclosed to Bank by a third party, if
Bank does not know that the third party is prohibited from disclosing the
information.

 

9.19  Mutual Waiver of Jury Trial.
BORROWER AND SILICON EACH HEREBY WAIVE THE
RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF,
OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER RELATED PRESENT OR
FUTURE INSTRUMENT OR AGREEMENT BETWEEN SILICON AND BORROWER, OR ANY CONDUCT,
ACTS OR OMISSIONS OF SILICON OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS,
EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH SILICON OR
BORROWER, IN ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT
OR OTHERWISE.

 

	
  Borrower:

  	
  Silicon:

  
	
   

  	
   

  
	
   

  	
  XPLORE TECHNOLOGIES CORPORATION

  	
  SILICON VALLEY BANK

  
	
   

  	
  OF AMERICA

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Michael J. Rapisand

  	
   

  	
  By:

  	
  /s/ 
  Shelia Colson

  	
   

  
	
   

  	
   

  	
  Title: Chief Financial Officer and
  Secretary

  	
   

  	
  Title: Vice President

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