Document:

EXHIBIT 10.1

 

EXECUTION COPY

 

AMENDED
AND RESTATED LOAN AND SECURITY AGREEMENT

 

THIS AMENDED AND RESTATED LOAN AND SECURITY
AGREEMENT
(together with any schedule, annex, or exhibit attached hereto, as the same may
be amended, restated, or otherwise modified, this “Agreement”) is
entered into on December 30, 2005 (the “Effective Date”) between SILICON
VALLEY BANK (“Bank”), whose address is 3003 Tasman Drive, Santa Clara,
California  95054, and FIBERSTARS, INC.,
a California corporation (“Borrower”), whose chief executive office is
44259 Nobel Drive, Fremont, California 
94538 (“Borrower’s Address”), and amends, restates, replaces and supersedes in
its entirety that certain Loan and Security Agreement dated the Original
Closing Date, as amended to date (the “Original Loan Agreement”) between
Bank and Borrower.  Definitions of
capitalized terms used in this Agreement are set forth in Section 8 below.

 

1.             ADVANCES.

 

1.1          Advances. 
Subject to the conditions in Section 1.1 of the Schedule and to
deduction of Reserves, Bank will make advances (collectively, the “Advances”)
to Borrower up to the amounts shown on the Schedule.

 

1.2          Equipment
Advances.  Through December 31, 2006 (“Equipment Availability End Date”), Bank will make advances
(“Equipment Advance” and collectively, “Equipment Advances”) not to exceed the Equipment Credit Limit, provided
no Default or Event of Default has occurred and is continuing.  The Equipment Advances may only be used to
purchase Eligible Equipment and may not exceed 100% of the equipment invoice
for the Eligible Equipment. Transferable licenses, leasehold improvements and
other soft costs including sales tax, freight and installation expense may
constitute up to 35% of such Equipment Advance. 
Each Equipment Advance must exceed $100,000.

 

(a)           Repayment.  Each
Equipment Advance shall immediately amortize and be payable in 48 equal
payments of principal plus interest beginning the last business day of the
month in which such Equipment Advance is made and continuing on the same day of
each month thereafter.  The final payment
due on the applicable Equipment Maturity Date shall include all outstanding
principal and all accrued unpaid interest.

 

(c)           Prepayment Upon an Event of Loss. 
Borrower shall bear the risk of any loss, theft, destruction, or damage
of or to the Financed Equipment.  If,
during the term of this Agreement, any item of Financed Equipment becomes
obsolete or is lost, stolen, destroyed, damaged beyond repair, rendered
permanently unfit for use, or seized by a governmental authority for any reason
for a period equal to at least the remainder of the term of this Agreement (an “Event of Loss”), then, if no Event
of Default has occurred or is continuing, within ten (10) days following such
Event of Loss, at Borrower’s option, Borrower shall (i) pay to Bank on account
of the Obligations all accrued interest to the date of the prepayment, plus all
outstanding principal owing with respect to the Financed Equipment subject to
the Event of Loss; or (ii) repair or replace any Financed Equipment subject to
an Event of Loss provided the repaired or replaced Financed Equipment is of
equal or like value to the Financed Equipment subject to an

 

 

Event of Loss and provided further that Bank has a
first priority perfected security interest in such repaired or replaced
Financed Equipment.

 

1.3          Interest. 
All 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, in
arrears, on the last day of the month. 
Interest shall be charged to a deposit account with Bank designated by
Borrower, or if no funds are available in any such deposit account, as a Credit
Extension under this Agreement.

 

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

 

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

 

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

 

1.6  Letters of Credit.   At the request
of Borrower, Bank 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 Bank 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 Bank 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 a fee
equal to 1.5% of the face amount of the Letter of Credit being issued, together
with such additional fee as Bank’s letter of credit department shall charge in
connection with the issuance of the Letters of Credit.  Any payment by Bank 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 Bank harmless from any loss, cost, expense, or liability,
including payments made by Bank, expenses, and reasonable attorneys’ fees
incurred by Bank arising out of or in connection with any Letters of
Credit.  Borrower agrees to be bound by
the regulations and interpretations of the issuer of any Letters of Credit
guarantied by Bank and opened for Borrower’s account or by Bank’s
interpretations of any Letter of Credit issued by Bank for Borrower’s account,
and Borrower understands and agrees that Bank shall not be liable for any
error, negligence, or mistake, whether of omission or commission, in following
Borrower’s instructions or those

 

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contained in the Letters of Credit or any
modifications, amendments, or supplements thereto.  Borrower understands that Letters of Credit
may require Bank 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
Bank harmless with respect to any loss, cost, expense, or liability incurred by
Bank under any Letter of Credit as a result of Bank’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 Bank 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 Bank to enter into this Agreement
and to make Credit Extensions, and except to the extent set forth in the
Representations, Borrower represents and warrants to Bank as follows, and
Borrower covenants that the following representations will continue to be true
at all times, 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 State of California. 
Borrower is and will continue to be qualified and licensed to do
business in California, and 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 (a) have been duly and validly
authorized, (b) 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), (c) do not violate Borrower’s 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 (d) 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, or such other name of
which it has notified Bank in accordance with this Section 3.2, 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 Bank thirty (30) days prior written notice before changing its name or doing
business under any other name.  Borrower

 

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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 as Borrower’s address (or such other
address of which Borrower has given Bank notice pursuant to this Section 3.3)
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 (or such other locations of which
Borrower has given or will give Bank notice pursuant to this Section 3.3).  Borrower will give Bank at least thirty (30)
days prior written notice before opening any additional place of business,
changing its chief executive office or state of incorporation, 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 $50,000 fair market value
of Equipment is located.

 

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 or licensed 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. 
Bank 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 Bank and the Collateral
against all claims of others.

 

(b)           Borrower has set forth in the
Representations all of Borrower’s deposit accounts, securities accounts, and
commodity accounts (collectively, “Collateral Accounts”).  Borrower will give Bank five (5) Business
Days advance written notice before establishing any new Collateral Account with
a bank or financial institution other than Bank and will cause the entity where
any such new Collateral Account is maintained to execute and deliver to Bank a
control agreement to perfect Bank’s security interest in the Collateral Account
and otherwise satisfactory to Bank in its good faith business judgment.  Nothing herein limits any requirements which
may be set forth in the Schedule as to where Collateral Accounts will be
maintained.  Borrower shall have until
January 21, 2006, to obtain an acceptable Control Agreement for its securities
account with Seneca Capital Management.

 

(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, and in which the potential recovery exceeds $100,000, Borrower
shall promptly notify Bank thereof in writing and provide Bank with such
information regarding the same as Bank shall request (unless providing such
information would waive the Borrower’s attorney-client privilege).  Such notification to Bank shall constitute a
grant of a security interest in the commercial tort claim and all proceeds
thereof to Bank, and Borrower shall execute and deliver all such documents and
take all such actions as Bank shall request in connection therewith.

 

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(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 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 Bank, use its best efforts to cause such third party to execute
and deliver to Bank, in form acceptable to Bank, such waivers and
subordinations as Bank shall specify in its good faith business judgment.  In the event that such waivers and
subordinations are not obtained, Bank may, in its discretion, establish
appropriate reserves against the Borrowing Base. 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 excepted), and Borrower will not use
the Collateral for any unlawful purpose. 
Borrower will promptly advise Bank 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 books and records sufficient to prepare financial statements
in accordance with GAAP.

 

3.7          Financial
Condition, Statements and Reports.  All financial
statements of Borrower and it consolidated Subsidiaries now or in the future
delivered to Bank 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 and its consolidated Subsidiaries, in
accordance with GAAP, at the times and for the periods therein stated.  Between the last date covered by any such
statement provided to Bank 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.  Notwithstanding the foregoing, Borrower may
defer payment of any contested taxes, provided that Borrower (a) in good faith
contests Borrower’s obligation to pay the taxes by appropriate proceedings
promptly and diligently instituted and conducted, (b) notifies Bank in writing
of the commencement of, and any material development in, the proceedings, and
(c) 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.

 

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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 the best of Borrower’s knowledge) threatened against Borrower in any
court or before any governmental agency which could reasonably be expected to
result, either separately or in the aggregate, in any Material Adverse
Change.  Borrower will promptly inform
Bank in writing of any claim, proceeding, litigation or investigation in the
future threatened in writing or instituted against Borrower involving any
single claim that can reasonably be expected to result in liability in excess
of $50,000, or $100,000 in the aggregate.

 

3.11        Use of
Proceeds.  The Credit Extensions shall be used solely
for working capital and other general business requirements of Borrower.  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 Credit Extension 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,” in either case in
violation of Regulation U.

 

4.             ACCOUNTS.

 

4.1          Representations
Relating to Accounts.  Borrower
represents and warrants to Bank as follows: 
Each Account with respect to which Advances are requested by Borrower
shall, on the date each Advance is requested and made, (a) represent an
undisputed bona fide existing unconditional obligation of the Account Debtor
created by the sale, delivery, and acceptance of goods or the rendition of
services, or the non-exclusive licensing of Intellectual Property, in the
ordinary course of Borrower’s business, and (b) 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 Bank 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 except to the extent that the enforceability thereof may be
limited by applicable bankruptcy, insolvency, moratorium and other similar laws
affecting creditors’ rights generally and by equitable principles (regardless
of whether enforcement is sought in equity or at law).

 

4.3          Schedules
and Documents relating to Accounts.  Borrower shall
deliver to Bank transaction reports and schedules of collections, as provided
in the Schedule, on Bank’s standard

 

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forms; provided, however,
that Borrower’s failure to execute and deliver the same shall not affect or
limit Bank’s security interest and other rights in all of Borrower’s Accounts,
nor shall Bank’s failure to advance or lend against a specific Account affect
or limit Bank’s security interest and other rights therein. If requested by
Bank, Borrower shall furnish Bank with copies (or, at Bank’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 Bank an aged accounts receivable trial balance as provided in the
Schedule.  In addition, Borrower shall
deliver to Bank, 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, Borrower shall hold all payments on,
and proceeds of, Accounts in trust for Bank, and Borrower shall immediately
deliver all such payments and proceeds to Bank in their original form, duly
endorsed, to be applied to the Obligations in such order as Bank shall
determine.  So long as Obligations are
outstanding, Borrower shall deposit all proceeds of Collateral into a lockbox
account, or such other “blocked account” as Bank may specify, pursuant to a
blocked account agreement in such form as Bank may specify in its good faith
business judgment unless the Streamline Option is in effect or only Equipment
Advances are outstanding.

 

4.5          Remittance
of Proceeds.  All proceeds arising from the disposition of
any Collateral shall be delivered, in kind, by Borrower to Bank 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
Bank shall determine; provided that, if no Default or Event of Default has
occurred and is continuing, Borrower shall not be obligated to remit to Bank
the proceeds of the sale of property the Transfer of which is permitted by
Section 5.6(c) hereof.  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 Bank.  Nothing in this Section limits the
restrictions on disposition of Collateral set forth elsewhere in this
Agreement.

 

4.6          Disputes. 
Borrower shall notify Bank 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: (a) 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 Bank on the regular reports provided to
Bank; (b) no Default or Event of Default has occurred and is continuing; and
(c) taking into account all such discounts, settlements and forgiveness, the
total outstanding Credit Extensions 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, unless such return is disputed by
Borrower or unless such return is

 

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immediately replaced by Borrower, 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 Bank, and immediately
notify Bank of the return of the Inventory.

 

4.8          Verification. 
Bank 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 Bank
or such other name as Bank may choose.

 

4.9          No
Liability.  Bank 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 Bank 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 Bank
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 Bank, in such form and amounts as Bank 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 Bank.  All casualty
insurance policies shall name Bank as loss payee and shall contain a lenders
loss payee endorsement in form reasonably acceptable to Bank.  All policies of liability insurance shall
name Bank as an additional insured.  Upon
receipt of the proceeds of any such insurance, Bank shall apply such proceeds
in reduction of the Obligations as Bank shall determine in its good faith
business judgment, except that, provided no Default or Event of Default has
occurred and is continuing, Bank shall release to Borrower casualty insurance
proceeds totaling less than $100,000, which shall be utilized by Borrower for
the replacement of the property with respect to which the insurance proceeds
were paid.  Bank may require reasonable
assurance that the insurance proceeds so released will be so used.  If Borrower fails to provide or pay for any
insurance, Bank may, but is not obligated to, obtain the same at Borrower’s
expense.  Borrower shall promptly deliver
to Bank copies of all material reports made to insurance companies.

 

5.3          Reports. 
Borrower, at its expense, shall provide Bank 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 Bank shall from time to time reasonably specify in
its good faith business judgment.

 

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5.4          Access
to Collateral, Books and Records.  At reasonable
times, and on one (1) Business Day’s notice, Bank, or its agents, shall have
the right to inspect the Collateral and the right to audit and copy Borrower’s
books and records.  If the Streamline
Option is not in effect, such inspections and audits shall occur at least three
times per year and prior to the initial Advance.  If the Streamline Option is in effect, only
an inspection and audit shall be required prior to the initial Advance and such
inspections and audits thereafter shall be limited to one per year if the
Streamline Option has been in effect for that full year.  Bank shall take reasonable steps to keep confidential
all information obtained in any such inspection or audit, but Bank shall have
the right to disclose any such information 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 Bank’s then current standard charge
for the same), plus reasonable out-of-pocket expenses; provided that so long as
no Event of Default has occurred and is continuing and Borrower requests Credit
Extensions regularly. Borrower shall not be required to pay such expenses more
than three times per fiscal year unless such inspections and audits are
pursuant to Borrower’s request for a Credit Extension.  Audits following termination of the
Streamline Option shall be at Borrower’s expense.  In the event Borrower and Bank schedule an
inspection or audit more than ten (10) days in advance, and Borrower seeks to
reschedule the inspection or audit with less than ten (10) days written notice
to Bank, then (without limiting any of Bank’s rights or remedies), Borrower
shall pay Bank a cancellation fee of $1,000 plus any out-of-pocket expenses
incurred by Bank, to compensate Bank for the anticipated costs and expenses of
the cancellation.

 

5.5          Operating
Accounts.  Borrower shall:

 

(a)           Maintain its and its Subsidiaries’
primary operating accounts with Bank and Bank’s affiliates; and

 

(b)           Provide Bank five (5) days prior written
notice before establishing any Collateral Account at or with any bank or
financial institution other than Bank or its Affiliates.  With respect to any Collateral Account that
has a balance in excess of $100,000 at any time, Borrower shall obtain a fully
executed Control Agreement from the applicable bank or financial institution
with respect to such Collateral Account. 
The provisions of the previous sentence shall not apply to deposit
accounts exclusively used for payroll, payroll taxes and other employee wage
and benefit payments to or for the benefit of Borrower’s employees and
identified to Bank by Borrower as such. 
Borrower shall have until January 21, 2006, to obtain an acceptable
Control Agreement for its securities account with Seneca Capital Management

 

5.6          Negative
Covenants.  Except as may be permitted in the Schedule,
Borrower shall not, and shall not permit any Subsidiary to, without Bank’s
prior written consent (which shall be a matter of its good faith business
judgment), do any of the following:

 

(a)           merge or consolidate with another
corporation or entity (except that a Subsidiary may merge or consolidate with
or into another Subsidiary or Borrower); or acquire all or substantially all of
the capital stock or property of a Person other than a Subsidiary;

 

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(b)           enter into any material transaction with
any Affiliate of Borrower except for (i) transactions that are in the
ordinary course of Borrower’s business, upon fair and reasonable terms (when
viewed in the context of any series of transactions of which it may be a part,
if applicable); and (ii) transactions permitted under Sections 5.6(f) or
(i);

 

(c)           convey, sell, lease, transfer or
otherwise dispose of (collectively “Transfer”) all or any part of its
business or property, except for:

 

(i)            sales of Inventory in the ordinary course
of business;

 

(ii)           dispositions of obsolete, damaged or
worn-out Equipment in the ordinary course of business; and

 

(iii)          non-exclusive licensing of Intellectual Property
in the ordinary course of business;

 

(d)           without prior written notice to Bank,
store any Inventory or other Collateral with any warehouseman or other third
party not specified in the Representations or otherwise consented to in writing
by Bank;

 

(e)           sell any Inventory on a sale-or-return,
guaranteed sale, consignment, or other contingent basis;

 

(f)            make any loans of any money or other
assets except for Permitted Investments;

 

(g)           incur any Indebtedness, other than
Permitted Indebtedness;

 

(h)           guarantee or otherwise become liable with
respect to the obligations of another party or entity other than Permitted
Indebtedness;

 

(i)            pay or declare any dividends on stock or
redeem, retire, purchase or otherwise acquire, directly or indirectly, any of
Borrower’s stock except for Permitted Distributions;

 

(j)            permit, vote in favor of, or enter into
any agreement that would result in, a Change of Control;

 

(k)           engage, directly or indirectly, in any
material line of business other than those lines of business conducted by
Borrower and its Subsidiaries on the date hereof and any businesses reasonably
related, complementary or incidental 
thereto or reasonable extensions thereof;

 

(l)            with respect to Borrower only, dissolve
or elect to dissolve, or, without prior written notice to Bank pursuant to
Section 3.3, change its state of incorporation; or

 

(m)          until Borrower obtains the Control
Agreement with Seneca Capital Management, Credit Extensions will be limited to
$1,092,000;

 

10

 

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

 

5.8          Further
Assurances.  Borrower agrees, at its expense, on request
by Bank, to execute all documents and take all actions, as Bank, may, in its
good faith business judgment, deem necessary or useful in order to perfect and
maintain Bank’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.

 

6.             TERM.

 

6.1          Maturity
Date.  This
Agreement shall continue in effect until the later of the Revolving Maturity Date or
Equipment Maturity Date set forth on the Schedule (each, a
“Maturity Date”), subject to Section 6.2 below.

 

6.2          Early
Termination. This Agreement may be terminated prior to the later of the
Revolving Maturity Date or Equipment Maturity Date set forth on the
Schedule as follows: 
(a) by Borrower, effective three (3) Business Days after written notice
of termination is given to Bank; or (b) by Bank at any time after the
occurrence and during the continuance of an Event of Default, without notice,
effective immediately. If this Agreement is terminated by Borrower or by Bank
under this Section 6.2, Borrower shall pay to Bank a termination fee, as
applicable, in an amount equal to (x) one percent (1.0%) of the Revolving
Credit Limit and (y) two percent (2.0%) of the aggregate
amount of Equipment Advances outstanding provided that no
termination fee shall be charged if the credit facility hereunder, as
applicable, is replaced with a new facility from another division of Bank.  The termination fee shall be due and payable
on the effective date of 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
applicable 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. 
Notwithstanding any termination of this Agreement, all of Bank’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 Bank may, in its sole
discretion, refuse to make any further Credit Extensions after
termination.  No termination shall in any
way affect or impair any right or remedy of Bank, nor shall any such
termination relieve Borrower of any Obligation to Bank, 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, Bank 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 Bank’s
security interests.

 

11

 

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 Bank immediate
written notice thereof:

 

(a)           any warranty, representation, statement,
report or certificate made or delivered to Bank by Borrower or any of Borrower’s
officers, employees or agents, now or in the future, shall be untrue or
misleading in any material respect when made or deemed to be made;

 

(b)           Borrower shall fail to pay (i) when due,
any Credit Extension or any interest thereon or (ii) within three (3) days
after when due, any other monetary Obligation, including any Overadvance;

 

(c)           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 Bank to conduct an inspection or audit as specified in Section
5.4 hereof;

 

(d)           Borrower shall fail to perform any other
non-monetary Obligation, which failure is not cured within three (3) days after
the date performance was to be rendered;

 

(e)           any levy, assessment, attachment,
seizure, lien or encumbrance (other than a Permitted Lien) is made on a
material part of the Collateral which is not cured within ten (10) Business
Days after the occurrence of the same;

 

(f)            any event of default occurs under any
Indebtedness in excess of $50,000 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;

 

(g)           any event of default in other agreement
between Borrower and a third party that gives the third party the right to
accelerate any Indebtedness exceeding $50,000;

 

(h)           dissolution, termination of existence or
insolvency 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 Indebtedness, dissolution
or liquidation law or statute of any jurisdiction, now or in the future in
effect;

 

(i)            the commencement of any proceeding
against Borrower under any reorganization, bankruptcy, insolvency, arrangement,
readjustment of Indebtedness, dissolution or liquidation law or statute of any
jurisdiction, now or in the future in effect, which is not cured by the
dismissal or stay thereof within thirty (30) days after the date commenced;

 

(j)            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;

 

(k)           there shall be a Change in Control;

 

12

 

(l)            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

 

(m)          a Material Adverse Change shall occur.

 

Bank may cease
making any Credit Extensions 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,
Bank, 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 Credit Extensions 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 Bank 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 Bank 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 Bank 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 Bank
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 Bank at places designated by Bank which are
reasonably convenient to Bank and Borrower, and to remove the Collateral to
such locations as Bank 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, Bank 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 Bank 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.  Bank shall have the right to conduct such
disposition on Borrower’s premises without charge, for such time or times as
Bank deems reasonable, or on Bank’s premises, or elsewhere and the Collateral
need not be located at the place of disposition.  Bank 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 Bank to

 

13

 

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 Bank’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 Bank 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 Bank 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 Bank’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 five
percent (5%) per annum (the “Default Rate”).

 

7.3          Standards
for Determining Commercial Reasonableness.  Borrower and
Bank 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: 
(a) 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; (b) notice of the sale describes the
collateral in general, non-specific terms; (c) the sale is conducted at a place
designated by Bank, with or without the Collateral being present; (d) the sale
commences at any time between 8:00 a.m. and 6:00 p.m; (e) payment of the
purchase price in cash or by cashier’s check or wire transfer is required; and
(f) with respect to any sale of any of the Collateral, Bank may (but is not
obligated to) direct any prospective purchaser to ascertain directly from
Borrower any and all information concerning the same.  Bank 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 Bank’s other rights and
remedies, Borrower grants to Bank an irrevocable power of attorney coupled with
an interest, authorizing and permitting Bank (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 Bank
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 Bank may, in its
good faith business judgment, deem advisable in order to perfect and maintain
Bank’s security interest in the Collateral, or in order to exercise a right of
Borrower or Bank, 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 Bank’s
possession; (d) endorse all checks and other forms of remittances received
by Bank; (e) pay, contest or settle

 

14

 

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 Bank the same rights of access and other rights with respect
thereto as Bank 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 Bank 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 Bank’s
rights under the foregoing power of attorney or any of Bank’s other rights
under this Agreement be deemed to indicate that Bank 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 Bank, first, to the costs, expenses,
liabilities, obligations and attorneys’ fees incurred by Bank in the exercise
of its rights under this Agreement, second, to the interest due upon any of the
Obligations, and third, to the principal of the Obligations, in such order as
Bank shall determine in its sole discretion. 
Any surplus shall be paid to Borrower or other persons legally entitled
thereto; Borrower shall remain liable to Bank for any deficiency.  If, Bank, in its good faith business
judgment, directly or indirectly enters into a deferred payment or other credit
transaction with any purchaser at any sale of Collateral, Bank shall have the
option, exercisable at any time, 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 Bank of the cash
therefor.

 

7.6          Remedies
Cumulative.  In addition to the rights and remedies set
forth in this Agreement, Bank 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 Bank and Borrower, and all of such rights and remedies are cumulative
and none is exclusive.  Exercise or
partial exercise by Bank of one or more of its rights or remedies shall not be
deemed an election, nor bar Bank from subsequent exercise or partial exercise
of any other rights or remedies.  The
failure or delay of Bank 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.

 

15

 

“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.

 

“Adjusted Quick
Ratio” means Quick Assets divided by Current Liabilities.

 

“Advances”
has the meaning set forth in Section 1.1 above.

 

“Affiliate”
means, with respect to any Person, any Person controlling, controlled by or
under common control with such Person.

 

“Bank Expenses”
are all audit/inspection fees and expenses and reasonable costs and expenses
(including reasonable attorneys’ fees and expenses) for preparing, negotiating,
administering, defending and enforcing the Loan Documents (including appeals or
Insolvency Proceedings).

 

“Borrowing Base”
means (a) 75% of Borrower’s Eligible Accounts other
than ‘Early Buy’ Pool and Spa Accounts, and (b) during the period
from November 1, 2005 through June 15, 2006 only, 70% of Eligible ‘Early Buy’
Pool and Spa Accounts provided,
from November 1, 2005 through April 30, 2006, no more than $2,000,000, and from
May 1 until June 15, 2006, no more than $1,500,000, will be advanced against
such Accounts (this clause (b) being referred to as the “Pool and Spa
Sublimit”).

 

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

 

“Change in
Control” is a transaction in which any “person” or “group” (within the
meaning of Section 13(d) and 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the “Act”)) becomes the “beneficial owner” (as defined in
Rule 13d-3 under the Act), directly or indirectly, of greater than 35% of the
shares of all classes of stock then outstanding of Borrower ordinarily entitled
to vote in the election of directors.

 

“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.

 

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

 

16

 

determined by the Person in good faith; but the amount may not exceed
the maximum of the obligations under the guarantee or other support
arrangement.

 

“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 Bank or cured within any applicable
cure period.

 

“Control Agreement” means,
collectively, any control agreement entered into among Borrower, Bank and the
depositary bank, securities intermediary, or commodity intermediary at which
Borrower maintains a deposit account, securities account, or a commodity
account, pursuant to which Bank obtains control (within the meaning of the
applicable provision of the Code) over such deposit account, securities
account, or commodity account.

 

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

 

“Current
Liabilities” means the aggregate amount of Borrower’s Total Liabilities
which mature within one (1) year.

 

“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
Accounts” means Accounts arising in the ordinary course of Borrower’s business
from the sale of goods, the rendition of services, or the non-exclusive
licensing of Intellectual Property to Account Debtors that are U.S. Account
Debtors, that meet all Borrower’s representations and warranties in Article 4
which Bank, 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 Bank’s good faith business judgment, the following (the “Minimum
Eligibility Requirements”) are the minimum requirements for an Account to
be an Eligible Account:  (a) the Account
must not be outstanding for more than 90 days from its invoice date (the “Eligibility
Period”), (b) the Account must not represent progress billings, or be
due under a fulfillment or requirements contract with an. Account Debtor, (c)
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 an Account Debtor may be conditional), (d) the Account must
not be owing from an Account Debtor with whom Borrower has any dispute (whether
or not relating to the particular Account) (but, subject to Bank’s satisfactory
verification, only the amount in dispute shall be excluded), (e) the Account
must not be owing from a Related Account Debtor of Borrower; (f) 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 acceptable
to Bank, or which, fails or goes out of a material portion of its business; (g)
the Account must not be owing from the United States or any department,

 

17

 

agency or instrumentality thereof (unless there has been compliance, to
Bank’s satisfaction, with the United States Assignment of Claims Act);
(h) 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); (g) the Account must
not have selling terms greater than 90 days, except for Eligible ‘Early Buy’
Pool and Spa Accounts (as defined below). 
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 an Account Debtor will be
deemed ineligible for borrowing.  Bank
may, from time to time, in its good faith business judgment, revise the Minimum
Eligibility Requirements upon written notice to Borrower.

 

“Eligible ‘Early
Buy’ Pool and Spa Accounts” means all of Borrower’s pool and spa accounts
which are due and payable 91 to 180 days from the invoice date, provided
however that such accounts do not include those not paid within the earlier of
(a) thirty (30) days from the invoice due date or (b) 180 days from the invoice
date.

 

“Eligible Equipment” means new and/or used Equipment
and furniture purchased within 90 days of such Equipment Advance.

 

“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.

 

“Equipment
Advances” has the meaning set forth in Section 1.2 of this Agreement.

 

“Equipment Availability End Date” is defined in Section 1.2 of this
Agreement.

 

“Equipment
Credit Limit” has the meaning set forth in Section 1 of the Schedule.

 

“Equipment Maturity Date” is defined in Section 4 on the
Schedule.

 

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

 

“Event of Loss” has the meaning set forth in 1.2(c) of this
Agreement.

 

“Financed Equipment” is all present
and future Eligible Equipment in which Borrower has any interest, the purchase
of which is financed by an Equipment Advance.

 

“GAAP”
means generally accepted accounting principles consistently applied.

 

“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

 

18

 

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 1201 of the Code) in the exercise of Bank’s business judgment.

 

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

 

“Indebtedness”
is (a) indebtedness for borrowed money or the deferred price of property or
services (such as reimbursement and other obligations for surety bonds and
letters of credit that are carried as liabilities on Borrower’s balance sheet)
other than Contingent Obligations, (b) obligations evidenced by notes,
bonds, debentures or similar instruments, and (c) capital lease
obligations.

 

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

 

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

 

19

 

“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.

 

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

 

“Loan Documents”
means, collectively, this Agreement, the Representations, the Intellectual
Property Security Agreement, and all other present and future documents,
instruments and agreements between Bank and Borrower, relating to this
Agreement, and all amendments and modifications thereto and replacements
therefor.

 

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

 

“Maturity Date” is defined in Section 6.1 of this
Agreement.

 

“Maximum Credit
Limit” has the meaning set forth in the Schedule.

 

“Minimum
Eligibility Requirements” is defined in the defined term “Eligible
Domestic Accounts.”

 

“Obligations”
means all present and future Credit Extensions, debts, liabilities,
obligations, guaranties, covenants, duties and indebtedness at any time owing
by Borrower to Bank, whether evidenced by this Agreement or any other Loan
Document, 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 Bank in Borrower’s debts owing to others), absolute or
contingent, due or to become due, including, without limitation, all interest,
charges, expenses, fees, attorneys’ fees, expert witness fees, audit/inspection
fees, collateral monitoring fees, closing fees, facility fees, minimum interest
charges and any other sums chargeable to Borrower under this Agreement or under
any other Loan Documents.

 

“Operating
Documents” shall mean, for any Person, such Person’s formation documents,
as currently filed with the Secretary of State of such Person’s state of
formation, and, (a) if such Person is a corporation, its bylaws in current
form, (b) if such Person is a limited liability company, its limited
liability company agreement (or similar agreement), each of the foregoing with all
current modifications and amendments thereto.

 

“Original Closing Date” is August 15, 2005.

 

20

 

“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 Bank
(including proceeds of Accounts and payment of the Obligations in full) for
credit to Borrower’s outstanding Credit Extensions or, if the Streamline Option
is in effect, to its deposit accounts with Bank.

 

“Permitted
Distributions” means:

 

(a)           purchases of capital stock from former
employees, consultants and directors pursuant to repurchase agreements or other
similar agreements;

 

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

 

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

 

(d)           any Subsidiary may pay dividends or make
distributions to Borrower or another Subsidiary.

 

“Permitted Indebtedness” is:

 

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

 

(b)           any Indebtedness in excess of $50,000 in
principal amount existing on the date of this Agreement and shown on the
Representations;

 

(c)           capitalized leases and purchase money
Indebtedness secured by Permitted Liens not exceeding $100,000;

 

(d)           refinanced Permitted Indebtedness,
provided that the amount of such Indebtedness is not increased except by an
amount equal to a reasonable premium or other reasonable amount paid in
connection with such refinancing and by an amount equal to any existing, but
unutilized, commitment thereunder;

 

(e)           Indebtedness of Borrower to any
Subsidiary to the extent it is Subordinated Debt; Indebtedness of any
Subsidiary to another Subsidiary; and Indebtedness of any Subsidiary to
Borrower to the extent permitted under clause (g) of the definition of
Permitted Investments; and

 

21

 

(f)            Indebtedness under any performance,
surety, statutory or appeal bonds or similar obligations incurred in the
ordinary course of business.

 

“Permitted Investments” are:

 

(a)           Investments existing on the date of this
Agreement;

 

(b)           (i) marketable direct obligations issued
or unconditionally guaranteed by the United States or its agencies or any State
maturing within one (1) year from its acquisition, (ii) commercial paper
maturing no more than one (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 two (2) years after issue; (iv) repurchase agreements having
maturities of not more than 90 days; (v) money market accounts maintained
with mutual funds having assets in excess of $1,000,000; (vi) tax exempt
securities rated A or better by Moody’s or A+ or better by Standard &
Poors; (vii) mutual funds having at least 95% of their assets invested in the
foregoing Investments, and (viii) other Investments permitted by Borrower’s
investment policy that has been approved by its board of directors (or a
committee thereof) and Bank;

 

(c)           Investments consisting of deposit and
investment accounts in the name of Borrower;

 

(d)           Investments consisting of extensions of
credit to Borrower’s or its Subsidiaries’ customers in the nature of accounts
receivable, prepaid royalties or notes receivable arising from the sale or
lease of goods, provision of services or licensing activities of Borrower;

 

(e)           Investments received in satisfaction or
partial satisfaction of obligations owed by financially troubled obligors;

 

(f)            Investments acquired in exchange for any
other Investments in connection with or as a result of a bankruptcy, workout,
reorganization or recapitalization;

 

(g)           Investments of Subsidiaries in or to
Borrower; Investments of Subsidiaries in or to other Subsidiaries; and

 

(h)           Investments received in a transaction
permitted under Section 5.6(c).

 

“Permitted Liens” means the following:

 

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

 

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

 

(c)           Liens (including with respect to capital
leases) (i) on property (including accessions, additions, parts, replacements,
fixtures, improvements and attachments thereto, and

 

22

 

the proceeds thereof) acquired or held by Borrower or
its Subsidiaries incurred for financing such property (including accessions,
additions, parts, replacements, fixtures, improvements and attachments thereto,
and the proceeds thereof), or (ii) existing on property (and accessions,
additions, parts, replacements, fixtures, improvements and attachments thereto,
and the proceeds thereof) when acquired, if the Lien is confined to such
property (including accessions, additions, parts, replacements, fixtures,
improvements and attachments thereto, and the proceeds thereof) and the
Indebtedness is Permitted Indebtedness;

 

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

 

(e)           licenses or sublicenses granted in the
ordinary course of Borrower’s business and any interest or title of a licensor
or under any license or sublicense, if the licenses and sublicenses permit
granting Bank a security interest;

 

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

 

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

 

(h)           pledges or deposits in the ordinary
course of business in connection with workers’ compensation, unemployment
insurance and other social security legislation;

 

(i)            deposits to secure the performance of
bids, trade contracts (other than for borrowed money), contracts for the
purchase of property, leases, statutory obligations, surety and appeal bonds,
performance bonds and other obligations of a like nature, in each case,
incurred in the ordinary course of business and not representing an obligation
for borrowed money;

 

(j)            easements, rights-of-way, restrictions
and other similar encumbrances affecting real property which do not materially
detract from the value of the property subject thereto or materially interfere
with the ordinary conduct of the business of the applicable Person;

 

(k)           statutory, common law or contractual
Liens of depository institutions or institutions holding securities accounts
(including rights of set-off) provided they are subordinate to Bank’s Liens
pursuant to the terms of a control agreement;

 

(l)            Liens in favor of customs or revenue
authorities arising as a matter of law to secure payment of customs duties in
connection with the importation of goods; and

 

(m)          Liens on insurance proceeds in favor of
insurance companies granted solely to secure financed insurance premiums.

 

23

 

“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.

 

“Prime Rate”
means the rate announced from time to time by Bank as its “prime rate;” it is a
base rate upon which other rates charged by Bank are based, and it is not
necessarily the best rate available at Bank.

 

“Quick Assets”
is, on any day, the Borrower’s consolidated, unrestricted cash, cash
equivalents, net billed accounts receivable, and investments with maturities
less than 12 months determined according to GAAP.

 

“Related
Account Debtor” means, with respect to any Person, any Affiliate, relative,
partner, shareholder, director, officer, or employee of such Person.

 

“Representations”
means the written Collateral Information Certificate provided by Borrower to
Bank.

 

“Reserves”
means, as of any date of determination, such amounts as Bank may from time to
time establish and revise in its good faith business judgment, reducing the
amount of Credit Extensions and other financial accommodations which would
otherwise be available to Borrower under the lending formula(s) provided in the
Schedule:  (a) for accrued interest; (b)
to reflect events, conditions, contingencies or risks which, as determined by
Bank 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 (iii) the security
interests and other rights of Bank in the Collateral (including the
enforceability, perfection and priority thereof); or (c) to reflect Bank’s good
faith belief that any collateral report or financial information furnished by
or on behalf of Borrower to Bank is or may have been incomplete, inaccurate or
misleading in any material respect; or (d) in respect of any state of facts
which Bank determines in good faith constitutes a Default or an Event of
Default.

 

“Revolving
Credit Limit” has the meaning set forth in Section 1 of the Schedule.

 

“Schedule”
means that Schedule to the Amended and Restated Loan and Security Agreement
attached to this Agreement.

 

“Streamline
Option” is, at any time, when (a) Borrower’s Adjusted Quick Ratio exceeds
2.0:1.0 or (b) Credit Extensions are zero or have been reduced to zero.  As long as the Streamline Option is in effect
under subpart (b) of the preceding sentence, Borrower must provide Bank thirty
(30) days notice to request a Credit Extension and after such notice is given
and provided that Borrower’s Adjusted Quick Ratio is not greater than 2.0:1.0,
then the Streamline Option will be terminated.

 

“Subsidiary”
is, for any Person, any other business entity of which more than 50% of the
voting stock or other equity interests is owned or controlled, directly or
indirectly, by the Person or one or more Affiliates of the Person.

 

24

 

“Subordinated Debt”
is debt incurred by Borrower subordinated to Borrower’s indebtedness owed to
Bank and which is reflected in a written agreement in a manner and form
acceptable to Bank and approved by Bank in writing.

 

“Tangible Net Worth” shall mean, for
Borrower, Subordinated Debt plus the excess of total assets of Borrower minus Total Liabilities of Borrower,
determined in accordance with GAAP and on an unconsolidated basis, and there
shall be excluded from assets, without duplication:  (a) notes, accounts receivable and other
obligations owing to Borrower from its officers or other Affiliates, and (b)
all assets which would be classified as intangible assets under GAAP, including
without limitation goodwill, licenses, patents, trademarks, trade names,
copyrights, capitalized software and organizational costs, licenses and
franchises.

 

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

 

“U.S. Account
Debtor” means any Account Debtor that is incorporated or organized under
the laws of the United States of America, a state thereof, or the District of
Columbia.

 

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
time on any day shall be deemed received on the next Business Day.  In addition, whenever Credit Extensions are
outstanding, Bank shall be entitled to charge Borrower a “float” charge in an
amount equal to two (2) Business Days’ interest, at the interest rate
applicable to the Credit Extensions, on all Payments received by Bank.  The float charge for each month shall be
payable on the last day of the month. 
Bank shall not, however, be required to credit Borrower’s account for
the amount of any item of payment which is unsatisfactory to Bank in its good
faith business judgment, and Bank may charge Borrower’s loan account for the
amount of any item of payment which is returned to Bank unpaid.

 

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

 

9.3          Charges
to Accounts.  Bank may, in its discretion, require that
Borrower pay monetary Obligations in cash to Bank or charge any monetary
Obligations to Borrower’s deposit accounts maintained with Bank, or, if no
amounts are available in such deposit accounts, charge them to Borrower’s loan
account with Bank, in which event they will bear interest at the same rate
applicable to the Credit Extensions.

 

25

 

9.4          Monthly
Accountings.  Bank 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 (except for reverses and reapplications
of payments made and corrections of errors discovered by Bank), unless Borrower
notifies Bank in writing to the contrary within sixty (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 Bank 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 Bank 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 Bank 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 Bank 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 Bank 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 Bank or its agents or employees, but only by a specific written
waiver signed by an authorized officer of Bank 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 Bank on which Borrower is or may in any way be liable, and notice of any
action taken by Bank, unless expressly required by this Agreement. Borrower
hereby agrees to indemnify Bank 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

 

26

 

or arising out of any of the Obligations, or any
relationship or agreement between Bank 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 Bank,
nor any of its directors, officers, employees, agents, attorneys or any other
Person affiliated with or representing Bank 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
Bank, or any of its directors, officers, employees, agents, attorneys or any
other Person affiliated with or representing Bank, but nothing herein shall
relieve Bank 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 Bank.

 

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 Bank for all reasonable attorneys’ fees and all filing, recording,
search, title insurance, appraisal, audit, inspection, and other reasonable
costs incurred by Bank, 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 Bank 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 Bank’s
security interest in, the Collateral; and otherwise represent Bank in any
litigation relating to Borrower.  In
satisfying Borrower’s obligation hereunder to reimburse Bank for attorneys
fees, Borrower may, for convenience, issue checks directly to Bank’s attorneys,
Bingham McCutchen LLP, but Borrower acknowledges and agrees that Bingham
McCutchen LLP is representing only Bank and not Borrower in connection with
this Agreement.  If either Bank 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 Bank
may be entitled pursuant to this Section shall immediately 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.

 

27

 

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 Bank; provided,
however, that Borrower may not assign or transfer any of its rights under this
Agreement without the prior written consent of Bank, and any prohibited
assignment shall be void.  No consent by
Bank to any assignment shall release Borrower from its liability for the
Obligations.

 

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

 

9.15        Paragraph
Headings; Construction.  Paragraph
headings are only used in this Agreement for convenience.  Borrower and Bank 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 Bank or Borrower under any rule of construction or otherwise.

 

9.16        Governing
Law; Jurisdiction; Venue.  This Agreement
and all acts and transactions hereunder and all rights and obligations of Bank
and Borrower shall be governed by the laws of the State of California.  As a material part of the consideration to
Bank to enter into this Agreement, Borrower (a) agrees that all actions and
proceedings relating directly or indirectly to this Agreement shall, at Bank’s
option, be litigated in courts located within California, and that the
exclusive venue therefor shall be Santa Clara County; (b) 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 (c) 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.

 

9.17        Mutual
Waiver of Jury Trial.  BORROWER AND BANK 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 PRESENT OR FUTURE INSTRUMENT OR
AGREEMENT BETWEEN BANK AND BORROWER, OR ANY CONDUCT, ACTS OR

 

28

 

OMISSIONS OF BANK OR BORROWER OR ANY
OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS
AFFILIATED WITH BANK OR BORROWER, IN ALL OF THE FOREGOING CASES, WHETHER
SOUNDING IN CONTRACT OR TORT OR OTHERWISE.

 

9.18        Confidentiality.  In handling any confidential information of Borrower,
Bank will exercise the same degree of care that it exercises for its own
proprietary information, but disclosure of information may be made:  (a) to Bank’s subsidiaries or affiliates
in connection with their present or prospective business relations with
Borrower; (b) to prospective transferees or purchasers of any interest in
the Credit Extensions; (c) as required by law, regulation, subpoena, or
other order so long as Borrower is given notice thereof if practicable (and
Bank is permitted to provide such notice) and an opportunity to seek a
protective order, (d) as required in connection with Bank’s examination or
inspection/audit; and (e) as Bank considers appropriate in exercising
remedies under this Agreement.  Confidential
information does not include information that either: (x) 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 (y) is disclosed to Bank by a
third party.

 

[Signature page follows.]

 

29

 

EXECUTION COPY

 

In Witness Whereof, the parties have duly authorized and caused this
Agreement to be executed as of the date first written above.

 

	
  BORROWER:

  	
   

  
	
   

  	
   

  
	
  FiberStars, Inc., a California corporation

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/ Robert A. Connors

  	
   

  
	
   

  	
   

  
	
  Title:

  	
  CFO

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  BANK:

  	
   

  
	
   

  	
   

  
	
  Silicon Valley Bank

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/ Tim Walsh

  	
   

  
	
   

  	
   

  
	
  Title

  	
  SVP

  	
   

  
					

 

 

Schedule to 

Amended and Restated Loan and Security Agreement

 

 

	
  Borrower:

  	
   

  	
  FiberStars, Inc.

  
	
  Address:

  	
   

  	
  44259 Nobel Drive

  
	
   

  	
   

  	
  Fremont, CA 94538

  

 

This Schedule forms an integral part of the Amended and
Restated Loan and Security Agreement between Silicon Valley Bank
and Borrower dated the Effective Date.

 

1.  CREDIT LIMIT(S)

(Section 1.1):

 

Revolver Loans.
An amount (the “Revolving Credit Limit”)
not to exceed the lesser of: (a) $5,000,000 at any one time outstanding or
(b) amounts available under the
Borrowing Base.

 

Bank may, from time to time, modify the
Borrowing Base in its good faith business judgment, upon notice to the
Borrower, based on changes in collection experience with respect to Eligible
Accounts or other issues or factors relating to the Eligible Accounts or other
Collateral.

 

Equipment
Loans. An
amount (the “Equipment Credit Limit”) not to exceed $3,000,000 at any
one time outstanding. At least $1,000,000 shall be disbursed prior to December
31, 2005.

 

Notwithstanding anything to the contrary
herein, the aggregate amount of the applicable Credit Extensions and amounts
outstanding under the sublimits set forth below, shall not exceed the Revolving
Credit Limit or Equipment Credit Limit, as applicable (combined, the “Maximum
Credit Limit”).

 

CONDITIONS
PRECEDENT

(Section 1.1)

 

Bank’s obligation to make the initial Credit
Extension is subject to the condition precedent that the following have been
satisfied, all in form and substance satisfactory to Bank:

 

(a)           Borrower
shall have executed and delivered the Loan Documents;

 

(b)           Borrower
shall have delivered an executed one or more Control Agreements in accordance
with Section 5.5 of the Amended and Restated Loan and Security Agreement; provided that
Borrower will have until January 21, 2006, to obtain an acceptable

 

1

 

Control Agreement for its securities account with
Seneca Capital Management.

 

(c)           Borrower
shall have delivered the Operating Documents and a good standing certificate of
Borrower from the State of California;

 

(d)           Borrower
shall have delivered the Corporate Borrowing Resolutions;

 

(e)           Bank
shall have conducted an initial field inspection of Borrower’s Accounts prior
to the initial Advance;

 

(f)            Borrower
shall have paid all costs and fees, including the Loan Fee and Bank Expenses,
then due; and

 

(g)           Borrower
shall have delivered to Bank, in addition to the documents required herein, all
documents, certificates, and other assurances that Bank or its counsel may
reasonably request.

 

Bank’s obligation to make each Credit Extension, including the initial
Credit Extension, is subject to the condition precedent that the following
shall have been satisfied, all in form and substance satisfactory to Bank:

 

(x)           timely receipt of a notice of borrowing
pursuant to Section 1.6;

 

(y)           unless otherwise waived by Bank, the
Control Agreements shall be in full force and effect; and

 

(z)           the representations and warranties in
Section 3 must be true on the date of the notice of borrowing and on the date
any Credit Extension is made, and no Default or Event of Default may have
occurred and be continuing or result from the Credit Extension.  Each Credit Extension is Borrower’s
representation and warranty on that date that the representations and
warranties of Section 3 remain true.

 

SUBLIMITS

(Sections 1.1, 1.2
and 1.6):

 

Cash Management Services
and Reserves:  

 

Borrower may use amounts
not to exceed $1,000,000 minus
the sum of (a) the FX Reserve and (b) amounts outstanding under the
Letters of Credit, for Bank’s Cash Management Services (as defined below),
including, merchant services, business credit card, ACH and other services
identified in the cash management services agreement related to such service
(the “Cash Management Services”). 
Bank may, in its

 

2

 

sole discretion, reserve
against Credit Extensions which would otherwise be available hereunder such
sums as Bank shall determine in its good faith business judgment in connection
with the Cash Management Services, and Bank may charge to Borrower’s loan
account or deposit accounts with Bank, any amounts that may become due or owing
to Bank in connection with the Cash Management Services.  Borrower agrees to execute and deliver to
Bank all standard form applications and agreements of Bank in connection with
the Cash Management Services, and, without limiting any of the terms of such
applications and agreements, Borrower will pay all standard fees and charges of
Bank in connection with the Cash Management Services.  The Cash Management Services shall terminate
on the Revolving Maturity Date.

 

Foreign Exchange Contract
Sublimit:

 

Borrower may enter into
foreign exchange forward contracts with Bank, on its standard forms, under
which Borrower commits to purchase from or sell to Bank a set amount of foreign
currency more than one business day after the contract date (the “FX Forward
Contracts”).  Bank will subtract ten
percent of each outstanding FX Forward Contract from the foreign exchange
sublimit which is a maximum of $1,000,000 minus
the sum of (a) all amounts utilized for Cash Management Services and
(b) the face amount of all issued outstanding Letters of Credit (the “FX
Reserve”).  The aggregate amount of
the FX Forward Contracts at any one time may not exceed ten (10) times the
amount of the FX Reserve (which shall be in addition to other reserves).  In the event at any time there are
insufficient amounts available to Borrower for such FX Reserve, Borrower shall
deposit and maintain with Bank cash collateral in an amount at all times equal
to such deficiency, which shall be held as Collateral for all purposes of this
Agreement.  Bank may, in its discretion,
terminate the FX Forward Contracts at any time that an Event of Default
occurs and is continuing. Borrower shall execute all standard form applications
and agreements of Bank in connection with the FX Forward Contracts, and without
limiting any of the terms of such applications and agreements, Borrower shall
pay all standard fees and charges of Bank in connection with the FX Forward
Contracts.

 

Letters of
Credit Sublimit

(Section 1.6)

 

Pursuant to the terms set forth in Section 1.6, the aggregate face
amount of all Letters of Credit from time to time issued and outstanding shall
not exceed the maximum of $1,000,000  minus the
sum of (a) the FX Reserve and (b) Cash Management Services.

 

2.  INTEREST.

 

Interest Rate

(Section 1.2):

 

For both Advances and Equipment Advances, a per annum rate equal

 

3

 

to the Prime Rate in effect from time to time plus (a) one-half percent (.50%) if Borrower’s Adjusted
Quick Ratio is greater than 1.5:1.0 or (b) one and one-half percent (1.50%) if Borrower’s Adjusted
Quick Ratio is less than or equal to 1.5:1.0.

 

Interest shall
be calculated on the basis of a 360-day year for the actual number of days
elapsed.  The interest rate applicable to
the Obligations shall change on each date there is a change in the Prime Rate.

 

3.  FEES
(Section 1.4):

 

Loan Fee:

 

$25,000, which
was paid on the Original Closing Date. 
Bank      acknowledges receipt of
payment of $25,000 which has been     credited to Borrower for
amounts payable hereunder.

 

Collateral Handling Fee:

 

$1,000 due and
payable on the last day of each month, so long  as
the Streamline Option is not in effect.

 

Unused Line Fee:

 

0.25% of the
average unused daily balance of the Revolving Credit Limit due and payable on
the last day of each month.

 

4.  MATURITY
DATE

(Section 6.1):

 

The maturity
date with respect to the Advances is August 14,
2006  (the
“Revolving Maturity Date”).

 

The maturity date
with respect to each Equipment Advance is 48 months after the date of such
Equipment Advance (the “Equipment Maturity Date”).

 

5.  FINANCIAL
COVENANTS

(Section 5.1):

 

Borrower shall
comply with each of the following covenants:

 

Minimum Tangible Net Worth (Monthly):

 

As of the last day of each month, Borrower
shall maintain a Tangible Net Worth of not less than (a) $10,000,000 from the
Effective Date through December 31, 2005 and (b) $8,500,000 thereafter, plus fifty percent (50%) of all
consideration received after the Effective Date for equity securities of Borrower
and Subordinated Debt and twenty-five percent (25%) of quarterly net
income.  Increases in the Minimum
Tangible Net Worth covenant based on consideration received for (a) equity
securities of Borrower and Subordinated Debt shall be effective as of the end
of each month in which such consideration is received and (b)

 

4

 

quarterly
income shall be effective as of the end of each fiscal quarter, and shall
continue effective thereafter.

 

6.  REPORTING.

(Section 5.3):

 

Borrower shall provide Bank
with the following:

 

1.     At
each request for a Credit Extension, but not less than weekly, transaction
reports and schedules of collections, on Bank’s standard form; provided
however, but not if the Streamline Option is in effect.

 

2.     Monthly
accounts receivable agings, aged by invoice date, and accounts payable agings,
aged by invoice date, inventory reports and outstanding or held check
registers, if any, within thirty (30) days after the end of each month, but not
if the Streamline Option is in effect.

 

3.     For
each Advance request, but not less than weekly, a Borrowing Base Certificate in
the form of Exhibit A attached
hereto; provided however, if the Streamline Option is in effect, then monthly.

 

4.     Monthly
reconciliations of accounts receivable agings (aged by invoice date),
transaction reports, and general ledger, within thirty (30) days after the end
of each month; provided however, if the Streamline Option is in effect, then
reconciliations of accounts receivables agings and a held checks report shall
not be required.

 

5.     Monthly
unaudited financial statements, as soon as available, and in any event within
thirty (30) days after the end of each month.

 

6.     A
monthly Compliance Certificate substantially in the form of Exhibit B attached hereto, within
thirty (30) days after the end of each month, in such form as Bank shall
reasonably specify, signed by the Chief Financial Officer of Borrower,
certifying that, as of the end of such month, Borrower was in full compliance with
all of the terms and conditions of this Agreement, and setting forth
calculations showing compliance with the financial covenants set forth in this
Agreement and such other information as Bank shall reasonably request,
including, without limitation, a statement that at the end of such month there
were no held checks.

 

5

 

7.     Annual
operating budgets (including income statements, balance sheets and cash flow
statements, by month) for the upcoming fiscal year of Borrower within thirty
(30) days prior to the end of each fiscal year of Borrower, but for fiscal year
2006, no later than November 15, 2005.

 

8.     Annual
financial statements, as soon as available, and in any event within 120 days
following the end of Borrower’s fiscal year, audited by, and with an
unqualified opinion of, independent certified public accountants acceptable to
Bank.

 

6

 

7.  ADDITIONAL
PROVISIONS

 

(1)           Banking
Relationship.  Borrower shall at all
times maintain with Bank or an affiliate of Bank, its primary deposit and
investment accounts in accordance with Section 5.5 of the Amended and Restated
Loan and Security Agreement.

 

(2)            Subordination of Inside Debt.  All present and future indebtedness of
Borrower to its officers, directors and shareholders (“Inside Debt”)
shall, at all times, be subordinated to the Obligations pursuant to a
subordination agreement on Bank’s standard form.  Borrower represents and warrants that there
is no Inside Debt presently outstanding, except as provided in the
Representations.  Prior to incurring any
Inside Debt in the future, Borrower shall cause the person to whom such Inside
Debt will be owed to execute and deliver to Bank a subordination agreement on
Bank’s standard form.

 

	
  Borrower:

  	
  Bank:

  
	
   

  	
   

  
	
  FIBERSTARS, INC. 

  	
  SILICON VALLEY
  BANK 

  
	
   

  	
   

  
	
   

  	
   

  
	
  By

  	
  /s/ Robert A.
  Connors

  	
   

  	
  By

  	
  /s/ Tim Walsh

  	
   

  
	
   

  	
   

  	
   

  
	
  Title

  	
    CFO

  	
   

  	
  Title

  	
  SVP

  	
   

  
								

 

7

 

Exhibit A

 

FORM OF BORROWING BASE CERTIFICATE

 

	
  Borrower:

  	
   

  	
  FIBERSTARS, INC.

  44259 Nobel Drive

  Fremont, California 94538

  	
   

  	
  Bank:

  	
   

  	
  SILICON VALLEY BANK

  3003 Tasman Drive

  Santa Clara, CA 95054

  

 

Commitment Amount:
$5,000,000

 

	
  ACCOUNTS RECEIVABLE

  
	
  1.

  	
   

  	
  Accounts Receivable Book Value as of                 

  	
   

  	
  $

  	
                

  
	
  2.

  	
   

  	
  Additions (please explain on reverse)

  	
   

  	
  $

  	
                 

  
	
  3.

  	
   

  	
  TOTAL ACCOUNTS RECEIVABLE

  	
   

  	
  $

  	
                 

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)

  	
   

  	
   

  
	
  4.

  	
   

  	
  Accounts over 90 days due

  	
   

  	
  $

  	
                 

  
	
  5.

  	
   

  	
  Accounts representing progress billings or fulfillment or
  requirements contracts

  	
   

  	
  $

  	
                 

  
	
  6.

  	
   

  	
  Accounts subject to contingencies

  	
   

  	
  $

  	
                 

  
	
  7.

  	
   

  	
  Disputed accounts (unless Bank verifies otherwise)

  	
   

  	
  $

  	
                 

  
	
  8.

  	
   

  	
  Intercompany/Employee Accounts

  	
   

  	
  $

  	
                 

  
	
  9.

  	
   

  	
  Accounts owing from Account Debtors subject to insolvency proceeding
  or whose financial condition is not acceptable to Bank

  	
   

  	
  $

  	
                 

  
	
  10.

  	
   

  	
  Governmental Accounts

  	
   

  	
  $

  	
                 

  
	
  11.

  	
   

  	
  Contra Accounts

  	
   

  	
  $

  	
                 

  
	
  12.

  	
   

  	
  Balance of 50% over 90 day accounts

  	
   

  	
  $

  	
                 

  
	
  13.

  	
   

  	
  Concentration Limits (25%)

  	
   

  	
  $

  	
                 

  
	
  14.

  	
   

  	
  Foreign Accounts

  	
   

  	
  $

  	
                 

  
	
  15.

  	
   

  	
  Accounts with selling terms greater than 90 days except for Eligible
  ‘Early Buy’ Pool and Spa Accounts (when applicable)

  	
   

  	
  $

  	
                 

  
	
  16.

  	
   

  	
  Other (please explain on reverse)

  	
   

  	
  $

  	
                 

  
	
  17.

  	
   

  	
  TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS

  	
   

  	
  $

  	
                 

  
	
  18.

  	
   

  	
  Eligible Accounts (#3 minus #17)

  	
   

  	
  $

  	
                 

  
	
  19.

  	
   

  	
  LOAN VALUE OF ACCOUNTS (75% of #18)

  	
   

  	
  $

  	
                 

  
	
  20.

  	
   

  	
  Eligible ‘Early Buy’ Pool and Spa Accounts, but not more than
  $2,000,000 from 11/1/05 through 4/30/06 and $1,500,000 from 5/1/06 until
  6/15/06

  	
   

  	
  $

  	
                 

  
	
  21.

  	
   

  	
  LOAN VALUE OF ACCOUNTS (70% of #20)

  	
   

  	
  $

  	
                 

  
	
  22.

  	
   

  	
  TOTAL LOAN VALUE OF ACCOUNTS (#19 + #21)

  	
   

  	
  $

  	
                 

  

 

1

 

	
  REVOLVING LINE AVAILABILITY

  	
   

  	
   

  
	
  23.

  	
   

  	
  Maximum Loan Amount

  	
   

  	
  $

  	
  5,000,000

  
	
  24.

  	
   

  	
  Total Funds Availability Calculation 

  (lesser of $5,000,000 or #22)

  	
   

  	
  $

  	
                 

  
	
  25.

  	
   

  	
  Present balance owing on Revolving Line

  	
   

  	
  $

  	
                 

  
	
  26.

  	
   

  	
  Amounts outstanding under sublimits (LC, FX and Cash Management)

  	
   

  	
  $

  	
                 

  
	
  27.

  	
   

  	
  RESERVE POSITION (#24 minus the sum of #25 and #26)

  	
   

  	
  $

  	
                 

  

 

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

 

	
  COMMENTS:

  	
   

  
	
   

  	
  BANK USE ONLY

  
	
   

  	
   

  
	
   

  	
  Rec’d By:

  	
   

  	
   

  
	
   

  	
  Auth. Signer

  
	
   

  	
   

  
	
   

  	
  Date:

  	
   

  	
   

  
	
  FIBERSTARS, INC.

  	
   

  
	
   

  	
  Verified:

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  Auth. Signer

  
	
  Authorized Signer

  	
   

  
	
   

  	
  Date:

  	
   

  	
   

  
									

 

 

Exhibit B

 

FORM OF COMPLIANCE CERTIFICATE

 

	
  TO:

  	
   

  	
  SILICON VALLEY BANK

  	
   

  	
  Date:

  
	
   

  	
   

  	
  3003 Tasman Drive

  	
   

  	
   

  
	
   

  	
   

  	
  Santa Clara, CA 95054

  	
   

  	
   

  

 

	
  FROM:

  	
   

  	
  FIBERSTARS, INC.

  	
   

  	
   

  

 

The undersigned
Chief Financial Officer of FiberStars, Inc. (“Borrower”) certifies that under
the terms and conditions of the Amended and Restated Loan and Security
Agreement dated December      , 2005, between Borrower
and Bank (the “Agreement”), (i) Borrower is in complete compliance for the
period ending                         
with all required covenants except as noted below and (ii) all representations
and warranties in the Agreement are true and correct in all material respects
on this date.  In addition, the
undersigned certifies that (x) Borrower and each of its Subsidiaries has
timely filed all required tax returns and paid, or made adequate provision to
pay, all material taxes, except those being contested in good faith with
adequate reserves under GAAP, (y) there are
no legal actions pending or threatened against Borrower or any of its
Subsidiaries which Borrower has not previously notified in writing to Bank,
and (z) as of the end of this compliance period, there were no held
checks. 
Attached are the required financial reports and calculation
of financial covenants supporting the certification.  The undersigned acknowledges that no borrowings
may be requested at any time or date of determination that Borrower is not in
compliance with any of the terms of the Agreement, and that compliance is
determined not just at the date this certificate is delivered.

 

Please indicate compliance status by circling Yes, No, or N/A under “Complies”
column.

 

	
  Reporting Covenant

  	
   

  	
  Required

  	
   

  	
  Complies

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Transaction reports and schedules of collections

  	
   

  	
  Weekly and with requests for Credit Extensions, but not if the
  Streamline Option is in effect.

  	
   

  	
  Yes

  	
   

  	
  No

  	
   

  	
  N/A

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Accounts receivable agings, aged by invoice date, accounts payable
  agings, aged by invoice date, and outstanding or held check registers, if any
  + BB

  	
   

  	
  Monthly within 30 days of month end, but not if the Streamline Option
  is in effect

  	
   

  	
  Yes

  	
   

  	
  No

  	
   

  	
  N/A

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Reconciliations of accounts receivable agings, aged by invoice date,
  transaction reports, and general ledger

  	
   

  	
  Monthly within 30 days of month end, but not if the Streamline Option
  is in effect

  	
   

  	
  Yes

  	
   

  	
  No

  	
   

  	
  N/A

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Perpetual inventory reports for Inventory valued on a first-in,
  first-out basis at the lower of cost or market (in accordance with GAAP)

  	
   

  	
  Monthly within 30 days of month end, but not if the Streamline Option
  is in effect

  	
   

  	
  Yes

  	
   

  	
  No

  	
   

  	
  N/A

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Monthly unaudited financial statements + CC

  	
   

  	
  Monthly within 30 days of month end

  	
   

  	
  Yes

  	
   

  	
  No

  	
   

  	
  N/A

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Annual operating budgets (including income statements, balance
  sheets, and cash flow statements, each of the foregoing, by month) for the
  upcoming fiscal year

  	
   

  	
  30 days prior to FYE

  	
   

  	
  Yes

  	
   

  	
  No

  	
   

  	
  N/A

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Annual financial statements certified by, and with an unqualified
  opinion of, independent CPA

  	
   

  	
  Annually, within 120 days after FYE

  	
   

  	
  Yes

  	
   

  	
  No

  	
   

  	
  N/A

  

 

 

	
  Financial Covenant

  	
   

  	
  Required

  	
   

  	
  Actual

  	
   

  	
  Complies

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Tangible Net Worth (month end)

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  From the Effective Date through December 31, 2005: $10,000,000 plus 50% of all consideration received
  after the Effective Date for equity securities and Subordinated Debt and 25%
  of quarterly net income

  	
   

  	
  $

  	
   

  	
  Yes

  	
   

  	
  No

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  From January 1, 2006 and thereafter: $8,500,000 plus 50% of all consideration received
  after the Effective Date for equity securities and Subordinated Debt and 25%
  of quarterly net income

  	
   

  	
  $

  	
   

  	
  Yes

  	
   

  	
  No

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Outstanding Obligations under Loan Agreement*

  	
   

  	
  $0

  	
   

  	
  $

  	
   

  	
  Yes

  	
   

  	
  No

  	
   

  	
  N/A

  

 

 

	
  Comments Regarding Exceptions: See Attached.

  	
   

  
	
   

  	
   

  
	
  Sincerely,

  	
  BANK USE ONLY

  
	
   

  	
   

  
	
  FiberStars, Inc.

  	
  Received by:

  	
   

  	
   

  
	
   

  	
  AUTHORIZED SIGNER

  
	
  By:

  	
   

  	
   

  	
   

  
	
   

  	
  Date:

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  	
   

  
	
   

  	
  Verified:

  	
   

  	
   

  
	
  Title:  Chief
  Financial Officer

  	
  AUTHORIZED SIGNER

  
	
   

  	
   

  
	
   

  	
  Date:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Compliance
  Status:

  	
  Yes

  	
  NoExhibit 10.57

 

TERM LOAN AGREEMENT

 

VIVUS, INC., a Delaware
Corporation and VIVUS REAL ESTATE LLC, a New Jersey Limited Liability Company
with a business address of 1172 Castro Street, Mountain View, CA 94040 (jointly
and severally if more than one, the “Borrower”) and Crown Bank, N.A., a banking
association created and existing under the laws of the United States of America
with a principal office located at 715 Route 70, Brick, NJ 08723 (the “Bank”),
for valuable consideration, the receipt of which is hereby acknowledged, agree
as follows:

 

I.              DEFINITIONS.

1.                             Each reference herein to:

 

a.                             “Accounts”, “Chattel Paper”,
“Consumer Goods”, “Documents”, “Equipment”, “Farm Products”, “Fixtures”, “General
Intangibles”, “Goods”, “Instruments”, “Inventory”, “Money”, and “Securities”
shall have the meaning assigned to each in the Uniform Commercial Code from
time to time in effect in the State (the “UCC”);

b.                            “Affiliates of Borrower” means any person or entity that, directly or
indirectly, controls, is controlled by or is under common control with the
Borrower or is an inside director or officer of the Borrower.  For purposes of this definition, the term “control”
(including the terms “controlling”, “controlled by” and “under common control
with”) means the possession, direct or indirect, of the power to vote five
percent (5%) or more of (i) the voting stock of a corporation, (ii) the
partnership interests of a partnership, or (iii) the membership interests
of a limited liability company, or to direct or cause the direction of the
management and policies of any such entity, whether through the ownership of
voting stock, partnership interests, membership interests, by contract or
otherwise;

c.                             “Books and Records” shall mean all books, correspondence, credit
files, records and other documents relating directly or indirectly to the
Obligations and the Collateral, including, without limitation, all tapes,
cards, runs, data bases, software programs, diskettes, and other papers and
documents in the possession or control of the Borrower, any computer service
bureau, or other agent or independent contractor:

d.                            “Loan Documents” shall mean this Agreement, the Note, any
Bank issued Commitment Letter and any amendments thereto, and any and all
mortgages, pledge agreements, security agreements, financing statements,
guaranties and other documents related to this Agreement and/or the Loan;

e.                             “Material Adverse Change” shall mean with respect to the Borrower and
any guarantors and any of their respective properties or revenues, an event,
action or condition that would or is reasonably likely to (i) adversely
affect the validity or enforceability of, or the authority of the Borrower
and/or any guarantor to perform their respective obligations under, the Loan
Documents, or (ii) materially adversely affect the business, operations,
assets or condition (financial or otherwise) of the Borrower and/or any
guarantor or the ability of the Borrower and/or any guarantor to perform their
respective obligations under any of the Loan Documents, or (iii) materially
adversely affect the value of any Collateral;

f.                               “Rate”  For
the first year of this Note, the interest rate will be fixed at eight and
one-quarter (8.25%) percent, which is equal to the Wall Street Journal Prime
Rate plus one (1%) percent and then adjusted annually to a fixed rate for the
year equal to the Wall Street Journal Prime Rate plus one (1%) percent, with a
floor rate of seven and one-half (7.50%) percent at all times, subject to Article V,
Section 8.

g.                            “State” shall mean the State of New Jersey.

 

II.             LOAN.

1.                              Term Loan; Purposes.  The Bank agrees on the terms and provisions of this Agreement to extend
a term loan for the account of the Borrower in the principal sum of Five
Million Three Hundred Seventy-Five Thousand and No/100 Dollars ($5,375,000.00)
(the “Loan”) for the following purpose(s): 
Purchase real estate

 

2.                              Note; Interest Calculation.  The
Loan shall be evidenced by the Borrower’s note of even date with this Agreement
(which note and all amendments thereto and any additional or supplementary
notes executed pursuant to this Agreement are herein referred to collectively
as the ‘‘Note’’).  The interest rate
initially set forth in the Note is a variable rate.  Interest shall be calculated on the basis of a
360-day year using the actual number of days elapsed.  On maturity, whether scheduled or otherwise,
both principal and all accrued and unpaid interest shall be immediately due and
payable.

 

3.                              Late Fee.  If
the entire amount of any required principal and/or interest is not paid in full
within (15) days after the same is due, the Borrower shall pay to the Bank a
late fee equal to five percent (5%) of the required payment.

 

4.                              Prepayment. 
During the term of the Loan, for the loss on income, there shall be a
premium for the prepayment of the Loan before its scheduled maturity.  (a)  Except as set forth in subsection (b) below,
if the Loan is prepaid, in whole or in part, within the first year of its term,
the premium shall be five (5%) percent of the prepaid amount.  If prepayment occurs in the second year of
its term, the premium shall be four (4%) percent.  If prepayment occurs in the third year the
prepayment shall be three

 

1

 

(3%)
percent.  If prepayment occurs in the
fourth year the premium shall be two (2%) percent, and one (1%) percent if it
occurs in the fifth year.  At no time
shall the prepayment premium be less than one (1%) percent.  (b)  If the Borrower sells one of the
two buildings to an independent party at a later date, the Bank will assess a
one (1%) percent premium provided the Bank received a payment reducing the loan
in an amount equal to forty (40%) percent of the initial appraised value and
the remaining parcel has a loan to value not less than sixty (60%) percent of
the remaining balance of the loan.  In
addition, the Borrower must pay a Five Thousand ($5,000.00) and 00/100 Dollar
release fee for the release of the parcel.

 

III.           REPRESENTATIONS
AND WARRANTIES.

 

The
Borrower represents and warrants that:

 

1.                              Organization and Powers.  (a) If
a corporate, partnership, limited liability company or trust Borrower, it is
duly organized, validly existing and in good standing under the laws of the
state of its formation and in every other jurisdiction, except where the
failure to so qualify would not have a material adverse effect upon the
Borrower, its property, its financial condition, or otherwise, (b) it has
the power and authority to own its properties and to carry on its business as
now being conducted and, if a corporate, partnership, limited liability company
or trust Borrower, is qualified to do business in every jurisdiction where such
qualification is necessary, (c) it has the power to execute, deliver and
perform the Loan Documents, (d) the execution, delivery and performance of
the Loan Documents have been duly authorized by all requisite action, (e) the
execution, delivery and performance of the Loan Documents will not violate any
provision of law, any order of any court or other agency of government, the
Articles of Formation or By-laws of a corporate Borrower, the partnership
agreement of a partnership Borrower, the Articles of Incorporation or Operating
Agreement of a limited liability company Borrower, or the trust agreement of a
trust Borrower, or any indenture, agreement or other instrument to which it is
a party, or by which it is bound, or be in conflict with, result in a breach of
or constitute (with due notice or lapse of time or both) a default under any
such indenture, agreement or other instrument, or result in the creation or
imposition of any lien, charge or encumbrance of any nature whatsoever upon any
of the property or assets of the Borrower (other than in favor of the Bank) or
the acceleration of any of its outstanding indebtedness.

 

2.                              Financial Statements.  The Borrower has heretofore furnished to the Bank accurate and complete
financial data and other information based on its operations in previous years,
and said financial data fairly presents the financial position and the results
of operations for the periods indicated therein.  There has been no Material Adverse Change
since the date of the most recent financial statement.

 

3.                              Litigation.  There is no action, suit or proceeding at law or in equity or by or
before any governmental instrumentality or other agency now pending or
threatened against or affecting the Borrower.

 

4.                              No Conflict.  The Borrower is not a party to any agreement or instrument or subject
to any restriction materially or adversely affecting its business, properties
or assets, operations or condition, financial or otherwise.  The Borrower has no knowledge that it is in
default in the performance, observance or fulfillment of any of the
obligations, covenants or conditions contained in any agreement or instrument
to which it is a party.

 

5.                              Use of Proceeds.  No part of the proceeds of the Loan will be used for consumer purposes
or will be used, in whole or in part, to purchase or carry, directly or
indirectly, any margin stock or margin security (within the meaning of
Regulation U of the Board of Governors of the Federal Reserve System) or to
extend credit to others for the purpose of purchasing or carrying any such
margin stock or margin security.  If requested
by the Bank, the Borrower will furnish in connection with this Agreement a
statement in conformity with the requirements of Federal Reserve Form U-1
referred to in said Regulation U.

 

IV.           CONDITIONS
OF LENDING.

 

1.        The
Bank shall be obligated to extend the credit and make the advances under this
Agreement only if on the date such advance is requested:

 

a.                             The Bank shall have received, to the extent
applicable (i) copies of the Articles of Incorporation, Certificate of
Incorporation, Certificate of Limited Partnership, or Certificate of a Limited
Liability Company or Partnership, each certified by the secretary of state of
the state of its formation, (ii) copies of partnership, trust, or
operating agreements, each certified to the Bank by a duly authorized
representative of such Borrower, (iii) Good Standing, Subsistence and/or
Existence Certificates of the state of formation of the Borrower if applicable,
and from all other states where such Borrower conducts its business or holds
property, (iv) duly adopted resolutions authorizing the execution,
delivery and performance under the Loan Documents certified by an officer of
the Borrower; (v) a title policy insuring that the Bank’s loan is a first
lien on the Property, (vi)  copy of the Certificate of Inspection from the
Department of Community Affairs, Bureau of Housing Inspection of the State of
New Jersey and a copy of the Certificate of Occupancy of both Properties;

b.                            The representations and warranties in Part III
hereof are true and correct;

c.                             No Event of Default shall have occurred;

 

2

 

V.                                              COVENANTS.

 

The
Borrower covenants and agrees that it will:

 

1.                              a.  Legal Existence; Insurance; Etc.  Keep in full force and effect its legal
existence (if a corporation, partnership, limited liability company or trust),
authority, rights, licenses, permits and franchises and operate its business as
conducted prior to the date hereof; maintain all property used in the conduct
of its business and keep the same in good repair, working order and condition;
and maintain adequate insurance on its properties against fire, theft, and
extended coverage risks and against public liability and property damage and
products liability and such other risks as may be required by law or as may be
reasonably required by the Bank, in such form, for such periods, and written by
such companies as may be satisfactory to the Bank, such insurance in the case
of a secured loan to name the Bank as additional insured and/or mortgagee/loss
payee.  All policies of insurance shall
provide for at least thirty (30) days’ written notice to the Bank prior to
cancellation or change in the coverage, scope or amount of any such policy or
policies.  Borrower shall furnish the
Bank with certificates of compliance with the foregoing insurance provision.

b.  Compliance
with Laws.  Comply with all
present and future applicable laws, ordinances, rules, regulations, directives
and other requirements of all governmental instrumentalities, including without
limitation those relating to Hazardous Substances, within such time periods as
required thereby, with time being of the essence.

 

2.                              Operation of Business.  Maintain and operate its business in a proper and efficient manner.

 

3.                              Payment of Taxes.  Pay and discharge all taxes, assessments, and governmental charges
imposed upon Borrower, its income or its property before the same shall be in
default, as well as all lawful claims for labor, materials and supplies or
otherwise which, if unpaid, might become a lien upon any such properties.

 

4.                              Financial Statements. 
Furnish to the Bank:

 

a.                             promptly, from time to time as requested by
the Bank, and in all events within one hundred twenty (120) days after the
close of each applicable party’s tax year, (i) with respect to the
Borrower and all corporate, partnership or trust guarantors, financial
statements (audited if requested), balance sheets, profit and loss statements,
together with supporting schedules, signed and in such form as may be
acceptable to the Bank; (ii) with respect to all individual guarantors,
signed personal financial statements; and (iii) with respect to all
entities and individuals referred to in (i) and (ii), current Federal
income tax returns (with all schedules and exhibits), or in the case of a
partnership, Form 1065 (with all schedules and exhibits).  In any event, all the documents referred to
in this subparagraph (a), regardless of when last submitted, must be submitted
to the Bank, as often as the Bank shall deem necessary, if there occurs a
Material Adverse Change;

b.                            promptly, from time to time, such other
information regarding the operations, assets, business, affairs and financial
condition of the Borrower and all guarantors, as the Bank may reasonably
request; and

c.                             with respect to all personal financial
statements submitted by individual guarantors, such statements shall be on
forms prescribed by the Bank.

 

5.                              Inspection.  Permit agents or representatives of the Bank, at reasonable hours and
upon reasonable notice, to inspect the Books and Records of the Borrower and to
make abstracts or reproductions thereof, all at the Borrower’s expense.

 

6.                              Adverse Changes.  Promptly advise the Bank of any Material Adverse Change.

 

7.                              Accounting System.  Maintain a standard system of accounting in accordance with generally
accepted accounting principles.

 

8.                              Depository.  Maintain the Bank as the Borrower’s depository and maintain in one or
more accounts at the Bank, a minimum collected balance of $100,000.00, to be
analyzed annually.  If the minimum
balance is not maintained the interest rate will be automatically increased by
one-half (.5%) percent.

 

9.                              Sales of Accounts and
Instruments.  Not sell, assign, discount or dispose of any
Accounts or Instruments held by the Borrower, with or without recourse, except
for collection (including endorsements) in the ordinary course of business.

 

10.                        Sales and Transfers.  Not sell, assign, lease, transfer, sell and leaseback, or otherwise
dispose of all or any material amount of its assets not in the ordinary course
of business to any person or entity or turn over the management of, or enter
into a management contract with respect to, such assets.

 

11.                        Valuation.  Not write up (by creating an appraisal surplus or otherwise) the value
of any capital assets above their cost less the depreciation regularly
allowable thereon.

 

12.                        Fundamental Changes.  Not
dissolve, liquidate, consolidate with or merge with any corporation, limited
liability company or other entity or agree to do any of the foregoing.

 

13.                        Additional Covenants. 
Comply special provisions with the additional covenants, if any, set
forth on affixed Exhibit A-1.

 

VI.                                          SECURITY AGREEMENT AND OTHER
SECURITY DOCUMENTS.

1.                              Security Interest;
Collateral; Obligations.  The Borrower hereby grants to the Bank, as
security for any and all obligations whatsoever of the Borrower to the Bank,
whether direct, indirect, absolute or contingent, due or to become due, and
whether

 

3

 

now
existing or hereafter arising and howsoever evidenced or acquired, including
without limitation all indebtedness and liabilities evidenced by the Loan, this
Agreement, the other Loan Documents, checking account overdrafts, and letter of
credit reimbursement agreements, excluding, however, indebtedness incurred
primarily for personal, family or household purposes (collectively, the “Obligations”),
a first lien on, and a security interest in and agrees and acknowledges that
the Bank has and will continue to have a first lien on and a perfected security
interest in all of the Collateral described below, both presently owned and
after acquired, together with all proceeds and products thereof, additions and
accessions thereto, and all replacements and substitutions therefor
(collectively, the “Collateral”), including all such Collateral which
constitutes Fixtures attached to the Property as set forth on Exhibit A-4
and the Certificate of Deposit (as defined below).

 

2.                              Borrower hereby warrants, covenants and
agrees that:

 

a.                             Title; Adverse Liens. 
Except for prior security interests disclosed on Exhibit A-2
(if any) and except for the security interest granted hereby, the Borrower is
the owner of presently owned Collateral and will be the owner of Collateral
hereafter acquired free from any lien or encumbrance (other than those in favor
of the Bank), and Borrower will defend the Collateral against the claims and
demands of all persons at any time claiming the same or any interest therein.

b.                            Financing Statements. 
Except for financing statements evidencing the security interests which
may be listed on Exhibit A-2 (if any), no financing statements
covering any Collateral are on file in any public office.  At the request of the Bank, the Borrower will
execute one or more (i) financing statements pursuant to the UCC; (ii) title
certificate lien application forms; and (iii) other documents necessary or
advisable to perfect the security interests evidenced hereby, all in form
satisfactory to the Bank.  Where allowed
by law, the Borrower hereby irrevocably authorizes the Bank to file financing
statements and amendments without the signature of the Borrower.  The Borrower will pay the cost of filing the
aforesaid documents or filing or recording this Agreement in all public offices
wherever filing or recording is deemed by the Bank to be necessary or
desirable.

c.                             Adverse Liens.  The
Borrower will keep the Collateral free from any future adverse liens.

d.                            Mortgages; Fixtures; Farm
Products.  If the Borrower has granted a mortgage on
real property and a security interest in Fixtures and/or Farm Products, there
is affixed hereto as Exhibit A-4 a description of the mortgaged
property and/or applicable real estate and the name(s) of the record owner.

e.                             Certificate of Deposit.  The
Borrower has granted a security interest in a $700,000.00 Certificate of
Deposit to be opened at the Bank (the “Certificate of Deposit”).  Anything to the contrary herein,
notwithstanding, the Certificate of Deposit shall be used by the Bank only to
maintain current payments of interest in the event of a default.

f.                               Taxes.  The
Borrower will pay promptly when due all taxes and assessments upon the
Collateral or for its use or operation or upon this Agreement and any of the
other Loan Documents.

g.                            Insurance.  With
respect to all required insurance policies and coverage, the Bank may act
either in its name or as attorney for the Borrower (for that purpose by these
presents duly authorized and appointed with full power of substitution and
revocation) in obtaining, adjusting, settling and canceling such insurance and
endorsing any drafts in payment of any loss.

h.                            Preservation of Collateral.  The
Bank may, at its election, discharge taxes and liens levied or placed on the
Collateral, pay for insurance on the Collateral and pay for the maintenance and
preservation of the Collateral.  The
Borrower agrees to reimburse Bank on demand for any payment made, or any
expense incurred by the Bank pursuant to the foregoing authorization, and in
any event all such payments and expenses shall constitute an Obligation
hereunder.  If the Borrower fails to
insure Collateral as required by this Agreement or any of the Loan Documents,
the Borrower shall pay to the Bank on the date of such failure a nonrefundable
fee for each such failure equal to the sum of (i) $100 plus (ii) the
amount of the insurance premium cost incurred by the Bank.  Notwithstanding the foregoing, neither the
charging or payment of such fee nor this provision shall in any way be deemed
to waive or imply or constitute a basis for waiver of any default occasioned by
Borrower’s failure to comply with the insurance requirements of this Agreement
or any of the Loan Documents.

i.                                Possession and Use.  Other
than with respect to Collateral in which the Bank’s security interest is
perfected by the Bank’s possession thereof, such as instruments, documents,
cash, bank accounts, etc., which so long as any of the Obligations remain
outstanding and unpaid shall remain in the possession of the Bank, until an
Event of Default, the Borrower may have possession of the Collateral, provided
that the Borrower will not use the Collateral in any unlawful manner or in a
manner inconsistent with this Agreement, the Loan Documents, or any policy of
insurance thereon.

j.                                Power of Attorney.  The
Borrower irrevocably designates and appoints the Bank its true and lawful
attorney with full power of substitution and revocation to execute, deliver,
and record in the name of the Borrower all financing statements, amendments,
continuation statements, title certificate lien applications and other
documents deemed by the Bank to be necessary or advisable to perfect or to
continue the perfection of the security interests granted hereunder.

k.                             Reproduction as Financing
Statement.  A carbon, photographic, or other reproduction
of a security agreement or a financing statement is sufficient as a financing
statement.

l.                                Remedies.  If an
Event of Default occurs, the Bank shall have the rights and remedies provided
in this Agreement, including without limitation in Part VII hereof.  In addition, the Bank may exercise and shall
have any and all rights and remedies accorded it by the UCC.  The Bank may require the Borrower to assemble
the Collateral and make it available to the Bank at a place to be designated by
the Bank which is reasonably convenient to both parties.  The requirement of reasonable notice shall be
met, if notice is mailed, postage prepaid, to the Borrower or other person
entitled thereto at least ten (10) days (including non-business days)
before the time of sale or disposition of the Collateral.  The Bank at its option may have a receiver
appointed to take possession of the Collateral, to use and operate the
Collateral, to collect the profits and proceeds

 

4

 

therefrom,
and to apply the same as the court may direct. 
The Borrower agrees that the Bank’s legal remedies are inadequate and
that the Bank shall be entitled to obtain equitable relief upon the occurrence
of an Event of Default.  The Borrower
shall pay to the Bank on demand all expenses, including reasonable legal
expenses and attorney’s fees (which may include costs allocated by the Bank’s
internal legal department), incurred or paid by the Bank in protecting or
enforcing any rights of the Bank hereunder, including its right to take
possession of the Collateral, storing and disposing of the same or in
collecting the proceeds thereof.

m.                          Inspection and Appraisal.  The
Bank and its agents and representatives (including without limitation
appraisers, engineers, and other professionals) shall, upon reasonable advance
notice, have access to the Borrower’s premises for the purpose of inspecting
and appraising the Collateral and/or performing environmental site
assessments.  If an event of default has
occurred and is continuing, all fees and expenses incurred by the Bank in
connection with such inspections, appraisals and site assessments shall be
payable by the Borrower to the Bank upon demand, and until paid in full, shall
be secured by the Bank’s security interests.

 

VII.          EVENTS
OF DEFAULT.

1.        Listing of Events of Default.  The happening of any of the following events
or conditions with respect to the Borrower, individually and collectively,
shall constitute an “Event of Default”:

 

a.                             any representation or warranty made herein or
in any report, certificate, financial statement or other instrument furnished
in connection with this Agreement or the Loan shall prove to be false or
misleading in any material respect;

b.                            failure to pay the principal of, or interest
on, the Note or any other indebtedness of the Borrower to the Bank, within
fifteen (15) days from the date the same or any installment thereof shall
become due and payable, whether at the due date thereof or at a date fixed for
prepayment or by acceleration or otherwise;

c.                             default in the due observance or performance
of any other covenant, condition or agreement contained in this Agreement, any
of the other Loan Documents, or in any other agreement or document evidencing
or pertaining to Obligations, and such other default shall remain unremedied
for fifteen (15) days or, except for non-monetary default, if such compliance
cannot be effected within fifteen (15) days, Borrower commences such compliance
within the fifteen (15) days, and diligently and continuously pursues the same;

d.                            the acceleration of the maturity of any of
the Borrower’s indebtedness other than to the Bank;

e.                             involvement in financial difficulties as
evidenced by:

i.         an attachment
made on the Borrower’s property or assets seeking a sum in excess of
$100,000.00 which remains unreleased for a period in excess of sixty (60) days;
or

ii.        the inability to pay
its debts (including without limitation taxes) generally as they become due; or

iii.       the appointment or
authorization of a custodian as defined in the Bankruptcy Code; provided,
however, that in the case of the appointment of a receiver in an involuntary
proceeding such appointment continues in effect and undischarged for a period
of sixty (60) days; or

iv.       the entry of an order for
relief in a voluntary case under any chapter of the Bankruptcy Code; or

v.        the filing of an
involuntary petition under any chapter of the Bankruptcy Code, which petition
remains undismissed for a period of sixty (60) days; or

vi.       any other judicial
modification or adjustment of the rights of Borrower’s creditors;

f.                               final judgment for the payment in excess of
an aggregate of One Hundred Thousand Dollars ($100,000.00) shall be rendered
against the Borrower and the same shall remain undischarged for a period of
thirty (30) consecutive days during which execution shall not be effectively
stayed;

g.                            the suspension of business for cause, other
than strike, casualty or other cause beyond the Borrower’s control and in the
event of such suspension for cause beyond the Borrower’s control, failure to
resume operations as soon as possible;

h.                            dissolution or termination of the legal
existence of the Borrower;

i.                                seizure, forfeiture or confiscation by any
federal or state governmental instrumentality of a material portion of the assets
of Borrower which shall not have been stayed for a period of sixty (60) days;

j.                                if the Bank believes in good faith, at any
time, that either (a) the prospect of the Borrower’s (i) repayment of
the Loan or payment of any of its other obligations under the Loan Documents or
(ii) performance of its duties thereunder is impaired or (b) there is
any Material Adverse Change;

k.                             with respect to any guaranty and/or
subordination agreement included in the Loan Documents, the failure of the same
to remain in full force and effect until the Loan is paid in full and this
Agreement is terminated;

l.                                the existence of any liens for taxes due with
respect to the Property unless the liens are being contested in good faith and
adequate reserves have been deposited with the Bank, or construction lien
claims which have not been dismissed for 30 days or for which escrows,
satisfactory in amount to the Bank, have not been established by the Borrower;
or

m.                          the default of the Borrower or any Guarantor
under any other obligation owed to the Bank, or any third party, now existing
or arising after the date of this Note.

 

2.                              Certain Cross-Defaults.  The happening of any event or
condition set forth in Article VII subsection 1(c), (e), (f), (l), or
(m) above, by the Borrower or any guarantor of the Loan shall likewise
constitute an Event of Default.

 

3.                              Acceleration.  If an Event of Default occurs, the Bank may declare all Obligations to
be immediately due and payable.

 

5

 

VIII.                                  MISCELLANEOUS.

1.                              Waiver of Event of Default.  No
delay in accelerating the maturity of any Obligation shall affect the rights of
the Bank later to take such action with respect thereto, and no waiver as to
one Event of Default shall affect rights as to any other default.

 

2.                              Notices.  Except as otherwise specifically provided for herein, any notice,
demand or communication hereunder shall be given in writing (including
facsimile transmission or telex) and mailed or delivered to each party at its
address set forth below, or, as to each party, at such other address as shall
be designated by such party by a prior notice to the other party in accordance
with the terms of this provision.  Any
notice to the Borrower shall be sent as follows:   VIVUS, INC. AND VIVUS REAL ESTATE, LLC, 1172
Castro Street, Mountain View, CA 94040. 
All notices hereunder shall be effective upon the earliest to occur of (i) five
(5) business days after such notice is mailed, by registered or certified
mail, postage prepaid (return receipt requested), (ii) upon delivery by
hand, (iii) upon delivery if delivered by overnight courier (such delivery
to be evidenced by the courier’s records), and (iv) in the case of any
notice or communication by telex or telecopy, on the date when sent.

 

3.                              Survival.  This Agreement and all covenants, agreements, representations and
warranties made herein and in the certificates delivered pursuant hereto shall
survive any making by the Bank of the Loan and the execution and delivery of
any Loan Documents and shall continue in full force and effect until this
Agreement is terminated and all the Obligations are paid in full.

 

4.                              Legal Fees and Expenses;
Additional Fees and Charges.
The Borrower will pay all reasonable expenses incurred by the Bank in
connection with the preparation of the Loan Documents, the making of the Loan,
and the enforcement of the rights of the Bank in connection with this
Agreement, any of the other Loan Documents and the Loan, including, but not
limited to, the reasonable fees of its counsel (which may include costs
allocated by the Bank’s internal legal department), plus the disbursements of
said counsel.  Borrower further agrees to
pay to the Bank on demand all reasonable fees, costs and expenses incurred by
the Bank in connection with the administration of the Loan, including, without
limitation, overnight courier fees, lien search fees, and filing and recording
fees.

 

5.                              Choice of Law.  This Agreement and all the other Loan Documents shall be construed in
accordance with and governed by the local laws (excluding the conflict of laws
rules, so-called) of the State.

 

6.                              Written Modification and
Waiver.  No modification or waiver of any provision of
this Agreement or of any of the other Loan Documents nor consent to any
departure by the Borrower therefrom shall in any event be effective unless the
same shall be in writing, and then such waiver or consent shall be effective
only in the specific instance and for the purpose for which given.  No notice to or demand on the Borrower in any
case shall entitle the Borrower to any other or further notice or demand in the
same, similar or other circumstances.

 

7.                              Accounting Practice.  All matters involving accounting practice are to be determined both as
to classification of items and amounts in accordance with generally accepted
principles of accounting practice consistently applied by the Borrower’s
accountants in the preparation of its previous annual financial statements.

 

8.                              Documentation.  All documents required hereunder shall be in form and substance
reasonably satisfactory to the Bank.

 

9.                              Replacement Documents.  Upon
receipt of an affidavit of an officer of the Bank as to the loss, theft,
destruction or mutilation of the Note or any security document which is not of
public record, and, in the case of any such loss, theft, destruction,
mutilation, upon cancellation of such Note or other security document, the
Borrower will issue, in lieu thereof, a replacement note or other security
document in the same principal amount thereof and otherwise of like tenor.

 

10.                        Joint and Several
Obligations.  If this Agreement is signed by more than one
Borrower, all obligations of the Borrowers are their joint and several
obligations, and all references to the Borrower herein shall be deemed to refer
to each of them, either of them, and all of them.

 

11.                        Unenforceability.  In the event any term or provision of this Agreement or the application
thereof to any person or circumstance shall, to any extent, be held invalid or
unenforceable, the remainder of this Agreement or the application of such term
or provision to persons or circumstances other than those to which it is held
invalid or unenforceable, shall be valid and enforceable to the fullest extent
permitted by law.

 

12.                        Cumulative Remedies; Setoff.
The rights and remedies
provided the Bank in this Agreement and in the other Loan Documents shall be
cumulative and shall be in addition to and not in derogation of any rights or
remedies provided the Bank in any other document, instrument or agreement or
under applicable law or otherwise, and may be exercised concurrently or
successively. The Borrower hereby grants to the Bank, a continuing lien,
security interest and right of setoff as security for all liabilities and
obligations to the Bank, whether now existing or hereafter arising, upon and
against all deposits, credits, collateral and property, now or hereafter in the
possession, custody, safekeeping or control of the Bank.  Except for the Certificate of Deposit, at any
time, without demand or notice (any such notice being expressly waived by the
Borrower), the Bank may setoff the same or any part thereof and apply the same
to any liability or obligation of the Borrower and any guarantor even though
unmatured and regardless of the adequacy of any other collateral securing the
Loan. ANY AND ALL RIGHTS TO REQUIRE THE BANK TO EXERCISE ITS RIGHTS OR REMEDIES
WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE LOAN, PRIOR TO
EXERCISING ITS RIGHT OF SETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER

 

6

 

PROPERTY
OF THE BORROWER OR ANY GUARANTOR, ARE HEREBY KNOWINGLY, VOLUNTARILY AND
IRREVOCABLY WAIVED.

 

13.                        Special Provisions. 
A)  the Borrower shall pay to the
Bank, each month, together with its monthly payment of principal and interest,
an amount equal to one twelfth (1/12) of the annual property taxes on the
Properties set forth on Exhibit A-4, attached hereto.  No interest shall be paid on the amount held
in escrow for the property taxes. 
Furthermore, an amount equal to two (2) months of the annual
property taxes is due at closing.  B) The
Borrower may, in its sole discretion, release certain of the collateral,
provided, that the Borrower pay a one (1%) percent prepayment premium and the
Bank receives a payment reducing the loan in an amount equal to forty (40%)
percent of the initial appraised value and the remaining parcel has a loan to
value not less than sixty (60%) percent of the remaining balance of the loan.
C)  At the time the Bank provides each
individual release of mortgage, the Borrower shall pay a fee in an amount equal
to $5,000.00 per release.

 

14.                        Assignments and
Participations; Credit Reporting.  The Borrower agrees that the Bank shall have
the right at all times to sell all or any portion of the Loan and all Loan
Documents, and to grant one or more participations in the Loan and in all Loan
Documents.  In connection therewith, the
Borrower hereby irrevocably authorizes the Bank to deliver to each such
purchaser, participant and prospective purchaser and prospective participant
originals and copies of all Loan Documents and all financial statements and
other credit and factual data from time to time in the Bank’s possession which
relate to the Borrower and/or all guarantors, if any, of the Loan.  The Borrower further agrees that the Bank
shall have the right at all times to disclose and report to credit reporting
agencies and credit rating agencies such information pertaining to the Borrower
and/or all guarantors, if any, as is consistent with the Bank’s policies and
practices from time to time in effect.

 

15.                        Maximum Rate of
Interest.  All provisions of this Agreement are
expressly subject to the condition that in no event , whether by reason of
acceleration of the maturity of the Loan or otherwise, shall the amount paid or
agreed to be paid to the Bank hereunder and deemed interest under applicable
law exceed the maximum rate of interest on the unpaid principal balance of the
Loan allowed by applicable law (the “Maximum Allowable Rate”), which shall mean
the law in effect on the date of this Agreement, except that if there is a
change in such law which results in a higher Maximum Allowable Rate being
applicable to this Agreement, then this Agreement shall be governed by such
amended law from and after its effective date. 
In the event that fulfillment of any provision of this Agreement results
in the interest rate hereunder being in excess of the Maximum Allowable Rate,
the obligation to be fulfilled shall automatically be reduced to eliminate such
excess.  If, notwithstanding the
foregoing, the Bank receives an amount which under applicable law would cause
the interest rate set forth in this Agreement to exceed the Maximum Allowable
Rate, the portion thereof which would be excessive shall automatically be applied
to and deemed a prepayment of the unpaid principal balance of the Loan and not
a payment of interest.

 

16.                        Pledge to Federal Reserve. The Bank may at any time pledge or assign
all or any portion of its rights under the Loan Documents [including any portion
of the promissory note] to any of the twelve (12) Federal Reserve Banks
organized under Section 4 of the Federal Reserve Act, 12 U.S.C. Section 341.  No such pledge or assignment or enforcement
thereof shall release the Bank from its obligations under any of the Loan
Documents.

 

17.                        WAIVER OF JURY TRIAL.  THE BORROWER WAIVES ANY RIGHTS IT MAY HAVE
TO A TRIAL BY JURY OF ANY DISPUTE ARISING UNDER OR RELATING TO THIS AGREEMENT
AND ANY OF THE OTHER LOAN DOCUMENTS, AND AGREES THAT ANY SUCH DISPUTE SHALL BE
TRIED BEFORE A JUDGE SITTING WITHOUT A JURY.

 

18.                        Jurisdiction and Venue.  The
Borrower irrevocably consents that any legal action or proceeding against it or
any of its property with respect to any matter arising under or relating to
this Agreement and the other Loan Documents may be brought in any court of the
State, or any Federal Court of the United States of America located in the
State, as the Bank may elect, and by execution and delivery of this Agreement
the Borrower hereby submits to and accepts with regard to any such action or
proceeding, for itself and in respect of its property, generally and
unconditionally, the jurisdiction of the aforesaid courts.  The Borrower further irrevocably consents to
the service of process in any such action or proceeding by the mailing of
copies thereof by registered or certified mail, postage prepaid, to the
Borrower at its address set forth herein. 
The foregoing, however, shall not limit the Bank’s rights to serve
process in any other manner permitted by law or to bring any legal action or
proceeding or to obtain execution of judgment in any other jurisdiction.  The Borrower irrevocably waives any objection
which it may now or hereafter have to the laying of the venue of any suit,
action or proceeding arising out of or relating to this Agreement and the other
Loan Documents, and further irrevocably waives any claim that the State is not
a convenient forum for any such suit, action or proceeding.

 

19.                        Presentment; Etc. The Borrower waives presentment, notice of
dishonor, protest, notice of non-payment, demand and other notice of any kind.

 

20.                        Debit.  The
Borrower hereby irrevocably authorizes the Bank and any subsequent holder of
the Note, both before and after demand, to debit any of the Borrower’s business
accounts maintained with the Bank (or subsequent holder) for all sums
(including without limitation principal, interest, late fees, and other fees)
payable from time to time under this Agreement and the other Loan
Documents.  In addition, if the Borrower
has signed a separate authorization, the Bank is authorized to initiate ACH
debit transfers for the Loan payments and on the business account(s) specified
in the authorization.  These provisions

 

7

 

shall
not obligate the Bank to create or allow any overdraft, and such authority
shall not relieve the Borrower of the obligation to assure that payments are
made when due.

 

21.                        Integration.  The
Loan Documents supersede all prior agreements between the parties with respect
to the Loan, whether oral or written, including, without limitation, all
correspondence between counsel for the respective parties.  The Loan Documents constitute the entire
agreements between the parties with respect to the Loan, and the rights,
duties, and obligations of the parties with respect thereto.

 

22.                        Lender Liability.  The
Bank shall not be liable for any loss sustained by any party resulting from any
action, omission, or failure to act by the Bank, whether with respect to the
exercise or enforcement of the Bank’s rights or remedies under the Loan
Documents, the Loan, or otherwise, unless such loss is caused by the actual
willful misconduct of the Bank conducted in bad faith.  IN NO EVENT
SHALL THE BANK EVER BE LIABLE FOR CONSEQUENTIAL OR PUNITIVE DAMAGES, ANY RIGHT
OR CLAIM THERETO  BEING EXPRESSLY
AND UNCONDITIONALLY WAIVED.

 

23.                        Bank’s Decisional Standards.  To the extent that applicable laws require
the Bank’s actions or decisions under the Loan Documents to be conducted in
good faith, the term “good faith” shall be defined (using a subjective
standard) as honesty in fact with regard to the conduct or transaction
concerned based upon the facts and circumstances actually known to the
individual(s) acting for the Bank, and such requirement may be satisfied by
reliance upon the advice of attorneys, accountants, appraisers, architects,
engineers, or other qualified professionals.

 

24.                        Descriptive Headings;
Context.  The captions in this Agreement are for
convenience of reference only and shall not define or limit any provision.  Whenever the context requires, reference in
this Agreement to the neuter gender shall include the masculine and/or feminine
gender, and the singular number shall include the plural, and, in each case,
vice versa.

 

25.                        Acknowledgment of Copy.  The Borrower acknowledges that it has received a fully executed copy of
this Agreement.

 

IN WITNESS WHEREOF, the
Borrower and the Bank, by persons duly authorized, have executed this Agreement
as of January 4, 2006.

 

	
  ATTEST OR
  WITNESSED BY:

  	
  BORROWER:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Vivus, Inc.,
  a Delaware Corporation

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
  /s/ Jay Samuels

  	
   

  	
  By:

  	
  /s/ Timothy
  E. Morris

  	
   

  
	
  Jay Samuels, Esq.

  	
  Timothy E. Morris, Vice
  President Finance

  
	
   

  	
  and Chief Financial
  Officer

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Vivus
  Real Estate, LLC,

  
	
   

  	
  a New
  Jersey Limited Liability Company

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
  /s/ Jay Samuels

  	
   

  	
  By:

  	
  /s/ Timothy
  E. Morris

  	
   

  
	
  Jay Samuels, Esq.

  	
  Vivus, Inc., a Delaware Corporation, Sole Member

  Timothy E. Morris, Vice President Finance

  and Chief Financial Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Crown
  Bank, N.A.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By: 

  	
   

  	
   

  
	
   

  	
  Name: 

  	
  Patricia J. Downs

  
	
   

  	
  Title:

  	
  Vice President

  
									

 

8

 

EXHIBIT A-1

 

Additional Covenants

 

None

 

EXHIBIT A-2

 

Prior Security Interests in Collateral

 

None

 

EXHIBIT A-3

 

Location of Equipment

 

None

 

Location of Inventory

 

None

 

Offices Containing Records of Accounts

 

None

 

EXHIBIT A-4

 

Description of Real Estate

 

735 and 745 Airport Road, , Block 1160.01, Lots 229 and 232, Lakewood,
Ocean County, NJ

 

Name(s) of Record Owner

 

VIVUS REAL ESTATE LLC

 

9

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