Document:

Exhibit 10.25

 

CREDIT AGREEMENT

 

THIS
AGREEMENT is entered into as of May 27, 2004, by and between ITERIS, INC.,
a Delaware corporation (“Borrower’), and WELLS FARGO BANK, NATIONAL ASSOCIATION
(“Bank”).

 

RECITALS

 

Borrower
has requested that Bank extend or continue credit to Borrower as described
below, and Bank has agreed to provide such credit to Borrower on the terms and
conditions contained herein.

 

NOW,
THEREFORE, for valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, Bank and Borrower hereby agree as follows;

 

ARTICLE I

CREDIT TERMS

 

SECTION 1.1                          LINE OF
CREDIT.

 

(a)                                  Line of
Credit.  Subject to the
terms and conditions of this Agreement, Bank hereby agrees to make advances to
Borrower from time to time up to and including August 1, 2005, not to
exceed at any time the aggregate principal amount of Five Million and 00/100
Dollars ($5,000,000.00) (“Line of Credit”), the proceeds of which shall be used
for working capital requirements. 
Borrowers obligation to repay advances under the Line of Credit shall be
evidenced by a promissory note dated as of May 27, 2004 (“Line of Credit
Note”), all terms of which are incorporated herein by this reference.

 

(b)                                 Limitation
on Borrowings. 
Outstanding borrowings under the Line of Credit, to a maximum of the
principal amount set forth above, shall not at any time exceed an aggregate of (i) eighty
percent 80% of Borrower’s eligible accounts receivable (Non-Gov’t/Non-Consulting)
(ii) Forty percent (40%) of Borrower’s eligible accounts receivable (Gov’t/Consulting)
provided that outstanding borrowings against such accounts receivable
shall not exceed Seven Hundred Fifty Thousand and 00/100 Dollars ($750,000.00),
and (iii) fifty percent (50%) of the value of Borrowers eligible
inventory, (exclusive of work in process and inventory which is obsolete,
unsaleable or damaged), with value defined as the lower of cost or market
value, provided however, that outstanding borrowing against inventory shall not
at any time exceed an aggregate of One Million and 00/100 Dollars
($1,000,000).  All of the foregoing shall
be determined by Bank upon receipt and review of all collateral reports
required hereunder and such other documents and collateral information as Bank
may from time to time require.  Borrower
acknowledges that said borrowing base was established by Bank with the
understanding that, among other items, the aggregate of all returns, rebates,
discounts, credits and allowances for the immediately preceding three (3) months
at all times shall be less than five percent (5%) of Borrower’s gross sales for
said period.  If such dilution of
Borrower’s accounts for the immediately preceding three (3) months at any
time exceeds five percent (5%) of Borrower’s gross sales for said period, or if
there at any time exists any other matters, events, conditions or contingencies
which Bank reasonably believes may affect payment of any portion of Borrower’s
accounts, Bank, in its sole discretion, may reduce the foregoing advance rate
against eligible accounts receivable to a percentage appropriate to reflect
such additional dilution and/or establish additional reserves against Borrowers
eligible accounts receivable.

 

As
used herein, “eligible accounts receivable” shall consist solely of trade
accounts created in the ordinary course of Borrower’s business, upon which
Borrower’s right to receive payment is absolute and not contingent upon the
fulfillment of any condition whatsoever, and in which Bank has a perfected
security interest of first priority, and shall not include:

 

(i)                                     any Non-Gov’t/Non-Consulting
account which is past due more than ninety (90) days, except with respect to
any account for which Borrower has provided extended payment terms not to
exceed one hundred eighty (180) days, any such account is more than thirty (30)
days past due;

 

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(ii)                                  any Gov’t/Consulting
account which is past due more than sixty (60) days;

 

(iii)                               that portion
of any account for which there exists any right of setoff, defense or discount
(except regular discounts allowed in the ordinary course of business to promote
prompt payment) or for which any defense or counterclaim has been asserted;

 

(iv)                              any account
which represents an obligation of an account debtor located in a foreign country
except (A) to the extent any such account, in Bank’s determination, is
supported by a letter of credit or insured under a policy of foreign credit
insurance, in each case in form, substance and issued by a party acceptable to
Bank and (B) accounts of Daimler Chrysler and Valeo to the extent that the
accounts of Daimler Chrysler and Valeo, in the aggregate, do not exceed 10% of
the total eligible accounts receivable and such accounts otherwise qualify as
eligible accounts receivable;

 

(v)                                 any account
which arises from the sale or lease to or performance of services for, or
represents an obligation of, an employee, affiliate, partner, member, parent or
subsidiary of Borrower;

 

(vi)                              that portion
of any account, which represents interim or progress billings or retention
rights on the part of the account debtor;

 

(vii)                           any account
which represents an obligation of any account debtor when twenty percent (20%)
or more of Borrowers accounts from such account debtor are not eligible
pursuant to (i) and (ii) above;

 

(viii)                        that portion
of any account from an account debtor which represents the amount by which
Borrower’s total accounts from said account debtor exceeds twenty-five percent
(25%) of Borrower’s total accounts;

 

(ix)                                any account
deemed ineligible by Bank when Bank, in its reasonable discretion from the
standpoint of a secured creditor, deems the creditworthiness or financial
condition of the account debtor, or the industry in which the account debtor is
engaged, to be unsatisfactory.

 

(c)                                  Borrowing
and Repayment. 
Borrower may from time to time during the term of the Line of Credit
borrow, partially or wholly repay its outstanding borrowings, and reborrow,
subject to all of the limitations, terms and conditions contained herein or in
the Line of Credit Note; provided however, that the total outstanding
borrowings under the Line of Credit shall not at any time exceed the maximum
principal amount available thereunder, as set forth above.

 

SECTION 1.2                          TERM
LOAN.

 

(a)                                  Term Loan.  Subject to the terms and conditions of this
Agreement, Bank hereby agrees to make a loan to Borrower in the principal
amount of Five Million and 00/100 Dollars ($5,000,000.00) (“Term Loan”), the
proceeds of which shall be used to repurchase preferred stock of Borrower,
directly or indirectly, by distribution of proceeds to Iteris Holdings, Inc.
(“Guarantor”) and causing Guarantor to purchase such shares.  Borrowers obligation to repay the Term Loan
shall be evidenced by a promissory note dated as of May 27, 2004 (“Term
Note”), all terms of which are incorporated herein by this reference.  Bank’s Commitment to grant the Term Loan
shall terminate on June 27, 2004.

 

(b)                                 Repayment.  The principal amount of the Term Loan shall
be repaid in accordance with the provisions of the Term Note.

 

(c)                                  Prepayment.  Borrower may prepay principal on the Term
Loan solely in accordance with the provisions of the Term Note.

 

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SECTION 1.3                          INTEREST/FEES.

 

(a)                                  Interest.  The outstanding principal balance of each credit
subject hereto shall beer interest at the rate of interest set forth in each
promissory note or other instrument or document executed in connection
therewith.

 

(b)                                 Computation
and Payment. 
Interest shall be computed on the basis of a 360-day year, actual days
elapsed.  Interest shall be payable at
the times and place set forth in each promissory note or other instrument or
document required hereby.

 

(c)                                  Commitment
Fee.  Borrower shall pay
to Bank a non-refundable commitment fee for the Term Loan equal to Six Thousand
Two Hundred Fifty Dollars ($6,250.00), which fee shall be due and payable in
full upon execution of this Agreement.

 

(d)                                 Unused
Commitment Fee. 
Borrower shall pay to Bank a fee equal to one quarter percent (0.25%)
per annum (computed on the basis of a 360-day year, actual days elapsed) on the
average daily unused amount of the Line of Credit, which fee shall be
calculated on a quarterly basis by Bank and shall be due and payable by
Borrower in arrears on the last day of each quarter.

 

SECTION 1.4                          COLLATERAL.

 

As
security for all indebtedness of Borrower to Bank subject hereto, Borrower
hereby grants to Bank security interests of first priority in all Borrower’s
accounts receivables and other rights to payment, general intangibles, inventory
and equipment.

 

All
of the foregoing shall be evidenced by and subject to the terms of such
security agreements, financing statements, deeds of trust and other documents
as Bank shall reasonably require, all in form and substance satisfactory to
Bank.  Borrower shall reimburse Bank
immediately upon demand for all costs and expenses incurred by Bank in
connection with any of the foregoing security, including without limitation,
filing and recording fees and costs of appraisals, audits and title insurance.

 

SECTION 1.5                          GUARANTIES.  All indebtedness of Borrower to Bank shall be
guaranteed jointly and severally by Guarantor in the principal amount of Ten
Million Dollars ($10,000,000.00), as evidenced by and subject to the terms of
guaranties in form and substance satisfactory to Bank.

 

ARTICLE II

REPRESENTATIONS AND WARRANTIES

 

Borrower
makes the following representations and warranties to Bank, which
representations and warranties shall survive the execution of this Agreement
and shall continue in full force and effect until the full and final payment,
and satisfaction and discharge, of all obligations of Borrower to Bank subject
to this Agreement.

 

SECTION 2.1                          LEGAL
STATUS.  Borrower is a corporation, duly organized and existing
and in good standing under the laws of the State of Delaware, and is qualified or licensed to do business (and is
in good standing as a foreign corporation, if applicable) in all jurisdictions
in which such qualification or licensing is required or in which the failure to
so qualify or to be so licensed could have a material adverse effect on
Borrower.

 

SECTION 2.2                          AUTHORIZATION
AND VALIDITY.  This Agreement and each
promissory note, contract, instrument and other document required hereby or at
any time hereafter delivered to Bank in connection herewith (collectively, the “Loan
Documents”) have been duly authorized, and upon their execution and delivery in
accordance with the provisions hereof will constitute legal, valid and binding
agreements and obligations of Borrower or the party which executes the same,
enforceable in accordance with their respective terms, except as enforceability
may be limited by applicable bankruptcy, insolvency or similar laws affecting
creditors’ rights generally.

 

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SECTION 2.3                          NO
VIOLATION.  The execution, delivery and
performance by Borrower of each of the Loan Documents do not violate any
provision of any law or regulation, or contravene any provision of the Articles
of Incorporation or By-Laws of Borrower, or result in any breach of or default
under any contract, obligation, indenture or other instrument to which Borrower
is a party or by which Borrower may be bound.

 

SECTION 2.4                          LITIGATION.  There are no pending, or to the best of
Borrower’s knowledge threatened, actions, claims, investigations, suits or
proceedings by or before any governmental authority, arbitrator, court or
administrative agency which could have a material adverse effect on the
financial condition or operation of Borrower other then those disclosed by
Borrower to Bank in writing prior to the date hereof.

 

SECTION 2.5                          CORRECTNESS
OF FINANCIAL STATEMENT.  The financial
statement of Borrower dated March 31, 2004, a true copy of which has been
delivered by Borrower to Bank prior to the date hereof, (a) is complete
and correct in all material respects and presents fairly the financial
condition of Borrower, (b) discloses all liabilities of Borrower that are
required to be reflected or reserved against under generally accepted
accounting principles, whether liquidated or unliquidated, fixed or contingent,
and (c) has been prepared in accordance with generally accepted accounting
principles consistently applied subject to normal year-end adjustments made by
outside auditors.  Since the date of such
financial statement there has been no material adverse change In the financial
condition of Borrower, nor has Borrower mortgaged, pledged, granted a security
interest in or otherwise encumbered any of its assets or properties except in
favor of Bank or as otherwise permitted by Bank in writing.

 

SECTION 2.6                          INCOME
TAX RETURNS.  Borrower has no knowledge
of any pending assessments or adjustments of its income tax payable with
respect to any year.

 

SECTION 2.7                          NO
SUBORDINATION.  There is no agreement,
indenture, contract or instrument to which Borrower is a party or by which
Borrower may be bound that requires the subordination in right of payment of
any of Borrower’s obligations subject to this Agreement to any other obligation
of Borrower.

 

SECTION 2.8                          PERMITS,
FRANCHISES.  Borrower possesses, and will
hereafter possess, all permits, consents, approvals, franchises and licenses
required and rights to all trademarks, trade names, patents, and fictitious
names, if any, necessary to enable it to conduct the business in which it is
now engaged in compliance with applicable law.

 

SECTION 2.9                          ERISA.  Borrower is in compliance in all material
respects with all applicable provisions of the Employee Retirement Income
Security Act of 1974, as amended or recodified from time to time (“ERISA”);
Borrower has not violated any provision of any defined employee pension benefit
plan (as defined in ERISA) maintained or contributed to by Borrower (each, a “Plan”);
no Reportable Event as defined in ERISA has occurred and is continuing with
respect to any Plan initiated by Borrower; Borrower has met its minimum funding
requirements under ERISA with respect to each Plan; and each Plan will be able
to fulfill its benefit obligations as they come due in accordance with the Plan
documents and under generally accepted accounting principles.

 

SECTION 2.10                    OTHER
OBLIGATIONS.  Borrower is not in default
on any obligation for borrowed money, any purchase money obligation or any
other material lease, commitment, contract, instrument or obligation other than
late payments to trade creditors in the ordinary course of business and
consistent with past practices, provided that the average payment time for any
individual trade creditor shall not be more than 30 days longer than the
average payment terms for such trade creditor.

 

SECTION 2.11                    ENVIRONMENTAL
MATTERS.  Except as disclosed by Borrower
to Bank in writing prior to the date hereof, Borrower is in compliance in all
material respects with all applicable federal or state environmental, hazardous
waste, health and safety statutes, and any rules or regulations adopted

 

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pursuant thereto, which
govern or effect any of Borrower’s operations and/or properties, including
without limitation, the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, the Superfund Amendments and Reauthorization Act of
1986, the Federal Resource Conservation and Recovery Act of 1976, and the
Federal Toxic Substances Control Act, as any of the same may to amended,
modified or supplemented from time to time. 
None of the operations of Borrower is the subject of any federal or
state investigation evaluating whether any remedial action involving a material
expenditure is needed to respond to a release of any toxic or hazardous waste
or substance into the environment. 
Borrower has no material contingent liability in connection with any
release of any toxic or hazardous waste or substance into the environment.

 

ARTICLE III

CONDITIONS

 

SECTION 3.1                          CONDITIONS
OF INITIAL EXTENSION OF CREDIT.  The
obligation of Bank to extend any credit contemplated by this Agreement is
subject to the fulfillment to Bank’s satisfaction of all of the following
conditions:

 

(a)                                  Approval of
Bank Counsel. 
All legal matters incidental to the extension of credit by Bank shall be
satisfactory to Bank’s counsel.

 

(b)                                 Documentation.  Bank shall have received, in form and
substance satisfactory to Bank, each of the following, duly executed:

 

	
  (i)

  	
   

  	
  This Agreement and each promissory note or other
  instrument or document required hereby.

  
	
  (ii)

  	
   

  	
  Certificate of Incumbency of Borrower.

  
	
  (iii)

  	
   

  	
  Certificate of Incumbency of Guarantor.

  
	
  (iv)

  	
   

  	
  Corporate Resolution: Borrowing.

  
	
  (v)

  	
   

  	
  Corporate Resolution: Continuing Guaranty.

  
	
  (vi)

  	
   

  	
  Continuing Guaranty.

  
	
  (vii)

  	
   

  	
  Disbursement Order for revolving loan.

  
	
  (viii)

  	
   

  	
  Disbursement Order for term loan.

  
	
  (ix)

  	
   

  	
  Security Agreement: Continuing-Rights to Payment and
  Inventory.

  
	
  (x)

  	
   

  	
  Insurance Information Request.

  
	
  (xi)

  	
   

  	
  Such other documents as Bank may require under any
  other Section of this Agreement.

  

 

(c)                                  Financial
Condition.  There shall have
been no material adverse change, as determined by Bank, in the financial
condition or business of Borrower or any guarantor hereunder, nor any material
decline, as determined by Bank, in the market value of any collateral required
hereunder or a substantial or material portion of the assets of Borrower or any
such guarantor.

 

(d)                                 Insurance.  Borrower shall have delivered to Bank
evidence of insurance coverage on all Borrower’s property, in form, substance,
amounts, covering risks and issued by companies satisfactory to Bank, and where
required by Bank, with loss payable endorsements in favor of Bank.

 

SECTION 3.2                          CONDITIONS
OF EACH EXTENSION OF CREDIT.  The
obligation of Bank to make each extension of credit requested by Borrower
hereunder shall be subject to the fulfillment to Bank’s satisfaction of each of
the following conditions:

 

(a)                                  Compliance.  The representations and warranties contained
herein and in each of the other Loan Documents shall be true on and as of the
date of the signing of this Agreement and on the date of each extension of
credit by Bank pursuant hereto, with the same effect as though such
representations and warranties had been made on and as of each such date, and
on each such date, no Event of Default as defined herein, and no condition,
event or act which with the giving of notice or the passage of time or both
would constitute such an Event of Default, shall have occurred and be
continuing or shall exist.

 

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(b)                                 Documentation.  Bank shall have received all additional
documents which may be required in connection with such extension of credit.

 

ARTICLE IV

AFFIRMATIVE COVENANTS

 

Borrower
covenants that so long as Bank remains committed to extend credit to Borrower
pursuant hereto, or any liabilities (whether direct or contingent, liquidated
or unliquidated) of Borrower to Bank under any of the Loan Documents remain
outstanding, and until payment in full of all obligations of Borrower subject
hereto, Borrower shall, unless Bank otherwise consents in writing:

 

SECTION 4.1                          PUNCTUAL
PAYMENTS.  Punctually pay all principal,
interest, fees or other liabilities due under any of the Loan Documents at the
times and place and in the manner specified therein, and immediately upon
demand by Bank, the amount by which the outstanding principal balance of any
credit subject hereto at any time exceeds any limitation on borrowings
applicable thereto.

 

SECTION 4.2                          ACCOUNTING
RECORDS.  Maintain adequate books and
records in accordance with generally accepted accounting principles
consistently applied, and permit any representative of Bank, at any reasonable
time, to inspect, audit and examine such books and records, to make copies of
the same, and to inspect the properties of Borrower.

 

SECTION 4.3                          FINANCIAL
STATEMENTS.  Provide to Bank all of the
following, in form and detail satisfactory to Bank:

 

(a)                                  not later
than 120 days after and as of the end of each fiscal year, a Borrower prepared
financial statement of Borrower, prepared by Borrower, to include a balance
sheet, statement of income and statement of cash flows;

 

(b)                                 not later
than 45 days after and as of the end of each fiscal quarter, a consolidating
financial statement of Borrower, prepared by Borrower, to include a balance
sheet, statement of income and statement of cash flows;

 

(c)                                  not later
than 120 days after and as of the end of each fiscal year, an audited financial
statement of each guarantor hereunder, prepared by a certified public
accountant acceptable to Bank, to include a balance sheet, statement of income,
statement of cash flows and to include a consolidating schedule;

 

(d)                                 not later
than 45 days after and as of the end of each fiscal quarter, a consolidating
financial statement of Guarantor, prepared by such Guarantor, to include a
balance sheet, statement of income and statement of cash flows;

 

(e)                                  not later
than 15 days after and as of the end of each month, a borrowing base
certificate, an inventory collateral report, an aged listing of accounts
receivable and accounts payable and a reconciliation of accounts, and not later
than each June 30 and December 31, a list of the names and addresses
of all Borrower’s account debtors.

 

(f)                                    from time to
time such other information as Bank may reasonably request.

 

SECTION 4.4                          COMPLIANCE.  Preserve and maintain all licenses, permits,
governmental approvals, rights, privileges and franchises necessary for the
conduct of its business; and comply with the provisions of all documents
pursuant to which Borrower is organized and/or which govern Borrower’s
continued existence and with the requirements of all laws, rules, regulations
and orders of any governmental authority applicable to Borrower and/or its
business.

 

6

 

SECTION 4.5                          INSURANCE.  Maintain and keep in force insurance of the
types and in amounts customarily carried in lines of business similar to that
of Borrower, including but not limited to fire, extended coverage, public
liability, flood, property damage and workers’ compensation, with all such
insurance carried with companies and in amounts satisfactory to Bank, and
deliver to Bank from time to time at Bank’s request schedules setting forth all
insurance then in effect.

 

SECTION 4.6                          FACILITIES.  Keep all properties necessary to Borrower’s
business in good repair and condition, and from time to time make necessary
repairs, renewals and replacements thereto so that such properties shall be
fully and efficiently preserved and maintained.

 

SECTION 4.7                          TAXES
AND OTHER LIABILITIES.  Pay and discharge
when due any and all indebtedness (except indebtedness to trade creditors in
the ordinary course of business and consistent with past practices, provided
that the average payment time for any individual trade creditor shall not be
more than 30 days longer than the average payment terms for such trade
creditor), obligations, assessments and taxes, both real or personal, including
without limitation federal and state income taxes and state and local property
taxes and assessments, except such (a) as Borrower may in good faith
contest or as to which a bona fide dispute may arise, and (b) for which
Borrower has made provision, to Bank’s satisfaction, for eventual payment
thereof in the event Borrower is obligated to make such payment.

 

SECTION 4.8                          LITIGATION.  Promptly give notice in writing to Bank of
any litigation pending or threatened against Borrower.

 

SECTION 4.9                          FINANCIAL
CONDITION.  Maintain Borrower’s financial
condition, as follows using generally accepted accounting principles
consistently applied and used consistently with prior practices (except to the
extent modified by the definitions herein), with compliance determined
commencing with Borrower’s financial statements for the period ending December 31,
2003:

 

(a)                                  Net income
after taxes not less than $1.00 on a year-to-date basis, determined as of each
fiscal quarter end.

 

(b)                                 Senior
Funded Debt to EBITDA not more than 4.00 to 1.0 as of June 30, 2004, not
more than 3.50 to 1.0 as of September 30, 2004, not more than 3.00 to 1.0
as of December 31, 2004, and not more than 2.75 to 1.0 quarterly
thereafter, with “Senior Funded Debt” defined as the sum of all obligations for
borrowed money plus all capital lease obligations less subordinated debt, and
with “EBITDA” defined as net profit before tax plus interest expense (net of
capital interest expense), depreciation expense and amortization expense.

 

(c)                                  Fixed Charge
Coverage Ratio not at any time less than 1.00 to 1.0, through September 30,
2004, not less than 1.15 to 1.0 as of December 31, 2004 and not less than
1.35 to 1.0 quarterly thereafter, determined on a rolling 4-quarter basis, “Fixed
Charge Coverage Ratio” shall mean consolidated EBITDA minus non-financed
capital expenditures divided by the aggregate sum of (i) all interest paid
or payable on the Funded Debt (ii) all installments of scheduled principal
during the period (iii) all income taxes paid or payable plus (iv) the
amount of dividends declared or paid in cash. 
“Funded Debt” shall mean the sum of all obligations for borrowed money
plus all capital lease obligations.

 

SECTION 4.10                    NOTICE TO
BANK.  Promptly (but in no event more
than five (5) days after the occurrence of each such event or matter) give
written notice to Bank in reasonable detail of: 
(a) the occurrence of any Event of Default, or any condition, event
or act which with the giving of notice or the passage of time or both would
constitute an Event of Default; (b) any change in the name or the
organizational structure of Borrower; (c) the occurrence and nature of any
Reportable Event or Prohibited Transaction, each as defined in ERISA, or any
funding deficiency with respect to any Plan; or (d) any termination or
cancellation of any insurance policy which Borrower is required to maintain, or
any uninsured or partially uninsured loss through liability or property damage,
or through fire, theft or any other cause affecting Borrower’s property.

 

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ARTICLE V

NEGATIVE COVENANTS

 

Borrower
further covenants that so long as Bank remains committed to extend credit to
Borrower pursuant hereto, or any liabilities (whether direct or contingent,
liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents
remain outstanding, and until payment in full of all obligations of Borrower
subject hereto, Borrower will not without Bank’s prior written consent:

 

SECTION 5.1                          USE OF
FUNDS.  Use any of the proceeds of any
credit extended hereunder except for the purposes stated in Article I
hereof.

 

SECTION 5.2                          CAPITAL
EXPENDITURES.  Make any additional
investment in fixed assets in any fiscal year in excess of an aggregate of
$750,000.00.

 

SECTION 5.3                          OTHER
INDEBTEDNESS.  Create, incur, assume or
permit to exist any indebtedness or liabilities resulting from borrowings,
loans or advances, whether secured or unsecured, matured or unmatured,
liquidated or unliquidated, joint or several, except (a) the liabilities
of Borrower to Bank, (b) any other liabilities of Borrower existing as of,
and disclosed to Bank prior to, the date hereof, (c) indebtedness incurred
in connection with lease obligations, not to exceed $100,000 in the aggregate
in any fiscal year, and any extensions or renewals thereof, (d) renewals
or extensions of operating leases existing on the date hereof, provided that
the outstanding principal amount does not increase, and (e) liabilities to
trade creditors incurred in the ordinary course of the Borrower’s business and
consistent with past practices.

 

SECTION 5.4                          MERGER,
CONSOLIDATION, TRANSFER OF ASSETS.  Merge
into or consolidate with any other entity; make any substantial change in the
nature of Borrower’s business as conducted as of the date hereof; acquire all
or substantially all of the assets of any other entity; nor sell, lease,
transfer or otherwise dispose of all or a substantial or material portion of
Borrower’s assets except in the ordinary course of its business.

 

SECTION 5.5                          GUARANTIES.  Guarantee or become liable in any way as
surety, endorser (other than as endorser of negotiable instruments for deposit
or collection in the ordinary course of business), accommodation endorser or
otherwise for, nor pledge or hypothecate any assets of Borrower as security
for, any liabilities or obligations of any other person or entity, except any
of the foregoing in favor of Bank.

 

SECTION 5.6                          LOANS,
ADVANCES, INVESTMENTS.  Make any loans or
advances to or investments (other than investments in cash equivalents) in any
person or entity, except (i) any of the foregoing existing as of, and
disclosed to Bank prior to, the date hereof and (ii) in an aggregate
amount outstanding at any time not to exceed $50,000.

 

SECTION 5.7                          DIVIDENDS,
DISTRIBUTIONS.  Declare or pay any
dividend or distribution either in cash, stock or any other property on
Borrower’s stock now or hereafter outstanding, nor redeem, retire, repurchase
or otherwise acquire any shares of any class of Borrowers stock now or
hereafter outstanding, except (a) annual divided distributions and
inter-company transactions limited to $1,000,000.00 to Guarantor (b) the
distributions to Guarantor and repurchases of preferred stock of Borrower from
Guarantor referenced in Section 1.2(a) hereof and (c) repurchases
of stock pursuant to the terms of incentive equity compensation arrangements
with employees, directors or consultants of Borrower in an aggregate amount not
to exceed $75,000 in any fiscal year.

 

SECTION 5.8                          PLEDGE
OF ASSETS.  Mortgage, pledge, grant or
permit to exist a security interest in, or lien upon, all or any portion of
Borrower’s assets now owned or hereafter acquired, except any of the foregoing
in favor of Bank or which is existing as of, and disclosed to Bank in writing
prior to, the date hereof and security interests under any lease agreement
permitted under Section 5.3, provided that the security interest is
limited to the leased equipment.

 

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ARTICLE VI

EVENTS OF DEFAULT

 

SECTION 6.1                          The
occurrence of any of the following shall constitute an “Event of Default” under
this Agreement:

 

(a)                                  Borrower
shall fail to pay when due any principal, interest, fees or other amounts
payable under any of the Loan Documents.

 

(b)                                 Any
financial statement or certificate furnished to Bank in connection with, or any
representation or warranty made by Borrower or any other party under this
Agreement or any other Loan Document shall prove to be incorrect, false or
misleading in any material respect when furnished or made.

 

(c)                                  Any default
in the performance of or compliance with any obligation, agreement or other
provision contained herein or in any other Loan Document (other than those
referred to in subsections (a) and (b) above), and with respect to
any such default which by its nature can be cured, such default shall continue
for a period of thirty (30) days from its occurrence.

 

(d)                                 Any default
in the payment or performance of any obligation or obligations, or any defined
event of default, under the terms of any contract, contracts, instrument, or
instruments (other than any of the Loan Documents) pursuant to which Borrower,
any guarantor hereunder, or any general partner or joint venturer in any
Borrower which is a partnership or a joint venture (with each such guarantor,
general partner and/or joint venturer referred to herein as a “Third Party
Obligor) has incurred any debt or other liability to any person, persons,
entity or entities, excluding Bank, in excess of $50,000 in the aggregate.

 

(e)                                  The filing
of a notice of judgment lien against Borrower or any Third Party Obligor, or
the recording of any abstract of judgment against Borrower or any Third Party
Obligor in any county in which Borrower or any Third Party Obligor has an
interest in real property; or the service of a notice of levy and/or of a writ
of attachment or execution, or other like process, against the assets of
Borrower or any Third Party Obligor; or the entry of a judgment against
Borrower or any Third Party Obligor, provided, that (1) a judgment
or judgments not in excess of $50,000 in the aggregate shall not constitute an
Event of Default, and (2) a judgment or judgments not in excess of
$500,000 in the aggregate each of which is (i) stayed pending appeal and (ii) bonded
(or insured against) in a manner satisfactory to Bank shall not constitute an
Event of Default.

 

(f)                                    Borrower or
any Third Party Obligor shall become insolvent, or shall suffer or consent to
or apply for the appointment of a receiver, trustee, custodian or liquidator of
itself or any of its property, or shall generally fail to pay its debts as they
become due, or shall make a general assignment for the benefit of creditors;
Borrower or any Third Party Obligor shall file a voluntary petition in
bankruptcy, or seeking reorganization, in order to effect a plan or other
arrangement with creditors or any other relief under the Bankruptcy Reform Act,
Title 11 of the United States Code, as amended or recodified from time to time
(“Bankruptcy Code”), or under any state or federal law granting relief to
debtors, whether now or hereafter in effect; or any involuntary petition or
proceeding pursuant to the Bankruptcy Code or any other applicable state or
federal law relating to bankruptcy, reorganization or other relief for debtors
is filed or commenced against Borrower or any Third Party Obligor which is not
dismissed within sixty (60) days; or Borrower or any Third Party Obligor shall
file an answer admitting the jurisdiction of the court and the material
allegations of any involuntary petition; or Borrower or any Third Party Obligor
shall be adjudicated a bankrupt, or an order for relief shall be entered
against Borrower or any Third Party Obligor by any court of competent
jurisdiction under the Bankruptcy Code or any other applicable state or federal
law relating to bankruptcy, reorganization or other relief for debtors.

 

(g)                                 There shall
exist or occur any event or condition which Bank in good faith believes
impairs, or is substantially likely to impair, the prospect of payment or
performance by Borrower of its obligations under any of the Loan Documents.

 

9

 

(h)                                 The
dissolution or liquidation of any Borrower or Third Party Obligor which is a
corporation, partnership, joint venture or other type of entity; or any such
Borrower or Third Party Obligor, or any of its directors, stockholders or
members, shall take action seeking to effect the dissolution or liquidation of
such Borrower or Third Party Obligor.

 

(i)                                     Any change
in ownership of an aggregate of twenty-five percent (25%) or more of the common
stock in Borrower.

 

SECTION 6.2                          REMEDIES.  Upon the occurrence of any Event of
Default:  (a) all indebtedness of
Borrower under each of the Loan Documents, any term thereof to the contrary
notwithstanding, shall at Bank’s option and without notice become immediately
due and payable without presentment, demand, protest or notice of dishonor, all
of which are hereby expressly waived by each Borrower; (b) the obligation,
if any, of Bank to extend any further credit under any of the Loan Documents
shall immediately cease and terminate; and (c) Bank shall have all rights,
powers and remedies available under each of the Loan Documents, or accorded by
law, including without limitation the right to resort to any or all security
for any credit Subject hereto and to exercise any or all of the rights of a
beneficiary or secured party pursuant to applicable law.  All rights, powers and remedies of Bank may
be exercised at any, time by Bank and from time to time after the occurrence of
an Event of Default, are cumulative and not exclusive, and shall be in addition
to any other rights, powers or remedies provided by law or equity.

 

ARTICLE VII

MISCELLANEOUS

 

SECTION 7.1                          NO
WAIVER.  No delay, failure or
discontinuance of Bank in exercising any right, power or remedy under any of
the Loan Documents shall affect or operate as a waiver of such right, power or
remedy; nor shall any single or partial exercise of any such right, power or
remedy preclude, waive or otherwise affect any other or further exercise
thereof or the exercise of any other right, power or remedy.  Any waiver, permit, consent or approval of
any kind by Bank of any breach of or default under any of the Loan Documents
must be in writing and shall be effective only to the extent set forth in such
writing.

 

SECTION 7.2                          NOTICES.  All notices, requests and demands which any
party is required or may desire to give to any other party under any provision
of this Agreement must be in writing delivered to each party at the following
address:

 

	
  BORROWER:

  	
   

  	
  Iteris, Inc.

  
	
   

  	
   

  	
  1515 S.
  Manchester

  
	
   

  	
   

  	
  Anaheim,
  CA 92802

  
	
   

  	
   

  	
   

  
	
  BANK:

  	
   

  	
  WELLS
  FARGO BANK, NATIONAL ASSOCIATION

  
	
   

  	
   

  	
  Orange
  County RCBO

  
	
   

  	
   

  	
  2030
  Main Street, Suite #900

  
	
   

  	
   

  	
  Irvine,
  CA 92614

  

 

or to such other address as any party may designate by
written notice to all other parties. 
Each such notice, request and demand shall be deemed given or made as
follows:  (a) if sent by hand
delivery, upon delivery; (b) if sent by mail, upon the earlier of the date
of receipt or three (3) days after deposit in the U.S. mail, first class
and postage prepaid; and (c) if sent by telecopy, upon receipt.

 

SECTION 7.3                          COSTS,
EXPENSES AND ATTORNEYS’ FEES.  Borrower
shall pay to Bank immediately upon demand the full amount of all payments,
advances, charges, costs and expenses, including reasonable attorneys’ fees (to
include outside counsel fees and all allocated costs of Bank’s in-house
counsel), expended or incurred by Bank in connection with (a) the
negotiation and preparation of this Agreement and the other Loan Documents,
Bank’s continued administration hereof and thereof, and the preparation of any
amendments and waivers hereto and thereto, (b) the enforcement of Bank’s
rights and/or the collection of any amounts which become due to Bank under any
of the Loan Documents, and

 

10

 

(c) the prosecution
or defense of any action in any way related to any of the Loan Documents,
including without limitation, any action for declaratory relief, whether
incurred at the trial or appellate level, in an arbitration proceeding or
otherwise, and including any of the foregoing incurred in connection with any
bankruptcy proceeding (including without limitation, any adversary proceeding,
contested matter or motion brought by Bank or any other person) relating to any
Borrower or any other person or entity.

 

SECTION 7.4                          SUCCESSORS,
ASSIGNMENT.  This Agreement shall be
binding upon and inure to the benefit of the heirs, executors, administrators,
legal representatives, successors and assigns of the parties; provided however,
that Borrower may not assign or transfer its interest hereunder without Bank’s
prior written consent.  Bank reserves the
right to sell, assign, transfer, negotiate or grant participations in all or
any part of, or any interest in, Bank’s rights and benefits under each of the
Loan Documents.  In connection therewith,
Bank may disclose all documents and information which Bank now has or may
hereafter acquire relating to any credit subject hereto, Borrower or its
business, any guarantor hereunder or the business of such guarantor, or any
collateral required hereunder.

 

SECTION 7.5                          ENTIRE
AGREEMENT; AMENDMENT.  This Agreement and
the other Loan Documents constitute the entire agreement between Borrower and
Bank with respect to each credit subject hereto and supersede all prior
negotiations, communications, discussions and correspondence concerning the
subject matter hereof.  This Agreement
may be amended or modified only in writing signed by each party hereto.

 

SECTION 7.6                          NO
THIRD-PARTY BENEFICIARIES.  This
Agreement is made and entered into for the sole protection and benefit of the
parties hereto and their respective permitted successors and assigns, and no
other person or entity shall be a third party beneficiary of, or have any
direct or indirect cause of action or claim in connection with, this Agreement
or any other of the Loan Documents to which it is not a party.

 

SECTION 7.7                          TIME.  Time is of the essence of each and every
provision of this Agreement and each other of the Loan Documents.

 

SECTION 7.8                          SEVERABILITY
OF PROVISIONS.  If any provision of this
Agreement shall be prohibited by or invalid under applicable law, such
provision shall be ineffective only to the extent of such prohibition or
invalidity without invalidating the remainder of such provision or any remaining
provisions of this Agreement.

 

SECTION 7.9                          COUNTERPARTS.  This Agreement may be executed in any number
of counterparts, each of which when executed and delivered shall be deemed to
be an original, and all of which when taken together shall constitute one and
the same Agreement.

 

SECTION 7.10                    GOVERNING
LAW.  This Agreement shall be governed by
and construed in accordance with the laws of the State of California.

 

SECTION 7.11                    ARBITRATION.

 

(a)                                  Arbitration.  The parties hereto agree, upon demand by any
party, to submit to binding arbitration all claims, disputes and controversies
between or among them (and their respective employees, officers, directors,
attorneys, and other agents), whether in tort, contract or otherwise arising
out of or relating to in any way (i) the loan and related Loan Documents
which ore the subject of this Agreement and its negotiation, execution,
collateralization, administration, repayment, modification, extension,
substitution, formation, inducement, enforcement, default or termination; or (ii) requests
for additional credit.

 

(b)                                 Governing
Rules.  Any arbitration
proceeding will (i) proceed in a location in California selected by the
American Arbitration Association (“AAA”); (ii) be governed by the Federal
Arbitration Act (Title 9 of the United States Code), notwithstanding any
conflicting choice of law provision in any of the documents between the
parties; and (iii) be conducted by the AAA, or such other administrator as
the parties shall

 

11

 

mutually agree upon, in
accordance with the AAA’s commercial dispute resolution procedures, unless the
claim or counterclaim is at least $1,000,000.00 exclusive of claimed interest,
arbitration fees and costs in which case the arbitration shall be conducted in
accordance with the AAA’s optional procedures for large, complex commercial
disputes (the commercial dispute resolution procedures or the optional
procedures for large, complex commercial disputes to be referred to, as
applicable, as the “Rules”).  If there is
any inconsistency between the terms hereof and the Rules, the terms and
procedures set forth herein shall control. 
Any party who fails or refuses to submit to arbitration following a
demand by any other party shall bear all costs and expenses incurred by such
other party in compelling arbitration of any dispute.  Nothing contained herein shall be deemed to
be a waiver by any party that is a bank of the protections afforded to it under
12 U.S.C. §91 or any similar applicable state law.

 

(c)                                  No Waiver of
Provisional Remedies, Self-Help and Foreclosure.  The arbitration requirement does not limit
the right of any party to (i) foreclose against real or personal property
collateral; (ii) exercise self-help remedies relating to collateral or
proceeds of collateral such as setoff or repossession; or (iii) obtain
provisional or ancillary remedies such as replevin, injunctive relief,
attachment or the appointment of a receiver, before during or after the
pendency of any arbitration proceeding. 
This exclusion does not constitute a waiver of the right or obligation
of any party to submit any dispute to arbitration or reference hereunder,
including those arising from the exercise of the actions detailed in sections
(i), (ii) and (iii) of this paragraph.

 

(d)                                 Arbitrator
Qualifications and Powers. 
Any arbitration proceeding in which the amount in controversy is
$5,000,000.00 or less will be decided by a single arbitrator selected according
to the Rules, and who shall not render an award of greater than
$5,000,000.00.  Any dispute in which the
amount in controversy exceeds $5,000,000.00 shall be decided by majority vote
of a panel of three arbitrators; provided however, that all three arbitrators
must actively participate in all hearings and deliberations.  The arbitrator will be a neutral attorney
licensed in the State of California or a neutral retired judge of the state or
federal judiciary of California, in either case with a minimum of ten years
experience in the substantive law applicable to the subject matter of the
dispute to be arbitrated.  The arbitrator
will determine whether or not an issue is arbitratable and will give effect to
the statutes of limitation in determining any claim.  In any arbitration proceeding the arbitrator
will decide (by documents only or with a hearing at the arbitrator’s
discretion) any pre-hearing motions which are similar to motions to dismiss for
failure to state a claim or motions for summary adjudication.  The arbitrator shall resolve all disputes in
accordance with the substantive law of California and may grant any remedy or
relief that a court of such state could order or grant within the scope hereof
and such ancillary relief as is necessary to make effective any award.  The arbitrator shall also have the power to
award recovery of all costs and fees, to impose sanctions and to take such
other action as the arbitrator deems necessary to the same extent a judge could
pursuant to the Federal Rules of Civil Procedure, the California Rules of
Civil Procedure or other applicable law. 
Judgment upon the award rendered by the arbitrator may be entered in any
court having jurisdiction.  The
institution and maintenance of an action for judicial relief or pursuit of a
provisional or ancillary remedy shall not constitute a waiver of the right of
any party, including the plaintiff, to submit the controversy or claim to
arbitration if any other party contests such action for judicial relief.

 

(e)                                  Discovery.  In any arbitration proceeding discovery will
be permitted in accordance with the Rules. 
All discovery shall be expressly limited to matters directly relevant to
the dispute being arbitrated and must be completed no later than 20 days before
the hearing date and within 180 days of the filing of the dispute with the AAA.  Any requests for an extension of the
discovery periods, or any discovery disputes, will be subject to final
determination by the arbitrator upon a showing that the request for discovery
is essential for the party’s presentation and that no alternative means for
obtaining information is available.

 

(f)                                    Class Proceedings
and Consolidations. 
The resolution of any dispute arising pursuant to the terms of this
Agreement shall be determined by a separate arbitration proceeding and such
dispute shall not be consolidated with other disputes or included in any class
proceeding.

 

(g)                                 Payment of
Arbitration Costs and Fees. 
The arbitrator shall award all costs and expenses of the arbitration
proceeding.

 

12

 

(h)                                 Real Property
Collateral; Judicial Reference. 
Notwithstanding anything herein to the contrary, no dispute shall be
submitted to arbitration if the dispute concerns indebtedness secured directly
or indirectly, in whole or in pert, by any real property unless (i) the
holder of the mortgage, lien or security interest specifically elects in
writing to proceed with the arbitration, or (ii) all parties to the
arbitration waive any rights or benefits that might accrue to them by virtue of
the single action rule statute of California, thereby agreeing that all
indebtedness and obligations of the parties, and all mortgages, liens and
security interests securing such indebtedness and obligations, shall remain
fully valid and enforceable.  If any such
dispute is not submitted to arbitration, the dispute shall be referred to a
referee in accordance with California Code of Civil Procedure Section 638
et seq., and this general reference agreement is intended to be specifically
enforceable in accordance with said Section 638.  A referee with the qualifications required
herein for arbitrators shall be selected pursuant to the AAAs selection
procedures.  Judgment upon the decision
rendered by a referee shall be entered in the court in which such proceeding
was commenced in accordance with California Code of Civil Procedure
Sections 644 and 645.

 

(i)                                     Miscellaneous.  To the maximum extent practicable, the AAA,
the arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the dispute with the
AAA.  No arbitrator or other party to an
arbitration proceeding may disclose the existence, content or results thereof,
except for disclosures of information by a party required in the ordinary
course of its business or by applicable law or regulation.  If more than one agreement for arbitration by
or between the parties potentially applies to a dispute, the arbitration
provision most directly related to the Loan Documents or the subject matter of
the dispute shall control.  This
arbitration provision shall survive termination, amendment or expiration of any
of the Loan Documents or any relationship between the parties.

 

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

 

	
  Iteris, Inc.

  
	
   

  
	
   

  
	
  By:

  	
   

  	
  /s/
  Jack Johnson

  	
   

  
	
   

  	
   

  
	
  Title:

  	
   

  	
  CEO

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
  /s/
  Abbas Mohaddes

  	
   

  
	
   

  	
   

  
	
  Title:

  	
   

  	
  Secretary

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  WELLS FARGO BANK, NATIONAL ASSOCIATION

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/ Elisa Angeles

  	
   

  
	
   

  	
  Elisa Angeles, Relationship Manager

  	
   

  
						

 

13Exhibit 10.26

 

ASSUMPTION AND AMENDMENT
AGREEMENT

 

This Assumption Agreement
(“Agreement”), dated as of October 20, 2004, is made by and between
Wells Fargo Bank, National Association (“Bank”) and Iteris Holdings, Inc.,
a Delaware corporation (“Holdings”), successor by merger to Iteris, Inc.,
a Delaware corporation (“Original Borrower”).

 

R  E
C  I  T  A  L  S

 

A.                                   Reference
is made to that certain Credit Agreement dated as of May 27, 2004 between
Bank and Original Borrower, as “Borrower” (as amended, supplemented or
otherwise modified from time to time, the “Credit Agreement”).  Capitalized terms used and not otherwise
defined herein shall have the meanings given such terms in the Credit Agreement

 

B.                                     In
addition, to the Credit Agreement, Original Borrower is a party to the certain
other Loan Documents, including without limitation each of the documents set
forth on Schedule I attacked hereto.

 

C.                                     Pursuant
to a merger (the “Merger”) described in a Certificate of Ownership and Merger
Merging Iteris, Inc. into Iteris Holdings, Inc. dated as of
10/22/2004, 2004 between Original Borrower and Holdings (the “Merger Agreement”;
collectively with other related documents, the (“Merger Documents”), the
existence of Original Borrower as a separate legal entity will be terminated
and Holdings, as the surviving corporation of the Merger, will, by operation of
law, succeeded to the liabilities and assets of Original Borrower.

 

D.                                    Bank
is agreeable to continuing the Loan Documents in effect with Holdings pursuant
to and in accordance with the terms and conditions set forth below and, in
connection therewith, Bank and Holdings have agreed to certain modifications to
the Loan Documents as set forth herein.

 

AGREEMENT

 

NOW, THEREFORE, in
consideration of the terms and conditions herein, and for other good and
valuable consideration, the receipt and adequacy of which are acknowledged, the
parties hereto agree to the following covenants, agreements, amendments and
modifications:

 

1.                                       Merger
and Assumption.

 

(a)                                  Holdings
hereby (i) acknowledges and affirms that it will perform and discharge any
and all of the obligations of Original Borrower under the Loan Documents, and (ii) agrees
to be bound by all the terms, provisions and conditions of the Loan Documents
with the same force and effect as though Holdings were an original party
thereto.

 

1

 

(b)                                 The
execution of this Agreement by Holdings shall be deemed its execution of the
Credit Agreement and the other Loan Documents. 
This Agreement does not (i) constitute the creation of a new
obligation or the extinguishment of the obligations evidenced by the Credit
Agreement or the other Loan Documents, or (ii) in any way affect or impair
the liens of the Loan Documents granted by Original Borrower, each of which
Holdings acknowledges to be valid first liens on the property described therein
(except as otherwise set forth in the Loan Documents).  Holdings agrees that the liens of the Loan
Documents granted by Original Borrower shall continue in full force and effect,
unimpaired and unaffected by this Agreement or by the Merger.

 

2.                                       Representations
and Warranties.  Holdings makes the
following representations and warranties to Bank:

 

(a)                                  Holdings
makes all of the representations and warranties made by Borrower in the Loan
Documents, other than representations and warranties that expressly speak as of
a particular date;

 

(b)                                 The
execution, delivery and performance of this Agreement are within Holdings’
powers, have been duly authorized by all necessary action, have received all
necessary approvals and do not contravene any law or any contractual
restrictions binding on Holdings;

 

(c)                                  This
Agreement and, pursuant to the assumption described herein, the Loan Documents,
are the legal, valid and binding obligations of Holdings, enforceable against
Holdings in accordance with their respective terms, except as
enforcement may be limited by bankruptcy, insolvency, reorganization, arrangement,
moratorium or other similar laws relating to or affecting creditors’ rights
generally or equitable principles relating to the granting of specific
performance and other equitable remedies as a matter of judicial discretion;

 

(d)                                 There
are no pending or, to the best of Holdings’ knowledge, threatened actions,
suits, proceedings or investigations before any Governmental Authority,
arbitrator or administrative agency which could have a material adverse effect
on the financial condition or operation of Holdings other than those disclosed
by Holdings, to Bank in writing prior to the date hereof; and

 

(e)                                  The
Merger has become effective pursuant to the terms of the Merger Documents and
all applicable laws.  All assets of
Original Borrower existing immediately prior to the Merger have become vested
in Holdings, subject to all the liabilities of Original Borrower immediately
prior to the Merger.  All consents and
approvals of any governmental agency and any other entity necessary to effect
the Merger have been obtained and the Merger has been effected in compliance
with all applicable laws.

 

3.                                       Knowledge
of Loan Documents.  Holdings warrants
that it has full knowledge of all terms of the Loan Documents.  Holdings understands and acknowledges that
except as expressly provided herein or In the Loan Documents, Bank has not
waived any right of Bank or obligation of Holdings under the Loan Documents,
and Bank has not agreed to any modification or extension of any provision of
any Loan Document.

 

2

 

4.                                       Security
Interest.  Holdings hereby confirms
the grant to Bank by Original Borrower of a security interest in all presently
existing and hereafter acquired Collateral (as defined in the Continuing
Security Agreement Rights to Payment and Inventory and the Security Agreement
Equipment).  Holdings irrevocably
authorizes Bank at any time and from time to time to file in any applicable
jurisdiction any financing statements (including fixture filings) and
amendments thereto that contain information required by Article 9 of the
Uniform Commercial Code of each applicable jurisdiction for the filing of any
such financing statement or amendment, including (a) whether Holdings is
an organization, the type of organization and any organizational identification
number issued to Holdings and (b) in the case of a financing statement
filed as a fixture filing, a sufficient description of the real property to
which such Article 9 collateral relates. 
Holdings agrees to provide any necessary information in connection
therewith to Bank promptly upon request.

 

5.                                       Indemnity.  Holdings indemnifies Bank and its directors,
officers, agents, attorneys and employees (collectively, the “Indemnitees”)
from and against any and all claims, demands, actions or causes of action (and
liabilities, losses and reasonable costs or expenses that any Indemnitee
suffers or incurs as a result of the assertion of any such claim, demand,
action or cause of action) relating to the Merger or Holdings’ assumption of
the Loan Documents and the obligations evidenced thereby; provided that
no Indemnitee shall be entitled to indemnification for any liability, loss,
cost or expense caused by its own gross negligence or willful misconduct or for
any liability, loss, cost or expense asserted against it by another
Indemnitee.  Any obligation or liability
of Holdings to any Indemnitee under this Section 5 shall survive the
expiration or termination of the Credit Agreement and the repayment of all
Advances and the payment and performance of all other Obligations owed to Bank.

 

6.                                       Confirmation
of Liens.  Nothing contained herein
shall affect or be construed to affect any lien, security interest, charge or
encumbrance created by any Loan Document or the priority of that lien, security
interest, charge or encumbrance over other liens, security interests, charges
or encumbrances.

 

7.                                       Integration;
Interpretation.  This Agreement is a “Loan
Document” as defined in the Credit Agreement. 
The Loan Documents, including this Agreement, contain or expressly
incorporate by reference the entire agreement of the parties with respect to
the matters contemplated herein and supersede all prior negotiations.  The Loan Documents shall not be modified
except as set forth therein.  Any
reference herein to the Loan Documents includes any amendments, renewals or
extensions thereof approved by Bank and otherwise done in accordance with the
terms thereof.  Except as expressly
modified hereby, all terms and conditions of the Loan Documents shall continue
in full force and effect without waiver or modification, and Lenders reserves
all of their rights, privileges and remedies in connection therewith.

 

3

 

8.                                       Amendments
to Credit Agreement.

 

(a)                                  Section 1.5
of the Credit Agreement is amended to read in its entirety as follows:  “[Intentionally Omitted]”.

 

(b)                                 Section 4.3
is amended to read in its entirety as follows:

 

SECTION 4.3                          FINANCIAL STATEMENTS.  Provide to Bank all of the following, in form
and detail satisfactory to Bank:

 

(a)                                  not
later than 120 days after and as of the end of each fiscal year, audited
financial statements of Borrower, prepared by an outside accounting firm
acceptable to Bank, to include a balance sheet, statement of income and
statement of cash flows;

 

(b)                                 not
later than 45 days after and as of the end of each fiscal quarter, financial
statements of Borrower, prepared by Borrower, to include a balance sheet,
statement of income and statement of cash flows;

 

(c)                                  not
later than 15 days after and as of the end of each month, a borrowing base
certificate, an inventory collateral report, an aged listing of accounts
receivable and accounts payable and a reconciliation of accounts, and not later
than each June 30 and December 31, a list of the names and addresses
of all Borrower’s account debtors; and

 

(d)                                 from
time to time such other information as Bank may reasonably request.

 

(c)                                  Section 5.7
is amended to read in its entirety as follows:

 

SECTION 5.7                          DIVIDENDS,
DISTRIBUTIONS.  Declare or pay any
dividend or distribution either in cash, stock or any other property on
Borrower’s stock now or hereafter outstanding, nor redeem, retire, repurchase
or otherwise acquire any shares of any class of Borrowers stock now or
hereafter outstanding, except repurchases of stock pursuant to the terms
of incentive equity compensation arrangements with employees, directors or
consultants of Borrower in an aggregate amount not to exceed $75,000 in any
fiscal year.

 

9.                                       Successors
and Assigns.  This Agreement is
binding upon and shall inure to the benefit of the successors and assigns of
the parties, subject to all prohibitions of transfers contained in any Loan
Document.

 

4

 

10.                                 Miscellaneous.  This Agreement shall be governed by and
interpreted in accordance with the laws of the State of California.  This Agreement may be executed in
counterparts, which counterparts, when so executed and delivered shall together
constitute but one original.  Execution
of any such counterpart may be evidenced by a telecopier transmission of the
signature of such party.

 

11.                                 Address
for Notices.  Holdings’ address for
notices pursuant to the Credit Agreement and the other Loan Documents shall be
the address for notices provided for Borrower in the Credit Agreement or as
Holdings may otherwise designate by written notice to the other parties to the
Loan Documents.

 

[signature page follows]

 

5

 

IN WITNESS WHEREOF, the
parties hereto have executed this Agreement as of the date first set forth
above.

 

 

	
   

  	
   

  	
  “Holdings”

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  ITERIS
  HOLDINGS, INC.,

  
	
   

  	
   

  	
  a
  Delaware corporation

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/
  Gregory A. Miner

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Gregory
  A. Miner CEO

  	
   

  
	
   

  	
   

  	
   

  	
  [Printed Name and Title]

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  “Bank”

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  WELLS
  FARGO BANK, NATIONAL

  ASSOCIATION

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/
  Elisa Angeles

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Elisa
  Angeles Assistant Vice President

  	
   

  
	
   

  	
   

  	
   

  	
  [Printed Name and Title]

  	
   

  

 

6

 

SCHEDULE I

SELECTED LOAN DOCUMENTS

 

In addition to the Credit Agreement, Original Borrower
executed and delivered to Bank each of the following Loan Documents:

 

1.                                       Revolving
Line of Credit Note

 

2.                                       Term
Note

 

3.                                       Addendum
to Promissory Note (Prime Rate Pricing Adjustments)

 

4.                                       Continuing
Security Agreement Rights to Payments and Inventory

 

5.                                       Security
Agreement Equipment

 

7

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