Document:

(Working Capital Line of Credit)

SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT

This SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (this “Agreement”) dated as of July 18, 2007, between SILICON VALLEY BANK, a California corporation, with its principal place of business at 3003 Tasman Drive, Santa Clara, California 95054 and with a loan production office located at One Newton Executive Park, Suite 200, 2221 Washington Street, Newton, Massachusetts  02462 (FAX 617-969-5965) (“Bank”) and AXS-ONE INC., a Delaware corporation with its chief executive office located at 301 Route 17 North, Rutherford, New Jersey 07070 (“Borrower”), provides the terms on which Bank shall lend to Borrower and
Borrower shall repay Bank. The parties agree as follows:

1 ACCOUNTING AND OTHER TERMS

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

2 LOAN AND TERMS OF PAYMENT

2.1 Promise to Pay. Borrower hereby unconditionally promises to pay Bank the unpaid principal amount of all Advances hereunder with all interest, fees and finance charges due thereon as and when due in accordance with this Agreement.

2.1.1 Financing of Accounts.

(a) Availability. 

(i) Subject to the terms of this Agreement and provided that Borrower is not Streamline Facility Eligible, Borrower may request that Bank finance specific Eligible Accounts. Bank may, in its good faith business discretion in each instance, finance such Eligible Accounts by extending credit to Borrower in an amount equal to the result of the Advance Rate multiplied by the face amount of the Eligible Account. Bank may, in its sole discretion, change the percentage of the Advance Rate for a particular Eligible Account on a case by case basis.

(ii) Subject to the terms of this Agreement and provided that Borrower is Streamline Facility Eligible, Borrower may request that Bank finance Eligible Accounts on an aggregate basis. Bank may, in its good faith business discretion in each instance, finance Eligible Accounts on an aggregate basis by extending credit to Borrower in an amount equal to the result of the Advance Rate multiplied by the aggregate face amount of a summary listing of Eligible Accounts provided to Bank (the “Aggregate Eligible Accounts”). Bank 

 
 

may, in its sole discretion, change the percentage of the Advance Rate for the Aggregate Eligible Accounts on a case by case basis.

(iii) Any Credit Extension made pursuant to the terms of subsection (i) or (ii) above shall be hereinafter referred to as an “Advance”. When Bank makes an Advance, the Eligible Account or the Aggregate Eligible Accounts each become a separate “Financed Receivable”.

(b) Maximum Advances. The aggregate face amount of all Financed Receivables outstanding at any time may not exceed the Facility Amount.

(c) Borrowing Procedure. Borrower will deliver an Advance Request and Invoice Transmittal in the form attached hereto as Exhibit C signed by a Responsible Officer for each Advance it requests, accompanied by an accounts receivable aging, if Borrower is then Streamline Facility Eligible, or by invoices, if Borrower is not Streamline Facility Eligible. Bank may rely on information set forth in or provided with the Advance Request and Invoice Transmittal.

(d) Credit Quality; Confirmations. Bank may, at its option, conduct a credit check of the Account Debtor for each Account requested by Borrower for financing hereunder in order to approve any such Account Debtor’s credit before agreeing to finance such Account. At any time at which Borrower is not Streamline Facility Eligible, Bank may also verify directly with the respective Account Debtors the validity, amount and other matters relating to the Accounts (including confirmations of Borrower’s representations in Section 5.3) by means of mail, telephone or otherwise, either in the name of Borrower or Bank from time to time in its sole discretion. 

(e) Accounts Notification/Collection. Bank may notify any Person owing Borrower money of Bank’s security interest in the funds and verify and/or collect the amount of the Account.

(f) Early Termination. This Agreement may be terminated prior to the Maturity Date as follows: (i) by Borrower, effective three Business Days after written notice of termination is given to Bank; or (ii) by Bank at any time after and during the occurrence of  an Event of Default, without notice, effective immediately. If this Agreement is terminated (A) by Bank in accordance with clause (ii) in the foregoing sentence, or (B) by Borrower for any reason, Borrower shall pay to Bank a termination fee in an amount equal to the Minimum Finance Charge multiplied by the number of calendar quarters remaining prior to the Maturity Date (for purposes of this calculation, a partial calendar quarter shall be deemed to be one (1) calendar quarter) (the “Early Termination Fee”). The Early Termination Fee
shall be due and payable on the effective date of such termination and thereafter shall bear interest at a rate equal to the highest rate applicable to any of the Obligations. Notwithstanding the foregoing, Bank agrees to waive the Early Termination Fee if Bank agrees to refinance and redocument this Agreement under another division of Bank (in its sole and exclusive discretion) prior to the Maturity Date.

(g) Maturity. This Agreement shall terminate and all Obligations outstanding hereunder shall be immediately due and payable on the Maturity Date.

(h) Suspension of Advances. Borrower’s ability to request that Bank finance Eligible Accounts and Aggregate Eligible Accounts hereunder will terminate if, in Bank’s sole discretion, there has been a material adverse change in the general affairs, management, results of operation, condition (financial or otherwise) or the prospect of repayment of the Obligations, or there has been any material adverse deviation by Borrower from the most recent business plan of Borrower presented to and accepted by Bank prior to the execution of this Agreement.

(i) End of Streamline Facility Eligible Status. On any day that Borrower ceases to be Streamline Facility Eligible, all outstanding Advances made based on Aggregate Eligible Accounts 

 
 

shall, upon notice to Borrower, be immediately due and payable, together with all Finance Charges and Collateral Handling Fees accrued thereon. Provided no Event of Default then exists hereunder and subject to the terms of this Agreement, Bank may, in its good faith business discretion in each instance, agree to refinance such Advances with new Advances made based on specific Eligible Accounts. In connection with same, Borrower shall deliver to Bank an Advance Request and Invoice Transmittal containing detailed invoice reporting, signed by a Responsible Officer, together with a current accounts receivable aging and a copy of each invoice, all in accordance with Section 6.2(g) hereof and Bank, in its good faith business discretion in each instance, may finance same (in accordance with this Agreement, including, without limitation, Section 2.1.1 hereof). Each Eligible Account financed shall
thereafter be deemed to be a Financed Receivable for purposes of this Agreement. If, following such determination, the outstanding principal amount of the Obligations exceeds the amount of Advances Bank has agreed to make based on specific Eligible Accounts, Borrower shall immediately pay to Bank the excess and, in connection with same, hereby irrevocably authorizes Bank to debit any account of Borrower maintained by Borrower with Bank or any of Bank’s Affiliates for the amount of such excess.

(j) Commencement of Streamline Facility Eligible Status. On any day that Borrower becomes Streamline Facility Eligible, provided no Event of Default then exists hereunder and subject to the terms of this Agreement, Bank may, in its good faith business discretion in each instance, agree to refinance such Advances with new Advances made based on Aggregate Eligible Accounts (provided that Borrower has sufficient availability based upon its accounts receivable aging). In connection with same, Borrower shall deliver to Bank an Advance Request and Invoice Transmittal signed by a Responsible Officer, together with a current summary of Borrower’s accounts receivable aging, all in accordance with Section 6.2(h) hereof and Bank, in its good faith business discretion in each instance, may finance same (in
accordance with this Agreement, including, without limitation, Section 2.1.1 hereof). Each Aggregate Eligible Account financed shall thereafter be deemed to be a Financed Receivable for purposes of this Agreement. If, following such refinancing, the outstanding principal amount of the Obligations exceeds the amount of Advances Bank has made based on Aggregate Eligible Accounts, Borrower shall immediately pay to Bank the excess and, in connection with same, hereby irrevocably authorizes Bank to debit any account of Borrower maintained by Borrower with Bank or any of Bank’s Affiliates for the amount of such excess.

2.2 Collections, Finance Charges, Remittances and Fees. The Obligations shall be subject to the following fees and Finance Charges. Unpaid fees and Finance Charges may, in Bank’s discretion, accrue interest and fees as described in Section 9.2 hereof. 

2.2.1 Collections. Collections will be credited to the Financed Receivable Balance for such Financed Receivable, but if there is an Event of Default, Bank may apply Collections to the Obligations in any order it chooses. If Bank receives a payment for both a Financed Receivable and a non-Financed Receivable, the funds will first be applied to the Financed Receivable and, if there is no Event of Default then existing, the excess will be remitted to Borrower, subject to Section 2.2.7. 

2.2.2 Facility Fee. A fully earned, non-refundable facility fee of Five Thousand Dollars ($5,000.00) is due upon execution of this Agreement (the “Facility Fee”).

2.2.3 Finance Charges. In computing Finance Charges on the Obligations under this Agreement, all Collections received by Bank shall be deemed applied by Bank on account of the Obligations three (3) Business Days after receipt of the Collections. Borrower will pay a finance charge (the “Finance Charge”) on each Financed Receivable which is equal to the Applicable Rate divided by 360 multiplied by the number of days each such Financed Receivable is outstanding multiplied by the outstanding Financed Receivable Balance. Except as otherwise provided in Section 2.3.1(b)(i), the Finance Charge is payable when the Advance made based on such Financed Receivable is payable in accordance with Section 2.3 hereof. After an Event of Default, the Applicable Rate will increase an additional five percent (5.0%) per annum effective immediately upon the occurrence of such Event of Default. In the event that the aggregate amount of Finance Charges earned by Bank in any calendar quarter is less than the Minimum Finance Charge, Borrower shall pay to Bank an additional Finance Charge equal to (i) the Minimum Finance Charge minus (ii) the aggregate amount of all Finance Charges earned by Bank in such 

 
 

calendar quarter. Such additional Finance Charge shall be payable on the first day of the next calendar quarter.

2.2.4 Collateral Handling Fee. For any time at which Borrower is not Streamline Facility Eligible, Borrower will pay to Bank a collateral handling fee equal to 0.25% per month of the Financed Receivable Balance for each Financed Receivable outstanding based upon a 360 day year (the “Collateral Handling Fee”). This fee is charged on a daily basis which is equal to the Collateral Handling Fee divided by 30, multiplied by the number of days each such Financed Receivable is outstanding, multiplied by the outstanding Financed Receivable Balance. Except as otherwise provided in Section 2.3.1(b)(i), the Collateral Handling Fee is payable when the Advance made based on such Financed Receivable is payable in accordance with Section 2.3 hereof. In computing Collateral Handling Fees under
this Agreement, all Collections received by Bank shall be deemed applied by Bank on account of Obligations three (3) Business Days after receipt of the Collections. After an Event of Default, the Collateral Handling Fee will increase an additional 0.50% effective immediately upon such Event of Default.

2.2.5 Accounting. After each Reconciliation Period, Bank will provide an accounting of the transactions for that Reconciliation Period, including the amount of all Financed Receivables, all Collections, Adjustments, Finance Charges, Collateral Handling Fee and the Facility Fee. If Borrower does not object to the accounting in writing within thirty (30) days it shall be considered accurate. All Finance Charges and other interest and fees are calculated on the basis of a 360 day year and actual days elapsed.

2.2.6 Deductions. Bank may deduct fees, Finance Charges, Advances which become due pursuant to Section 2.3, and other amounts due pursuant to this Agreement from any Advances made or Collections received by Bank.

2.2.7 Lockbox; Account Collection Services. 

(a) As and when directed by Bank from time to time, at Bank’s option and at the sole and exclusive discretion of Bank (regardless of whether an Event of Default has occurred), Borrower shall direct each Account Debtor (and each depository institution where proceeds of Accounts are on deposit) to remit payments with respect to the Accounts to a lockbox account established with Bank or to wire transfer payments to a cash collateral account that Bank controls (collectively, the “Lockbox”). It will be considered an immediate Event of Default if the Lockbox is not set-up and operational on the Closing Date. 

(b) For any time at which such Lockbox is not established, the proceeds of the Accounts shall be paid by the Account Debtors to an address consented to by Bank. Upon receipt by Borrower of such proceeds, Borrower shall immediately transfer and deliver same to Bank, along with a detailed cash receipts journal. Provided no Event of Default exists or an event that with notice or lapse of time will be an Event of Default, within three (3) days of receipt of such amounts by Bank, Bank will turn over to Borrower the proceeds of the Accounts other than Collections with respect to Financed Receivables and the amount of Collections in excess of the amounts for which Bank has made an Advance to Borrower, less any amounts due to Bank, such as the Finance Charge, the Facility Fee, payments due to Bank, other fees and expenses, or otherwise; provided, however, Bank may hold such excess
amount with respect to Financed Receivables as a reserve until the end of the applicable Reconciliation Period if Bank, in its discretion, determines that other Financed Receivable(s) may no longer qualify as an Eligible Account at any time prior to the end of the subject Reconciliation Period. This Section does not impose any affirmative duty on Bank to perform any act other than as specifically set forth herein. All Accounts and the proceeds thereof are Collateral and if an Event of Default occurs, Bank may apply the proceeds of such Accounts to the Obligations.

2.3 Repayment of Obligations; Adjustments.

2.3.1 Repayment. 

 
 

(a) With respect to Advances made based on specific Eligible Accounts, Borrower will repay each Advance on the earliest of: (i) the date on which payment is received of the Financed Receivable with respect to which the Advance was made; (ii) the date on which the Financed Receivable is no longer an Eligible Account; (iii) the date on which any Adjustment is asserted to the Financed Receivable (but only to the extent of the Adjustment if the Financed Receivable remains otherwise an Eligible Account); (iv) the date on which there is a breach of any warranty or representation set forth in Section 5.3; or (v) the Maturity Date (including any early termination). Each payment will also include all accrued Finance Charges and Collateral Handling Fees with respect to such Advance and all other amounts then due and payable hereunder.

(b) With respect to Advances made based on Aggregate Eligible Accounts:

(i) Borrower shall pay to Bank, on the first day of each Reconciliation Period, all accrued Finance Charges and Collateral Handling Fees on the Advances made based on the Aggregate Eligible Accounts; and

(ii) Borrower shall also pay the principal amount of each Advance made based on Aggregate Eligible Accounts on the earliest of: (A) the date the Financed Receivable (or any portion thereof) is no longer an Eligible Account, or an Adjustment has been made to any portion of the Aggregate Eligible Accounts, or any Account comprising the Aggregate Eligible Accounts has been paid by the Account Debtor (but in each case only up to the portion of Advances such that the aggregate Financed Receivable Balance (net of any Accounts that are paid, not Eligible Accounts, or subject to an Adjustment) is not less than 125% of the aggregate Advances made thereon); or (B) the date on which there is a breach of any warranty or representation set forth in Section 5.3; or (C) the Maturity Date (including any early termination); or (D) as required pursuant to Section 2.1.1(i).

2.3.2 Repayment on Event of Default. When there is an Event of Default, Borrower will, if Bank demands (or, upon the occurrence of an Event of Default under Section 8.5, immediately without notice or demand from Bank) repay all of the Advances. The demand may, at Bank’s option, include the Advance for each Financed Receivable then outstanding and all accrued Finance Charges, the Early Termination Fee, Collateral Handling Fee, attorneys’ and professional fees, court costs and expenses, and any other Obligations.

2.3.3 Debit of Accounts. Bank may debit any of Borrower’s deposit accounts for payments or any amounts Borrower owes Bank hereunder. Bank shall promptly notify Borrower when it debits Borrower’s accounts. These debits shall not constitute a set-off.

2.3.4 Adjustments. If at any time during the term of this Agreement any Account Debtor asserts an Adjustment or if Borrower issues a credit memorandum or if any of the representations, warranties or covenants set forth in Section 5.3 are no longer true in all material respects, Borrower will promptly advise Bank. 

2.4 Power of Attorney. Borrower irrevocably appoints Bank and its successors and assigns as attorney-in-fact and authorizes Bank, to: (a) following the occurrence and during the continuance of an Event of Default, (i) sell, assign, transfer, pledge, compromise, or discharge all or any part of the Financed Receivables; (ii) demand, collect, sue, and give releases to any Account Debtor for monies due and compromise, prosecute, or defend any action, claim, case or proceeding about the Financed Receivables, including filing a claim or voting a claim in any bankruptcy case in Bank’s or Borrower’s name, as Bank chooses; and (iii) prepare, file and sign Borrower’s name on any notice, claim, assignment, demand, draft, or notice of or satisfaction of lien or mechanics’ lien or
similar document; and (b) regardless of whether there has been an Event of Default,  (i) notify all Account Debtors to pay Bank directly; (ii) receive, open, and dispose of mail addressed to Borrower; (iii) endorse Borrower’s name on checks or other instruments

 
 

(to the extent necessary to pay amounts owed pursuant to this Agreement); and (iv) execute on Borrower’s behalf any instruments, documents, financing statements to perfect Bank’s interests in the Financed Receivables and Collateral and do all acts and things necessary or expedient, as determined solely and exclusively by Bank, to protect or  preserve, Bank’s rights and remedies under this Agreement, as directed by Bank.

3 CONDITIONS OF LOANS

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

(a) a certificate of the Secretary of Borrower with respect to articles, bylaws, incumbency and resolutions authorizing the execution and delivery of this Agreement;

(b) ratification of subordination agreement from Blue Line Capital;

(c) Perfection Certificate by Borrower;

(d) a legal opinion of Borrower’s counsel (authority/enforceability), in form and substance acceptable to Bank;

(e) Account Control Agreement/ Investment Account Control Agreement;

(f) evidence satisfactory to Bank that the insurance policies required by Section 6.5 hereof are in full force and effect, together with appropriate evidence showing lender loss payable and/or additional insured clauses or endorsements in favor of Bank;

(g) payment of the fees and Bank Expenses then due and payable;

(h) Certificates of Foreign Qualification (as applicable); 

(i) Certificate of Good Standing/Legal Existence; and

(j) such other documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate.

3.2 Conditions Precedent to all Advances. Bank’s agreement to make each Advance, including the initial Advance, is subject to the following:

(a) receipt of the Advance Request and Invoice Transmittal; 

(b) Bank shall have (at its option) conducted the confirmations and verifications as described in Section 2.1.1(d); and

(c) each of the representations and warranties in Section 5 shall be true on the date of the Advance Request and Invoice Transmittal and on the effective date of each Advance and no Event of Default shall have occurred and be continuing, or result from the Advance. Each Advance is Borrower’s representation and warranty on that date that the representations and warranties in Section 5 remain true.

 
 

4 CREATION OF SECURITY INTEREST

4.1 Grant of Security Interest. Borrower hereby grants Bank, to secure the payment and performance in full of all of the Obligations and the performance of each of Borrower’s duties under the Loan Documents, a continuing security interest in, and pledges and assigns to Bank, the Collateral, wherever located, whether now owned or hereafter acquired or arising, and all proceeds and products thereof. Borrower warrants and represents that the security interest granted herein shall be a first priority security interest in the Collateral. 

If the Agreement is terminated, Bank’s lien and security interest in the Collateral shall continue until Borrower fully satisfies its Obligations. If Borrower shall at any time, acquire a commercial tort claim, Borrower shall promptly notify Bank in a writing signed by Borrower of the brief details thereof and grant to Bank in such writing a security interest therein and in the proceeds thereof, all upon the terms of this Agreement, with such writing to be in form and substance satisfactory to Bank.

4.2 Authorization to File Financing Statements. Borrower hereby authorizes Bank to file financing statements, without notice to Borrower, with all appropriate jurisdictions in order to perfect or protect Bank’s interest or rights hereunder, which financing statements may indicate the Collateral as “all assets of the Debtor” or words of similar effect, or as being of an equal or lesser scope, or with greater detail, all in Bank’s discretion, and may include a notice that any disposition of the Collateral, by Borrower or any other Person, shall be deemed to violate the rights of Bank under the Code.

5 REPRESENTATIONS AND WARRANTIES

Borrower represents and warrants as follows: 

5.1 Due Organization and Authorization. Borrower and each of its domestic Subsidiaries are duly existing and in good standing as a Registered Organizations in their respective jurisdictions of formation and are qualified and licensed to do business and are in good standing in any jurisdiction in which the conduct of their respective business or ownership of property requires that they be qualified except where the failure to do so could not reasonably be expected to have a material adverse effect on Borrower’s business. In connection with this Agreement, Borrower has delivered to Bank a completed certificate signed by Borrower (the “Perfection Certificate”). Borrower represents and warrants to Bank that: (a) Borrower’s exact legal name is that indicated on the
Perfection Certificate and on the signature page hereof; (b) Borrower is an organization of the type and is organized in the jurisdiction set forth in the Perfection Certificate; (c) the Perfection Certificate accurately sets forth Borrower’s organizational identification number or accurately states that Borrower has none; (d) the Perfection Certificate accurately sets forth Borrower’s place of business, or, if more than one, its chief executive office as well as Borrower’s mailing address (if different than its chief executive office); (e) Borrower (and each of its predecessors) has not, in the past five (5) years, changed its jurisdiction of formation, organizational structure or type, or any organizational number assigned by its jurisdiction; and (f) all other information set forth on the Perfection Certificate pertaining to Borrower and each of its Subsidiaries is accurate and complete (it being understood and agreed that Borrower may from time to time
update certain information in the Perfection Certificate after the Closing Date to the extent permitted by one or more specific provisions in this Agreement). If Borrower is not now a Registered Organization but later becomes one, Borrower shall promptly notify Bank of such occurrence and provide Bank with Borrower’s organizational identification number.

The execution, delivery and performance by Borrower of the Loan Documents to which it is a party have been duly authorized, and do not (i) conflict with any of Borrower’s organizational documents, 

 

(ii) contravene, conflict with, constitute a default under or violate any material Requirement of Law, (iii) contravene, conflict or violate any applicable order, writ, judgment, injunction, decree, determination or award of any Governmental Authority by which Borrower or any its Subsidiaries or any of their property or assets may be bound or affected, (iv) require any action by, filing, registration, or qualification with, or approval from any Governmental Authority (except such approvals which have already been obtained and are in full force and effect), or (v) constitute an event of default under any material agreement by which Borrower is bound. Borrower is not in default under any agreement to which it is a party or by which it is bound in which the default could have a material adverse effect on Borrower’s business.

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

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

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

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

Without prior consent from Bank, Borrower shall not enter into, or become bound by, any such license or agreement which is reasonably likely to have a material impact on Borrower’s business or financial condition. Borrower shall take such steps as Bank requests to obtain the consent of, or waiver by, any person whose consent or waiver is necessary for all such licenses or contract rights to be deemed “Collateral” and for Bank to have a security interest in it that might otherwise be restricted or prohibited by law or by the terms of any such license or agreement, whether now existing or entered into in the future.

5.3 Financed Receivables. Borrower represents and warrants for each Financed Receivable:

(a) Each Financed Receivable is an Eligible Account;

 

(b) Borrower is the owner with legal right to sell, transfer, assign and encumber such Financed Receivable;

(c) The correct amount is on the Advance Request and Invoice Transmittal and is not disputed;

(d) Except with respect to Deferred Revenue to the extent that it is not offset in accordance with the definition of Advance Rate, payment is not contingent on any obligation or contract and Borrower has fulfilled all its obligations as of the Advance Request and Invoice Transmittal date;

(e) Each Financed Receivable is based on an actual sale and delivery of goods and/or services rendered, is due to Borrower, is not past due or in default, has not been previously sold, assigned, transferred, or pledged and is free of any liens, security interests and encumbrances other than Permitted Liens;

(f) There are no defenses, offsets, counterclaims or agreements for which the Account Debtor may claim any deduction or discount;

(g) Borrower reasonably believes no Account Debtor is insolvent or subject to any Insolvency Proceedings; 

(h) Borrower has not filed or had filed against it Insolvency Proceedings and does not anticipate any filing;

(i) Bank has the right to endorse and/ or require Borrower to endorse all payments received on Financed Receivables and all proceeds of Collateral; and

(j) No representation, warranty or other statement of Borrower in any certificate or written statement given to Bank contains any untrue statement of a material fact or omits to state a material fact necessary to make the statement contained in the certificates or statement not misleading.

5.4 Litigation. There are no actions or proceedings pending or, to the knowledge of Borrower’s Responsible Officers, threatened by or against Borrower or any Subsidiary in which an adverse decision could reasonably be expected to cause a Material Adverse Change.

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

5.6 Solvency. The fair salable value of Borrower’s assets (including goodwill minus disposition costs) exceeds the fair value of its liabilities; Borrower is not left with unreasonably small capital after the transactions in this Agreement; and Borrower is able to pay its debts (including trade debts) as they mature.

5.7 Regulatory Compliance. Borrower is not an “investment company” or a company “controlled” by an “investment company” under the Investment Company Act. Borrower is not engaged as one of its important activities in extending credit for margin stock (under Regulations X, T and U of the Federal Reserve Board of Governors). Borrower has complied in all material respects with the Federal Fair Labor Standards Act. Borrower has not violated any laws, ordinances or rules, the violation of which could 

 

reasonably be expected to cause a Material Adverse Change. None of Borrower’s or any Subsidiary’s properties or assets has been used by Borrower or any Subsidiary or, to the best of Borrower’s knowledge, by previous Persons, in disposing, producing, storing, treating, or transporting any hazardous substance other than legally. Borrower and each Subsidiary have 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. Borrower and each Subsidiary have obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all government authorities that are necessary to continue its business as currently conducted except where the failure to obtain or make such consents, declarations, notices or filings would
not reasonably be expected to cause a Material Adverse Change. Borrower and each of its Subsidiaries have obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all Government Authorities that are necessary to continue their respective businesses as currently conducted.

No certificate, authorization, permit, consent, approval, order, license, exemption from, or filing or registration or qualification with, any Governmental Authority or any Requirement of Law is or will be required to authorize, or is otherwise required in connection with Borrower’s performance of its obligations under the Loan Documents and the creation of the Liens described in and granted by Borrower pursuant to the Loan Documents.

5.8 Subsidiaries. Borrower does not own any stock, partnership interest or other equity securities except for (a) Permitted Investments and (b) Borrower’s ownership of stock in certain foreign Subsidiaries as detailed on the Perfection Certificate.

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

6 AFFIRMATIVE COVENANTS

Borrower shall do all of the following:

6.1 Government Compliance. Maintain its and all its domestic Subsidiaries’ legal existence and good standing in their respective jurisdictions of formation and maintain qualification in each jurisdiction in which the failure to so qualify would reasonably be expected to have a material adverse effect on Borrower’s business or operations. Borrower shall comply, and have each Subsidiary comply, with all laws, ordinances and regulations to which it is subject, noncompliance with which could have a material adverse effect on Borrower’s business or operations or would reasonably be expected to cause a Material Adverse Change.

6.2 Financial Statements, Reports, Certificates.

(a) Deliver to Bank:  (i) as soon as available, but no later than thirty (30) days after the last day of each month, a company prepared consolidated balance sheet and income statement covering Borrower’s consolidated operations during the period certified by a Responsible Officer and in a form acceptable to Bank; (ii) as soon as available, but no later than one hundred eighty (180) days after the last 

 

day of Borrower’s fiscal year, audited  consolidated financial statements prepared under GAAP, consistently applied, together with an unqualified opinion on the financial statements from an independent certified public accounting firm reasonably acceptable to Bank; (iii) within five (5) days of filing, copies of all statements, reports and notices made available to Borrower’s equity security holders and all reports on Form 10-K, 10-Q and 8-K filed with the Securities and Exchange Commission; (iv) a prompt report of any legal actions pending or threatened against Borrower or any Subsidiary that could result in damages or costs to Borrower or any Subsidiary of One Hundred Thousand Dollars ($100,000.00) or more; (v) prompt notice of any material change in the composition of the Intellectual Property Collateral, or the registration of any copyright, including any subsequent ownership
right of Borrower in or to any copyright, patent or trademark not shown in the IP Agreement or knowledge of an event that materially adversely affects the value of the Intellectual Property Collateral; (vi) as soon as available, but no later than forty-five (45) days after the last day of Borrower’s fiscal year, Borrower’s financial projections for the current fiscal year as approved by Borrower’s board of directors; and (vii) budgets, sales projections, operating plans or other financial information reasonably requested by Bank.

(b) Within thirty (30) days after the last day of each month, deliver to Bank with the monthly financial statements a Compliance Certificate signed by a Responsible Officer in the form of Exhibit B. 

(c) Allow Bank to audit Borrower’s Collateral, including, but not limited to, Borrower’s Accounts at Borrower’s expense, upon reasonable notice to Borrower; provided, however, prior to the occurrence of an Event of Default, Borrower shall be obligated to pay for not more than one (1) audit per year. After the occurrence of an Event of Default, Bank may audit Borrower’s Collateral, including, but not limited to, Borrower’s Accounts and accounts receivable at Borrower’s expense and at Bank’s sole and exclusive discretion and without notification and authorization from Borrower.

(d) Upon Bank’s request, provide a written report respecting any Financed Receivable, if payment of any Financed Receivable does not occur by its due date and include the reasons for the delay.

(e) Provide Bank with, as soon as available, but no later than thirty (30) days following each Reconciliation Period, an aged listing of accounts receivable and accounts payable by invoice date, in form acceptable to Bank.

(f) Provide Bank with, as soon as available, but no later than thirty (30) days following each Reconciliation Period, a Deferred Revenue report, in form acceptable to Bank.

(g) Immediately upon Borrower ceasing to be Streamline Facility Eligible, provide Bank with a current aging of Accounts and, to the extent not previously delivered to Bank, a copy of the invoice for each Eligible Account and an Advance Request and Invoice Transmittal with respect to each such Account.

(h) Immediately upon Borrower becoming Streamline Facility Eligible, provide Bank with a current summary aging of Accounts and an Advance Request and Invoice Transmittal with respect to such Accounts.

6.3 Inventory; Returns. Keep all Inventory in good and marketable condition, free from material defects. Returns and allowances between Borrower and its Account Debtors shall follow Borrower’s customary practices as they exist at the Closing Date. Borrower must promptly notify Bank of all returns, recoveries, disputes and claims that involve more than One Hundred Thousand Dollars ($100,000.00).

6.4 Taxes. Borrower shall make, and cause each Subsidiary to make, timely payment of all material federal, state, and local taxes or assessments (other than taxes and assessments which Borrower is 

 

contesting in good faith, with adequate reserves maintained in accordance with GAAP) and will deliver to Bank, on demand, appropriate certificates attesting to such payments.

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

6.6 Accounts.

(a) To permit Bank to monitor Borrower’s financial performance and condition, Borrower, and all Borrower’s domestic Subsidiaries, shall maintain Borrower’s and such domestic Subsidiaries’, depository and operating accounts and securities accounts with Bank and Bank’s affiliates. Any Guarantor shall maintain all depository, operating and securities accounts with Bank, or SVB Securities.

(b) Borrower shall obtain Bank’s prior written consent to open any deposit or securities account opened by Borrower with any institution other than Bank. In addition, for each such account that Borrower or any Guarantor at any time opens or maintains, Borrower shall, at Bank’s request and option, pursuant to an agreement in form and substance acceptable to Bank, cause the depository bank or securities intermediary to agree that such account is the collateral of Bank pursuant to the terms hereunder. The provisions of this Section 6.6(b) 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.

6.7 Financial Covenant - Net Losses. Borrower shall have quarterly net losses of not more than (a) Four Million Dollars ($4,000,000.00) for the quarter ending June 30, 2007, (b) Two Million Eight Hundred Thousand Dollars ($2,800,000.00) for the quarter ending September 30, 2007, and (c) Two Million Four Hundred Thousand Dollars ($2,400,000.00) for the quarter ending December 31, 2007.

6.8 Protection of Intellectual Property Rights. Borrower shall: (a) protect, defend and maintain the validity and enforceability of its intellectual property; (b) promptly advise Bank in writing of material infringements of its intellectual property; and (c) not allow any intellectual property material to Borrower’s business to be abandoned, forfeited or dedicated to the public without Bank’s written consent.

6.9
  Further Assurances.
  Borrower shall execute any further instruments and take further action as Bank
  reasonably requests to perfect or continue Bank’s security interest in
  the Collateral or to effect the purposes of this Agreement.

7
  NEGATIVE COVENANTS

 

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

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

7.2 Changes in Business, Ownership, Management or Business Locations. Engage in or permit any of its Subsidiaries to engage in any business other than the businesses currently engaged in by Borrower or reasonably related thereto, or have a material change in its ownership (other than by the sale of Borrower’s equity securities in a public offering or to venture capital investors so long as Borrower identifies to Bank the venture capital investors prior to the closing of the investment), or management. Borrower shall not, without at least thirty (30) days prior written notice to Bank: (a) relocate its chief executive office, or add any new offices or business locations, including warehouses  (unless such new offices or business locations contain less than Five Thousand Dollars
($5,000.00) in Borrower’s assets or property), or (b) change its jurisdiction of organization, or (c) change its organizational structure or type, or (d) change its legal name, or (e) change any organizational number (if any) assigned by its jurisdiction of organization.

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

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

7.5 Encumbrance. Create, incur, or allow any Lien on any of its property, or assign or convey any right to receive income, including the sale of any Accounts, or permit any of its domestic Subsidiaries to do so, except for Permitted Liens, or permit any Collateral not to be subject to the first priority security interest granted herein, or enter into any agreement, document, instrument or other arrangement (except with or in favor of Bank) with any Person which directly or indirectly prohibits or has the effect of prohibiting Borrower or any domestic Subsidiary from assigning, mortgaging, pledging, granting a security interest in or upon, or encumbering any of Borrower’s or any domestic Subsidiary’s intellectual property, except as is otherwise permitted in Section 7.1 hereof
and the definition of “Permitted Liens” herein. The Collateral may also be subject to Permitted Liens.

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

7.7 Transactions with Affiliates. Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower, except for transactions that are in the ordinary course of Borrower’s business (provided that, for transactions for which the Affiliate is a Subsidiary, such transactions need not be in the ordinary course of Borrower’s business), upon fair and reasonable terms that are no less favorable to Borrower than would be obtained in an arm’s length transaction with a non-affiliated Person.

 

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

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

8 EVENTS OF DEFAULT

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

8.1 Payment Default. Borrower fails to pay any of the Obligations when due;

8.2 Covenant Default. Borrower fails or neglects to perform any obligation in Section 6 or violates any covenant in Section 7 or fails or neglects to perform, keep, or observe any other material term, provision, condition, covenant or agreement contained in this Agreement, any Loan Documents and as to any default under such other term, provision, condition, covenant or agreement that can be cured, has failed to cure the default within ten (10) days after the occurrence thereof; provided, however, grace and cure periods provided under this section shall not apply to financial covenants or any other covenants that are required to be satisfied, completed or tested by a date certain;

8.3 Material Adverse Change. A Material Adverse Change occurs;

8.4 Attachment. (i) Any portion of Borrower’s assets is attached, seized, levied on, or comes into possession of a trustee or receiver and the attachment, seizure or levy is not removed in ten (10) days; (ii) the service of process upon Bank or Borrower seeking to attach, by trustee or similar process, any funds of Borrower on deposit with Bank, or any entity under the control of Bank (including a subsidiary); (iii) Borrower is enjoined, restrained, or prevented by court order from conducting any part of its business; (iv) a judgment or other claim becomes a Lien on a portion of Borrower’s assets; or (v) a notice of lien, levy, or assessment is filed against any of Borrower’s assets by any government agency and not paid within ten (10) days after
Borrower receives notice;

8.5 Insolvency. (a) Borrower is unable to pay its debts (including trade debts) as they become due or otherwise becomes insolvent; (b) Borrower begins an Insolvency Proceeding; or (c) an Insolvency Proceeding is begun against Borrower and not dismissed or stayed within thirty (30) days (but

 

no Advances shall be made while of any of the conditions described in clause (a) exist and/or until any Insolvency Proceeding is dismissed);

8.6 Other Agreements. If there is a default in any agreement to which Borrower is a party with a third party or parties resulting in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness in an amount in excess of One Hundred Thousand Dollars ($100,000) or that could result in a Material Adverse Change;

8.7 Judgments. A judgment or judgments for the payment of money in an amount, individually or in the aggregate, of at least Fifty Thousand Dollars ($50,000.00) (not covered by independent third-party insurance as to which liability has been accepted by the insurance carrier) shall be rendered against Borrower and shall remain unsatisfied and unstayed for a period of ten (10) days (provided that no Advances will be made prior to the satisfaction or stay of such judgment);

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

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

9 BANK’S RIGHTS AND REMEDIES

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

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

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

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

(d) Settle or adjust disputes and claims directly with Account Debtors for amounts, on terms and in any order that Bank considers advisable and notify any Person owing Borrower money of Bank’s security interest in such funds and verify the amount of such account. Borrower shall collect all payments in trust for Bank and, if requested by Bank, immediately deliver the payments to Bank in the form received from the Account Debtor, with proper endorsements for deposit;  

 

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

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

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

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

(i) Exercise all rights and remedies and dispose of the Collateral according to the Code; and

(j) Demand and receive possession of Borrower’s Books.

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

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

9.4 Remedies Cumulative. Bank’s rights and remedies under this Agreement, the Loan Documents, and all other agreements are cumulative. Bank has all rights and remedies provided under the Code, by law, or in equity. Bank’s exercise of one right or remedy is not an election, and Bank’s waiver of any Event of Default is not a continuing waiver. Bank’s delay is not a waiver, election, or acquiescence. No waiver hereunder shall be effective unless signed by Bank and then is only effective for the specific instance and purpose for which it was given.

 

 

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

10 NOTICES.

Notices or demands by either party about this Agreement must be in writing and personally delivered or sent by an overnight delivery service, by certified mail postage prepaid return receipt requested, or by fax to the addresses listed at the beginning of this Agreement. A party may change notice address by written notice to the other party.

11 CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER

Massachusetts law governs the Loan Documents without regard to principles of conflicts of law. Borrower and Bank each submit to the exclusive jurisdiction of the State and Federal courts in Massachusetts; provided, however, that if for any reason Bank cannot avail itself of such courts in the Commonwealth of Massachusetts, Borrower accepts jurisdiction of the courts and venue in Santa Clara County, California. NOTWITHSTANDING THE FOREGOING, BANK SHALL HAVE THE RIGHT TO BRING ANY ACTION OR PROCEEDING AGAINST BORROWER OR ITS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION WHICH BANK DEEMS NECESSARY OR APPROPRIATE IN ORDER TO REALIZE ON THE COLLATERAL OR TO OTHERWISE ENFORCE BANK’S RIGHTS AGAINST BORROWER OR ITS PROPERTY. Borrower expressly submits and consents in advance to such jurisdiction in any action or suit commenced in any such court, and Borrower hereby waives any
objection that it may have based upon lack of personal jurisdiction, improper venue, or forum non conveniens and hereby consents to the granting of such legal or equitable relief as is deemed appropriate by such court. Borrower hereby waives personal service of the summons, complaints, and other process issued in such action or suit and agrees that service of such summons, complaints, and other process may be made by registered or certified mail addressed to Borrower at the address set forth in Section 10 of this Agreement and that service so made shall be deemed completed upon the earlier to occur of Borrower’s actual receipt thereof or three (3) days after deposit in the U.S. mails, proper postage prepaid.

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

12 GENERAL PROVISIONS

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

 

 

12.2 Indemnification. Borrower agrees to  indemnify, defend, and hold Bank and its officers, directors, employees, agents, attorneys or any other Person affiliated with or representing Bank harmless against:  (a) all obligations, demands, claims, and liabilities (collectively, “Claims”) asserted by any other party in connection with the transactions contemplated by the Loan Documents; and (b) all losses or Bank Expenses incurred, or paid by Bank from, following, or arising from transactions between Bank and Borrower (including reasonable attorneys’ fees and expenses), except for Claims and/or losses directly caused by Bank’s gross negligence or willful misconduct.

12.3 Right of Set-Off.  Borrower hereby grants to Bank, a lien, security interest and right of set-off as security for all Obligations to 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 Bank or any entity under the control of Bank (including a Bank subsidiary) or in transit to any of them. At any time after the occurrence and during the continuance of an Event of Default, without demand or notice, Bank may set off the same or any part thereof and apply the same to any liability or obligation of Borrower even though unmatured and regardless of the adequacy of any other collateral securing the Obligations. ANY AND ALL RIGHTS TO REQUIRE BANK TO EXERCISE ITS
RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE OBLIGATIONS, PRIOR TO EXERCISING ITS RIGHT OF SETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF BORROWER, ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED.

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

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

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

12.7 Counterparts. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, are an original, and all taken together, constitute one Agreement.

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

12.9 Confidentiality. In handling any confidential information, Bank shall exercise the same degree of care that it exercises for its own proprietary information, but disclosure of information may be made: (a) to Bank’s Subsidiaries or Affiliates; (b) to prospective transferees or purchasers of any interest in the Advances (provided, however, Bank shall use commercially reasonable efforts to obtain such 

 

prospective transferee’s or purchaser’s agreement to the terms of this provision); (c) as required by law, regulation, subpoena, or other order, (d) to Bank’s regulators or as otherwise in connection with Bank’s examination or audit; and (e) as Bank considers appropriate in exercising remedies under this Agreement. Confidential information does not include information that either: (i) is in the public domain or in Bank’s possession when disclosed to Bank, or becomes part of the public domain after disclosure to Bank; or (ii) is disclosed to Bank by a third party, if Bank does not know that the third party is prohibited from disclosing the information.

12.10 Ratification of Intellectual Property Security Agreement. Borrower hereby ratifies, confirms and reaffirms, all and singular, the terms and conditions of a certain Intellectual Property Security Agreement dated as of October 31, 2006, between Borrower and Bank (the “IP Agreement”), and acknowledges, confirms and agrees that said IP Agreement contains an accurate and complete listing of all Intellectual Property Collateral as defined in said IP Agreement, shall remain in full force and effect. In addition, Borrower hereby acknowledges and agrees that all references in the IP Agreement to “Loan Agreement” shall include this Agreement.

12.11 Amended and Restated Agreement. This Agreement amends and restates, in its entirety, that certain Amended and Restated Loan and Security Agreement dated as of September 13, 2005 by and between Bank and Borrower, as has been amended (the “Prior Agreement”).

12.12 Waiver. Bank hereby waives Borrower’s existing defaults under the Prior Agreement by virtue of Borrower’s failure to comply with the financial covenant set forth in subsection (a) of Section 5 of the schedule to the Prior Agreement as of the months ended February 28, 2007 and March 31, 2007. Bank’s waiver of Borrower’s compliance of said affirmative covenant shall apply have no impact on this Agreement.

13 DEFINITIONS

13.1 Definitions. In this Agreement:

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

“Account Debtor” is as defined in the Code and shall include, without limitation, any person liable on any Financed Receivable, such as, a guarantor of the Financed Receivable and any issuer of a letter of credit or banker’s acceptance.

“Adjusted Quick Ratio” is the ratio of Quick Assets to Current Liabilities minus Deferred Revenue.

“Adjustments” are all discounts, allowances, returns, disputes, counterclaims, offsets, defenses, rights of recoupment, rights of return, warranty claims, or short payments, asserted by or on behalf of any Account Debtor for any Financed Receivable.

“Advance” is defined in Section 2.1.1.

“Advance Rate” is (a) if Borrower is Streamline Facility Eligible, eighty percent (80.0%), net of any offsets related to each specific Account Debtor, other than Deferred Revenue, or such other percentage 

 

as Bank establishes under Section 2.1.1, and (b) if Borrower is not Streamline Facility Eligible, eighty percent (80.0%), net of any offsets related to each specific Account Debtor, including, without limitation, Deferred Revenue (except for Deferred Revenue in connection with licenses, annual maintenance and professional service invoices, so long as, at such time, no Event of Default exists), or such other percentage as Bank establishes under Section 2.1.1

“Advance Request and Invoice Transmittal” is in the form attached hereto as Exhibit C and shows Eligible Accounts and/or Aggregate Eligible Accounts which Bank may finance and, for each such Account, includes the Account Debtor’s, name, address, invoice amount, invoice date and invoice number.

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

“Aggregate Eligible Accounts” is defined in Section 2.1.1.

“Applicable Rate” is (a) at any time that Borrower is not Streamline Facility Eligible, a per annum rate equal to the Prime Rate plus three-quarters of one percent (0.75%), and (b) at any time that Borrower is Streamline Facility Eligible, a per annum rate equal to the Prime Rate plus one-quarter of one percent (0.25%)

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

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

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

“Closing Date” is the date of this Agreement.

“Code” is the Uniform Commercial Code as adopted in Massachusetts, as amended and as may be amended and in effect from time to time.

“Collateral” is any and all properties, rights and assets of Borrower granted by Borrower to Bank or arising under the Code, now, or in the future, in which Borrower obtains an interest, or the power to transfer rights, as described on Exhibit A.

“Collateral Handling Fee” is defined in Section 2.2.4.

“Collections” are all funds received by Bank from or on behalf of an Account Debtor for Financed Receivables.

“Compliance Certificate” is attached as Exhibit B.

“Contingent Obligation” is, for any Person, any direct or indirect liability, contingent or not, of that Person for (i) 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; (ii) any obligations for undrawn letters of credit for the account of that Person; and (iii) all obligations from any interest rate, currency or commodity swap agreement, interest rate cap or collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices;  but 

 

“Contingent Obligation” does not include endorsements in the ordinary course of business. The amount of a Contingent Obligation is the stated or determined amount of the primary obligation for which the Contingent Obligation is made or, if not determinable, the maximum reasonably anticipated liability for it determined by the Person in good faith; but the amount may not exceed the maximum of the obligations under the guarantee or other support arrangement.

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

“Current Liabilities” are all obligations and liabilities of Borrower to Bank, plus, without duplication, the aggregate amount of Borrower’s Total Liabilities which mature within one (1) year.

“Deferred Revenue” is all amounts received or invoiced, as appropriate, in advance of performance under contracts and not yet recognized as revenue.

“Early Termination Fee” is defined in Section 2.1.1.

“Eligible Accounts” are billed Accounts in the ordinary course of Borrower’s business that meet all Borrower’s representations and warranties in Section 5.3, have been, at the option of Bank, confirmed in accordance with Section 2.1.1 (d), and are due and owing from Account Debtors deemed creditworthy by Bank in its sole discretion. Without limiting the fact that the determination of which Accounts are eligible hereunder is a matter of Bank discretion in each instance, Eligible Accounts shall not include the following Accounts (which listing may be amended or changed in Bank’s discretion with notice to Borrower):

(a) Accounts that the Account Debtor has not paid within ninety (90) days of invoice date (or within one hundred twenty (120) days of invoice date for Accounts for which the Account Debtor is Sun Microsystems);

(b) Accounts for which the Account Debtor does not have its principal place of business in the United States, unless agreed to by Bank in writing, in its sole discretion, on a case-by-case basis;

(c) Accounts for which the Account Debtor is a federal, state or local government entity or any department, agency, or instrumentality thereof except for Accounts of the United States if the payee has assigned its payment rights to Bank and the assignment has been acknowledged under the Assignment of Claims Act of 1940 (31 U.S.C. 3727);

(d) Accounts for which Borrower owes the Account Debtor, but only up to the amount owed (sometimes called “contra” accounts, accounts payable, pre-bill, milestone, customer deposits or credit accounts);

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

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

(g) Accounts in which the Account Debtor disputes liability or makes any claim and Bank believes there may be a basis for dispute (but only up to the disputed or claimed amount), or if the Account Debtor is subject to an Insolvency Proceeding, or becomes insolvent, or goes out of business; and

(h) Accounts for which Bank reasonably determines collection to be doubtful or any Accounts which are unacceptable to Bank for any reason.

 

Notwithstanding the foregoing, when Borrower is Streamline Facility Eligible, Eligible Accounts shall also not include the following Accounts (which listing may be amended or changed in Bank’s discretion with notice to Borrower):

(a) Accounts for which the Account Debtor is a federal, state or local government entity or any department, agency, or instrumentality thereof;

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

(c) Accounts for which the Account Debtor is Sun Microsystems, fifty percent (50%) or more of whose Accounts have not been paid within one hundred twenty (120) days of invoice date; and

(d) Accounts owing from an Account Debtor, including Affiliates, whose total obligations to Borrower exceed forty percent (40.0%) of all Accounts, for the amounts that exceed that percentage, unless otherwise approved by Bank in writing.

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

“Events of Default” are set forth in Article 8.

“Facility Amount” is Three Million One Hundred Twenty Five Thousand Dollars ($3,125,000.00).

“Facility Fee” is defined in Section 2.2.2.

“Finance Charges” is defined in Section 2.2.3.

“Financed Receivables” are all those Eligible Accounts and Aggregate Eligible Accounts, including their proceeds which Bank finances and makes an Advance, as set forth in Section 2.1.1. A Financed Receivable stops being a Financed Receivable (but remains Collateral) when the Advance made for the Financed Receivable has been fully paid.

“Financed Receivable Balance” is the total outstanding gross face amount, at any time, of any Financed Receivable.

“GAAP” is generally accepted accounting principles.

“Governmental Authority” is any nation or government, any state or other political subdivision thereof, any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative functions of or pertaining to government, any securities exchange and any self-regulatory organization.

“Guarantor” is any guarantor of the Obligations.

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

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

 

“Intellectual Property Collateral” is defined in the IP Agreement.

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

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

 “IP Agreement” is defined in Section 12.10.

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

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

“Lockbox” is defined in Section 2.2.7.

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

“Maturity Date” is April 1, 2008.

“Minimum Finance Charge” is an amount equal to the amount of Finance Charges Bank would have earned in any quarter if Borrower’s outstanding Obligations during such quarter averaged eight percent (8.0%) of the Facility Amount.

“Obligations” are all advances, liabilities, obligations, covenants and duties owing, arising, due or payable by Borrower to Bank now or later under this Agreement or any other document, instrument or agreement, account (including those acquired by assignment) primary or secondary, such as all Advances, Finance Charges, Facility Fee, Early Termination Fee, Collateral Handling Fee, interest, fees, expenses, professional fees and attorneys’ fees, or other amounts now or hereafter owing by Borrower to Bank.

“Perfection Certificate” is defined in Section 5.1.

“Permitted Indebtedness” is:

	
                         
 	
                        (a)
 	
                        Borrower’s indebtedness to Bank under this Agreement or the Loan Documents;
 

	
                         
 	
                        (b)
 	
                        Subordinated Debt;
 

	
                         
 	
                        (c)
 	
                        Indebtedness to trade creditors incurred in the ordinary course of business; and
 

	
                         
 	
                        (d)
 	
                        Indebtedness secured by Permitted Liens.
 

 

“Permitted Investments” are: (i)  marketable direct obligations issued or unconditionally guaranteed by the United States or its agency or any state maturing within 1 year from its acquisition, (ii) commercial paper maturing no more than 1 year after its creation and having the highest rating from either Standard & Poor’s Corporation or Moody’s Investors Service, Inc., (iii) Bank’s certificates of deposit issued maturing no more than 1 year after issue, and (iv) any other investments administered through Bank.

“Permitted Liens” are:

(a) Liens arising under this Agreement or other Loan Documents;

(b) Liens arising in connection with any Subordinated Debt (provided that Bank has consented to such Liens);

(c) 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;

(d) Purchase money Liens securing no more than Two Hundred Fifty Thousand Dollars ($250,000.00) in the aggregate amount outstanding  (i) on equipment acquired or held by Borrower incurred for financing the acquisition of the equipment, or (ii) existing on equipment when acquired, if the Lien is confined to the property and improvements and the proceeds of the equipment;

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

(f) Liens incurred in the extension, renewal or refinancing of the indebtedness secured by Liens described in (a) through (e), 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 may not increase.

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

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

“Prior Agreement” is defined in Section 12.11.

“Quick Assets” is, on any date, Borrower’s unrestricted cash plus net accounts receivable, determined according to GAAP.

 “Reconciliation Period” is each calendar month.

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

“Requirement of Law” is as to any Person, the organizational or governing documents of such Person, and any law (statutory or common), treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject.

 

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

“Streamline Facility Eligible” occurs when Borrower has an Adjusted Quick Ratio of at least 1.30 to 1.0 as of the last day of the immediately preceding month.

“Subordinated Debt” is debt incurred by Borrower subordinated to Borrower’s debt to Bank (pursuant to a subordination agreement entered into between Bank, Borrower and the subordinated creditor), on terms acceptable to Bank.

“Subsidiary” is any Person, corporation, partnership, limited liability company, joint venture, or 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

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

[Signature pages follows.]

 

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as a sealed instrument under the laws of the Commonwealth of Massachusetts as of the date first above written.

 

	
                        BORROWER:
 	
                         
 	
                         
 	
                         
 
	
                         
 	
                         
 	
                         
 	
                         
 
	
                        AXS-ONE INC.
 	
                         
 	
                         
 	
                         
 
	
                        
 By:
 	
                        /s/ William P. Lyons
 	
                         
 	
                         
 	
                          
 
	
                        Name:
 	
                        William P. Lyons
 	
                         
 	
                         
 	
                         
 
	
                        Title:
 	
                        CEO
 	
                         
 	
                         
 	
                         
 

 

	
                        BANK:
 	
                         
 	
                         
 	
                         
 
	
                         
 	
                         
 	
                         
 	
                         
 
	
                        SILICON VALLEY BANK
 	
                         
 	
                         
 	
                         
 
	
                        
 By:
 	
                        /s/ Gage Gilmore
 	
                         
 	
                         
 	
                          
 
	
                        Name:
 	
                        Gage Gilmore
 	
                         
 	
                         
 	
                         
 
	
                        Title:
 	
                        VP
 	
                         
 	
                         
 	
                         
 

 

EXHIBIT A

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

All goods, equipment, inventory, contract rights or rights to payment of money, leases, license agreements, franchise agreements, general intangibles (including payment intangibles) accounts (including health-care receivables), documents, instruments (including any promissory notes), chattel paper (whether tangible or electronic), cash, deposit accounts, fixtures, letters of credit rights (whether or not the letter of credit is evidenced by a writing), commercial tort claims, securities, and all other investment property, supporting obligations, and financial assets, whether now owned or hereafter acquired, wherever located; and any copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work, whether published or unpublished, now owned or later acquired; any patents, trademarks, service marks and
applications therefor; trade styles, trade names, any trade secret rights, including any rights to unpatented inventions, know-how, operating manuals, license rights and agreements and confidential information, now owned or hereafter acquired; or any claims for damages by way of any past, present and future infringement of any of the foregoing; and 

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

 

EXHIBIT B

 

SPECIALTY FINANCE DIVISION

Compliance Certificate

I, an authorized officer of AXS-ONE INC. (“Borrower”) certify under the Second Amended and Restated Loan and Security Agreement (the “Agreement”) between Borrower and Silicon Valley Bank (“Bank”) as follows (all capitalized terms used herein shall have the meaning set forth in the Agreement):

Borrower represents and warrants for each Financed Receivable:

Each Financed Receivable is an Eligible Account.

Borrower is the owner with legal right to sell, transfer, assign and encumber such Financed Receivable;

The correct amount is on the Advance Request and Invoice Transmittal and is not disputed;

Except with respect to Deferred Revenue to the extent that it is not offset in accordance with the definition of Advance Rate, payment is not contingent on any obligation or contract and Borrower has fulfilled all its obligations as of the Advance Request and Invoice Transmittal date;

Each Financed Receivable is based on an actual sale and delivery of goods and/or services rendered, is due to Borrower,  is not past due or in default, has not been previously sold, assigned, transferred, or pledged and is free of any liens, security interests and encumbrances other than Permitted Liens;

There are no defenses, offsets, counterclaims or agreements for which the Account Debtor may claim any deduction or discount;

It reasonably believes no Account Debtor is insolvent or subject to any Insolvency Proceedings; 

It has not filed or had filed against it Insolvency Proceedings and does not anticipate any filing;

Bank has the right to endorse and/ or require Borrower to endorse all payments received on Financed Receivables and all proceeds of Collateral.

No representation, warranty or other statement of Borrower in any certificate or written statement given to Bank contains any untrue statement of a material fact or omits to state a material fact necessary to make the statement contained in the certificates or statement not misleading.

Additionally, Borrower represents and warrants as follows:

Borrower and each domestic Subsidiary is duly existing and in good standing in its state of formation and qualified and licensed to do business in, and in good standing in, any state in which the conduct of its business or its ownership of property requires that it be qualified except where the failure to do so could not reasonably be expected to cause a Material Adverse Change. The execution, delivery and performance of the Loan Documents have been duly authorized, and do not conflict with Borrower’s organizational documents, nor constitute an event of default under any material agreement by which Borrower is bound. Borrower is not in default under any agreement to which or by which it is bound in which the default could reasonably be expected to cause a Material Adverse Change.

 

Borrower has good title to the Collateral, free of Liens except Permitted Liens. All inventory is in all material respects of good and marketable quality, free from material defects. 

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

Borrower is in compliance with the Financial Covenant(s) set forth in Section 6.7 of the Agreement.

All representations and warranties in the Agreement are true and correct in all material respects on this date, and Borrower represents that there is no existing Event of Default. 

Financial Covenant

 

	
                         
 	
                         
 	
                        Required
 	
                         
 	
                        Actual
 	
                         
 	
                        Compliance
 
	
                         
 	
                         
 	
                         
 	
                         
 	
                         
 	
                         
 	
                         
 
	
                        Maximum Net Loss
 	
                         
 	
                        $______*
 	
                         
 	
                        $______
 	
                         
 	
                        Yes  No
 

* As set forth in Section 6.7 of the Agreement.

Stream Line Facility Eligibility/Determination of Pricing

 

	
                         
 	
                         
 	
                        Required
 	
                         
 	
                        Actual
 	
                         
 	
                        Eligible/Pricing Level
 
	
                         
 	
                         
 	
                         
 	
                         
 	
                         
 	
                         
 	
                         
 
	
                        Adjusted Quick Ratio
 	
                         
 	
                        ≥1.30 : 1.0
 	
                         
 	
                        ____:1.0
 	
                         
 	
                        Yes  No
 

 

	
                        Sincerely,  
 	
                         
 	
                         
 	
                         
 
	
                        

                          

          
 	
                         
 	
                         
 	
                          
 
	
                        

                          

          
 	
                         
 	
                         
 	
                         
 
	
                        Signature  

                          

                        
 	
                         
 	
                         
 	
                         
 
	
                        Title  

                          

                        
 	
                         
 	
                         
 	
                         
 
	
                        

                        Date  
 	
                         
 	
                         
 	
                         
 

 

Exhibit C

[to be provided by Bank]EXECUTION COPY 
	 

	 
		AMENDED AND RESTATED EMPLOYMENT
		AGREEMENT
	 

	 
		AGREEMENT dated as of July 18, 2007, between
		EDWARD J. FRED, residing at 58 West 6th Street, Deer Park, New York
		11729 (“Executive”), and CPI AEROSTRUCTURES, INC., a New York
		corporation having its principal office at 60 Heartland Blvd., Edgewood, New
		York 11717 (“Company”);
	 

	 
		WHEREAS, Executive has served as the
		Company’s Chief Executive Officer and President pursuant to an Employment
		Agreement, dated February 7, 2005 (the “Prior Agreement”); and
		
	 

	 
		WHEREAS, the Company and Executive desire to
		amend and restate the Prior Agreement (as so amended and restated, this
		“Agreement”) to provide for continued employment of Executive by the
		Company for the period and upon the terms and conditions set forth
		herein.
	 

	 
		IT IS AGREED:
	 

	 
		1. Employment, Duties and Acceptance.
	 

	 
		1.1 General. The
		Company hereby agrees to the continued employment of Executive as its Chief
		Executive Officer (“CEO”) and President. All of Executive’s
		powers and authority in any capacity shall at all times be subject to the
		direction and control of the Company’s Board of Directors. The Board may
		assign to Executive such management and supervisory responsibilities and
		executive duties for the Company or any subsidiary of the Company, including
		serving as an executive officer and/or director of any subsidiary, as are
		consistent with Executive’s status as CEO and President. 
	 

	 
		1.2 Full-Time Position. Executive accepts such employment and agrees to devote
		substantially all of his business time, energies and attention to the
		performance of his duties hereunder. Nothing herein shall be construed as
		preventing Executive from making and supervising personal investments, provided
		they will not interfere with the performance of Executive’s duties
		hereunder or violate the provisions of Section 5.4 hereof.
	 

	 
		 
	 

	 
		 
	 

	 
	 

	 

	 
		1.3 Location. The
		Company will maintain its principal executive offices within a 30-mile radius
		of its current location in Edgewood, New York. Executive shall undertake such
		occasional travel, within or outside the United States, as is reasonably
		necessary in the interests of the Company.
	 

	 
		1.4 Board of Directors Position. If, at any time during the Term, Executive is not
		serving as a director of the Company, he shall nonetheless be invited to attend
		each meeting of the Board of Directors of the Company.
	 

	 
		2. Term. The term
		of Executive’s employment hereunder shall commence on July 18, 2007 and
		shall continue until December 31, 2010 (“Term”) unless terminated
		earlier as hereinafter provided in this Agreement, or unless extended by mutual
		written agreement of the Company and Executive. Unless the Company and
		Executive have otherwise agreed in writing, if Executive continues to work for
		the Company after the expiration of the Term, his employment thereafter shall
		be under the same terms and conditions provided for in this Agreement, except
		that his employment will be on an “at will” basis and the provisions
		of Sections 4.5 and 4.7(c) shall no longer be in effect.
	 

	 
		3. Compensation and Benefits.
	 

	 
		3.1 Salary. The
		Company shall pay to Executive a salary (“Base Salary”) at the annual
		rate of (i) $283,150 from July 18, 2007 until December 31, 2007; (ii) $300,000
		from January 1, 2008 until December 31, 2008; (iii) $318,000 from January 1,
		2009 until December 31, 2009; and (iv) $337,000 from January 1, 2010 until
		December 31, 2010. Executive’s compensation shall be paid in equal,
		periodic installments in accordance with the Company’s normal payroll
		procedures.
	 

	 
		3.2 Bonus. In
		addition to Base Salary, for each of the years ending December 31, 2007, 2008,
		2009 and 2010, Executive shall be paid a bonus (“Bonus”) to be
		calculated in the manner set forth on Schedule A
		annexed hereto. The amount of the Bonus shall be pro-rated to the date of
		termination of Executive’s employment. The Bonus with respect to any year
		shall be paid on or prior to April 15 of the following year.
	 

	 
		 
	 

	 
		 
	 

	 
		2
	 

	 
		 
	 

	 
	 

	 

	 
		3.3 Benefits.
		Executive shall be entitled to such medical, dental, life, disability and other
		benefits as are generally afforded to other executives of the Company, subject
		to applicable waiting periods and other conditions.
	 

	 
		3.4 Vacation.
		Executive shall be entitled to such paid vacation days in each year during the
		Term and to a reasonable number of other days off for religious and personal
		reasons in accordance with customary Company policy.
	 

	 
		3.5 Automobile.
		During the Term, the Company shall provide a luxury class automobile
		(reasonably satisfactory to Executive) for Executive to be used in connection
		with the business of the Company. The Company shall reimburse Executive for all
		costs associated with the use of such automobile, including lease and insurance
		costs, repairs and maintenance.
	 

	 
		3.6 Expenses. The
		Company shall pay or reimburse Executive for all transportation, hotel and
		other expenses reasonably incurred by Executive on business trips (including
		business class air travel if the scheduled flight is more than two (2)
		consecutive hours) and for all other ordinary and reasonable out-of-pocket
		expenses actually incurred by him in the conduct of the business of the Company
		against itemized vouchers submitted with respect to any such expenses and
		approved in accordance with customary procedures.
	 

	 
		3.7 Club Membership.
		During the Term, Executive shall be entitled to a country club membership, as
		long as the Company maintains a group membership at such club.
	 

	 
		4. Termination.
	 

	 
		4.1 Death. If
		Executive dies during the Term, Executive’s employment hereunder shall
		terminate and the Company shall pay to Executive’s estate the amount set
		forth in Section 4.7(a).
	 

	 
		4.2 Disability. The
		Company, by written notice to Executive, may terminate Executive’s
		employment hereunder if Executive shall fail because of illness or incapacity
		to render services of the character contemplated by this Agreement for six
		consecutive months. Upon such termination, the Company shall pay to Executive
		the amount set forth in Section 4.7(a).
	 

	 
		 
	 

	 
		 
	 

	 
		3
	 

	 
		 
	 

	 
	 

	 

	 
		4.3 By Company for “Cause”. The Company, by written notice to Executive, may
		terminate Executive’s employment hereunder for “Cause”. As used
		herein, “Cause” shall mean: (a) the refusal or failure by Executive
		to carry out specific directions of the Board which are of a material nature
		and consistent with his status as CEO and President, or the refusal or failure
		by Executive to perform a material part of Executive’s duties hereunder;
		(b) the commission by Executive of a material breach of any of the provisions
		of this Agreement; (c) fraud or dishonest action by Executive in his
		relations with the Company or any of its subsidiaries or affiliates
		(“dishonest” for these purposes shall mean Executive’s knowingly
		or recklessly making of a material misstatement or omission for his personal
		benefit); or (d) the conviction of Executive of a felony under federal or state
		law. Notwithstanding the foregoing, no “Cause” for termination shall
		be deemed to exist with respect to Executive’s acts described in clauses
		(a) or (b) above, unless the Company shall have given written notice to
		Executive specifying the “Cause” with reasonable particularity and,
		within thirty calendar days after such notice, Executive shall not have cured
		or eliminated the problem or thing giving rise to such “Cause;”
		provided, however, no more than two cure periods need be provided during any
		twelve-month period. Upon such termination, the Company shall pay to Executive
		the amount set forth in Section 4.7(b).
	 

	 
		4.4 By Company Without “Cause”. The Company may terminate Executive’s employment
		hereunder without “Cause” by giving at least 30 days written notice
		to Executive. Upon such termination, the Company shall pay to Executive the
		amount set forth in Section 4.7(c).
	 

	 
		4.5 By Executive for “Good Reason”. The Executive, by written notice to the Company, may
		terminate Executive’s employment hereunder if a “Good Reason”
		exists. For purposes of this Agreement, “Good Reason” shall mean the
		occurrence of any of the following circumstances without the Executive’s
		prior written consent: (a) a substantial and material adverse change in the
		nature of Executive’s title, duties or responsibilities with the Company
		that represents a demotion from his title, duties or responsibilities as in
		effect immediately prior to such change; (b) Executive is not nominated or is
		removed from service as a director of the Company; (c) material breach of this
		Agreement by the Company; (d) a failure by the Company to make any payment to
		Executive when due, unless the payment is not material and is being
	 

	 
		 
	 

	 
		 
	 

	 
		4
	 

	 
		 
	 

	 
	 

	 

	 
		contested by the Company, in good faith; (e)
		any person or entity other than the Company and/or any officers or directors of
		the Company as of the date of this Agreement acquires securities of the Company
		(in one or more transactions) having 50% or more of the total voting power of
		all the Company’s securities then outstanding; or (f) a liquidation,
		bankruptcy or receivership of the Company. Notwithstanding the foregoing, no
		“Good Reason” shall be deemed to exist with respect to the
		Company’s acts described in clauses (a), (c) or (d) above, unless
		Executive shall have given written notice to the Company specifying the
		“Good Reason” with reasonable particularity and, within thirty
		calendar days after such notice, the Company shall not have cured or eliminated
		the problem or thing giving rise to such “Good Reason”; provided,
		however, that no more than two cure periods shall be provided during any
		twelve-month period of a breach of clauses (a), (c) or (d) above. Upon such
		termination, the Company shall pay to Executive the amount set forth in Section
		4.7(c).
	 

	 
		4.6 By Executive Without Reason. The Executive may terminate his employment hereunder
		by giving at least 75 days written notice to the Company. Upon such
		termination, the Company shall pay to Executive the amount set forth in Section
		4.7(a).
	 

	 
		4.7 Compensation Upon Termination. In the event that Executive’s employment
		hereunder is terminated, the Company shall pay to Executive the following
		compensation:
	 

	 
		(a) Payment Upon Death or Disability or by Executive Without
		Reason. In the event that
		Executive’s employment is terminated pursuant to Sections 4.1, 4.2 or 4.6,
		the Company shall no longer be under any obligation to Executive or his legal
		representatives pursuant to this Agreement except for: (i) the Base Salary due
		Executive pursuant to Section 3.1 hereof through the date of termination; (ii)
		any Bonus which would have become payable under Section 3.2 for the year in
		which the employment was terminated prorated by multiplying the full amount of
		the Bonus by a fraction, the numerator of which is the number of “full
		calendar months” worked by Executive during the year of termination and
		the denominator of which is 12 (a “full calendar month” is a month in
		which the Executive worked at least two weeks); (iii) all earned and previously
		approved but unpaid Bonuses for any year prior to the
	 

	 
		 
	 

	 
		 
	 

	 
		5
	 

	 
		 
	 

	 
	 

	 

	 
		year of termination; (iv) all valid expense
		reimbursements, and (v) all accrued but unused vacation pay.
	 

	 
		(b) Payment Upon Termination by the Company For
		“Cause”. In the event that
		the Company terminates Executive’s employment hereunder pursuant to
		Section 4.3, the Company shall have no further obligations to Executive
		hereunder, except for: (i) the Base Salary due Executive pursuant to Section
		3.1 hereof through the date of termination; (ii) all valid expense
		reimbursements; and (iii) all unused vacation pay through the date of
		termination required by law to be paid.
	 

	 
		(c) Payment Upon Termination by Company Without Cause or by
		Executive for Good Reason. In the event
		that Executive’s employment is terminated pursuant to Sections 4.4 or 4.5,
		the Company shall have no further obligations to Executive hereunder except
		for: (i) the Base Salary due Executive pursuant to Section 3.1 hereof through
		the end of the Term; (ii) all earned and previously approved but unpaid
		Bonuses; (iv) all valid expense reimbursements; (v) all accrued but unused
		vacation pay; and (vi) the same medical insurance covering Executive as of the
		date of termination through June 30, 2012. Notwithstanding the foregoing, if a
		“change of control” of the Company (as described in Section 4.5(e))
		occurs prior to a termination of Executive’s employment pursuant to
		Sections 4.4 or 4.5 and if Executive’s employment is then terminated
		pursuant to Sections 4.4 or 4.5, then at the option of Executive, in lieu of
		the above compensation and benefits, the Company shall pay to Executive a lump
		sum payment on the date of termination equal to three times (3X) the total
		compensation (including salary and bonus) earned by Executive during the last
		full calendar year of his employment. 
	 

	 
		(d) Executive shall have no duty to mitigate
		awards paid or payable to him pursuant to this Agreement, and any compensation
		paid or payable to Executive from sources other than the Company will not
		offset or terminate the Company’s obligation to pay to Executive the full
		amounts pursuant to this Agreement. 
	 

	 
		4.8 Resignation as Member of Board. If Executive’s employment hereunder is terminated
		for any reason, then Executive shall, at the Company’s request, resign as
		a director of the Company and all of its subsidiaries, effective upon the date
		of such termination.
	 

	 
		 
	 

	 
		 
	 

	 
		6
	 

	 
		 
	 

	 
	 

	 

	 
		5. Protection of Confidential Information;
		Non-Competition.
	 

	 
		5.1 Acknowledgment.
		Executive acknowledges that:
	 

	 
		(a) As a result of his current and prior
		employment with the Company, Executive has obtained and will obtain secret and
		confidential information concerning the business of the Company and its
		subsidiaries (referred to collectively in this Section 5 as the
		“Company”), including, without limitation, financial information,
		proprietary rights, trade secrets and “know-how,” customers and
		sources (“Confidential Information”).
	 

	 
		(b) The Company will suffer substantial
		damage which will be difficult to compute if, during the period of his
		employment with the Company or thereafter, Executive should enter a business
		competitive with the Company or divulge Confidential Information.
	 

	 
		(c) The provisions of this Agreement are
		reasonable and necessary for the protection of the business of the
		Company.
	 

	 
		5.2 Confidentiality.
		Executive agrees that he will not at any time, during the Term or thereafter,
		divulge to any person or entity any Confidential Information obtained or
		learned by him as a result of his employment with the Company, except (i) in
		the course of performing his duties hereunder, (ii) with the Company’s
		prior written consent; (iii) to the extent that any such information is in the
		public domain other than as a result of Executive’s breach of any of his
		obligations hereunder; or (iv) where required to be disclosed by court order,
		subpoena or other government process. If Executive shall be required to make
		disclosure pursuant to the provisions of clause (iv) of the preceding sentence,
		Executive promptly, but in no event more than 48 hours after learning of such
		subpoena, court order, or other government process, shall notify, confirmed by
		mail, the Company and, at the Company’s expense, Executive shall: (a) take
		all reasonably necessary and lawful steps required by the Company to defend
		against the enforcement of such subpoena, court order or other government
		process, and (b) permit the Company to intervene and participate with counsel
		of its choice in any proceeding relating to the enforcement thereof.
	 

	 
		 
	 

	 
		 
	 

	 
		7
	 

	 
		 
	 

	 
	 

	 

	 
		5.3 Documents. Upon
		termination of his employment with the Company, Executive will promptly deliver
		to the Company all memoranda, notes, records, reports, manuals, drawings,
		blueprints and other documents (and all copies thereof) relating to the
		business of the Company and all property associated therewith, which he may
		then possess or have under his control; provided, however, that Executive shall
		be entitled to retain copies of such documents reasonably necessary to document
		his financial relationship with the Company.
	 

	 
		5.4 Non-competition.
		While Executive is employed by the Company and for a period of two years
		thereafter, Executive, without the prior written permission of the Company,
		shall not, anywhere in the world, (i) be employed by, or render any services
		to, (a) any person, firm or corporation engaged in any business
		(“Competitive Business”) which is directly in competition with any
		“material” business conducted by the Company or any of its
		subsidiaries at the time of termination (as used herein “material”
		means a business which generated at least 10% of the Company’s
		consolidated revenues for the last full fiscal year for which audited financial
		statements are available) or (b) any of the Company’s customers or other
		persons with whom the Company has a contractual relationship; (ii) engage in
		any Competitive Business for his or its own account; (iii) be associated with
		or interested in any Competitive Business as an individual, partner,
		shareholder, creditor, director, officer, principal, agent, employee, trustee,
		consultant, advisor or in any other relationship or capacity; (iv) employ or
		retain, or have or cause any other person or entity to employ or retain, any
		person who was employed or retained by the Company while Executive was employed
		by the Company (other than Executive’s personal secretary and assistant);
		or (v) solicit, interfere with, or endeavor to entice away from the Company,
		for the benefit of a Competitive Business, any of its customers or other
		persons with whom the Company has a contractual relationship. Notwithstanding
		the foregoing, nothing in this Agreement shall preclude Executive from
		investing his personal assets in any manner he chooses, provided, however, that
		Executive may not, during the period referred to in this Section 5.4, own more
		than 4.9% of the equity securities of any Competitive Business.
	 

	 
		5.5 Injunctive Relief. If Executive commits a breach, or threatens to commit
		a breach, of any of the provisions of Sections 5.2 or 5.4, the Company shall
		have the right and remedy to seek to have the provisions of this Agreement
		specifically enforced by any court having equity jurisdiction, it being
		acknowledged and agreed by Executive that the services
	 

	 
		 
	 

	 
		 
	 

	 
		8
	 

	 
		 
	 

	 
	 

	 

	 
		being rendered hereunder to the Company are
		of a special, unique and extraordinary character and that any such breach or
		threatened breach will cause irreparable injury to the Company and that money
		damages will not provide an adequate remedy to the Company. The rights and
		remedies enumerated in this Section 5.5 shall be in addition to, and not in
		lieu of, any other rights and remedies available to the Company under law or
		equity. In connection with any legal action or proceeding arising out of or
		relating to this Agreement, the prevailing party in such action or proceeding
		shall be entitled to be reimbursed by the other party for the reasonable
		attorneys’ fees and costs incurred by the prevailing party.
	 

	 
		5.6 Modification. If
		any provision of Sections 5.2 or 5.4 is held to be unenforceable because of the
		scope, duration or area of its applicability, the tribunal making such
		determination shall have the power to modify such scope, duration, or area, or
		all of them, and such provision or provisions shall then be applicable in such
		modified form.
	 

	 
		5.7 Survival. The
		provisions of this Section 5 shall survive the termination of this Agreement
		for any reason, except in the event Executive is terminated by the Company
		without “Cause,” or if Executive terminates this Agreement with
		“Good Reason,” in either of which events, clauses (i), (ii) and (iii)
		of Section 5.4 shall be null and void and of no further force or effect. The
		non-renewal of this Agreement at the end of the Term shall not be a termination
		by the Company without “Cause.”
	 

	 
		6. Miscellaneous Provisions.
	 

	 
		6.1 Notices. All
		notices provided for in this Agreement shall be in writing, and shall be deemed
		to have been duly given when (i) delivered personally to the party to receive
		the same, or (ii) when mailed first class postage prepaid, by certified mail,
		return receipt requested, addressed to the party to receive the same at his or
		its address set forth below, or such other address as the party to receive the
		same shall have specified by written notice given in the manner provided for in
		this Section 6.1. All notices shall be deemed to have been given as of the date
		of personal delivery or mailing thereof.
	 

	 
		 
	 

	 
		 
	 

	 
		9
	 

	 
		 
	 

	 
	 

	 

	 
		 
	 

	 
			
				
				  If to Executive:
				

			 
	
				
				   
				

			 	
				
				   
				

			 
	
				
				   
				

			 	
				
				  Edward J. Fred

				  58 West 6th Street

				  Deer Park, New York 11729
				

			 
	
				
				   
				

			 	
				
				   
				

			 
	
				
				  If to the Company:
				

			 
	
				
				   
				

			 	
				
				   
				

			 
	
				
				   
				

			 	
				
				  CPI Aerostructures, Inc.

				  60 Heartland Blvd.

				  Edgewood, New York 11717

				  Attn: Chairman
				

			 
	
				
				   
				

			 	
				
				   
				

			 
	
				
				  With a copy in either case
				  to:
				

			 
	
				
				   
				

			 	
				
				   
				

			 
	
				
				   
				

			 	
				
				  Graubard Miller

				  405 Lexington Avenue

				  New York, New York 10174

				  Attn: David Alan Miller, Esq.
				

			 

 

	 
		6.2 Entire Agreement; Waiver. This Agreement sets forth the entire agreement of the
		parties relating to the employment of Executive and is intended to supersede
		all prior negotiations, understandings and agreements. No provisions of this
		Agreement may be waived or changed except by a writing by the party against
		whom such waiver or change is sought to be enforced. The failure of any party
		to require performance of any provision hereof or thereof shall in no manner
		affect the right at a later time to enforce such provision.
	 

	 
		6.3 Governing Law.
		All questions with respect to the construction of this Agreement, and the
		rights and obligations of the parties hereunder, shall be determined in
		accordance with the law of the State of New York applicable to agreements made
		and to be performed entirely in New York.
	 

	 
		6.4 Binding Effect; Nonassignability. This Agreement shall inure to the benefit of and be
		binding upon the successors and assigns of the Company. This Agreement shall
		not be assignable by Executive, but shall inure to the benefit of and be
		binding upon Executive’s heirs and legal representatives.
	 

	 
		6.5 Severability.
		Should any provision of this Agreement become legally unenforceable, no other
		provision of this Agreement shall be affected, and this Agreement shall
		continue as if the Agreement had been executed absent the unenforceable
		provision.
	 

	 
		 
	 

	 
		 
	 

	 
		10
	 

	 
		 
	 

	 
	 

	 

	 
		6.6 Section 409A.
		This Agreement is intended to comply with the provisions of Section 409A of the
		Internal Revenue Code (“Section 409A”). To the extent that any
		payments and/or benefits provided hereunder are not considered compliant with
		Section 409A, the parties agree that the Company shall take all actions
		necessary to make such payments and/or benefits become compliant.
	 

	 
		IN WITNESS WHEREOF, the parties have
		executed this Agreement on the date first above written.
	 

	 
		 
	 

	 
			
				
				   
				

			 	
				
				   
				

			 	
				
				  CPI AEROSTRUCTURES, INC.
				

			 
	
				
				

			 	
				
				   
				

			 	
				
				  By: 
				

			 	
				
				  
 /s/ Vincent Palazzolo
				

			 
	
				
				   
				

			 	
				
				   
				

			 	
				
				   
				

			 	
				
				  Vincent Palazzolo, Chief Financial
				  Officer
				

			 

 

	 
		 
	 

	 
			
				
				

			 	
				
				   
				

			 	
				
				  
 /s/ Edward J. Fred
				

			 
	
				
				   
				

			 	
				
				   
				

			 	
				
				  EDWARD J. FRED
				

			 

 

	 
		 
	 

	 
		 
	 

	 
		11
	 

	 
		 
	 

	 
	 

	 

	 
		SCHEDULE A
	 

	 
		Bonus: Based on our common understanding of the significance
		of your participation in the budgeting process of the Company, your bonus shall
		be based on specific revenue and earnings before interest, taxes, depreciation
		and amortization (“EBITDA”) goals, which shall allow you to earn a
		target annual bonus equal to sixty-five percent (65%) of your annual base
		salary if a 10% annual increase is achieved. The Company’s auditors will
		determine EBITDA after taking into account all necessary provisions and the
		accrual of all bonuses, including your own bonus, and excluding all
		extraordinary items. Twenty-five percent (25%) of the bonus amount will be
		determined by revenues (the “revenue bonus”) and seventy-five percent
		(75%) by EBITDA (the “EBITDA bonus”).
	 

	 
		EBITDA Bonus
	 

	 
		1. At 100% of EBITDA target (i.e., 10%
		growth), your EBITDA bonus will equal 100% of 75% of 65% of base salary.
	 

	 
		2. Should EBITDA fall short or exceed EBITDA
		target, your EBITDA bonus will decrease or increase based on the grid, below.
		For example, if there is a 50% increase in EBITDA, the EBITDA bonus would equal
		150% of 75% of 65% of base salary; and if there is a 10% decrease in EBITDA,
		the EBITDA bonus would equal 25% of 75% of 65% of base salary.
	 

	 
		3. If the decrease in EBITDA is 15% or more,
		no EBITDA bonus will be paid.
	 

	 
		Revenue Bonus
	 

	 
		1. At 100% of revenue target (i.e., 10%
		growth), your revenue bonus will equal 100% of 25% of 65% of base
		salary.
	 

	 
		2. Should revenue fall short or exceed
		revenue target, your revenue bonus will decrease or increase based on the grid,
		below. For example, if there is a 50% increase in revenue, the revenue bonus
		would equal 150% of 25% of 65% of base salary; and if there is a10% decrease in
		revenue, the revenue bonus would equal 25% of 25% of 65% of base salary.
	 

	 
		3. If the decrease in revenue is 15% or
		more, no revenue bonus will be paid.
	 

	 
		4. Notwithstanding the foregoing, if EBITDA
		for the year preceding the year for which the EBITDA bonus is to be determined
		is less than $1 million, then the EBITDA bonus will be calculated by comparing
		the current year’s EBITDA to the EBITDA of the first preceding year in
		which EBITDA was in excess of $2 million.
	 

	 
		General
	 

	 
		1. Both bonuses will be adjusted pro rata if
		EBITDA and/or revenues fall in between two grid percentages.
	 

	 
		 
	 

	 
		 
	 

	 
	 

	 

	 
		2. The first $140,000 of bonus would be paid
		in cash. The balance would be paid half in cash and half in shares of the
		Company’s common stock, valued at the VWAP for the five trading days
		ending two days before issuance. They will be issued under the Company’s
		Performance Equity Plan 2000.
	 

	 
		3. The Company and executive to mutually
		agree on how to handle all acquisitions.
	 

	 
		Grid
	 

	 
		 
	 

	 
			
				
				  Growth
				

			 	
				
				   
				

			 	
				
				  Bonus
				

			 
	
				
				  Decrease greater than 15%
				

			 	
				
				   
				

			 	
				
				  No bonus
				

			 
	
				
				  Decrease 10%
				

			 	
				
				   
				

			 	
				
				  75% Decrease
				

			 
	
				
				  Decrease 5%
				

			 	
				
				   
				

			 	
				
				  50% Decrease
				

			 
	
				
				  Flat
				

			 	
				
				   
				

			 	
				
				  25% Decrease
				

			 
	
				
				  Increase 5%
				

			 	
				
				   
				

			 	
				
				  10% Decrease
				

			 
	
				
				  Increase 10%
				

			 	
				
				   
				

			 	
				
				  Baseline bonus
				

			 
	
				
				  Increase 15%
				

			 	
				
				   
				

			 	
				
				  5% Increase
				

			 
	
				
				  Increase 25%
				

			 	
				
				   
				

			 	
				
				  10% Increase
				

			 
	
				
				  Increase 50%
				

			 	
				
				   
				

			 	
				
				  50% Increase
				

			 
	
				
				  Increase 100% or greater
				

			 	
				
				   
				

			 	
				
				  75% Increase
				

			 

 

	 
		 
	 

	 
		 
	 

	 
		13

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