Document:

Exhibit
10.2

REAFFIRMATION

Each of the undersigned hereby acknowledges receipt of
a copy of the foregoing Amendment No. 1 to the Amended and Restated Five-Year
Revolving Credit Agreement dated as of October 12, 2005 by and among UNITED
STATIONERS SUPPLY CO. (the “Borrower”), UNITED STATIONERS INC., as a
credit party (the “Parent”), the financial institutions from time to
time parties thereto (the “Lenders”) and JPMORGAN CHASE BANK, NATIONAL
ASSOCIATION (successor by merger to BANK ONE, NA (ILLINOIS)), in its capacity
as administrative agent (the “Agent”) (as the same may be amended,
restated, supplemented or otherwise modified from time to time, the “Credit
Agreement”), which Amendment No. 1 is dated as of November 10, 2006 (the “Amendment”).  Capitalized terms used in this Reaffirmation
and not defined herein shall have the meanings given to them in the Credit
Agreement.  The undersigned acknowledge
and agree that nothing in the Credit Agreement, the Amendment or any other Loan
Document shall be deemed to require the consent of the Agent or any Lender to
any future amendment or other modification to the Credit Agreement or any Loan
Document.  Each of the undersigned
reaffirms the terms and conditions of the Guaranty, the Security Agreement, the
Intellectual Property Security Agreements and any other Loan Document executed
by it and acknowledges and agrees that such agreement and each and every such
Loan Document executed by the undersigned in connection with the Credit
Agreement remains in full force and effect and is hereby reaffirmed, ratified
and confirmed.  All references to the
Credit Agreement contained in the above-referenced documents shall be a
reference to the Credit Agreement as so modified by the Amendment and as the
same may from time to time hereafter be amended, modified or restated.

Dated:  November
10, 2006

	
  LAGASSE, INC.

  	
   

  	
  UNITED STATIONERS FINANCIAL 

  SERVICES LLC 

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By: 

  	
  /s/ Brian S. Cooper

  	
   

  	
  By:

  	
  /s/ Brian S. Cooper

  
	
  Name:

  	
  Brian S. Cooper

  	
   

  	
  Name:

  	
  Brian S. Cooper 

  
	
  Title:

  	
  Vice President and Treasurer

  	
   

  	
  Title:

  	
  Vice President and Treasurer

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  UNITED STATIONERS SUPPLY CO. 

  	
   

  	
  UNITED STATIONERS TECHNOLOGY 

  SERVICES LLC 

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By: 

  	
  /s/ Brian S. Cooper

  	
   

  	
  By:

  	
  /s/ Brian S. Cooper

  
	
  Name:

  	
  Brian S. Cooper 

  	
   

  	
  Name:

  	
  Brian S. Cooper 

  
	
  Title:

  	
  Senior Vice President and Treasurer

  	
   

  	
  Title:

  	
  Vice President and TreasurerExhibit
10.1

LOAN AND SECURITY AGREEMENT

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

1              ACCOUNTING
AND OTHER TERMS

Accounting terms not defined in this Agreement shall
be construed following GAAP. 
Calculations and determinations must be made following GAAP.  Capitalized terms not otherwise defined in
this Agreement shall have the meanings set forth in Section 13.  All other terms contained in this Agreement,
unless otherwise indicated, shall have the meaning provided by the Code to the extent
such terms are defined therein.

2              LOAN
AND TERMS OF PAYMENT

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

2.1.1       Revolving Advances.

(a)           Availability.  Subject to the terms and conditions of this
Agreement and to deduction of Reserves, Bank will make Advances to Borrower up
to an amount not to exceed the lesser of: (a) the Revolving Line; or
(b) the
Borrowing Base.  Amounts borrowed
under the Revolving Line may be repaid and, prior to the Revolving Line
Maturity Date, reborrowed, subject to the applicable terms and conditions
precedent herein.

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

2.1.2       Cash Management Services.  Borrower may use up to $300,000 (the “Cash Management Services Sublimit”) of the
Revolving Line for Bank’s cash management services which may include merchant
services, direct deposit of payroll, business credit card, and check cashing
services identified in Bank’s various cash management services agreements
(collectively, the “Cash Management Services”).  Any amounts Bank pays on behalf of Borrower
or any amounts that are not paid by Borrower for any Cash Management Services
will be treated as Advances under the Revolving Line and will accrue interest
at the interest rate applicable to Advances.

2.2          Overadvances. 
If at any time or for any reason the total of all outstanding Advances
and all other monetary Obligations exceeds the lesser of: (a) the Revolving
Line; or (b) the Borrowing Base
(an “Overadvance”), Borrower shall
immediately pay the amount of the excess to Bank, without notice or
demand.  Without limiting Borrower’s
obligation to repay to Bank the amount of any Overadvance, Borrower agrees to
pay Bank interest on the outstanding amount of any Overadvance, on demand, at
the Default Rate.

2.3          Payment of Interest on the Credit
Extensions.

(a)           Interest Rate; Advances.  Subject to Section 2.3(b), the amounts
outstanding under the Revolving Line shall accrue interest at a per annum rate
equal to one and one-quarter of one percent (1.25%) above the Prime Rate, which
interest shall be payable monthly.

(b)           Default Rate. Immediately upon
the occurrence and during the continuance of an Event of Default, Obligations
shall bear interest at a rate per annum which is five percentage points above
the rate effective immediately before the Event of Default (the “Default Rate”).  Payment or acceptance of the increased
interest rate provided in this Section 2.3(b) is not a permitted
alternative to timely payment and shall not constitute a waiver of any Event of
Default or otherwise prejudice or limit any rights or remedies of Bank.

 

 

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

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

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

(f)            Payment; Interest Computation;
Float Charge.  Interest is payable
monthly on the last calendar day of each month. 
In computing interest on the Obligations, all payments received after
12:00 p.m. Pacific time on any day shall be deemed received on the next
Business Day.  In addition, after the
occurrence of a Dominion Trigger Event, Bank shall be entitled to charge
Borrower a “float” charge in an amount equal to two (2) Business Days interest,
at the interest rate applicable to the Advances, on all payments received by
Bank.  The float charge for each month
shall be payable on the last day of the month. 
Bank
shall not, however, be required to credit Borrower’s account for the amount of
any item of payment, which is unsatisfactory to Bank in Bank’s good faith
business judgment, and Bank may charge Borrower’s Designated Deposit Account
for the amount of any item of payment which is returned to Bank unpaid.

2.4          Fees.  Borrower shall pay to Bank:

(a)           Facility
Fee.  A fully earned, non-refundable
facility fee of $20,000.00, on the Effective Date; and

(b)           Termination Fee.  Subject to the terms of Section 4.1, a
termination fee; and

(c)           Unused Revolving Line Facility Fee.  A fee (the “Unused
Revolving Line Facility Fee”), which fee shall be paid monthly, in arrears,
on a calendar year basis, in an amount equal to thirty-five hundredths of one
percent (0.35%) per annum of the average unused portion of the Revolving Line,
as determined by Bank.  Borrower shall
not be entitled to any credit, rebate or repayment of any Unused Revolving Line
Facility Fee previously earned by Bank pursuant to this Section notwithstanding
any termination of the within Agreement, or suspension or termination of Bank’s
obligation to make loans and advances hereunder; and

(d)           Collateral
Monitoring Fee.  After the occurrence
of a Dominion Trigger Event and until the Bank has suspended the consequences
of a Dominion Trigger Event under Section 6.13, a monthly collateral monitoring
fee of $750.00, payable in arrears on the last day of each month (prorated for
any partial month); and

(e)           Bank Expenses.  All Bank Expenses (including reasonable
attorneys’ fees and expenses, plus expenses, for documentation and negotiation
of this Agreement) incurred through and after the Effective Date, when due.

3              CONDITIONS
OF LOANS

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

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

(b)           Borrower shall have delivered a duly
executed original signature to the Warrant;

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

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

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

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

(g)           Borrower shall use its reasonable
best efforts to have a bailee agreement executed by each of the following
companies: (i) ADV, Inc., dba Advanced Technology, 235 Citation Circle, Corona,
CA 92880, (ii) Alinabal, Inc., P.O. Box 5120, 28 Woodmont Road, Milford, CT
06460, (iii) Magnum Plastics, Inc., 425 Bonnell Ave, Erie, CO 80516, (iv) New
Deantronics, Ltd., 1 Ygnacio Center, Ste 1040, 1990 N. California Blvd., Walnut
Creek, CA 94596, and (v) Upchurch Scientific Div., Inc., P.O. Box 1592, 619 Oak
Street, Oak Harbor, WA 98277, executed by each such bailee in favor of Bank;

(h)           Borrower shall have delivered
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 loss payable and/or additional insured clauses or endorsements in favor
of Bank; and

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

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

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

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

(c)           in Bank’s sole discretion, there has
not been a Material Adverse Change.

3.3          Covenant to Deliver.

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

3.4          Procedures for Borrowing.  Subject to the prior satisfaction of all
other applicable conditions to the making of an Advance set forth in this
Agreement, to obtain an Advance (other than Advances under Section 2.1.2),
Borrower shall notify Bank (which notice shall be irrevocable) by electronic
mail, facsimile, or telephone by 12:00 p.m. Pacific time on the Funding Date of
the Advance.  Together with such
notification, after the occurrence of a Dominion Trigger Event, Borrower must
promptly deliver to Bank by electronic mail or facsimile a completed
Transaction Report executed by a Responsible Officer or his or her
designee.  Bank shall credit Advances to
the Designated Deposit Account.  Bank may
make Advances under this Agreement based on instructions from a Responsible
Officer or his or her designee or without instructions if the Advances are
necessary to meet Obligations 

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which have become due.  Bank may rely on any telephone notice given
by a person whom Bank believes is a Responsible Officer or designee.

4              CREATION
OF SECURITY INTEREST

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

This Agreement may
be terminated prior to the Revolving Maturity Date by Borrower, effective three
(3) Business Days after written notice of termination is given to Bank unless
Bank’s obligation to fund Credit Extensions terminates pursuant to the terms of
Section 2.1.1(b).  Notwithstanding any
such termination, Bank’s lien and security interest in the Collateral shall
continue until Borrower fully satisfies its Obligations.  If such termination is at Borrower’s election
or at Bank’s election due to the occurrence and continuance of an Event of
Default, Borrower shall pay to Bank, in addition to the payment of any other
expenses or fees then-owing, a termination fee in an amount equal to one
percent (1.00%) of the Revolving Line provided that no termination fee shall be
charged if the credit facility hereunder is replaced with a new facility from
another division of Silicon Valley Bank. 
Upon payment in full of the Obligations and at such
time as Bank’s obligation to make Credit Extensions has terminated, Bank shall
release its liens and security interests in the Collateral and all rights
therein shall revert to Borrower.

4.2          Authorization to File Financing
Statements. 
Borrower hereby authorizes Bank to file financing statements, without
notice to Borrower, with all appropriate jurisdictions to perfect or protect
Bank’s interest or rights hereunder, including a notice that any disposition of
the Collateral, by either 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 Subsidiaries are
duly existing and in good standing in their respective jurisdictions of
formation and are qualified and licensed to do business and are in good
standing in any jurisdiction in which the conduct of their business or their
ownership of property requires that they be qualified except where the failure
to do so could not reasonably be expected to have a material adverse effect on
Borrower’s business.  In connection with
this Agreement, Borrower has delivered to Bank a completed certificate
substantially in the form attached hereto as Exhibit C signed by
Borrower, entitled “Perfection Certificate”. 
Borrower represents and warrants to Bank that (a) Borrower’s exact legal
name is that indicated on the Perfection Certificate and on the signature page
hereof; (b) Borrower is an organization of the type and is organized in
the jurisdiction set forth in the Perfection Certificate; (c) the Perfection
Certificate accurately sets forth Borrower’s organizational identification
number or accurately states that Borrower has none; (d) the Perfection
Certificate accurately sets forth Borrower’s place of business, or, if more
than one, its chief executive office as well as Borrower’s mailing address (if
different than its chief executive office); (e) Borrower (and each of its
predecessors) has not, in the past five (5) years, changed its state of
formation, organizational structure or type, or any organizational number
assigned by its jurisdiction; and (f) all other information set forth on the
Perfection Certificate pertaining to Borrower and each of its Subsidiaries is
accurate and complete.  If Borrower is
not now a Registered Organization but later becomes one, Borrower shall
promptly notify Bank of such occurrence and provide Bank with Borrower’s
organizational identification number.

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

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5.2          Collateral.  Borrower has good title to the Collateral,
free of Liens except Permitted Liens. 
Borrower has no deposit account other than the deposit accounts with
Bank and deposit accounts described in the Perfection Certificate delivered to
Bank in connection herewith.

Except as disclosed to Bank, the Collateral
is not in the possession of any third party bailee (such as a warehouse).  Except as hereafter disclosed to Bank in
writing by Borrower, none of the components of the Collateral shall be
maintained at locations other than as provided in the Perfection
Certificate.  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 acknowledge in writing that the bailee is holding
such Collateral for the benefit of Bank.

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

Borrower is the sole owner of its
intellectual property, except for non-exclusive licenses granted to its
customers in the ordinary course of business. 
To our knowledge, 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 material license
or other agreement with respect to which Borrower is the licensee that
prohibits or otherwise restricts Borrower from granting a security interest in
Borrower’s interest in such license or agreement or any other property.  Borrower shall provide written notice to Bank
within thirty (30) days of entering or becoming bound by any such license or
agreement which is reasonably likely to have a material impact on Borrower’s
business or financial condition (other than over-the-counter software that is
commercially available to the public). 
Borrower shall take such steps as Bank requests to obtain the consent
of, or waiver by, any person whose consent or waiver is necessary for all such
licenses or contract rights to be deemed “Collateral” and for Bank to have a security
interest in it that might otherwise be restricted or prohibited by law or by
the terms of any such license or agreement (such consent or authorization may
include a licensor’s agreement to a contingent assignment of the license to
Bank if Bank determines that is necessary in its good faith judgment), whether
now existing or entered into in the future.

5.3          Accounts Receivable.

(a)           For each Account with respect to
which Advances are requested, on the date each Advance is requested and made,
such Account shall be an Eligible Account.

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

5.4          Litigation.  There are no actions or proceedings pending
or, to the knowledge of the Responsible Officers, threatened in writing by or
against Borrower or any of its Subsidiaries involving more than $50,000.

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

5.6          Solvency.  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
 

 

 

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

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

5.9          Tax Returns and Payments; Pension
Contributions. 
Borrower has timely filed all required tax returns and reports, and
Borrower has timely paid all foreign, federal, state and local taxes,
assessments, deposits and contributions owed by Borrower.  Borrower may defer payment of any contested
taxes, provided that Borrower (a) in good faith contests its obligation to pay
the taxes by appropriate proceedings promptly and diligently instituted and
conducted, (b) notifies Bank in writing of the commencement of, and any
material development in, the proceedings, (c) posts bonds or takes any other
steps required to prevent the governmental authority levying such contested
taxes from obtaining a Lien upon any of the Collateral that is other than a “Permitted
Lien”.  Borrower is unaware of any claims
or adjustments proposed for any of Borrower’s prior tax years which could
result in additional taxes becoming due and payable by Borrower.  Borrower has paid all amounts necessary to
fund all present pension, profit sharing and deferred compensation plans in
accordance with their terms, and Borrower has not withdrawn from participation
in, and has not permitted partial or complete termination of, or permitted the
occurrence of any other event with respect to, any such plan which could
reasonably be expected to result in any liability of Borrower, including any
liability to the Pension Benefit Guaranty Corporation or its successors or any
other governmental agency.

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

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

6              AFFIRMATIVE
COVENANTS

Borrower shall do all of
the following:

6.1          Government Compliance.  Maintain its and all its 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.

6.2          Financial Statements, Reports,
Certificates.

(a)           Borrower shall provide Bank with the
following:

(i) after the
occurrence of a Dominion Trigger Event, weekly, a Transaction Report and a
Borrowing Base Certificate signed by a Responsible Officer;

(ii) within fifteen
(15) days after the end of each month, (A) monthly accounts receivable agings,
aged by invoice date, (B) monthly accounts payable agings, aged by invoice
date, and outstanding or held check 

 

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registers, if any, (C) monthly reconciliations of
accounts receivable agings (aged by invoice date), transaction reports, and
general ledger, (D) monthly perpetual inventory reports for Inventory valued on
a first-in, first-out basis at the lower of cost or market (in accordance with
GAAP) or such other inventory reports as are requested by Bank in its good
faith business judgment, and (E) a monthly Borrowing Base Certificate signed by
a Responsible Officer;

(iii) as soon as
available, and in any event within thirty (30) days after the end of each
month, monthly unaudited financial statements;

(iv) within thirty
(30) days after the end of each month a monthly Compliance Certificate signed
by a Responsible Officer, certifying that as of the end of such month, Borrower
was in full compliance with all of the terms and conditions of this Agreement,
and setting forth calculations showing compliance with the financial covenants
set forth in this Agreement and such other information as Bank shall reasonably
request, including, without limitation, a statement that at the end of such
month there were no held checks;

(v) within thirty
(30) days prior to the end of each fiscal year of Borrower, (A) annual
operating budgets (including income statements, balance sheets and cash flow
statements, by month) for the upcoming fiscal year of Borrower, and (B) annual
financial projections for the following fiscal year (on a quarterly basis) as
approved by Borrower’s board of directors, together with any related business
forecasts used in the preparation of such annual financial projections; and

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

 (b)          Borrower
shall provide Bank , within five (5) days after filing, all reports on Form
10-K, 10-Q and 8-K filed with the Securities and Exchange Commission or a
link thereto on Borrower’s or another website on the Internet.

(c)           Borrower shall provide Bank prompt
written notice of (i) any material change in the composition of the
intellectual property, (ii) 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 Security Agreement or previously disclosed to
Bank, or (iii) Borrower’s knowledge of an event that materially adversely
affects the value of the intellectual property.

6.3          Accounts
Receivable.

(a)           Schedules
and Documents Relating to Accounts.  Borrower shall deliver to Bank transaction
reports and schedules of collections, as provided in Section 6.2, on Bank’s
standard forms; provided, however, that Borrower’s failure to execute and
deliver the same shall not affect or limit Bank’s Lien and other rights in all
of Borrower’s Accounts, nor shall Bank’s failure to advance or lend against a
specific Account affect or limit Bank’s Lien and other rights therein.  If requested by Bank, Borrower shall furnish
Bank with copies (or, at Bank’s request, originals) of all contracts, orders,
invoices, and other similar documents, and all shipping instructions, delivery
receipts, bills of lading, and other evidence of delivery, for any goods the
sale or disposition of which gave rise to such Accounts.  In addition, Borrower shall deliver to Bank,
on its request, the originals of all instruments, chattel paper, security
agreements, guarantees and other documents and property evidencing or securing
any Accounts, in the same form as received, with all necessary indorsements,
and copies of all credit memos.

(b)           Disputes.  Borrower shall promptly notify Bank of all
disputes or claims relating to Accounts. 
Borrower may forgive (completely or partially), compromise, or settle
any Account for less than payment in full, or agree to do any of the foregoing
so long as (i) Borrower does so in good faith, in a commercially reasonable
manner, in the ordinary course of business, in arm’s-length transactions, and
reports the same to Bank in the regular reports provided to Bank; (ii) no
Default or Event of Default has occurred and is continuing; and
(iii) after taking into account all such discounts, settlements and
forgiveness, the total outstanding Advances will not exceed the lesser of the
Revolving Line or the Borrowing Base.

(c)           Collection of Accounts.  Borrower shall have the right to collect all
Accounts, unless and until a Default or an Event of Default has occurred and is
continuing.  Whether or not an Event of
Default has occurred and is continuing, Borrower shall hold all payments on,
and proceeds of, Accounts in trust for Bank, and Borrower shall immediately
deliver all such payments and proceeds to Bank in their original form, duly
endorsed, for deposit to the lockbox account described below, and after the
occurrence of a Dominion Trigger Event such payments and proceeds shall be
applied directly to the Obligations pursuant to the terms of Section 9.4
hereof.  All 

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proceeds
of Accounts shall be deposited by Borrower into a lockbox account, or such
other “blocked account” as Bank may specify, pursuant to a blocked account
agreement in such form as Bank may specify in its good faith business judgment.

(d)           Returns.  Provided no Event of Default has occurred and
is continuing, if any Account Debtor returns any Inventory to Borrower,
Borrower shall promptly (i) determine the reason for such return,
(ii) issue a credit memorandum to the Account Debtor in the appropriate
amount, and (iii) provide a copy of such credit memorandum to Bank, upon
request from Bank.  In the event any
attempted return occurs after the occurrence and during the continuance of any
Event of Default, Borrower shall hold the returned Inventory in trust for Bank,
and immediately notify Bank of the return of the Inventory.

(e)           Verification.  Bank may, from time
to time, verify directly with the respective Account Debtors the validity,
amount and other matters relating to the Accounts, either in the name of
Borrower or Bank or such other name as Bank may choose.

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

6.4          Remittance of Proceeds.  Except as otherwise provided in Section
6.3(c), deliver, in kind, all proceeds arising from the disposition of any
Collateral to Bank in the original form in which received by Borrower not later
than the following Business Day after receipt by Borrower, to be applied to the
Obligations pursuant to the terms of Section 9.4 hereof; provided that, if no
Default or Event of Default has occurred and is continuing, Borrower shall not
be obligated to remit to Bank the proceeds of the sale of worn out or obsolete
Equipment disposed of by Borrower in good faith in an arm’s length transaction
for an aggregate purchase price of $25,000 or less (for all such transactions
in any fiscal year).  Borrower agrees
that it will not commingle proceeds of Collateral with any of Borrower’s other
funds or property, but will hold such proceeds separate and apart from such
other funds and property and in an express trust for Bank.  Nothing in this Section limits the
restrictions on disposition of Collateral set forth elsewhere in this
Agreement.

6.5          Taxes;
Pensions.  Timely file all
required tax returns and reports and timely pay all foreign, federal, state and
local taxes, assessments, deposits and contributions owed by Borrower except for
deferred payment of any taxes contested pursuant to the terms of Section 5.[9]
hereof, and pay all amounts necessary to fund all present pension, profit
sharing and deferred compensation plans in accordance with their terms.

6.6          Access to Collateral; Books and
Records.  At
reasonable times, on one (1) Business Day’s notice (provided no notice is
required if an Event of Default has occurred and is continuing), Bank, or its
agents, shall have the right to inspect the Collateral and the right to audit
and copy Borrower’s Books.  As long as no
Dominion Trigger Event has occurred, such inspections and audits shall be
conducted no more often than once every twelve (12) months and after the
occurrence of a Dominion Trigger Event, no more often than once every four (4)
months, but in either case unless other circumstance warrant otherwise or a
Default or an Event of Default has occurred and is continuing. The foregoing
inspections and audits shall be at Borrower’s expense, and the charge therefor
shall be $750 per person per day (or such higher amount as shall represent Bank’s
then-current standard charge for the same), plus reasonable out-of-pocket
expenses.  In the event Borrower and Bank
schedule an audit more than ten (10) days in advance, and Borrower cancels or
seeks to reschedules the audit with less than ten (10) days written notice to
Bank, then (without limiting any of Bank’s rights or remedies), Borrower shall
pay Bank a fee of $1,000 plus any out-of-pocket expenses incurred by Bank to
compensate Bank for the anticipated costs and expenses of the cancellation or
rescheduling.

6.7          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 the sole 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 

 8
 

 

 

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.  Notwithstanding the foregoing, (a) so long as
no Event of Default has occurred and is continuing, Borrower shall have the
option of applying the proceeds of any casualty policy up to $50,000, in the
aggregate, toward the replacement or repair of destroyed or damaged property;
provided that any such replaced or repaired property (i) shall be of equal or
like value as the replaced or repaired Collateral and (ii) shall be deemed
Collateral in which Bank has been granted a first priority security interest,
and (b) after the occurrence and during the continuance of an Event of Default,
all proceeds payable under such casualty policy shall, at the option of Bank,
be payable to Bank on account of the Obligations.  If Borrower fails to obtain insurance as
required under this Section 6.7 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 6.7,
and take any action under the policies Bank deems prudent.

6.8          Operating Accounts.

(a)           Within sixty (60) days after the
Effective Date, establish and maintain its and its Subsidiaries’ primary
depository and operating accounts and securities accounts with Bank and Bank’s
affiliates which accounts shall represent at least 85% of the dollar value of
Borrower’s and such Subsidiaries accounts at all financial institutions.

(b)           Provide Bank five (5) days prior
written notice before establishing any Collateral Account at or with any bank
or financial institution other than Bank or its Affiliates.  In addition, for each Collateral Account that
Borrower at any time maintains, Borrower shall cause the applicable bank or
financial institution (other than Bank) at or with which any Collateral Account
is maintained to execute and deliver a Control Agreement or other appropriate
instrument with respect to such Collateral Account to perfect Bank’s Lien in
such Collateral Account in accordance with the terms hereunder.  The provisions of the previous sentence shall
not apply to deposit accounts exclusively used for payroll, payroll taxes and
other employee wage and benefit payments to or for the benefit of Borrower’s
employees and identified to Bank by Borrower as such.

6.9          Financial Covenants.

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

Maximum Losses/ Profitability.  Borrower shall not suffer any loss in excess
of ($400,000.00) until June 30, 2007, then not in excess of ($200,000.00) until
November 30, 2007 and thereafter shall have a minimum positive Net Income of
$1.00, in each case, measured as of the
end of each fiscal month calculated
for the three (3) consecutive months then-ended, where losses are calculated as
pre-tax losses plus stock option expense for the period.

6.10        Protection and Registration 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.  If Borrower decides to register
any copyrights or mask works in the United States Copyright Office, Borrower
shall: (x) provide Bank with at least fifteen (15) days prior written notice of
its intent to register such copyrights or mask works together with a copy of
the application it intends to file with the United States Copyright Office
(excluding exhibits thereto); (y) execute an intellectual property security
agreement or such other documents as Bank may reasonably request to maintain
the perfection and priority of Bank’s security interest in the copyrights or
mask works intended to be registered with the United States Copyright Office;
and (z) record such intellectual property security agreement with the United
States Copyright Office contemporaneously with filing the copyright or mask
work application(s) with the United States Copyright Office.  Borrower shall promptly provide to Bank a
copy of the application(s) filed with the United States Copyright Office
together with evidence of the recording of the intellectual property security
agreement necessary for Bank to maintain the perfection and priority of its
security interest in such copyrights or mask works.  Borrower shall provide written notice to Bank
of any application filed by Borrower in the United States Patent and Trademark
Office for a patent or to register a trademark or service mark within 30 days
after any such filing.

 9
 

 

 

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

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

6.13        Dominion Trigger
Events.  After the occurrence
of a Dominion Trigger Event, at such time as Borrower’s Quick Ratio equals or
exceeds 1.25 to 1.00 for three (3) consecutive months, Borrower may request
that the consequences of the Dominion Trigger Event (being float charges under
Section 2.3(f), collateral monitoring fees under Section 2.4(e), Transaction
Reports under Sections 3.4 and 6.2(a)(i), daily application of cash to loan
under Section 6.3(c), and 4-monthly audits under Section 6.6) be suspended,
subject to reinstatement in the event another, subsequent Dominion Trigger
Event occurs, and, as long as no Event of Default has occurred and is
continuing, Bank shall then suspend the consequences of the Dominion Trigger
Event.

7              NEGATIVE
COVENANTS

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

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

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

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

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

7.5          Encumbrance.  Create, incur, or allow any Lien on any of
its property, or assign or convey any right to receive income, including the
sale of any Accounts, or permit any of its Subsidiaries to do so, except for
Permitted Liens, permit any Collateral not to be subject to the first priority
security interest granted herein, 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 Subsidiary from assigning, mortgaging, pledging, granting a security
interest in or upon, or encumbering any of Borrower’s or any Subsidiary’s
intellectual property, except as is otherwise permitted in Section 7.1 hereof
and the definition of “Permitted Lien” herein.

7.6          Maintenance of Collateral Accounts.  Maintain any Collateral Account except pursuant
to the terms of Section 6.8.(b) hereof.

7.7          Investments; Distributions.  (a) Directly or indirectly make any
Investment 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 provided that (i) Borrower
may convert any of its convertible 

 10
 

 

 

securities into other securities pursuant to
the terms of such convertible securities or otherwise in exchange thereof,
(ii) Borrower may pay dividends solely in common stock; and (iii) Borrower
may repurchase the stock of former employees or consultants pursuant to stock
repurchase agreements so long as an Event of Default does not exist at the time
of such repurchase and would not exist after giving effect to such repurchase,
provided such repurchase does not exceed in the aggregate of $50,000 per fiscal
year.

7.8          Transactions with Affiliates.  Directly or indirectly enter into or permit
to exist any material transaction with any Affiliate of Borrower, except for
transactions that are in the ordinary course of Borrower’s business, upon fair
and reasonable terms that are no less favorable to Borrower than would be
obtained in an arm’s length transaction with a non-affiliated Person.

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

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

8              EVENTS
OF DEFAULT

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

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

8.2          Covenant Default.

(a) Borrower fails or
neglects to perform any obligation in Section 6.2, which is not cured within
fifteen (15) days after the occurrence thereof, or in Sections 6.8 or 6.9 or
Borrower violates any covenant in Section 7; or

(b) Borrower fails or neglects to perform,
keep, or observe any other term, provision, condition, covenant or agreement
contained in this Agreement, any Loan Documents, and as to any default (other
than those specified in this Section 8) under such other term, provision,
condition, covenant or agreement that can be cured, has failed to cure the
default within thirty (30) days after the occurrence thereof; provided,
however, that if the default cannot by its nature be cured within the thirty
(30) day period or cannot after diligent attempts by Borrower be cured within
such thirty (30) day period, and such default is likely to be cured within a
reasonable time, then Borrower shall have an additional period (which shall not
in any case exceed an additional fifteen (15) days) to attempt to cure such
default, and within such reasonable time period the failure to cure the default
shall not be deemed an Event of Default (but no Credit Extensions shall be made
during such cure period); and further provided that a Dominion Trigger Event
will not constitute an Event of Default. 
Grace periods provided under this section shall not apply, among other
things, to financial covenants or any other covenants set forth in subsection
(a) above;

8.3          Material Adverse Change.  A Material Adverse Change occurs;

 11
 

 

 

8.4          Attachment.  (a) Any material portion of Borrower’s assets
is attached, seized, levied on, or comes into possession of a trustee or
receiver and the attachment, seizure or levy is not removed in ten (10) days;
(b) the service of process upon Bank seeking to attach, by trustee or
similar process, any funds of Borrower or of any entity under control of
Borrower (including a Subsidiary) on deposit with Bank; (c) Borrower is
enjoined, restrained, or prevented by court order from conducting a material
part of its business; (d) a judgment or other claim in excess of $50,000
becomes a Lien on any of Borrower’s assets; or (e) a notice of lien, levy, or
assessment is filed against any of Borrower’s assets by any government agency
and not paid within ten (10) days after Borrower receives notice.  These are not Events of Default if stayed or
if a bond is posted pending contest by Borrower (but no Credit Extensions shall
be made during the cure period);

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

8.6          Other Agreements.  There is a default in any agreement to which
Borrower or any Guarantor 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 Fifty Thousand
Dollars ($50,000) or that could have a material adverse effect on Borrower’s or
any Guarantor’s business and, in either event, Borrower has received notice of
such default from such third party or parties;

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) (not covered by independent third-party insurance)
shall be rendered against Borrower and shall remain unsatisfied and unstayed (a
judgment may also be stayed by the filing of an appeal if any applicable bond
is posted) for a period of ten (10) days after the entry thereof (provided that
no Credit Extensions will be made prior to the satisfaction or stay of such
judgment);

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

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

9              BANK’S
RIGHTS AND REMEDIES

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

(a)           declare all Obligations immediately
due and payable (but if an Event of Default described in Section 8.5 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)           settle or adjust disputes and claims
directly with Account Debtors for amounts on terms and in any order that Bank
considers advisable, notify any Person owing Borrower money of Bank’s security
interest in such funds, and verify the amount of such account;

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

 

 12

 

 

(e)           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;

(f)            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;

(g)           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;

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

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

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

9.3          Protective Payments.  If Borrower fails to obtain the insurance
called for by Section 6.7 or fails to pay any premium thereon or fails to pay
any other amount which Borrower is obligated to pay under this Agreement or any
other Loan Document, Bank may obtain such insurance or make such payment, and
all amounts so paid by Bank are Bank Expenses and immediately due and payable,
bearing interest at the then highest applicable rate, and secured by the
Collateral.  Bank will make reasonable
efforts to provide Borrower with notice of Bank obtaining such insurance at the
time it is obtained or within a reasonable time thereafter.  No payments by Bank are deemed an agreement
to make similar payments in the future or Bank’s waiver of any Event of
Default.

9.4          Application of Payments and Proceeds.  Unless an Event of Default has occurred and
is continuing, Bank shall apply any payment of the Obligations that it
receives, whether a payment from Borrower or proceeds realized as the result of
any collection of Accounts or other disposition of the Collateral, first, to
the principal of the Obligations; second, to Bank Expenses, including without
limitation, the reasonable costs, expenses, liabilities, obligations and
attorneys’ fees incurred by Bank in the exercise of its rights under this
Agreement; third, to the interest due upon any of the Obligations; and finally,
to any applicable fees and other charges, in such order as Bank shall determine
in its sole discretion.  Any surplus
shall be paid to Borrower by credit to the Designated Deposit Account or other
Persons legally entitled thereto; Borrower shall remain liable to Bank for any
deficiency.  If an Event of Default has
occurred and is continuing, Bank may apply any funds in its possession, whether
from Borrower account balances, payments, proceeds realized as the result of
any collection of Accounts or other disposition of the Collateral, or
otherwise, to the Obligations in such order as Bank shall determine in its sole
discretion.  Any surplus shall be paid to
Borrower by credit to the Designated Deposit Account or to other Persons
legally entitled thereto; Borrower shall remain liable to Bank for any
deficiency.  If Bank, in its good faith
business 

 13
 

 

 

judgment, directly or indirectly enters into
a deferred payment or other credit transaction with any purchaser at any sale
of Collateral, Bank shall have the option, exercisable at any time, of either
reducing the Obligations by the principal amount of the purchase price or
deferring the reduction of the Obligations until the actual receipt by Bank of
cash therefor.

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

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

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

10           NOTICES

All notices, consents,
requests, approvals, demands, or other communication (collectively, “Communication”), other than Advance requests made pursuant
to Section 3.4, by any party to this Agreement or any other Loan Document must
be in writing and be delivered or sent by facsimile at the addresses or
facsimile numbers listed below.  Bank or
Borrower may change its notice address by giving the other party written notice
thereof.  Each such Communication shall
be deemed to have been validly served, given, or delivered: (a) upon the
earlier of actual receipt and three (3) Business Days after deposit in the U.S.
mail, registered or certified mail, return receipt requested, with proper
postage prepaid; (b) upon transmission, when sent by facsimile transmission
(with such facsimile promptly confirmed by delivery of a copy by personal
delivery or United States mail as otherwise provided in this Section 10); (c)
one (1) Business Day after deposit with a reputable overnight courier with all charges
prepaid; or (d) when delivered, if hand-delivered by messenger, all of which
shall be addressed to the party to be notified and sent to the address or
facsimile number indicated below. 
Advance requests made pursuant to Section 3.4 must be in writing and may
be in the form of electronic mail, delivered to Bank by Borrower at the e-mail
address of Bank provided below and shall be deemed to have been validly served,
given, or delivered when sent (with such electronic mail promptly confirmed by
delivery of a copy by personal delivery or United States mail as otherwise
provided in this Section 10).  Bank or
Borrower may change its address, facsimile number, or electronic mail address
by giving the other party written notice thereof in accordance with the terms
of this Section 10.

If to Borrower:                                                                   Encision
Inc.

6797 Winchester Circle

Boulder, CO 80301

Attn: John R. Serino, President and CEO

Fax: 303-339-6939

Email: jserino@encision.com

If to Bank:                                                                                         Silicon
Valley Bank 

4410 Arapahoe Avenue, Suite 200

Boulder, CO  80303 -1155

Attn: Regina Perkins

Fax:  303-410-4546

Email: rperkins@svb.com

 14
 

 

 

11           Choice
of Law, Venue, Jury Trial Waiver and Judicial Reference

Colorado 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 the State of Colorado; provided, however, that nothing in
this Agreement shall be deemed to operate to preclude Bank from bringing suit
or taking other legal action in any other jurisdiction to realize on the
Collateral or any other security for the Obligations, or to enforce a judgment
or other court order in favor of Bank. 
Borrower expressly submits and consents in advance to such jurisdiction
in any action or suit commenced in any such court, and Borrower hereby waives
any objection that it may have based upon lack of personal jurisdiction,
improper venue, or forum non conveniens and hereby consents to the granting of
such legal or equitable relief as is deemed appropriate by such court.  Borrower hereby waives personal service of
the summons, complaints, and other process issued in such action or suit and
agrees that service of such summons, complaints, and other process may be made
by registered or certified mail addressed to Borrower at the address set forth
in Section 10 of this Agreement and that service so made shall be deemed
completed upon the earlier to occur of Borrower’s actual receipt thereof or
three (3) days after deposit in the U.S. mails, proper postage prepaid.

12           GENERAL
PROVISIONS

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

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

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

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

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

 15
 

 

 

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 any such confidential information
may be made: (a) to Bank’s Subsidiaries or Affiliates; (b) to prospective
transferees or purchasers of any interest in the Credit Extensions (provided,
however, to the extent that any such information is not yet in the public
domain, recognizing that Borrower is a public company, and Bank has been
notified by Borrower or has determined that any such information is not yet in
the public domain, Bank shall obtain such prospective transferee’s or purchaser’s
agreement to the terms of this provision); (c) as required by law,
regulation, subpoena, or other order; (d) to Bank’s regulators or as
otherwise required in connection with Bank’s examination or audit; and (e) as
Bank considers appropriate in exercising remedies under this Agreement.  Confidential information does not include
information that either: (i) is in the public domain or in Bank’s possession
when disclosed to Bank, or becomes part of the public domain after disclosure
to Bank; or (ii) is disclosed to Bank by a third party, if Bank does not know
that the third party is prohibited from disclosing the information.

12.10      Attorneys’ Fees, Costs and Expenses.  In any action or proceeding between Borrower
and Bank arising out of or relating to the Loan Documents, the prevailing party
shall be entitled to recover its reasonable attorneys’ fees and other costs and
expenses incurred, in addition to any other relief to which it may be entitled.

13           DEFINITIONS

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

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

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

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

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

“Agreement” is
defined in the preamble hereof.

“Bank” is defined in the
preamble hereof.

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

“Borrower” is
defined in the preamble hereof

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

 16
 

 

 

“Borrowing Base”
is (a) 80% of Eligible Accounts plus (b) the lesser of 35% of the value of
Borrower’s Eligible Inventory (valued at the lower of cost or wholesale fair
market value) or $700,000.00, as determined by Bank from Borrower’s most recent
Borrowing Base Certificate; provided, however, that Bank may decrease the
foregoing percentages in its good faith business judgment based on events,
conditions, contingencies, or risks which, as determined by Bank, may adversely
affect Collateral.

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

“Borrowing Resolutions”
are, with respect to any Person, those resolutions substantially in the form
attached hereto as Exhibit F.

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

“Cash Equivalents” means
(a) marketable direct obligations issued or unconditionally guaranteed by
the United States or any agency or any State thereof having maturities of not
more than one (1) year from the date of acquisition; (b) commercial paper
maturing no more than one (1) year after its creation and having the highest
rating from either Standard & Poor’s Ratings Group or Moody’s Investors
Service, Inc., (c) Bank’s certificates of deposit issued maturing no more than
one (1) year after issue; and (d) money market funds at least ninety-five
percent (95%) of the assets of which constitute Cash Equivalents of the kinds
described in clauses (a) through (c) of this definition.

“Cash Management Services” is
defined in Section 2.1.4.

“Cash Management Services Sublimit” is
defined in Section 2.1.4.

“Change in Control” means any event, transaction, or occurrence as a result of which (a) any “person” (as such term is defined in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), other than a trustee or other fiduciary holding securities under an employee benefit plan of Borrower, is or becomes a beneficial owner (within the meaning Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of Borrower, representing thirty-five percent (35%) or more of the combined voting power of Borrower’s then outstanding securities; or (b) during any period of twelve consecutive calendar months, individuals who at the beginning of such period constituted the Board of Directors of Borrower (together with any new directors whose election by the Board of Directors of Borrower was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of such period  or whose election or nomination for election was previously so approved) cease for any reason other than death or disability to constitute a majority of the directors then in office.
“Code” is the Uniform Commercial Code, as the same may, from time to time, be enacted and in effect in the State of Colorado; provided, that, to the extent that the Code is used to define any term herein or in any Loan Document and such term is defined differently in different Articles or Divisions of the Code, the definition of such term contained in Article or Division 9 shall govern; provided further, that in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection, or priority of, or remedies with respect to, Bank’s Lien on any Collateral is governed by the Uniform Commercial Code in effect in a jurisdiction other than the State of Colorado, the term “Code” shall mean the Uniform Commercial Code as enacted and in effect in such other jurisdiction solely for purposes on the provisions thereof relating to such attachment, perfection, priority, or remedies and for purposes of definitions relating to such provisions.

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

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

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

“Communication”
is defined in Section 10.

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

“Contingent Obligation”
is, for any Person, any direct or indirect liability, contingent or not, of
that Person for (a) any indebtedness, lease, dividend, letter of credit or
other obligation of another such as an obligation 

 17
 

 

 

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

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

“Credit Extension”
is any Advance, amount utilized for Cash Management Services, 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 that mature
within one (1) year.

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

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

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

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

“Designated Deposit Account”
is Borrower’s deposit account, account number 3300522804, maintained with Bank.

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

“Dominion Trigger Event”
means the determination by Bank that Borrower’s Quick Ratio is less than 1.25
to 1.00 as of the end of any month.

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

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

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

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

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

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

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

 18
 

 

 

(e)           Accounts owing from an Account
Debtor, including Affiliates, whose total obligations to Borrower exceed
twenty-five (25%) of all Accounts, for the amounts that exceed that percentage,
unless Bank approves in writing;

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

(g)           Accounts owing from an Account Debtor
which is a federal, state or local government entity or any department, agency,
or instrumentality thereof except for Accounts of the United States if Borrower
has assigned its payment rights to Bank and the assignment has been
acknowledged under the Federal Assignment of Claims Act of 1940, as amended;

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

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

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

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

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

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

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

 “Eligible Inventory” means, at any time, the aggregate of
Borrower’s Inventory that (a) consists of finished goods and raw materials, in
good, new and salable condition, which are not perishable, returned, consigned,
obsolete, damaged, or defective, and are not comprised of un-sellable,
demonstrative or custom inventory, work in progress, packaging or shipping
materials, or supplies; (b) meets all applicable governmental standards; (c)
has been manufactured in compliance with the Fair Labor Standards Act; (d) is
not subject to any Liens, except the first priority Liens granted or in favor
of Bank under this Agreement or any of the other Loan Documents; (e) is located
at Borrower’s principal place of business (or any location permitted under
Section 7.2), and in the case of Inventory in the possession of (i) ADV, Inc.,
dba Advanced Technology, 235 Citation Circle, Corona, CA 92880, (ii) Magnum
Plastics, Inc., 425 Bonnell Ave, Erie, CO 80516, (iii) Beamone, LLC, 6750 E. 46th Ave Drive, Denver, CO 80216, (iv) Ipax, Inc.,
2622 South Zuni Street, Englewood, CO 80110, (v) Laser Advantage, LLC, 5 Pine
Street Extension, Nashua, NH 03060, and (vi) Linerar Technologies, LLC, 1096
Elkton Drive #200, Colorado Springs, CO 80907, Bank has received written
agreement from each such bailee substantially in the form of Exhibit H attached hereto; and
(f) is otherwise acceptable to Bank in its good faith business judgment.

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

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

“Event of Default”
is defined in Section 8.

“Funding Date”
is any date on which a Credit Extension is made to or on account of Borrower
which shall be a Business Day.

 19
 

 

 

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

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

“Guarantor” is any present or future 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.

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

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

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

“Investor Support”
means it is the clear intention of Borrower’s investors to continue to fund the
Borrower in the amounts and timeframe necessary to enable Borrower to satisfy
the Obligations as they become due and payable.

“IP Agreement”
is that certain Intellectual Property Security Agreement executed and delivered
by Borrower to Bank dated as of the Effective Date.

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

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

“Material Adverse Change” is (a)
a material impairment in the perfection or priority of Bank’s Lien in the
Collateral (other than through an action or inaction by Bank) or in the value
of such Collateral; (b) a material 

 20
 

 

 

adverse change in the business, operations, or
condition (financial or otherwise) of Borrower; or (c) a material impairment of
the prospect of repayment of any portion of the Obligations.

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

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

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

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

“Perfection Certificate”
is defined in Section 5.1.

“Permitted Indebtedness”
is:

(a)           Borrower’s Indebtedness to Bank under
this Agreement and the other Loan Documents;

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

(c)           Subordinated Debt;

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

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

(f)            Indebtedness in an aggregate principal
amount not to exceed $600,000 secured by Permitted Liens;

(g)           Indebtedness of Borrower
to any Subsidiary and Contingent Obligations of any Subsidiary with respect to
obligations of Borrower (provided that the primary obligations are not
prohibited hereby), and Indebtedness of any Subsidiary to Borrower in an
aggregate principal amount not to exceed $50,000 or any other Subsidiary and
Contingent Obligations of any Subsidiary with respect to obligations of any
other Subsidiary (provided that the primary obligations are not prohibited
hereby);

(h)           other Indebtedness not otherwise
permitted by Section 7.4 not exceeding $50,000 in the aggregate outstanding at
any time; and

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

“Permitted Investments”
are:

(a)           Investments shown on the Perfection
Certificate and existing on the Effective Date;

(b)           Cash Equivalents;

 21
 

 

 

(c)           Investments consisting of
the endorsement of negotiable instruments for deposit or collection or similar
transactions in the ordinary course of Borrower;

(d)           Investments
consisting of deposit accounts in which Bank has a perfected security interest;

(e)           Investments
accepted in connection with Transfers permitted by Section 7.1;

(f)            Investments
of Subsidiaries in or to other Subsidiaries or Borrower and Investments by
Borrower in Subsidiaries not to exceed $50,000 in the aggregate in any fiscal
year;

(g)           Investments
consisting of (i) travel advances and employee relocation loans and other
employee loans and advances in the ordinary course of business, and (ii) loans
to employees, officers or directors relating to the purchase of equity
securities of Borrower or its Subsidiaries pursuant to employee stock purchase
plans or agreements approved by Borrower’s Board of Directors;

(h)           Investments
(including debt obligations) received in connection with the bankruptcy or
reorganization of customers or suppliers and in settlement of delinquent
obligations of, and other disputes with, customers or suppliers arising in the
ordinary course of business;

(i)            Investments
consisting of notes receivable of, or prepaid royalties and other credit
extensions, to customers and suppliers who are not Affiliates, in the ordinary
course of business; provided that this paragraph (i) shall not apply to
Investments of Borrower in any Subsidiary;

(j)            joint
ventures or strategic alliances in the ordinary course of Borrower’s business
consisting of the non-exclusive licensing of technology, the development of
technology or the providing of technical support, provided that any cash
investments by Borrower do not exceed $50,000 in the aggregate in any fiscal
year; and

(k)           other
Investments not otherwise permitted by Section 7.7 not exceeding $50,000 in the
aggregate outstanding at any time.

“Permitted Liens”
are:

(a)           Liens existing on the Effective Date
with Wells Fargo Financial Leasing, Inc. as secured party or otherwise shown on
the Perfection Certificate or arising under this Agreement and the other Loan
Documents;

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

(c)           purchase money Liens (i) on Equipment
acquired or held by Borrower incurred for financing the acquisition of the
Equipment securing no more than $600,000 in the aggregate amount outstanding,
or (ii) existing on Equipment when acquired, if the Lien is confined to
the property and improvements and the proceeds of the Equipment;

(d)           statutory Liens securing claims or
demands of materialmen, mechanics, carriers, warehousemen, landlords and other
Persons imposed without action of such parties, provided, they have no priority
over any of Bank’s Lien and the aggregate amount of such Liens does not at any
time exceed $50,000;

(e)           Liens to secure payment of workers’
compensation, employment insurance, old-age pensions, social security and other
like obligations incurred in the ordinary course of business, provided, they
have no priority over any of Bank’s Liens and the aggregate amount of the
Indebtedness secured by such Liens does not at any time exceed $50,000;

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

(g)           leases or subleases of real property
granted in the ordinary course of business, and leases, subleases,
non-exclusive licenses or sublicenses of property (other than real property or
intellectual property) 

 22
 

 

 

granted in the
ordinary course of Borrower’s business, if the leases, subleases,
licenses and sublicenses do not prohibit granting Bank a security interest;

(h)           non-exclusive license of intellectual
property granted to third parties in the ordinary course of business[,and licenses of intellectual property that could not
result in a legal transfer of title of the licensed property that may be
exclusive in respects other than territory and that may be exclusive as to
territory only as to discreet geographical areas outside of the United States];

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

(j)            Liens in favor of other financial
institutions arising in connection with Borrower’s deposit and/or securities
accounts held at such institutions, provided that Bank has a perfected security
interest in the amounts held in such deposit and/or securities accounts.

“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.

“Quick Ratio”
is, on any date, the sum of (a) Borrower’s consolidated unrestricted cash and
Cash Equivalents maintained with Bank or with another financial institution
subject to a Control Agreement in accordance with Section 6.8, Eligible
Accounts, and 50% of Eligible Inventory divided
by (b) Borrower’s consolidated Current Liabilities plus, without
duplication, all outstanding Obligations owing to Bank.

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

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

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

“Revolving Line”
is an Advance or Advances in an aggregate amount of up to $2,000,000.00
outstanding at any time.

“Revolving Line Maturity Date” is
the earliest of (a) the third anniversary of the Effective Date or (b) the
occurrence of an Event of Default.

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

 “Subordinated Debt” is indebtedness incurred by Borrower
subordinated to all of Borrower’s indebtedness to Bank now existing or
hereafter arising (pursuant to a subordination, intercreditor, or other similar
agreement in writing in form and substance satisfactory to Bank entered into
between Bank and the other creditor), on terms acceptable to Bank.

 23
 

 

 

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

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

“Transaction Report”
is that certain reporting form in the form attached hereto as Exhibit G.

“Transfer” is
defined in Section 7.1.

“Unused Revolving Line
Facility Fee” is defined in Section 2.4(c).

“Warrant” is
that certain Warrant to Purchase Stock dated on or about the Effective Date
executed by Borrower in favor of Bank.

TO THE FULLEST EXTENT PERMITTED
BY APPLICABLE LAW, 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.

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

	
  BORROWER:

  	
   

  
	
   

  	
   

  	
   

  
	
  ENCISION INC.

  	
   

  
	
   

  	
   

  	
   

  
	
  By

  	
  s/ John R. Serino

  	
   

  
	
  Title:

  	
  President & CEO

  	
   

  
	
   

  	
   

  	
   

  
	
  BANK:

  	
   

  
	
   

  	
   

  	
   

  
	
  SILICON VALLEY BANK

  	
   

  
	
   

  	
   

  	
   

  
	
  By

  	
  /s/ Regina Perkins

  	
   

  
	
  Title:

  	
  Relationship Manager

  	
   

  
	
  Effective Date: 11/10/06

  

 

 24

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