UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549


FORM 10-Q

  X
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended:                                                       June 30, 2008

OR

 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                                                 to                      

Commission File Number:                                                       000-19301                       


COMMUNICATION INTELLIGENCE CORPORATION
(Exact name of registrant as specified in its charter)

 
Delaware
 
94-2790442
 
 
(State or other jurisdiction of
 
(I.R.S. Employer
 
 
incorporation or organization)
 
Identification No.)
 

 
   275 Shoreline Drive, Suite 500, Redwood Shores, CA  94065-1413
          (Address of principal executive offices)                  (Zip Code)

Registrant's telephone number, including area code:     (650) 802-7888

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 
Yes
X
 
No
   

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer, or a smaller reporting company.  See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange act.

 
Large accelerated filer
 
Accelerated filer
 
Non-accelerated filer (do not check if smaller reporting company)
X
Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Section 12b-2 of the exchange Act)

 
Yes
   
No
X
 

Number of shares outstanding of the registrant’s Common Stock, as of August 8, 2008: 129,057,161.



INDEX


 
Page No.
PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
Condensed Consolidated Balance Sheets at June 30, 2008 (unaudited) and
December 31, 2007
3
Condensed Consolidated Statements of Operations for the Three and Six-Month
Periods Ended June 30, 2008 and 2007 (unaudited)
4
Condensed Consolidated Statements of Changes in Stockholders’ Equity for the
Three and Six-Month Periods Ended June 30, 2008 (unaudited)
5
Condensed Consolidated Statements of Cash Flows for the Six-Month Periods
Ended June 30, 2008 and 2007 (unaudited)
6
Notes to Unaudited Condensed Consolidated Financial Statements
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
17
Item 3. Quantitative and Qualitative Disclosures About Market Risk
24
Item 4. Controls and Procedures
24
PART II. OTHER INFORMATION
 
Item 1. Legal Proceedings
25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
25
Item 3. Defaults Upon Senior Securities
25
Item 4. Submission of Matters to a Vote of Security Holders
25
Item 5. Other Information
26
Item 6. Exhibits
 
(a) Exhibits
26
Signatures
28


 
- 2 - 

 

Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Balance Sheets
 (In thousands)

   
June 30
   
December 31
 
   
2008
   
2007
 
Assets
 
Unaudited
       
Current assets:
           
Cash and cash equivalents
  $ 2,387     $ 1,144  
Accounts receivable, net of allowances of $136 and $117 at June 30, 2008
and December 31, 2007 respectively
       244       452  
Prepaid expenses and other current assets
    84       135  
                 
Total current assets
    2,715       1,731  
                 
Property and equipment, net
    52       77  
Patents
    3,338       3,528  
Capitalized software development costs
    1,389       1,109  
Other assets
    30       30  
Deferred financing costs     433       −   
                 
Total assets
  $ 7,957     $ 6,475  
                 
Liabilities and Stockholders' Equity
               
Current liabilities:
               
Short-term debt – net of unamortized fair value assigned to warrants of $9 and $350 at June 30, 2008 and December 31, 2007, including related party debt of $1,170 at December 31, 2007, net of unamortized fair value assigned to warrants
        116           1,370  
Accounts payable
    124       135  
Accrued compensation
    297       364  
Other accrued liabilities
    442       298  
Deferred revenue
    384       431  
                 
Total current liabilities
    1,363       2,598  
                 
Long-term debt –net of unamortized fair value assigned to warrants of $1,196 and $21 at June 30, 2008 and December 31, 2007, including related party debt of $2,458 at June 30, 2008, net of unamortized fair value assigned to warrants
        2,559           96  
                 
Commitments and contingencies
               
Stockholders' equity:
               
Preferred stock, $.01 par value; $1,046 liquidation preference; 10,000 shares authorized; 1,040 outstanding at June 30, 2008 and 0 at December 31, 2007, respectively
    1,046        
Common stock, $.01 par value; 225,000 shares authorized; 129,057 shares issued and outstanding at June 30, 2008 and December 31, 2007
    1,291       1,291  
Additional paid-in capital
    95,294       93,785  
Accumulated deficit
    (93,574 )     (91,260 )
Accumulated other comprehensive loss
    (22 )     (35 )
                 
Total stockholders' equity
    4,035       3,781  
                 
Total liabilities and stockholders' equity
  $ 7,957     $ 6,475  
                 


The accompanying notes form an integral part of these Condensed Consolidated Financial Statements

- 3 -
 
 

 

Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Statements of Operations
Unaudited
(In thousands, except per share amounts)
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2008
   
2007
   
2008
   
2007
 
                         
Revenues
                       
Product                                                
  $ 218     $ 385     $ 460     $ 543  
Maintenance                                                
    189       170       377       346  
Total Revenues
    407       555       837       889  
                                 
Operating costs and expenses:
                               
                                 
Cost of sales
                               
Product                                           
    157       132       327       162  
Maintenance                                           
    43       30       73       58  
Research and development                                                
    43       131       96       260  
Sales and marketing                                                
    355       297       715       557  
General and administrative                                                
    552       523       1,019       998  
Total operating costs and expenses
    1,150       1,113       2,230       2,035  
                                 
Loss from operations                                                      
    (743 )     (558 )     (1,393 )     (1,146 )
                                 
Interest and other income (expense), net
    2       4       5       4  
Interest expense:
                               
Related party (Note 5)                                                
    (48 )     (33 )     (92 )     (49 )
Other (Notes 4 and 5)                                                
    (18 )     (43 )     (41 )     (74 )
Amortization of loan discount and deferred financing:
                               
Related party (Note 5)                                                
    (217 )     (74 )     (308 )     (147 )
Other (Notes 4 and 5)                                                
    (63 )     (141 )     (108 )     (243 )
                                 
Minority interest                                                      
          2             5  
Net loss                                                
    (1,087 )     (843 )     (1,937)       (1,650)  
Accretion of beneficial conversion feature, Preferred shares (Note 7):
                               
      Related party                                                
    (273 )           (273 )      
      Other
    (98 )           (98 )      
Preferred stock dividends:
                               
Related party                                                
    (4 )           (4 )      
Other
    (2 )           (2 )      
                                 
Net loss attributable to commonstockholders
  $ (1,464 )   $ (843 )   $ (2,314 )   $ (1,650 )
Basic and diluted loss per common share
  $ (0.01 )   $ (0.01 )   $ (0.02 )   $ (0.02 )
Weighted average common shares outstanding, basic and diluted
    129,057       107,557       129,057       107,557  


The accompanying notes form an integral part of these Condensed Consolidated Financial Statements

- 4 -
 
 

 

Communication Intelligence Corporation
and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
Three and Six Months Ended June 30, 2008
Unaudited
(In thousands, except share amounts)

   
Preferred
Shares
Outstanding
   
Preferred
Shares
Amount
   
Common
Shares
Outstanding
   
Common
Stock
   
Additional
Paid-In
Capital
   
Accumulated
Deficit
   
Accumulated
Other
Comprehensive
Loss
   
Total
 
                                                 
Balances as of December 31, 2007
        $       129,057     $ 1,291     $ 93,785     $ (91,260 )   $ (35 )   $ 3,781  
Stock based employee compensation
                                    14                       14  
                                                                 
Comprehensive loss:
                                                               
 
Net loss
                                            (850 )             (850 )
 
Foreign currency translation adjustment
                                                    (2 )     (2 )
Total comprehensive loss
                                                            (852 )
 
Balance as of March 31, 2008
                129,057       1,291       93,799       (92,110 )     (37 )     2,943  
Stock based employee compensation
                                    26                       26  
Fair value of warrants issued  in connection with Long-term debt
                                      1,231                         1,231  
Conversion of Short-term notes into Preferred Shares, net of expenses of $127
      1,040         1,040                       (127 )                       913  
Beneficial Conversion Feature associated with the Preferred Shares
                                      371                         371  
Preferred share dividends
            6                       (6 )                      
Comprehensive loss:
                                                               
 
Net loss
                                            (1,087 )             (1,087 )
Accretion of beneficial conversion feature on preferred stock                                             (371)                (371)   
Preferred stock dividend                                             (6)                (6)   
 
Foreign currency translation adjustment
                                                      15         15  
Total comprehensive loss
                                                            (1,449 )
 
Balance as of June 30, 2008
    1,040     $ 1,046       129,057     $ 1,291     $ 95,294     $ (93,574 )   $ (22 )   $ 4,035  


The accompanying notes form an integral part of these Condensed Consolidated Financial Statements

- 5 -
 
 

 

Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Statements of Cash Flows
Unaudited
(In thousands)

   
Six Months Ended
June 30,
 
   
2008
   
2007
 
Cash flows from operating activities:                                    
           
Net loss                                                                        
  $      (1,937 )   $      (1,650 )
Adjustments to reconcile net loss to net cash
      used for operating activities:                                                                        
               
Depreciation and amortization                                                                   
    438       391  
Amortization of discount on convertible notes
          149  
Amortization of discount and deferred financing costs
related party debt                                                                   
    308       197  
Amortization of discount and deferred financing costs
on other debt                                                                   
    108       45  
Stock based employee
         compensation                                                                   
    40       60  
Minority interest                                                                   
          (5 )
Provision for doubtful accounts                                                                   
    19       16  
Changes in operating assets and liabilities:
               
   Accounts receivable, net                                                                   
    189       14  
   Prepaid expenses and other current assets
    51       29  
   Accounts payable                                                                   
    (11 )     13  
   Accrued compensation                                                                   
    (67 )     38  
   Other accrued liabilities                                                                   
    138       -  
   Deferred revenue                                                                   
    (47 )     103  
Net cash used for operating  activities                                                                   
    (771 )     (600 )
                 
Cash flows from investing activities:
Acquisition of property and uipment                                                                        
    (7 )     (3 )
Capitalized software development costs                                                                        
    (492 )     (373 )
Net cash used for investing activities                                                                   
    (499 )     (376 )
                 
Cash flows from financing activities:
               
Deferred financing costs                                                                        
    (452 )     -  
Proceeds from issuance of short-term debt                                                                        
    125       -  
Proceeds from issuance of long-term debt                                                                        
    3,000       1,120  
Principal payments on short-term debt                                                                        
    (125 )     -  
Principal payments on capital lease obligations
    -       (4 )
Net cash provided by (used) for financing activities
    2,548       1,116  
 
Effect of exchange rate changes on cash                                                                              
    (35 )     -  
                 
Net increase (decrease) in cash and cash equivalents
    1,243       140  
Cash and cash equivalents at beginning of period
    1,144       727  
Cash and cash equivalents at end of period                                                                              
  $ 2,387     $ 867  
 
(Continued)

The accompanying notes form an integral part of these Condensed Consolidated Financial Statements

- 6 -
 
 

 

Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Statements of Cash Flows (Continued)
Unaudited
(In thousands)

Supplemental Disclosure of Non Cash Financing Activities
 
Short-term notes and accrued interest exchanged for convertible preferred stock
  $ 1,040     $  
Preferred stock dividend
  $ 6     $  
Short term notes and accrued interest exchanged for long term notes
  $ 638     $  
Fair value of beneficial conversion feature and warrants
  $     $ 546  
        Accretion of beneficial conversion feature on convertible preferred shares   $   371     $  
                 
Supplemental disclosure of cash flow information
               
Interest paid
  $ 95     $ 82  

The accompanying notes form an integral part of these Condensed Consolidated Financial Statements

- 7 -
 
 

 
Communication Intelligence Corporation
and Subsidiary
 (In thousands, except per share amounts)
FORM 10-Q


Item1.
Interim financial statements and basis of presentation

1.  
Nature of business

The financial information contained herein should be read in conjunction with the Company's consolidated audited financial statements and notes thereto included in its Annual Report  for the year ended December 31, 2007.

The accompanying unaudited condensed consolidated financial statements of Communication Intelligence Corporation and its subsidiary (the “Company” or “CIC”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete consolidated financial statements. In the opinion of management, the unaudited condensed consolidated financial statements included in this quarterly report reflect all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for a fair presentation of its financial position at the dates presented and the Company’s results of operations and cash flows for the periods presented.  The Company’s interim results are not necessarily indicative of the results to be expected for the entire year.

The Company's core technologies are classified into two broad categories: "transaction and communication enabling technologies" and "natural input technologies". These technologies include multi-modal electronic signature, handwritten biometric signature verification, cryptography (Sign-it, iSign, and SignatureOne) and multilingual handwriting recognition software (Jot).  The Company reports results in one segment, handwriting recognition.

The Company's transaction and communication enabling technologies are designed to provide a cost-effective means for securing electronic transactions, providing network and device access control and enabling workflow automation of traditional paper form processing. The Company believes that these technologies offer more efficient methods for conducting electronic transactions while providing more functional user authentication and heightened data security. The Company's transaction and communication enabling technologies have been fundamental to its development of software for multi-modal electronic signatures, handwritten biometric signature verification, and data security.

The Company’s natural input technologies are designed to allow users to interact with a computer or handheld device by using an electronic pen or stylus as the primary input device. CIC's natural input offering includes multilingual handwriting recognition software for such devices as electronic organizers, pagers and smart cellular phones that do not have a keyboard. For such devices, handwriting recognition offers the most viable solutions for performing text entry and editing.

Going Concern

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. Except for 2004, the Company has incurred significant losses since its inception and, at June 30, 2008, the Company’s accumulated deficit was approximately $93,600. At June 30, 2008, the Company had working capital of $1,352, including cash and cash equivalents of $2,387.  These factors raise substantial doubt about the Company’s ability to continue as a going concern.  The Company has primarily funded losses through the sale of debt and equity securities.

In June 2008, the Company raised additional funds through a debt and equity financing and also converted short-term notes payable to equity (see notes 4 and 5).  Management believes these transactions along with planed operations, will provide adequate capital recourses for at least the next twelve months.  However, there can be no assurance that these transactions will provide the Company with adequate capital resources to fund planned operations or that any additional funds will be available to the Company when needed or if

 
- 8 -

Communication Intelligence Corporation
and Subsidiary
(In thousands except per share amounts)
FORM 10-Q
 
 
 
 
Item 1.   Intermim financial statements and basis of presentation
 
1.  
Nature of business

available, will be available on favorable terms or in amounts required by the Company. If the Company is unable to obtain adequate capital resources to fund operations, it may be required to delay, scale back or eliminate some or all of its operations, which may have a material adverse effect on the Company's business, results of operations and ability to operate as a going concern.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Fair value of financial instruments

The carrying amounts of the Company's financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, short-term debt and long-term debt approximate fair value due to their relatively short maturities.

2.          Accounts receivable and revenue concentration

As of June 30, 2008 three customers in the aggregate accounted for 68% of net accounts receivable:  eCom Asia Pacific, Ltd. (26%), Travelers Insurance Company (25%), and Palm, Inc. (17%).  As of December 31, 2007 four customers in the aggregate accounted for 92% of accounts receivable: Access Systems Americas, Inc, (28%), eCom Asia Pacific, Ltd (22%), Tennessee Valley Authority (32%) and Sony Ericsson (10%).

Three customers in the aggregate accounted for 49% of total revenues for the three months ended June 30, 2008:  Fiserv (12%), Wells Fargo Bank, NA (13%), and Travelers Insurance Company (24%).  For the three months ended June 30, 2007, two customers in the aggregate accounted for 43% of total revenues: Wells Fargo Bank, NA (10%), and Access Americas, Inc. (33%).

Three customers in the aggregate accounted for 43% of total revenue for the six months ended June 30, 2008: Travelers Insurance Company (11%), Wells Fargo Bank, NA (13%) and Access Systems Americas, Inc. (19%). Two customers in the aggregate accounted for 48% of total revenue for the six months ended June 30, 2007: Wells Fargo Bank, NA (12%), and Access Systems Americas, Inc. (36%).

3.
Patents

The Company performs intangible asset impairment analyses at least annually in accordance with the guidance in Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” ("SFAS 142") and Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets” ("SFAS 144"). The Company follows the guidance of SFAS 144 in response to changes in industry and market conditions that affect its patents. The Company then determines if an impairment of its assets has occurred. The Company periodically reassesses the lives of its patents and tests for impairment in order to determine whether the book value of each patent exceeds the fair value of each patent. Fair value is determined by estimating future cash flows from the products that are and will be protected by the patents and considering the additional factors listed in Critical Accounting Policies in the Company’s Annual Report.

Management completed an analysis of its patents as of December 31, 2007.  Based on that analysis, the Company concluded that no impairment of the carrying value of the patents existed. The Company believes that no events or circumstances occurred or changed during the six months ended June 30, 2008, and therefore concluded that no impairment in the carrying values of the patents existed at June 30, 2008.

 
- 9 - 
 

 
Communication Intelligence Corporation
and Subsidiary
 (In thousands, except per share amounts)
FORM 10-Q


Item1.
Interim financial statements and basis of presentation (continued)

3.
Patents (continued)

Amortization of patent costs was $95 and $190, respectively, for each of the three and six month periods ended June 30, 2008 and 2007.

4.
Short-term debt

In 2006 and 2007, the Company entered into long-term financing agreements with Michael Engmann, a stockholder of the Company owning approximately 7% of the Company’s then outstanding shares of common stock, and with unrelated third parties. Each financing included a Note and Warrant Purchase Agreement and a Registration Rights Agreement.  The notes bear interest at a rate of 15% per annum, payable quarterly in cash.  The fair value ascribed to the warrants issued in connection with the financings creates a debt discount that is amortized to interest expense over the life of the respective loans. The proceeds from these financings, as more fully described below, were used for working capital purposes.

In November 2006, the Company borrowed $600, of which $450 was borrowed from Michael Engmann and the remaining $150 from an unrelated third party.  The notes were due May 17, 2008.  In connection with the notes, the lenders were granted warrants to purchase 3,111 shares of common stock. The warrants are exercisable for three years commencing June 30, 2007, and have an exercise price of $0.51. The Company ascribed a fair value of $336 to the warrants, which was recorded as a discount to “debt” in the balance sheet.  The fair value ascribed to the warrants was estimated on the commitment date using the Black-Scholes pricing model with the following assumptions: risk-free interest rate of 4.68%; expected life of 3 years; expected volatility of 54%; and expected dividend yield of 0%.

In March 2007 the Company borrowed $670, of which $350 was borrowed from Michael Engmann and the remaining $320 from unrelated third parties .  The notes are due August 30, 2008. In connection with the notes, the lenders were granted warrants to purchase 3,474 shares of common stock.  The warrants are exercisable for three years commencing June 30, 2007, and have an exercise price of $0.51.  The Company ascribed a fair value of $359 to the warrants, which was recorded as a discount to “debt” in the balance sheet.  The fair value ascribed to the warrants was estimated on the commitment date using the Black-Scholes pricing model with the following assumptions: risk-free interest rate of 4.68%; life of 3 years; expected volatility of 45%; and expected dividend yield of 0%.

In June 2007, the Company borrowed $400 under a financing agreement from Michael Engmann .  The notes are due December 30, 2008.   In connection with the notes, the lenders were granted warrants to purchase 3,168 shares of common stock.  The warrants are exercisable for three years commencing June 30, 2007, and have an exercise price of $0.25.   The Company has ascribed a fair value of $187 to the warrants, which is recorded as a discount to “debt” in the balance.  The relative fair value ascribed to the warrants was estimated on the commitment date using the Black-Scholes pricing model with the following assumptions: risk-free interest rate of 4.90%; life of 3 years; expected volatility of 69%; and expected dividend yield of 0%.

All of the shares underlying the warrants discussed above were registered with the Company’s Form S-1/A, which was declared effective December 28, 2007.

A portion of the above referenced debt held by Michael Engmann, including accrued and unpaid interest through May 31, 2008, was exchanged for Preferred Shares (See Note 7). The remainder of the debt held by Michael Engmann , and the debt held by certain third parties, including accrued and unpaid interest through May 31, 2008, was refinanced pursuant to the Credit Agreement (See Note 5).  The debt being so
 
 
- 10 -

Communication Intelligence Corporation
and Subsidiary
(In thousands except per share amounts)
FORM-10Q
 
 

Item1.
Interim financial statements and basis of presentation (continued)

4.
Short-term debt (continued)

exchanged or refinanced was originally issued in the transactions between August 2006 and June 2007 discussed above, and the related Note and Warrant Purchase Agreements, were terminated in connection with the Financing Transactions.  The warrants to acquire 9,653 shares of the Company’s common stock issued as part of the above reference financings remain outstanding.  These warrants are exercisable until June 30, 2010.

5.  
Long-term debt

On June 5, 2008, the Company effected a financing transaction under which the Company raised capital through the issuance of new secured indebtedness and equity, and restructured a portion of the Company’s existing short-term debt (collectively, the “Financing Transaction”).  Certain parties to the Financing Transactions (Phoenix Venture Fund LLC and Michael Engmann) have a pre-existing relationship with the Company and, with respect to such parties, the Financing Transaction may be considered a related party transaction.

Under the Financing Transaction, the Company entered into a Credit Agreement (the “Credit Agreement”) and a Pledge and Security Agreement (the “Pledge Agreement”), each dated as of June 5, 2008, with Phoenix Venture Fund LLC (“Phoenix”), Michael Engmann and Ronald Goodman (collectively with Phoenix, the “Creditors,” and each individually a “Creditor”).  Under the terms of the Credit Agreement, the Company received an aggregate of $3,000 and refinanced $638 of existing indebtedness and accrued interest on that indebtedness (individually, a “Loan” and collectively, the “Loans”).  The Loans, which are represented by secured promissory notes (each a “Note” and collectively, the “Notes”), bear interest at eight percent (8%) per annum which, at the option of the Company, may be paid in cash or in kind and mature two (2) years from issue date.  The Company may use the proceeds from the Loans to pay the Company’s existing indebtedness and accrued interest on that indebtedness that was not exchanged for preferred stock as described below, for working capital and general corporate purposes, in each case in the ordinary course of business; and to pay fees and expenses in connection with the Financing Transaction, which were approximately $475.  Additionally, a portion of the proceeds of the Loans were used to repay a short term loan from a Company employee in the amount of $125, plus accrued interest, that was made prior to and in anticipation of the closing of the Financing Transaction.  Under the terms of the Pledge Agreement, the Company and its subsidiary, CIC Acquisition Corp., granted the Creditors a first priority security interest in and lien upon all of the assets of the Company and CIC Acquisition Corp.

Under the terms of the Credit Agreement and in partial consideration for the Creditors’ respective Loans made pursuant to the terms of the Credit Agreement as described above, the Company issued to each Creditor a warrant to purchase up to the number of shares of the Company’s common stock obtained by dividing the amount of such Creditor’s Loan by 0.14 (each a “Warrant” and collectively, the ‘Warrants”).  A total of 25,982 shares of the Company’s Common Stock may be issued upon exercise of the Warrants.  The Warrants are exercisable beginning June 30, 2008 until their expiration on June 30, 2011. The Warrants have an exercise price of fourteen cents ($0.14) per share. Additional Warrants may be issued if the Company exercises its option to make interest payments on the Loans in kind.   The Company ascribed the relative fair value of $1,231 to the warrants, which is recorded as a discount to “Long-term debt” in the balance sheet.  The fair value of the warrants was estimated on the commitment date using the Black-Scholes pricing model with the following assumptions: risk-free interest rate of 2.73%; expected life of 3 years; expected volatility of 82.3%; and expected dividend yield of 0%.


- 11 -

Communication Intelligence Corporation
and Subsidiary
(In thousands except per share amounts)
FORM-10-Q
 
 


Item1.
Interim financial statements and basis of presentation (continued)

5.
Long-term debt (continued)

In connection with the closing of the Financing Transaction, the Company also entered into a Securities Purchase Agreement (the “Purchase Agreement”) and a Registration Rights Agreement (the “Registration Rights Agreement”) each dated as of June 5, 2008, (See Note 7).

The offer and sale of the Notes, Warrants and Preferred Shares as detailed above, including the Common Stock issuable upon exercise or conversion thereof, was made in reliance upon exemptions from registration afforded by Section 4(2) of the Securities Act and Rule 506 of Regulation D, as promulgated by the Securities and Exchange Commission under the Securities Act and under exemptions from registration available under applicable state securities laws.

Interest expense associated with the Company’s debt for the three months ended June 30, 2008 and 2007 was $346 and $291, respectively, of which $265 and $107 was related party and $81 and $184 was related to other creditors. Amortization of debt discount included in interest expense for the three months ended June 30, 2008 and 2007 was $280 and $215, respectively, of which $217 and $74 was related party expense and $63 and $141 was related to the other creditors.

 
Interest expense associated with the Company’s debt for the six months ended June 30, 2008 and 2007 was $549 and $513, respectively, of which $400 and $196 was related party and $149 and $317 was related to the other creditors. Amortization of debt discount included in interest expense for the six months ended June 30, 2008 and 2007 was $416 and $390, respectively, of which $308 and $147 was related party and $108 and $243 was related to the other creditors.

6.
Net (loss) per share

The Company calculates net loss per share under the provisions of Statement of Financial Accounting Standards No. 128, “Earnings Per Share” (“SFAS 128”). SFAS 128 requires the disclosure of both basic net loss per share, which is based on the weighted average number of shares outstanding, and when applicable, diluted income per share, which is based on the weighted average number of shares and dilutive potential shares outstanding.

For the three and six month periods ended June 30, 2008, 6,002 and 41,131 shares of common stock subject to outstanding options and warrants, respectively, and 7,429 shares of common stock issuable upon the conversion of the convertible preferred stock were excluded from the calculation of dilutive earnings per share because the exercise of such options and warrants and the conversion of the preferred stock would be anti-dilutive. For the three and six month periods ended June 30, 2007, 5,641 and 14,862 shares of common stock subject to outstanding options, and warrants, respectively, and 3,013 shares issuable upon the conversion of the convertible notes were excluded from the calculation of dilutive earnings per share because the exercise or conversion of such options and warrants would be anti-dilutive.

7.
Equity

Common Stock Options

The Company has one stock-based employee compensation plan, (the "1999 Option Plan") and also grants options to employees, directors and consultants pursuant to individual agreements (collectively, the "Individual
 
 
- 12 -

Communication Intelligence Corporation
and Subsidiary
(In thousands except per share amounts)
FORM 10-Q
 
 

Item1.
Interim financial statements and basis of presentation

7.
Equity

Common Stock Options (continued)

Plans"). Share-based compensation expense is based on the estimated grant date fair value of the portion of share-based payment awards that are ultimately expected to vest during the period.  The grant date fair value of stock-based awards to employees and directors is calculated using the Black-Scholes option pricing model. Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “ Share-Based Payment” requires forfeitures of share-based payment awards to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.  The estimated average forfeiture rates for both the six months ended June 30, 2008 and 2007 was approximately 27%, based on historical data.

SFAS No. 123(R) requires the cash flows from tax benefits for deductions in excess of the compensation costs recognized for share-based payment awards to be classified as financing cash flows.  Due to the Company’s loss position, there were no such tax benefits during the three and six month periods ending June 30, 2008 and 2007.

Valuation and Expense Information under SFAS No. 123(R):

The weighted-average fair value of stock-based compensation is based on the single option valuation approach.  Forfeitures are estimated and it is assumed no dividends will be declared.  The estimated fair value of stock-based compensation awards to employees is amortized using the accrual method over the vesting period of the options. The fair value calculations are based on the following assumptions:


   
Three and Six Months Ended
June 30, 2008
 
Three and Six Months Ended
June 30, 2007
Risk free interest rate
 
3.32% - 5.11%
 
3.65% - 5.11%
Expected life (years)
 
3.21 – 6.86
 
3.19 -7.00
Expected volatility
 
80.96% – 104.57%
 
51.68% – 104.57%
Expected dividends
 
None
 
None

The following table summarizes the allocation of stock-based compensation expense related to stock option grants under SFAS 123(R) included in operating expenses for the three and six months ended June 30, 2008 and 2007. There were 100 stock options granted during the three and six months ended June 30, 2008 and no options were exercised. There were 325 stock options granted during the three and six months ended June 30, 2007, and no options were exercised.

   
Three Months Ended June    30,
   
Six months Ended
 June 30,
 
   
2008
   
2007
   
2008
   
2007
 
 
Research and development
  $ 1     $ 3     $ 2     $ 6  
Sales and marketing
    8       19       20       37  
General and administrative
    1       5       2       8  
Director options
    15       9       16       9  
Stock-based compensation expense
  $ 25     $ 36     $ 40     $ 60  
 
 
- 13 -

Communication Intelligence Corporation
and Subsidiary
(In thousands except per share amounts)
FORM 10-Q
 
 

Item1.
Interim financial statements and basis of presentation

7.
Equity

Common Stock Options (continued)

A summary of option activity under the Company’s plans as of June 30, 2008 and 2007 is as follows:
 
As of June 30,
      2008               2007      
 
 
 
Options
 
Shares
(000)
 
Weighted Average Exercise Price
 
Weighted average Remaining Contractual Term
 
Aggregate Intrinsic Value
 
Shares
(000)
 
Weighted Average Exercise Price
 
Weighted average Remaining Contractual Term
Aggregate Intrinsic Value
Outstanding at January 1,
   6,036
  $
0.59
         
   5,893
  $
    0.69
     
Granted
      100
  $
0.20
         
      325
  $
0.22
     
Exercised
        -
               
          −
           
Forfeited or expired
 (134)    $
0.25
           (577)    $
    0.95
     
Outstanding at June 30
   6,002
  $
0.58
 
     4.16
  $  
   5,641
  $
    0.63
 
      4.79
$
 
Vested and expected to vest at June 30
  6,002
  $
 
 
0.58
 
         4.16
  $
    −
 
   5,641
  $
 
 
    0.63
 
      4.94
$
    −
Exercisable at June 30
  5,550
  $
0.61
 
     4.04
  $
    −
 
   4,978
  $
0.68
 
      4.78
$


 
The following tables summarize significant ranges of outstanding and exercisable options as of June 30, 2008:

     
As of June 30, 2008
 
     
Options Outstanding
   
Options Exercisable
 
 
 
 
Range of Exercise Prices
   
 
 
Number Outstanding
   
Weighted Average Remaining Contractual Life(in years)
   
Weighted Average Exercise Price
   
 
 
Number Outstanding
   
Weighted Average Exercise Price
 
$ 0.14 – $0.50       2,479       4.80     $ 0.32       2,027     $ 0.33  
  0.51 – 1.00       3,341       3.84     $ 0.73       3,341     $ 0.73  
  1.01 – 2.00       167       1.62     $ 1.32       167     $ 1.32  
  2.01 – 3.00                 $           $  
  3.01 – 7.50       15       1.97     $ 3.56       15     $ 3.56  
          6,002       4.16     $ .58       5,550     $    


- 14 -
 
 

 
Communication Intelligence Corporation
and Subsidiary
 (In thousands, except per share amounts)
FORM 10-Q


Item1.
Interim financial statements and basis of presentation

7.
Equity

Common Stock Options (continued)

The following tables summarize significant ranges of outstanding and exercisable options as of June 30, 2007:

     
As of June 30, 2007
 
     
Options Outstanding
   
Options Exercisable
 
 
 
 
Range of Exercise Prices
   
 
 
Number Outstanding
   
Weighted Average Remaining Contractual Life(in years)
   
Weighted Average Exercise Price
   
 
 
Number Outstanding
   
Weighted Average Exercise Price
 
$ 0.14 – $0.50       2,059       5.5     $ 0.34       1,442     $ 0.36  
  0.51 – 1.00       3,341       4.8     $ 0.73       3,295     $ 0.73  
  1.01 – 2.00       176       2.5     $ 1.31       176     $ 1.31  
  2.01 – 3.00       50       0.3     $ 3.00       50     $ 3.00  
  3.01 – 7.50       15       2.9     $ 3.56       15     $ 3.56  
          5,641       4.8     $ 0.63       4,978     $ 0.68  

There were 100 options granted to four directors with an exercise price of $0.20 during the three and six months ended June 30, 2008.

A summary of the status of the Company’s non-vested shares as of June 30, 2008 is as follows:

 
 
Nonvested Shares
 
 
Shares
   
Weighted Average
Grant-Date
Fair Value
 
Nonvested at January 1, 2008
    672     $ 0.32  
Granted
    100     $ 0.16  
Forfeited
    (134 )   $ 0.17  
Vested
    (186 )   $ 0.33  
Nonvested at June 30, 2008
    452     $ 0.17  

As of June 30, 2008, there was $25 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plans.  The unrecognized compensation cost is expected to be realized over a weighted average period of 1.9 years.

Preferred Shares

In connection with the closing of the June 2008 Financing Transaction (see Note 6, Long-term debt), the Company also entered into a Securities Purchase Agreement (the “Purchase Agreement”) and a Registration Rights Agreement (the “Registration Rights Agreement”) each dated as of June 5, 2008.  Under the Purchase Agreement, in exchange for the cancellation of $995 in principal amount and $45 of interest accrued thereon of the Company’s aggregate outstanding $2,071 in existing debt and interest accrued thereon through May 31, 2008, the Company issued to the holders of such debt an aggregate of   1,040 shares of the Company’s Series A Cumulative Convertible Preferred Stock (the “Preferred Shares”).  The Preferred Shares carry an eight percent (8%) annual dividend, payable quarterly in arrears in cash or in additional Preferred Shares, have a liquidation preference over Common Stock of one dollar ($1.00) per share and are convertible into shares of Common Stock at the conversion price of fourteen cents ($0.14) per share.  If the “Preferred Shares” are converted in their entirety, the Company would issue 7,429 shares of common stock. The shares of Preferred Stock are convertible any time after June 30, 2008. The preferred stock transaction resulted in a beneficial conversion
 
 
- 15 -

Communication Intelligence Corporation
and Subsidiary
(In thousands except per share amounts)
FORM 10-Q
 
 

Item1.
Interim financial statements and basis of presentation

7.
Equity (continued)

Preferred Shares (continued)

feature of $371, of which $273 is attributable to Michael Engmann and $98 to the other creditors.  The beneficial conversion feature was recorded as a charge to loss applicable to common stockholders for the quarter ended June 30, 2008.  In addition, the Company accrued a dividend on the preferred shares of $6.  
 
Under the terms of the Registration Rights Agreement, the Company is obligated to prepare and file with the Securities and Exchange Commission (the “Commission”) a registration statement under the Securities Act of 1933, as amended (the Securities Act”) covering the resale of the shares of Common Stock issued upon conversion of the shares of Preferred Stock and exercise of the Warrants as described above.  The Company must also use its reasonable best efforts to keep the registration statement continuously effective under the Securities Act until the earlier of the date that is two years after its Effective Date or until the date that all shares purchased under the Purchase Agreement have been sold or can be sold publicly under Rule 144.  The Registration Rights Agreement provides for certain registration rights whereby the Company could incur penalties if a registration statement is not filed or declared effective by the SEC on a timely basis. Under the Registration Rights Agreement, the Company must file a registration statement registering for  resale the shares within 2 days following the filing of its Quarterly Report on Form 10-Q for the three and six months ending June 30, 2008. Furthermore, the Company is to use commercially reasonable efforts to cause such registration statement to become effective within 180 calendar days after the closing of the June 2008 Financing Transaction. If the registration statement is not filed on a timely basis or is not declared effective by the SEC for any reason on a timely basis, the Company will be required to make a payment to the holders of the registrable securities an amount in cash equal to 1.5% of the aggregate conversion, or exercise price applicable to such holder’s registrable securities for certain defined failures every thirtieth day until such failure is cured. The Company is obligated to pay the costs and expenses of such registration.

The Company believes that it is not probable that an event can occur which will trigger a penalty payment under the agreement. Therefore, the Purchase Agreement was recorded as an equity transaction with no recorded asset or liability associated with the defined failure features included in the Registration Rights Agreement.

- 16 -
 
 

 
Communication Intelligence Corporation
and Subsidiary
 (In thousands, except share and per share amounts)
FORM 10-Q


Forward Looking Statements

Certain statements contained in this quarterly report on Form 10-Q, including, without limitation, statements containing the words “believes”, “anticipates”, “hopes”, “intends”, “expects”, and other words of similar import, constitute “forward looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors which may cause actual events to differ materially from expectations.  Such factors include those set forth in the Company’s Annual Report  for the year ended December 31, 2007, including the following:

·  
Technological, engineering, manufacturing, quality control or other circumstances that could delay the sale or shipment of products;
·  
Economic, business, market and competitive conditions in the software industry and technological innovations that could affect the Company’s business;
·  
The Company’s inability to protect its trade secrets or other proprietary rights, operate without infringing upon the proprietary rights of others and prevent others from infringing on the proprietary rights of the Company; and
·  
General economic and business conditions and the availability of sufficient financing.

Except as otherwise required by applicable laws, the Company undertakes no obligation to publicly update or revise any forward-looking statements, as a result of new information, future events or otherwise.

Item 2.                       Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and notes thereto included in Part 1, Item 1 of this quarterly report on Form 10-Q and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in the Company’s Annual Report for the fiscal year ended December 31, 2007.

Overview

The Company is a leading supplier of electronic signature solutions for business process automation serving primarily the financial services industry and the acknowledged leader in biometric signature verification technology. Our products enable companies to achieve secure paperless business transactions with multiple signature technologies across virtually all applications and hardware platforms.

The Company was incorporated in Delaware in October 1986. Except for the year ended December 31, 2004, in each year since its inception the Company has incurred losses. For the five-year period ended December 31, 2007, net losses aggregated approximately $11,441 and at December 31, 2007, the Company's accumulated deficit was approximately $91,300. At June 30, 2008, our accumulated deficit was approximately $93,600.

For the six month period ended June 30, 2008, total revenues were $837, a decrease of $52, or 6%, compared to total revenues of $889 in the corresponding prior year period. Total revenue for the three months ended June 30, 2008 decreased $148, or 27% to $407, compared to revenues of $555 in the corresponding prior year period.   Orders for the three month period ended June 30, 2008, however, were $296 higher than revenue recognizable for that period and such orders are expected to be recognized in the third quarter of 2008.

The Company is experiencing expanding demand and usage of its electronic signature technology in its target financial services market. Two recent orders received from top ten US banks are for the Company’s eSignature technologies in new applications and lines of business that expand the use of CIC's technology beyond the initial deployments with these firms.  In addition, the Company received an order from a top five insurance company for a property and casualty application and orders for additional licenses from one of its key channel partners, a top five supplier of software solutions and platforms to the financial services industry.  The Company also recently signed an agreement with a leading top tier solution provider to the financial services industry, which the Company believes is of strategic significance relative to near term and future revenue generation.   Recent market surveys by independent
 
 
- 17 -

Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
 
 
 
technology and market research firms such as Forrester Research conclude  that US banks and lenders are challenged with the need to increase revenue hile improving the effectiveness and efficiency of their processes in the face of increased regulatory and compliance demands exacerbated by the recent subprime and credit crises.  The Company believes that electronic signature solutions enhance the customer experience and significantly reduce the time required for account openings and applications, creating more time available for up-cross selling while delivering significant reductions in the life cycle cost of managing mission critical documents, thereby enhancing the need and demand for its product solutions.

The loss from operations for the six months ended June 30, 2008 increased by $247 to $1,393, compared with a loss from operations of $1,146 in the prior year period.  This increase is primarily attributable to a $52 decrease in revenue to $837 in the current period compared to $889 in the prior six month period and to an increase of $195 in operating expenses to $2,230 compared to $2,035 of operating expenses in the comparable prior period. This increase in operating expenses is primarily due to an increase in cost of goods sold related to third party hardware sold with the Company’s software solutions and engineering labor costs associated with nonrecurring engineering project revenue.

In June 2008, the Company closed a financing transaction under which it raised capital through the issuance of secured indebtedness and equity and restructured a portion of the Company’s existing debt.  In connection with the transaction, the Company borrowed an aggregate of $3,000 and refinanced $638 of existing indebtedness and accrued interest on the Company's existing indebtedness. In partial consideration for the respective loans made as described above, the Company issued to each creditor a warrant to purchase up to the number of shares of its common stock obtained by dividing the amount of such creditor’s loan by 0.14.  A total of 25,982,143 shares of our common stock may be issued upon exercise of the warrants at an exercise price of $0.14 per share.  The issuance of the warrants was exempt from registration under Sections 4(2) and 4(6) of the Securities Act and Rule 506 of Regulation D promulgated thereunder.

In June 2008, in connection with the closing of the financing transaction, the Company also entered into a Securities Purchase Agreement and a Registration Rights Agreement.  Under the Securities Purchase Agreement, in exchange for the cancellation of $995 in principal and $45 of interest accrued on our existing debt, the Company issued to the holders of such debt an aggregate of 1,040,000 shares of Series A Cumulative Convertible Preferred Stock.  The preferred shares carry an 8% annual dividend, payable quarterly in arrears in cash or in additional preferred shares, have a liquidation preference over common stock of $1.00 per share and are convertible into shares of common stock at the conversion price of fourteen cents $0.14 per share.  The shares of preferred stock are convertible at any time. The issuance and sale of such shares was effected without registration under the Securities Act in reliance on the exemption from registration provided under Rule 506 of Regulation D promulgated under the Securities Act and under Sections 4(2) and 4(6) of the Securities Act.
 
Critical Accounting Policies and Estimates
 
Warrant valuation

Warrants to purchase shares of the Company’s common stock were issued as part of the Company’s financing transaction. The fair value of the warrants was calculated using the Black-Scholes pricing model at the date of issuance.  The relative fair value attributable to the warrants is recorded as a debt discount in the Company’s balance sheet. The debt discount is amortized to interest expense over the life of the debt, using the straight-line interest method, which approximates the effective interest method, assuming the debt will be held to maturity.

The use of the Black-Scholes model requires that we estimate the fair value of the underlying equity instruments issuable upon the exercise of options and warrants. In determining the fair value of our warrants, the Company utilizes the market price for our shares, the contractual life, and volatility.

- 18 -

Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
 
 
 
For a complete description of the Company’s critical accounting policies refer to Item 7, “Management Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2007 Annual Report.

Results of Operations

Revenues

Total revenue for the three months ended June 30, 2008 decreased $148, or 27%, to $407, compared to $555 in the prior year period.  Product revenue reflects a 7% decrease in eSignature and a 84% decrease in natural input revenues compared to the prior year period.  Orders for the three month period ended June 30, 2008 were $296 higher than revenue recognizable for that period and  is expected to be recognized as revenue in the third quarter of 2008.  Maintenance revenue increased 11%, or $19, for the three months ended June 30, 2008 compared to the prior year period. The increase was primarily due to the renewal of existing maintenance contracts from ongoing customers and new maintenance contracts associated with new product orders.

For the six months ended June 30, 2008, total revenues were $837, a decrease of $52, or 6%, compared to $889 in the prior year period. Product revenues decreased 15% or $83, while maintenance revenues increased 9%, or $31, compared to the prior year period.  The reduction in revenue primarily reflects lower reported royalties from a major natural input/Jot customer. The increase in maintenance revenue was primarily due to the renewal of existing maintenance contracts from ongoing customers and new maintenance contracts associated with new product orders.

Cost of Sales

Cost of sales primarily includes amortization of new and previously capitalized software development costs associated with the Company’s product and maintenance revenues, engineering labor and third party hardware costs associated with certain product sales.  Cost of sales for the three months ended June 30, 2008 increased $38, or 23%, to $200, compared to $162 in the prior year period. The increase is due in part to engineering labor for product development work completed in the second quarter. In addition, amortization of previously capitalized software development costs increased $23, or 24%, to $117, compared to $94 in the prior year period.

For the six months ended June 30, 2008, cost of sales increased $180, or 82%, to $400 compared to $220 in the prior year period.  The increase is due primarily to the sale of third party hardware, engineering labor associated with nonrecurring engineering revenues and amortization of previously capitalized engineering software development costs.  Amortization of capitalized software development cost to cost of sales will increase in the future as new products and enhancements are completed.

Operating expenses

Research and Development Expenses

Research and development expenses consist primarily of salaries and related costs, outside engineering, maintenance, and allocated facilities expenses, net of software development costs capitalized.  Research and development expenses decreased approximately 67%, or $88, for the three months ended June 30, 2008 compared to the prior year period.  The decrease was due primarily to engineering labor cost associated with nonrecurring engineering revenues transferred to cost of sales and an increase in the amount of software development costs capitalized compared to the prior year period.  Total costs, before capitalization of software development and other allocations, were $394 for the three months ended June 30, 2008 compared to $367 in the prior year period.

For the six months ended June 30, 2008, research and development expenses decreased $164, or 63%, compared to the prior year period.  The decrease is primarily due to the amount of engineering labor transferred to cost of sales and the amount software development costs capitalized compared to the prior year period.

- 19 -
 
 

 
Communication Intelligence Corporation
and Subsidiary
 (In thousands, except share and per share amounts)
FORM 10-Q



Sales and Marketing Expenses

Sales and marketing expenses increased 20%, or $58, for the three month ended June 30, 2008 compared to the prior year period. The increase was primarily attributable to increases in salary and related expenses due to the addition of one sales person compared to the prior year, increases in advertising and marketing programs and engineering sales support efforts. 

For the six months ended June 30, 2008, sales and marketing expense increased $158, or 28%, compared to the prior year period.  The increase is primarily due to the reasons discussed above for the change in the three month period.

The Company expects sales and marketing expenses will continue at the current higher levels in the near term due to planned increases marketing programs.

General and Administrative Expenses

General and administrative expenses increased 6%, or $29, for the three months ended June 30, 2008, compared to the prior year period. The increase was due to increases in professional services expense, amortization of annual maintenance subscriptions and the provision for uncollectible accounts compared to the prior year period. These increases were partially offset by an decrease in insurance premiums and stock option expense compared to the prior year period.

For the six months ended June 30, 2008, general and administrative expenses increased $21, or 2%, compared to the prior period. The increase is attributable to the reasons discussed above for the change in the three month period.

The Company anticipates that general and administrative expense will remain above the prior year amounts for the foreseeable future due to the increases in the expenses discussed above.

Interest income and other income, net

Interest income and other income (expense), net, for the three months ended June 30, 2008 decreased $2 from income of $4 in the prior year period.  The decrease is due to the reduced cash balance during the current period compared to the prior year period.  For the six months ended June 30, 2008, interest income and other income (expense), net, increased $1, or 25%,  to $5, compared to $4 in the prior year period.  The increase was primarily due to the interest earned on the cash received in the June 2008 financing transaction.

Interest expense

Interest expense decreased 13%, or $10, to $66 for the three months ended June 30, 2008, compared to $76 in the prior year period. The decrease was primarily due to the reduction in the rate of interest accrued on the Company’s debt from 15% to 8% brought about by debt and equity financing completed in June, 2008. (See Notes 4 and 5 in the Condensed Consolidated Financial Statements of this Form 10-Q).

For the six months ended June 30, 2008, interest expense increased 8%, or $10, to $133, compared to $123 in the prior year period.  The increase is primarily due to the increase in debt financing consummated in June 2007, which was accrued during the full six months ended June 30, 2008.

Amortization of loan discount, which includes warrant and beneficial conversion feature costs associated with the Company’s debt, deferred financing costs, associated with the convertible notes and note and warrant purchase agreements increased 30%, or $65, to $280 for the three months ended June 30, 2008 compared to $215 in the prior year period.  The increase was primarily due to acceleration of the write off to expense of the warrant and beneficial conversion feature costs of a portion of short-term debt due to the conversion in June 2008 to new long-term debt and equity.

- 20 -

Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
 
 
 
For the six months ended June 30, 2008, amortization of loan discount and related costs discussed above increased 7%, or $26, to $416 compared to $390 in the prior year period. The increase was due to the factors discussed above.  The Company will amortize an additional $9 to interest expense over the remaining life of the unconverted notes and $1,180 assigned to the new long term debtor or sooner if the notes are paid off before the due date.

 
Liquidity and Capital Resources

At June 30, 2008, cash and cash equivalents totaled $2,387 compared to cash and cash equivalents of $1,144 at December 31, 2007. The increase in cash was primarily due to proceeds from the financing transaction offset by cash used in operations of $771 and $499 used in investing activities, including $492 in capitalization of software development costs and the acquisition of property and equipment amounting to $7. Total current assets were $2,715 at June 30, 2008, compared to $1,731 at December 31, 2007. As of June 30, 2008, the Company's principal sources of funds included its cash and cash equivalents aggregating $2,387.

Accounts receivable net, decreased $208 for the six months ended June 30, 2008, compared to the December 31, 2007 balance, due primarily to the decrease in sales in the second quarter of 2008 compared to the fourth quarter of 2007.  The Company expects the development of the eSignature market ultimately will result in more consistent revenue on a quarter to quarter basis and, therefore, less fluctuation in accounts receivable from quarter to quarter.

The deferred financing costs of $433 at June 30, 2008 are associated with the debt and equity financing consummated in June 2008.  These costs represent consulting and legal fees associated with the Financing transaction. These costs will be amortized to interest expense over the life of the debt or sooner if the debt is paid off early.

Prepaid expenses and other current assets decreased by $51 as of June 30, 2008, compared to December 31, 2007, due primarily to expensing the prepaid fees for a marketing program held in May 2008. Annual fees on maintenance and support costs added to prepaids over the three months ended June, 2008 were approximately equal to the quarterly amortization amounts.

Accounts payable decreased $11 as of June 30, 2008, compared to December 31, 2007, due primarily to third party hardware costs related to orders shipped in the three months ended March 31, 2008. Accounts payable balances typically increase in the second and fourth quarters when the insurance and annual maintenance and support fees are incurred.  Materials used in cost of sales may impact accounts payable depending on the amount of third party hardware sold as part of the software solution.  Accrued compensation decreased $67, compared to the December 31, 2007 balance due to the payment of salaries that were deferred during 2007.  The balance may fluctuate due to increases or decreases in the number of personnel and utilization of, or increases to, the accrued vacation balance.

Total current liabilities were $1,363 at June 30, 2008, compared to $2,598 at December 31, 2007. Deferred revenue, totaling $384 at June 30, 2008, compared to $431 at December 31, 2007, primarily reflects advance payments for maintenance fees from the Company's licensees that are generally recognized as revenue by the Company when all obligations are met or over the term of the maintenance agreement, whichever is longer.  Deferred revenue is recorded when the Company receives payment from its customers.
 
 
- 21 -

Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
 
 

In 2006 and 2007, the Company entered into long-term financing agreements aggregating $1,670 with Michael Engmann, a stockholder of the Company owning approximately 7% of the Company’s then outstanding shares of common stock and from unrelated third parties. Each financing included a Note and Warrant Purchase Agreement and a Registration Rights Agreement.  The notes bore interest at a rate of 15% per annum, payable quarterly in cash.  The Company issued warrants to acquire an aggregate of 9,753,000 shares of the Company’s common stock associated with the notes with an exercise price range of $0.25 to $0.51 per share. These warrants are exercisable until June 30, 2010. All of the shares underlying the warrants discussed above were registered with the Company’s Form S-1/A, which was declared effective December 28, 2007. The fair value ascribed to the warrants issued in connection with the financings is carried as a discount to the related debt in the balance sheet and is written off to interest expense over the life of the respective loans. The proceeds from these financings were used for working capital purposes.  At June 30, 2008, there is $125 of the above referenced debt remaining, which is due August 30, 2008.  The balance of the debt, including accrued and unpaid interest through May 31, 2008, was restructured into long term debt or exchanged for Preferred Shares as more fully described below.

On June 5, 2008, the Company closed a financing transaction which raised capital through the issuance of new secured indebtedness and equity, and restructured a portion of the Company’s existing short-term debt (collectively, the “Financing Transaction”).  Certain parties to the Financing Transactions (Phoenix Venture Fund LLC and Michael Engmann) have a pre-existing relationship with the Company and, with respect to such parties, the Financing Transactions may be considered a related party transaction.

Under the Financing Transaction, the Company entered into a Credit Agreement (the “Credit Agreement”) and a Pledge and Security Agreement (the “Pledge Agreement”), each dated as of June 5, 2008, with Phoenix Venture Fund LLC (“Phoenix”), Michael Engmann and Ronald Goodman (collectively with Phoenix, the “Creditors,” and each individually a “Creditor”).  Under the terms of the Credit Agreement, the Company received an aggregate of $3,000 and refinanced $638 of existing indebtedness and accrued interest on that indebtedness (individually, a “Loan” and collectively, the “Loans”).  The Loans, which are represented by secured promissory notes (each a “Note” and collectively, the “Notes”), bear interest at eight percent (8%) per annum which, at the option of the Company, may be paid in cash or in kind and mature two (2) years from issue date.  The Company may use the proceeds from the Loans to pay the Company’s existing indebtedness and accrued interest on that indebtedness that was not exchanged for Preferred Shares as described below, for working capital and general corporate purposes, in each case in the ordinary course of business; and to pay fees and expenses in connection with the Financing Transaction, which were approximately $475.  Additionally, a portion of the proceeds of the Loans were used to repay a short term loan from a Company employee in the amount of $125, plus accrued interest, that was made prior to and in anticipation of the closing of the Financing Transaction.  Under the terms of the Pledge Agreement, the Company and its subsidiary, CIC Acquisition Corp., granted the Creditors a first priority security interest in and lien upon all of the respective assets of the Company and CIC Acquisition Corp.

Under the terms of the Credit Agreement and in partial consideration for the Creditors’ respective Loans made pursuant to the terms of the Credit Agreement as described above, the Company issued to each Creditor a warrant to purchase up to the number of shares of the Company’s common stock (“Common Stock”) obtained by dividing the amount of such Creditor’s Loan by 0.14 (each a “Warrant” and collectively, the ‘Warrants”).  A total of 25,982,000 shares of the Company’s Common Stock may be issued upon exercise of the Warrants.  The Warrants are exercisable beginning June 30, 2008 until their expiration on June 30, 2011. The Warrants have an exercise price of fourteen cents ($0.14) per share. Additional Warrants may be issued if the Company exercises its option to make interest payments on the Loans in kind.   The Company ascribed a relative fair value of $1,231 to the Warrants, which is recorded as a discount to “Long-term debt” in the balance sheet.  The fair value of  the Warrants ($1,861) was estimated on the commitment date using the Black-Scholes pricing model with the following assumptions: risk-free interest rate of 2.73%; expected life of 3 years; expected volatility of 82.3%; and expected dividend yield of 0%.

In connection with the closing of the Financing Transaction, the Company also entered into a Securities Purchase Agreement (the “Purchase Agreement”) and a Registration Rights Agreement (the “Registration Rights Agreement”), each dated as of June 5, 2008.  Under the Purchase Agreement, in exchange for the cancellation of $995 in principal amount and $45 of interest accrued thereon of the Company’s aggregate outstanding $2,071 in existing debt and interest accrued thereon through May 31, 2008, the Company issued to the holders of such debt an aggregate of   1,040,000 shares of the
 
 
- 22 -

Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
 
 
 
Company’s Series A Cumulative Convertible Preferred Stock (the “Preferred Shares”).  The Preferred Shares carry an eight percent (8%) annual dividend, payable quarterly in arrears in cash or in additional Preferred Shares, have a liquidation preference over Common Stock of one dollar ($1.00) per share and are convertible into shares of Common Stock at the conversion price of fourteen cents ($0.14) per share.  If the “Preferred Shares” are converted in their entirety, the Company would issue 7,429,000 shares of common stock. The shares of Preferred Stock are convertible any time after June 30, 2008.

Under the terms of the Registration Rights Agreement, the Company is obligated to prepare and file with the Securities and Exchange Commission (the “Commission”) a registration statement under the Securities Act of 1933, as amended (the "Securities Act”) covering the resale of the shares of Common Stock issued upon conversion of the shares of Preferred Stock and exercise of the Warrants as described above.  The Company must also use its reasonable best efforts to keep the registration statement continuously effective under the Securities Act until the earlier of the date that is two years after its Effective Date or until the date that all shares purchased under the Purchase Agreement have been sold or can be sold publicly under Rule 144.  The Company is obligated to pay the costs and expenses of such registration.

The offer and sale of the Notes, Warrants and Preferred Shares as detailed above, including the Common Stock issuable upon exercise or conversion thereof, was made in reliance upon exemptions from registration afforded by Section 4(2) of the Securities Act and Rule 506 of Regulation D, as promulgated by the Commission under the Securities Act and under exemptions from registration available under applicable state securities laws.

Interest expense associated with the Company’s debt for the three months ended June 30, 2008 and 2007 was $346 and $291, respectively, of which $265 and $107 was related party and $81 and $184 was related to other creditors. Amortization of debt discount included in interest expense for the three months ended June 30, 2008 and 2007 was $280 and $215, respectively, of which $217 and $74 was related party expense and $63 and $141 was related to the other creditors.
 
Interest expense associated with the Company’s debt for the six months ended June 30, 2008 and 2007 was $549 and $513, respectively, of which $400 and $196 was related party and $149 and $317 was related to the other creditors. Amortization of debt discount included in interest expense for the six months ended June 30, 2008 and 2007 was $416 and $390, respectively, of which $308 and $147 was related party and $108 and $243 was related to the other creditors.

The warrants to purchase 4,850,000 shares of the Company’s common stock issued under the 2004 Purchase Agreement expire on October 28, 2009. The Company may call the warrants if the Company’s common stock trades at $1.00 or above for 20 consecutive trading days after the date that is 20 days  The placement agent in connection with this financing will be paid approximately $28 in the aggregate if all of the investor warrants are exercised.  The Company will receive additional proceeds of approximately $1,845 if all of the investor warrants are exercised.

- 23-
 
 

 
Communication Intelligence Corporation
and Subsidiary
 (In thousands, except share and per share amounts)
FORM 10-Q



The Company has the following material commitments as of June 30, 2008:

   
Payments due by period
 
Contractual obligations
 
Total
   
2008
   
2009
   
2010
   
2011
   
2012
   
Thereafter
 
Short-term debt (1)
  $      125     $      125     $      –     $      –     $      –     $      –     $      –  
Long-term debt related party (2)
    3,638                     3,638                    
Long-term debt (3)
    117               117                                  
Operating lease commitments (4)
    924       132       272       280       240              
Total contractual cash obligations
  $ 4,804     $ 257     $ 389     $ 3,918     $ 240     $     $  

1.  
Short-term debt reported on the balance sheet is net of approximately $9 in discounts representing the fair value of warrants issued to the investors.

2.  
Long-term debt related party reported on the balance sheet is net of approximately $1,180 in discounts representing the fair value of warrants issued to the investors.

3.  
Long-term debt reported on the balance sheet is net of approximately $16 in discounts representing the fair value of warrants issued to the investor.

4.  
The operating lease commenced on November 1, 2002. The lease was renegotiated in December 2005 and extended for an additional 60 months. The base rent increases approximately 3% per annum over the term of the lease, which expires on October 31, 2011.

The Company has suffered recurring losses from operations that raise a substantial doubt about its ability to continue as a going concern. There can be no assurance that the debt and equity transactions described above (or "entered into in June 2008") will provide the Company with adequate capital resources to fund planned operations or that any additional funds will be available to it when needed, or if available, will be available on favorable terms or in amounts required by it. If the Company is unable to obtain adequate capital resources to fund operations, it may be required to delay, scale back or eliminate some or all of its operations, which may have a material adverse effect on its business, results of operations and ability to operate as a going concern. In addition, under the terms of the June debt financing the Company granted the holders of the debt a security interest in all of the Companies assets. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Item 3.                        Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

Not applicable.

Item 4. Controls and Procedures

Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rule 13a-14(c) as of the end of the period covered by this quarterly report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation.
 

 
- 24-

Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
 
 
 
Part II-Other Information

Item 1.       Legal Proceedings

None

Item 1A.     Risk Factors

 
Not applicable.

Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds

Information with respect to Item 2 is incorporated by reference to Exhibits 10.41, 10.42, 10.43, and 10.44 of this Form 10-Q and to Form 8-K filed on June 6, 2008.

The securities referenced in the above Exhibits were issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”), for transactions by an issuer not involving any public offering.  Each investor was an accredited investor, as such term is defined in 2(a)(15) of the Securities Act.

Item 3.        Defaults Upon Senior Securities

None

Item 4.        Submission of Matters to a Vote of Security Holders

The Company held its Annual Meeting of Stockholders on June 30, 2008. The number of shares of common stock with voting rights as of the record date represented at the meeting either in person or by proxy was 119,519,145 shares, or 92.6% of the eligible outstanding Common Stock of the Company. Two proposals were voted upon by the stockholders.  The proposals and the voting results are as follows:

Proposal 1

The five persons listed below received the most votes in favor of election at the annual meeting and, accordingly were elected as directors to serve until the next Annual Meeting or until his successor is elected or appointed.
         
 
Name
 
For
 
 
Guido DiGregorio
 
 114,851,528
 
 
Garry Meyer
 
113,072,180
 
 
Louis P. Panetta
 
115,007,710
 
 
Chien Bor (C. B.) Sung
 
113,979,292
 
 
David E. Welch
 
113,179,835
 


- 25 -
 
 

 
Communication Intelligence Corporation
and Subsidiary
 (In thousands, except share and per share amounts)
FORM 10-Q



Proposal 2

The voting on the proposal to amend the Company’s amended and restated certificate of incorporation to increase the number of common shares available for issuance from 155,000 to 225,000 was as follows:

 
FOR
 
Against
 
Abstain
Shares voted
104,324,468
 
15,061,196
 
133,480
Percent of voted
87.28%
 
12.60%
 
0.11%
Percent of total
80.83%
 
11.67%
 
0.10%


Item 5.                       Other Information

None

Item 6.                       Exhibits

(a)          Exhibits

- 26 -
 
 

 
Communication Intelligence Corporation
and Subsidiary
 (In thousands, except share and per share amounts)
FORM 10-Q



Exhibit
Number
 
Document
3.1
By-laws of the Company adopted on October 6, 1986, incorporated herein by reference to Exhibit 3.5 to the Company's Registration Statement on Form 10 (File No. 0-19301).
*3.2
Amended and Restated Certificate of Incorporation of the Company dated May 10, 1995, as filed with the Delaware Secretary of State’s office on May 18, 1995.
3.3
Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation dated June 12, 1998, incorporated herein by reference to Exhibit 10.24 to the Company’s 1998 Form 10-K, filed April 6, 1999 (File No. 0-19301).
3.4
Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation dated January 24, 2001, incorporated herein by reference to Exhibit 3.5 to the Company’s Registration Statement on Form S-1/A, filed December 20, 2007.
3.5
Certificate of Elimination of the Company’s Certificate of Designation of the Series A Preferred Stock dated August 17, 2001, incorporated herein by reference to Exhibit 3.6 to the Company’s Registration Statement on Form S-1/A, filed December 20, 2007.
3.6
Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation dated August 17, 2007, incorporated herein by reference to Exhibit 3.7 to the Company’s Registration Statement on Form S-1/A, filed December 20, 2007.
*3.7
Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation dated June 30, 2008.
*4.19
Form of Common Stock Purchase Warrant issued by the Company.
*4.20
Form of Additional Common Stock Purchase Warrant
*4.21
Form of Secured Promissory Note issued by the Company dated June 5, 2008
*4.22
Form of Additional Secured Promissory Note.
*4.23
Certificate of Designations dated June 4, 2008 with respect to Series A Cumulative Convertible Preferred Stock.
*10.41
Credit Agreement dated June 5, 2008, between Communication Intelligence Corporation and the Lenders Party Hereto and SG Phoenix as Collateral Agent.
*10.42
Pledge and Securities Agreement dated June 5, 2008, among Communication Intelligence Corporation and the parties identified there in.
*10.43
Securities Purchase Agreement dated June 5, 2008, among Communication Intelligence Corporation and the parties identified there in.
*10.44
Registration Rights Agreement dated June 5, 2008, among Communication Intelligence Corporation and the parties identified there in.
*  31.1
Certification of Company’s Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
*  31.2
Certificate of Company’s Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
*  32.1
Certification of Chief Executive Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*  32.2
Certification of Chief Financial Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*
Filed herewith.
  Confidential treatment of certain portions of this exhibit have been requested from the SEC pursuant to a request for confidentiality dated August 14, 2008, filed pursuant to the Securities and Exchange Act of 1934.

- 27 -
 
 

 
Communication Intelligence Corporation
and Subsidiary
 (In thousands, except share and per share amounts)
FORM 10-Q




SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





   
COMMUNICATION INTELLIGENCE CORPORATION
   
Registrant
     


August 14, 2008
 
/s/ Francis V. Dane
Date
 
Francis V. Dane
   
(Principal Financial Officer and Officer Duly Authorized to Sign on Behalf of the Registrant)


 
 
 
 
 
 
 
 
- 28 -
 
EXHIBIT 3.2

 
 
STATE OF DELAWARE
 
SECRETARY OF STATE
 
DIVISION OF CORPORATIONS
 
FILED 12:00 PM 05/18/1395
 
950110278 - 2103295



AMENDED AND RESTATED

CERTIFICATE OF INCORPORATION OF

COMMUNICATION INTELLIGENCE CORPORATION

Communication Intelligence Corporation (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, originally incorporated on October 1, 1986,  under the name "Communication Intelligence Corporation,"

DOES HEREBY CERTIFY:

A.           That the Corporation filed a Voluntary Petition for protection under Chapter 11 of Title 11 of the United States code ("Bankruptcy Code") on July 18, 1994, operating its business as Debtor-in-Possession under 11 U.S.C. 1108 thereafter. On October 19, 1994, the Corporation filed a Second Amended Plan of Reorganization (the "Plan") the adequacy of which was approved on November 14, 1994, by the United States Bankruptcy Court for the Northern District of California (the "Court"). The Plan was distributed to all claim and interest holders of the Corporation.  Ballots returned by claim and interest holders overwhelmingly voted to approve the Plan.  On December 22, 1994, the Court entered an order confirming the Plan.  Execution of the Plan requires amendment of the Corporation's Certificate of Incorporation to authorize additional shares of stock and to eliminate authorization of non-voting equity, as set forth below.

B.           That the following Amended and Restated Certificate of Incorporation is duly authorized in accordance with the provisions of Sections 242 and 303 of the Delaware General Corporation Law.

C.           That the Certificate of Incorporation of the Corporation is amended and restated as follows:


FIRST:  The name of the Corporation is Communication Intelligence Corporation.

SECOND:  The address of the registered office of the Corporation in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle.  The name of its registered agent at that address is The Corporation Trust Company.

THIRD:  The purpose of the Corporation is to engage in any lawful act or activity for which corporations may


- 1 -

 
 

 
 
EXHIBIT 3.2
be organized under the General Corporation Law of Delaware.

FOURTH:  (a) The total number of shares of stock which the Corporation shall have authority to issue is 90,000,000 of which 80,000,000 shall be Common Stock, par value $.01 per share, and 10,000,000 shares shall be Preferred Stock, par value $.01 per share.

(b)   Subject to all of the rights of the Preferred Stock, and except as may be provided expressly with respect to the Preferred Stock herein, by law or by the Board of Directors pursuant to this article Fourth, (1) dividends may be declared and paid or set apart for payment upon the Common Stock out of any assets or funds of the Corporation legally available for the payment of dividends;  (2) the holders of Common Stock and Preferred Stock shall have the right to vote for the election of directors and on all other matters requiring stockholder action, each share being entitled to one vote; and (3) upon the voluntary liquidation, dissolution or winding up of the Corporation, the net assets of the Corporation shall be distributed pro rata to the holders of the Common Stock.

(c)   The shares of Preferred stock may be issued from time to time in one or more series. The Board of Directors hereby is authorized to establish from time to time by resolution or resolutions and, if and to the extent from time to time required by law, by filing a certificate pursuant to the applicable law of the State of Delaware the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations, or restrictions thereof, including but not limited to the fixing or alteration of the dividend rights, dividend rate or rates, conversion rights, voting rights, rights in terms of redemption (including sinking fund provisions), the redemption price or prices, and the liquidation preferences of any wholly unissued series of shares of Preferred Stock and the number of shares constituting any such series and the designation thereof, or any or all of them; and to increase or decrease the number of shares of any series subsequent to the issue of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. In addition to all of the qualifications, limitations or restrictions that may be


- 2 -

 
 

 
EXHIBIT 3.2

 
attached to the shares of Preferred Stock of any series, each share of Preferred Stock of any series shall be entitled to receive the par value thereof, being $.01 per share, on the dissolution, liquidation or winding-up of the Corporation.

(d)  No holder of any stock of the Corporation shall be entitled as such, as a matter of right, to subscribe for or purchase any part of any new or additional issue of stock or any class whatsoever of the Corporation, or of securities convertible into stock of any class whatsoever, whether now or hereafter authorized, or whether issued for cash or other consideration or by way of dividend.

FIFTH:  In furtherance and not in limitation of the powers conferred by statute, the Board of Directors shall have the power to make, alter, amend and repeal the bylaws (except so far as the bylaws adopted by the stockholders shall otherwise provide). Any bylaws made by the Board of Directors under the powers conferred hereby may be altered, amended or repealed by the Board of Directors or by the Stockholders.

SIXTH:   (a)   The business and affairs of the Corporation shall be managed by the Board of Directors of the Corporation.

(b)   The number of directors which shall constitute the whole Board of Directors of the Corporation shall be as specified in the bylaws of the Corporation.

(c)   To the fullest extent permitted by the General Corporation Law of the State of Delaware as the same now exists or say hereafter be amended, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. Any repeal or modification of this paragraph by the stockholders of the Corporation shall be prospective only, and shall not adversely affect any limitation on the personal liability of a director of the Corporation with respect to any act or omission occurring prior to the time of such repeal or modification.

SEVENTH: The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Amended and Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute and this Amended and Restated Certificate of Incorporation, and all rights conferred on stockholders herein are granted subject to this reservation.


- 3 -

 
 

 
EXHIBIT 3.2

 
EIGHTH: Notwithstanding any provision to the contrary in this Amended and Restated Certificate of Incorporation, the Corporation is prohibited from issuing nonvoting equity securities.

IN WITNESS WHEREOF, the President of the Corporation has executed this amended and restated certificate on the 10th day of May, 1995.


   
COMMUNICATION INTELLIGENCE
   
CORPORATION
       
       
       
   
By:
/s/ James Dao
     
James Dao,  President
       
       
ATTEST:
     
       
       
       
/s/ Frank  Dane
     
Frank Dane, Secretary
     



- 4 -


EXHIBIT 3.7

 
Delaware
PAGE  1
 
The First State
 

 
I, HARRIET SMITH WINDSOR, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT OF "COMMUNICATION INTELLIGENCE CORPORATION", FILED IN THIS OFFICE ON THE THIRTIETH DAY OF JUNE, A.D. 2008, AT 6:54 O'CLOCK P.M.
A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE COUNTY RECORDER OF DEEDS.

 

 
 
 
 
 
 
 

 










2103295  8100
 
            08074539
DELAWARE SEAL
 
 
 
 
 
/s/ Harriet Smith Windsor

Harriet Smith Windsor, Secretary of State
AUTHENTICATION:  6699267
 
DATE:  06-30-08
 
You may verify this certificate online at corp.delaware.gov/authver.shtml
 
   

 
 
 

 

 
EXHIBIT 3.7

   
of Delaware
   
Secretary of State
   
Division of Corporations
   
Delivered 07:05 PM 06/30/2008
   
FILED 06:54 PM 06/30/2008
   
SRV 080745391  - 2103295 FILE

 


 

CERTIFICATE OF AMENDMENT
TO
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
COMMUNICATION INTELLIGENCE CORPORATION


It is hereby certified that:

1.   The name of the corporation is Communication Intelligence Corporation (hereinafter called the "Corporation").

2.   The Amended and Restated Certificate of Incorporation of the Corporation is hereby amended by striking paragraph (a) of Article Fourth thereof and by substituting in lieu of said paragraph the following new paragraph:

"FOURTH: The total number of shares which the Corporation shall have authority to issue is 235,000.000 of which 225,000.000 shares shall be Common Stock, par value $0.01 per share, and 10,000,000 shares shall be Preferred Stock, par value $0.01 per share."

The balance of Article Fourth shall remain unchanged.

3.   This amendment to the Corporation's Amended and Restated Certificate of Incorporation has been duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware.

4.   This Certificate of Amendment shall be effective as of the date of filing with the Secretary of State of the State of Delaware.

IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to be signed by Guido DiGregorio, its Chairman and Chief Executive Officer, this 30th day of June, 2008.

 
 
COMMUNICATION INTELLIGENCE
 
CORPORATION
   
   
/s/ Guido DiGregorio
 
By:
Guido DiGregorio
   
Chairman and Chief Executive Officer

 







 
1


EXHIBIT 4-19

 
Exhibit 1.9 to Credit Agreement
 
NEITHER THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES ISSUABLE UPON EXERCISE OF THESE SECURITIES HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR APPLICABLE STATE SECURITIES LAWS.  THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT, OR (B) IF REASONABLY REQUESTED BY THE COMPANY, AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT.  THESE SECURITIES AND THE SECURITIES ISSUABLE UPON EXERCISE OF THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT SECURED BY SUCH SECURITIES.
 
COMMUNICATION INTELLIGENCE CORPORATION
 
[FORM OF] COMMON STOCK PURCHASE WARRANT
 
Warrant No. [                 ] Dated:  June ___, 2008
 
Communication Intelligence Corporation, a Delaware corporation (the “Company” ), hereby certifies that, for value received,   _____________________, or its registered assigns (the “Holder” ), is entitled to purchase from the Company up to a total of _________   shares of common stock, $0.01 par value per share (the “Common Stock” ), of the Company (each such share, a “Warrant Share” and all such shares, the “Warrant Shares” ) at an exercise price equal to $0.14 (as adjusted from time to time as provided in Section 9 , the “Exercise Price” ), at any time from June 30, 2008 and through and including the date that is three years from the date this Warrant is first exercisable (the “Expiration Date” ), and subject to the following terms and conditions.  This Warrant (this “Warrant” ) is one of a series of similar warrants (collectively, the “Warrants” ) issued pursuant to that certain Credit Agreement, dated as of the date hereof, by and among the Company, Phoenix Venture Fund LLC, Michael Engmann and Ronald Goodman (the “Credit Agreement” ).
 
1.   Definitions .  In addition to the terms defined elsewhere in this Warrant, capitalized terms that are not otherwise defined herein have the meanings given to such terms in the Credit Agreement.
 
2.   Registration of Warrant .  The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the “Warrant Register” ), in the name of the record Holder hereof from time to time.  The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.
 
3.   Registration of Transfers .  The Company shall register the transfer of any portion of this Warrant in the Warrant Register, upon surrender of this Warrant, with the Form of Assignment attached hereto as Annex A duly completed and signed, to the transfer agent or to  the Company at its address specified herein.  Upon any such registration or transfer, a new warrant to purchase Common Stock, in
 
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substantially the form of this Warrant (any such new warrant, a “New Warrant” ), evidencing the portion of this Warrant so transferred shall be issued to the transferee and a New Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the transferring Holder.  The acceptance of the New Warrant by the transferee thereof shall be deemed the acceptance by such transferee of all of the rights and obligations of a holder of a Warrant.
 
4.   Exercise and Duration of Warrants .
 
(a)   This Warrant shall be exercisable by the registered Holder at any time and from time to time on or after June 30, 2008, through and including the Expiration Date.  At 6:30 p.m. New York City time on the Expiration Date, the portion of this Warrant not exercised prior thereto shall be and become void and of no value; provided that , if on the Expiration Date, there is no effective Registration Statement covering the resale of the Warrant Shares, then this Warrant shall be deemed to have been exercised in full (to the extent not previously exercised) on a “cashless exercise” basis at 6:30 p.m. New York City time on the Expiration Date.  The Company may not call or redeem any portion of this Warrant without the prior written consent of the affected Holder.
 
5.   Delivery of Warrant Shares .
 
(a)   Other than as may be required in connection with registration of a transfer of this Warrant, the Holder shall not be required to physically surrender this Warrant unless this Warrant is being exercised in full.  To effect exercises hereunder, the Holder shall duly execute and deliver to the Company at its address for notice set forth herein (or to such other address as the Company may designate by notice in writing to the Holder), an Exercise Notice in the form of Annex B hereto, along with the Warrant Share Exercise Log in the form of Annex C hereto, and shall pay the Exercise Price, if applicable, multiplied by the number of Warrant Shares that the Holder intends to purchase hereunder.  The Company shall promptly (but in no event later than three Trading Days after the Date of Exercise (as defined herein)) issue or cause to be issued and cause to be delivered to or upon the written order of the Holder a certificate for the Warrant Shares issuable upon such exercise.  The Company shall, upon request of the Holder, and subsequent to the date on which a Registration Statement covering the resale of the Warrant Shares has been declared effective by the SEC, use commercially reasonable efforts to deliver Warrant Shares hereunder electronically through the Depository Trust Corporation or another established clearing corporation performing similar functions.  A “Date of Exercise” for purposes of this Warrant, means the date on which the Holder shall have delivered to the Company: (i) the Exercise Notice (with the Warrant Exercise Log attached to it), appropriately completed and duly signed and (ii) if such Holder is not utilizing the cashless exercise provisions set forth in this Warrant, payment of the Exercise Price for the number of Warrant Shares so indicated by the Holder to be purchased.  If by the third Trading Day after the Date of Exercise, the Company fails to deliver the required number of Warrant Shares, the Holder will have the right to rescind the exercise.  If by the third Trading Day after a Date of Exercise, the Company fails to deliver the required number of Warrant Shares, and if after such third Trading Day and prior to the receipt of such Warrant Shares, the Holder purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the
 
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Holder of Warrant Shares which the Holder anticipated receiving upon such exercise (a “Buy In” ), then the Company shall (i) pay in cash to the Holder the amount by which (x) the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (A) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue by (B) the closing bid price of the Common Stock on the exercise date and (ii) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored or deliver to the Holder the number of shares of Warrant Shares that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder.  The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy In.
 
(b)   In the event that a Holder surrenders this Warrant following one or more partial exercises, the Company shall, provided that the applicable number of Warrant Shares related to each such partial exercise has been delivered pursuant to Section 5(a) , cancel such surrendered Warrant and issue or cause to be issued to the Holder, at the Company’s expense, a New Warrant evidencing the right to purchase the remaining number of Warrant Shares.
 
(c)   The Company’s obligations to issue and deliver Warrant Shares in accordance with the terms hereof are absolute and unconditional, irrespective of any action or inaction by the Holder to enforce the same, any waiver or consent with respect to any provision hereof, the recovery of any judgment against any Person or any action to enforce the same, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder or any other Person of any obligation to the Company or any violation or alleged violation of law by the Holder or any other Person, and irrespective of any other circumstance which might otherwise limit such obligation of the Company to the Holder in connection with the issuance of Warrant Shares.  Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver certificates representing shares of Common Stock upon exercise of the Warrant as required pursuant to the terms hereof.
 
6.   Charges, Taxes and Expenses .  Issuance and delivery of certificates for Warrant Shares upon exercise of this Warrant shall be made without charge to the Holder for any issue or transfer tax, withholding tax, transfer agent fee or other incidental tax or expense in respect of the issuance of such certificates, all of which taxes and expenses shall be paid by the Company; provided , however , that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the registration of any certificates for Warrant Shares or Warrants in a name other than that of the Holder.  The Holder shall be responsible for all other tax liability that may arise as a result of holding or transferring this Warrant or receiving Warrant Shares upon exercise hereof.
 
7.   Replacement of Warrant .  If this Warrant is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation hereof, or in lieu of and substitution for this Warrant, a New Warrant, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and customary and reasonable indemnity
 
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(which shall not include a surety bond), if requested.  for a New Warrant under such circumstances shall also comply with such other reasonable regulations and procedures and pay such other reasonable third-party costs as the Company may prescribe.  If a New Warrant is requested as a result of a mutilation of this Warrant, then the Holder shall deliver such mutilated Warrant to the Company as a condition precedent to the Company’s obligation to issue the New Warrant.
 
8.   Reservation of Warrant Shares .
 
(a)   The Company covenants that it will at all times reserve and keep available out of the aggregate of its authorized but unissued and otherwise unreserved Common Stock, solely for the purpose of enabling it to issue Warrant Shares upon exercise of this Warrant as herein provided, the number of Warrant Shares that are then issuable and deliverable upon the exercise of this entire Warrant, free from preemptive rights or any other contingent purchase rights of persons other than the Holder (after giving effect to the adjustments and restrictions of Section 9 , if any).  The Company covenants that all Warrant Shares so issuable and deliverable shall, upon issuance and the payment of the applicable Exercise Price in accordance with the terms hereof, be duly and validly authorized, issued and fully paid and non-assessable.  The Company will take all such action as may be necessary to assure that such shares of Common Stock may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of any securities exchange or automated quotation system upon which the Common Stock may be listed.  The Company will notify its transfer agent for the Common Stock of the reservation of shares of Common Stock as required under this provision.
 
(b)   Insufficient Authorized Shares .  If at any time after June 30, 2008, and prior to the Expiration Date, the Company does not have a sufficient number of authorized and unreserved shares of Common Stock to satisfy its obligation to reserve for issuance upon exercise of this Warrant and Warrants of like tenor at least a number of shares of Common Stock as shall from time to time be necessary to effect the exercise of all of the Warrants of like tenor then outstanding (an “Authorized Share Failure” ), then the Company shall promptly take all action necessary to increase the Company's authorized shares of Common Stock to an amount sufficient to allow the Company to reserve the required amount for the Warrants of like tenor then outstanding.  Without limiting the generality of the foregoing sentence, as soon as practicable after the date of the occurrence of an Authorized Share Failure, but in no event later than ninety (90) days after the occurrence of such Authorized Share Failure, the Company shall hold a meeting of its stockholders for the approval of an increase in the number of authorized shares of Common Stock.  In connection with such meeting, the Company shall provide each stockholder with a proxy statement and shall use commercially reasonable efforts to solicit its stockholders' approval of such increase in authorized shares of Common Stock and to cause its board of directors to recommend to the stockholders that they approve such proposal.
 
9.   Certain Adjustments .  The Exercise Price and number of Warrant Shares issuable upon exercise of this Warrant are subject to adjustment from time to time as set forth in this Section 9 .
 
(a)   Stock Dividends and Splits.   If at any time while this Warrant is outstanding, the number of outstanding shares of Common Stock is increased by a stock dividend payable in shares of Common Stock or by a split-up of shares of Common Stock or  other
 
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similar event, then, on the effective date thereof, the number of shares issuable on exercise of each Warrant shall be increased in proportion to such increase in outstanding shares and the then applicable Exercise Price shall be correspondingly decreased, each in accordance with Section 9(h) .
 
(b)   Change in Option Price or Conversion Rate .  If, at any time after the date hereof, (1) the purchase price or exercise price provided for in any warrants or other rights to subscribe for or to purchase, or any options for the purchase of, Common Stock or any stock or security convertible into or exchangeable for Common Stock that are outstanding as of the date hereof (such warrants, rights or options being called “Options” and such convertible or exchangeable stock or securities being called “Convertible Securities” ) issued by the Corporation is reduced, (2) the number of shares into which the Option is exercisable is increased, (3) the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities is increased (if such consideration is payable to the holder of the Convertible Securities) or decreased (if such consideration is payable by the holder of the Convertible Securities), or (4) the rate at which Convertible Securities are convertible into or exchangeable for Common Stock is increased or the conversion price is decreased (including, but not limited to, such increases or decreases, as applicable, under or by reason of provisions designed to protect against dilution), the Exercise Price in effect at the time of such event shall forthwith be readjusted to the Exercise Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or conversion rate, as the case may be, at the time initially granted, issued or sold.
 
(c)   Aggregation of Shares.   If at any time while this Warrant is outstanding, the number of outstanding shares of Common Stock is decreased by a consolidation, combination or reclassification of shares of Common Stock or other similar event, then, upon the effective date of such consolidation, combination or reclassification, the number of shares issuable on exercise of each Warrant shall be decreased in proportion to such decrease in outstanding shares and the then applicable Exercise Price shall be correspondingly increased.
 
(d)   Replacement of Securities Upon Reorganization, etc.   If at any time while this Warrant is outstanding (1) the Company effects any merger or consolidation of the Company with or into another Person, (2) the Company effects any sale of all or substantially all of its assets in one or a series of related transactions, (3) any tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, cash or property, or (4) the Company effects any capital reorganization or reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property (each, a “Fundamental Transaction” ), then, as a condition of such Fundamental Transaction, lawful and fair provision shall be made whereby the Holder of the Warrant shall thereafter have the right to purchase and receive, upon the basis and upon the terms and conditions specified in the Warrants and in lieu of the shares of Common Stock of the Company immediately theretofore purchasable and receivable upon the exercise of the rights represented thereby, such shares of stock, securities, or assets as may be issued or payable with respect to or in exchange for the number of outstanding shares of such Common Stock equal to the number of shares of such stock immediately theretofore purchasable  and receivable upon the exercise of the rights represented by the Warrants, had such Fundamental Transaction not taken place and in such event appropriate provision shall be made with respect to the rights and interests of the Holder of the Warrant to the end that the provisions hereof
 
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(including, without limitation, provisions for adjustments of the Exercise Price and of the number of shares purchasable upon the exercise of the Warrants) shall thereafter be applicable, as nearly as may be in relation to any share of stock, securities, or assets thereafter deliverable upon the exercise hereof.  The Company shall not effect any such Fundamental Transaction unless prior to the consummation thereof the successor corporation (if other than the Company) resulting from such Fundamental Transaction, or the corporation purchasing such assets in a Fundamental Transaction, shall assume by written instrument executed and delivered to the Holders of the Warrants the obligation to deliver to the Holders of the Warrant such shares of stock, securities, or assets as, in accordance with the foregoing provisions, such Holders may be entitled to purchase.  Notwithstanding the foregoing, in the event of any Fundamental Transaction, other than a Fundamental Transaction in which a successor entity of the Company that is a publicly traded corporation whose stock is quoted or listed for trading on a Trading Market (as defined in the Registration Rights Agreement, dated as of the date hereof, by and among the Company and the investors signatory thereto (the “Registration Rights Agreement” )) assumes this Warrant such that the Warrant shall thereafter be exercisable for the publicly traded common stock of such successor entity, then, at the written request of the Holder, if and only if such request is delivered by notice in writing to the Company within 30 Business Days following the effective date of the Fundamental Transaction, the Company (or the successor entity) shall purchase this Warrant from the Holder by paying to the Holder, within five Business Days after such request (or, if later, on the effective date of the Fundamental Transaction), cash in an amount per Warrant Share equal to the greater of (A) the Black Scholes value of the remaining unexercised portion of this Warrant on the date of such request or (B) the Transaction Value per share of Common Stock outstanding. The terms of any agreement pursuant to which a Fundamental Transaction is effected shall include terms requiring any such successor or surviving entity to comply with the provisions of this Section 9(d) and insuring that the Warrant (or any such replacement security) will be similarly adjusted upon any subsequent transaction analogous to a Fundamental Transaction.
 
“Transaction Value” shall mean the value on the effective date of the Fundamental Transaction of the net pre-tax proceeds received or receivable by common stockholders of the Company in the Fundamental Transaction.  Any proceeds not constituting cash shall be valued at their fair market value (as determined in good faith by the Company's Board of Directors after reasonable prior notice of the proposed determination to the Holder, and an opportunity for the Holder to discuss the proposed determination with the Company).

(e)   Number of Warrant Shares .  Simultaneously with any adjustment to the Exercise Price pursuant to this Section 9 , the number of Warrant Shares that may be purchased upon exercise of this Warrant shall be increased or decreased proportionately, so that after such adjustment the aggregate Exercise Price payable hereunder for the adjusted number of Warrant Shares shall be the same as the aggregate Exercise Price in effect immediately prior to such adjustment.
 
(f)   Calculations .  All calculations under this Section 9 shall be made to the nearest cent or the nearest 1/100th of a share, as
 
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applicable.  The number of shares of Common  Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock.
 
(g)   Notice of Adjustments .  Upon the occurrence of each adjustment pursuant to this Section 9 , the Company at its expense will promptly compute such adjustment in accordance with the terms of this Warrant and prepare a certificate setting forth such adjustment, including a statement of the adjusted Exercise Price and adjusted number or type of Warrant Shares or other securities, cash or property issuable upon exercise of this Warrant (as applicable), describing the transactions giving rise to such adjustments and showing in detail the facts upon which such adjustment is based.  Upon written request, the Company will promptly deliver a copy of each such certificate to the Holder and to the Company’s transfer agent.
 
(h)   Notice of Corporate Events .  If the Company (i) declares a dividend or any other distribution of cash, securities or other property in respect of its Common Stock, including without limitation any granting of rights or warrants to subscribe for or purchase any capital stock of the Company or any Subsidiary, (ii) authorizes or approves, enters into any agreement contemplating or solicits stockholder approval for any Fundamental Transaction or (iii) authorizes the voluntary dissolution, liquidation or winding up of the affairs of the Company, then the Company shall deliver to the Holder a notice describing the material terms and conditions of such transaction, at least ten Business Days prior to the applicable record or effective date on which a Person would need to hold Common Stock in order to participate in or vote with respect to such transaction, and the Company will take all steps reasonably necessary in order to insure that the Holder is given the practical opportunity to exercise this Warrant prior to such time so as to participate in or vote with respect to such transaction; provided , however , that the failure to deliver such notice or any defect therein shall not affect the validity of the corporate action required to be described in such notice.
 
(i)   Rights Upon Distribution Of Assets .  If the Company shall declare or make any dividend or other distribution of its assets (or rights to acquire its assets) to Holders of shares of Common Stock, by way of return of capital or otherwise (including, without limitation, any distribution of cash, stock or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a “Distribution” ), at any time after the issuance of this Warrant, then, in each such case the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive such Distribution and such record date shall be deemed to be the date of such Distribution (the “Record Date” ), then, in each such case:
 
(A)           any Exercise Price in effect immediately prior to the close of business on the record date fixed for the determination of holders of shares of Common Stock entitled to receive the Distribution shall be reduced, effective as of the close of business on such record date, to a price determined by multiplying such Exercise Price by a fraction of which (I) the numerator shall be the closing bid price of the shares of Common Stock on the Trading Day immediately preceding such record date minus the fair market value of the Distribution (as determined in good faith by the Company's Board of Directors) applicable to one share of Common Stock, and (II) the denominator shall be the closing bid price of the shares of Common Stock on the Trading Day immediately preceding such record date; and
 
 
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(B)           the number of Warrant Shares shall be increased to a number of shares equal to the number of shares of Common Stock obtainable immediately prior to the close of business on the record date fixed for the determination of holders of shares of Common Stock entitled to receive the Distribution multiplied by the reciprocal of the fraction set forth in the immediately preceding paragraph (A); provided that in the event that the Distribution is of shares of Common Stock (or common stock) ( “Other Shares of Common Stock” ) of a company whose common shares are traded on a national securities exchange or a national automated quotation system, then the Holder may elect to receive a warrant to purchase Other Shares of Common Stock in lieu of an increase in the number of Warrant Shares, the terms of which shall be identical to those of this Warrant, except that such warrant shall be exercisable into the number of shares of Other Shares of Common Stock that would have been payable to the Holder pursuant to the Distribution had the Holder exercised this Warrant immediately prior to such record date and with an aggregate exercise price equal to the product of the amount by which the exercise price of this Warrant was decreased with respect to the Distribution pursuant to the terms of the immediately preceding paragraph (A) and the number of Warrant Shares calculated in accordance with the first part of this paragraph (B).

(j)   Treasury Shares .  The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock for the purpose of this Section 9 .
 

10.   Payment of Exercise Price .  The Holder shall pay the Exercise Price in immediately available funds; provided , however , the Holder, in its sole discretion, may also satisfy its obligation to pay the Exercise Price through one of the following means:
 
(a)   A “cashless exercise,” in which event the Company shall issue to the Holder the number of Warrant Shares determined as follows:
 
 
X = Y [(A-B)/A]
where:
 
 
X = the number of Warrant Shares to be issued to the Holder.
   
 
Y = the number of Warrant Shares with respect to which this Warrant is being exercised.
   
 
A = the average of the Closing Prices for the five Trading Days immediately prior to (but not including) the Exercise Date.
   
 
B = the Exercise Price.

For purposes of Rule 144 promulgated under the Securities Act, it is intended, understood and acknowledged that the Warrant Shares issued in a cashless exercise transaction shall be deemed
 
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to have been acquired by the Holder, and the holding period for the Warrant Shares shall be deemed to have commenced, on the date this Warrant was originally issued.
 
(b)   Reduction in the amount of its Loan as evidenced by any Note or Additional Note in an amount equal to the Exercise Price multiplied by the number of Warrant Shares to be issued to the Holder, up to the unpaid outstanding obligations under such Note or Additional Note.  To the extent that the Exercise Price multiplied by the number of Warrant Shares to be issued to the Holder exceeds the outstanding obligations under such Note or Additional Note, the holder may pay such excess by any other means permitted hereunder.  In the event that the Holder chooses to exercise all or part of this Warrant pursuant to this paragraph, the Holder shall deliver the Note or Additional Note, as the case may be, to the Company and, the Company shall, upon such exercise, issue to or at the direction of the Holder, a new Note or Additional Note, as the case may be, that reflects such reduced principal amount ( provided that, if such reduced principal amount is zero, no such new Note or Additional Note shall be issued).
 
11.   Fractional Shares .  The Company shall not be required to issue or cause to be issued fractional Warrant Shares on the exercise of this Warrant.  If any fraction of a Warrant Share would, except for the provisions of this Section, be issuable upon exercise of this Warrant, the number of Warrant Shares to be issued will be rounded up to the nearest whole share.
 
12.   Notices .  Any and all notices or other communications or deliveries hereunder (including without limitation any Exercise Notice) shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in the Credit Agreement prior to 6:30 p.m. (New York City time) on a Trading Day, (ii) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in the Credit Agreement on a day that is not a Trading Day or later than 6:30 p.m. (New York City time) on any Trading Day, (iii) the Trading Day following the date of mailing, if sent by nationally recognized overnight courier service or (iv) upon actual receipt by the party to whom such notice is required to be given.  The address for such notices or communications shall be as set forth in the Credit Agreement or at such other address as the Holder shall notify the Company.
 
13.   Registration Rights Agreement .  The Warrant Shares for which this Warrant is exercisable are entitled to the benefits and subject to the limitations of the Registration Rights Agreement, which include registration rights for the Warrant Shares.
 
14.   Warrant Agent .  The Company shall serve as warrant agent under this Warrant.  Upon 10 days’ notice to the Holder, the Company may appoint a new warrant agent.  Any corporation into which the Company or any new warrant agent may be merged or any corporation resulting from any consolidation to which the Company or any new warrant agent shall be a party or any corporation to which the Company or any new warrant agent transfers substantially all of its corporate trust or shareholders services business shall be a successor warrant agent under this Warrant without any further act.  Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed (by first class mail, postage prepaid) to the Holder at the Holder’s last address as shown on the Warrant Register.
 
 
 
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15.   Miscellaneous .
 
(a)   Subject to the restrictions on transfer set forth herein, this Warrant and the registration rights set forth in the Registration Rights Agreement may be assigned by the Holder in whole or in part.  This Warrant may not be assigned by the Company except to a successor in the event of a sale of all or substantially all of the Company’s assets or a merger or acquisition of the Company.  This Warrant shall be binding on and inure to the benefit of the parties hereto and their respective successors and assigns.  Subject to the preceding sentences, nothing in this Warrant shall be construed to give to any Person other than the Company and the Holder any legal or equitable right, remedy or cause of action under this Warrant.  This Warrant may be amended only in writing signed by the Company and the Holder and their successors and assigns.
 
(b)   The Company will not, by amendment of its governing documents or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be reasonably necessary or appropriate in order to protect the rights of the Holder against impairment.  Without limiting the generality of the foregoing, the Company (i) will not increase the par value of any Warrant Shares above the amount payable therefor on such exercise, (ii) will take all such action as may be reasonably necessary or appropriate in order that the Company may validly and legally issue fully paid and non-assessable Warrant Shares on the exercise of this Warrant, and (iii) will not close its stockholder books or records in any manner which interferes with the timely exercise of this Warrant.
 
(c)   GOVERNING LAW; VENUE; WAIVER OF JURY TRIAL .  ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY, ENFORCEMENT AND INTERPRETATION OF THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.  EACH PARTY HEREBY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS SITTING IN THE CITY OF NEW YORK, BOROUGH OF MANHATTAN, FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR WITH ANY TRANSACTION CONTEMPLATED HEREBY OR DISCUSSED HEREIN (INCLUDING WITH RESPECT TO THE ENFORCEMENT OF ANY OF THE TRANSACTION DOCUMENTS), AND HEREBY IRREVOCABLY WAIVES, AND AGREES NOT TO ASSERT IN ANY SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF ANY SUCH COURT, THAT SUCH SUIT, ACTION OR PROCEEDING IS IMPROPER.  EACH PARTY HEREBY IRREVOCABLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS TO PROCESS BEING SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING BY MAILING A COPY
 
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THEREOF VIA REGISTERED OR CERTIFIED MAIL OR OVERNIGHT DELIVERY (WITH EVIDENCE OF DELIVERY) TO SUCH PARTY AT THE ADDRESS IN EFFECT FOR NOTICES TO IT UNDER THIS AGREEMENT AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE GOOD AND SUFFICIENT SERVICE OF PROCESS AND NOTICE THEREOF.  NOTHING CONTAINED HEREIN SHALL BE DEEMED TO LIMIT IN ANY WAY ANY RIGHT TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW.  THE COMPANY HEREBY WAIVES ALL RIGHTS TO A TRIAL BY JURY.
 
(d)   The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to limit or affect any of the provisions hereof.
 
(e)   In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Warrant.
 
(f)   Prior to exercise of this Warrant, the Holder hereof shall not, by reason of being a Holder, be entitled to any rights of a stockholder with respect to the Warrant Shares.
 

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EXHIBIT 4-19

 
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its authorized officer as of the date first indicated above.
 
 
COMMUNICATION INTELLIGENCE CORPORATION
 
 
By:                                                                
Name:                                                                
Title:                                                                
 
 
 
 
 
 
 
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EXHIBIT 4-20

Exhibit 1.2(b)-2 to Credit Agreement
 
NEITHER THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES ISSUABLE UPON EXERCISE OF THESE SECURITIES HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR APPLICABLE STATE SECURITIES LAWS.  THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT, OR (B) IF REASONABLY REQUESTED BY THE COMPANY, AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT.  THESE SECURITIES AND THE SECURITIES ISSUABLE UPON EXERCISE OF THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT SECURED BY SUCH SECURITIES.
 
COMMUNICATION INTELLIGENCE CORPORATION
 
[FORM OF] ADDITIONAL COMMON STOCK PURCHASE WARRANT
 
Warrant No. [___________] Dated:_____________
 
Communication Intelligence Corporation, a Delaware corporation (the “Company” ), hereby certifies that, for value received, ____________________, or its registered assigns (the “Holder” ), is entitled to purchase from the Company up to a total of ________   shares of common stock, $0.01 par value per share (the “Common Stock” ), of the Company (each such share, a “Warrant Share” and all such shares, the “Warrant Shares” ) at an exercise price equal to $0.14 (as adjusted from time to time as provided in Section 9 , the “Exercise Price” ), at any time from the date hereof and through and including the date that is three years from the date hereof (the “Expiration Date” ), and subject to the following terms and conditions.  This Warrant (this “Warrant” ) is one of a series of similar warrants (collectively, the “Warrants” ) issued pursuant to that certain Credit Agreement, dated as of June ___, 2008, by and among the Company, Phoenix Venture Fund LLC, Michael Engmann and Ronald Goodman (the “Credit Agreement” ).
 
1.   Definitions .  In addition to the terms defined elsewhere in this Warrant, capitalized terms that are not otherwise defined herein have the meanings given to such terms in the Credit Agreement.
 
2.   Registration of Warrant .  The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the “Warrant Register” ), in the name of the record Holder hereof from time to time.  The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.
 
3.   Registration of Transfers .  The Company shall register the transfer of any portion of this Warrant in the Warrant Register, upon surrender of this Warrant, with the Form of Assignment attached hereto as Annex A duly completed and signed, to the transfer agent or to the Company at its address specified herein.  Upon any such registration or transfer, a new warrant to purchase Common Stock, in
 
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EXHIBIT 4-20
 
substantially the form of this Warrant (any such new warrant, a “New Warrant” ), evidencing the portion of this Warrant so transferred shall be issued to the transferee and a New Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the transferring Holder.  The acceptance of the New Warrant by the transferee thereof shall be deemed the acceptance by such transferee of all of the rights and obligations of a holder of a Warrant.
 
4.   Exercise and Duration of Warrants .
 
(a)   This Warrant shall be exercisable by the registered Holder at any time and from time to time on or after June 30, 2008, through and including the Expiration Date.  At 6:30 p.m. New York City time on the Expiration Date, the portion of this Warrant not exercised prior thereto shall be and become void and of no value; provided that , if on the Expiration Date, there is no effective Registration Statement covering the resale of the Warrant Shares, then this Warrant shall be deemed to have been exercised in full (to the extent not previously exercised) on a “cashless exercise” basis at 6:30 p.m. New York City time on the Expiration Date.  The Company may not call or redeem any portion of this Warrant without the prior written consent of the affected Holder.
 
5.   Delivery of Warrant Shares .
 
(a)   Other than as may be required in connection with registration of a transfer of this Warrant, the Holder shall not be required to physically surrender this Warrant unless this Warrant is being exercised in full.  To effect exercises hereunder, the Holder shall duly execute and deliver to the Company at its address for notice set forth herein (or to such other address as the Company may designate by notice in writing to the Holder), an Exercise Notice in the form of Annex B hereto, along with the Warrant Share Exercise Log in the form of Annex C hereto, and shall pay the Exercise Price, if applicable, multiplied by the number of Warrant Shares that the Holder intends to purchase hereunder.  The Company shall promptly (but in no event later than three Trading Days after the Date of Exercise (as defined herein)) issue or cause to be issued and cause to be delivered to or upon the written order of the Holder a certificate for the Warrant Shares issuable upon such exercise.  The Company shall, upon request of the Holder, and subsequent to the date on which a Registration Statement covering the resale of the Warrant Shares has been declared effective by the SEC, use commercially reasonable efforts to deliver Warrant Shares hereunder electronically through the Depository Trust Corporation or another established clearing corporation performing similar functions.  A “Date of Exercise” for purposes of this Warrant, means the date on which the Holder shall have delivered to the Company: (i) the Exercise Notice (with the Warrant Exercise Log attached to it), appropriately completed and duly signed and (ii) if such Holder is not utilizing the cashless exercise provisions set forth in this Warrant, payment of the Exercise Price for the number of Warrant Shares so indicated by the Holder to be purchased.  If by the third Trading Day after the Date of Exercise, the Company fails to deliver the required number of Warrant Shares, the Holder will have the right to rescind the exercise.  If by the third Trading Day after a Date of Exercise, the Company fails to deliver the required number of Warrant Shares, and if after such third Trading Day and prior to the receipt of such Warrant
 
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EXHIBIT 4-20
 
Shares, the Holder purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of Warrant Shares which the Holder anticipated receiving upon such exercise (a “Buy In” ), then the Company shall (i) pay in cash to the Holder the amount by which (x) the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (A) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue by (B) the closing bid price of the Common Stock on the exercise date and (ii) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored or deliver to the Holder the number of shares of Warrant Shares that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder.  The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy In.
 
(b)   In the event that a Holder surrenders this Warrant following one or more partial exercises, the Company shall, provided that the applicable number of Warrant Shares related to each such partial exercise has been delivered pursuant to Section 5(a) , cancel such surrendered Warrant and issue or cause to be issued to the Holder, at the Company’s expense, a New Warrant evidencing the right to purchase the remaining number of Warrant Shares.
 
(c)   The Company’s obligations to issue and deliver Warrant Shares in accordance with the terms hereof are absolute and unconditional, irrespective of any action or inaction by the Holder to enforce the same, any waiver or consent with respect to any provision hereof, the recovery of any judgment against any Person or any action to enforce the same, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder or any other Person of any obligation to the Company or any violation or alleged violation of law by the Holder or any other Person, and irrespective of any other circumstance which might otherwise limit such obligation of the Company to the Holder in connection with the issuance of Warrant Shares.  Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver certificates representing shares of Common Stock upon exercise of the Warrant as required pursuant to the terms hereof.
 
6.   Charges, Taxes and Expenses .  Issuance and delivery of certificates for Warrant Shares upon exercise of this Warrant shall be made without charge to the Holder for any issue or transfer tax, withholding tax, transfer agent fee or other incidental tax or expense in respect of the issuance of such certificates, all of which taxes and expenses shall be paid by the Company; provided , however , that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the registration of any certificates for Warrant Shares or Warrants in a name other than that of the Holder.  The Holder shall be responsible for all other tax liability that may arise as a result of holding or transferring this Warrant or receiving Warrant Shares upon exercise hereof.
 
7.   Replacement of Warrant .  If this Warrant is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation hereof, or in lieu of and substitution for this Warrant, a New Warrant, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and customary and reasonable indemnity
 
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EXHIBIT 4-20
 
(which shall not include a surety bond), if requested. Applicants for a New Warrant under such circumstances shall also comply with such other reasonable regulations and procedures and pay such other reasonable third-party costs as the Company may prescribe.  If a New Warrant is requested as a result of a mutilation of this Warrant, then the Holder shall deliver such mutilated Warrant to the Company as a condition precedent to the Company’s obligation to issue the New Warrant.
 
8.   Reservation of Warrant Shares .
 
(a)   The Company covenants that it will at all times reserve and keep available out of the aggregate of its authorized but unissued and otherwise unreserved Common Stock, solely for the purpose of enabling it to issue Warrant Shares upon exercise of this Warrant as herein provided, the number of Warrant Shares that are then issuable and deliverable upon the exercise of this entire Warrant, free from preemptive rights or any other contingent purchase rights of persons other than the Holder (after giving effect to the adjustments and restrictions of Section 9 , if any).  The Company covenants that all Warrant Shares so issuable and deliverable shall, upon issuance and the payment of the applicable Exercise Price in accordance with the terms hereof, be duly and validly authorized, issued and fully paid and non-assessable.  The Company will take all such action as may be necessary to assure that such shares of Common Stock may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of any securities exchange or automated quotation system upon which the Common Stock may be listed.  The Company will notify its transfer agent for the Common Stock of the reservation of shares of Common Stock as required under this provision.
 
(b)   Insufficient Authorized Shares .  If at any time after June 30, 2008, and prior to the Expiration Date, the Company does not have a sufficient number of authorized and unreserved shares of Common Stock to satisfy its obligation to reserve for issuance upon exercise of this Warrant and Warrants of like tenor at least a number of shares of Common Stock as shall from time to time be necessary to effect the exercise of all of the Warrants of like tenor then outstanding (an “Authorized Share Failure” ), then the Company shall promptly take all action necessary to increase the Company's authorized shares of Common Stock to an amount sufficient to allow the Company to reserve the required amount for the Warrants of like tenor then outstanding.  Without limiting the generality of the foregoing sentence, as soon as practicable after the date of the occurrence of an Authorized Share Failure, but in no event later than ninety (90) days after the occurrence of such Authorized Share Failure, the Company shall hold a meeting of its stockholders for the approval of an increase in the number of authorized shares of Common Stock.  In connection with such meeting, the Company shall provide each stockholder with a proxy statement and shall use commercially reasonable efforts to solicit its stockholders' approval of such increase in authorized shares of Common Stock and to cause its board of directors to recommend to the stockholders that they approve such proposal.
 
9.   Certain Adjustments .  The Exercise Price and number of Warrant Shares issuable upon exercise of this Warrant are subject to adjustment from time to time as set forth in this Section 9 .
 
(a)   Stock Dividends and Splits.   If at any time while this Warrant is outstanding, the number of outstanding shares of Common Stock is increased by a stock dividend payable in shares of Common Stock or by a split-up of shares of Common Stock or other
 
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EXHIBIT 4-20
 
similar event, then, on the effective date thereof, the number of shares issuable on exercise of each Warrant shall be increased in proportion to such increase in outstanding shares and the then applicable Exercise Price shall be correspondingly decreased, each in accordance with Section 9(h) .
 
(b)   Change in Option Price or Conversion Rate .  If, at any time after the date hereof, (1) the purchase price or exercise price provided for in any warrants or other rights to subscribe for or to purchase, or any options for the purchase of, Common Stock or any stock or security convertible into or exchangeable for Common Stock that are outstanding as of the date of the Credit Agreement (such warrants, rights or options being called “Options” and such convertible or exchangeable stock or securities being called “Convertible Securities” ) issued by the Corporation is reduced, (2) the number of shares into which the Option is exercisable is increased, (3) the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities is increased (if such consideration is payable to the holder of the Convertible Securities) or decreased (if such consideration is payable by the holder of the Convertible Securities), or (4) the rate at which Convertible Securities are convertible into or exchangeable for Common Stock is increased or the conversion price is decreased (including, but not limited to, such increases or decreases, as applicable, under or by reason of provisions designed to protect against dilution), the Exercise Price in effect at the time of such event shall forthwith be readjusted to the Exercise Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or conversion rate, as the case may be, at the time initially granted, issued or sold.
 
(c)   Aggregation of Shares.   If at any time while this Warrant is outstanding, the number of outstanding shares of Common Stock is decreased by a consolidation, combination or reclassification of shares of Common Stock or other similar event, then, upon the effective date of such consolidation, combination or reclassification, the number of shares issuable on exercise of each Warrant shall be decreased in proportion to such decrease in outstanding shares and the then applicable Exercise Price shall be correspondingly increased.
 
(d)   Replacement of Securities Upon Reorganization, etc.   If at any time while this Warrant is outstanding (1) the Company effects any merger or consolidation of the Company with or into another Person, (2) the Company effects any sale of all or substantially all of its assets in one or a series of related transactions, (3) any tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, cash or property, or (4) the Company effects any capital reorganization or reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property (each, a “Fundamental Transaction” ), then, as a condition of such Fundamental Transaction, lawful and fair provision shall be made whereby the Holder of the Warrant shall thereafter have the right to purchase and receive, upon the basis and upon the terms and conditions specified in the Warrants and in lieu of the shares of Common Stock of the Company immediately theretofore purchasable and receivable upon the exercise of the rights represented thereby, such shares of stock, securities, or assets as may be issued or payable with respect to or in exchange for the number of outstanding shares of such Common Stock equal to the number of shares of such stock immediately theretofore purchasable and receivable upon the exercise of the rights represented by the Warrants, had such Fundamental Transaction not taken place and in such event appropriate provision shall be made with respect to the rights and interests of the Holder of the Warrant to the end that the provisions hereof (including, without limitation, provisions for adjustments of the Exercise Price and of the number of shares purchasable upon the exercise of the Warrants) shall thereafter be applicable, as nearly as may be in relation to any share of stock, securities, or assets thereafter deliverable upon the exercise hereof.  The Company shall not effect any such Fundamental Transaction unless prior to the consummation thereof the successor corporation (if other than the Company) resulting from such Fundamental Transaction, or the corporation purchasing such assets
 
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EXHIBIT 4-20
 
in a Fundamental Transaction, shall assume by written instrument executed and delivered to the Holders of the Warrants the obligation to deliver to the Holders of the Warrant such shares of stock, securities, or assets as, in accordance with the foregoing provisions, such Holders may be entitled to purchase.  Notwithstanding the foregoing, in the event of any Fundamental Transaction, other than a Fundamental Transaction in which a successor entity of the Company that is a publicly traded corporation whose stock is quoted or listed for trading on a Trading Market (as defined in the Registration Rights Agreement, dated as of the date hereof, by and among the Company and the investors signatory thereto (the “Registration Rights Agreement” )) assumes this Warrant such that the Warrant shall thereafter be exercisable for the publicly traded common stock of such successor entity, then, at the written request of the Holder, if and only if such request is delivered by notice in writing to the Company within 30 Business Days following the effective date of the Fundamental Transaction, the Company (or the successor entity) shall purchase this Warrant from the Holder by paying to the Holder, within five Business Days after such request (or, if later, on the effective date of the Fundamental Transaction), cash in an amount per Warrant Share equal to the greater of (A) the Black Scholes value of the remaining unexercised portion of this Warrant on the date of such request or (B) the Transaction Value per share of Common Stock outstanding. The terms of any agreement pursuant to which a Fundamental Transaction is effected shall include terms requiring any such successor or surviving entity to comply with the provisions of this Section 9(d) and insuring that the Warrant (or any such replacement security) will be similarly adjusted upon any subsequent transaction analogous to a Fundamental Transaction.
 
“Transaction Value” shall mean the value on the effective date of the Fundamental Transaction of the net pre-tax proceeds received or receivable by common stockholders of the Company in the Fundamental Transaction.  Any proceeds not constituting cash shall be valued at their fair market value (as determined in good faith by the Company's Board of Directors after reasonable prior notice of the proposed determination to the Holder, and an opportunity for the Holder to discuss the proposed determination with the Company).

(e)   Number of Warrant Shares .  Simultaneously with any adjustment to the Exercise Price pursuant to this Section 9 , the number of Warrant Shares that may be purchased upon exercise of this Warrant shall be increased or decreased proportionately, so that after such adjustment the aggregate Exercise Price payable hereunder for the adjusted number of Warrant Shares shall be the same as the aggregate Exercise Price in effect immediately prior to such adjustment.
 
(f)   Calculations .  All calculations under this Section 9 shall be made to the nearest cent or the nearest 1/100th of a share, as applicable.  The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock.
 
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EXHIBIT 4-20
 
(g)   Notice of Adjustments .  Upon the occurrence of each adjustment pursuant to this Section 9 , the Company at its expense will promptly compute such adjustment in accordance with the terms of this Warrant and prepare a certificate setting forth such adjustment, including a statement of the adjusted Exercise Price and adjusted number or type of Warrant Shares or other securities, cash or property issuable upon exercise of this Warrant (as applicable), describing the transactions giving rise to such adjustments and showing in detail the facts upon which such adjustment is based.  Upon written request, the Company will promptly deliver a copy of each such certificate to the Holder and to the Company’s transfer agent.
 
(h)   Notice of Corporate Events .  If the Company (i) declares a dividend or any other distribution of cash, securities or other property in respect of its Common Stock, including without limitation any granting of rights or warrants to subscribe for or purchase any capital stock of the Company or any Subsidiary, (ii) authorizes or approves, enters into any agreement contemplating or solicits stockholder approval for any Fundamental Transaction or (iii) authorizes the voluntary dissolution, liquidation or winding up of the affairs of the Company, then the Company shall deliver to the Holder a notice describing the material terms and conditions of such transaction, at least ten Business Days prior to the applicable record or effective date on which a Person would need to hold Common Stock in order to participate in or vote with respect to such transaction, and the Company will take all steps reasonably necessary in order to insure that the Holder is given the practical opportunity to exercise this Warrant prior to such time so as to participate in or vote with respect to such transaction; provided , however , that the failure to deliver such notice or any defect therein shall not affect the validity of the corporate action required to be described in such notice.
 
(i)   Rights Upon Distribution Of Assets .  If the Company shall declare or make any dividend or other distribution of its assets (or rights to acquire its assets) to Holders of shares of Common Stock, by way of return of capital or otherwise (including, without limitation, any distribution of cash, stock or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a “Distribution” ), at any time after the issuance of this Warrant, then, in each such case the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive such Distribution and such record date shall be deemed to be the date of such Distribution (the “Record Date” ), then, in each such case:
 
(A)           any Exercise Price in effect immediately prior to the close of business on the record date fixed for the determination of holders of shares of Common Stock entitled to receive the Distribution shall be reduced, effective as of the close of business on such record date, to a price determined by multiplying such Exercise Price by a fraction of which (I) the numerator shall be the closing bid price of the shares of Common Stock on the Trading Day immediately preceding such record date minus the fair market value of the Distribution (as determined in good faith by the Company's Board of Directors) applicable to one share of Common Stock, and (II) the denominator shall be the closing bid price of the shares of Common Stock on the Trading Day immediately preceding such record date; and
 
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EXHIBIT 4-20
 
(B)           the number of Warrant Shares shall be increased to a number of shares equal to the number of shares of Common Stock obtainable immediately prior to the close of business on the record date fixed for the determination of holders of shares of Common Stock entitled to receive the Distribution multiplied by the reciprocal of the fraction set forth in the immediately preceding paragraph (A); provided that in the event that the Distribution is of shares of Common Stock (or common stock) ( “Other Shares of Common Stock” ) of a company whose common shares are traded on a national securities exchange or a national automated quotation system, then the Holder may elect to receive a warrant to purchase Other Shares of Common Stock in lieu of an increase in the number of Warrant Shares, the terms of which shall be identical to those of this Warrant, except that such warrant shall be exercisable into the number of shares of Other Shares of Common Stock that would have been payable to the Holder pursuant to the Distribution had the Holder exercised this Warrant immediately prior to such record date and with an aggregate exercise price equal to the product of the amount by which the exercise price of this Warrant was decreased with respect to the Distribution pursuant to the terms of the immediately preceding paragraph (A) and the number of Warrant Shares calculated in accordance with the first part of this paragraph (B).
 

(j)   Treasury Shares .  The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock for the purpose of this Section 9 .
 

10.   Payment of Exercise Price .  The Holder shall pay the Exercise Price in immediately available funds; provided , however , the Holder, in its sole discretion, may also satisfy its obligation to pay the Exercise Price through one of the following means:
 
(a)   A “cashless exercise,” in which event the Company shall issue to the Holder the number of Warrant Shares determined as follows:
 
 
X = Y [(A-B)/A]
where:
 
 
X = the number of Warrant Shares to be issued to the Holder.
   
 
Y = the number of Warrant Shares with respect to which this Warrant is being exercised.
   
 
A = the average of the Closing Prices for the five Trading Days immediately prior to (but not including) the Exercise Date.
   
 
B = the Exercise Price.

For purposes of Rule 144 promulgated under the Securities Act, it is intended, understood and acknowledged that the Warrant Shares issued in a cashless exercise transaction shall be deemed
 
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EXHIBIT 4-20
 
to have been acquired by the Holder, and the holding period for the Warrant Shares shall be deemed to have commenced, on the date this Warrant was originally issued.
 
(b)   Reduction in the amount of its Loan as evidenced by any Note or Additional Note in an amount equal to the Exercise Price multiplied by the number of Warrant Shares to be issued to the Holder, up to the unpaid outstanding obligations under such Note or Additional Note.  To the extent that the Exercise Price multiplied by the number of Warrant Shares to be issued to the Holder exceeds the outstanding obligations under such Note or Additional Note, the holder may pay such excess by any other means permitted hereunder.  In the event that the Holder chooses to exercise all or part of this Warrant pursuant to this paragraph, the Holder shall deliver the Note or Additional Note, as the case may be, to the Company and, the Company shall, upon such exercise, issue to or at the direction of the Holder, a new Note or Additional Note, as the case may be, that reflects such reduced principal amount ( provided that, if such reduced principal amount is zero, no such new Note or Additional Note shall be issued).
 
11.   Fractional Shares .  The Company shall not be required to issue or cause to be issued fractional Warrant Shares on the exercise of this Warrant.  If any fraction of a Warrant Share would, except for the provisions of this Section, be issuable upon exercise of this Warrant, the number of Warrant Shares to be issued will be rounded up to the nearest whole share.
 
12.   Notices .  Any and all notices or other communications or deliveries hereunder (including without limitation any Exercise Notice) shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in the Credit Agreement prior to 6:30 p.m. (New York City time) on a Trading Day, (ii) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in the Credit Agreement on a day that is not a Trading Day or later than 6:30 p.m. (New York City time) on any Trading Day, (iii) the Trading Day following the date of mailing, if sent by nationally recognized overnight courier service or (iv) upon actual receipt by the party to whom such notice is required to be given.  The address for such notices or communications shall be as set forth in the Credit Agreement or at such other address as the Holder shall notify the Company.
 
13.   Registration Rights Agreement .  The Warrant Shares for which this Warrant is exercisable are entitled to the benefits and subject to the limitations of the Registration Rights Agreement, which include registration rights for the Warrant Shares.
 
14.   Warrant Agent .  The Company shall serve as warrant agent under this Warrant.  Upon 10 days’ notice to the Holder, the Company may appoint a new warrant agent.  Any corporation into which the Company or any new warrant agent may be merged or any corporation resulting from any consolidation to which the Company or any new warrant agent shall be a party or any corporation to which the Company or any new warrant agent transfers substantially all of its corporate trust or shareholders services business shall be a successor warrant agent under this Warrant without any further act.  Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed (by first class mail, postage prepaid) to the Holder at the Holder’s last address as shown on the Warrant Register.
 
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EXHIBIT 4-20
 
15.   Miscellaneous .
 
(a)   Subject to the restrictions on transfer set forth herein, this Warrant and the registration rights set forth in the Registration Rights Agreement may be assigned by the Holder in whole or in part.  This Warrant may not be assigned by the Company except to a successor in the event of a sale of all or substantially all of the Company’s assets or a merger or acquisition of the Company.  This Warrant shall be binding on and inure to the benefit of the parties hereto and their respective successors and assigns.  Subject to the preceding sentences, nothing in this Warrant shall be construed to give to any Person other than the Company and the Holder any legal or equitable right, remedy or cause of action under this Warrant.  This Warrant may be amended only in writing signed by the Company and the Holder and their successors and assigns.
 
(b)   The Company will not, by amendment of its governing documents or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be reasonably necessary or appropriate in order to protect the rights of the Holder against impairment.  Without limiting the generality of the foregoing, the Company (i) will not increase the par value of any Warrant Shares above the amount payable therefor on such exercise, (ii) will take all such action as may be reasonably necessary or appropriate in order that the Company may validly and legally issue fully paid and non-assessable Warrant Shares on the exercise of this Warrant, and (iii) will not close its stockholder books or records in any manner which interferes with the timely exercise of this Warrant.
 
(c)   GOVERNING LAW; VENUE; WAIVER OF JURY TRIAL .  ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY, ENFORCEMENT AND INTERPRETATION OF THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.  EACH PARTY HEREBY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS SITTING IN THE CITY OF NEW YORK, BOROUGH OF MANHATTAN, FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR WITH ANY TRANSACTION CONTEMPLATED HEREBY OR DISCUSSED HEREIN (INCLUDING WITH RESPECT TO THE ENFORCEMENT OF ANY OF THE TRANSACTION DOCUMENTS), AND HEREBY IRREVOCABLY WAIVES, AND AGREES NOT TO ASSERT IN ANY SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF ANY SUCH COURT, THAT SUCH SUIT, ACTION OR PROCEEDING IS IMPROPER.  EACH PARTY HEREBY IRREVOCABLY WAIVES PERSONAL SERVICE OF
 
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EXHIBIT 4-20
 
PROCESS AND CONSENTS TO PROCESS BEING SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING BY MAILING A COPY THEREOF VIA REGISTERED OR CERTIFIED MAIL OR OVERNIGHT DELIVERY (WITH EVIDENCE OF DELIVERY) TO SUCH PARTY AT THE ADDRESS IN EFFECT FOR NOTICES TO IT UNDER THIS AGREEMENT AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE GOOD AND SUFFICIENT SERVICE OF PROCESS AND NOTICE THEREOF.  NOTHING CONTAINED HEREIN SHALL BE DEEMED TO LIMIT IN ANY WAY ANY RIGHT TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW.  THE COMPANY HEREBY WAIVES ALL RIGHTS TO A TRIAL BY JURY.
 
(d)   The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to limit or affect any of the provisions hereof.
 
(e)   In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Warrant.
 
(f)   Prior to exercise of this Warrant, the Holder hereof shall not, by reason of being a Holder, be entitled to any rights of a stockholder with respect to the Warrant Shares.
 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK,
 
SIGNATURE PAGE FOLLOWS]
 

 
 
 
-11- 

 
EXHIBIT 4-20

 
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its authorized officer as of the date first indicated above.
 
 
COMMUNICATION INTELLIGENCE CORPORATION
 
 
By:                                                                
Name:                                                                
Title:                                                                
 
 
 
 
 
 
 
- 12 -

 
EXHIBIT 4-21

Exhibit 1.1(a) to Credit Agreement
 
THIS SECURITY HAS BEEN ISSUED WITH ORIGINAL ISSUE DISCOUNT (OID). PURSUANT TO TREASURY REGULATION §1.1275-3(b)(1), FRANCIS V. DANE, A REPRESENTATIVE OF THE ISSUER HEREOF WILL, BEGINNING TEN DAYS AFTER THE ISSUE DATE OF THIS SECURITY, PROMPTLY MAKE AVAILABLE TO THE HOLDER UPON REQUEST THE INFORMATION DESCRIBED IN TREASURY REGULATION §1.1275-3(b)(1)(i). MR. DANE MAY BE REACHED AT TELEPHONE NUMBER (650) 802-7737.
 
[FORM OF] SECURED PROMISSORY NOTE
 
$[    ,    ,    ]
June __, 2008 New York, New York

 
FOR VALUE RECEIVED , COMMUNICATION INTELLIGENCE CORPORATION   ( “Borrower” ), having an office at 275 Shoreline Drive, Suite 500, Redwood Shores, California 94065, hereby promises to pay to the order of _________ (the “Payee” ) or its registered assigns, the principal amount of _______ Dollars and 00/100 ($[   ,   ,   ]) on June ___, 2010 (the “Maturity Date” ). Borrower shall make principal payments on this Note on or before the Maturity Date set forth in Section 10.1 of that certain Credit Agreement, dated as of June __, 2008 (as it may be amended, supplemented or otherwise modified, the “Credit Agreement” ; the terms defined therein and not otherwise defined herein being used herein as therein defined), by and among Borrower and the Lenders party thereto.
 
Borrower also promises to pay interest on the unpaid principal amount hereof, from the date hereof until paid in full, at the rates and at the times which shall be determined in accordance with the provisions of the Credit Agreement.
 
This Note is being executed and delivered by Borrower to Payee to evidence the Loan made by Payee to Borrower pursuant to the Credit Agreement.
 
This Note is issued with a detachable Warrant evidencing the right initially to purchase a number of shares of Common Stock of the Borrower equal to the principal amount of this Note divided by 0.14, at an initial exercise price of Fourteen Cents ($0.14) per share.
 
This Note is entitled to the benefits of the Credit Agreement and the Loan Documents, including the Pledge and Security Agreement.  This Note may be pre-paid, in whole or in part (together with interest accrued thereon at the time of such prepayment), at any time, provided that Borrower pays any breakage costs associated therewith as provided in Section 1.6(h) of the Credit Agreement.
 
All cash payments of principal and interest in respect of this Note shall be made in lawful money of the United States of America in same day funds to the Payee at its
 

- 1 -
 
 
 

 
EXHIBIT 4-21

 
address provided in Section 9.2 of the Credit Agreement or at such other place as shall be designated in writing for such purpose in accordance with the terms of the Credit Agreement.  Payee hereby agrees, by its acceptance hereof, that before disposing of this Note or any part hereof it will make a notation hereon of all principal payments previously made hereunder and of the date to which interest hereon has been paid; provided , the failure to make a notation of any payment made on this Note shall not limit or otherwise affect the obligations of Borrower hereunder with respect to payments of principal of or interest on this Note.
 
This Note, and all amounts payable hereunder, is secured by a pledge of certain Collateral and is entitled to the benefits of the Pledge and Security Agreement.
 
Upon the occurrence of an Event of Default, the unpaid balance of the principal amount of this Note, together with all accrued and unpaid interest thereon, may become, or may be declared to be, due and payable in the manner, upon the conditions and with the effect provided in the Credit Agreement.
 
Borrower waives demand, presentment, protest and notice of any kind and consents to the extension of time of payments, the release, surrender or substitution of any and all security or guarantees for the obligations evidenced hereby or other indulgence with respect to this Note, all without notice and agrees that no such extension or other indulgence, and no substitution, release or surrender of collateral shall discharge or otherwise affect the liability of the Borrower.  No delay or omission on the part of the Payee in exercising any right hereunder shall operate as a waiver of such right or of any other right hereunder, and a waiver of any such right on any one occasion shall not be construed as a bar to or waiver of any such right on any future occasion.
 
This Note and the rights and obligations of Borrower and Payee hereunder shall be governed by and construed in accordance with the laws of the State of New York. Borrower hereby irrevocably consents to the jurisdiction of any state or federal court located in New York, New York.
 
In the event of any litigation with respect to the obligations evidenced by this Note, Borrower WAIVES THE RIGHT TO A TRIAL BY JURY and all rights of setoff and rights to inter­pose permissive counterclaims and cross claims.  Borrower further agrees to pay Payee for the costs and expenses of enforcement and collection of this Note, including attorneys’ fees and expenses and court costs.  All such costs and expenses shall be immediately due and payable.
 
The terms of this Note are subject to amendment only in the manner provided in the Credit Agreement.
 
This Note shall be binding upon the successors, assigns and legal representatives of Borrower and inure to the benefit of the Payee, its successors, endorsees, assigns and legal representatives.
 
If any term or provision of this Note shall be held invalid, illegal or unenforceable, the validity of all other terms and provisions hereof shall in no way be affected thereby.
 
This Note is a full recourse obligation of Borrower and is not limited to the Collateral.
 

- 2 -
 
 
 

 
EXHIBIT 4-21
 
 

IN WITNESS WHEREOF , Borrower has executed the foregoing instrument as of the date first written above.

 
COMMUNICATION INTELLIGENCE CORPORATION



By:_________________________________
     Name:
     Title:


 
 
 
 
 
 
 
 
 
- 3 -
EXHIBIT 4-22

Exhibit 1.2(b)-1 to Credit Agreement
 
THIS SECURITY HAS BEEN ISSUED WITH ORIGINAL ISSUE DISCOUNT (OID). PURSUANT TO TREASURY REGULATION §1.1275-3(b)(1), FRANCIS V. DANE, A REPRESENTATIVE OF THE ISSUER HEREOF WILL, BEGINNING TEN DAYS AFTER THE ISSUE DATE OF THIS SECURITY, PROMPTLY MAKE AVAILABLE TO THE HOLDER UPON REQUEST THE INFORMATION DESCRIBED IN TREASURY REGULATION §1.1275-3(b)(1)(i). MR. DANE MAY BE REACHED AT TELEPHONE NUMBER (650) 802-7737.
 
[FORM OF] ADDITIONAL SECURED PROMISSORY NOTE
 
$[    ,    ,    ]
Dated:______________ New York, New York

 
FOR VALUE RECEIVED , COMMUNICATION INTELLIGENCE CORPORATION   ( “Borrower” ), having an office at 275 Shoreline Drive, Suite 500, Redwood Shores, California 94065, hereby promises to pay to the order of _________ (the “Payee” ) or its registered assigns, the principal amount of _____________ Dollars and 00/100 ($[   ,   ,   ]) on June ___, 2010 (the “Maturity Date” ). Borrower shall make principal payments on this Note on or before the Maturity Date set forth in Section 10.1 of that certain Credit Agreement, dated as of June ___, 2008 (as it may be amended, supplemented or otherwise modified, the “Credit Agreement” ; the terms defined therein and not otherwise defined herein being used herein as therein defined), by and among Borrower and the Lenders party thereto.
 
Borrower also promises to pay interest on the unpaid principal amount hereof, from the date hereof until paid in full, at the rates and at the times which shall be determined in accordance with the provisions of the Credit Agreement.
 
This Note is being executed and delivered by Borrower to Payee to evidence the payment by Borrower to Payee of interest on the Loan made by Payee to Borrower by issuing Payee this Additional Note pursuant to the Credit Agreement.
 
This Note is issued with a detachable Warrant evidencing the right initially to purchase a number of shares of Common Stock of the Borrower equal to the principal amount of this Note divided by 0.14, at an initial exercise price of Fourteen Cents ($0.14) per share.
 
This Note is entitled to the benefits of the Credit Agreement and the Loan Documents, including the Pledge and Security Agreement.  This Note may be pre-paid, in whole or in part (together with interest accrued thereon at the time of such prepayment), at any time, provided that Borrower pays any breakage costs associated therewith as provided in Section 1.6(h) of the Credit Agreement.
 

- 1 -
 
 

 
EXHIBIT 4-22

All cash payments of principal and interest in respect of this Note shall be made in lawful money of the United States of America in same day funds to the Payee at its address provided in Section 9.2 of the Credit Agreement or at such other place as shall be designated in writing for such purpose in accordance with the terms of the Credit Agreement.  Payee hereby agrees, by its acceptance hereof, that before disposing of this Note or any part hereof it will make a notation hereon of all principal payments previously made hereunder and of the date to which interest hereon has been paid; provided , the failure to make a notation of any payment made on this Note shall not limit or otherwise affect the obligations of Borrower hereunder with respect to payments of principal of or interest on this Note.
 
This Note, and all amounts payable hereunder, is secured by a pledge of certain Collateral and is entitled to the benefits of the Pledge and Security Agreement.
 
Upon the occurrence of an Event of Default, the unpaid balance of the principal amount of this Note, together with all accrued and unpaid interest thereon, may become, or may be declared to be, due and payable in the manner, upon the conditions and with the effect provided in the Credit Agreement.
 
Borrower waives demand, presentment, protest and notice of any kind and consents to the extension of time of payments, the release, surrender or substitution of any and all security or guarantees for the obligations evidenced hereby or other indulgence with respect to this Note, all without notice and agrees that no such extension or other indulgence, and no substitution, release or surrender of collateral shall discharge or otherwise affect the liability of the Borrower.  No delay or omission on the part of the Payee in exercising any right hereunder shall operate as a waiver of such right or of any other right hereunder, and a waiver of any such right on any one occasion shall not be construed as a bar to or waiver of any such right on any future occasion.
 
This Note and the rights and obligations of Borrower and Payee hereunder shall be governed by and construed in accordance with the laws of the State of New York. Borrower hereby irrevocably consents to the jurisdiction of any state or federal court located in New York, New York.
 
In the event of any litigation with respect to the obligations evidenced by this Note, Borrower WAIVES THE RIGHT TO A TRIAL BY JURY and all rights of setoff and rights to inter­pose permissive counterclaims and cross claims.  Borrower further agrees to pay Payee for the costs and expenses of enforcement and collection of this Note, including attorneys’ fees and expenses and court costs.  All such costs and expenses shall be immediately due and payable.
 
The terms of this Note are subject to amendment only in the manner provided in the Credit Agreement.
 
This Note shall be binding upon the successors, assigns and legal representatives of Borrower and inure to the benefit of the Payee, its successors, endorsees, assigns and legal representatives.
 
If any term or provision of this Note shall be held invalid, illegal or unenforceable, the validity of all other terms and provisions hereof shall in no way be affected thereby.
 
This Note is a full recourse obligation of Borrower and is not limited to the Collateral.
 

- 2  -
 
 
 

 
EXHIBIT 4-22


 

IN WITNESS WHEREOF , Borrower has executed the foregoing instrument as of the date first written above.

 
COMMUNICATION INTELLIGENCE CORPORATION



By:_________________________________
     Name:
     Title:

 
 
 
 
 
 
 
 
 
 
- 3 -
EXHIBIT 4-23
b
 
 
CERTIFICATE OF DESIGNATIONS,
 
POWERS, PREFERENCES AND RIGHTS OF THE SERIES A
 
 CUMULATIVE CONVERTIBLE PREFERRED STOCK
 
 
OF
 
 
COMMUNICATION INTELLIGENCE CORPORATION
 
Pursuant to Section 151 of the
 
Delaware General Corporation Law
 
Communication Intelligence Corporation (the “Corporation” ), organized and existing under the laws of the State of Delaware, does, by its Chief Executive Officer, hereby certify that, pursuant to the authority contained in Article Fourth of its Amended and Restated Certificate of Incorporation and in accordance with the provisions of Section 151 of the Delaware General Corporation Law, its Board of Directors has adopted the following resolution creating the following class and series of the Corporation’s Preferred Stock and determining the voting powers, designations, powers, preferences and relative, participating, optional or other special rights, and the qualifications, limitations and restrictions thereof, of such classes and series:
 
RESOLVED, that, pursuant to authority conferred upon the Board of Directors by the Amended and Restated Certificate of Incorporation of the Corporation (the “Certificate of Incorporation” ), there is hereby created the following series of Preferred Stock:
 
·  
2,000,000 shares shall be designated Series A Cumulative Convertible Preferred Stock, par value $0.01 per share (the “Series A Preferred Stock” ).
 
The designations, powers, preferences, and rights and the qualifications, limitations and restrictions of the Series A Preferred Stock in addition to those set forth in the Certificate of Incorporation shall be as follows:
 
Section 1.   Designation and Amount .  2,000,000 shares of the unissued preferred stock of the Corporation shall be designated as Series A Cumulative Convertible Preferred Stock, par value $0.01 per share.  The Series A Preferred Stock shall be issued in accordance with the Purchase Agreement at a purchase price of $1.00 per share (the “Series A Issue Price” ).
 
Section 2.   Rank .  The Series A Preferred Stock shall rank: (i) junior to any other class or series of capital stock of the Corporation hereafter created specifically ranking as to dividend rights, redemption rights, liquidation preference and other rights senior to the Series A Preferred Stock (the “Senior Securities” ); (ii) senior to all of the Corporation’s common stock, par value $0.01 per share (the “Common Stock” ); (iii) senior to any class or series of capital stock of the Corporation hereafter created not specifically ranking as to dividend rights, redemption rights, liquidation preference and other rights senior to or on parity with any Series A Preferred Stock of whatever subdivision (collectively, with the Common Stock, the “Junior Securities” ); and (iv) on a parity with any class or series of capital stock of the Corporation hereafter created specifically ranking as to dividend rights, redemption rights, liquidation preference and other rights on a parity with the Series A Preferred Stock (the “Parity Securities” ).
 
- 1 -

EXHIBIT 4-23
 
Section 3.   Dividends .  (a) So long as shares of Series A Preferred Stock remain outstanding, the holders of each share of the Series A Preferred Stock shall be entitled, from and after the date of issuance of such share, to receive, and shall be paid quarterly in arrears on the last day of each calendar quarter (beginning on September 30, 2008) in cash out of funds legally available therefor, cumulative dividends which shall accrue regardless of whether they are declared by the Board, of an amount equal to 8.00% per share (as adjusted for any stock dividends, stock splits, combinations, recapitalizations involving equity securities of the Corporation, reclassifications or other similar events involving a change with respect to the Series A Preferred Stock) per annum with respect to each share of the Series A Preferred Stock; provided , however , that such dividend may, at the option of the Corporation, be paid to the holders of Series A Preferred Stock in shares of the Series A Preferred Stock in the amount of such dividend on a one (1) share of Series A Preferred Stock per one dollar ($1.00) basis (as adjusted for any stock dividends, stock splits, combinations, recapitalizations involving equity securities of the Corporation, reclassifications or other similar events involving a change with respect to the Series A Preferred Stock).  The holders of shares of Series A Preferred Stock shall be entitled to receive such dividends immediately after the payment of any dividends to Senior Securities required by the Certificate of Incorporation, as amended or amended and restated and in effect, including for this purpose any certificate(s) of designation, prior and in preference to any dividends paid to Junior Securities but in parity with any distribution to the holders of Parity Securities.
 
(b)   In case the Corporation shall at any time or from time to time declare, order, pay or make a dividend or other distribution (including, without limitation, any distribution of stock or other securities or property or rights or warrants to subscribe for securities of the Corporation or any of its subsidiaries by way of a dividend, distribution or spin-off) on its Common Stock, other than (i) a distribution made in compliance with the provisions of Section 4 or (ii) a dividend or distribution made in Common Stock, the holders of the Series A Preferred Stock shall be entitled to receive from the Corporation with respect to each share of Series A Preferred Stock held, any dividend or distribution that would be received by a holder of the number of shares (including fractional shares) of Common Stock into which such Series A Preferred Stock is convertible on the record date for such dividend or distribution, with fractional shares of Common Stock deemed to be entitled to the corresponding fraction of any dividend or distribution that would be received by a whole share.  Any such dividend or distribution shall be declared, ordered, paid and made at the same time such dividend or distribution is declared, ordered, paid and made on the Common Stock.  No dividend or distribution shall be declared, ordered, paid or made on the Common Stock unless the dividend or distribution on the Series A Preferred Stock provided for by this paragraph shall be declared, ordered, paid or made at the same time.
 
Section 4.   Liquidation Preference .
 
(a)   In the event of any liquidation, dissolution or winding up of the Corporation (which shall not include any corporate recapitalizations), either voluntary or involuntary, the holders of Series A Preferred Stock shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, whether from capital, surplus or earnings, immediately after any distributions to Senior Securities required by the Certificate of Incorporation, and prior and in preference to any distribution to Junior Securities but in parity with any distribution to the holders of Parity
 
- 2 -

EXHIBIT 4-23
 
Securities, an amount per share equal to the Series A Issue Price (as adjusted for any stock splits, combinations, recapitalizations involving equity securities of the Corporation, reclassifications of other similar events involving a change with respect to the Series A Preferred Stock), plus any accrued but unpaid dividends on the Series A Preferred Stock; provided that each holder of Series A Preferred Stock may, upon written notice to the Corporation sent prior to any distribution under this Section 4(a) (which notice may, but is not required to be, a Notice of Conversion (as defined under Section 5(b) ), elect to receive a distribution pursuant to Section 4(c) in lieu of the distribution under this Section 4(a) , on an as converted to Common Stock basis, upon completion of the distributions pursuant to Section 4(a) and Section 4(b) .  For the purpose of clarity, if a holder of Series A Preferred Stock elects to receive a distribution pursuant to Section 4(c) , such holder shall not receive a distribution pursuant to Section 4(a) .  If upon the occurrence of such event, and after the payment in full of the preferential amounts with respect to the Senior Securities, the assets and funds available to be distributed among the holders of the Series A Preferred Stock pursuant to Section 4(a) and the holders of any Parity Securities shall be insufficient to permit the payment to such holders of the full preferential amounts due to such holders of the Series A Preferred Stock and the holders of the Parity Securities, respectively, then the entire assets and funds of the Corporation legally available for distribution shall be distributed among the holders of such Series A Preferred Stock and the Parity Securities, pro rata, based on the amount each such holder would receive if such full preferential amounts were paid unless otherwise provided in the Certificate of Incorporation.
 
(b)   Upon the completion of the distributions required by Section 4(a) , if assets remain in the Corporation, they shall be distributed to the holders of Junior Securities, other than Common Stock with respect to any liquidation preference payable to such holders.
 
(c)   Upon the completion of the distributions required by Section 4(a) and Section 4(b) , if assets remain in the Corporation, they shall be distributed pro rata, on an as converted to Common Stock basis, to the holders of Common Stock and the holders of Series A Preferred Stock who have so elected pursuant to Section 4(a) .
 
(d)   A sale, lease, conveyance or disposition of all or substantially all of the capital stock or assets of the Corporation or a merger, consolidation, share exchange, reorganization or other transaction or series of related transactions (whether involving the Corporation or a subsidiary thereof) in which the Corporation’s stockholders immediately prior to such transaction do not retain a majority of the voting power in the surviving entity (a “Transaction” ), shall be deemed to be a liquidation, dissolution or winding up within the meaning of this Section 4 , unless (i) the holders of a majority of the then outstanding shares of the Series A Preferred Stock vote affirmatively or consent in writing that such Transaction shall not be treated as a liquidation, dissolution or winding up within the meaning of this Section 4 , or (ii) the surviving or acquiring corporation unconditionally assumes the Preferred Stock and all obligations thereunder; provided , however , that each holder of Series A Preferred Stock shall have the right to elect the conversion benefits of the provisions of Section 5(a) or other applicable conversion provisions in lieu of receiving payment in liquidation, dissolution or winding up of
 
- 3 -

EXHIBIT 4-23
 
the Corporation pursuant to this Section; and provided , further , that shares of the surviving entity held by holders of the capital stock of the Corporation acquired by means other than the Transaction shall not be used in determining if the shareholders of the Corporation own a majority of the voting power of the surviving entity, but shall be used for determining the total outstanding voting power of such entity.
 
(e)   Prior to the closing of a Transaction described in Section 4(d) which would constitute a liquidation, dissolution or winding up within the meaning of this Section 4 , the Corporation shall, at its sole option, either (i) make all distributions of cash or other property that it is required to make to the holders of Series A Preferred Stock pursuant to the first sentence of Section 4(a) , (ii) set aside sufficient funds or other property from which the distributions required to be made to such holders can be made, or (iii) establish an escrow or other similar arrangement with a third party pursuant to which the proceeds payable to the Corporation from the Transaction will be used to make the liquidating payments to such holders immediately after the consummation of the Transaction.  In the event that the Corporation is unable to fully comply with any of the foregoing alternatives, the Corporation shall either: (x) cause such closing to be postponed until the Corporation complies with one of the foregoing alternatives, or (y) cancel such Transaction, in which event the rights of the holders of Series A Preferred Stock shall be the same as existing immediately prior to such proposed Transaction.
 
Section 5.   Conversion of Series A Preferred Stock .  The Corporation and the record holders of the Series A Preferred Stock shall have conversion rights as follows:
 
(a)   Right to Convert .  Each record holder of Series A Preferred Stock shall be entitled to convert whole shares of Series A Preferred Stock for the Common Stock issuable upon conversion of the Series A Preferred Stock, at any time after June 30, 2008, at the option of the holder thereof, subject to adjustment as provided in Section 5(c) hereof, as follows: Each share of Series A Preferred Stock shall be convertible into such number of fully paid and nonassessable shares of Common Stock as is obtained by (i) multiplying the number of shares of Series A Preferred Stock so to be converted by the Series A Issue Price and (ii) dividing the result thereof by the Conversion Price.  The Conversion Price shall initially be $0.14 per share of Series A Preferred Stock, subject to adjustment as provided in Section 5(c) .  Accrued but unpaid dividends will be paid in cash upon any such conversion.
 
- 4 -

EXHIBIT 4-23
 
(b)   Mechanics of Conversion .  In order to convert Series A Preferred Stock into full shares of Common Stock pursuant to Section 5(a) , the holder shall (i) fax or e-mail a copy of a fully executed notice of conversion ( “Notice of Conversion” ) to the Corporation at the office of the Corporation or to the Corporation’s designated transfer agent (the “Transfer Agent” ) for the Series A Preferred Stock stating that the holder elects to convert, which notice shall specify the Date of Conversion (as defined in Section 5(b)(iii) below), the number of shares of Series A Preferred Stock to be converted, the Conversion Price (together with a copy of the front page of each certificate to be converted) and (ii) surrender to a common courier for either overnight or two (2) day delivery to the office of the Corporation or the Transfer Agent, the original certificates representing the Series A Preferred Stock (the “Preferred Stock Certificates” ) being converted, duly endorsed for transfer.
 
(i)   Lost or Stolen Certificates .  Upon receipt by the Corporation of evidence of the loss, theft, destruction or mutilation of any Preferred Stock Certificates representing shares of Series A Preferred Stock, and (in the case of loss, theft or destruction) of indemnity or security reasonably satisfactory to the Corporation, and upon surrender and cancellation of the Preferred Stock Certificates, if mutilated, the Corporation shall execute and deliver new Preferred Stock Certificates of like tenor and date; provided that the Corporation shall pay all costs of delivery (including insurance against loss and theft until delivered in an amount satisfactory to the holders of Series A Preferred Stock).  However, the Corporation shall not be obligated to reissue such lost or stolen Preferred Stock Certificates if the holder contemporaneously requests the Corporation to convert such Series A Preferred Stock into Common Stock or if such shares of Series A Preferred Stock have been otherwise converted into Common Stock.
 
(ii)   Delivery of Common Stock Upon Conversion .  The Corporation no later than 6:00 p.m. (Pacific time) on the third (3rd) business day after receipt by the Corporation or its Transfer Agent of all necessary documentation duly executed and in proper form required for conversion, including the original Preferred Stock Certificates to be converted (or after provision for security or indemnification in the case of lost, stolen or destroyed certificates, if required), shall issue and surrender to a common courier for either overnight or (if delivery is outside the United States) two (2)-day delivery to the holder as shown on the stock records of the Corporation a certificate for the number of shares of Common Stock to which the holder shall be entitled as aforesaid.
 
(iii)   Date of Conversion .  The date on which conversion pursuant to Section 5(a) occurs (the “Date of Conversion” ) shall be deemed to be the date the applicable Notice of Conversion is faxed or emailed to the Corporation or the Transfer Agent, as the case may be, provided that the copy of the Notice of Conversion is faxed to the Corporation on or prior to 6:00 p.m. (Pacific time) on the Date of Conversion.  The original Preferred Stock Certificates representing the shares of Series A Preferred Stock to be converted shall be surrendered by depositing such certificates with a common courier for either overnight or two (2)-day delivery, as soon as practicable following the Date of Conversion. The person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on the Date of Conversion.
 
(iv)   No Fractional Shares on Conversion .  No fractional shares of Common Stock shall be issued upon conversion of the Series A Preferred Stock.  In lieu of any fractional share to which the holder would otherwise be entitled, the Corporation shall (after aggregating all shares into which shares of Series A Preferred tendered by the holder for conversion) pay cash equal to such fraction multiplied by the market price per share of Common Stock (as determined in a reasonable manner by the Board) at the close of business on the Date of Conversion.
 
(c)   Adjustment of Conversion Price .
 
(i)   Adjustments of Conversion Price Upon Certain Events .  Upon the occurrence at any time after the first filing of this Certificate of Designations of any of the events set forth in Section 5(c)(i)(A) through (D) below, the Corporation shall be deemed to have issued or sold
 
- 5 -

EXHIBIT 4-23
 
shares of Common Stock for a consideration per share less than the Conversion Price in effect immediately prior to the time of such deemed issue or sale, and, forthwith upon such event, the Conversion Price shall be reduced to the price determined by dividing (x) an amount equal to the sum of (a) the number of shares of Common Stock outstanding immediately prior to such deemed issue or sale multiplied by the then existing Conversion Price and (b) the consideration, if any, received by the Corporation upon such deemed issue or sale, by (y) the total number of shares of Common Stock outstanding immediately after such deemed issue or sale.  For purposes of determining the number of shares of Common Stock outstanding as provided in clauses (x) and (y) above, the number of shares of Common Stock issuable upon conversion of all outstanding shares of Series A Preferred Stock, exercise of all outstanding Options (as defined below) and conversion of all outstanding Convertible Securities (as defined below) shall be deemed to be outstanding.
 
(A)   Change in Option Price or Conversion Rate .  If, at any time after the date of that certain Credit Agreement by and among the Corporation, SG Phoenix LLC, Phoenix Venture Fund LLC, Michael Engmann and Ronald Goodman (the “Credit Agreement” ) (1) the purchase price or exercise price provided for in any warrants or other rights to subscribe for or to purchase, or any options for the purchase of, Common Stock or any stock or security convertible into or exchangeable for Common Stock outstanding as of the date of the Credit Agreement (such warrants, rights or options being called “Options” and such convertible or exchangeable stock or securities being called “Convertible Securities” ) issued by the Corporation is reduced, (2) the number of shares into which the Option is exercisable is increased, (3) the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities is increased (if such consideration is payable to the holder of the Convertible Securities) or decreased (if such consideration is payable by the holder of the Convertible Securities), or (4) the rate at which Convertible Securities are convertible into or exchangeable for Common Stock is increased or the conversion price is decreased (including, but not limited to, such increases or decreases, as applicable, under or by reason of provisions designed to protect against dilution), the Conversion Price in effect at the time of such event shall forthwith be readjusted to the Conversion Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or conversion rate, as the case may be, at the time initially granted, issued or sold.
 
(B)   Stock Dividends .  In case the Corporation shall declare a dividend or make any other distribution upon any stock of the Corporation (other than Common Stock or Series A Preferred Stock) payable in Common Stock, then any Common Stock issuable in payment of such dividend or distribution shall be deemed to have been issued or sold for $0.01 per share, unless the holders of more than 50% of the then outstanding Series A Preferred Stock shall have consented to such dividend or distribution.
 
(C)   Record Date .  In case the Corporation shall take a record of the holders of its Common Stock for the purpose of entitling them (i) to receive a dividend or other distribution payable in Common Stock, Options or Convertible Securities or (ii) to otherwise determine the effective date of any such event described in this Section 5 , then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of such other event, as the case may be.
 
- 6 -

EXHIBIT 4-23
 
(D)   Treasury Shares .  The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Corporation, and the disposition of any such shares shall be considered an issue or sale of Common Stock for the purpose of this Section 5(c)(i) .
 
(ii)   Certain Issues of Common Stock Excepted .  Anything herein to the contrary notwithstanding, the Corporation shall not be required to make any adjustment of the Conversion Price in the case of the issuance or sale from and after the date of filing of this Certificate of Designations of Anti-Dilution Excluded Securities (as defined below).
 
(iii)   Adjustments for Subdivisions, Common Stock Dividends, Combinations or Consolidations of Common Stock .  If the outstanding shares of Common Stock shall be subdivided or increased, by stock split, stock dividend or otherwise, into a greater number of shares of Common Stock, the Conversion Price shall concurrently with the effectiveness of such subdivision or payment of such stock dividend, be proportionately decreased.  If the outstanding shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, the Conversion Price shall, concurrently with the effectiveness of such combination or consolidation, be proportionately increased.
 
(iv)   Adjustments for Reclassification, Exchange and Substitution . If the Common Stock issuable upon conversion of the Series A Preferred Stock shall be changed into the same or a different number of shares of any other class or classes of stock, whether by capital reorganization, reclassification or otherwise (other than a subdivision or combination of shares provided for above), the Conversion Price shall, concurrently with the effectiveness of such reorganization or reclassification, be proportionately adjusted such that the Series A Preferred Stock shall be convertible into, in lieu of the number of shares of Common Stock which the holders would otherwise have been entitled to receive, a number of shares of such other class or classes of stock equivalent to the number of shares of Common Stock that would have been subject to receipt by the holders upon conversion of the Series A Preferred Stock immediately before that change.
 
(v)   Adjustments for Merger, Sale, Lease or Conveyance .  In case of any share exchange, reorganization, consolidation with or merger of the Corporation with or into another corporation, or in case of any sale, lease, conveyance or disposition to another Corporation of the assets of the Corporation as an entirety or substantially as an entirety, which is not treated as a liquidation, dissolution or winding up pursuant to Section 4(d) above, the Series A Preferred Stock shall after the date of such share exchange, reorganization, consolidation, merger, sale, lease, conveyance or disposition be convertible into the number of shares of stock or other securities or property (including cash) to which the Common Stock issuable (at the time of such consolidation, merger, sale, lease, conveyance or disposition) upon conversion of the Series A Preferred Stock would have been entitled upon such share exchange, reorganization, consolidation, merger, sale, lease, conveyance or disposition; and in any such case, if necessary, the provisions set
 
- 7 -

EXHIBIT 4-23
 
forth herein with respect to the rights and interests thereafter of the holders of the Series A Preferred Stock shall be appropriately adjusted so as to be applicable, as nearly as may reasonably be, to any shares of stock or other securities or property thereafter deliverable on the conversion of the shares of Series A Preferred Stock.
 
(vi)   Fractional Shares .  If any adjustment under this Section 5(c) would create a fractional share of Common Stock or a right to acquire a fractional share of Common Stock, such fractional share shall be rounded to the nearest whole number of shares with one-half share being rounded up.
 
(vii)   Notice of Adjustment .  Concurrent with any adjustment pursuant to this Section 5(c) , the Corporation shall provide prompt notice to the holders of Series A Preferred Stock notifying such holders of any such adjustment.  Upon written request by a holder, the Corporation will promptly deliver a copy of each such certificate to such holder and to the Corporation’s Transfer Agent.
 
Section 6.   Voting Rights .  The holders of Series A Preferred Stock shall have no voting rights incident thereto.
 
Section 7.   Status of Converted Stock .  In the event any shares of Series A Preferred Stock are converted pursuant to Section 5 hereof, the shares of Series A Preferred Stock so converted shall be canceled, shall return to the status of authorized but unissued Preferred Stock of no designated series, and shall not be issuable by the Corporation as Series A Preferred Stock.
 
Section 8.   Reservation of Stock .  The Corporation shall at all times after June 30, 2008, reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of shares of Series A Preferred Stock issued or issuable to the holders, such number of shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Series A Preferred Stock; if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of Series A Preferred Stock, in addition to such other remedies as shall be available to the holder of Series A Preferred Stock, the Corporation shall take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number as shall be sufficient for such purposes, including, without limitation, using best efforts to obtain stockholder approval of any necessary amendment to the Charter.
 
Section 9.   Redemption Rights .  The holders of the Series A Preferred Stock shall have no redemption rights.
 
Section 10.   Rescission Rights .  On or before June 30, 2008, the Corporation (i) shall have obtained approval of holders of its Common Stock, and shall have taken all requisite actions (including filing an amendment to its Certificate of Incorporation with the Delaware Secretary of State) to effect, an increase in the Corporation’s authorized Common Stock by 116% of the number of shares as shall be sufficient to fully reserve shares of Common Stock for issuance upon exercise or conversion of all securities or other rights that are convertible into, or exchangeable or exercisable for, or otherwise entitle the holder to, shares of Common Stock of the Corporation, including the Series A Preferred Stock (including any additional Series A Preferred Stock
 
- 8 -

EXHIBIT 4-23
 
that may be issued in the event the Corporation opts to make dividend payments in shares of Series A Preferred Stock in accordance with Section 3 ) and (ii) shall have taken all actions necessary to reserve for issuance such number of shares of Common Stock as is issuable upon conversion of the Series A Preferred Stock (including any additional Series A Preferred Stock that may be issued in the event the Corporation opts to make dividend payments in shares of Series A Preferred Stock in accordance with Section 3 ).  In the event that the Corporation fails to comply with the requirements set forth in the immediately preceding sentence, the Corporation shall make a rescission offer to the holders of the Series A Preferred Stock by sending to each holder, on or before July 7, 2008, a notice (the “Rescission Notice” ) of such rescission offer, which shall specify the rescission rights including the date by which the rescission offer must be accepted, the method of acceptance, the documents (including certificates for Series A Preferred Stock) that are required for acceptance, and the consideration to be received in accordance with this Section 10 .  Each holder may accept such rescission offer, in whole or in part, in its sole discretion, by sending a notice of acceptance ( “Notice of Acceptance” ) of such rescission offer on or prior to August 4, 2008 (or such later date as the Corporation shall specify in the Rescission Notice), stating the number of shares of Series A Preferred Stock such holder will rescind.  The Corporation shall make a payment to each holder of Series A Preferred Stock who accepts the rescission offer, promptly (and in no event more than three (3) business days) following such holder’s tendering certificate(s) for all or such portion of its Series A Preferred Stock as are specified in the Notice of Acceptance, consideration identical to the consideration paid by such holder for such shares of Series A Preferred Stock, plus an amount in cash equal to all accrued but unpaid dividends thereon (as adjusted to reflect forward or reverse stock splits, stock dividends, recapitalizations or other similar capital reorganization or reclassification of capital stock (the “Rescission Price” )).  The shares of Series A Preferred Stock not rescinded shall remain outstanding and entitled to all the rights and preferences provided herein, including, but not limited to, those rights and preferences set forth in Section 10(i) and (ii) .  To the extent applicable, the Corporation shall issue replacement certificates representing any shares of Series A Preferred Stock not rescinded to be delivered to such holder with such holder’s Rescission Price.  Upon rescission, all rights of the holders of shares of the Series A Preferred Stock so rescinded shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose and shall be automatically and immediately canceled and shall not be reissued or sold, and neither the Corporation nor any of its subsidiaries shall be a holder of, nor may any of them exercise any rights granted to holders of, such shares of Series A Preferred Stock following rescission.
 
Section 11.   Definitions .  As used in this Certificate, the following capitalized terms have the following meanings.
 
“Anti-Dilution Excluded Securities” mean any of the following securities: (1)  securities issued to employees, consultants, officers or directors of the Corporation or options to purchase Common Stock granted by the Corporation to employees, consultants, officers or directors of the Corporation pursuant to any option plan, agreement or other arrangement duly adopted by the Corporation and the grant of which is approved by the compensation committee of the Board; (2) the Series A Preferred Stock and any Common Stock issued upon conversion of the Series A Preferred Stock; (3)
 
 
- 9 -

EXHIBIT 4-23
 
for the avoidance of doubt, securities issued on the conversion of any Convertible Securities or the exercise of any Options, in each case, outstanding on the date of the first filing of this Certificate of Designations; and (4) for the avoidance of doubt, securities issued in connection with a stock split, stock dividend, combination, reorganization, recapitalization or other similar event for which adjustment is made in accordance with Section 5(c)(iii) or (iv) .
 
“Purchase Agreement” means the Purchase Agreement, dated June 5, 2008, between the Corporation and the initial purchasers of the Series A Preferred Stock.
 
 
Signature on following page.


                                                                   

 
- 10 - 

 
EXHIBIT 4-23
 

IN WITNESS WHEREOF, the Corporation has caused this Certificate to be duly executed on its behalf by its __________________ this 5th day of June, 2008.
 
COMMUNICATION INTELLIGENCE CORPORATION
 
 
 
  By:   s/  Guido DiGregorio               
 
 
  Name:   Guido D. DiGregorio          
 
 
  Title:     Chief Executive Officer and President

 
 
 
 
 
 
 
 
 
 
 
 
- 11 -

EXHIBIT 10-41

 
 
 


Portions of this document have been redacted and filed separately with the Securities and Exchange Commission.  Redacted sections marked with “*****.”


 
 
 
 
 
 
 
CREDIT AGREEMENT

Dated as of June 5, 2008,
 
By And Among

COMMUNICATION INTELLIGENCE CORPORATION
as Borrower,

THE LENDERS PARTY HERETO

AND

SG PHOENIX LLC
As Collateral Agent
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 

 
TABLE OF CONTENTS  
                                                                                                                                               EXHIBIT 10-41  
 
                                                                                                                                                                            Page
SECTION 1.
AMOUNTS AND TERMS OF LOANS                                                                            
1
1.1
Loans  
2
1.2
Interest. 
3
1.3
Use of Proceeds
3
1.4
Fees and Expenses 
4
1.5
Payments 
4
1.6
Repayments of Loans
5
1.7
Loan Accounts
7
1.8
Taxes
7
1.9
Warrants
8
1.1
Term of This Agreement 
8
SECTION 2.
AFFIRMATIVE COVENANTS 
8
2.1
Compliance With Laws 
8
2.2
Maintenance of Books and Records; Properties; Insurance.
9
2.3
Inspection; Lenders’ Meeting
9
2.4
Legal Existence, Etc
10
2.5
Use of Proceeds
10
2.6
Authorized Common Stock 
10
2.7
Further Assurances; Notices of Acquisition of Property
10
2.8
Taxes and other Government Charges
10
SECTION 3.
NEGATIVE COVENANTS
11
3.1
Indebtedness
11
3.2
Liens and Related Matters
11
3.3
Investments 
12
3.4
Contingent Obligations
12
3.5
Restricted Junior Payments
12
3.6
Restriction on Fundamental Changes
12
3.7
Disposal of Assets or Subsidiary Stock
12
3.8
Transactions with Affiliates
12
3.9
Management Fees
13
3.10
Conduct of Business
13
3.11
Fiscal Year 
13
3.12
Subsidiaries; Partnerships
13
3.13
Modification of Agreements
13
3.14
Board of Directors 
13
3.15
Management of Borrower
13
3.16
Investment Company Act; Public Utility Holding Act
13
SECTION 4.
FINANCIAL COVENANTS AND REPORTING
14
4.1
Reports and Covenants
14
4.2
Accounting Terms; Utilization of GAAP 
16
SECTION 5.
REPRESENTATIONS AND WARRANTIES
16
5.1
Disclosure
16
5.2
No Material Adverse Effect 
17
 
-i-

EXHIBIT 10-41
TABLE OF CONTENTS  
                                                                                                                                                                                                                                        Page
5.3
Organization, Powers, Authorization and Good Standing 
17
5.4
Compliance with Applicable Law
17
5.5
Tax Returns and Payments
18
5.6
Environmental Matters
18
5.7
Financial Statements
18
5.8
Intellectual Property 
19
5.9
Litigation, Investigations, Audits, Etc. 
19
5.10
Employee Labor Matters
20
5.11
Employee Benefit Plans
20
5.12
Perfection and Priority
20
5.13
Solvency
20
5.14
Investment Company Act; Federal Regulations
20
5.15
Material Contracts
21
5.16
Title to Properties
21
5.17
Subsidiaries and Affiliates
21
5.18
Filings
21
5.19
Insurance
22
5.20
Approvals
22
5.21
Internal Accounting Controls
22
5.22
Foreign Corrupt Practices
22
5.23
Representations and Covenants Made to the Investors
23
SECTION 6.
EVENTS OF DEFAULT AND RIGHTS AND REMEDIES
23
6.1
Events of Default
23
6.2
Acceleration
26
6.3
Rights of Collection
26
6.4
Consents
26
6.5
Performance by Lenders or Collateral Agent
27
6.6
Set Off and Sharing of Payments
27
6.7
Application of Payments
27
6.8
Rescission
27
SECTION 7.
CONDITIONS TO LOANS
28
7.1
Executed Loan Documents
28
7.2
Executed Debt Refinancing Documents
28
7.3
Certificate of Designations
28
7.4
Cancelled Notes
28
7.5
Representations and Warranties
28
7.6
Covenants
28
7.7
No Default
29
7.8
Lien Priority
29
7.9
No Litigation
29
7.10
Fees and Expenses
29
7.11
Closing Certificates; Opinions
29
7.12
Collateral
30
7.13
Insurance
30
7.14
Consents
30
7.15
No Injunction, Etc.
30
 
-ii-

EXHIBIT 10-41
TABLE OF CONTENTS  
                                                                                                                                                                                                                                        Page
7.16
Fees, Expenses, Taxes, Etc.
31
7.17
Proceedings and Documents
31
7.18
Other Deliveries
31
7.19
Post-Closing Deliveries
31
SECTION 8.
INTERCREDITOR PROVISIONS
32
8.1
Appointment, Powers and Immunities of Agents
32
8.2
Reliance
33
8.3
Non-Reliance
33
8.4
Defaults; Material Adverse Effect
33
8.5
Successor Agent
34
8.6
Authorization
34
8.7
Other Roles
34
8.8
Amendments and Waivers
35
SECTION 9.
MISCELLANEOUS
35
9.1
Indemnities
35
9.2
Notices
36
9.3
Failure or Indulgence Not Waiver; Remedies Cumulative
37
9.4
Marshaling; Payments Set Aside
37
9.5
Severability
37
9.6
Headings
37
9.7
Applicable Law
37
9.8
Successors and Assigns
38
9.9
Participations
38
9.10
No Fiduciary Relationship
38
9.11
Construction
38
9.12
Confidentiality
39
9.13
Consent to Jurisdiction and Service of Process
39
9.14
Waiver of Jury Trial
40
9.15
Survival of Warranties and Certain Agreements
40
9.16
Entire Agreement
40
9.17
Counterparts; Effectiveness
40
SECTION 10.
DEFINITIONS
41
10.1
Certain Defined Terms
41
10.2
Other Definitional Provisions
49


 
-iii- 

EXHIBIT 10-41  

SCHEDULES
 
Schedule 1.1(a)                           Loans
Schedule 1.3                                Repayment of Outstanding Debt
Schedule 2.2(b)                           Insurance
Schedule 3.1                                Indebtedness/Liens
Schedule 5.3(a)                           Organization and Powers
Schedule 5.3(c)                           Qualification to Transact Business
Schedule 5.4                                Compliance with Applicable Law
Schedule 5.6                                Environmental Matters
Schedule 5.8                                Intellectual Property
Schedule 5.9                                Litigation, Investigations, Audits, Etc.
Schedule 5.10                              Employee Labor Matters
Schedule 5.15                              Material Contracts
Schedule 5.16                              Owned and Leased Property
Schedule 5.17(a)                         Subsidiaries and Affiliates
Schedule 5.17(b)                         Inventory and Equipment
Schedule 5.18                              Filings


EXHIBITS
 
Exhibit 1.1(a)                                Form of Note
Exhibit 1.2(b)-1                            Form of Additional Note
Exhibit 1.2(b)-2                            Form of Additional Warrant
Exhibit 1.9                                    Form of Warrant
Exhibit 4.1(b)                               Form of Compliance Certificate
Exhibit 10.1(ccc)                          Form of Pledge and Security Agreement

 - iv -
 
 

 
EXHIBIT 10-41
INDEX OF DEFINED TERMS
 
Defined Term
Defined in Section
1933 Act
§5.18
1934 Act
§2.3
1940 Act
§3.16
Accounting Changes
§4.2
Additional Note
§1.2(b)
Additional Warrant
§1.2(b)
Affiliate
§10.1
Agreement
§10.1
Applicable Law
§10.1
Asset Disposition
§10.1
Bankruptcy Code
§10.1
Borrower
Preamble
Business Day
§10.1
Capital Lease
§10.1
Cash Equivalents
§10.1
Change of Control
§6.1(s)
Closing Date
§10.1
Collateral
§10.1
Collateral Agent
§8.1(a)
Common Stock
§10.1
Compliance Certificate
§4.1(b)
Contingent Obligation
§10.1
Control
§10.1
Debt Refinancing
§10.1
Debt Refinancing Documents
§10.1
Default
§10.1
Engmann
Preamble
Environmental Laws
§10.1
Evaluation Date
§5.21
Event of Default
§6.1
GAAP
§10.1
Goodman
Preamble
Governmental Authority
§10.1
Indebtedness
§10.1
Indemnitees
§9.1
Initial Warrants
§1.9
Intellectual Property Rights
§5.8
Investment
§10.1
Investors
§10.1
IRC
§10.1
Lender(s)
Preamble
Lien
§10.1
Loan(s)
§1.1(a)
 
-v-

EXHIBIT 10-41
   
Loan Documents
§10.1
Majority Lenders
§10.1
Material Adverse Effect
§10.1
Material Contracts
§10.1
Maturity Date
§10.1
Net Proceeds
§10.1
Note(s)
§1.1(a)
Obligation(s)
§10.1
Permitted Encumbrances
§10.1
Person
§10.1
Phoenix
Preamble
Pledge and Security Agreement
§10.1
Purchase Agreement
§10.1
Real Property
§5.6
Registration Rights Agreement
§10.1
Restricted Junior Payment
§10.1
SEC
§10.1
Secured Party or Secured Parties
§10.1
Security Documents
§10.1
Security Interest
§10.1
Series A Preferred Stock
§10.1
Subsidiary
§10.1
Warrant(s)
§10.1

 

- vi -
 
 

EXHIBIT 10-41  


 
CREDIT AGREEMENT
 
This CREDIT AGREEMENT is entered into as of June 5, 2008, by and among COMMUNICATION INTELLIGENCE CORPORATION, a Delaware corporation having an address at 275 Shoreline Drive, Suite 500, Redwood Shores, California 94065 ( “Borrower” ) and PHOENIX VENTURE FUND LLC, a Delaware limited liability company having an address at 110 East 59th Street, Suite 1901, New York, New York 10022 ( “Phoenix” ), Michael Engmann, an individual having an address at 38 San Fernando Way, San Francisco, California 94127 ( “Engmann” ) and Ronald Goodman, an individual having an address at 31 Tierra Verde Court, Walnut Creek, California 94598 ( “Goodman” ) (each of Phoenix, Engmann and Goodman individually, a “Lender , and collectively, the “Lenders” ).  Capitalized terms shall have the meanings given to them in Section 10.1 below.
 
R E C I T A L   S :
 
WHEREAS , Lenders have agreed to finance the Loans to the Borrower upon the terms  and for the uses as provided in the Loan Documents; and
 
WHEREAS , Borrower will have access to additional working capital as a result of the Loans; and
 
WHEREAS , certain proceeds of the Loans will be used to refinance loans due and payable on May 15, 2008 to certain of the Lenders as set forth on Schedule 1.3 pursuant to the Debt Refinancing; and
 
WHEREAS , Lenders are prepared to make the Loans available to the Borrower only upon consummation of the Debt Refinancing by the Investors; and
 
WHEREAS , Borrower intends to secure all of its Obligations under the Loan Documents by granting to Lenders a first priority Security Interest in and Lien upon the Collateral; and
 
WHEREAS , Borrower intends to further secure all of its Obligations under the Loan Documents by granting to Lenders a pledge of all of its shares of capital stock,
 
NOW, THEREFORE , in consideration of the premises and the agreements, provisions and covenants herein contained, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties do hereby agree, as follows:
 
SECTION 1.   AMOUNTS AND TERMS OF LOANS
 
1.1   Loans
.  Subject to the terms and conditions of this Agreement and in reliance upon the representations, warranties and covenants of Borrower contained herein and in the other Loan Documents:
 
(a)   Loans to Borrower .  Lenders agree to lend to Borrower, on the Closing Date, an aggregate of Three Million Six Hundred Thirty-Seven Thousand Five Hundred Dollars ($3,637,500), each Lender to lend the amount set forth opposite its name on Schedule
 

EXHIBIT 10-41
 
 
 1.1(a) (individually, each a “Loan , collectively, the “Loans” ); provided all conditions precedent set forth in Section 7 are satisfied or waived.  Amounts borrowed under this Section 1.1(a) that are repaid or prepaid may not be reborrowed.  Borrower shall execute and deliver to each Lender a Note in the amount of such Lender’s Loan in the form attached to this Agreement as Exhibit 1.1(a) (together with any Notes issued pursuant to Section 1.2(b)) , dated as of the Closing Date.
 
(b)   Advances
 
.  The Loans will be made available (i) with respect to the Loans by Phoenix, by wire transfer of immediately available funds to such account or accounts as may be authorized by Borrower, less amounts for fees, and (ii) with respect to the Loans by Engmann and Goodman, by termination of Borrower’s obligations under such Lenders’ respective loans, as evidenced by the related promissory notes due May 15, 2008, including the accrued and unpaid interest thereon through May 31, 2008, as set forth on Schedule 1.3 .  Each of Engmann and Goodman, by accepting his respective Note hereunder, acknowledges and agrees that such Note has been tendered by Borrower, and accepted by him, as full payment and satisfaction for Borrower’s obligations under his respective promissory note due May 15, 2008 as set forth on Schedule 1.3 hereto, including accrued and unpaid interest through May 31, 2008, and, upon the occurrence of the Closing and the delivery to each such Lender of his respective Note hereunder, plus payment of an amount equal to interest on such promissory note from (and including) June 1, 2008 to (but excluding) the Closing Date, each of Engmann and Goodman acknowledge and agree that all obligations, liabilities, covenants and agreements of Borrower under his respective promissory note due May 15, 2008 described on Schedule 1.3 , and Borrower’s related obligations under that certain Note and Warrant Purchase Agreement, dated as of August 10, 2006, pursuant to which such promissory notes were issued, are terminated and cancelled and are of no further force or effect.
 
1.2   Interest .
 
(a)   Interest
 
.  Commencing as of the Closing Date, the Loans shall accrue interest on a monthly basis at a rate equal to (i) eight percent (8%) per annum until the Maturity Date.
 
(b)   Calculation and Payment
 
.  Interest on the Loans shall be calculated on the basis of a three hundred sixty-five (365) day year for the actual number of days elapsed.  The date of payment of any Loan or interest on any Loan shall be excluded from the calculation of interest.  Interest accruing on each Loan is payable in arrears on each of the following dates or events: (i) the last day of each calendar quarter commencing on June 30, 2008; (ii) the prepayment of such Loan (or a portion thereof); and (iii) the Maturity Date.  Such interest may be paid in cash or, at the option of Borrower, interest may be paid in kind by adding the amount of such interest to the principal amount of each Loan (each Lender’s Loan to be ratably increased) on the applicable interest payment date, which will accrue interest pursuant to Section 1.2(a) or Section 1.2(c) , as applicable, and issuing to each Lender (i) an additional note in the amount of the ratable increase of such Lender’s Loan in substantially the form attached as Exhibit 1.2(b)-1 (each, an “Additional Note” ) and (ii) an additional warrant substantially in the form attached as Exhibit 1.2(b)-2 to purchase up to the number of shares of Common Stock obtained by dividing the amount of the ratable increase in such Lender’s
 
-2-

EXHIBIT 10-41
 
 
Loan by 0.14 (each, an “Additional Warrant” ).  In the event that interest is not timely paid pursuant to this Section 1.2(b) on the applicable interest payment date, such interest payment shall be paid in kind and shall be added to the principal amount of each respective Lender’s Loan no later than the Business Day following the applicable interest payment date, and the Borrower shall issue the applicable Additional Notes and Additional Warrants as provided herein.  Borrower shall, in connection with the issuance of Additional Warrants pursuant hereto, take all actions (including the reservation of shares of Common Stock) required pursuant to the terms of such Additional Warrants.  Notwithstanding the foregoing, Borrower shall not have an option to pay interest in kind in the event that Borrower does not have sufficient authorized, unissued and unreserved Common Stock to fully reserve shares of Common Stock for issuance upon exercise of the Additional Warrants or is otherwise unable to comply with the terms of the Additional Warrants.
 
(c)   Default Rate of Interest
 
.  At the election of the Majority Lenders, upon the occurrence of an Event of Default and for so long as it continues, all Loans and other Obligations shall bear interest at the highest rate permitted by Applicable Law.
 
(d)   Excess Interest
 
.  Notwithstanding anything to the contrary set forth herein, the aggregate interest, fees and other amounts required to be paid by Borrower to Lenders is hereby expressly limited so that in no contingency or event whatsoever, whether by reason of acceleration of maturity of the Obligations or otherwise, shall the amount paid or agreed to be paid to Lenders for the use or the forbearance of the Obligations evidenced hereby exceed the maximum permissible under Applicable Law.  If under or from any circumstances whatsoever, fulfillment of any provision hereof or of any of the other Loan Documents at the time performance of such provision shall be due, shall involve exceeding the limit permitted by Applicable Law then the Obligation to be fulfilled shall automatically be reduced to the limit permitted, and if under or from any circumstances whatsoever, Lenders should ever receive as interest any amount which would exceed the highest lawful rate, the amount of such interest that is excessive shall be applied to the reduction of the principal balance of the Obligations and not to the payment of interest.  In the event of a conflict, this provision shall control every other provision of this Agreement and all provisions of every other Loan Document.
 
1.3   Use of Proceeds
 
.  Borrower agrees that the proceeds of the Loans shall be used only in accordance with the following: (1) to refinance the loans due and payable on May 15, 2008 to certain of the Lenders as set forth on Schedule 1.3 hereto pursuant to the Debt Refinancing, (2) for working capital and general corporate purposes, in each case in the ordinary course of business and (3) to pay fees and expenses in connection with the Debt Refinancing, including the fees and expenses hereunder.  In no event shall the proceeds of working capital Loans be used to (i) make distributions, or (ii) make a contribution to the capital of any Subsidiary of the Borrower.
 
1.4   Fees and Expenses .
 
(a)   Borrower agrees to pay promptly all fees, costs and expenses (including legal fees, due diligence costs, expenses of attorneys and costs of advisers, counsel, accountants and other experts, if any) incurred by Lenders, Investors, Collateral Agent and/or any Affiliate, member or related party of any Lender, Investor or Collateral Agent in connection with (i) the Debt Refinancing, (ii) any matters contemplated by or arising out of the Loan Documents and the Purchase Agreement, (iii) the examination, review, due diligence investigation, documentation, negotiation and closing of the transactions contemplated herein or otherwise in connection with the Debt Refinancing; (iv) the continued administration of the Loan Documents, including any such fees, costs and expenses incurred in perfecting, maintaining, determining the priority of and releasing any security, any tax (of the type discussed in Section 7.16) payable in connection with
 
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EXHIBIT 10-41
 
 
any Loan Document or other Debt Refinancing Document and any amendments, modifications and waivers thereof; (v) any amendment, supplement, waiver or modification of any of the Loan Documents or other Debt Refinancing Documents, unless both (1) such amendment, supplement, waiver or modification is made at the request and for the sole benefit of any Lender and (2) no Event of Default has occurred and is continuing, in which case each Lender shall be responsible for its related fees, costs and expenses; and (vi) any Default and any enforcement or collection proceeding resulting therefrom or any workout or restructuring of any of the transactions hereunder or under any other Debt Refinancing Document or contemplated hereby or thereby or any action to enforce any Loan Document or other Debt Refinancing Document or to collect any payments due from Borrower hereunder or thereunder.
 
(b)   The Borrower shall pay at Closing to or at the direction of Phoenix a restructuring fee of one hundred thousand dollars ($100,000).
 
(c)   The aggregate amount of fees and expenses accrued under Section 1.4(a) as of the Closing Date shall be paid by Borrower at Closing.  All post-Closing fees, costs and expenses for which Borrower is responsible shall be immediately due and payable and deemed part of the Obligations when incurred and shall be secured by the Collateral.  Following an Event of Default, any fees, costs and expenses which are not paid within thirty (30) days of presentment may be debited and added to the principal amount of the applicable Loans without notice.
 
1.5   Payments .
 
(a)   Funds .  All payments by Borrower of the Obligations shall be made in same day funds and delivered to each Lender by wire transfer to the following account or such other place as such Lender may from time to time designate:
 
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EXHIBIT 10-41
 
 
If to Phoenix:

 
Citibank N.A.
666 Fifth Avenue, 6 th Floor
New York, New York 10103
Attn: H. Alex Trejo at Citi Private Bank
 
ABA *****
 
for account ***** for the account of SG Phoenix LLC
 
If to Engmann:

Bank of the West
180 Montgomery St. 3 rd Floor
San Francisco, California 94104
Attn: Daniel Tondeau or Jennifer Avi
ABA *****
for account ***** for the account of Michael W. Engmann

If to Goodman:
 
Wells Fargo Bank
 
1499 North Main Street
 
ABA *****
 
for account ***** for the account of Ronald Goodman or Janet Goodman
 


(b)   Credit .  Borrower shall receive credit on the day of receipt for funds received by Lender by 1:00 p.m., New York, New York time, on any Business Day.  Funds received after 1:00 p.m., New York, New York time, on any Business Day shall be deemed to have been paid on the next Business Day.  Whenever any payment to be made hereunder shall be stated to be due on a day that is not a Business Day, the payment shall be due on the next succeeding Business Day and such extension of time shall be included in the computation of the amount of interest and fees due hereunder.
 
(c)   Payment Set Aside .  To the extent Borrower, or any other Person on behalf of Borrower, makes a payment or payments to a Lender in order to satisfy any amount of Borrower’s Obligations, which payments or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, state or federal law, common law or equitable cause, or any combination of the foregoing (whether by demand, litigation, settlement or otherwise), then, to the extent of such payment or proceeds repaid, the Obligations or part thereof intended to be satisfied shall be reinstated and continued in full force and effect as if such payment or proceeds had not been received by such Lender.
 
1.6   Repayments of Loans .
 
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EXHIBIT 10-41
(a)   Scheduled Repayments of Loans .  Borrower shall repay the aggregate outstanding principal balance of the Loans on and by the Maturity Date.  All repayments of the Loans shall be applied in accordance with Section 1.6(f) , and shall be accompanied by accrued interest on the amount repaid.
 
(b)   Voluntary Prepayment of Loans .  Upon three (3) Business Day’s prior notice, Borrower may prepay the Loans, in whole or in part.  All prepayments shall be in a minimum amount of at least One Hundred Thousand Dollars ($100,000) or such other lesser amount as may equal the then outstanding aggregate principal amount of the Loans.  All prepayment notices shall be irrevocable.  All prepayments shall be applied pro rata to each Loan and shall be remitted to each respective Lender.  All prepayments shall be accompanied by accrued interest on the amount prepaid plus any applicable breakage fees, and any amount so repaid may not be reborrowed.
 
(c)   Repayments from Insurance Proceeds .  Immediately upon their receipt, Borrower shall repay the Loans in an amount equal to all Net Proceeds constituting insurance proceeds from any Asset Disposition received by Borrower or any of its Subsidiaries; provided, however , that Borrower shall not be required to so apply an amount of such Net Proceeds up to One Hundred Thousand Dollars ($100,000) in any calendar year if the following requirements are satisfied: (i) such proceeds are pledged to Lender, (ii) no Event of Default has occurred and is continuing, and (iii) Borrower or such Subsidiary has taken steps in good faith and customary in its industry to replace the damaged Collateral and in any event such replacement or restoration has occurred within two hundred and seventy (270) days of receipt by Borrower or such Subsidiary of such proceeds.  All such repayments (other than prepayments under Section 1.6(b) as contemplated in this Section 1.6 ) shall be applied in accordance with Section 1.6(f) .
 
(d)   Repayments from Certain Asset Dispositions .  Immediately upon receipt by Borrower or any of its Subsidiaries of Net Proceeds (other than insurance proceeds) from any Asset Disposition, Borrower shall repay the Loans in an amount equal to such Net Proceeds.  All such repayments shall be applied in accordance with Section 1.6(f) .
 
(e)   Repayments from Debt or Equity Issuances .  Immediately upon receipt by Borrower or any of its Subsidiaries of Net Proceeds relating to the issuance or incurrence by Borrower or any of its Subsidiaries of any public or private Indebtedness (other than pursuant to Section 3.1 ) or any equity (but other than issuance of equity upon conversion or exercise of (i) any security outstanding prior to the date hereof, (ii) the Series A Preferred Stock, (iii) the Warrants or (iv) any option for Common Stock issued on or after the date hereof to an employee or member of the Board of Directors of Borrower pursuant to an equity compensation plan), Borrower shall repay the Loans in an amount equal to such Net Proceeds.  All such repayments shall be applied in accordance with Section 1.6(f) .
 
(f)   Application of Repayments .  All repayments of a Loan shall be applied first to fees and expenses due under the Loan Documents, then to accrued and unpaid interest, and then to the outstanding principal balance of the Loans.  All repayments, after application to payment of fees and expenses, shall be applied pro rata to each Loan including accrued and unpaid interest thereon, and shall be remitted to each respective Lender.
 
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EXHIBIT 10-41
(g)   Payment Upon Sale or Change of Control .  Borrower shall repay immediately upon the occurrence of such event, in full in cash in same day funds the aggregate outstanding principal balance on the applicable Notes and all accrued interest in the event of a sale of all or substantially all of the assets of Borrower, or upon the occurrence of a Change of Control of Borrower, whether in a single transaction or a series of related transactions.
 
(h)   Breakage Costs .  If Borrower makes any payment of principal with respect to a Loan on any day other than (i) the last day of a calendar quarter after Closing or (ii) the Maturity Date, or fails to make a prepayment after giving notice thereof, Borrower shall reimburse each Lender within 10 days after demand for any resulting loss or expense incurred by it (or by an existing or prospective Participant in a Loan who has signed an agreement relating to such prospective participation and has incurred actual breakage costs), including without limitation any loss incurred in obtaining, liquidating or employing deposits from third parties, but excluding loss of margin for the period after any such payment or failure to prepay, provided that such Lender or Participant, as the case may be, shall have delivered to Borrower a certificate describing the amount of such loss or expense in reasonable detail, which certificate shall be conclusive in the absence of manifest error.
 
1.7   Loan Accounts .  Lenders will maintain Loan account records for (i) all Loans, interest charges and payments thereof, (ii) the charging and payment of all fees, costs and expenses, and (iii) all other debits and credits pursuant to this Agreement.  The balance in the Loan accounts shall be presumptive evidence of the amounts due and owing to Lenders, absent manifest error; provided that any failure by Lenders to maintain such records shall not limit or affect Borrower’s obligation to pay.
 
1.8   Taxes .
 
(a)   No Deductions .  Any and all payments or reimbursements made under the Loan Documents shall be made free and clear of, and without deduction for, any and all taxes, levies, deductions, charges or withholdings, and all liabilities with respect thereto (including all such taxes, deductions, charges or withholdings and all liabilities with respect thereto, excluding such taxes imposed on net income).  If Borrower shall be required by Applicable Law to deduct any such amounts from or in respect of any sum payable hereunder to Lenders then, except as provided in Section 1.8(b) , Borrower shall pay such amounts to the appropriate Governmental Authority and provide Lenders with satisfactory documentary evidence of such payment within ten (10) days after such payment and the sum payable hereunder shall be increased as may be necessary so that, after making all required deductions, Lenders receive an amount equal to the sum they would have received had no such deductions been made.
 
(b)   Changes in Tax Laws .  In the event that, subsequent to the Closing Date, (i) any changes in any existing law, regulation, treaty or directive or in the interpretation or application thereof, (ii) any new law, regulation, treaty or directive enacted or any interpretation or application thereof, or (iii) compliance by Lenders with any request or directive (whether or not having the force of law) from any Governmental Authority (x) does or shall subject Lenders to any tax of any kind whatsoever with respect to this Agreement, the other Loan
 
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EXHIBIT 10-41
 
Documents or any Loans made hereunder, or change the basis of taxation of payments to Lenders of principal, fees, interest or any other amount payable hereunder (except for net income taxes or franchise taxes imposed in lieu of net income taxes, or changes in the rate of such taxes); or (y) does or shall impose on Lenders any other condition or increased cost in connection with the transactions contemplated hereby; and the result of any of the foregoing is to increase the cost to Lenders of making or continuing any Loan hereunder, or to reduce any amount receivable hereunder, as the case may be, then, in any such case, the Borrower shall promptly pay to Lenders, upon its demand, any additional amounts necessary to compensate Lenders, on an after-tax basis, for such additional cost or reduced amount receivable, as determined by Lenders with respect to this Agreement or the other Loan Documents.  If Lenders become entitled to claim any additional amounts pursuant to this Section 1.8(b) , it shall promptly notify Borrower of the event by reason of which Lenders have become so entitled.  A certificate as to any additional amounts payable pursuant to the foregoing sentence submitted by Lenders to Borrower shall, absent manifest error, be final, conclusive and binding for all purposes.  There is no limitation on the number of times such a certificate may be submitted.
 
1.9   Warrants .  In partial consideration for the Lenders’ respective Loans made pursuant to this Agreement, Borrower shall issue warrants (the “Initial Warrants” ), in substantially the form of Exhibit 1.9 hereto, each Lender to purchase up to the number of shares obtained by dividing the amount of such Lender’s Loan by 0.14.  Additional Warrants may be issued in the event of Borrower’s election to make payments in kind in accordance with the terms of this Agreement.
 
1.10   Term of This Agreement .  All of the Obligations shall become due and payable as otherwise set forth herein, but in any event, all of the remaining Obligations shall become due and payable on the Maturity Date.  This Agreement shall remain in effect through and including, and (except with respect to provisions hereof expressly stated herein to survive any such termination) shall terminate immediately after, the date on which all Obligations shall have been irrevocably paid and satisfied in full.
 
SECTION 2.   AFFIRMATIVE COVENANTS
 
Borrower hereby covenants and agrees that until payment in full of all Obligations, unless the Majority Lenders give their prior written consent, Borrower shall perform and comply, and shall cause each of its Subsidiaries to perform and comply, with all covenants in this Section 2 .
 
2.1   Compliance With Laws .  Borrower will in all material respects comply with and will cause its Subsidiaries to comply with the requirements of all Applicable Laws (including laws, rules, regulations and orders relating to taxes, employer and employee contributions, securities, and employee retirement and welfare benefits) as in effect in all jurisdictions in which Borrower and any Subsidiary of Borrower are now or hereafter doing business.  This Section 2.1 shall not preclude Borrower or any Subsidiary of Borrower from contesting any taxes or other payments, if such taxes and other payments are being diligently contested in good faith and if adequate reserves (if required by Applicable Law) therefore are maintained in conformity with GAAP.
 
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EXHIBIT 10-41
 
 
2.2   Maintenance of Books and Records; Properties; Insurance .
 
(a)   Books and Records .  Borrower will keep and will cause each of its Subsidiaries to keep adequate records and books of account, in which complete entries will be made in accordance with GAAP consistently applied.  Borrower will maintain or cause to be maintained and will cause each of its Subsidiaries to maintain or cause to be maintained in good repair, working order and condition all Collateral used in its business and the business of its Subsidiaries, and will make or cause to be made all appropriate repairs, renewals and replacements thereof.  Borrower will and will cause each of its Subsidiaries to maintain complete, accurate and up-to-date books, records, accounts and other information relating to all Collateral in such form and in such detail as may be reasonably satisfactory to Lenders.
 
(b)   Insurance .  Borrower will maintain or cause to be maintained and will cause each of its Subsidiaries to maintain or cause to be maintained, with financially sound and reputable insurers, commercial general liability, property loss and damage and business interruption insurance with respect to its business and properties and the business and properties of its Subsidiaries against loss and damage of the kinds customarily carried or maintained by similarly situated corporations engaged in businesses similar to the Borrower’s and of such types, with such insurers, in such amounts, with such limits and deductibles and otherwise on such terms and conditions as shall be acceptable to Lenders in their reasonable discretion and will deliver evidence thereof to Lenders on or prior to the Closing Date, and thereafter at least thirty (30) days prior to any expiration thereof, evidence of renewal of such insurance.  All property loss and damage insurance shall be on an all-risk basis and shall insure property for the full replacement cost thereof and contain an agreed amount endorsement waiving any coinsurance penalty.  Other than Borrower’s directors and officers policy set forth on Schedule 2.2(b) hereto, Borrower will cause each insurance policy to be subject to such endorsements and assignments as shall be satisfactory to Lenders, including but not limited to naming Lenders (or Collateral Agent on behalf of Lenders) as lender loss payee in the case of property loss and damage insurance, as assignee in the case of all business interruption insurance, and as an additional insured in the case of all liability insurance.  Liability for premiums shall be solely a liability of Borrower.
 
2.3   Inspection; Lenders’ Meeting .  Upon reasonable prior notice (which shall not be less than one Business Day), Borrower will permit and will cause each of its Subsidiaries to permit Lenders and any authorized representatives of Lenders to visit and inspect any of its properties and the properties of its Subsidiaries, including their financial and accounting records, and to make copies and take extracts therefrom, for the purpose of determining or monitoring the value of the Collateral and to discuss the Borrower’s and its Subsidiaries’ affairs, finances and business with its and their officers, employees and public accountants, upon reasonable prior notice at such times during normal business hours and as often as may be reasonably requested; provided that if there is no Event of Default that has occurred and is continuing, Borrower and its Subsidiaries may, but shall not be required, to permit the foregoing more than two (2) times each calendar quarter.  Notwithstanding the preceding sentence, this Section 2.3 shall not require Borrower to disclose material non-public information within the meaning of Regulation FD under the Securities Exchange Act of 1934, as amended (the “1934 Act” ), to any Person unless such Person has expressly agreed to maintain such information in confidence in accordance with the confidentiality provisions of Section 9.12 hereof.
 
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EXHIBIT 10-41
 
 
2.4   Legal Existence, Etc .  Except as otherwise permitted by Section 3.6 , Borrower will, and will cause each of its Subsidiaries to, at all times preserve and keep in full force and effect its legal existence and good standing and all rights and franchises material to its or their business.
 
2.5   Use of Proceeds .  Borrower will use the proceeds of the Loans, and will cause any of its Subsidiaries who receive (directly or indirectly) proceeds of the Loans to use such proceeds, solely for the purposes described in Section 1.3 of this Agreement.  No part of any Loan will be used (directly or indirectly) to purchase any margin securities or otherwise in violation of the regulations of the Federal Reserve System.
 
2.6   Authorized Common Stock .  By no later than June 30, 2008, Borrower shall have obtained stockholder approval of, and shall have taken all requisite actions (including filing an amendment to its Certificate of Incorporation with the Delaware Secretary of State) to increase the Borrower’s authorized Common Stock by a sufficient amount to fully reserve shares of Common Stock for issuance upon exercise of the Warrants and otherwise in accordance with the terms of the Warrants and conversion of the Series A Preferred Stock issued pursuant to the Purchase Agreement (including any Additional Warrants or Series A Preferred Stock that may be issued in the event of Borrower’s election to make payments in kind in accordance with the terms of this Agreement and the Series A Preferred Stock, as applicable).
 
2.7   Further Assurances; Notices of Acquisition of Property .
 
(a)   Borrower will, and will cause each of its Subsidiaries to, do, execute and deliver, as applicable, all such additional and further acts, documents and instruments as the Lenders request to consummate the transactions contemplated hereby and to vest completely in and assure Lenders of their respective rights under this Agreement and the other Loan Documents, including such financing statements, documents, security agreements and reports to evidence, perfect or otherwise implement the security for repayment of the Obligations contemplated by the Loan Documents.
 
(b)   Borrower will notify Lenders in each Compliance Certificate delivered pursuant to Section 4.1(b) of the acquisition (including by way of lease) by Borrower (or any of its Subsidiaries) of any property or any interest therein, and will, in a timely manner, execute and deliver all such additional documents and instruments in connection with the acquisition of such property as Lenders may reasonably require.
 
2.8   Taxes and other Government Charges . Subject to the second sentence of this Section 2.8 , Borrower shall timely tile, or cause to be filed, all material tax returns and pay, or cause to be paid as and when due and prior to any delinquency, all material taxes, assessments and governmental charges of any kind that may at any time be lawfully assessed or levied against or with respect to Borrower or its Subsidiaries.  Borrower may contest in good faith any such taxes, assessments and other charges and, in such event, may permit the taxes, assessments or other charges so contested to remain unpaid during any period, including appeals, when Borrower is in good faith contesting the same, so long as (a) reserves to the extent required by GAAP have been established in an amount sufficient to pay any such taxes, assessments or other charges, accrued interest
 
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EXHIBIT 10-41
 
 
thereon and potential penalties or other costs relating thereto, or other adequate provision for the payment thereof shall have been made and maintained at all times during such contest, (b) enforcement of the contested tax, assessment or other charge is stayed for the entire duration of such contest, and (c) any tax, assessment or other charge determined to be due, together with any interest or penalties thereon, is promptly paid after resolution of such contest.
 
SECTION 3.   NEGATIVE COVENANTS
 
Borrower hereby covenants and agrees that until payment in full of all Obligations, unless the Majority Lenders give their prior written consent, Borrower shall perform and comply, and shall cause each of its Subsidiaries to perform and comply, with all covenants in this Section 3 .
 
3.1   Indebtedness .  Except as set forth on Schedule 3.1 , Borrower will not, and will not permit any of its Subsidiaries to, directly or indirectly, create, incur, assume, issue, guaranty or otherwise become or remain liable with respect to any Indebtedness other than: (a) the Obligations (including any renewals, extensions or refinancings thereof, in whole or in part); (b) the Contingent Obligations permitted by Section 3.4 ; (c) Indebtedness under purchase money security agreements, Capital Leases and equipment leases, the aggregate amount of which for the Borrower and Subsidiaries on a consolidated basis shall not at any time exceed $50,000 from the Closing Date through the first anniversary of the Closing Date, plus an additional $50,000 through each anniversary of the Closing Date thereafter; (d) renewals, extensions, refinancings and refundings of Indebtedness permitted by this Section 3.1 , provided that any such renewal, extension, refinancing or refunding is on terms satisfactory to the Lenders in their sole discretion (as evidenced by the written consent of the Majority Lenders); and (e) other unsecured Indebtedness ranking junior to the Security Interests of Lenders that, without the prior written consent thereto of the Majority Lenders, shall not exceed $100,000 individually or $250,000 in the aggregate at any time outstanding.
 
3.2   Liens and Related Matters .
 
(a)   No Liens .  Borrower will not, and will not permit any of its Subsidiaries to, directly or indirectly, create, incur, assume or permit to exist any Lien on or with respect to any property or asset (including, but not limited to, any document or instrument with respect to accounts receivable) of Borrower or any of its Subsidiaries, whether now owned or hereafter acquired, or any income or profits therefrom, except Permitted Encumbrances, Liens, if any, in effect as of the Closing Date securing Indebtedness described on Schedule 3.1 , and any Lien securing the extension, renewal, refinancing or refunding of any Indebtedness secured by any Lien permitted by this Section 3.2(a) ; provided there is (i) no change in the assets subject to such Lien and (ii) no increase in the amount of Indebtedness secured by the assets subject to such Lien.
 
(b)   No Negative Pledges .  Borrower will not, and will not permit any of its Subsidiaries to, directly or indirectly, enter into or assume any agreement (other than the Loan Documents or instruments entered into in connection with Permitted Encumbrances) prohibiting the creation or assumption of any Lien created or required pursuant to any of the Loan Documents upon its or their respective properties or assets, whether now owned or hereafter acquired.
 
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EXHIBIT 10-41
 
 
3.3   Investments .  Borrower will not, and will not permit any of its Subsidiaries to, directly or indirectly, make or own any Investment in any Person except that Borrower and its Subsidiaries may make and own (a) Investments in Cash Equivalents; provided that such Cash Equivalents are not subject to set-off rights; (b) any Investment in any note constituting Indebtedness under Section 3.1 above.
 
3.4   Contingent Obligations .  Borrower will not, and will not permit any of its Subsidiaries to, directly or indirectly, create or become or be liable with respect to any Contingent Obligation except those resulting from endorsement of negotiable instruments for collection in the ordinary course of business.
 
3.5   Restricted Junior Payments .  Borrower will not, and will not permit any of its Subsidiaries to, directly or indirectly, declare, order, pay, make or set apart any sum for any Restricted Junior Payment.
 
3.6   Restriction on Fundamental Changes .  Borrower will not, and will not permit any of its Subsidiaries to, directly or indirectly: (a) unless and only to the extent required by Applicable Law, amend, modify or waive any term or provision of its articles of incorporation or bylaws other than an amendment, modification or waiver that is solely ministerial or administrative in nature and that could not reasonably likely have an adverse effect on the interests of Lenders; provided that notice of such ministerial or administrative amendment, modification or waiver is given to Lenders prior to such act; (b) enter into any transaction of merger or consolidation except that any Subsidiary of Borrower may be merged with or into Borrower ( provided that Borrower is the surviving entity); (c) liquidate, recapitalize, reorganize, wind-up or dissolve itself (or suffer any liquidation or dissolution); (d) acquire all or substantially all of the assets of another Person other than in the ordinary course of the Borrower’s business; or (e) commence a voluntary case under the Bankruptcy Code, file a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization, winding up or composition for adjustment of debts of Borrower or any of its Subsidiaries, or consent to, or fail to contest in a timely and appropriate manner, the entry of an order for relief in an involuntary case.
 
3.7   Disposal of Assets or Subsidiary Stock .  Borrower will not, and will not permit any of its Subsidiaries to, directly or indirectly, convey, sell, issue, lease, sublease, transfer or otherwise dispose of, or grant to any Person an option to acquire, in one transaction or a series of transactions, any of its property, business or assets, or the capital stock of or other equity interests in it or in any of its Subsidiaries, except for (a) bona fide sales of product or inventory to customers in the ordinary course of business and dispositions of obsolete equipment not used or useful in the business and de minimis asset sales; (b) leasing or subleasing of its property in the ordinary course of business; and (c) all other Asset Dispositions, the Net Proceeds of which are applied in accordance with Section 1.6 above.
 
3.8   Transactions with Affiliates .  Borrower will not, and will not permit any of its Subsidiaries to, directly or indirectly, enter into or permit to exist any transaction (including the purchase, sale, lease or exchange of any property or the rendering of any service) with any Affiliate or with any director, officer or employee of Borrower or any Affiliate, except (a) transactions in the ordinary course of and pursuant to the reasonable
 
 
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EXHIBIT 10-41
 
 
requirements of the business of Borrower or such Subsidiary and upon fair and reasonable terms that are no less favorable to Borrower or such Subsidiary than would be obtained in a comparable arm’s length transaction with a Person that is not an Affiliate; provided that such transactions are subject to approval of a majority of the disinterested directors on the Board of Directors of the Borrower and that Borrower shall forthwith notify Lenders in writing of each such transaction; or (b) payment of compensation to directors, officers and employees in the ordinary course of business for services actually rendered in their capacities as directors, officers and employees; provided (i) such compensation is reasonable and comparable with compensation paid by companies of like nature and similarly situated; and (ii) any increase in compensation of officers and directors (other than in accordance with the employment agreements of such officers and directors in effect on the Closing Date) is subject to the prior written consent of the Majority Lenders.
 
3.9   Management Fees .  Borrower will not, and will not permit any of its Subsidiaries to, directly or indirectly, pay any management or other similar fees to any Person, except as provided under Section 1.4 .
 
3.10   Conduct of Business .  Borrower will not, and will not permit any of its Subsidiaries to, directly or indirectly, effect any material change in the nature of its business, or engage in any business other than, as carried on as of the date hereof and described in Section 5.3 .
 
3.11   Fiscal Year .  Borrower will not, and will not permit any of its Subsidiaries to, change its fiscal year.
 
3.12   Subsidiaries; Partnerships .  Borrower will not, and will not permit any of its Subsidiaries to, directly or indirectly, establish, create or acquire any Subsidiary, become a general or limited partner in any partnership or a joint venturer in any joint venture.
 
3.13   Modification of Agreements .  Borrower will not amend, modify or change, or consent or agree to any amendment, modification or change to, any of the terms of any Material Contracts, except to the extent such change, amendment, modification or consent is not materially adverse to Lenders and would not otherwise have a Material Adverse Effect.
 
3.14   Board of Directors .  Borrower will not expand or decrease the number of members on its Board of Directors.
 
3.15   Management of Borrower .  Borrower will not elect, appoint or remove any executive officer, including the chief executive officer, chief financial officer, president, chief operating officer, chief accounting officer or controller.
 
3.16   Investment Company Act; Public Utility Holding Act .  Neither Borrower nor any of its Subsidiaries shall be or become an “investment company” as that term is defined in and is not otherwise subject to regulation under, the Investment Company Act of 1940, as amended (the “1940 Act” ).
 
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EXHIBIT 10-41
 
 
SECTION 4.   FINANCIAL COVENANTS AND REPORTING
 
4.1   Reports and Covenants .  Borrower hereby covenants and agrees that until payment in full of all Obligations, unless the Majority Lenders shall otherwise give their prior written consent, Borrower (where indicated) shall perform and comply with, and shall cause each of its Subsidiaries (where indicated) to perform and comply with, all covenants in this Section 4 .  For the purposes of this Section 4 , all covenants calculated for Borrower shall be calculated on a consolidated basis for Borrower and its Subsidiaries.
 
(a)   Financial Statements and Other Reports .  Borrower will maintain, and cause each of its Subsidiaries to maintain, a system of accounting established and administered in accordance with sound business practices to permit preparation of financial statements in conformity with GAAP (it being understood that quarterly financial statements are not required to have footnote disclosures).  Borrower will deliver or cause to be delivered each of the financial statements and other reports described below to Lender.
 
(i)   Quarterly and Annual Reports .  Whether or not required by the rules and regulations of the SEC, so long as any Obligations are outstanding, Borrower shall furnish to Lenders, within the time periods specified in the SEC’s rules and regulations, all quarterly and annual reports that would be required to be filed with the SEC on Forms 10-Q and 10-K if Borrower were required to file such reports.  All such reports shall be prepared in all material respects in accordance with all of the rules and regulations applicable to such reports.  Each annual report on Form 10-K shall include a report on Borrower’s consolidated financial statements by Borrower’s certified independent accountants and certifications by Borrower’s principal executive officer and principal financial officer in the forms required by Item 601(b)(31) and (32) of Regulation S-K under the 1934 Act.  In addition, the Borrower shall file a copy of each of the reports with the SEC for public availability within the time periods specified in the rules and regulations applicable to such reports (unless the SEC shall not accept such a filing).  Borrower’s obligation to furnish such reports to the Lenders hereunder may be satisfied by filing such reports with the SEC for so long as the SEC accepts such filings.  If, at any time, Borrower is no longer subject to the periodic reporting requirements of the 1934 Act for any reason, Borrower shall nevertheless continue filing the reports specified in this Section 4.1(a) with the SEC within the time periods specified above unless the SEC shall not accept such a filing.  Borrower agrees that it shall not take any action for the purpose of causing the SEC not to accept any such filings.  If, notwithstanding the foregoing, the SEC shall not accept Borrower’s filings for any reason, Borrower shall, within the time periods that would apply if Borrower were required to file those reports with the SEC, post the reports referred to in Section 4.1(a) on its website and provide Lenders copies thereof.
 
(ii)   Monthly Financials .  If, and for so long as Collateral Agent shall request, as soon as available and in any event within forty-five (45) days after the end of each January, February, April, May, July, August, October and November, Borrower will deliver or cause to be delivered to Collateral Agent consolidated and consolidating balance sheets of Borrower and its Subsidiaries, as at the end of such month, and the related consolidated and consolidating statements of income and operating cash flow for such month, and for the period from the beginning of the then current fiscal year of Borrower to the end of such month.
 
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(iii)   Monthly Budgets .  If, and for so long as Collateral Agent shall request, as soon as available and in any event within forty-five (45) days after the end of each January, February, April, May, July, August, October and November, Borrower will deliver or cause to be delivered to Collateral Agent any budgets, forecasts, projections or similar documents prepared by the Borrower prior to the end of such month that have not previously been so delivered.
 
(iv)   Other Reports .  Promptly following receipt thereof, Borrower shall deliver to Lenders copies of any management letter or report by independent public accountants with respect to the financial condition, operations or business of the Borrower and its Subsidiaries.
 

(b)   Compliance Certificates .  Together with each delivery of financial statements of Borrower and its Subsidiaries, as applicable, Borrower will deliver or cause to be delivered (i) a fully and properly completed compliance certificate in substantially the same form as Exhibit 4.1(b) (each, a “Compliance Certificate” ) signed by the chief executive officer or chief financial officer of Borrower.
 
(c)   Press Releases .  Promptly upon their becoming available, the Borrower will deliver or cause to be delivered copies of all press releases and other statements made available by Borrower or any of its Subsidiaries to the public concerning developments in the business of any such Person.
 
(d)   Events of Default, Etc .  Promptly upon any executive officer of Borrower obtaining knowledge of any of the following events or conditions, Borrower shall deliver copies of all notices given or received by Borrower or any of its Subsidiaries with respect to any such event or condition and a certificate of the chief executive officer or chief operating officer of Borrower specifying the nature and period of existence of such event or condition and what action Borrower or such Subsidiary has taken, is taking and proposes to take with respect thereto: (i) any condition or event that constitutes an Event of Default or Default; (ii) any notice that any Person has given to Borrower or any of its Subsidiaries or any other action taken with respect to a claimed default or event or condition of the type referred to in Section 6.1(b) ; or (iii) any event or condition that could reasonably be expected to have a Material Adverse Effect.
 
(e)   Litigation .  Promptly upon any executive officer of Borrower obtaining knowledge of (i) the commencement of any action, suit, proceeding, governmental investigation or arbitration against or affecting Borrower or any of its Subsidiaries not previously disclosed by Borrower to Lenders; or (ii) any material development in any action, suit, proceeding, governmental investigation or arbitration at any time pending against or affecting Borrower or any of its Subsidiaries which, in each case or in the aggregate, is expected by counsel to Borrower to have a Material Adverse Effect, Borrower will promptly give notice thereof to Lenders and provide such other information as may be reasonably available to Borrower to enable Lenders and their counsel to evaluate such matter.
 
(f)   Supplemented Schedules; Corporate Changes .  From time to time, and concurrently with the delivery by Borrower of the Compliance Certificates required by Section 4.1(b) , Borrower shall, if necessary to prevent the same from becoming materially
 
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misleading, supplement in writing and deliver revisions of the Schedules annexed to this Agreement to the extent necessary to disclose material new or changed facts or circumstances after the Closing Date; provided , that (i) subsequent disclosures shall not constitute a cure or waiver of any Default or Event of Default resulting from the matters disclosed; and (ii) any revised Schedule shall not in and of itself be deemed a breach of any representation of the other Loan Documents so long as such Schedules are delivered within thirty (30) days of Borrower becoming aware of the new information set forth therein.
 
(g)   Regulatory and Other Notices .  Within thirty (30) days after filing, receipt or becoming aware thereof, Borrower will deliver or cause to be delivered copies of any filings or communications sent to or notices and other communications received by Borrower, or any of its Subsidiaries from any Governmental Authority relating to any noncompliance by Borrower or any of its Subsidiaries with any law or with respect to any matter or proceeding the effect of which could reasonably be expected to have a Material Adverse Effect.
 
(h)   Other Information .  Promptly upon request, Borrower will deliver such other information and data with respect to Borrower and any of its Subsidiaries as from time to time may be reasonably requested by Lenders.
 
4.2   Accounting Terms; Utilization of GAAP .  For purposes of this Agreement, all accounting terms not otherwise defined herein shall have the meanings assigned to such terms in conformity with GAAP.  Except as otherwise expressly provided, financial statements furnished to Lenders pursuant to Section 4.1(a) shall be prepared in accordance with GAAP as in effect at the time of such preparation.  No Accounting Changes (as defined below) shall affect financial covenants, standards or terms in this Agreement.   “Accounting Changes” means: (a) changes in accounting principles required by GAAP and implemented by Borrower or any of its Subsidiaries; (b) changes in accounting principles recommended by Borrower’s certified public accountants and implemented by Borrower or any of its Subsidiaries; and (c) changes in the method of determining carrying value of Borrower’s, or any of its Subsidiaries’ assets, liabilities or equity accounts.  All such adjustments resulting from expenditures made subsequent to the Closing Date (including, but not limited to, capitalization of costs and expenses or payment of pre-Closing Date liabilities) shall be treated as expenses in the period the expenditures are made.
 
SECTION 5.   REPRESENTATIONS AND WARRANTIES
 
In order to induce Lenders to enter into this Agreement and make the Loans, Borrower hereby represents and warrants to Lenders that the following statements are true, correct and complete:
 
5.1   Disclosure .  No information furnished by or on behalf of Borrower or any of its Subsidiaries contained in this Agreement, the financial statements referred to in Section 5.7 or any other document, certificate, opinion or written statement furnished to Lenders pursuant to this Agreement contains any untrue statement of a material fact or omitted, omits or will omit to state a material fact necessary, when taken as a whole with all information so furnished, in order to make the statements contained herein or therein not misleading in light of the circumstances in which the same were made.
 
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5.2   No Material Adverse Effect .  Since March 31, 2007, there has been no event or change in facts or circumstances affecting Borrower or any of its Subsidiaries which individually or in the aggregate have had or could reasonably be expected to have a Material Adverse Effect and that have not been disclosed herein or in the attached Schedules.
 
5.3   Organization, Powers, Authorization and Good Standing .
 
(a)   Organization and Powers .  Except as disclosed on Schedule 5.3(a) , Borrower and each of its Subsidiaries is a limited liability company, corporation or partnership duly organized, validly existing and in good standing under the laws of the State of Delaware.  Borrower and each of its Subsidiaries has all requisite legal power and authority to own and operate its properties, to carry on its business as now conducted and proposed to be conducted, to enter into each Debt Refinancing Document to which it is a party and to carry out its respective obligations with respect thereto.
 
(b)   Authorization; Binding Obligation .  Borrower and each of its Subsidiaries has taken all necessary corporate, limited liability company, partnership, and other action to authorize the execution, delivery and performance of this Agreement and each of the other Debt Refinancing Documents to which it is a party.  This Agreement is, and the other Debt Refinancing Documents when executed and delivered will be, the legally valid and binding obligations of the applicable parties thereto (other than Lenders and Investors), each enforceable against each of such parties, as applicable, in accordance with their respective terms, except as such enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar state or federal debt or relief laws from time to time in effect which affect the enforcement of creditors’ rights in general and general principles of equity.
 
(c)   Qualification .  Borrower and each of its Subsidiaries is duly qualified and authorized to do business and in good standing in each jurisdiction where the nature of its business and operations requires such qualification and authorization, except where the failure to be so qualified, authorized and in good standing could not reasonably be expected to have a Material Adverse Effect.  All jurisdictions in which each such Person is qualified and authorized to do business are set forth on Schedule 5.3(c) .
 
5.4   Compliance with Applicable Law .  Neither the Borrower nor any of its Subsidiaries is in violation of any Applicable Law, or in default with respect to any judgment, writ, injunction or decree of any Governmental Authority, the violation of which, or a default with respect to which, could reasonably be expected to have a Material Adverse Effect.  The execution, delivery and performance by Borrower and its Subsidiaries of the Debt Refinancing Documents to which each such Person is a party, the borrowings hereunder and the transactions contemplated hereby and thereby do not and will not, by the passage of time, the giving of notice or otherwise, (i) require any Governmental Approval or violate any Applicable Law relating to Borrower or any of its Subsidiaries in any material respect, (ii) except as set forth on Schedule 5.4 , conflict with, result in a breach of or constitute a default under the articles of incorporation, bylaws or other organizational documents of Borrower or its Subsidiaries or any Material Contract to which such Person is a party or by which any of its properties may be bound or any Governmental
 
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Approval relating to such Person or (iii) except as required or permitted under the Debt Refinancing Documents, result in or require the creation or imposition of any Lien upon or with respect to any property now owned or hereafter acquired by such Person.
 
5.5   Tax Returns and Payments .  Borrower and each of its Subsidiaries has duly filed or caused to be filed all federal, state, local and other tax returns required by Applicable Law to be filed, and has paid, or made adequate provision for the payment of, all federal, state, local and other taxes, assessments and governmental charges or levies upon it and its property, income, profits and assets which are due and payable, except where the payment of such tax is being diligently contested in good faith and adequate reserves therefore have been established in compliance with GAAP.  The charges, accruals and reserves on the books of the Borrower and its Subsidiaries in respect of federal, state, local and other taxes for all fiscal years and portions thereof are, in the judgment of Borrower, adequate, and Borrower and each of its Subsidiaries do not anticipate any additional material taxes or assessments for any of such years.
 
5.6   Environmental Matters .  Borrower and each of its Subsidiaries is in compliance in all material respects with all applicable Environmental Laws, and there is no contamination at, under or about any of the real property owned or leased by the Borrower or any of its Subsidiaries (the “Real Property” ) or such operations which interfere in any material respect with the continued operation of such Real Property or impair in any material respect the fair saleable value thereof or in amounts or concentrations or under circumstances that constitute a violation of, or could give rise to liability under, any Environmental Laws.  No claim, notice or investigation based on any Environmental Laws relating to the Real Property or any operations or activities on or about the Real Property (i) has been asserted or conducted in the past or is currently pending against or with respect to Borrower or its Subsidiaries, or (ii) to the knowledge of Borrower, is threatened or contemplated, nor does Borrower have knowledge or reason to believe that any such claim, notice or investigation could reasonably be expected to be received.  There are no consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements outstanding under any Environmental Law with respect to the Real Property or the business of Borrower and its Subsidiaries.  Neither Borrower nor any of its Subsidiaries has directly, nor has it caused any third party (i) to manufacture, process, distribute, use, treat, store or dispose of any substance, material or waste upon, at or under the Real Property in violation of, or in a manner that would reasonably be expected to give rise to liability under, any Environmental Laws or to transport or otherwise dispose of any substance, material or waste in violation of, or in a manner or to a location that would reasonably be expected to give rise to liability under, any Environmental Laws, or (ii) to take any other action or conduct or to fail to take to any action or conduct upon, at or under the Real Property in violation of, or in a manner that would reasonably be expected to give rise to liability under, any Environmental Laws.  There has been no release or threat of release of any substance, material or waste at or from any Real Property, or arising from or related to the operations of the Borrower or its Subsidiaries, in violation of or in amounts or in a manner that could give rise to liability under Environmental Laws.  Neither Borrower nor any of its Subsidiaries has contractually assumed or, to the knowledge of the Borrower, assumed by operation of law any liability of any other Person under Environmental Laws.  No underground storage tanks are currently, or have been, located on any of the Real Property.  Except as set forth on Schedule 5.6 , there is no building or structure on the Real Property containing asbestos.
 
5.7   Financial Statements .
 
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(a)   All financial statements of Borrower and its Subsidiaries which have been furnished to Lenders or Collateral Agent pursuant to this Agreement have been prepared in accordance with GAAP consistently applied (except as disclosed therein) and present fairly the financial condition of the Persons covered thereby as of the date thereof and the results of their operations for the periods covered thereby and disclose all material liabilities and Contingent Obligations of Borrower or its Subsidiaries as at the dates thereof.  Borrower and its Subsidiaries do not have outstanding, as of the Closing Date, and after giving effect to the Loans on the Closing Date, any Indebtedness for borrowed money or Contingent Obligations other than the Loans and the Indebtedness permitted under Section 3.1 .
 
(b)   All projections concerning Borrower and its Subsidiaries which have been furnished to Lenders were prepared and presented in good faith by or on behalf of Borrower and such Subsidiaries.  No fact is known to Borrower which is reasonably likely (so far as Borrower can reasonably foresee) to have a Material Adverse Effect which has not been set forth in the financial statements referred to in Section 5.7(a) hereof or in such information, reports, papers and data or otherwise disclosed in writing to Lenders prior to the date hereof.
 
5.8   Intellectual Property .  Borrower and each of its Subsidiaries owns, or possesses through valid licensing arrangements, the right to use all patents, copyrights, trademarks, trade names, service marks, technology know-how and processes used in or necessary for the conduct of its business as currently conducted or anticipated to be conducted (collectively, the “Intellectual Property Rights” ) without infringing upon the rights of any other Person in any material respect.  No event has occurred which permits, or after notice or lapse of time or both would permit, the revocation or termination of any such Intellectual Property Rights.  No material claim has been asserted or is pending by any Person challenging or questioning any Intellectual Property Rights or Borrower or any of its Subsidiaries, or the validity or effectiveness of any Intellectual Property Rights, nor does Borrower know of any valid basis for any such claim.  Except as set forth on Schedule 5.8 , Borrower does not have knowledge of any infringement by others of Intellectual Property Rights of the Borrower or its Subsidiaries.  Except as provided on Schedule 5.8 , there is no claim, action or proceeding being made or brought, or to the knowledge of the Borrower, being threatened, against the Borrower or its Subsidiaries regarding Intellectual Property Rights.  Except as provided on Schedule 5.8 , the Borrower and its Subsidiaries have good and marketable title in all Intellectual Property Rights owned by them, in each case free and clear of all Liens.
 
5.9   Litigation, Investigations, Audits, Etc .
 
(a)   Except as set forth on Schedule 5.9 , there is no action, suit, proceeding or investigation pending against, or, to the knowledge of Borrower, threatened against or in any other manner relating adversely to the Borrower or its Subsidiaries or any of their respective properties in any court or before any arbitrator of any kind or before or by any Governmental Authority, which could reasonably be expected to have a Material Adverse Effect, nor does Borrower know of any valid basis therefor.  None of the actions, suits, proceedings or investigations disclosed on Schedule 5.9 calls into question the validity of this Agreement or any other Debt Refinancing Document.
 
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(b)   To Borrower’s knowledge, none of the Borrower and its Subsidiaries are the subject of any review or audit by the Internal Revenue Service or any investigation by any Governmental Authority concerning the violation or possible violation of any law which, individually or collectively, if determined adversely to Borrower or any of its Subsidiaries, would reasonably be expected to have a Material Adverse Effect, nor does Borrower know of any valid basis therefor.
 
5.10   Employee Labor Matters .  Except as set forth on Schedule 5.10 , (a) None of Borrower, its Subsidiaries and any of their respective employees is subject to any collective bargaining agreement, (b) no petition for certification or union election is pending with respect to the employees of any such Person and no union or collective bargaining unit has sought such certification or recognition with respect to the employees of any such Person and (c) there are no strikes, slowdowns, unfair labor practice complaints, work stoppages or controversies pending or, to the knowledge of Borrower after due inquiry, threatened between any such Person and its respective employees, other than employee grievances arising in the ordinary course of business which could not reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect.
 
5.11   Employee Benefit Plans .  Borrower and each of its Subsidiaries is in compliance in all material respects with all applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, and the regulations and published interpretations thereunder, the failure to comply with which could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.
 
5.12   Perfection and Priority .  Except for Permitted Encumbrances, the Security Interest is a valid and perfected first priority lien security interest in the Collateral in favor of Lenders, securing, in accordance with the terms of the Security Documents, the Obligations, and the Collateral is subject to no Lien other than permitted pursuant to Section 3.2 .
 
5.13   Solvency .  Borrower: (a) owns and will own assets the present fair saleable value of which are (i) greater than the total amount of liabilities (including contingent liabilities) of Borrower, and (ii) greater than the amount that will be required to pay the probable liabilities of Borrower’s then existing debts and liabilities as they become absolute and matured considering all financing alternatives and potential asset sales reasonably available to Borrower; (b) has capital that is not unreasonably small in relation to its business as presently conducted or after giving effect to any contemplated transaction; and (c) does not intend to incur and does not believe that it will incur debts and liabilities beyond its ability to pay such debts and liabilities as they become due.
 
5.14   Investment Company Act; Federal Regulations
 
.  Neither Borrower nor any of its Subsidiaries is an “investment company” or a company “controlled” by an “investment company” as such terms are defined in, and is not otherwise subject to regulation under, the 1940 Act.  No part of the proceeds of any Loans will be used for “buying” or “carrying” any “margin stock” within the respective meanings of each of the quoted terms under Regulation U as now and from time to time hereafter in effect or for any purpose that violates the provisions of the Regulations of the Board of Governors.  If
 
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requested by any Lender, Borrower will furnish to each Lender a statement to the foregoing effect in conformity with the requirements of FR Form G-3 or FR Form U 1, as applicable, referred to in Regulation U.
 
5.15   Material Contracts .   Schedule 5.15 sets forth a complete and accurate list of all Material Contracts of the Borrower and its Subsidiaries.  Borrower and each of its Subsidiaries has performed all of its material obligations under such Material Contracts and, to the knowledge of Borrower, each other party thereto is in material compliance with each such Material Contract and no defaults, events of default, acceleration event or similar events have occurred or are continuing under any Material Contract.  Each Material Contract is in full force and effect in accordance with the terms thereof.  Borrower and its Subsidiaries have made available a true and complete copy of each Material Contract listed on Schedule 5.15 for inspection by Lenders.
 
5.16   Title to Properties .  Borrower and each of its Subsidiaries has such title or leasehold interest in and to the Real Property owned or leased by it as is necessary or desirable to the conduct of its business and valid and legal title or leasehold interest in and to all of its personal property, including those reflected on the balance sheets of Borrower and each of its Subsidiaries delivered pursuant to Section 5.7 , except those which have been disposed of by Borrower subsequent to such date which dispositions have been in the ordinary course of business or as otherwise expressly permitted hereunder.  Set forth on Schedule 5.16 is a true and complete list of all Real Property owned, and all Real Property or personal property leased or subleased by or to each of Borrower and its Subsidiaries (other than leases of personal property as to which either Borrower is lessee or sublessee for which the value of such personal property in the aggregate is less than $100,000).
 
5.17   Subsidiaries and Affiliates .   Schedule 5.17(a) sets forth a complete and accurate list of all direct or indirect Subsidiaries and Affiliates of Borrower, including for each such Subsidiary whether such Subsidiary is wholly-owned by Borrower, and if not, the percentage ownership of Borrower or its Subsidiary in such Subsidiary.  Except as disclosed to the Lenders by the Borrower in writing from time to time after the Closing Date, (a) Schedule 5.17(b) sets forth the name, location of chief executive office, location of Inventory and Equipment (as each such term is defined in the New York UCC) and jurisdiction of incorporation of Borrower and each of its Subsidiaries and (b) there are no outstanding subscriptions, options, warrants, calls, rights or other agreements or commitments (other than stock options or restricted stock granted to employees or directors and directors’ qualifying shares) of any nature relating to any equity of Borrower or any of its Subsidiaries, except as created or permitted by the Debt Refinancing Documents.
 
5.18   Filings .  Except as set forth on Schedule 5.18 , since March 31, 2007, Borrower has timely filed with the SEC all the annual and periodic reports, and has submitted to the SEC such other documents and reports, as it is required under the Securities Act of 1933, as amended (the “1933 Act” ), the 1934 Act, the 1940 Act, and any other federal statute applicable to Borrower and administered by the SEC; (ii) each such filing or submission, when it became effective or was filed with the SEC, as the case may be, conformed in all material respects to the requirements of the 1933 Act, the 1934 Act or the 1940 Act, as applicable, and the rules and regulations thereunder, and none
 
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of such annual and periodic reports or other documents or reports contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading.
 
5.19   Insurance .  All policies of insurance of any kind or nature owned by or issued to Borrower and its Subsidiaries, including without limitation, policies of life, fire, theft, product liability, public liability, property damage, other casualty, employee fidelity, workers’ compensation, employee health and welfare, title, property and liability insurance, are in full force and effect except to the extent commercially reasonably determined by the Borrower not to be necessary pursuant to the immediately succeeding clause or which is not material to the overall coverage and are of a nature and provide such coverage as in the reasonable opinion of the Borrower, is sufficient and as is customarily carried by companies of the size and character of Borrower.
 
5.20   Approvals .  No authorizations of any Governmental Authority, or any applicable securities exchange, are necessary for the execution, delivery or performance by Borrower of the Debt Refinancing Documents to which it is a party, or for the legality, validity or enforceability hereof or thereof.
 
5.21   Internal Accounting Controls .  Borrower and its Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management’s general or specific authorization, and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.  Borrower has established disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for Borrower and designed such disclosure controls and procedures to ensure that material information relating to Borrower, including its Subsidiaries, is made known to the certifying officers by others within those entities.  Borrower’s certifying officers have evaluated the effectiveness of Borrower’s controls and procedures in accordance with Item 307 of Regulation S-K under the Exchange Act for Borrower’s most recently ended fiscal quarter or fiscal year-end (such date, the “Evaluation Date” ).  Borrower presented in its most recently filed Form 10-K or Form 10-Q the conclusions of the certifying officers about the effectiveness of the disclosure controls and procedures based on their evaluations as of the Evaluation Date.  Since the Evaluation Date, there have been no significant changes in Borrower’s internal controls (as such term is defined in Item 308(c) of Regulation S-K under the Exchange Act) or, to Borrower’s knowledge, in other factors that could significantly affect Borrower’s internal controls.
 
5.22   Foreign Corrupt Practices .  Neither Borrower nor any of its Subsidiaries nor, to the knowledge of Borrower, any director, officer, agent, employee or other Person acting on behalf of Borrower or any of its Subsidiaries has, in the course of its actions for, or on behalf of, Borrower (i) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political activity; (ii) made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate
 
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funds; (iii) violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended; or (iv) made any unlawful bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any foreign or domestic government official or employee.
 
5.23   Representations and Covenants Made to the Investors .  Subject to any and all representations, warranties, covenants and agreements made by Borrower to and for the benefit of the Investors that survive the consummation of the transactions contemplated by the Purchase Agreement shall be deemed to have also been made to and for the benefit of Lenders.
 
SECTION 6.   EVENTS OF DEFAULT AND RIGHTS AND REMEDIES
 
6.1   Events of Default .   “Event of Default” shall mean the occurrence or existence of any one or more of the following:
 
(a)   Payment .  Failure of the Borrower to repay any principal amount of the Loans when due in accordance with the terms of this Agreement or any Note, or to pay any interest on the Loans in accordance with the terms of this Agreement or any Note, or any other amounts payable under this Agreement or any other Loan Document with three (3) Business Days after any such interest or other amount becomes due in accordance with the terms hereof or thereof; or
 
(b)   Default in Other Agreements .  (i) Failure of Borrower or any of its Subsidiaries to pay when due, subject to any applicable grace period, any principal or interest on Indebtedness (other than the Loans) or any Contingent Obligation; any dividend or other payment due in respect of the Series A Preferred Stock, or any other payment due under any Debt Refinancing Document (other than as provided in Section 6.1(a) ); (ii) any other breach or default of Borrower or any of its Subsidiaries with respect to any Indebtedness (other than the Loans) or any Contingent Obligation if the effect of such breach or default is to cause or to permit the holder or holders then to cause such Indebtedness or Contingent Obligation to become or be declared due prior to its stated maturity; or (iii) the continuation of any breach or default of Borrower or any of its Subsidiaries under any Material Contract beyond any applicable grace period which has a Material Adverse Effect; or
 
(c)   Breach of Certain Provisions .  (i) Failure of Borrower or any of its Subsidiaries to perform or comply with any term or condition contained in that portion of Section 2.2 relating to the obligation of Borrower and each Subsidiary of Borrower, to maintain insurance, Section 2.4 , Section 2.6 , Section 3 , Section 4 or Section 7.19 except that, with respect to a failure of Borrower to perform or comply with any term or condition contained in Section 4.1(a) , such failure shall not be deemed to be an Event of Default unless it shall remain uncured for a period of five (5) days or more; or
 
(d)   Breach of Warranty .  Any material representation, warranty, certification or other statement made by Borrower or any of its Subsidiaries, in any Debt Refinancing Document or in any statement or certificate at any time given by Borrower or any of its Subsidiaries in writing pursuant to any Loan Document is false in any material respect on the date made or deemed made; or
 
(e)   Other Defaults Under Loan Documents .  Borrower or any of its Subsidiaries breaches or defaults in the performance of or compliance with (x) any other term contained in this Agreement or the other Loan Documents and such breach or default is
 
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not remedied or waived within twenty (20) days (other than occurrences described in other provisions of this Section 6.1 for which a different grace or cure period is specified or which constitute immediate Events of Default) or (y) any term contained in any other Debt Refinancing Document (subject to any applicable grace period); or
 
(f)   Involuntary Bankruptcy; Appointment of Receiver; Etc .  (i) A court enters a decree or order for relief with respect to Borrower or any of its Subsidiaries in an involuntary case under the Bankruptcy Code, which decree or order is not stayed or other similar relief is not granted under any applicable federal or state law within thirty (30) days; or (ii) the continuance of any of the following events for thirty (30) days unless dismissed, bonded or discharged: (A) an involuntary case is commenced against Borrower or any of its Subsidiaries under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect; or (B) a decree or order of a court for the appointment of a receiver, liquidator, sequestrator, trustee, custodian or other officer having similar powers over Borrower or any of its Subsidiaries, or over all or a substantial part of its property, is entered; or (C) an interim receiver, trustee or other custodian is appointed without the consent of Borrower or any of its Subsidiaries for all or a substantial part of the property of Borrower or any such Subsidiary; or
 
(g)   Voluntary Bankruptcy; Appointment of Receiver; Etc .  Borrower or any of its Subsidiaries (i) commences a voluntary case under the Bankruptcy Code, files a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization, winding up or composition for adjustment of debts of Borrower or any of its Subsidiaries, or consents to, or fails to contest in a timely and appropriate manner, the entry of an order for relief in an involuntary case, the conversion of an involuntary case to a voluntary case under any such law, or the appointment of or taking possession by a receiver, trustee or other custodian of all or a substantial part of the property of Borrower or any of its Subsidiaries; or (ii) makes any assignment for the benefit of creditors; or (iii) the Board of Directors of Borrower or any of its Subsidiaries adopts any resolution or otherwise authorizes action to approve any of the actions referred to in this Section 6.1(g) ; or
 
(h)   Governmental Liens .  Any Lien, levy or assessment (other than Permitted Encumbrances) is filed or recorded with respect to or otherwise imposed upon all or any part of the Collateral or the other assets of Borrower or any of its Subsidiaries by the United States or any department or instrumentality thereof or by any state, county, municipality or other Governmental Authority and remains undischarged, unvacated, unbonded or unstayed for a period of thirty (30) days or in any event later than five (5) Business Days prior to the date of any proposed sale thereunder and such Liens secures an amount individually or in the aggregate in excess of $50,000; or
 
(i)   Judgment and Attachments .  Any money judgment, writ or warrant of attachment or similar process (other than those described in Section 6.1(h) ) involving an amount in any individual case or in the aggregate for or against Borrower and/or its Subsidiaries at any time in excess of $50,000 (in either case not adequately covered by insurance as to which the insurance company has not disclaimed coverage subject to customary reservations of rights) is entered or filed against Borrower or any of its Subsidiaries and/or any of
 
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their respective assets and remains undischarged, unvacated, unbonded or unstayed for a period of thirty (30) days or in any event later than five (5) Business Days prior to the date of any proposed sale thereunder; or
 
(j)   Dissolution .  Any order, judgment or decree is entered against Borrower, or any of its Subsidiaries decreeing the dissolution or split up of Borrower or such Subsidiary; or
 
(k)   Solvency .  Borrower or any of its Subsidiaries ceases to be solvent or Borrower or any of its Subsidiaries admits in writing its present or prospective inability to pay its debts as they become due; or
 
(l)   Injunction .  Borrower or any of its Subsidiaries is enjoined, restrained or in any way prevented by the order of any court or any Governmental Authority from conducting all or any material part of its business and such order continues for more than fifteen (15) days; or
 
(m)   ERISA; Pension Plans .  (i) Borrower or any of its Subsidiaries fails to make full payment when due of all amounts which, under the provisions of any employee benefit plans or any applicable provisions of the IRC, any such Person is required to pay as contributions thereto and such failure results in or could reasonably be expected to have a Material Adverse Effect; or (ii) a material accumulated funding deficiency occurs or exists, whether or not waived, with respect to any such employee benefit plans; or (iii) any employee benefit plan of Borrower or any of its Subsidiaries loses its status as a qualified plan under the IRC and such loss results in or could reasonably be expected to have a Material Adverse Effect; or
 
(n)   Environmental Matters .  Borrower or any of its Subsidiaries fails to: (i) obtain or maintain any operating licenses or permits required by any Environmental Laws or environmental authorities; (ii) begin, continue or complete any remediation activities as required by any environmental authorities; (iii) store or dispose of any hazardous materials in accordance with applicable Environmental Laws; or (iv) comply with any other Environmental Laws, if in any such case such failure could reasonably be expected to have a Material Adverse Effect; or
 
(o)   Invalidity of Debt Refinancing Documents .  Any of the Debt Refinancing Documents for any reason, other than a partial or full release in accordance with the terms thereof, ceases to be in full force and effect or is declared to be null and void and Borrower or any of its Subsidiaries fails to promptly correct such cessation or declaration, or Borrower or any of its Subsidiaries denies that it has any further liability under any Debt Refinancing Documents to which it is party, or gives notice to such effect; or
 
(p)   Damage; Strike; Casualty .  Any material damage to, or loss, theft or destruction of a major portion of the Collateral, whether or not insured, or any strike, lockout, labor dispute, embargo, condemnation, act of God or public enemy, or other casualty which causes, for more than fifteen (15) consecutive days, the cessation or substantial curtailment of revenue producing activities of Borrower or any of its Subsidiaries; or
 
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(q)   Licenses, Permits and Contracts .  (i) The loss, suspension or revocation of, or failure to renew, any license or permit now held or hereafter acquired or utilized by Borrower, or any of its Subsidiaries, if such loss, suspension, revocation or failure to renew could reasonably be expected to have a Material Adverse Effect and (ii) any breach, default or termination shall have occurred under any Material Contract by any of the parties thereto, or any Material Contract shall fail to be renewed or otherwise have ceased to be in full force and effect, if such breach, default, failure to renew, cessation or termination could reasonably be expected to have a Material Adverse Effect; or
 
(r)   Failure of Security .  Lenders do not have or cease to have a valid and perfected first priority security interest or second priority security interest, as the case may be (subject to Permitted Encumbrances), in the Collateral or any substantial portion thereof, in each case, except to the extent that such failure to have a valid and perfected first priority security interest or second priority security interest is caused solely by the failure of Lenders to take any action reasonably within its control after obtaining knowledge thereof or being notified by Borrower in writing to take such action; or
 
(s)   Change in Control .  A Change of Control shall have occurred.  For purposes of this Section 6.1(s) , a “Change of Control” shall be deemed to have occurred upon (i) the acquisition of ownership, directly or indirectly, beneficially or of record, by any Person or group (within the meaning of the1934 Act and the rules of the SEC thereunder as in effect on the date hereof) of shares representing more than 30% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of the Borrower and (ii) the occupation of a majority of seats (other than vacant seats) on the Board of Directors of the Borrower by Persons who were neither nominated by the Board of Directors of the Borrower on the Closing Date nor appointed or nominated by directors so nominated.
 
6.2   Acceleration Upon the occurrence of an Event of Default (and after the expiration of any applicable cure period), as well as a breach by Borrower of Section 5.13 , the unpaid principal amount of and accrued interest and fees on all Loans and all other Obligations shall automatically become immediately due and payable, without presentment, demand, protest, notice of intent to accelerate, notice of acceleration or other requirements of any kind, all of which are hereby expressly waived by Borrower.
 
6.3   Rights of Collection .  Without limiting the rights and remedies of Lenders set forth in Section 6.1 above and notwithstanding anything to the contrary contained in any other Loan Document, upon the occurrence and during the continuation of any Event of Default, unless and until such Event of Default is cured or waived by the Majority Lenders, Majority Lenders may, upon five (5) Business Days’ prior written notice by the Majority Lenders, (i) exercise all of their rights and remedies under this Agreement, the other Loan Documents and Applicable Law and (ii) assume control of Borrower and direct the management and operations of Borrower, in order to satisfy all of the Borrower’s Obligations under the Loan Documents
 
6.4   Consents .  Borrower acknowledges that certain transactions contemplated by this Agreement and the other Loan Documents and certain actions which may be taken by Lenders or Collateral Agent in the exercise of their rights under this Agreement and the other Loan Documents may require the consent of a third party.  If counsel to any of the Lenders or Collateral Agent reasonably determines that the consent of a third party including a Governmental Authority is required in connection with the execution, delivery and performance of any of
 
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the aforesaid Loan Documents or any Loan Documents delivered to Lenders or Collateral Agent in connection therewith or as a result of any action which may be taken pursuant thereto, then Borrower, at Borrower’s cost and expense, agrees to use its commercially reasonable efforts, and to cause its Subsidiaries to use their commercially reasonable efforts, to secure such consent and to cooperate in any action commenced by any Lender or Collateral Agent to secure such consent.
 
6.5   Performance by Lenders or Collateral Agent .  If Borrower shall fail to perform any covenant, duty or agreement contained in any of the Loan Documents, Lenders, or Collateral Agent upon the request of the Majority Lenders, may perform or attempt to perform such covenant, duty or agreement on behalf of Borrower after the expiration of any cure or grace periods set forth herein.  In such event, Borrower shall be obligated, at the request of Lenders or Collateral Agent, to promptly pay any amount reasonably expended by Lenders or Collateral Agent in such performance or attempted performance, to Lenders or Collateral Agent, together with interest thereon at the highest rate of interest in effect upon the occurrence of an Event of Default as specified in Section 1.2(c) from the date of such expenditure until paid.  Notwithstanding the foregoing, it is expressly agreed that neither Lenders nor Collateral Agent shall have any liability or responsibility for the performance of any obligation of Borrower under this Agreement or any other Loan Document.
 
6.6   Set Off and Sharing of Payments .  In addition to any rights now or hereafter granted under Applicable Law and not by way of limitation of any such rights, during the continuance of any Event of Default, Lenders and Collateral Agent are hereby authorized by Borrower at any time or from time to time, with reasonably prompt subsequent notice to Borrower (any prior or contemporaneous notice being hereby expressly waived) to set off and to appropriate and to apply any and all (i) balances held by Lenders or Collateral Agent for the account of Borrower or any Subsidiaries, and (ii) other property at any time held or owing by Lenders or Collateral Agent to or for the credit or for the account of Borrower or any of its Subsidiaries, against and on account of any of the Obligations.
 
6.7   Application of Payments .  Subsequent to the acceleration of the Loans pursuant to Section 6.2 , all payments received by Lenders (or Collateral Agent on behalf of Lenders) on the Obligations and on the proceeds from the enforcement of the Obligations shall be applied as follows: First , to all fees and expenses of the Collateral Agent then due and payable, then to all fees and expenses of the Lenders then due and payable, then to all other expenses then due and payable by Borrower under any Loan Document, then to all indemnitee obligations then due and payable by Borrower under any Loan Document, then to all other fees and expenses then due and payable by Borrower under any Loan Document, then to accrued and unpaid interest on the Loans (pro rata in accordance with all such amounts due on the Loans), and then to the principal amount of the Loans (pro rata among all Loans), in that order.  Any remaining monies not applied as provided in this Section 6.7 shall be paid equally to Borrower or to any Person lawfully entitled thereto.
 
6.8   Rescission .  In the event that Borrower or any of its Subsidiaries fails to perform or comply with any term or condition contained in Section 2.6 , this Agreement shall become null and void and of no further force and effect, except as provided in Section 9.15 .
 
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In the event of rescission under this Section 6.8 , Borrower shall immediately repay the Loans and any interest or fees related thereto.  The remedy provided under this Section 6.8 is in addition to, at the option of the Lenders, not in place of, the other rights and remedies afforded to Lenders in the Event of Default.
 
SECTION 7.   CONDITIONS TO LOANS
 
The obligations of Lenders to make Loans are subject to satisfaction of all of the applicable conditions set forth below.
 
7.1   Executed Loan Documents .  The Loan Documents including but not limited to (a) this Agreement, (b) the Notes, (c) the Pledge and Security Agreement and (d) the Warrants, and all other documents and instruments contemplated by such agreements, shall have been duly authorized and executed by each of the parties thereto in form and substance reasonably satisfactory to Lenders, and Borrower shall have delivered sufficient original counterparts thereof to Lenders.
 
7.2   Executed Debt Refinancing Documents .  All other Debt Refinancing Documents including but not limited to (a) the Purchase Agreement, (b) the Certificate of Designations of the Series A Preferred Stock, and (c)  all other documents and instruments contemplated by such agreements, shall have been duly authorized and executed by each of the parties thereto in form and substance reasonably satisfactory to Lenders, and Borrower shall have delivered sufficient original counterparts thereof to Lenders.
 
7.3   Certificate of Designations .  The Certificate of Designations of the Series A Preferred Stock shall have been filed with the Secretary of State of the State of Delaware.
 
7.4   Cancelled Notes . Each note holder listed on Schedule 1.3 hereto shall have delivered its respective note referenced therein to be cancelled upon Closing pursuant to the Debt Refinancing Documents.  With respect to each note holder listed on Schedule 1.3 hereto, all obligations, liabilities, covenants and agreements of the Borrower to the holders of such notes under or in connection with each of the Note and Warrant Purchase Agreements, dated as of August 10, 2006, February 5, 2007 and June 15, 2007, respectively, and each related note set forth on Schedule 1.3 hereto, shall, with respect to each note holder, hereby be terminated and cancelled and of no further force or effect upon Closing and the satisfaction of each of the following: (i) with respect to the notes due and payable on May 15, 2008, to Engmann and Goodman, in accordance with Section 1.1(b)(ii) , and (ii) with respect to each other holder of such notes listed on Schedule 1.3 in accordance with Section 4.11 of the Purchase Agreement.
 
7.5   Representations and Warranties .  Each of the representations and warranties of Borrower contained in this Agreement or any other Debt Refinancing Document shall be true and correct in all respects at and as of the Closing.
 
7.6   Covenants .  Borrower shall have performed and complied in all respects with each of the covenants and agreements required to be performed or complied with by it in this Agreement and each other Debt Refinancing Document on or before the Closing Date.
 
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7.7   No Default .  There shall not be any Default or Event of Default both immediately before and immediately after the Closing.
 
7.8   Lien Priority .  The Security Interests in favor of the Lenders pursuant to the Loan Documents shall be valid and perfected first priority Liens on the Collateral, subject to no Liens other than Permitted Encumbrances.
 
7.9   No Litigation .  No action, suit, proceeding, claim or dispute shall have been brought or otherwise have arisen at law, in equity, in arbitration or by or before any Governmental Authority or arbitrator against Borrower or any of its Subsidiaries or any of their respective Assets.
 
7.10   Fees and Expenses .  All fees and expenses payable at Closing pursuant to Section 1.4 hereof shall have been paid in full.
 
7.11   Closing Certificates; Opinions .
 
(a)   Officer’s Certificate .  Lenders shall have received a certificate from the chief executive officer or chief financial officer of Borrower in form and substance reasonably satisfactory to Lenders, to the effect that all representations and warranties of the Borrower contained in this Agreement and the other Debt Refinancing Documents are true, correct and complete; that neither Borrower nor any of its Subsidiaries is in violation of any of the covenants contained in this Agreement and the other Debt Refinancing Documents; that, after giving effect to the transactions contemplated by this Agreement, no Default or Event of Default has occurred and is continuing; that Borrower has satisfied each of the closing conditions to be satisfied hereby; that Borrower and its Subsidiaries have filed all required tax returns and owe no delinquent taxes.
 
(b)   Certificate of Secretary of Borrower .  Lenders shall have received a certificate of the secretary or assistant secretary of Borrower certifying as to the incumbency and genuineness of the signature of each officer of Borrower executing any Debt Refinancing Document and certifying that attached thereto is (i) a true and complete copy of the certificate of incorporation of the Borrower, and all amendments thereto including the Certificate of Designations of the Series A Preferred Stock, certified by the appropriate Governmental Authority in its jurisdiction of incorporation; (ii) a true and complete copy of the certificate of incorporation of each of CIC Acquisition Corp., a Delaware corporation, and all amendments thereto, certified by the appropriate Governmental Authority in its jurisdiction of incorporation and a true and complete copy of the articles of association of Communication Intelligence Computer Corporation, Ltd., and all amendments thereto, as on file as of the date hereof in the People’s Republic of China and which is in full force and effect on the date hereof; (iii) a true and complete copy of the bylaws of Borrower as in effect on the date of such certification; (iv) a true and complete copy of resolutions duly adopted by the Board of Directors of Borrower authorizing the borrowings contemplated hereunder, the execution, delivery and performance of this Agreement and the other Debt Refinancing Documents; (v) a true and complete copy of each of Borrower’s
 
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insurance policies, as in effect on the date of such certification; and (vi) true, complete and correct copies of certificates of insurance for each of Borrower’s insurance policies, except for its directors and officers insurance policy, each showing Collateral Agent as an additional insured.
 
(c)   Certificates of Good Standing .  Lenders shall have received certificates as of a recent date of the good standing of Borrower under the laws of its respective jurisdictions of incorporation and such other jurisdictions as are requested by Lenders.
 
(d)   Opinions of Counsel .  Lenders shall have received favorable opinions of counsel to Borrower addressed to Lenders with respect to Borrower covering such matters as requested by Lenders, including, without limitation, the Loan Documents, the Security Interest, due authorization and other corporate matters, local laws and choice of laws issues and which are reasonably satisfactory in form and substance to Lenders.
 
7.12   Collateral .
 
(a)   Filings and Recordings .  All filings and recordings that are necessary to perfect the Security Interest in the Collateral described in the Security Documents shall have been filed or recorded in all appropriate locations (or delivered to Lenders for filing), and Lenders shall have received evidence satisfactory to Lenders that such Security Interest constitutes a valid and perfected first priority or second priority Lien, as the case may be, therein subject to Permitted Encumbrances.
 
(b)   Lien Searches .  Borrower shall have delivered to Lenders the results of Lien searches of all filings made against each of the Borrower and its Subsidiaries under the Uniform Commercial Code (and local tax and judgment filing offices) as in effect in any jurisdiction in which any of its respective assets are located, indicating, among other things, that the assets of Borrower and its Subsidiaries and the stock of Borrower and its Subsidiaries are free and clear of any Lien, except for Permitted Encumbrances.
 
(c)   Stock Certificates .  All certificates evidencing capital stock of any pledged entity, accompanied by duly executed instruments of transfer or assignment in blank, shall have been delivered to Collateral Agent.
 
7.13   Insurance .  Other than as set forth on Schedule 2.2(b) , Lenders shall have received certificates of insurance and certified copies of insurance policies in the form required under Section 2.2(b) , and the Security Documents and otherwise in form and substance reasonably satisfactory to Lenders.
 
7.14   Consents .  Other than any consent that may be required to be obtained  from Basso Multi-Strategy Holding Fund Ltd., Borrower shall have delivered to Lenders all necessary approvals, authorizations and consents, if any, of all Persons, Governmental Authorities, and courts having jurisdiction with respect to the execution and delivery of this Agreement and the other Loan Documents, the granting of the Security Interest and all such approvals shall be in form and substance satisfactory to Lenders.
 
7.15   No Injunction, Etc .  No action, proceeding, investigation, regulation or legislation shall have been instituted, threatened or proposed before any Governmental Authority or arbitrator challenging or seeking to enjoin, restrain or prohibit, or to obtain substantial damages in respect of, or which is related to or arises out of this Agreement or the other Debt Refinancing Documents or the
 
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consummation of the transactions contemplated hereby or thereby, or which, as determined by Lenders in their reasonable discretion, would make it inadvisable to consummate the transactions contemplated by this Agreement and such other Loan Documents. No order, decree, temporary restraining order, preliminary or permanent injunction or other order issued by any Governmental Authority or arbitrator preventing the transactions contemplated by this Agreement or any other Debt Refinancing Document shall be in effect.  The making of the Loans and the consummation of the transactions contemplated by this Agreement and the other Debt Refinancing Documents shall not be prohibited by any Applicable Law or other legal requirement and shall not subject any Lender to any penalty or, in its reasonable judgment, any other liability or onerous condition under any Applicable Law.
 
7.16   Fees, Expenses, Taxes, Etc . Borrower shall have paid to Lenders the fees set forth or referenced in Section 1.4 and any other accrued and unpaid fees or commissions due hereunder (including legal fees and expenses), and to any other Person such amount as may be due thereto in connection with the transactions contemplated hereby, including all taxes, fees and other charges in connection with the execution, delivery, recording, filing and registration of any of the Loan Documents.
 
7.17   Proceedings and Documents .  All opinions, certificates and other instruments and all proceedings in connection with the transactions contemplated by this Agreement shall be reasonably satisfactory in form and substance to Lenders.  Lenders shall have received copies of all other instruments and other evidence as Lenders may reasonably request, in form and substance reasonably satisfactory to Lenders, with respect to the transactions contemplated by this Agreement and the taking of all actions in connection therewith.
 
7.18   Other Deliveries .  Such other agreements, instruments, approvals, opinions, certificates and other documents as the Lenders may reasonably request in connection with the transactions contemplated by the Debt Refinancing Documents, all in form an substance satisfactory to the Lenders, in their sole discretion.
 
7.19   Post-Closing Deliveries .  Borrower shall deliver to Lenders, and Lenders shall have received, as soon as reasonably practicable after the Closing Date, but in no event later than July 4, 2008, the following:
 
(a)   depositary account control agreements with respect to any accounts of Borrower or its subsidiaries open at the Closing Date, including the Borrower’s accounts at (i) Wells Fargo Bank, checking account ***** and money market account *****, and (ii) Silicon Valley Bank, checking account *****:
 

                 (b)   favorable opinions of counsel to Borrower addressed to Lenders with respect to Borrower covering such matters as requested by Lenders, including, without limitation, as to the Common Stock underlying the Warrants and Series A Preferred Stock and perfection of the security interest in the foregoing accounts, which are reasonably satisfactory in form and substance to Lenders;
 
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(c)   such evidence satisfactory to the Lenders, in their sole discretion, that Borrower shall have obtained stockholder approval of, and shall have taken all requisite actions (including filing an amendment to its Certificate of Incorporation with the Delaware Secretary of State) to increase the Borrower’s authorized Common Stock in accordance with Section 2.6 , and to reserve a sufficient number of shares of Common Stock for issuance upon exercise of the Warrants and conversion of the Series A Preferred Stock; and
 
(d)   such other agreements, instruments, approvals, opinions, certificates and other documents as the Lenders may reasonably request, all in form and substance satisfactory to the Lenders, in their sole discretion.
 

SECTION 8.   INTERCREDITOR PROVISIONS
 
8.1   Appointment, Powers and Immunities of Agents .
 
(a)   Each Lender hereby appoints and authorizes SG Phoenix LLC to act as its collateral agent (“ Collateral Agent ”) hereunder and under the other Loan Documents, in each case with such powers as are expressly delegated to Collateral Agent by the terms of this Agreement and the other Loan Documents, together with such other powers as are reasonably incidental thereto.  Collateral Agent shall not have any duties or responsibilities except those expressly set forth in this Agreement or in any other Loan Document, or be a trustee or a fiduciary for Borrower or any Lender or Secured Party.  Notwithstanding anything to the contrary contained herein or in any other Loan Document, Collateral Agent shall not be required to take any action that is contrary to this Agreement or any other Loan Document or any Applicable Law, or that exposes Collateral Agent to any liability.  Each of Collateral Agent, the Lenders and their respective Affiliates shall not be responsible to Borrower or to any other Secured Party for (i) any recitals, statements, representations or warranties made by Borrower or its Affiliates contained in this Agreement, the other Loan Documents or in any certificate or other document referred to or provided for in, or received by Collateral Agent or any Secured Party under this Agreement or any other Loan Document, (ii) the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement, the other Loan Documents, any Notes or any other document referred to or provided for herein or therein, or (iii) any failure by Borrower or its Affiliates to perform their respective obligations hereunder or thereunder.  Collateral Agent may employ agents and attorneys-in-fact, and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care.
 
(b)   None of Collateral Agent or its respective directors, officers, employees or agents shall be responsible for any action taken or omitted to be taken by it or them hereunder or under any other Loan Document or in connection herewith or therewith, except for its or their own gross negligence or willful misconduct.  Without limiting the generality of the foregoing, (a) Collateral Agent may consult with legal counsel, independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (b) Collateral Agent makes no warranty or representation to Borrower or any Lender or Secured Party for any statements, warranties or representations made in or in connection with any Debt Refinancing Document; (c) Collateral Agent shall have no duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of any Debt Refinancing Document on the part of any party thereto, to inspect the property
 
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(including the books and records) of Borrower or any other Person or to ascertain or determine whether a Material Adverse Effect exists or is continuing; and (d) Collateral Agent shall not be responsible to Borrower or any Lender or Secured Party for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of any Debt Refinancing Document or any other instrument or document furnished pursuant hereto.  Except as otherwise provided under this Agreement and the other Loan Documents, Collateral Agent shall take such action with respect to the Loan Documents as shall be directed by the Majority Lenders.
 
8.2   Reliance .  Collateral Agent shall be entitled to rely upon any certificate, notice or other document (including any cable, telegram, facsimile, electronic mail or telex) believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by it.  As to any other matters not expressly provided for by this Agreement or the other Loan Documents, Collateral Agent shall not be required to take any action or exercise any discretion, but shall be required to act or to refrain from acting upon instructions of the Majority Lenders (except that Collateral Agent shall not be required to take any action which exposes it to personal liability or which is contrary to this Agreement, any other Loan Document or any Applicable Law).  Collateral Agent shall in all cases (including when any action by Collateral Agent alone is authorized hereunder or under any other Loan Document, if Collateral Agent elects in its sole discretion to obtain instructions from the Majority Lenders) be fully protected in acting, or in refraining from acting, hereunder or under any other Loan Document in accordance with the instructions of the Majority Lenders, and such instructions of the Majority Lenders and any action taken or failure to act pursuant thereto shall be binding on all of the Secured Parties.
 
8.3   Non-Reliance .  Each Lender represents that it has, independently and without reliance on Collateral Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of the financial condition and affairs of the Borrower and its own decision to enter into this Agreement and agrees that it will, independently and without reliance upon Collateral Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own appraisals and decisions in taking or not taking action under this Agreement.  Neither Collateral Agent nor any Lender shall be required to keep informed as to the performance or observance by the Borrower or its Affiliates under this Agreement or any other document referred to or provided for herein or to make inquiry of, or to inspect the properties or books of, the Borrower or its Affiliates.
 
8.4   Defaults; Material Adverse Effect .  Neither Collateral Agent nor any Lender shall be deemed to have knowledge or notice of the occurrence of any Default, Event of Default or Material Adverse Effect, unless such Person has received a notice from a Lender or Borrower, referring to this Agreement, describing such Default, Event of Default or Material Adverse Effect and indicating that such notice is a notice of the occurrence of such Default, Event of Default or Material Adverse Effect (as the case may be). Collateral Agent shall take
 
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such action with respect to such Default, Event of Default or Material Adverse Effect as is provided in the Pledge and Security Agreement, or if not provided for therein, as Collateral Agent shall be reasonably directed by the Majority Lenders; provided , however , that unless and until Collateral Agent shall have received such directions, Collateral Agent may (but shall not be obligated to) take such action, or refrain from king such action, with respect to such Default, Event of Default or Material Adverse Effect as it shall deem advisable in the best interest of the Lenders.
 
8.5   Successor Agent .  Collateral Agent may resign at any time by giving fifteen days’ written notice thereof to the Secured Parties and Borrower.  Collateral Agent may be removed involuntarily only for a material breach of its duties and obligations hereunder and under the other Loan Documents or for gross negligence or willful misconduct in connection with the performance of its respective duties hereunder or under the other Loan Documents and then only upon the affirmative vote of the Majority Lenders.  Upon any such resignation or removal, the Majority Lenders shall have the right, upon notice to Borrower, to appoint a successor Collateral Agent under this Agreement.  If no successor Collateral Agent shall have been so appointed and shall have accepted such appointment, within 30 days after such resignation or removal (as the case may be), the retiring or removed Collateral Agent may, on behalf of the Secured Parties, appoint a successor Collateral Agent hereunder upon notice to the Secured Parties and the Borrower.  Such successor Collateral Agent shall be a Lender or an Affiliate of a Lender, if any Lender or Affiliate shall be willing to serve, and otherwise shall be a commercial bank having a combined capital and surplus of at least $10,000,000.  Upon the acceptance of any appointment as Collateral Agent, such successor Collateral Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Collateral Agent, and the retiring Collateral Agent shall be discharged from its duties and obligations as Collateral Agent under the Loan Documents.  After any Collateral Agent’s resignation or removal hereunder, the provisions of this Section 8 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Collateral Agent under the Loan Documents.

8.6   Authorization .  Collateral Agent is hereby authorized by the Lenders and Secured Parties to execute, deliver and perform each of the Loan Documents to which Collateral Agent is or is intended to be a party, and each Lender and Secured Party agrees to be bound by all of the agreements of Collateral Agent contained in the Loan Documents.  Collateral Agent is further authorized by the Lenders and Secured Parties to (a) release Liens on property that Borrower is permitted to sell, transfer or otherwise release pursuant to the terms of this Agreement or the other Loan Documents, (b) perform all of its obligations under this Section 8 and (c) enter into agreements supplemental hereto for the purpose of curing any formal defect, inconsistency, omission or ambiguity in this Agreement or any Loan Document to which it is a party.
 
8.7   Other Roles .  With respect to any Loans made by it or any of its Affiliates and any Note issued to it or any of its Affiliates, Collateral Agent (or any such Affiliates of Collateral Agent) in its individual capacity shall have the same rights and powers under the Loan Documents and any other Debt Refinancing Documents as any other Lender or Secured Party and may exercise the same as though it were not Collateral Agent or an Affiliate of Collateral Agent.  Collateral Agent and its Affiliates may accept deposits from, lend money to, act as trustee under indentures of, and generally engage in any kind of business with Borrower or any other Person, without any duty to
 
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account therefor to the Lenders or Secured Parties.  For the avoidance of doubt, SG Phoenix LLC or any of its Affiliates (or any permitted successor or assign) may act as Collateral Agent notwithstanding any potential or actual conflict of interest presented by the foregoing and Borrower and each of the Lenders and Secured Parties hereby waives any claim against Collateral Agent and any of its Affiliates based upon any conflict of interest that such Person may have with regard to acting as a Lender or Collateral Agent hereunder and acting in such other roles.

8.8   Amendments and Waivers .
 
(a)   Majority Lenders’ Consent .  No amendment, modification, termination or waiver of any provision of the Loan Documents, or consent to any departure by the Borrower therefrom, shall in any event be effective without the written concurrence of the Majority Lenders and any additional consents required by this Section 8.8 .
 
(b)   Other Consents .  No amendment, modification, termination or waiver of any provision of the Loan Documents, or consent to any departure by Borrower therefrom, shall amend, modify, terminate or waive any provision of this Section 8 as the same applies to Collateral Agent, or any other provision hereof as the same applies to the rights or obligations of Collateral Agent, in each case without the consent of Collateral Agent.
 
(c)   Execution of Amendments, etc .  Any amendment, modification, waiver or consent under the Debt Refinancing Documents requiring consent or approval of Lenders shall be binding on all Lenders upon execution by the Majority Lenders on the date thereof and, if applicable, Borrower.  Any waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given.  No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances.  Any amendment, modification, termination, waiver or consent effected in accordance with this Section 8.8 shall be binding upon each Lender at the time outstanding, each future Lender and, if signed by the Borrower, on the Borrower.
 
SECTION 9.   MISCELLANEOUS
 
9.1   Indemnities
 
.  Borrower agrees to indemnify, pay, and hold Lenders and Collateral Agent and their respective Affiliates and the officers, directors, employees, agents, and attorneys (individually, “Indemnitee” , and collectively, “Indemnitees” ) harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits and claims of any kind or nature whatsoever that may be imposed on, incurred by, or asserted against the Indemnitee as a result of Lenders or Collateral Agent being a party to this Agreement with Borrower, or otherwise in connection with this Agreement and Borrower, any of the other Loan Documents or any of the transactions contemplated hereby or thereby with respect to Borrower; provided , that Borrower shall not have an obligation to an Indemnitee hereunder with respect to liabilities arising from the gross negligence or willful misconduct of that Indemnitee or as a result of an Indemnitee’s failure to perform its obligations hereunder, in each such case as determined by a final non appealable judgment of a court of competent jurisdiction.  This Section 9.1 and all indemnification provisions contained within any other Loan Document shall survive the termination of this Agreement.
 
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9.2   Notices .  Any required notice or other communication shall be in writing addressed to the respective party as set forth below and may be personally delivered, facsimiled, sent by overnight courier service or U.S. mail and shall be deemed to have been given: (a) if delivered in person, when delivered; (b) if delivered by facsimile, on the date of transmission if transmitted on a Business Day before 2:00 p.m. (New York, New York time) and otherwise on the Business Day next succeeding the date of transmission; (c) if delivered by overnight courier, two (2) Business Days after delivery to the courier properly addressed; or (d) if delivered by U.S. mail, four (4) Business Days after deposit with postage prepaid and proper address.  The addresses for such notices and communications shall be as follows:
 
 
If to the Borrower:
Communication Intelligence Corporation
275 Shorewood Drive, Suite #500
Redwood Shores, California 94065
Attn:  Frank Dane
Facsimile:  (650) 802-7777

 
With a copy (which shall not constitute notice) to:
 
 
Davis Wright Tremaine LLP
 
23 rd Floor
 
1300 S.W. Fifth Ave.
 
Portland, Oregon 97201
 
Attn:  Michael C. Phillips
 
Facsimile:  (503) 778-5299

 
If to Phoenix:
Phoenix Venture Fund LLC
 
110 East 59 th Street, Suite 1901
 
New York, New York  10022
 
Attn:  Andrea Goren
 
Facsimile:  (212) 202-7565

 
With a copy (which shall not constitute notice) to:

 
Thelen Reid Brown Raysman & Steiner LLP
 
875 Third Avenue
 
New York, New York 10022
 
Attn:  Herman Sassower, Esq.
 
Facsimile:  (212) 603-2001
 

 
   If to Engmann:    Michael W. Engmann
   38 San Fernando Way
   San Francisco, California 94127
   Facsimile:  (415) 781-4641
 
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If to Goodman:    Ronald Goodman
   31 Tierra Verde Court
  Walnut Creek, California 94598
   Facsimile: (925) 933-7548
                                                    
 If to Collateral Agent:  SG Phoenix LLC
 
110 East 59 th Street, Suite 1901
 
New York, New York  10022
 
Attn:  Andrea Goren
 
Facsimile:  (212) 202-7565

 
With a copy (which shall not constitute notice) to:
 

 
Thelen Reid Brown Raysman & Steiner LLP
 
875 Third Avenue
 
New York, New York 10022
 
Attn:  Herman Sassower, Esq.
 
Facsimile:  (212) 603-2001

9.3   Failure or Indulgence Not Waiver; Remedies Cumulative .  No failure or delay on the part of Lenders or Collateral Agent to exercise, nor any partial exercise of, any power, right or privilege hereunder or under any other Loan Documents shall impair such power, right, or privilege or be construed to be a waiver of any Default or Event of Default.  All rights and remedies existing hereunder or under any other Loan Document are cumulative to and not exclusive of any rights or remedies otherwise available.
 
9.4   Marshaling; Payments Set Aside .  Lenders shall not be under any obligation to marshal any assets in payment of any or all of the Obligations.  To the extent that Borrower or any other Person makes payment(s) or Lenders enforce their Liens or exercises their right of set-off, and such payment(s) or the proceeds of such enforcement or set-off is subsequently invalidated, declared to be fraudulent or preferential, set aside, or required to be repaid by anyone (whether by demand, litigation, settlement or otherwise), then to the extent of such recovery, the Obligations or part thereof originally intended to be satisfied, and all Liens, rights and remedies therefore, shall be reinstated and continued in full force and effect as if such payment had not been made or such enforcement or set off had not occurred.
 
9.5   Severability .  The invalidity, illegality, or unenforceability in any jurisdiction of any provision under the Loan Documents shall not affect or impair the remaining provisions in the Loan Documents or any such invalid, unenforceable or illegal provision in any jurisdiction in which it is not invalid, unenforceable or illegal.
 
9.6   Headings .  Sections and Section headings are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purposes or be given substantive effect.
 
9.7   Applicable Law .  THIS AGREEMENT SHALL BE GOVERNED BY AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE
 
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INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES THAT REQUIRE OR PERMIT APPLICATION OF THE LAWS OF ANY OTHER STATE OR JURISDICTION.
 
9.8   Successors and Assigns .  This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns.  Borrower may not assign its rights or Obligations hereunder without the written consent of the Majority Lenders.
 
9.9   Participations .
 
              (a)   Participations .  Each Lender may sell to one or more commercial banks, commercial finance lenders, other financial institutions or any other Person, participations in the Loans and other extensions of credit made and to be made by it to the Borrower hereunder.  Borrower acknowledges that in selling such participations, such Lender may grant to its participants certain rights to consent to waivers, amendments and other actions with respect to this Credit Agreement, provided that the consent of any participant shall be limited solely to matters as to which Lenders may be requested to consent under Section 3 and Section 4 hereof.  Except for such consent rights, if any, granted by such Lender to any of its participants, no participant shall have any rights as a Lender hereunder, and notwithstanding the sale of any participation by a Lender, such Lender shall remain solely responsible to the other parties hereto for the performance of its obligations hereunder, and the Borrower and the other Lenders may continue to deal solely with such Lender with respect to all matters relating to this Agreement and the transactions contemplated hereby.  In addition, all amounts payable under this Agreement to such Lender shall continue to be paid directly to, or at the direction of, such Lender.
 
(b)   Cooperation of Borrower .  If necessary, Borrower agrees to (i) execute any documents (including Additional Notes) reasonably required to effectuate and acknowledge each participation effected pursuant to Section 9.9(a) ; (ii) make Borrower’s management available to meet with prospective participants; and (iii) assist Lenders in the preparation of information relating to the financial affairs of the Borrower as any prospective participant reasonably may request. Subject to Section 9.12 , Borrower authorizes each Lender to disclose to any prospective participant any and all information in its possession concerning Borrower and its financial affairs which has been delivered to such Lender by or on behalf of Borrower pursuant to this Agreement, or which has been delivered to such Lender by or on behalf of Borrower in connection with its credit evaluation of Borrower prior to entering into this Agreement.
 
9.10   No Fiduciary Relationship .  No provision in the Loan Documents and no course of dealing between the parties shall be deemed to create any fiduciary duty owing to Borrower or its Subsidiaries by Lenders.
 
9.11   Construction .  Lenders and Borrower acknowledge that each of them has had the benefit of legal counsel of its own choice and has been afforded an opportunity to review the Loan Documents with its legal counsel and that the Loan Documents shall be constructed as if jointly drafted by Lenders and Borrower.
 
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9.12   Confidentiality .  Each Lender agrees to hold in confidence any confidential information that it may receive from Borrower and its Subsidiaries pursuant to this Agreement that is identified as being confidential or proprietary, except for disclosure: (a) on a confidential need-to-know basis to its Affiliates and legal counsel, independent public accountants and other professional advisors; (b) to regulatory officials having jurisdiction over it; (c) as required or requested by Applicable Law or legal process; (d) in connection with any legal proceeding between or among any Lender and Borrower and/or their respective Subsidiaries or Affiliates ( provided that, in the event such Lender is so required to disclose such confidential information pursuant to clause (c) of this Section 9.12 , such Lender shall promptly notify Borrower (unless legally prohibited from so doing), so that Borrower or its Subsidiaries, as applicable, may seek, at their sole cost and expense, a protective order or other appropriate remedy); and (e) subject to Section 9.9 , to another Person in connection with a disposition or proposed disposition to that Person of all or part of that Lenders’ interests hereunder; provided that such agrees to comply with the terms of this Section 9.12 .  For purposes of the foregoing, “confidential information” shall mean all information respecting Borrower or its Subsidiaries, other than (i) information previously filed by Borrower or its Subsidiaries with any Governmental Authority and available to the public or otherwise made available to third parties on a non-confidential basis, (ii) information previously published in any public medium from a source other than, directly or indirectly, a Lender in violation of this Section 9.12 and (iii) information obtained by a Lender from a source independent of Borrower or its Subsidiaries.

9.13   Consent to Jurisdiction and Service of Process .
 
(a)   BORROWER HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL COURT OR STATE COURT IN THE STATE OF NEW YORK, COUNTY OF NEW YORK, HAVING SUBJECT MATTER JURISDICTION OVER ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENTS.  BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT, PERSONAL JURISDICTION OF ANY SUCH COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM.  NOTHING HEREIN SHALL LIMIT THE RIGHT OF LENDERS TO BRING PROCEEDINGS AGAINST BORROWER IN THE COURTS OF ANY OTHER JURISDICTION.
 
(b)   BORROWER HEREBY AGREES THAT SERVICE OF THE SUMMONS AND COMPLAINT AND ALL OTHER PROCESS WHICH MAY BE SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING BY REGISTERED MAIL, RETURN RECEIPT REQUESTED, A COPY OF SUCH PROCESS TO BORROWER AT THE ADDRESS TO WHICH NOTICES TO BORROWER ARE THEN TO BE SENT PURSUANT TO SECTION 9.2 AND THAT PERSONAL SERVICE OF PROCESS SHALL NOT BE REQUIRED.  NOTHING HEREIN SHALL BE CONSTRUED TO PROHIBIT SERVICE OF PROCESS BY ANY OTHER METHOD PERMITTED BY LAW.
 
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9.14   Waiver of Jury Trial .  LENDERS AND BORROWER HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT, ANY OF THE OTHER LOAN DOCUMENTS, OR ANY DEALINGS BETWEEN OR AMONG THEM RELATING TO THE SUBJECT MATTER OF THIS LOAN TRANSACTION AND ANY RELATIONSHIP THAT IS BEING ESTABLISHED AMONG ANY OF THEM.  THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS TRANSACTION, INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS.  LENDER AND BORROWER ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS.  LENDERS AND BORROWER FURTHER WARRANT AND REPRESENT THAT EACH HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.  THIS WAIVER IS IRREVOCABLE, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THE LOAN DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE LOANS.  IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.  LENDERS AND BORROWER ALSO WAIVE ANY BOND OR SURETY OR SECURITY UPON SUCH BOND WHICH MIGHT, BUT FOR THIS WAIVER, BE REQUIRED OF LENDERS.
 
9.15   Survival of Warranties and Certain Agreements .  All agreements, representations and warranties made herein shall survive the execution and delivery of this Agreement, the making of the Loans, and the execution and delivery of the Notes.  Notwithstanding anything in this Agreement or implied by law to the contrary, the agreements of Borrower set forth in Sections 1.4 , 9.1 , 9.13 , 9.14 and 9.15 (together with any other Sections stated herein to so survive) shall survive the payment of the Loans and the termination of this Agreement.
 
9.16   Entire Agreement .  This Agreement, the Notes and the other Loan Documents referred to herein embody the final, entire agreement among the parties hereto and supersede any and all prior commitments, agreements, representations, understandings, whether oral or written, relating to the subject matter hereof and may not be contradicted or varied by evidence of prior, contemporaneous or subsequent oral agreements or discussions of the parties hereto.
 
9.17   Counterparts; Effectiveness .  This Agreement and any amendments, waivers, consents or supplements may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and
 
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delivered shall be deemed an original, but all of which counterparts together shall constitute but one and the same instrument.  This Agreement shall become effective upon the execution of a counterpart hereof by each of the parties hereto.
 
SECTION 10.   DEFINITIONS
 
10.1   Certain Defined Terms
 
.  The terms defined below are used in this Agreement as so defined.  Terms defined in the preamble, recitals and elsewhere in this Agreement are used in this Agreement as so defined.
 
(a)   “1933 Act” has the meaning set forth in Section 5.18 .
 
(b)   “1934 Act” has the meaning set forth in Section 2.3 .
 
(c)   “1940 Act” has the meaning set forth in Section 3.16 .
 
(d)   “Additional Note” has the meaning set forth in Section 1.2(b) .
 
(e)   “Additional Warrants” has the meaning set forth in Section 1.2(b) .
 
(f)   “Accounting Changes” has the meaning set forth in Section 4.2 .
 
(g)   “Affiliate” means (i) with respect to Borrower or any of its Subsidiaries, any Person: (A) directly or indirectly controlling, controlled by, or under common control with such Person or (B) directly or indirectly owning or holding five percent (5%) or more of any equity interest in Borrower or any of its Subsidiaries; and (ii) with respect to Lenders, any Person which controls or is controlled by or is under common control with such Person.  For purposes of this definition, “control” (including with correlative meanings, the terms “controlling,” “controlled by” and “under common control with”) means the possession directly or indirectly of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities or by contract or otherwise.
 
(h)   “Agreement” means this Credit Agreement (including all Schedules and Exhibits hereto), as amended, modified and supplemented from time to time as permitted herein.
 
(i)   “Applicable Law” means, in respect of any Person, all provisions of constitutions, statutes, rules, regulations and orders of governmental bodies or regulatory agencies applicable to such Person, and all orders, decisions, judgments and decrees of all courts and arbitrators in proceedings or actions to which the Person in question is a party or by which it is bound.
 
(j)   “Asset Disposition” means the disposition, whether by sale, lease, transfer, loss, damage, destruction, condemnation or otherwise, by Borrower or any of its Subsidiaries, of any of the following: (i) any of the capital stock of Borrower or any of its Subsidiaries; or (ii) any or all of the operating assets of Borrower or any of its Subsidiaries, other than bona fide sales of product or
 
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inventory to customers in the ordinary course of business, dispositions of obsolete equipment not used or useful in the business of Borrower or any of its Subsidiaries and de minimis asset sales, or (iii) sales of Cash Equivalents for fair value.
 
(k)   “Bankruptcy Code” means Title 11 of the United States Code entitled “Bankruptcy,” as amended from time to time, or any applicable bankruptcy, insolvency or other similar law now or hereafter in effect and all rules and regulations promulgated thereunder.
 
(l)   “Borrower” has the meaning set forth in the Preamble.
 
(m)   “Business Day” means any day excluding Saturday, Sunday and any day which is a legal holiday under the laws of the State of New York, or is a day on which banking institutions located in such state are closed or which the Federal Reserve Banks are closed.
 
(n)   “Capital Lease” means any lease of real or personal property which is required to be capitalized under GAAP.
 
(o)   “Cash Equivalents” means: (i) marketable direct obligations issued or unconditionally guarantied by the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one (1) year from the date of acquisition thereof; (ii) commercial paper maturing no more than one (1) year from the date issued and, at the time of acquisition, having a rating of at least A 1 from Standard & Poor’s Rating Service or at least P 1 from Moody’s Investors Service, Inc.; (iii) certificates of deposit or bankers’ acceptances maturing within one (1) year from the date of issuance thereof issued by, or overnight reverse repurchase agreements from, any commercial bank organized under the laws of the United States of America or any state thereof or the District of Columbia having combined capital and surplus of not less than $500,000,000; and (iv) time deposits maturing no more than thirty (30) days from the date of creation thereof with commercial banks having membership in the Federal Deposit Insurance Corporation in amounts at any one such institution not exceeding the lesser of $100,000 or the maximum amount of insurance applicable to the aggregate amount of Borrower’s deposits at such institution.
 
(p)   “Change of Control” has the meaning set forth in Section 6.1(s) .
 
(q)   “Closing Date” means June 5, 2008.
 
(r)   “Collateral” has the meaning set forth in Section 2 of the Security Agreement, and includes the Pledged Stock as such term is defined in the recitals of the Pledge and Security Agreement.
 
(s)   “Collateral Agent” has the meaning set forth in Section 8.1(a) .
 
(t)   “Common Stock” means the common stock of the Borrower, par value $0.01 per share, and any securities into which such common stock may hereafter be reclassified or for which it may be exchanged as a class.
 
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(u)   “Compliance Certificate” has the meaning set forth in Section 4.1(b) .
 
(v)   “Contingent Obligation” means, as applied to any Person, any direct or indirect contingent liability of that Person: (i) with respect to any Indebtedness, lease, dividend or other obligation of another Person if the primary purpose or intent of the Person incurring such liability, or the primary effect thereof, is to provide assurance to the obligee of such liability that such liability will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such liability will be protected (in whole or in part) against loss with respect thereto; or (ii) with respect to any letter of credit issued for the account of that Person or as to which that Person is otherwise liable for reimbursement of drawings.  Contingent Obligations shall also include (A) the direct or indirect guaranty, endorsement (other than for collection or deposit in the ordinary course of business), co-making, discounting with recourse or sale with recourse by such Person of the obligation of another, (B) the obligation to make take-or-pay or similar payments if required regardless of nonperformance by any other party or parties to an agreement, other than pursuant to routine agreements entered into in the ordinary course of business, and (C) any liability of such Person for the obligations of another through any agreement to purchase, repurchase or otherwise acquire such obligation or any property constituting security therefore, to provide funds for the payment or discharge of such obligation or to maintain the solvency, financial condition or any balance sheet item or level of income of another.  The amount of any Contingent Obligation shall be equal to the amount of the obligation so guaranteed or otherwise supported or, if not a fixed and determined amount, the maximum amount so guaranteed.
 
(w)   “Control” or “control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management, policies or activities of such Person, whether through ownership of voting securities, by contract or otherwise.
 
(x)   “Debt Refinancing” means, collectively, the following: (i) the conversion of the outstanding debt set forth on Schedule 1.3 of this Agreement into Loans under this Agreement and the tender of the promissory notes evidencing such debt to the Borrower for cancellation; (ii) the tender of certain Promissory Notes (as defined under the Purchase Agreement) to the Borrower for cancellation in full payment for shares of Series A Preferred Stock as set forth in the Purchase Agreement and (iii) each of the other transactions contemplated hereby and by the other Debt Refinancing Documents..
 
(y)   “Debt Refinancing Documents” means the Loan Documents and the Share Lending Agreement, dated as of the date hereof, by and among Phoenix, Engmann and Goodman and all other instruments, documents and agreements executed by or on behalf of Borrower or any of its Subsidiaries, and delivered concurrently herewith or at any time hereafter to or for the benefit of any Lender in connection with the Loans and other transactions contemplated by this Agreement, all as amended, supplemented or modified from time to time.
 
(z)   “Default” means a condition or event that, after notice or lapse of time or both, would constitute an Event of Default if that condition or event were not cured or removed within any applicable grace or cure period.
 
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(aa)   “Engmann” has the meaning set forth in the preamble.
 
(bb)   “Environmental Laws” means all applicable federal, state or local laws, statutes, rules, regulations or ordinances, codes, common law, consent agreements, orders, decrees, judgments or injunctions issued, promulgated, approved or entered thereunder relating to public health, safety or the pollution or protection of the environment, including those relating to releases, discharges, emissions, spills, leaching, or disposals of hazardous substances (including petroleum, crude oil or any fraction or derivative thereof, or other hydrocarbons) to air, water, land or ground water, to the withdrawal or use of ground water, to the use, handling or disposal of polychlorinated biphenyls, asbestos or urea formaldehyde, to the treatment, storage, disposal or management of hazardous substances (including petroleum, crude oil or any fraction or derivative thereof, or other hydrocarbons), pollutants or contaminants, to exposure to toxic, hazardous or other controlled, prohibited, or regulated substances, including, without limitation, any such provisions under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (42 U.S.C. § 9601, et seq .), and the Resource Conservation and Recovery Act of 1976, as amended (42 U.S.C. § 6901, et seq .).
 
(cc)   “Evaluation Date” has the meaning set forth in Section 5.21 .
 
(dd)   “Event of Default” has the meaning set forth in Section 6.1 .
 
(ee)   “GAAP” means generally accepted accounting principles as set forth in statements from Auditing Standards No. 69 entitled “The Meaning of Present Fairly in Conformance with Generally Accepted Accounting Principles in the Independent Auditors Reports’” issued by the Auditing Standards Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board that are applicable to the circumstances as of the date of determination.
 
(ff)   “Goodman” has the meaning set forth in the preamble.
 
(gg)   “Governmental Authority” means any nation, province, or state or any political subdivision of any of the foregoing, and any government or any Person exercising executive, legislative, regulatory or administrative functions of or pertaining to government, and any corporation or other entity exercising such functions owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing.
 
(hh)   “Indebtedness” means, as applied to any Person, without duplication: (i) all indebtedness for borrowed money including but not limited to, the Obligations; (ii) that portion of obligations with respect to Capital Leases or other capitalized agreements that is properly classified as a liability on a balance sheet in conformity with GAAP; (iii) notes payable and drafts accepted representing extensions of credit whether or not representing obligations for borrowed money; (iv) any obligation owed for all or any part of the deferred purchase price of property or services except trade payables arising in the ordinary course of business not more than ninety (90) days past due; (v) all indebtedness secured by any Lien on any property or asset owned or held by that Person regardless of whether the indebtedness secured thereby shall have been assumed by that Person or is nonrecourse to the credit of that Person, but only to the extent of
 
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EXHIBIT 10-41
 
 
the fair value of such property or asset; (vi) fixed rate hedging obligations that are due (after giving effect to any period of grace or notice requirement applicable thereto) and remain unpaid; (vii) obligations with respect to principal under Contingent Obligations for the repayment of money or the deferred purchase price of property, whether or not then due and payable (calculated as the amount of such principal); and (viii) obligations under partnership, organizational or other agreements to fund capital contributions or other equity calls with respect to any Person or Investment, or to redeem, repurchase or otherwise make payments in respect to capital stock or other securities of such Person.
 
(ii)   “Indemnitee” or “Indemnitees” has the meaning set forth in Section 9.1 .
 
(jj)   “Initial Warrant” or “Initial Warrants” has the meaning set forth in Section 1.9 .
 
(kk)   “Intellectual Property Rights” has the meaning set forth in Section 5.8 .
 
(ll)   “Investment” means (i) any direct or indirect purchase or other acquisition by Borrower or any of its Subsidiaries of any beneficial interest in, including stock, partnership interest or other equity securities of, any other Person; and (ii) any direct or indirect loan, advance, transfer, guarantee, assumption of liability or other obligation or liability, or capital contribution by Borrower or any of its Subsidiaries to any other Person, including all Indebtedness and accounts receivable from that other Person that are not current assets or did not arise from sales to that other Person in the ordinary course of business.  The amount of any Investment shall be the original cost of such Investment plus the cost of all additions thereto, without any adjustments for increases or decreases in value, or write-ups, write-downs or write-offs with respect to such Investment.
 
(mm)   “Investors” means the purchasers of the Series A Preferred Stock under the Purchase Agreement.
 
(nn)   “IRC” means the Internal Revenue Code of 1986, as amended from time to time, and all rules and regulations promulgated thereunder.
 
(oo)   “Lender” or “Lenders” has the meaning set forth in the Preamble.
 
(pp)   “Lien” means any lien, mortgage, pledge, security interest, charge or encumbrance of any kind, whether voluntary or involuntary (including any conditional sale or other title retention agreement and any lease in the nature thereof), and any agreement to give any lien, mortgage, pledge, security interest, charge or encumbrance.
 
(qq)   “Loan” or “Loans” has the meaning set forth in Section 1.1(a) .
 
(rr)   “Loan Documents” means this Agreement, the Notes, the Security Documents, the Warrants, the Purchase Agreement, the Registration Rights Agreement and all other instruments, documents and agreements executed by or on behalf of Borrower or
 
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EXHIBIT 10-41
 
 
any of its Subsidiaries, and delivered concurrently herewith or at any time hereafter to or for the benefit of any Lender in connection with the Loans and other transactions contemplated by this Agreement, all as amended, supplemented or modified from time to time.
 
(ss)   “Majority Lenders” means, at any time, any Lender or Lenders holding pro rata Obligations which in the aggregate exceed 50%.
 
(tt)   “Material Adverse Effect” means (i) a material adverse effect upon the business, operations, properties or assets, or condition (financial or otherwise) or prospects or upon Borrower or any of its Subsidiaries taken as a whole, or (ii) the impairment of the ability of Borrower, or any of its Subsidiaries to perform its material Obligations under any Loan Document to which it is a party or of Lenders to enforce any Loan Document or collect any of the Obligations.  In determining whether any individual event could reasonably be  expected to have a Material Adverse Effect, notwithstanding that such event does not of itself have such effect, a Material Adverse Effect shall be deemed to have occurred if the cumulative effect of such event and all other then existing events could reasonably be expected to have a Material Adverse Effect.
 
(uu)   “Material Contracts” means (i) the Material Contracts listed on Schedule 5.15 , (ii) any contract or any other agreement, written or oral, of Borrower or any of its Subsidiaries involving monetary liability of or to any such Person in an aggregate amount in excess of One Hundred Thousand Dollars ($100,000) per annum and (iii) any other contract or agreement, written or oral, of Borrower or any of its Subsidiaries the failure to comply with which could reasonably be expected to have a Material Adverse Effect.
 
(vv)   “Maturity Date” means the earlier of (i) the date payment is due under the Notes as a result of acceleration or otherwise; and (ii) June 5, 2010.
 
(ww)   “Net Proceeds” means cash proceeds received by Borrower or any of its Subsidiaries from any Asset Disposition, or debt or equity issuance including insurance proceeds, awards of condemnation, and payments under notes or other debt securities received in connection with any Asset Disposition, net of (i) the reasonable costs incurred or accrued in connection with such sale, lease, transfer, issuance or other disposition (including taxes attributable to such sale, lease, transfer or issuance, including, if the disposing Person is a limited liability company, S corporation or a partnership, taxes attributable to its members, shareholders or partners with respect to such disposition) and (ii) amounts applied to repayment of Indebtedness (other than the Obligations) secured by a Lien on the asset or property disposed.
 
(xx)   “Note” or “Notes” means any promissory note contemplated by Section 1.1(a) , substantially in the form attached hereto as Exhibit 1.1(a) , or any combination thereof, and any replacements, restatements, renewals or extensions of any such notes, in whole or in part.
 
(yy)   “Obligation” or “Obligations” means all obligations, liabilities and Indebtedness of every nature of Borrower from time to time owed to Lenders under the Loan Documents, including the unpaid principal amount of all debts, claims and indebtedness,
 
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EXHIBIT 10-41
 
 
accrued and unpaid interest and all fees, costs and expenses, whether primary, secondary, direct, contingent, fixed or otherwise, heretofore, now or from time to time hereafter owing, due or payable, or any combination thereof, whether before or after the filing of a proceeding under the Bankruptcy Code by or against Borrower.
 
(zz)   “Permitted Encumbrances” means the following:
 
(i)   Liens for taxes, assessments or other governmental charges not yet due and payable or Liens for taxes, assessment or other governmental charges due and payable if the same are being diligently contested in good faith and by appropriate proceedings and then only if and to the extent that adequate reserves therefore are maintained on the books of Borrower and its Subsidiaries, as applicable, in accordance with GAAP;
 
(ii)   Liens of landlords, carriers, warehousemen, mechanics, materialmen and other similar Liens imposed by Applicable Law, which are incurred in the ordinary course of business for sums not more than ninety (90) days delinquent or which are being diligently contested in good faith; provided that a reserve or other appropriate provision shall have been made therefore and the aggregate amount of liabilities secured by such Liens is less than $100,000;
 
(iii)   Liens incurred or deposits made in the ordinary course of business in connection with workers’ compensation, unemployment insurance and other types of social security (other than any Lien imposed by the Employee Retirement Income Security Act of 1974 or any rule or regulation promulgated thereunder), or to secure the performance of tenders, statutory obligations, surety, stay, customs and appeal bonds, bids, leases, government contracts, trade contracts, performance and return of money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money);
 
(iv)   deposits, in an aggregate amount not to exceed $50,000, made in the ordinary course of business to secure liability to insurance carriers;
 
(v)   any attachment or judgment Lien which, individually or when aggregated, does not constitute an Event of Default under Section 6.1(i) (whether individually or when aggregated with other such Liens);
 
(vi)   Liens in favor of Lenders;
 
(vii)   Liens securing purchase money security agreements and Capital Leases permitted under Section 3.1(d) ; provided that such Liens do not encumber any property other than the items purchased with the proceeds of such Indebtedness or leased pursuant to such Indebtedness and such Liens do not secure any amounts other than amounts necessary to purchase or lease such items; and
 
(viii)   Liens permitted pursuant to this Agreement which secure refinanced or replaced Indebtedness which had been secured by a Lien.
 
(aaa)   “Person” means and includes natural persons, corporations, limited liability companies, limited partnerships, limited liability partnerships, general partnerships, joint stock companies, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts or other organizations, whether or not legal entities, and governments and agencies and political
 
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EXHIBIT 10-41
 
 
subdivisions thereof and their respective permitted successors and assigns (or in the case of a governmental person, the successor functional equivalent of such Person).
 
(bbb)   “Phoenix” has the meaning set forth in the Preamble.
 
(ccc)   “Pledge and Security Agreement” means the pledge and security agreement, dated as of even date herewith, substantially in the form of Exhibit 10.1(ccc) annexed hereto, executed by Borrower in favor of Lenders.
 
(ddd)   “Purchase Agreement” means the securities purchase agreement, dated as of the date hereof, by and among Borrower and the purchasers of the Series A Preferred Stock listed therein.
 
(eee)   “Real Property” has the meaning set forth in Section 5.6 .
 
(fff)   “Registration Rights Agreement” means the registration rights agreement, dated as of the date hereof, by and among Borrower and investors signatory thereto.
 
(ggg)   “Restricted Junior Payment” means, except as contemplated in the Purchase Agreement: (i) any dividend or other distribution, direct or indirect, on account of any equity interest in Borrower or any of its Subsidiaries, including any shares of any class of stock of Borrower or any of its Subsidiaries now or hereafter outstanding, except a dividend payable solely in shares of a class of stock to the holders of that class; (ii) any redemption, repurchase, conversion, exchange, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, prior to its stated maturity, of any equity interest in Borrower or any of its Subsidiaries, including any shares of any class of stock of Borrower or any of its Subsidiaries now or hereafter outstanding (except repurchases of shares of common stock held by an employee upon termination of employment); (iii) any payment or prepayment of interest on, principal of, premium, if any, redemption, conversion, exchange, purchase, retirement, defeasance, sinking fund or similar payment with respect to, any Indebtedness prior to its stated maturity or payment date, or in contravention of any subordination provisions for the benefit of Lenders; and (iv) any payment made prior to its stated maturity, to retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire any equity interest in Borrower or any of its Subsidiaries, including any shares of any class of stock of Borrower or any of its Subsidiaries now or hereafter outstanding.
 
(hhh)   “SEC” means the U.S. Securities and Exchange Commission.
 
(iii)   “Secured Party” or “Secured Parties” means Collateral Agent, or any Lender, or any of their respective Affiliates, and each of their respective successors, transferees and assigns.
 
(jjj)   “Security Documents” means, collectively, all instruments, documents and agreements executed by or on behalf of Borrower to provide collateral security with respect to the Obligations, including, without limitation, the Pledge and Security
 
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EXHIBIT 10-41
 
 
Agreement, depositary account control agreements and all instruments, documents and agreements executed pursuant to the terms of the foregoing, in such case, as amended, modified and supplemented from time to time.
 
(kkk)   “Security Interest” means all Liens in favor of Lenders, created hereunder or under any of the Security Documents to secure the Obligations.
 
(lll)   “Series A Preferred Stock” means shares designated Series A Cumulative Convertible Preferred Stock issued by the Borrower, par value $0.01 per share.
 
(mmm)   “Subsidiary” means, with respect to any Person, any corporation, partnership, association or other business entity of which more than fifty percent (50%) of the total voting power of shares of stock (or equivalent ownership or controlling interest) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof.
 
(nnn)   “Warrants” means the Initial Warrants and the Additional Warrants.
 
10.2   Other Definitional Provisions
 
.  References to “Sections,” “Exhibits” and “Schedules” shall be to Sections, Exhibits and Schedules, respectively, of this Agreement unless otherwise specifically provided.  Any of the terms defined in Section 10.1 may, unless the context otherwise requires, be used in the singular or the plural depending on the reference.  In this Agreement, “hereof,” “herein,” “hereto,” “hereunder” and the like mean and refer to this Agreement as a whole and not merely to the specific section, paragraph or clause in which the respective word appears; words importing any gender include the other gender; references to “writing” include printing, typing, lithography and other means of reproducing words in a tangible visible form; the words “including,” “includes” and “include” shall be deemed to be followed by the words “without limitation”; references to agreements and other contractual instruments shall be deemed to include subsequent amendments, assignments, and other modifications thereto, but only to the extent such amendments, assignments and other modifications are not prohibited by the terms of this Agreement or any other Loan Document; references to Persons include their respective permitted successors and assigns or, in the case of governmental Persons, Persons succeeding to the relevant functions of such Persons; and all references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations.
 
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  -49-
 

 
EXHIBIT 10-41

WITNESS the due execution hereof by the respective duly authorized officers of the undersigned as of the date first written above.
 
LENDERS :

PHOENIX VENTURE FUND LLC,
as Lender

      By: SG Phoenix Ventures LLC,
             its Managing Member

             By: /s/ Andrea Goren                                                                
 
            Name: Andrea Goren          
 
            Title:  Member                     
 
 
 

                                                       
                                                                                                                   /s/ Michael Engmann
                                                                                                                 MICHAEL ENGMANN, as Lender
 
                                                                          
                                                        
                                                        /s/ Ronald Goodman
RONALD GOODMAN, as Lender
 
 
 
BORROWER :

COMMUNICATION INTELLIGENCE
 CORPORATION, as Borrower


By: /S/ Guido D. Digregorio
Name: Guido D. DiGregorio
Title: Chief Executive Officer and
                President
 

 - 50 -
 
 

 
EXHIBIT 10-41

COLLATERAL AGENT :
 
SG PHOENIX LLC,
as Collateral Agent

By:   /s/ Andrea Goren                                       
 
Name:  Andrea Goren                                   
 
Title:  Member                                          
 
 
 
 
 
 
 
 
 
 
 
-51-
EXHIBIT 10-42




 

PLEDGE AND SECURITY AGREEMENT
 

 
made by
 

 
COMMUNICATION INTELLIGENCE CORPORATION
 

 
and certain of its Subsidiaries
 

 
in favor of
 

 
SG PHOENIX LLC,
 
as Collateral Agent
 
for the ratable benefit of the Secured Parties
 

 

Dated as of June 5, 2008
 


 



     
 
 
 

 
EXHIBIT 10-42

Table of Contents
 
Page
 
SECTION 1.
Defined Terms
1
1.1
Definitions.
1
1.2
Other Definitional Provisions
5
SECTION 2.
Grant of Security Interest
5
SECTION 3.
Representations and Warranties
6
3.1
Title; No Other Liens
6
3.2
Perfected First Priority Liens
7
3.3
Jurisdiction of Organization; Chief Executive Office
7
3.4
Farm Products
7
3.5
Investment Property
7
3.6
Receivables.
8
3.7
Intellectual Property.
8
3.8
Commercial Tort Claims.
8
SECTION 4.
Covenants.
9
4.1
Delivery of Instruments, Certificated Securities and Chattel Paper
9
4.2
Maintenance of Insurance.
9
4.3
Maintenance of Perfected Security Interest; Further Documentation.
9
4.4
Changes in Name, etc.
10
4.5
Notices
10
4.6
Investment Property.
10
4.7
Intellectual Property.
12
4.8
Commercial Tort Claims
13
SECTION 5.
Remedial Provisions.
13
5.1
Certain Matters Relating to Receivables.
13
5.2
Communications with Obligors; Grantors Remain Liable.
14
5.3
Pledged Stock.
15
5.4
Proceeds to be Turned Over to Collateral Agent
16
5.5
Application of Proceeds
16
5.6
Code and Other Remedies
16
5.7
Registration Rights
17
5.8
Subordination
18
5.9
Deficiency
18
SECTION 6.
The Collateral Agent.
18
6.1
Collateral Agent’s Appointment as Attorney-in-Fact, etc.
18
6.2
Undertaking of the Collateral Agent.
20
6.6
Duty of Collateral Agent
24
 
(i)

EXHIBIT 10-42
 
Table of Contents
(continued)
Page
 
6.7
Execution of Financing Statements
24
6.8
Authority of Collateral Agent
24
6.9
Intercreditor Arrangements
24
SECTION 7.
Miscellaneous.
25
7.1
Amendments.
25
7.2
Notices
25
7.3
No Waiver by Course of Conduct; Cumulative Remedies
25
7.4
Enforcement Expenses; Indemnification.
26
7.5
Security Interest Absolute
26
7.6
Successors and Assigns
26
7.7
Set-Off; Limitation on Individual Actions.
26
7.8
Counterparts
27
7.9
Severability
28
7.10
Section Headings
28
7.11
Integration
28
7.12
GOVERNING LAW
28
7.13
Submission To Jurisdiction; Waivers
28
7.14
Acknowledgements
29
7.15
Additional Grantors.
30
7.16
Continuing Security Interest; Releases of Collateral.
30
7.17
WAIVER OF JURY TRIAL
30


SCHEDULES
 
Schedule 1                           —                 Notice Address
Schedule 2                           —                 Investment Property
Schedule 3                           —                 Perfection Matters
Schedule 4                           —                 Location of Jurisdiction of Organization and Chief Executive Offices
Schedule 5                           —                 Intellectual Property

ANNEXES

Annex 1                   —         Form of Assignment and Assumption Agreement



 
(ii)
 
 
 
 

 
EXHIBIT 10-42

PLEDGE AND SECURITY AGREEMENT
 
PLEDGE AND SECURITY AGREEMENT, dated as of June 5, 2008, made by each of the signatories hereto (together with any other entity that may become a party hereto as provided herein, the “ Grantors ”), in favor of SG PHOENIX LLC (“ Phoenix ”), as Collateral Agent (in such capacity, the “ Collateral Agent ”) for (i) the lenders (the “ Lenders ”) party to the Credit Agreement, dated as of June 5, 2008 (as amended, supplemented or otherwise modified from time to time, the “ Credit Agreement ”), among COMMUNICATION INTELLIGENCE CORPORATION (the “ Borrower ”) and the Lenders.
 
W I T N E S S E T H  :
 
WHEREAS, pursuant to the Credit Agreement, the Lenders have severally agreed to make Loans to the Borrower upon the terms and subject to the conditions set forth therein;
 
WHEREAS, the Borrower and the other Grantors are engaged in related businesses, and each Grantor will derive substantial direct and indirect benefit from the making of the Loans under the Credit Agreement;
 
WHEREAS, it is a condition precedent to the obligation of the Lenders to make their respective Loans to the Borrower under the Credit Agreement that the Grantors shall have executed and delivered this Agreement to the Collateral Agent for the ratable benefit of the Secured Parties;
 
NOW, THEREFORE, in consideration of the premises and to induce the Collateral Agent and the Lenders to enter into the Credit Agreement, to induce the Lenders to make their respective Loans to the Borrower under the Credit Agreement, each Grantor hereby agrees with the Collateral Agent, for the ratable benefit of the Secured Parties, as follows:
 
 
SECTION 1.                                 Defined Terms
 
1.1            Definitions .
 
(a)           Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement, and the following terms are used herein as defined in the New York UCC:  Accounts, Certificated Security, Chattel Paper, Commercial Tort Claims, Contract, Documents, Equipment, Farm Products, Fixture, General Intangibles, Goods, Instruments, Inventory, Letter-of-Credit Rights and Supporting Obligations.
 
(b)           The following terms shall have the following meanings:
 
Act of Required Lenders ” means, as to any matter at any time, a direction in writing delivered to the Collateral Agent by or with the written consent of the Required Lenders.
 
Agreement ” means this Pledge and Security Agreement, as the same may be amended, supplemented or otherwise modified from time to time.
 

EXHIBIT 10-42
 
 
Capital Stock ” means any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person (other than a corporation) and any and all warrants, rights or options to purchase any of the foregoing.
 
Collateral ” has the meaning set forth in Section 2 .
 
Collateral Account ” means any collateral account established by the Collateral Agent as provided in Section 5.1 or Section 5.4 .
 
Copyrights ” means  (i) all copyrights arising under the laws of the United States, any other country or any political subdivision thereof, whether registered or unregistered and whether published or unpublished (including, without limitation, those listed in Schedule 5 ), all registrations and recordings thereof, and all applications in connection therewith, including, without limitation, all registrations, recordings and applications in the United States Copyright Office, and (ii) the right to obtain all renewals thereof.
 
Copyright Licenses ” means any written agreement naming any Grantor as licensor or licensee (including, without limitation, those listed in Schedule 5 ), granting any right under any Copyright, including, without limitation, the grant of rights to manufacture, distribute, exploit and sell materials derived from any Copyright.
 
Default ” means any “Default” under, and as defined in, any Loan Document.
 
Deposit Account ” has the meaning defined in the Uniform Commercial Code of any applicable jurisdiction and, in any event, including, without limitation, any demand, time, savings, passbook or like account maintained with a depositary institution.
 
Discharge of Obligations ” means the occurrence of all of the following:
 
(a)           termination or expiration of all commitments of the Lenders to extend credit that would constitute Obligations;
 
(b)           payment in full in cash and discharge of the principal of and interest and premium (if any) on all Obligations; and
 
(c)           without duplication, payment in full in cash and discharge of all other Obligations, other than any inchoate indemnity obligations that expressly survive the termination of the underlying Loan Documents.
 
Grantors ” has the meaning set forth in the preamble, together with any other entity that may become a party hereto (and is identified as a Grantor) as provided herein.
 
Intellectual Property ” means, collectively, all rights, priorities and privileges relating to intellectual property, whether arising under United States, multinational or foreign laws or otherwise, including, without limitation, the Copyrights, the Copyright Licenses,
 
2

EXHIBIT 10-42
 
 
the Patents, the Patent Licenses, the Trademarks and the Trademark Licenses, and any transferable rights to sue at law or in equity for any infringement or other impairment thereof, including the right to receive all proceeds and damages therefrom.
 
Intercompany Note ” means any promissory note evidencing loans made by any Grantor to the Borrower or any of its Subsidiaries.
 
Investment Property ” means, collectively, (i) all “investment property” as such term is defined in Section 9-102(a)(49) of the New York UCC and (ii) whether or not constituting “investment property” as so defined, all Pledged Notes and all Pledged Stock.
 
Issuers ” means, collectively, each issuer of any Investment Property.
 
New York UCC ” means the Uniform Commercial Code as from time to time in effect in the State of New York.
 
Obligations ” means the collective reference to the unpaid principal of and interest on the Loans and Notes and all other obligations and liabilities of the Borrower (including, without limitation, interest accruing at the then applicable rate provided in the Credit Agreement after the maturity of the Loans and interest accruing at the then applicable rate provided in the Credit Agreement after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) to the Collateral Agent or any Lender, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, the Credit Agreement, this Agreement, the other Loan Documents or any other document made, delivered or given in connection with any of the foregoing, in each case whether on account of principal, interest, premiums (if any), reimbursement obligations, fees, indemnities, costs, expenses or otherwise (including, without limitation, all fees and disbursements of counsel to the Collateral Agent or to the Lenders that are required to be paid by the Borrower pursuant to the terms of any of the foregoing agreements).
 
Officer’s Certificate ” means a certificate of a Responsible Officer of the Borrower.
 
Patents ” means (i) all letters patent of the United States, any other country or any political subdivision thereof, all reissues and extensions thereof and all goodwill associated therewith, including, without limitation, any of the foregoing referred to in Schedule 5 , (ii) all applications for letters patent of the United States or any other country and all divisions, continuations and continuations-in-part thereof, including, without limitation, any of the foregoing referred to in Schedule 5 , and (iii) all rights to obtain any reissues or extensions of the foregoing.
 
Patent License ” means all agreements, whether written or oral, providing for the grant by or to any Grantor of any right to manufacture, use or sell any invention covered in whole or in part by a Patent, including, without limitation, any of the foregoing referred to in Schedule 5 .
 
3

EXHIBIT 10-42
 
 
Pledged Notes ” means all promissory notes listed on Schedule 2 , all Intercompany Notes at any time issued to any Grantor and all other promissory notes in principal amounts in excess of $10,000 issued to or held by any Grantor (other than promissory notes issued in connection with extensions of trade credit by any Grantor in the ordinary course of business).
 
Pledged Stock ” means the shares of Capital Stock listed on Schedule 2 , together with any other shares, stock certificates, options, interests or rights of any nature whatsoever in respect of the Capital Stock of any Person that may be issued or granted to, or held by, any Grantor while this Agreement is in effect.
 
Proceeds ” means all “proceeds” as such term is defined in Section 9-102(a)(64) of the New York UCC and, in any event, shall include, without limitation, all dividends or other income from the Investment Property, collections thereon or distributions or payments with respect thereto.
 
Receivable ” means any right to payment for goods sold or leased or for services rendered, whether or not such right is evidenced by an Instrument or Chattel Paper and whether or not it has been earned by performance (including, without limitation, any Account).
 
Required Lenders ” means Lenders representing a majority in principal amount of the then outstanding Loans.
 
Requirement of Law ” means, as to any Person, the certificate of incorporation and by laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject.
 
Responsible Officer” means the chief executive officer, president, any executive vice president or the chief financial officer of the Borrower.
 
Secured Parties ” means, collectively, the Collateral Agent and the Lenders.
 
Securities Act ” means the Securities Act of 1933, as amended.
 
Security Documents ” means this Agreement and all security agreements, pledge agreements, collateral assignments, mortgages, depositary agreements, collateral agency agreements, control agreements, deeds of trust or other grants or transfers for security executed and delivered by the Borrower or any other Grantor creating (or purporting to create) a Lien upon Collateral in favor of the Collateral Agent, for the benefit of the Secured Parties, in each case, as amended, modified, renewed, restated or replaced, in whole or in part, from time to time, in accordance with its terms and Section 7.1 .
 
Trademarks ” means (i) all trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, logos and other source or business identifiers, and all goodwill associated therewith, all registrations and recordings thereof, and all applications in connection therewith (other than “intent to use” applications), whether in the
 
4

EXHIBIT 10-42
 
 
United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof or any other country or any political subdivision thereof, or otherwise, and all common-law rights related thereto, including, without limitation, any of the foregoing referred to in Schedule 5 , and (ii) the right to obtain all renewals thereof.
 
Trademark License ” means any agreement, whether written or oral, providing for the grant by or to any Grantor of any right to use any Trademark, including, without limitation, any of the foregoing referred to in Schedule 5 .
 
1.2            Other Definitional Provisions
 
(a)           The words “hereof,” “herein”, “hereto” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section and Schedule references are to this Agreement unless otherwise specified.
 
(b)           The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms.
 
(c)           Where the context requires, terms relating to the Collateral or any part thereof, when used in relation to a Grantor, shall refer to such Grantor’s Collateral or the relevant part thereof.
 
 
SECTION 2.                                 Grant of Security Interest
 
Each Grantor hereby assigns and transfers to the Collateral Agent, and hereby grants to the Collateral Agent, for the ratable benefit of the Secured Parties, a security interest in, all of the following property now owned or at any time hereafter acquired by such Grantor or in which such Grantor now has or at any time in the future may acquire any right, title or interest (collectively, the “ Collateral ”), as collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Obligations:
 
(a)           all Accounts;
 
(b)           all Chattel Paper;
 
(c)           all Contracts;
 
(d)           all Deposit Accounts and cash;
 
(e)           all Documents;
 
(f)           all Equipment;
 
(g)           all Fixtures;
 
(h)           all General Intangibles;
 
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(i)           all Instruments;
 
(j)           all Intellectual Property;
 
(k)           all Inventory;
 
(l)           all Goods;
 
(m)           all Investment Property;
 
(n)           all Letter-of-Credit Rights;
 
(o)           all Commercial Tort Claims described in Section 4.8 hereof;
 
(p)           all books and records pertaining to the Collateral; and
 
(q)           to the extent not otherwise included, all Proceeds, Supporting Obligations and products of any and all of the foregoing and all collateral security and guarantees given by any Person with respect to any of the foregoing;
 
provided , however , that notwithstanding any of the other provisions set forth in this Section 2 , this Agreement shall not constitute a grant of a security interest in any property to the extent that such grant of a security interest is prohibited by any Requirements of Law of a Governmental Authority, requires a consent not obtained of any Governmental Authority pursuant to such Requirement of Law or is prohibited by, or constitutes a breach or default under or results in the termination of or requires any consent not obtained under, any contract, license, agreement, instrument or other document evidencing or giving rise to such property or, in the case of any Investment Property, Pledged Stock or Pledged Note, any applicable shareholder or similar agreement, except to the extent that such Requirement of Law or the term in such contract, license, agreement, instrument or other document or shareholder or similar agreement providing for such prohibition, breach, default or termination or requiring such consent is ineffective under applicable law.
 
 
SECTION 3.                                 Representations and Warranties
 
To induce the Collateral Agent and the Lenders to enter into the Credit Agreement, to induce the Lenders to make their Loans to the Borrower under the Credit Agreement, each Grantor hereby represents and warrants to the Collateral Agent and each Secured Party that:
 
3.1            Title; No Other Liens
 
.  Except for the security interest granted to the Collateral Agent for the ratable benefit of the Secured Parties pursuant to this Agreement and the other Liens permitted to exist on the Collateral under each then outstanding Loan Document, such Grantor owns, or has rights in, each item of the Collateral free and clear of any and all Liens or claims of others.  No effective financing statement or other public notice with respect to all or any part of the Collateral is on file or of record in any public office, except such as have been filed in favor of the Collateral Agent, for the ratable benefit of the Secured Parties, pursuant to this Agreement or as are permitted by the Credit Agreement.
 
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3.2            Perfected First Priority Liens
 
.  The security interests granted pursuant to this Agreement (a) upon completion of the filings and other actions specified on Schedule 3 (which, in the case of all filings and other documents referred to on said Schedule, have been delivered to the Collateral Agent in completed and duly executed form) will constitute valid perfected security interests in all of the Collateral for which such filings and actions are effective to perfect such security interests in favor of the Collateral Agent, for the ratable benefit of the Secured Parties, as collateral security for the Obligations, enforceable in accordance with the terms hereof against all creditors of such Grantor and any Persons purporting to purchase any Collateral from such Grantor, except such Persons who are good faith purchasers to the extent set forth in the New York UCC and (b) are prior to all other Liens on the Collateral in existence on the date hereof except for unrecorded Liens permitted by the Credit Agreement which have priority over the Liens on the Collateral by operation of law or as otherwise permitted to have priority over the Liens on the Collateral under Section 3.2 of the Credit Agreement.
 
3.3            Jurisdiction of Organization; Chief Executive Office
 
.  On the date hereof, such Grantor’s jurisdiction of organization, identification number from the jurisdiction of organization (if any), and the location of such Grantor’s chief executive office or sole place of business, as the case may be, are specified on Schedule 4 .  Such Grantor has furnished to the Collateral Agent a certified charter, certificate of incorporation or other organization document and long-form good standing certificate as of a date which is recent to the date hereof.
 
3.4            Farm Products
 
.  None of the Collateral constitutes, or is the Proceeds of, Farm Products.
 
3.5            Investment Property
 
.
 
(a)           The shares of Pledged Stock pledged by such Grantor hereunder constitute all the issued and outstanding shares of all classes of the Capital Stock of each Issuer owned by such Grantor.
 
(b)           All the shares of the Pledged Stock issued by an Issuer which is a Subsidiary of such Grantor have been duly and validly issued and are, if such shares are shares of stock in a domestic corporation, fully paid and nonassessable.
 
(c)           Each of the Pledged Notes issued by an Issuer which is a Subsidiary of such Grantor constitutes the legal, valid and binding obligation of the obligor with respect thereto, enforceable in accordance with its terms, subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors’ rights generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing.
 
(d)           Such Grantor is the owner of, and has good title to, the Investment Property pledged by it hereunder, free of any and all Liens or options in favor of, or claims of, any other Person, except the security interest created by this Agreement or as otherwise permitted under Section 3.2 of the Credit Agreement.
 
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3.6            Receivables .
 
(a)           No amount in excess of $50,000 payable to such Grantor under or in connection with any Receivable is evidenced by any Instrument or Chattel Paper which has not been delivered to the Collateral Agent.
 
(b)           The amounts represented by such Grantor to the Lenders from time to time as owing to such Grantor in respect of the Receivables will at such times be accurate in all material respects.
 
3.7            Intellectual Property .
 
(a)            Schedule 5 lists all Intellectual Property owned by such Grantor in its own name on the date hereof and which is registered with the United States Copyright Office or the United States Patent and Trademark Office or any similar office or agency in any other country or any political subdivision thereof.
 
(b)           On the date hereof, all material scheduled Intellectual Property owned, used or held by such Grantor is valid, subsisting, unexpired and in full force and effect, has not been abandoned and does not infringe the intellectual property rights of any other Person.
 
(c)           No holding, decision or judgment has been rendered by any Governmental Authority which would limit, cancel or question the validity of, or such Grantor’s rights in, any Intellectual Property owned, used or held by such Grantor in any respect.
 
(d)           No action or proceeding is pending, or, to the knowledge of such Grantor, threatened, on the date hereof seeking to limit, cancel or question the validity of any Intellectual Property owned, used or held by such Grantor or such Grantor’s ownership interest therein.
 
(e)           No action or proceeding is pending, or, to the knowledge of Grantor, threatened, on the date hereof asserting infringement by Grantor of any intellectual property rights owned by another entity.
 
3.8            Commercial Tort Claims .
 
(a)           On the date hereof, except to the extent listed in Section 2.1 above, no Grantor has rights in any Commercial Tort Claim with a reasonably expected value in excess of $50,000.
 
(b)           Upon the filing of a financing statement specifically describing any Commercial Tort Claim referred to in Section 4.8 hereof against such Grantor in the jurisdiction specified in Schedule 3 hereto, the security interest granted in such Commercial Tort Claim will constitute a valid perfected security interest in favor of the Collateral Agent, for the ratable benefit of the Secured Parties, as collateral security for such Grantor’s Obligations, enforceable in accordance with the terms hereof against all creditors of such Grantor and any Persons purporting to purchase such Collateral from Grantor except such Persons who are good faith purchasers to the extent set forth in the New
 
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York UCC, which security interest shall be prior to all other Liens on such Collateral except for unrecorded Liens permitted by the Credit Agreement which have priority over the Liens on such Collateral by operation of law or as otherwise permitted to have priority over the Liens on the Collateral under the relevant provisions of the then effective Loan Documents.
 
                       SECTION 4.                                  Covenants .
 
Each Grantor covenants and agrees with the Collateral Agent and the Secured Parties that, from and after the date of this Agreement and until the Discharge of Obligations:
 
4.1            Delivery of Instruments, Certificated Securities and Chattel Paper
 
.  If any amount in excess of $50,000 payable to a Grantor under or in connection with any of the Collateral shall be or become evidenced by any Instrument, Certificated Security or Chattel Paper, such Instrument, Certificated Security or Chattel Paper shall be immediately delivered to the Collateral Agent, duly indorsed in a manner satisfactory to the Collateral Agent, to be held as Collateral pursuant to this Agreement.
 
4.2            Maintenance of Insurance .
 
(a)           Such Grantor will maintain, with financially sound and reputable companies, insurance policies insuring such Grantor and the Collateral Agent against liability for personal injury and property damage relating to Inventory and Equipment, such policies to be in such form and amounts and having such coverage as may be reasonably satisfactory to the Collateral Agent.
 
(b)           All such insurance shall (i) name the Collateral Agent as an additional insured party or loss payee and (ii) be reasonably satisfactory in all other respects to the Collateral Agent.
 
(c)           The Borrower shall deliver to the Collateral Agent a report of a reputable insurance broker with respect to such insurance substantially concurrently with each delivery of the Borrower’s audited annual financial statements and such supplemental reports with respect thereto as the Collateral Agent may from time to time reasonably request.
 
4.3            Maintenance of Perfected Security Interest; Further Documentation .
 
(a)           Such Grantor shall maintain the security interest created by this Agreement as a perfected security interest having at least the priority described in Section 3.2 and shall defend such security interest against the claims and demands of all Persons whomsoever, subject to the rights of such Grantor under the Loan Documents to dispose of the Collateral.
 
(b)           Such Grantor will furnish to the Collateral Agent and the Lenders from time to time statements and schedules further identifying and describing the assets and property of such Grantor and such other reports in connection therewith as the Collateral Agent may reasonably request, all in reasonable detail.
 
(c)           At any time and from time to time, upon the written request of the Collateral Agent, and at the sole expense of such Grantor, such Grantor will promptly and duly execute and deliver, and have recorded, such further instruments and documents and take such
 
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further actions as the Collateral Agent may reasonably request for the purpose of obtaining or preserving the full benefits of this Agreement and of the rights and powers herein granted, including, without limitation, (i) filing any financing or continuation statements under the Uniform Commercial Code (or other similar laws) in effect in any jurisdiction with respect to the security interests created hereby and (ii) in the case of Investment Property, Deposit Accounts, Letter-of-Credit Rights and any other relevant Collateral, taking any actions necessary to enable the Collateral Agent to obtain “control” (within the meaning of the applicable Uniform Commercial Code) with respect thereto.
 
4.4            Changes in Name, etc .
 
  Such Grantor will not, except upon 15 days’ prior written notice to the Collateral Agent and delivery to the Collateral Agent of all additional financing statements and other executed documents reasonably requested by the Collateral Agent to maintain the validity, perfection and priority of the security interests provided for herein, (i) change its jurisdiction of organization or the location of its chief executive office or sole place of business from that referred to in Section 3.3 or (ii) change its name.
 
4.5            Notices
 
.  Such Grantor will advise the Collateral Agent and the Lenders promptly, in reasonable detail, of:
 
(a)           any Lien (other than security interests created hereby or Liens permitted under the Loan Documents) on any of the Collateral which would adversely affect the ability of the Collateral Agent to exercise any of its remedies hereunder; and
 
(b)           of the occurrence of any other event which could reasonably be expected to have a material adverse effect on the aggregate value of the Collateral or on the security interests created hereby.
 
4.6            Investment Property .
 
(a)           If such Grantor shall become entitled to receive or shall receive any certificate (including, without limitation, any certificate representing a dividend or a distribution in connection with any reclassification, increase or reduction of capital or any certificate issued in connection with any reorganization), option or rights in respect of the Capital Stock (constituting Collateral hereunder) of any Issuer, whether in addition to, in substitution of, as a conversion of, or in exchange for, any shares of the Pledged Stock, or otherwise in respect thereof, such Grantor shall accept the same as the agent of the Collateral Agent and the Secured Parties, hold the same in trust for the Collateral Agent and the Secured Parties and deliver the same forthwith to the Collateral Agent in the exact form received, duly indorsed by such Grantor to the Collateral Agent, if required, together with an undated stock power covering such certificate duly executed in blank by such Grantor and with, if the Collateral Agent so requests, signature guaranteed, to be held by the Collateral Agent, subject to the terms hereof, as additional collateral security for the Obligations.  Any sums paid upon or in respect of the Investment Property constituting Collateral hereunder upon the liquidation or dissolution of any Issuer shall be paid over to the Collateral Agent to be held by it hereunder as additional collateral security for the Obligations, and in case any distribution of capital shall be made on or in respect of such Investment
 
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Property or any property shall be distributed upon or with respect to such Investment Property pursuant to the recapitalization or reclassification of the capital of any Issuer or pursuant to the reorganization thereof, the property so distributed shall, unless otherwise subject to a perfected security interest in favor of the Collateral Agent, be delivered to the Collateral Agent to be held by it hereunder as additional collateral security for the Obligations.  If any sums of money or property so paid or distributed in respect of such Investment Property shall be received by such Grantor, such Grantor shall, until such money or property is paid or delivered to the Collateral Agent, hold such money or property in trust for the Collateral Agent and the Secured Parties, segregated from other funds of such Grantor, as additional collateral security for the Obligations.
 
(b)           Without the prior written consent of the Collateral Agent or except as permitted under the Credit Agreement, such Grantor will not (i) vote to enable, or take any other action to permit, any Issuer to issue any Capital Stock of any nature or to issue any other securities convertible into or granting the right to purchase or exchange for any Capital Stock of any nature of any Issuer, unless all such Capital Stock is pledged by such Grantor to the Collateral Agent, for the ratable benefit of the Secured Parties, to the extent such pledge is required under this Agreement or any other Loan Document, (ii) sell, assign, transfer, exchange, or otherwise dispose of, or grant any option with respect to, the Investment Property or Proceeds thereof constituting Collateral hereunder (except pursuant to a transaction that is permitted by the Loan Documents), (iii) create, incur or permit to exist any Lien or option in favor of, or any claim of any Person with respect to, any of the Investment Property or Proceeds thereof constituting Collateral hereunder, or any interest therein, except for the security interests created by this Agreement or (iv) enter into any agreement or undertaking restricting the right or ability of such Grantor or the Collateral Agent to sell, assign or transfer any of the Investment Property or Proceeds thereof.
 
(c)           In the case of each Grantor which is an Issuer, such Issuer agrees that (i) it will be bound by the terms of this Agreement relating to the Investment Property issued by it and will comply with such terms insofar as such terms are applicable to it, (ii) it will notify the Collateral Agent promptly in writing of the occurrence of any of the events described in Section 4.6(a) with respect to the Investment Property issued by it and (iii) the terms of Sections 5.3(c) and 5.7 shall apply to it, mutatis mutandis , with respect to all actions that may be required of it pursuant to Section 5.3(c) or 5.7 with respect to the Investment Property issued by it.
 
(d)           With respect to any Pledged Stock in the form of uncertificated securities as defined in Section 8-102(18) of the New York UCC, the Grantor shall promptly instruct the Issuer thereof to indicate (and each Issuer who is a Grantor hereunder shall promptly so indicate) clearly in writing in its stock book or other comparable books and records that the Pledged Stock is subject to the security interest of the Collateral Agent under this Agreement.  Each Grantor that is an Issuer of Pledged Stock in the form of uncertificated securities as defined in Section 8-102(18) of the New York UCC further agrees to comply with instructions originated by the Collateral Agent with respect to such Pledged Stock without further consent by the Grantor that is the registered owner of such Pledged Stock.
 
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4.7            Intellectual Property .
 
(a)           Except in such Grantor’s reasonable business judgment, each Grantor will not knowingly do any act or knowingly omit to do any act whereby any Trademark constituting Collateral hereunder may become invalidated or impaired in any way.
 
(b)           Each Grantor will not knowingly do any act, or knowingly omit to do any act, that could reasonably be expected cause any Patent owned, used or held by such Grantor to become forfeited, abandoned or dedicated to the public.
 
(c)           Except in such Grantor’s reasonable business judgment, each Grantor will not knowingly do any act or knowingly omit to do any act whereby any portion of the Copyrights owned, used or held by such Grantor may become invalidated or otherwise impaired nor knowingly do any act whereby any portion of the Copyrights owned, used or held by such Grantor may fall into the public domain.
 
(d)           Such Grantor will not do any act that knowingly uses any Intellectual Property owned by such Grantor to infringe the intellectual property rights of any other Person.
 
(e)           Such Grantor will notify the Collateral Agent promptly if it knows, or has reason to know, that any application or registration relating to any Intellectual Property owned by such Grantor has become forfeited, abandoned or dedicated to the public, or of any adverse determination or development (including, without limitation, the institution of, or any such determination or development in, any proceeding in the United States Patent and Trademark Office, the United States Copyright Office or any court or tribunal in any country) regarding such Grantor’s ownership of, or the validity of, any Intellectual Property constituting Collateral hereunder or such Grantor’s right to register the same or to own and maintain the same.
 
(f)           Whenever such Grantor, either by itself or through any agent, employee, licensee or designee, shall file an application for the registration of any Intellectual Property with the United States Patent and Trademark Office, the United States Copyright Office or any similar office or agency in any other country or any political subdivision thereof, such Grantor shall report such filing to the Collateral Agent within five Business Days after the last day of the fiscal quarter in which such filing occurs.  Upon request of the Collateral Agent, such Grantor shall execute and deliver, and have recorded, any and all agreements, instruments, documents, and papers as the Collateral Agent may request to evidence the Collateral Agent’s and the Secured Parties’ security interest in such Copyright, Patent or Trademark and the goodwill and general intangibles of such Grantor relating thereto or represented thereby.
 
(g)           Each Grantor will take all reasonable and necessary steps, including, without limitation, in any proceeding before the United States Patent and Trademark Office, the United States Copyright Office or any similar office or agency in any other country or any political subdivision thereof, to maintain and pursue each application (and to obtain the relevant registration) and to maintain each registration of the material Intellectual Property constituting Collateral hereunder, including, without limitation, filing of applications for renewal, affidavits of use and affidavits of incontestability.
 
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(h)           In the event that any Intellectual Property constituting Collateral hereunder is infringed, misappropriated or diluted by a third party, such Grantor shall take such actions as such Grantor shall reasonably deem appropriate under the circumstances to protect such Intellectual Property including, without limitation, suing for infringement, misappropriation or dilution, to seek injunctive relief and seeking to recover any and all damages for such infringement, misappropriation or dilution.
 
(i)           Grantor will notify the Collateral Agent and Secured Parties promptly if it knows, or has reason to know, that any action or proceeding becomes pending, or, to the knowledge of Grantor, threatened, which asserts infringement by Grantor of any intellectual property rights owned by another entity.
 
4.8            Commercial Tort Claims
 
.  If such Grantor shall obtain an interest in any Commercial Tort Claim with a reasonably expected value in excess of $50,000, such Grantor shall within 45 days of obtaining such interest advise the Collateral Agent thereof and, if requested by the Collateral Agent in writing, within 30 days after such request sign and deliver documentation acceptable to the Collateral Agent granting a security interest under the terms and provisions of this Agreement in and to such Commercial Tort Claim.
 
4.9            Subsidiaries .
 
(a)           Such Grantor will not, except upon 15 days’ prior written notice to the Collateral Agent and delivery to the Collateral Agent of all financing statements and other documents and information reasonably requested by the Collateral Agent to acquire or maintain the validity, perfection and priority of the security interests provided for herein, and solely to the extent permitted under the Credit Agreement, (i) sell, assign, pledge, transfer, exchange, or otherwise dispose of, or grant any option with respect to, as the case may be, any Collateral to any Subsidiary or (ii) make any contribution, distribution or other payment to any Subsidiary unless, in each case, such Subsidiary is a Grantor under this Agreement and the Capital Stock of such Subsidiary constitutes Pledged Shares hereunder.
 
(b)           In the event that any non-Grantor Subsidiary of such Grantor has or acquires more than de minimus property or assets constituting Collateral, such non-Grantor Subsidiary shall promptly, but in no even more than five Business Days thereafter, become a Grantor under this Agreement, and Grantor or Grantors holding the Capital Stock of such Subsidiary shall take all necessary actions to ensure that such Capital Stock constitutes Pledged Shares hereunder.
 
 
SECTION 5.                                 Remedial Provisions .
 
5.1            Certain Matters Relating to Receivables .
 
(a)           The Collateral Agent shall have the right at reasonable times and with reasonable notice to make test verifications of the Receivables constituting Collateral hereunder in any manner and through any medium that it reasonably considers advisable, and each Grantor shall furnish all such assistance and information as the Collateral Agent may reasonably require in connection with such test verifications.  At any time (but no more frequently than once per fiscal year (unless an Event of Default shall have occurred and be
 
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continuing, in which case there shall be no limits), upon the Collateral Agent’s request and at the expense of the relevant Grantor, such Grantor shall use commercially reasonable efforts to cause independent public accountants or others satisfactory to the Collateral Agent to furnish to the Collateral Agent reports showing reconciliations, aging and test verifications of, and trial balances for, the Receivables constituting Collateral hereunder.
 
(b)           The Collateral Agent hereby authorizes each Grantor to collect such Grantor’s Receivables, subject to the Collateral Agent’s direction and control, and the Collateral Agent may curtail or terminate said authority at any time after the occurrence and during the continuance of an Event of Default.  If required by the Collateral Agent at any time after the occurrence and during the continuance of an Event of Default, any payments of Receivables, when collected by any Grantor, (i) shall be forthwith (and, in any event, within three Business Days) deposited by such Grantor in the exact form received, duly indorsed by such Grantor to the Collateral Agent if required, in a Collateral Account maintained under the sole dominion and control of the Collateral Agent, subject to withdrawal by the Collateral Agent for the account of the Secured Parties only as provided in Section 5.5 , and (ii) until so turned over, shall be held by such Grantor in trust for the Collateral Agent and the Secured Parties, segregated from other funds of such Grantor.  Each such deposit of Proceeds of Receivables shall be accompanied by a report identifying in reasonable detail the nature and source of the payments included in the deposit.
 
(c)           At the Collateral Agent’s request after the occurrence and during the continuance of an Event of Default, each Grantor shall deliver to the Collateral Agent all original and other documents evidencing, and relating to, the agreements and transactions which gave rise to the Receivables constituting Collateral hereunder, including, without limitation, all original orders, invoices and shipping receipts.
 
5.2            Communications with Obligors; Grantors Remain Liable .
 
(a)           The Collateral Agent in its own name or in the name of others may at any time after the occurrence and during the continuance of an Event of Default communicate with obligors under the Receivables constituting Collateral hereunder and parties to the Contracts constituting Collateral hereunder to verify with them to the Collateral Agent’s satisfaction the existence, amount and terms of any such Receivables or Contracts.
 
(b)           Upon the request of the Collateral Agent at any time after the occurrence and during the continuance of an Event of Default, each Grantor shall notify obligors on the Receivables constituting Collateral hereunder and parties to the Contracts constituting Collateral hereunder that such Receivables and the Contracts have been assigned to the Collateral Agent for the ratable benefit of the Secured Parties and that payments in respect thereof shall be made directly to the Collateral Agent.
 
(c)           Anything herein to the contrary notwithstanding, each Grantor shall remain liable under each of the Receivables and Contracts to observe and perform all the conditions and obligations to be observed and performed by it thereunder, all in accordance with the terms of any agreement giving rise thereto.  Neither the Collateral Agent nor any Secured Party shall have any obligation or liability under any Receivable (or any agreement giving rise thereto) or Contract by reason of or arising out of this Agreement or the receipt by the
 
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Collateral Agent or any Secured Party of any payment relating thereto, nor shall the Collateral Agent or any Secured Party be obligated in any manner to perform any of the obligations of any Grantor under or pursuant to any Receivable (or any agreement giving rise thereto) or Contract, to make any payment, to make any inquiry as to the nature or the sufficiency of any payment received by it or as to the sufficiency of any performance by any party thereunder, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times.
 
5.3            Pledged Stock .
 
(a)           Unless an Event of Default shall have occurred and be continuing and the Collateral Agent shall have given written notice to the relevant Grantor of the Collateral Agent’s intent to exercise its corresponding rights pursuant to Section 5.3(b) , each Grantor shall be permitted to receive all cash dividends paid in respect of the Pledged Stock and all payments made in respect of the Pledged Notes, in each case paid in the normal course of business of the relevant Issuer and consistent with past practice, to the extent permitted in the Credit Agreement, and to exercise all voting and corporate or other organizational rights with respect to the Investment Property; provided that no vote shall be cast or corporate or other organizational right exercised or other action taken which, in the Collateral Agent’s reasonable judgment, would materially impair the Collateral or which would be inconsistent with or result in any violation of any provision of the Credit Agreement, this Agreement or any other Loan Document.
 
(b)           If an Event of Default shall occur and be continuing and the Collateral Agent shall give written notice of its intent to exercise such rights to the relevant Grantor or Grantors, (i) the Collateral Agent shall have the right to receive any and all cash dividends, payments or other Proceeds paid in respect of the Investment Property constituting Collateral hereunder and make application thereof to the Obligations in such order as the Collateral Agent may determine, and (ii) any or all of the Investment Property shall be registered in the name of the Collateral Agent or its nominee, and the Collateral Agent or its nominee may thereafter exercise (x) all voting, corporate and other rights pertaining to such Investment Property at any meeting of shareholders of the relevant Issuer or Issuers or otherwise and (y) any and all rights of conversion, exchange and subscription and any other rights, privileges or options pertaining to such Investment Property as if it were the absolute owner thereof (including, without limitation, the right to exchange at its discretion any and all of the Investment Property constituting Collateral hereunder upon the merger, consolidation, reorganization, recapitalization or other fundamental change in the corporate or other organizational structure of any Issuer, or upon the exercise by any Grantor or the Collateral Agent of any right, privilege or option pertaining to such Investment Property, and in connection therewith, the right to deposit and deliver any and all of such Investment Property with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions as the Collateral Agent may determine), all without liability except to account for property actually received by it, but the Collateral Agent shall have no duty to any Grantor to exercise any such right, privilege or option and shall not be responsible for any failure to do so or delay in so doing.
 
(c)           Each Grantor hereby authorizes and instructs each Issuer of any Investment Property pledged by such Grantor hereunder to (i) comply with any instruction received by it from the Collateral Agent in writing that (x) states that an Event of Default has
 
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occurred and is continuing and (y) is otherwise in accordance with the terms of this Agreement, without any other or further instructions from such Grantor, and each Grantor agrees that each Issuer shall be fully protected in so complying, and (ii) unless otherwise expressly permitted hereby, pay any dividends or other payments with respect to the Investment Property directly to the Collateral Agent.
 
5.4            Proceeds to be Turned Over to Collateral Agent
 
.  In addition to the rights of the Collateral Agent and the Secured Parties specified in Section 5.1 with respect to payments of Receivables, if an Event of Default shall occur and be continuing, all Proceeds received by any Grantor consisting of cash, checks and other near-cash items shall be held by such Grantor in trust for the Collateral Agent and the Secured Parties, segregated from other funds of such Grantor, and shall, forthwith upon receipt by such Grantor, be turned over to the Collateral Agent in the exact form received by such Grantor (duly indorsed by such Grantor to the Collateral Agent, if required).  All Proceeds constituting Collateral hereunder received by the Collateral Agent hereunder shall be held by the Collateral Agent in a Collateral Account maintained under its sole dominion and control.  All Proceeds constituting Collateral hereunder while held by the Collateral Agent in a Collateral Account (or by such Grantor in trust for the Collateral Agent and the Secured Parties) shall continue to be held as collateral security for all the Obligations and shall not constitute payment thereof until applied as provided in Section 5.5 .
 
5.5            Application of Proceeds
 
.  At such intervals as may be agreed upon by the Borrower and the Collateral Agent, or, if an Event of Default shall have occurred and be continuing, at any time at the Collateral Agent’s election, the Collateral Agent may apply all or any part of Proceeds constituting Collateral, whether or not held in any Collateral Account, in payment of the Obligations in the following order:
 
First , to pay incurred and unpaid fees and expenses of the Collateral Agent under the Loan Documents;
 
Second , to the Collateral Agent, for application by it towards payment of amounts then due and owing and remaining unpaid in respect of the Obligations, pro rata among the Secured Parties according to the amounts of the Obligations then due and owing and remaining unpaid to the Secured Parties;
 
Third , to the Collateral Agent, for application by it towards prepayment of the Obligations, pro rata among the Secured Parties according to the amounts of the Obligations then held by the Secured Parties; and
 
Fourth , any balance remaining after the Discharge of Obligations shall be paid over to the Borrower or to whomsoever may be lawfully entitled to receive the same.
 
5.6            Code and Other Remedies
 
.  If an Event of Default shall occur and be continuing, the Collateral Agent, on behalf of the Secured Parties, may exercise, in addition to all other rights and remedies granted to them in this Agreement and in any other instrument or agreement securing, evidencing or relating to the Obligations, all rights and remedies of a secured party under the New York UCC or any other applicable law.  Without limiting the generality of the foregoing, the Collateral Agent, without demand of performance or other demand, presentment, protest, advertisement or notice of any
 
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kind (except any notice required by law referred to below) to or upon any Grantor or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived), may, subject to the requirements of applicable law, in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, at any exchange, broker’s board or office of the Collateral Agent or any Secured Party or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk.  The Collateral Agent or any Secured Party shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in any Grantor, which right or equity is hereby waived and released.  Each Grantor further agrees, at the Collateral Agent’s request, to assemble the Collateral and make it available to the Collateral Agent at places which the Collateral Agent shall reasonably select, whether at such Grantor’s premises or elsewhere.  The Collateral Agent shall apply the net proceeds of any action taken by it pursuant to this Section 5.6 , after deducting all reasonable costs and expenses of every kind incurred in connection therewith or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Collateral Agent and the Secured Parties hereunder, including, without limitation, reasonable attorneys’ fees and disbursements, to the payment in whole or in part of the Obligations, in such order as the Collateral Agent may elect, and only after such application and after the payment by the Collateral Agent of any other amount required by any provision of law, including, without limitation, Section 9-615(a)(3) of the New York UCC, need the Collateral Agent account for the surplus, if any, to any Grantor.  To the extent permitted by applicable law, each Grantor waives all claims, damages and demands it may acquire against the Collateral Agent or any Secured Party arising out of the exercise by them of any rights hereunder.  If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least 10 days before such sale or other disposition.
 
5.7            Registration Rights
 
(a)           Each Grantor recognizes that the Collateral Agent may be unable to effect a public sale of any or all the Pledged Stock, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws or otherwise, and may be compelled to resort to one or more private sales thereof to a restricted group of purchasers which will be obliged to agree, among other things, to acquire such securities for their own account for investment and not with a view to the distribution or resale thereof.  Each Grantor acknowledges and agrees that any such private sale may result in prices and other terms less favorable than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner.  The Collateral Agent shall be under no obligation to delay a sale of any of the Pledged Stock for the period of time necessary to permit the Issuer thereof to register such securities for public sale under the Securities Act, or under applicable state securities laws, even if such Issuer would agree to do so.
 
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(b)           Each Grantor agrees to use its commercially reasonable efforts to do or cause to be done all such other acts as may be necessary to make such sale or sales of all or any portion of the Pledged Stock pursuant to this Section 5.7 valid and binding and in compliance with any and all other applicable Requirements of Law.  Each Grantor further agrees that a breach of any of the covenants contained in this Section 5.7 will cause irreparable injury to the Collateral Agent and the Secured Parties, that the Collateral Agent and the Secured Parties have no adequate remedy at law in respect of such breach and, as a consequence, that each and every covenant contained in this Section 5.7 shall be specifically enforceable against such Grantor, and such Grantor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that no Event of Default has occurred.
 
5.8            Subordination
 
.  Each Grantor hereby agrees that, upon the occurrence and during the continuance of an Event of Default, unless otherwise agreed by the Collateral Agent, all Indebtedness owing by it to any Subsidiary of the Borrower shall be fully subordinated to the indefeasible payment in full in cash of the Obligations.
 
5.9            Deficiency
 
.  The Borrower shall remain liable for any deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to pay the Obligations and the fees and disbursements of any attorneys employed by the Collateral Agent or any Secured Party to collect such deficiency.
 
 
SECTION 6.                                 The Collateral Agent .
 
6.1            Collateral Agent’s Appointment as Attorney-in-Fact, etc .
 
(a)           Each Grantor hereby irrevocably constitutes and appoints the Collateral Agent and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of such Grantor and in the name of such Grantor or in its own name, for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Agreement.  At any time when an Event of Default has occurred and is continuing and without limiting the generality of the foregoing, each Grantor hereby gives the Collateral Agent the power and right, on behalf of such Grantor, without notice to or assent by such Grantor, to do any or all of the following:
 
(i)           in the name of such Grantor or its own name, or otherwise, take possession of and indorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under any Receivable or Contract or with respect to any other Collateral and file any claim or take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the Collateral Agent for the purpose of collecting any and all such moneys due under any Receivable or Contract or with respect to any other Collateral whenever payable;
 
(ii)           in the case of any Intellectual Property, execute and deliver, and have recorded, any and all agreements, instruments, documents and papers as the Collateral Agent may reasonably request to evidence the Collateral Agent’s and the Secured Parties’ security interest in such Intellectual Property and the goodwill and general intangibles of such Grantor relating thereto or represented thereby;
 
(iii)           pay or discharge taxes and Liens levied or placed on or threatened against the Collateral, effect any repairs or any insurance called for by the terms of this Agreement and pay all or any part of the premiums therefor and the costs thereof;
 
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(iv)           execute, in connection with any sale provided for in Section 5.6 or 5.7 , any endorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral; and
 
(v)           (1)  direct any party liable for any payment under any of the Collateral to make payment of any and all moneys due or to become due thereunder directly to the Collateral Agent or as the Collateral Agent shall direct; (2) ask or demand for, collect, and receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (3) sign and indorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications, notices and other documents in connection with any of the Collateral; (4) commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any portion thereof and to enforce any other right in respect of any Collateral; (5) defend any suit, action or proceeding brought against such Grantor with respect to any Collateral; (6) settle, compromise or adjust any such suit, action or proceeding and, in connection therewith, give such discharges or releases as the Collateral Agent may deem appropriate; (7) assign any Copyright, Patent or Trademark (along with the goodwill of the business to which any such Copyright, Patent or Trademark pertains), throughout the world for such term or terms, on such conditions, and in such manner, as the Collateral Agent shall in its sole discretion determine; and (8) generally, sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Collateral Agent were the absolute owner thereof for all purposes, and do, at the Collateral Agent’s option and such Grantor’s expense, at any time, or from time to time, all acts and things which the Collateral Agent deems necessary to protect, preserve or realize upon the Collateral and the Collateral Agent’s and the Secured Parties’ security interests therein and to effect the intent of this Agreement, all as fully and effectively as such Grantor might do.
 
Notwithstanding anything to the contrary in this Section 6.1(a) , the Collateral Agent agrees that it will not exercise any rights under the power of attorney provided for in this Section 6.1(a) unless an Event of Default shall have occurred and be continuing.
 
(b)           If any Grantor fails to perform or comply with any of its agreements contained herein, the Collateral Agent, at its option, but without any obligation so to do, may perform or comply, or otherwise cause performance or compliance, with such agreement.
 
(c)           The reasonable expenses of the Collateral Agent incurred in connection with actions undertaken as provided in this Section 6.1 , together with interest thereon at a rate per annum equal to the highest rate per annum at which interest would then be
 
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payable on any category of past due Loans under the Credit Agreement, from the date of payment by the Collateral Agent to the date reimbursed by the relevant Grantor, shall be payable by such Grantor to the Collateral Agent on demand.
 
(d)           Each Grantor hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof.  All powers, authorizations and agencies contained in this Agreement are coupled with an interest and are irrevocable until this Agreement is terminated and the security interests created hereby are released.
 
6.2            Undertaking of the Collateral Agent .
 
(a)           Subject to, and in accordance with the terms of the Credit Agreement, this Agreement and the other Security Documents, the Collateral Agent will, for the benefit solely and exclusively of the Secured Parties:
 
(i)           accept, enter into, hold, maintain, administer and enforce all Security Documents, including all Collateral subject thereto, and all Liens created thereunder, perform its obligations under the Security Documents and protect, exercise and enforce the interests, rights, powers and remedies granted or available to it under, pursuant to or in connection with the Security Documents;
 
(ii)           take all lawful and commercially reasonable actions permitted under the Security Documents that it may deem necessary or advisable to protect or preserve its interest in the Collateral subject thereto and such interests, rights, powers and remedies;
 
(iii)           deliver and receive notices pursuant to the Security Documents;
 
(iv)           sell, assign, collect, assemble, foreclose on, institute legal proceedings with respect to, or otherwise exercise or enforce the rights and remedies of a secured party (including a mortgagee, trust deed beneficiary and insurance beneficiary or loss payee) with respect to the Collateral under the Security Documents and its other interests, rights, powers and remedies;
 
(v)           remit as provided in Section 5.5 all cash proceeds, cash equivalents and other distributions of or in respect of Collateral received by it from the collection, foreclosure or enforcement of its interest in the Collateral under the Security Documents or any of its other interests, rights, powers or remedies;
 
(vi)           execute and deliver amendments to this Agreement as from time to time authorized pursuant to Section 7.1 ; and
 
(vii)           release any Lien granted to it by any Security Document upon any Collateral if and as required by Section 7.16 .
 
(b)           Each party to this Agreement acknowledges and consents to the undertaking of the Collateral Agent set forth in this Section 6.2 and agrees to each of the other provisions of this Agreement applicable to the Collateral Agent.
 
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(c)           Notwithstanding anything to the contrary contained in this Agreement or any other Security Document or Loan Document, the Collateral Agent may commence, or consent to or otherwise sustain any exercise of remedies or any foreclosure actions or otherwise take any action or proceeding against any of the Collateral (including actions as necessary to prove, protect or preserve the Liens securing the Obligations); provided that it shall not be required to do so unless and until it shall have been directed by an Act of Required Lenders and then only in accordance with the provisions of this Agreement and the other Security Documents and Loan Documents.
 
6.3            Immunities of the Collateral Agent .
 
(a)            No Implied Duty .  The Collateral Agent will not have any fiduciary duties nor will it have responsibilities or obligations other than those expressly assumed or taken by it in this Agreement and the other Security Documents and Loan Documents.  The Collateral Agent will not be required to take any action that is contrary to Applicable Law or any provision of this Agreement or the other Security Documents or Loan Documents.
 
(b)            Appointment of Agents and Advisors .  The Collateral Agent may execute any of the powers hereunder or perform any duties hereunder either directly or by or through agents, attorneys, accountants, appraisers or other experts or advisors selected by it in good faith as it may reasonably require.
 
(c)            Solicitations of Instructions .
 
(i)           The Collateral Agent may at any time solicit written confirmatory instructions from the Lenders in the form of an Act of Required Lenders or otherwise, or in the form of an Officer’s Certificate or an order of a court of competent jurisdiction, as to any action that it may be requested or required to take, or that it may propose to take, in the performance of any of its obligations under this Agreement or the other Security Documents or Loan Documents.
 
(ii)           No written direction given to the Collateral Agent by an Act of Required Lenders that in the sole judgment of the Collateral Agent imposes, purports to impose or might reasonably be expected to impose upon the Collateral Agent any obligation or liability not set forth in or arising under this Agreement and the other Security Documents or Loan Documents will be binding upon the Collateral Agent unless the Collateral Agent elects, at its sole option, to accept such direction.
 
(e)            Exculpation .  Neither the Collateral Agent nor any of its respective directors, officers, employees or agents shall be liable to any Secured Party or Grantor for any action taken or omitted to be taken by it under this Agreement or any other Security Document or Loan Document, or in connection herewith or therewith, except as provided herein and except for its own willful misconduct or gross negligence as determined in the final judgment of a court of competent jurisdiction, nor responsible for any recitals or warranties herein or therein, nor for the effectiveness, enforceability, validity or due execution of this Agreement or any
 
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other Security Document or Loan Document, nor to make any inquiry respecting the performance by any Grantor of its Obligations.  Any such inquiry which may be made by the Collateral Agent shall not obligate it to make any further inquiry or to take any action.
 
(f)            Documents in Satisfactory Form .  The Collateral Agent will be entitled to require that all agreements, certificates, opinions, instruments and other documents at any time submitted to it, including those expressly provided for in this Agreement, be delivered to it in a form and with substantive provisions reasonably satisfactory to it and not inconsistent with the terms of this Agreement, the other Security Documents and the Loan Documents.
 
(g)            Entitled to Rely .  The Collateral Agent may seek and rely upon, and shall be fully protected in relying upon, any judicial order or judgment, upon any advice, opinion or statement of legal counsel, independent consultants and other experts selected by it in good faith and upon any certification, instruction, notice or other writing delivered to it by the Borrower or any other Grantor in compliance with the provisions of this Agreement or delivered to it by any Lender or Secured Party, without being required to determine the authenticity thereof or the correctness of any fact stated therein or the propriety or validity of service thereof.  The Collateral Agent may act in reliance upon any instrument comporting with the provisions of this Agreement or any signature reasonably believed by it to be genuine and may assume that any Person purporting to give notice or receipt or advice or make any statement or execute any document in connection with the provisions hereof or the other Security Documents or Loan Documents has been duly authorized to do so (including for purposes of releasing any Collateral in accordance with the provisions of the applicable Loan Documents or Security Documents).  To the extent an Officer’s Certificate or opinion of counsel is required or permitted under this Agreement to be delivered to the Collateral Agent in respect of any matter, the Collateral Agent may reasonably rely conclusively on such Officer’s Certificate or opinion of counsel as to such matter and such Officer’s Certificate or opinion of counsel shall be a full warranty and protection to the Collateral Agent for any action taken, suffered or omitted by it under the provisions of this Agreement and the other Security Documents.
 
(h)            Default .  The Collateral Agent will not be required to inquire as to the occurrence or absence of any Default or Event of Default and will not be affected by or required to act upon any notice or knowledge as to the occurrence of any Default or Event of Default unless and until it is directed by an Act of Required Lenders.
 
(i)            Actions by Collateral Agent .  As to any matter not expressly provided for by this Agreement or the other Security Documents or Loan Documents, the Collateral Agent will act or refrain from acting as directed by an Act of Required Lenders and will be fully protected if it does so, and any action taken, suffered or omitted pursuant to hereto or thereto shall be binding on the holders of Obligations.
 
(j)            Security or Indemnity in favor of the Collateral Agent .  The Collateral Agent will not be required to advance or expend any funds or otherwise incur any financial liability in the performance of its duties or the exercise of its powers or rights
 
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hereunder unless it has been provided with security or indemnity reasonably satisfactory to it against any and all liability or expense which may be incurred by it by reason of taking or continuing to take such action.
 
(k)            Rights of the Collateral Agent .  In the event there is any bona fide, good faith disagreement between the other parties to this Agreement or any of the other Security Documents or Loan Documents resulting in adverse claims being made in connection with Collateral held by the Collateral Agent and the terms of this Agreement or any of the other Security Documents or Loan Documents do not unambiguously mandate the action the Collateral Agent is to take or not to take in connection therewith under the circumstances then existing, or the Collateral Agent is in doubt as to what action it is required to take or not to take hereunder or under the other Security Documents, it will be entitled to refrain from taking any action (and will incur no liability for doing so) until directed otherwise in writing by a request signed jointly by the parties hereto entitled to give such direction or by order of a court of competent jurisdiction.
 
6.4            Release of Liens .  The Collateral Agent will not release any Lien of the Collateral Agent or consent to the release of any Lien of the Collateral Agent, except:
 
(a)           as permitted by Section 7.16 ; or
 
(b)           as ordered pursuant to applicable law under a final order or judgment of a court of competent jurisdiction.
 
6.5            Enforcement of Liens
 
.  Each Secured Party hereby agrees to promptly notify the Collateral Agent in writing of any Default or Event of Default arising under the Loan Documents.  If the Collateral Agent at any time receives written notice that any Default or Event of Default has occurred, the Collateral Agent will promptly deliver written notice thereof to the Borrower and each Secured Party.  In the event any Secured Party, following the delivery of (and with reference to) any such notice, requests in writing that the Collateral Agent pursue any lawful action described in the immediately succeeding sentence, the Collateral Agent shall notify the Borrower and each other Secured Party thereof in writing and seek the consent of the Required Lenders to pursue such action (it being understood that the Collateral Agent shall not be required to advise the Required Lenders to pursue such action).  Following receipt of any notice that a Default or Event of Default has occurred and until such time as it receives a notice by such Secured Party rescinding such Default or Event of Default, the Collateral Agent may await direction by an Act of Required Lenders and will act, or decline to act, as directed by an Act of Required Lenders, in the exercise and enforcement of the Collateral Agent’s interests, rights, powers and remedies in respect of the Collateral or under the Security Documents or applicable law and, following the initiation of such exercise of remedies, the Collateral Agent will act, or decline to act, with respect to the manner of such exercise of remedies as directed by an Act of Required Lenders.  Subsequent to the Collateral Agent delivering written notice to the Borrower and each Secured Party that any Default or Event of Default has occurred entitling the Collateral Agent to foreclose upon, collect or otherwise enforce its Liens thereunder, then, unless it has been directed to the contrary by an Act of Required Lenders, the Collateral Agent in any event may (but will not be obligated to) take all lawful and commercially reasonable actions permitted under the Security Documents that it may deem
 
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necessary or advisable to protect or preserve its interest in the Collateral subject thereto and the interests, rights, powers and remedies granted or available to it under, pursuant to or in connection with the Security Documents.
 
6.6            Duty of Collateral Agent
 
.  To the full extent permitted by applicable law, the Collateral Agent’s sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the New York UCC or otherwise, shall be to deal with it in the same manner as the Collateral Agent deals with similar property for its own account.  Neither the Collateral Agent, any Secured Party nor any of their respective officers, directors, employees or agents shall be liable for failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of any Grantor or any other Person or to take any other action whatsoever with regard to the Collateral or any part thereof, except as provided herein.  The powers conferred on the Collateral Agent and the Secured Parties hereunder are solely to protect the Collateral Agent’s and the Secured Parties’ interests in the Collateral and shall not impose any duty upon the Collateral Agent or any Secured Party to exercise any such powers.  The Collateral Agent and the Secured Parties shall be accountable only for amounts that they actually receive as a result of the exercise of such powers, and neither they nor any of their officers, directors, employees or agents shall be responsible to any Grantor for any act or failure to act hereunder, except for their own gross negligence or willful misconduct.
 
6.7            Execution of Financing Statements
 
.  Pursuant to any applicable law, each Grantor authorizes the Collateral Agent to file or record financing statements and other filing or recording documents or instruments with respect to the Collateral without the signature of such Grantor in such form and in such offices as the Collateral Agent determines appropriate to perfect the security interests of the Collateral Agent under this Agreement.  Each Grantor authorizes the Collateral Agent to use the collateral description “all personal property” in any such financing statements.  Each Grantor hereby ratifies and authorizes the filing by the Collateral Agent of any financing statement with respect to the Collateral made prior to the date hereof.
 
6.8            Authority of Collateral Agent
 
.  Each Grantor acknowledges that the rights and responsibilities of the Collateral Agent under this Agreement with respect to any action taken by the Collateral Agent or the exercise or non-exercise by the Collateral Agent of any option, voting right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Agreement shall, as between the Collateral Agent and the Secured Parties, be governed by the relevant Loan Documents, and by such other agreements with respect thereto as may exist from time to time among any of them, but, as between the Collateral Agent and the Grantors, the Collateral Agent shall be conclusively presumed to be acting as agent for the Secured Parties with full and valid authority so to act or refrain from acting, and no Grantor shall be under any obligation, or entitlement, to make any inquiry respecting such authority.
 
6.9            Intercreditor Arrangements
 
.  Each party hereto (and each Secured Party) acknowledges and agrees that the Collateral Agent may act in accordance with, and shall be required to take certain actions as required by, the terms of Section 8 of the Credit Agreement.  Each of the parties hereto (and each Secured Party) acknowledges and agrees that any such actions shall be permitted, and further agrees that in the event of a conflict between the
 
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provisions of this Agreement, including Section 5 and Section 6.1 hereof, and the Credit Agreement, the relevant provisions of the Credit Agreement shall control.  The parties hereto (and each Secured Party) also acknowledge and agree that the Collateral Agent shall have the benefit of the provisions contained in the Credit Agreement.
 
 
SECTION 7.                                 Miscellaneous .
 
7.1            Amendments .
 
(a)           No amendment, supplement or other modification to the provisions of any Security Document will be effective without the approval of the Collateral Agent and the Required Lenders, except that:
 
(i)           any amendment, supplement or other modification that has the effect solely of adding or maintaining Collateral, securing additional Obligations that are otherwise permitted by the terms of the Loan Documents to be secured by the Collateral or preserving, perfecting or establishing the Liens thereon or the rights of the Collateral Agent therein will become effective when executed and delivered by the Borrower or any other applicable Grantor party thereto and the Collateral Agent; and
 
(ii)           no amendment or supplement that imposes any obligation upon the Collateral Agent or adversely affects the rights of the Collateral Agent in its capacity as such will become effective without the consent of the Collateral Agent.
 
(b)           Notwithstanding paragraph (a) above, the Collateral Agent and the Borrower (and/or each other applicable Grantor) may, without the consent of any Secured Party, enter into any amendment, supplement or other modification of a Security Document to cure any ambiguity or to correct or supplement any provision in such document that may be inconsistent with any other provision of a Security Document or to further the intended purposes thereof.
 
(c)           The Collateral Agent will deliver a copy of each amendment, supplement or other modification to the Security Documents to each Secured Party upon request.  Each Secured Party understands and agrees that it will be bound by any such amendment.
 
7.2            Notices
 
.  All notices, requests and demands to or upon the Collateral Agent or any Grantor hereunder shall be effected in the manner provided for in Section 9.3 of the Credit Agreement, to the Borrower, the Collateral Agent and each Lender or Secured Party at its address as provided in the Credit Agreement, and each Grantor (other than the Borrower) at its address set forth on Schedule 1 hereto.
 
7.3            No Waiver by Course of Conduct; Cumulative Remedies
 
.  Neither the Collateral Agent nor any Secured Party shall by any act (except by a written instrument pursuant to Section 7.1 ), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Default or Event of Default.  No failure to exercise, nor any delay in exercising, on the part of the Collateral Agent or any Secured Party any right, power or privilege hereunder shall operate as a waiver thereof.  No single or partial exercise of any right, power or privilege hereunder shall preclude
 
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any other or further exercise thereof or the exercise of any other right, power or privilege.  A waiver by the Collateral Agent or any Secured Party of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Collateral Agent or such Secured Party would otherwise have on any future occasion.  The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any other rights or remedies provided by law.
 
7.4            Enforcement Expenses; Indemnification .
 
(a)           Each Grantor agrees to pay or reimburse each Secured Party and the Collateral Agent for all its costs and expenses incurred in collecting against such Grantor or otherwise enforcing or preserving any rights under this Agreement and the other Loan Documents to which such Grantor is a party, including, without limitation, the fees and disbursements of counsel (including the allocated fees and expenses of in-house counsel) to each Secured Party and of counsel to the Collateral Agent.
 
(b)           Each Grantor agrees to pay, and to save the Collateral Agent and the Secured Parties harmless from, any and all liabilities with respect to, or resulting from any delay in paying, any and all stamp, excise, sales or other taxes which may be payable or determined to be payable with respect to any of the Collateral or in connection with any of the transactions contemplated by this Agreement.
 
(c)           Each Grantor agrees to pay, and to save the Collateral Agent and the Secured Parties harmless from, any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement to the extent the Borrower would be required to do so pursuant to Section 8.1 of the Credit Agreement or the relevant provisions of any other Loan Document.
 
(d)           The agreements in this Section 7.4 shall survive repayment of the Obligations and all other amounts payable under the Loan Documents.
 
7.5            Security Interest Absolute
 
.  All rights of the Collateral Agent and security interests hereunder, and all obligations of each of the Grantors hereunder, shall be absolute and unconditional, irrespective of any circumstance which might constitute a defense available to, or a discharge of, any Grantor or other obligor in respect of the Obligations other than the Discharge of Obligations.
 
7.6            Successors and Assigns
 
.  This Agreement shall be binding upon the successors and assigns of each Grantor and shall inure to the benefit of the Collateral Agent and the Secured Parties and their successors and assigns; provided that no Grantor may assign, transfer or delegate any of its rights or obligations under this Agreement without the prior written consent of the Collateral Agent.
 
7.7            Set-Off; Limitation on Individual Actions .
 
(a)           In addition to any rights and remedies of the Secured Parties provided by law, each Secured Party shall have the right, without notice to any Grantor, any such notice being expressly waived by each Grantor to the extent permitted by applicable law, upon any Obligations becoming due and payable (whether at the stated maturity, by acceleration or otherwise), to apply to the payment of such
 
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EXHIBIT 10-42
 
 
Obligations, by setoff or otherwise, any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by such Secured Party, any affiliate thereof or any of their respective branches or agencies to or for the credit or the account of such Grantor.  Each Secured Party agrees promptly to notify in writing the relevant Grantor and the Collateral Agent after any such application made by such Secured Party, provided that the failure to give such notice shall not affect the validity of such application.
 
(b)           NOTWITHSTANDING THE FOREGOING SUBSECTION (a) OR ANY CONTRARY PROVISION CONTAINED IN ANY LOAN DOCUMENT, AT ANY TIME THAT ANY OBLIGATION SHALL BE SECURED BY ANY INTEREST IN ANY REAL PROPERTY LOCATED IN CALIFORNIA, NO SECURED PARTY (OTHER THAN THE COLLATERAL AGENT) SHALL EXERCISE ANY REMEDIES AGAINST ANY LOAN PARTY OR ANY PROPERTY THEREOF, INCLUDING WITHOUT LIMITATION, A RIGHT OF SETOFF, LIEN OR COUNTERCLAIM OR TAKE ANY COURT OR ADMINISTRATIVE ACTION OR INSTITUTE ANY PROCEEDING TO ENFORCE ANY PROVISION OF THIS AGREEMENT OR ANY LOAN DOCUMENT (ALTHOUGH A SECURED PARTY CAN ACCELERATE THE MATURITY OF ANY LOAN OR OTHER OBLIGATION IN ACCORDANCE WITH THE TERMS OF THE LOAN DOCUMENTS) UNLESS IT IS TAKEN PURSUANT TO AN ACT OF REQUIRED LENDERS) OR APPROVED IN WRITING BY THE COLLATERAL AGENT; PROVIDED THAT IF REPUTABLE OUTSIDE CALIFORNIA COUNSEL TO SUCH SECURED PARTY PROVIDES ITS WRITTEN LEGAL OPINION (WITHOUT ANY MATERIAL QUALIFICATION OR EXCEPTION) TO THE EFFECT THAT SUCH SETOFF OR ACTION OR PROCEEDING WOULD NOT (PURSUANT TO APPLICABLE CALIFORNIA STATE LAW, INCLUDING, WITHOUT LIMITATION, SECTIONS 580a, 580b, 580d AND 726 OF THE CALIFORNIA CODE OF CIVIL PROCEDURE OR SECTION 2924 OF THE CALIFORNIA CIVIL CODE, IF APPLICABLE) ADVERSELY AFFECT OR IMPAIR THE VALIDITY, PRIORITY OR ENFORCEABILITY OF THE LIENS GRANTED TO THE COLLATERAL AGENT PURSUANT TO THE LOAN DOCUMENTS OR THE ENFORCEABILITY OF THE OBLIGATIONS UNDER THE LOAN DOCUMENTS, THEN SUCH ACTION MAY BE TAKEN OR COMMENCED SO LONG AS THE RESPECTIVE SECURED PARTY PROVIDES AT LEAST FIVE BUSINESS DAYS’ ADVANCE WRITTEN NOTICE THEREOF TO THE COLLATERAL AGENT (TOGETHER WITH A COPY OF THE RESPECTIVE OPINION OF CALIFORNIA COUNSEL).  ANY ATTEMPTED EXERCISE BY ANY SECURED PARTY OF ANY SUCH RIGHT IN CONTRAVENTION OF THE FOREGOING PROVISIONS SHALL BE NULL AND VOID.  THIS SUBSECTION (b) SHALL BE SOLELY FOR THE BENEFIT OF EACH OF THE SECURED PARTIES AND THE COLLATERAL AGENT, AND MAY BE AMENDED BY AN ACT OF REQUIRED LENDERS.
 
7.8            Counterparts
 
.  This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts (including by electronic transmission or facsimile), and all of said counterparts taken together shall be deemed to constitute one and the same instrument.
 
27

EXHIBIT 10-42
 
 
7.9            Severability
 
.  Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
 
7.10            Section Headings
 
.  The Section headings used in this Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof.
 
7.11            Integration
 
.  This Agreement, the Credit Agreement and the other Loan Documents represent the entire agreement of the Grantors, the Collateral Agent and the Secured Parties with respect to the subject matter hereof and thereof, and there are no promises, undertakings, representations or warranties by the Collateral Agent or any Secured Party relative to subject matter hereof and thereof not expressly set forth or referred to herein or therein.
 
7.12            GOVERNING LAW
 
.  THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
 
7.13            Submission To Jurisdiction; Waivers
 
.  Each Grantor hereby irrevocably and unconditionally:
 
(a)           submits for itself and its property in any legal action or proceeding relating to this Agreement, the Credit Agreement and the other Loan Documents to which it is a party, or for recognition and enforcement of any judgment in respect thereof, to the non exclusive general jurisdiction of the courts of the State of New York, the courts of the United States of America for the Southern District of New York, and appellate courts from any thereof;
 
(b)           consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same;
 
(c)           agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to such Grantor at its address referred to in Section 7.2 or at such other address of which the Collateral Agent shall have been notified pursuant thereto;
 
(d)           agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction;
 
(e)           waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this Section any special, exemplary, punitive or consequential damages;
 
28

EXHIBIT 10-42
 
 
(f)           acknowledges and affirms that it understands that to the extent the Obligations are secured by real property located in the State of California, such Grantor shall be liable for the full amount of the liability hereunder notwithstanding foreclosure on such real property by trustee sale or any other reason impairing such Grantor’s or any Secured Parties’ right to proceed against the Borrower or any other Grantor;
 
(g)           waives (to the fullest extent permitted by applicable law) all rights and defenses under Section 580a, 580b, 580d and 726 of the California Code of Civil Procedure;
 
(h)           waives (to the fullest extent permitted by applicable law), without limiting the generality of the foregoing or any other provision hereof, all rights and defenses which might otherwise be available to such Grantor under Sections 2809, 2810, 2815, 2819, 2821, 2839, 2845, 2848, 2849, 2850, 2899 and 3433 of the California Civil Code; and
 
(i)           waives, until the Obligations have been paid in full in cash, its rights of subrogation and reimbursement and any other rights and defenses, in each case available to such Grantor by reason of Sections 2787 to 2855, inclusive, of the California Civil Code because the Obligations are secured by real property, including, without limitation, (1) any defenses such Grantor may have to the guarantee provided under this Agreement by reason of an election of remedies by the Secured Parties and (2) any rights or defenses such Grantor may have by reason of protection afforded to the Borrower or any other Grantor pursuant to the antideficiency or other laws of California limiting or discharging the Borrower’s or such Grantor’s indebtedness, including, without limitation, Section 580a, 580b, 580d or 726 of the California Code of Civil Procedure.  In furtherance of such provisions, each Grantor hereby waives all rights and defenses arising out of an election of remedies by the Secured Parties, even though that election of remedies, such as a nonjudicial foreclosure, destroys such Grantor’s rights of subrogation and reimbursement against the Borrower or any other Grantor by the operation of Section 580d of the California Code of Civil Procedure or otherwise.
 
7.14            Acknowledgements
 
.  Each Grantor hereby acknowledges that:
 
(a)           it has been advised by counsel in the negotiation, execution and delivery of this Agreement, the Credit Agreement and the other Loan Documents to which it is a party;
 
(b)           neither the Collateral Agent nor any Secured Party has any fiduciary relationship with or duty to any Grantor arising out of or in connection with this Agreement, the Credit Agreement or any other Loan Documents, and the relationship between the Grantors, on the one hand, and the Collateral Agent and the Secured Parties, on the other hand, in connection herewith or therewith is solely that of debtor and creditor; and
 
(c)           no joint venture is created hereby, by this Agreement, the Credit Agreement or the other Loan Documents or
 
29

EXHIBIT 10-42
 
 
otherwise exists by virtue of the transactions contemplated hereby among the Secured Parties or among the Grantors and the Secured Parties.
 
7.15            Additional Grantors .
 
(a)           Each Subsidiary of a Grantor that is required to become a party to or a Grantor under this Agreement pursuant to any relevant provision of this Agreement or any other Loan Document shall execute and deliver to Collateral Agent an Assumption Agreement in the form of Annex 1 hereto, and shall become a Grantor for all purposes of this Agreement upon such execution and delivery.
 
7.16            Continuing Security Interest; Releases of Collateral .
 
(a)           This Agreement shall create a continuing security interest in the Collateral and shall (i) remain in full force and effect until the Discharge of Obligations, (ii) be binding upon each of the Grantors, their successors and assigns and (iii) inure, together with the rights and remedies of the Collateral Agent hereunder, to the benefit of the Collateral Agent and each of the Secured Parties and their respective permitted successors, transferees and assigns.
 
(b)           Notwithstanding anything to the contrary contained herein or in any other Loan Document, the Collateral Agent is hereby irrevocably authorized by each Secured Party to take any action requested by the Borrower having the effect of releasing any Collateral or guarantee obligations (i) to the extent necessary to permit consummation of any transaction permitted under the Credit Agreement or otherwise consented to as provided therein, or (ii) under the circumstances described in Section 7.16(d) below.
 
(c)           Upon the Discharge of Obligations, the Collateral shall be released from the Liens created by the Security Documents, and the Security Documents and all obligations (other than those expressly stated to survive such termination) of the Collateral Agent and each Grantor under the Security Documents shall terminate, all without delivery of any instrument or performance of any act by any Person.
 
(d)           For avoidance of doubt, (i) upon (x) any sale, assignment, disposition or other transfer by any of the Grantors of any Collateral that is permitted under the Credit Agreement or (y) the effectiveness of any written consent to the release of the security interest granted pursuant to the Credit Agreement or hereby in any Collateral, the security interest in such Collateral (but not any proceeds thereof) shall be automatically released.
 
(e)           Upon any termination described above, the Collateral Agent will, at the Grantor’s expense, execute and deliver to the Grantors such documents as the Grantors shall reasonably request to evidence such termination, and the Collateral Agent shall be entitled to rely conclusively on, without independent investigation, a certificate of the applicable Grantor certifying that any specific sale, assignment, disposition or other transfer of any Collateral is permitted under the Credit Agreement.
 
7.17            WAIVER OF JURY TRIAL .  EACH GRANTOR HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR
 
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EXHIBIT 10-42
 
 
PROCEEDING RELATING TO THIS AGREEMENT, THE CREDIT AGREEMENT OR ANY OTHER FIRST LIEN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN.
 
[remainder of page intentionally left blank]
 


     
 
 
31 

 
EXHIBIT 10-42

IN WITNESS WHEREOF, each of the undersigned has caused this Pledge and Security Agreement to be duly executed and delivered as of the date first above written.
 
 
 
COMMUNICATION INTELLIGENCE CORPORATION,
 
 
 
as Borrower and as a Grantor
 
 
 
By: /s/ Francis V. Dane
 
 
Name: Francis V. Dane
 
 
Title:  Chief Financial Officer
 
 
 
CIC ACQUISITION CORP.,
 
as Grantor
 
                                        By: /s/ Francis V. Dane    
                                     
 
Name: Francis V. Dane
 
 
Title:
 
 
 
SG PHOENIX LLC,
 
   as Collateral Agent
 
 
 
By:  /s/ Andrea Goren
 
 
Name: Andrea Goren
 
 
Title:Member
 

 
 
 

 
EXHIBIT 10-42

 
 
Acknowledged and Agreed to:
 
 
 
PHOENIX VENTURE FUND LLC,
 
   as a Secured Party
 
 
 
       By: SG Phoenix Ventures LLC,
 its Managing Member
 
      
 
 By: /s/ Andrea Goren
 Name:     Andrea Goren
 Title:     Member
 
 
 
                                                                                                                /s/   Micheal Engmann
 
MICHAEL ENGMANN, as a Secured Party
 
 

                                                                                                         /s/  Ronald Goodman        
 
RONALD GOODMAN, as a Secured Party
 

EXHIBIT 10-43









SECURITIES PURCHASE AGREEMENT
 
Dated as of June 5, 2008,
 
By And Among

COMMUNICATION INTELLIGENCE CORPORATION

AND

THE INVESTORS SIGNATORY HERETO
 


 
 

EXHIBIT 10-43


TABLE OF CONTENTS
   
Page
ARTICLE 1.
DEFINITIONS
1
 
1.1    Definitions
1
ARTICLE 2.
PURCHASE AND SALE
6
 
2.1    Closing
6
 
2.2    Purchase Price
6
 
2.3    Closing Deliveries
7
ARTICLE 3.
REPRESENTATIONS AND WARRANTIES
8
 
3.1    Representations and Warranties of the Company
8
 
3.2    Representations and Warranties of the Investors
18
ARTICLE 4.
OTHER AGREEMENTS OF THE PARTIES
20
 
4.1    Transfer Restrictions; Legends
20
 
4.2    Furnishing of Information
22
 
4.3    Integration
22
 
4.4    Reservation of Securities
22
 
4.5    Securities Laws Disclosure; Publicity
22
 
4.6    Use of Proceeds
23
 
4.7    Indemnification of Investors
23
 
4.8    Listing of Securities
24
 
4.9    Stockholder Approval
24
 
4.10   Ranking
25
 
4.11  Cancellation of Notes
25
ARTICLE 5.
CONDITIONS PRECEDENT TO CLOSING
25
 
5.1    Conditions Precedent to the Obligations of the Investors
25
 
5.2    Conditions Precedent to the Obligations of the Company
25
ARTICLE 6.  MISCELLANEOUS
26
 
6.1    Rescission
26
 
6.2    Fees and Expenses
27
 
6.3    Entire Agreement
27
 
6.4    Notices
27
 
6.5    Amendments; Waivers
27
 
6.6    Construction
28
 
6.7    Successors and Assigns
28
 
6.8    No Third-Party Beneficiaries
28
 
6.9    Governing Law; Venue; Waiver of Jury Trial
28
 
6.10   Survival
29
 
6.11   Execution
29
 
6.12   Severability
29
 
6.13   Rescission and Withdrawal Right
29
 
6.14   Replacement of Securities
29
 
6.15   Remedies
30
 
6.16   Payment Set Aside
30
 
6.17   Further Assurances
30
 
6.18   Adjustments in Share Numbers and Prices
30
 
6.19   Independent Nature of Investors’ Obligations and Rights
30

 
 

 
EXHIBIT 10-43


Exhibit A                      Schedule of Investors
Exhibit B                      Instruction Sheet For Investor
Exhibit B-1                                                                                                                                Communication Intelligence Corporation –Stock Certificate Questionnaire
Exhibit B-2                                                                                                                                Communication Intelligence Corporation – Registration Statement Questionnaire
Exhibit B-3
Communication Intelligence Corporation – Certificate For Corporate, Partnership, Limited Liability Company, Trust Foundation, Joint and Individual Investors - Certificate
Exhibit C
Form of Registration Rights Agreement
Exhibit D
Form of Certificate of Designations


 

 
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EXHIBIT 10-43


 
SECURITIES PURCHASE AGREEMENT
 
This Securities Purchase Agreement (this “Agreement” ) is dated as of June 5, 2008, by and among Communication Intelligence Corporation, a Delaware corporation, and all predecessors thereto (the “Company” ) and the investors identified on the signature pages hereto (each, an “Investor” and collectively, the “Investors” ).
 
WHEREAS, the Investors have extended loans to the Company as evidenced by certain promissory notes (each a “Promissory Note” and, collectively, the “Promissory Notes” ), in such amounts and with such maturities as are set forth on Exhibit A hereto; and
 
WHEREAS, subject to the terms and conditions set forth in this Agreement and pursuant to Section 4(2) of the Securities Act (as defined below) and Rule 506 promulgated thereunder, the Company shall issue and sell to each Investor, and each Investor, severally and not jointly, shall purchase from the Company the number of shares of Series A Cumulative Convertible Preferred Stock of the Company (the “Series A Preferred Stock” ) set forth on Exhibit A , as more fully described in this Agreement; and
 
WHEREAS, each Investor, in consideration and payment for the shares of Series A Preferred Stock purchased by such Investor, shall return to the Company for cancellation the Promissory Note issued by the Company to such Investor;
 
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement, and for other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, the Company and the Investors agree as follows:
 
ARTICLE 1.
 
DEFINITIONS
 
1.1.   Definitions
 
.  In addition to the terms defined elsewhere in this Agreement, for all purposes of this Agreement, the following terms shall have the meanings indicated in this Section 1.1 :
 
“8-K Filing” has the meaning set forth in Section 4.5 .
 
“Agreement” has the meaning set forth in the preamble.
 
“Affiliate” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 144 under the Securities Act.
 
“Best Efforts” means the reasonable efforts that a prudent person desirous of achieving a result would use in similar circumstances to ensure that such result is achieved as expeditiously as practical; provided , however , that an obligation to use Best Efforts under this Agreement does not require the Company to dispose of or make any change to its business.
 


 
 
- 1 - 

 
EXHIBIT 10-43

“Business Day” means any day except Saturday, Sunday and any day which is a federal legal holiday or a day on which banking institutions in the State of New York are authorized or required by law or other governmental action to close.
 
“Certificate of Designations” shall mean a certificate of designations to be filed prior to the Closing by the Company with the Secretary of State of the State of Delaware, setting forth the rights, preferences and privileges of the Shares, in substantially the form attached as Exhibit D hereto.
 
“CIC Acquisition Corp.” means CIC Acquisition Corp., a Delaware corporation.
 
“Closing” means the closing of the purchase and sale of the Shares pursuant to Article II.
 
“Closing Date” means the Business Day on which all of the conditions set forth in Sections 5.1 and 5.2 hereof are satisfied, or such other date as the parties may agree.
 
“Collateral Agent” means SG Phoenix LLC.
 
“Commission” means the Securities and Exchange Commission.
 
“Common Stock” means the common stock of the Company, par value $0.01 per share, and any securities into which such common stock may hereafter be reclassified or for which it may be exchanged as a class.
 
“Common Stock Equivalents” means any securities of the Company or any Subsidiary which entitle the holder thereof to acquire Common Stock at any time, including without limitation, any debt, preferred stock, rights, options, warrants or other instrument that is at any time convertible into or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock or other securities that entitle the holder to receive, directly or indirectly, Common Stock.
 
“Company” has the meaning set forth in the preamble.
 
“Company Counsel” means Davis Wright Tremaine LLP.
 
“Company Deliverables” has the meaning set forth in Section 2.3(a) .
 
“Contingent Obligation” has the meaning set forth in Section 3.1(bb) .
 
“Convertible Securities” means any stock or securities (other than Options) convertible into or exercisable or exchangeable for Common Stock..
 
“Covering Shares” has the meaning set forth in Section 4.1(b) .
 
“Credit Agreement” means that certain credit agreement, dated as of the date of this Agreement, by and among the Company and the lenders signatory thereto.
 

 
 
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EXHIBIT 10-43

“Depositary Account Control Agreement” means that certain depositary account control agreement, dated as of the date of this Agreement, by and among the Collateral Agent, the Company and the Depositary signatory thereto.
 
“Disclosure Materials” has the meaning set forth in Section 3.1(h) .
 
“Effective Date” means the date that the Registration Statement required by Section 2(a) of the Registration Rights Agreement is first declared effective by the Commission.
 
“Environmental Laws” has the meaning set forth in Section 3.1(ff) .
 
“Evaluation Date” has the meaning set forth in Section 3.1(s) .
 
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
 
“GAAP” means U.S. generally accepted accounting principles.
 
“Governmental Authority” means any nation, province, or state or any political subdivision of any of the foregoing, and any government or any Person exercising executive, legislative, regulatory or administrative functions of or pertaining to government, and any corporation or other entity exercising such functions owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing.
 
“Hazardous Materials” has the meaning set forth in Section 3.1(ff) .
 
“Indebtedness” has the meaning set forth in Section 3.1(bb) .
 
“Insolvent” has the meaning set forth in Section 3.1(j) .
 
“Intellectual Property Rights” has the meaning set forth in Section 3.1(p) .
 
“Investment Amount” means, with respect to each Investor, the Investment Amount indicated on such Investor’s signature page to this Agreement.
 
“Investor” has the meaning set forth in the preamble.
 
“Investor Deliverables” has the meaning set forth in Section 2.3(b) .
 
“Investor Party” has the meaning set forth in Section 4.7 .
 
“Lien” means any lien, charge, encumbrance, security interest, right of first refusal, right of participation or other restrictions of any kind.
 
“Loan Documents” means this Agreement, the Notes, the Security Documents, the Credit Agreement, the Registration Rights Agreement, the Depositary Account Control Agreement and all other instruments, documents and agreements executed by or on behalf of the Company or any of its Subsidiaries, and delivered concurrently herewith or at any time hereafter to or for the benefit of Phoenix, Michael Engmann and/or Ronald Goodman in connection with
 
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EXHIBIT 10-43
 
the loans and other transactions contemplated by the Credit Agreement, all as amended, supplemented or modified from time to time.
 
“Losses” means any and all losses, claims, damages, liabilities, settlement costs and expenses, including, without limitation, reasonable attorney’s fees.
 
“Material Adverse Effect” means a material and adverse effect on (i) the legality, validity or enforceability of any Transaction Document, (ii) the results of operations, assets, prospects, business or condition (financial or otherwise) of the Company and its Subsidiaries, taken as a whole, or (iii) the rights and remedies of the Investors under the Transaction Documents taken as a whole.
 
“New York Courts” means the state and federal courts sitting in the City of New York, Borough of Manhattan.
 
“Note” or “Notes” means those certain secured promissory notes, issued by the Company to Phoenix, Michael Engmann and Ronald Goodman pursuant to the Credit Agreement, and any replacements, restatements, renewals or extensions of such notes, in whole or in part.
 
“Notice of Acceptance” has the meaning set forth in Section 6.1 .
 
“Options” means any outstanding rights, warrants or options to subscribe for or purchase Common Stock or Convertible Securities.
 
“Person” means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.
 
“Phoenix” means Phoenix Venture Fund LLC.
 
“Pledge and Security Agreement” means that certain pledge and security agreement, dated as of the date hereof, by and among the Company and its Subsidiaries, and the Collateral Agent, Michael Engmann and Ronald Goodman.
 
“Proceeding” means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened in writing.
 
“Promissory Note” has the meaning set forth in the recitals.
 
“PCAOB” means the Public Company Accounting Oversight Board.
 
“Purchase Price” has the meaning set forth in Section 2.2 .
 
“Registrable Securities” means the Common Stock issued or issuable pursuant to the Transaction Documents, together with any securities issued or issuable upon any stock
 
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EXHIBIT 10-43
 
split, dividend or other distribution, recapitalization, or similar event with respect to the foregoing.
 
“Registration Rights Agreement” means that certain registration rights agreement, dated as of the date of this Agreement, by and among the Company and the investors signatory thereto, substantially in the form of Exhibit C hereto.
 
“Registration Statement” means a registration statement meeting the requirements set forth in the Registration Rights Agreement and covering the resale by the Investors of the Underlying Shares.
 
“Regulation D” means Rule 506 of Regulation D as promulgated by the United States Securities and Exchange Commission under the Securities Act.
 
“Rescission Notice” has the meaning set forth in Section 6.1 .
 
“Rescission Payment Date” has the meaning set forth in Section 6.1 .
 
“Rescission Price” has the meaning set forth in Section 6.1 .
 
“Rule 144” means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule.
 
“SEC Reports” has the meaning set forth in Section 3.1(h) .
 
“Securities” means the Shares and the Underlying Shares.
 
“Securities Act” means the Securities Act of 1933, as amended.
 
“Security Documents” means, collectively, all instruments, documents and agreements executed by or on behalf of the Company to provide collateral security with respect to all obligations, liabilities and Indebtedness of every nature of the Company from time to time owed to Phoenix, Michael Engmann and Ronald Goodman under the Loan Documents, including the Pledge and Security Agreement and the Depositary Account Control Agreement and all instruments, documents and agreements executed pursuant to the terms of the foregoing, in such case, as amended, modified and supplemented from time to time.
 
“Selling Holder Questionnaire” has the meaning set forth in Section 2.3(b)(iii) .
 
“Shares” or “Series A Preferred Stock” means the shares of Series A Cumulative Convertible Preferred Stock, par value $0.01 per share, issued or issuable to the Investors pursuant to this Agreement.
 
“Stockholder Approval” has the meaning set forth in Section 4.9 .
 
“Subsidiary” means, with respect to any Person, any corporation, partnership, association or other business entity of which more than fifty percent (50%) of the total voting
 
- 5 -

EXHIBIT 10-43
 
power of shares of stock (or equivalent ownership or controlling interest) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof.
 
“Trading Day” means (i) a day on which the Common Stock is traded on a Trading Market (other than the OTC Bulletin Board), or (ii) if the Common Stock is not listed on a Trading Market (other than the OTC Bulletin Board), a day on which the Common Stock is quoted in the over-the-counter market, as reported by the OTC Bulletin Board, or (iii) if the Common Stock is not quoted on any Trading Market, a day on which the Common Stock is quoted in the over-the-counter market as reported by the Pink Sheets LLC (or any similar organization or agency succeeding to its functions of reporting prices); provided , that in the event that the Common Stock is not listed or quoted as set forth in (i), (ii) and (iii) hereof, then Trading Day shall mean a Business Day.
 
“Trading Market” means whichever of the New York Stock Exchange, the American Stock Exchange, the NASDAQ Global Select Market, the NASDAQ Global Market, the NASDAQ Capital Market or OTC Bulletin Board on which the Common Stock is listed or quoted for trading on the date in question.
 
“Transaction Documents” means this Agreement, the schedules and exhibits attached hereto, the Transfer Agent Instructions, the Registration Rights Agreement, the Certificate of Designations and any other documents or agreements executed in connection with the transactions contemplated hereunder.
 
“Transfer Agent” means American Stock Transfer and Trust Company, or any successor transfer agent for the Company.
 
“Transfer Agent Instructions” means, with respect to the Company, the Irrevocable Transfer Agent Instructions, executed by the Company and delivered to and acknowledged in writing by the Transfer Agent.
 
“Underlying Shares” means the shares of Common Stock issuable upon conversion or exchange of the Shares.
 
ARTICLE 2.
 
PURCHASE AND SALE
 
2.1.   Closing
 
.  Subject to the terms and conditions set forth in this Agreement, at the Closing the Company shall issue and sell to each Investor, and each Investor shall, severally and not jointly, purchase from the Company, the Shares representing such Investor’s Investment Amount.  The Closing shall take place at the offices of Thelen Reid Brown Raysman & Steiner LLP, 875 Third Avenue, New York, NY 10022 on the Closing Date or at such other location or time as the parties may agree.
 
2.2.   Purchase Price .  At the Closing, each Investor shall, in full payment for its Shares, tender to the Company for cancellation its
 
- 6 -

EXHIBIT 10-43
 
Promissory Note in the amount set forth opposite such Investor’s name on Exhibit A hereto (the “ Purchase Price ”), such that each Investor shall receive one Share for each one dollar represented by its Promissory Note.
 
2.3.   Closing Deliveries
 
.  (a)  At the Closing, the Company shall deliver or cause to be delivered to each Investor the following (the “Company Deliverables” ):
 
 
(i)           a certificate executed by the Company’s chief executive officer and chief financial officer, dated as of the Closing Date, confirming the truth and correctness of the Company’s representations and warranties made in Article III hereof as of the date when made and as of the Closing Date as if made at such time (except for representations and warranties that speak as of a specific date which shall be true and correct as of such specified date);
 
(ii)           a certificate, executed by the Company’s chief executive officer and chief financial officer, dated as of the Closing Date, confirming that the Company has performed, satisfied and complied in all respects with the covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by the Company at or prior to the Closing Date;
 
(iii)           a certificate of the secretary or an assistant secretary of the Company, attaching a recent copy of the certificate of incorporation or formation, as amended, of the Company and each Subsidiary of the Company, and a good standing certificate of the Company dated as of a recent date, a certificate evidencing the Company’s qualification as a foreign corporation and good standing issued by the Secretary of State (or comparable office) of each jurisdiction in which the Company conducts business and is required to so qualify, dated as of a recent date, copies of the by-laws of the Company and resolutions of the Board of Directors authorizing the transactions contemplated hereby, which the secretary or assistant secretary of the Company has certified as true and correct copies in full force and effect as of the Closing, the execution, delivery and performance of this Agreement and the other Transaction Documents;
 
(iv)           one or more certificates evidencing the number of Shares set forth opposite such Investor’s name on Exhibit A hereto under the heading “Shares,” in such denominations and registered in such names as such Investor requests;
 
(v)           the Transaction Documents, executed by the Company;
 
(vi)           a legal opinion of Company Counsel executed by such counsel and delivered to the Investors in form and substance acceptable to the Investors;
 
(vii)           duly executed Transfer Agent Instructions acknowledged by the Company’s transfer agent;
 
(viii)                      approval by each applicable Trading Market of an additional shares listing application covering all of the Registrable Securities, if required by such Trading Market (and, if applicable, evidence of conditional listing approval);
 
(ix)           a certificate from the Secretary of State for the State of Delaware,  evidencing filing of the Certificate of Designations;

 
 
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(x)           any consents or approvals of any Person listed on Schedule 3.1(bb) or any other third-party required to effect the terms and conditions of this Agreement; and
 
(xi)           such other documents relating to the transactions contemplated by this Agreement and the other Transaction Documents as such Investor or its counsel may reasonably request.
 
(b)   At the Closing, each Investor shall deliver or cause to be delivered to the Company the following (the “Investor Deliverables” ):
 
(i)   such Investor’s Promissory Note in the amount set forth on Exhibit A hereto constituting the Purchase Price;
 
(ii)   each of the Transaction Documents to which it is a party, executed by such Investor; and
 
(iii)   a completed and executed Selling Stockholder Questionnaire in the form attached hereto as Exhibit B (the “Selling Holder Questionnaire” ).
 
ARTICLE 3.
 
REPRESENTATIONS AND WARRANTIES
 
3.1.   Representations and Warranties of the Company
 
.  The Company hereby makes the following representations and warranties to each Investor:
 
(a)   Subsidiaries .  The Company has no Subsidiaries other than those listed in Schedule 3.1(a) hereto.  Except as disclosed in Schedule 3.1(a) hereto, the Company owns, directly or indirectly, all of the capital stock or comparable equity interests of each Subsidiary free and clear of any and all Liens, and all the issued and outstanding shares of capital stock or comparable equity interest of each Subsidiary are validly issued and are fully paid, non-assessable and free of preemptive and similar rights.
 
(b)   Organization and Qualification .  Each of the Company and its Subsidiaries is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization (as applicable), with the requisite legal power and authority to own and use its properties and assets and to carry on its business as currently conducted.  Neither the Company nor any of its Subsidiaries is in violation of any of the provisions of its respective certificate or articles of incorporation, bylaws or other organizational or charter documents.  The Company and each of its Subsidiaries are duly qualified to conduct their respective businesses and are in good standing as a foreign corporation or other entity in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, could not, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect.
 
(c)   Authorization; Enforcement .  The Company has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by each of the Transaction Documents to which it is a party and otherwise to carry out its
 
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obligations thereunder.  The execution and delivery of each of the Transaction Documents to which it is a party by the Company and the consummation by it of the transactions contemplated thereby have been duly authorized by all necessary action on the part of the Company and no further consent or action is required by the Company in connection therewith.  Each Transaction Document has been (or upon delivery will be) duly executed by the Company and, when delivered in accordance with the terms hereof, will constitute the valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally the enforcement of, creditors’ rights and remedies, and (ii) the effect of rules of law governing the availability of specific performance and other equitable remedies.
 
(d)   No Conflicts .  The execution, delivery and performance of the Transaction Documents by the Company and the consummation by the Company of the transactions contemplated thereby do not and will not (i) conflict with or violate any provision of the Company’s or any Subsidiary’s certificate or articles of incorporation, bylaws or other organizational or charter documents, or (ii) except as disclosed in Schedule 3.1(d) hereto, conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement, credit facility, debt or other instrument (evidencing a Company or Subsidiary debt or otherwise) or other understanding to which the Company or any of its Subsidiaries is a party or by which any property or asset of the Company or any of its Subsidiaries is bound or affected, or (iii) result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or Governmental Authority to which the Company or any of its Subsidiaries is subject (including, assuming the accuracy of the representations and warranties of the Investors set forth in Section 3.2 hereof, federal and state securities laws and regulations and the rules and regulations of any self-regulatory organization to which the Company or its securities are subject, including all applicable Trading Markets), or by which any property or asset of the Company or a Subsidiary is bound or affected.
 
(e)   Filings, Consents and Approvals .  Except as set forth on Schedule 3.1(e) , the Company is not required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any court or other federal, state, local or other Governmental Authority or other third party or Person in connection with the execution, delivery and performance by the Company of the Transaction Documents, other than (i) the filing with the Commission of one or more Registration Statements in accordance with the requirements of the Registration Rights Agreement, (ii) filings required by state securities laws, (iii) the filing of a Notice of Sale of Securities on Form D with the Commission under Regulation D of the Securities Act, (iv) the filings required in accordance with Section 4.5 and (v) those that have been made or obtained prior to the date of this Agreement.
 
(f)   Issuance of the Securities .  Upon the Stockholder Approval, the Securities will be duly authorized and, when issued and paid for in accordance with the Transaction Documents, will be duly and validly issued, fully paid and nonassessable, free and clear of all Liens and will not be subject to preemptive or similar rights of stockholders.  Upon Stockholder Approval, the Company will reserve from its
 
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duly authorized capital stock the shares of Common Stock issuable pursuant to this Agreement in order to issue the Underlying Shares upon conversion of the Shares.  Based, in part, on the representations and warranties of the Investors set forth in Section 3.2 of this Agreement, the offer, issuance and sale of the Shares and the Underlying Shares to the Investors pursuant to this Agreement are exempt from the registration requirements of the Securities Act.
 
(g)   Capitalization .  The aggregate number of shares and type of all authorized, issued and outstanding classes of capital stock, options and other securities of the Company (whether or not presently convertible into or exercisable or exchangeable for shares of capital stock of the Company) is set forth in Schedule 3.1(g) hereto.  All outstanding shares of capital stock are duly authorized, validly issued, fully paid and nonassessable and have been issued in compliance in all materials respects with the applicable securities laws.  Except as disclosed in Schedule 3.1(g) hereto, the Company does not have at the date hereof any other Options, script rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities, rights or obligations convertible into or exercisable or exchangeable into shares of Common Stock.  Except as set forth in Schedule 3.1(g) hereto, and except for customary adjustments as a result of stock dividends, stock splits, combinations of shares, reorganizations, recapitalizations, reclassifications or other similar events, there are no anti-dilution or price adjustment provisions contained in any security issued by the Company (or in any agreement providing rights to security holders) and the issuance and sale of the Shares will not obligate the Company to issue shares of Common Stock or other securities to any Person (other than the Investors) and will not result in a right of any holder of securities to adjust the exercise, conversion, exchange or reset price under such securities.  To the knowledge of the Company, except as disclosed in the SEC Reports and any Schedules 13D or 13G filed with the Commission pursuant to Rule 13d-1 of the Exchange Act by reporting persons or in Schedule 3.1(g) hereto, no Person or group of related Persons beneficially owns (as determined pursuant to Rule 13d-3 under the Exchange Act), or has the right to acquire, by agreement with or by obligation binding upon the Company, beneficial ownership of 5% or more of the outstanding Common Stock.
 
(h)   SEC Reports; Financial Statements .  The Company has filed all reports required to be filed by it under the Securities Act and the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for the twelve months preceding the date hereof (the foregoing materials being collectively referred to herein as the “SEC Reports” and, together with the Schedules to this Agreement, the “Disclosure Materials” ) on a timely basis or has timely filed a valid extension of such time of filing and has filed any such SEC Reports prior to the expiration of any such extension.  As of their respective dates, the SEC Reports filed by the Company complied in all material respects with the requirements of the Securities Act and the Exchange Act and the rules and regulations of the Commission promulgated thereunder, and none of the SEC Reports, when filed, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.  The financial statements of the Company included in the SEC Reports comply in all material respects with applicable accounting requirements and the rules and regulations of the Commission and the PCAOB with respect thereto as in effect at the time of filing.  Such financial statements have been prepared in accordance with GAAP applied on a consistent basis during the periods involved, except as may be otherwise
 
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specified in such financial statements or the notes thereto, and except that unaudited financial statements may not contain all footnotes required by GAAP or may be condensed or summary statements, and fairly present in all material respects the financial position of the Company and its consolidated Subsidiaries as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal, immaterial, year-end audit adjustments.  All material agreements to which the Company or any of its Subsidiaries is a party or to which the property or assets of the Company or any of its Subsidiaries are subject are included as part of or identified pursuant to the rules and regulations of the Commission.
 
(i)   Press Releases .  The press releases disseminated by the Company during the twelve months preceding the date of this Agreement taken as a whole do not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made and when made, not misleading.
 
(j)   Material Changes .  Since the date of the latest audited financial statements included within the SEC Reports, except as specifically disclosed in the SEC Reports or in Schedule 3.1(j) hereto, (i) there has been no event, occurrence or development that has had or that could reasonably be expected to result in a Material Adverse Effect, (ii) the Company has not incurred any material liabilities (contingent or otherwise) other than (A) trade payables and accrued expenses and other liabilities incurred in the ordinary course of business consistent with past practice and (B) liabilities not required to be reflected in the Company’s financial statements pursuant to GAAP or required to be disclosed in filings made with the Commission, (iii) the Company has not altered its method of accounting or the identity of its auditors, except as disclosed in its SEC Reports, (iv) the Company has not declared or made any dividend or distribution of cash or other property to its stockholders, in their capacities as such, or purchased, redeemed or made any agreements to purchase or redeem any shares of its capital stock (except for repurchases by the Company of shares of capital stock held by employees, officers, directors or consultants pursuant to an option of the Company to repurchase such shares upon the termination of employment or services), and (v) the Company has not issued any equity securities to any officer, director or Affiliate, except pursuant to existing Company stock-based plans. The Company has not taken any steps to seek protection pursuant to any bankruptcy law nor does the Company have any knowledge or reason to believe that its creditors intend to initiate involuntary bankruptcy proceedings or any actual knowledge of any fact which would reasonably lead a creditor to do so.  The Company is not as of the date hereof, and after giving effect to the transactions contemplated hereby to occur at the applicable Closing, will not be Insolvent (as defined immediately hereinafter).  For purposes of this Section 3.1(j) , “Insolvent” means (i) the present fair saleable value of the Company’s assets is less than the amount required to pay the Company’s total Indebtedness (as defined in Section 3.1(bb) ), (ii) the Company is unable to pay its debts and liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured, (iii) the Company intends to incur or believes that it will incur debts that would be beyond its ability to pay as such debts mature or (iv) the Company has unreasonably small capital with which to conduct the business in which it is engaged as such business is now conducted and is proposed to be conducted.
 
(k)   Absence of Litigation .  Except as described in Schedule 3.1(k) , there is no action, suit claim or Proceeding, or, to the Company’s knowledge, inquiry or investigation, before or by any court, public board, government agency, self-regulatory organization or
 
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body pending or, to the knowledge of the Company, threatened against or affecting the Company or any of its Subsidiaries that could, individually or in the aggregate, have a Material Adverse Effect.
 
(l)   Labor Relations .  The Company and its Subsidiaries are in compliance in all material respects with all federal, state, local and foreign laws and regulations respecting labor, employment and employment practices and benefits, terms and conditions of employment and wages and hours.
 
(m)   Compliance .  Except as described in Schedule 3.1(m) , neither the Company nor any of its Subsidiaries, except in each case as would not, individually or in the aggregate, reasonably be expected to have or result in a Material Adverse Effect, (i) is in default under or in violation of (and no event has occurred that has not been waived that, with notice or lapse of time or both, would result in a default by the Company or any Subsidiary under), nor has the Company or any Subsidiary received notice of a claim that it is in default under or that it is in violation of, any indenture, loan or credit agreement or any other agreement or instrument to which it is a party or by which it or any of its properties is bound (whether or not such default or violation has been waived), (ii) is in violation of any order of any court, arbitrator or governmental body, or (iii) is or has been in violation of any statute, rule or regulation of any Governmental Authority, including without limitation all foreign, federal, state and local laws relating to taxes, environmental protection, occupational health and safety, product quality and safety and employment and labor matters.  The Company is in compliance with all effective requirements of the Sarbanes-Oxley Act of 2002, as amended, and the rules and regulations thereunder, that are applicable to it, except where the failure to so comply would not have a Material Adverse Effect.
 
(n)   Regulatory Permits .  The Company and the Subsidiaries possess all certificates, authorizations and permits issued by the appropriate federal, state, local or foreign regulatory authorities necessary to conduct their respective businesses as described in the SEC Reports, except where the failure to possess such permits could not, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect, and neither the Company nor any of its Subsidiaries has received any written notice of proceedings relating to the revocation or modification of any such permits.
 
(o)   Title to Assets .  The Company and its Subsidiaries own no real property, except as provided in Schedule 3.1(o)(i) .  Except as provided in Schedule 3.1(o)(ii) , the Company and its Subsidiaries have good and marketable title in all personal property owned by them, in each case free and clear of all Liens.  Any real property and facilities held under lease by the Company and its Subsidiaries are held by them under valid, subsisting and enforceable leases of which the Company and its Subsidiaries are in material compliance.
 
(p)   Patents and Trademarks .  The Company and its Subsidiaries have, or have rights to use, all patents, patent applications, trademarks, trademark applications, service marks, trade names, copyrights, licenses and other similar rights that are necessary or material for use in connection with their respective businesses as described in the SEC Reports and which the failure to so have could, individually or in
 
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EXHIBIT 10-43
 
the aggregate, have or reasonably be expected to result in a Material Adverse Effect (collectively, the “Intellectual Property Rights” ).  Except as set forth in Schedule 3.1(p) , none of the Company’s Intellectual Property Rights have expired or terminated, or are expected to expire or terminate, within three years from the date of this Agreement.  Neither the Company nor any of its Subsidiaries has any knowledge that the Intellectual Property Rights used by the Company or any Subsidiary violates or infringes upon the rights of others.  Except as set forth in Schedule 3.1(p) , the Company does not have knowledge of any infringement by others of Intellectual Property Rights of the Company or its Subsidiaries.  Except as provided in Schedule 3.1(p) , there is no claim, action or proceeding being made or brought, or to the knowledge of the Company, being threatened, against the Company or its Subsidiaries regarding Intellectual Property Rights.  Except as provided in Schedule 3.1(p) , the Company and its Subsidiaries have good and marketable title in all Intellectual Property Rights owned by them, in each case free and clear of all Liens.
 
(q)   Insurance .  The Company and its Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which the Company and its Subsidiaries are engaged.  The Company has no reason to believe that it will not be able to renew its and its Subsidiaries’ existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its and its Subsidiaries’ business on terms consistent with market for the Company’s and such Subsidiaries’ respective lines of business.
 
(r)   Transactions With Affiliates and Employees .  Except as set forth or incorporated by reference in the Company’s SEC Reports, none of the officers, directors or employees of the Company is presently a party to any transaction that would be required to be reported on Form 10-K with the Company or any of its Subsidiaries (other than for ordinary course services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or employee or, to the knowledge of the Company, any entity in which any officer, director, or employee has a substantial interest or is an officer, director, trustee or partner.
 
(s)   Internal Accounting Controls .  The Company and its Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management’s general or specific authorization, and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.  The Company has established disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and designed such disclosure controls and procedures to ensure that material information relating to the Company, including its Subsidiaries, is made known to the certifying officers by others within those entities.  The Company’s certifying officers have evaluated the effectiveness of the Company’s controls and procedures in accordance with Item 307 of Regulation S-K under the Exchange Act for the Company’s most recently ended fiscal quarter or fiscal year-end (such date, the Evaluation Date ).  The Company presented in its most recently filed Form 10-K or Form 10-Q the conclusions of the certifying officers about the effectiveness of the disclosure
 
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controls and procedures based on their evaluations as of the Evaluation Date.  Since the Evaluation Date, there have been no significant changes in the Company’s internal controls (as such term is defined in Item 308(c) of Regulation S-K under the Exchange Act) or, to the Company’s knowledge, in other factors that could significantly affect the Company’s internal controls.
 
(t)   No General Solicitation; Fees .  Neither the Company, nor any of its Affiliates, nor any Person acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D) in connection with the offer or sale of the Shares or the Underlying Shares.  The Company shall be responsible for the payment of any placement agent’s fees, financial advisory fees, or brokers’ commission (other than for Persons engaged by any Investor or its investment advisor) relating to or arising out of the issuance of the Shares pursuant to this Agreement.  The Company shall pay, and hold each Investor harmless against, any liability, loss or expense (including, without limitation, reasonable attorneys’ fees and out-of-pocket expenses) arising in connection with any such claim for fees arising out of the issuance of the Shares pursuant to this Agreement.  The Company has not engaged any placement agent or other agent in connection with the sale of the Shares.
 
(u)   Registration Rights .  Except as specified in Schedule 3.1(u) , the Company has not granted or agreed to grant to any Person any rights (including “piggy-back” registration rights) to have any securities of the Company registered with the Commission or any other Governmental Authority except for such rights that by their terms have expired or terminated and are no longer effective as of the Closing Date or which are subject to currently effective registration statements previously filed by the Company, as set forth on Schedule 3.1(u) .
 
(v)   Listing and Maintenance Requirements .  The Company has not, in the two years preceding the date hereof, received notice (written or oral) from any Trading Market on which the Common Stock is or has been listed or quoted to the effect that the Company is not in compliance with the listing or maintenance requirements thereof.  The Company is, and has no reason to believe that it will not in the foreseeable future continue to be, in compliance with all such listing and maintenance requirements.  The issuance and sale of the Securities under the Transaction Documents does not contravene the rules and regulations of the Trading Market on which the Common Stock is currently listed or quoted.
 
(w)   Investment Company .  The Company is not, and is not an Affiliate of, and immediately following the Closing will not have become, an “investment company” within the meaning of the Investment Company Act of 1940, as amended.
 
(x)   Application of Takeover Protections .  Except as described in Schedule 3.1(x) , there is no control share acquisition, business combination, poison pill (including any distribution under a rights agreement) or other similar anti-takeover provision under the Company’s certificate of incorporation or formation, as amended (or similar charter documents) or the laws of its state of incorporation that is or could become applicable to any of the Investors as a result of the Investors and the Company fulfilling their obligations or exercising their rights under the Transaction Documents, including without limitation, as a result of the Company’s issuance of the Shares and the Investors’ ownership of the Shares.
 

 
 
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EXHIBIT 10-43  

(y)   No Additional Agreements .  The Company does not have any agreement or understanding with any Investor with respect to the transactions contemplated by the Transaction Documents other than as specified in the Transaction Documents.
 
(z)   Consultation with Auditors .  The Company has consulted its independent auditors concerning the accounting treatment of the transactions contemplated by the Transaction Documents, and in connection therewith has furnished such auditors complete copies of the Transaction Documents.
 
(aa)   Disclosure .  The Company confirms that, except with respect to information, including projections, disclosed to the Investors, or any of them, as a result of their positions as members or observers of the Company’s Board of Directors, neither it nor any Person acting on its behalf has provided any of the Investors or their respective agents or counsel with any information that constitutes or might constitute material, non-public information (other than the existence and terms of the issuance of the Shares, as contemplated by this Agreement) concerning the Company, any of its Subsidiaries or their respective businesses.  The Company understands and confirms that each of the Investors will rely on the foregoing representations and covenants in effecting transactions in securities of the Company.  Subject to the assumptions and qualifications stated therein, all disclosure provided to the Investors regarding the Company, its Subsidiaries or their respective businesses and the transactions contemplated hereby, furnished by or on behalf of the Company (including the Schedules to this Agreement) are true and correct in all material respects and do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading.  To the Company’s knowledge, except for the transactions contemplated by this Agreement, no event or circumstance has occurred or information exists with respect to the Company or any of its Subsidiaries or its or their business, properties, operations or financial condition, which, under applicable law, rule or regulation, requires public disclosure or announcement by the Company but which has not been so publicly announced or disclosed.  The Company acknowledges and agrees that no Investor makes or has made any representations or warranties with respect to the transactions contemplated hereby other than those set forth in the Transaction Documents.
 
 
(bb)   Indebtedness .  Except as disclosed in Schedule 3.1(bb) or in the Company’s SEC Reports, neither the Company nor any of its Subsidiaries (i) has any outstanding Indebtedness (as defined below), (ii) is in violation of any term of or in default under any contract, agreement or instrument relating to any Indebtedness, except where such violations and defaults would not result, individually or in the aggregate, in a Material Adverse Effect ( provided that, if the effect of such violation or default is to cause or to permit the holder or holders then to cause any such Indebtedness to become or be declared due prior to its stated maturity it shall be deemed to be a Material Adverse Effect), or (iii) is a party to any contract, agreement or instrument relating to any Indebtedness, the performance of which, in the judgment of the Company’s officers, has or is expected to have a Material Adverse Effect.   Schedule 3.1(bb) provides a detailed description of the material terms of any such outstanding Indebtedness.  For purposes of this Agreement:  (x) “Indebtedness” of any Person means, without duplication (A) all indebtedness for borrowed money, (B) all obligations issued, undertaken or assumed as the deferred purchase price of property or services (other than trade payables entered into in the ordinary course of business), (C) all reimbursement or payment obligations
 
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with respect to letters of credit, surety bonds and other similar instruments, (D) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced incurred in connection with the acquisition of property, assets or businesses, (E) all indebtedness created or arising under any conditional sale or other title retention agreement, or incurred as financing, in either case with respect to any property or assets acquired with the proceeds of such indebtedness (even though the rights and remedies of the seller or bank under such agreement in the event of default are limited to repossession or sale of such property), (F) all monetary obligations under any leasing or similar arrangement which, in connection with GAAP, consistently applied for the periods covered thereby, is classified as a capital lease, (G) all indebtedness referred to in clauses (A) through (F) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any mortgage, lien, pledge, charge, security interest or other encumbrance upon or in any property or assets (including accounts and contract rights) owned by any Person, even though the Person which owns such assets or property has not assumed or become liable for the payment of such indebtedness, and (H) all Contingent Obligations in respect of indebtedness or obligations of others of the kinds referred to in clauses (A) through (G) above; and (y) “Contingent Obligation” means, as to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to any indebtedness, lease, dividend or other obligation of another Person if the primary purpose or intent of the Person incurring such liability, or the primary effect thereof, is to provide assurance to the obligee of such liability that such liability will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such liability will be protected (in whole or in part) against loss with respect thereto.
 
(cc)   Foreign Corrupt Practices .  Neither the Company nor any of its Subsidiaries nor, to the knowledge of the Company, any director, officer, agent, employee or other Person acting on behalf of the Company or any of its Subsidiaries has, in the course of its actions for, or on behalf of, the Company (i) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political activity; (ii) made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; (iii) violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended; or (iv) made any unlawful bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any foreign or domestic government official or employee.
 
(dd)   Acknowledgment Regarding Investors’ Purchase of Securities .  Based upon the assumption that the transactions contemplated by this Agreement are consummated in all material respects in conformity with the Transaction Documents, the Company acknowledges and agrees that each of the Investors is acting solely in the capacity of an arm’s length purchaser with respect to the Transaction Documents and the transactions contemplated hereby and thereby.  The Company further acknowledges that no Investor is acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to this Agreement and the transactions contemplated hereby and any advice given by any Investor or any of their respective representatives or agents in connection with the Transaction Documents and the transactions contemplated hereby and thereby is merely incidental to the Investors’ purchase of the Securities.  The Company further represents to each Investor that the Company’s decision to enter into this Agreement has been based solely on the independent evaluation of the transactions contemplated hereby by the Company and its representatives.

 
 
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(ee)   Employee Relations .  Neither the Company nor any of its Subsidiaries is a party to any collective bargaining agreement or employs any member of a union.  The Company believes that its relations with its employees are as disclosed in the SEC Reports.  Except as disclosed in the SEC Reports, during the period covered by the SEC Reports, no executive officer of the Company or any of its Subsidiaries (as defined in Rule 501(f) of the Securities Act) has notified the Company or any such Subsidiary that such officer intends to leave the Company or any such Subsidiary or otherwise terminate such officer’s employment with the Company or any such Subsidiary.  To the knowledge of the Company or any such Subsidiary, no executive officer of the Company or any of its Subsidiaries is in violation of any material term of any employment contract, confidentiality, disclosure or proprietary information agreement, non-competition agreement, or any other contract or agreement or any restrictive covenant, and the continued employment of each such executive officer does not subject the Company or any such Subsidiary to any liability with respect to any of the foregoing matters.
 
(ff)   Environmental Laws .  The Company and its Subsidiaries (i) are in compliance in all material respects with any and all Environmental Laws (as hereinafter defined), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses, and (iii) are in compliance in all material respects with all terms and conditions of any such permit, license or approval where, in each of the foregoing clauses (i), (ii) and (iii), the failure to so comply would be reasonably expected to have, individually or in the aggregate, a Material Adverse Effect.  The term “Environmental Laws” means all federal, state, local or foreign laws relating to pollution or protection of human health or the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata), including, without limitation, laws relating to emissions, discharges, releases or threatened releases of chemicals, pollutants, contaminants, or toxic or hazardous substances or wastes (collectively, “Hazardous Materials” ) into the environment, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials, as well as all authorizations, codes, decrees, demands or demand letters, injunctions, judgments, licenses, notices or notice letters, orders, permits, plans or regulations issued, entered, promulgated or approved thereunder.
 
(gg)   Subsidiary Rights .  Except as set forth in Schedule 3.1(gg) , the Company or one of its Subsidiaries has the unrestricted right to vote, and (subject to limitations imposed by applicable law) to receive dividends and distributions on, all capital securities of its Subsidiaries as owned by the Company or such Subsidiary.
 
(hh)   Tax Status.   The Company and each of its Subsidiaries (i) has made or filed all foreign, federal and state income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject, (ii) has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith, and (iii) has set aside on its books provision reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply.  There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim.

 
 
 
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(ii)   Right of First Offer .  Except as set forth on Schedule 3.1(ii) , the Company has not granted to any Person any rights of first offer or rights of first refusal with respect to the provision or obtaining of any debt or equity financing, including, but not limited to, any rights to provide additional financing currently available under the credit facilities described on Schedule 3.1(bb) hereto, except for such rights of first offer or rights of first refusal that by their terms have expired or terminated and are no longer effective as of the Closing Date.

3.2.   Representations and Warranties of the Investors
 
.  Each Investor hereby, for itself and for no other Investor, represents and warrants to the Company as follows, as of the date hereof and as of the Closing:
 
(a)   Organization; Authority .  Such Investor (other than Michael Engmann and Ronald Goodman) is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization with the requisite corporate, partnership or other power and authority to enter into and to consummate the transactions contemplated by the applicable Transaction Documents and otherwise to carry out its obligations hereunder and thereunder. The execution, delivery and performance by such Investor (other than Michael Engmann and Ronald Goodman) of this Agreement and the other Transaction Documents to which it is a party have been duly authorized by all necessary corporate or, if such Investor is not a corporation, such partnership, limited liability company or other applicable like action, on the part of such Investor.  Each of this Agreement and the Registration Rights Agreement has been duly executed by such Investor, and when delivered by such Investor in accordance with the terms hereof and thereof, will constitute the valid and legally binding obligation of such Investor, enforceable against it in accordance with its terms, except as such enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally the enforcement of, creditors’ rights and remedies and (ii) other equitable principles of general application.
 
(b)   No Public Sale or Distribution .  Such Investor is acquiring the Shares in the ordinary course of business, as principal for its own account for investment purposes only and not with a view to or for distributing or reselling such Shares or any part thereof, except pursuant to sales registered under the Securities Act or under an exemption from such registration and in compliance with applicable federal and state securities laws, and such Investor does not have a present arrangement to effect any distribution of the Shares to or through any Person or entity; provided , however , that by making the representations herein, such Investor does not agree to hold any of the Shares for any minimum or other specific term and reserves the right to dispose of the Shares at any time in accordance with or pursuant to a registration statement or an exemption under the Securities Act.
 
(c)   Investor Status .  At the time such Investor was offered the Shares, it was, and at the date hereof it is, an “accredited investor” as defined in Rule 501(a) under the Securities Act or a “qualified institutional buyer” as defined under Rule 144A(a) under the Securities Act.  Such Investor is not a registered broker-dealer under Section 15 of the Exchange Act, or a member of the NASD, Inc., or an entity engaged in the business of being a broker dealer.  Except as otherwise disclosed in writing to the Company on Exhibit B-2 (attached
 
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EXHIBIT 10-43
 
hereto) on or prior to the date of this Agreement, such Investor is not affiliated with any broker dealer registered under Section 15(a) of the Exchange Act, or a member of the NASD, Inc., or an entity engaged in the business of being a broker dealer.
 
(d)   Experience of Such Investor .  Such Investor, either alone or together with its representatives, has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Shares, and has so evaluated the merits and risks of such investment.  Such investor understands that it must bear the risk of this investment in the Shares indefinitely, and is able to bear such risk and is able too afford a complete loss of such investment.
 
(e)   Access to Information .  Such Investor acknowledges that it has reviewed the Disclosure Materials and has been afforded: (i) the opportunity to ask such questions as it has deemed necessary of, and to receive answers from, representatives of the Company concerning the terms and conditions of the offering of the Securities and the merits and risks of investing in the Securities; (ii) access to information ( provided , if any such information constitutes material non-public information, the Company shall (I) inform such Investor thereof at the time such information is provided and (II) make such information publicly available by furnishing or filing a Form 8-K with the Commission no later than the Closing Date; provided , however , the Company shall not be required to make public, disclose or file information, including projections, disclosed to the Investors, or any of them, as a result of their positions as members or observers of the Company’s Board of Directors) about the Company and its Subsidiaries and their respective financial condition, results of operations, business, properties, management and prospects sufficient to enable it to evaluate its investment; and (iii) the opportunity to obtain such additional information that the Company possesses or can acquire without unreasonable effort or expense that is necessary to make an informed investment decision with respect to the investment.  Neither such inquiries nor any other investigation conducted by or on behalf of such Investor or its representatives or counsel shall modify, amend or affect such Investor’s right to rely on the truth, accuracy and completeness of the Disclosure Materials and the Company’s representations and warranties contained in the Transaction Documents.  Such Investor acknowledges receipt of copies of the SEC Reports.
 
(f)   No Governmental Review .  Such Investor understands that no United States federal or state agency or any other government or governmental agency has passed on or made any recommendation or endorsement of the Shares or the fairness or suitability of the investment in the Shares nor have such authorities passed upon or endorsed the merits of the offering of the Shares.
 
(g)   No Conflicts .  The execution, delivery and performance by such Investor of this Agreement and the consummation by such Investor of the transactions contemplated hereby will not (i) result in a violation of the organizational documents, if any, of such Investor, or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which such Investor is a party, or (iii) result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws) applicable to such Investor, except in the case of clauses (ii) and (iii) above, for such that are not material and do not otherwise affect the ability of such Investor to consummate the transactions contemplated hereby.
 

 
 
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(h)   Restricted Securities .  The Investors understand that the Shares are characterized as “restricted securities” under the U.S. federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations such Shares may be resold without registration under the Securities Act only in certain limited circumstances.
 
(i)   Legends .  It is understood that, except as set forth in Section 4.1(b) of this Agreement, certificates evidencing such Shares may bear the legend set forth in Section 4.1(b) .
 
(j)   No Legal, Tax or Investment Advice .   Such Investor understands that nothing in this Agreement or any other materials presented by or on behalf of the Company to the Investor in connection with the purchase of the Securities constitutes legal, tax or investment advice.  Such Investor has consulted such legal, tax and investment advisors as it, in its sole discretion, has deemed necessary or appropriate in con­nection with its purchase of the Securities.
 
The Company acknowledges and agrees that no Investor has made or makes any representations or warranties with respect to the transactions contemplated hereby other than those specifically set forth in this Section 3.2 .
 
ARTICLE 4.
 
OTHER AGREEMENTS OF THE PARTIES
 
4.1.   Transfer Restrictions; Legends .   (a)
 
Shares may only be disposed of pursuant to an effective registration statement under, and in compliance with the requirements of, the Securities Act or pursuant to an available exemption from the registration requirements of the Securities Act, and in compliance with any applicable state securities laws.  In connection with any transfer of the Securities other than pursuant to an effective registration statement, to the Company, to an Affiliate of an Investor or in connection with a pledge as contemplated in Section 4.1(b) , the Company may require the transferor thereof to provide to the Company an opinion of counsel selected by the transferor and reasonably acceptable to the Company, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration of such transferred Securities under the Securities Act.  Notwithstanding the foregoing, the Company hereby consents to and agrees to register on the books of the Company and with its Transfer Agent, without any such legal opinion, except to the extent that the Transfer Agent requests such legal opinion, any transfer of Shares by an Investor to an Affiliate of such Investor, provided that the transferee certifies to the Company that it is an “accredited investor” as defined in Rule 501(a) under the Securities Act and provided that such Affiliate does not request any removal of any existing legends on any certificate evidencing the Shares and the Company reasonably believes such transfer is in compliance with all applicable securities laws.
 
(b)   The Investors agree to the imprinting, so long as is required by this Section 4.1(b) , of the following legend on any certificate evidencing any of the Shares:
 
THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION
 
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FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY APPLICABLE STATE SECURITIES LAWS AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS OR BLUE SKY LAWS.  

Certificates evidencing Shares shall not be required to contain such legend or any other legend (i) following any sale of such Shares pursuant to an effective registration statement (including the Registration Statement) covering the resale of the Shares, (ii) in connection with a sale, assignment or other transfer, provided such holder provides the Company with an opinion of counsel reasonably satisfactory to the Company, in a generally acceptable form, to the effect that such sale, assignment or transfer of the Securities may be made without registration under the applicable requirements of the 1933 Act and that such legend is no longer required, or (iii) upon such holder’s providing the Company with assurance reasonably acceptable to the Company, including customary seller and broker representation letters, that the Shares can be sold, assigned or transferred pursuant to Rule 144 or Rule 144A under the Securities Act.  The Company shall cause its counsel to issue the legal opinion included in the Transfer Agent Instructions to the Transfer Agent on the Effective Date.  Following the Effective Date or at such earlier time as a legend is no longer required for certain Shares, the Company will, no later than three Trading Days following the delivery by an Investor to the Company or the Transfer Agent of (i) a legended certificate representing such Shares and (ii) an opinion of counsel or such other information to the extent required by Section 4.1(a) or Section 4.1(b) , deliver or cause to be delivered to such Investor a certificate representing such Shares that is free from all restrictive and other legends.  The Company may not make any notation on its records or give instructions to the Transfer Agent that enlarge the restrictions on transfer set forth in this Section 4.1(b) .
 
If within three Trading Days after the Company’s receipt of a legended certificate and the other documents as specified in Clauses (i) and (ii) of the paragraph immediately above, the Company shall fail to issue and deliver to such Investor a certificate representing such Shares that is free from all restrictive and other legends, and if on or after such Trading Day the Investor purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Investor of shares of Common Stock that the Investor anticipated receiving from the Company without any restrictive legend (the “Covering Shares” ), then the Company shall, within three Trading Days after the Investor’s request, pay cash to the Investor in an amount equal to the excess (if any) of the Investor’s total purchase price (including brokerage commissions, if any) for the Covering Shares, over the product of (A) the number of Covering Shares, times (B) the closing bid price on the date of delivery of such certificate and the other documents as specified in Clauses (i) and (ii) of the paragraph immediately above.
 
(c)   The Company will not object to and shall permit (except as prohibited by law) an Investor to pledge or grant a security interest in some or all of the Shares in connection with a bona fide margin agreement or other loan or financing arrangement secured by the Shares, and if required under the terms of such agreement, loan or arrangement, the Company will not object to and shall permit (except as prohibited by law) such Investor to transfer pledged or secured Shares to the pledgees or secured parties.  Except as required by law, such a
 
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EXHIBIT 10-43
 
pledge or transfer shall not be subject to approval of the Company, no legal opinion of the pledgee, secured party or pledgor shall be required in connection therewith, and no notice shall be required of such pledge.  Each Investor acknowledges that the Company shall not be responsible for any pledges relating to, or the grant of any security interest in, any of the Shares or for any agreement, understanding or arrangement between any Investor and its pledgee or secured party.  At the appropriate Investor’s expense, the Company will execute and deliver such reasonable documentation as a pledgee or secured party of Shares may reasonably request in connection with a pledge or transfer of the Shares, including the preparation and filing of any required prospectus supplement under Rule 424(b)(3) of the Securities Act or other applicable provision of the Securities Act to appropriately amend the list of selling stockholders thereunder.   Provided that the Company is in compliance with the terms of this Section 4.1(c) , the Company’s indemnification obligations pursuant to Section 4.7 shall not extend to any Proceeding or Losses arising out of or related to this Section 4.1(c) .
 
4.2.   Furnishing of Information
 
.  Until the date that any Investor owning Shares may sell all of them under Rule 144 of the Securities Act (or any successor provision), the Company covenants to use its Best Efforts to timely file (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by the Company after the date hereof pursuant to the Exchange Act.  The Company further covenants that it will take such further action as any holder of Shares may reasonably request to satisfy the provisions of this Section 4.2 .
 
4.3.   Integration
 
.  The Company shall not, and shall use its Best Efforts to ensure that no Affiliate of the Company shall, sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of the Shares in a manner that would require the registration under the Securities Act of the sale of the Shares to the Investors, or that would be integrated with the offer or sale of the Shares for purposes of the rules and regulations of any Trading Market.
 
4.4.   Reservation of Securities .  The Company shall, at all times, maintain a reserve from its duly authorized Shares of Shares for issuance pursuant to the Transaction Documents.  In addition, the Company shall, as soon as possible, but in no event later than June 30, 2008, maintain a reserve from its duly authorized shares of Common Stock a sufficient number of shares of Common Stock for issuance pursuant to the Transaction Documents in such amount as may be required to fulfill its obligations to issue such shares of Common Stock upon conversion of the Shares or otherwise under the Transaction Documents.  In the event that at any time the then authorized Shares of shares of Common Stock are insufficient for the Company to satisfy its obligations to issue such Shares or shares of Common Stock under the Transaction Documents, the Company shall promptly take such actions as may be required to increase the number of authorized and reserved Shares and shares of Common Stock, as applicable.
 
4.5.   Securities Laws Disclosure; Publicity .  The Company shall, promptly after the Closing, but in no event later than 5:30 p.m., New York time, on the Business Day following the Closing, issue a press release reasonably acceptable to the Investors disclosing all material terms
 
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of the transactions contemplated hereby and by the Credit Agreement.  The Company shall, promptly after the Closing, but in no event later than the second Business Day following the Closing Date, file a Current Report on Form 8-K with the Commission (the “8-K Filing” ) describing the terms of the transactions contemplated by the Transaction Documents and the Credit Agreement, in the form required by the Exchange Act.  Thereafter, the Company shall timely file any filings and notices required by the Commission or applicable law with respect to the transactions contemplated hereby and by the other Transaction Documents and shall provide copies thereof to the Investors promptly after filing.  Except as herein provided, the Company shall not publicly disclose the name of any Investor, or include the name of any Investor in any press release without the prior written consent of such Investor, unless otherwise required by law.  The Company shall not, and shall cause each of its Subsidiaries and its and each of their respective officers, directors, employees and agents not to, provide any Investor with any material nonpublic information regarding the Company or any of its Subsidiaries from and after the issuance of the above referenced press release without the express written consent of such Investor.
 
4.6.   Use of Proceeds .  The Company does not anticipate receiving any proceeds under the Transaction Documents.  To the extent that the Company does receive any proceeds under the Transaction Documents or in connection with the transactions contemplated thereby, the Company intends to use such proceeds for the payment of fees and expenses related to the transactions contemplated hereby and by the other Transaction Documents and then to use any remaining proceeds for product development, working capital and general corporate purposes.
 
4.7.   Indemnification of Investors
 
.  In consideration of each Investor’s execution and delivery of the Transaction Documents and acquisition of the Shares thereunder, and in addition to all of the Company’s other obligations under the Transaction Documents, including the indemnity provided in the Registration Rights Agreement, the Company will defend, protect, indemnify and hold harmless each of the Investors, each other holder of Shares, and their respective stockholders, directors, officers, shareholders, partners, members, employees and agents or other representatives (each, an “Investor Party” ) from any and all Losses that any such Investor Party may suffer or incur as a result of, arising out of or relating to (a) any misrepresentation, breach or inaccuracy of any representation, warranty, covenant or agreement made by the Company in any Transaction Document or any other certificate, instrument or document contemplated hereby or thereby, (b) any breach of any covenant, agreement or obligation of the Company contained in the Transaction Documents or any other certificate, instrument or document contemplated hereby or thereby or (c) any cause of action, suit or claim brought or made against such Investor Party by a third party (including for these purposes a derivative action brought on behalf of the Company) and arising out of or resulting from (i) the execution, delivery, performance or enforcement of the Transaction Documents or any other certificate, instrument or document contemplated hereby or thereby, (ii) any transaction financed or to be financed in whole or in part, directly or indirectly, with the proceeds of the issuance of the Shares, or (iii) the status of such Investor or holder of the Shares or the Underlying Shares as an investor in the Company, except, in each case, solely to the extent arising out of the gross negligence, fraud or other intentional misconduct by such Investor Party, any material misrepresentation or material breach of any representation or warranty made by the Investor Party in the Transaction Documents or any other certificate, instrument or document contemplated hereby or thereby, or material breach of any covenant, agreement or obligation of
 
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the Investor Party contained in the Transaction Documents or any other certificate, instrument or document contemplated hereby or thereby.  To the extent that the foregoing undertaking by the Company may be unenforceable for any reason, the Company shall make the maximum contribution to the payment and satisfaction of each of the indemnified Losses which is permissible under applicable law.  In addition to the indemnity contained herein, the Company will reimburse each Investor Party for its reasonable legal and other expenses (including the cost of any investigation, preparation and travel in connection therewith) incurred in connection therewith, as such expenses are incurred.  Except as otherwise set forth herein, the mechanics and procedures with respect to the rights and obligations under this Section 4.7 shall be the same as those set forth in Section 5 of the Registration Rights Agreement.
 
4.8.   Listing of Securities
 
.  The Company agrees, (i) if the Company applies to have the Common Stock traded on any other Trading Market, it will include in such application the Underlying Shares, and will take such other action as is necessary or desirable to cause the Underlying Shares to be listed on such other Trading Market as promptly as possible, and (ii) it will take all action reasonably necessary to continue the listing and trading of its Common Stock on a Trading Market and will comply in all material respects with the Company’s reporting, filing and other obligations under the bylaws or rules of the Trading Market.
 
4.9.   Stockholder Approval.
 
(a)   The Company covenants and agrees to obtain the approval of its stockholders, and to take all requisite actions in order to increase the number of authorized shares of Common Stock by a number of shares as shall be sufficient to fully reserve shares for issuance upon conversion of the Shares (collectively “Stockholder Approval” ) which Stockholder Approval shall occur as soon as possible, but in no event later than June 30, 2008.
 
(b)   In furtherance of obtaining the Stockholder Approval, (i) the Company shall adopt proper resolutions authorizing the actions set forth in subsection (a) above, (ii) the Board of Directors of the Company shall recommend and the Company shall otherwise use its Best Efforts to promptly and duly obtain Stockholder Approval, including, without limitation, soliciting proxies from its stockholders in connection therewith in the same manner as all other management proposals in such proxy statement and having all management-appointed proxy-holders vote their proxies in favor of such proposals to carry out such resolutions, and (iii) within three Business Days of obtaining such Stockholder Approval, take all actions necessary to effectuate the actions set forth in subsections (b)(i) and (b)(ii) above.
 
4.10.   Ranking .  The Shares shall rank senior to any class of equity security of the Company.
 
4.11.   Cancellation of Notes .  With respect to each Investor that holds a Promissory Note issued by the Company as set forth on Exhibit A hereto, all obligations, liabilities, covenants and agreements of the Company under or in connection with the Note and Warrant Purchase Agreement, dated as of February 5, 2007 and June 15, 2007, respectively, and each related Promissory Note issued thereunder, are, as to each Investor, hereby terminated and cancelled and are of no further force or effect upon Closing and receipt by each Investor of (i) a certificate evidencing its respective Shares pursuant to Section 2.3(a)(iv) , (ii) in the case of AFS Investments, Inc., Rubicon Global Value Fund,
 
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L.P. and Frederick Farrar, payment at Closing of accrued and unpaid interest in the amounts set forth on Exhibit A and (iii) payment to each Investor of interest accrued and unpaid for the period from (and including) June 1, 2008 to (but excluding) the Closing Date, which certificates and payments have been tendered by the Company and accepted by each Investor as full payment and satisfaction for the Promissory Note(s) issued to such Investor and the Company’s obligations thereunder and under the Note and Warrant Purchase Agreement under which such Promissory Note was issued, except as may otherwise be provided in connection with a rescission pursuant to Section 6.1 .
 
ARTICLE 5.
CONDITIONS PRECEDENT TO CLOSING
 
5.1.   Conditions Precedent to the Obligations of the Investors
 
.  The obligation of each Investor to acquire Shares at the Closing is subject to the satisfaction or waiver by such Investor, at or before the Closing, of each of the following conditions:
 
(a)   Representations and Warranties .  The representations and warranties of the Company contained herein shall be true and correct as of the date when made and as of the Closing as though made on and as of such date (except for representations and warranties that speak as of a specific date which shall be true and correct as of such specified date);
 
(b)   Performance .  The Company and each Investor shall have performed, satisfied and complied with all covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by it at or prior to the Closing;
 
(c)   Company Deliverables .  The Company shall have delivered each of the Company Deliverables; and
 
(d)   Executed Loan Documents .  The Loan Documents including but not limited to (a) the Credit Agreement, (b) the Notes, (c) the Pledge and Security Agreement, and (d) the Depositary Account Control Agreement, and all other documents and instruments contemplated by such agreements, shall have been duly authorized and executed by each of the parties thereto in form and substance reasonably satisfactory to Phoenix, Michael Engmann and Ronald Goodman, and the Company shall have delivered sufficient original counterparts thereof to Phoenix, Michael Engmann and Ronald Goodman.
 
5.2.   Conditions Precedent to the Obligations of the Company
 
.  The obligation of the Company to sell Shares at the Closing to each Investor is subject to the satisfaction or waiver by the Company, at or before the Closing, of each of the following conditions:
 
(a)   Representations and Warranties .  The representations and warranties of such Investor contained herein shall be true and correct in all material respects as of the date when made and as of the Closing Date as though made on and as of such date (except for representations and warranties that speak as of a specific date which shall be true and correct as of such specified date);
 
(b)   Performance .  Such Investor shall have performed, satisfied and complied in all material respects (except as to those
 
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covenants, agreements and conditions qualified by materiality) with the covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by such Investor at or prior to the Closing;
 
(c)   Promissory Notes .  Not less than $945,000 in principal of the Promissory Notes shall be tendered as payment for the Shares; and
 
(d)   Investor Deliverables .  Such Investor shall have delivered each of the Investor Deliverables to be delivered by such Investor at the Closing.
 
ARTICLE 6.
 
MISCELLANEOUS
 
6.1.   Rescission .  In the event that the Company fails to meet the requirements of Section 4.9 herein, the Company shall make a rescission offer to the holders of the Shares by sending to each holder, on or before July 7, 2008, a notice (the “Rescission Notice” ) of such rescission offer, which shall specify the rescission rights including the date by which the rescission offer must be accepted, the method of acceptance, the documents (including certificates for Shares) that are required for acceptance, and the consideration to be received.  Each holder may accept such rescission offer, in whole or in part, in its sole discretion, by sending a notice of acceptance ( “Notice of Acceptance” ) of such rescission offer on or prior to August 4, 2008 (or such later date as the Company shall specify in the Rescission Notice), stating the number of Shares such holder will rescind.  The Company shall make a payment to each holder of Shares who accepts the rescission offer, promptly (and in no event more than three (3) Business Days) (the “Rescission Payment Date” ) following such holder’s tendering certificate(s) for all or such portion of its Shares as are specified in the Notice of Acceptance, consideration identical to the consideration paid by such holder for such Shares by reissuing to such holder its Promissory Note or issuing to such holder a new promissory note identical in all respects to such holder’s Promissory Note, in a principal amount equal to one dollar ($1.00) for each Share being rescinded, plus, at the holder’s option: (i) an amount in cash equal to all accrued but unpaid dividends on the Shares being rescinded to the Rescission Payment Date, or (ii) an amount in cash equal to the accrued but unpaid interest on such holder’s Promissory Note (or new promissory note, as the case may be) being reissued (or issued, as the case may be) to such holder pursuant hereto, as would have accrued had it been outstanding from the Closing Date to the Rescission Payment Date (in each case, as adjusted to reflect forward or reverse stock splits, stock dividends, recapitalizations or other similar capital reorganization or reclassification of capital stock) (the “Rescission Price” ).  The Shares not rescinded shall remain outstanding and entitled to all the rights and preferences provided herein other than those rights set forth in this Section 6.1 .  To the extent applicable, the Company shall issue replacement certificates representing any Shares not rescinded to be delivered to such holder with such holder’s Rescission Price.  Upon rescission, all rights of the holders of Shares so rescinded shall cease with respect to such Shares, and such Shares shall not thereafter be transferred on the books of the Company or be deemed to be outstanding for any purpose and shall be automatically and immediately canceled and shall not be reissued or sold, and neither the Company nor any of its Subsidiaries shall be a
 
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EXHIBIT 10-43
 
holder of, nor may any of them exercise any rights granted to holders of, such Shares following rescission.  Upon return of all or any portion of such holder’s Promissory Note, along with the Rescission Price and any other deliverables pursuant to this Section 6.1 , interest shall accrue on such Promissory Note pursuant to the original terms set forth therein.
 
6.2.   Fees and Expenses .  The Company shall pay all fees, costs and expenses (including legal fees, due diligence costs, expenses of attorneys and costs of advisers, counsel, accountants and other experts, if any) incurred by any party to this Agreement in connection with (a) any matters contemplated by or arising out of this Agreement and the Transaction Documents, (b) the examination, review, due diligence investigation, documentation, negotiation and closing of the transactions contemplated herein; (c) the continued administration of the Transaction Documents, including any such fees, costs and expenses incurred in perfecting, maintaining, determining the priority of and releasing any security, any tax payable in connection with any Transaction Documents and any amendments, modifications and waivers thereof; (d) any amendment, supplement, waiver or modification of any of the Transaction Documents; and (e) any default and any enforcement of collection proceeding resulting therefrom or any workout or restructuring of any of the transactions hereunder or contemplated thereby or any action to enforce any Transaction Document or to collect any payments due from the Company; provided , however , that the aggregate amount of subsections (a) and (b) and the legal fees and expenses, due diligence costs, costs of advisers, counsel, accountants and other experts, if any, and all other expenses that occur pre-Closing shall be paid by the Company to Phoenix or its designee at Closing.
 
6.3.   Entire Agreement
 
.  The Transaction Documents, together with the Exhibits and Schedules thereto, contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements, understandings, discussions and representations, oral or written, with respect to such matters, which the parties acknowledge have been merged into such documents, exhibits and schedules.  At or after the Closing, and without further consideration, the Company will execute and deliver to the Investors such further documents as may be reasonably requested in order to give practical effect to the intention of the parties under the Transaction Documents.
 
6.4.   Notices
 
.  Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (a) the date of transmission, if such notice or communication is delivered via facsimile or e-mail at the facsimile number or e-mail address specified in this Section 6.4 prior to 6:30 p.m. (New York City time) on a Trading Day, (b) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile or e-mail at the facsimile number or e-mail address specified in this Section on a day that is not a Trading Day or later than 6:30 p.m. (New York City time) on any Trading Day, (c) the Trading Day following the date of deposit with a nationally recognized overnight courier service, or (d) upon actual receipt by the party to whom such notice is required to be given.  The addresses, facsimile numbers and e-mail addresses for such notices and communications are those set forth on the signature pages hereof, or such other address, facsimile number or e-mail address as may be designated hereafter, in the same manner, by any such Person.
 
6.5.   Amendments; Waivers
 
.  No provision of this Agreement may be waived or amended except in a written instrument signed, in the case of an amendment, by the Company
 
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EXHIBIT 10-43
 
and each of the Investors or, in the case of a waiver, by the party against whom enforcement of any such waiver is sought.  No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of any party to exercise any right hereunder in any manner impair the exercise of any such right.
 
6.6.   Construction
 
.  The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof.  The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.
 
6.7.   Successors and Assigns
 
.  This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns.  The Company may not assign this Agreement or any rights or obligations hereunder without the prior written consent of the Investors holding a majority of the Shares.  Any Investor may assign its rights under this Agreement to any Person to whom such Investor assigns or transfers (including by way of distribution to its members, partners or stockholders) any Securities, provided  (i) such transferor agrees in writing with the transferee or assignee to assign such rights, and a copy of such agreement is furnished to the Company after such assignment, (ii) the Company is furnished with written notice of the name and address of such transferee or assignee, (iii) following such transfer or assignment, the further disposition of such securities by the transferee or assignee is restricted under the Securities Act and applicable state securities laws, (iv) such transferee agrees in writing to be bound, with respect to the transferred Securities, by the provisions hereof that apply to the “Investors”, and (v) such transfer shall have been made in accordance with the applicable requirements of this Agreement and with all laws applicable thereto.
 
6.8.   No Third-Party Beneficiaries
 
.  This Agreement is intended for the benefit of the parties hereto and their respective successors and permitted assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other Person.
 
6.9.   Governing Law; Venue; Waiver of Jury Trial
 
.  THE CORPORATE LAWS OF THE STATE OF DELAWARE SHALL GOVERN ALL ISSUES CONCERNING THE RELATIVE RIGHTS OF THE COMPANY AND ITS STOCKHOLDERS.  ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY, ENFORCEMENT AND INTERPRETATION OF THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.  THE COMPANY AND INVESTORS HEREBY IRREVOCABLY SUBMIT TO THE NON-EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS SITTING IN THE CITY OF NEW YORK, BOROUGH OF MANHATTAN FOR THE ADJUDICATION OF ANY DISPUTE BROUGHT BY THE COMPANY OR ANY INVESTOR HEREUNDER, IN CONNECTION HEREWITH OR WITH ANY TRANSACTION CONTEMPLATED HEREBY OR DISCUSSED HEREIN (INCLUDING WITH RESPECT TO THE ENFORCEMENT OF ANY OF THE TRANSACTION DOCUMENTS), AND HEREBY IRREVOCABLY WAIVE, AND AGREE NOT TO ASSERT IN ANY SUIT, ACTION OR PROCEEDING BROUGHT BY THE COMPANY OR ANY INVESTOR, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF ANY SUCH COURT, OR THAT SUCH SUIT,
 
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EXHIBIT 10-43
 
ACTION OR PROCEEDING IS IMPROPER.  EACH PARTY HEREBY IRREVOCABLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS TO PROCESS BEING SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING BY MAILING A COPY THEREOF VIA REGISTERED OR CERTIFIED MAIL OR OVERNIGHT DELIVERY (WITH EVIDENCE OF DELIVERY) TO SUCH PARTY AT THE ADDRESS IN EFFECT FOR NOTICES TO IT UNDER THIS AGREEMENT AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE GOOD AND SUFFICIENT SERVICE OF PROCESS AND NOTICE THEREOF.  NOTHING CONTAINED HEREIN SHALL BE DEEMED TO LIMIT IN ANY WAY ANY RIGHT TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW.  THE COMPANY AND INVESTORS HEREBY WAIVE ALL RIGHTS TO A TRIAL BY JURY.
 
6.10.   Survival
 
.  The representations, warranties, agreements and covenants contained herein shall survive the Closing.
 
6.11.   Execution
 
.  This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart.  In the event that any signature is delivered by facsimile transmission or e-mail attachment, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile signature page were an original thereof.
 
6.12.   Severability
 
.  If any provision of this Agreement is held to be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affected or impaired thereby and the parties will attempt to agree upon a valid and enforceable provision that is a reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Agreement.
 
6.13.   Rescission and Withdrawal Right
 
.  Notwithstanding anything to the contrary contained in (and without limiting any similar provisions of) the Transaction Documents, whenever any Investor exercises a right, election, demand or option under a Transaction Document and the Company does not timely perform its related obligations within the periods therein provided, then such Investor may rescind or withdraw, in its sole discretion from time to time upon written notice to the Company, any relevant notice, demand or election in whole or in part without prejudice to its future actions and rights.
 
6.14.   Replacement of Securities .
 
  If any certificate or instrument evidencing any Securities is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation thereof, or in lieu of and substitution therefor, a new certificate or instrument, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and the execution by the holder thereof of a customary lost certificate affidavit of that fact and an agreement to indemnify and hold harmless the Company for any losses in connection therewith.  The applicants for a new certificate or instrument under such circumstances shall also pay any reasonable third-party costs associated with the issuance of such replacement Securities.
 

 
 
- 29 - 

 
EXHIBIT 10-43
 
6.15.   Remedies
 
.  In addition to being entitled to exercise all rights provided herein or in the other Transaction Documents or granted by law or any other agreement or contract, including recovery of damages, each Investor, each other holder of Shares and the Company will be entitled to seek specific performance under the Transaction Documents.  The parties agree that monetary damages may not be adequate compensation for any loss incurred by reason of any breach of obligations described in the foregoing sentence and hereby agree to waive in any action for specific performance of any such obligation (other than in connection with any action for a temporary restraining order) the defense that a remedy at law would be adequate. Furthermore, the Company recognizes that in the event that it fails to perform, observe, or discharge any or all of its obligations under the Transaction Documents, any remedy at law may prove to be inadequate relief to the Buyers.  The Company therefore agrees that the Buyers shall be entitled to seek temporary and permanent injunctive relief in any such case without the necessity of proving actual damages and without posting a bond or other security.
 
6.16.   Payment Set Aside
 
. To the extent that the Company makes a payment or payments to any Investor pursuant to any Transaction Document or an Investor enforces or exercises its rights thereunder, and such payment or payments or the proceeds of such enforcement or exercise or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, recovered from, disgorged by or are required to be refunded, repaid or otherwise restored to the Company, a trustee, receiver or any other person under any law (including, without limitation, any bankruptcy law, state or federal law, common law or equitable cause of action), then to the extent of any such restoration the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred.
 
6.17.   Further Assurances
 
.  Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as any other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.
 
6.18.   Adjustments in Share Numbers and Prices
 
.  In the event of any stock split, subdivision, dividend or distribution payable in shares of Common Stock (or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly shares of Common Stock), combination or other similar recapitalization or event occurring after the date hereof, each reference in any Transaction Document to a number of shares or a price per share shall be amended to appropriately account for such event.
 
6.19.   Independent Nature of Investors’ Obligations and Rights
 
.  The obligations of each Investor under any Transaction Document are several and not joint with the obligations of any other Investor, and no Investor shall be responsible in any way for the performance of the obligations of any other Investor under any Transaction Documents.  The decision of each Investor to purchase Securities pursuant to this Agreement has been made by such Investor independently of any other Investor and independently of any information, materials, statements or opinions as to the business, affairs, operations, assets, properties, liabilities, results of
 
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EXHIBIT 10-43
 
operations, condition (financial or otherwise) or prospects of the Company which may have been made or given by any other Investor or by any agent or employee of any other Investor, and no Investor or any of its agents or employees shall have any liability to any other Investor (or any other person) relating to or arising from any such information, materials, statements or opinions.  Nothing contained herein or in any Transaction Document, and no action taken by any Investor pursuant thereto, shall be deemed to constitute the Investors as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Investors are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by the Transaction Document.  Each Investor acknowledges that no other Investor has acted as agent for such Investor in connection with making its investment hereunder and that no other Investor will be acting as agent of such Investor in connection with monitoring its investment hereunder.  Each Investor shall be entitled to independently protect and enforce its rights, including without limitation the rights arising out of this Agreement or out of the other Transaction Documents, and it shall not be necessary for any other Investor to be joined as an additional party in any Proceeding for such purpose.
 
 [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
 
SIGNATURE PAGES FOLLOW]
 

 
 
- 31 - 

 
EXHIBIT 10-43


 
IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.
 
Communication Intelligence Corporation
 

 
By:        /s/  Guido DiGregorio                                                          
Name:  Guido D. DiGregorio
Title: Chief Executive Officer and President

Address for Notice:
275 Shoreline Drive, #500
Redwood Shores, California 94065

Facsimile No.:  (650) 802-7777
Telephone No.: (650) 802-7888
Attn:  Frank Dane
 
With a copy to:
 
Davis Wright Tremaine LLP
1300 SW Fifth Avenue, Suite 2300
Portland, Oregon 97201
Facsimile:  (503) 778-5299
Telephone: (503) 778-5214
Attn: Michael C. Philips, Esq.


COMPANY SIGNATURE PAGE

 

 
 
  - 32 -

 
EXHIBIT 10-43

 
Investor Signature Page

By its execution and delivery of this signature page, the undersigned Investor hereby joins in and agrees to be bound by the terms and conditions of the Securities Purchase Agreement dated as of  June 5 , 2008 (the “Purchase Agreement” ) by and among Communication Intelligence Corporation and the Investors (as defined therein), as to the number of shares of Common Stock set forth below, and authorizes this signature page to be attached to the Purchase Agreement or counterparts thereof.
 
Name of Investor:

 
By: Rubicon Global Value Fund, L.P.
 

 
By:   /s/  Steven Shum                 
Name:  Steven Shum
Title: Managing Director
 

Address:  One SW Columbia St. Suite 900
                                                                                                                                   Portland, OR 97258
 
Telephone No.:   503-548-4800
 
Facsimile No.:   503-548-4805
 
Email Address:  sshum@corefundmgmt.com
 
Number of Shares:   75,000
 
Aggregate Purchase Price:  $75,000


 
 
- 33 - 

 
EXHIBIT 10-43
 
Investor Signature Page

By its execution and delivery of this signature page, the undersigned Investor hereby joins in and agrees to be bound by the terms and conditions of the Securities Purchase Agreement dated as of  June 5 , 2008 (the “Purchase Agreement” ) by and among Communication Intelligence Corporation and the Investors (as defined therein), as to the number of shares of Common Stock set forth below, and authorizes this signature page to be attached to the Purchase Agreement or counterparts thereof.
 
Name of Investor:

 
By: Kendu Partners

 
By:   /s/  Michale W. Engmann
Name:  Michael W. Engmann
Title: General Partner
 

Address:     c/o Engmann Options                                                                                                                                  
                     220 Bush St. Suite 950 
                     San Francisco, CA 94104
 
Telephone No.:   415-293-3818
 
Facsimile No.:   415-781-4641
 
Email Address:  Mike.Engmann@engmannoptions.com
 
Number of Shares:  320,000
 
Aggregate Purchase Price:  $320,000
 

 
- 33-

EXHIBIT 10-43
 
Investor Signature Page

By its execution and delivery of this signature page, the undersigned Investor hereby joins in and agrees to be bound by the terms and conditions of the Securities Purchase Agreement dated as of  June 5 , 2008 (the “Purchase Agreement” ) by and among Communication Intelligence Corporation and the Investors (as defined therein), as to the number of shares of Common Stock set forth below, and authorizes this signature page to be attached to the Purchase Agreement or counterparts thereof.
 
Name of Investor:  Michael Engmann

 
By:

 
By:   /s/ Michael W. Engmann
Name:  Michael Engmann
Title:
 

Address:    38 San Fernando Way   
                    San Francisco, CA  94127
 
Telephone No.:   415-293-3818
 
Facsimile No.:   415-781-4641
 
Email Address:  MIKE.ENGMANN@ENGMANNOPTIONS.COM
                                                                                                                                                                  (small letters)
 
Number of Shares:   250,000
 
Aggregate Purchase Price:  $250,000
 
 
 
 
- 33 -

EXHIBIT 10-43
 
Investor Signature Page
 
By its execution and delivery of this signature page, the undersigned Investor hereby joins in and agrees to be bound by the terms and conditions of the Securities Purchase Agreement dated as of  June 5 , 2008 (the “Purchase Agreement” ) by and among Communication Intelligence Corporation and the Investors (as defined therein), as to the number of shares of Common Stock set forth below, and authorizes this signature page to be attached to the Purchase Agreement or counterparts thereof.
 
Name of Investor:  MDNH Partners, L.P.
 
 
By:   MDNH Partners, L.P.
 
 
By:   /s/  Michael W. Engmann
Name:  Michael W. Engmann
Title:  General Partner 
 
 
Address:   MDNH Partners 
                    220 Bush St., Suite 950
                    San Francisco, CA 94104
                                                                                                                                                                                                                                                                   
Telephone No.:  415-293-3818
 
Facsimile No.:   415-781-4641
 
Email Address:  MIKE.ENGMANN@ENGMANNOPTIONS.COM
 
Number of Shares:   150,000
 
Aggregate Purchase Price:  $150,000
 
 
- 33 -

EXHIBIT 10-43
 
Investor Signature Page

By its execution and delivery of this signature page, the undersigned Investor hereby joins in and agrees to be bound by the terms and conditions of the Securities Purchase Agreement dated as of  June 5 , 2008 (the “Purchase Agreement” ) by and among Communication Intelligence Corporation and the Investors (as defined therein), as to the number of shares of Common Stock set forth below, and authorizes this signature page to be attached to the Purchase Agreement or counterparts thereof.
 
Name of Investor:

 
By:

 
By:   /s/ Frederich L. Farrar
Name: Frederich L. Farrar 
Title:
 
 
Address: 3502 Woodview Trace, Suite #200
                                                                                                                                   Indianapolis, IN 46268
 
Telephone No.:   317 860 8216
 
Facsimile No.:   317 860 9190
 
Email Address:  fred.farrar@lclipsch.com
 
Number of Shares:   50,000
 
Aggregate Purchase Price:  $50,000.00
 
 
 
- 33 -

EXHIBIT 10-43
Investor Signature Page

By its execution and delivery of this signature page, the undersigned Investor hereby joins in and agrees to be bound by the terms and conditions of the Securities Purchase Agreement dated as of  June 5 , 2008 (the “Purchase Agreement” ) by and among Communication Intelligence Corporation and the Investors (as defined therein), as to the number of shares of Common Stock set forth below, and authorizes this signature page to be attached to the Purchase Agreement or counterparts thereof.
 
Name of Investor:
 
 
By:   AFS Investments, Inc.
 
 
By:   /s/  Fred J. Merritt
Name:  Fred J. Merritt
Title: President
 
 
Address: 14510 Lima Rd
                  Ft. Wayne, IN 46818
 
Telephone No.:   317-506-1937
 
Facsimile No.:   260-637-4472
 
Email Address:  AFSINVESTMENTS@MSN.COM
 
Number of Shares:  
 
Aggregate Purchase Price: 
 
 
 
 
- 33 -
EXHIBIT 10-44

 

 
 
 

 

 

 

 
REGISTRATION RIGHTS AGREEMENT
 
Dated as of June 5, 2008,
 
By And Among
 
COMMUNICATION INTELLIGENCE CORPORATION
 
AND
 
THE INVESTORS SIGNATORY HERETO
 

 

 
 
 

 
EXHIBIT 10-44


TABLE OF CONTENTS
     
   
Page
Section 1.
Definitions
1
Section 2.
Registration
5
Section 3.
Other Agreements of the Parties
6
Section 4.
Registration Procedures
9
Section 5.
Registration Expenses
14
Section 6.
Indemnification
14
 
(a)     Indemnification by the Company
14
 
(b)     Indemnification by Holders
15
 
(c)     Conduct of Indemnification Proceedings
16
 
(d)     Contribution
16
Section 7.
Reports Under the 1934 Act
17
Section 8.
Miscellaneous
18
 
(a)     Remedies
18
 
(b)     Compliance
18
 
(c)     Discontinued Disposition
18
 
(d)     Piggy-Back Registrations
18
 
(e)   Demand Registrations in Connection with Additional Registrable Securities
19
 
(f)     Representations and Covenants Made to the Investors
20
 
(g)     Amendments and Waivers
20
 
(h)     Notices
20
 
(i)     Successors and Assigns
21
 
(j)     Execution and Counterparts
21
 
(k)    Governing Law
22
 
(l)     Cumulative Remedies
22
 
(m)    Severability
22
 
(n)     Headings
22
 
(o)     Independent Nature of Investors’ Obligations and Rights
22

 
- i - 

 
EXHIBIT 10-44



REGISTRATION RIGHTS AGREEMENT
 
This Registration Rights Agreement (this “Agreement” ) is made and entered into as of June 5, 2008, by and among Communication Intelligence Corporation, a Delaware corporation (the “Company” ), and the investors signatory hereto (each an “Investor” and collectively, the “Investors” ).
 
This Agreement is made pursuant to the Securities Purchase Agreement, dated as of the date hereof, among the Company and the investors identified on the signature pages thereto (the “Purchase Agreement” ), the Credit Agreement, dated as of the date hereof, among the Company and the lenders signatory thereto (the “Credit Agreement” ), and other Transaction Documents pursuant to which the Company will effect a Debt Refinancing.
 
The Company and the Investors hereby agree as follows:
 
1.   Definitions .  Capitalized terms used and not otherwise defined herein that are defined in the Purchase Agreement will have the meanings given such terms in the Purchase Agreement.  As used in this Agreement, the following terms have the respective meanings set forth in this Section 1 :
 
“Advice” has the meaning set forth in Section 8(c) .
 
“Additional Registrable Securities” means the Additional Underlying Shares, and any securities issued or issuable upon any stock split, dividend or other distribution, recapitalization or similar event, or any price adjustment as a result of such stock splits, reverse stock splits or similar events with respect to any of the Additional Underlying Shares.
 
“Additional Registrable Securities Piggy Back Period” has the meaning set forth in Section 8(d) .
 
“Additional Shares” means the shares of Series A Cumulative Convertible Preferred Stock, having the rights, preferences and privileges set forth in the Certificate of Designations, issuable pursuant to the Company’s option to make dividend payments “in kind” pursuant to the Certificate of Designations.
 
“Additional Underlying Shares” means the Shares of Common Stock issuable upon conversion of the Additional Shares or exercise of the Additional Warrants.
 
“Additional Warrants” means the warrants to purchase from the Company shares of Common Stock of the Company issued pursuant to the Company’s option to make interest payments “in kind” pursuant to the Credit Agreement.
 
“Agreement” has the meaning set forth in the Preamble.
 
“Allowable Grace Period” has the meaning set forth in Section 3(a) .
 

                                                        

 
- 1 - 

 
EXHIBIT 10-44

“Certificate of Designations” means the Certificate of Designations filed by the Company as of the date hereof.
 
“Commission” means the U.S. Securities and Exchange Commission.
 
“Company” has the meaning set forth in the Preamble.
 
“Covering Shares” has the meaning set forth in Section 3(c) .
 
“Credit Agreement” has the meaning set forth in the Recitals.
 
“Debt Refinancing” means, collectively, the following: (i) the conversion of the outstanding debt set forth on Schedule 1.3 of the Credit Agreement into Loans (as defined in the Credit Agreement) under the Credit Agreement and the tender of the promissory notes evidencing such debt to the Company for cancellation; (ii) the tender of certain Promissory Notes (as defined under the Purchase Agreement) to the Company for cancellation in full payment for shares of Series A Preferred Stock as set forth in the Purchase Agreement and (iii) each of the other transactions contemplated hereby and by the other Debt Refinancing Documents.
 
“Demand Registration” has the meaning set forth in Section 8(e) .
 
“Demand Registration Notice” has the meaning set forth in Section 8(e) .
 
“Demand Registration Request” has the meaning set forth in Section 8(e) .
 
“Demanding Holders” has the meaning set forth in Section 8(e) .
 
“Effective Date” means, as to a Registration Statement, the date on which such Registration Statement is first declared effective by the Commission.
 
“Effectiveness Date” means (a) with respect to the Registration Statement required to be filed under Section 2(a) , the earlier of (i) the 150 th day following the Closing, and (ii) the fifth Trading Day following the date on which the Company is notified by the Commission that such Registration Statement will not be reviewed or is no longer subject to further review and comments, and (b) with respect to a Registration Statement required to be filed under Section 2(b) , the earlier of: (i) the 90 th day following the applicable Filing Date, and (ii) the fifth Trading Day following the date on which the Company is notified by the Commission that the Registration Statement will not be reviewed or is no longer subject to further review and comments.
 
“Effectiveness Failure” has the meaning set forth in Section 3(a) .
 
“Effectiveness Period” has the meaning set forth in Section 2(a) .
 
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
 
“Filing Date” means (a) with respect to the Registration Statement required to be filed under Section 2(a) , the earlier of (i) two (2) Business Days following the filing of the
 
- 2 -

EXHIBIT 10-44
 
Company’s Quarterly Report on Form 10-Q for the three and six months ending June 30, 2008, and (ii) August 18, 2008, and (b) with respect to a Registration Statement required to be filed under Section 2(b) , the 30 th day following the date on which Holders of a majority of the Registrable Securities request that the Company register the resale of Common Stock on Form S-3.
 
“Filing Failure” has the meaning set forth in Section 3(a) .
 
“Grace Period” has the meaning set forth in Section 3(a) .
 
“Holder” or “Holders” means the holder or holders, as the case may be, from time to time of Registrable Securities (including a holder or holders of Shares or Warrants convertible or exchangeable into Registrable Securities) or Additional Registrable Securities (including a holder or holders of Shares or Warrants convertible or exchangeable into Additional Registrable Securities).
 
“Indemnified Party” has the meaning set forth in Section 6(c) .
 
“Indemnifying Party” has the meaning set forth in Section 6(c) .
 
“Inspectors” has the meaning set forth in Section 4(l) .
 
“Investor” or “Investors” has the meaning set forth in the Preamble.
 
“Losses” has the meaning set forth in Section 6(a) .
 
“Maintenance Failure” has the meaning set forth in Section 3(a) .
 
“New York Courts” means the state and federal courts sitting in the City of New York, Borough of Manhattan.
 
“Proceeding” means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened.
 
“Principal Market” means the primary market on which a security trades.
 
“Prospectus” means the prospectus included in a Registration Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by a Registration Statement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus.
 
“Purchase Agreement” has the meaning set forth in the Recitals.
 

 
 
- 3 - 

 
EXHIBIT 10-44

“Records” has the meaning set forth in Section 4(l) .
 
“register , “registered , and “registration” refer to a registration effected by preparing and filing one or more Registration Statements (as defined below) in compliance with the 1933 Act and pursuant to Rule 415, and the declaration or ordering of effectiveness of such Registration Statement(s) by the SEC.
 
“Registration Delay Payments” has the meaning set forth in Section 3(a) .
 
“Registrable Securities” means the Underlying Shares and any securities issued or issuable upon any stock split, dividend or other distribution, recapitalization or similar event, or any price adjustment as a result of such stock splits, reverse stock splits or similar events with respect to any of the Underlying Shares.
 
“Registration Statement” means the registration statement required to be filed in accordance with Section 2(a) and any additional registration statement(s) required to be filed under Section 2(b) or Section 8(e) , including (in each case) the Prospectus, amendments and supplements to such registration statements or Prospectus, including pre- and post-effective amendments, all exhibits thereto, and all material incorporated by reference or deemed to be incorporated by reference therein.
 
“Rule 144” means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule 144.
 
“Rule 415” means Rule 415 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule 415.
 
“Rule 424” means Rule 424 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule 424.
 
“Securities” means the Warrants, the Shares and the Underlying Shares.
 
“Securities Act” means the Securities Act of 1933, as amended.
 
“Selling Holder Questionnaire” has the meaning set forth in Section 2(c) .
 
“Shares” means the shares of Series A Cumulative Convertible Preferred Stock, having the rights, preferences and privileges set forth in the Certificate of Designations, issuable pursuant to the Purchase Agreement.
 
“Trading Market” means whichever of the New York Stock Exchange, the American Stock Exchange, the NASDAQ Global Select Market, the NASDAQ Global Market, the NASDAQ Capital Market or OTC Bulletin Board on which the Common Stock is listed or quoted for trading on the date in question.
 

 
 
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EXHIBIT 10-44

“Transaction Documents” means this Agreement, the Purchase Agreement, the Credit Agreement, the Certificate of Designations and any other documents or agreements executed in connection with the transactions contemplated thereunder.
 
“Transfer Agent” means American Stock Transfer & Trust Company, or any successor transfer agent for the Company.
 
“Transfer Agent Instructions” means, with respect to the Company, the Irrevocable Transfer Agent Instructions, in the form of Exhibit D , executed by the Company and delivered to the Transfer Agent.
 
“Underlying Shares” means the shares of Common Stock issuable upon conversion of the Shares or exercise of the Warrants.
 
“Warrants” means the warrants (other than the Additional Warrants) to purchase from the Company   shares of Common Stock of the Company issued pursuant to the Credit Agreement.
 
2.   Registration .
 
(a)   On or prior to the applicable Filing Date, the Company shall prepare and file with the Commission a Registration Statement covering the resale of all Registrable Securities not already covered by an existing and effective Registration Statement for an offering to be made on a continuous basis pursuant to Rule 415, on Form S-1 (or on such other form appropriate for such purpose).  Such Registration Statement shall contain (except if otherwise required pursuant to written comments received from the Commission upon a review of such Registration Statement) the “Plan of Distribution” attached hereto as Exhibit A .  The Company shall use its reasonable best efforts to cause such Registration Statement to be declared effective under the Securities Act as soon as possible but, in any event, no later than its Effectiveness Date, and shall use its reasonable best efforts to keep the Registration Statement continuously effective under the Securities Act until the date which is the earliest of (i) two years after its Effective Date, (ii) such time as all of the Registrable Securities covered by such Registration Statement have been publicly sold by the Holders pursuant to such Registration Statement, or (iii) such time as all of the Registrable Securities covered by such Registration Statement may be sold by the Holders without volume or manner of sale limitations pursuant to Rule 144 as determined by the counsel to the Company pursuant to a written opinion letter to such effect, addressed and acceptable to the Company’s Transfer Agent and the affected Holders (the “Effectiveness Period” ).  By 5:00 p.m. (New York City time) on the Business Day immediately following the Effective Date of such Registration Statement, the Company shall file with the Commission in accordance with Rule 424 under the Securities Act the final Prospectus to be used in connection with sales pursuant to such Registration Statement (whether or not such filing is technically required under such Rule).
 
(b)   Promptly following any date on which the Company becomes eligible to use a registration statement on Form S-3 to register Registrable Securities for resale, the Company shall notify the Holder of Registrable Securities thereof.  Thereafter, for so long as the Company remains eligible to use a registration statement on Form S-3 to register Registrable  Securities for resale, the Company shall, promptly upon the request of the Holders of a majority of the Registrable Securities, prepare a Registration Statement on Form S-3 covering all such Registrable Securities (or a post-effective amendment on Form S-3 to the then effective Registration Statement) and shall cause such Registration Statement to be filed by the Filing Date for such Registration Statement and declared effective under the Securities Act as soon
 
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EXHIBIT 10-44
 
as possible thereafter, but in any event prior to the Effectiveness Date therefor. Such Registration Statement shall contain (except if otherwise required pursuant to written comments received from the Commission upon a review of such Registration Statement) the “Plan of Distribution” attached hereto as Exhibit A .  The Company shall use its reasonable best efforts to keep such Registration Statement continuously effective under the Securities Act during the entire Effectiveness Period.  By 5:00 p.m. (New York City time) on the Business Day immediately following the Effective Date of such Registration Statement, the Company shall file with the Commission in accordance with Rule 424 under the Securities Act the final Prospectus to be used in connection with sales pursuant to such Registration Statement (whether or not such filing is technically required under such Rule).
 
(c)   Each Holder agrees to furnish to the Company a completed Questionnaire in the form attached to this Agreement as Exhibit B (a “Selling Holder Questionnaire” ).  The Company shall not be required to include in a Registration Statement the Registrable Securities of a Holder who fails to furnish to the Company a fully completed Selling Holder Questionnaire at least two Trading Days prior to the Filing Date (subject to the requirements set forth in Section 4(a) ).
 
3.   Other Agreements of the Parties
 
(a)   Effect of Failure to File and Obtain and Maintain Effectiveness of Registration Statement .  If (i) a Registration Statement covering all the Registrable Securities required to be covered thereby and required to be filed by the Company pursuant to this Agreement is (A) not filed with the Commission on or before the applicable Filing Deadline (a “Filing Failure” ) or (B) not declared effective by the Commission on the applicable Effectiveness Deadline (an “Effectiveness Failure” ) or (ii) on any day after the applicable Effective Date of any Registration Statement, sales of all the Registrable Securities included on such Registration Statement cannot be made (other than during an Allowable Grace Period (as defined below) pursuant to such Registration Statement or otherwise (including, without limitation, because of a failure to keep such Registration Statement effective, to disclose such information as is necessary for sales to be made pursuant to such Registration Statement, to register a sufficient number of shares of Common Stock or to maintain the listing of the Common Stock) (a “Maintenance Failure” ) then, as partial relief for the damages to any Holder by reason of any such delay in or reduction of its ability to sell the Registrable Securities (which remedy shall not be exclusive of any other remedies available at law or in equity), (A) the Company shall pay to each Holder of Registrable Securities relating to such Registration Statement an amount in cash equal to one and one-half percent (1.5%) of the aggregate conversion price or exercise price, as the case may be, applicable with respect to such Holder’s Registrable Securities included in such Registration Statement on each of the following dates: (i) on the thirtieth day after the date of a Filing Failure and every thirtieth day thereafter (pro rated for periods totaling less than thirty days) until such Filing Failure has been cured or the Effectiveness Period has terminated, whichever is earlier; (ii) on the thirtieth day after the date of  an Effectiveness Failure and every thirtieth day thereafter (pro rated for periods totaling less than thirty days) until the such Effectiveness Failure is cured or the Effectiveness Period has terminated, whichever is
 
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EXHIBIT 10-44
 
earlier; and (iii) on the thirtieth day after the date of a Maintenance Failure and every thirtieth day thereafter (pro rated for periods totaling less than thirty days) until such Maintenance Failure is cured or the Effectiveness Period has terminated, whichever is earlier.  The payments to which a Holder shall be entitled pursuant to this Section 3(a) are referred to herein as “Registration Delay Payments .   Registration Delay Payments shall be paid on the earlier of (I) the dates set forth above and (II) the third Business Day after the event or failure giving rise to the Registration Delay Payments is cured or the Effectiveness Period has terminated.  In the event the Company fails to make Registration Delay Payments in a timely manner, such Registration Delay Payments shall bear interest at the rate of one percent (1.0%) per month (prorated for partial months) until paid in full.  Notwithstanding the foregoing, in no event shall the Company be required to pay Registration Delay Payments for a contemporaneous Filing Failure and Effectiveness Failure.
 
Notwithstanding anything to the contrary herein, at any time after the Effective Date, the Company may (i) delay the disclosure of material, non-public information concerning the Company the disclosure of which at the time is not, in the good faith opinion of the Board of Directors of the Company and its counsel, in the best interest of the Company and, in the opinion of counsel to the Company, otherwise required or (ii) cause the Registration Statement to be suspended if such suspension is required by law, rule or regulation, or is otherwise in the best interest of the Company (a “Grace Period” ); provided , that the Company shall promptly (i) notify the Holders in writing of the existence of material, non-public information giving rise to a Grace Period ( provided that in each notice the Company will not disclose the content of such material, non-public information to the Holders) and the date on which the Grace Period will begin, and (ii) notify the Holders in writing of the date on which the Grace Period ends; and, provided further , that (x) no Grace Period shall exceed five (5) consecutive Trading Days, (y) during any three hundred sixty five (365) day period such Grace Periods shall not exceed an aggregate of thirty (30) calendar days and (z) the first day of any Grace Period must be at least five (5) Trading Days after the last day of any prior Grace Period (each, an “Allowable Grace Period” ).  For purposes of determining the length of a Grace Period above, the Grace Period shall begin on and include the date the Holders receive the notice referred to in clause (i) and shall end on and include the later of the date the Holders receive the notice referred to in clause (ii) and the date referred to in such notice.  Notwithstanding anything to the contrary, the Company shall cause its Transfer Agent to deliver unlegended Registrable Securities to a transferee of an Holder in connection with any sale of Registrable Securities with respect to which a Holder has entered into a contract for sale, and delivered a copy of the Prospectus included as part of the applicable Registration Statement, prior to the Holder’s receipt of the notice of a Grace Period and for which the Holder has not yet settled.

(b)   The Registrable Securities may only be disposed of pursuant to an effective registration statement under, and in compliance with the requirements of, the Securities Act or pursuant to an available exemption from the registration requirements of the Securities Act, and in compliance with any applicable state securities laws.  In connection with any transfer of the Registrable Securities other than pursuant to an effective registration statement, to the Company, to an Affiliate of a Holder or in connection with a pledge as contemplated in Section 3(d) , the Company may require the transferor thereof to provide to the Company an opinion of  counsel selected by the transferor, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does
 
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EXHIBIT 10-44
 
not require registration of such transferred Securities under the Securities Act.  Notwithstanding the foregoing, the Company hereby consents to and agrees to register on the books of the Company and with its Transfer Agent, without any such legal opinion, except to the extent that the Transfer Agent requests such legal opinion, any transfer of Registrable Securities by a Holder to an Affiliate of such Holder, provided that the transferee certifies to the Company that it is an “accredited investor” as defined in Rule 501(a) under the Securities Act and provided that such Affiliate does not request any removal of any existing legends on any certificate evidencing the Registrable Securities.
 
(c)   The Holders agree to the imprinting, so long as is required by this Section 3(c) , of the following legend on any certificate evidencing any of the Registrable Shares:
 
 
THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY APPLICABLE STATE SECURITIES LAWS AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS OR BLUE SKY LAWS.
 
Certificates evidencing Registrable Securities shall not be required to contain such legend or any other legend following any sale of such Registrable Securities (1) under a registration statement or (2) pursuant to Rule 144 if the holder provides the Company with assurance reasonably acceptable to the Company, including customary seller and broker representation letters, that the Shares can be sold, assigned or transferred pursuant to Rule 144 or Rule 144A under the Securities Act.  The Company shall cause its counsel to issue the legal opinion included in the Transfer Agent Instructions to the Transfer Agent on the Effective Date.  Following the Effective Date or at such earlier time as a legend is no longer required for the Registrable Securities, the Company will no later than (i) the time provided in the Certificate of Designations or the Warrants with respect to the issuance of shares of Common Stock upon conversion of the Shares or exercise of the Warrants, as applicable or (ii) three Trading Days following the delivery by a Holder to the Company or the Transfer Agent, as applicable, of (x) the legended certificate representing such Registrable Securities, if the Company had issued a legended certificate for such Registrable Securities, and (y)  such other documents or information as is required pursuant to this Section 3(c) , deliver or cause to be delivered to such Holder a certificate representing such Registrable Securities that is free from all restrictive and other legends.  The Company may not make any notation on its records or give instructions to the Transfer Agent that enlarge the restrictions on transfer set forth in this Section 3(c) .
 

 
 
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EXHIBIT 10-44

If within three Trading Days after the Company’s receipt of a legended certificate and the other documents as specified in Clauses (ii)(x) and (ii)(y) of the paragraph immediately above, the Company shall fail to issue and deliver to such Holder a certificate representing such Registrable Securities that is free from all restrictive and other legends, and if on or after such Trading Day the Holder purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of shares of Common Stock that the Holder anticipated receiving from the Company without any restrictive legend (the “Covering Shares” ), then the Company shall, within three Trading Days after the Holder’s request, pay cash to the Holder in an amount equal to the excess (if any) of the Holder’s total purchase price (including brokerage commissions, if any) for the Covering Shares, over the product of (A) the number of Covering Shares, times (B) the closing bid price on the date of delivery of such certificate and the other documents as specified in Clauses (ii)(x) and (ii)(y) of the paragraph immediately above.
 
(d)   The Company will not object to and shall permit (except as prohibited by law) a Holder to pledge or grant a security interest in some or all of the Securities in connection with a bona fide margin agreement or other loan or financing arrangement secured by the Securities, and if required under the terms of such agreement, loan or arrangement, the Company will not object to and shall permit (except as prohibited by law) such Holder to transfer pledged or secured Securities to the pledgees or secured parties.  Except as required by law, such a pledge or transfer shall not be subject to approval of the Company, no legal opinion of the pledgee, secured party or pledgor shall be required in connection therewith, and no notice shall be required of such pledge.  Each Holder acknowledges that the Company shall not be responsible for any pledges relating to, or the grant of any security interest in, any of the Securities or for any agreement, understanding or arrangement between any Holder and its pledgee or secured party.  At the appropriate Holder’s expense, the Company will execute and deliver such reasonable documentation as a pledgee or secured party of Securities may reasonably request in connection with a pledge or transfer of the Securities, including the preparation and filing of any required prospectus supplement under Rule 424(b)(3) of the Securities Act or other applicable provision of the Securities Act to appropriately amend the list of selling stockholders thereunder.  Provided that the Company is in compliance with the terms of this Section 3(d) , the Company’s indemnification obligations pursuant to Section 6 shall not extend to any Proceeding or Losses arising out of or related to this Section 3(d) .
 

4.   Registration Procedures .
 
In connection with the Company's registration obligations hereunder, the Company shall:
 
(a)   Not less than four Trading Days prior to the filing of a Registration Statement or any related Prospectus or any amendment or supplement thereto, furnish to each Holder copies of the “Selling Stockholders” section of such document, the “Plan of Distribution” and any risk factor contained in such document that addresses specifically this transaction or the Selling Stockholders, as proposed to be filed, which documents will be subject to the review of such Holder. Any Holder must provide its comments, if any, to the Company at least two Trading Days prior to the filing of such Registration Statement or any related Prospectus or any  amendment or
 
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EXHIBIT 10-44
 
supplement thereto.  The Company shall not file a Registration Statement, any Prospectus or any amendments or supplements thereto in which the “Selling Stockholder” section thereof differs from the disclosure received from a Holder in its Selling Holder Questionnaire (as amended or supplemented).
 
(b)   (i)  Prepare and file with the Commission such amendments, including post-effective amendments, to each Registration Statement and the Prospectus used in connection therewith as may be necessary to keep such Registration Statement continuously effective as to the applicable Registrable Securities for its Effectiveness Period and prepare and file with the Commission such additional Registration Statements in order to register for resale under the Securities Act all of the Registrable Securities; (ii) cause the related Prospectus to be amended or supplemented by any required Prospectus supplement, and as so supplemented or amended to be filed pursuant to Rule 424; (iii) respond as promptly as reasonably possible to any comments received from the Commission with respect to each Registration Statement or any amendment thereto and, as promptly as reasonably possible provide the Holders true and complete copies of all correspondence from and to the Commission relating to such Registration Statement that would not result in the disclosure to the Holders of material and non-public information concerning the Company; and (iv) comply in all material respects with the provisions of the Securities Act and the Exchange Act with respect to the Registration Statements and the disposition of all Registrable Securities covered by each Registration Statement.
 
(c)   Notify the Holders as promptly as reasonably possible (and, in the case of (i)(A) below, not less than three Trading Days prior to such filing and, in the case of (v) below, not less than three Trading Days prior to the financial statements in any Registration Statement becoming ineligible for inclusion therein) and (if requested by any such Person) confirm such notice in writing no later than one Trading Day following the day (i)(A) when a Prospectus or any Prospectus supplement or post-effective amendment to a Registration Statement is proposed to be filed; (B) when the Commission notifies the Company whether there will be a "review" of such Registration Statement and whenever the Commission comments in writing on such Registration Statement (the Company shall provide true and complete copies thereof and all written responses thereto to each of the Holders that pertain to the Holders as a Selling Stockholder or to the Plan of Distribution, but not information which the Company believes would constitute material and non-public information); and (C) with respect to each Registration Statement or any post-effective amendment, when the same has become effective; (ii) of any request by the Commission or any other Federal or state governmental authority for amendments or supplements to a Registration Statement or Prospectus or for additional information; (iii) of the issuance by the Commission of any stop order suspending the effectiveness of a Registration Statement covering any or all of the Registrable Securities or the initiation of any Proceedings for that purpose; (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any Proceeding for such purpose; and (v) of the occurrence of any event or passage of time that makes the financial statements included in a Registration Statement ineligible for inclusion therein or any statement made in such
 
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EXHIBIT 10-44
 
Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to such Registration Statement, Prospectus or other documents so that, in the case of such Registration Statement or the Prospectus, as the case may be, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.
 
(d)   Use its reasonable best efforts to avoid the issuance of, or, if issued, obtain the withdrawal of (i) any order suspending the effectiveness of a Registration Statement, or (ii) any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction, at the earliest practicable moment.
 
(e)   Furnish to each Holder, without charge, at least one conformed copy of each Registration Statement and each amendment thereto and all exhibits to the extent requested by such Person (including those previously furnished) promptly after the filing of such documents with the Commission.
 
(f)   Promptly deliver to each Holder, without charge, as many copies of each Prospectus or Prospectuses (including each form of prospectus) and each amendment or supplement thereto as such Persons may reasonably request.  The Company hereby consents to the use of such Prospectus and each amendment or supplement thereto by each of the selling Holders in connection with the offering and sale of the Registrable Securities covered by such Prospectus and any amendment or supplement thereto.
 
(g)   Prior to any public offering of Registrable Securities, register or qualify such Registrable Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions within the United States as any Holder may reasonably request, to keep each such registration or qualification (or exemption therefrom) effective during the Effectiveness Period and to do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by the Registration Statements; provided , however , the company shall not be required to register to do business in any such state.
 
(h)   Cooperate with the Holders to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be delivered to a transferee pursuant to the Registration Statements, which certificates shall be free of all restrictive legends, and to enable such Registrable Securities to be in such denominations or amounts, and registered in such names, as any such Holders may request.
 
(i)   Upon the occurrence of any event contemplated by Section 4(c)(v) , as promptly as reasonably possible, prepare a supplement or amendment, including a post-effective amendment, to the affected Registration Statements or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, and file any other required document so that, as thereafter delivered, no Registration Statement nor any Prospectus will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.
 

 
 
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EXHIBIT 10-44

(j)   In conjunction with the filing of the Registration Statement or sales thereunder, the Company will make any filings as may be required to be made with the NASD, via the COBRA desk filing system.
 
(k)   The Company shall not identify any Holder as an underwriter in any public disclosure or filing with the Commission, the Principal Market or any other market or exchange without such Holder’s consent.  If such Holder refuses to give such consent in connection with a Registration Statement and the Company is obligated by law or the rules or regulations of the SEC, to identify such Holder as an underwriter, the Company shall not be obligated to register such Holder’s Registrable Securities on the applicable Registration Statement.  If any Holder is required under applicable securities laws to be described in the Registration Statement as an underwriter, provided that such Holder has consented to be identified as such in the Registration Statement, at the reasonable request of such Holder and at such Holder’s expense, the Company shall furnish to such Holder, on the date of the effectiveness of the Registration Statement and thereafter from time to time on such dates as an Holder may reasonably request (i) a letter, dated such date, from the Company's independent certified public accountants in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the Investors, and (ii) an opinion, dated as of such date, of counsel representing the Company for purposes of such Registration Statement, in form, scope and substance as is customarily given in an underwritten public offering, addressed to the Holder.
 
(l)   If any Holder is required under applicable securities laws to be described in the Registration Statement as an underwriter, and provided that such Holder has consented to be identified as such in the Registration Statement, the Company shall make available for inspection by (i) such Holder, (ii) its legal counsel and (iii) the accountants or other agents retained by the Holder (collectively, the “Inspectors” ), all pertinent financial and other records, and pertinent corporate documents and properties of the Company (collectively, the “Records” ), as shall be reasonably deemed necessary by each Inspector, and cause the Company's officers, directors and employees to supply all information which any Inspector may reasonably request; provided , however , that each Inspector shall agree to hold in strict confidence and shall not make any disclosure (except to a Holder) or use of any Record or other information which the Company determines in good faith to be confidential, and of which determination the Inspectors are so notified, unless (a) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in any Registration Statement or is otherwise required under the 1933 Act, (b) the release of such Records is ordered pursuant to a final, non-appealable subpoena or order from a court or government body of competent jurisdiction, or (c) the information in such Records has been made generally available to the public other than by disclosure in violation of this Agreement.  Each Holder agrees that it shall, upon learning that disclosure of such Records is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt notice to the Company and allow the Company, at its expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, the Records deemed confidential.  Nothing herein (or in any other confidentiality agreement between the Company and any Holder) shall be deemed to limit the Holder’s ability to sell Registrable Securities in a manner which is otherwise consistent with applicable laws and regulations.
 

 
 
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EXHIBIT 10-44

(m)   The Company shall hold in confidence and not make any disclosure of information concerning a Holder provided to the Company, other than the information provided in or pursuant to the Selling Holder Questionnaire, unless (i) disclosure of such information is necessary to comply with federal or state securities laws, (ii) the disclosure of such information is necessary to avoid or correct a misstatement or omission in any Registration Statement, (iii) the release of such information is ordered pursuant to a subpoena or other final, non-appealable order from a court or governmental body of competent jurisdiction, or (iv) such information has been made generally available to the public other than by disclosure in violation of this Agreement or, to the knowledge of the Company, any other agreement.  The Company agrees that it shall, upon learning that disclosure of such information concerning a Holder is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt written notice to such Holder and allow such Holder, at the Holder’s expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, such information.
 
(n)   The Company shall use its reasonable best efforts either to (i) cause all the Registrable Securities covered by a Registration Statement to be listed on the Principal Market or, if securities of the same class and series as the Registrable Securities are no longer listed on the Principal Market such other securities market or exchange on which securities of the same class and series issued by the Company are then listed, if any, if the listing of such Registrable Securities is then permitted under the rules of the Principal Market or such other exchange or market.  The Company shall pay all fees and expenses in connection with satisfying its obligation under this Section 4(n) .
 
(o)   If requested by an Investor, the Company shall as soon as reasonably practicable (i) incorporate in a prospectus supplement or post-effective amendment such information as such Investor reasonably requests to be included therein relating to the sale and distribution of Registrable Securities, including, without limitation, information with respect to the number of Registrable Securities being offered or sold, the purchase price being paid therefor and any other terms of the offering of the Registrable Securities to be sold in such offering; (ii) make all required filings of such prospectus supplement or post-effective amendment after being notified of the matters to be incorporated in such prospectus supplement or post-effective amendment; and (iii) supplement or make amendments to any Registration Statement if reasonably requested by an Investor holding any Registrable Securities.
 
(p)   The Company shall use its reasonable best efforts to cause the Registrable Securities covered by a Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to consummate the disposition of such Registrable Securities.
 
(q)   Unless the following information is otherwise available on the EDGAR system, the Company shall make generally available to its security holders as soon as practical, but not later than ninety (90) days after the close of the period covered thereby, an earnings statement (in form complying with, and in the manner provided by, the provisions of Rule 158 under the 1933 Act) covering a twelve-month period beginning not later than the first day of the Company's fiscal quarter next following the Effective Date of a Registration Statement.
 

 
 
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EXHIBIT 10-44

(r)   The Company shall otherwise use its reasonable best efforts to comply with all applicable rules and regulations of the Commission in connection with any registration hereunder.
 
(s)   Within two (2) Business Days after a Registration Statement which covers Registrable Securities is ordered effective by the Commission, the Company shall deliver, and / or shall cause legal counsel for the Company to deliver (as required by the Company's Transfer Agent to remove legends from the Registrable Securities), to the Transfer Agent for such Registrable Securities (with copies to the Investors whose Registrable Securities are included in such Registration Statement) confirmation that such Registration Statement has been declared effective by the SEC in the form attached hereto as Exhibit C .
 
5.   Registration Expenses .  All fees and expenses incident to the performance of or compliance with this Agreement by the Company shall be borne by the Company whether or not any Registrable Securities are sold pursuant to a Registration Statement.  The fees and expenses referred to in the foregoing sentence shall include, without limitation, (i) all registration and filing fees (including, without limitation, fees and expenses (A) with respect to filings required to be made with any Trading Market on which the Common Stock is then listed for trading, and (B) in compliance with applicable state securities or Blue Sky laws), (ii) printing expenses (including, without limitation, expenses of printing certificates for Registrable Securities and of printing prospectuses if the printing of prospectuses is reasonably requested by the holders of a majority of the Registrable Securities included in the Registration Statement), (iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of counsel for the Company, (v) Securities Act liability insurance, if the Company so desires such insurance, and (vi) fees and expenses of all other Persons retained by the Company in connection with the consummation of the transactions contemplated by this Agreement; provided , however , the Company shall not be responsible for any fees, expenses or costs incurred by Holder in connection with the sale of Shares covered by a Registration Statement.  In addition, the Company shall be responsible for all of its internal expenses incurred in connection with the consummation of the transactions contemplated by this Agreement (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit and the fees and expenses incurred in connection with the listing of the Registrable Securities on any securities exchange as required hereunder.
 
6.   Indemnification .
 
(a)   Indemnification by the Company .  The Company shall, notwithstanding any termination of this Agreement, indemnify and hold harmless each Holder, the officers, directors, agents, investment advisors, partners, members and employees of each of them, each Person who controls any such Holder (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) and the officers, directors, agents and employees of each such controlling Person, to the fullest extent permitted by applicable law, from and against any and all losses, claims, damages, liabilities, costs (including, without limitation, reasonable costs of preparation and reasonable attorneys' fees) and expenses (collectively, “Losses” ), as incurred, arising out of or relating to any untrue or alleged untrue statement of a material fact contained in any Registration Statement, any Prospectus or any form of prospectus or in any amendment or supplement thereto or in any
 
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EXHIBIT 10-44
 
preliminary prospectus, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of any Prospectus or form of prospectus or supplement thereto, in light of the circumstances under which they were made) not misleading, except to the extent, but only to the extent, that (1) such untrue statements or omissions are based solely upon information regarding such Holder furnished in writing to the Company by such Holder expressly for use therein, or to the extent that such information relates to such Holder or such Holder's proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in the Registration Statement, such Prospectus or such form of Prospectus or in any amendment or supplement thereto (it being understood that the Holder has approved Exhibit A hereto for this purpose) or (2) in the case of an occurrence of an event of the type specified in Section 4(c)(ii)-(v) , the use by such Holder of an outdated or defective Prospectus after the Company has notified such Holder in writing that the Prospectus is outdated or defective and prior to the receipt by such Holder of an Advice or an amended or supplemented Prospectus, but only if and to the extent that following the receipt of the Advice or the amended or supplemented Prospectus the misstatement or omission giving rise to such Loss would have been corrected.  The Company shall notify the Holders promptly of the institution, threat or assertion of any Proceeding of which the Company is aware in connection with the transactions contemplated by this Agreement.
 
(b)   Indemnification by Holders .  Each Holder shall, severally and not jointly, indemnify and hold harmless the Company, its directors, officers, agents and employees, each Person who controls the Company (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, agents or employees of such controlling Persons, to the fullest extent permitted by applicable law, from and against all Losses, as incurred, arising solely out of or based solely upon: (x) such Holder's failure to comply with the prospectus delivery requirements of the Securities Act or (y) any untrue statement of a material fact contained in any Registration Statement, any Prospectus, or any form of prospectus, or in any amendment or supplement thereto, or arising solely out of or based solely upon any omission of a material fact required to be stated therein or necessary to make the statements therein not misleading to the extent, but only to the extent that, (1) such untrue statements or omissions are based solely upon information regarding such Holder furnished in writing to the Company by such Holder expressly for use therein, or to the extent that such information relates to such Holder or such Holder's proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in the Registration Statement (it being understood that the Holder has approved Exhibit A hereto for this purpose), such Prospectus or such form of Prospectus or in any amendment or supplement thereto or (2) in the case of an occurrence of an event of the type specified in Section 4(c)(ii)-(v) , the use by such Holder of an outdated or defective Prospectus after the Company has notified such Holder in writing that the Prospectus is outdated or defective and prior to the receipt by such Holder of an Advice or an amended or supplemented Prospectus, but only if and to the extent that following the receipt of the Advice or the amended or supplemented Prospectus the misstatement or omission giving rise to such Loss would have been corrected.  In no event shall the liability of any selling Holder hereunder be greater in amount than the dollar amount of the net proceeds received by such Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation.
 

 
 
- 15 - 

 
EXHIBIT 10-44

(c)   Conduct of Indemnification Proceedings .  If any Proceeding shall be brought or asserted against any Person entitled to indemnity hereunder (an “Indemnified Party” ), such Indemnified Party shall promptly notify the Person from whom indemnity is sought (the “Indemnifying Party” ) in writing, and the Indemnifying Party shall assume the defense thereof, including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of all fees and expenses incurred in connection with defense thereof; provided , that the failure of any Indemnified Party to give such notice shall not relieve the Indemnifying Party of its obligations or liabilities pursuant to this Agreement, except (and only) to the extent that it shall be finally determined by a court of competent jurisdiction (which determination is not subject to appeal or further review) that such failure shall have proximately and materially adversely prejudiced the Indemnifying Party.
 
An Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party or Parties unless:  (1) the Indemnifying Party has agreed in writing to pay such fees and expenses; (2) the Indemnifying Party shall have failed promptly to assume the defense of such Proceeding and to employ counsel reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3) the named parties to any such Proceeding (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party, and such Indemnified Party shall have been advised by counsel that a conflict of interest is likely to exist if the same counsel were to represent such Indemnified Party and the Indemnifying Party (in which case, if such Indemnified Party notifies the Indemnifying Party in writing that it elects to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense thereof and such counsel shall be at the expense of the Indemnifying Party).  The Indemnifying Party shall not be liable for any settlement of any such Proceeding effected without its written consent, which consent shall not be unreasonably withheld.  No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending Proceeding in respect of which any Indemnified Party is a party, unless such settlement includes an unconditional release of such Indemnified Party from all liability on claims that are the subject matter of such Proceeding.
 
All fees and expenses of the Indemnified Party (including reasonable fees and expenses to the extent incurred in connection with investigating or preparing to defend such Proceeding in a manner not inconsistent with this Section) shall be paid to the Indemnified Party, as incurred, within ten Trading Days of written notice thereof to the Indemnifying Party (regardless of whether it is ultimately determined that an Indemnified Party is not entitled to indemnification hereunder; provided , that the Indemnifying Party may require such Indemnified Party to undertake to reimburse all such fees and expenses to the extent it is finally judicially determined that such Indemnified Party is not entitled to indemnification hereunder).
 
(d)   Contribution .  If a claim for indemnification under Section 6(a) or 6(b) is unavailable to an Indemnified Party (by reason of public policy or otherwise), then each Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Losses, in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and Indemnified Party in connection with the actions, statements or omissions that resulted in such Losses as well as
 
- 16 -

EXHIBIT 10-44
 
any other relevant equitable considerations.  The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission of a material fact, has been taken or made by, or relates to information supplied by, such Indemnifying Party or Indemnified Party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action, statement or omission.  The amount paid or payable by a party as a result of any Losses shall be deemed to include, subject to the limitations set forth in Section 6(c) , any reasonable attorneys' or other reasonable fees or expenses incurred by such party in connection with any Proceeding to the extent such party would have been indemnified for such fees or expenses if the indemnification provided for in this Section was available to such party in accordance with its terms.
 
The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 6(d) were determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding paragraph.  Notwithstanding the provisions of this Section 6(d) , no Holder shall be required to contribute, in the aggregate, any amount in excess of the amount by which the proceeds actually received by such Holder from the sale of the Registrable Securities subject to the Proceeding exceeds the amount of any damages that such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission.
 
The indemnity and contribution agreements contained in this Section are in addition to any liability that the Indemnifying Parties may have to the Indemnified Parties.
 
7.   Reports Under the 1934 Act .
 
With a view to making available to the Holders the benefits of Rule 144, the Company agrees, until the earlier of such time as all of the Registrable Securities (i) have been sold and (ii) may be sold by all Holders without volume limitations pursuant to Rule 144, to:
 
(a)   make and keep public information available, as those terms are understood and defined in Rule 144;
 
(b)   file with the SEC in a timely manner all reports and other documents required of the Company under Section 13 or 15(d) of the 1934 Act so long as the Company remains subject to such requirements and the filing of such reports and other documents is required for the applicable provisions of Rule 144; and
 
(c)   furnish to each Holder so long as such Holder owns (or has the right to receive pursuant to conversion of Shares or exercise of Warrants) Registrable Securities, promptly upon request, (i) a written statement by the Company, if true, that it has complied with the reporting requirements of Rule 144, the 1933 Act and the 1934 Act, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested to permit the Holders to sell such securities pursuant to Rule 144 without registration.
 

 
 
- 17 - 

 
EXHIBIT 10-44

8.   Miscellaneous .
 
(a)            Remedies .  In the event of a breach by the Company or by a Holder, of any of their obligations under this Agreement, each Holder or the Company, as the case may be, in addition to being entitled to exercise all rights granted by law and under this Agreement, including recovery of damages, will be entitled to specific performance of its rights under this Agreement.  The Company and each Holder agree that monetary damages would not provide adequate compensation for any losses incurred by reason of a breach by it of any of the provisions of this Agreement and hereby further agrees that, in the event of any action for specific performance in respect of such breach, it shall waive the defense that a remedy at law would be adequate.
 
(b)            Compliance .  Each Holder covenants and agrees that it will comply with the prospectus delivery requirements of the Securities Act as applicable to it in connection with sales of Registrable Securities pursuant to the Registration Statement.
 
(c)            Discontinued Disposition .  Each Holder agrees by its acquisition of such Registrable Securities that, upon receipt of a notice from the Company of the occurrence of any event of the kind described in Section 4(c) , such Holder will forthwith discontinue disposition of such Registrable Securities under the Registration Statement until such Holder's receipt of the copies of the supplemented Prospectus and/or amended Registration Statement or until it is advised in writing (the “Advice” ) by the Company that the use of the applicable Prospectus may be resumed, and, in either case, has received copies of any additional or supplemental filings that are incorporated or deemed to be incorporated by reference in such Prospectus or Registration Statement.  The Company may provide appropriate stop orders to enforce the provisions of this paragraph.
 
(d)            Piggy-Back Registrations .
 
If at any time:
 
(i)           during the Effectiveness Period  there is not an effective Registration Statement covering all of the Registrable Securities; or
 
(ii)           prior to the date which is the earliest of (I) two years after the Effective Date of a Registration Statement covering Additional Registrable Securities, (II) such time as all of the Additional Registrable Securities have been publicly sold by the Holders pursuant to a Registration Statement, or (III) such time as all of the Additional Registrable Securities may be sold by the Holders without volume or manner of sale limitations pursuant to Rule 144 as determined by the counsel to the Company pursuant to a written opinion letter to such effect, addressed and acceptable to the Company’s Transfer Agent and the affected Holders (the “Additional Registrable Securities Piggy Back Period” ) there is not an effective Registration Statement covering all of the Additional Registrable Securities;
 
and the Company shall determine to prepare and file with the Commission a registration statement relating to an offering for its own account or the account of others under the Securities Act of any of its equity securities, other than on Form S-4 or Form S-8 (each as promulgated
 
- 18 -

EXHIBIT 10-44
 
under the Securities Act) or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with stock option or other employee benefit plans, then the Company shall send to each Holder of Registrable Securities (during the Effectiveness Period) and each Holder of Additional Registrable Securities (during the Additional Registrable Securities Piggy Back Period) written notice of such determination and, if within fifteen days after receipt of such notice, any such Holder shall so request in writing, the Company shall include in such registration statement all or any part of such Registrable Securities and Additional Registrable Securities, as the case may be, as the applicable Holder requests to be registered and which are not otherwise covered in an effective Registration Statement, subject to customary underwriter cutbacks applicable to all holders of registration rights.
 
(e)            Demand Registrations in Connection with Additional Registrable Securities .  If at any time during the Additional Registrable Securities Piggy Back Period the Company shall receive from Holders (the “Demanding Holders” ) of at least 750,000 Additional Registrable Securities a written request (the “Demand Registration Request” ) that the Company register all or a part (but not less than 750,000) Additional Registrable Securities (each such registration being a “Demand Registration” ), the Company shall: (x) promptly (and in any event no more than five days after receipt of such Demand Registration Request) give written notice (the “Demand Registration Notice” ) of the proposed Demand Registration to all other Holders of Additional Registrable Securities; and (y) as soon as practicable, but in no event more than 90 days ( provided that, if the Commission reviews and has written comments to the registration statement filed in connection with the Demand Registration that would require the filing of a pre-effective amendment thereto with the Commission, then in no event more than 150 days) after receiving such Demand Registration Request, use its reasonable best efforts to cause such Registration Statement covering all or such portion of the Additional Registrable Securities of the Demanding Holders as are specified in the Demand Request, together with all or such portion of the Additional Registrable Securities of any Holder or Holders that have, within 15 days of receiving the Demand Registration Notice, notified the Company of their intention to join in such Demand Registration Request, to be declared effective under the Securities Act, and shall use its reasonable best efforts to keep such Registration Statement continuously effective under the Securities Act until the date which is the earliest of (i) two years after its effective date, (ii) such time as all of the Additional Registrable Securities covered by such Registration Statement have been publicly sold by the Holders thereof pursuant to such Registration Statement or (iii) such time as all of the Additional Registrable Securities covered by such Registration Statement may be sold by the Holders thereof without volume or manner of sale limitations pursuant to Rule 144 as determined by the counsel to the Company pursuant to a written opinion letter to such effect, addressed and acceptable to the Company’s Transfer Agent and the affected Holders; provided ,
 
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EXHIBIT 10-44
 
however , that the Company shall not be obligated to effect, or take any action to effect, more than one Demand Registration pursuant to this Section 8(e) in any 12-month period during which at least one Demand Registration has been declared or ordered effective by the Commission.  The filing of two or more Registration Statements in response to one Demand Registration Request shall be counted as one Demand Registration.  Notwithstanding the foregoing, the Company shall not be obligated to effect, or take any action to effect, a Demand Registration during the period starting with the date 30 days prior to the Company’s date of filing of, and ending on the date 90 days immediately following the effective date of, any registration statement pertaining to equity securities of the Company (other than a
 
registration statement on Form S-4 or Form S-8 (each as promulgated under the Securities Act) or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with stock option or other employee benefit plans), provided that the Company is actively employing in good faith its reasonable best efforts to cause such registration statement to become effective and, provided further , that Holders of Additional Registrable Securities are afforded piggy-back registration rights with respect to such registration statement pursuant to Section 8(d) .
 
(f)            Representations and Covenants Made to the Investors
 
(a)   .  Any and all representations, warranties, covenants and agreements made by the Company to and for the benefit of the Investors that survive the consummation of the transactions contemplated by the Purchase Agreement shall be deemed to have also been made to and for the benefit of Holders.
 
(g)            Amendments and Waivers .  The provisions of this Agreement, including the provisions of this Section 8(g) , may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the same shall be in writing and signed by the Company and the Holders of no less than a majority in interest of the then outstanding Registrable Securities.  Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of certain Holders and that does not directly or indirectly affect the rights of other Holders may be given by Holders of at least a majority of the Registrable Securities to which such waiver or consent relates.
 
(h)            Notices .  Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (a) the date of transmission, if such notice or communication is delivered via facsimile ( provided the sender receives a machine-generated confirmation of successful transmission) at the facsimile number specified in this Section prior to 6:30 p.m. (New York City time) on a Trading Day, (b) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section on a day that is not a Trading Day or later than 6:30 p.m. (New York City time) on any Trading Day, (c) the Trading Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (d) upon actual receipt by the party to whom such notice is required to be given.  The address for such notices and communications shall be as follows:
 
 
If to the Company:
Communication Intelligence Corporation
  275 Shorewood Drive, Suite #500
  Redwood Shores, California 94065
  Attn:  Frank Dane
  Facsimile:  (650) 802-7777

 
 
- 20 - 

 
EXHIBIT 10-44


 
With a copy (which shall not constitute notice) to:
 
 
Davis Wright Tremaine LLP
 
23 rd Floor
 
1300 S.W. Fifth Ave.
 
Portland, Oregon 97201
 
Attn: Michael C. Phillips
 
Facsimile: 503-778-5299

 
If to a Investor:
To the address set forth under such Investor's name on the
signature pages hereto.
 
 
With a copy to:
Thelen Reid Brown Raysman & Steiner LLP
 
875 Third Avenue
 
New York, New York 10022
 
Facsimile:  (212) 603-2001
 
Attn:  Herman Sassower, Esq.

 
If to any other Person who is then the registered Holder:
 
 
To the address of such Holder as it appears in the stocktransfer books of the Company
 
or such other address as may be designated in writing hereafter, in the same manner, by such Person.
 
(i)            Successors and Assigns .  This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of each of the parties and shall inure to the benefit of each Holder.  The Company may not assign its rights or obligations hereunder without the prior written consent of each Holder.  Each Holder may assign their respective rights hereunder in the manner and to the Persons as permitted under the Purchase Agreement.
 
(j)            Execution and Counterparts .  This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same Agreement.  In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature were the original thereof.
 
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EXHIBIT 10-44
 
(k)            Governing Law .  All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof.  Each party agrees that all Proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement (whether brought against a party hereto or its respective Affiliates, employees or agents) will be commenced in the New York Courts.  Each party hereto hereby irrevocably submits to the
 
exclusive jurisdiction of the New York Courts for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any Proceeding, any claim that it is not personally subject to the jurisdiction of any New York Court, or that such Proceeding has been commenced in an improper or inconvenient forum.  Each party hereto hereby irrevocably waives personal service of process and consents to process being served in any such Proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof.  Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law.  Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any Proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.  If either party shall commence a Proceeding to enforce any provisions of this Agreement, then the prevailing party in such Proceeding shall be reimbursed by the other party for its attorney’s fees and other costs and expenses incurred with the investigation, preparation and prosecution of such Proceeding.
 
(l)            Cumulative Remedies .  The remedies provided herein are cumulative and not exclusive of any remedies provided by law.
 
(m)            Severability . If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction.  It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable.
 
(n)            Headings .  The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.
 
(o)            Independent Nature of Investors’ Obligations and Rights .  The obligations of each Investor under this Agreement are several and not joint with the obligations of each other Investor, and no Investor shall be responsible in any way for the performance of the obligations of any other Investor under this Agreement.  Nothing contained herein or in any Transaction Document, and no action taken by any Investor pursuant thereto, shall be deemed to constitute the Investors as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Investors are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by this Agreement or any other Transaction Document.  Each Investor acknowledges that no other Investor will be acting as agent of such Investor in enforcing its rights under this Agreement.  Each Investor shall be entitled to independently protect and enforce its rights, including without limitation the rights arising out of this Agreement, and it shall not be necessary for any other Investor to be joined as an additional party in any Proceeding for such purpose.  The Company acknowledges that each of the Investors has been provided with the same Registration Rights Agreement for the purpose of
 
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EXHIBIT 10-44
 
closing a transaction with multiple Investors and not because it was required or requested to do so by any Investor.
 
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGES TO FOLLOW]

 
 
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EXHIBIT 10-44

IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above.
COMMUNICATION INTELLIGENCE CORPORATION


By:            /s/ Guido DiGregorio
Name:   Guido D. DiGregorio
Title:     Chief Executive Officer and President
 
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
 
 
SIGNATURE PAGES OF INVESTORS TO FOLLOW]
 

 
 
- 24 - 

 
EXHIBIT 10-44

 
IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above.
 

NAME OF INVESTOR
                                                                                           
                                                                                                Michael Engmann

By:           /s/Michael Engmann 
Name: Michael Engmann
Title:

ADDRESS FOR NOTICE

c/o:                                                                             

Street:  38 San Fernando Way  

City/State/Zip:    San Francisco , CA 94127

 
Attention:                                                                             

Tel:     415-293-3811   

Fax:      415-781-4641       

Email:   MIKE.ENGMANN@ENGMANNOPTIONS.COM
                                                                                                                   (SMALL LETTERS)                                                                          

 
 
- 25 - 

 
EXHIBIT 10-44

IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above.
 
 
NAME OF INVESTOR
                                                                                           
                                                                                                Ronald Goodman

 
 
By:    /s/ Ronald Goodman      
                                                         N ame:  Ronald Goodman
Title:
 
ADDRESS FOR NOTICE
 
c/o:                                                                             
 
Street:  31 Tierra Verde Court
 
City/State/Zip:    Walnut Creek, CA 94593
 
 
Attention:                                                                             
 
Tel:    415-710-6931
 
Fax:                               
         
Email:   rgoodman524@earthlink.net
 
 
 
- 25 -

EXHIBIT 10-44
 
IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above.
 
 
NAME OF INVESTOR
                                                                                           
                                                                                                PHOENIX VENTURE FUND LLC

 
 
By:     /s/  Andrea Goren     
                                                         N ame:  Andrea Goren
Title:   Member
 
ADDRESS FOR NOTICE
 
c/o:                                                                             
 
Street:   110 East 59th Street, Suite 1901
 
City/State/Zip:    New York, NY 10022
 
 
Attention:   Andrea Goren                                                                          
 
Tel:    212 759 1909 x202
 
Fax:    212 202 7565  
 
Email:    agoren@sgphoenix.com
 
 
 
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EXHIBIT 10-44
 
IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above.
 
 
NAME OF INVESTOR
                                                                                           
                                                                                                 AFS Investments, Inc.

 
 
By:    /s/   Fred  J. Merritt       
                                                          N ame:   Fred J. Merritt
Title:   President
 
ADDRESS FOR NOTICE
 
c/o:    Fred J. Merritt                                                                         
 
Street:  14510 Lima Rd.   
 
City/State/Zip:   Ft. Wayne, IN 46818    
 
 
Attention:      Fred J. Merritt                                                                       
 
Tel:    317-506-1937
 
Fax:    260-637-4472  
 
Email:   AFSINVESTMENTS@MSN.COM
 
 
 
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EXHIBIT 10-44
 
IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above.
 
 
NAME OF INVESTOR
                                                                                           
                                                                                                Frederich L. Farrar

 
 
By:     /s/  Frederich L. Farrar     
                                                          N ame :  Frederich L. Farrar
Title:
 
ADDRESS FOR NOTICE
 
c/o:                                                                             
 
Street:    3502 Woodview Trace, #200
 
City/State/Zip:   Indianapolis, IN 46268   
 
 
Attention:                                                                             
 
Tel:    317 860 8213
 
Fax:      317 860 9190
 
Email:   fred.farrar@klipsch.com
 
 
 
 
 
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EXHIBIT 10-44
 
IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above.
 
 
NAME OF INVESTOR
                                                                                           
                                                                                                 Rubicon Global Value Fund, L.P.  
                                                                                             

 
 
By:     /s/  Steven Shum     
                                                          N ame:   Steven Shum
Title:    Managing Director
 
ADDRESS FOR NOTICE
 
c/o:                                                                             
 
Street:   One SW Columbia St., Suite 900
 
City/State/Zip:   Portland, OR 97258 
 
 
Attention:   Steve Shum                                                                          
 
Tel:    503-548-4800
 
Fax:   503-548-4805    
 
Email:   sshum@corefundmgmt.com
 
 
 
 
 
 
 
 
 
 
 
- 25 -

EXHIBIT 10-44
 
IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above.
 
 
NAME OF INVESTOR
                                                                                           
                                                                                                 MDNH Partners, LP 

 
 
By:     /s/  Michael W. Engmann     
                                                          N ame:   Michael W. Engmann
Title:   General Partner
 
ADDRESS FOR NOTICE
 
c/o:    MDNH Partners                                                                         
 
Street:   220 Bush St., Suite 950
 
City/State/Zip:    San Francisco, CA 94104
 
 
Attention:     Mike Engmann                                                                        
 
Tel:    415-293-3818
 
Fax:      415-781-4641
 
Email:   MIKE.ENGMANN@ENGMANNOPTIONS.COM
 
 
 
 
 
 
- 25 -

EXHIBIT 10-44
 
IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above.
 
 
NAME OF INVESTOR
 
                                                Kendu Partners
 
 
By:     /s/  Michael W. Engmann     
                                                          N ame:   Michael W. Engmann
Title:   General Partner
 
ADDRESS FOR NOTICE
 
c/o:    Engmann Options                                                          
 
Street:   220 Bush St., Suite 950
 
City/State/Zip:    San Francisco, CA 94104
 
 
Attention:     Mike Engmann                                                                        
 
Tel:    415-293-3818
 
Fax:      415-781-4641
 
Email:   MIKE.ENGMANN@ENGMANNOPTIONS.COM
 
 
 
 
 
 
 
 
 
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EXHIBIT 31.1
 
 
CERTIFICATION PURSUANT TO
 
 
Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
 
 
I, Guido DiGregorio, certify that:
 
1.
I have reviewed this report on Form 10-Q of Communication Intelligence Corporation;
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
 
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
 
 
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
 
 
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
Date: August 14, 2008
 
By: /s/ Guido DiGregorio
Chairman and Chief Executive Officer
 
 
 
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EXHIBIT 31.2
 
 
CERTIFICATION PURSUANT TO
 
 
Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
 
 
I, Francis V. Dane, certify that:
 
1.
I have reviewed this report on Form 10-Q of Communication Intelligence Corporation;
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
 
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
 
 
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
 
 
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
Date: August 14, 2008
 
By: /s/ Francis V. Dane
Principal Financial Officer
 

 
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EXHIBIT 32.1
 
 
CERTIFICATION PURSUANT TO
 
 
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
 
In connection with the quarterly report of Communication Intelligence Corporation (the “Company”) on Form 10-Q for the quarterly period ended June 30, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Guido DiGregorio, Chairman and Chief Executive Officer, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002, that to the best of my knowledge:
 
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
Date: August 14, 2008
 
 
By: /s/ Guido DiGregorio
Chairman and Chief Executive Officer
 
 

 
 
 
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EXHIBIT 32.2
 
 
CERTIFICATION PURSUANT TO
 
 
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
 
In connection with the quarterly report of Communication Intelligence Corporation (the “Company”) on Form 10-Q for the quarterly period ended June 30, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Francis V. Dane, Principal Financial Officer, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002, that to the best of my knowledge:
 
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
Date: August 14, 2008
 
 
By: /s/ Francis V. Dane
Principal Financial Officer
 
 

 

 
 
 
 
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