EXHIBIT 10.1

 

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LOAN AND SECURITY AGREEMENT

 

by and between

 

LEXAR MEDIA, INC.

47421 Bayside Parkway

Fremont, California 94538

 

and

 

SILICON VALLEY BANK

3003 Tasman Drive

Santa Clara, California 95054

 

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TABLE OF CONTENTS

 

        

Page

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1.

 

ACCOUNTING AND OTHER TERMS

  

1

2.

 

LOAN AND TERMS OF PAYMENT

  

1

   

2.1        Credit Extensions.

  

1

   

2.2        Overadvances.

  

3

   

2.3        Interest Rate, Payments.

  

3

   

2.4        Fees.

  

3

3.

 

CONDITIONS OF LOANS

  

4

   

3.1        Conditions Precedent to Initial Credit Extension.

  

4

   

3.2        Conditions Precedent to all Credit Extensions.

  

4

4.

 

CREATION OF SECURITY INTEREST

  

4

   

4.1        Grant of Security Interest.

  

4

5.

 

REPRESENTATIONS AND WARRANTIES

  

5

   

5.1        Due Organization and Authorization.

  

5

   

5.2        Collateral.

  

5

   

5.3        Litigation.

  

5

   

5.4        No Material Adverse Change in Financial Statements.

  

6

   

5.5        Solvency.

  

6

   

5.6        Regulatory Compliance.

  

6

   

5.7        Subsidiaries.

  

6

   

5.8        Full Disclosure.

  

6

6.

 

AFFIRMATIVE COVENANTS

  

7

   

6.1        Government Compliance.

  

7

   

6.2        Financial Statements, Reports, Certificates.

  

7

   

6.3        Inventory; Returns.

  

8

   

6.4        Taxes.

  

8

   

6.5        Insurance.

  

8

   

6.6        Primary and Investments Accounts.

  

8

   

6.7        Financial Covenants.

  

8

   

6.8        Registration of Intellectual Property Rights.

  

9

   

6.9        Control Agreements.

  

9

 

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6.10      Subordination of Debt.

  

9

   

6.11      Further Assurances.

  

9

7.

 

NEGATIVE COVENANTS

  

9

   

7.1        Dispositions.

  

9

   

7.2        Changes in Business, Ownership, Management or Business Locations.

  

10

   

7.3        Mergers or Acquisitions.

  

10

   

7.4        Indebtedness.

  

10

   

7.5        Encumbrance.

  

10

   

7.6        Distributions; Investments.

  

10

   

7.7        Transactions with Affiliates.

  

11

   

7.8        Subordinated Debt.

  

11

   

7.9        Compliance.

  

11

8.

 

EVENTS OF DEFAULT

  

11

   

8.1        Payment Default.

  

11

   

8.2        Covenant Default.

  

11

   

8.3        Material Adverse Change.

  

12

   

8.4        Attachment.

  

12

   

8.5        Insolvency.

  

12

   

8.6        Other Agreements.

  

12

   

8.7        Judgments.

  

12

   

8.8        Misrepresentations.

  

12

   

8.9        Guaranty.

  

12

9.

 

BANK'S RIGHTS AND REMEDIES

  

13

   

9.1        Rights and Remedies.

  

13

   

9.2        Power of Attorney.

  

13

   

9.3        Accounts Collection.

  

14

   

9.4        Bank Expenses.

  

14

   

9.5        Bank's Liability for Collateral.

  

14

   

9.6        Remedies Cumulative.

  

14

   

9.7        Demand Waiver.

  

15

10.

 

NOTICES

  

15

11.

 

CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER

  

15

12.

 

GENERAL PROVISIONS

  

15

   

12.1      Successors and Assigns.

  

15

   

12.2      Indemnification.

  

15

 

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12.3      Time of Essence.

  

16

   

12.4      Severability of Provision.

  

16

   

12.5      Amendments in Writing, Integration.

  

16

   

12.6      Counterparts.

  

16

   

12.7      Survival.

  

16

   

12.8      Confidentiality.

  

16

   

12.9      Attorneys’ Fees, Costs and Expenses.

  

17

13.

 

DEFINITIONS

  

17

   

13.1      Definitions.

  

17

 

 

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This LOAN AND SECURITY AGREEMENT dated April 3, 2003, between SILICON VALLEY
BANK (“Bank”), whose address is 3003 Tasman Drive, Santa Clara, California 95054
and LEXAR MEDIA, INC., a Delaware corporation (“Borrower”), whose address is
47421 Bayside Parkway, Fremont, California 94538 provides the terms on which
Bank will lend to Borrower and Borrower will repay Bank. The parties agree as
follows:

 

1.    ACCOUNTING AND OTHER TERMS.

 

Accounting terms not defined in this Agreement will be construed following GAAP.
Calculations and determinations must be made following GAAP. The term “financial
statements” includes the notes and schedules. The terms “including” and
“includes” always mean “including (or includes) without limitation,” in this or
any Loan Document.

 

2.    LOAN AND TERMS OF PAYMENT

 

2.1    Credit Extensions.

 

Borrower will pay Bank the unpaid principal amount of all Credit Extensions and
interest on the unpaid principal amount of the Credit Extensions.

 

2.1.1    Formula Revolving Advances.

 

(a)    Formula and Non-Formula Advances.

 

(i)    Non-Formula Advances. If at any time, and so long as, the then
outstanding Revolving Obligations are less than or equal to the Committed
Non-Formula Revolving Line, Bank will make Advances (“Non-Formula Advances”) in
an amount not to exceed the Committed Non-Formula Revolving Line minus the then
outstanding Revolving Obligations. Amounts borrowed under this Section may be
repaid and reborrowed during the term of this Agreement.

 

(ii)    Formula Advances. If at any time, and so long as, the then outstanding
Revolving Obligations exceed the Committed Non-Formula Revolving Line, Bank will
make Advances (“Formula Advances”) not exceeding the amount calculated as: (X)
the lesser of (A) the Committed Formula Revolving Line minus the sum of any
portion of the following not reserved against the Committed Non-Formula
Revolving Line: (x) FX Reserve, plus, (y) the aggregate amounts deemed
outstanding under the sublimit described in Section 2.1.5, plus, (z) the amount
of all outstanding Letters of Credit (including drawn but unreimbursed Letters
of Credit) or (B) the Borrowing Base minus the sum of any portion of the
following not reserved against the Committed Non-Formula Revolving Line: (x) FX
Reserve, plus, (y) the aggregate amounts deemed outstanding under the sublimit
described in Section 2.1.5, plus, (z) the amount of all outstanding Letters of
Credit (including drawn but unreimbursed Letters of Credit). Amounts borrowed
under this Section may be repaid and reborrowed during the term of this
Agreement.

 

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(b)    The Committed Non-Formula Revolving Line and the Committed Formula
Revolving Line terminate on the Revolving Maturity Date, when all outstanding
Advances are immediately payable.

 

2.1.2    Requesting Advances.

 

To obtain an Advance, Borrower must notify Bank by facsimile or telephone by
12:00 noon Pacific time on the Business Day the Advance is to be made. Borrower
must promptly confirm the notification by delivering to Bank the Payment/Advance
Form attached as Exhibit B. Bank will credit Advances to Borrower’s deposit
account. Bank may make Advances under this Agreement based on instructions from
a Responsible Officer or his or her designee or without instructions if the
Advances are necessary to meet Obligations which have become due. Bank may rely
on any telephone notice given by a person whom Bank believes is a Responsible
Officer or designee. Borrower will indemnify Bank for any loss Bank suffers due
to such reliance.

 

2.1.3    Letters of Credit Sublimit.

 

(a)    Bank will issue Letters of Credit for Borrower’s account not exceeding
the lesser of: (i) $25,000,000 and (ii) Availability.

 

(b)    Each Letter of Credit will have an expiry date of no later than ninety
(90) days after the Revolving Maturity Date, but Borrower’s reimbursement
obligation will be secured by cash on terms acceptable to Bank at any time after
the Revolving Maturity Date if the term of this Agreement is not extended by
Bank. Borrower agrees to execute any further documentation in connection with
the Letters of Credit as Bank may reasonably request.

 

2.1.4    Foreign Exchange Sublimit.

 

Subject to the limits set forth below in this Section 2.1.4, Borrower may enter
into foreign exchange forward contracts with the Bank under which Borrower
commits to purchase from or sell to Bank a set amount of foreign currency more
than one business day after the contract date (the “FX Forward Contract”) (the
amount equal to 10% of the aggregate outstanding FX Forward Contracts is
hereinafter referred to as the “FX Reserve”). The FX Reserve may not exceed the
lesser of: (i) $25,000,000 and (ii) Availability. The total FX Forward Contracts
at any one time may not exceed the amount calculated as 10 multiplied by the FX
Reserve. Bank may terminate the FX Forward Contracts if an Event of Default
occurs.

 

2.1.5    Cash Management Services Sublimit.

 

Borrower may use for Bank’s Cash Management Services up to an amount equal to
the lesser of: (i) $25,000,000 and (ii) Availability (Cash Management Services
Sublimit”). Such services may include merchant services, direct deposit of
payroll, business credit card, and check cashing services identified in various
cash management services agreements related to such services (the “Cash
Management Services”). The aggregate amount of the credit limits under all such
agreements with respect to Cash Management Services shall be deemed to be the
amount of the Cash Management Services for the purposes of calculating the Cash
Management Services

 

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Sublimit. All amounts Bank pays for any Cash Management Services will be treated
as Advances under Section 2.1.1. Bank will advise Borrower of any amounts that
would affect the Cash Management Services Sublimit.

 

2.2    Overadvances.

 

(a)    With respect to Formula Advances, if Borrower’s Obligations under Section
2.1 at any time exceed the lesser of the Committed Formula Revolving Line or the
Borrowing Base, Borrower must immediately pay Bank the excess; and

 

(b)    With respect to Non-Formula Advances, if the Revolving Obligations exceed
the Committed Non-Formula Revolving Line, Borrower must either: (i) immediately
pay Bank the excess or (ii) immediately deliver to Bank a Borrowing Base
Certificate demonstrating that Borrower has Availability in excess of the
Committed Non-Formula Revolving Line sufficient to comply with the requirements
of Section 2.1 hereof with respect to Formula Advances.

 

2.3    Interest Rate, Payments.

 

(a)    Interest Rate. Advances accrue interest on the outstanding principal
balance at a per annum rate of 50 basis points (0.50 percentage points) above
the Prime Rate. After an Event of Default, Obligations accrue interest at 5
percentage points above the rate effective immediately before the Event of
Default. The interest rate increases or decreases when the Prime Rate changes.
Interest is computed on a 360 day year for the actual number of days elapsed.

 

(b)    Payments. Interest due on the Committed Formula Revolving Line and on the
Committed Non-Formula Revolving Line is payable on the first day of each month.
Bank may debit any of Borrower’s deposit accounts including Account Number
                                                  for principal and interest
payments owing or any amounts Borrower owes Bank. Bank will promptly notify
Borrower when it debits Borrower’s accounts. These debits are not a set-off.
Payments received after 12:00 noon Pacific time are considered received at the
opening of business on the next Business Day. When a payment is due on a day
that is not a Business Day, the payment is due the next Business Day and
additional fees or interest accrue.

 

2.4    Fees.

 

Borrower will pay:

 

(a)    Closing Fee. A closing fee in the amount of $50,000 to be fully earned
and payable on the Closing Date. Bank acknowledges that it has received from
Borrower a $15,000 good faith deposit that will applied towards the Closing Fee.

 

(b)    Anniversary Fee. An anniversary fee in the amount of $50,000 to be fully
earned and payable on the first anniversary date of the Closing Date.

 

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(c)    Bank Expenses. All Bank Expenses (including reasonable attorneys’ fees
and reasonable expenses) incurred through and after the date of this Agreement,
are payable when due.

 

3.    CONDITIONS OF LOANS

 

3.1    Conditions Precedent to Initial Credit Extension.

 

Bank’s obligation to make the initial Credit Extension is subject to the
following conditions precedent:

 

(a)    Negative Pledge Agreement in the form of Exhibit E;

 

(b)    receipt by Bank of the Closing Fee;

 

(c)    receipt by Bank of Borrower’s insurance certificate with Lender’s loss
payable endorsement reflecting Bank as loss payee;

 

(d)    receipt by Bank of results of UCC searches or other evidence satisfactory
to Bank (in each case dated as of a date reasonably satisfactory to Bank)
indicating the absence of liens on assets of the Borrower, except for Permitted
Liens;

 

(e)    Bank shall have filed all such UCC financing statements as Bank deems
appropriate and UCC searches to reflect Bank’s first priority security interest;
and

 

(f)    receipt by Bank of all other the agreements, documents and fees that Bank
may require.

 

3.2    Conditions Precedent to all Credit Extensions.

 

Bank’s obligations to make each Credit Extension, including the initial Credit
Extension, is subject to the following:

 

(a)    timely receipt of any Payment/Advance Form; and

 

(b)    the representations and warranties in Section 5 must be materially true
on the date of the Payment/Advance Form and on the effective date of each Credit
Extension and no Event of Default may have occurred and be continuing, or result
from the Credit Extension. Each Credit Extension is Borrower’s representation
and warranty on that date that the representations and warranties of Section 5
remain true.

 

4.    CREATION OF SECURITY INTEREST

 

4.1    Grant of Security Interest.

 

Borrower grants Bank a continuing security interest in all presently existing
and later acquired Collateral to secure all Obligations and performance of each
of Borrower’s duties under the Loan Documents. Except for Permitted Liens, any
security interest will be a first priority

 

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security interest in the Collateral. Upon the occurrence of an Event of Default,
Bank may place a “hold” on any deposit account pledged as Collateral. If this
Agreement is terminated, Bank’s lien and security interest in the Collateral
will continue until Borrower fully satisfies its Obligations.

 

5.    REPRESENTATIONS AND WARRANTIES

 

Borrower represents and warrants as follows:

 

5.1    Due Organization and Authorization.

 

Borrower and each Subsidiary is duly existing and in good standing in its state
of formation and qualified and licensed to do business in, and in good standing
in, any state in which the conduct of its business or its ownership of property
requires that it be qualified, except where the failure to do so could not
reasonably be expected to cause a Material Adverse Change.

 

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

 

5.2    Collateral.

 

Borrower has good title to the Collateral, free of Liens except Permitted Liens.
The Accounts are bona fide, existing obligations, and the service or property
has been performed or delivered to the account debtor or its agent for immediate
shipment to and unconditional acceptance by the account debtor. Borrower has no
notice of any actual or imminent Insolvency Proceeding of any account debtor
whose accounts are an Eligible Account in any Borrowing Base Certificate. All
Inventory is in all material respects of good and marketable quality, free from
material defects. Borrower is the sole owner of the Intellectual Property,
except for: (i) non-exclusive licenses granted to third parties in the ordinary
course of business; (ii) licenses granted to third parties on or before the
Closing Date; (iii) as may be determined by the litigation disclosed in the
Schedule and (iv) exclusive licenses of Intellectual Property entered into the
ordinary course of business so long as: (x) such licenses cover specific
products and processes; (y) the duration of any such license does not exceed 5
years; and (z) such exclusive license arrangement is not tantamount to a sale of
the subject Intellectual Property (exclusive licenses of the type described in
this subsection (iv) are herein defined as “Permitted Exclusive Licenses”). Each
Patent is valid and enforceable and no part of the Intellectual Property has
been judged invalid or unenforceable, in whole or in part, and no claim has been
made that any part of the Intellectual Property violates the rights of any third
party, except to the extent such claim could not reasonably be expected to cause
a Material Adverse Change.

 

5.3    Litigation.  

 

Except as shown in the Schedule, there are no actions or proceedings pending or,
to the knowledge of Borrower’s Responsible Officers and legal counsel,
threatened by or against

 

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Borrower or any Subsidiary in which a likely adverse decision could reasonably
be expected to cause a Material Adverse Change.

 

5.4    No Material Adverse Change in Financial Statements.

 

All consolidated financial statements for Borrower, and any Subsidiary,
delivered to Bank fairly present in all material respects Borrower’s
consolidated financial condition and Borrower’s consolidated results of
operations. There has not been any material deterioration in Borrower’s
consolidated financial condition since the date of the most recent financial
statements submitted to Bank.

 

5.5    Solvency.

 

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

 

5.6    Regulatory Compliance.

 

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

 

5.7    Subsidiaries.

 

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

 

5.8    Full Disclosure.

 

No written representation, warranty or other statement of Borrower in any
certificate or written statement given to Bank (taken together with all such
written certificates and written statements to Bank) contains any untrue
statement of a material fact or omits to state a material fact necessary to make
the statements contained in the certificates or statements not misleading;

 

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it being recognized by Bank that the projections and forecasts provided by
Borrower in good faith and based upon reasonable assumptions are not viewed as
facts and that actual results during the period or periods covered by such
projections and forecasts may differ from the projected and forecasted results.

 

6.    AFFIRMATIVE COVENANTS

 

Borrower will do all of the following:

 

6.1    Government Compliance.

 

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

 

6.2    Financial Statements, Reports, Certificates.

 

(a)    Borrower will deliver to Bank: (i) as soon as available, but no later
than 45 days after the last day of each month, a company prepared consolidated
balance sheet and income statement together with a statement of cash flow
covering Borrower’s consolidated operations during the period, in a form and
certified by a Responsible Officer acceptable to Bank; (ii) as soon as
available, but no later than 120 days after the last day of Borrower’s fiscal
year, audited consolidated financial statements prepared under GAAP,
consistently applied, together with an unqualified opinion on the financial
statements from an independent certified public accounting firm reasonably
acceptable to Bank; (iii) within 5 days of filing, copies of all statements,
reports and notices made available to Borrower’s security holders or to any
holders of Subordinated Debt and all reports on Form 10-K, 10-Q and 8-K filed
with the Securities and Exchange Commission; (iv) a prompt report of any legal
actions pending or threatened in writing against Borrower or any Subsidiary that
could result in damages or costs to Borrower or any Subsidiary of $100,000 or
more; (v) as soon as available but not later than 30 days prior to the end of
Borrower’s fiscal year, Borrower’s quarterly financial projections for the
upcoming fiscal year as presented to Borrower’s Board of Directors; (vi)
budgets, sales projections, operating plans or other financial information Bank
reasonably requests; and (vii) prompt notice of any material change in the
composition of the Intellectual Property, including any subsequent ownership
right of Borrower in or to any Copyright, Patent or Trademark not shown in any
intellectual property security agreement between Borrower and Bank or knowledge
of an event that materially adversely affects the value of the Intellectual
Property.

 

(b)    Within 30 days after the last day of each month, Borrower will deliver to
Bank a Borrowing Base Certificate signed by a Responsible Officer in the form of
Exhibit C, with aged listings of accounts receivable and accounts payable, an
inventory report and a sell-through report.

 

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(c)    Within 45 days after the last day of each month, Borrower will deliver to
Bank with the monthly financial statements a Compliance Certificate signed by a
Responsible Officer in the form of Exhibit D.

 

(d)    Bank has the right to audit Borrower’s Collateral at Borrower’s expense,
but the audits will be conducted no more often than twice in any fiscal year
unless an Event of Default has occurred and is continuing.

 

6.3    Inventory; Returns.

 

Borrower will keep all Inventory in good and marketable condition, free from
material defects. Returns and allowances between Borrower and its account
debtors will follow Borrower’s customary practices as they exist at execution of
this Agreement. Borrower must promptly notify Bank of all returns, recoveries,
disputes and claims, that involve more than the following in any one fiscal
quarter: (i) an amount equal to 5% of the cost (net of any discounts) of all
products shipped, with respect to returns relating to stock rotation
arrangements between Borrower and a third party and (ii) an amount equal to 2%
of all shipments of products, with respect to returns relating to defective
products.

 

6.4    Taxes.

 

Borrower will make, and cause each Subsidiary to make, timely payment of all
material federal, state, and local taxes or assessments and will deliver to
Bank, on demand, appropriate certificates attesting to the payment.

 

6.5    Insurance.

 

Borrower will keep its business and the Collateral insured for risks and in
amounts, as Bank may reasonably request. Insurance policies will be in a form,
with companies, and in amounts that are satisfactory to Bank in Bank’s
reasonable discretion. Bank agrees that Borrower’s current insurance policies
and companies are satisfactory for Borrower’s current level of business. All
property policies will have a lender’s loss payable endorsement showing Bank as
an additional loss payee and all liability policies will show the Bank as an
additional insured and provide that the insurer must give Bank at least 20 days
notice before canceling its policy. At Bank’s request, Borrower will deliver
certified copies of policies and evidence of all premium payments. Proceeds
payable under any policy will, at Bank’s option, be payable to Bank on account
of the Obligations.

 

6.6    Primary and Investments Accounts.

 

Borrower will maintain its primary depository, operating, and investment
accounts with Bank or one of Bank’s affiliates.

 

6.7    Financial Covenants.

 

Borrower will maintain as of the last day of each month:

 

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(i)    Quick Ratio (Adjusted).    A ratio of Quick Assets to Current Liabilities
minus current Deferred Revenue of at least 1.35 to 1.00.

 

(ii)    Tangible Net Worth.    Tangible Net Worth of not less than: (A)
$35,000,000 as of December 31, 2002 and (B) the sum of: (i) $35,000,000 plus
(ii) an amount equal to 75% of aggregate amount of positive net earnings (with
no adjustment for losses) for each month commencing on January 1, 2003 to the
date of determination.

 

6.8    Registration of Intellectual Property Rights.

 

Borrower will not allow any Intellectual Property to be abandoned, forfeited or
dedicated to the public without Bank’s written consent.

 

6.9    Control Agreements.

 

With respect to deposit accounts or investment accounts maintained at financial
institutions other than Bank, within 15 days of the opening of any such deposit
account or investment account, Borrower will execute and deliver to Bank,
control agreements in form satisfactory to Bank in order for Bank to perfect its
security interest in Borrower’s deposit accounts or investment accounts.

 

6.10    Subordination of Debt.

 

All present and future indebtedness of Borrower to its officers, directors and
shareholders (“Inside Debt”) shall, at all times, be subordinated to the
Obligations pursuant to a subordination agreement on Bank’s standard form. Prior
to incurring any Inside Debt in the future, Borrower shall cause the person to
whom such Inside Debt will be owed to execute and deliver to Bank a
subordination agreement on Bank’s standard form.

 

6.11    Further Assurances.

 

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

 

7.    NEGATIVE COVENANTS

 

Borrower will not do any of the following without Bank’s prior written consent,
which will not be unreasonably withheld:

 

7.1    Dispositions.

 

Convey, sell, lease, transfer or otherwise dispose of (collectively “Transfer”),
or permit any of its Subsidiaries to Transfer, all or any part of its business
or property, other than Transfers (i) of Inventory in the ordinary course of
business; (ii) of non-exclusive licenses and similar arrangements for the use of
the property of Borrower or its Subsidiaries in the ordinary course of business;
(iii) of Permitted Exclusive Licenses or (iv) of worn-out or obsolete Equipment;
or

 

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(v) other property in an amount not to exceed one hundred thousand dollars
($100,000) during any calendar year.

 

7.2    Changes in Business, Ownership, Management or Business Locations.

 

Engage in or permit any of its Subsidiaries to engage in any business other than
the businesses currently engaged in by Borrower or reasonably related thereto or
have a material change in its ownership or management (other than the sale of
Borrower’s equity securities in a public offering or to venture capital
investors approved by Bank) of greater than 25%. Borrower will not, without at
least 30 days prior written notice, relocate its chief executive office or add
any new offices or business locations.

 

7.3    Mergers or Acquisitions.

 

Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate,
with any other Person, or acquire, or permit any of its Subsidiaries to acquire,
all or substantially all of the capital stock or property of another Person,
except where (i) no Event of Default has occurred and is continuing or would
result from such action during the term of this Agreement and (ii) such
transaction would not result in a decrease of more than 25% of Tangible Net
Worth. A Subsidiary may merge or consolidate into another Subsidiary or into
Borrower.

 

7.4    Indebtedness.

 

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

 

7.5    Encumbrance.

 

Create, incur, or allow any Lien on any of its property, or assign or convey any
right to receive income, including the sale of any Accounts, or permit any of
its Subsidiaries to do so, except for Permitted Liens, or permit any Collateral
not to be subject to the first priority security interest granted here, subject
to Permitted Liens.

 

7.6    Distributions; Investments.

 

Directly or indirectly acquire or own any Person, or make any Investment in any
Person, other than Permitted Investments, or permit any of its Subsidiaries to
do so. Pay any dividends or make any distribution or payment or redeem, retire
or purchase any capital stock. Notwithstanding the foregoing, so long as no
Event of Default has occurred, is continuing or would exist after giving effect
to any repurchase, Borrower may repurchase stock from former employees,
directors, and service providers of Borrower under the terms of applicable
repurchase agreements in an aggregate amount not to exceed the following amounts
in any fiscal year: (i) $300,000 if the consideration paid for such repurchases
is cash and (ii) $1,000,000 if the consideration paid for such repurchases is
the cancellation of indebtedness owing from the employee, director, or service
provider to Borrower.

 

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7.7    Transactions with Affiliates.

 

Directly or indirectly enter into or permit any material transaction with any
Affiliate except transactions that are in the ordinary course of Borrower’s
business, on terms less favorable to Borrower than would be obtained in an arm’s
length transaction with a non-affiliated Person.

 

7.8    Subordinated Debt.

 

Make or permit any payment on any Subordinated Debt, except under the terms of
the Subordinated Debt, or amend any provision in any document relating to the
Subordinated Debt without Bank’s prior written consent.

 

7.9    Compliance.

 

Become an “investment company” or a company controlled by an “investment
company,” under the Investment Company Act of 1940 or undertake as one of its
important activities extending credit to purchase or carry margin stock, or use
the proceeds of any Credit Extension for that purpose; fail to meet the minimum
funding requirements of ERISA, permit a Reportable Event or Prohibited
Transaction, as defined in ERISA, to occur; fail to comply with the Federal Fair
Labor Standards Act or violate any other law or regulation, if the violation
could reasonably be expected to have a material adverse effect on Borrower’s
business or operations or would reasonably be expected to cause a Material
Adverse Change, or permit any of its Subsidiaries to do so.

 

8.    EVENTS OF DEFAULT

 

Any one of the following is an Event of Default:

 

8.1    Payment Default.

 

If Borrower fails to pay any of the Obligations within 3 Business Days after
their due date. During the additional period the failure to cure the default is
not an Event of Default (but no Credit Extension will be made during the cure
period);

 

8.2    Covenant Default.

 

If Borrower does not perform any obligation in Section 6 or violates any
covenant in Section 7 or does not perform or observe any other material term,
condition or covenant in this Agreement, any Loan Documents, or in any agreement
between Borrower and Bank and as to any default under a term, condition or
covenant that can be cured, has not cured the default within 10 days after it
occurs, or if the default cannot be cured within 10 days or cannot be cured
after Borrower’s attempts within 10 day period, and the default may be cured
within a reasonable time, then Borrower has an additional period (of not more
than 30 days) to attempt to cure the default. During the additional time, the
failure to cure the default is not an Event of Default (but no Credit Extensions
will be made during the cure period);

 

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8.3    Material Adverse Change.

 

If there (i) occurs a material adverse change in the business operations, or
condition (financial or otherwise) of the Borrower; or (ii) is a material
impairment of the prospect of repayment of any portion of the Obligations; or
(iii) is a material impairment of the value or priority of Bank’s security
interests in the Collateral;

 

8.4    Attachment.  

 

If any material portion of Borrower’s assets is attached, seized, levied on, or
comes into possession of a trustee or receiver and the attachment, seizure or
levy is not removed in 10 days, or if Borrower is enjoined, restrained, or
prevented by court order from conducting a material part of its business or if a
judgment or other claim becomes a Lien on a material portion of Borrower’s
assets, or if a notice of lien, levy, or assessment is filed against any of
Borrower’s assets by any government agency and not paid within 10 days after
Borrower receives notice. These are not Events of Default if stayed or if a bond
is posted pending contest by Borrower (but no Credit Extensions will be made
during the cure period);

 

8.5    Insolvency.

 

If Borrower becomes insolvent or if Borrower begins an Insolvency Proceeding or
an Insolvency Proceeding is begun against Borrower and not dismissed or stayed
within 30 days (but no Credit Extensions will be made before any Insolvency
Proceeding is dismissed);

 

8.6    Other Agreements.

 

If there is a default in any agreement between Borrower and a third party that
gives the third party the right to accelerate any Indebtedness exceeding
$400,000 or that could cause a Material Adverse Change;

 

8.7    Judgments.

 

If a money judgment(s) in the aggregate of at least $50,000 is rendered against
Borrower and is unsatisfied and unstayed for 10 days (but no Credit Extensions
will be made before the judgment is stayed or satisfied);

 

8.8    Misrepresentations.

 

If Borrower or any Person acting for Borrower makes any material
misrepresentation or material misstatement now or later in any warranty or
representation in this Agreement or in any writing delivered to Bank or to
induce Bank to enter this Agreement or any Loan Document; or

 

8.9    Guaranty.  

 

Any guaranty of any Obligations ceases for any reason to be in full force or any
Guarantor does not perform any obligation under any guaranty of the Obligations,
or any material misrepresentation or material misstatement exists now or later
in any warranty or

 

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representation in any guaranty of the Obligations or in any certificate
delivered to Bank in connection with the guaranty, or any circumstance described
in Sections 8.4, 8.5 or 8.7 occurs to any Guarantor.

 

9.    BANK’S RIGHTS AND REMEDIES

 

9.1    Rights and Remedies.

 

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

 

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

 

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

 

(c)    Settle or adjust disputes and claims directly with account debtors for
amounts, on terms and in any order that Bank considers advisable;

 

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

 

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

 

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

 

(g)  Dispose of the Collateral according to the Code.

 

9.2    Power of Attorney.

 

Effective only when an Event of Default occurs and continues, Borrower
irrevocably appoints Bank as its lawful attorney to: (i) endorse Borrower’s name
on any checks or other forms of payment or security; (ii) sign Borrower’s name
on any invoice or bill of lading for any

 

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Account or drafts against account debtors, (iii) make, settle, and adjust all
claims under Borrower’s insurance policies; (iv) settle and adjust disputes and
claims about the Accounts directly with account debtors, for amounts and on
terms Bank determines reasonable; and (v) transfer the Collateral into the name
of Bank or a third party as the Code permits. Bank may exercise the power of
attorney to sign Borrower’s name on any documents necessary to perfect or
continue the perfection of any security interest regardless of whether an Event
of Default has occurred. Bank’s appointment as Borrower’s attorney in fact, and
all of Bank’s rights and powers, coupled with an interest, are irrevocable until
all Obligations have been fully repaid and performed and Bank’s obligation to
provide Credit Extensions terminates.

 

9.3    Accounts Collection.

 

When an Event of Default occurs and continues, Bank may notify any Person owing
Borrower money of Bank’s security interest in the funds and verify the amount of
the Account. Borrower must collect all payments in trust for Bank and, if
requested by Bank, immediately deliver the payments to Bank in the form received
from the account debtor, with proper endorsements for deposit.

 

9.4    Bank Expenses.

 

If Borrower fails to pay any amount or furnish any required proof of payment to
third persons, Bank may make all or part of the payment or obtain insurance
policies required in Section 6.5, and take any action under the policies Bank
deems prudent. Any amounts paid by Bank are Bank Expenses and immediately due
and payable, bearing interest at the then applicable rate and secured by the
Collateral. No payments by Bank are deemed an agreement to make similar payments
in the future or Bank’s waiver of any Event of Default.

 

9.5    Bank’s Liability for Collateral.

 

If Bank complies with reasonable banking practices and Section 9-207 of the
Code, it is not liable for: (a) the safekeeping of the Collateral; (b) any loss
or damage to the Collateral; (c) any diminution in the value of the Collateral;
or (d) any act or default of any carrier, warehouseman, bailee, or other person.
Borrower bears all risk of loss, damage or destruction of the Collateral.

 

9.6    Remedies Cumulative.

 

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

 

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9.7    Demand Waiver.

 

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

 

10.    NOTICES

 

All notices or demands by any party about this Agreement or any other related
agreement must be in writing and be personally delivered or sent by an overnight
delivery service, by certified mail, postage prepaid, return receipt requested,
or by telefacsimile to the addresses set forth at the beginning of this
Agreement. A party may change its notice address by giving the other party
written notice.

 

11.    CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER

 

California law governs the Loan Documents without regard to principles of
conflicts of law. Borrower and Bank each submit to the exclusive jurisdiction of
the State and Federal courts in Santa Clara County, California.

 

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

 

12.    GENERAL PROVISIONS

 

12.1    Successors and Assigns.

 

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

 

12.2    Indemnification.

 

Borrower will indemnify, defend and hold harmless Bank and its officers,
employees, and agents against: (a) all obligations, demands, claims, and
liabilities asserted by any other party in connection with the transactions
contemplated by the Loan Documents; and (b) all losses or Bank Expenses
incurred, or paid by Bank from, following, or consequential to transactions
between Bank and Borrower (including reasonable attorneys fees and expenses),
except for losses caused by Bank’s gross negligence or willful misconduct.

 

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12.3    Time of Essence.

 

Time is of the essence for the performance of all obligations in this Agreement.

 

12.4    Severability of Provision.

 

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

 

12.5    Amendments in Writing, Integration.

 

All amendments to this Agreement must be in writing and signed by Borrower and
Bank. This Agreement represents the entire agreement about this subject matter,
and supersedes prior negotiations or agreements. All prior agreements,
understandings, representations, warranties, and negotiations between the
parties about the subject matter of this Agreement merge into this Agreement and
the Loan Documents.

 

12.6    Counterparts.

 

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

 

12.7    Survival.

 

All covenants, representations and warranties made in this Agreement continue in
full force while any Obligations remain outstanding. The obligations of Borrower
in Section 12.2 to indemnify Bank will survive until all statutes of limitations
for actions that may be brought against Bank have run.

 

12.8    Confidentiality.

 

In handling any confidential information, Bank will exercise the same degree of
care that it exercises for its own proprietary information, but disclosure of
information may be made (i) to Bank’s subsidiaries or affiliates in connection
with their business with Borrower, (ii) to prospective transferees or purchasers
of any interest in the loans, (iii) as required by law, regulation, subpoena, or
other order, provided that, Bank will use commercially reasonable efforts to
notify Borrower promptly, as reasonably possible, of any such request for
disclosure to the extent permitted by law, regulation or the terms of the
relevant subpoena or other order but Bank shall not be liable for any failure to
so notify Borrower, (iv) as required in connection with Bank’s examination or
audit and (v) as Bank considers appropriate exercising remedies under this
Agreement. Confidential information does not include information that either:
(a) is in the public domain or in Bank’s possession when disclosed to Bank, or
becomes part of the public domain after disclosure to Bank; or (b) is disclosed
to Bank by a third party, if Bank does not know that the third party is
prohibited from disclosing the information.

 

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12.9    Attorneys’ Fees, Costs and Expenses.

 

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

 

13.    DEFINITIONS

 

13.1    Definitions.

 

In this Agreement:

 

“Accounts” are all existing and later arising accounts, contract rights, and
other obligations owed Borrower in connection with its sale or lease of goods
(including licensing software and other technology) or provision of services,
all credit insurance, guaranties, other security and all merchandise returned or
reclaimed by Borrower and Borrower’s Books relating to any of the foregoing.

 

“Advance” or “Advances” is a Formula Advance or a Non-Formula Advance, as
applicable.

 

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

 

“Availability” means, as of any date of determination, the amount that Borrower
is entitled to borrow as Advances under Section 2.1.1 (after giving effect to
all then outstanding Advances and all sublimits on reserves applicable
thereunder).

 

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

 

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

 

“Borrowing Base” is (i) 75% of Eligible Accounts plus (ii) 75% of Eligible
Foreign Accounts (but not to exceed 10% of total Eligible Accounts) as
determined by Bank from Borrower’s most recent Borrowing Base Certificate;
provided, however, that Bank may lower the percentage of the Borrowing Base
after performing an audit of Borrower’s Collateral.

 

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

 

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“Cash Management Services” are defined in Section 2.1.5.

 

“Closing Date” is the date of this Agreement.

 

“Code” is the California Uniform Commercial Code, as amended and supplemented
from time to time

 

“Collateral” is the property described on Exhibit A.

 

“Committed Formula Revolving Line” is Formula Advances of up to $15,000,000
outstanding at any time.

 

“Committed Non-Formula Revolving Line” is Non-Formula Advances of up to
$10,000,000 outstanding at any time.

 

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

 

“Copyrights” are all copyright rights, applications or registrations and like
protections in each work or authorship or derivative work, whether published or
not (whether or not it is a trade secret) now or later existing, created,
acquired or held.

 

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

 

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

 

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

 

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“Eligible Accounts” are Accounts in the ordinary course of Borrower’s business
that meet all Borrower’s representations and warranties in Section 5; but Bank
may change eligibility standards by giving Borrower notice. Unless Bank agrees
otherwise in writing, Eligible Accounts will not include:

 

(a)    Accounts that the account debtor has not paid within 90 days of invoice
date;

 

(b)    Accounts for an account debtor, 50% or more of whose Accounts have not
been paid within 90 days of invoice date;

 

(c)    Credit balances over 90 days from invoice date;

 

(d)    Accounts for an account debtor, including Affiliates, whose total
obligations to Borrower exceed 25% of all Accounts, for the amounts that exceed
that percentage, unless the Bank approves otherwise in writing;

 

(e)    Accounts for which the account debtor does not have its principal place
of business in the United States except for Eligible Foreign Accounts;

 

(f)    Accounts for which the account debtor is a federal, state or local
government entity or any department, agency, or instrumentality;

 

(g)    Accounts for which Borrower owes the account debtor, but only up to the
amount owed (sometimes called “contra” accounts, accounts payable, customer
deposits or credit accounts);

 

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

 

(i)    Accounts for which the account debtor is Borrower’s Affiliate, officer,
employee, or agent;

 

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

 

(k)    Accounts for which Bank reasonably determines collection to be doubtful.

 

“Eligible Foreign Accounts” are Accounts for which the account debtor does not
have its principal place of business in the United States but are: (1) covered
by credit insurance satisfactory to Bank, less any deductible; or (2) supported
by letter(s) of credit advised and negotiated by Bank or (3) that Bank approves
in writing.

 

“Equipment” is all present and future machinery, equipment, tenant improvements,
furniture, fixtures, vehicles, tools, parts and attachments in which Borrower
has any interest.

 

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

 

“Formula Advance” or “Formula Advances” is a loan advance (or advances) under
the Formula Committed Revolving Line.

 

“FX Forward Contract” is defined in Section 2.1.4.

 

“FX Reserve “ is defined in Section 2.1.4.

 

“GAAP” is generally accepted accounting principles.

 

“Guarantor” is any present or future guarantor of the Obligations.

 

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

 

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

 

“Intellectual Property” is::

 

(a)    Copyrights, Trademarks, Patents, and Mask Works including amendments,
renewals, extensions, and all licenses or other rights to use and all license
fees and royalties from the use;

 

(b)    Any trade secrets and any intellectual property rights in computer
software and computer software products now or later existing, created, acquired
or held;

 

(c)    All design rights which may be available to Borrower now or later
created, acquired or held;

 

(d)    Any claims for damages (past, present or future) for infringement of any
of the rights above, with the right, but not the obligation, to sue and collect
damages for use or infringement of the intellectual property rights above;

 

All proceeds and products of the foregoing, including all insurance, indemnity
or warranty payments.

 

“Inventory” is present and future inventory in which Borrower has any interest,
including merchandise, raw materials, parts, supplies, packing and shipping
materials, work in process and finished products intended for sale or lease or
to be furnished under a contract of service, of every kind and description now
or later owned by or in the custody or possession,

 

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actual or constructive, of Borrower, including inventory temporarily out of its
custody or possession or in transit and including returns on any accounts or
other proceeds (including insurance proceeds) from the sale or disposition of
any of the foregoing and any documents of title.

 

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

 

“Letter of Credit” is defined in Section 2.1.3.

 

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

 

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

 

“Mask Works” are all mask works or similar rights available for the protection
of semiconductor chips, now owned or later acquired.

 

“Material Adverse Change” is defined in Section 8.3.

 

“Non-FormulaAdvance” or “Non-FormulaAdvances” is a loan advance (or advances)
under the Non-Formula Committed Revolving Line.

 

“Obligations” are debts, principal, interest, Bank Expenses and other amounts
Borrower owes Bank now or later, including cash management services, letters of
credit and foreign exchange contracts, if any and including interest accruing
after Insolvency Proceedings begin and debts, liabilities, or obligations of
Borrower assigned to Bank.

 

“Patents” are patents, patent applications and like protections, including
improvements, divisions, continuations, renewals, reissues, extensions and
continuations-in-part of the same.

 

“Permitted Exclusive License” is defined in Section 5.2.

 

“Permitted Indebtedness” is:

 

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

 

(b)    Indebtedness existing on the Closing Date and shown on the Schedule;

 

(c)    Subordinated Debt;

 

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

 

(e)    Indebtedness secured by Permitted Liens.

 

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“Permitted Investments” are:

 

(a)    Investments shown on the Schedule and existing on the Closing Date;

 

(b)    Investments consisting of cash transfers to Borrower’s Subsidiaries to
fund operations of such Subsidiaries in an amount not to exceed $2,000,000 in
any one calendar year; and

 

(c)    (i) marketable direct obligations issued or unconditionally guaranteed by
the United States or its agency or any State maturing within 1 year from its
acquisition, (ii) commercial paper maturing no more than 1 year after its
creation and having the highest rating from either Standard & Poor’s Corporation
or Moody’s Investors Service, Inc., and (iii) Bank’s certificates of deposit
issued maturing no more than 1 year after issue.

 

“Permitted Liens” are:

 

(a)    Liens existing on the Closing Date and shown on the Schedule or arising
under this Agreement or other Loan Documents;

 

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

 

(c)    Purchase money Liens (i) on Equipment acquired or held by Borrower or its
Subsidiaries incurred for financing the acquisition of the Equipment, or (ii)
existing on equipment when acquired, if the Lien is confined to the property and
improvements and the proceeds of the equipment;

 

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

 

(e)    Leases or subleases granted in the ordinary course of Borrower’s
business, including in connection with Borrower’s leased premises or leased
property;

 

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

 

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

 

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

 

22

--------------------------------------------------------------------------------

 

“Quick Assets” is, on any date, the sum of Borrower’s consolidated, unrestricted
cash and cash equivalents plus net billed accounts receivable determined
according to GAAP.

 

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

 

“Revolving Maturity Date” is April 2, 2005.

 

“Revolving Obligations” is the sum of : (i) any amounts deemed outstanding under
the Cash Management Services Sublimit, plus (ii) the amount of all outstanding
Letters of Credit (including drawn but unreimbursed Letters of Credit), plus
(iii) the FX Reserve, plus (iv) Advances.

 

“Schedule” is any attached schedule of exceptions.

 

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

 

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

 

“Tangible Net Worth” is, on any date, the consolidated total assets of Borrower
and its Subsidiaries minus, (i) any amounts attributable to (a) goodwill, (b)
intangible items such as unamortized debt discount and expense, Patents, trade
and service marks and names, Copyrights and research and development expenses
except prepaid expenses, (c) restricted cash and cash equivalents, and (d)
reserves not already deducted from assets, and (ii) Total Liabilities.

 

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

 

23

--------------------------------------------------------------------------------

 

“Trademarks” are trademark and servicemark rights, registered or not,
applications to register and registrations and like protections, and the entire
goodwill of the business of Assignor connected with the trademarks.

 

BORROWER:

 

LEXAR MEDIA, INC.

By:

 

/s/    Michael Perez

--------------------------------------------------------------------------------

Title:

 

CFO

 

 

BANK:

 

SILICON VALLEY BANK

By:

 

/s/    Quentin Falconer

--------------------------------------------------------------------------------

Title:

 

Senior Vice President

 

 

24

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EXHIBIT A

 

The Collateral consists of all of Borrower’s right, title and interest in and to
the following whether owned now or hereafter arising and whether the Borrower
has rights now or hereafter has rights therein and wherever located:

 

All goods and equipment now owned or hereafter acquired, including, without
limitation, all machinery, fixtures, vehicles (including motor vehicles and
trailers), and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located;

 

All inventory, now owned or hereafter acquired, including, without limitation,
all merchandise, raw materials, parts, supplies, packing and shipping materials,
work in process and finished products including such inventory as is temporarily
out of Borrower’s custody or possession or in transit and including any returns
upon any accounts or other proceeds, including insurance proceeds, resulting
from the sale or disposition of any of the foregoing and any documents of title
representing any of the above;

 

All contract rights and general intangibles (as such definitions may be amended
from time to time according to the Code), now owned or hereafter acquired,
including, without limitation, leases, license agreements, franchise agreements,
blueprints, drawings, purchase orders, customer lists, route lists,
infringements, claims, computer programs, computer discs, computer tapes,
literature, reports, catalogs, design rights, income tax refunds, payments of
insurance, payment intangibles, and rights to payment of any kind;

 

All now existing and hereafter arising accounts, contract rights, royalties,
license rights and all other forms of obligations owing to Borrower arising out
of the sale or lease of goods, the licensing of technology or the rendering of
services by Borrower (as such definitions may be amended from time to time
according to the Code) whether or not earned by performance, and any and all
credit insurance, insurance (including refund) claims and proceeds, guaranties,
and other security therefor, as well as all merchandise returned to or reclaimed
by Borrower;

 

All documents (including negotiable documents), cash, deposit accounts,
securities, securities entitlements, securities accounts, investment property,
financial assets, letters of credit, letter of credit rights, certificates of
deposit, instruments (including promissory notes) and chattel paper (including
tangible and electronic chattel paper) now owned or hereafter acquired and
Borrower’s Books relating to the foregoing;

 

All Borrower’s Books relating to the foregoing and any and all claims, rights
and interests in any of the above and all substitutions for, additions and
accessions to and proceeds thereof.

 

The Collateral shall not be deemed to include any copyrights, copyright
applications, copyright registration and like protection in each work of
authorship and derivative work thereof, whether published or unpublished, now
owned or hereafter acquired; any patents, patent applications and like
protections including without limitation improvements, divisions, continuations,
renewals, reissues, extensions and continuations-in-part of the same,
trademarks, servicemarks and applications therefor, whether registered or not,
and the goodwill of the business of Borrower connected with and symbolized by
such trademarks, any trade secret rights, including any rights to unpatented
inventions, know-how, operating manuals, license rights and agreements and
confidential information, now owned or hereafter acquired; or any claims for
damage by way of

 

25

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any past, present and future infringement of any of the foregoing (collectively,
the “Intellectual Property”), except that the Collateral shall include the
proceeds of all the Intellectual Property that are accounts, (i.e. accounts
receivable) of Borrower, or general intangibles consisting of rights to payment,
if a judicial authority (including a U.S. Bankruptcy Court) holds that a
security interest in the underlying Intellectual Property is necessary to have a
security interest in such accounts and general intangibles of Borrower that are
proceeds of the Intellectual Property, then the Collateral shall automatically,
and effective as of the Closing Date, include the Intellectual Property to the
extent necessary to permit perfection of Bank’s security interest in such
accounts and general intangibles of Borrower that are proceeds of the
Intellectual Property.

 

Borrower and Bank are parties to that certain Negative Pledge Agreement, whereby
Borrower, in connection with Bank’s loan or loans to Borrower, has agreed, among
other things, not to sell, transfer, assign, mortgage, pledge, lease grant a
security interest in, or encumber any of its intellectual property, without
Bank’s prior written consent. Further, Borrower has agreed not to grant such
negative pledge in favor of any other party.

 

Notwithstanding the foregoing, Collateral shall not be deemed to include
leasehold interests where the Borrower is a lessee under any real property
lease.

 

 

26

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EXHIBIT B

 

LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM

 

DEADLINE FOR SAME DAY PROCESSING IS 12:00 noon, P.S.T.

 

TO: CENTRAL CLIENT SERVICE DIVISION                 DATE:
                                                     

 

FAX#: (408) 496-2426                                         
                 TIME:                                                     

 

FROM:    Lexar Media, Inc.

--------------------------------------------------------------------------------

CLIENT NAME (BORROWER)

 

REQUESTED BY:                                  
                                        
                                        
                                        
                                                                  

AUTHORIZED SIGNER’S NAME

 

AUTHORIZED SIGNATURE:                                 
                                        
                                        
                                        
                                             

 

PHONE NUMBER:                                  
                                        
                                        
                                        
                                                                 

 

FROM ACCOUNT #                                 
              TO ACCOUNT #                      
                                        
                                                               

 

REQUESTED TRANSACTION TYPE                                 REQUESTED DOLLAR
AMOUNT

 

PRINCIPAL INCREASE (ADVANCE)                         $
                                                                     

PRINCIPAL PAYMENT (ONLY)                                 $
                                                                     

INTEREST PAYMENT (ONLY)                                   $
                                                                     

PRINCIPAL AND INTEREST (PAYMENT)               $
                                                                     

 

OTHER INSTRUCTIONS:                                 
                                        
                                        
                                        
                                                   

                                                                              
                                        
                                        
                                        
                                                             

 

All Borrower’s representations and warranties in the Loan and Security Agreement
are true, correct and complete in all material respects on the date of the
telephone request for and Advance confirmed by this Borrowing Certificate; but
those representations and warranties expressly referring to another date shall
be true, correct and complete in all material respects as of that date.

 

BANK USE ONLY

 

TELEPHONE REQUEST:

 

The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.

 

 

--------------------------------------------------------------------------------

Authorized Requester

 

 

--------------------------------------------------------------------------------

Phone #

 

 

--------------------------------------------------------------------------------

Received By (Bank)

 

 

 

--------------------------------------------------------------------------------

Phone #

 

 

 

--------------------------------------------------------------------------------

Authorized Signature (Bank)

 

27

--------------------------------------------------------------------------------

 

EXHIBIT C

 

BORROWING BASE CERTIFICATE

 

Borrower:

 

Lexar Media, Inc.

47421 Bayside Parkway

Fremont, CA 94538

 

Bank:

 

Silicon Valley Bank

3003 Tasman Drive

Santa Clara, CA 95054

 

Commitment Amount: $15,000,000

 

ACCOUNTS RECEIVABLE

       

$                     

1.

  

Accounts Receivable Book Value as of             

         

$                     

2.

  

Additions (please explain on reverse)

         

$                     

3.

  

TOTAL ACCOUNTS RECEIVABLE

                              

ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)

           

4.

  

Amounts over 90 days due

  

$

                 

    

5.

  

Balance of 50% over 90 day accounts

  

$

                 

    

6.

  

Credit balances over 90 days

  

$

                 

    

7.

  

Concentration Limits

  

$

                 

    

8.

  

Foreign Accounts (not deemed Eligible foreign Accounts)

  

$

                 

    

9.

  

Governmental Accounts

  

$

                 

    

10.

  

Contra Accounts

  

$

                 

    

11.

  

Promotion or Demo Accounts

  

$

                 

    

12.

  

Intercompany/Employee Accounts

  

$

                 

    

13.

  

Other (please explain on reverse)

  

$

                 

    

14.

  

TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS

         

$                 

15.

  

Eligible Accounts (#3 minus #14)

  

$

                 

    

16.

  

LOAN VALUE OF ACCOUNTS (75% of #15)

         

$                 

                  

FOREIGN ACCOUNTS RECEIVABLE DEDUCTIONS

           

17.

  

Foreign Accounts Receivable Book Value as of             

  

$

                 

    

18.

  

Additions (please explain on reverse)

  

$

                 

    

19.

  

TOTAL FOREIGN ACCOUNTS RECEIVABLE

         

$                 

    

a.      Amounts over 90 days due

                

b.      Balance of 50% over 90 day accounts

  

$

                 

         

c.      Concentration Limits

  

$

                 

         

d.      Governmental Accounts

  

$

                 

         

e.      Contra Accounts

  

$

                 

         

f.       Promotion or Demo Accounts

  

$

                 

         

g.      Intercompany/Employee Accounts

                

h.      Not approved by Bank

                

i.       Eligible Foreign Accounts in excess of 11.11% of #15 above

  

$

                 

         

j.       Other (please explain on reverse)

  

$

                 

    

20.

  

TOTAL FOREIGN ACCOUNTS RECEIVABLE

                

DEDUCTIONS

  

$

                 

    

21.

  

Eligible Accounts (#19 minus #20)

  

$

                 

    

22.

  

LOAN VALUE OF FOREIGN ACCOUNTS (75% of #21)

  

$

                 

                       

BALANCES

           

23.

  

Maximum Loan Amount

  

$

                 

    

24.

  

Total Funds Available [Lesser of #23 or (#16 plus #22)]

         

$                 

25.

  

Present balance owing on Line of Credit

  

$

                 

    

26.

  

Outstanding under Sublimits (LC or FX)

  

$

                 

         

RESERVE POSITION (#24 minus #25 and #26)

         

$                 

 

28

--------------------------------------------------------------------------------

 

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

 

Comments:

 

 

 

 

 

 

 

 

LEXAR MEDIA, INC.

 

 

By                                                                              
                                            

AUTHORIZED SIGNER

  

BANK USE ONLY

 

Received by:                                  
                                                               

AUTHORIZED SIGNER

 

Date:                                    
                                                                            

 

Verified:                                    
                                                                     

AUTHORIZED SIGNER

 

Date:                                    
                                                                            

 

Compliance Status:                                         Yes      No

 

 

29

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EXHIBIT D

COMPLIANCE CERTIFICATE

 

TO:            SILICON VALLEY BANK

         3003 Tasman Drive

         Santa Clara, CA 95054

 

FROM:     LEXAR MEDIA, INC.

47421 Bayside Parkway

Fremont, CA 94538

 

The undersigned authorized officer of Lexar Media, Inc. (“Borrower”) certifies
that under the terms and conditions of the Loan and Security Agreement between
Borrower and Bank (the “Agreement”), (i) Borrower is in complete compliance for
the period ending                              with all required covenants
except as noted below and (ii) all representations and warranties in the
Agreement are true and correct in all material respects on this date. Attached
are the required documents supporting the certification. The Officer certifies
that these are prepared in accordance with Generally Accepted Accounting
Principles (GAAP) consistently applied from one period to the next except as
explained in an accompanying letter or footnotes. The Officer acknowledges that
no borrowings may be requested at any time or date of determination that
Borrower is not in compliance with any of the terms of the Agreement, and that
compliance is determined not just at the date this certificate is delivered.

 

Please indicate compliance status by circling Yes/No under “Complies” column.

 

Reporting Covenant

--------------------------------------------------------------------------------

  

Required

--------------------------------------------------------------------------------

    

Complies

--------------------------------------------------------------------------------

      

Monthly financial statements + CC

  

Monthly within 45 days

    

Yes

    

No

Annual (Audited)

  

FYE within 120 days

    

Yes

    

No

10-Q, 10-K and 8-K

  

Within 5 days after filing with SEC

    

Yes

    

No

A/R & A/P Agings

  

Monthly within 30 days

    

Yes

    

No

A/R Audit

  

Initial and Twice annually

    

Yes

    

No

Borrowing Base Certificate

  

Monthly within 30 days

    

Yes

    

No

 

Financial Covenant

--------------------------------------------------------------------------------

  

Required

--------------------------------------------------------------------------------

  

Actual

--------------------------------------------------------------------------------

  

Complies

--------------------------------------------------------------------------------

    

Maintain on a Monthly Basis:

                     

    Minimum Quick Ratio (Adjusted)

  

1.35:1.00

  

 

_____:1.00

  

Yes

  

No

    Minimum Tangible Net Worth

  

Tangible Net Worth of not less than: (A) $35,000,000 as of December 31, 2002 and
(B) the sum of: (i) $35,000,000 plus (ii) an amount equal to 75% of aggregate
amount of positive net earnings (with no adjustment for losses) for each month
commencing on January 1, 2003 to the date of determination.

  

$

                    

  

Yes

  

No

Have there been updates to Borrower’s intellectual property, if appropriate?

  

 

Yes

       

No

 

30

--------------------------------------------------------------------------------

 

Comments Regarding Exceptions: See Attached.

 

Sincerely,

 

LEXAR MEDIA, INC.

 

--------------------------------------------------------------------------------

SIGNATURE

 

--------------------------------------------------------------------------------

TITLE

 

--------------------------------------------------------------------------------

DATE

  

BANK USE ONLY

 

Received by:                                  
                                                               

AUTHORIZED SIGNER

 

Date:                                    
                                                                            

 

 

Verified:                                    
                                                                     

AUTHORIZED SIGNER

 

Date:                                    
                                                                            

 

Compliance Status:                                                      Yes    
No

 

 

 

31

--------------------------------------------------------------------------------

 

CORPORATE BORROWING RESOLUTION

 

Borrower:

  

Lexar Media, Inc.

47421 Bayside Parkway

Fremont, CA 94538

  

Bank:

  

Silicon Valley Bank

3003 Tasman Drive

Santa Clara, CA 95054-1191

 

I, the Secretary or Assistant Secretary of LEXAR MEDIA, INC. (“Borrower”),
CERTIFY that Borrower is a corporation existing under the laws of the State of
Delaware.

 

I certify that at a meeting of Borrower’s Directors (or by other authorized
corporate action) duly held the following resolutions were adopted.

 

It is resolved that any one of the following officers of Borrower, whose name,
title and signature is below:

 

NAMES

--------------------------------------------------------------------------------

    

POSITIONS

--------------------------------------------------------------------------------

    

ACTUAL SIGNATURES

--------------------------------------------------------------------------------

--------------------------------------------------------------------------------

    

--------------------------------------------------------------------------------

    

--------------------------------------------------------------------------------

--------------------------------------------------------------------------------

    

--------------------------------------------------------------------------------

    

--------------------------------------------------------------------------------

--------------------------------------------------------------------------------

    

--------------------------------------------------------------------------------

    

--------------------------------------------------------------------------------

--------------------------------------------------------------------------------

    

--------------------------------------------------------------------------------

    

--------------------------------------------------------------------------------

 

may act for Borrower and:

 

Borrow Money.    Borrow money from Silicon Valley Bank (“Bank”).

 

Execute Loan Documents.    Execute any loan documents Bank requires.

 

Grant Security.    Grant Bank a security interest in any of Borrower’s assets.

 

Negotiate Items.    Negotiate or discount all drafts, trade acceptances,
promissory notes, or other indebtedness in which Borrower has an interest and
receive cash or otherwise use the proceeds.

 

Letters of Credit.    Apply for letters of credit from Bank.

 

Foreign Exchange Contracts.    Execute spot or forward foreign exchange
contracts.

 

Further Acts.    Designate other individuals to request advances, pay fees and
costs and execute other documents or agreements (including documents or
agreement that waive Borrowers right to a jury trial) they think necessary to
effectuate these Resolutions.

 

1

--------------------------------------------------------------------------------

 

Further resolved that all acts authorized by these Resolutions and performed
before they were adopted are ratified. These Resolutions remain in effect and
Bank may rely on them until Bank receives written notice of their revocation.

 

I certify that the persons listed above are Borrower’s officers with the titles
and signatures shown following their names and that these resolutions have not
been modified are currently effective.

 

CERTIFIED TO AND ATTESTED BY:

X                                                                              
                      

    *Secretary or Assistant Secretary

X                                                                              
                      

*  NOTE: In case the Secretary or other certifying officer is designated by the
foregoing resolutions as one of the signing officers, this resolution should
also be signed by a second Officer or Director of Borrower.

 

 

2

--------------------------------------------------------------------------------

 

SCHEDULE

 

A.    Legal Proceedings.

 

Litigation Against Fuji, Memtek and PNY

 

On July 11, 2002, we filed a lawsuit in the United States District Court for the
Eastern District of Texas against Fuji Photo Film USA, Memtek Products, Inc. and
PNY Technologies Inc. for patent infringement. We alleged that the defendants
infringe: U.S. Patent Nos. 5,479,638; 5,907,856; 5,930,815; 6,034,897;
6,134,151; 6,141,249; 6,145,051; and 6,262,918. We sought injunctive relief and
damages against all defendants.

 

On November 4, 2002, we filed an amended complaint against Fuji Photo Film USA.
In the amended complaint, we allege that Fuji Photo Film USA infringes U.S.
Patent Nos. 5,479,638, 6,145,051, 6,262,918; 6,141,249; and 6,397,314 through
the sale of its flash memory products and digital cameras. We are seeking
injunctive relief and damages against Fuji. Memtek Products, Inc. and PNY
Technologies, Inc. are no longer parties to this particular action. On December
9, 2002, Fuji filed an answer in which they seek declaratory relief that they
did not infringe the five patents in suit as well as our U.S. Patent No.’s
6,134,151; 5,930,815; 5,907,856 and 6,034,897.

 

On January 8, 2003, the United States District Court for the Eastern District of
Texas ordered this case transferred to the United States District Court for the
Northern District of California where it is now pending.

 

Litigation with Toshiba

 

On November 1, 2002, Toshiba Corporation filed a lawsuit seeking declaratory
judgment that Toshiba does not infringe our U.S. Patent Nos. 5,479,638;
5,818,781; 5,907,856; 5,930,815; 6,034,897; 6,040,997; 6,134,151; 6,141,249;
6,145,051; 6,172,906; 6,202,138; 6,262,918; 6,374,337; and 6,397,314 or that
these patents are invalid. This suit was filed in the United States District
Court for the Northern District of California. We believe that Toshiba’s claims
are without merit and intend to contest this lawsuit vigorously.

 

On February 28, 2003, we filed a counterclaim against Toshiba for infringement
of our U.S. Patent No’s. 5,479,638; 5,818,781; 5,907,856; 5,930,815; 6,034,897;
6,040,997; 6,134,151; 6,141,249; 6,145,051; 6,172,906; 6,202,138; 6,262,918;
6,374,337; and 6,397,314. We are seeking damages as well as an injunction
against Toshiba for its products that infringe our patents, including its flash
memory chips, flash cards and digital cameras.

 

On November 4, 2002, we filed a lawsuit against Toshiba Corporation, Toshiba
America, Inc. and Toshiba America alleging theft of trade secrets and breach of
fiduciary duty. The basis of the allegations is that since our inception in
1996, and including the period from 1997 through 1999 when Toshiba was
represented on our Board of Directors, Toshiba had access to and was presented
with details of our methods of achieving high performance flash devices that
Toshiba

 

1

--------------------------------------------------------------------------------

 

has now incorporated into its flash chips and flash systems. This lawsuit is
pending in Santa Clara County Superior Court.

 

On January 13, 2003, Toshiba Corporation filed a lawsuit against us in the
United States District Court for the Northern District of California, alleging
that we infringe U.S. Patent Nos. 6,145,023; 5,546,351; 5,724,300; 5,793,696;
5,946,231; 5,986,933; 6,292,850; and 6,338,104. On February 7, 2003, Toshiba
Corporation filed an amended complaint and now alleges that we infringe U.S.
Patent Nos. 5,546,351; 5,724,300; 5,793,696; 5,946,231; 5,986,933; 6,094,697;
6,292,850; 6,338,104; and 5,611,067. In this action, Toshiba Corporation seeks
injunctive relief and damages. Toshiba’s patents appear to primarily relate to
flash components that we purchase from vendors who provide us with
indemnification. We believe that Toshiba’s claims are without merit and intend
to contest this lawsuit vigorously.

 

Litigation with SimpleTech, Inc.

 

On October 1, 2002, SimpleTech, Inc. filed a lawsuit against us in Orange County
Superior Court alleging trade libel, libel per se, intentional interference with
prospective economic advantage, California unfair competition, violation of the
California Unfair Trade Practices Act, violation of the Sherman Antitrust Act,
and violation of common law unfair competition. SimpleTech’s lawsuit arose from
correspondence between ourselves and SimpleTech and one of its customers
regarding our belief that certain of SimpleTech’s products infringe our patents.
SimpleTech is seeking damages, including treble damages under its Sherman Act
claim, punitive damages, and injunctive relief. On October 30, 2002, we removed
this case to federal court. It is now pending in the United States District
Court for the Central District of California, in Santa Ana.

 

On November 6, 2002, we filed a motion to dismiss SimpleTech’s complaint. On
November 14, 2002, SimpleTech amended its complaint. On December 4, 2002, we
filed a motion to dismiss SimpleTech’s amended complaint. On January 8, 2003,
the Court ordered that SimpleTech’s claims under the California Unfair Trade
Practices Act, the Sherman Antitrust Act, and common law unfair competition be
dismissed. On January 27, 2003, the judge dismissed the remainder of
SimpleTech’s complaint for lack of prosecution. On January 31, 2003 SimpleTech
sought to reinstate its complaint. On February 14, 2003, the Court agreed to set
aside its dismissal after imposing a monetary sanction on SimpleTech. A
scheduling conference is currently set for May 5, 2003.

 

We believe that SimpleTech’s lawsuit is without merit and intend to vigorously
defend ourselves in this matter.

 

Litigation Against Pretec, PNY, Memtek and C-One

 

On December 22, 2000, we sued Pretec Electronics Corporation and PNY for patent
infringement. We sued Pretec and PNY on the basis of four patents: U.S. Patent
Nos. 5,818,781; 5,907,856; 5,930,815; and 6,145,051. The suit is pending in the
United States District Court for the Northern District of California. We are
seeking injunctive relief and damages against all defendants.

 

2

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On April 13, 2001, we filed an amended complaint in our litigation with Pretec,
naming Memtek as an additional defendant. On June 26, 2001, the Court allowed us
to file our second amended complaint in our litigation with Pretec, naming C-One
as an additional defendant and adding our U.S. Patent No. 5,479,638 against all
of the defendants. In this action we allege that Memtek and the other defendants
infringe our U.S. Patent Nos. 5,479,638, 5,818,781, 5,907,856, 5,930,815 and
6,145,051. This suit is pending in the United States District Court for the
Northern District of California. We are seeking injunctive relief and damages
against all of the defendants.

 

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