Exhibit 10.24

LOAN AND SECURITY AGREEMENT

THIS LOAN AND SECURITY AGREEMENT (this “Agreement”) dated as of March 5, 2009
(the “Effective Date”) by and among (i) SILICON VALLEY BANK, a California
corporation with a loan production office located at 380 Interlocken Crescent,
Suite 600, Broomfield, Colorado 80021 (“Bank”), and (ii) DRUGSTORE.COM, INC., a
Delaware corporation, and each of the other Persons listed as “Borrower” on the
signature pages hereto (individually and collectively, jointly and severally,
“Borrower”), provides the terms on which Bank shall lend to Borrower and
Borrower shall repay Bank. The parties agree as follows:

 

  1 ACCOUNTING AND OTHER TERMS

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

 

  2 LOAN AND TERMS OF PAYMENT

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

2.1.1 Revolving Advances.

(a) Availability. Subject to the terms and conditions of this Agreement and to
deduction of Reserves, Bank shall make Advances not exceeding the Availability
Amount. Amounts borrowed under the Revolving Line may be repaid and, prior to
the Revolving Line Maturity Date, reborrowed, subject to the applicable terms
and conditions precedent herein. Advances shall be in minimum increments of
$1,000,000 and multiples of $500,000 in excess thereof.

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

2.1.2 Letters of Credit Sublimit.

As part of the Revolving Line and subject to deduction of Reserves, Bank shall
issue or have issued Letters of Credit for Borrower’s account. Such aggregate
amounts utilized hereunder shall at all times reduce the amount otherwise
available for Advances under the Revolving Line. The face amount of outstanding
Letters of Credit (including drawn but unreimbursed Letters of Credit and any
Letter of Credit Reserve) may not exceed Two Million Five Hundred Thousand
Dollars ($2,500,000), inclusive of Credit Extensions relating to Sections 2.1.3
and 2.1.4. The aggregate amount available to be used for the issuance of Letters
of Credit may not exceed (i) the lesser of (A) the Revolving Line or (B) the
Borrowing Base, minus (ii) the outstanding principal amount of any Advances
(including any amounts used for Cash Management Services and the face amount of
any outstanding Letters of Credit (including drawn but unreimbursed Letters of
Credit and any Letter of Credit Reserve), minus (iii) the FX Reduction Amount,
and (iv) minus (f) the aggregate amount of Advances that have been converted to
a Term Loan. If, on the Revolving Line Maturity Date, or the effective date of
any termination of this Agreement by Borrower, there are any outstanding Letters
of Credit, then no later than five Business Days prior to such date Borrower
shall provide to Bank cash collateral (in the form of a Bank certificate of
deposit) in an amount equal to 105% of the face amount of all such Letters of
Credit plus all interest, fees, and costs due or to become due in connection
therewith (as estimated by Bank in its good faith business judgment), to secure
all of the Obligations relating to said Letters of Credit. All Letters of Credit
shall be in form and substance acceptable to Bank in its sole discretion and
shall be subject to the terms and conditions of Bank’s standard Application and
Letter of Credit Agreement (the “Letter of Credit Application”). Borrower agrees
to execute any further documentation in connection with the Letters of Credit as
Bank may reasonably request. Borrower further agrees to be bound by the
regulations and interpretations of the issuer of any Letters of Credit
guarantied by Bank and opened for Borrower’s account or by Bank’s
interpretations of any Letter of Credit issued by Bank for Borrower’s account,
and Borrower understands and agrees that Bank shall not be liable for any error,
negligence, or mistake, whether of omission or commission, in following
Borrower’s instructions or those contained in the Letters of Credit or any
modifications, amendments, or supplements thereto.

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(a) The obligation of Borrower to immediately reimburse Bank for drawings made
under Letters of Credit shall be absolute, unconditional, and irrevocable, and
shall be performed strictly in accordance with the terms of this Agreement, such
Letters of Credit, and the Letter of Credit Application.

(b) Borrower may request that Bank issue a Letter of Credit payable in a Foreign
Currency. If a demand for payment is made under any such Letter of Credit, Bank
shall treat such demand as an Advance to Borrower of the equivalent of the
amount thereof (plus fees and charges in connection therewith such as wire,
cable, SWIFT or similar charges) in Dollars at the then-prevailing rate of
exchange in San Francisco, California, for sales of the Foreign Currency for
transfer to the country issuing such Foreign Currency.

(c) To guard against fluctuations in currency exchange rates, upon the issuance
of any Letter of Credit payable in a Foreign Currency, Bank shall create a
reserve (the “Letter of Credit Reserve”) under the Revolving Line in an amount
equal to ten percent (10%) of the face amount of such Letter of Credit. The
amount of the Letter of Credit Reserve may be adjusted by Bank from time to time
to account for fluctuations in the exchange rate. The availability of funds
under the Revolving Line shall be reduced by the amount of such Letter of Credit
Reserve for as long as such Letter of Credit remains outstanding.

2.1.3 Foreign Exchange Sublimit. As part of the Revolving Line, Borrower may
enter into foreign exchange contracts with Bank under which Borrower commits to
purchase from or sell to Bank a specific amount of Foreign Currency (each, a “FX
Forward Contract”) on a specified date (the “Settlement Date”). Each FX Forward
Contract shall have a Settlement Date of at least one (1) FX Business Day after
the contract date and shall be subject to a reserve of ten percent (10%) of the
outstanding amount of the FX Forward Contract (the “FX Reserve”). The aggregate
amount of FX Forward Contracts at any one time may not exceed ten (10 times the
amount of the FX Reserve. The amount otherwise available for Credit Extensions
under the Revolving Line shall be reduced by an amount equal to the aggregate FX
Reserves for all outstanding FX Forward Contracts (the “FX Reduction
Amount”). Any amounts needed to fully reimburse Bank will be treated as Advances
under the Revolving Line and will accrue interest at the interest rate
applicable to Advances.

2.1.4 Cash Management Services Sublimit. Borrower may use up to Two Million Five
Hundred Thousand Dollars ($2,500,000), inclusive of Credit Extensions relating
to Sections 2.1.2 and 2.13 and the FX Reduction Amount of the Revolving Line for
Bank’s cash management services which may include merchant services, direct
deposit of payroll, business credit card, and check cashing services identified
in Bank’s various cash management services agreements (collectively, the “Cash
Management Services”). Any amounts Bank pays on behalf of Borrower for any Cash
Management Services will be treated as Advances under the Revolving Line and
will accrue interest at the interest rate applicable to Advances.

2.1.5 Term Loan.

(a) Availability. Borrower may elect, upon 30 days prior written notice to Bank,
to convert any or all of the outstanding Advances into one or more term loans
(such term loan(s) are hereinafter referred to, singly or collectively, as a
“Term Loan” or the “Term Loans”), provided that (i) each Term Loan shall be in a
minimum increment of $5,000,000, (ii) the aggregate initial principal amount of
all Term Loans advanced hereunder shall not exceed the Term Loan Amount,
(iii) as a condition to the conversion of Advances to a Term Loan, Borrower
shall been in compliance with the covenants (A) contained in Section 6.7(c)
hereof for the trailing twelve (12) months preceding the date of conversion, and
(B) contained in Sections 6.7(a) and (c) hereof on a pro forma basis after
giving effect to the conversion, and (iv) no conversion of Advances to a Term
Loan may occur after the date which is 360 days after the Effective Date.

(b) Repayment. On the first Payment Date following the Funding Date for a Term
Loan, Borrower shall pay any accrued but unpaid interest with respect to the
Term Loan and the Advances which were converted into the Term Loan. Commencing
on the next Payment Date, and continuing on the Payment Date of each month
thereafter, for each Term Loan, Borrower shall make consecutive equal monthly
payments of principal plus interest, in arrears, as calculated by Bank based
upon: (1) the amount of the Term Loan, (2) the effective rate of interest, as
determined in Section 2.2(a), and (3) an amortization schedule equal to
thirty-six (36) months. All unpaid principal and accrued interest with respect
to each Term Loan is due and payable in full on the Term Loan Maturity Date with
respect to such Term Loan. Payments received after 12:00 noon Pacific time are
considered received at the opening of business on the next Business Day. Once
repaid, no Term Loan may be reborrowed.

 

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(c) Mandatory Prepayment Upon Certain Transfers. In the event Borrower Transfers
(as hereinafter defined) any part of its business or property (other than those
Transfers permitted by Section 7.1 hereof), Borrower shall immediately pay to
Bank an amount equal to the sum of: (i) 100% of the net cash proceeds of such
Transfer plus accrued interest thereon and (ii) the Prepayment Fee in respect of
the amount of the Term Loan prepaid.

(d) Mandatory Prepayment Upon an Acceleration. If (i) a Term Loan is accelerated
following the occurrence of an Event of Default or (ii) in the event any law,
rule, regulation, ordinance, order, directive, treaty or policy applicable to
the Bank or any change therein or in the interpretation or application thereof,
made after the date hereof, shall make it unlawful for the Bank to maintain a
Term Loan or to claim or receive any amount otherwise payable under this
Agreement, Borrower shall immediately pay to Bank an amount equal to the sum of:
(i) all outstanding principal plus accrued interest, (ii) the Prepayment Fee in
respect of the amount of the Term Loan prepaid, plus (iii) all other sums, that
shall have become due and payable, including interest at the Default Rate with
respect to any past due amounts.

(e) Permitted Prepayment of Loans. Borrower shall have the option to prepay all,
but not less than all, of the Term Loans advanced by Bank under this Agreement,
provided Borrower (i) provides written notice to Bank of its election to prepay
the Term Loans at least one (1) Business Day prior to such prepayment, and
(ii) pays, on the date of such prepayment (A) all outstanding principal plus
accrued interest, (B) the Prepayment Fee, plus (C) all other sums, that shall
have become due and payable, including interest at the Default Rate with respect
to any past due amounts.

(f) Application of Prepayments. Prepayments of a Term Loan shall be applied
against all remaining scheduled payments in respect of all Term Loans in the
inverse order of maturity.

2.2 Overadvances. If, at any time, the sum of (a) the outstanding principal
amount of any Advances (including any amounts used for Cash Management
Services), plus (b) the face amount of any outstanding Letters of Credit
(including drawn but unreimbursed Letters of Credit and any Letter of Credit
Reserve), plus(c)the FX Reduction Amount, plus (d) the outstanding principal
amount of all Term Loans exceeds the lesser of either the Revolving Line or the
Borrowing Base, Borrower shall immediately pay to Bank in cash such excess.

2.3 Payment of Interest on the Credit Extensions.

(a) Interest Rate.

(i) Advances. Subject to Section 2.3(b), the principal amount outstanding under
the Revolving Line shall accrue interest at a floating per annum rate equal to
the greater of (a) fifty basis points (0.50%) above the Prime Rate or (b) four
and one-half percent (4.50%), which interest shall be payable monthly in
accordance with Section 2.3(f) below.

(ii) Term Loans. Subject to Section 2.3(b), the principal amount outstanding
under the Term Loans shall accrue interest at a floating per annum rate equal to
the greater of (a) fifty basis points (0.50%) above the Prime Rate or (b) four
and one-half percent (4.50%), which interest shall be payable monthly in
accordance with Section 2.3(f) below.

(b) Default Rate. Immediately upon the occurrence and during the continuance of
an Event of Default, Obligations shall bear interest at a rate per annum which
is five percentage points (5.00%) above the rate that is otherwise applicable
thereto (the “Default Rate”). Payment or acceptance of the increased interest
rate provided in this Section 2.3(b) is not a permitted alternative to timely
payment and shall not constitute a waiver of any Event of Default or otherwise
prejudice or limit any rights or remedies of Bank.

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

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

 

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

(f) Payments. Unless otherwise provided, interest is payable monthly in arrears
on the Payment Date of each month. Payments of principal and/or interest
received after 12:00 p.m. Pacific time are considered received at the opening of
business on the next Business Day. When any payment is due on a day that is not
a Business Day, the payment shall be due the next Business Day and all fees or
interest, as applicable, shall continue to accrue until paid.

2.4 Fees. Borrower shall pay to Bank:

(a) Loan Fee. A fully earned, non-refundable loan fee of $62,500.00 on the
Effective Date;

(b) Letter of Credit Fee. Bank’s customary fees and expenses for the issuance or
renewal of Letters of Credit , including, without limitation, a Letter of Credit
Fee of one percent (1.00%) per annum of the face amount of each Letter of Credit
issued, upon the issuance, each anniversary of the issuance, and the renewal of
such Letter of Credit by Bank;

(c) Unused Revolving Line Facility Fee. A fee (the “Unused Revolving Line
Facility Fee”), payable quarterly, in arrears, on a calendar year basis, in an
amount equal to three hundred seventy five basis points (0.375%) per annum of
the average unused portion of the Revolving Line, as determined by Bank. The
utilized portion of the Revolving Line, for the purposes of this calculation,
shall not include amounts utilized or reserved under Sections 2.1.1, 2.1.3, or
2.1.4. Borrower shall not be entitled to any credit, rebate or repayment of any
Unused Revolving Line Facility Fee previously earned by Bank pursuant to this
Section notwithstanding any termination of the Agreement or the suspension or
termination of Bank’s obligation to make loans and advances hereunder;

(d) Term Loan Termination Fee. The Termination Fee when due pursuant to the
terms of Section 12.1;

(e) Prepayment Fee. The Prepayment Fee when due pursuant to the terms of
Section 2.1.5; and

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

2.5 International Vision Direct Ltd. Notwithstanding any other provision of this
Agreement to the contrary, International Vision Direct Ltd. (the “Canadian
Subsidiary”) shall not be permitted to request or receive Loans hereunder and no
cash proceeds of the Loans hereunder shall be made available to the Canadian
Subsidiary, directly or indirectly; provided, however that drugstore.com, Inc.
may make distributions to the Canadian Subsidiary of cash and/or assets in order
to fund the operations of the Canadian Subsidiary in the ordinary course of
business.

 

  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 condition precedent that Bank
shall have received, in form and substance satisfactory to Bank, such documents,
and completion of such other matters, as Bank may reasonably deem necessary or
appropriate, including, without limitation:

(a) Duly executed original signatures to the Loan Documents to which it is a
party;

(b) Duly executed original signatures to the Control Agreement[s];

(c) Borrower’s Operating Documents and a good standing certificate of Borrower
certified by the Secretary of State of the State of Delaware as of a date no
earlier than thirty (30) days prior to the Effective Date;

(d) Secretary’s Certificate with completed Borrowing Resolutions for Borrower;

(e) A payoff letter from Bank;

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

 

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(g) The Perfection Certificate executed by Borrower, together with the duly
executed original signatures thereto;

(h) A landlord’s consent in favor of Bank for each of Borrower's locations
executed by the landlord thereof, together with the duly executed original
signatures thereto;

(i) [Reserved];

(j) evidence satisfactory to Bank that the insurance policies required by
Section 6.4 hereof are in full force and effect, together with appropriate
evidence showing lender loss payable and/or additional insured clauses or
endorsements in favor of Bank; and

(k) payment of the fees and Bank Expenses then due as specified in Section 2.4
hereof.

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

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

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

(c) in Bank’s sole discretion, there has not been a Material Adverse Change or
any material impairment in the general affairs, management, results of
operation, financial condition or the prospect of repayment of the Obligations,
or any material adverse deviation by Borrower from the most recent business plan
of Borrower presented to and accepted by Bank.

3.3 Covenant to Deliver.

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

3.4 Procedures for Borrowing.

(a) Advances. Subject to the prior satisfaction of all other applicable
conditions to the making of an Advance set forth in this Agreement, to obtain an
Advance (other than Advances under Sections 2.1.2 or 2.1.4), Borrower shall
notify Bank (which notice shall be irrevocable) by electronic mail, facsimile,
or telephone by 12:00 noon Pacific time on the Funding Date of the Advance.
Together with any such electronic or facsimile notification, Borrower shall
deliver to Bank by electronic mail or facsimile a completed Payment/Advance Form
executed by a Responsible Officer or his or her designee. Bank may rely on any
telephone notice given by a person whom Bank believes is a Responsible Officer
or designee. Bank shall credit Advances to the Designated Deposit Account. Bank
may make Advances under this Agreement based on instructions from a Responsible
Officer or his or her designee or without instructions if the Advances are
necessary to meet Obligations which have become due.

 

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(b) Term Loan. Subject to the prior satisfaction of all other applicable
conditions to the making of a Term Loan set forth in this Agreement, to obtain a
Term Loan, Borrower shall notify Bank (which notice shall be irrevocable) by
electronic mail, facsimile, or telephone by 12:00 noon Eastern time thirty
(30) Business Days prior to the date the Term Loan is to be made. Together with
any such electronic or facsimile notification, Borrower shall deliver to Bank by
electronic mail or facsimile a completed Payment/Advance Form executed by a
Responsible Officer or his or her designee. Bank may rely on any telephone
notice given by a person whom Bank believes is a Responsible Officer or
designee. On the Funding Date, Bank shall credit and/or transfer (as applicable)
to Borrower's Designated Deposit Account, an amount equal to the applicable Term
Loan.

 

  4 CREATION OF SECURITY INTEREST

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

If this Agreement is terminated, Bank’s Lien in the Collateral shall continue
until the Obligations (other than inchoate indemnity obligations) are repaid in
full in cash. Upon payment in full in cash of the Obligations and at such time
as Bank’s obligation to make Credit Extensions has terminated, Bank shall, at
Borrower’s sole cost and expense, release its Liens in the Collateral and all
rights therein shall revert to Borrower.

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

 

  5 REPRESENTATIONS AND WARRANTIES

Borrower represents and warrants as follows at all times unless expressly
provided below:

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

 

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

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

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

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

Borrower is the sole owner of its intellectual property, except for
non-exclusive licenses granted to its customers in the ordinary course of
business. Each patent is valid and enforceable, and no part of the intellectual
property has been judged invalid or unenforceable, in whole or in part, and to
the best of Borrower’s knowledge, no claim has been made that any part of the
intellectual property violates the rights of any third party except to the
extent such claim could not reasonably be expected to have a material adverse
effect on Borrower’s business. Except as noted on the Perfection Certificate,
Borrower is not a party to, nor is bound by, any material license or other
agreement with respect to which Borrower is the licensee (a) that prohibits or
otherwise restricts Borrower from granting a security interest in Borrower’s
interest in such license or agreement or any other property, or (b) for which a
default under or termination of which could interfere with the Bank’s right to
sell any Collateral. Borrower shall provide written notice to Bank within ten
(10) days of entering or becoming bound by any such license or agreement (other
than over-the-counter software that is commercially available to the public).
Borrower shall take such steps as Bank requests to obtain the consent of, or
waiver by, any person whose consent or waiver is necessary for (x) all such
licenses or agreements to be deemed “Collateral” and for Bank to have a security
interest in it that might otherwise be restricted or prohibited by law or by the
terms of any such license or agreement, whether now existing or entered into in
the future, and (y) Bank to have the ability in the event of a liquidation of
any Collateral to dispose of such Collateral in accordance with Bank’s rights
and remedies under this Agreement and the other Loan Documents.

5.3 Accounts Receivable; Inventory. For any Eligible Account in any Borrowing
Base Certificate, all statements made and all unpaid balances appearing in all
invoices, instruments and other documents evidencing such Eligible Accounts are
and shall be true and correct and all such invoices, instruments and other
documents, and all of Borrower's Books are genuine and in all respects what they
purport to be. Whether or not an Event of Default has occurred and is
continuing, Bank may notify any Account Debtor owing Borrower money of Bank’s
security interest in such funds and verify the amount of such Eligible Account.
All sales and other transactions underlying or giving rise to each Eligible
Account shall comply in all material respects with all applicable laws and
governmental rules and regulations. Borrower has no knowledge of any actual or
imminent Insolvency Proceeding of any Account Debtor whose accounts are Eligible
Accounts in any Borrowing Base Certificate. To the best of Borrower’s knowledge,
all signatures and endorsements on all documents, instruments, and agreements
relating to all Eligible Accounts are genuine, and all such documents,
instruments and agreements are legally enforceable in accordance with their
terms.

 

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For any item of Inventory consisting of “Eligible Inventory” in any Borrowing
Base Certificate, such Inventory (a) consists of raw materials or finished
goods, in good, new, and salable condition, which is not perishable, returned,
consigned, obsolete, not sellable, damaged, or defective, and is not comprised
of demonstrative or custom inventory, works in progress, packaging or shipping
materials, or supplies; (b) meets all applicable governmental standards; (c) has
been manufactured in compliance with the Fair Labor Standards Act; (d) is not
subject to any Liens, except the first priority Liens granted or in favor of
Bank under this Agreement or any of the other Loan Documents; and (e) is located
at the locations identified by Borrower in the Perfection Certificate where it
maintains Inventory (or any location permitted under Section 7.2) for which Bank
has received a bailee waiver.

5.4 Litigation. Except as provided in the Perfection Certificate, as of the
Effective Date and at such other times required hereunder, including pursuant to
Section 3.2, there are no actions or proceedings pending or, to the knowledge of
the Responsible Officers, threatened in writing by or against Borrower or any of
its Subsidiaries involving more than Two Hundred Fifty Thousand Dollars
($250,000).

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

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

5.7 Regulatory Compliance. Borrower is not an “investment company” or a company
“controlled” by an “investment company” under the Investment Company Act of
1940, as amended. Borrower is not engaged as one of its important activities in
extending credit for margin stock (under Regulations X, T and U of the Federal
Reserve Board of Governors). Borrower has complied in all material respects with
the Federal Fair Labor Standards Act. Neither Borrower nor any of its
Subsidiaries is a “holding company” or an “affiliate” of a “holding company” or
a “subsidiary company” of a “holding company” as each term is defined and used
in the Public Utility Holding Company Act of 2005. Borrower has not violated any
laws, ordinances or rules, the violation of which could reasonably be expected
to have a material adverse effect on its business. None of Borrower’s or any of
its Subsidiaries’ properties or assets has been used by Borrower or any
Subsidiary or, to the best of Borrower’s knowledge, by previous Persons, in
disposing, producing, storing, treating, or transporting any hazardous substance
other than legally. Borrower and each of its Subsidiaries have obtained all
consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all Government Authorities that are necessary to
continue their respective businesses as currently conducted.

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

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

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

 

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

 

  6 AFFIRMATIVE COVENANTS

Borrower shall do all of the following:

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

6.2 Financial Statements, Reports, Certificates.

(a) Deliver to Bank: (i) as soon as available, but no later than thirty
(30) days after the last day of each month, a company prepared consolidated
balance sheet and income statement covering Borrower’s consolidated operations
for such month certified by a Responsible Officer and in a form acceptable to
Bank; (ii) as soon as available, but no later than one hundred twenty (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 acceptable to Bank in its reasonable discretion;
(iii) within five (5) days of delivery, copies of all statements, reports and
notices made available to Borrower’s security holders or to any holders of
Subordinated Debt; (iv) within five (5) days of filing, all reports on Form
10-K, 10-Q and 8-K filed with the Securities and Exchange Commission or a link
thereto on Borrower’s or another website on the internet; (v) as soon as
available, but in any event prior to the last day of Borrower’s fiscal
year, Borrower’s financial projections for coming fiscal year as approved by
Borrower’s Board of Directors; (vi) a prompt report of any legal actions pending
or threatened against Borrower or any of its Subsidiaries that could result in
damages or costs to Borrower or any of its Subsidiaries of Two Hundred Fifty
Thousand Dollars ($250,000) or more; and (vii) budgets, sales projections,
operating plans and other financial information reasonably requested by Bank.

(b) Within thirty (30) days after the last day of each month, deliver to Bank a
duly completed Borrowing Base Certificate signed by a Responsible Officer,
together with (i) aged listings of accounts receivable (including merchant
services balances) and accounts payable (by invoice date), (ii) a statement
listing all Collateral Accounts maintained by Borrower and the
balances/investments therein, and (iii) perpetual inventory reports for the
Inventory valued on a first-in, first-out basis at the lower of cost or market
(in accordance with GAAP) or such other inventory reports as are requested by
Bank in its good faith business judgment.

(c) Within thirty (30) days after the last day of each month, deliver to Bank
with the monthly financial statements, a duly completed Compliance Certificate
signed by a Responsible Officer setting forth calculations showing compliance
with the financial covenants set forth in this Agreement.

(d) Allow Bank to audit Borrower’s Collateral at Borrower’s expense. Such audits
shall be conducted no more often than once every twelve (12) months unless an
Event of Default has occurred and is continuing.

6.3 Inventory; Returns. Keep all Inventory in good and marketable condition,
free from material defects. Returns and allowances between Borrower and its
Account Debtors shall follow Borrower’s customary practices as they exist at the
Effective Date. Borrower must promptly notify Bank of all returns, recoveries,
disputes and claims that involve more than Two Hundred Fifty Thousand Dollars
($250,000).

6.4 Taxes; Pensions. Timely file, and require each of its Subsidiaries to timely
file, all required tax returns and reports and timely pay, and require each of
its Subsidiaries to timely pay all foreign, federal, state and local taxes,
assessments, deposits and contributions owed by Borrower and each of its
Subsidiaries, except for deferred payment of any taxes contested pursuant to the
terms of Section 5.9 hereof, and shall deliver to Bank, on demand, appropriate
certificates attesting to such payments, and pay all amounts necessary to fund
all present pension, profit sharing and deferred compensation plans in
accordance with their terms.

 

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6.5 Insurance. Keep its business and the Collateral insured for risks and in
amounts standard for companies in Borrower’s industry and location and as Bank
may reasonably request. Insurance policies shall be in a form, with companies,
and in amounts that are satisfactory to Bank. All property policies shall have a
lender’s loss payable endorsement showing Bank as the sole loss payee, and all
liability policies shall show, or have endorsements showing, Bank, as an
additional insured. All policies (or the loss payable and additional insured
endorsements) shall provide that the insurer must endeavor to give Bank at least
thirty (30) days notice before canceling, amending, or declining to renew its
policy. At Bank’s request, Borrower shall deliver certified copies of policies
and evidence of all premium payments. Proceeds payable under any policy shall,
at Bank’s option, be payable to Bank on behalf of the Lenders on account of the
Obligations. If Borrower fails to obtain insurance as required under this
Section 6.5 or to pay any amount or furnish any required proof of payment to
third persons and Bank, Bank may make all or part of such payment or obtain such
insurance policies required in this Section 6.5, and take any action under the
policies Bank deems prudent.

WARNING

Unless you provide us with evidence of the insurance coverage as required
herein, we may purchase insurance at your expense to protect our interest. This
insurance may, but need not, also protect your interest. If the Collateral
becomes damaged, the coverage we purchase may not pay any claim you make or any
claim made against you. You may later cancel this coverage by providing evidence
that you have obtained property coverage elsewhere. You are responsible for the
cost of any insurance purchased by us. The cost of this insurance may be added
to the Obligations. If the cost is added to the Obligations, the interest rate
on the Term Loans will apply to this added amount. The effective date of
coverage may be the date your prior coverage lapsed or the date you failed to
provide proof of coverage. This coverage we purchased may be considerably more
expensive than insurance you can obtain on your own and may not satisfy any need
for property damage coverage or any mandatory liability insurance requirements
imposed by applicable law.

6.6 Operating Accounts.

(a) Maintain (i) its primary and its Subsidiaries’ primary operating and other
deposit accounts with Bank and Bank’s Affiliates, (ii) a majority of Borrower’s
excess cash balances with Bank and Bank’s Affiliates and (iii) at all times at
least $7,500,000.00 on deposit in a demand deposit account or other account over
which Banks has the written authority from the depository institution to sweep
such account at any time; provided, however, that Borrower may maintain accounts
numbered 69028108, 69027910, 19538818, 68846716, 68932219, 68846807, 46095220
and 46095212 at Bank of America provided that the aggregate amount on deposit in
all such accounts shall at no time exceed $100,000.

(b) Provide Bank five (5) days prior written notice before establishing any
Collateral Account at or with any bank or financial institution other than Bank
or Bank’s Affiliates. For each Collateral Account that Borrower at any time
maintains, Borrower shall cause the applicable bank or financial institution
(other than Bank) at or with which any Collateral Account is maintained to
execute and deliver a Control Agreement or other appropriate instrument with
respect to such Collateral Account to perfect Bank’s Lien in such Collateral
Account in accordance with the terms hereunder, which Control Agreement may not
be terminated without the prior written consent of the Bank. The provisions of
the previous sentence shall not apply to deposit accounts exclusively used for
payroll, payroll taxes and other employee wage and benefit payments to or for
the benefit of Borrower’s employees and identified to Bank by Borrower as such.

6.7 Financial Covenants.

Borrower shall maintain at all times, to be tested as of the last day of each
month, unless otherwise noted:

(a) Adjusted Quick Ratio. (i) prior to the conversion of any Advances to a Term
Loan pursuant to Section 2.1.5, an Adjusted Quick Ratio of at least 1.20 to
1.00, and (ii) after the conversion of any Advances to a Term Loan pursuant to
Section 2.1.5, an Adjusted Quick Ratio of at least 1.00 to 1.00.

(b) Minimum Free Cash Flow: Borrower shall not permit its Free Cash Flow, tested
monthly as of the end of each month, to be less than (i) ($1,000,000) at the end
of each month from the Effective Date to and including September 30, 2009, and
(ii) $0.00 at the end of each month commencing on October 30, 2009 and
thereafter.

 

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(c) Minimum Fixed Charge Coverage Ratio: Borrower shall not permit its Fixed
Charge Coverage Ratio, tested on a trailing twelve-month basis at the end of
each month commencing at the end of the month in which the Funding Date with
respect to the initial Term Loan occurs, to be less than 1.25 to 1.00.

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

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

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

6.11 Creation/Acquisition of Subsidiaries. In the event Borrower or any
Subsidiary creates or acquires any Subsidiary, Borrower and such Subsidiary
shall promptly notify Bank of the creation or acquisition of such new Subsidiary
and take all such action as may be reasonably required by Bank to cause each
such Subsidiary to become a co-Borrower under the Loan Documents and grant a
continuing pledge and security interest in and to the assets of such Subsidiary
(substantially as described on Exhibit A hereto) and Borrower shall grant and
pledge to Bank a perfected security interest in the stock, units or other
evidence of ownership of each Subsidiary.

 

  7 NEGATIVE COVENANTS

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

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

7.2 Changes in Business, Management, Ownership or Business Locations. (a) Engage
in or permit any of its Subsidiaries to engage in any business other than the
businesses currently engaged in by Borrower and such Subsidiary, as applicable,
or reasonably related thereto; (b) liquidate or dissolve; or (c) (i) have a
material change in senior management or (ii) enter into any transaction or
series of related transactions in which the stockholders of Borrower who were
not stockholders immediately prior to the first such transaction own more than
25% of the voting stock of Borrower immediately after giving effect to such
transaction or related series of such transactions (other than by the sale of
Borrower’s equity securities in a public offering or to venture capital
investors so long as Borrower identifies to Bank the venture capital investors
prior to the closing of the transaction. Borrower shall not, without at least
thirty (30) days prior written notice to Bank: (1) add any new offices or
business locations, including warehouses (unless such new offices or business
locations contain less than One Hundred Thousand Dollars ($100,000) in
Borrower’s assets or property), (2) change its jurisdiction of organization,
(3) change its organizational structure or type, (4) change its legal name, or
(5) change any organizational number (if any) assigned by its jurisdiction of
organization.

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

 

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

7.6 Maintenance of Collateral Accounts. Maintain any Collateral Account except
pursuant to the terms of Section 6.6(b) hereof.

7.7 Distributions; Investments. (a) Pay any dividends or make any distribution
or payment or redeem, retire or purchase any capital stock; or (b) directly or
indirectly make any Investment other than Permitted Investments, or permit any
of its Subsidiaries to do so.

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

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

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

 

  8 EVENTS OF DEFAULT

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

8.1 Payment Default. Borrower fails to (a) make any payment of principal or
interest on any Credit Extension on its due date, or (b) pay any other
Obligations within three (3) Business Days after such Obligations (under (a) or
(b) above) are due and payable (which three (3) Business Day grace period shall
not apply to payments due on the Maturity Date, or the date of acceleration
pursuant to Section 9.1(a) herein). During the cure period, the failure to cure
the payment default is not an Event of Default (but no Credit Extension will be
made during the cure period);

8.2 Covenant Default.

(a) Borrower fails or neglects to perform any obligation in Sections 6.2, 6.4,
6.5, 6.6 or 6.7 or violates any covenant in Section 7; or

(b) Borrower or any of its Subsidiaries fails or neglects to perform, keep, or
observe any other term, provision, condition, covenant or agreement contained in
this Agreement or any Loan Documents, and as to any default (other than those
specified in this Section 8) under such other term, provision, condition,
covenant or agreement that can be cured, has failed to cure the default within
ten (10) days after the occurrence thereof;

 

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provided, however, that if the default cannot by its nature be cured within the
ten (10) day period or cannot after diligent attempts by Borrower be cured
within such ten (10) day period, and such default is likely to be cured within a
reasonable time, then Borrower shall have an additional period (which shall not
in any case exceed thirty (30) days) to attempt to cure such default, and within
such reasonable time period the failure to cure the default shall not be deemed
an Event of Default (but no Credit Extensions shall be made during such cure
period). Grace periods provided under this Section shall not apply, among other
things, to financial covenants or any other covenants set forth in subsection
(a) above;

8.3 Material Adverse Change. A Material Adverse Change occurs;

8.4 Attachment; Levy; Restraint on Business.

(a) (i) The service of process seeking to attach, by trustee or similar process,
any funds of Borrower or of any entity under control of Borrower (including a
Subsidiary) on deposit with Bank or any Bank Affiliate, or (ii) a notice of
lien, levy, or assessment is filed against any of Borrower’s assets by any
government agency, and the same under subclauses (i) and (ii) hereof are not,
within ten (10) days after the occurrence thereof, discharged or stayed (whether
through the posting of a bond or otherwise); provided, however, no Credit
Extensions shall be made during any ten (10) day cure period; and

(b) (i) any material portion of Borrower’s assets is attached, seized, levied
on, or comes into possession of a trustee or receiver, or (ii) any court order
enjoins, restrains, or prevents Borrower from conducting any part of its
business;

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

8.6 Other Agreements. There is a default in any agreement to which Borrower is a
party with a third party or parties resulting in a right by such third party or
parties, whether or not exercised, to accelerate the maturity of any
Indebtedness in an amount in excess of One Hundred Thousand Dollars ($100,000)
or that could have a material adverse effect on Borrower’s business;

8.7 Judgments. One or more judgments, orders, or decrees for the payment of
money in an amount, individually or in the aggregate, of at least Two Hundred
Fifty Thousand Dollars ($250,000) (not covered by independent third-party
insurance as to which liability has been accepted by such insurance carrier)
shall be rendered against Borrower and shall remain unsatisfied, unvacated, or
unstayed for a period of ten (10) days after the entry thereof (provided that no
Credit Extensions will be made prior to the satisfaction, vacation, or stay of
such judgment, order, or decree);

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

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

8.11 Governmental Approvals. Any Governmental Approval shall have been
(a) revoked, rescinded, suspended, modified in an adverse manner or not renewed
in the ordinary course for a full term or (b) subject to any decision by a
Governmental Authority that designates a hearing with respect to any
applications for renewal of any of such Governmental Approval or that could
result in the Governmental Authority taking any of the actions described in
clause (a) above, and such decision or such revocation, rescission, suspension,
modification or non-renewal (i) has, or could reasonably be expected to have, a
Material Adverse Change, or (ii) adversely affects the legal qualifications of
Borrower or any of its Subsidiaries to hold such Governmental Approval in any
applicable jurisdiction and such revocation, rescission, suspension,
modification or non-renewal could reasonably be expected to affect the status of
or legal qualifications of Borrower or any of its Subsidiaries to hold any
Governmental Approval in any other jurisdiction.

 

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  9 BANK’S RIGHTS AND REMEDIES

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

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

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

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

(d) terminate any FX Forward Contracts;

(e) settle or adjust disputes and claims directly with Account Debtors for
amounts on terms and in any order that Bank considers advisable, notify any
Person owing Borrower money of Bank’s security interest in such funds, and
verify the amount of such account;

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

(g) 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;

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

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

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

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

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

 

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to make Credit Extensions hereunder. Bank’s foregoing appointment as Borrower’s
attorney in fact, and all of Bank’s rights and powers, coupled with an interest,
are irrevocable until all Obligations have been fully repaid and performed and
Bank’s obligation to provide Credit Extensions terminates.

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

9.4 Application of Payments and Proceeds. Borrower shall have no right to
specify the order or the accounts to which Bank shall allocate or apply any
payments required to be made by Borrower to Bank or otherwise received by Bank
under this Agreement when any such allocation or application is not specified
elsewhere in this Agreement. If an Event of Default has occurred and is
continuing, Bank may apply any funds in its possession, whether from Borrower
account balances, payments, proceeds realized as the result of any collection of
Accounts or other disposition of the Collateral, or otherwise, to the
Obligations in such order as Bank shall determine in its sole discretion. Any
surplus shall be paid to Borrower or other Persons legally entitled thereto;
Borrower shall remain liable to Bank for any deficiency. If Bank, in its good
faith business judgment, directly or indirectly enters into a deferred payment
or other credit transaction with any purchaser at any sale of Collateral, Bank
shall have the option, exercisable at any time, of either reducing the
Obligations by the principal amount of the purchase price or deferring the
reduction of the Obligations until the actual receipt by Bank of cash therefor.

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

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

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

 

  10 NOTICES

All notices, consents, requests, approvals, demands, or other communication by
any party to this Agreement or any other Loan Document must be in writing and
shall be deemed to have been validly served, given, or delivered: (a) upon the
earlier of actual receipt and three (3) Business Days after deposit in the U.S.
mail, first class, registered or certified mail return receipt requested, with
proper postage prepaid; (b) upon transmission, when sent by electronic mail or
facsimile transmission; (c) one (1) Business Day after deposit with a reputable
overnight courier with all charges prepaid; or (d) when delivered, if
hand-delivered by messenger, all of which shall be addressed to the party to be
notified and sent to the address, facsimile number, or email address indicated
below. Bank or Borrower may change its mailing or electronic mail address or
facsimile number by giving the other party written notice thereof in accordance
with the terms of this Section 10.

 

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If to Borrower:

   Drugstore.Com, Inc.    411 108th Avenue NE    Suite 1400    Bellevue,
Washington 98004    Attn: General Counsel    Fax: 425.372.3808   
Email: generalcounsel@drugstore.com

If to Bank:

   Silicon Valley Bank    380 Interlocken Crescent    Suite 600    Broomfield,
Colorado 80021    Attn: Mr. John Kinzer    Fax:    Email: Jkinzer@svb.com

with a copy to:

   Riemer & Braunstein, LLP    Three Center Plaza    Boston, Massachusetts 02108
   Attn: David A. Ephraim, Esquire    Fax: (617) 880-3456    Email:
DEphraim@riemerlaw.com

 

  11 CHOICE OF LAW, VENUE, JURY TRIAL WAIVER

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

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

ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR FORBEAR
FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.

 

  12 GENERAL PROVISIONS

12.1 Termination of Revolving Line Prior to Maturity Date. The Revolving Line
may be terminated prior to the Revolving Line Maturity Date by Borrower,
effective three (3) Business Days after written notice of termination is given
to Bank or if Bank’s obligation to fund Credit Extensions terminates pursuant to
the terms of Section 2.1.1(b). Borrower shall prepay on the date specified in
the notice all outstanding Advances under

 

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the Revolving Line and accrued interest thereon through the date of prepayment.
Notwithstanding any such termination, Bank’s lien and security interest in the
Collateral shall continue until Borrower fully satisfies its Obligations. If
such termination is at Borrower’s election or at Bank’s election due to the
occurrence and continuance of an Event of Default, Borrower shall pay to Bank,
in addition to the payment of any other expenses or fees then-owing, a
termination fee in an amount equal to one-half of one percent (0.50%) of the
Advances prepaid under Revolving Line provided that no termination fee shall be
charged if the credit facility hereunder is replaced with a new facility from
another division of Silicon Valley Bank. Upon payment in full of the Obligations
and at such time as Bank’s obligation to make Credit Extensions has terminated,
Bank shall release its liens and security interests in the Collateral and all
rights therein shall revert to Borrower

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

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

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

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

12.6 Correction of Loan Documents. Bank may correct patent errors and fill in
any blanks in this Agreement and the other Loan Documents consistent with the
agreement of the parties.

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

12.8 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, is an original, and all taken together, constitute one Agreement.

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

12.10 Confidentiality. In handling any confidential information, Bank shall
exercise the same degree of care that it exercises for its own proprietary
information, but disclosure of information may be made: (a) to Bank’s
Subsidiaries or Affiliates; (b) to prospective transferees or purchasers of any
interest in the Credit Extensions (provided, however, Bank shall use
commercially reasonable efforts to obtain such prospective transferee’s or
purchaser’s agreement to the terms of this provision); (c) as required by law,
regulation, subpoena, or other order; (d) to Bank’s regulators or as otherwise
required in connection with Bank’s examination or audit; (e) as Bank considers
appropriate in exercising remedies under the Loan Documents; and (f) to
third-party service providers of Bank so long as such service providers have
executed a confidentiality agreement with Bank with terms no less restrictive
than those contained herein. Confidential information does not include
information that either: (i) is in the public domain or in Bank’s possession
when disclosed to Bank, or becomes part of the public domain after disclosure to
Bank; or (ii) is disclosed to Bank by a third party, if Bank does not know that
the third party is prohibited from disclosing the information.

 

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Bank may use confidential information for any purpose, including, without
limitation, for the development of client databases, reporting purposes, and
market analysis, so long as Bank does not disclose Borrower’s identity or the
identity of any person associated with Borrower unless otherwise expressly
permitted by this Agreement. The provisions of the immediately preceding
sentence shall survive the termination of this Agreement.

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

12.12 Borrower Liability. Any Borrower may, acting singly, request Credit
Extensions hereunder. Each Borrower hereby appoints drugstore.com, Inc. as agent
for the other for all purposes hereunder, including with respect to requesting
Credit Extensions hereunder. Each Borrower hereunder shall be obligated to repay
all Credit Extensions made hereunder, regardless of which Borrower actually
receives said Advance, as if each Borrower hereunder directly received all
Credit Extensions. Each Borrower waives any suretyship defenses available to it
under the Code or any other applicable law. Each Borrower waives any right to
require Bank to: (i) proceed against any Borrower or any other person;
(ii) proceed against or exhaust any security; or (iii) pursue any other remedy.
Bank may exercise or not exercise any right or remedy it has against any
Borrower or any security it holds (including the right to foreclose by judicial
or non-judicial sale) without affecting any Borrower’s liability.
Notwithstanding any other provision of this Agreement or other related document,
so long as any Obligation remains outstanding and unpaid, each Borrower
irrevocably waives during such period any Obligations remain outstanding and
unpaid, all rights that it may have at law or in equity (including, without
limitation, any law subrogating Borrower to the rights of Bank under this
Agreement) to seek contribution, indemnification or any other form of
reimbursement from any other Borrower, or any other Person now or hereafter
primarily or secondarily liable for any of the Obligations, for any payment made
by Borrower with respect to the Obligations in connection with this Agreement or
otherwise and all rights that it might have to benefit from, or to participate
in, any security for the Obligations as a result of any payment made by Borrower
with respect to the Obligations in connection with this Agreement or otherwise.
Any agreement providing for indemnification, reimbursement or any other
arrangement prohibited under this Section shall be null and void. If any payment
is made to a Borrower in contravention of this Section, such Borrower shall hold
such payment in trust for Bank and such payment shall be promptly delivered to
Bank for application to the Obligations, whether matured or unmatured.

 

  13 DEFINITIONS

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

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

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

“Adjusted EBITDA” shall mean (a) Net Income, plus (b) Interest Expense, plus
(c) to the extent deducted in the calculation of Net Income, depreciation
expense, amortization expense and non-cash expenses (including the impact of
stock based compensation expense), plus (d) income tax expense. At Bank’s
discretion, Adjusted EBITDA may be adjusted following any extraordinary expenses
or income associated with one-time charges such as merger and acquisition
expenses, restructuring charges or sales of assets or discontinued business
lines.

 

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“Adjusted Quick Ratio” is the ratio of (i) the Quick Assets of Borrower to
(ii) the Current Liabilities of Borrower.

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

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

“Agreement” is defined in the preamble hereof.

“Availability Amount” is (a) the lesser of (i) the Revolving Line or (ii) the
amount available under the Borrowing Base minus (b) the amount of all
outstanding Letters of Credit (including drawn but unreimbursed Letters of
Credit) plus an amount equal to the Letter of Credit Reserve, minus (c) the FX
Reduction Amount, minus (d) any amounts used for Cash Management Services, minus
(e) the outstanding principal balance of any Advances and minus (f) the
aggregate amount of Advances that have been converted to a Term Loan.

“Bank” is defined in the preamble hereof.

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

“Borrower” is defined in the preamble hereof.

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

“Borrowing Base” is (a) 80% of Eligible Accounts, plus (b) the lesser of (i) 70%
of the value of Borrower’s Eligible Inventory (valued at the lower of cost or
wholesale fair market value) or (ii) 80% of the net liquidation value of
Borrower’s Eligible Inventory as reflected in the most recent appraisal of
Borrower’s Eligible Inventory received by Bank, plus (c) 50% of the average
daily cash balances in Borrower’s operating accounts and/or Eurodollar
investment accounts held at Bank and its Affiliates in the month immediately
preceding the date of the most recent Borrowing Base Certificate delivered by
Borrower to Bank, plus (d) 25% of the average daily balances in Borrower’s other
deposit or investment accounts held at Bank and its Affiliates in the month
immediately preceding the date of the most recent Borrowing Base Certificate
delivered by Borrower to Bank, as determined by Bank from Borrower’s most recent
Borrowing Base Certificate; provided, however, that Bank may decrease the
foregoing percentages in its good faith business judgment based on events,
conditions, contingencies, or risks which, as determined by Bank, may adversely
affect Collateral.

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

“Borrowing Resolutions” are, with respect to any Person, those resolutions
adopted by such Person’s Board of Directors and delivered by such Person to Bank
approving the Loan Documents to which such Person is a party and the
transactions contemplated thereby, together with a certificate executed by its
secretary on behalf of such Person certifying that (a) such Person has the
authority to execute, deliver, and perform its obligations under each of the
Loan Documents to which it is a party, (b) that attached as Exhibit A to such
certificate is a true, correct, and complete copy of the resolutions then in
full force and effect authorizing and ratifying the execution, delivery, and
performance by such Person of the Loan Documents to which it is a party, (c) the
name(s) of the Person(s) authorized to execute the Loan Documents on behalf of
such Person, together with a sample of the true signature(s) of such Person(s),
and (d) that Bank may conclusively rely on such certificate unless and until
such Person shall have delivered to Bank a further certificate canceling or
amending such prior certificate.

 

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

“Cash Equivalents” means (a) marketable direct obligations issued or
unconditionally guaranteed by the United States or any agency or any State
thereof having maturities of not more than one (1) year from the date of
acquisition; (b) commercial paper maturing no more than one (1) year after its
creation and having the highest rating from either Standard & Poor’s Ratings
Group or Moody’s Investors Service, Inc.; and (c) Bank’s certificates of deposit
issued maturing no more than one (1) year after issue .

“Cash Management Services” is defined in Section 2.1.4.

“Claims” are defined in Section 12.2.

“Code” is the Uniform Commercial Code, as the same may, from time to time, be
enacted and in effect in the State of Washington; provided, that, to the extent
that the Code is used to define any term herein or in any Loan Document and such
term is defined differently in different Articles or Divisions of the Code, the
definition of such term contained in Article or Division 9 shall govern;
provided further, that in the event that, by reason of mandatory provisions of
law, any or all of the attachment, perfection, or priority of, or remedies with
respect to, Bank’s Lien on any Collateral is governed by the Uniform Commercial
Code in effect in a jurisdiction other than the State of Washington, the term
“Code” shall mean the Uniform Commercial Code as enacted and in effect in such
other jurisdiction solely for purposes of the provisions thereof relating to
such attachment, perfection, priority, or remedies and for purposes of
definitions relating to such provisions.

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

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

“Committed Availability” means, as the date of determination, an amount equal to
the Revolving Line minus all outstanding Credit Extensions.

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

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

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

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

“Credit Extension” is any Advance, Letter of Credit, Term Loan, FX Forward
Contract, amount utilized for Cash Management Services, or any other extension
of credit by Bank for Borrower’s benefit.

“Current Assets” are amounts that under GAAP should be included on that date as
current assets on Borrower’s consolidated balance sheet.

“Current Liabilities” are all funded obligations and liabilities of Borrower,
including capital leases and amounts owed to Bank and Reserves established by
Bank.

 

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

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

“Designated Deposit Account” is Borrower’s deposit account, account number
3300380008, maintained with Bank.

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

“Effective Date” is the date set forth in the preamble hereof.

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

(a) Accounts that the Account Debtor has not paid within ninety (90) days of
invoice date regardless of invoice payment period terms;

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

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

(d) Accounts billed and/or payable outside of the United States;

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

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

(g) Accounts with credit balances over ninety (90) days from invoice date;

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

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

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

(k) Accounts owing from an Account Debtor that has not been invoiced or where
goods or services have not yet been rendered to the Account Debtor (sometimes
called memo billings or pre-billings);

(l) Accounts subject to contractual arrangements between Borrower and an Account
Debtor where payments shall be scheduled or due according to completion or
fulfillment requirements where the Account Debtor has a right of offset for
damages suffered as a result of Borrower’s failure to perform in accordance with
the contract (sometimes called contracts accounts receivable, progress billings,
milestone billings, or fulfillment contracts);

(m) Accounts owing from an Account Debtor the amount of which may be subject to
withholding based on the Account Debtor’s satisfaction of Borrower’s complete
performance (but only to the extent of the amount withheld; sometimes called
retainage billings);

 

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(n) Accounts subject to trust provisions, subrogation rights of a bonding
company, or a statutory trust;

(o) Accounts owing from an Account Debtor that has been invoiced for goods that
have not been shipped to the Account Debtor unless Bank, Borrower, and the
Account Debtor have entered into an agreement acceptable to Bank in its sole
discretion wherein the Account Debtor acknowledges that (i) it has title to and
has ownership of the goods wherever located, (ii) a bona fide sale of the goods
has occurred, and (iii) it owes payment for such goods in accordance with
invoices from Borrower (sometimes called “bill and hold” accounts);

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

(q) Accounts that represent non-trade receivables or that are derived by means
other than in the ordinary course of Borrower’s business;

(r) Accounts consisting of credit card receivables;

(s) Accounts for which Borrower has permitted Account Debtor’s payment to extend
beyond 90 days;

(t) Accounts subject to chargebacks or others payment deductions taken by an
Account Debtor;

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

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

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

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

“Eligible Inventory” means Inventory that meets all of Borrower’s
representations and warranties in Section 5.3 and is otherwise acceptable to
Bank in all respects. Eligible Inventory shall not include Inventory aged more
than 365 days from its purchase date, in-transit Inventory or Inventory located
on dock.

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

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

“Event of Default” is defined in Section 8.

“Fixed Charges” means, for any period, the sum of all principal payments due and
payable in respect of any term Indebtedness and all cash interest charges due
and payable in respect of all Indebtedness during such period.

“Fixed Charge Coverage Ratio” and/or “FCCR” means, with respect to any period,
the ratio of (i) Free Cash Flow for such period to (ii) Fixed Charges for such
period.

“Foreign Currency” means lawful money of a country other than the United States.

“Free Cash Flow” means at any date of determination, Borrower’s Adjusted EBITDA
less (i) capital expenditures (including capitalized software development costs
but excluding capital expenditures constituting a Permitted Acquisition and
capital expenditures funded by capital leases) and (ii) cash taxes paid by
Borrower, in each case for the rolling three-month period ending on the date of
determination.

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

 

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“FX Business Day” is any day when (a) Bank’s Foreign Exchange Department is
conducting its normal business and (b) the Foreign Currency being purchased or
sold by Borrower is available to Bank from the entity from which Bank shall buy
or sell such Foreign Currency.

“FX Forward Contract” is defined in Section 2.1.3.

“FX Reduction Amount” is defined in Section 2.1.3.

“FX Reserve” is defined in Section 2.1.3.

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

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

“Governmental Approval” is any consent, authorization, approval, order, license,
franchise, permit, certificate, accreditation, registration, filing or notice,
of, issued by, from or to, or other act by or in respect of, any Governmental
Authority.

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

“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.

“Indemnified Person” is defined in Section 12.2.

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

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

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

 

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

“Letter of Credit” means a standby letter of credit issued by Bank or another
institution based upon an application, guarantee, indemnity or similar agreement
on the part of Bank as set forth in Section 2.1.2.

“Letter of Credit Application” is defined in Section 2.1.2(a).

“Letter of Credit Reserve” has the meaning set forth in Section 2.1.2(d).

“Lien” is a claim, mortgage, deed of trust, levy, charge, pledge, security
interest or other encumbrance of any kind, whether voluntarily incurred or
arising by operation of law or otherwise against any property.

“Liquidity” is Borrower’s unrestricted cash and Cash Equivalents plus the
Committed Availability.

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

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

“Maturity Date” is, as applicable, the Revolving Line Maturity Date or the Term
Loan Maturity Date.

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

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

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

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

“Payment Date” is the first Business Day of each calendar month.

“Perfection Certificate” is defined in Section 5.1.

“Permitted Acquisition” is an acquisition by Borrower of substantially all the
stock or property of any person which results in substantially all of the stock
or property of a Person being owned by Borrower following the closing of such
transaction, provided that the following criteria have been satisfied in Bank’s
discretion: (a) Borrower has provided Bank with no less than thirty (30) days
notice prior to the closing of such transaction, including without limitation,
the name of the Person that Borrower is acquiring, the total consideration for
the transaction (broken out into line items for cash and other property), the
form of the transaction (asset purchase, stock

 

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purchase or otherwise) and any other information reasonably requested by Bank;
(b) the Person being acquired is in the same line of business as Borrower as
determined by Bank; (c) the cash portion of the purchase price in such
transaction is not more than Fifteen Million Dollars ($15,000,000.00) in the
aggregate, including any contingent obligations; (d) the aggregate cash portion
of the purchase price paid in all such transactions since the Effective Date,
including, without limitation, contingent obligations, is not more than Twenty
Million Dollars ($20,000,000.00) in the aggregate; (e) the aggregate total
purchase price paid in all such transactions since the Effective Date,
including, without limitation, contingent obligations, is not more than Thirty
Million Dollars ($30,000,000.00) in the aggregate; (f) before and after giving
effect to the consummation of the transaction, (1) no Event of Default has
occurred and is continuing or could not reasonably be expected to result from
such transaction, (2) Borrower is in compliance with all financial covenants in
Section 6.7 hereof on a pro forma basis giving effect to such transaction, as
demonstrated by Borrower to the reasonable satisfaction of Bank prior to the
consummation of the transaction and (3) Borrower shall have minimum Liquidity of
not less than $10,000,000, as demonstrated by Borrower to the reasonable
satisfaction of Bank prior to the consummation of the transaction; (g) the
assets of the target company in such acquisition are free and clear of all Liens
that would not otherwise constitute Permitted Liens hereunder at the time of the
closing of such transaction; (h) Borrower is the surviving corporation of any
such transaction, (i) the transaction is consensual having been approved by the
board of directors and shareholders of each party thereto; (j) the Person being
acquired shall have achieved positive EBITDA for the trailing twelve month
period most recently ended prior to the date of the acquisition, as demonstrated
by Borrower to the reasonable satisfaction of Bank prior to the consummation of
the transaction; (k) the assets of the target company in such acquisition are
free and clear of all Liens that would not otherwise constitute Permitted Liens
hereunder at the time of the closing of such transaction and (l) if requested by
Bank in its sole discretion, Borrower delivers to Bank, within thirty (30) days
of the closing of any such transaction, any documents required by Bank in order
for Bank to obtain a first priority security interest in the assets acquired by
Borrower (including, without limitation, assets owned by a Subsidiary with
respect to which Borrower has acquired all or a portion of such entity’s stock).

“Permitted Indebtedness” is:

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

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

(c) Subordinated Debt;

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

(e) Indebtedness secured by Permitted Liens;

“Permitted Investments” are:

(a) Investments (including Subsidiaries) shown on the Perfection Certificate
which are existing on the Effective Date;

(b) Cash and Cash Equivalents;

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

(d) Investments consisting of Permitted Acquisitions.

“Permitted Liens” are:

(a) Liens existing on the Effective Date and shown on the Perfection Certificate
or arising under this Agreement and the other Loan Documents;

(b) Liens for taxes, fees, assessments or other government charges or levies,
either not delinquent or being contested in good faith and for which Borrower
maintains adequate reserves on its Books, provided that no notice of any such
Lien has been filed or recorded under the Internal Revenue Code of 1986, as
amended, and the Treasury Regulations adopted thereunder;

 

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

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

(e) non-exclusive license of intellectual property granted to third parties in
the ordinary course of business; and

(f) Liens arising from attachments or judgments, orders, or decrees in
circumstances not constituting an Event of Default under Sections 8.4 and 8.7.

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

“Prepayment Fee” shall be an additional fee in respect of a Term Loan, payable
to Bank, in an amount equal to one-half of one percent (0.50%) of the principal
amount of the Term Loan prepaid.

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

“Quick Assets” is, on any date, Borrower’s (i) unrestricted cash and Cash
Equivalents maintained with Bank and (ii) unrestricted cash and Cash Equivalents
maintained in accounts with depository institutions acceptable to Bank which are
subject to Control Agreements in form and substance acceptable to Bank.

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

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

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

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

“Revolving Line” is an Advance or Advances in an amount equal to Twenty-Five
Million Dollars ($25,000,000.00).

“Revolving Line Maturity Date” is the earlier of March 5, 2011, and the
termination of the Revolving Line (i) by Borrower, or (ii) after the occurrence
of an Event of Default, by Bank.

 

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“Secretary’s Certificate” is the Certificate executed by Secretary of the
Borrower, in form and substance reasonably acceptable to Bank, certifying that
the transaction contemplated by this Agreement, have been authorized.

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

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

“Subsidiary” means, with respect to any Person, any Person of which more than
fifty percent (50.0%) of the voting stock or other equity interests (in the case
of Persons other than corporations) is owned or controlled directly or
indirectly by such Person or one or more of Affiliates of such Person.

“Term Loan” is a loan made by Bank pursuant to the terms of Section 2.1.5
hereof.

“Term Loan Amount” is an amount equal to Fifteen Million Dollars ($15,000,000).

“Term Loan Maturity Date” with respect to a Term Loan is the date which is 48
months from the Effective Date.

“Transfer” is defined in Section 7.1.

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

[Signature page follows.]

 

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

BORROWER:

 

DRUGSTORE.COM, INC., a Delaware corporation By     Name:     Title:    

 

BEAUTY.COM, INC., a Delaware corporation and wholly owned subsidiary of
drugstore.com, inc. By     Name:     Title:    

 

CUSTOM NUTRITION SERVICES, INC., a Delaware corporation and wholly owned
subsidiary of drugstore.com, inc. By     Name:     Title:    

 

DS PHARMACY, INC., a Delaware corporation and wholly owned subsidiary of
drugstore.com, inc. By     Name:     Title:    

 

DS FULFILLMENT, INC., a Delaware corporation and wholly owned subsidiary of
drugstore.com, inc. By     Name:     Title:    

 

DS DISTRIBUTION, INC., a Delaware corporation and wholly owned subsidiary of
drugstore.com, inc. By     Name:     Title:    

 

DS NON-PHARMACEUTICAL SALES, INC., a Delaware corporation and wholly owned
subsidiary of drugstore.com, inc. By     Name:     Title:    

 

DE~LUXE DISTRIBUTORS, INC., a Delaware corporation and wholly owned subsidiary
of drugstore.com, inc. By     Name:     Title:    

 

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VISION DIRECT, INC., a Texas corporation and wholly owned subsidiary of
drugstore.com, inc. By     Name:     Title:    

 

INTERNATIONAL VISION DIRECT, LTD., a British Columbia, Canada company and wholly
owned subsidiary of drugstore.com, inc. By     Name:     Title:    

 

MICHIGAN ONLINE SALES, INC., a Delaware corporation and wholly owned subsidiary
of drugstore.com, inc. By     Name:     Title:    

 

RAD ONLINE SALES, INC., a Delaware corporation and wholly owned subsidiary of
drugstore.com, inc. By     Name:     Title:    

BANK:

 

SILICON VALLEY BANK By     Name:     Title:    

 

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EXHIBIT A – COLLATERAL DESCRIPTION

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

All goods, Accounts (including health-care receivables), Equipment, Inventory,
contract rights or rights to payment of money, leases, license agreements,
franchise agreements, General Intangibles (except as provided below), commercial
tort claims, documents, instruments (including any promissory notes), chattel
paper (whether tangible or electronic), cash, deposit accounts, fixtures,
letters of credit rights (whether or not the letter of credit is evidenced by a
writing), securities, and all other investment property, supporting obligations,
and financial assets, whether now owned or hereafter acquired, wherever located;
and

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

Notwithstanding the foregoing, the Collateral does not include any of the
following, whether now owned or hereafter acquired any copyright rights,
copyright applications, copyright registrations and like protections in each
work of authorship and derivative work, whether published or unpublished, any
patents, patent applications and like protections, including improvements,
divisions, continuations, renewals, reissues, extensions, and
continuations-in-part of the same, trademarks, service marks and, to the extent
permitted under applicable law, any applications therefor, whether registered or
not, and the goodwill of the business of Borrower connected with and symbolized
thereby, know-how, operating manuals, trade secret rights, rights to unpatented
inventions, and any claims for damage by way of any past, present, or future
infringement of any of the foregoing; provided, however, the Collateral shall
include all Accounts, license and royalty fees and other revenues, proceeds, or
income arising out of or relating to any of the foregoing.

Pursuant to the terms of a certain negative pledge arrangement with Bank,
Borrower has agreed not to encumber any of its copyright rights, copyright
applications, copyright registrations and like protections in each work of
authorship and derivative work, whether published or unpublished, any patents,
patent applications and like protections, including improvements, divisions,
continuations, renewals, reissues, extensions, and continuations-in-part of the
same, trademarks, service marks and, to the extent permitted under applicable
law, any applications therefor, whether registered or not, and the goodwill of
the business of Borrower connected with and symbolized thereby, know-how,
operating manuals, trade secret rights, rights to unpatented inventions, and any
claims for damage by way of any past, present, or future infringement of any of
the foregoing, without Bank’s prior written consent.

 

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