Exhibit 10.1

LOAN AND SECURITY AGREEMENT

THIS LOAN AND SECURITY AGREEMENT (this “Agreement”) dated as of June 11, 2010
(the “Effective Date”) between SILICON VALLEY BANK, a California corporation
(“Bank”), and IRIDEX CORPORATION, a Delaware corporation (“Borrower”), provides
the terms on which Bank shall lend to Borrower and Borrower shall repay Bank.
The parties agree as follows:

 

  1 ACCOUNTING AND OTHER TERMS

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

 

  2 LOAN AND TERMS OF PAYMENT

2.1 Promise to Pay.

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

2.1.1 Revolving Advances.

(a) Availability. Subject to the terms and conditions of this Agreement and to
deduction of Reserves, Bank shall make advances against the Borrowing Base
(“Formula Advances”) not exceeding the Availability Amount. Amounts borrowed
hereunder may be repaid and, prior to the Revolving Line Maturity Date,
reborrowed, subject to the applicable terms and conditions precedent herein.

(b) Streamline Period. At any time in which (i) there are no outstanding
Advances or (ii) Borrower’s Net Cash is greater than the Net Cash Threshold,
Borrower may, at its option, commencing on the first (1st) day of the next
month, elect to be in a streamline period (each, a “Streamline Period”). At
least five (5) days prior to requesting that a Streamline Period be put into
effect, Borrower shall give Bank written notice thereof. On or prior to the
Business Day immediately preceding the commencement of the Streamline Period,
Borrower will either (x) provide evidence satisfactory to Bank that Borrower’s
Net Cash is greater than the Net Cash Threshold, or (y) pay to Bank, by wire
transfer, an amount sufficient to repay in full all Obligations. Any Streamline
Period elected by Borrower pursuant to clause (x) above will immediately
terminate if Borrower’s Net Cash is equal to or less than the Net Cash
Threshold. During any Streamline Period elected by Borrower pursuant to clause
(y) above, Borrower may not request any Credit Extensions, and Bank shall have
no obligation to make any Credit Extensions. To terminate a Streamline Period,
Borrower shall provide Bank at least five (5) days prior written notice thereof
together with such information relating to the Eligible Accounts and other
Collateral as Bank may specify.

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(c) 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.

(a) As part of the Revolving Line, Bank shall issue or have issued Letters of
Credit denominated in Dollars or a Foreign Currency for Borrower’s account. The
aggregate Dollar Equivalent amount utilized for the issuance of Letters of
Credit shall at all times reduce the amount otherwise available for Advances
under the Revolving Line. The aggregate Dollar Equivalent of the face amount of
outstanding Letters of Credit (including drawn but unreimbursed Letters of
Credit) may not exceed the lesser of (i) the sum of (A) One Million Dollars
($1,000,000), minus (B) all amounts used for Cash Management Services, and minus
(C) the FX Reduction Amount, or (ii) the sum of (A) the lesser of (1) the
Revolving Line or (2) the Borrowing Base plus, during any Streamline Period, the
Non Formula Amount, minus (B) the outstanding principal amount of all Advances
(including any amounts used for Cash Management Services), and minus (C) the FX
Reduction Amount.

(b) If, on the Revolving Line Maturity Date (or the effective date of any
termination of this Agreement), there are any outstanding Letters of Credit,
then on such date Borrower shall provide to Bank cash collateral in an amount
equal to one hundred five percent (105%) of the Dollar Equivalent 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 such 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.

(c) 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.

 

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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”). FX Forward Contracts 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 each outstanding FX
Forward Contract (the “FX Reserve”). The aggregate amount of FX Forward
Contracts at any one time may not exceed ten (10) times the lesser of (a) the
sum of (i) One Million Dollars ($1,000,000), minus (ii) all amounts used for
Cash Management Services, and minus (iii) the Dollar Equivalent of the face
amount of any outstanding Letters of Credit (including drawn but unreimbursed
Letters of Credit), or (b) the sum of (i) the lesser of (1) the Revolving Line
or (2) the Borrowing Base plus, during any Streamline Period, the Non Formula
Amount, minus (ii) the outstanding principal amount of all Advances (including
any amounts used for Cash Management Services), and minus (iii) the Dollar
Equivalent of the face amount of any outstanding Letters of Credit (including
drawn but unreimbursed Letters of Credit). The amount otherwise available for
Credit Extensions under the Revolving Line shall be reduced by an amount equal
to ten percent (10%) of each outstanding FX Forward Contract (the “FX Reduction
Amount”). Any amounts needed to fully reimburse Bank for any amounts not paid by
Borrower in connection with FX Forward Contracts will be treated as Advances
under the Revolving Line (except for purposes of determining whether Borrower is
in a Streamline Period) and will accrue interest at the interest rate applicable
to Advances.

2.1.4 Cash Management Services Sublimit.

Borrower may use 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”), in an aggregate
amount not to exceed the lesser of (a) the sum of (i) One Million Dollars
($1,000,000), minus (ii) the Dollar Equivalent of the face amount of any
outstanding Letters of Credit (including drawn but unreimbursed Letters of
Credit), and minus (iii) the FX Reduction Amount, or (b) the sum of (i) the
lesser of (1) the Revolving Line or (2) the Borrowing Base plus, during any
Streamline Period, the Non Formula Amount, minus (ii) the outstanding principal
amount of all Advances, minus (iii) the Dollar Equivalent of the face amount of
any outstanding Letters of Credit (including drawn but unreimbursed Letters of
Credit), and minus (iv) the FX Reduction Amount. Any amounts Bank pays on behalf
of Borrower for any Cash Management Services will be treated as Advances (except
for purposes of determining whether Borrower is in a Streamline Period) under
the Revolving Line and will accrue interest at the interest rate applicable to
Advances.

2.1.5 Non Formula Line of Credit.

During any Streamline Period, as part of the Revolving Line, Bank shall make non
formula advances (the “Non Formula Advance”) to Borrower in an aggregate amount
not to exceed the lesser of (a) the Non Formula Amount, or (b) the sum of
(i) the Revolving Line, minus (ii) the sum of all outstanding principal amounts
of any Formula Advances (including any amounts used for Cash Management
Services), minus (iii) the Dollar Equivalent of the face

 

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amount of any outstanding Letters of Credit (including drawn but unreimbursed
Letters of Credit), and minus (iv) the FX Reduction Amount. The dollar amount of
each Non Formula Advance shall at all times reduce the amount otherwise
available for Advances under the Revolving Line. Upon the termination of any
Streamline Period, Borrower shall (x) deliver to Bank, as soon as possible, but
in no event more than one (1) Business Day after such termination, a Transaction
Report containing detailed invoice reporting, signed by a Responsible Officer
together with a current accounts receivable aging, and (y) if the outstanding
principal amount of the Advances exceeds the Availability Amount, Borrower shall
immediately pay to Bank the excess and, in connection with same, hereby
irrevocably authorizes Bank to debit any account of Borrower maintained by
Borrower with Bank or any of Bank’s Affiliates for the amount of such excess.

2.2 Overadvances.

If, at any time, (a) the sum of (i) the outstanding principal amount of any
Formula Advances (including any amounts used for Cash Management Services), plus
(ii) the face amount of any outstanding Letters of Credit (including drawn but
unreimbursed Letters of Credit), plus (iii) the FX Reduction Amount, exceeds the
lesser of the Revolving Line or the Borrowing Base, or (b) the sum of (i) the
outstanding principal amount of any Formula Advances (including any amounts used
for Cash Management Services) and Non-Formula Advances, plus (ii) the face
amount of any outstanding Letters of Credit (including drawn but unreimbursed
Letters of Credit), plus (iii) the FX Reduction Amount, exceeds the Revolving
Line, or (c) the outstanding principal balance of the Non-Formula Advances
exceeds the Non-Formula Amount (the excess amount set forth in (a), (b) and
(c) above being an “Overadvance”), then Borrower shall immediately pay to Bank
in cash such Overadvance. Without limiting Borrower’s obligation to repay Bank
any amount of the Overadvance, Borrower agrees to pay Bank interest on the
outstanding amount of any Overadvance, on demand, at the Default Rate.

2.3 Payment of Interest on the Credit Extensions.

(a) 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 Prime Rate, plus the Applicable Margin, which interest shall be payable
monthly in accordance with Section 2.3(e) 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 percent (5.00%) above the rate that is otherwise applicable thereto (the
“Default Rate”) unless Bank otherwise elects from time to time in its sole
discretion to impose a smaller increase. Fees and expenses which are required to
be paid by Borrower pursuant to the Loan Documents (including, without
limitation, Bank Expenses) but are not paid when due shall bear interest until
paid at a rate equal to the highest rate applicable to the Obligations. 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.

 

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(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) 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.

(e) Payment; Interest Computation; Float Charge. Interest is payable monthly on
the last calendar day of each month and shall be computed on the basis of a
360-day year for the actual number of days elapsed. In computing interest,
(i) all Payments received after 12:00 p.m. Pacific time on any day shall be
deemed received at the opening of business on the next Business Day, and
(ii) the date of the making of any Credit Extension shall be included and the
date of payment shall be excluded; provided, however, that if any Credit
Extension is repaid on the same day on which it is made, such day shall be
included in computing interest on such Credit Extension. In addition, Bank shall
be entitled to charge Borrower a “float” charge in an amount equal to three
(3) Business Days interest, at the interest rate applicable to the Advances
whether or not any Advances are outstanding, on all Payments received by Bank.
The float charge for each month shall be payable on the last day of the month.
Bank shall not, however, be required to credit Borrower’s account for the amount
of any item of payment which is unsatisfactory to Bank in its good faith
business judgment, and Bank may charge Borrower’s Designated Deposit Account for
the amount of any item of payment which is returned to Bank unpaid.

2.4 Fees.

Borrower shall pay to Bank:

(a) Commitment Fee. A non-refundable commitment fee, fully earned as of the
Effective Date, equal to Twenty Five Thousand Dollars ($25,000) (the “Commitment
Fee”) payable as follows: (i) Twelve Thousand Five Hundred Dollars ($12,500) on
the Effective Date; and (ii) Twelve Thousand Five Hundred Dollars ($12,500) on
the first anniversary of the Effective Date;

(b) Good Faith Deposit. Borrower has paid to Bank a fully-earned good faith
deposit of Fifteen Thousand Dollars ($15,000) (the “Good Faith Deposit”) to
initiate Bank’s due diligence review process. Any portion of the Good Faith
Deposit not utilized to pay Bank Expenses will be applied to the Commitment Fee;

(c) Letter of Credit Fee. Bank’s customary fees and expenses for the issuance or
renewal of Letters of Credit, upon the issuance of such Letter of Credit, each
anniversary of the issuance during the term of such Letter of Credit, and upon
the renewal of such Letter of Credit by Bank;

(d) Collateral Monitoring Fee. In any month in which Borrower’s Net Cash on any
day in such month is less than the Net Cash Threshold, a monthly collateral
monitoring fee of Five Hundred Dollars ($500), payable in arrears on the last
day of each such month (prorated for any partial month at the beginning and upon
termination of this Agreement); provided that Borrower shall not pay such fee
prior to the initial Advance; and

 

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

2.5 Payments; Application of Payments.

(a) All payments (including prepayments) to be made by Borrower under any Loan
Document shall be made in immediately available funds in U.S. Dollars, without
setoff or counterclaim, before 12:00 p.m. Pacific time on the date when due.
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 a
payment is due on a day that is not a Business Day, the payment shall be due the
next Business Day, and additional fees or interest, as applicable, shall
continue to accrue until paid.

(b) All payments with respect to the Obligations may be applied in such order
and manner as Bank shall determine in its sole discretion. 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.

 

  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;

(b) duly executed original signatures to the Control Agreement;

(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) duly executed original signatures to the completed Borrowing Resolutions for
Borrower;

(e) evidence that (i) the Liens securing Indebtedness owed by Borrower to Wells
Fargo Bank, National Association and American Medical Systems, Inc. and
Laserscope will be terminated and (ii) the documents and/or filings evidencing
the perfection of such Liens, including without limitation any financing
statements and/or control agreements, have or will, concurrently with the
initial Credit Extension, be terminated.

 

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(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;

(g) the Perfection Certificate of Borrower, together with the duly executed
original signature thereto;

(h) evidence satisfactory to Bank that the insurance policies required by
Section 6.6 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

(i) 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, timely receipt of an executed
Transaction Report;

(b) the representations and warranties in this Agreement shall be true,
accurate, and complete in all material respects on the date of the Transaction
Report 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 this Agreement 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.

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.

 

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3.4 Procedures for Borrowing.

Subject to the prior satisfaction of all other applicable conditions to the
making of an Advance set forth in this Agreement, to obtain an Advance (other
than Advances under 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 p.m. Pacific time on the Funding Date of the Advance. Together with such
notification, Borrower must promptly deliver to Bank by electronic mail or
facsimile a completed Transaction Report executed by a Responsible Officer or
his or her designee. Bank shall credit Advances to the Designated Deposit
Account. Bank may make Advances under this Agreement based on instructions from
a Responsible Officer or his or her designee or without instructions if the
Advances are necessary to meet Obligations which have become due. Bank may rely
on any telephone notice given by a person whom Bank believes is a Responsible
Officer or designee.

 

  4 CREATION OF SECURITY INTEREST

4.1 Grant of Security Interest. Borrower hereby grants Bank, to secure the
payment and performance in full of all of the Obligations, a continuing security
interest in, and pledges to Bank, the Collateral, wherever located, whether now
owned or hereafter acquired or arising, and all proceeds and products thereof.

4.2 Priority of Security Interest. 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 (other than
inchoate indemnity 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.

4.3 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 in violation of this
Agreement, by either Borrower or any other Person, shall be deemed to violate
the rights of Bank under the Code.

 

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  5 REPRESENTATIONS AND WARRANTIES

Borrower represents and warrants as follows:

5.1 Due Organization, Authorization; Power and Authority.

Borrower is duly existing and in good standing as a Registered Organization in
the State of Delaware 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) except as set forth on the
Perfection Certificate, 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).

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 it is 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.

 

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The Collateral is not in the possession of any third party bailee (such as a
warehouse) except as otherwise provided in the Perfection Certificate or
otherwise permitted pursuant to Section 7.2. 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.

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

Borrower is the sole owner of the Intellectual Property which it owns or
purports to own except for (a) non-exclusive licenses granted to its customers
in the ordinary course of business, (b) over-the-counter software that is
commercially available to the public and other non-material Intellectual
Property licensed to Borrower, and (c) material Intellectual Property licensed
to Borrower and noted on the Perfection Certificate. To Borrower’s knowledge,
each Patent which it owns or purports to own and which is material to Borrower’s
business is valid and enforceable, and no part of the Intellectual Property
which Borrower owns or purports to own and which is material to Borrower’s
business has been judged invalid or unenforceable, in whole or in part. To
Borrower’s knowledge, no claim has been made in writing that any part of the
Intellectual Property violates the rights of any third party except to the
extent such claim would 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 it bound by, any Restricted License.

5.3 Accounts Receivable.

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

(b) All statements made and all unpaid balances appearing in all invoices,
instruments and other documents evidencing the Eligible Accounts are and shall
be true and correct in all material respects 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 and upon notice to Borrower (provided no notice is required if 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 Transaction Report. 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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5.4 Litigation.

There are no actions or proceedings pending or, to the knowledge of the
Responsible Officers, threatened in writing by or against Borrower or any of its
Subsidiaries involving more than Two Hundred Fifty Thousand Dollars ($250,000),
individually or in the aggregate.

5.5 Financial Statements; Financial Condition.

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, except that unaudited financial statements may be subject to normal
adjustments and need not contain footnotes. 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 Governmental Authorities that are necessary to continue their respective
businesses as currently conducted, except to the extent that failure to obtain,
make or file the same would not reasonably be expected to have a material
adverse effect on its business.

5.8 Subsidiaries; Investments.

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

 

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5.9 Tax Returns and Payments; Pension Contributions.

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

5.10 Use of Proceeds.

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

5.11 Full Disclosure.

No written representation, warranty or other statement of Borrower in any
certificate or written statement given to Bank, as of the date such
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).

5.12 Definition of “Knowledge.”

For purposes of the Loan Documents, whenever a representation or warranty is
made to Borrower’s knowledge or awareness, to the “best of” Borrower’s
knowledge, or with a similar qualification, knowledge or awareness means the
actual knowledge, after reasonable investigation, of the Responsible Officers.

 

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  6 AFFIRMATIVE COVENANTS

Borrower shall do all of the following:

6.1 Government Compliance.

(a) 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.

(b) Obtain all of the Governmental Approvals necessary for the performance by
Borrower of its obligations under the Loan Documents to which it is a party and
the grant of a security interest to Bank in all of the Collateral. Borrower
shall promptly provide copies of any such obtained Governmental Approvals to
Bank.

6.2 Financial Statements, Reports, Certificates.

Provide Bank with the following:

(a) a Transaction Report (and any schedules related thereto), (i) monthly within
thirty (30) days of the end of each month, during any Streamline Period, and
(ii) weekly within two (2) Business Days of the end of each week, at all other
times; provided, however that Borrower shall not be required to deliver any
Transaction Reports to Bank at any time when no Advances, other than Non Formula
Advances, are outstanding;

(b) within thirty (30) days after the end of each month, (A) monthly accounts
receivable agings, aged by invoice date, (B) monthly accounts payable agings,
aged by invoice date, and outstanding or held check registers, if any,
(C) monthly reconciliations of accounts receivable agings (aged by invoice
date), transaction reports and general ledger and (D) a Deferred Revenue report,
in form acceptable to Bank;

(c) as soon as available, but no later than (i) thirty (30) days after the last
day of the first two months of each fiscal quarter or (ii) forty-five (45) days
after the last day of the last month of each fiscal quarter, 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 (the “Monthly Financial Statements”);

(d) within thirty (30) days after the last day of each month and together with
the Monthly Financial Statements, a duly completed Compliance Certificate in the
form attached hereto as Exhibit B signed by a Responsible Officer;

(e) within thirty (30) days after the end of each fiscal year of Borrower,
annual financial projections for the following fiscal year as approved by
Borrower’s board of directors, together with any related business forecasts used
in the preparation of such annual financial projections;

(f) as soon as available, and in any event within two hundred forty (240) days
following the end 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;

 

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(g) within five (5) days of filing, copies of all periodic and other reports,
proxy statements and other materials filed by Borrower with the SEC, any
Governmental Authority succeeding to any or all of the functions of the SEC or
with any national securities exchange, or distributed to its shareholders, as
the case may be, including, without limitation, all reports on Form 10-K, 10-Q
and 8-K. Documents required to be delivered pursuant to the terms hereof (to the
extent any such documents are included in materials otherwise filed with the
SEC) may be delivered electronically and if so delivered, shall be deemed to
have been delivered on the date on which Borrower posts such documents, or
provides a link thereto, on Borrower’s website on the Internet at Borrower’s
website address;

(h) 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;

(i) prompt report of any legal actions pending or threatened in writing against
Borrower or any of its Subsidiaries that could result in damages or costs to
Borrower or any of its Subsidiaries of, individually or in the aggregate, Two
Hundred Fifty Thousand Dollars ($250,000) or more; and

(j) other financial information reasonably requested by Bank.

6.3 Accounts Receivable.

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

(b) Disputes. So long as any Credit Extensions are outstanding or have been
requested, Borrower shall promptly notify Bank of all disputes or claims
relating to Accounts, in excess of Fifty Thousand Dollars ($50,000). Borrower
may forgive (completely or partially), compromise, or settle any Account for
less than payment in full, or agree to do any of the foregoing so long as
(i) Borrower does so in good faith, in a commercially reasonable manner, in the
ordinary course of business, in arm’s-length transactions, and reports the same
to Bank in the regular reports provided to Bank; (ii) no Event of Default has
occurred and is continuing; and (iii) after taking into account all such
discounts, settlements and forgiveness, the total outstanding Formula Advances
will not exceed the lesser of the Revolving Line or the Borrowing Base.

 

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(c) Collection of Accounts. Borrower shall have the right to collect all
Accounts, unless and until an Event of Default has occurred and is
continuing. Bank shall require that all proceeds of Accounts be deposited by
Borrower into a lockbox account, or such other “blocked account” as specified by
Bank, pursuant to a blocked account agreement in such form as Bank may specify
in its good faith business judgment. During any Streamline Period, provided no
Event of Default has occurred and is continuing, funds in the blocked account
will be remitted to Borrower’s primary operating account at Bank, but at all
other times, such collections shall be applied to reduce the Obligations on a
daily basis. After the occurrence and during the continuance of an Event of
Default, Borrower shall immediately deliver all payments on and proceeds of
Accounts to an account maintained with Bank to be applied pursuant to the terms
of Section 9.4 hereof.

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

(e) Verification. Bank may, from time to time upon notice to Borrower (provided
no notice is required if an Event of Default has occurred and is continuing),
verify directly with the respective Account Debtors the validity, amount and
other matters relating to the Accounts, either in the name of Borrower or Bank
or such other name as Bank may choose.

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

6.4 Remittance of Proceeds.

Except as otherwise provided in Section 6.3(c), deliver, in kind, all proceeds
arising from the disposition of any Collateral to Bank in the original form in
which received by Borrower not later than the following Business Day after
receipt by Borrower, to be applied to the Obligations (1) prior to an Event of
Default, pursuant to the terms of Section 2.5(b) hereof, and (2) after the
occurrence and during the continuance of an Event of Default, pursuant to the
terms of Section 9.4 hereof; provided that, if no Event of Default has occurred
and is continuing, Borrower shall not be obligated to remit to Bank the proceeds
of the sale of surplus, worn out or obsolete Equipment disposed of by Borrower
in good faith in an arm’s length transaction for an aggregate

 

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purchase price of Two Hundred Thousand Dollars ($200,000) or less (for all such
transactions in any fiscal year). Borrower agrees that it will maintain all
proceeds of Collateral in an account maintained with Bank. Nothing in this
Section limits the restrictions on disposition of Collateral set forth elsewhere
in this Agreement.

6.5 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.

6.6 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 lender loss payee and waive
subrogation against Bank. 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
shall give Bank at least twenty (20) days notice before canceling, amending, or
declining to renew its policy. At Bank’s request, Borrower shall deliver
certified copies of policies and evidence of all premium payments. Proceeds
payable under any property policy with respect to Collateral shall, at Bank’s
option, be payable to Bank on account of the Obligations. Notwithstanding the
foregoing, (a) so long as no Event of Default has occurred and is continuing,
Borrower shall have the option of applying the proceeds of any casualty policy
up to Fifty Thousand Dollars ($50,000) with respect to any loss with respect to
Collateral, but not exceeding One Hundred Thousand Dollars ($100,000) in the
aggregate for all losses with respect to Collateral under all casualty policies
in any one year, toward the replacement or repair of destroyed or damaged
property; provided that any such replaced or repaired property (i) shall be of
equal or like value as the replaced or repaired Collateral and (ii) shall be
deemed Collateral in which Bank has been granted a first priority security
interest subject to Permitted Liens on such Collateral in existence as of the
date of the casualty, and (b) after the occurrence and during the continuance of
an Event of Default, all proceeds payable under such casualty policy with
respect to Collateral shall, at the option of Bank, be payable to Bank on
account of the Obligations. If Borrower fails to obtain insurance as required
under this Section 6.6 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 6.6, and take any action
under the policies Bank deems prudent.

6.7 Operating Accounts.

(a) Maintain with Bank and Bank’s Affiliates Borrower’s primary banking
relationship including, without limitation, its operating and other deposit
accounts, securities accounts and excess cash, which excess cash shall represent
at least eighty-five percent (85%) of Borrower’s excess cash at all financial
institutions.

 

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(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 by Borrower without the prior written consent of 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.

6.8 Financial Covenants.

Maintain at all times, to be tested as of the last day of each month on a
consolidated basis with respect to Borrower and its Subsidiaries:

(a) Adjusted Quick Ratio. A ratio of (i) Quick Assets to (ii) Current
Liabilities minus Deferred Revenue, of at least 1.25 to 1.00.

6.9 Protection of Intellectual Property Rights.

(a) (i) Protect, defend and maintain the validity and enforceability of its
Intellectual Property material to Borrower’s business; (ii) promptly advise Bank
in writing of material infringements of its Intellectual Property; and (iii) not
allow any Intellectual Property material to Borrower’s business to be abandoned,
forfeited or dedicated to the public without Bank’s written consent.

(b) Provide written notice to Bank within ten (10) days of entering or becoming
bound by any Restricted License (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 (i) any Restricted License 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 Restricted License, in a manner
enforceable under applicable law, whether now existing or entered into in the
future, and (ii) 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.

6.10 Litigation Cooperation.

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

 

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6.11 Access to Collateral; Books and Records.

At reasonable times and upon reasonable notice, (provided no notice is required
if an Event of Default has occurred and is continuing), allow Bank, or its
agents, to inspect the Collateral and audit and copy Borrower’s Books. Unless an
Event of Default has occurred and is continuing, such inspections or audits
shall be conducted no more often than (a) once every twelve (12) months during
any period in which Borrower’s Net Cash is greater than the Net Cash Threshold
and Borrower’s Net Income is greater than One Dollar ($1.00), or (b) twice every
twelve (12) months at all other times. The initial audit shall be completed with
results satisfactory to Bank in its sole and absolute discretion within one
hundred twenty (120) days after the Effective Date. The foregoing inspections
and audits shall be at Borrower’s expense, and the charge therefor shall be
Eight Hundred Fifty Dollars ($850) per person per day (or such higher amount as
shall represent Bank’s then-current standard charge for the same), plus
reasonable out-of-pocket expenses. In the event Borrower and Bank schedule an
audit more than twenty (20) days in advance, and Borrower cancels or seeks to
reschedule the audit with less than ten (10) days written notice to Bank, then
(without limiting any of Bank’s rights or remedies), Borrower shall pay Bank a
fee of One Thousand Dollars ($1,000) plus any out-of-pocket expenses incurred by
Bank to compensate Bank for the anticipated costs and expenses of the
cancellation or rescheduling.

6.12 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. Deliver to Bank, within five (5) days after the same
are sent or received, copies of all correspondence, reports, documents and other
filings with any Governmental Authority regarding compliance with or maintenance
of Governmental Approvals or Requirements of Law or that could reasonably be
expected to have a material effect on any of the Governmental Approvals or
otherwise on the operations of Borrower or any of its Subsidiaries.

 

  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; (c) in connection
with Permitted Liens and Permitted Investments; and (d) of non-exclusive
licenses for the use of the property of Borrower or its Subsidiaries in the
ordinary course of business.

 

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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)
any Key Person ceases to hold such office with Borrower and such Key Person is
not replaced with a Person of comparable experience and approved by Borrower’s
Board of Directors within one hundred eighty (180) days of such Key Person
ceasing to hold such office, or both Key Persons cease to hold such offices with
Borrower and at least one such Key Person is not replaced with a Person of
comparable experience and approved by Borrower’s Board of Directors within
ninety (90) days of such Key Person ceasing to hold such office; 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 forty-nine percent (49%) 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
and provides to Bank a description of the material terms 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 Two Hundred
Thousand Dollars ($200,000) in Borrower’s assets or property) or deliver any
portion of the Collateral valued, individually or in the aggregate, in excess of
Two Hundred Thousand Dollars ($200,000) to a bailee at a location other than to
a bailee and at a location already disclosed in the Perfection Certificate,
(2) change its jurisdiction of organization, (3) change its organizational type,
(4) change its legal name, or (5) change any organizational number (if any)
assigned by its jurisdiction of organization. If Borrower intends to deliver any
portion of the Collateral valued, individually or in the aggregate, in excess of
Two Hundred Thousand Dollars ($200,000) to a bailee, and Bank and such bailee
are not already parties to a bailee agreement governing both the Collateral and
the location to which Borrower intends to deliver the Collateral, then Borrower
will first receive the written consent of Bank, and such bailee shall execute
and deliver a bailee agreement in form and substance satisfactory to Bank in its
sole discretion.

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,
provided that 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 except for Permitted Liens described in clauses (c), (d), (k) and (l) of
the definition of “Permitted Liens” hereunder, or enter into any agreement,
document, instrument or other arrangement (except with or in favor of Bank) with
any Person which directly or indirectly prohibits or has the effect of
prohibiting Borrower or any Subsidiary from assigning, mortgaging, pledging,
granting a security interest in or upon, or encumbering any of Borrower’s or any
Subsidiary’s Intellectual Property, except as is otherwise permitted in
Section 7.1 hereof and the definition of “Permitted Liens” herein.

7.6 Maintenance of Collateral Accounts.

Maintain any Collateral Account except pursuant to the terms of Section 6.7(b)
hereof.

7.7 Distributions; Investments.

(a) Pay any dividends or make any distribution or payment or redeem, retire or
purchase any capital stock; provided that (i) Borrower may convert any of its
convertible securities into other securities pursuant to the terms of such
convertible securities or otherwise in exchange thereof, (ii) Borrower may pay
dividends solely in common stock; (iii) Borrower may repurchase the stock of
former employees, directors or consultants pursuant to stock repurchase
agreements so long as an Event of Default does not exist at the time of such
repurchase and would not exist after giving effect to such repurchase, provided
such repurchase does not exceed in the aggregate of One Hundred Thousand Dollars
($100,000) per fiscal year, and (iv) Borrower may make payments in cash in lieu
of the issuance of fractional shares 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 (i) 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, (ii) transactions between or among
Borrower and its Subsidiaries, and (iii) compensation arrangements approved by
Borrower’s board of directors.

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.

 

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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 material liability of
Borrower, including any liability to the Pension Benefit Guaranty Corporation or
its successors or any other governmental agency.

 

  8 EVENTS OF DEFAULT

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

8.1 Payment Default.

Borrower fails to (a) make any payment of principal or interest on any Credit
Extension on its due date, or (b) pay any other Obligations within three
(3) Business Days after such Obligations are due and payable (which three
(3) Business Day cure period shall not apply to payments due on the Revolving
Line Maturity Date). During the cure period, the failure to make or pay any
payment specified under clause (a) or (b) hereunder 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, 6.5,
6.6, 6.7, 6.8, 6.10, or violates any covenant in Section 7; or

(b) Borrower fails or neglects to perform, keep, or observe any other term,
provision, condition, covenant or agreement contained in this Agreement 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; 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). Cure periods provided under this section shall not
apply, among other things, to financial covenants or any other covenants set
forth in clause (a) above;

 

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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 the control of Borrower (including
a Subsidiary) on deposit or otherwise maintained with Bank or any Bank
Affiliate, or (ii) a notice of lien or levy 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; or

(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 material 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, under any agreement to which Borrower is a party with a third party or
parties, (a) any default resulting in a right by such third party or parties,
whether or not exercised, to accelerate the maturity of any Indebtedness in an
amount individually or in the aggregate in excess of Two Hundred Fifty Thousand
Dollars ($250,000); or (b) any default by Borrower, the result of which could
have a material adverse effect on Borrower’s business;

8.7 Judgments.

One or more final 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 the same are not, within ten (10) days after the entry thereof,
discharged or execution thereof stayed or bonded pending appeal, or such
judgments are not discharged prior to the expiration of any such stay (provided
that no Credit Extensions will be made prior to the discharge, stay, or bonding
of such judgment, order, or decree);

 

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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; or

8.9 Subordinated Debt.

Any subordination agreement related to any Subordinated Debt shall for any
reason be revoked or invalidated or otherwise cease to be in full force and
effect, any Person shall be in breach thereof or contest in any manner the
validity or enforceability thereof or deny that it has any further liability or
obligation thereunder, or the Obligations shall for any reason be subordinated
or shall not have the priority contemplated by this Agreement, except, in each
case, as may be permitted pursuant to the terms of such subordination agreement.

 

  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) deposit cash with Bank in an amount equal to 105%
of the Dollar Equivalent of the aggregate face amount of all Letters of Credit
remaining undrawn (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 such Letters of Credit,
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;

 

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(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, 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
(other than inchoate indemnity obligations) have been satisfied in full and Bank
is under no further obligation to make Credit Extensions hereunder. Bank’s
foregoing appointment as Borrower’s attorney in fact, and all of Bank’s rights
and powers, coupled with an interest, are irrevocable until all Obligations
(other than inchoate indemnity obligations) have been fully repaid and performed
and Bank’s obligation to provide Credit Extensions terminates.

 

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9.3 Protective Payments.

If Borrower fails to obtain the insurance called for by Section 6.6 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 rate applicable to the Obligations, 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.

If an Event of Default has occurred and is continuing, Bank may apply any funds
in its possession, whether from Borrower account balances, payments, proceeds
realized as the result of any collection of Accounts or other disposition of the
Collateral, or otherwise, to the Obligations in such order as Bank shall
determine in its sole discretion. Any surplus shall be paid to Borrower by
credit to the Designated Deposit Account or to other Persons legally entitled
thereto; Borrower shall remain liable to Bank for any deficiency. If Bank, in
its good faith business 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 the party granting the waiver 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 shall not preclude
Bank from exercising any other remedy under this Agreement or other remedy
available at law or in equity, 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.

 

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9.7 Demand Waiver.

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

 

  10 NOTICES

All notices, 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.

 

If to Borrower:    Iridex Corporation    1212 Terra Bella Avenue    Mountain
View, California 94043    Attn: Chief Financial Officer    Fax: 650-940-4710   
Email: jmackaness@iridex.com If to Bank:    Silicon Valley Bank    2400 Hanover
Street    Palo Alto, California 94304    Attn: Ryan Edwards    Fax: (650)
320-0016    Email: redwards@svb.com

 

  11 CHOICE OF LAW, VENUE, JURY TRIAL WAIVER AND JUDICIAL REFERENCE

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

 

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such summons, complaints, and other process may be made by registered or
certified mail addressed to Borrower at the address set forth in, or
subsequently provided by Borrower in accordance with, 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.

WITHOUT INTENDING IN ANY WAY TO LIMIT THE PARTIES’ AGREEMENT TO WAIVE THEIR
RESPECTIVE RIGHT TO A TRIAL BY JURY, if the above waiver of the right to a trial
by jury is not enforceable, the parties hereto agree that any and all disputes
or controversies of any nature between them arising at any time shall be decided
by a reference to a private judge, mutually selected by the parties (or, if they
cannot agree, by the Presiding Judge of the Santa Clara County, California
Superior Court) appointed in accordance with California Code of Civil Procedure
Section 638 (or pursuant to comparable provisions of federal law if the dispute
falls within the exclusive jurisdiction of the federal courts), sitting without
a jury, in Santa Clara County, California; and the parties hereby submit to the
jurisdiction of such court. The reference proceedings shall be conducted
pursuant to and in accordance with the provisions of California Code of Civil
Procedure §§ 638 through 645.1, inclusive. The private judge shall have the
power, among others, to grant provisional relief, including without limitation,
entering temporary restraining orders, issuing preliminary and permanent
injunctions and appointing receivers. All such proceedings shall be closed to
the public and confidential and all records relating thereto shall be
permanently sealed. If during the course of any dispute, a party desires to seek
provisional relief, but a judge has not been appointed at that point pursuant to
the judicial reference procedures, then such party may apply to the Santa Clara
County, California Superior Court for such relief. The proceeding before the
private judge shall be conducted in the same manner as it would be before a
court under the rules of evidence applicable to judicial proceedings. The
parties shall be entitled to discovery which shall be conducted in the same
manner as it would be before a court under the rules of discovery applicable to
judicial proceedings. The private judge shall oversee discovery and may enforce
all discovery rules and orders applicable to judicial proceedings in the same
manner as a trial court judge. The parties agree that the selected or appointed
private judge shall have the power to decide all issues in the action or
proceeding, whether of fact or of law, and shall report a statement of decision
thereon pursuant to California Code of Civil Procedure § 644(a). Nothing in this
paragraph shall limit the right of any party at any time to exercise self-help
remedies, foreclose against collateral, or obtain provisional remedies. The
private judge shall also determine all issues relating to the applicability,
interpretation, and enforceability of this paragraph.

 

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  12 GENERAL PROVISIONS

12.1 Termination Prior to Revolving Line Maturity Date.

This Agreement 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. Notwithstanding any such termination, Bank’s lien and security
interest in the Collateral shall continue until Borrower fully satisfies its
Obligations (other than inchoate indemnity 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 Fifty Thousand Dollars ($50,000), provided, that no termination
fee shall be charged if the credit facility hereunder is replaced with a new
facility from another division of Bank.

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”) claimed
or asserted by any other party in connection with the transactions contemplated
by the Loan Documents; and (b) all losses or expenses (including Bank Expenses)
in any way suffered, incurred, or paid by such Indemnified Person as a result
of, following from, consequential to, or arising from transactions between Bank
and Borrower contemplated by the Loan Documents (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.

 

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12.6 Correction of Loan Documents.

Bank may correct patent errors and fill in any blanks in the Loan Documents
consistent with the agreement of the parties so long as Bank provides written
notice of such correction and allows Borrower at least ten (10) days to object
to such correction.

12.7 Amendments in Writing; Waiver; Integration.

No purported amendment or modification of any Loan Document, or waiver,
discharge or termination of any obligation under any Loan Document, shall be
enforceable or admissible unless, and only to the extent, expressly set forth in
a writing signed by the party against which enforcement or admission is sought.
Without limiting the generality of the foregoing, no oral promise or statement,
nor any action, inaction, delay, failure to require performance or course of
conduct shall operate as, or evidence, an amendment, supplement or waiver or
have any other effect on any Loan Document. Any waiver granted shall be limited
to the specific circumstance expressly described in it, and shall not apply to
any subsequent or other circumstance, whether similar or dissimilar, or give
rise to, or evidence, any obligation or commitment to grant any further waiver.
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 the Loan Documents merge into 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 satisfied. The obligation of Borrower in Section 12.3 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 (such
Subsidiaries and Affiliates, together with Bank, collectively, “Bank Entities”);
(b) to prospective transferees or purchasers of any interest in the Credit
Extensions (provided, however, Bank shall use its best efforts to obtain any
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

 

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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 is either: (i) in the public domain or in
Bank’s possession when disclosed to Bank, or becomes part of the public domain
after disclosure to Bank through no fault of Bank; or (ii) disclosed to Bank by
a third party if Bank does not know that the third party is prohibited from
disclosing the information.

Bank Entities may use the confidential information for reporting purposes and
the development and distribution of databases and market analyses so long as
such confidential information is aggregated and anonymized prior to distribution
unless otherwise expressly prohibited by Borrower. The provisions of the
immediately preceding sentence shall survive the termination of this Agreement.

12.11 Attorneys’ Fees, Costs and Expenses.

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

12.12 Electronic Execution of Documents.

The words “execution,” “signed,” “signature” and words of like import in any
Loan Document shall be deemed to include electronic signatures or the keeping of
records in electronic form, each of which shall be of the same legal effect,
validity and enforceability as a manually executed signature or the use of a
paper-based recordkeeping system, as the case may be, to the extent and as
provided for in any applicable law, including, without limitation, any state law
based on the Uniform Electronic Transactions Act.

12.13 Captions.

The headings used in this Agreement are for convenience only and shall not
affect the interpretation of this Agreement.

12.14 Construction of Agreement.

The parties mutually acknowledge that they and their attorneys have participated
in the preparation and negotiation of this Agreement. In cases of uncertainty
this Agreement shall be construed without regard to which of the parties caused
the uncertainty to exist.

12.15 Relationship.

The relationship of the parties to this Agreement is determined solely by the
provisions of this Agreement. The parties do not intend to create any agency,
partnership, joint venture, trust, fiduciary or other relationship with duties
or incidents different from those of parties to an arm’s-length contract.

 

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12.16 Third Parties.

Nothing in this Agreement, whether express or implied, is intended to:
(a) confer any benefits, rights or remedies under or by reason of this Agreement
on any persons other than the express parties to it and their respective
permitted successors and assigns; (b) relieve or discharge the obligation or
liability of any person not an express party to this Agreement; or (c) give any
person not an express party to this Agreement any right of subrogation or action
against any party to this Agreement.

 

  13 DEFINITIONS

13.1 Definitions.

As used in the Loan Documents, the word “shall” is mandatory, the word “may” is
permissive, the word “or” is not exclusive, the words “includes” and “including”
are not limiting, the singular includes the plural, and numbers denoting amounts
that are set off in brackets are negative. As used in this Agreement, the
following capitalized terms have the following meanings:

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

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

“Advance” or “Advances” means a Formula Advance or a Non-Formula Advance.

“Affiliate” is, with respect to any Person, each other 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.

“Applicable Margin” means the following amounts during the following times:

 

Period

   Applicable Margin:  

Streamline Period

   0.25 % 

At all other times

   2.00 % 

In the event that Borrower fails to deliver to Bank when due the monthly
financial statements and Compliance Certificate, the Applicable Margin shall be
two percent (2.00%) until the first day of the first month after Bank receives
and reviews such financial statements and Compliance Certificate.

 

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“Availability Amount” is (a) the lesser of (i) the Revolving Line or (ii) the
amount available under the Borrowing Base, minus (b) the Dollar Equivalent
amount of all outstanding Letters of Credit (including drawn but unreimbursed
Letters of Credit), minus (c) the FX Reduction Amount, minus (d) any amounts
used for Cash Management Services, and minus (e) the outstanding principal
balance of any Advances.

“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 eighty percent (80%) of Eligible Accounts, as determined by
Bank from Borrower’s most recent Transaction Report; provided, however, that
Bank may decrease the foregoing percentage in its good faith business judgment
based on events, conditions, contingencies, or risks which, as determined by
Bank, may adversely affect Collateral.

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

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

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

“Cash Management Services” is defined in Section 2.1.4.

“Code” is the Uniform Commercial Code, as the same may, from time to time, be
enacted and in effect in the State of California; 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

 

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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
California, 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.

“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 B.

“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, in each
case, 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.

“Copyrights” are any and all copyright rights, copyright applications, copyright
registrations and like protections in each work or authorship and derivative
work thereof, whether published or unpublished and whether or not the same also
constitutes a trade secret.

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

 

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

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

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

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

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

“Dollars,” “dollars” or use of the sign “$” means only lawful money of the
United States and not any other currency, regardless of whether that currency
uses the “$” sign to denote its currency or may be readily converted into lawful
money of the United States.

“Dollar Equivalent” is, at any time, (a) with respect to any amount denominated
in Dollars, such amount, and (b) with respect to any amount denominated in a
Foreign Currency, the equivalent amount therefor in Dollars as determined by
Bank at such time on the basis of 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.

“Effective Date” is defined 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 otherwise agrees in writing, Eligible
Accounts shall not include:

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

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

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

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

(e) Accounts billed in the United States and owing from an Account Debtor which
does not have its principal place of business in the United States or Canada
unless such Accounts are otherwise Eligible Accounts, such Account is approved
by Bank in writing, in its sole discretion, on a case-by-case basis and
(i) covered in full by credit insurance satisfactory to Bank, less any
deductible, (ii) supported by letter(s) of credit acceptable to Bank, or
(iii) supported by a guaranty from the Export-Import Bank of the United States;

 

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(f) Accounts billed and/or payable outside of the United States unless Bank has
a first priority, perfected security interest or other enforceable Lien in such
Accounts under all applicable laws, including foreign laws (sometimes called
foreign invoiced accounts) and such Account is approved by Bank in writing, in
its sole discretion, on a case-by-case basis;

(g) 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).

(h) Accounts owing from an Account Debtor, 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);

(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);

 

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

(s) Accounts arising from chargebacks, debit memos or others payment deductions
taken by an Account Debtor (but only to the extent the chargeback is determined
invalid and subsequently collected by Borrower);

(t) Accounts arising from product returns and/or exchanges (sometimes called
“warranty” or “RMA” accounts);

(u) Accounts owing from an Account Debtor with respect to which Borrower has
received Deferred Revenue (but only to the extent of such Deferred Revenue);

(v) 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; and

(w) Accounts for which Bank in its good faith business judgment determines
collection to be doubtful, including, without limitation, accounts represented
by “refreshed” or “recycled” invoices.

“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.

“Exchange Act” is the Securities Exchange Act of 1934, as amended.

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

“Formula Advance” is defined in Section 2.1.1(a).

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

“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.

 

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“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 Intellectual Property, claims, income
and other tax refunds, security and other deposits, payment intangibles,
contract rights, 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 12.3.

“Initial Audit” is Bank’s inspection of Borrower’s Accounts, the Collateral, and
Borrower’s Books with results satisfactory to Bank in its sole and absolute
discretion.

“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.

 

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“Intellectual Property” means all of Borrower’s right, title, and interest in
and to the following:

(a) its Copyrights, Trademarks and Patents;

(b) any and all trade secrets and trade secret rights, including, without
limitation, any rights to unpatented inventions, know-how, operating manuals;

(c) any and all source code;

(d) any and all design rights which may be available to a Borrower;

(e) any and all claims for damages by way of past, present and future
infringement of any of the foregoing, with the right, but not the obligation, to
sue for and collect such damages for said use or infringement of the
Intellectual Property rights identified above; and

(f) all amendments, renewals and extensions of any of the Copyrights, Trademarks
or Patents.

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

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

“Key Person” means any of Borrower’s Chief Executive Officer or Chief Financial
Officer who are, as of the Effective Date, Theodore Boutacoff and James H.
Mackaness, respectively.

“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(b).

“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.

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

 

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“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 financial
condition of Borrower; or (c) a material impairment of the prospect of repayment
of any portion of the Obligations.

“Monthly Financial Statements” is defined in Section 6.2(c).

“Net Cash” is the sum of (a) the balance of all of Borrower’s unrestricted cash
and Cash Equivalents maintained at Bank or Bank’s Affiliates, less (b) all
outstanding Obligations.

“Net Cash Threshold” is One Million Five Hundred Thousand Dollars ($1,500,000).

“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.

“Non Formula Advance” is defined in Section 2.1.5.

“Non Formula Amount” is a Non Formula Advance or Non Formula Advances in an
amount equal to (a) Five Million Dollars ($5,000,000) at all times that Borrower
maintains a minimum Net Income of greater than One Dollar ($1.00) for the
previous fiscal quarter or (b) Two Million Dollars ($2,000,000) at all other
times. At any time that Borrower’s Net Income is equal to or less than One
Dollar ($1.00) for the previous fiscal quarter, the Non-Formula amount will not
be increased to Five Million Dollars ($5,000,000) until such time as Bank
confirms that Borrower’s Net Income was greater than One Dollar ($1.00) at all
times during the immediately preceding two (2) fiscal quarters. For purposes of
determining the Non Formula Amount, Borrower’s Net Income shall be tested as of
the last day of each fiscal quarter and any changes to the Non Formula Amount
resulting from a change in Borrower’s Net Income shall be effective as of the
first day of the second calendar month following such fiscal quarter being
tested.

“Obligations” are Borrower’s obligations to pay when due any debts, principal,
interest, Bank Expenses and other amounts Borrower owes Bank now or later,
whether under this Agreement, the Loan Documents, or otherwise, including,
without limitation, all obligations relating to letters of credit (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 to perform 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.

“Overadvance” is defined in Section 2.1.5.

 

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“Patents” means all patents, patent applications and like protections including
without limitation improvements, divisions, continuations, renewals, reissues,
extensions and continuations-in-part of the same.

“Payment” means all checks, wire transfers and other items of payment received
by Bank (including proceeds of Accounts and payment of the Obligations in full)
for credit to Borrower’s outstanding Credit Extensions or, if the balance of the
Credit Extensions has been reduced to zero, for credit to its deposit accounts.

“Perfection Certificate” is defined in Section 5.1.

“Permitted Indebtedness” is:

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

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

(c) Subordinated Debt;

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

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

(f) Indebtedness secured by Liens permitted under clauses (a) and (c) of the
definition of “Permitted Liens” hereunder;

(g) intercompany Indebtedness that otherwise constitutes an Investment allowed
under clauses (a) and (f) of the definition of Permitted Investments;

(h) unsecured Indebtedness incurred with corporate credit cards;

(i) other unsecured Indebtedness not otherwise permitted by Section 7.4 not
exceeding One Hundred Thousand Dollars ($100,000) in the aggregate outstanding
at any time; and

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

“Permitted Investments” are:

(a) Investments (including, without limitation, Subsidiaries) existing on the
Effective Date and shown on the Perfection Certificate;

 

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(b) Investments consisting of Cash Equivalents;

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

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

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

(f) Investments (i) by Borrower in Subsidiaries related to any balances in
connection with intercompany sales in the ordinary course of business, (ii) by
Borrower in Subsidiaries not to exceed Two Hundred Thousand Dollars ($200,000)
in the aggregate in any fiscal year; and (iii) by Subsidiaries in other
Subsidiaries or in Borrower;

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

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

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

(j) other Investments not exceeding Two Hundred Thousand Dollars ($200,000) in
the aggregate in any fiscal year.

“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 (i) not due and payable or (ii) 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 acquired or held by Borrower incurred
for financing the acquisition of the Equipment securing no more than Two Hundred
Thousand Dollars ($200,000) in the aggregate amount outstanding, or
(ii) existing on Equipment when acquired, if the Lien is confined to the
property and improvements and the proceeds of the Equipment;

(d) Liens of carriers, warehousemen, suppliers, or other Persons that are
possessory in nature arising in the ordinary course of business so long as such
Liens attach only to Inventory, securing liabilities in the aggregate amount not
to exceed Two Hundred Thousand Dollars ($200,000) and which are not delinquent
or remain payable without penalty or which are being contested in good faith and
by appropriate proceedings which proceedings have the effect of preventing the
forfeiture or sale of the property subject thereto;

(e) Liens to secure payment of workers’ compensation, employment insurance,
old-age pensions, social security and other like obligations incurred in the
ordinary course of business (other than Liens imposed by ERISA);

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

(g) leases or subleases of real property granted in the ordinary course of
Borrower’s business (or, if referring to another Person, in the ordinary course
of such Person’s business), and leases, subleases, non-exclusive licenses or
sublicenses of personal property (other than Intellectual Property) granted in
the ordinary course of Borrower’s business (or, if referring to another Person,
in the ordinary course of such Person’s business), if the leases, subleases,
licenses and sublicenses do not prohibit granting Bank a security interest
therein;

(h) non-exclusive license of Intellectual Property granted to third parties in
the ordinary course of business;

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

(j) Liens in favor of customs and revenue authorities arising as a matter of law
to secure payment of customs duties in connection with the importation of goods;

(k) Liens on insurance proceeds in favor of insurance companies granted solely
as security for financed premiums provided such Liens are confined to such
premiums and have no priority over any of Bank’s Liens; and

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

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

 

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“Prime Rate” is the greater of (a) Bank’s most recently announced “prime rate,”
even if it is not Bank’s lowest rate or (b) four percent (4.00%).

“Quick Assets” is, on any date, Borrower’s unrestricted cash and Cash
Equivalents maintained with Bank, plus net billed accounts receivable.

“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 its good faith business judgment, reducing
the amount of Advances and other financial accommodations which would otherwise
be available to Borrower (a) to reflect events, conditions, contingencies or
risks which, as determined by Bank in its good faith business judgment, do or
may adversely affect (i) the Collateral or any other property which is security
for the Obligations or its value (including without limitation any increase in
delinquencies of Accounts), (ii) the assets, business or prospects of Borrower,
or (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.

“Restricted License” is 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 could interfere with the Bank’s right to sell any Collateral.

“Revolving Line” is an Advance or Advances in an amount equal to Five Million
Dollars ($5,000,000).

“Revolving Line Maturity Date” is June 11, 2012.

“SEC” shall mean the Securities and Exchange Commission, any successor thereto,
and any analogous Governmental Authority.

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

 

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“Settlement Date” is defined in Section 2.1.3.

“Streamline Period” is defined in Section 2.1.1(b).

“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” is, as to any Person, a corporation, partnership, limited liability
company or other entity of which shares of stock or other ownership interests
having ordinary voting power (other than stock or such other ownership interests
having such power only by reason of the happening of a contingency) to elect a
majority of the board of directors or other managers of such corporation,
partnership or other entity are at the time owned, or the management of which is
otherwise controlled, directly or indirectly through one or more intermediaries,
or both, by such Person. Unless the context otherwise requires, each reference
to a Subsidiary herein shall be a reference to a Subsidiary of Borrower.

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

“Trademarks” means any trademark and servicemark rights, whether registered or
not, applications to register and registrations of the same and like
protections, and the entire goodwill of the business of Borrower connected with
and symbolized by such trademarks.

“Transaction Report” is that certain report of transactions and schedule of
collections in the form attached hereto as Exhibit C.

“Transfer” is defined in Section 7.1.

[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: IRIDEX CORPORATION By   /s/ J. Mackaness Name:   J. Mackaness Title:  
CFO  

 

BANK: SILICON VALLEY BANK By   /s/ Ryan Edwards Name:   Ryan Edwards Title:  
Relationship Manager  

[Signature Page to Loan and Security Agreement]

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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 (i) property (and
all substitutions, accessions, additions, attachments, accessories,
improvements, replacements, products and proceeds thereto) subject to a lien
described in clause (c) of the definition of Permitted Liens in which the
granting of a security interest in such property or equipment is prohibited by
or would constitute a default under any agreement or documents governing such
property, provided that upon the termination or lapsing of any such prohibition,
such property shall automatically be part of the Collateral; (ii) property that
constitutes the capital stock of a controlled foreign corporation (as defined in
the Internal Revenue Code of 1986, as amended) in excess of sixty-five percent
(65%) of the voting power of all classes of capital stock of such controlled
foreign corporation entitled to vote; and (iii) any Intellectual Property;
provided, however, the Collateral shall include all Accounts and all proceeds of
Intellectual Property. If a judicial authority (including a U.S. Bankruptcy
Court) would hold that a security interest in the underlying Intellectual
Property is necessary to have a security interest in such Accounts and such
property that are proceeds of Intellectual Property, then the Collateral shall
automatically, and effective as of the Effective Date, include the Intellectual
Property to the extent necessary to permit perfection of Bank’s security
interest in such Accounts and such other property of Borrower that are proceeds
of the Intellectual Property.

Borrower has agreed not to encumber any of its Intellectual Property without
Bank’s prior written consent.

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EXHIBIT B

COMPLIANCE CERTIFICATE

 

TO:         SILICON VALLEY BANK    Date:                                  
FROM:  IRIDEX CORPORATION   

The undersigned authorized officer of IRIDEX CORPORATION (“Borrower”) certifies
that under the terms and conditions of the Loan and Security Agreement between
Borrower and Bank (the “Agreement”):

(1) Borrower is in complete compliance for the period ending _______________
with all required covenants except as noted below; (2) there are no Events of
Default; (3) all representations and warranties in the Agreement are true and
correct in all material respects on this date except as noted below; 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;
(4) Borrower, and each of its Subsidiaries, has timely filed all required tax
returns and reports, and Borrower has timely paid all foreign, federal, state
and local taxes, assessments, deposits and contributions owed by Borrower except
as otherwise permitted pursuant to the terms of Section 5.9 of the Agreement;
and (5) no Liens have been levied or claims made against Borrower or any of its
Subsidiaries relating to unpaid employee payroll or benefits of which Borrower
has not previously provided written notification to Bank.

Attached are the required documents supporting the certification. The
undersigned certifies that the attached financial statements are prepared in
accordance with GAAP consistently applied from one period to the next except as
explained in an accompanying letter or footnotes and except, in the cases of
unaudited financial statements for the absence of footnotes and subject to
year-end adjustments. The undersigned acknowledges that no borrowings may be
requested at any time or date of determination that Borrower is not in
compliance with any of the terms of the Agreement, and that compliance is
determined not just at the date this certificate is delivered. Capitalized terms
used but not otherwise defined herein shall have the meanings given them in the
Agreement.

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

 

Reporting Covenant

  

Required

   Complies

Monthly financial statements with Compliance Certificate

   Monthly within 30 days and within 45 days of quarter end    Yes    No

Annual financial statement (CPA Audited) + CC

   FYE within 240 days    Yes    No

10-Q, 10-K and 8-K

   Within 5 days after filing with SEC    Yes    No

A/R & A/P Agings and Deferred Revenue Reports

   (a) weekly during any Streamline Period and (b) monthly at all other times*
   Yes    No

Transaction Reports

   Monthly within 30 days    Yes    No

Annual board projections

   FYE within 30 days    Yes    No

 

* Transaction Reports not required if no Advances (other than Non-Formula
Advances) are outstanding

 

Financial Covenant

   Required    Actual    Complies

Maintain on a Monthly Basis:

        

Minimum Adjusted Quick Ratio

   1.25:1.00    _____:1.00    Yes    No

 

     

Performance Pricing

         

Applies

Net Cash > $1,500,000

   (a) Greater of Prime or 4% plus (b) 0.25%         Yes    No

Net Cash £ $1,500,000

   (a) Greater of Prime or 4% plus (b) 2.00%         Yes    No

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The following financial covenant analysis and information set forth in Schedule
1 attached hereto are true and accurate as of the date of this Certificate.

The following are the exceptions with respect to the certification above: (If no
exceptions exist, state “No exceptions to note.”)

 

 

 

 

 

 

 

IRIDEX CORPORATION     BANK USE ONLY By:         Received by:     Name:        
  AUTHORIZED SIGNER Title:         Date:           Verified:            
AUTHORIZED SIGNER       Date:           Compliance Status:     Yes     No

 

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Schedule 1 to Compliance Certificate

Financial Covenants of Borrower

In the event of a conflict between this Schedule and the Loan Agreement, the
terms of the Loan Agreement shall govern.

Dated: ____________________

 

I. Adjusted Quick Ratio (Section 6.8(a))

Required:     1.25:1.00

Actual:

 

A.

   Aggregate value of the unrestricted cash and cash equivalents of Borrower and
its Subsidiaries    $             

B.

   Aggregate value of the net billed accounts receivable of Borrower and its
Subsidiaries    $             

C.

  

Aggregate value of the Investments with maturities of fewer than 12 months

of Borrower and it Subsidiaries

   $             

D.

   Quick Assets (the sum of lines A through C)    $             

E.

   Aggregate value of Obligations to Bank    $             

F.

   Aggregate value of liabilities that should, under GAAP, be classified as
liabilities on Borrower’s consolidated balance sheet, including all
Indebtedness, and not otherwise reflected in line E above that matures within
one (1) year    $             

G.

   Current Liabilities (the sum of lines E and F)    $             

H.

   Aggregate value of all amounts received or invoiced by Borrower in advance of
performance under contracts and not yet recognized as revenue    $             

I.

   Line G minus line H    $             

J.

   Quick Ratio (line D divided by line I)      ______

Is line H equal to or greater than 1.25:1:00?

             No, not in compliance                                        
                                                  Yes, in compliance

 

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EXHIBIT C

Transaction Report

 

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