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Exhibit 10.1
 
 
 
 
 
SCIENTIFIC LEARNING CORPORATION
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT

 
 
 
 
 
 
 

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This AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT is entered into as of
February 9, 2012, by and between COMERICA BANK (“Bank”) and SCIENTIFIC LEARNING
CORPORATION (“Borrower”).
 
RECITALS
 
Bank and Borrower have entered into that certain Loan and Security Agreement
dated as of January 15, 2004 (as amended, restated, modified or supplemented
from time to time, the “Original Agreement”).  Bank and Borrower wish to amend
and restate the terms of the Original Agreement in accordance with the terms
hereof.  This Agreement sets forth the terms on which Bank will advance credit
to Borrower, and Borrower will repay the amounts owing to Bank.
 
AGREEMENT
 
The parties agree as follows:
 
1.             DEFINITIONS AND CONSTRUCTION.
 
1.1           Definitions.  As used in this Agreement the following terms shall
have the following definitions:
 
“Accounts” means all presently existing and hereafter arising accounts, contact
rights, payment intangibles, and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods (including, without
limitation, the licensing of software and other technology) or the rendering of
services by Borrower, whether or not earned by performance, and any and all
credit insurance, guaranties, and other security, therefor, as well as all
merchandise returned to or reclaimed by Borrower and Borrower’s Books relating
to any of the foregoing.
 
“Advance” or “Advances” means a cash advance or cash advances under the
Revolving Facility.
 
“Affiliate” means, with respect to any Person, any Person that owns or controls
directly or indirectly such Person, any Person that controls or is controlled by
or is under common control with such Person, and each of such person’s senior
executive officers, directors, general partners and limited partners.
 
“Bank Expenses” means all:  reasonable costs or expenses (including reasonable
attorneys’ fees and expenses) incurred in connection with the preparation,
negotiation, administration, and enforcement of the Loan Documents; reasonable
Collateral audit fees; and Bank’s reasonable attorneys* fees and expenses
incurred in amending, enforcing or defending the Loan Documents (including fees
and expenses of appeal), incurred before, during and after an Insolvency
Proceeding, whether or not suit is brought.
 
“Borrower’s Books” means all of Borrower’s books and records
including:  ledgers; records concerning Borrower’s assets or liabilities, the
Collateral, business operations or financial condition; and all computer
programs, or tape files, and the equipment, containing such information.
 
“Business Day” means any day that is not a Saturday, Sunday, or other day on
which banks in the State of California are authorized or required to close.
 
“Change in Control” shall mean a transaction in which any “person” or “group”
(within the meaning of Section 13(d) and 14(d)(2) of the Securities Exchange Act
of 1934) becomes the “beneficial owner” (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934), directly or indirectly, of a sufficient number
of shares of all classes of stock then outstanding of Borrower ordinarily
entitled to vote in the election of directors, empowering such “person” or
“group” to elect a majority of the Board of Directors of Borrower, who did not
have such power before such transaction.  Notwithstanding the foregoing, the
present holdings of, and any additional acquisition of, securities of the
Borrower by Trigran Investments or any of its affiliates shall not constitute a
Change of Control for purposes of this Agreement.
 
 
 

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“Closing Date” means the date of this Agreement,
 
“Code” means the California Uniform Commercial Code.
 
“Collateral” means the property described on Exhibit A attached hereto.
 
“Contingent Obligation” means, as applied to any Person, any direct or indirect
liability, contingent or otherwise, of that Person with respect to (i) any
indebtedness, lease, dividend, letter of credit or other obligation of another,
including, without limitation, any such obligation directly or indirectly
guaranteed, endorsed, co-made or discounted or sold with recourse by that
Person, or in respect of which that Person is otherwise directly or indirectly
liable; (ii) any obligations with respect to undrawn letters of credit,
corporate credit cards, or merchant services issued or provided for the account
of that Person; and (iii) all obligations arising under any interest rate,
currency or commodity swap agreement, interest rate cap agreement, interest rate
collar agreement, or other agreement or arrangement designed to protect such
Person against fluctuation in interest rates, currency exchange rates or
commodity prices; provided, however, that the term “Contingent Obligation” shall
not include endorsements for collection or deposit in the ordinary course of
business.  The amount of any Contingent Obligation shall be deemed to be an
amount equal to the stated or determined amount of the primary obligation in
respect of which such Contingent Obligation is made or, if not stated or
determinable, the maximum reasonably anticipated liability in respect thereof as
determined by such Person in good faith; provided, however, that such amount
shall not in any event exceed the maximum amount of the obligations under the
guarantee or other support arrangement.
 
“Copyrights” means any and all copyright rights, copyright applications,
copyright registrations and like protections in each work of authorship and
derivative work thereof, whether published or unpublished and whether or not the
same also constitutes a trade secret, now or hereafter existing, created,
acquired or held.
 
“Credit Extension” means each Advance or any other extension of credit by Bank
for the benefit of Borrower hereunder.
 
“Current Liabilities” means, as of any applicable date, all amounts that should,
in accordance with GAAP, be included as current liabilities on the consolidated
balance sheet of Borrower and its Subsidiaries, as at such date, plus, to the
extent not already included therein, all amounts that Borrower owes Bank under
this Agreement or otherwise, including all Indebtedness that is payable upon
demand or within one year from the date of determination thereof unless such
Indebtedness is renewable or extendible at the option of Borrower or any
Subsidiary to a date more than one year from the date of determination.
 
“Equipment” means all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments to
which Borrower has any interest.
 
“ERISA” means the Employee Retirement Income Security Act of 1974, as amended,
and the regulations thereunder.
 
“Event of Default” has the meaning assigned in Article 8.
 
“GAAP” means generally accepted accounting principles as in effect from time to
time.
 
“Indebtedness” means (a) all indebtedness for borrowed money or the deferred
purchase price of property or services, including without limitation
reimbursement and other obligations with respect to surety bonds and letters of
credit, (b) all obligations evidenced by notes, bonds, debentures or similar
instruments, (c) all capital lease obligations, and (d) all Contingent
Obligations.
 
 
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“Insolvency Proceeding” means any proceeding commenced by or against any person
or entity under any provision of the United States Bankruptcy Code, as amended,
or under any other bankruptcy or insolvency law, including assignments for the
benefit of creditors, formal or informal moratoria, compositions, extension
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.
 
“Inventory” means all present and future inventory in which Borrower has any
interest, including merchandise, raw materials, parte, supplies, packing and
shipping materials, work in process and finished products intended for sale or
lease or to be furnished under a contract of service, of every kind and
description now or at any time hereafter owned by or in the custody or
possession, actual or constructive, of Borrower, including such inventory as is
temporarily out of its custody or possession or in transit and including any
returns upon any accounts or other proceeds, including insurance proceeds,
resulting from the sale or disposition of any of the foregoing and any documents
of title representing any of the above, and Borrower’s Books relating to any of
the foregoing.
 
“Investment” means any beneficial ownership of (including stock; partnership
interest or other securities) any Person, or any loan, advance or capital
contribution to any Person.
 
“IRC” means the Internal Revenue Code of 1986, as amended, and the regulations
thereunder.
 
“Letter of Credit” means a commercial or standby letter of credit or similar
undertaking issued by Bank at Borrower’s request in accordance with Section
2.1(a)(iii).
 
“Letter of Credit Sublimit” means a sublimit for Letters of Credit under the
Revolving Line not to exceed One Million Dollars ($1,000,000).
 
“Lien” means any mortgage, lien, deed of trust, charge, pledge, security
interest or other encumbrance.
 
“Loan Documents” means, collectively, this Agreement, any note or notes executed
by Borrower, and any other agreement entered into in connection with this
Agreement, all as amended or extended from time to time.
 
“Material Adverse Effect” means a material adverse effect on (i) the business
operations or financial condition of Borrower and its Subsidiaries taken as a
whole or (ii) the ability of Borrower to repay the Obligations or otherwise
perform its obligations under the Loan Documents or (iii) the value or priority
of Bank’s security interests in the Collateral or (iv) the prospect of repayment
of the Obligations.
 
“Negotiable Collateral” means all of Borrower’s present and future letters of
credit of which it is a beneficiary, notes, drafts, instruments, securities,
documents of title, and chattel paper, and Borrower’s Books relating to any of
the foregoing.
 
“Net Worth” means the sum of the capital stock, partnership interest or limited
liability company interest of Borrower as determined in accordance with GAAP.
 
“Obligations” means all debt, principal, interest, Bank Expenses and other
amounts owed to Bank by Borrower pursuant to this Agreement or any other
agreement, whether absolute or contingent, due or to become due, now existing or
hereafter arising, including any interest that accrues after the commencement of
an Insolvency Proceeding.
 
“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.
 
 
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“Periodic Payments” means all installments or similar recurring payments that
Borrower may now or hereafter become obligated to pay to Bank pursuant to the
terms and provisions of any instrument, or agreement now or hereafter in
existence between Borrower and Bank.
 
“Permitted Indebtedness” means:
 
(a)           Indebtedness of Borrower in favor of Bank arising under this
Agreement or any other Loan Document;
 
(b)           Indebtedness existing on the Closing Date and disclosed in the
Schedules;
 
(c)           Indebtedness secured by a lien described in clause (c) of the
defined term “Permitted Liens,” provided (i) such Indebtedness does not exceed
the lesser of the cost or fair market value of the equipment financed with such
Indebtedness and (ii) such Indebtedness does not exceed $250,000 in the
aggregate at any given time;
 
(d)           Subordinated Debt;
 
(e)           Indebtedness to trade creditors incurred in the ordinary course of
business;
 
(f)            Indebtedness other than Indebtedness described in clauses (a)
through (e) of this definition of Permitted Indebtedness, provided such
Indebtedness shall not exceed Two Hundred Fifty Thousand Dollars ($250,000) in
the aggregate at any given time; and
 
(g)           Extensions, refinancings and renewals of any items of Permitted
Indebtedness, provided that the principal amount is not increased or the terms
modified to impose more burdensome terms upon Borrower or its Subsidiary, as the
case may be.
 
“Permitted Investment” means:
 
(a)           Investments existing on the Closing Date disclosed in the
Schedules;
 
(b)           marketable direct obligations issued or unconditionally guaranteed
by the United States of America or any agency or any State thereof maturing
within one (1) year from the date of acquisition thereof, (ii) commercial paper
maturing no more than one (1) year from the date of creation thereof and
currently having rating of at least A-2 or P-2 from either Standard & Poor’s
Corporation or Moody’s Investors Service, (iii) certificates of deposit maturing
no later than one (1) year from the date of investment therein issued by Bank
and (iv) Bank’s money market accounts;
 
(c)           Investments in Subsidiaries or joint ventures provided that the
aggregate amount of such Investments does not exceed Two Hundred Thousand
Dollars ($200,000) at any given time;
 
(d)           Repurchases of stock from former employees or directors of
Borrower under the terms of applicable repurchase agreements (i) in an aggregate
amount not to exceed $200,000 in any fiscal year, provided that no Event of
Default has occurred, is continuing or would exist after giving effect to the
repurchases, or (ii) in any amount where the consideration for the repurchase is
the cancellation of Indebtedness owed by such former employees to Borrower
regardless of whether an Event of Default exists;
 
(e)           Investments accepted in connection with Permitted Transfers;
 
(f)            Investments consisting of (i) travel advances and employee
relocation loans and other employee loans and advances in (he 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 plan agreements approved by Borrower’s Board of
Directors;
 
 
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(g)           Investments (including debt obligations) received in connection
with the bankruptcy or reorganization of custom disputes with, customers or
suppliers arising in the ordinary course of Borrower’s business;
 
(h)           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;
 
(i)            Investments not otherwise permitted under Section 7.7 which do
not exceed Two Hundred Fifty Thousand Dollars ($250,000) in the aggregate during
the term of this Agreement; and
 
(j)            Investments pursuant to Borrower’s investment policy, which has
been delivered to Bank.
 
“Permitted Liens” means the following:
 
(a)           Any Liens existing on the Closing Date and disclosed in the
Schedule or arising under this Agreement or the other Loan Documents;
 
(b)           Liens for taxes, tees, assessments or other governmental charges
or levies, either not delinquent or being contested in good faith by appropriate
proceedings, provided the same have no priority over any of Bank’s security
interests;
 
(c)           Liens (i) upon or in any equipment which was not financed by Bank
acquired or held by Borrower or any of its Subsidiaries to secure the purchase
price of such equipment or indebtedness incurred solely for the purpose of
financing the acquisition of such equipment, or (ii) existing on such equipment
at the time of its acquisition, provided that the Lien is confined solely to the
property so acquired and improvements thereon, and the proceeds of such
equipment;
 
(d)           Liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by Liens of the type described in
clauses (a) through (c) above, pro vided that any extension, renewal or
replacement Lien shall be limited to the property encumbered by the existing
Lien and the principal amount of the indebtedness being extended, renewed or
refinanced does not increase;
 
(e)           Liens arising from judgments, decrees or attachments in
circumstances not constituting an Event of Default under Sections 8.4 or 8.8;
 
(f)            Leases or subleases and licenses and sublicenses granted to
others which do not interfere in any material respect with the business of
Borrower and its Subsidiaries taken as a whole;
 
(g)           Deposits in the ordinary course of business under worker’s
compensation, unemployment insurance, social security and other similar laws, or
to secure the performance of bids, tenders or contracts (other than for the
repayment of borrowed money) or to secure indemnity, performance or other
similar bonds tor the performance of bids, tenders or contracts (other than for
the repayment of borrowed money) or to secure statutory obligations (other than
liens arising under ERISA or environmental liens) or surety or appeal bonds, or
to secure indemnity, performance or other similar bonds;
 
(h)           Liens in favor of customs and revenue authorities arising as a
matter of law to secure payments of custom duties in connection with the
importation of goods;
 
(i)            Liens of materialmen, mechanics, warehousemen, carriers,
artisan’s or other similar Liens arising in the ordinary course of Borrower’s
business or by operation of law, which are not past due or which are being
contested in good faith by appropriate proceedings and for which accordance with
GAAP;
 
 
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(j)            Liens in favor of other financial institutions arising in
connection with Borrower’s deposit accounts held at such institutions, provided
that Bank has a perfected security interest in the amounts held in such deposit
accounts.
 
“Permitted Transfer” means the conveyance, sale, lease, transfer or disposition
by Borrower or any Subsidiary of:
 
(a)           Inventory in the ordinary course of business;
 
(b)           licenses and similar arrangements for the use of the property of
the Borrower in the ordinary course of its business;
 
(c)           worn-out or obsolete Equipment not financed with the proceeds of
Equipment Advances; or
 
(d)           other assets of Borrower or its Subsidiaries which do not in the
aggregate exceed Five Hundred Thousand Dollars ($500,000) during any fiscal
year.
 
“Person” means any individual, sole proprietorship, partnership, limited
liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or governmental agency.
 
“Prime Rate” is defined in the Prime Referenced Rate Addendum.
 
“Prime Referenced Rate Addendum” means the Prime Referenced Rate Addendum to
Amended and Restated Loan and Security Agreement attached hereto as Exhibit C.
 
“Responsible Officer” means each of the Chief Executive Officer, the President,
the Chief Operating Officer, the Chief Financial Officer, the Treasurer, the
Comptroller and the Controller of Borrower.
 
“Revolving Facility” means the facility under which Borrower may request Bank to
issue Advances, as specified in Section 2.1(a) hereof.
 
“Revolving Line” means a Credit Extension of up to Five Million ($5,000,000)
(inclusive of the aggregate face amount of Letters of Credit issued under the
Letter of Credit Sublimit).
 
“Revolving Maturity Date” means December 31, 2013.
 
“Schedule” means the schedule of exceptions attached hereto and approved by
Bank, if any.
 
“Shares” means (i) sixty-five percent (65%) of the issued and outstanding
capital stock, membership units or other securities owned or held of record by
Borrower in any Subsidiary of Borrower which is not an entity organized under
the laws of the United States or any territory thereof, and (ii) one hundred
percent (100%) of the issued and outstanding capital stock, membership units or
other securities owned or held of record by Borrower in any Subsidiary of
Borrower which is an entity organized under the laws of the United States or any
territory thereof.
 
“Subordinated Debt” means any debt incurred by Borrower that is subordinated to
the debt owing by Borrower to Bank on terms acceptable to Bank (and identified
as being such by Borrower and Bank).
 
“Subsidiary” means any corporation, company or partnership in which (i) any
general partnership interest or (ii) more than 50% of the stock or other units
of ownership which by the terms thereof has the ordinary voting power to elect
the Board of Directors, managers or trustees of the entity, at the time as of
which any determination is being made, is owned by Borrower, either directly or
through an Affiliate.
 
 
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“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.
 
1.2           Accounting Terms.  All accounting terms not specifically defined
herein shall be construed in accordance with GAAP and all calculations made
hereunder shall be made in accordance with GAAP.  When used herein, the terms
“financial statements” shall include the notes and schedules thereto.
 
2.             LOAN AND TERMS OF PAYMENT.
 
2.1           Credit Extensions.
 
Borrower promises to pay to the order of Bank, in lawful money of the United
States of America, the aggregate unpaid principal amount of all Credit
Extensions made by Bank to Borrower hereunder.  Borrower shall also pay interest
on the unpaid principal amount of such Credit Extensions at rates in accordance
with the terms hereof.
 
(a)           Revolving Advances.
 
(i)           Subject to and upon the terms and conditions of this Agreement (1)
Borrower may request Advances in an aggregate outstanding amount not to exceed
the Revolving Line, less the aggregate face amount of Letters of Credit issued
under the Letter of Credit Sublimit, and (2) amounts borrowed pursuant to this
Section 2.1(a) may be repaid and reborrowed at any time prior to the Revolving
Maturity Date, at which time all Advances under this Section 2.1(a) shall be
immediately due and payable.  Each Advance must be in an amount equal to or
greater than the lesser of Five Hundred Thousand Dollars ($500,000) or the
amount that has not yet been drawn under the Revolving Line (less the aggregate
face amount of Letters of Credit issued under the Letter of Credit
Sublimit).  Except as set forth in the Prime Referenced Rate Addendum, Borrower
may prepay any Advances without penalty or premium.
 
(ii)         Whenever Borrower desires an Advance, Borrower will notify Bank by
facsimile transmission or telephone no later than 3:00 pm Pacific time, on the
Business Day that the Advance is to be made.  Each such notification shall be
promptly confirmed by a Payment/Advance Form in substantially the form of
Exhibit B hereto.  Bank is authorized to make Advances under this Agreement,
based upon instructions received from a Responsible Officer or a designee of a
Responsible Officer, or without instructions if in Bank’s discretion such
Advances are necessary to meet Obligations which have become due and remain
unpaid.  Bank shall be entitled to rely on any telephonic notice given by a
person who Bank reasonably believes to be a Responsible Officer or a designee
thereof, and Borrower shall indemnify and hold Bank harmless for any damages or
loss suffered by Bank as a result of such reliance.  Bank will credit the amount
of Advances made under this Section 2.1(a) to Borrower’s deposit account
 
(iii)         Letter of Credit Sublimit.  Subject to the availability under the
Revolving Line, and in reliance on the representations and warranties of
Borrower set forth herein, at any time and from time to time from the date
hereof through the Business Day immediately prior to the Revolving Maturity
Date, Bank shall issue for the account of Borrower such Letters of Credit as
Borrower may request by delivering to Bank a duly executed letter of credit
application on Bank’s standard form; provided, however, that the outstanding and
undrawn amounts under all such Letters of Credit (i) shall not at any time
exceed the Letter of Credit Sublimit, and (ii) shall be deemed to constitute
Advances for the purpose of calculating availability under the Revolving
Line.  Any drawn but unreimbursed amounts under any Letters of Credit shall be
charged as Advances against the Revolving Line. 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 form application and letter of
credit agreement.  Borrower will pay any standard issuance and other fees that
Bank notifies Borrower it will charge for issuing and processing Letters of
Credit.
 
(iv)        Collateralization of Obligations Extending Beyond Maturity.  If
Borrower has not secured to Bank’s satisfaction its obligations with respect to
any Letters of Credit that may extend beyond the Revolving Maturity Date, then,
effective as of the Revolving Maturity Date, the balance in any deposit accounts
held by Bank and the certificates of deposit or time deposit accounts issued by
Bank in Borrower’s name (and any interest paid thereon or proceeds thereof,
including any amounts payable upon the maturity or liquidation of such
certificates or accounts), shall automatically secure such obligations to the
extent of the then continuing or outstanding and undrawn Letters of Credit;
provided, however, that if there are insufficient balances in such accounts to
secure such obligations, Borrower shall immediately deposit such additional
funds as are necessary to fully secure such obligations.  Borrower authorizes
Bank to hold such balances in pledge and to decline to honor any drafts thereon
or any requests by Borrower or any other Person to pay or otherwise transfer any
part of such balances for so long as the Letters of Credit are outstanding or
continue.
 
 
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2.2           Intentionally Omitted.
 
2.3           Interest Rates, Payments, and Calculations.
 
(a)            Advances.  Except as set forth in Section 2.3(b), the Advances
shall bear interest, on the outstanding daily balance thereof as set forth in
the Prime Referenced Rate Addendum.
 
(b)            Late Fee; Default Rate.  If any payment of an Obligation
hereunder is not made within ten (10) days after the date such payment is due,
Borrower shall pay Bank a late fee equal to the lesser of (i) three percent of
the amount of such unpaid amount or (ii) the maximum amount permitted to be
charged under applicable law.  All Advances shall bear interest, from and after
the occurrence and during the continuance of an Event of Default, at a rate
equal to three (3) percentage points above the interest rate applicable
immediately prior to the occurrence of the Event of Default.
 
(c)            Payments.  Interest hereunder shall be due and payable on the
first calendar day of each month during the term hereof.  Bank shall, at its
option, charge such interest, all Bank Expenses, and all Periodic Payments
against any of Borrower’s deposit accounts or against the Revolving Line, in
which case those amounts shall thereafter accrue interest at the rate then
applicable hereunder.  Any interest not paid when due shall be compounded by
becoming a part of the Obligations, and such interest shall thereafter accrue
interest at the rate then applicable hereunder.  All payments shall be free and
clear of any taxes (other than any taxes relating to Bank’s net income),
withholdings, duties, impositions or other charges, to the end that Bank will
receive the entire amount of any Obligations payable hereunder, regardless of
source of payment.
 
(d)            Computation.  In the event the Prime Rate is changed from time to
time hereafter, the applicable rate of interest hereunder shall be increased or
decreased, effective as of the day the Prime Rate is changed, by an amount equal
to such change in the Prime Rate.  All interest chargeable under the Loan
Documents shall be computed on the basis of a three hundred sixty (360) day year
for the actual number of days elapsed.
 
2.4           Crediting Payments.  Prior to the occurrence of an Event of
Default, Bank shall credit a wire transfer of funds, check or other item of
payment to such deposit account or Obligations as Borrower specifies.  After the
occurrence and during the continuance of an Event of Default, the receipt by
Bank of any wire transfer of funds, check, or other item of payment shall be
immediately applied to conditionally reduce Obligations, but shall not be
considered a payment on account unless such payment is of immediately available
federal funds or unless and until such check or other item of payment is honored
when presented for payment.  Notwithstanding anything to the contrary contained
herein, any wire transfer or payment received by Bank after 12:00 noon Pacific
time shall be deemed to have been received by Bank as of the opening of business
on the immediately following Business Day.  Whenever any payment to Bank under
the Loan Documents would otherwise be due (except by reason of acceleration) on
a date that is not a Business Day, such payment shall instead be due on the next
Business Day, and additional fees or interest, as the case may be, shall accrue
and be payable for the period of such extension.
 
2.5           Fees.  Borrower shall pay to Bank the following:
 
(a)            Unused Facility Fee.  A fee equal to one quarter of one percent
(0.25%) of the difference between the amount then available under the Revolving
Line pursuant to Section 2.1(a)(i) and the average outstanding daily balance
thereunder during the term hereof, paid quarterly in arrears; and
 
 
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(b)           Bank Expenses.  On the Closing Date, all Bank Expenses incurred
through the Closing Date, including reasonable attorneys’ fees and expenses, at
such times as Bank shall request in written notice to Borrower.
 
2.6           Additional Costs.  After the date hereof, in case any law,
regulation, treaty or official directive or the interpretation or application
thereof by any court or any governmental authority charged with the
administration thereof or the compliance with any guideline or request of any
central bank or other governmental authority (whether or not having the force of
law):
 
(a)           subjects Bank to any tax with respect to payments of principal or
interest or any other amounts payable hereunder by Borrower or otherwise with
respect to the transactions contemplated hereby (except for taxes on the overall
net income of Bank imposed by the United States of America or any political
subdivision thereof);
 
(b)           imposes, modifies or deems applicable any deposit insurance,
reserve, special deposit or similar requirement against assets held by, or
deposits in or for the account of, or loans by, Bank; or
 
(c)           imposes upon Bank any other condition with respect to its
performance under this Agreement,
 
and the result of any of the foregoing is to increase the cost to Bank, reduce
the income receivable by Bank or impose any expense upon Bank with respect to
the Obligations, Bank shall notify Borrower thereof.  Borrower agrees to pay to
Bank the amount of such increase in cost, reduction in income or additional
expense as and when such cost reduction or expense is incurred or determined,
upon presentation by Bank of a statement of the amount and setting forth Bank’s
calculation thereof, all in reasonable detail, which statement shall be deemed
true and correct absent manifest error.
 
2.7           Term.  This Agreement shall become effective on the Closing Date
and, subject to Section 13.7, shall continue in full force and effect for so
long as any Obligations remain outstanding or Bank has any obligation to make
Credit Extensions under this Agreement.  Notwithstanding the foregoing, Bank
shall have the right to terminate its obligation to make Credit Extensions under
this Agreement immediately and without notice upon the occurrence and during the
continuance of an Event of Default Notwithstanding termination, Bank’s Lien on
the Collateral shall remain in effect for so long as any Obligations are
outstanding.
 
3.           CONDITIONS OF LOANS.
 
3.1           Conditions Precedent to Initial Credit Extension.  The obligation
of bank to make the initial Credit Extension is subject n the condition
precedent that Bank shall have received, in form and substance satisfactory to
Bank, the following:
 
(a)           this Agreement;
 
(b)           a certificate of the Secretary of Borrower with respect to
incumbency and resolutions authorizing the execution and delivery of this
Agreement;
 
(c)           an agreement to provide insurance;
 
(d)           payment of the fees and Bank Expenses then due specified in
Section 2.5 hereof;
 
(e)           such other documents, and completion of such other matters, as
Bank may reasonably deem necessary or appropriate.
 
 
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3.2           Conditions Precedent to all Credit Extensions.  The obligation of
Bank to make each Credit Extension, including the initial Credit Extension, is
further subject to the following conditions:
 
(a)           timely receipt by Bank of the Payment/Advance Form as provided in
Section 2.1; and
 
(b)           the representations and warranties contained in Section 5 shall be
true and correct in all material respects on and as of the date of such
Payment/Advance Form and on the effective date of each Credit Extension as
though made at and as of each such date, and no Event of Default shall have
occurred and be continuing, or would exist after giving effect to such Credit
Extension (provided, however, that those representations and warranties
expressly referring to another date shall be true, correct and complete in all
material respects as of such date).  The making of each Credit Extension shall
be deemed to be a representation and warranty by Borrower on the date of such
Credit Extension as to the accuracy of the facts referred to in this Section
3.2.
 
4.             CREATION OF SECURITY INTEREST.
 
4.1           Grant of Security Interest.  Borrower grants and pledges to Bank a
continuing security interest in all presently existing and hereafter acquired or
arising Collateral in order to secure prompt repayment of any and all
Obligations and in order to secure prompt performance by Borrower of each of its
covenants and duties under the Loan Documents.  Except is set forth in the
Schedule and for Permitted Liens, such security interest constitutes a valid,
first priority security interest in the presently existing Collateral, and
subject to Permitted Liens will constitute a valid, first priority security
interest in Collateral acquired after the date hereof.
 
4.2           Delivery of Additional Documentation Required.  Borrower shall
from time to time execute and deliver to Bank, at the request of Bank, all
Negotiable Collateral, all financing statements and other documents that Bank
may reasonably request, in form satisfactory to Bank, to perfect and continue
the perfection of Bank’s security interests in the Collateral and in order to
fully consummate all of the transactions contemplated under the Loan
Documents.  Borrower from time to time may deposit with Bank specific time
deposit accounts to secure specific Obligations.  Borrower authorizes Bank to
hold such balances in pledge and to decline to honor any drafts thereon or any
request by Borrower or any other Person to pay or otherwise transfer any part of
such balances for so long as the Obligations are outstanding.
 
4.3           Right to Inspect.  Bank (through any of its officers, employees,
or agents) shall have the right, upon reasonable prior notice, from time to tine
during Borrower’s usual business hours but no more than twice a year (unless an
Event of Default has occurred and is continuing), to inspect Borrower’s Books
and to make copies thereof and to check, test, and appraise the Collateral in
order to verify Borrower’s financial condition or the amount, condition of, or
any other matter relating to, the Collateral.
 
5.             REPRESENTATIONS AND WARRANTIES.
 
Borrower represents and warrants as follows:
 
5.1           Due Organization and Qualification.  Borrower and each Subsidiary
is a corporation duly existing under the laws of its state of incorporation and
qualified and licensed to do business in any state in which the failure to be so
qualified or licensed would have a Material Adverse Effect.
 
5.2           Due Authorization; No Conflict.  The execution, delivery, and
performance of the Loan Documents are within Borrower’s powers, have been duly
authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower’s Articles of Incorporation or Bylaws, nor will
they constitute an event of default under any material agreement to which
Borrower is a party or by which Borrower is bound.  Borrower is not in default
under any material agreement to which it is a party or by which it is bound.
 
5.3           No Prior Encumbrances.  Borrower has good and marketable title to
its property, free and clear of Liens, except for Permitted liens.
 
5.4           Intentionally Omitted.
 
 
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5.5           Merchantable Inventory.  All Inventory is in all material respects
of good and marketable quality, free from all material defects, except for
Inventory for which adequate reserves have been made.
 
5.6           Intellectual Property.  Except as disclosed in the Schedule,
Borrower is the licensee or owner of its property.  To the best of Borrower’s
knowledge, each of the Patents material to Borrower’s business is valid and
enforceable, and no part of its Patents, Copyrights or Trademarks material to
Borrower’s business has been judged invalid or unenforceable, in whole or in
part, and except as stated in the Schedules, no claim has been made that any
part of such property violates the rights of any third party.
 
5.7           Name; Location of Chief Executive Office.  Except as disclosed in
the Schedule, Borrower has not done business under any name other than that
specified on the signature page hereof.  The chief executive office of Borrower
is located at the address indicated in Section 10 hereof.  All Borrower’s
Inventory and Equipment is located only at the location set forth in Section 10
hereof and as stated in the Schedules.
 
5.8           Litigation.  Except as set forth in the Schedule, there are no
actions or proceedings pending by or against Borrower or any Subsidiary before
any court or administrative agency in which an adverse decision would be likely
to have a Material Adverse Effect
 
5.9           No Material Adverse Change in Financial Statements.  All
consolidated and consolidating financial statements related to Borrower and any
Subsidy that Bank has received from Borrower fairly present in all material
respects Borrower’s financial condition as of the date thereof and Borrower’s
consolidated and consolidating results of operations for the period then
ended.  There has not been a material adverse change in the consolidated or the
consolidating financial condition of Borrower since the date of the most recent
of such financial statements submitted to Bank.
 
5.10         Solvency, Payment of Debts.  Borrower is solvent and able to pay
its debts (including trade debts) as they mature.
 
5.11         Regulatory Compliance.  Borrower and each Subsidiary have met the
minimum funding requirements of ERISA with respect to any employee benefit plans
subject to ERISA, and no event has occurred resulting from Borrower’s failure to
comply with ERISA that could result Borrower’s incurring any material
liability.  Borrower is not an “investment company” or a company “controlled” by
an “investment company” within the meaning of the Investment Company Act of
1940.  Borrower is not engaged principally, or as one of the important
activities, in the business of extending credit for the purpose of purchasing or
carrying margin stock (within the meaning of Regulations T and U of the Board of
Governors of the Federal Reserve System).  Borrower has complied in all material
respects with all tie provisions of the Federal Fair Labor Standards
Act.  Borrower has not violated any statutes, laws, ordinances or rules
applicable to it, violation of which could have a Material Adverse Effect.
 
5.12         Environmental Condition.  Except as disclosed in the Schedule, none
of Borrower’s or any Subsidiary’s properties or assets has ever been used by
Borrower or any Subsidiary or, to the best of Borrower’s knowledge, by previous
owners or operators, in the disposal of, or to produce, store, handle, treat,
release, or transport any hazardous waste or hazardous substance other than in
accordance with applicable law; to the best of Borrower’s knowledge, none of
Borrower’s properties or assets has ever been designated or identified in any
manner pursuant to any environmental protection statute as a hazardous waste or
hazardous substance disposal site, or a candidate for closure pursuant to any
environmental protection statute; no lien arising under any environmental
protection statute has attached to any revenues or to any real or personal
property owned by Borrower or any Subsidiary; and neither Borrower nor any
Subsidiary has received a summons, citation, notice, or directive from the
Environmental Protection Agency or any other federal, state or other
governmental agency concerning any action or omission by Borrower or any
Subsidiary resulting in the releasing, or otherwise disposing of hazardous waste
or hazardous substances into the environment.
 
5.13         Taxes.  Borrower and each Subsidiary have filed or caused to be
filed all tax returns required to be filed, and have paid, or have made adequate
provision for the payment of all taxes reflected therein.
 
 
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5.14         Subsidiaries.  Borrower does not own any stock, partnership
interest or other equity securities of any Person, except for Permitted
Investments.
 
5.15         Government Consents.  Borrower and each Subsidiary 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
for the continued operation of Borrower’s business as currently conducted, the
failure to obtain which could have a Material Adverse Effect.
 
5.16         Accounts.  Borrower’s primary operating and investment accounts are
maintained with Bank and/or Comerica Securities, Inc.
 
5.17         Full Disclosure.  No representation, warranty or other statement
made by Borrower in any certificate or written statement furnished to Bank
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained in such certificates or
statements not misleading.
 
6.             AFFIRMATIVE COVENANTS.
 
Borrower covenants and agrees that, until payment in full of all outstanding
Obligations, and for so long as Bank may have any commitment to make a Credit
Extension hereunder, Borrower shall do all of the following:
 
6.1           Good Standing.  Borrower shall maintain its and each of its
Subsidiaries’ corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to be so qualified or licensed would have a Material Adverse
Effect.  Borrower shall maintain, and shall cause each of its Subsidiaries to
maintain, in force all licenses, approvals and agreements, the loss of which
could have a Material Adverse Effect.
 
6.2           Government Compliance.  Borrower shall meet, and shall cause each
Subsidiary to meet, the minimum funding requirements of ERISA with respect to
any employee benefit plans subject to ERISA.  Borrower shall comply, and shall
cause each Subsidiary to comply, with all statutes, laws, ordinances and
governmental rules and regulations to which it is subject, noncompliance with
which could have a Material Adverse Effect.
 
6.3           Financial Statements, Reports, Certificates.  Borrower shall
deliver the following to Bank:  (a) as soon as available, but in any event
within twenty five (25) days after the end of each calendar month, a company
prepared consolidated balance sheet, income, and cash flow statement covering
Borrower’s consolidated operations during such period, prepared in accordance
with GAAP (subject to year-end adjustments lacking footnotes), consistently
applied, in a form acceptable to Bank and certified by a Responsible Officer;
(b) as soon as available, but in any event within ninety (90) days after the end
of Borrower’s fiscal year, audited consolidated financial statements of Borrower
prepared in accordance with GAAP, consistently applied, together with an
unqualified opinion on such financial statements of an independent certified
public accounting firm reasonably acceptable to Bank; (c) copies of all
statements, reports and notices sent or made available generally by Borrower to
its security holders or to any holders of Subordinated Debt and, if applicable,
all reports on Forms 10-K and 10-Q filed with the Securities and Exchange
Commission; (d) promptly upon receipt of notice thereof, a report of any legal
actions pending or threatened against Borrower or any Subsidiary that could
result in damages or costs to Borrower or any Subsidiary that could result in
damages or costs to Borrower or any Subsidiary of Two Hundred Thousand Dollars
($200,000) or more; (e) no later than twenty five (25) days prior to the end of
Borrower’s fiscal year, Borrower’s annual business plan (including operating
budget) for the next year; (f) such other budgets, sales projections, operating
plans or other financial information as Bank may reasonably request from time to
time; and (g) within thirty (30) days of the last day of each fiscal quarter, a
report signed by Borrower, in form reasonably acceptable to Bank listing any
applications or registrations that Borrower has made or filed in respect of any
Patents, Copyrights or Trademarks and the status of any outstanding applications
or registrations, as well as any material change in Borrower’s intellectual
property, including but not limited to any subsequent ownership right of
Borrower in or to any Trademark, Patent or Copyright.
 
 
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Within fifteen (15) days after (1) the fifteenth (15th) day of each month, and
(ii) the last day of each month, Borrower shall deliver to Bank a Trade Accounts
Receivable Certificate signed by a Responsible Officer in substantially the form
of Exhibit E hereto, together with  aged listings of accounts receivable and
accounts payable.
 
Borrower shall deliver to Bank with the monthly financial statements a
Compliance Certificate signed by a Responsible Officer in substantially the form
of Exhibit D hereto.
 
Bank shall have a right from time to time hereafter to audit, at reasonable
times with prior notice, Borrower’s Accounts and appraise Collateral at
Borrower’s expense, provided that such audits will be conducted no more often
than every six (6) months unless an Event of Default has occurred and is
continuing.
 
Notwithstanding the foregoing, if at no time during any period covered by a
reporting requirement pursuant to this Section 6.3 Advances are outstanding,
then all financial statements and other reporting items in this Section 6.3
which are required to be delivered to Bank on a monthly or bi-monthly basis,
shall instead be delivered to Bank on a quarterly basis.
 
6.4           Inventory; Returns.  Borrower shall keep all Inventory in good and
marketable condition, free from all material defects except for Inventory for
which adequate reserves have been made.  Returns and allowances, if any, as
between Borrower and its account debtors shall be on the same basis and in
accordance with the usual customary practices of Borrower, as they exist at the
time of the execution and delivery of this Agreement.
 
6.5           Taxes.  Borrower shall make, and shall cause each Subsidiary to
make, due and timely payment or deposit of all material federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Bank, on demand, appropriate certificates attesting to
the payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws, including, but not limited
to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local,
state, and federal income taxes, and will, upon request, furnish Bank with proof
satisfactory to Bank indicating that Borrower or a Subsidiary has made such
payments or deposits; provided that Borrower or a Subsidiary need not make any
payment if the amount or validity of such payment is contested in good faith by
appropriate proceedings and is reserved against (to the extent required by GAAP)
by Borrower.
 
6.6           Insurance.
 
(a)           Borrower, at its expense, shall keep the Collateral insured
against loss or damage by fire, theft, explosion, sprinklers, and all other
hazards and risks, and in such amounts, as ordinarily insured against by other
owners in similar businesses conducted in the locations where Borrower’s
business is conducted on the date hereof.  Borrower shall also maintain
insurance relating to Borrower’s business, ownership and use of the Collateral
in amounts and of a type that are customary to businesses similar to Borrower’s.
 
(b)           All such policies of insurance shall be in such form, with such
companies, and in such amounts as are reasonably satisfactory to Bank.  All such
policies of property insurance shall contain a lender’s loss payable
endorsement, in a form satisfactory to Bank, showing Bank as an additional loss
payee thereof, and all liability insurance policies shall show the Bank as an
additional insured and shall specify that the insurer must give at least twenty
(20) days notice to Bank before cancelling its policy for any reason; provided,
however, Borrower may provide such notice of cancellation to Bank (within twenty
(20) days) for any liability insurance policies that do not specify the
foregoing notice requirement.  Upon Bank’s request, Borrower shall deliver to
Bank certified copies of such policies of insurance and evidence of the payments
of all premiums therefor.  If no Event of Default has occurred and is
continuing, proceeds payable under any policy will, at Borrower’s option, be
payable to Borrower to replace the property subject to the claim, provided that
any such replacement property shall be deemed Collateral in which Bank has been
granted a first priority security interest except for Permitted Liens.  If an
Event of Default has occurred and is continuing, all proceeds payable under any
such policy shall, at Bank’s option, be payable to Bank to be applied on account
of the Obligations.
 
 
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6.7           Accounts.  Borrower shall maintain all of its operating and
investment Accounts with Bank and/or Comerica Securities, Inc.
 
6.8           Quick Ratio.  Borrower shall maintain at all times a ratio of
unrestricted cash and cash equivalents maintained at Bank or at Bank’s
affiliates covered by control agreements in form and substance satisfactory to
Bank, plus net trade accounts receivable less than ninety (90) days from invoice
date to Current Liabilities less non-refundable deferred revenues plus, (to the
extent not already included therein) all Indebtedness to Bank, of at least 1.15
to 1.00; provided that for any of the February, March, April, May and June 2012
measuring periods, such ratio shall be 0.75:1.00.  For purposes of this ratio,
deferred revenue shall be considered to be nonrefundable so long as (1) it was
recorded on Borrower’s balance sheet in accordance with GAAP; and (2) Borrower
has not expressly agreed to refund the purchase price to the
Customer.  Contingent obligations to make a refund should there be a breach of
warranty or should the customer be dissatisfied with the product or service
shall not constitute an express agreement to refund.  The foregoing covenant
shall be measured (i) as of the last day of each quarter if at no time during
any such quarter Advances are outstanding, and (ii) as of the last day of each
month at all other times.
 
6.9           Net Worth.  A Net Worth greater than or equal to the amounts set
forth below:
 
Period
 
Net Worth
         
From the Closing Date through April 30, 2012
  $ (5,600,000 )          
From May 1, 2012 through May 31, 2012
  $ (4,000,000 )          
From June 1, 2012 through June 30, 2012
  $ (3,000,000 )          
From July 1, 2012 though July 31, 2012
  $ (1,000,000 )          
From August 1, 2012 and thereafter
  $ 1.00  

 
The foregoing covenant shall be measured (i) as of the last day of each quarter
if at no time during any such quarter Advances are outstanding, and (ii) as of
the last day of each month at all other times.
 
6.10         Intellectual Property Rights.
 
(a)           Borrower shall register or cause to be registered (to the extent
not already registered) with the United States Patent and Trademark Office or
the United States Copyright Office, as the case may be, those registerable
intellectual property rights now owned or hereafter developed or acquired by
Borrower, to the extent that Borrower, in its reasonable business judgment,
deems it appropriate to so protect such intellectual property rights.
 
(b)           Within thirty (30) days of the last day of each fiscal quarter,
Borrower shall provide Bank written notice of any applications or registrations
of intellectual property rights filed with the United States Patent and
Trademark Office, including the date of such filing and the registration or
application numbers, if any.  Borrower shall (i) give Bank not less than 30 days
prior written notice of the filing of any applications or registrations with the
United States Copyright Office, including the title of such intellectual
property rights to be registered, as such title will appear on such application
or registrations, and the date such applications or registrations will be filed,
and (ii) prior to the filing of any such applications or registrations, shall
execute such documents as Bank may reasonably request for Bank to maintain its
perfection in the proceeds of such intellectual property rights to be registered
by Borrower, and upon the request of Bank, shall file such documents
simultaneously with the filing of any such applications or registrations.  Upon
filing any such applications or registrations with the United States Copyright
Office, Borrower shall promptly provide Bank with (i) a copy of such
applications or registrations, without the exhibits, if any, thereto, (ii)
evidence of the filing of any documents requested by Bank to be filed for Bank
to maintain the perfection and priority of its security interest in such
intellectual property rights, and (iii) the date of such filing.
 
 
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(c)           Borrower shall (i) use commercially reasonable efforts to protect,
defend and maintain the validity and enforceability of to trade secrets,
Trademarks, Patents and Copyrights, (ii) use commercially reasonable efforts to
detect impingements of the Trademarks, Patents and Copyrights and promptly
advise Bank in writing of material infringements detected and (iii) not allow
any Trademarks, Patents or Copyrights to be abandoned, forfeited or dedicated to
the public if such action would have a Material Adverse Effect on the Company
without the written consent of Bank, which shall not be unreasonably withheld.
 
6.11         Consent of Inbound Licensors.  Prior to entering into or becoming
bound by any inbound license or agreement (other than over-the-counter software
that is commercially available to the public), the failure, breach, or
termination of which could reasonably be expected to cause a Material Adverse
Effect, Borrower shall:  (i) provide written notice to Bank of the material
terms of such license or agreement with a description of its likely impact on
Borrower’s business or financial condition; and (ii) in good faith take such
actions as Bank may reasonably request to obtain the consent of, or waiver by,
any person whose consent or waiver is necessary for (A) Borrower’s interest in
such licenses or contract rights to be deemed Collateral and for Bank to have a
security interest in it that might otherwise be restricted by the terms of the
applicable license or agreement, whether now existing or entered into in the
future, and (B) 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, provided, however,
that the failure to obtain any such consent or waiver shall not constitute a
default under this Agreement.
 
6.12         Creation/Acquisition of Subsidiaries.  In the event Borrower or any
Subsidiary creates or acquires any Subsidiary, Borrower and such Subsidiary
shall promptly notify Bank of the creation or acquisition of such new Subsidiary
and take all such action as may be reasonably required by Bank to cause each
such domestic Subsidiary to guarantee the Obligations of Borrower under the Loan
Documents and grant a continuing pledge and security interest in and to the
collateral of such Subsidiary (substantially as described on Exhibit A hereto),
and Borrower shall grant and pledge to Bank a perfected security interest in the
Shares of each Subsidiary (whether foreign or domestic).
 
6.13         Further Assurances.  At any time and from time to time Borrower
shall execute and deliver such further instruments and take such further action
as may reasonably be requested by Bank to effect the purposes of this Agreement
 
7.             NEGATIVE COVENANTS.
 
Borrower covenants and agrees that, so long as any credit hereunder shall be
available and until payment in full of the outstanding Obligations or for so
long as Bank may have any Commitment to make any Credit Extensions, Borrower
will not do any of the following:
 
7.1           Dispositions.  Convey, sell, lease, transfer or otherwise dispose
of (collectively, a “Transfer”), or permit any of its Subsidiaries to Transfer,
all or any part of its business property, other than in Permitted Transfers.
 
7.2           Change in Business; Change in Control or Executive Office.  Engage
in any business, or permit any of its Subsidiaries to engage in any business,
other than the businesses currently engaged in by Borrower and any business
substantially similar or related thereto (or incidental thereto):  or suffer or
permit a Change in Control; or without thirty (30) days prior written
notification to Bank, relocate its chief executive office or state of
incorporation or change its legal name; or without Bank’s prior written consent,
change the date on which its fiscal year ends.
 
7.3           Mergers or Acquisitions.  Merge or consolidate, or permit any of
its Subsidiaries to merge or consolidate, with or into any other business
organization (provided however, a Subsidiary may merge into another Subsidiary
or Borrower), or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person, provided
Borrower may enter into any of the foregoing transactions as long as the
aggregate consideration given in any calendar year for such transaction is in
Borrower’s capital stock or less than Five Hundred Thousand Dollars ($500,000)
in cash or a combination thereof, provided in each case that Borrower is the
surviving entity and an Event of Default does not exist before or after giving
effect to such transaction on a consolidate or consolidating basis.
 
 
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7.4           Indebtedness.  Create, incur, assume or be or remain liable with
respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.
 
7.5           Encumbrances.  Create, incur, assume or suffer to exist any Lien
with respect to any of its property, or assign or otherwise convey any right to
receive income, including the sale of any Accounts, or permit any of its
Subsidiaries so to do, except for Permitted Liens.  Agree with any Person other
than Bank not to grant a security interest in, or otherwise encumber, any of its
property, or permit any Subsidiary to do so.
 
7.6           Distributions.  Pay any dividends or make any other distribution
or payment on account of or in redemption, retirement or purchase of any capital
stock, or permit any of its Subsidiaries to do so, except that Borrower may (1)
Pay dividends in capital stock or (2) repurchase the stock of former employees
pursuant to stock repurchase agreements as long as an Event of Default does not
exist prior to such repurchase or would not exist after giving effect to such
repurchase.
 
7.7           Investments.  Directly or indirectly acquire or own, or make any
Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments; or suffer or permit any Subsidiary to be a
party to, or be bound by, an agreement that restricts such Subsidiary from
paying dividends or other wise distributing property to Borrower
 
7.8           Transactions with Affiliates.  Except as provided in the
Schedules, directly or indirectly enter into or permit to exist any material
transaction with any Affiliate of Borrower except for transactions that are upon
fair and reasonable terms that are no less favorable to Borrower than would be
obtained in an arm’s length transaction with a non-affiliated Person.
 
7.9           Subordinated Debt.  Make any payment in respect of any
Subordinated Debt, or permit any of its Subsidiaries to make any such payment,
except in compliance with the terms of such Subordinated Debt, or amend any
provision in a manner adverse to Bank’s interest hereunder (as determined by
Bank) contained in any documentation relating to the Subordinated Debt without
Bank’s prior written consent.
 
7.10         Inventory and Equipment.  Store or maintain any Equipment or
inventory at a location other than the location set forth in Section 10 of this
Agreement or in the Schedules unless Borrower gives Bank thirty (30) days prior
written notice and takes such steps as are necessary to continue Bank’s first
priority security interest in the Equipment and Inventory.
 
7.11         Compliance.  Become an “investment company” or be controlled by an
“investment company,” within the meaning of the Investment Company Act of 1940,
or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Credit Extension for such
purpose.  Fail to meet the minimum finding 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 in any material respect or
violate any law or regulation, which violation could have a Material Adverse
Effect, or a material adverse effect on the Collateral or the priority of Bank’s
Lien on the Collateral, or permit any of its Subsidiaries to do any of the
foregoing.
 
7.12         Negative Pledge Agreements.  Other than licenses in the ordinary
course of business, permit the inclusion in any contract to which it or a
Subsidiary becomes a party of any provisions that could restrict or invalidate
the creation of a security interest in any of Borrower’s or such Subsidiary’s
intellectual Property.
 
 
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8.           EVENTS OF DEFAULT.
 
Any one or more of the following events shall constitute an Event of Default by
Borrower under this Agreement:
 
8.1           Payment Default.  If Borrower fails to pay any principal when due
or any other Obligation within three (3) Business Days when due;
 
8.2           Covenant Default.
 
(a)           If Borrower fails to perform any obligation under Sections 6.3,
6.5, 6.6, 6.7, 6.8, 6.9 and 6.13 or violates any of the covenants contained in
Article 7 of this Agreement; or
 
(b)           If Borrower fails or neglects to perform or observe any other
material term, provision, condition, covenant contained in this Agreement or in
any of the Loan Documents, or in any other present or future agreement between
Borrower and Bank and as to any default under such other term, provision,
condition or covenant that can be cured, has failed to cure such default within
fifteen (15) days after Borrower receives notice thereof or any officer of
Borrower becomes aware thereof; provided, however, that if the default cannot by
its nature by cured within the fifteen (15) day period or cannot after diligent
attempts by Borrower be cured within such fifteen (15) day period, and such
default is likely to be cured within a reasonable time, then Borrower shall have
an additional reasonable 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 have cured such default shall not be deemed an Event of Default
but no Credit Extensions will be made.
 
8.3           Material Adverse Effect.  If there occurs any circumstance or
circumstances that could have a Material Adverse Effect;
 
8.4           Attachment.  If all or any substantial portion of Borrower’s
assets is attached, seized, subjected to a writ or distress warrant, or is
levied upon, or comes into the possession of any trustee, receiver or person
acting in a similar capacity and such attachment, seizure, writ or distress
warrant or levy has not been removed, discharged or rescinded within ten (10)
days, or if Borrower is enjoined, restrained, or in any way prevented by court
order from continuing to conduct all or any material part of its business
affairs, or if a judgment or other claim becomes a lien or encumbrance upon any
material portion of Borrower’s assets, or if a notice of lien, levy, or
assessment is filed of record with respect to any of Borrower’s assets by the
United States Government, or any department, agency, or instrumentality thereof,
or by any state, county, municipal, or governmental agency, and the same is not
paid within ten (10) days after Borrower receives notice thereof, provided that
none of the foregoing shall constitute an Event of Default where such action or
event is stayed or an adequate bond has been posted pending a good faith contest
by Borrower (provided that no Credit Extensions will be required to be made
during such cure period);
 
8.5           Insolvency.  If Borrower becomes insolvent, as defined in the
United States Bankruptcy Code, or if an Insolvency Proceeding is commenced by
Borrower, or if an Insolvency Proceeding is commenced against Borrower and is
not dismissed or stayed within thirty (30) days (provided that no Credit
Extensions will be made prior to the dismissal of such Insolvency Proceeding);
 
8.6           Other Agreements.  If there is a default or other failure to
perform in any agreement to which Borrower is a party or by which it is bound
resulting in a right by a third party or parties, whether or not exercised, to
accelerate the maturity of any Indebtedness in an amount in excess of One
Hundred-Fifty Thousand Dollars ($150,000) or which could have a Material Adverse
Effect;
 
8.7           Subordinated Debt.  If Borrower makes any payment on account of
Subordinated Debt, except to the extent such payment is allowed under any
subordination agreement entered into with Bank;
 
8.8           Judgments.  If a judgment or judgments for the payment of money in
an amount, individually or in the aggregate, of a least One Hundred-Fifty
Thousand Dollars ($150,000) in excess of applicable insurance shall be rendered
against Borrower and shall remain unsatisfied and unstayed for a period of ten
(10) days (provided that no Credit Extensions will be made prior to the
satisfaction or stay of such judgment; or
 
8.9           Misrepresentations.  If any material misrepresentation or material
misstatement exists now or hereafter in any warranty or representation set forth
herein or in any certificate delivered to Bank by any Responsible Officer
pursuant to this Agreement or to induce Bank to enter into this Agreement or any
other Loan Document.
 
 
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9.             BANK’S RIGHTS AND REMEDIES.
 
9.1           Rights and Remedies.  Upon the occurrence and during the
continuance of an Event of Default, Bank may, at its election, without notice of
its election and without demand, do any one or more of the following, all of
which are authorized by Borrower:
 
(a)           Declare all Obligations, whether evidenced by this Agreement, by
any of the other Loan documents, or otherwise, immediately due and payable
(provided that upon the occurrence of an Event of Default described in Section
8.5, all Obligations shall become immediately due and payable without any action
by the Bank);
 
(b)           Demand that Borrower (i) deposit cash with Bank in an amount equal
to the amount of any Letters of Credit remaining undrawn, as collateral security
for the repayment of any future drawings under such Letters of Credit, and (ii)
pay in advance all Letter of Credit fees scheduled to be paid or payable over
the remaining term of the Letters of Credit, and Borrower shall promptly deposit
and pay such amounts;
 
(c)           Cease advancing money or extending credit to or for the benefit of
Borrower under this Agreement or under any other agreement between Borrower and
Bank;
 
(d)           Settle or adjust disputes and claims directly with account debtors
for amounts, upon terms and in whatever order that Bank reasonably considers
advisable;
 
(e)           Make such payments and do such acts as Bank considers necessary or
reasonable to protect its security interest in the Collateral.  Borrower agrees
to assemble the Collateral if Bank so requires, and to make the Collateral
available to Bank as Bank may designate.  Borrower authorizes Bank to enter the
premises where the Collateral is located, to take and maintain possession of the
Collateral, or any part of it, and to pay, purchase, contest, or compromise any
encumbrance, charge, or hen which in Bank’s determination appears to be prior or
superior to its security interest and to pay all expenses incurred in connection
therewith.  With respect to any of Borrower’s owned premises, Borrower hereby
grants Bank a license to enter into possession of such premises and to occupy
the same, without charge, in order to exercise any of Bank’s rights or remedies
provided herein, at law, in equity, or otherwise;
 
(f)           Set off and apply to the Obligations any and all (i) balances and
deposits of Borrower held by Bank; or (ii) indebtedness at any time owing to or
for the credit or the account of Borrower held by Bank;
 
(g)           Ship, reclaim, recover, store finish, maintain, repair, prepare
for sale, advertise for sale, and sell (in the manner provided for herein) the
Collateral.  Bank is hereby granted a license or other right, solely pursuant to
the provisions of this Section 9.1, to use, without charge, Borrower’s labels,
patents, copyrights, rights of use of any name and advertising matter, or any
property of a similar nature, 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 9.1, Borrower’s
rights under all licenses and all franchise agreements shall inure to Bank’s
benefit;
 
(h)           Dispose of the Collateral by way of one of more contracts or
transactions, for cash or on terms, in such manner and at such places (including
Borrower’s premises) as Bank determines is commercially reasonable, and apply
any proceeds to the Obligations in whatever manner or order Bank deems
appropriate;
 
(i)           Bank may credit bid and purchase at any public sale; and
 
 
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(j)           Any deficiency that exists after disposition of the Collateral as
provided above will be paid immediately by Borrower.
 
9.2           Power of Attorney.  Effective only upon the occurrence and during
the continuance of an Event of Default, Borrower hereby irrevocably appoints
Bank (and any of Bank’s designated officers, or employees) as Borrower’s true
and lawful attorney to:  (a) send requests for verification of Accounts or
notify account debtors of Bank’s security interest in the Accounts; (b) endorse
Borrower’s name on any checks or other forms of payment or security that may
come into Bank’s possession; (c) sign Borrower’s name on any invoice or bill of
lading relating to any Account; drafts against account debtors, schedules and
assignments of Accounts, verification, and notices to account debtors; (d)
dispose of any Collateral; (e) make, settle, and adjust all claims under and
decisions with respect to Borrower’s policies of insurance; (f) settle and
adjust disputes and claims respecting, the accounts directly with account
debtors, for amounts and upon terms which Bank determines to be reasonable; and
(g) to in its sole discretion, one or more financing or continuation statements
and amendments thereto, relative to any of the Collateral; provided Bank may
exercise such power of attorney to sign the name of Borrower on any of the
documents described in Section 42 regardless of whether an Event of Default has
occurred.  The appointment of Bank as Borrower’s attorney in fact, and each and
every one of Bank’s rights and powers, being coupled with an interest, is
irrevocable until all of the Obligations have been fully repaid and performed
and Bank’s obligation to provide Credit Extensions hereunder is terminated.
 
9.3           Accounts Collection.  At any time after the occurrence and during
the continuance of an Event of Default, Bank may notify any Person owing funds
to Borrower of Bank’s security interest in such funds and verify the amount of
such Account.  Upon the occurrence and during the continuance of an Event of
Default, Borrower shall collect all amounts owing to Borrower for Bank, receive
in trust all payments as Bank’s trustee, and immediately deliver such payments
to Bank in their original form as received from the account debtor, with proper
endorsements for deposit.
 
9.4           Bank Expenses.  If Borrower fails to pay any amount or furnish any
required proof of payment due to third persons or entities, as required under
the terms of this Agreement, then Bank may do any or all of the following after
reasonable notice to Borrower:  (a) make payment of the same or any part
thereof; (b) set up such reserves under a loan facility in Section 2.1 as Bank
deems necessary to protect Bank from the exposure created by such failure; or
(c) obtain and maintain insurance policies of the type discussed in Section 6.6
of this Agreement, and take any action with respect to such policies as Bank
deems prudent.  Any amounts so paid or deposited by Bank shall constitute Bank
Expenses, shall be immediately due and payable, and shall bear interest at the
then applicable rate hereinabove provided, and shall be secured by the
Collateral.  Any payments made by Bank shall not constitute an agreement by Bank
to make similar payments in the future or a waiver by Bank of any Event of
Default under this Agreement.
 
9.5           Bank’s Liability for Collateral.  So long as Bank complies with
reasonable banking practices.  Bank shall not in any way or manner be liable or
responsible for:  (a) the safekeeping of the Collateral; (b) any loss or damage
thereto occurring or arising in any manner of fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever.  All risk
of loss, damage or destruction of the Collateral shall be borne by Borrower.
 
9.6           No Obligation to Pursue Others.  Bank has no obligation to attempt
to satisfy the Obligations by collecting them from any other person liable for
them and Bank may release, modify or waive any collateral provided by any other
Person to secure any of the Obligations, all without affecting Bank’s rights
against Borrower.  Borrower waives any right it may have to require Bank to
pursue any other Person for any of the Obligations.
 
9.7           Remedies Cumulative.  Bank’s rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be
cumulative.  Bank shall have all other rights and remedies not inconsistent
herewith as provided under the Code, by law, or in equity.  No exercise by Bank
of one right or remedy shall be deemed an election, and no waiver by Bank of any
Event of Default on Borrower’s part shall be deemed a continuing waiver.  No
delay by Bank shall constitute a waiver, election or acquiescence by it.  No
waiver by Bank shall be effective unless made in a written document signed on
behalf of Bank and then shall be effective only in the specific instance and for
the specific purpose for which it was given.
 
 
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9.8           Demand; Protest.  Borrower waives demand, protest, notice of
protest, 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 at any time held by Bank on which Borrower may in any way be liable.
 
10.           NOTICES.
 
Unless otherwise provided in this Agreement, all notices or demands by any party
relating to this Agreement or any other agreement entered into in connection
herewith shall be in writing and (except for financial statements and other
informational documents which may be sent by first-class mail, postage prepaid)
shall be personally delivered or sent by a recognized overnight delivery
service, certified mail, postage prepaid, return receipt requested, or by
telefacsimile to Borrower or to Bank; as the case may be, at its addresses set
forth below:
 
 
If to Borrower
Scientific Learning Corporation

 
300 Frank H. Ogawa Plaza, Suite 600

 
Oakland, CA  94612

 
Attn:  Robert E. Feller

 
FAX:  (510)874-1883

 
 
If to Bank:
Comerica Bank

 
2321 Rosecrans Ave., Suite 5000

 
El Segundo, CA 90245

 
Attn:  Manager

 
FAX:  (310) 297-2290

 
 
With a copy to:
Comerica Bank

 
5 Palo Alto Square, Suite 800

 
3000 E1 Camino Real

 
Palo Alto, CA 94306

 
Attn:  Rod Werner

 
FAX:  (650) 213-1710

 
The parties hereto may change the address at which they are to receive notices
hereunder, by nonce in writing in the foregoing manner given to the other.
 
11.           CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.
 
This Agreement shall be governed by, and construed in accordance with, the
internal laws of the State of California, without regard to principles of
conflicts of law.  Each of Borrower and Bank hereby submits to the exclusive
jurisdiction of the state and Federal courts located in the County of Santa
Clara, State of California.  THE UNDERSIGNED ACKNOWLEDGE THAT THE RIGHT TO TRIAL
BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED UNDER CERTAIN
CIRCUMSTANCES.  TO THE EXTENT PERMITTED BY LAW, EACH PARTY, AFTER CONSULTING (OR
HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF ITS, HIS OR HER CHOICE,
KNOWINGLY AND VOLUNTARILY, AND FOR THE MUTUAL BENEFIT OF ALL PARTIES, WAIVES ANY
RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION ARISING OUT OF OR RELATED TO
THIS AGREEMENT OR ANY OTHER DOCUMENT, INSTRUMENT OR AGREEMENT BETWEEN THE
UNDERSIGNED PARTIES.
 
12.           REFERENCE PROVISION.
 
12.1          In the event the Jury Trial Waiver set forth above is not
enforceable, the parties elect to proceed under this Judicial Reference
Provision.
 
12.2          With the exception of the items specified in Section 12.3, below,
any controversy, dispute or claim (each, a “Claim”) between the parties arising
out of or relating to this Agreement or any other document, instrument or
agreement between the undersigned parties (collectively in this Section, the
“Loan Documents”), will be resolved by a reference proceeding in California in
accordance with the provisions of Sections 638 et seq. of the California Code of
Civil Procedure (“CCP”), or their successor sections, which shall constitute the
exclusive remedy for the resolution of any Claim, including whether the Claim is
subject to the reference proceeding. Except as otherwise provided in the Loan
Documents, venue for the reference proceeding will be in the Superior Court in
the County where the real property involved in the action, if any, is located or
in a County where venue is otherwise appropriate under applicable law (the
“Court”).
 
 
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12.3          The matters that shall not be subject to a reference are the
following: (i) foreclosure of any security interests in real or personal
property, (ii) exercise of selfhelp remedies (including, without limitation,
set-off), (iii) appointment of a receiver and (iv) temporary, provisional or
ancillary remedies (including, without limitation, writs of attachment, writs of
possession, temporary restraining orders or preliminary injunctions). This
Agreement does not limit the right of any party to exercise or oppose any of the
rights and remedies described in clauses (i) and (ii) or to seek or oppose from
a court of competent jurisdiction any of the items described in clauses (iii)
and (iv). The exercise of, or opposition to, any of those items does not waive
the right of any party to a reference pursuant to this Agreement.
 
12.4          The referee shall be a retired Judge or Justice selected by mutual
written agreement of the parties. If the parties do not agree within ten (10)
days of a written request to do so by any party, then, upon request of any
party, the referee shall be selected by the Presiding Judge of the Court (or his
or her representative). A request for appointment of a referee may be heard on
an ex parte or expedited basis, and the parties agree that irreparable harm
would result if ex parte relief is not granted.
 
12.5          The parties agree that time is of the essence in conducting the
reference proceedings. Accordingly, the referee shall be requested, subject to
change in the time periods specified herein for good cause shown, to (i) set the
matter for a status and trial-setting conference within fifteen (15) days after
the date of selection of the referee, (ii) if practicable, try all issues of law
or fact within one hundred twenty (120) days after the date of the conference
and (iii) report a statement of decision within twenty (20) days after the
matter has been submitted for decision.
 
12.6          The referee will have power to expand or limit the amount and
duration of discovery.  The referee may set or extend discovery deadlines or
cutoffs for good cause, including a party’s failure to provide requested
discovery for any reason whatsoever. Unless otherwise ordered based upon good
cause shown, no party shall be entitled to “priority” in conducting discovery,
depositions may be taken by either party upon seven (7) days written notice, and
all other discovery shall be responded to within fifteen (15) days after
service. All disputes relating to discovery which cannot be resolved by the
parties shall be submitted to the referee whose decision shall be final and
binding.
 
12.7          Except as expressly set forth in this Agreement, the referee shall
determine the manner in which the reference proceeding is conducted including
the time and place of hearings, the order of presentation of evidence, and all
other questions that arise with respect to the course of the reference
proceeding. All proceedings and hearings conducted before the referee, except
for trial, shall be conducted without a court reporter, except that when any
party so requests, a court reporter will be used at any hearing conducted before
the referee, and the referee will be provided a courtesy copy of the transcript.
The party making such a request shall have the obligation to arrange for and pay
the court reporter. Subject to the referee’s power to award costs to the
prevailing party, the parties will equally share the cost of the referee and the
court reporter at trial.
 
12.8          The referee shall be required to determine all issues in
accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in the State
of California will be applicable to the reference proceeding. The referee shall
be empowered to enter equitable as well as legal relief, enter equitable orders
that will be binding on the parties and rule on any motion which would be
authorized in a court proceeding, including without limitation motions for
summary judgment or summary adjudication. The referee shall issue a decision at
the close of the reference proceeding which disposes of all claims of the
parties that are the subject of the reference.  Pursuant to CCP § 644, such
decision shall be entered by the Court as a judgment or an order in the same
manner as if the action had been tried by the Court and any such decision will
be final, binding and conclusive.  The parties reserve the right to appeal from
the final judgment or order or from any appealable decision or order entered by
the referee.  The parties reserve the right to findings of fact, conclusions of
laws, a written statement of decision, and the right to move for a new trial or
a different judgment, which new trial, if granted, is also to be a reference
proceeding under this provision.
 
 
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12.9          If the enabling legislation which provides for appointment of a
referee is repealed (and no successor statute is enacted), any dispute between
the parties that would otherwise be determined by reference procedure will be
resolved and determined by arbitration.   The arbitration will be conducted by a
retired judge or Justice, in accordance with the California Arbitration Act
§1280 through §1294.2 of the CCP as amended from time to time. The limitations
with respect to discovery set forth above shall apply to any such arbitration
proceeding.
 
12.10        THE PARTIES RECOGNIZE AND AGREE THAT ALL CONTROVERSIES, DISPUTES
AND CLAIMS RESOLVED UNDER THIS REFERENCE PROVISION WILL BE DECIDED BY A REFEREE
AND NOT BY A JURY. AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT)
WITH COUNSEL OF ITS, HIS OR HER OWN CHOICE, EACH PARTY KNOWINGLY AND
VOLUNTARILY, AND FOR THE MUTUAL BENEFIT OF ALL PARTIES, AGREES THAT THIS
REFERENCE PROVISION WILL APPLY TO ANY CONTROVERSY, DISPUTE OR CLAIM BETWEEN OR
AMONG THEM ARISING OUT OF OR IN ANY WAY RELATED TO, THIS AGREEMENT OR THE OTHER
LOAN DOCUMENTS.
 
13.           GENERAL PROVISIONS.
 
13.1          Successors and Assigns.  This Agreement shall bind and inure to
the benefit of the respective successors and permitted assigns of each of the
parties; provided, however, that neither this Agreement nor any rights hereunder
may be assigned by Borrower without Bank’s prior written consent, which consent
may be granted or withheld in Bank’s sole discretion.  Bank shall have the right
without the consent of or notice to Borrower to sell, transfer, negotiate, or
grant participation in all or any part of, or any interest in, Bank’s
obligations rights and benefits hereunder.
 
13.2          Indemnification.  Borrower shall defend, indemnify and hold
harmless Bank and its officers, employees, and agents against:  (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by this Agreement; and
(b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank
as a result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under this Agreement, or
otherwise (including without limitation reasonable attorneys’ fees and
expenses), except in each case for losses caused by Bank’s gross negligence or
willful misconduct
 
13.3          Time of Essence.  Time is of the essence for the performance of
all obligations set forth in this Agreement.
 
13.4          Severability of Provisions.  Each provision of this Agreement
shall be severable from every other provision of this Agreement for the purpose
of determining the legal enforceability of any specific provision.
 
13.5          Amendments in Writing, Integration.  Neither this Agreement no the
Loan Documents can be amended or terminated orally.  All prior agreements,
understandings, representations, warranties, and negotiations between the
parties hereto with respect to the subject natter of this Agreement and the Loan
Documents, if any, are merged ado this Agreement and the Loan Documents.
 
13.6          Correction of Loan Documents.  Bank may correct patent errors and
fill in any blanks in this Agreement and the other Loan Documents consistent
with the agreement of the parties.
 
13.7          Counterparts.  This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
 
 
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13.8          Survival.  All covenants, representations and warranties made in
this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding or Bank has any obligation to make Credit
Extensions to Borrower.  The obligations of Borrower to indemnify Bank with
respect to the expenses, damages, losses, costs and liabilities described in
Section 13.2 shall survive until all applicable statute of limitations periods
with respect to actions that may be brought against Bank have run.
 
13.9          Confidentiality.  In handling any confidential information Bank
and all employees and agents of Bank shall exercise the same degree of care that
Bank exercises with respect to its own proprietary information of the same types
to maintain the confidentiality of any non-public information thereby received
or received pursuant to this Agreement except that disclosure of such
information may be made (i) to the subsidiaries or affiliates of Bank in
connection with their present or prospective business relations with Borrower,
(ii) to prospective transferees or purchaser of any interest in the Loans,
provided that they have entered into a comparable confidentiality agreement in
favor of borrower and have delivered a copy to borrower, (iii) as required by
law, regulations, rule or order, subpoena, judicial order or similar order, (iv)
as may be required in connection with the examination, audit or similar
investigation of Bank and (v) as Bank may determine in connection with the
enforcement of any remedies hereunder.  Confidential information hereunder shall
not include information that either:  (a) is in the public domain or in the
knowledge or possession of Bank when disclosed to Bank, or becomes part of the
public domain after disclosure to Bank through no fault of Bank; or (b) is
disclosed to Bank by a third party, provided Bank does not have actual knowledge
that such third party is prohibited from disclosing such
information.  Notwithstanding any other express or implied agreement,
arrangement or understanding between the parties to the contrary, if any Person
has received a written or oral statement made by (or on behalf of) Borrower as
to the tax consequences of any transaction (i) that is otherwise subject to a
confidentiality agreement or other restriction on disclosure that is enforceable
by the party who made such statement of tax consequences (or on whose behalf
such statement was made) and (ii) that is the subject of such statement, such
Person may disclose to any and all Persons, without limitation of any kind, the
tax treatment and tax structure of any such transaction.  For the purposes of
this provision, “tax treatment” is the purported or claimed Federal income tax
treatment of any such transaction and “tax structure” is limited to any fact
that may be relevant to understanding the purported or claimed transaction, (ii)
the name of any Person furnishing statements as to tax consequences and (iii)
any information as to the potential valuation of Borrower or any of its
subsidiaries.
 
13.10        Effect of Amendment and Restatement.  Except as otherwise set forth
herein, this Agreement is intended to and does completely amend and restate,
without novation, the Original Agreement.  All security interests granted under
the Original Agreement are hereby confirmed and ratified and shall continue to
secure all Obligations under this Agreement.
 
[Balance of Page Intentionally Left Blank]
 
 
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the date first above written.
 

 
SCIENTIFIC LEARNING CORPORATION
   
 
By: /s/ Andy Myers
     
Title: CEO
      COMERICA BANK       By: /s/ Ramesh Bart       Title: VP

 
 
 

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DEBTOR
SCIENTIFIC LEARNING CORPORATION
   
SECURED PARTY
COMERICA BANK

EXHIBIT A
 

COLLATERAL DESCRIPTION ATTACHMENT

TO LOAN AND SECURITY AGREEMENT
 
All personal property of Borrower (herein referred to as “Borrower” or “Debtor”)
whether presently existing or hereafter created or acquired, and wherever
located, including, but not limited to:
 
(a)           all accounts (including health-care-insurance receivables),
chattel paper (including tangible and electronic chattel paper), deposit
accounts, documents (including negotiable documents), equipment (including all
accessions and additions thereto), general intangibles (including payment
intangibles and software), goods (including fixtures), instruments (including
promissory notes), inventory (including all goods held for sale or lease or to
be furnished under a contract of service, and including returns and
repossessions), investment property (including securities and securities
entitlements), letter of credit rights, money, and all of Debtor’s books and
records with respect to any of the foregoing, and the computers and equipment
containing said books and records; and
 
(b)           and all cash proceeds and/or noncash proceeds of any of the
foregoing, including, without insurance proceeds, and all supporting obligations
and the security therefor or for any right to payment.  All terms above have the
meanings given to them in the California Uniform Commercial Code, as amended or
supplemented from time to time, including revised Division 9 of the Uniform
Commercial Code-Secured Transaction, added by Stats. 1999, c. 991 (S.B. 45),
Section 35, operative July 1, 2001.
 
Notwithstanding the foregoing, the Collateral shall not include any (1) such
property that (a) is nonassignable by its terms without the consent of the
licensor thereof or another party (but only to the extent such prohibition on
transfer is enforceable under applicable law, including, without limitation,
Sections 9406 and 9408 of the Code), (b) the granting of a security interest
therein is contrary to applicable law, provided that upon the cessation of any
such restriction or prohibition, such property shall automatically become part
of the Collateral, or (2) copyrights, patents, trademarks, servicemarks and
applications therefor, now owned or hereafter acquired, or any claims for
damages by way of any past, present and future infringement of any of the
foregoing (collectively, the “Intellectual Property); provided however, the
Collateral shall include all accounts and general intangibles that consist of
rights to payment and proceeds from the sale, licensing or disposition of all or
any part, or rights in, the foregoing (the “Rights to
Payment”).  Notwithstanding the foregoing, if a judicial authority (including a
U.S. Bankruptcy Court) holds that a security interest in the underlying
Intellectual Property is necessary in have a security interest in the Rights to
Payment, then the Collateral shall automatically, and effective as of the
Closing Date, include the Intellectual Property to the extent necessary to
permit perfection of Bank’s security interest in the Rights to Payment.
 
 
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EXHIBIT C

PRIME REFERENCED RATE ADDENDUM

[See attached]
 
 
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Prime Referenced Rate Addendum To
Amended and Restated Loan and Security Agreement

This Prime Referenced Rate Addendum to Amended and Restated Loan and Security
Agreement (this “Addendum”) is entered into as of February 9, 2012, by and
between COMERICA BANK (“Bank”) and SCIENTIFIC LEARNING CORPORATION
(“Borrower”).  This Addendum supplements the terms of the Amended and Restated
Loan and Security Agreement dated as of even date herewith (as the same may be
amended, restated, modified or otherwise supplemented from time to time,
collectively, the “Agreement”).
 
1.             Definitions.  As used in this Addendum, the following terms shall
have the following meanings.  Initially capitalized terms used and not defined
in this Addendum shall have the meanings ascribed thereto in the Agreement.
 
a.             “Applicable Margin” means one and one quarter percent (1.25%) per
annum.
 
b.             “Business Day” means any day, other than a Saturday, Sunday or
any other day designated as a holiday under Federal or applicable State statute
or regulation, on which Bank is open for all or substantially all of its
domestic and international business (including dealings in foreign exchange)
in San Jose, California, and, in respect of notices and determinations relating
the Daily Adjusting LIBOR Rate, also a day on which dealings in dollar deposits
are also carried on in the London interbank market and on which banks are open
for business in London, England.
 
c.             “Daily Adjusting LIBOR Rate” means, for any day, a per annum
interest rate which is equal to the quotient of the following:
 
 
(1)
for any day, the per annum rate of interest determined on the basis of the rate
for deposits in United States Dollars for a period equal to one (1) month
appearing on Page BBAM of the Bloomberg Financial Markets Information Service as
of 8:00 a.m. (California time) (or as soon thereafter as practical) on such day,
or if such day is not a Business Day, on the immediately preceding Business
Day.  In the event that such rate does not appear on Page BBAM of the Bloomberg
Financial Markets Information Service (or otherwise on such Service) on any day,
the “Daily Adjusting LIBOR Rate” for such day shall be determined by reference
to such other publicly available service for displaying eurodollar rates as may
be reasonably selected by Bank, or in the absence of such other service, the
“Daily Adjusting LIBOR Rate” for such day shall, instead, be determined based
upon the average of the rates at which Bank is offered dollar deposits at or
about 8:00 a.m. (California time) (or as soon thereafter as practical), on such
day, or if such day is not a Business Day, on the immediately preceding Business
Day, in the interbank eurodollar market in an amount comparable to the
outstanding principal amount of the Obligations and for a period equal to one
(1) month;

 
divided by
 
 
(2)
1.00 minus the maximum rate (expressed as a decimal) on such day at which Bank
is required to maintain reserves on “Euro-currency Liabilities” as defined in
and pursuant to Regulation D of the Board of Governors of the Federal Reserve
System or, if such regulation or definition is modified, and as long as Bank is
required to maintain reserves against a category of liabilities which includes
eurodollar deposits or includes a category of assets which includes eurodollar
loans, the rate at which such reserves are required to be maintained on such
category.

 
d.             “LIBOR Lending Office” means Bank’s office located in the Cayman
Islands, British West Indies, or such other branch of Bank, domestic or foreign,
as it may hereafter designate as its LIBOR Lending Office by notice to Borrower.
 
 
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e.             “Prime Rate” means the per annum interest rate established by
Bank as its prime rate for its borrowers, as such rate may vary from time to
time, which rate is not necessarily the lowest rate on loans made by Bank at any
such time.
 
e.             “Prime Referenced Rate” means, for any day, a per annum interest
rate which is equal to the Prime Rate in effect on such day, but in no event and
at no time shall the Prime Referenced Rate be less than the sum of the Daily
Adjusting LIBOR Rate for such day plus two and one-half percent (2.50%) per
annum. If, at any time, Bank determines that it is unable to determine or
ascertain the Daily Adjusting LIBOR Rate for any day, the Prime Referenced Rate
for each such day shall be the Prime Rate in effect at such time, but not less
than two and one-half percent (2.50%) per annum.
 
2.             Interest Rate.  Subject to the terms and conditions of this
Addendum, the Obligations under the Agreement shall bear interest at the Prime
Referenced Rate plus the Applicable Margin.
 
3.             Payment of Interest.  Accrued and unpaid interest on the unpaid
balance of the Obligations outstanding under the Agreement shall be payable
monthly, in arrears, on the first calendar day of each month, until maturity
(whether as stated herein, by acceleration, or otherwise).  In the event that
any payment under this Addendum becomes due and payable on any day which is not
a Business Day, the due date thereof shall be extended to the next succeeding
Business Day, and, to the extent applicable, interest shall continue to accrue
and be payable thereon during such extension at the rates set forth in this
Addendum.  Interest accruing hereunder shall be computed on the basis of a year
of 360 days, and shall be assessed for the actual number of days elapsed, and in
such computation, effect shall be given to any change in the applicable interest
rate as a result of any change in the Prime Referenced Rate on the date of each
such change.
 
4.             Bank’s Records.  The amount and date of each advance under the
Agreement, its applicable interest rate, and the amount and date of any
repayment shall be noted on Bank’s records, which records shall be conclusive
evidence thereof, absent manifest error; provided, however, any failure by Bank
to make any such notation, or any error in any such notation, shall not relieve
Borrower of its obligations to repay Bank all amounts payable by Borrower to
Bank under or pursuant to this Addendum and the Agreement, when due in
accordance with the terms hereof.
 
5.             Default Interest Rate.  From and after the occurrence of any
Event of Default, and so long as any such Event of Default remains unremedied or
uncured thereafter, the Obligations outstanding under the Agreement shall bear
interest at a per annum rate of five percent (5%) above the otherwise applicable
interest rate hereunder, which interest shall be payable upon demand.  In
addition to the foregoing, a late payment charge equal to five percent (5%) of
each late payment hereunder may be charged on any payment not received by Bank
within ten (10) calendar days after the payment due date therefor, but
acceptance of payment of any such charge shall not constitute a waiver of any
Event of Default under the Agreement.  In no event shall the interest payable
under this Addendum and the Agreement at any time exceed the maximum rate
permitted by law.
 
6.             Prepayment.   Borrower may prepay all or part of the outstanding
balance of any Obligations at any time without premium or penalty.  Any
prepayment hereunder shall also be accompanied by the payment of all accrued and
unpaid interest on the amount so prepaid.  Borrower hereby acknowledges and
agrees that the foregoing shall not, in any way whatsoever, limit, restrict, or
otherwise affect Bank’s right to make demand for payment of all or any part of
the Obligations under the Agreement due on a demand basis in Bank’s sole and
absolute discretion.
 
7.             Regulatory Developments or Other Circumstances Relating to the
Daily Adjusting LIBOR Rate.
 
a.              If the adoption after the date hereof, or any change after the
date hereof in, any applicable law, rule or regulation (whether domestic or
foreign) of any governmental authority, central bank or comparable agency
charged with the interpretation or administration thereof, or compliance by Bank
with any request or directive (whether or not having the force of law) made by
any such authority, central bank or comparable agency after the date hereof: (a)
shall subject Bank to any tax, duty or other charge with respect to this
Addendum or any Obligations under the Agreement, or shall change the basis of
taxation of payments to Bank of the principal of or interest under this Addendum
or any other amounts due under this Addendum in respect thereof (except for
changes in the rate of tax on the overall net income of Bank or its LIBOR
Lending Office imposed by the jurisdiction in which Bank’s principal executive
office or LIBOR Lending Office is located); or (b) shall impose, modify or deem
applicable any reserve (including, without limitation, any imposed by the Board
of Governors of the Federal Reserve System), special deposit or similar
requirement against assets of, deposits with or for the account of, or credit
extended by Bank, or shall impose on Bank or the foreign exchange and interbank
markets any other condition affecting this Addendum or the Obligations
hereunder; and the result of any of the foregoing is to increase the cost to
Bank of maintaining any part of the Obligations hereunder or to reduce the
amount of any sum received or receivable by Bank under this Addendum by an
amount deemed by the Bank to be material, then Borrower shall pay to Bank,
within fifteen (15) days of Borrower’s receipt of written notice from Bank
demanding such compensation, such additional amount or amounts as will
compensate Bank for such increased cost or reduction.  A certificate of Bank,
prepared in good faith and in reasonable detail by Bank and submitted by Bank to
Borrower, setting forth the basis for determining such additional amount or
amounts necessary to compensate Bank shall be conclusive and binding for all
purposes, absent manifest error.
 
 
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b.           In the event that any applicable law, treaty, rule or regulation
(whether domestic or foreign) now or hereafter in effect and whether or not
presently applicable to Bank, or any interpretation or administration thereof by
any governmental authority charged with the interpretation or administration
thereof, or compliance by Bank with any guideline, request or directive of any
such authority (whether or not having the force of law), including any
risk-based capital guidelines, affects or would affect the amount of capital
required or expected to be maintained by Bank (or any corporation controlling
Bank), and Bank determines that the amount of such capital is increased by or
based upon the existence of any obligations of Bank hereunder or the maintaining
of any Obligations hereunder, and such increase has the effect of reducing the
rate of return on Bank’s (or such controlling corporation’s) capital as a
consequence of such obligations or the maintaining of such Obligations hereunder
to a level below that which Bank (or such controlling corporation) could have
achieved but for such circumstances (taking into consideration its policies with
respect to capital adequacy), then Borrower shall pay to Bank, within fifteen
(15) days of Borrower’s receipt of written notice from Bank demanding such
compensation, additional amounts as are sufficient to compensate Bank (or such
controlling corporation) for any increase in the amount of capital and reduced
rate of return which Bank reasonably determines to be allocable to the existence
of any obligations of the Bank hereunder or to maintaining any Obligations
hereunder.  A certificate of Bank as to the amount of such compensation,
prepared in good faith and in reasonable detail by the Bank and submitted by
Bank to the undersigned, shall be conclusive and binding for all purposes absent
manifest error.
 
8.             Legal Effect.  Except as specifically modified hereby, all of the
terms and conditions of the Agreement remain in full force and effect.
 
9.             Conflicts.  As to the matters specifically the subject of this
Addendum, in the event of any conflict between this Addendum and the Agreement,
the terms of this Addendum shall control.
 
[Balance of Page Intentionally Left Blank]
 
 
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IN WITNESS WHEREOF, the parties have agreed to the foregoing as of the date
first set forth above.
 

COMERICA BANK  
SCIENTIFIC LEARNING CORPORATION
         
By:  
/s/ Ramesh Bart      
By:
/s/ Andy Myers  Name:  Ramesh Bart   Name:  Andy Myers  Title: VP   Title:  CEO

 
 
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