Exhibit 10.20
 
LOAN AND SECURITY AGREEMENT
 
This LOAN AND SECURITY AGREEMENT (this “Agreement”) dated as of August 25, 2011
(the “Effective Date”) is between SILICON VALLEY BANK, a California corporation
(“Bank”), and AEHR TEST SYSTEMS, a California corporation (“Borrower”), and
provides the terms on which Bank shall lend to Borrower, and Borrower shall
repay Bank.  The parties agree as follows:
 
1           ACCOUNTING AND OTHER TERMS
 
Accounting terms not defined in this Agreement shall be construed following
GAAP.  Calculations and determinations must be made following GAAP; provided
that if at any time any change in GAAP would affect the computation of any
financial ratio or requirement set forth in any Loan Document, and either
Borrower or Bank shall so request, Borrower and Bank shall negotiate in good
faith to amend such ratio or requirement to preserve the original intent thereof
in light of such change in GAAP; provided, further, that, until so amended, (a)
such ratio or requirement shall continue to be computed in accordance with GAAP
prior to such change therein and (b) Borrower shall provide Bank financial
statements and other documents required under this Agreement or as reasonably
requested hereunder setting forth a reconciliation between calculations of such
ratio or requirement made before and after giving effect to such change in
GAAP.  Capitalized terms not otherwise defined in this Agreement shall have the
meanings set forth in Section 13 of this Agreement.  All other terms contained
in this Agreement, unless otherwise indicated, shall have the meaning provided
by the Code to the extent such terms are defined therein.
 
2           LOAN AND TERMS OF PAYMENT
 
2.1           Promise to Pay.  Borrower hereby unconditionally promises to pay
Bank the outstanding principal amount of all Credit Extensions and accrued and
unpaid interest thereon together with any fees and Finance Charges and other
Obligations as and when due in accordance with this Agreement.
 
2.1.1           Financing of Accounts
 
(a)           Availability.  Subject to the terms of this Agreement, Borrower
may request that Bank finance Eligible Accounts.  At all times when Borrower is
not Borrowing Base Eligible (as hereinafter defined), Bank may, in its good
faith business discretion in each instance, finance specific Eligible Accounts
by extending credit to Borrower in an amount equal to the result of the Advance
Rate multiplied by the face amount of the Eligible Account.   At all times that
Borrower is Borrowing Base Eligible, Borrower may request that Bank finance
Eligible Accounts on an aggregate basis.  Bank shall finance Eligible Accounts
on an aggregate basis by extending credit to Borrower in an amount not to exceed
the result of the Advance Rate multiplied by the aggregate face amount of the
Eligible Accounts (the “Borrowing Base”).  Bank may, in its sole discretion,
change the percentage of the Advance Rate for a particular Eligible Account on a
case by case basis.  When Bank finances an Eligible Account (an “Advance”), the
Eligible Account becomes a “Financed Receivable.”
 
(b)           Maximum Advances.   At all times that Borrower is Borrowing Base
Eligible, the aggregate principal amount of the Advances shall not exceed the
lesser of (i) One Million Five Hundred Thousand Dollars ($1,500,000) or (ii) the
amount available under the Borrowing Base.  At all times that Borrower is not
Borrowing Base Eligible, the aggregate face amount of all Financed Receivables
outstanding at any time may not exceed the Facility Amount. In addition and
notwithstanding the foregoing, the sum of (i) the aggregate amount of Advances
outstanding, plus (ii) the aggregate amount of Exim Advances outstanding, plus
(iii) the aggregate amount of Exim Inventory Advances outstanding, may not, at
any time, exceed One Million Five Hundred Thousand Dollars ($1,500,000).
 
(c)           Borrowing Procedure.  Subject to the prior satisfaction of all
other applicable conditions to the making of an Advance set forth in this
Agreement, to obtain an Advance, Borrower must deliver to Bank an Invoice
Transmittal executed by a Responsible Officer or his or her designee for each
Eligible Account it offers, or if Borrower is Borrowing Base Eligible, Borrower
shall instead deliver a Payment/Advance Form executed by a Responsible Officer
or his or her designee, together with a Borrowing Base Certificate.  Bank may
rely on information set forth in or provided with each Invoice Transmittal and
Payment/Advance Form. In addition, upon Bank’s request, Borrower shall deliver
to Bank any contracts, purchase orders, or other underlying supporting
documentation with respect to each Eligible Account.
 
 
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(d)           End of Borrowing Base Eligible Status.  On any day that Borrower
is no longer Borrowing Base Eligible all outstanding Advances must be supported
by specific Eligible Accounts.  Borrower shall deliver to Bank, as soon as
possible, but in no event more than one (1) Business Day after Borrower is no
longer Borrowing Base Eligible, an Invoice Transmittal and a Payment/Advance
Form in the form attached hereto as Exhibit E containing detailed invoice
reporting, signed by a Responsible Officer together with a current accounts
receivable aging and a copy of each invoice, all in accordance with Section 6.2
hereof and subject to the terms of this Agreement, including, without
limitation, Section 2.1.1 hereof, each such Eligible Account financed shall
thereafter be deemed to be a Financed Receivable for purposes of this
Agreement.  At all times that Borrower is not Borrowing Base Eligible, if the
outstanding principal amount of the Advances exceeds the amount of Advances
available against Eligible Accounts (as determined by Bank), Borrower shall
immediately pay to Bank the excess and, in connection with same, hereby
irrevocably authorizes Bank to debit any account of Borrower maintained by
Borrower with Bank or any of Bank’s Affiliates for the amount of such excess.
 
(e)           Credit Quality; Confirmations.  Bank may, at its option, conduct a
credit check of the Account Debtor for each Account requested by Borrower for
financing hereunder to approve any such Account Debtor’s credit before agreeing
to finance such Account.  At all times that Borrower is not Borrowing Base
Eligible or an Event of Default has occurred and is continuing, Bank may also
verify directly with the respective Account Debtors the validity, amount and
other matters relating to the Accounts (including confirmations of Borrower’s
representations in Section 5.3 of this Agreement) by means of mail, telephone or
otherwise, either in the name of Borrower or Bank from time to time in its sole
discretion.
 
(f)           Accounts Notification/Collection.  At all times that Borrower is
not Borrowing Base Eligible or an Event of Default has occurred and is
continuing, Bank may notify any Account Debtor of Bank’s security interest in
the Borrower’s Accounts and verify and/or collect them.
 
(g)           Early Termination.  This Agreement may be terminated prior to the
Maturity Date as follows: (i) by Borrower, effective three Business Days after
written notice of termination is given to Bank; or (ii) by Bank at any time
after the occurrence of an Event of Default, without notice, effective
immediately.  If this Agreement is terminated (A) by Bank in accordance with
clause (ii) in the foregoing sentence, or (B) by Borrower for any reason,
Borrower shall pay to Bank a non refundable termination fee in an amount equal
to the product of (x) the number of months (rounded up to the nearest whole
month) remaining until the Maturity Date, times (y) One Thousand Dollars
($1,000) (the “Early Termination Fee”).  The Early Termination Fee shall be due
and payable on the effective date of such termination and thereafter shall bear
interest at a rate equal to the highest rate applicable to any of the
Obligations.  Notwithstanding the foregoing, Bank agrees to waive the Early
Termination Fee if Bank closes on the refinance and re-documentation of this
Agreement under another division of Bank (in its sole and exclusive discretion)
prior to the Maturity Date.
 
(h)           Maturity.  This Agreement shall terminate and all Obligations
outstanding hereunder shall be immediately due and payable in full on the
Maturity Date.
 
(i)           Suspension of Advances.  Borrower’s ability to request that Bank
finance Eligible Accounts hereunder will terminate if, in Bank’s sole
discretion, there has been a material adverse change in the general affairs,
management, results of operation, condition (financial or otherwise) or the
prospect of repayment of the Obligations, or there has been any material adverse
deviation by Borrower from the most recent business plan of Borrower presented
to and accepted by Bank prior to the Effective Date.
 
(j)           Overadvances.  If, at any time during which Borrower is Borrowing
Base Eligible, the outstanding principal amount of the Advances exceeds the
lesser of either (a) One Million Five Hundred Thousand Dollars ($1,500,000)
minus the aggregate amount of Exim Advances and Exim Inventory Advances
outstanding, or (b) the Borrowing Base, Borrower shall immediately pay to Bank
in cash such excess.
 
2.2           Collections, Finance Charges, Remittances and Fees.   The
Obligations shall be subject to the following fees and Finance Charges.  Unpaid
fees and Finance Charges may, in Bank’s discretion, accrue interest at the then
highest rate applicable to the Obligations.
 
 
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2.3           Collections. When Borrower is Borrowing Base Eligible, Collections
will be credited to Borrower’s operating account (for the avoidance of doubt,
all Collections shall be directed to the Lockbox in accordance with Section 2.9
below, even when Borrower is Borrowing Base Eligible).  When Borrower is not
Borrowing Base Eligible, (i) Collections will be credited to the Financed
Receivable Balance for such Financed Receivable and (ii) if Bank receives a
payment for both a Financed Receivable and a non-Financed Receivable, the funds
will first be applied to the Financed Receivable and the excess will be remitted
to Borrower, subject to Section 2.9 of this Agreement.  Notwithstanding anything
to the contrary contained herein, if an Event of Default has occurred and is
continuing, Bank may apply Collections to the Obligations in any order it
chooses.
 
2.4           Facility Fee. A fully earned, non-refundable facility fee of Eight
Thousand Dollars ($8,000) is due upon the Effective Date (the “Facility Fee”).
 
2.5           Finance Charges. In computing Finance Charges on the Obligations
under this Agreement, all Collections received by Bank shall be deemed applied
by Bank on account of the Obligations upon receipt of the Collections.  When
Borrower is not Borrowing Base Eligible, Borrower will pay a finance charge (the
“Finance Charge”) on the Financed Receivable Balance which is equal to the
Applicable Rate divided by three hundred sixty (360) multiplied by the number of
days each such Financed Receivable is outstanding multiplied by the outstanding
Financed Receivable Balance. At all times that Borrower is Borrowing Base
Eligible, Borrower will pay a Finance Charge on the unpaid principal balance of
the Advances which is equal to the Applicable Rate divided by the Advance Rate
divided by three hundred sixty (360) multiplied by the number of days each such
Advance is outstanding multiplied by the unpaid principal balance of such
Advance.  At all times that Borrower is Borrowing Base Eligible the Finance
Charge shall be payable monthly on the first day of each month.  At all times
that Borrower is not Borrowing Base Eligible, the Finance Charge is payable when
the Advance made based on such Financed Receivable is repaid in accordance with
Section 2.12 of this Agreement.  Immediately upon the occurrence of an Event of
Default, the Applicable Rate will increase an additional five percent (5.0%) per
annum.
 
2.6           Collateral Handling Fee. At all times that Borrower’s Net Cash is
equal to or greater than Zero Dollars ($0.00), Borrower shall not pay any
Collateral Handling Fee (as hereinafter defined).  At all other times, Borrower
shall pay to Bank a Collateral Handling Fee equal to two-tenths of one percent
(0.20%) per Reconciliation Period of the Financed Receivable Balance for each
Financed Receivable outstanding based upon a three hundred sixty (360) day year
(the “Collateral Handling Fee”).  The Collateral Handling Fee is charged on a
daily basis and is equal to the Collateral Handling Fee divided by thirty (30),
multiplied by the number of days each such Financed Receivable is outstanding,
multiplied by the outstanding Financed Receivable Balance.  The Collateral
Handling Fee is payable when the Advance made based on such Financed Receivable
is repaid in accordance with Section 2.12 of this Agreement.  In computing
Collateral Handling Fees under this Agreement, all Collections received by Bank
shall be deemed applied by Bank on account of Obligations upon receipt of the
Collections.  Immediately upon the occurrence of an Event of Default, the
Collateral Handling Fee will increase an additional 0.50%.

2.7           Accounting.  After each Reconciliation Period, Bank will provide
Borrower with an accounting of the transactions for that Reconciliation Period,
including the amount of all Financed Receivables, all Collections, Adjustments,
Finance Charges, Collateral Handling Fees and the Facility Fee.  If Borrower
does not object to the accounting in writing within thirty (30) days it shall be
considered accurate.  All Finance Charges and other interest and fees are
calculated on the basis of a three hundred sixty (360) day year and actual days
elapsed.
 
2.8           Deductions.  Bank may deduct fees, Bank Expenses, Finance Charges,
Collateral Handling Fees, Advances which become due pursuant to Section 2.12 of
this Agreement, and other amounts due pursuant to this Agreement from any
Advances made or Collections received by Bank.
 
2.9           Lockbox; Account Collection Services
 
(a)           Borrower shall direct each Account Debtor (and each depository
institution where proceeds of Accounts are on deposit) to remit payments with
respect to the Accounts to a lockbox account established with Bank or to wire
transfer payments to a cash collateral account that Bank controls (collectively,
the “Lockbox”).  It will be considered an immediate Event of Default if the
Lockbox is not established and operational within forty-five (45) days after the
Effective Date and at all times thereafter.
 
 
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(b)           Until such Lockbox is established, the proceeds of the Accounts
shall be paid by the Account Debtors to an address consented to by Bank.  Upon
receipt by Borrower of any proceeds of Accounts, Borrower shall immediately
transfer and deliver same to Bank, along with a detailed cash receipts journal.
 
(c)           During any period when Borrower is Borrowing Base Eligible,
provided no Event of Default exists or an event that with notice or lapse of
time will be an Event of Default, Bank will promptly turn over to Borrower the
proceeds of all the Accounts.  During any period when Borrower is not Borrowing
Base Eligible, provided no Event of Default exists or an event that with notice
or lapse of time will be an Event of Default, within three (3) days of receipt
of any proceeds of the Accounts by Bank (whether received by Bank in the
Lockbox, directly from Borrower, or otherwise), Bank will turn over to Borrower
such proceeds other than (i) Collections applied by Bank pursuant to Section 2.3
of this Agreement, and (ii) such proceeds which shall be used by Bank to repay
any other amounts due to Bank, such as the Finance Charge, the Facility Fee,
Collateral Handling Fee, and Bank Expenses; provided, however, Bank may hold any
proceeds of the Accounts (whether received by Bank in the Lockbox, directly from
Borrower, or otherwise and whether or not in respect of Financed Receivables) as
a reserve until the end of the applicable Reconciliation Period if Bank, in its
discretion, determines that other Financed Receivable(s) may no longer qualify
as an Eligible Account at any time prior to the end of the subject
Reconciliation Period.  All monies applied to the Obligations shall be applied
in accordance with the procedures set forth in Section 2.3 above.
 
(d)           This Section 2.9 does not impose any affirmative duty on Bank to
perform any act other than as specifically set forth herein.  All Accounts and
the proceeds thereof are Collateral, and if an Event of Default occurs, Bank
may, without notice, apply the proceeds of such Accounts to the Obligations.
 
2.10           Bank Expenses.  Borrower shall pay all Bank Expenses (including
reasonable attorneys’ fees and expenses, plus expenses, for documentation and
negotiation of this Agreement) incurred through and after the Effective Date,
when due.
 
2.11           Good Faith Deposit.  Borrower has paid to Bank a deposit of Eight
Thousand Dollars ($8,000) (the “Good Faith Deposit”) to initiate Bank’s due
diligence review process.  The Good Faith Deposit will be applied to the
Facility Fee on the Effective Date.
 
2.12           Repayment of Obligations; Adjustments
 
2.12.1           Repayment.  At all times that Borrower is not Borrowing Base
Eligible, Borrower will repay each Advance on the earliest of: (a) the date on
which payment is received of the Financed Receivable with respect to which the
Advance was made, (b) the date on which the Financed Receivable is no longer an
Eligible Account, (c) the date on which any Adjustment is asserted to the
Financed Receivable (but only to the extent of the Adjustment if the Financed
Receivable otherwise remains an Eligible Account), (d) the date on which there
is a breach of any representation or warranty in Section 5.3 of this Agreement
or of any covenant in the Loan Documents, or (e) the Maturity Date (including
any early termination).  Each payment will also include all accrued Finance
Charges and Collateral Handling Fees with respect to such Advance and all other
amounts then due and payable hereunder.  Notwithstanding the foregoing, at any
time that Borrower is Borrowing Base Eligible, Borrower will repay each Advance
on the earliest of: (a) the date on which there is a breach of any warranty or
representation set forth in Section 5.3, (b) the Maturity Date (including any
early termination), or (c) to the extent required under Section 2.1.1(d).
 
2.12.2           Repayment on Event of Default.  When there is an Event of
Default, Borrower will, if Bank demands (or, upon the occurrence of an Event of
Default under Section 8.5 of this Agreement, immediately without notice or
demand from Bank) repay all of the Obligations.  The demand may, at Bank’s
option, include the Advance for each Financed Receivable then outstanding and
all accrued Finance Charges, the Early Termination Fee, Collateral Handling Fee,
attorneys’ and professional fees, court costs and expenses, Bank Expenses and
any other Obligations.
 
2.12.3           Debit of Accounts.   Bank may debit any of Borrower’s deposit
accounts for payments or any amounts Borrower owes Bank hereunder.  Bank shall
promptly notify Borrower when it debits Borrower’s accounts.  These debits shall
not constitute a set-off.
 
 
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2.13           Power of Attorney.  Borrower irrevocably appoints Bank and its
successors and assigns as attorney-in-fact and authorizes Bank and its successor
and assigns, to: (a) following the occurrence of an Event of Default, (i) sell,
assign, transfer, pledge, compromise, or discharge all or any part of the
Financed Receivables; (ii) demand, collect, sue, and give releases to any
Account Debtor for monies due and compromise, prosecute, or defend any action,
claim, case or proceeding about the Financed Receivables, including filing a
claim or voting a claim in any bankruptcy case in Bank’s or Borrower’s name, as
Bank chooses; and (iii) prepare, file and sign Borrower’s name on any notice,
claim, assignment, demand, draft, or notice of or satisfaction of lien or
mechanics’ lien or similar document; and (b) regardless of whether an Event of
Default has occurred and is continuing, (i) notify all Account Debtors to pay
Bank directly; (ii) receive, open, and dispose of mail addressed to Borrower;
(iii) endorse Borrower’s name on checks or other instruments (to the extent
necessary to pay amounts owed pursuant to any of the Loan Documents); and (iv)
execute on Borrower’s behalf any instruments, documents, financing statements to
perfect Bank’s interests in the Financed Receivables and Collateral and do all
acts and things necessary or prudent, as determined solely and exclusively by
Bank, to protect or preserve, Bank’s rights and remedies under the Loan
Documents, as directed by Bank.
 
3           CONDITIONS OF LOANS
 
3.1           Conditions Precedent to Initial Credit Extension.  Bank’s
obligation to make the initial Credit Extension is subject to the condition
precedent that Bank shall have received, in form and substance satisfactory to
Bank, such documents, and completion of such other matters, as Bank may
reasonably deem necessary or appropriate, including, without limitation:
 
(a)          the Loan Documents;
 
(b)          the SVB Control Agreement and any other Control Agreements required
by Bank;
 
(c)          Borrower’s Operating Documents and a good standing certificate of
Borrower certified by the Secretary of State of the State of California as of a
date no earlier than thirty (30) days prior to the Effective Date;
 
(d)          the completed and executed Borrowing Resolutions for Borrower;
 
(e)          certified copies, dated as of a recent date, of financing statement
searches, as Bank shall request, accompanied by written evidence (including any
UCC termination statements) that the Liens indicated in any such financing
statements either constitute Permitted Liens or have been or, in connection with
the initial Credit Extension, will be terminated or released;
 
(f)          the Perfection Certificate of Borrower, together with the duly
executed original signature thereto;
 
(g)          a copy of its Investors’ Rights Agreement and any amendments
thereto;
 
(h)          evidence satisfactory to Bank that the insurance policies required
by Section 6.4 of this Agreement are in full force and effect, together with
appropriate evidence showing lender loss payable and additional insured clauses
or endorsements in favor of Bank; and
 
(i)          payment of the fees and Bank Expenses then due as specified in
Section 2.10 of this Agreement.
 
3.2           Conditions Precedent to all Credit Extensions.  Bank’s agreement
to make each Credit Extension, including the initial Credit Extension, is
subject to the following:
 
(a)           receipt of the Invoice Transmittal or Payment/Advance Form, as
applicable;
 
(b)           Bank shall have (at its option) conducted the confirmations and
verifications as described in Section 2.1.1(e) of this Agreement; and
 
 
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(c)           each of the representations and warranties in this Agreement shall
be true, accurate, and complete on the date of the Invoice Transmittal and on
the effective date of each Credit Extension and no Event of Default shall have
occurred and be continuing, or result from the Credit Extension.  Each Credit
Extension is Borrower’s representation and warranty on that date that the
representations and warranties in this Agreement remain true, accurate, and
complete.
 
3.3           Covenant to Deliver.  Borrower agrees to deliver to Bank each item
required to be delivered to Bank under this Agreement as a condition precedent
to any Credit Extension.  Borrower expressly agrees that a Credit Extension made
prior to the receipt by Bank of any such item shall not constitute a waiver by
Bank of Borrower’s obligation to deliver such item, and the making of any Credit
Extension in the absence of a required item shall be in Bank’s sole discretion.
 
4           CREATION OF SECURITY INTEREST
 
4.1           Grant of Security Interest.  Borrower hereby grants Bank, to
secure the payment and performance in full of all of the Obligations, a
continuing security interest in, and pledges to Bank, the Collateral, wherever
located, whether now owned or hereafter acquired or arising, and all proceeds
and products thereof.  Borrower represents, warrants, and covenants that the
security interest granted herein shall be and shall at all times continue to be
a first priority perfected security interest in the Collateral subject only to
Permitted Liens.  If Borrower shall at any time acquire a commercial tort claim,
Borrower shall promptly notify Bank in a writing signed by Borrower of the
general details thereof and grant to Bank in such writing a security interest
therein and in the proceeds thereof, all upon the terms of this Agreement, with
such writing to be in form and substance satisfactory to Bank.
 
If this Agreement is terminated, Bank’s Lien in the Collateral shall continue
until the Obligations (other than inchoate indemnity obligations) are repaid in
full in cash.  Upon payment in full in cash of the Obligations and at such time
as this Agreement has been terminated, Bank shall, at Borrower’s sole cost and
expense, release its Liens in the Collateral and all rights therein shall revert
to Borrower.
 
4.2           Authorization to File Financing Statements.  Borrower hereby
authorizes Bank to file financing statements, without notice to Borrower, with
all appropriate jurisdictions to perfect or protect Bank’s interest or rights
hereunder.
 
5           REPRESENTATIONS AND WARRANTIES
 
Borrower represents and warrants as follows:
 
5.1           Due Organization and Authorization.  Borrower and each of its
Subsidiaries are duly existing and in good standing as Registered Organizations
in their respective jurisdictions of formation and are qualified and licensed to
do business and are in good standing in any other jurisdiction in which the
conduct of their respective business or ownership of property requires that they
be qualified except where the failure to do so could not reasonably be expected
to have a material adverse effect on Borrower’s business.  In connection with
this Agreement, Borrower has delivered to Bank a completed certificate signed by
Borrower, entitled Perfection Certificate (the “Perfection
Certificate”).  Borrower represents and warrants to Bank that (a) Borrower’s
exact legal name is that indicated on the Perfection Certificate and on the
signature page hereof; (b) Borrower is an organization of the type and is
organized in the jurisdiction set forth in the Perfection Certificate; (c) the
Perfection Certificate accurately sets forth Borrower’s organizational
identification number or accurately states that Borrower has none; (d) the
Perfection Certificate accurately sets forth Borrower’s place of business, or,
if more than one, its chief executive office as well as Borrower’s mailing
address (if different than its chief executive office); (e) Borrower (and each
of its predecessors) has not, in the past five (5) years, changed its
jurisdiction of formation, corporate structure, organizational type, or any
organizational number assigned by its jurisdiction; and (f) all other
information set forth on the Perfection Certificate pertaining to Borrower and
each of its Subsidiaries is accurate and complete (it being understood and
agreed that Borrower may from time to time update certain information in the
Perfection Certificate after the Effective Date to the extent permitted by one
or more specific provisions in this Agreement).
 
 
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The execution, delivery and performance by Borrower of the Loan Documents to
which it is a party have been duly authorized, and do not (i) conflict with any
of Borrower’s organizational documents, (ii) contravene, conflict with,
constitute a default under or violate any material Requirement of Law, (iii)
contravene, conflict or violate any applicable order, writ, judgment,
injunction, decree, determination or award of any Governmental Authority by
which Borrower or any of its Subsidiaries or any of their property or assets may
be bound or affected, (iv) require any action by, filing, registration, or
qualification with, or Governmental Approval from, any Governmental Authority
(except such Governmental Approvals which have already been obtained and are in
full force and effect) or (v) constitute an event of default under any material
agreement by which Borrower is bound.  Borrower is not in default under any
agreement to which it is a party or by which it is bound in which the default
could have a material adverse effect on Borrower’s business.
 
5.2           Collateral.  Borrower has good title to, has rights in, and the
power to transfer, each item of the Collateral upon which it purports to grant a
Lien hereunder, free and clear of any and all Liens except Permitted
Liens.  Borrower has no deposit accounts other than the deposit accounts with
Bank, the deposit accounts, if any, described in the Perfection Certificate
delivered to Bank in connection herewith, or of which Borrower has given Bank
notice and taken such actions as are necessary to give Bank a perfected security
interest therein.  The Accounts are bona fide, existing obligations of the
Account Debtors.  All Inventory is in all material respects of good and
marketable quality, free from material defects.
 
The Collateral is not in the possession of any third party bailee (such as a
warehouse) except as otherwise provided in the Perfection Certificate.  None of
the components of the Collateral are currently being maintained at locations
other than as provided in the Perfection Certificate or as permitted pursuant to
Section 7.2 of this Agreement.
 
Borrower is the sole owner of the Intellectual Property which it owns or
purports to own except for (a) non-exclusive licenses granted to its customers
in the ordinary course of business, (b) over-the-counter software that is
commercially available to the public, and (c) material Intellectual Property
licensed to Borrower and noted on the Perfection Certificate.  Each Patent which
it owns or purports to own and which is material to Borrower’s business is valid
and enforceable, and no part of the Intellectual Property which Borrower owns or
purports to own and which is material to Borrower’s business has been judged
invalid or unenforceable, in whole or in part.  To the best of Borrower’s
knowledge, no claim has been made that any part of the Intellectual Property
violates the rights of any third party except to the extent such claim would not
reasonably be expected to have a material adverse effect on Borrower’s
business.  Except as noted on the Perfection Certificate, Borrower is not a
party to, nor is it bound by, any Restricted License.
 
5.3           Financed Receivables.  Borrower represents and warrants for each
Financed Receivable:
 
(a)           Such Financed Receivable is an Eligible Account;
 
(b)           Borrower is the owner of and has the legal right to sell,
transfer, assign and encumber such Financed Receivable;
 
(c)           The correct amount is on the Invoice Transmittal and is not
disputed;
 
(d)           Payment is not contingent on any obligation or contract and
Borrower has fulfilled all its obligations as of the Invoice Transmittal date;
 
(e)           Such Financed Receivable is based on an actual sale and delivery
of goods and/or services rendered, is due to Borrower, is not past due or in
default, has not been previously sold, assigned, transferred, or pledged and is
free of any liens, security interests and encumbrances other than Permitted
Liens;
 
(f)           There are no defenses, offsets, counterclaims or agreements for
which the Account Debtor may claim any deduction or discount;
 
(g)           Borrower reasonably believes no Account Debtor is insolvent or
subject to any Insolvency Proceedings;
 
 
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(h)           Borrower has not filed or had filed against it Insolvency
Proceedings and does not anticipate any filing;
 
(i)           Bank has the right to endorse and/ or require Borrower to endorse
all payments received on Financed Receivables and all proceeds of Collateral;
and
 
(j)           No representation, warranty or other statement of Borrower in any
certificate or written statement given to Bank contains any untrue statement of
a material fact or omits to state a material fact necessary to make the
statement contained in the certificates or statement not misleading.
 
5.4           Litigation.  There are no actions or proceedings pending or, to
the knowledge of Borrower’s Responsible Officers, threatened in writing by or
against Borrower or any Subsidiary in which an adverse decision could reasonably
be expected to cause a Material Adverse Change.
 
5.5           No Material Deviation in Financial Statements and Deterioration in
Financial Condition.  All consolidated financial statements for Borrower and any
Subsidiary delivered to Bank fairly present in all material respects Borrower’s
consolidated financial condition and Borrower’s consolidated results of
operations.  There has not been any material deterioration in Borrower’s
consolidated financial condition since the date of the most recent financial
statements submitted to Bank.
 
5.6           Solvency.  The fair salable value of Borrower’s assets (including
goodwill minus disposition costs) exceeds the fair value of its liabilities;
Borrower is not left with unreasonably small capital after the transactions in
this Agreement; and Borrower is able to pay its debts (including trade debts) as
they mature.
 
5.7           Regulatory Compliance.  Borrower is not an “investment company” or
a company “controlled” by an “investment company” under the Investment Company
Act of 1940, as amended.  Borrower is not engaged as one of its important
activities in extending credit for margin stock (under Regulations X, T and U of
the Federal Reserve Board of Governors).  Neither Borrower nor any of its
Subsidiaries is a “holding company” or an “affiliate” of a “holding company” or
a “subsidiary company” of a “holding company” as each term is defined and used
in the Public Utility Holding Company Act of 2005.  Borrower has complied in all
material respects with the Federal Fair Labor Standards Act.  Borrower has not
violated any laws, ordinances or rules, the violation of which could reasonably
be expected to cause a Material Adverse Change.  None of Borrower’s or any
Subsidiary’s properties or assets has been used by Borrower or any Subsidiary
or, to the best of Borrower’s knowledge, by previous Persons, in disposing,
producing, storing, treating, or transporting any hazardous substance other than
legally.  Borrower and each of its Subsidiaries have obtained all consents,
approvals and authorizations of, made all declarations or filings with, and
given all notices to, all Governmental Authorities that are necessary to
continue their respective businesses as currently conducted.
 
5.8           Subsidiaries.  Borrower does not own any stock, partnership
interest or other equity securities except for Permitted Investments.
 
5.9           Tax Returns and Payments; Pension Contributions.  Borrower and
each Subsidiary have timely filed all required tax returns and reports, and
Borrower and each Subsidiary have timely paid all foreign, federal, state and
material local taxes, assessments, deposits and contributions owed by Borrower
and each Subsidiary.  Borrower may defer payment of any contested taxes,
provided that Borrower (a) in good faith contests its obligation to pay the
taxes by appropriate proceedings promptly and diligently instituted and
conducted, (b) notifies Bank in writing of the commencement of, and any material
development in, the proceedings and (c) posts bonds or takes any other steps
required to prevent the Governmental Authority levying such contested taxes from
obtaining a Lien upon any of the Collateral that is other than a “Permitted
Lien”.  Borrower is unaware of any claims or adjustments proposed for any of
Borrower's prior tax years which could result in additional taxes becoming due
and payable by Borrower.  Borrower has paid all amounts necessary to fund all
present pension, profit sharing and deferred compensation plans in accordance
with their terms, and Borrower has not withdrawn from participation in, and has
not permitted partial or complete termination of, or permitted the occurrence of
any other event with respect to, any such plan which could reasonably be
expected to result in any liability of Borrower, including any liability to the
Pension Benefit Guaranty Corporation or its successors or any other governmental
agency.
 
 
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5.10           Full Disclosure.  No written representation, warranty or other
statement of Borrower in any certificate or written statement given to Bank, as
of the date such representation, warranty, or other statement was made, taken
together with all such written certificates and written statements given to
Bank, contains any untrue statement of a material fact or omits to state a
material fact necessary to make the statements contained in the certificates or
statements not misleading (it being recognized by Bank that any projections and
forecasts provided by Borrower in good faith and based upon reasonable
assumptions are not viewed as facts and that actual results during the period or
periods covered by such projections and forecasts may differ from the projected
or forecasted results).
 
6           AFFIRMATIVE COVENANTS
 
Borrower shall do all of the following:
 
6.1           Government Compliance
 
(a)           Maintain its and all its Subsidiaries’ legal existence and good
standing in their respective jurisdictions of formation and maintain
qualification in each jurisdiction in which the failure to so qualify would
reasonably be expected to have a material adverse effect on Borrower’s business
or operations.  Borrower shall comply, and have each Subsidiary comply, with all
laws, ordinances and regulations to which it is subject, noncompliance with
which could have a material adverse effect on Borrower’s business.
 
(b)           Obtain all of the Governmental Approvals necessary for the
performance by Borrower of its obligations under the Loan Documents to which it
is a party and the grant of a security interest to Bank in all of its
property.  Borrower shall promptly provide copies of any such obtained
Governmental Approvals to Bank.
 
(c)           Deliver to Bank, within five (5) days after the same are sent or
received, copies of all material correspondence, reports, documents and other
filings with any Governmental Authority regarding compliance with or maintenance
of Governmental Approvals or Requirements of Law or that could reasonably be
expected to have a material adverse effect on any of the Governmental Approvals
or otherwise on the operations of Borrower or any of its Subsidiaries.
 
6.2           Financial Statements, Reports, Certificates
 
(a)           Deliver to Bank:  (i) as soon as available, but no later than
thirty (30) days after the last day of each quarter (or forty (40) days after
the last day of fiscal quarter two), a company prepared consolidated and
consolidating balance sheet and income statement covering Borrower and each of
its Subsidiary’s operations during the period certified by a Responsible Officer
and in a form acceptable to Bank; (ii) within five (5) days of being publicly
available, but in no event later than fifty-five (55) days after the last day of
Borrower’s fiscal year, a company prepared consolidated and consolidating
balance sheet and income statement covering Borrower and each of its
Subsidiary’s operations during such year certified by a Responsible Officer and
in a form acceptable to Bank; (iii) as soon as available, but no later than one
hundred eighty (180) days after the last day of Borrower’s fiscal year, audited
consolidated financial statements prepared under GAAP, consistently applied,
together with an unqualified opinion on the financial statements from an
independent certified public accounting firm reasonably acceptable to Bank; (iv)
within five (5) days of filing, copies of all statements, reports and notices
made available to Borrower’s security holders or to any holders of Subordinated
Debt and all reports on Form 10-K, 10-Q and 8-K filed with the SEC; (v) a prompt
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
of One Hundred Thousand Dollars ($100,000) or more; (vi) as soon as available,
but no later than thirty (30) days after approval by Borrower’s Board of
Directors, annual financial projections for the following fiscal year approved
by Borrower’s Board of Directors and commensurate in form and substance with
those provided to Borrower’s Board of Directors, together with any related
business forecasts used in the preparation of such annual financial plans and
projections; and (vii) budgets, sales projections, operating plans or other
financial information reasonably requested by Bank.
 
(b)           Within thirty (30) days after the last day of each quarter (or
forty (40) days after the last day of fiscal quarter two), deliver to Bank with
the quarterly financial statements a Compliance Certificate signed by a
Responsible Officer in the form of Exhibit B.
 
 
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(c)           Allow Bank to inspect the Collateral and audit and copy Borrower’s
Books, including, but not limited to, Borrower’s Accounts, upon reasonable
notice to Borrower.  Such inspections or audits shall be conducted no more often
than once every six (6) months unless an Event of Default has occurred and is
continuing.  Borrower hereby acknowledges that the first such audit shall be
conducted within sixty (60) days after the Effective Date.  The foregoing
inspections and audits shall be at Borrower’s expense, and the charge therefor
shall be $850 per person per day (or such higher amount as shall represent
Bank’s then-current standard charge for the same), plus reasonable out-of-pocket
expenses.  In the event Borrower and Bank schedule an audit more than ten (10)
days in advance, and Borrower cancels or seeks to reschedule the audit with less
than ten (10) days written notice to Bank, then (without limiting any of Bank’s
rights or remedies), Borrower shall pay Bank a fee of $1,000 plus any
out-of-pocket expenses incurred by Bank to compensate Bank for the anticipated
costs and expenses of the cancellation or rescheduling.  After the occurrence of
an Event of Default, Bank may audit Borrower’s Collateral at Borrower’s expense,
including, but not limited to, Borrower’s Accounts as frequently as Bank deems
necessary at Borrower’s expense and at Bank’s sole and exclusive discretion,
without notification to and authorization from Borrower.
 
(d)           Upon Bank’s request, provide a written report on any Financed
Receivable, where payment of such Financed Receivable does not occur by its due
date and include the reasons for the delay.
 
(e)           Provide Bank with, as soon as available, but no later than thirty
(30) days following each Reconciliation Period, an aged listing of accounts
receivable and accounts payable by invoice date, in form and detail acceptable
to Bank.
 
(f)           Provide Bank with, as soon as available, but no later than thirty
(30) days following each Reconciliation Period, a Deferred Revenue report, in
form and detail acceptable to Bank.
 
(g)           If Borrower is Borrowing Base Eligible, provide Bank within thirty
(30) days after the last day of each month, a Borrowing Base Certificate signed
by a Responsible Officer of Borrower.
 
(h)           Provide Bank with, as soon as available following each quarter,
copies of actual invoices of not less than ten percent (10%) of the quarter-end
accounts receivable aging balance and not less than ten percent (10%) of the
total (cumulatively) purchase orders received in the prior quarter.
 
6.3           Taxes.  Make, and cause each Subsidiary to make, timely payment of
all foreign, federal, state, and material local taxes or assessments (other than
taxes and assessments which Borrower is contesting in good faith, with adequate
reserves maintained in accordance with GAAP) and will deliver to Bank, on
demand, appropriate certificates attesting to such payments.
 
6.4           Insurance.  Keep its business and the Collateral insured for risks
and in amounts standard for companies in Borrower’s industry and location, and
as Bank may reasonably request.  Insurance policies shall be in a form, with
companies, and in amounts that are satisfactory to Bank.  All property policies
shall have a lender’s loss payable endorsement showing Bank as lender loss payee
and waive subrogation against Bank, and all liability policies shall show, or
have endorsements showing, Bank as an additional insured.  All policies (or the
lender loss payable and additional insured endorsements) shall provide that the
insurer must give Bank at least twenty (20) days notice before canceling,
amending, or declining to renew its policy.  At Bank’s request, Borrower shall
deliver certified copies of policies and evidence of all premium
payments.  Proceeds payable under any policy shall, at Bank’s option, be payable
to Bank on account of the Obligations.  Notwithstanding the foregoing, (a) so
long as no Event of Default has occurred and is continuing, Borrower shall have
the option of applying the proceeds of any casualty policy up to Fifty Thousand
Dollars ($50,000) with respect to any loss, but not exceeding One Hundred
Thousand Dollars ($100,000) in the aggregate for all losses under all casualty
policies in any one year, toward the replacement or repair of destroyed or
damaged property; provided that any such replaced or repaired property (i) shall
be of equal or like value as the replaced or repaired Collateral and (ii) shall
be deemed Collateral in which Bank has been granted a first priority security
interest, and (b) after the occurrence and during the continuance of an Event of
Default, all proceeds payable under such casualty policy shall, at the option of
Bank, be payable to Bank on account of the Obligations.  If Borrower fails to
obtain insurance as required under this Section 6.4 or to pay any amount or
furnish any required proof of payment to third persons and Bank, Bank may make
all or part of such payment or obtain such insurance policies required in this
Section 6.4, and take any action under the policies Bank deems prudent.
 
 
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6.5           Accounts
 
(a)           To permit Bank to monitor Borrower’s financial performance and
condition, maintain Borrower’s primary depository and operating accounts with
Bank and Bank’s Affiliates and conduct all of its cash management, foreign
exchange and letters of credit business with Bank.
 
(b)           Provide Bank five (5) days prior written notice before
establishing any Collateral Account at or with any bank or financial institution
other than Bank or Bank’s Affiliates.  For each Collateral Account that Borrower
at any time maintains, Borrower shall cause the applicable bank or financial
institution (other than Bank) at or with which any Collateral Account is
maintained to execute and deliver a Control Agreement or other appropriate
instrument with respect to such Collateral Account to perfect Bank’s Lien in
such Collateral Account in accordance with the terms hereunder which Control
Agreement may not be terminated without the prior written consent of Bank.  The
provisions of the previous sentence shall not apply to deposit accounts
exclusively used for payroll, payroll taxes and other employee wage and benefit
payments to or for the benefit of Borrower’s employees and identified to Bank by
Borrower as such.
 
6.6           Inventory; Returns; Notices of Adjustments.  Keep all Inventory in
good and marketable condition, free from material defects.  Returns and
allowances between Borrower and its Account Debtors shall follow Borrower’s
customary practices as they exist at the Effective Date.  If, at any time during
the term of this Agreement, any Account Debtor asserts an Adjustment in excess
of One Hundred Thousand Dollars ($100,000), Borrower issues a credit memorandum,
or any representation, warranty or covenant set forth in this Agreement or the
other Loan Documents is no longer true in all material respects, Borrower will
promptly advise Bank.
 
6.7           Protection of Intellectual Property Rights
 
(a)           (i) Use commercially reasonable efforts to protect, defend and
maintain the validity and enforceability of its Intellectual Property;
(ii) promptly advise Bank in writing of material infringements of its
Intellectual Property; and (iii) not allow any Intellectual Property material to
Borrower’s business to be abandoned, forfeited or dedicated to the public
without Bank’s written consent.
 
(b)           Provide written notice to Bank within ten (10) days of entering or
becoming bound by any Restricted License (other than over-the-counter software
that is commercially available to the public).  Borrower shall take such steps
as Bank reasonably requests to obtain the consent of, or waiver by, any person
whose consent or waiver is necessary for (i) any Restricted License to be deemed
“Collateral” and for Bank to have a security interest in it that might otherwise
be restricted or prohibited by law or by the terms of any such Restricted
License, whether now existing or entered into in the future, and (ii) Bank to
have the ability in the event of a liquidation of any Collateral to dispose of
such Collateral in accordance with Bank’s rights and remedies under this
Agreement and the other Loan Documents.
 
6.8           Litigation Cooperation.  From the Effective Date and continuing
through the termination of this Agreement, make available to Bank, without
expense to Bank, Borrower and its officers, employees and agents and Borrower’s
Books, to the extent that Bank may deem them reasonably necessary to prosecute
or defend any third-party suit or proceeding instituted by or against Bank with
respect to any Collateral or relating to Borrower.
 
6.9           Further Assurances.  Execute any further instruments and take
further action as Bank reasonably requests to perfect or continue Bank’s Lien in
the Collateral or to effect the purposes of this Agreement.
 
7           NEGATIVE COVENANTS
 
Borrower shall not do any of the following without Bank’s prior written consent.
 
7.1           Dispositions.  Convey, sell, lease, transfer, assign, or otherwise
dispose of (collectively a “Transfer”), or permit any of its Subsidiaries to
Transfer, all or any part of its business or property, except for Transfers (a)
of Inventory in the ordinary course of business; (b) of worn-out or obsolete
Equipment; (c) in connection with Permitted Liens and Permitted Investments; and
(d) of non-exclusive licenses for the use of the property of Borrower or its
Subsidiaries  in the ordinary course of business and licenses that could not
result in a legal transfer of title of the licensed property but that may be
exclusive in respects other than territory and that may be exclusive as to
territory only as to discreet geographical areas outside of the United States.
 
 
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7.2           Changes in Business; Change in Control; Jurisdiction of Formation;
Business Locations.  (a) Engage in or permit any of its Subsidiaries to engage
in any business other than the businesses currently engaged in by Borrower and
such Subsidiary, as applicable, or reasonably related thereto; (b) liquidate or
dissolve; or (c) permit or suffer any Change in Control.
 
Borrower shall not, without at least thirty (30) days prior written notice to
Bank: (1) add any new offices or business locations, including warehouses
(unless such new offices or business locations contain less than Ten Thousand
Dollars ($10,000) in Borrower’s assets or property), (2) change its jurisdiction
of organization, (3) change its organizational structure or type, (4) change its
legal name, (5) change any organizational number (if any) assigned by its
jurisdiction of organization, or (6) deliver any portion of the Collateral to a
bailee, unless (i) such bailee location contains less than Ten Thousand Dollars
($10,000) in Borrower’s assets or property and (ii) Bank and such bailee are
parties to a bailee agreement governing both the Collateral and the location to
which Borrower intends to deliver the Collateral.
 
Borrower hereby agrees upon Borrower adding any new office or business location,
including any warehouse, Borrower will, if requested by Bank, cause its landlord
to enter into a landlord consent in favor of Bank prior to such new office or
business location containing Ten Thousand Dollars ($10,000) of Collateral.
 
Borrower hereby agrees that prior to Borrower delivering any Collateral to a
bailee, Borrower shall cause such bailee to execute and deliver a bailee
agreement in form and substance satisfactory to Bank.
 
7.3           Mergers or Acquisitions.  Merge or consolidate, or permit any of
its Subsidiaries to merge or consolidate, with any other Person, or acquire, or
permit any of its Subsidiaries to acquire, all or substantially all of the
capital stock or property of another Person.  A Subsidiary may merge or
consolidate into another Subsidiary or into Borrower.
 
7.4           Indebtedness.  Create, incur, assume, or be liable for any
Indebtedness, or permit any Subsidiary to do so, other than Permitted
Indebtedness.
 
7.5           Encumbrance.  Create, incur, allow, or suffer any Lien on any of
its property, or assign or convey any right to receive income, including the
sale of any Accounts, or permit any of its Subsidiaries to do so, except for
Permitted Liens, or permit any Collateral not to be subject to the first
priority security interest granted herein, or enter into any agreement,
document, instrument or other arrangement (except with or in favor of Bank) with
any Person which directly or indirectly prohibits or has the effect of
prohibiting Borrower or any Subsidiary from assigning, mortgaging, pledging,
granting a security interest in or upon, or encumbering any of Borrower’s or any
Subsidiary’s Intellectual Property, except as is otherwise permitted in Section
7.1 of this Agreement and the definition of “Permitted Liens” herein.
 
7.6           Maintenance of Collateral Accounts.  Maintain any Collateral
Account except pursuant to the terms of Section 6.5 of this Agreement.
 
7.7           Distributions; Investments.  (a) Directly or indirectly acquire or
own any Person, or make any Investment in any Person, other than Permitted
Investments, or permit any of its Subsidiaries to do so; or (b) pay any
dividends or make any distribution or payment or redeem, retire or purchase any
capital stock other than Permitted Distributions.
 
7.8           Transactions with Affiliates.  Directly or indirectly enter into
or permit to exist any material transaction with any Affiliate of Borrower,
except for transactions that are in the ordinary course of Borrower’s business,
upon fair and reasonable terms that are no less favorable to Borrower than would
be obtained in an arm’s length transaction with a non-affiliated Person.
 
7.9           Subordinated Debt.  (a) Make or permit any payment on any
Subordinated Debt, except under the terms of the subordination, intercreditor,
or other similar agreement to which such Subordinated Debt is subject, or (b)
amend any provision in any document relating to the Subordinated Debt which
would increase the amount owed by Borrower thereof, shorten the maturity
thereof, increase the rate of interest applicable thereto or adversely affect
the subordination thereof to Obligations owed to Bank.
 
 
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7.10           Compliance.  Become an “investment company” or a company
controlled by an “investment company”, under the Investment Company Act of 1940,
as amended, or undertake as one of its important activities extending credit to
purchase or carry margin stock (as defined in Regulation U of the Board of
Governors of the Federal Reserve System), or use the proceeds of any Credit
Extension for that purpose; fail to meet the minimum funding requirements of
ERISA, permit a Reportable Event or Prohibited Transaction, each as defined in
ERISA, to occur; fail to comply with the Federal Fair Labor Standards Act or
violate any other law or regulation, if the violation could reasonably be
expected to have a material adverse effect on Borrower’s business, or permit any
of its Subsidiaries to do so; withdraw or permit any Subsidiary to withdraw from
participation in, permit partial or complete termination of, or permit the
occurrence of any other event with respect to, any present pension, profit
sharing and deferred compensation plan which could reasonably be expected to
result in any liability of Borrower, including any liability to the Pension
Benefit Guaranty Corporation or its successors or any other governmental agency.
 
8           EVENTS OF DEFAULT
 
Any one of the following shall constitute an event of default (an “Event of
Default”) under this Agreement:
 
8.1           Payment Default.  Borrower fails to (a) make any payment of
principal or interest on any Credit Extension on its due date, or (b) pay any
other Obligations within three (3) Business Days after such Obligations are due
and payable (which three (3) Business Day cure period shall not apply to
payments due on the Maturity Date).  During the cure period, the failure to make
or pay any payment specified under clause (b) hereunder is not an Event of
Default (but no Credit Extension will be made during the cure period);
 
8.2           Covenant Default.  (a) Borrower fails or neglects to perform any
obligation in Section 2.9, 6.1, 6.2, 6.3, 6.4, 6.5 or 6.7(b) of this Agreement
or violates any of the covenants contained in Section 7 of this Agreement or (b)
fails or neglects to perform, keep, or observe any other material term,
provision, condition, covenant or agreement contained in this Agreement, any
Loan Documents and as to any default under such other term, provision,
condition, covenant or agreement that can be cured, has failed to cure the
default within ten (10) days after the occurrence thereof; provided, however,
grace and cure periods provided under this Section 8.2(b) shall not apply to
financial covenants or any other covenants that are required to be satisfied,
completed or tested by a date certain or as set forth in clause (a) above;
 
8.3           Material Adverse Change.  A Material Adverse Change occurs;
 
8.4           Attachment; Levy; Restraint on Business
 
(a) (i) The service of process seeking to attach, by trustee or similar process,
any funds of Borrower or of any entity under the control of Borrower (including
a Subsidiary) on deposit or otherwise maintained with Bank or any Bank
Affiliate, or (ii) a notice of lien or levies filed against any of Borrower’s
assets by any government agency, and the same under subclauses (i) and (ii)
hereof are not, within ten (10) days after the occurrence thereof, discharged or
stayed (whether through the posting of a bond or otherwise); provided, however,
no Credit Extensions shall be made during any ten (10) day cure period; or
 
(b) (i) any material portion of Borrower’s assets is attached, seized, levied
on, or comes into possession of a trustee or receiver, or (ii) any court order
enjoins, restrains, or prevents Borrower from conducting any material part of
its business;
 
8.5           Insolvency.  (a) Borrower is unable to pay its debts (including
trade debts) as they become due or otherwise becomes insolvent; (b) Borrower
begins an Insolvency Proceeding; or (c) an Insolvency Proceeding is begun
against Borrower and not dismissed or stayed within forty-five (45) days (but no
Credit Extensions shall be made while of any of the conditions described in
clause (a) exist and/or until any Insolvency Proceeding is dismissed);
 
 
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8.6           Other Agreements.  There is, under any agreement to which Borrower
or any Guarantor is a party with a third party or parties, (a) any default
resulting in a right by such third party or parties, whether or not exercised,
to accelerate the maturity of any Indebtedness in an amount individually or in
the aggregate in excess of One Hundred Thousand Dollars ($100,000); or (b) any
default by Borrower or Guarantor, the result of which could result in a Material
Adverse Change to Borrower’s or any Guarantor’s business.  Notwithstanding any
provision of this Agreement or any Loan Document, any non-payment default
arising under the Exim Agreement or any other Ex-Im Loan Document (as defined in
the Exim Agreement) shall not constitute an Event of Default hereunder unless
the event giving rise to such default also separately constitutes an Event of
Default pursuant to the terms of this Agreement.
 
8.7           Judgments.  One or more final judgments, orders, or decrees for
the payment of money in an amount, individually or in the aggregate, of at least
One Hundred Thousand Dollars ($100,000) (not covered by independent third-party
insurance as to which liability has been accepted by such insurance carrier)
shall be rendered against Borrower and the same are not, within ten (10) days
after the entry thereof, discharged or execution thereof stayed or bonded
pending appeal, or such judgments are not discharged prior to the expiration of
any such stay (provided that no Credit Extensions will be made prior to the
discharge, stay, or bonding of such judgment, order, or decree);
 
8.8           Misrepresentations.  Borrower or any Person acting for Borrower
makes any representation, warranty, or other statement now or later  in this
Agreement, any Loan Document or in any writing delivered to Bank or to induce
Bank to enter this Agreement or any Loan Document, and such representation,
warranty, or other statement is incorrect in any material respect when made;
 
8.9           Subordinated Debt. Any document, instrument, or agreement
evidencing any Subordinated Debt shall for any reason be revoked or invalidated
or otherwise cease to be in full force and effect, any Person shall be in breach
thereof or contest in any manner the validity or enforceability thereof or deny
that it has any further liability or obligation thereunder, or the Obligations
shall for any reason be subordinated or shall not have the priority contemplated
by this Agreement or the subordination agreement;
 
8.10           Governmental Approvals. Any Governmental Approval shall have been
(a) revoked, rescinded, suspended, modified in an adverse manner or not renewed
in the ordinary course for a full term or (b) subject to any decision by a
Governmental Authority that designates a hearing with respect to any
applications for renewal of any of such Governmental Approval or that could
result in the Governmental Authority taking any of the actions described in
clause (a) above, and such decision or such revocation, rescission, suspension,
modification or non-renewal (i) has, or could reasonably be expected to have, a
Material Adverse Change, or (ii) adversely affects the legal qualifications of
Borrower or any of its Subsidiaries to hold such Governmental Approval in any
applicable jurisdiction and such revocation, rescission, suspension,
modification or non-renewal could reasonably be expected to affect the status of
or legal qualifications of Borrower or any of its Subsidiaries to hold any
Governmental Approval in any other jurisdiction.
 
9           BANK’S RIGHTS AND REMEDIES
 
9.1           Rights and Remedies.  When an Event of Default occurs and
continues beyond any applicable grace period Bank may, without notice or demand,
do any or all of the following:
 
(a)           declare all Obligations immediately due and payable (but if an
Event of Default described in Section 8.5 of this Agreement occurs, all
Obligations are immediately due and payable without any action by Bank);
 
(b)           stop advancing money or extending credit for Borrower’s benefit
under this Agreement or under any other agreement between Borrower and Bank;
 
(c)           settle or adjust disputes and claims directly with Account Debtors
for amounts, on terms and in any order that Bank considers advisable and notify
any Person owing Borrower money of Bank’s security interest in such funds and
verify the amount of such account.  Borrower shall collect all payments in trust
for Bank and, if requested by Bank, immediately deliver the payments to Bank in
the form received from the Account Debtor, with proper endorsements for deposit;
 
 
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(d)           make any payments and do any acts it considers necessary or
reasonable to protect its security interest in the Collateral.  Borrower shall
assemble the Collateral if Bank requests and make it available as Bank
designates.  Bank may enter premises where the Collateral is located, take and
maintain possession of any part of the Collateral, and pay, purchase, contest,
or compromise any Lien which appears to be prior or superior to its security
interest and pay all expenses incurred. Borrower grants Bank a license to enter
and occupy any of its premises, without charge, to exercise any of Bank’s rights
or remedies;
 
(e)           apply to the Obligations any (i) balances and deposits of Borrower
it holds, or (ii) any amount held by Bank owing to or for the credit or the
account of Borrower;
 
(f)           ship, reclaim, recover, store, finish, maintain, repair, prepare
for sale, advertise for sale, and sell the Collateral.  Bank is hereby granted a
non-exclusive, royalty-free license or other right to use, without charge,
Borrower’s labels, Patents, Copyrights, mask works, rights of use of any name,
trade secrets, trade names, Trademarks, and advertising matter, or any similar
property as it pertains to the Collateral, in completing production of,
advertising for sale, and selling any Collateral and, in connection with Bank’s
exercise of its rights under this Section 9.1, Borrower’s rights under all
licenses and all franchise agreements inure to Bank’s benefit;
 
(g)           place a “hold” on any account maintained with Bank and/or deliver
a notice of exclusive control, any entitlement order, or other directions or
instructions pursuant to any Control Agreement or similar agreements providing
control of any Collateral;
 
(h)           demand and receive possession of Borrower’s Books; and
 
(i)           exercise all rights and remedies available to Bank under the Loan
Documents or at law or equity, including all remedies provided under the Code
(including disposal of the Collateral pursuant to the terms thereof).
 
9.2           Protective Payments.  If Borrower fails to obtain the insurance
called for by Section 6.4 of this Agreement or fails to pay any premium thereon
or fails to pay any other amount which Borrower is obligated to pay under this
Agreement or any other Loan Document, Bank may obtain such insurance or make
such payment, and all amounts so paid by Bank are Bank Expenses and immediately
due and payable, bearing interest at the then highest rate applicable to the
Obligations, and secured by the Collateral.  Bank will make reasonable efforts
to provide Borrower with notice of Bank obtaining such insurance at the time it
is obtained or within a reasonable time thereafter.  No payments by Bank are
deemed an agreement to make similar payments in the future or Bank’s waiver of
any Event of Default.
 
9.3           Bank’s Liability for Collateral.  So long as Bank complies with
reasonable banking practices regarding the safekeeping of the Collateral in the
possession or under the control of Bank, Bank shall not be liable or responsible
for:  (a) the safekeeping of the Collateral; (b) any loss or damage to the
Collateral; (c) any diminution in the value of the Collateral; or (d) any act or
default of any carrier, warehouseman, bailee, or other Person.  Borrower bears
all risk of loss, damage or destruction of the Collateral.
 
9.4           No Waiver; Remedies Cumulative.  Bank’s failure, at any time or
times, to require strict performance by Borrower of any provision of this
Agreement or any other Loan Document shall not waive, affect, or diminish any
right of Bank thereafter to demand strict performance and compliance herewith or
therewith.  No waiver hereunder shall be effective unless signed by the party
granting the waiver and then is only effective for the specific instance and
purpose for which it is given.  Bank’s rights and remedies under this Agreement
and the other Loan Documents are cumulative.  Bank has all rights and remedies
provided under the Code, by law, or in equity.  Bank’s exercise of one right or
remedy is not an election and shall not preclude Bank from exercising any other
remedy under this Agreement or other remedy available at law or in equity, and
Bank’s waiver of any Event of Default is not a continuing waiver.  Bank’s delay
in exercising any remedy is not a waiver, election, or acquiescence.
 
9.5           Demand Waiver.  Borrower waives demand, notice of default or
dishonor, notice of payment and nonpayment, notice of any default, nonpayment at
maturity, release, compromise, settlement, extension, or renewal of accounts,
documents, instruments, chattel paper, and guarantees held by Bank on which
Borrower is liable.
 
 
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10           NOTICES
 
All notices, consents, requests, approvals, demands, or other communication by
any party to this Agreement or any other Loan Document must be in writing and
shall be deemed to have been validly served, given, or delivered: (a) upon the
earlier of actual receipt and three (3) Business Days after deposit in the U.S.
mail, first class, registered or certified mail return receipt requested, with
proper postage prepaid; (b) upon transmission, when sent by electronic mail or
facsimile transmission; (c) one (1) Business Day after deposit with a reputable
overnight courier with all charges prepaid; or (d) when delivered, if
hand-delivered by messenger, all of which shall be addressed to the party to be
notified and sent to the address, facsimile number, or email address indicated
below.  Bank or Borrower may change its mailing or electronic mail address or
facsimile number by giving the other party written notice thereof in accordance
with the terms of this Section 10.
 

  If to Borrower:
Aehr Test Systems
400 Kato Terrace
Fremont, CA 94539
Attn:  Gary L. Larson
Fax:  (510) 623-9686
Email: glarson@aehr.com
            If to Bank:  
Silicon Valley Bank
2400 Hanover Street
Palo Alto, CA 94304
Attn:  Mei Chui
Fax:  (650) 320-1152
Email:  mchui@svb.com
 

 
11           CHOICE OF LAW, VENUE, JURY TRIAL WAIVER AND JUDICIAL REFERENCE
 
California law governs the Loan Documents without regard to principles of
conflicts of law.  Borrower and Bank each submit to the exclusive jurisdiction
of the State and Federal courts in Santa Clara County, California; provided,
however, that nothing in this Agreement shall be deemed to operate to preclude
Bank from bringing suit or taking other legal action in any other jurisdiction
to realize on the Collateral or any other security for the Obligations, or to
enforce a judgment or other court order in favor of Bank.  Borrower expressly
submits and consents in advance to such jurisdiction in any action or suit
commenced in any such court, and Borrower hereby waives any objection that it
may have based upon lack of personal jurisdiction, improper venue, or forum non
conveniens and hereby consents to the granting of such legal or equitable relief
as is deemed appropriate by such court.  Borrower hereby waives personal service
of the summons, complaints, and other process issued in such action or suit and
agrees that service of such summons, complaints, and other process may be made
by registered or certified mail addressed to Borrower at the address set forth
in, or subsequently provided to Borrower in accordance with, Section 10 of this
Agreement and that service so made shall be deemed completed upon the earlier to
occur of Borrower’s actual receipt thereof or three (3) days after deposit in
the U.S. mails, proper postage prepaid.
 
TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, BORROWER AND BANK EACH WAIVE
THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF OR
BASED UPON THIS AGREEMENT, THE LOAN DOCUMENTS OR ANY CONTEMPLATED TRANSACTION,
INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS WAIVER IS A
MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT.  EACH PARTY
HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.
 
WITHOUT INTENDING IN ANY WAY TO LIMIT THE PARTIES’ AGREEMENT TO WAIVE THEIR
RESPECTIVE RIGHT TO A TRIAL BY JURY, if the above waiver of the right to a trial
by jury is not enforceable, the parties hereto agree that any and all disputes
or controversies of any nature between them arising at any time shall be decided
by a reference to a private judge, mutually selected by the parties (or, if they
cannot agree, by the Presiding Judge of the Santa Clara County, California
Superior Court) appointed in accordance with California Code of Civil Procedure
Section 638 (or pursuant to comparable provisions of federal law if the dispute
falls within the exclusive jurisdiction of the federal courts), sitting without
a jury, in Santa Clara County, California; and the parties hereby submit to the
jurisdiction of such court.  The reference proceedings shall be conducted
pursuant to and in accordance with the provisions of California Code of Civil
Procedure §§ 638 through 645.1, inclusive.  The private judge shall have the
power, among others, to grant provisional relief, including without limitation,
entering temporary restraining orders, issuing preliminary and permanent
injunctions and appointing receivers.  All such proceedings shall be closed to
the public and confidential and all records relating thereto shall be
permanently sealed.  If during the course of any dispute, a party desires to
seek provisional relief, but a judge has not been appointed at that point
pursuant to the judicial reference procedures, then such party may apply to the
Santa Clara County, California Superior Court for such relief.  The proceeding
before the private judge shall be conducted in the same manner as it would be
before a court under the rules of evidence applicable to judicial
proceedings.  The parties shall be entitled to discovery which shall be
conducted in the same manner as it would be before a court under the rules of
discovery applicable to judicial proceedings.  The private judge shall oversee
discovery and may enforce all discovery rules and orders applicable to judicial
proceedings in the same manner as a trial court judge.  The parties agree that
the selected or appointed private judge shall have the power to decide all
issues in the action or proceeding, whether of fact or of law, and shall report
a statement of decision thereon pursuant to California Code of Civil Procedure §
644(a).  Nothing in this paragraph shall limit the right of any party at any
time to exercise self-help remedies, foreclose against collateral, or obtain
provisional remedies.  The private judge shall also determine all issues
relating to the applicability, interpretation, and enforceability of this
paragraph.
 
 
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12           GENERAL PROVISIONS
 
12.1           Successors and Assigns.  This Agreement binds and is for the
benefit of the successors and permitted assigns of each party.  Borrower may not
assign this Agreement or any rights or obligations under it without Bank’s prior
written consent (which may be granted or withheld in Bank’s discretion).  Bank
has the right, without the consent of or notice to Borrower, to sell, transfer,
assign, negotiate, or grant participation in all or any part of, or any interest
in, Bank’s obligations, rights, and benefits under this Agreement and the other
Loan Documents.
 
12.2           Indemnification.  Borrower agrees to indemnify, defend and hold
Bank and its directors, officers, employees, agents, attorneys, or any other
Person affiliated with or representing Bank (each, an “Indemnified Person”)
harmless against:  (a) all obligations, demands, claims, and liabilities
(collectively, “Claims”) claimed or asserted by any other party in connection
with the transactions contemplated by the Loan Documents; and (b) all losses or
expenses (including Bank Expenses) in any way suffered, incurred, or paid by
such Indemnified Person as a result of, following from, consequential to, or
arising from transactions between Bank and Borrower (including reasonable
attorneys’ fees and expenses), except for Claims and/or losses directly caused
by such Indemnified Person’s gross negligence or willful misconduct.
 
12.3           Right of Set-Off.   Borrower hereby grants to Bank, a lien,
security interest and right of setoff as security for all Obligations to Bank,
whether now existing or hereafter arising upon and against all deposits,
credits, collateral and property, now or hereafter in the possession, custody,
safekeeping or control of Bank or any entity under the control of Bank
(including a Bank subsidiary) or in transit to any of them.  At any time after
the occurrence and during the continuance of an Event of Default, without demand
or notice, Bank may set off the same or any part thereof and apply the same to
any liability or obligation of Borrower even though unmatured and regardless of
the adequacy of any other collateral securing the Obligations.  ANY AND ALL
RIGHTS TO REQUIRE BANK TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO ANY
OTHER COLLATERAL WHICH SECURES THE OBLIGATIONS, PRIOR TO EXERCISING ITS RIGHT OF
SETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF BORROWER, ARE
HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED.
 
12.4           Time of Essence.  Time is of the essence for the performance of
all Obligations in this Agreement.
 
12.5           Correction of Loan Documents.  Bank may correct patent errors and
fill in any blanks in the Loan Documents consistent with the agreement of the
parties.
 
12.6           Severability of Provisions.  Each provision of this Agreement is
severable from every other provision in determining the enforceability of any
provision.
 
 
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12.7           Amendments in Writing; Waiver; Integration.  No purported
amendment or modification of any Loan Document, or waiver, discharge or
termination of any obligation under any Loan Document, shall be enforceable or
admissible unless, and only to the extent, expressly set forth in a writing
signed by the party against which enforcement or admission is sought.  Without
limiting the generality of the foregoing, no oral promise or statement, nor any
action, inaction, delay, failure to require performance or course of conduct
shall operate as, or evidence, an amendment, supplement or waiver or have any
other effect on any Loan Document.  Any waiver granted shall be limited to the
specific circumstance expressly described in it, and shall not apply to any
subsequent or other circumstance, whether similar or dissimilar, or give rise
to, or evidence, any obligation or commitment to grant any further waiver.  The
Loan Documents represent the entire agreement about this subject matter and
supersede prior negotiations or agreements.  All prior agreements,
understandings, representations, warranties, and negotiations between the
parties about the subject matter of the Loan Documents merge into the Loan
Documents.
 
12.8           Counterparts.  This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, is an original, and all taken together, constitute
one Agreement.
 
12.9           Survival.  All covenants, representations and warranties made in
this Agreement continue in full force until this Agreement has terminated
pursuant to its terms and all Obligations (other than inchoate indemnity
obligations and any other obligations which, by their terms, are to survive the
termination of this Agreement) have been paid in full and satisfied.  The
obligation of Borrower in Section 12.2 of this Agreement to indemnify Bank shall
survive until the statute of limitations with respect to such claim or cause of
action shall have run.
 
12.10           Confidentiality.  In handling any confidential information, Bank
shall exercise the same degree of care that it exercises for its own proprietary
information, but disclosure of information may be made: (a) to Bank’s
Subsidiaries or Affiliates (such Subsidiaries and Affiliates, together with
Bank, each a “Bank Entity” and collectively, the “Bank Entities”); (b) to
prospective transferees or purchasers of any interest in the Credit Extensions
(provided, however, Bank shall use its best efforts to obtain any prospective
transferee’s or purchaser’s agreement to the terms of this Section 12.10); (c)
as required by law, regulation, subpoena, or other order; (d) to Bank’s
regulators or as otherwise required in connection with Bank’s examination or
audit; (e) as Bank considers appropriate in exercising remedies under the Loan
Documents; and (f) to third-party service providers of Bank so long as such
service providers have executed a confidentiality agreement with Bank with terms
no less restrictive than those contained herein.  Confidential information does
not include information that is: (i) either in the public domain other than as a
result of Bank’s breach of this section or is in Bank’s possession when
disclosed to Bank; or (ii) disclosed to Bank by a third party on a
nonconfidential basis if Bank does not know that the third party is prohibited
from disclosing the information.
 
Bank Entities may use the confidential information for reporting purposes and
the development and distribution of databases and market analyses so long as
such confidential information is aggregated and anonymized prior to distribution
unless otherwise expressly prohibited by Borrower.  The provisions of the
immediately preceding sentence shall survive the termination of this Agreement.
 
12.11           Electronic Execution of Documents.  The words “execution,”
“signed,” “signature” and words of like import in any Loan Document shall be
deemed to include electronic signatures or the keeping of records in electronic
form, each of which shall be of the same legal effect, validity and
enforceability as a manually executed signature or the use of a paper-based
recordkeeping systems, as the case may be, to the extent and as provided for in
any applicable law, including, without limitation, any state law based on the
Uniform Electronic Transactions Act.
 
12.12           Captions.  The headings used in this Agreement are for
convenience only and shall not affect the interpretation of this Agreement.
 
12.13           Construction of Agreement.  The parties mutually acknowledge
that they and their attorneys have participated in the preparation and
negotiation of this Agreement.  In cases of uncertainty this Agreement shall be
construed without regard to which of the parties caused the uncertainty to
exist.
 
12.14           Relationship.  The relationship of the parties to this Agreement
is determined solely by the provisions of this Agreement.  The parties do not
intend to create any agency, partnership, joint venture, trust, fiduciary or
other relationship with duties or incidents different from those of parties to
an arm’s-length contract.
 
 
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12.15           Third Parties.  Nothing in this Agreement, whether express or
implied, is intended to: (a) confer any benefits, rights or remedies under or by
reason of this Agreement on any persons other than the express parties to it and
their respective permitted successors and assigns; (b) relieve or discharge the
obligation or liability of any person not an express party to this Agreement; or
(c) give any person not an express party to this Agreement any right of
subrogation or action against any party to this Agreement.
 
13           DEFINITIONS
 
13.1           Definitions.  As used in the Loan Documents, the word “shall” is
mandatory, the word “may” is permissive, the word “or” is not exclusive, the
words “includes” and “including” are not limiting, the singular includes the
plural, and numbers denoting amounts that are set off in brackets are
negative.  As used in this Agreement, the following capitalized terms have the
following meanings:
 
“Account” is any “account” as defined in the Code with such additions to such
term as may hereafter be made, and includes, without limitation, all accounts
receivable and other sums owing to Borrower.
 
“Account Debtor” is as defined in the Code and shall include, without
limitation, any person liable on any Financed Receivable, such as, a guarantor
of the Financed Receivable and any issuer of a letter of credit or banker’s
acceptance.
 
“Adjustments” are all discounts allowances, returns, recoveries, disputes,
claims of any kind (including, without limitation, counterclaims or warranty
claims), offsets, defenses, rights of recoupment, rights of return, or short
payments, asserted by or on behalf of any Account Debtor for any Financed
Receivable.
 
“Advance” is defined in Section 2.1.1of this Agreement.
 
“Advance Rate” is eighty percent (80.0%), net of any offsets related to each
specific Account Debtor, or such other percentage as Bank establishes under
Section 2.1.1 of this Agreement.
 
“Affiliate” of any Person is a Person that owns or controls directly or
indirectly the Person, any Person that controls or is controlled by or is under
common control with the Person, and each of that Person’s senior executive
officers, directors, partners, and, for any Person that is a limited liability
company, that Person’s managers and members.
 
“Agreement” is defined in the preamble of this Agreement.
 
“Applicable Rate” is a per annum rate equal to (a) at all times that Borrower’s
revenue is at least seventy percent (70%) of Borrower’s projected performance as
outlined in Borrower’s Business Plan, the greater of either (i) the Prime Rate
minus one-half of one percent (0.50%), or (ii) three and one-half percent
(3.50%) and (b) at all times that Borrower’s revenue is less than seventy
percent (70%) of Borrower’s projected performance as outlined in Borrower’s
Business Plan, the greater of either (i) the Prime Rate plus three-quarters of
one percent (0.75%), or (ii) four and three quarters percent (4.75%).
 
“Bank” is defined in the preamble of this Agreement.
 
“Bank Entities” is defined in Section 12.10.
 
“Bank Expenses” are all audit fees and expenses, costs, and expenses (including
reasonable attorneys’ fees and expenses) for preparing, amending, negotiating,
administering, defending and enforcing the Loan Documents (including, without
limitation, those incurred in connection with appeals or Insolvency Proceedings)
or otherwise incurred with respect to Borrower.
 
“Borrower” is defined in the preamble of this Agreement.
 
“Borrower Agreement” has the meaning set forth in the Exim Agreement.
 
 
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“Borrower’s Books” are all Borrower’s books and records including ledgers,
federal and state tax returns, records regarding Borrower’s assets or
liabilities, the Collateral, business operations or financial condition, and all
computer programs or storage or any equipment containing such information.
 
“Borrowing Base” is defined in Section 2.1.1(a).
 
“Borrowing Base Certificate” is that certain certificate in the form attached
hereto as Exhibit D.
 
“Borrowing Base Eligible” means that Borrower’s revenue for each month shall not
be less than seventy percent (70%) of Borrower’s projected performance for such
month as outlined in Borrower’s Business Plan; provided, however, that if an
Event of Default has occurred and is continuing then Bank may, in its sole
discretion, cause Borrower to no longer be Borrowing Base Eligible.  If Borrower
is transitioning from not being Borrowing Base Eligible to being Borrowing Base
Eligible then prior to becoming Borrowing Base Eligible Borrower must (a)
maintain revenue for two consecutive months of not less than seventy percent
(70%) of Borrower’s projected performance for such months as outlined in
Borrower’s Business Plan and (b) deliver a current Borrowing Base Certificate to
Bank.
 
“Borrowing Resolutions” are, with respect to any Person, those resolutions
substantially in the form attached hereto as Exhibit C.
 
“Business Day” is any day that is not a Saturday, Sunday or a day on which Bank
is closed.
 
“Business Plan” means Borrower’s business plan delivered to Bank dated June 28,
2011.
 
“Cash Equivalents” means (a) marketable direct obligations issued or
unconditionally guaranteed by the United States or any agency or any State
thereof having maturities of not more than one (1) year from the date of
acquisition; (b) commercial paper maturing no more than one (1) year after its
creation and having the highest rating from either Standard & Poor’s Ratings
Group or Moody’s Investors Service, Inc.; (c) Bank’s certificates of deposit
issued maturing no more than one (1) year after issue; and (d) money market
funds at least ninety-five percent (95%) of the assets of which constitute Cash
Equivalents of the kinds described in clauses (a) through (c) of this
definition.
 
“Change in Control” means any event, transaction, or occurrence as a result of
which (a) any “person” (as such term is defined in Sections 3(a)(9) and 13(d)(3)
of the Exchange Act), other than a trustee or other fiduciary holding securities
under an employee benefit plan of Borrower, is or becomes a beneficial owner
(within the meaning Rule 13d-3 promulgated under the Exchange Act), directly or
indirectly, of securities of Borrower, representing twenty-five percent (25%) or
more of the combined voting power of Borrower’s then outstanding securities; or
(b) during any period of twelve consecutive calendar months, individuals who at
the beginning of such period constituted the Board of Directors of Borrower
(together with any new directors whose election by the Board of Directors of
Borrower was approved by a vote of not less than two-thirds of the directors
then still in office who either were directions at the beginning of such period
or whose election or nomination for election was previously so approved) cease
for any reason other than death or disability to constitute a majority of the
directors then in office.
 
“Claims” is defined in Section 12.2 of this Agreement.
 
“Code” is the Uniform Commercial Code, as the same may, from time to time, be
enacted and in effect in the State of California; provided, that, to the extent
that the Code is used to define any term herein or in any Loan Document and such
term is defined differently in different Articles or Divisions of the Code, the
definition of such term contained in Article or Division 9 shall govern;
provided further, that in the event that, by reason of mandatory provisions of
law, any or all of the attachment, perfection, or priority of, or remedies with
respect to, Bank’s Lien on any Collateral is governed by the Uniform Commercial
Code in effect in a jurisdiction other than the State of California, the term
“Code” shall mean the Uniform Commercial Code as enacted and in effect in such
other jurisdiction solely for purposes of the provisions thereof relating to
such attachment, perfection, priority, or remedies and for purposes of
definitions relating to such provisions.
 
“Collateral” is any and all properties, rights and assets of Borrower described
on Exhibit A.
 
“Collateral Account” is any Deposit Account, Securities Account, or Commodity
Account.
 
 
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“Collateral Handling Fee” is defined in Section 2.6 of this Agreement.
 
“Collections” are all funds received by Bank from or on behalf of an Account
Debtor for Financed Receivables.
 
“Commodity Account” is any “commodity account” as defined in the Code with such
additions to such term as may hereafter be made.
 
“Compliance Certificate” is attached as Exhibit B.
 
“Contingent Obligation” is, for any Person, any direct or indirect liability,
contingent or not, of that Person for (a) any indebtedness, lease, dividend,
letter of credit or other obligation of another such as an obligation directly
or indirectly guaranteed, endorsed, co-made, discounted or sold with recourse by
that Person, or for which that Person is directly or indirectly liable; (b) any
obligations for undrawn letters of credit for the account of that Person; and
(c) all obligations from any interest rate, currency or commodity swap
agreement, interest rate cap or collar agreement, or other agreement or
arrangement designated to protect a Person against fluctuation in interest
rates, currency exchange rates or commodity prices; but “Contingent Obligation”
does not include endorsements in the ordinary course of business.  The amount of
a Contingent Obligation is the stated or determined amount of the primary
obligation for which the Contingent Obligation is made or, if not determinable,
the maximum reasonably anticipated liability for it determined by the Person in
good faith; but the amount may not exceed the maximum of the obligations under
any guarantee or other support arrangement.
 
“Control Agreement” is any control agreement entered into among the depository
institution at which Borrower maintains a Deposit Account or the securities
intermediary or commodity intermediary at which Borrower maintains a Securities
Account or a Commodity Account, Borrower, and Bank pursuant to which Bank
obtains control (within the meaning of the Code) over such Collateral Account.
 
“Copyrights” are any and all copyright rights, copyright applications, copyright
registrations and like protections in each work or authorship and derivative
work thereof, whether published or unpublished and whether or not the same also
constitutes a trade secret.
 
“Credit Extension” is any Advance or any other extension of credit by Bank for
Borrower’s benefit.
 
“Deferred Revenue” is all amounts received or invoiced, as appropriate, in
advance of performance under contracts and not yet recognized as revenue.
 
“Deposit Account” is any “deposit account” as defined in the Code with such
additions to such term as may hereafter be made.
 
“Dollars,”“dollars” or use of the sign “$” means only lawful money of the United
States and not any other currency, regardless of whether that currency uses the
“$” sign to denote its currency or may be readily converted into lawful money of
the United States.
 
“Domestic Subsidiary” means a Subsidiary organized under the laws of the United
States or any state or territory thereof or the District of Columbia.
 
“Early Termination Fee” is defined in Section 2.1.1(g) of this Agreement.
 
“Effective Date” is defined in the preamble hereof.
 
“Eligible Accounts” are billed Accounts in the ordinary course of Borrower’s
business that meet all Borrower’s representations and warranties in Section 5.3
of this Agreement, have been, at the option of Bank, confirmed in accordance
with Section 2.1.1(e) of this Agreement, and are due and owing from Account
Debtors deemed creditworthy by Bank in its sole discretion.  Without limiting
the fact that the determination of which Accounts are eligible hereunder is a
matter of Bank discretion in each instance, Eligible Accounts shall not include
the following Accounts (which listing may be amended or changed in Bank’s
discretion with notice to Borrower):
 
 
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(a)           Accounts for which the Account Debtor is Borrower’s Affiliate,
officer, employee, or agent;
 
(b)           Accounts that the Account Debtor has not paid within ninety (90)
days of invoice date regardless of invoice payment period terms;
 
(c)           Accounts owing from an Account Debtor, in which fifty percent
(50%) or more of the Accounts have not been paid within ninety (90) days of
invoice date;
 
(d)           Accounts owing from an Account Debtor which does not have its
principal place of business in the United States;
 
(e)           Accounts billed and/or payable outside of the United States;
 
(f)           Accounts owing from an Account Debtor to the extent that Borrower
is indebted or obligated in any manner to the Account Debtor (as creditor,
lessor, supplier or otherwise - sometimes called “contra” accounts, accounts
payable, customer deposits or credit accounts), with the exception of customary
credits, adjustments and/or discounts given to an Account Debtor by Borrower in
the ordinary course of its business;
 
(g)           Accounts owing from an Account Debtor which is a United States
government entity or any department, agency, or instrumentality thereof unless
Borrower has assigned its payment rights to Bank and the assignment has been
acknowledged under the Federal Assignment of Claims Act of 1940, as amended;
 
(h)           Accounts for demonstration or promotional equipment, or in which
goods are consigned, or sold on a “sale guaranteed”, “sale or return”, “sale on
approval”, or other terms if Account Debtor’s payment may be conditional;
 
(i)           Accounts owing from an Account Debtor where goods or services have
not yet been rendered to the Account Debtor (sometimes called memo billings or
pre-billings);
 
(j)           Accounts subject to contractual arrangements between Borrower and
an Account Debtor where payments shall be scheduled or due according to
completion or fulfillment requirements where the Account Debtor has a right of
offset for damages suffered as a result of Borrower’s failure to perform in
accordance with the contract (sometimes called contracts accounts receivable,
progress billings, milestone billings, or fulfillment contracts);
 
(k)           Accounts owing from an Account Debtor the amount of which may be
subject to withholding based on the Account Debtor’s satisfaction of Borrower’s
complete performance (but only to the extent of the amount withheld; sometimes
called retainage billings);
 
(l)           Accounts subject to trust provisions, subrogation rights of a
bonding company, or a statutory trust;
 
(m)           Accounts owing from an Account Debtor that has been invoiced for
goods that have not been shipped to the Account Debtor unless Bank, Borrower,
and the Account Debtor have entered into an agreement acceptable to Bank in its
sole discretion wherein the Account Debtor acknowledges that (i) it has title to
and has ownership of the goods wherever located, (ii) a bona fide sale of the
goods has occurred, and (iii) it owes payment for such goods in accordance with
invoices from Borrower (sometimes called “bill and hold” accounts);
 
(n)           Accounts for which the Account Debtor has not been invoiced;
 
(o)           Accounts that represent non-trade receivables or that are derived
by means other than in the ordinary course of Borrower’s business;
 
(p)           Accounts subject to chargebacks or other payment deductions taken
by an Account Debtor;
 
(q)           Accounts arising from product returns and/or exchanges (sometimes
called “warranty” or “RMA” accounts);
 
 
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(r)           Accounts in which the Account Debtor disputes liability or makes
any claim (but only up to the disputed or claimed amount), or if the Account
Debtor is subject to an Insolvency Proceeding, or becomes insolvent, or goes out
of business;
 
(s)           Accounts owing from an Account Debtor with respect to which
Borrower has received Deferred Revenue (but only to the extent of such Deferred
Revenue); and
 
(t)           Accounts for which Bank in its good faith business judgment
determines collection to be doubtful, including, without limitation, accounts
represented by “refreshed” or “recycled” invoices.
 
“Equipment” is all “equipment” as defined in the Code with such additions to
such term as may hereafter be made, and includes without limitation all
machinery, fixtures, goods, vehicles (including motor vehicles and trailers),
and any interest in any of the foregoing.
 
“ERISA” is the Employee Retirement Income Security Act of 1974, and its
regulations.
 
“Events of Default” are set forth in Section 8 of this Agreement.
 
“Exchange Act” is the Securities Exchange Act of 1934, as amended.
 
“Exim Advances” are “Eligible Foreign Account Advances” as defined in the Exim
Agreement.
 
“Exim Agreement” is that certain Export-Import Loan and Security Agreement by
and between Bank and Borrower dated as of the Effective Date.
 
“Exim Inventory Advances” are “Exim Inventory Advances” as defined in the Exim
Agreement.
 
“Facility Amount” is One Million Eight Hundred Seventy Five Thousand Dollars
($1,875,000).
 
“Facility Fee” is defined in Section 2.4 of this Agreement.
 
“Finance Charges” is defined in Section 2.5 of this Agreement.
 
“Financed Receivables” are all those Eligible  Accounts, including their
proceeds which Bank finances and makes an Advance, as set forth in Section 2.1.1
of this Agreement.  A Financed Receivable stops being a Financed Receivable (but
remains Collateral) when the Advance made for the Financed Receivable has been
fully paid.
 
“Financed Receivable Balance” is the total outstanding gross face amount, at any
time, of any Financed Receivable.
 
“Foreign Subsidiary” means any Subsidiary which is not a Domestic Subsidiary.
 
“GAAP” is generally accepted accounting principles set forth in the opinions and
pronouncements of the Accounting Principles Board of the American Institute of
Certified Public Accountants and statements and pronouncements of the Financial
Accounting Standards Board or in such other statements by such other Person as
may be approved by a significant segment of the accounting profession, which are
applicable to the circumstances as of the date of determination.
 
“Good Faith Deposit” is defined in Section 2.11 of this Agreement.
 
“Governmental Approval” is any consent, authorization, approval, order, license,
franchise, permit, certificate, accreditation, registration, filing or notice,
of, issued by, from or to, or other act by or in respect of, any Governmental
Authority.
 
“Governmental Authority” is any nation or government, any state or other
political subdivision thereof, any agency, authority, instrumentality,
regulatory body, court, central bank or other entity exercising executive,
legislative, judicial, taxing, regulatory or administrative functions of or
pertaining to government, any securities exchange and any self-regulatory
organization.
 
 
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“Guarantor” is any present or future guarantor of the Obligations.
 
“Indebtedness” is (a) indebtedness for borrowed money or the deferred price of
property or services, such as reimbursement and other obligations for surety
bonds and letters of credit, (b) obligations evidenced by notes, bonds,
debentures or similar instruments, (c) capital lease obligations and (d)
Contingent Obligations.
 
“Indemnified Person” is defined in Section 12.2 of this Agreement.
 
“Insolvency Proceeding” is any proceeding by or against any Person under the
United States Bankruptcy Code, or any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, compositions, extensions
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.
 
“Intellectual Property” means all of Borrower’s right, title, and interest in
and to the following:
 
(a)           its Copyrights, Trademarks and Patents;
 
(b)           any and all trade secrets and trade secret rights, including,
without limitation, any rights to unpatented inventions, know-how, operating
manuals;
 
(c)           any and all source code;
 
(d)           any and all design rights which may be available to a Borrower;
 
(e)           any and all claims for damages by way of past, present and future
infringement of any of the foregoing, with the right, but not the obligation, to
sue for and collect such damages for said use or infringement of the
Intellectual Property rights identified above; and
 
(f)           all amendments, renewals and extensions of any of the Copyrights,
Trademarks or Patents.
 
“Inventory” is all “inventory” as defined in the Code in effect on the Effective
Date with such additions to such term as may hereafter be made, and includes
without limitation all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products, including without
limitation such inventory as is temporarily out of Borrower’s custody or
possession or in transit and including any returned goods and any documents of
title representing any of the above.
 
“Investment” is any beneficial ownership of (including stock, partnership
interest or other securities) any Person, or any loan, advance or capital
contribution to any Person.
 
“Invoice Transmittal” shows Eligible Accounts which Bank may finance and, for
each such Account, includes the Account Debtor’s, name, address, invoice amount,
invoice date and invoice number.
 
“Lien” is a claim, mortgage, deed of trust, levy, charge, pledge, security
interest or other encumbrance of any kind, whether voluntarily incurred or
arising by operation of law or otherwise against any property.
 
“Loan Documents” are, collectively, this Agreement, the Exim Agreement, the
Perfection Certificate, the SVB Control Agreement, the Borrowing Resolutions,
any note, or notes or guaranties executed by Borrower and/or any Guarantor, and
any other present or future agreement between Borrower any Guarantor and/or for
the benefit of Bank in connection with this Agreement, all as amended, restated,
or otherwise modified.
 
“Lockbox” is defined in Section 2.9 of this Agreement.
 
“Material Adverse Change” is: (a) a material impairment in the perfection or
priority of Bank’s Lien in the Collateral or in the value of such Collateral;
(b) a material adverse change in the business, operations, or condition
(financial or otherwise) of Borrower; or (c) a material impairment of the
prospect of repayment of any portion of the Obligations.
 
 
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“Maturity Date” is 364 days from the Effective Date.
 
“Net Cash” means an amount equal to Borrower’s unrestricted cash held at Bank,
minus the outstanding Obligations.
 
“Obligations” are Borrower’s obligations to pay when due any debts, principal,
interest, Bank Expenses and other amounts Borrower owes Bank now or later,
whether under this Agreement, the Loan Documents, or otherwise, including,
without limitation, all obligations relating to letters of credit (including
reimbursement obligations for drawn and undrawn letters of credit), cash
management services, and foreign exchange contracts, if any, and including
interest accruing after Insolvency Proceedings begin and debts, liabilities, or
obligations of Borrower assigned to Bank, and to perform Borrower’s duties under
the Loan Documents.
 
“Operating Documents” are, for any Person, such Person’s formation documents, as
certified with the Secretary of State of such Person’s state of formation on a
date that is no earlier than 30 days prior to the Effective Date, and, (a) if
such Person is a corporation, its bylaws in current form, (b) if such Person is
a limited liability company, its limited liability company agreement (or similar
agreement), and (c) if such Person is a partnership, its partnership agreement
(or similar agreement), each of the foregoing with all current amendments or
modifications thereto.
 
“Patents” means all patents, patent applications and like protections including
without limitation improvements, divisions, continuations, renewals, reissues,
extensions and continuations-in-part of the same.
 
“Payment/Advance Form” is that certain form attached hereto as Exhibit E.
 
“Perfection Certificate” is defined in Section 5.1 of this Agreement.
 
“Permitted Distributions” are:

(a)           purchases of capital stock from former employees, consultants and
directors pursuant to repurchase agreements or other similar agreements in an
aggregate amount not to exceed One Hundred Thousand Dollars ($100,000) in any
fiscal year provided that at the time of such purchase no Event of Default has
occurred and is continuing;

(b)           distributions or dividends consisting solely of Borrower's capital
stock;

(c)           purchases for value of any rights distributed in connection with
any stockholder rights plan;

(d)           purchases of capital stock or options to acquire such capital
stock with the proceeds received from a substantially concurrent issuance of
capital stock or convertible securities;

(e)           purchases of capital stock pledged as collateral for loans to
employees;

(f)           purchases of capital stock in connection with the exercise of
stock options or stock appreciation rights by way of cashless exercise or in
connection with the satisfaction of withholding tax obligations;

(g)           purchases of fractional shares of capital stock arising out of
stock dividends, splits or combinations or business combinations; and

(h)           other distributions, dividends or purchases of Borrower’s capital
stock in cash, provided that no Event of Default exists or could result from
such other distribution, dividend, or purchase.
 
“Permitted Indebtedness” is:
 
(a)           Borrower’s Indebtedness to Bank under this Agreement and the other
Loan Documents;
 
 
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(b)           Indebtedness existing on the Effective Date which is shown on the
Perfection Certificate;
 
(c)           Subordinated Debt;
 
(d)           unsecured Indebtedness to trade creditors incurred in the ordinary
course of business;
 
(e)           Indebtedness incurred as a result of endorsing negotiable
instruments received in the ordinary course of business;
 
(f)           Indebtedness secured by Liens permitted under clauses (a) and (c)
of the definition of “Permitted Liens” hereunder
 
(g)           Indebtedness of any Subsidiary owed to (i) Borrower in an
aggregate principal amount (for all such Indebtedness owed to Borrower by all
Subsidiaries) not to exceed Five Hundred Thousand Dollars ($500,000) or (ii) any
other Subsidiary; and
 
(h)           extensions, refinancings, modifications, amendments and
restatements of any items of Permitted Indebtedness (a) through (g) above,
provided that the principal amount thereof is not increased or the terms thereof
are not modified to impose more burdensome terms upon Borrower or its
Subsidiary, as the case may be.
 
“Permitted Investments” are:
 
(a)           Investments (including, without limitation, Subsidiaries) existing
on the Effective Date which are shown on the Perfection Certificate (but
specifically excluding any future Investments in any Subsidiaries unless
otherwise permitted hereunder);
 
(b)           Investments consisting of Cash Equivalents;
 
(c)           Investments consisting of the endorsement of negotiable
instruments for deposit or collection or similar transactions in the ordinary
course of Borrower;
 
(d)           Investments consisting of deposit accounts in which Bank has a
first priority perfected security interest;
 
(e)           Investments accepted in connection with Transfers permitted by
Section 7.1 of this Agreement;
 
(f)           Investments (i) by Borrower in Subsidiaries not to exceed One
Hundred Thousand Dollars ($100,000) in the aggregate in any twelve-month period
and (ii) by Subsidiaries in other Subsidiaries or in Borrower;
 
(g)           Investments consisting of (i) travel advances and employee
relocation loans and other employee loans and advances in the ordinary course of
business, and (ii) loans to employees, officers or directors relating to the
purchase of equity securities of Borrower or its Subsidiaries pursuant to
employee stock purchase plans or agreements approved by Borrower’s Board of
Directors;
 
(h)           Investments (including debt obligations) received in connection
with the bankruptcy or reorganization of customers or suppliers and in
settlement of delinquent obligations of, and other disputes with, customers or
suppliers arising in the ordinary course of business; and
 
(i)           Investments consisting of notes receivable of, or prepaid
royalties and other credit extensions, to customers and suppliers who are not
Affiliates, in the ordinary course of business; provided that this paragraph (i)
shall not apply to Investments of Borrower in any Subsidiary.
 
“Permitted Liens” are:
 
(a)           Liens existing on the Effective Date which are shown on the
Perfection Certificate or arising under this Agreement and the other Loan
Documents;
 
 
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(b)           Liens for taxes, fees, assessments or other government charges or
levies, either (i) not due and payable or (ii) being contested in good faith and
for which Borrower maintains adequate reserves on Borrower’s Books, provided
that no notice of any such Lien has been filed or recorded under the Internal
Revenue Code of 1986, as amended, and the Treasury Regulations adopted
thereunder;
 
(c)           purchase money Liens (i) on Equipment acquired or held by Borrower
incurred for financing the acquisition of the Equipment securing no more than
One Hundred Thousand Dollars ($100,000) in the aggregate amount outstanding, or
(ii) existing on Equipment when acquired, if the Lien is confined to the
property and improvements and the proceeds of the Equipment;
 
(d)           Liens of carriers, warehousemen, suppliers, or other Persons that
are possessory in nature arising in the ordinary course of business so long as
such Liens attach only to Inventory, securing liabilities in the aggregate
amount not to exceed One Hundred Thousand Dollars ($100,000) and which are not
delinquent or remain payable without penalty or which are being contested in
good faith and by appropriate proceedings which proceedings have the effect of
preventing the forfeiture or sale of the property subject thereto;
 
(e)           Liens to secure payment of workers’ compensation, employment
insurance, old-age pensions, social security and other like obligations incurred
in the ordinary course of business (other than Liens imposed by ERISA);
 
(f)           Liens incurred in the extension, renewal or refinancing of the
indebtedness secured by Liens described in (a) through (c), but any extension,
renewal or replacement Lien must be limited to the property encumbered by the
existing Lien and the principal amount of the indebtedness may not increase;
 
(g)           leases or subleases of real property granted in the ordinary
course of Borrower’s business (or, if referring to another Person, in the
ordinary course of such Person’s business), and leases, subleases, non-exclusive
licenses or sublicenses of personal property (other than Intellectual Property)
granted in the ordinary course of Borrower’s business (or, if referring to
another Person, in the ordinary course of such Person’s business), if the
leases, subleases, licenses and sublicenses do not prohibit granting Bank a
security interest therein;
 
(h)           non-exclusive license of Intellectual Property granted to third
parties in the ordinary course of business, and licenses of Intellectual
Property that could not result in a legal transfer of title of the licensed
property that may be exclusive in respects other than territory and that may be
exclusive as to territory only as to discreet geographical areas outside of the
United States;
 
(i)           Liens arising from attachments or judgments, orders, or decrees in
circumstances not constituting an Event of Default under Sections 8.4 and 8.7 of
this Agreement;
 
(j)           Liens in favor of other financial institutions arising in
connection with Borrower’s deposit and/or securities accounts held at such
institutions, provided that Bank has a first priority perfected security
interest in the amounts held in such deposit and/or securities accounts; and
 
(k)           Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of custom duties in connection with the
importation of goods.
 
“Person” is any individual, sole proprietorship, partnership, limited liability
company, joint venture, company, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or government agency.
 
“Prime Rate” is Bank’s most recently announced “prime rate,” even if it is not
Bank’s lowest rate.
 
“Reconciliation Period” is each calendar month.
 
“Registered Organization” is any “registered organization” as defined in the
Code with such additions to such term as may hereafter be made.
 
 
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“Requirement of Law” is as to any Person, the organizational or governing
documents of such Person, and any law (statutory or common), treaty, rule or
regulation or determination of an arbitrator or a court or other Governmental
Authority, in each case applicable to or binding upon such Person or any of its
property or to which such Person or any of its property is subject.
 
“Responsible Officer” is any of the Chief Executive Officer, President, Chief
Financial Officer and Controller of Borrower.
 
“Restricted License” is any material license or other agreement with respect to
which Borrower is the licensee (a) that prohibits or otherwise restricts
Borrower from granting a security interest in Borrower’s interest in such
license or agreement or any other property, or (b) for which a default under or
termination of could interfere with Bank’s right to sell any Collateral.
 
“Schedule” is the schedule of exceptions annexed hereto.
 
“SEC” shall mean the Securities and Exchange Commission, any successor thereto,
and any analogous Governmental Authority.
 
“Securities Account” is any “securities account” as defined in the Code with
such additions to such term as may hereafter be made.
 
“Subordinated Debt” is indebtedness incurred by Borrower subordinated to all of
Borrower’s now or hereafter indebtedness to Bank (pursuant to a subordination,
intercreditor, or other similar agreement in form and substance satisfactory to
Bank entered into between Bank and the other creditor), on terms acceptable to
Bank.
 
“Subsidiary” is, as to any Person, a corporation, partnership, limited liability
company or other entity of which shares of stock or other ownership interests
having ordinary voting power (other than stock or such other ownership interests
having such power only by reason of the happening of a contingency) to elect a
majority of the board of directors or other managers of such corporation,
partnership or other entity are at the time owned, or the management of which is
otherwise controlled, directly or indirectly through one or more intermediaries,
or both, by such Person.  Unless the context otherwise requires, each reference
to a Subsidiary herein shall be a reference to a Subsidiary of Borrower.
 
“SVB Control Agreement” is that certain Securities Account Control Agreement by
and among SVB Securities, Penson Financial Services, Inc., Borrower, and Bank of
even date herewith.
 
“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.
 
“Transfer” is defined in Section 7.1 of this Agreement.
 
[Signature page follows.]
 
 
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the Effective Date.
 

BORROWER                     AEHR TEST SYSTEMS                     By: /s/ Gary
L. Larson         Name: 
Gary L. Larson
   
 
  Title: 
VP, CFO
   
 
 

 
 

BANK                     SILICON VALLEY BANK                     By: /s/ Matthew
Wright         Name: 
Matthew Wright
   
 
  Title: 
RM
   
 
 

 

 
 

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

 
 
EXHIBIT A
 
The Collateral consists of all of Borrower’s right, title and interest in and to
the following:
 
All goods, equipment, inventory, contract rights or rights to payment of money,
leases, license agreements, franchise agreements, general intangibles (including
payment intangibles) accounts (including health-care receivables), documents,
instruments (including any promissory notes), chattel paper (whether tangible or
electronic), cash, deposit accounts, fixtures, letters of credit rights (whether
or not the letter of credit is evidenced by a writing), commercial tort claims,
securities, and all other investment property, supporting obligations, and
financial assets, whether now owned or hereafter acquired, wherever located; and
 
All Borrower’s books relating to the foregoing and any and all claims, rights
and interests in any of the above and all substitutions for, additions,
attachments, accessories, accessions and improvements to and replacements,
products, proceeds and insurance proceeds of any or all of the foregoing.
 
Notwithstanding the foregoing, the Collateral shall not be deemed to include:
(a) more than 65% of the presently existing and hereafter arising issued and
outstanding shares of capital stock owned by Borrower of any Foreign Subsidiary
which shares entitle the holder thereof to vote for directors or any other
matter, (b) any intent-to-use trademarks at all times prior to the first use
thereof, whether by the actual use thereof in commerce, the recording of a
statement of use with the United States Patent and Trademark Office or
otherwise; (c) any interest of Borrower as a lessee or sublessee under a real
property lease; (d) rights held under a license that are not assignable by their
terms without the consent of the licensor thereof (but only to the extent such
transfer is unenforceable under applicable law); (e) any interest of Borrower as
a lessee under an Equipment lease if Borrower is prohibited by the terms of such
lease from granting a security interest in such lease or under which such an
assignment or Lien would cause a default to occur under such lease; provided,
however, that upon termination of such prohibition, such interest shall
immediately become Collateral without any action by Borrower or Bank; or (f) any
Intellectual Property, except that the Collateral shall include all accounts,
license and royalty fees and other revenues, proceeds, or income arising out of
or relating to Intellectual Property.
 
 
 

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EXHIBIT B

[ex10-202.jpg]

SPECIALTY FINANCE DIVISION
Compliance Certificate

I, an authorized officer of AEHR TEST SYSTEMS (“Borrower”) certify under the
Loan and Security Agreement (as amended, the “Agreement”) between Borrower and
Silicon Valley Bank (“Bank”) as follows for the period ending
_____________________________ (all capitalized terms used herein shall have the
meaning set forth in this Agreement):
 
Borrower represents and warrants for each Financed Receivable:
 
Each Financed Receivable is an Eligible Account;
 
Borrower is the owner with legal right to sell, transfer, assign and encumber
such Financed Receivable;
 
The correct amount is on the Invoice Transmittal and is not disputed;
 
Payment is not contingent on any obligation or contract and Borrower has
fulfilled all its obligations as of the Invoice Transmittal date;
 
Each Financed Receivable is based on an actual sale and delivery of goods and/or
services rendered, is due to Borrower,  is not past due or in default, has not
been previously sold, assigned, transferred, or pledged and is free of any
liens, security interests and encumbrances other than Permitted Liens;
 
There are no defenses, offsets, counterclaims or agreements for which the
Account Debtor may claim any deduction or discount;
 
Borrower reasonably believes no Account Debtor is insolvent or subject to any
Insolvency Proceedings;
 
Borrower has not filed or had filed against it Insolvency Proceedings and does
not anticipate any filing;
 
Bank has the right to endorse and/ or require Borrower to endorse all payments
received on Financed Receivables and all proceeds of Collateral.
 
No representation, warranty or other statement of Borrower in any certificate or
written statement given to Bank contains any untrue statement of a material fact
or omits to state a material fact necessary to make the statement contained in
the certificates or statement not misleading.
 
Additionally, Borrower represents and warrants as follows:
 
Borrower and each Subsidiary is duly existing and in good standing in its state
of formation and qualified and licensed to do business in, and in good standing
in, any state in which the conduct of its business or its ownership of property
requires that it be qualified except where the failure to do so could not
reasonably be expected to cause a Material Adverse Change.  The execution,
delivery and performance of the Loan Documents have been duly authorized, and do
not conflict with Borrower’s organizational documents, nor constitute an event
of default under any material agreement by which Borrower is bound.  Borrower is
not in default under any agreement to which or by which it is bound in which the
default could reasonably be expected to cause a Material Adverse Change.
 
 
 

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

 
 
Borrower has good title to the Collateral, free of Liens except Permitted
Liens.  All inventory is in all material respects of good and marketable
quality, free from material defects.
 
Borrower is not an “investment company” or a company “controlled” by an
“investment company” under the Investment Company Act of 1940, as
amended.  Neither Borrower nor any of its Subsidiaries is a “holding company” or
an “affiliate” of a “holding company” or a “subsidiary company” of a “holding
company” as each term is defined and used in the Public Utility Holding Company
Act of 2005.  Borrower is not engaged as one of its important activities in
extending credit for margin stock (under Regulations X, T and U of the Federal
Reserve Board of Governors).  Borrower has complied in all material respects
with the Federal Fair Labor Standards Act.  Borrower has not violated any laws,
ordinances or rules, the violation of which could reasonably be expected to
cause a Material Adverse Change.  None of Borrower’s or any Subsidiary’s
properties or assets has been used by Borrower or any Subsidiary or, to the best
of Borrower’s knowledge, by previous Persons, in disposing, producing, storing,
treating, or transporting any hazardous substance other than legally.  Borrower
and each Subsidiary has timely filed all required tax returns and paid, or made
adequate provision to pay, all material taxes, except those being contested in
good faith with adequate reserves under GAAP.  Borrower and each Subsidiary has
obtained all consents, approvals and authorizations of, made all declarations or
filings with, and given all notices to, all government authorities that are
necessary to continue its business as currently conducted except where the
failure to obtain or make such consents, declarations, notices or filings would
not reasonably be expected to cause a Material Adverse Change.
 
Please indicate compliance status by circling Yes/No under “Complies” column.
 
Reporting Covenant
Required
Complies
     
Quarterly financial statements with Compliance Certificate
Quarterly within 30 days (40 days for Borrower’s second fiscal quarter)
Yes   No
Fiscal year end financials + CC
Within 5 days of being publicly available but no later than 55 days FYE
Yes   No
Annual financial statement (CPA Audited) + CC
FYE within 180 days
Yes   No
10-Q, 10-K and 8-K
Within 5 days after filing with SEC
Yes   No
A/R & A/P Agings, Deferred Revenue report
Monthly within 30 days
Yes   No
Quarterly Invoices/Purchase Orders
As soon as available
Yes   No
Annual Financial Projections
Within 30 days after Board Approval
  Yes   No

Pricing Reduction
Applies
     
Revenue ≥ 70% of Plan
Prime – 0.50%
Yes   No
Revenue < 70% of Plan
Prime + 0.75%
Yes   No
Net Cash ≥ $0.00
CHF = 0.20%
Yes   No
Net Cash < $0.00
No CHF
Yes   No

Pricing Reduction
 

Trigger Required  Actual  Eligible for Reduction         Revenue $__________
(70% of Plan) $__________  Yes   No Net Cash  $0.00  $__________  Yes   No      
 

 

 
[Continued next page.]

 
 

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All other representations and warranties in this Agreement are true and correct
in all material respects on this date, and Borrower represents that there is no
existing Event of Default.

Sincerely,
 
AEHR TEST SYSTEMS

________________________
Signature
________________________
Title
________________________
Date
 
 
 

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EXHIBIT C

BORROWING RESOLUTIONS
 
 
 
[see attached]

 
 

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EXHIBIT D

BORROWING BASE CERTIFICATE
 

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Borrower: Aehr Test Systems
 
Lender:  Silicon Valley Bank
 
Commitment Amount:    $1,500,000
 

ACCOUNTS RECEIVABLE   1.
Accounts Receivable (invoiced) Book Value as of ____________________
$_______________
2.
Additions (Please explain on next page)
$_______________
3.
Less: Intercompany / Employee / Non-Trade Accounts
$_______________
4.
NET TRADE ACCOUNTS RECEIVABLE
$_______________
      ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)   5.
90 Days Past Invoice Date
$_______________
6.
Balance of 50% over 90 Day Accounts (Cross-Age or Current Affected)
$_______________
7.
Foreign Account Debtor Accounts
$_______________
 
8. Foreign Invoiced and/or Collected Accounts
$_______________
9.
Contra / Customer Deposit Accounts
$_______________
10.
U.S. Government Accounts
$_______________
 
11. Promotion or Demo Accounts; Guaranteed Sale or Consignment Sale Accounts
$_______________
12.
Accounts with Memo or Pre-Billings
$_______________
13.
Contract Accounts; Accounts with Progress / Milestone Billings
$_______________
14.
Accounts for Retainage Billings
$_______________
15.
Trust / Bonded Accounts
$_______________
16.
Bill and Hold Accounts
$_______________
17.
Unbilled Accounts
$_______________
18.
Non-Trade Accounts (If not already deducted above)
$_______________
19.
Accounts with Extended Term Invoices (Net 90+)
$_______________
20.
Chargebacks Accounts / Debit Memos
$_______________
21.
Product Returns/Exchanges
$_______________
22.
Disputed Accounts; Insolvent Account Debtor Accounts
$_______________
23.
Deferred Revenue / Other (Please explain on next page)
$_______________
24.
[Reserved]
$_______________
25.
TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS
  26.
Eligible Accounts (#4 minus #25)
$_______________
27.
ELIGIBLE AMOUNT OF ACCOUNTS (80% of #26)
$_______________
      BALANCES   28.
Maximum Loan Amount
$1,500,000
29.
Outstanding Exim Advances and Exim Inventory Advances
$_______________
30.
Unused Loan Amount (#28 minus #29)
$_______________
31.
Total Funds Available (Lesser of #27 or #30)
$_______________
32.
Present balance owing on Line of Credit
$_______________
33.
RESERVE POSITION (#31 minus #32)
$_______________

[Continued on following page.]
 
 
1

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Explanatory comments from previous page:
 

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The undersigned represents and warrants that this is true, complete and correct,
and that the information in this Borrowing Base Certificate complies with the
representations and warranties in the Loan and Security Agreement between the
undersigned and Silicon Valley Bank.
 
COMMENTS:
 
 
By: ___________________________
Authorized Signer
Date: __________________________                       
BANK USE ONLY
Received by: _____________________
authorized signer
Date:   __________________________
Verified: ________________________
authorized signer
Date: ___________________________
Compliance Status:                                Yes           No

 
2

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EXHIBIT E – LOAN PAYMENT/ADVANCE REQUEST FORM

Deadline for same day processing is Noon Pacific Time

Fax To:  (650)
320-1152                                                                                                       Date:
_____________________
 
Loan Payment:
 
AEHR TEST SYSTEMS

From Account
#________________________________                                                                                            To
Account #__________________________________________________
(Deposit Account
#)                                                                                                                                                           
  (Loan Account #)
Principal
$____________________________________                                                                                            and/or
Interest $________________________________________________

Authorized Signature:
___________________________                                                                                           
Phone Number: _________________________________________________
 
Print Name/Title: _______________________________

 
Loan Advance:

Complete Outgoing Wire Request section below if all or a portion of the funds
from this loan advance are for an outgoing wire.

From Account
#________________________________                                                                                            To
Account #__________________________________________________
(Loan Account
#)                                                                                                                                                                 
 (Deposit Account #)

Amount of Advance $___________________________

All Borrower’s representations and warranties in the Loan and Security Agreement
are true, correct and complete in all material respects on the date of the
request for an advance; provided, however, that such materiality qualifier shall
not be applicable to any representations and warranties that already are
qualified or modified by materiality in the text thereof; and provided, further
that those representations and warranties expressly referring to a specific date
shall be true, accurate and complete in all material respects as of such date:

Authorized Signature:
____________________________                                                                                          
Phone Number: ________________________________________________
 
Print Name/Title: ________________________________

 
Outgoing Wire Request:
Complete only if all or a portion of funds from the loan advance above is to be
wired.
Deadline for same day processing is noon, Pacific Time

Beneficiary Name: _____________________________                      Amount of
Wire: $____________________________
 
Beneficiary Bank: ______________________________                     Account
Number: ____________________________
 
City and State: ________________________________

Beneficiary Bank Transit (ABA) #: _________________                      
Beneficiary Bank Code (Swift, Sort, Chip, etc.): __________________________
                         (For International Wire Only)
 
Intermediary Bank: _____________________________                       Transit
(ABA) #: ________________________________________________
 
For Further Credit
to: ___________________________________________________________________________________________________  

Special Instruction:
____________________________________________________________________________________________________  

By signing below, I (we) acknowledge and agree that my (our) funds transfer
request shall be processed in accordance with and subject to the terms and
conditions set forth in the agreements(s) covering funds transfer service(s),
which agreements(s) were previously received and executed by me (us).

Authorized Signature:
___________________________                                                                                         2nd
Signature (if required): _______________________________________
 
Print Name/Title:
______________________________                                                                                            Print
Name/Title: ______________________________________________
 
Telephone
#:__________________________________                                                                                          Telephone
#: _________________________________________________