Exhibit 10.19

 

SILICON VALLEY BANK

 

LOAN AND SECURITY AGREEMENT

 

Borrower:

TUT SYSTEMS, INC., a Delaware corporation

 

 

Address:

6000 SW Meadows Drive, Suite 200
Lake Oswego, Oregon 97035

 

 

Date:

September 23, 2004

 

THIS LOAN AND SECURITY AGREEMENT (as amended, modified, or otherwise
supplemented from time to time, this “Agreement”) is entered into on the above
date between SILICON VALLEY BANK, a California-chartered bank, with its
principal place of business at 3003 Tasman Drive, Santa Clara, California  95054
and with a loan production office located at 4700 Carillon Point, Kirkland,
Washington 98033 (“Silicon”) and the borrower named above (the “Borrower”),
whose chief executive office is located at the above address (“Borrower’s
Address”).  The Schedule and Exhibits to this Agreement (the “Schedule” and the
“Exhibits,” respectively) shall for all purposes be deemed to be part of this
Agreement, and the same are integral parts of this Agreement.  (Definitions of
certain terms used in this Agreement are set forth in Section 8 below.)

 

Section 1                                               LOANS.

 

1.1                                 Loans.  Silicon will, in its good faith
business judgment, make revolving loans to Borrower (the “Loans’) up to the
amounts (the “Credit Limit”) shown on the Schedule, provided no Default or Event
of Default has occurred and is continuing, and subject to deduction of any
Reserves for accrued interest and such other Reserves as Silicon deems proper
from time to time in its good faith business judgment.  Amounts borrowed may be
repaid and reborrowed during the term of this Agreement.

 

1.2                                 Interest.  All Loans and all other monetary
Obligations shall bear interest at the rate shown on the Schedule, except where
expressly set forth to the contrary in this Agreement.  Interest shall be
payable monthly, on the last day of the month.  Interest shall be charged to a
deposit account with Silicon designated by Borrower, or if no funds are
available in any such deposit account, then as a Loan under this Agreement.

 

1.3                                 Overadvances.  If at any time or for any
reason the total of all outstanding Loans and all other monetary Obligations
(including extensions of credit under Section 1.6, Section 1.7, and Section 1.8)
exceeds the Credit Limit (an “Overadvance”), Borrower shall immediately pay the
amount of the excess to Silicon, without notice or demand.  Without limiting
Borrower’s obligation to repay to Silicon the amount of any Overadvance,
Borrower agrees to pay Silicon interest on the outstanding amount of any
Overadvance, on demand, at the Default Rate.

 

1.4                                 Fees.  Borrower shall pay Silicon the fees
shown on the Schedule, which are in addition to all interest and other sums
payable to Silicon and are not refundable.

 

1.5                                 Loan Requests.  To obtain a Loan, Borrower
shall make a request to Silicon by facsimile or telephone.  Loan requests
received after 12:00 Noon will not be considered by Silicon until the next
Business Day.  Silicon may rely on any telephone request for a Loan given by a
person whom Silicon reasonably believes is an

 

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authorized representative of Borrower, and Borrower will indemnify Silicon for
any loss Silicon suffers as a result of that reliance.

 

1.6                                 Letters of Credit.  At the request of
Borrower, Silicon may, in its good faith business judgment, issue or arrange for
the issuance of letters of credit for the account of Borrower, in each case in
form and substance satisfactory to Silicon in its sole discretion (collectively,
“Letters of Credit”).  The aggregate face amount of all Letters of Credit
outstanding from time to time (plus all Silicon exposure under any foreign
exchange contracts and Cash Management Services entered into with Borrower or
provided on behalf of Borrower under this Agreement) shall not exceed the amount
shown on the Schedule (the “Letter of Credit Sublimit”), and shall be reserved
against Loans which would otherwise be available hereunder in accordance with
the terms of Section 1 of the Schedule, and in the event at any time the
aggregate amount of Loans, Letters of Credit and any other financial
accommodations hereunder exceed the Credit Limit, Borrower shall deposit and
maintain with Silicon cash collateral in an amount at all times equal to such
excess, which shall be held as Collateral for all purposes of this Agreement. 
Borrower shall pay all reasonable bank charges (including charges of Silicon)
for the issuance of Letters of Credit, together with such additional fee as
Silicon’s letter of credit department shall charge in connection with the
issuance of the Letters of Credit.  Any payment by Silicon under or in
connection with a Letter of Credit shall constitute a Loan hereunder (to the
extent that such payment amount exceeds any cash collateral provided for such
Letter of Credit) on the date such payment is made.  Each Letter of Credit shall
have an expiry date no later than thirty days prior to the Maturity Date unless
such Letter of Credit is fully secured by cash collateral to the extent and in
the amount described in Section 6.2 hereof.  Borrower hereby agrees to
indemnify, save, and hold Silicon harmless from any loss, cost, expense, or
liability, including payments made by Silicon, expenses, and reasonable
attorneys’ fees incurred by Silicon arising out of or in connection with any
Letters of Credit unless such loss, cost, expense, or liability is caused by
Silicon’s gross negligence or willful misconduct.  Borrower agrees to be bound
by the regulations and interpretations of the issuer of any Letters of Credit
guaranteed by Silicon and opened for Borrower’s account or by Silicon’s
interpretations of any Letter of Credit issued by Silicon for Borrower’s
account, and Borrower understands and agrees that Silicon shall not be liable
for any error, negligence, or mistake, whether of omission or commission, in
following Borrower’s instructions or those contained in the Letters of Credit or
any modifications, amendments, or supplements thereto except to the extent that
such liabilities are caused by the gross negligence or willful misconduct of
Silicon.  Borrower understands that Letters of Credit may require Silicon to
indemnify the issuing bank for certain costs or liabilities arising out of
claims by Borrower against such issuing bank.  Borrower hereby agrees to
indemnify and hold Silicon harmless with respect to any loss, cost, expense, or
liability incurred by Silicon under any Letter of Credit as a result of
Silicon’s indemnification of any such issuing bank unless such loss, cost,
expense, or liability is caused by Silicon’s gross negligence or willful
misconduct.  The provisions of this Agreement, as it pertains to Letters of
Credit, and any other Loan Documents relating to Letters of Credit are
cumulative.

 

1.7                                 Foreign Exchange Sublimit. In addition to
Section 1.5, Section 1.6 and Section 1.8, Borrower may use up to the amount set
forth on the Schedule in connection with foreign exchange forward contracts with
Silicon under which Borrower commits to purchase from or sell to Silicon a set
amount of foreign currency more than one business day after the contract date. 
Silicon shall subtract up to a maximum of 10% of the amount of each outstanding
foreign exchange contract from the foreign exchange sublimit (the “FX
Reserve”).  Silicon may terminate the foreign exchange contracts if an Event of
Default occurs and continues.

 

1.8                                 Cash Management Services Sublimit.  In
addition to Section 1.5, 1.6 and 1.7 above, Borrower may also use up to the
amount set forth on the Schedule for Cash Management Services.  Such aggregate
amounts utilized under the Cash Management Services Sublimit shall at all times
reduce the amount otherwise available for Loans, letters of credit, foreign
exchange contracts or other credit accommodations hereunder.  Any amounts
Silicon

 

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pays on behalf of Borrower or any amounts that are not paid by Borrower for any
Cash Management Services will be treated as Loans hereunder and will accrue
interest at the interest rate applicable to Loans.

 

Section 2                                               SECURITY INTEREST.

 

2.1                                 Security Interest.  To secure the payment
and performance of all of the Obligations when due, and the performance of each
of the Borrower’s duties under this Agreement and all documents executed in
connection herewith,  Borrower hereby grants to Silicon a continuing security
interest in all of Borrower’s interest in the following, whether now owned or
hereafter acquired, and wherever located:  All Inventory, Equipment, Payment
Intangibles, Letter-of-Credit Rights, Supporting Obligations, Accounts, and
General Intangibles, including, without limitation, all of Borrower’s
Intellectual Property, Deposit Accounts, and all money, and all property now or
at any time in the future in Silicon’s possession (including claims and credit
balances), and all proceeds (including proceeds of any insurance policies,
proceeds of proceeds and claims against third parties), all products and all
books and records related to any of the foregoing (all of the foregoing,
together with all other property in which Silicon may now or in the future be
granted a lien or security interest by Borrower, is referred to herein,
collectively, as the “Collateral”).  The security interest granted herein shall
be a first priority security interest in the Collateral, subject to Permitted
Liens.  Except as disclosed to Silicon in writing, Borrower is not a party to,
nor is bound by, any material license or other material agreement with respect
to which the Borrower is the licensee that prohibits or otherwise restricts
Borrower from granting a security interest in Borrower’s interest in such
license or agreement or any other property.  Borrower will provide written
notice to Silicon within thirty (30) days of entering or becoming bound by any
such material license or material agreement which is reasonably likely to have a
material impact on Borrower’s business or financial condition (other than
over-the-counter software that is commercially available to the public). 
Borrower shall take such steps as Silicon reasonably requests to obtain the
consent of, or waiver by, any person whose consent or waiver is necessary for
all such licenses or contract rights to be deemed “Collateral” and for Silicon
to have a security interest in it that might otherwise be restricted or
prohibited by law or by the terms of any such license or agreement, whether now
existing or entered into in the future.  Notwithstanding the foregoing, the
security interest granted herein does not extend to, and the term “Collateral”
does not include (i) any outstanding capital stock of a controlled foreign
corporation (as defined in the Internal Revenue Code of 1986, as amended) in
excess of 65% of the voting power of all classes of capital stock of such
controlled foreign corporation entitled to vote, or (ii) Equipment (and
additions, accessions, parts, replacements, fixtures, improvements and
accessions to, and proceeds of, such Equipment) secured by Permitted Liens
described in clause (i) of the definition of Permitted Liens but only to the
extent that Borrower is prohibited by any existing agreement related to such
purchase money debt from granting  other liens, security interests or
encumbrances on such Equipment) and additions, accessions, parts, replacements,
fixtures, improvements and accessions to, and proceeds of, such Equipment) so
long as such prohibition remains in effect.

 

Section 3                                               REPRESENTATIONS,
WARRANTIES AND COVENANTS OF BORROWER.

 

In order to induce Silicon to enter into this Agreement and to make Loans and
except as disclosed on the Representations and Warranties Certificate, Borrower
represents and warrants to Silicon as follows, and Borrower covenants that the
following representations are true as of the date hereof, and as of the date of
any request for a Loan or other financial accommodation hereunder, and that
Borrower will at all times comply with all of the following covenants,
throughout the term of this Agreement and until all Obligations have been paid
and performed in full:

 

3.1                                 Corporate Existence and Authority.  Borrower
is and will continue to be, duly organized, validly existing and in good
standing under the laws of the jurisdiction of its organization.  Borrower is
and will continue to

 

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be qualified and licensed to do business in all jurisdictions in which any
failure to do so would have a material adverse effect on Borrower.  The
execution, delivery and performance by Borrower of this Agreement, and all other
documents contemplated hereby (i) have been duly and validly authorized by
Borrower, (ii) are enforceable against Borrower in accordance with their terms
(except as enforcement may be limited by equitable principles (whether
considered in a proceeding in equity or at law) and by bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to creditors’ rights
generally), (iii) do not violate Borrower’s organizational documents, or any law
or any  material agreement or instrument which is binding upon Borrower or its
property, except where such violation would not reasonably be expected to have a
materially adverse effect on the business or financial condition of Borrower,
and (iv) do not constitute grounds for acceleration of any material indebtedness
or obligation under any material agreement or instrument which is binding upon
Borrower or its property.

 

3.2                                 Name; Trade Names and Styles.  The name of
Borrower set forth in the heading to this Agreement is its name as set forth in
its certificate of incorporation, as amended, on the date hereof.  Listed on the
Representations and Warranties Certificate are all prior names of Borrower and
all of Borrower’s present and prior trade names.  Borrower shall give Silicon 10
days’ prior written notice before changing its name or doing business under any
other name.

 

3.3                                 Place of Business; Location of Collateral.
 The address set forth in the heading to this Agreement is Borrower’s chief
executive office as of the date of this Agreement.  In addition, as of the date
hereof Borrower has places of business and Collateral is located only at the
locations set forth on the Representations and Warranties Certificate.  Borrower
will give Silicon at least 30 days prior written notice before opening any
additional place of business, changing its state of formation or moving any of
the Collateral to a location other than Borrower’s Address or one of the
locations set forth on the Representations and Warranties Certificate, except
that Borrower may maintain sales offices in the ordinary course of business at
which not more than a total of $75,000 fair market value of Equipment is
located.

 

3.4                                 Title to Collateral; Perfection; Permitted
Liens.

 

(a)                                  Borrower is now, and will at all times in
the future be, the sole owner of all the Collateral, except for items of
Equipment which are leased to Borrower.  The Collateral now is and will remain
free and clear of any and all liens, charges, security interests, encumbrances
and adverse claims, except for Permitted Liens.  To the best of Borrower’s
knowledge, Silicon now has, and will continue to have, until Obligations under
this Agreement are paid in full and this Agreement is terminated, a
first-priority perfected and enforceable security interest in all of the
Collateral, subject only to the Permitted Liens, and Borrower will at all times
defend Silicon and the Collateral against all claims of others (other than with
respect to Permitted Liens) until Obligations under this Agreement are paid in
full and this Agreement is terminated.

 

(b)                                 Borrower has set forth in the
Representations and Warranties Certificate all of Borrower’s Deposit Accounts as
of the date of this Agreement, and Borrower will give Silicon five Business Days
advance written notice before establishing any new Deposit Accounts and will
cause the institution where any such new Deposit Account is maintained to
execute and deliver to Silicon a control agreement in form sufficient to perfect
Silicon’s security interest in the Deposit Account and otherwise reasonably
satisfactory to Silicon in its good faith business judgment.  Nothing herein
limits any requirements which may be set forth in the Schedule as to where
Deposit Accounts will be maintained.

 

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(c)                                  In the event that Borrower shall at any
time after the date hereof have any commercial tort claims against others, which
it is asserting or intends to assert, and in which the potential recovery could
reasonably be expected to exceed $100,000, Borrower shall promptly notify
Silicon thereof in writing and provide Silicon with such information regarding
the same as Silicon shall reasonably request (unless providing such information
would waive the Borrower’s attorney-client privilege).  Such notification to
Silicon shall constitute a grant of a security interest in the commercial tort
claim and all proceeds thereof to Silicon, and Borrower shall execute and
deliver all such documents and take all such actions as Silicon shall request in
connection therewith.

 

(d)                                 None of the Collateral now is or will be
affixed to any real property in such a manner, or with such intent, as to become
a fixture.  Borrower is not and will not become a lessee under any real property
lease pursuant to which the lessor may obtain any rights in any of the
Collateral other than any landlord’s lien available to a lessor by statute or
common law (provided, however, such lien shall be at all times junior and
subordinate to the lien of Silicon) and no such lease now prohibits, restrains,
impairs or will prohibit, restrain or impair Borrower’s right to remove any
Collateral from the leased premises.  Whenever any Collateral is located upon
premises in which any third party has an interest, Borrower shall, whenever
requested by Silicon, use its reasonable efforts to cause such third party to
execute and deliver to Silicon, in form reasonably acceptable to Silicon, such
waivers and subordinations as Silicon shall specify in its good faith business
judgment.  Borrower will keep in full force and effect, and will comply with all
material terms of, any material lease of real property where any of the
Collateral now or in the future may be located, except to the extent that the
failure to so comply could not reasonably be expected to result in a material
adverse effect on Borrower.

 

(e)                                  Borrower hereby authorizes Silicon to file
financing statements, without notice to Borrower, with all appropriate
jurisdictions in order to perfect or protect Silicon’s interest or rights
hereunder, which financing statements may indicate the Collateral as “all assets
of the Debtor” or words of similar effect, or as being of an equal or lesser
scope, or with greater detail, all in Silicon’s discretion.

 

3.5                                 Maintenance of Collateral.  Borrower will
maintain the Collateral in good working condition (ordinary wear and tear
excepted), and Borrower will not use the Collateral for any unlawful purpose. 
Borrower will promptly advise Silicon in writing of any material loss or damage
to the Collateral.

 

3.6                                 Books and Records.  Borrower has maintained
and will maintain at Borrower’s Address complete and accurate books and records,
from which financial statements prepared  in accordance with GAAP may be
prepared.

 

3.7                                 Financial Condition, Statements and
Reports.  All financial statements now or in the future delivered to Silicon
have been, and will be, prepared in conformity with GAAP and now and in the
future will (subject to appropriate adjustments and absence of footnotes in the
case of interim period financial statements) and fairly present in all material
respects the results of operations and financial condition of Borrower, in
accordance with GAAP, at the times and for the periods therein stated.  Between
the last date covered by any such statement provided to Silicon and the date
hereof, there has been no material adverse change in the financial condition or
business of Borrower.  Borrower is not currently, and will not be at any time
during the term of this Agreement, insolvent (as defined in the Code).

 

3.8                                 Tax Returns and Payments; Pension
Contributions.  Borrower has timely filed, and will timely file, all required
tax returns and reports, and Borrower has timely paid, and will timely pay, all
foreign, federal, state

 

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and local taxes, assessments, deposits and contributions now or in the future
owed by Borrower.  Borrower may, however, defer payment of any contested taxes,
provided that Borrower (i) in good faith contests Borrower’s obligation to pay
the taxes by appropriate proceedings promptly and diligently instituted and
conducted, (ii) notifies Silicon in writing of the commencement of, and any
material development in, the proceedings, and (iii) posts bonds or takes any
other steps required to keep the contested taxes from becoming a lien upon any
of the Collateral.  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, and shall continue to
pay all amounts necessary to fund all present and future pension, profit sharing
and deferred compensation plans in accordance with their terms, and Borrower has
not and will not withdraw from participation in, permit partial or complete
termination of, or permit the occurrence of any other event with respect to, any
such plan which could reasonably be expected to result in a material liability
of Borrower, including any material liability to the Pension Benefit Guaranty
Corporation or its successors or any other governmental agency.

 

3.9                                 Compliance with Law.  Borrower has, to the
best of its knowledge, complied, and will comply, in all material respects, with
all provisions of all foreign, federal, state and local laws and regulations
applicable to Borrower, including, but not limited to, those relating to
Borrower’s ownership of real or personal property, the conduct and licensing of
Borrower’s business, and all environmental matters to the extent such failure to
comply with such law or regulation would reasonably be expected to have
materially adverse effect on Borrower.

 

3.10                           Litigation.  Except as disclosed in the
Representations and Warranties Certificate, there is no claim, suit, litigation,
proceeding or investigation pending or (to Borrower’s knowledge) threatened in
writing by or against Borrower in any court or before any governmental agency 
which could reasonably be expected to result, either separately or in the
aggregate, in any material adverse change in the financial condition or business
of Borrower, or in any material impairment in the ability of Borrower to carry
on its business in substantially the same manner as it is now being conducted. 
Borrower will promptly inform Silicon in writing of any claim, proceeding,
litigation or investigation in the future threatened in writing or instituted by
or against Borrower involving any single claim of $100,000 or more, or involving
$250,000 or more in the aggregate.

 

3.11                           Use of Proceeds.  All proceeds of all Loans shall
be used solely for lawful business purposes.  Borrower is not purchasing or
carrying any “margin stock” (as defined in Regulation U of the Board of
Governors of the Federal Reserve System) and no part of the proceeds of any Loan
will be used to purchase or carry any “margin stock” or to extend credit to
others for the purpose of purchasing or carrying any “margin stock.”

 

Section 4                                               ACCOUNTS.

 

4.1                                 Representations Relating to Accounts.
 Borrower represents and warrants to Silicon as follows:  Each Account with
respect to which Loans are requested by Borrower shall, on the date each Loan is
requested and made, (i) represent an undisputed bona fide existing unconditional
obligation of the Account Debtor created by the sale, delivery, and acceptance
of goods or the rendition of services, or the non-exclusive licensing of
Intellectual Property, in the ordinary course of Borrower’s business, and (ii)
meet the Minimum Eligibility Requirements set forth in  Section 8 below.

 

4.2                                 Representations Relating to Documents and
Legal Compliance.  Borrower represents and warrants to Silicon as follows:  All
statements made and all unpaid balances appearing in all invoices, instruments
and other documents evidencing the Accounts are and shall be true and correct in
all material respects as of the date of such invoice, instrument, or document
and all such invoices, instruments and other documents and all of Borrower’s
books and records are and shall be genuine and in all respects what they purport
to be.  All sales and

 

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other transactions underlying or giving rise to each Account shall fully comply
in all material respects with all applicable laws and governmental rules and
regulations to the extent that such failure to comply would reasonably be
expected to have a material adverse effect on Borrower.  To Borrower’s
knowledge, all signatures and endorsements on all documents, instruments, and
agreements relating to all Accounts are and shall be genuine, and all such
documents, instruments and agreements are and shall be legally enforceable in
accordance with their terms except as may be limited by equitable principles
(whether considered in a proceeding at law or in equity), and by bankruptcy,
insolvency, reorganization, moratorium, or similar laws relating to creditor’s
rights generally.

 

4.3                                 Schedules and Documents relating to
Accounts.  Borrower shall deliver to Silicon transaction reports and schedules
of collections, as provided in the Schedule, on Silicon’s standard forms or in
such form generated by Borrower and reasonably acceptable to Silicon; provided,
however, that Borrower’s failure to execute and deliver the same shall not
affect or limit Silicon’s security interest and other rights in all of
Borrower’s Accounts, nor shall Silicon’s failure to advance or lend against a
specific Account affect or limit Silicon’s security interest and other rights
therein. Loan requests received after 12:00 Noon will not be considered by
Silicon until the next Business Day.  Together with each such schedule, or later
if requested by Silicon, Borrower shall furnish Silicon with copies (or, at
Silicon’s request, originals if reasonably deemed necessary by Silicon for
perfection or collection) of all contracts, orders, invoices, and other similar
documents, and all original shipping instructions, delivery receipts, bills of
lading, and other evidence of delivery, for any goods the sale or disposition of
which gave rise to such Accounts, and Borrower warrants the genuineness of all
of the foregoing.  Borrower shall also furnish to Silicon an aged accounts
receivable trial balance in such form and at such intervals as Silicon shall
reasonably request.  In addition, Borrower shall deliver to Silicon, on its
request, the originals of all instruments, chattel paper, security agreements,
guarantees and other documents and property evidencing or securing any Accounts,
in the same form as received, with all necessary endorsements and copies of all
credit memos.

 

4.4                                 Collection of Accounts.  Borrower shall
cause the Account Debtors to remit all Accounts to Silicon and Silicon shall
hold all payments on, and proceeds of, Accounts in a lockbox account, or such
other “blocked account” as Silicon may reasonably specify, pursuant to a blocked
account agreement in such form as Silicon may reasonably specify.  All such
payments on, and proceeds of, Accounts shall be applied to the Obligations in
such order as Silicon shall determine.  Silicon or its designee may, at any
time, notify Account Debtors that Silicon has been granted a security interest
in the Accounts.  Notwithstanding the foregoing, if Borrower is on “streamline
reporting status” pursuant to Section 6 of the Schedule hereto, funds received
by Silicon in the lockbox account or such other blocked account will not be
applied to the Obligations and will be transferred by Silicon to an operating
account of Borrower maintained at Silicon.

 

4.5                                 Remittance of Proceeds.  So long as this
Agreement has not been terminated or any Obligations are outstanding, all
proceeds arising from the disposition of any Collateral shall not be commingled
with any of Borrower’s other funds or property and will be held separate and
apart from such other funds and property in an express trust for Silicon and
shall be delivered, in kind, by Borrower to Silicon in the original form in
which received by Borrower not later than the following Business Day after
receipt by Borrower, to be applied to the Obligations in such order as Silicon
shall determine; provided that, if no Default or Event of Default has occurred
and is continuing, Borrower shall not be obligated to segregate and remit to
Silicon the proceeds of (i) the sale of worn out or obsolete Equipment disposed
of by Borrower in good faith in an arm’s length transaction for an aggregate
purchase price of $50,000 or less (for all such transactions in any fiscal
year)  or (ii) the sale of worn out or obsolete Inventory disposed of by
Borrower in good faith in an arm’s length transaction for an aggregate purchase
price of $250,000 or less (for all such transactions in any fiscal year). 
Nothing in this  Section 4.5 limits the restrictions on disposition of
Collateral set forth elsewhere in this Agreement.

 

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4.6                                 Disputes.  Borrower shall notify Silicon
promptly of all material disputes or claims relating to Accounts in an amount of
more than the lesser of (i) $50,000 or (ii) 10.0% of the subject Account for any
individual dispute.  Borrower shall not forgive (completely or partially),
compromise or settle any Account for less than payment in full, or agree to do
any of the foregoing, except that Borrower may do so, provided that: (i)
Borrower does so in good faith, in a commercially reasonable manner, in the
ordinary course of business, and in arm’s length transactions, which are
reported to Silicon on the regular reports provided to Silicon; (ii) no Default
or Event of Default has occurred and is continuing; and (iii) taking into
account all such discounts settlements and forgiveness, the total outstanding
Loans will not exceed the Credit Limit.  Silicon may, at any time after the
occurrence and during the continuance of an Event of Default, settle or adjust
disputes or claims directly with Account Debtors for amounts and upon terms
which Silicon considers advisable in its reasonable judgment and, in all cases,
Silicon shall credit Borrower’s Loan account with only the net amounts received
by Silicon in payment of any Accounts.

 

4.7                                 Returns.  Provided no Event of Default has
occurred and is continuing, if any Account Debtor returns any Inventory to
Borrower, Borrower shall promptly determine the reason for such return and
promptly issue a credit memorandum to the Account Debtor in the appropriate
amount (sending a copy to Silicon).  In the event any attempted return occurs
after the occurrence and during the continuance of any Event of Default,
Borrower shall hold the returned Inventory in trust for Silicon and immediately
notify Silicon of the return of any Inventory, specifying the reason for such
return, the location and condition of the returned Inventory, and on Silicon’s
request deliver such returned Inventory to Silicon.

 

4.8                                 Verification.  Silicon may, from time to
time, verify directly with the respective Account Debtors in a commercially
reasonable manner the validity, amount and other matters relating to the
Accounts, by means of mail, telephone or otherwise, either in the name of
Borrower or Silicon or such other name as Silicon may choose.

 

4.9                                 No Liability.   If Silicon complies with
reasonable banking practices and Section 9-207 of the Code, Silicon shall not be
responsible or liable for any shortage or discrepancy in, damage to, or loss or
destruction of, any goods, the sale or other disposition of which gives rise to
an Account, or for any error, act, omission, or delay of any kind occurring in
the settlement, failure to settle, collection or failure to collect any Account,
or for settling any Account in good faith for less than the full amount thereof,
nor shall Silicon be deemed to be responsible for any of Borrower’s obligations
under any contract or agreement giving rise to an Account.  Nothing herein
shall, however, relieve Silicon from liability for its own gross negligence or
willful misconduct.

 

Section 5                                               ADDITIONAL DUTIES OF THE
BORROWER.

 

5.1                                 Financial and Other Covenants.  Borrower
shall at all times comply with the financial and other covenants set forth in
the Schedule.

 

5.2                                 Insurance.  Borrower shall, at all times
insure all of the tangible personal property Collateral and carry such other
business insurance, with insurers reasonably acceptable to Silicon, in such form
and amounts as Silicon may reasonably require and that are customary and in
accordance with standard practices for Borrower’s industry and locations, and
Borrower shall provide evidence of such insurance to Silicon.  All such
insurance policies shall name Silicon as an additional loss payee, and shall
contain a lenders loss payee endorsement in form reasonably acceptable to
Silicon.  Upon receipt of the proceeds of any such insurance, Silicon shall
apply such proceeds in reduction of the Obligations as Silicon shall determine
in its good faith business judgment, except that, provided no Default or Event
of Default has occurred and is continuing, Silicon shall release to Borrower
insurance proceeds, which shall be utilized by Borrower for the repair or
replacement of the Collateral or property with respect to which the insurance
proceeds were paid.  Silicon may require reasonable assurance that the insurance
proceeds so

 

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released will be so used.  If Borrower fails to provide or pay for any
insurance, Silicon may, but is not obligated to, obtain the same at Borrower’s
expense.  Borrower shall promptly deliver to Silicon copies of all material
reports made to insurance companies.

 

5.3                                 Reports.  Borrower, at its expense, shall
provide Silicon with the written reports set forth in the Schedule, and such
other written reports with respect to Borrower (including budgets, sales
projections, operating plans and other financial documentation) that are
prepared by Borrower in the ordinary course of business, as Silicon shall from
time to time reasonably specify in its good faith business judgment; it being
recognized by Silicon that the projections and forecasts provided by Borrower in
good faith are not to be viewed as facts and that actual results during the
period or periods covered by any such projections and forecasts may vary.

 

5.4                                 Access to Collateral, Books and Records.  At
reasonable times, and on one Business Day’s notice, Silicon, or its agents,
shall have the right to inspect the Collateral, and the right to audit and copy
Borrower’s books and records.  Such audits shall be conducted no more often than
once every three (3) months, provided no Event of Default has occurred and is
continuing. Such audits shall be conducted no more often than once every twelve
(12) months while Borrower is on “streamline reporting status” pursuant to
Section 6 of the Schedule hereto, provided no Event of Default has occurred and
is continuing.  Notwithstanding anything to the contrary in this Section 5.4,
while no Event of Default exists, Borrower will not be required to disclose or
permit the examination or inspection of any document, information or other
matter that (i) constitutes non-financial trade secrets or non-financial
proprietary information, (ii) in respect of which disclosure to Silicon (or its
representative) is then prohibited by applicable law or any agreement binding on
Borrower as of the date hereof which has been disclosed to Silicon in writing,
or (iii) is subject to attorney-client privilege.  Silicon shall take reasonable
steps to keep confidential all information obtained in any such inspection or
audit, but Silicon shall have the right to disclose any such information to its
auditors, regulatory agencies, and attorneys, and pursuant to any subpoena or
other legal process.  The foregoing inspections and audits shall be at
Borrower’s expense and the charge therefor shall be $750 per person per day plus
reasonable out-of-pocket expenses.

 

5.5                                 Negative Covenants.  So long as any
Obligations are outstanding (or Borrower has any ability to request Loans
hereunder) and except as may be permitted in the Schedule, Borrower shall not,
without Silicon’s prior written consent which shall be a matter of its good
faith business judgment, do any of the following:  (i) merge or consolidate with
another corporation or entity, or acquire any assets outside of the ordinary
course of Borrower’s business; provided, however, Borrower may merge or
consolidate with another corporation or entity, or acquire assets outside of the
ordinary course of Borrower’s business if (A) Borrower is the surviving legal
entity, (B) immediately after giving effect to such merger, consolidation or
acquisition, no Default or Event of Default shall have occurred and be
continuing, (C) at least 15 days’ prior to the effective date of the merger,
consolidation, or acquisition, Borrower gives written notice thereof to Silicon
and provides Silicon with such information regarding the same as Silicon shall
request in its good faith business judgment, and (D) the aggregate cash
consideration paid  (exclusive of any stock consideration) by Borrower for all
such mergers, consolidations, or acquisitions during the term hereof shall not
exceed the aggregate of (x) $1,000,000 and (y) the total net amount of cash
received by Borrower after the date hereof from the issuance of equity
securities in Borrower; (ii) enter into any other transaction outside the
ordinary course of business or reasonably related thereto; (iii) sell or
transfer any Collateral, except as expressly permitted by the other provisions
of this Section 5.5, and except that Borrower may do the following:  (A) sell
Inventory in the ordinary course of business, (B) enter into non-exclusive
licenses with respect to its Intellectual Property and exclusive licenses of
Intellectual Property to a licensee in or for a foreign territory or for a
specific filed of use, (C) dispose of obsolete or unneeded Equipment or
Inventory, (D) sales or transfers not otherwise permitted in this subsection, or
(E) make transfers constituting payments of trade payables, payments of
operating expenses and payments with respect to Permitted Indebtedness, all in
the ordinary course of business;

 

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(iii) which in the aggregate do not exceed $100,000 in any fiscal year; (iv)
store any Inventory or other Collateral with any warehouseman or other third
party, except for (A) as set forth on Representations and Warranties Certificate
or (B) if Borrower provides Silicon with prior written notice of new location;
(v) sell any Inventory on a sale-or-return, guaranteed sale, consignment, or
other contingent basis; (vi) make any loans of any money or other assets except
for (A) advances to employees in the ordinary course of business in an aggregate
amount outstanding for all such advances to all employees not to exceed $200,000
and employee draws in connection with their sales commissions in the ordinary
course of business, (B) other loans not otherwise permitted pursuant to this
Agreement, in an amount not to exceed $100,000 in any fiscal year, and (C)
extensions of credit in the nature of accounts receivable, prepaid royalties or
expenses, or notes receivable arising from the sale, lease, or license of goods
or the provision of services in the ordinary course of business, or performance
or similar deposits arising in the ordinary course of business or evidences of
indebtedness received in satisfaction or partial satisfaction of amounts owed by
financially troubled account debtors to the extent necessary to prevent or limit
loss; (vii) incur any Indebtedness other than Permitted Indebtedness; (viii)
guarantee or otherwise become liable with respect to the obligations of another
Person, except for guarantees of Permitted Indebtedness, endorsements of
negotiable instruments for deposit or collection in the ordinary course of
business and indemnification obligations arising in the ordinary course of
business; (ix) pay or declare any dividends on Borrower’s stock (other than
dividends or deemed dividends payable solely in shares of stock of Borrower);
(x) redeem, retire, purchase or otherwise acquire, directly or indirectly, any
of Borrower’s stock; (xi) make any change in Borrower’s capital structure which
would have a material adverse effect on Borrower or on the prospect of repayment
of the Obligations (except that Borrower may repurchase its capital stock (A) in
an aggregate amount not to exceed $200,000 in any fiscal year pursuant to
applicable stock repurchase plans or agreements and other similar plans or
agreements or by cancellation of indebtedness from employees, officers,
directors, and consultants, provided that no Default or Event of Default exists
immediately prior to or immediately after giving effect to such repurchases, (B)
with the proceeds of a substantially concurrent sale of its capital stock
provided that no Default or Event of Default exists immediately prior to or
immediately after giving effect to such repurchases, and (C) conversion of any
of its convertible securities into other securities pursuant to the terms of
such convertible securities or otherwise in exchange therefor; (xii) engage,
directly or indirectly, in any business other than the businesses currently
engaged in by Borrower or reasonably related thereto; or (xiii) dissolve or
elect to dissolve.  Transactions permitted by the foregoing provisions of this
Section are only permitted if no Default or Event of Default would occur as a
result of such transaction.

 

5.6                                 Litigation Cooperation.  Should any
third-party suit or proceeding be instituted by or against Silicon with respect
to any Collateral or relating to Borrower, Borrower shall, without expense to
Silicon, make available for reasonable periods of time Borrower and its
officers, employees and agents and Borrower’s books and records, to the extent
that Silicon may deem them reasonably necessary in order to prosecute or defend
any such suit or proceeding; provided that Borrower shall not be required to
make available any books, records, documents or information (i) that constitutes
non-financial trade secrets of non-financial proprietary information, (ii) in
respect of which disclosure to Silicon (or its representatives) is prohibited by
applicable law or any agreement binding on Borrower as of the date hereof which
has been disclosed to Silicon in writing, or (iii) that is subject to
attorney-client privilege.

 

5.7                                 Further Assurances.  Borrower agrees, at its
expense, on request by Silicon, to execute all documents and take all actions,
as Silicon may, in its good faith business judgment, deem necessary or useful in
order to perfect and maintain Silicon’s perfected first-priority security
interest in the Collateral (subject to Permitted Liens), and in order to fully
consummate the transactions contemplated by this Agreement.

 

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Section 6                                               TERM.

 

6.1                                 Maturity Date.  This Agreement shall
continue in effect until the maturity date set forth on the Schedule (the
“Maturity Date”) subject to Section 6.2 below.

 

6.2                                 Payment of Obligations.  On the Maturity
Date or on any earlier effective due date, Borrower shall pay and perform in
full all Obligations, whether evidenced by installment notes or otherwise, and
whether or not all or any part of such Obligations are otherwise then due and
payable.  Without limiting the generality of the foregoing, if on the Maturity
Date, or on any earlier effective date of termination, there are any outstanding
Letters of Credit issued by Silicon or issued by another institution based upon
an application, guarantee, indemnity or similar agreement on the part of
Silicon, then on such date Borrower shall provide to Silicon cash collateral in
an amount equal to 105% of the face amount of all such Letters of Credit plus
all interest, fees and cost due or to become due in connection therewith (as
estimated by Silicon in its good faith business judgment), to secure all of the
Obligations relating to said Letters of Credit, pursuant to Silicon’s then
standard form cash pledge agreement.  Notwithstanding any termination of this
Agreement, all of Silicon’s security interests in all of the Collateral and all
of the terms and provisions of this Agreement shall continue in full force and
effect until all Obligations have been paid and performed in full; provided that
Silicon may, in its sole discretion, refuse to make any further Loans after
termination.  No termination shall in any way affect or impair any right or
remedy of Silicon, nor shall any such termination relieve Borrower of any
Obligation to Silicon, until all of the Obligations have been paid and performed
in full.  Upon payment and performance in full of all the Obligations and
written termination of this Agreement by Silicon,  Silicon shall promptly
deliver to Borrower termination statements, requests for reconveyances and such
other documents as may be required to fully terminate Silicon’s security
interests.

 

Section 7                                               EVENTS OF DEFAULT AND
REMEDIES.

 

7.1                                 Events of Default.  The  occurrence of any
of the following events shall constitute an “Event of Default” under this
Agreement, and Borrower shall give Silicon immediate written notice thereof: (a)
Any warranty, representation, statement, report or certificate made or delivered
to Silicon by Borrower or any of Borrower’s officers, employees or agents, shall
be untrue or misleading in a material respect when made or deemed made; or
(b) Borrower shall fail to pay when due any Loan or any interest thereon or any
other monetary Obligation; or (c) the total Loans and other Obligations
outstanding at any time shall exceed the Credit Limit and Borrower shall have
failed to pay the excess within 2 Business Days; or (d) Borrower shall fail to
comply with any of the financial covenants set forth in the Schedule or shall
fail to perform any other non-monetary Obligation which by its nature cannot be
cured, or shall fail to permit Silicon to conduct an inspection or audit as
specified in Section 5.4 hereof; or (e) Borrower shall fail to perform any other
non-monetary Obligation, which failure is not cured within 10 Business Days
after the date due; or (f) any levy, assessment, attachment, seizure, lien or
encumbrance (other than a Permitted Lien) is made on all or any part of the
Collateral which is not cured within 20 days after the occurrence of the same,
or immediately upon the service of process upon Silicon seeking to attach by
trustee or other process, any of Borrower’s funds on deposit with, or assets of
the Borrower in the possession of, Silicon; or (g) any default or event of
default occurs under any obligation in an amount in excess of $250,000 secured
by a Permitted Lien, which is not cured within any applicable cure period or
waived in writing by the holder of the Permitted Lien; or (h) Borrower breaches
any material contract or obligation, which has or may reasonably be expected to
have a material adverse effect on Borrower’s business or financial condition; or
(i) Dissolution, termination of existence, insolvency or business failure of
Borrower; or appointment of a receiver, trustee or custodian, for all or any
part of the property of, assignment for the benefit of creditors by, or the
commencement of any proceeding by Borrower under any reorganization, bankruptcy,
insolvency, arrangement, readjustment of debt, dissolution or liquidation law or
statute of any jurisdiction, now or in the future in effect; or (j) the
commencement of any proceeding against Borrower or any guarantor of any of the
Obligations under any reorganization, bankruptcy, insolvency, arrangement,
readjustment of debt, dissolution or liquidation law or statute of any
jurisdiction, now or in the future in effect,

 

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which is not cured by the dismissal thereof within 30 days after the date
commenced; or (k) revocation or termination of, or limitation or denial of
liability upon, any pledge of any certificate of deposit, securities or other
property or asset of any kind pledged by any third party to secure any or all of
the Obligations, or any attempt to do any of the foregoing, or commencement of
proceedings by or against any such third party under any bankruptcy or
insolvency law; or (l) Borrower defaults under any agreement evidencing any
indebtedness to any third party in excess of $250,000; or (m) Borrower makes any
payment on account of any indebtedness or obligation in excess of $100,000 which
has been subordinated to the Obligations other than as permitted in the
applicable subordination agreement, or a default occurs under any instrument
evidencing such subordinated indebtedness in excess of $100,000, or the holder
of any such subordinated indebtedness in excess of $100,000 accelerates all or
any portion of such subordinated indebtedness or if any Person who has
subordinated such indebtedness or obligations terminates or in any way limits
his subordination agreement; or (n) direct or indirect acquisition, in one or
more transactions, by any person (as such term is used in Section 13(d) and
Section 14(d)(2) of the Exchange Act) of beneficial ownership of the issued and
outstanding shares of voting stock of Borrower, the result of which acquisition
is that such person or group possesses in excess of 50% of the combined voting
power of all then issued and outstanding stock of Borrower; or (o) Borrower
shall generally not pay its debts as they become due, or Borrower shall conceal,
remove or transfer any part of its property, with intent to hinder, delay or
defraud its creditors, or make or suffer any transfer of any of its property
which may be fraudulent under any bankruptcy, fraudulent conveyance or similar
law; or (p) there shall be (i) a material impairment in the perfection or
priority (subject to Permitted Liens) of Silicon’s security interest in the
Collateral or in the value of such Collateral; (ii) a material adverse change in
the business, operations  or condition (financial or otherwise) of the Borrower;
or (iii) a material impairment of the prospect of repayment of any portion of
the Obligations; or (q) Borrower shall breach any material term of the IP
Security Agreement.  Silicon may cease making any Loans hereunder during any of
the above cure periods, and thereafter if an Event of Default has occurred and
is continuing.

 

7.2                                 Remedies.  Upon the occurrence and during
the continuance of any Event of Default, Silicon, at its option, and without
notice or demand of any kind (all of which are hereby expressly waived by
Borrower), may do any one or more of the following: (a) Cease making Loans or
otherwise extending credit to Borrower under this Agreement or any other
document or agreement; (b) Accelerate and declare all or any part of the
Obligations to be immediately due, payable, and performable, notwithstanding any
deferred or installment payments allowed by any instrument evidencing or
relating to any Obligation; (c) Take possession of any or all of the Collateral
wherever it may be found, and for that purpose Borrower hereby authorizes
Silicon without judicial process to enter onto any of Borrower’s premises
without interference to search for, take possession of, keep, store, or remove
any of the Collateral, and remain on the premises or cause a custodian to remain
on the premises in exclusive control thereof, without charge for so long as
Silicon deems it reasonably necessary in order to complete the enforcement of
its rights under this Agreement or any other agreement; provided, however, that
should Silicon seek to take possession of any of the Collateral by court
process, Borrower hereby irrevocably waives to the extent permitted by law: (i)
any bond and any surety or security relating thereto required by any statute,
court rule or otherwise as an incident to such possession; (ii) any demand for
possession prior to the commencement of any suit or action to recover possession
thereof; and (iii) any requirement that Silicon retain possession of, and not
dispose of, any such Collateral until after trial or final judgment; (d) Require
Borrower to assemble any or all of the Collateral and make it available to
Silicon at places designated by Silicon which are reasonably convenient to
Silicon and Borrower, and to remove the Collateral to such locations as Silicon
may deem advisable; (e) Complete the processing, manufacturing or repair of any
Collateral prior to a disposition thereof and, for such purpose and for the
purpose of removal, Silicon shall have the right to use Borrower’s premises,
vehicles, hoists, lifts, cranes, and other Equipment and all other property
without charge; (f) Sell, lease or otherwise dispose of any of the Collateral,
in its condition at the time Silicon obtains possession of it or after further
manufacturing, processing or repair, at one or more public and/or private sales,
in lots or in bulk, for cash, exchange or other property, or on credit, and to
adjourn any such sale from time to

 

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time without notice other than oral announcement at the time scheduled for
sale.  Silicon shall have the right to conduct such disposition on Borrower’s
premises without charge, for such time or times as Silicon deems reasonable, or
on Silicon’s premises, or elsewhere and the Collateral need not be located at
the place of disposition.  Silicon may directly or through any affiliated
company purchase or lease any Collateral at any such public disposition, and if
permissible under applicable law, at any private disposition.  Any sale or other
disposition of Collateral shall not relieve Borrower of any liability Borrower
may have if any Collateral is defective as to title or physical condition or
otherwise at the time of sale; (g) Demand payment of, and collect any Accounts
and General Intangibles comprising Collateral and, in connection therewith,
Borrower irrevocably authorizes Silicon to endorse or sign Borrower’s name on
all collections, receipts, instruments and other documents, to take possession
of and open mail addressed to Borrower and remove therefrom payments made with
respect to any item of the Collateral or proceeds thereof, and, in Silicon’s
sole discretion, to grant extensions of time to pay, compromise claims and
settle Accounts and the like for less than face value; (h) Offset against any
sums in any of Borrower’s general, special or other Deposit Accounts with
Silicon against any or all the Obligations or place a “hold” on any account
maintained with Silicon 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; and (i)
Demand and receive possession of any of Borrower’s federal and state income tax
returns and the books and records utilized in the preparation thereof or
referring thereto.  All reasonable attorneys’ fees, expenses, costs, liabilities
and obligations incurred by Silicon with respect to the foregoing shall be added
to and become part of the Obligations, shall be due on demand, and shall bear
interest at a rate equal to the highest interest rate applicable to any of the
Obligations.  Without limiting any of Silicon’s rights and remedies, from and
after the occurrence and during the continuance of any Event of Default, the
interest rate applicable to the Obligations shall be increased by an additional
three percent (3%) per annum (the “Default Rate”).

 

7.3                                 Standards for Determining Commercial
Reasonableness.  To the extent permitted by law, Borrower and Silicon agree that
a sale or other disposition (collectively, “sale”) of any Collateral in
connection with the exercise of remedy by Silicon permitted under Section 7.2
hereof which complies with the following standards will conclusively be deemed
to be commercially reasonable:  (i) Notice of the sale is given to Borrower at
least ten (10) days prior to the sale, and, in the case of a public sale, notice
of the sale is published at least five (5) days before the sale in a newspaper
of general circulation in the county where the sale is to be conducted; (ii)
Notice of the sale describes the collateral in general, non-specific terms;
(iii) The sale is conducted at a place designated by Silicon, with or without
the Collateral being present; (iv) The sale commences at any time between 8:00
a.m. and 6:00 p.m.; (v) Payment of the purchase price in cash or by cashier’s
check or wire transfer is required; (vi) With respect to any sale of any of the
Collateral, Silicon may (but is not obligated to) direct any prospective
purchaser to ascertain directly from Borrower any and all information concerning
the same.  Silicon shall be free to employ other methods of noticing and selling
the Collateral, in its discretion, if they are commercially reasonable.

 

7.4                                 Power of Attorney.  Upon the occurrence and
during the continuance of any Event of Default, without limiting Silicon’s other
rights and remedies, Borrower grants to Silicon an irrevocable power of attorney
coupled with an interest, authorizing and permitting Silicon (acting through any
of its employees, attorneys or agents) at any time, at its option, but without
obligation, with or without notice to Borrower, and at Borrower’s reasonable
expense, to do any or all of the following, in Borrower’s name or otherwise, but
Silicon agrees to exercise the following powers in a commercially reasonable
manner:  (a) Execute on behalf of Borrower any documents that Silicon may, in
its good faith business judgment, deem advisable in order to perfect and
maintain Silicon’s security interest in the Collateral, or in order to exercise
a right of Borrower or Silicon, or in order to fully consummate all the
transactions contemplated under this Agreement, and all other present and future
agreements; (b) Execute on behalf of Borrower any document exercising,
transferring or assigning any option to purchase, sell or otherwise dispose of
or to lease (as lessor or lessee) any real or personal property which is part of
Silicon’s

 

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Collateral or in which Silicon has an interest; (c) Execute on behalf of
Borrower, any invoices relating to any Account, any draft against any Account
Debtor and any notice to any Account Debtor, any proof of claim in bankruptcy,
any Notice of Lien, claim of mechanic’s, materialman’s or other lien, or
assignment or satisfaction of mechanic’s, materialman’s or other lien; (d) Take
control in any manner of any cash or non-cash items of payment or proceeds of
Collateral; endorse the name of Borrower upon any instruments, or documents,
evidence of payment or Collateral that may come into Silicon’s possession; (e)
Endorse all checks and other forms of remittances received by Silicon; (f) Pay,
contest or settle any lien, charge, encumbrance, security interest and adverse
claim in or to any of the Collateral, or any judgment based thereon, or
otherwise take any action to terminate or discharge the same; (g) Grant
extensions of time to pay, compromise claims and settle Accounts and General
Intangibles for less than face value and execute all releases and other
documents in connection therewith; (h) Pay any sums required on account of
Borrower’s taxes or to secure the release of any liens therefor, or both; (i)
Settle and adjust, and give releases of, any insurance claim that relates to any
of the Collateral and obtain payment therefor; (j) Instruct any third party
having custody or control of any books or records belonging to, or relating to,
Borrower to give Silicon the same rights of access and other rights with respect
thereto as Silicon has under this Agreement; and (k) Take any action or pay any
sum required of Borrower pursuant to this Agreement and any other present or
future agreements.  Any and all reasonable sums paid and any and all reasonable
costs, expenses, liabilities, obligations and attorneys’ fees incurred by
Silicon with respect to the foregoing shall be added to and become part of the
Obligations, shall be payable on demand, and shall bear interest at a rate equal
to the highest interest rate applicable to any of the Obligations.  In no event
shall Silicon’s rights under the foregoing power of attorney or any of Silicon’s
other rights under this Agreement be deemed to indicate that Silicon is in
control of the business, management or properties of Borrower.

 

7.5                                 Application of Proceeds.  All proceeds
realized as the result of any sale of the Collateral shall be applied by Silicon
first to the reasonable costs, expenses, liabilities, obligations and attorneys’
fees incurred by Silicon in the exercise of its rights under this Agreement,
second to the interest due upon any of the Obligations, and third to the
principal of the Obligations, in such order as Silicon shall determine in its
sole discretion.  Any surplus shall be paid to Borrower or other persons legally
entitled thereto; Borrower shall remain liable to Silicon for any deficiency. 
If, Silicon, in its good faith business judgment, directly or indirectly enters
into a deferred payment or other credit transaction with any purchaser at any
sale of Collateral, Silicon shall have the option, exercisable at any time, in
its good faith business judgment, of either reducing the Obligations by the
principal amount of purchase price or deferring the reduction of the Obligations
until the actual receipt by Silicon of the cash therefor.

 

7.6                                 Remedies Cumulative.  In addition to the
rights and remedies set forth in this Agreement, Silicon shall have all the
other rights and remedies accorded a secured party under the Code and under all
other applicable laws, and under any other instrument or agreement now or in the
future entered into between Silicon and Borrower, and all of such rights and
remedies are cumulative and none is exclusive.  Exercise or partial exercise by
Silicon of one or more of its rights or remedies shall not be deemed an
election, nor bar Silicon from subsequent exercise or partial exercise of any
other rights or remedies.  The failure or delay of Silicon to exercise any
rights or remedies shall not operate as a waiver thereof, but all rights and
remedies shall continue in full force and effect until all of the Obligations
have been fully paid and performed.

 

Section 8                                               DEFINITIONS.

 

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

 

“Accounts” means all of Borrower’s now owned and hereafter acquired accounts as
defined in the Code and all accounts receivable, health-care insurance
receivables, rights to payment, letters of credit, contract rights,

 

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chattel paper, instruments, securities, securities accounts, investment
property, documents and all other forms of obligations at any time owing to
Borrower, all guaranties and other security therefor, all merchandise returned
to or repossessed by Borrower, and all rights of stoppage in transit and all
other rights or remedies of an unpaid vendor, lienor or secured party.

 

“Account Debtor” means the obligor on an Account.

 

“Affiliate” means, with respect to any Person, a relative, partner, shareholder,
director, officer, or employee of such Person, or any parent or subsidiary of
such Person, or any Person controlling, controlled by or under common control
with such Person.

 

“Business Day” means a day on which Silicon is open for business.

 

“Cash Management Services” means Silicon’s cash management services, direct
deposit of payroll, business credit card, and check cashing services as may be
further identified in the various cash management services agreements related to
such Cash Management Services.

 

“Code” means the Uniform Commercial Code as adopted and in effect in the State
of California from time to time.

 

“Collateral” has the meaning set forth in Section 2.1 above.

 

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

 

“Default” means any event which with notice or passage of time or both, would
constitute an Event of Default.

 

“Default Rate” has the meaning set forth in Section 7.2 above.

 

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

 

“Deposit Account” has the meaning set forth in Section 9-102 of the Code.

 

“Eligible Accounts” means Accounts, General Intangibles, and Payment Intangibles
arising in the ordinary course of Borrower’s business from the sale of goods or
the rendition of services, or the non-exclusive licensing of Intellectual
Property, which Silicon, in its good faith business judgment, shall deem
eligible for borrowing.  Without

 

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limiting the fact that the determination of which Accounts are eligible for
borrowing is a matter of Silicon’s discretion, the following (the “Minimum
Eligibility Requirements”) are the minimum requirements for an Account to be  an
Eligible Account:  (i) the Account must not be outstanding for more than 90 days
from its invoice date, (ii) the Account must not represent progress billings, be
due under a fulfillment or requirements contract  with the Account Debtor,
(iii)  the Account must not be subject to any contingencies (including Accounts
arising from sales on consignment, guaranteed sale or other terms pursuant to
which payment by the Account Debtor may be conditional, except as may otherwise
be acceptable to Silicon in its discretion), (iv) the Account must not be owing
from an Account Debtor with whom the Borrower has any dispute (whether or not
relating to the particular Account), (v) the Account must not be owing from an
Affiliate of Borrower, (vi) the Account must not be owing from an Account Debtor
which is subject to any insolvency or bankruptcy proceeding, or whose financial
condition is not reasonably acceptable to Silicon, or which, fails or goes out
of a material portion of its business, (vii) the Account must not be owing from
the United States or any department, agency or instrumentality thereof (unless
there has been compliance, to Silicon’s reasonable satisfaction, with the United
States Assignment of Claims Act), (viii) the Account must not be owing from an
Account Debtor located outside the United States (unless pre-approved by Silicon
in its discretion in writing, or backed by a letter of credit satisfactory to
Silicon, or FCIA insured satisfactory to Silicon), and (ix) the Account must not
be owing from an Account Debtor to whom Borrower is or may be liable for goods
purchased from such Account Debtor or otherwise, and (x) the Account must not
have a credit balance over 90 days from invoice date.  Accounts owing from one
Account Debtor will not be deemed Eligible Accounts to the extent they exceed
25% of the total Accounts outstanding.  In addition, if more than 50% of the
Accounts owing from an Account Debtor are outstanding more than 90 days from
their invoice date (without regard to unapplied credits) or are otherwise not
Eligible Accounts, then all Accounts owing from that Account Debtor will be
deemed ineligible for borrowing.  Silicon may, from time to time, in its good
faith business judgment, revise the Minimum Eligibility Requirements, upon 10
days’ prior written notice to the Borrower.

 

“Eligible Inventory” means Borrower’s raw materials and finished goods located
in the United States at a location of Borrower listed on the Representations and
Warranties Certificate or another location in the United States of which
Borrower gives Silicon notice pursuant to this Agreement which Silicon, in its
commercially reasonable business judgment, shall deem eligible for borrowing
pursuant to the terms of this Agreement, but does not include, in any event, (i)
used, returned, obsolete, consigned, demonstrative or custom Inventory, or
supplies, or (ii) any raw materials and finished goods not subject to a
perfected security interest in favor of Silicon, or (iii) any of Borrower’s raw
materials or finished goods not in Borrower’s possession (unless such raw
materials or finished goods are at a warehouse location listed on the
Representations and Warranties Certificate or another location in the United
States of which Borrower gives Silicon notice pursuant to this Agreement and
such warehouseman has executed a waiver agreement reasonably satisfactory to
Silicon).

 

“Equipment” means all of Borrower’s present and hereafter acquired machinery,
molds, machine tools, motors, furniture, equipment, furnishings, fixtures, trade
fixtures, motor vehicles, tools, parts, dyes, jigs, goods and other tangible
personal property (other than Inventory) of every kind and description used in
Borrower’s operations or owned by Borrower and any interest in any of the
foregoing, and all attachments, accessories, accessions, replacements,
substitutions, additions or improvements to any of the foregoing, wherever
located.

 

“Event of Default” means any of the events set forth in Section 7.1 of this
Agreement.

 

“GAAP” means generally accepted accounting principles, consistently applied.

 

“General Intangibles” means all general intangibles of Borrower, whether now
owned or hereafter created or acquired by Borrower, including, without
limitation, all choses in action, rights to payment for credit extended,

 

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amounts due to Borrower, credit memoranda in favor of Borrower, warranty claims,
causes of action, corporate or other business records, deposits, inventions,
designs, drawings, blueprints, patents, patent applications, trademarks and the
goodwill of the business symbolized thereby, names, trade names, trade secrets,
goodwill, copyrights, registrations, licenses, franchises, customer lists,
security  and other deposits, rights in all litigation presently or hereafter
pending for any cause or claim (whether in contract, tort or otherwise), and all
judgments now or hereafter arising therefrom, all claims of Borrower against
Silicon, rights to purchase or sell real or personal property, rights as a
licensor or licensee of any kind, royalties, telephone numbers, proprietary
information, purchase orders, and all insurance policies and claims (including
without limitation life insurance, key man insurance, credit insurance,
liability insurance, property insurance and other insurance), tax refunds and
claims, computer programs, discs, tapes and tape files, claims under guaranties,
security interests or other security held by or granted to Borrower, all rights
to indemnification and all other intangible property of every kind and nature
(other than Accounts).

 

“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.

 

“Intellectual Property” is the Intellectual Property Collateral, as defined in
the IP Security Agreement.

 

“IP Security Agreement” means that certain Intellectual Property Security
Agreement of even date herewith by and between Borrower and Silicon.

 

“Inventory” means all of Borrower’s now owned and hereafter acquired goods,
merchandise or other personal property, wherever located, to be furnished under
any contract of service or held for sale or lease (including without limitation
all raw materials, work in process, finished goods and goods in transit), and
all materials and supplies of every kind, nature and description which are or
might be used or consumed in Borrower’s business or used in connection with the
manufacture, packing, shipping, advertising, selling or finishing of such goods,
merchandise or other personal property, and all warehouse receipts, documents of
title and other documents representing any of the foregoing.

 

“Letter-of-Credit Rights” means all letter-of-credit rights including, without
limitation, “letter-of-credit rights” as defined in the Code and also any right
to payment or performance under a letter of credit, whether or not the
beneficiary has demanded or is at the time entitled to demand payment or
performance.

 

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

 

“Loan Documents” means, collectively, this Agreement, the Representations and
Warranties Certificate, the IP Security Agreement, and all other present and
future documents, instruments and agreements between Silicon and Borrower,
including, but not limited to those relating to this Agreement, and all
amendments and modifications thereto and replacements therefor.

 

“Obligations” means all present and future Loans, advances, debts, liabilities,
obligations, guaranties, covenants, duties and indebtedness at any time owing by
Borrower to Silicon, whether evidenced by this Agreement or any note or other
instrument or document, including, without limitation, the  Borrower’s
obligations pursuant to the IP Security Agreement, whether arising from an
extension of credit, opening of a letter of credit, banker’s acceptance, foreign
exchange contracts, loan, Cash Management Services, guaranty, indemnification or
otherwise, whether direct or indirect (including, without limitation, those
acquired by assignment and any participation by Silicon in Borrower’s debts
owing to others), absolute or contingent, due or to become due, including,
without

 

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limitation, all interest, charges, expenses, fees, attorney’s fees, expert
witness fees, audit fees, letter of credit fees, collateral monitoring fees,
closing fees, facility fees, termination fees, minimum interest charges and any
other sums chargeable to Borrower under this Agreement or under any other
present or future instrument or agreement between Borrower and Silicon.

 

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

 

“Payment Intangibles” means all payment intangibles including, without
limitation, “payment intangibles” as defined in the Code and also any general
intangible under which the Account Debtor’s primary obligation is a monetary
obligation.

 

“Permitted Indebtedness” is: (a) Borrower’s indebtedness to Silicon under this
Agreement or any other Loan Document; (b) Indebtedness existing on the Closing
Date and shown on the Representations and Warranties Certificate; (c)
Subordinated Debt; (d) trade debt incurred in the ordinary course of business;
(e) Indebtedness secured by Permitted Liens; (f) Indebtedness with respect to
surety bonds and similar obligations incurred in the ordinary course of
business, (g) other Indebtedness not otherwise permitted pursuant to this
definition of Permitted Indebtedness, in an amount not to exceed $50,000, (h)
extensions, refinancings, modifications, amendments and restatements of any item
of permitted indebtedness (a) through (g); provided, however, that the principal
amount thereof is not increased or the terms thereof are not modified to impose
more burdensome terms upon Borrower.

 

“Permitted Liens” means the following: (i) purchase money security interests in
specific items of Equipment (and additions, accessions, parts, replacements,
fixtures, improvements and accessions to, and the proceeds of, such Equipment)
in an amount not to exceed $250,000 in the aggregate amount outstanding any time
during the term of this Agreement; (ii) liens arising in connection with leases
of specific items of Equipment (and additions, accessions, parts, replacements,
fixtures, and improvements and accessions to, and the proceeds of, such
Equipment) in an amount not to exceed $250,000 in the aggregate amount
outstanding any time during the term of this Agreement; (iii) liens for taxes or
other governmental or regulatory assessments not yet payable or which are
contested in good faith by the appropriate procedures and for which appropriate
reserves are maintained; (iv) additional security interests and liens consented
to in writing by Silicon, which consent may be withheld in its good faith
business judgment; (v) security interests being terminated substantially
concurrently with this Agreement; (vi) liens of materialmen, mechanics,
warehousemen, carriers, landlords or other similar liens arising in the ordinary
course of business and securing obligations which are not delinquent or are
being contested in good faith by appropriate proceedings; (vii) liens incurred
in connection with the extension, renewal or refinancing of the indebtedness
secured by liens of the type described above in clauses (i) or (ii) above,
provided that any extension, renewal or replacement lien is limited to the
property encumbered by the existing lien and the principal amount of the
indebtedness being extended, renewed or refinanced does not increase; (viii)
liens in favor of customs and revenue authorities which secure payment of
customs duties in connection with the importation of goods, (ix) liens in favor
of Silicon, (x) bankers’ liens, rights of setoff and similar liens incurred on
deposits made in the ordinary course of business (but only to the extent such
banker’s liens, rights of set-off or other rights are in respect of customary
service charges relative to such deposit accounts and other funds, and not in
respect of any loans or other extensions of credit by such bank or other
financial institution to Borrower), (xi) any judgment, attachment or similar
lien, unless the judgment it secures has not been discharged or execution
thereof effectively stayed and bonded against pending appeal within 30 days of
the entry thereof, (xii) licenses or sublicenses of Intellectual Property in the
ordinary course of Borrower’s business and exclusive licenses of Intellectual
Property to a licensee in or for a foreign territory or for a specific field of
use, (xiii) cash deposits or pledges or other Liens to secure the

 

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payment of worker’s compensation, unemployment insurance or other social
security benefits or obligations, public or statutory obligations, surety or
appeal bonds, bid or performance bonds, leases or other obligations incurred in
the ordinary course of business, (xiv) liens existing as of the date hereof and
listed on Schedule 2 hereto, (xv) liens subordinated to the liens of Silicon (on
terms acceptable to Silicon), (xvi) liens on insurance proceeds in favor of
insurance companies granted solely as security for financed premiums, (xvii)
leases or subleases granted to others in the ordinary course of business, and
(xviii) customary liens granted in favor of trustees to secure fees and other
amounts owing to such trustee under an indenture or other agreement pursuant to
which Permitted Indebtedness is issued.  Silicon will have the right to require,
as a condition to its consent under subsection (iv) above, that the holder of
the additional security interest or lien sign an intercreditor agreement on
Silicon’s then standard form, acknowledge that the security interest is
subordinate to the security interest in favor of Silicon, and agree not to take
any action to enforce its subordinate security interest so long as any
Obligations remain outstanding, and that Borrower agree that any uncured default
in any obligation secured by the subordinate security interest shall also
constitute an Event of Default under this Agreement.

 

“Person” means any individual, sole proprietorship, partnership, joint venture,
trust, unincorporated organization, association, corporation, government, or any
agency or political division thereof, or any other entity.

 

“Representations and Warranties Certificate” means that certain Representations
and Warranties letter agreement dated                      , 2004 executed by
Borrower in favor of Silicon.

 

“Reserves” means, as of any date of determination, such amounts as Silicon may
from time to time establish and revise in good faith upon prior notice to
Borrower reducing the amount of Loans, Letters of Credit and other financial
accommodations which would otherwise be available to Borrower under the lending
formula(s) provided in the Schedule:  (a) to reflect specific events or
conditions which, as reasonably determined by Silicon in good faith, would
materially and adversely affect (i) the Collateral, or (ii) the security
interests and other rights of Silicon in the Collateral (including the
enforceability, perfection and priority thereof); or (b) to reflect Silicon’s
good faith and commercially reasonable belief that any Collateral report or
financial information furnished by or on behalf of Borrower or any guarantor to
Silicon is and remains after notice and opportunity to cure incomplete,
inaccurate or misleading in any material respect; or (c) in respect of any state
of facts which Silicon determines in good faith constitutes an Event of Default
or is reasonably likely to, with notice or passage of time or both, constitute
an Event of Default.

 

“Subordinated Debt” is debt incurred by Borrower subordinated to Borrower’s debt
to Silicon on terms acceptable to Silicon pursuant to a subordination agreement
entered into between Silicon, Borrower and the subordinated creditor, or
pursuant to the terms of such debt, if such terms are approved in writing by
Silicon.  Silicon hereby acknowledges and agrees that the subordination terms of
a certain Subordinated Promissory Note dated November 7, 2002 made by Borrower
and payable to Tektronix, Inc., a copy of which has been previously delivered to
Silicon prior to the date hereof, are acceptable to Silicon and such promissory
note constitutes Subordinated Debt for the purposes of this Agreement.

 

“Supporting Obligations” means all supporting obligations including, without
limitation, “supporting obligations” as defined in the Code and also any
letter-of-credit right or secondary obligation which supports the payment or
performance of an account, chattel paper, a document, a general intangible, an
instrument, or investment property.

 

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Other Terms.  All accounting terms used in this Agreement, unless otherwise
indicated, shall have the meanings given to such terms in accordance with GAAP. 
All other terms contained in this Agreement, unless otherwise indicated, shall
have the meanings provided by the Code, to the extent such terms are defined
therein.

 

Section 9                                               GENERAL PROVISIONS.

 

9.1                                 Interest Computation; Float Charge.  In
computing interest on the Obligations, all Payments received after 12:00 Noon on
any day shall be deemed received on the next Business Day.  In addition, except
when Borrower is on “streamline reporting status” pursuant to Section 6 of the
Schedule hereto, Silicon shall be entitled to charge Borrower a “float” charge
in an amount equal to two Business Days interest, at the interest rate
applicable to the Loans, on all Payments received by Silicon.  Said float charge
is not included in interest for purposes of computing Minimum Monthly Interest
(if any) under this Agreement.  The float charge for each month shall be payable
on the last day of the month. Silicon shall not, however, be required to credit
Borrower’s account for the amount of any item of payment which is unsatisfactory
to Silicon in its good faith business judgment, and Silicon may charge
Borrower’s loan account for the amount of any item of payment which is returned
to Silicon unpaid.

 

9.2                                 Application of Payments.  All payments with
respect to the Obligations may be applied, and in Silicon’s good faith business
judgment reversed and re-applied, to the Obligations, in such order and manner
as Silicon shall determine in its good faith business judgment.

 

9.3                                 Charges to Accounts.  Silicon may, in its
discretion, require that Borrower pay monetary Obligations in cash to Silicon,
or, if not paid as and when due, charge them to Borrower’s Loan account, in
which event they will bear interest at the same rate applicable to the Loans. 
Silicon may also, in its discretion, charge any monetary Obligations to
Borrower’s Deposit Accounts maintained with Silicon.

 

9.4                                 Monthly Accountings.  Silicon shall provide
Borrower monthly with an account of advances, charges, expenses and payments
made pursuant to this Agreement.  Such account shall be deemed correct, accurate
and binding on Borrower and an account stated (except for reverses and
reapplications of payments made and corrections of errors discovered by
Silicon), unless Borrower notifies Silicon in writing to the contrary within
sixty (60) days after each account is rendered, describing the nature of any
alleged errors or omissions.

 

9.5                                 Notices.  All notices to be given under this
Agreement shall be in writing and shall be given either personally or by
reputable private delivery service or by regular first-class mail, or certified
mail return receipt requested, addressed to Silicon or Borrower at the addresses
shown in the preamble or heading, respectively, to this Agreement, or at any
other address designated in writing by one party to the other party.  Notices to
Silicon shall be directed to the Commercial Finance Division, to the attention
of the Division Manager or the Division Credit Manager.  All notices shall be
deemed to have been given upon delivery in the case of notices personally
delivered, or at the expiration of one Business Day following delivery to the
private delivery service, or two Business Days following the deposit thereof in
the United States mail, with postage prepaid.

 

9.6                                 Severability.  Should any provision of this
Agreement be held by any court of competent jurisdiction to be void or
unenforceable, such defect shall not affect the remainder of this Agreement,
which shall continue in full force and effect.

 

9.7                                 Integration.  This Agreement and such other
written agreements, documents and instruments as may be executed in connection
herewith are the final, entire and complete agreement between Borrower and
Silicon and supersede all prior and contemporaneous negotiations and oral
representations and agreements, all of which are

 

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merged and integrated in this Agreement.  There are no oral understandings,
representations or agreements between the parties which are not set forth in
this Agreement or in other written agreements signed by the parties in
connection herewith.

 

9.8                                 Waivers; Indemnity.  The failure of Silicon
at any time or times to require Borrower to strictly comply with any of the
provisions of this Agreement or any other present or future agreement between
Borrower and Silicon shall not waive or diminish any right of Silicon later to
demand and receive strict compliance therewith.  Any waiver of any default shall
not waive or affect any other default, whether prior or subsequent, and whether
or not similar.  None of the provisions of this Agreement or any other agreement
now or in the future executed by Borrower and delivered to Silicon shall be
deemed to have been waived by any act or knowledge of Silicon or its agents or
employees, but only by a specific written waiver signed by an authorized officer
of Silicon and delivered to Borrower.  To the extent permitted by law, Borrower
waives the benefit of all statutes of limitation relating to any of the
Obligations or this Agreement or any document related hereto, and to the extent
permitted by law, Borrower waives demand, protest, notice of protest and notice
of default or dishonor, notice of payment and nonpayment, release, compromise,
settlement, extension or renewal of any commercial paper, instrument, account,
General Intangible, document or guaranty at any time held by Silicon on which
Borrower is or may in any way be liable, and notice of any action taken by
Silicon, unless expressly required by this Agreement.  Borrower hereby agrees to
indemnify Silicon and its affiliates, subsidiaries, parent, directors, officers,
employees, agents, and attorneys, and to hold them harmless from and against any
and all claims, debts, liabilities, demands, obligations, actions, causes of
action, penalties, costs and expenses (including reasonable attorneys’ fees), of
every kind, which they may sustain or incur based upon or arising out of any of
the Obligations, or any relationship or agreement between Silicon and Borrower,
or any other matter, relating to Borrower or the Obligations; provided, that
this indemnity shall not extend to damages, claims, debts, liabilities, demands,
obligations, actions, causes of action, penalties, costs and expenses
proximately caused by the indemnitee’s own gross negligence or willful
misconduct.  Notwithstanding any provision in this Agreement to the contrary,
the indemnity agreement set forth in this Section shall survive any termination
of this Agreement and shall for all purposes continue in full force and effect.

 

9.9                                 No Liability for Ordinary Negligence. 
Neither Silicon, nor any of its directors, officers, employees, agents,
attorneys or any other Person affiliated with or representing Silicon shall be
liable for any claims, demands, losses or damages, of any kind whatsoever, made,
claimed, incurred or suffered by Borrower or any other party through the
ordinary negligence of Silicon, or any of its directors, officers, employees,
agents, attorneys or any other Person affiliated with or representing Silicon,
but nothing herein shall relieve Silicon from liability for its own gross
negligence or willful misconduct.

 

9.10                           Amendment.  The terms and provisions of this
Agreement may not be waived or amended, except in a writing executed by Borrower
and a duly authorized officer of Silicon.

 

9.11                           Time of Essence.  Time is of the essence in the
performance by Borrower of each and every obligation under this Agreement.

 

9.12                           Attorneys Fees and Costs.  Borrower shall
reimburse Silicon for all reasonable attorneys’ fees and all filing, recording,
search, title insurance, appraisal, audit, and other reasonable costs incurred
by Silicon, pursuant to, or in connection with, or relating to this Agreement
(whether or not a lawsuit is filed), including, but not limited to, any
reasonable attorneys’ fees and costs Silicon incurs in order to do the
following: prepare and negotiate this Agreement and all present and future
documents relating to this Agreement; obtain legal advice in connection with
this Agreement or Borrower; enforce, or seek to enforce, any of its rights;
prosecute actions against, or defend actions by, Account Debtors; commence,
intervene in, or defend any action or proceeding; initiate any complaint to

 

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be relieved of the automatic stay in bankruptcy; file or prosecute any probate
claim, bankruptcy claim, third-party claim, or other claim; examine, audit,
copy, and inspect any of the Collateral or any of Borrower’s books and records;
protect, obtain possession of, lease, dispose of, or otherwise enforce Silicon’s
security interest in, the Collateral; and otherwise represent Silicon in any
litigation relating to Borrower.  In satisfying Borrower’s obligation hereunder
to reimburse Silicon for attorneys fees, Borrower may, for convenience, issue
checks directly to Silicon’s attorneys, Riemer & Braunstein, LLP, but Borrower
acknowledges and agrees that Riemer & Braunstein, LLP is representing only
Silicon and not Borrower in connection with this Agreement.  If either Silicon
or Borrower files any lawsuit against the other predicated on a breach of this
Agreement, Silicon shall be entitled to recover its reasonable costs and
attorneys’ fees, including (but not limited to) reasonable attorneys’ fees and
costs incurred in the enforcement of, execution upon or defense of any order,
decree, award or judgment.  All attorneys’ fees and costs to which Silicon may
be entitled pursuant to this Section 9.12 shall immediately become part of
Borrower’s Obligations, shall be due on demand, and shall bear interest at a
rate equal to the highest interest rate applicable to any of the Obligations.

 

9.13                           Benefit of Agreement.  The provisions of this
Agreement shall be binding upon and inure to the benefit of the respective
successors, assigns, heirs, beneficiaries and representatives of Borrower and
Silicon; provided, however, that Borrower may not assign or transfer any of its
rights under this Agreement without the prior written consent of Silicon, and
any prohibited assignment shall be void.  No consent by Silicon to any
assignment shall release Borrower from its liability for the Obligations.

 

9.14                           Joint and Several Liability. If Borrower consists
of more than one Person, their liability shall be joint and several, and the
compromise of any claim with, or the release of, any Borrower shall not
constitute a compromise with, or a release of, any other Borrower.

 

9.15                           Limitation of Actions.  Any claim or cause of
action by Borrower against Silicon, its directors, officers, employees, agents,
accountants or attorneys, based upon, arising from, or relating to this
Agreement or any Loan Document shall be barred unless asserted by Borrower by
the commencement of an action or proceeding in a court of competent jurisdiction
by the filing of a complaint within the earlier to occur of (i) one year after
the discovery of the act, occurrence or omission upon which such claim or cause
of action is based, and the service of a summons and complaint on an officer of
Silicon, or on any other person authorized to accept service on behalf of
Silicon, within thirty (30) days thereafter, or (ii) three years from the date
of this Agreement, or if later, one year from the Maturity Date of this
Agreement if such Maturity Date is extended pursuant to an amendment or
modification of this Agreement.  Borrower agrees that such period is a
reasonable and sufficient time for Borrower to investigate and act upon any such
claim or cause of action.  The period provided herein shall not be waived,
tolled, or extended except by the written consent of Silicon in its sole
discretion.  This provision shall survive any termination of this Agreement or
any other present or future agreement.

 

9.16                           Section Headings; Construction.  Section headings
are only used in this Agreement for convenience.  Borrower and Silicon
acknowledge that the headings may not describe completely the subject matter of
the applicable section, and the headings shall not be used in any manner to
construe, limit, define or interpret any term or provision of this Agreement. 
The term “including”, whenever used in this Agreement, shall mean “including
(but not limited to)”.  This Agreement has been fully reviewed and negotiated
between the parties and no uncertainty or ambiguity in any term or provision of
this Agreement shall be construed strictly against Silicon or Borrower under any
rule of construction or otherwise.

 

9.17                           Governing Law; Jurisdiction; Venue.  This
Agreement and all acts and transactions hereunder and all rights and obligations
of Silicon and Borrower shall be governed by the laws of the State of
California.  As a

 

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material part of the consideration to Silicon to enter into this Agreement,
Borrower (i) agrees that all actions and proceedings relating directly or
indirectly to this Agreement shall, at Silicon’s option, be litigated in state
or federal courts located within California; (ii) consents to the jurisdiction
and venue of any such court and consents to service of process in any such
action or proceeding by personal delivery or any other method permitted by law;
and (iii) waives any and all rights Borrower may have to object to the
jurisdiction of any such court, or to transfer or change the venue of any such
action or proceeding.

 

9.18                           Mutual Waiver of Jury Trial.  BORROWER AND
SILICON EACH HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING
BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY
OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN SILICON AND BORROWER, OR
ANY CONDUCT, ACTS OR OMISSIONS OF SILICON OR BORROWER OR ANY OF THEIR DIRECTORS,
OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH
SILICON OR BORROWER, IN ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT
OR TORT OR OTHERWISE.

 

9.19                           Confidentiality.  In handling any confidential
information, Silicon shall exercise the same degree of care that it exercises
for its own proprietary information, but disclosure of information may be made: 
(i) to Silicon’s subsidiaries or affiliates in connection with their present or
prospective business relations with Borrower; (ii) to prospective transferees or
purchasers of any interest in the Loans (provided, however, Silicon shall use
commercially reasonable efforts in obtaining such prospective transferee’s or
purchaser’s agreement to the terms of this provision); (iii) as required by law,
regulation, subpoena, or other order; (iv) as required in connection with
Silicon’s examination or audit; and (v) as Silicon considers appropriate in
exercising remedies under this Agreement.  Confidential information does not
include information that either:  (a) is in the public domain or in Silicon’s
possession when disclosed to Silicon, or becomes part of the public domain after
disclosure to Silicon (through no act or omission of Silicon); or (b) is
disclosed to Silicon by a third party, which third party is not under any
non-disclosure obligation.

 

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the date first above written.

 

 

BORROWER:

 

 

 

TUT SYSTEMS, INC.

 

 

 

 

 

By

 

/s/ Randall K. Gausman

 

 

Name: Randall K. Gausman

 

Title: Chief Financial Officer

 

 

 

 

 

SILICON:

 

 

 

SILICON VALLEY BANK

 

 

 

 

 

By

 

/s/ Bruce Helberg

 

 

Name: Bruce Helberg

 

Title:

 

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SILICON VALLEY BANK

 

SCHEDULE TO

 

LOAN AND SECURITY AGREEMENT

 

Borrower:

TUT SYSTEMS, INC., a Delaware corporation

 

 

Address:

6000 SW Meadows Drive, Suite 200
Lake Oswego, Oregon 97035

 

 

Date:

September 23, 2004

 

This Schedule forms an integral part of the Loan and Security Agreement between
Silicon Valley Bank and the above-borrower of even date.

 

Section 1                                             Credit Limit

 

(Section 1.1):                           An amount not to exceed the lesser of
(A) or (B), below:

 

(A)                              (i)                                    
$7,000,000.00 (the “Maximum Credit Limit”); minus

 

(ii)                                  the aggregate amounts then undrawn on all
outstanding letters of credit, foreign exchange contracts, or any other
accommodations issued or incurred, or caused to be issued or incurred by Silicon
for the account and/or benefit of the Borrower.

 

(B)                                (i)                                     75%
of the amount of the Borrower’s Eligible Accounts, net of any offsets related to
each specific Account Debtor, including, without limitation, Deferred Revenue;
provided, however, Silicon will not net Deferred Revenue when Borrower is on
“streamline reporting status” pursuant to Section 6, below; plus

 

(ii)                                  the lesser of (a) 25% of Borrower’s
Eligible Inventory (valued at the lower of actual cost or fair market value) or
(b) $1,400,000.00; provided, however, in no event shall advances based upon
Borrower’s Eligible Inventory exceed 30% of the amount of Borrower’s Eligible
Accounts; minus

 

(iii)                               the aggregate amounts then undrawn on all
outstanding letters of credit, foreign exchange contracts, or any other
accommodations issued or incurred, or caused to be issued or incurred by Silicon
for the account and/or benefit of the Borrower.

 

Silicon may, from time to time, modify the advance rate(s) set forth herein in
its good faith business judgment upon  10 day prior written notice to Borrower
based on changes in collection experience with respect to the Accounts or other
issues or factors relating to the Accounts or the Collateral.

 

Letter of Credit/Foreign Exchange Contract Sublimit (Section 1.6, and 1.7):

 

$500,000.00

 

Cash Management Services Sublimit  (Section 1.8):

 

$500,000.00

 

Section 2                                             INTEREST.

 

Interest Rate (Section 1.2):

 

A rate equal to the Base Rate plus 1.50% per annum; provided, however, in the
event Borrower is on “streamline reporting status” pursuant to Section 6, below,
such rate shall be reduced to a rate equal to the Base Rate plus 0.50% per
annum, to be effective as of the first day of any month in which Borrower is on
“streamline reporting status”.  Interest shall be calculated on the basis of a
360-day year for the actual number of days elapsed.  As used herein, “Base Rate”
means the greater of (i) 4.25%, or (ii) the rate announced from time to time by
Silicon as its “prime rate;” it is a base rate upon which other rates charged by
Silicon are based, and it is not necessarily the best rate available at
Silicon.  The interest rate applicable to the Obligations shall change on each
date there is a change in the Base Rate.

 

Minimum Monthly Interest (Section 1.2):   Not applicable.

 

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Section 3                                             FEES

 

(Section 1.4):

 

Loan Fee:                                            $35,000.00 payable
concurrently herewith, and $35,000.00 payable on the one year anniversary of the
date of this Agreement.

 

Collateral Handling Fee:     $750.00 ($0.00 when Borrower is on “streamline
reporting status” pursuant to Section 6, below) per month, payable in arrears on
the last day of each month.

 

Unused Line Fee:     In the event, in any calendar month (or portion thereof at
the beginning and end of the term hereof), the average daily principal balance
of the Loans outstanding during the month is less than the amount of the Maximum
Credit Limit, Borrower shall pay Silicon an unused line fee in an amount equal
to 0.375% per annum on the difference between the amount of the Maximum Credit
Limit and the average daily principal balance of the Loans outstanding during
the month, which unused line fee shall be computed and paid monthly, in arrears,
on the last day of each month.

 

Early Termination Fee:     If this Agreement is voluntarily or involuntarily
terminated prior to its maturity, the Borrower shall pay to Silicon a
termination fee in the amount equal to $70,000.00, provided that no such
termination fee shall be charged if the credit facility hereunder is replaced or
transferred to another division of Silicon.  The termination fee shall be due
and payable upon prepayment by the Borrower in the case of voluntary prepayments
or upon demand by Silicon in the event of  involuntary prepayment, and if not
paid immediately shall bear interest at a rate equal to the highest rate
applicable to any of the Obligations.

 

Section 4                                             MATURITY DATE

 

(Section 6.1):              Two years from the date of this Agreement.

 

Section 5                                             FINANCIAL COVENANTS

 

(Section 5.1):              Borrower shall comply with each of the following
covenant(s).

 

Compliance shall be determined as of the end of each month, except as otherwise
specifically provided below:

 

a. Minimum Tangible Net Worth:

 

Borrower shall maintain a Tangible Net Worth of not less $9,000,000.00 as of the
end of any calendar month, from the date of this Agreement until the Maturity
Date.

 

In no event shall the amount of this Minimum Tangible Net Worth covenant be
decreased.

 

Definitions.                                For purposes of the foregoing
financial covenants, the following term shall have the following meaning:

 

“Liabilities” shall have the meaning ascribed thereto by generally accepted
accounting principles.

 

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“Tangible Net Worth” shall mean the excess of total assets over total
Liabilities, determined in accordance with generally accepted accounting
principles, with the following adjustments:

 

(A) there shall be excluded from assets:  (i) notes, accounts receivable and
other obligations owing to the Borrower from its officers or other Affiliates,
and (ii) all assets which would be classified as intangible assets under
generally accepted accounting principles, including without limitation goodwill,
licenses, patents, trademarks, trade names, copyrights, capitalized software and
organizational costs, licenses and franchises

 

(B) there shall be excluded from Liabilities:  Subordinated Debt.

 

Section 6                                             REPORTING.

 

(Section 5.3):

 

Borrower shall provide Silicon with the following:

 

(a)                                  Weekly (monthly, if Borrower is on
“streamline reporting status”), and upon each loan request, borrowing base
certificates and transaction reports.

 

(b)                                 Monthly accounts payable agings, aged by
invoice date, and outstanding or held check registers, if any, within fifteen
days after the end of each month.

 

(c)                                  Monthly accounts receivable agings, aged by
invoice date, and receivable reconciliations, within fifteen days after the end
of each month.

 

(d)                                 Monthly deferred revenue reports, within
fifteen days after the end of each month.

 

(e)                                  Monthly inventory report, within fifteen
days after the end of each month.

 

(f)                                    Monthly unaudited financial statements,
as soon as available, and in any event within thirty days after the end of each
month.

 

(g)                                 Quarterly unaudited financial statements, as
soon as available, and in any event within forty-five days after the end of each
fiscal quarter of Borrower.  Borrower may satisfy this requirement by delivering
by email an electronic copy of documents filed with the SEC.

 

(h)                                 Annual operating budgets (including income
statements, balance sheets and cash flow statements, by month) for the upcoming
fiscal year of Borrower within forty-five days after the end of each fiscal year
of Borrower.

 

(i)                                     Annual audited financial statements, as
soon as available, and in any event within 120 days following the end of
Borrower’s fiscal year, prepared under GAAP, consistently applied, together with
an unqualified opinion on the financial statements from an independent certified
public accounting firm reasonably acceptable to Silicon.  Borrower may satisfy
this requirement by delivering by email an electronic copy of documents filed
with the SEC.

 

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(j)                                     Compliance Certificates, within thirty
days after the end of each month and within 120 days following the end of
Borrower’s fiscal year, in such form as Silicon shall reasonably specify, signed
by the Chief Financial Officer of Borrower, certifying that as of the end of
such month Borrower was in full compliance with all of the terms and conditions
of this Agreement, and setting forth calculations showing compliance with the
financial covenants set forth in this Agreement and such other information as
Silicon shall reasonably request, including, without limitation, a statement
that at the end of such month there were no held checks.

 

(k)                                  Such additional reports and information as
Silicon may from time to time specify.

 

So long as (i) Borrower maintains an Adjusted Quick Ratio of greater than 1.75
to 1.0, (ii) no Default or Event of Default has occurred and is continuing, and
(iii) Borrower is not in breach of its obligations under this Agreement, then
the Borrower will be on “streamline reporting status”.   In the event that
Borrower is unable to maintain an Adjusted Quick Ratio of greater than 1.75 to
1.0, then Borrower will no longer be on “streamline reporting status” unless and
until such time as Borrower has thereafter maintained an Adjusted Quick Ratio of
greater than 1.75 to 1.0 for at least three consecutive months.

 

Definitions.                                For purposes of the foregoing
paragraph, the following term shall have the following meaning:

 

“Adjusted Quick Ratio” is a ratio of Quick Assets to Current Liabilities minus
Deferred Revenue.

 

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

 

“Quick Assets” is, on any date, the Borrower’s consolidated, unrestricted cash,
cash equivalents maintained at Silicon, accounts receivable (less all reserves
thereof) and investments with maturities of fewer than 12 months determined
according to GAAP.

 

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

 

Section 7                                             OTHER COVENANTS

 

Borrower shall at all times comply with all of the following additional
covenants:

 

(a)                                  Banking Relationship.  In order for Silicon
to properly monitor its loan arrangement with the Borrower, Borrower shall at
all times maintain its primary banking relationship with Silicon, with all
significant deposits to be maintained at Silicon.

 

(b)                                 Subordination of Inside Debt.  All present
and future indebtedness of the Borrower to its officers, directors and
shareholders (“Inside Debt”) shall, at all times, be subordinated to the
Obligations pursuant to a subordination agreement on Silicon’s standard form. 
Borrower represents and warrants that there is no Inside Debt presently
outstanding.  Prior to incurring any Inside Debt in the future, Borrower

 

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shall cause the person to whom such Inside Debt will be owed to execute and
deliver to Silicon a subordination agreement reasonably acceptable to Silicon.

 

(c)                                  Intellectual Property Security Agreement. 
As a condition precedent to the effectiveness of this Agreement, Borrower shall
have executed and delivered to Silicon an  Intellectual Property Security
Agreement (the “IP Security Agreement”), substantially in the form attached
hereto as Exhibit B.

 

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IN WITNESS WHEREOF, the parties hereto have caused this Schedule to Loan and
Security Agreement to be executed as of the date first above written.

 

 

BORROWER:

 

 

 

TUT SYSTEMS, INC.

 

 

 

 

 

By

 

/s/ Randall K. Gausman

 

 

Name: Randall K. Gausman

 

Title: Chief Financial Officer

 

 

 

SILICON:

 

 

 

SILICON VALLEY BANK

 

 

 

 

 

By

 

/s/ Bruce Helberg

 

 

Name:

 

Title:

 

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