Exhibit
10.1


 


LOAN AND
SECURITY AGREEMENT


 


THIS LOAN AND SECURITY AGREEMENT
(this “Agreement”) dated as of October 31,
2009 (the “Effective Date”) between SILICON VALLEY BANK, a California corporation (“Bank”), and NETLIST, INC.,
a Delaware corporation (“Borrower”),
provides the terms on which Bank shall lend to Borrower and Borrower shall
repay Bank.  The parties agree as
follows:


 


1                                         ACCOUNTING
AND OTHER TERMS


 


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


 


2                                         LOAN
AND TERMS OF PAYMENT


 


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


 


2.1.1                     Revolving
Advances.


 


(a)                                  Availability.  Subject to the terms and conditions of this
Agreement and to deduction of Reserves (without duplication of the BB Blocked
Amount component of the Borrowing Base), Bank shall make Advances not exceeding
the Availability Amount.  Amounts
borrowed hereunder may be repaid and, prior to the Revolving Line Maturity
Date, reborrowed, subject to the applicable terms and conditions precedent
herein.


 


(b)                                 Streamline
Period.  During or in respect of
certain periods of time as to which the Streamline Requirements are all met
(each such period, subject to the provisions of this Section 2.1.1(b), a “Streamline Period”): (i) Borrower’s reporting
requirements shall be reduced, (ii) certain proceeds shall be deposited in
Borrower’s operating account(s) instead of being applied to the Advances; (iii) the
interest rate applicable to outstanding Advances shall be lower; and (iv) no
Collateral Handling Fee shall be payable; in each case, as set forth in other
provisions of this Agreement.  Such a
Streamline Period shall be deemed to be in effect as of the Effective
Date.  If at any time during any Streamline
Period the Streamline Requirements are not met, upon written notice from Bank
to Borrowing Agent the Streamline Period shall immediately cease to be
effective, and any terms or conditions of this Agreement that are dependent
upon the existence of a Streamline Period will immediately revert to the
respective terms and conditions that are to be in force when a Streamline
Period is not in effect, without the need for any further action on the part of
Bank or Borrower.  Further, if following
the cessation of a Streamline Period the Streamline Requirements are thereafter
satisfied for 30 consecutive days, Borrowing Agent may elect to again put a
Streamline Period into effect (which new Streamline Period shall commence on
the first day of the applicable subsequent month) pursuant to the terms hereof
by giving Bank at least 5 Business Days prior written notice of such election
(including the proposed start date of such new Streamline Period).  Thus, it is the intention of the parties that
Borrower has the opportunity for successive Streamline Periods to apply when
and to the extent the conditions thereto are satisfied.


 


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


 


2.1.2                     Letters
of Credit Sublimit.


 


(a)                                  Subject
to the Overall Sublimit in Section 2.1.5 below, as part of the Revolving
Line, Bank shall issue or have issued Letters of Credit denominated in Dollars
or a Foreign Currency for Borrower’s account. The aggregate Dollar Equivalent amount utilized for the issuance of
Letters of Credit shall at all times reduce the amount otherwise available for
Advances under the Revolving Line. The aggregate amount available to 


 


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be used for the issuance of Letters of Credit is Two
Million Five Hundred Thousand Dollars ($2,500,000) (the “LC Sublimit”),
subject to the Overall Sublimit in Section 2.1.5 below, and in addition
may not exceed the Availability Amount.


 


(b)                                 If,
on the Revolving Line Maturity Date (or the effective date of any termination
of this Agreement), there are any outstanding Letters of Credit, then on such
date Borrower shall provide to Bank cash collateral in an amount equal to 105% of the Dollar Equivalent of the face amount of all such
Letters of Credit plus all interest, fees, and costs due or to become due in
connection therewith (as estimated by Bank in its good faith business
judgment), to secure all of the Obligations relating to such Letters of
Credit.  All Letters of Credit shall be
in form and substance acceptable to Bank in its sole discretion and shall be
subject to the terms and conditions of Bank’s standard Application and Letter
of Credit Agreement (the “Letter of Credit
Application”).  Borrower
agrees to execute any further documentation in connection with the Letters of
Credit as Bank may reasonably request. 
Borrower further agrees to be bound by the regulations and
interpretations of the issuer of any Letters of Credit guarantied by Bank and
opened for Borrower’s account or by Bank’s interpretations of any Letter of
Credit issued by Bank for Borrower’s account, and Borrower understands and
agrees that Bank shall not be liable for any error, negligence, or mistake,
whether of omission or commission, in following Borrower’s instructions or
those contained in the Letters of Credit or any modifications, amendments, or
supplements thereto.


 


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


 


(d)                                 Borrower
may request that Bank issue a Letter of Credit payable in a Foreign
Currency.  If a demand for payment is
made under any such Letter of Credit, Bank shall treat such demand as an
Advance to Borrower of the Dollar Equivalent of the amount thereof (plus fees
and charges in connection therewith such as wire, cable, SWIFT or similar
charges).


 


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


 


2.1.3                     Foreign
Exchange Sublimit.  Subject to the
Overall Sublimit in Section 2.1.5 below, as part of the Revolving Line,
Borrower may enter into foreign exchange contracts with Bank under which
Borrower commits to purchase from or sell to Bank a specific amount of Foreign
Currency (each, a “FX Forward Contract”)
on a specified date (the “Settlement Date”).  FX Forward Contracts shall have a Settlement
Date of at least one (1) FX Business Day after the contract date and shall
be subject to a reserve of ten percent (10%) of each outstanding FX Forward
Contract (the “FX Reserve”). Subject to the
Overall Sublimit in Section 2.1.5 below, the aggregate amount of FX
Forward Contracts at any one time may not exceed ten (10) times the lesser
of (A) Two Million Five Hundred Thousand Dollars ($2,500,000.00) (the “FX Sublimit”), or (B) the lesser of the Maximum
Revolver Amount or the Borrowing Base, minus (i) the sum of all
outstanding principal amounts of any Advances (including any amounts used for
Cash Management Services), and minus (ii) the Dollar Equivalent of the
face amount of any outstanding Letters of Credit (including drawn but
unreimbursed Letters of Credit and any Letter of Credit Reserve).  The amount otherwise available for Credit
Extensions under the Revolving Line shall be reduced by an amount equal to ten
percent (10%) of each outstanding FX Forward Contract (the “FX Reduction Amount”).  Any amounts needed to fully
reimburse Bank for any amounts not paid by Borrower in connection with FX
Forward Contracts will be treated as Advances under the Revolving Line and will
accrue interest at the interest rate applicable to Advances.


 


2.1.4                     Cash
Management Services Sublimit. 
Subject to the Overall Sublimit in Section 2.1.5 below, Borrower
may use up to Two Million Five Hundred Thousand Dollars ($2,500,000) (the “CMS Sublimit”) of the Revolving Line for Bank’s cash
management services which may include merchant services, direct deposit of
payroll, business credit card, and check cashing services identified in Bank’s
various cash management services agreements (collectively, the “Cash Management Services”). 
Any amounts Bank pays on behalf of Borrower for any Cash Management
Services as a result of Borrower’s failure to pay its obligations with respect
thereto on a timely basis (as opposed to Borrower’s mere utilization of the
Cash Management Services products) will be treated as Advances under the
Revolving Line and will accrue interest at the interest rate applicable to
Advances.


 


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2.1.5                     Overall
Aggregate Sublimit.  In no event
shall the total amount of (i) all outstanding Letters of Credit (including
drawn but unreimbursed Letters of Credit and any Letter of Credit Reserve),
plus (ii) the FX Reserve, plus (iii) the amount of the Revolving Line
utilized for Cash Management Services, at any time exceed Two Million Five
Hundred Thousand Dollars ($2,500,000) in the aggregate  (the “Overall Sublimit”).


 


2.2                               Overadvances.
.. If at any time or for any
reason any one or more of the following occurs (in any such case, an “Overadvance”):


 


(a) the sum of (i) the
outstanding principal amount of any Advances (including any amounts used for
Cash Management Services), plus (ii) the face amount of any outstanding
Letters of Credit (including drawn but unreimbursed Letters of Credit and any
Letter of Credit Reserve), plus (iii) the FX Reduction Amount exceeds the
lesser of either the Maximum Revolver Amount 
or the Borrowing Base; or


 


(b) the aggregate
face amount of outstanding Letters of Credit (including drawn but unreimbursed
Letters of Credit) under this Agreement, plus any Letter of Credit Reserve
under this Agreement, exceeds the LC Sublimit; or


 


(c) the FX Reduction
Amount under this Agreement exceeds the FX Sublimit; or


 


(d) the aggregate
amount of Obligations in respect of Cash Management Services under this
Agreement exceeds the CMS Sublimit;


 


(e) the sum of the
aggregate face amount of outstanding Letters of Credit (including drawn but
unreimbursed Letters of Credit) under this Agreement, plus any Letter of Credit
Reserve under this Agreement, plus the FX Reduction Amount under this
Agreement, plus the aggregate amount of Obligations in respect of Cash
Management Services under this Agreement, exceeds the Overall Sublimit;


 


then, Borrower shall immediately pay to Bank in cash
such Overadvance.  Without limiting
Borrower’s obligation to repay Bank any amount of the Overadvance, Borrower
agrees to pay Bank interest on the outstanding amount of any Overadvance, on
demand, at the Default Rate.


 


2.3                               Payment
of Interest on the Credit Extensions.


 


(a)                                  Advances.
 Subject to Section 2.3(b), the
principal amount outstanding under the Revolving Line shall accrue interest at
a per annum rate equal to the following: (i) at all times that a
Streamline Period is in effect, one and one-quarter of one percentage points
(1.25%) above the Prime Rate; and (ii) at all times that a Streamline
Period is not in effect, two and one-quarter of one percentage points (2.25%)
above the Prime Rate; which interest shall be payable monthly in accordance
with Section 2.3(f) below.


 


(b)                                 Default
Rate.  Immediately upon the
occurrence and during the continuance of an Event of Default, Obligations shall
bear interest at a rate per annum which is five percentage points (5.00%) above
the rate that is otherwise applicable thereto (the “Default Rate”)
unless Bank otherwise elects from time to time in its sole discretion to impose
a smaller increase.  Fees and expenses
which are required to be paid by Borrower pursuant to the Loan Documents
(including, without limitation, Bank Expenses) but are not paid when due shall
bear interest until paid at a rate equal to the highest rate applicable to the
Obligations.  Payment or acceptance of
the increased interest rate provided in this Section 2.3(b) is not a
permitted alternative to timely payment and shall not constitute a waiver of
any Event of Default or otherwise prejudice or limit any rights or remedies of
Bank.


 


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


 


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


 


(e)                                  Minimum
Monthly Interest.  In the event the
aggregate amount of interest earned by Bank in any month (exclusive of any
collateral monitoring fees, unused line fees, or any other fees and charges 


 


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hereunder) is less than Three Thousand Seven Hundred
Fifty Dollars ($3,750.00) (the “Minimum Monthly Interest”),
Borrower shall pay Bank an amount, payable on the last day of such month, in an
amount equal to the (i) Minimum Monthly Interest minus (ii) the
aggregate amount of all interest earned by Bank (exclusive of any collateral
monitoring fees, unused line fees, float charge, or any other fees and charges
hereunder) in such month.


 


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


 


2.4                               Fees.  Borrower shall pay to Bank:


 


(a)                                  Commitment
Fee.  A fully earned, non-refundable
commitment fee of Twenty Five Thousand Dollars ($25,000.00), on the Effective
Date; and


 


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


 


(c)                                  [intentionally
omitted]


 


(d)           [intentionally omitted]


 


(e)                                  Collateral
Monitoring Fee.  A monthly
collateral monitoring fee of $1,500.00, payable in arrears on the last day of
each month (prorated for any partial month at the beginning and upon
termination of this Agreement); provided, however, that no such collateral
monitoring fee shall be due in respect of any month during which at all times a
Streamline Period is in effect; and


 


(f)                                    Bank
Expenses.  All Bank Expenses
(including reasonable attorneys’ fees and expenses for documentation and
negotiation of this Agreement and the other Loan Documents) incurred through
and after the Effective Date, when due (or, if there is no stated due date,
upon demand by Bank.


 


2.5                               Payments;
Application of Payments.


 


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


 


(b)                                 All
payments with respect to the Obligations may be applied in such order and
manner as Bank shall determine in its sole discretion.  Borrower shall have no right to specify the
order or the accounts to which Bank shall allocate or apply any payments
required to be made by Borrower to Bank or otherwise received by Bank under
this Agreement when any such allocation or application is not specified
elsewhere in this Agreement.


 


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3                                         CONDITIONS
OF LOANS


 


3.1                               Conditions
Precedent to Initial Credit Extension. 
Bank’s obligation to make the initial Credit Extension is subject to the
condition precedent that Bank shall have received, in form and substance
satisfactory to Bank, such documents, and completion of such other matters, as
Bank may reasonably deem necessary or appropriate, including, without
limitation:


 


(a)                          Borrower
and Guarantor shall have delivered duly executed original signatures to the
Loan Documents to which it is a party, including this Agreement, the Guaranty,
the Guarantor Security Agreement, the IP Security Agreement, the Intercompany
Subordination Agreement, and one or more Control Agreements relative to all
Collateral Accounts maintained with any affiliate of Bank;


 


(b)                                 Borrower
and Guarantor shall have delivered duly executed original signatures to one or more
Control Agreements relative to all Collateral Accounts maintained with any
institution (other than Bank or any affiliate of Bank), except to the extent
expressly not required under Section 6.8(b);


 


(c)                                  Borrower
shall have delivered: (i) its Operating Documents; and (ii) good
standing certificates with respect to Borrower issued by the applicable
Secretary of State -- and, if separate, the state tax authority -- of the
jurisdiction of organization of Borrower and the applicable Secretary of State
-- and, if separate, the state tax authority of the jurisdictions (other than
the applicable jurisdiction of organization of Borrower) in which Borrower’s
failure to be duly qualified or licensed would constitute a Material Adverse
Change, in each case, as of a date no earlier than thirty (30) days prior to
the Effective Date;


 


(d)                                 Guarantor
shall have delivered: (i) its Operating Documents; and (ii) good
standing certificates with respect to Guarantor issued by the applicable
Secretary of State -- and, if separate, the state tax authority -- of the
jurisdiction of organization of Guarantor and the applicable Secretary of State
-- and, if separate, the state tax authority of the jurisdictions (other than
the applicable jurisdiction of organization of Guarantor) in which Guarantor’s
failure to be duly qualified or licensed would constitute a “Material Adverse
Change” (as such term is defined in the Guarantor Security Agreement), in each
case, as of a date no earlier than thirty (30) days prior to the Effective
Date;


 


(e)                                  Borrower
shall have delivered duly executed original signatures to the completed
Borrowing Resolutions for Borrower;


 


(f)                                    Guarantor
shall have delivered duly executed original signature(s) to the completed
certified resolutions & incumbency certificate of Guarantor;


 


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


 


(h)                                 Borrower
shall have delivered evidence reasonably satisfactory to Bank that the
insurance policies required by Section 6.7 hereof are in full force and
effect, together with appropriate evidence showing lender loss payable and/or
additional insured clauses or endorsements in favor of Bank;


 


(i)                                     with
respect to Borrower and each Guarantor, Bank shall have received certified
copies, dated as of a recent date, of financing statement searches, as Bank
shall request, reflecting Bank’s financing statements filed of record with
respect to Bank’s Liens, and accompanied by written evidence (including any UCC
termination statements) that the Liens (other than the Bank’s Liens) indicated
in any financing statements either constitute Permitted Liens or have been or,
in connection with the initial Credit Extension, will be terminated or
released. Without limiting the generality of the foregoing, Bank shall receive
either (1) evidence (satisfactory to Bank) of the due termination of
record of, or (2) written authorization by the secured party to terminate
of record, all financing statements filed against Borrower or Guarantor in
favor of Wells Fargo, including (a) that certain UCC-1 financing
statement, listing Borrower as debtor and Wells Fargo as secured party, filed
with the Delaware Secretary of State on 5/15/2003 as File No. 31254302,
and (b) that certain UCC-1 financing statement, listing Netlist Technology
Texas LP as debtor and Wells Fargo as secured party, filed with the Texas
Secretary of State on 1/02/2004 as File No. 04-0052779165;


 


(j)                                     the
completion of the Initial Audit with results satisfactory to Bank in its good
faith business judgment; and


 


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


 


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


 


(a)                                  except
as otherwise provided in Section 3.5(a), timely receipt of an executed
Transaction Report;


 


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


 


(c)                                  in
Bank’s sole discretion, there has not been a Material Adverse Change.


 


3.3                               [intentionally
omitted]


 


3.4                               Covenant
to Deliver.


 


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


 


3.5                               Procedures
for Borrowing. Subject to the prior satisfaction of all other applicable
conditions to the making of an Advance set forth in this Agreement, in order
for Borrower to obtain an Advance (other than Advances under Sections 2.1.2,
2.1.3, or 2.1.4), Borrower, shall notify Bank (which notice shall be
irrevocable) by electronic mail, facsimile, or telephone by 12:00 p.m.
Pacific time on the Funding Date of the request for such Advance. Borrower must
promptly deliver to Bank by electronic mail or facsimile a completed
Transaction Report executed by a Responsible Officer or his or her
designee.  Bank shall credit Advances to
the Designated Deposit Account.  Bank may
make Advances under this Agreement based on instructions from a Responsible
Officer or his or her designee or without instructions if the Advances are
necessary to meet Obligations which have become due.  Bank may rely on any telephone notice given
by a person whom Bank in its good faith business judgment believes is a
Responsible Officer or designee.


 


4                                         CREATION
OF SECURITY INTEREST


 


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


 


4.2                               Priority
of Security Interest.  Borrower
represents, warrants, and covenants that the security interest granted herein
is and shall at all times continue to be a first priority perfected security
interest in the Collateral (subject in lien priority only to those Permitted
Liens that are expressly entitled to such priority over the security interests
of Bank by operation of law or by written subordination agreement duly executed
and delivered by Bank in favor of the holders of such Permitted Liens).  If Borrower shall acquire a commercial tort
claim, Borrower shall promptly notify Bank in a writing signed by Borrower of
the general details thereof and grant to Bank in such writing a security
interest therein and in the proceeds thereof, all upon the terms of this
Agreement, with such writing to be in form and substance reasonably
satisfactory to Bank.


 


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


 


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


 


5                                         REPRESENTATIONS
AND WARRANTIES


 


Borrower
represents and warrants as follows:


 


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


 


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


 


5.2                               Collateral.  (a) Borrower has good title to, has
rights in, and the power to transfer each item of the Collateral upon which it
purports to grant a Lien hereunder, free and clear of any and all Liens except
Permitted Liens. Borrower has no deposit account other than the deposit
accounts with Bank and deposit accounts described in the Perfection Certificate
delivered to Bank in connection herewith or as disclosed to Bank pursuant to Section 6.8(b),
other than deposit accounts not required to be disclosed pursuant to Section 6.8(b).
The Accounts are bona fide, existing obligations of the Account Debtors.


 


(b) The Collateral is not in the possession of
any third party bailee (such as a warehouse) except as otherwise provided in
the Perfection Certificate.  None of the
components of the Collateral shall be maintained at locations other than as
provided in the Perfection Certificate or as permitted pursuant to Section 7.2.
In the event that Borrower intends to store or otherwise deliver any portion of
the Collateral with an aggregate value in excess of 


 


7

















 


$250,000 to any one or more bailees, then Borrower shall, promptly upon
Bank’s request therefor, use commercially reasonable efforts to deliver to Bank
a bailee agreement (in form and substance satisfactory to Bank in its good
faith business judgment) duly executed by such bailee. In the event that Bank
requests such a bailee agreement and Borrower uses such efforts but does not
succeed in delivering such a bailee agreement, Bank may (in its good faith
business judgment) maintain a Reserve with respect to the Collateral located
with such bailee.


 


(c) With respect to any leased premises of
Borrower at which Collateral with an aggregate value of more than $250,000 is
located, Borrower shall, promptly upon Bank’s request therefor, use
commercially reasonable efforts to deliver to Bank a landlord agreement (in
form and substance satisfactory to Bank in its good faith business judgment)
duly executed by the lessor of such leased premises. In the event that Bank
requests such a landlord agreement and Borrower uses such efforts but does not
succeed in delivering such a landlord agreement, Bank may (in its good faith
business judgment) maintain a Reserve with respect to such leased premises.


 


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


 


(e) Borrower is the sole owner of the
Intellectual Property which it owns or purports to own except for (a) non-exclusive
licenses granted to its customers in the ordinary course of business, (b) over-the-counter
software that is commercially available to the public, and (c) material
Intellectual Property licensed to Borrower and noted on the Perfection
Certificate.  Each Patent which it owns
or purports to own and which is material to Borrower’s business is valid and
enforceable, and no part of the Intellectual Property which Borrower owns or
purports to own and which is material to Borrower’s business has been judged
invalid or unenforceable, in whole or in part. 
To the best of Borrower’s knowledge, no claim has been made that any
part of the Intellectual Property violates the rights of any third party except
to the extent such claim would not reasonably be expected to have a material
adverse effect on Borrower’s business.


 


(f) Except as noted on the Perfection
Certificate, Borrower is not a party to, nor is it bound by, any Restricted
License.


 


5.3                               Accounts
Receivable.


 


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


 


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


 


5.4                               Litigation.  Except as expressly identified in the
Perfection Certificate, there are no actions or proceedings pending or, to the
knowledge of the Responsible Officers, threatened in writing by or against
Borrower or any of its Subsidiaries involving more than $100,000 individually,
or $250,000 in the aggregate.


 


5.5                               Financial
Statements; Financial Condition. All consolidated financial statements for
Borrower and any of its Subsidiaries delivered to Bank fairly present in all
material respects Borrower’s consolidated financial condition and Borrower’s
consolidated results of operations as of the date of such financial statements,
except that that interim financial statements may be subject to normal year-end
audit adjustments (which will not be material in the aggregate) and need not
contain footnote disclosures required by GAAP. 
There has not been any material deterioration in Borrower’s consolidated
financial condition since the date of the most recent financial statements
submitted to Bank.


 


8

















 


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


 


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


 


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


 


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


 


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


 


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


 


5.12                        Indebtedness.
Borrower is not liable for any Indebtedness other than Permitted Indebtedness.


 


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


 


9

















 


6                                         AFFIRMATIVE
COVENANTS


 


Borrower shall do all of
the following:


 


6.1                               Government
Compliance.


 


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


 


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


 


6.2                               Financial
Statements, Reports, Certificates. 
Provide Bank with the following:


 


(a)                                  a
Transaction Report (and any schedules related thereto): (i) at all times
when a Streamline Period is in effect, monthly (within twenty (20) days after
the end of each month) and at the time of each request for an Advance; and (ii) at
all times when a Streamline Period is not in effect, weekly and at the time of
each request for an Advance;


 


(b)                                 within twenty
(20) days after the end of each month, (A) monthly accounts receivable
agings, aged by invoice date, (B) monthly accounts payable agings, aged by
invoice date, and outstanding or held check registers, if any, (C) monthly
reconciliations of accounts receivable agings (aged by invoice date),
transaction reports and general ledger, and (D) Deferred Revenue reports;


 


(c)                                  as soon as
available, but no later than thirty (30) days after the last day of each month,
a company prepared consolidated and consolidating balance sheet and
income statement covering Borrower’s and each of its Subsidiary’s operations
for such month certified by a Responsible Officer and in a form acceptable to
Bank (the “Monthly Financial Statements”);


 


(d)                                 within thirty
(30) days after the last day of each month and together with the Monthly
Financial Statements, a duly completed Compliance Certificate signed by a
Responsible Officer, 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 Bank shall reasonably
request, including, without limitation, a statement that at the end of such
month there were no held checks;


 


(e)                                  [intentionally
omitted]


 


(f)                                    within thirty
(30) days after the end of each fiscal year of Borrower (or more frequently as
updated), (A) annual operating budgets (including income statements,
balance sheets and cash flow statements, by month) for the new fiscal year of
Borrower, and (B) annual financial projections for the new fiscal year (on
a quarterly basis) as approved by Borrower’s board of directors, together with
any related business forecasts used in the preparation of such annual financial
projections;


 


(g)                                 as soon as
available, and in any event concurrently with the delivery of the copy of (or
link to) Borrower’s 10K report for the applicable fiscal year required under
clause (h) below, audited consolidated financial statements prepared under
GAAP, consistently applied, together with an unqualified opinion on the
financial statements from an independent certified public accounting firm
acceptable to Bank in its reasonable discretion;


 


(h)                                 As
long as Borrower is subject to the reporting requirements under the Exchange
Act, within five (5) days of filing, copies (or a link to such documents
on Borrower’s or another website on the Internet) of all periodic and other
reports (including the Borrower’s 10K, 10Q, and 8K reports), proxy statements
and other materials filed by Borrower with the SEC, any Governmental Authority
succeeding to any or all of the functions of the SEC or with any national
securities exchange, or distributed to its shareholders, as the case may
be.  As to any information contained in
the materials furnished pursuant to this clause (h), Borrower shall not be
required separately to furnish such information under clause (g) but the
foregoing shall not be in derogation of the obligation of Borrower to furnish
the information and materials described in such clause (g) at the times
specified therein.


 


10

















 


(i)                                     within five (5) days
of delivery, copies of all statements, reports and notices made available to
Borrower’s security holders or to any holders of Subordinated Debt;


 


(j)                                     prompt written
notice of (i) any material change in the composition of the Borrower’s  Intellectual Property, (ii) the
registration of any copyright, including any subsequent ownership right of
Borrower in or to any copyright, patent or trademark not previously disclosed
in writing to Bank, and (iii) Borrower’s knowledge of an event that could
reasonably be expected to materially and adversely affect the value of the
Borrower’s Intellectual Property; and


 


(k)                                  prompt report
of any legal actions pending or threatened in writing against Borrower or any
of its Subsidiaries that could result in damages or costs to Borrower or any of
its Subsidiaries of at least $100,000, individually, or at least $250,000, in
the aggregate; and


 


(l)                                     other financial
information reasonably requested by Bank.


 


6.3                               Accounts
Receivable.


 


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


 


(b)                                 Disputes.  Borrower shall promptly notify Bank of all
disputes or claims relating to Accounts. 
Borrower may forgive (completely or partially), compromise, or settle
any Account for less than payment in full, or agree to do any of the foregoing
so long as (i) Borrower does so in good faith, in a commercially
reasonable manner, in the ordinary course of business, in arm’s-length
transactions, and reports the same to Bank in the regular reports provided to
Bank; (ii) no Event of Default has occurred and is continuing; and (iii) after
taking into account all such discounts, settlements and forgiveness, no Credit
Extension(s) shall exceed any limit set forth herein.


 


 (c)                               Collection
of Accounts. 
Until payment in full in cash of all Advances and all other Obligations
relating to the Revolving Line (other than inchoate indemnity obligations) and Bank’s obligations to make Advances and any other Credit
Extensions relating to the Revolving Line have terminated (provided that
Borrower’s obligation under this sentence shall not end at a time when any
Event of Default exists), Borrower shall be a party to a lockbox agreement in
such form as Bank may specify in its good faith business judgment (the “Lockbox Agreement”) with Bank and a lockbox provider (the “Lockbox Provider”). 
The Lockbox Agreement and Lockbox Provider shall be acceptable to
Bank.  Borrower shall use the lockbox
address as the payment address on all invoices issued by Borrower and shall
direct all its Account Debtors to remit their payments to the lockbox
address.  The Lockbox Agreement shall
provide that the Lockbox Provider shall remit all collections received in the
lockbox to Bank.  Upon Bank’s receipt of
such collections, Bank shall apply the same as follows:


 


(i)                                    If a
Streamline Period is in effect, Bank shall deposit such proceeds into the
operating account of Borrower at Bank that is designated by Borrower; and


 


(ii)                                 If a
Streamline Period is not in effect, Bank shall apply such proceeds to the
outstanding Advances, and if all outstanding Advances have been paid in full,
Bank shall deposit the remainder into the operating account of Borrower at Bank
that is designated by Borrower; and


 


(iii)                              If a Default
or Event of Default has occurred and is continuing, without limiting Bank’s
other rights and remedies, Bank shall have the right to apply such proceeds
pursuant to the terms of Section 9.4 hereof.


 


11
















 


It
is understood and agreed by Borrower that this Section does not impose any
affirmative duty on Bank to do any act other than to turn over such
amounts.  Without limitation on the
foregoing, whether or not an Event of Default has occurred and is continuing,
Borrower shall hold all payments on, and proceeds of, Accounts that Borrower
receives, in trust for Bank, and Borrower shall immediately deliver all such
payments and proceeds to Bank in their original form, duly endorsed, to be
applied to the Obligations pursuant to the terms of Sections 2.5(b) and
9.4 hereof.


 


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


 


(e)                                  Verification.  Bank may, from time
to time, verify directly with the respective Account Debtors the validity,
amount and other matters relating to the Accounts, either in the name of
Borrower or Bank or such other name as Bank may choose.


 


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


 


6.4                               Remittance
of Proceeds.  Except as otherwise
provided in Section 6.3(c), deliver, in kind, all proceeds arising from
the disposition of any Collateral to Bank in the original form in which received
by Borrower not later than the following Business Day after receipt by
Borrower, to be applied to the Obligations (a) prior to an Event of
Default, pursuant to the terms of Section 2.5(b) hereof, and (b) after
the occurrence and during the continuance of an Event of Default, pursuant to
the terms of Section 9.4 hereof; provided that, if no Event of Default has
occurred and is continuing, Borrower shall not be obligated to remit to Bank
the proceeds of the sale of worn out or obsolete Equipment disposed of by
Borrower in good faith in an arm’s length transaction for an aggregate purchase
price of $25,000 or less (for all such transactions in any fiscal year).  Borrower agrees that it will not commingle
proceeds of Collateral with any of Borrower’s other funds or property, but will
hold such proceeds separate and apart from such other funds and property and in
an express trust for Bank.  Nothing in
this Section limits the restrictions on disposition of Collateral set
forth elsewhere in this Agreement.


 


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


 


6.6                               Access
to Collateral; Books and Records.  At
reasonable times, on at least five (5) Business Day’s notice (provided no
notice is required if an Event of Default has occurred and is continuing),
Bank, or its agents, shall have the right to inspect the Collateral and the
right to audit and copy Borrower’s Books, which inspections (after the Initial
Audit) shall be conducted no less frequently than twice per year, or more
frequently as conditions may warrant in Bank’s good faith business
judgment.  The foregoing inspections and
audits shall be at Borrower’s expense, and the charge therefor shall be $850
per person per day (or such higher amount as shall represent Bank’s
then-current standard charge for the same), plus reasonable out-of-pocket
expenses.  In the event Borrower and Bank
schedule an audit more than ten (10) days in advance, and Borrower cancels
or seeks to reschedules the audit with less than ten (10) days written
notice to Bank, then (without limiting any of Bank’s rights or remedies),
Borrower shall pay Bank a fee of $1,000 plus any out-of-pocket expenses
incurred by Bank to compensate Bank for the anticipated costs and expenses of
the cancellation or rescheduling.


 


12

















 


6.7                               Insurance.  Keep its business and the Collateral insured
for risks and in amounts standard for companies in Borrower’s industry and
location and as Bank may reasonably request. 
Insurance policies shall be in a form, with companies, and in amounts
that are satisfactory to Bank.  All
property policies (but not Borrower’s D&O insurance) shall have a lender’s
loss payable endorsement showing Bank as lender loss payee and waive
subrogation against Bank.  All liability
policies shall show, or have endorsements showing, Bank as an additional
insured.  All policies (or the loss
payable and additional insured endorsements) shall provide that the insurer
shall give Bank at least twenty (20) days notice before canceling, amending, or
declining to renew its policy.  At Bank’s
request, Borrower shall deliver certified copies of policies and evidence of
all premium payments.  Proceeds payable
under any policy shall, at Bank’s option, be payable to Bank on account of the
Obligations.  Notwithstanding the
foregoing, (a) so long as no Event of Default has occurred and is
continuing, Borrower shall have the option of applying the proceeds of any
casualty policy up to Fifty Thousand Dollars ($50,000) with respect to any
loss, but not exceeding One Hundred Thousand Dollars ($100,000) in the
aggregate for all losses under all casualty policies in any one year, toward
the replacement or repair of destroyed or damaged property; provided that any
such replaced or repaired property (i) shall be of equal or like value as
the replaced or repaired Collateral and (ii) shall be deemed Collateral in
which Bank has been granted a first priority security interest, and (b) after
the occurrence and during the continuance of an Event of Default, all proceeds
payable under such casualty policy shall, at the option of Bank, be payable to
Bank on account of the Obligations.  If
Borrower fails to obtain insurance as required under this Section 6.7 or
to pay any amount or furnish any required proof of payment to third persons and
Bank, Bank may make all or part of such payment or obtain such insurance
policies required in this Section 6.7, and take any action under the
policies Bank deems prudent.


 


6.8                               Operating
Accounts.


 


(a)                          Borrower
shall at all times maintain its, and its Subsidiaries’, primary domestic and
international banking relationship (including foreign exchange activity) with
Bank. Borrower shall at all times maintain on deposit with Bank not less than
85% of the aggregate dollar value of Borrower’s and such Subsidiaries’ domestic
and international Collateral Accounts at all financial institutions.


 


(b)                                 As
to any Collateral Accounts maintained with an institution other than Bank,
Borrower shall cause such institution to enter into a Control Agreement in form
acceptable to Bank in its good faith business judgment in order to perfect Bank’s
first-priority security interest in such Collateral Accounts (to the extent
that Bank determines in its good faith business judgment that a Control
Agreement is necessary to perfect and protect such security interest), and each
such Control Agreement may not be terminated without the prior written consent
of Bank. The provisions of the previous sentence shall not apply to (i) 
deposit accounts exclusively used for payroll, payroll taxes and other employee
wage and benefit payments to or for the benefit of Borrower’s employees and
identified to Bank by Borrower as such; and (ii) Borrower’s (or its Subsidiary’s)
Collateral Accounts located in China and relating to Borrower’s (or its
Subsidiary’s) operations in Suzhou, China.


 


6.9                               Financial
Covenants.


 


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


 


(a)                                  Adjusted
Quick Ratio.  An Adjusted Quick Ratio
of at least 1.25 to 1.00.  As used
herein, the term “Adjusted Quick Ratio” means, as of any date of determination
and with respect to Borrower, the ratio of (i) the sum of (y) Borrower’s
cash and Cash Equivalents that are unencumbered (except for Bank’s security
interest) and unrestricted, plus (z) the aggregate net amount of Eligible
Accounts, to (ii) Borrower’s Current Liabilities.


 


(b)                                 Profitability.  Measured as of the end of each of the
following fiscal quarters, minimum Gross Profit of not less than the following
[note — amounts within pointed brackets ( < $ > ) are negative amounts]:


 


	
  Fiscal Quarter ending
  ...

  	
   

  	
  Minimum Gross Profit

  	
   

  
	
  September 30,
  2009

  	
   

  	
  $

  	
  <415,000.00

  	
  > 

  
	
  December 31,
  2009

  	
   

  	
  $

  	
  43,000.00

  	
   

  



 


13

















 


	
  Fiscal Quarter ending
  ...

  	
   

  	
  Minimum Gross Profit

  	
   

  
	
  March 31,
  2010

  	
   

  	
  $

  	
  1,000,000.00

  	
   

  
	
  June 30,
  2010

  	
   

  	
  $

  	
  2,000,000.00

  	
   

  
	
  September 30,
  2010

  	
   

  	
  $

  	
  4,500,000.00

  	
   

  
	
  December 31,
  2010

  	
   

  	
  $

  	
  6,500,000.00

  	
   

  



 


6.10                        Protection
and Registration of Intellectual Property Rights.


 


(a) Borrower shall:  (1) protect, defend and maintain the
validity and enforceability of any and all of its Intellectual Property; (2) promptly
advise Bank in writing of known material infringements of its Intellectual
Property; and (3) not allow any Intellectual Property to be abandoned,
forfeited or dedicated to the public without Bank’s written consent.


 


(b) Borrower hereby represents and warrants that,
as of the Effective Date, Borrower does not own any maskworks, computer
software, or other copyrights of Borrower that are registered (or the subject
of an application for registration) with the United States Copyright Office
(collectively, the “Registered Copyrights”). 
Borrower will NOT register with the United States Copyright Office (or
apply for such registration of) any of Borrower’s maskworks, computer software,
or other copyrights, unless Borrower: (i) provides Bank with at least fifteen
(15) days prior written notice of its intent to register such copyrights or
mask works together with a copy of the application it intends to file with the
United States Copyright Office (excluding exhibits thereto); (ii) executes
and delivers a security agreement or such other documents as Bank may
reasonably request to maintain the perfection and priority of Bank’s security
interest in the copyrights or mask works intended to be registered with the
United States Copyright Office; and (iii) records such security agreement
with the United States Copyright Office contemporaneously with or promptly (but
in no event more than 10 days) after filing the copyright or mask work
application(s) with the United States Copyright Office.  Borrower shall promptly provide to Bank a
copy of the application(s) actually filed with the United States Copyright
Office together with evidence of the recording of the security agreement
necessary for Bank to maintain the perfection and priority of its security
interest in the copyrights or mask works intended to be registered with the
United States Copyright Office.  Borrower
hereby represents and warrants that, as of the Effective Date, the IP Security
Agreement identifies all Patents and Trademarks of Borrower that are registered
(or the subject of an application for registration) with the United States
Patent and Trademark Office. From and after the Effective Date, Borrower shall
provide written notice to Bank of any application filed by Borrower in the
United States Patent and Trademark Office for a Patent or to register a
Trademark within 30 days after any such filing, and, upon the request of Bank,
Borrower shall promptly execute and deliver a security agreement or such other
documents as Bank may reasonably request with respect to such additional
patents and/or Trademarks of Borrower that are registered (or the subject of an
application for registration) with the United States Patent and Trademark
Office. The foregoing notwithstanding, Bank shall not acquire any interest in
any intent to use a federal trademark application for a trademark, servicemark,
or other mark filed on Borrower’s behalf prior to the filing under applicable
law of a verified statement of use (or equivalent) for such mark that is the
subject of such application.


 


(c)                                  Provide
written notice to Bank within ten (10) days of entering or becoming bound
by any Restricted License (other than over-the-counter software that is
commercially available to the public). Borrower shall take such steps as Bank
requests to obtain the consent of, or waiver by, any person whose consent or
waiver is necessary for (i) any Restricted License to be deemed “Collateral”
and for Bank to have a security interest in it that might otherwise be
restricted or prohibited by law or by the terms of any such Restricted License,
whether now existing or entered into in the future, and (ii) Bank to have
the ability in the event of a liquidation of any Collateral to dispose of such
Collateral in accordance with Bank’s rights and remedies under this Agreement
and the other Loan Documents.


 


6.11                        Litigation
Cooperation.  From the date hereof
and continuing through the termination of this Agreement, make available to
Bank, without expense to Bank, Borrower and its officers, employees and agents
and 


 


14

















 


Borrower’s books and records, to the extent that Bank
may deem them reasonably necessary to prosecute or defend any third-party suit
or proceeding instituted by or against Bank with respect to any Collateral or
relating to Borrower.


 


6.12                        Intercompany
Debt.  All present and future
indebtedness of Borrower and any Guarantor owed or owing to any one or more of
Borrower, any Guarantor, or any other Affiliate of Borrower or any other
Affiliate of any Guarantor shall, at all times, be subordinated to the
Obligations pursuant to a subordination agreement on Bank’s standard form (the “Intercompany
Subordination Agreement”).


 


6.13                        Subsidiaries.  As of the Effective Date, the Perfection
Certificate identifies each direct or indirect Subsidiary of Borrower.  Without limiting any requirements for the
Bank’s consent under one or more of Section 7.3 and Section 7.7, at
the time that Borrower or any Guarantor forms any direct or indirect Subsidiary
or acquires any direct or indirect Subsidiary after the Effective Date,
Borrower shall promptly notify Bank in writing of such formation or
acquisition, and, if so requested by Bank, Borrower or such Guarantor shall (a) cause
such new Subsidiary to provide to Bank: (i) either (y) a joinder to
the Loan Agreement to cause such Subsidiary to become a co-borrower hereunder,
or (z) a Guaranty and a Guarantor Security Agreement, together with (ii) such
appropriate financing statements and/or Control Agreements, all in form and
substance satisfactory to Bank (including being sufficient to grant Bank a
first priority Lien (subject to Permitted Liens) in and to the assets of such
newly formed or acquired Subsidiary), (b) provide to Bank appropriate
certificates and powers and financing statements, pledging all of the direct or
beneficial ownership interest in such new Subsidiary, in form and substance
satisfactory to Bank, and (c) provide to Bank all other documentation in
form and substance satisfactory to Bank (including, if requested by Bank, one
or more opinions of counsel satisfactory to Bank), which in its opinion is
appropriate with respect to the execution and delivery of the applicable
documentation referred to above.  Any
document, agreement, or instrument executed or issued pursuant to this Section 6.13
shall be a Loan Document.


 


6.14                        Further
Assurances.  Execute any further
instruments and take further action as Bank reasonably requests to perfect or
continue Bank’s Lien in the Collateral or to effect the purposes of this Agreement.  Deliver to Bank,  within
five (5) days after the same are sent or received, copies of all
correspondence, reports, documents and other filings with any Governmental
Authority regarding compliance with or maintenance of Governmental Approvals or
Requirements of Law or that could reasonably be expected to have a material
effect on any of the Governmental Approvals or otherwise on the operations of
Borrower or any of its Subsidiaries.


 


7                                         NEGATIVE
COVENANTS


 


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


 


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


 


7.2                               Changes
in Business, Management, Control, or Business Locations.


 


(a) (i) Engage in or permit any of its
Subsidiaries to engage in any business other than the businesses currently
engaged in by Borrower and such Subsidiary, as applicable, or reasonably
related thereto; (ii) liquidate or dissolve; or (iii) have a change
in senior management; or (iv)  permit or suffer any Change in Control.


 


(b) Without at least thirty (30) days prior
written notice to Bank: (1) add any new offices or business locations,
including warehouses (unless such new offices or business locations contain
less than Ten Thousand Dollars ($10,000) in Borrower’s assets or property) or
deliver any portion of the Collateral valued, individually or in the aggregate,
in excess of Two Hundred Fifty Thousand Dollars ($250,000) to a bailee at a
location other than to a bailee and at a location already disclosed in the
Perfection Certificate, (2) change its jurisdiction of organization, (3) change
its organizational structure or type, (4) change its legal name (whether
such name is in English or French or otherwise), or (5) change any organizational
number (if any) assigned by its jurisdiction of organization.  If Borrower intends to deliver any portion of the Collateral valued,
individually or in the aggregate, in excess of Two Hundred Fifty
Thousand Dollars ($250,000) to a bailee,
and Bank and such bailee are not already parties to a bailee agreement
governing both the Collateral and the location to which Borrower intends to
deliver the Collateral, then Borrower will first receive the written consent of
Bank, and such bailee shall execute and deliver a bailee agreement in form and
substance satisfactory to Bank in its sole discretion.


 


15

















 


7.3                               Mergers
or Acquisitions. Merge or consolidate, or permit any of its Subsidiaries to
merge or consolidate, with any other Person, or acquire, or permit any of its
Subsidiaries to acquire, all or substantially all of the capital stock or
property of another Person (including, without limitation, by the formation of
any Subsidiary).  A Subsidiary of
Borrower or any Guarantor that itself is not a Borrower or a Guarantor may
enter into any merger or consolidation with another Subsidiary of Borrower that
itself is not a Borrower or a Guarantor.


 


7.4                               Indebtedness.


 


(a) Create, incur, assume, or be liable for any Indebtedness,
or permit any Subsidiary to do so, other than Permitted Indebtedness.


 


(b) Without limiting the generality of Section 7.4(a),
all present and future indebtedness of Borrower to its officers, directors, and
equityholders (“Inside Debt”) shall, at all times, be subordinated to the
Obligations pursuant to a subordination agreement on Bank’s standard form.  Borrower represents and warrants that there
is no Inside Debt presently outstanding, except for the following: NONE. Prior
to incurring any Inside Debt in the future, Borrower shall cause the person to
whom such Inside Debt will be owed to execute and deliver to Bank a
subordination agreement on Bank’s standard form.


 


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


 


7.6                               Maintenance
of Collateral Accounts.  Maintain any
Collateral Account except pursuant to the terms of Section 6.8(b) hereof.


 


7.7                               Distributions; Investments. 
(a) Pay any dividends or make any distribution or payment or
redeem, retire or purchase any capital stock provided that (i) Borrower
may convert any of its convertible securities into other securities pursuant to
the terms of such convertible securities or otherwise in exchange thereof, (ii) Borrower
may pay dividends solely in common stock; and (iii) Borrower may
repurchase the stock of former employees or consultants pursuant to stock
repurchase agreements so long as an Event of Default does not exist at the time
of such repurchase and would not exist after giving effect to such repurchase,
provided such repurchase does not exceed in the aggregate of Fifty Thousand
Dollars ($50,000) per fiscal year; or (b) directly or indirectly make any
Investment other than Permitted Investments, or permit any of its Subsidiaries
to do so.


 


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


 


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


 


7.10                        Compliance.  Become an “investment company” or a company
controlled by an “investment company”, under the Investment Company Act of
1940, as amended, or undertake as one of its important activities extending
credit to purchase or carry margin stock (as defined in Regulation U of the
Board of Governors of the Federal Reserve System), or use the proceeds of any
Credit Extension for that purpose; fail to meet the minimum 


 


16

















 


funding requirements of ERISA, permit a Reportable
Event or Prohibited Transaction, as defined in ERISA, to occur; fail to comply
with the Federal Fair Labor Standards Act or violate any other law or
regulation, if the violation could reasonably be expected to have a material
adverse effect on Borrower’s business, or permit any of its Subsidiaries to do
so; withdraw or permit any Subsidiary to withdraw from participation in, permit
partial or complete termination of, or permit the occurrence of any other event
with respect to, any present pension, profit sharing and deferred compensation
plan which could reasonably be expected to result in any liability of Borrower,
including any liability to the Pension Benefit Guaranty Corporation or its
successors or any other governmental agency.


 


8                                         EVENTS
OF DEFAULT


 


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


 


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


 


8.2                               Covenant
Default.


 


(a) Borrower fails
or neglects to perform any obligation in Sections 6.2, 6.3, 6.4, 6.6, 6.8, 6.9,
or 6.10 or violates any covenant in Section 7; or


 


(b) Borrower fails or neglects to perform, keep,
or observe any other term, provision, condition, covenant or agreement
contained in this Agreement or any Loan Documents, and as to any default (other
than those specified in this Section 8) under such other term, provision,
condition, covenant or agreement that can be cured, has failed to cure the
default within ten (10) days after the occurrence thereof; provided,
however, that if the default cannot by its nature be cured within the ten (10) day
period or cannot after diligent attempts by Borrower be cured within such ten (10) day
period, and such default is likely to be cured within a reasonable time, then
Borrower shall have an additional period (which shall not in any case exceed
thirty (30) days) to attempt to cure such default, and within such reasonable
time period the failure to cure the default shall not be deemed an Event of
Default (but no Credit Extensions shall be made during such cure period).  Cure periods provided under this section
shall not apply, among other things, to financial covenants or any other
covenants set forth in clause (a) above;


 


8.3                               Material
Adverse Change.  A Material Adverse
Change occurs;


 


8.4                               Attachment;
Levy; Restraint on Business.


 


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


 


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


 


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


 


8.6                               Other
Agreements.  There is, under any
agreement to which Borrower or any Guarantor is a party with a third party or
parties, (a) any default resulting in a right by such third party or
parties, whether or not 


 


17

















 


exercised, to accelerate the maturity of any
Indebtedness in an amount individually or in the aggregate in excess of Fifty
Thousand Dollars ($50,000); or (b) any default by Borrower or Guarantor,
the result of which could have a material adverse effect on Borrower’s or any
Guarantor’s business;


 


8.7                               Judgments.  One or more final judgments, orders, or
decrees for the payment of money in an amount, individually or in the
aggregate, of at least Fifty Thousand Dollars ($50,000) (not covered by
independent third-party insurance as to which liability has been accepted by
such insurance carrier) shall be rendered against Borrower and the same are
not, within ten (10) days after the entry thereof, discharged or execution
thereof stayed or bonded pending appeal, or such judgments are not discharged
prior to the expiration of any such stay (provided that no Credit Extensions
will be made prior to the discharge, stay, or bonding of such judgment, order,
or decree);


 


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


 


8.9                               Subordinated
Debt or Lien.  Any document,
instrument, or agreement evidencing any Subordinated Debt shall for any reason
be revoked or invalidated or otherwise cease to be in full force and effect;
any Person shall be in breach thereof or contest in any manner the validity or
enforceability thereof or deny that it has any further liability or obligation
thereunder; a default or breach occurs under any agreement between Borrower and
any creditor of Borrower that signed a subordination, intercreditor, or other
similar agreement with Bank, or any creditor that has signed such an agreement
with Bank breaches any terms of such agreement; or the Obligations shall for
any reason be subordinated or shall not have the priority contemplated by this
Agreement or any such subordination, intercreditor, or other similar agreement;


 


8.10                        Guaranty.  (a) Any guaranty of any Obligations
terminates or ceases for any reason to be in full force and effect; (b) any
Guarantor does not perform any obligation or covenant under any guaranty of the
Obligations; (c) any circumstance described in Sections 8.4, 8.5, 8.7, or
8.8. occurs with respect to any Guarantor, or (d) the death, liquidation,
winding up, or termination of existence of any Guarantor; or (e) (i) a
material impairment in the perfection or priority of Bank’s Lien in the
collateral provided by Guarantor or in the value of such collateral or (ii) a
material adverse change in the general affairs, management, results of
operation, condition (financial or otherwise) or the prospect of repayment of
the Obligations occurs with respect to any Guarantor.


 


8.11                        Event
of Default under other Loan Documents.  An event of default has occurred
and is continuing under any other Loan Document (after giving effect to, but
without duplication of, any applicable grace periods).


 


9                                         BANK’S
RIGHTS AND REMEDIES


 


9.1                               Rights
and Remedies. If an Event of Default has occurred and is continuing, Bank
may, without notice or demand, do any or all of the following:


 


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


 


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


 


(c)                                  demand
that Borrower (i) deposit cash with Bank in an amount equal to 105% of the
Dollar Equivalent of the aggregate face amount of all Letters of Credit
remaining undrawn (plus all interest, fees, and costs due or to become due in
connection therewith (as estimated by Bank in its good faith business
judgment)), to secure all of the Obligations relating to such Letters of
Credit, as collateral security for the repayment of any future drawings under
such Letters of Credit, and Borrower shall forthwith deposit and pay such
amounts, and (ii) pay in advance all letter of credit fees scheduled to be
paid or payable over the remaining term of any Letters of Credit;


 


18

















 


(d)                                 terminate
any FX Forward Contracts;


 


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


 


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


 


(g)                                 apply
to the Obligations any (i) balances and deposits of Borrower it holds, or (ii) any
amount held by Bank owing to or for the credit or the account of Borrower;


 


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


 


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


 


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


 


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


 


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


 


9.3                               Protective
Payments.  If Borrower fails to
obtain the insurance called for by Section 6.7 or fails to pay any premium
thereon or fails to pay any other amount which Borrower is obligated to pay
under this Agreement or any other Loan Document, Bank may obtain such insurance
or make such payment, and all amounts so paid by Bank are Bank Expenses and
immediately due and payable, bearing interest at the then highest rate
applicable to the Obligations, and secured by the Collateral.  Bank will make reasonable efforts to provide
Borrower with notice of Bank obtaining such insurance at the time it is
obtained or within a reasonable time thereafter.  No payments by Bank are deemed an agreement
to make similar payments in the future or Bank’s waiver of any Event of
Default.


 


19

















 


9.4                               Application
of Payments and Proceeds.  If an
Event of Default has occurred and is continuing, Bank may apply any funds in
its possession, whether from Borrower account balances, payments, proceeds
realized as the result of any collection of Accounts or other disposition of
the Collateral, or otherwise, to the Obligations in such order as Bank shall
determine in its sole discretion.  Any
surplus shall be paid to Borrower by credit to the Designated Deposit Account
or to other Persons legally entitled thereto; Borrower shall remain liable to
Bank for any deficiency.  If Bank, in its
good faith business judgment, directly or indirectly enters into a deferred
payment or other credit transaction with any purchaser at any sale of
Collateral, Bank shall have the option, exercisable at any time, of either
reducing the Obligations by the principal amount of the purchase price or
deferring the reduction of the Obligations until the actual receipt by Bank of
cash therefor.


 


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


 


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


 


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


 


10                                  NOTICES


 


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


 


	
  If
  to Borrower:

  	
  NETLIST,
  INC.

  
	
   

  	
  51 Discovery, Suite 150

  Irvine, CA 92618

  Attn:  Gail
  Itow, CFO

  Fax: 
  949.679.0113

  Email:  gitow@netlist.com

  
	
   

  	
   

  
	
  If to Bank:

  	
  Silicon Valley Bank

  38 Technology Drive, Suite 150

  Irvine, California 92618

  Attn:  Kurt
  Miklinski, Relationship Manager

  Fax: 949.790.9020

  Email:
  kmiklinski@svb.com

  



 


20

















 


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


 


California law governs the Loan Documents without
regard to principles of conflicts of law. 
Borrower and Bank each submit to the exclusive jurisdiction of the State
and Federal courts in Santa Clara County, California; provided, however, that
nothing in this Agreement shall be deemed to operate to preclude Bank from
bringing suit or taking other legal action in any other jurisdiction to realize
on the Collateral or any other security for the Obligations, or to enforce a
judgment or other court order in favor of Bank. 
Borrower expressly submits and consents in advance to such jurisdiction
in any action or suit commenced in any such court, and Borrower hereby waives
any objection that it may have based upon lack of personal jurisdiction,
improper venue, or forum non conveniens and hereby consents to the granting of
such legal or equitable relief as is deemed appropriate by such court.  Borrower hereby waives personal service of
the summons, complaints, and other process issued in such action or suit and
agrees that service of such summons, complaints, and other process may be made
by registered or certified mail addressed to Borrower at the address set forth
in, or subsequently provided by Borrower in accordance with, Section 10 of
this Agreement and that service so made shall be deemed completed upon the
earlier to occur of Borrower’s actual receipt thereof or three (3) days
after deposit in the U.S. mails, proper postage prepaid.


 


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


 


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


 


12                                  GENERAL
PROVISIONS


 


12.1                        Termination
Prior to Revolving Line Maturity Date. On the Revolving Line Maturity Date
or on any earlier effective date of termination, 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.  This Agreement may be
terminated prior to the Revolving Line Maturity Date by Borrower, effective
three (3) Business Days after written notice of termination is given to
Bank.  Notwithstanding any such
termination, Bank’s lien and security interest in the Collateral and all of
Bank’s rights and remedies under this Agreement shall continue until Borrower
fully satisfies its Obligations.


 


21

















 


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


 


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


 


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


 


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


 


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


 


12.7                        Amendments
in Writing; Waiver; Integration.  No
purported amendment or modification of any Loan Document, or waiver, discharge
or termination of any obligation under any Loan Document, shall be enforceable
or admissible unless, and only to the extent, expressly set forth in a writing
signed by the party against which enforcement or admission is sought.  Without limiting the generality of the
foregoing, no oral promise or statement, nor any action, inaction, delay,
failure to require performance or course of conduct shall operate as, or evidence,
an amendment, supplement or waiver or have any other effect on any Loan
Document.  Any waiver granted shall be
limited to the specific circumstance expressly described in it, and shall not
apply to any subsequent or other circumstance, whether similar or dissimilar,
or give rise to, or evidence, any obligation or commitment to grant any further
waiver.  The Loan Documents represent the
entire agreement about this subject matter and supersede prior negotiations or
agreements.  All prior agreements,
understandings, representations, warranties, and negotiations between the
parties about the subject matter of the Loan Documents merge into the Loan
Documents.


 


12.8                        Counterparts.  This Agreement may be executed in any number
of counterparts and by different parties on separate counterparts, each of
which, when executed and delivered, is an original, and all taken together,
constitute one Agreement.


 


12.9                        Survival.  All covenants, representations and warranties
made in this Agreement continue in full force until this Agreement has
terminated pursuant to its terms and all Obligations (other than inchoate
indemnity obligations and any other obligations which, by their terms, are to
survive the termination of this Agreement) have been satisfied.  The obligation of Borrower in Section 12.3
to indemnify the Indemnified Persons shall survive until all statutes of
limitation with respect to the Claims, losses and expenses for which indemnity
is given shall have run.


 


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


 


22

















 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


13                                  DEFINITIONS


 


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


 


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


 


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


 


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


 


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


 


“Agreement” is
defined in the preamble hereof.


 


23
















 


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


 


“Bank” is
defined in the preamble hereof.


 


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


 


“Bankruptcy-Related
Defaults” is defined in Section 9.1.


 


“BB Blocked Amount”
is defined within the definition of “Borrowing Base”.


 


“Borrower” is
defined in the preamble hereof


 


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


 


“Borrowing Base”
is (a) 80% (the “A/R Advance Rate”
and also an “Advance Rate”) of Eligible
Accounts minus (b) the amount of One Million
Dollars ($1,000,000) (the “BB Blocked Amount”),
as determined by Bank from Borrower’s most recent Transaction Report; provided,
however, that Bank may decrease any one or more of the Advance Rates in its
good faith business judgment based on events, conditions, contingencies, or
risks which, as determined by Bank, may adversely affect Collateral or
Borrower.


 


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


 


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


 


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


 


“Cash Management Services” is
defined in Section 2.1.4.


 


“Change in Control” means any event, transaction, or occurrence as a result of which (a) any “person” (as such term is defined in Sections 3(a)(9) and 13(d)(3) of the Exchange Act), other than a trustee or other fiduciary holding securities under an employee benefit plan of Borrower, is or becomes a beneficial owner (within the meaning Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of Borrower, representing twenty-five percent (25%) or more of the combined voting power of Borrower’s then outstanding securities; or (b) during any period of twelve consecutive calendar months, individuals who at the beginning of such period constituted the Board of Directors (or equivalent) of Borrower (together with any new directors whose election by the Board of Directors (or equivalent) of Borrower was approved by a vote of not less than two-thirds of 


 


24

















 


the directors (or equivalent) then still in office who either were directors (or equivalent) at the beginning of such period  or whose election or nomination for election was previously so approved) cease for any reason other than death or disability to constitute a majority of the directors (or equivalent) then in office or (c) Borrower ceases to own, directly or indirectly, 100% of the voting securities of any Guarantor.
 
“Code” is the Uniform Commercial Code, as the same may, from time to time, be enacted and in effect in the State of California; provided, that, to the extent that the Code is used to define any term herein or in any Loan Document and such term is defined differently in different Articles or Divisions of the Code, the definition of such term contained in Article or Division 9 shall govern; provided further, that in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection, or priority of, or remedies with respect to, Bank’s Lien on any Collateral is governed by the Uniform Commercial Code in effect in a jurisdiction other than the State of California, the term “Code” shall mean the Uniform Commercial Code as enacted and in effect in such other jurisdiction solely for purposes of the provisions thereof relating to such attachment, perfection, priority, or remedies and for purposes of definitions relating to such provisions.
 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


25

















 


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


 


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


 


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


 


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


 


“Dollar Equivalent”
is, at any time, (a) with respect to any amount denominated in Dollars,
such amount, and (b) with respect to any amount denominated in a Foreign
Currency, the equivalent amount therefor in Dollars as determined by Bank at
such time on the basis of the then-prevailing rate of exchange in San
Francisco, California, for sales of the Foreign Currency for transfer to the
country issuing such Foreign Currency.


 


“Domestic Subsidiary”
means a Subsidiary organized under the laws of the United States or any state
or territory thereof or the District of Columbia.


 


“Effective Date”
is defined in the preamble hereof.


 


“Eligible Accounts”
means Accounts which arise in the ordinary course of Borrower’s business that
are subject to Bank’s first-priority perfected security interests therein and
meet all Borrower’s representations and warranties in Section 5.3.  Bank reserves the right upon prior written
notice to Borrower at any time and from time to time after the Effective Date
to adjust any of the criteria set forth below and to establish new criteria in
its good faith business judgment.  Unless
Bank otherwise agrees in writing, Eligible Accounts shall not include:


 


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


 


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


 


(c)                                  [intentionally
omitted];


 


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


 


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


 


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


 


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


 


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


 


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


 


26

















 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


(t)                                    Accounts
subject to chargebacks or others payment deductions taken by an Account Debtor
(but only to the extent of the chargebacks or deductions);


 


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


 


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


 


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


 


Furthermore, Bank expressly reserves the right to exclude from Eligible
Accounts any one or more Accounts owing from an Account Debtor which does not
have its principal place of business in the United States, or those provinces
or territories of Canada that have adopted the Personal Property Security Act,
unless such Accounts are (i) covered in full by credit insurance
satisfactory to Bank, less any deductible, (ii) supported by letter(s) of
credit acceptable to Bank, (iii) supported by a guaranty from the
Export-Import Bank of the United States, or (iv) otherwise approved by
Bank in writing.


 


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


 


27

















 


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


 


“Event of Default”
is defined in Section 8.


 


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


 


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


 


“Foreign Subsidiary” means any
Subsidiary which is not a Domestic Subsidiary.


 


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


 


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


 


“FX Forward Contract”  is defined in Section 2.1.3.


 


“FX Reduction Amount”
is defined in Section 2.1.3.


 


“FX Reserve”  is defined in Section 2.1.3.


 


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


 


“General Intangibles”
is all “general intangibles” as defined in the Code in effect on the date hereof
with such additions to such term as may hereafter be made, and includes without
limitation, all Intellectual Property, claims, income and other tax refunds,
security and other deposits, payment intangibles, contract rights, options to
purchase or sell real or personal property, rights in all litigation presently
or hereafter pending (whether in contract, tort or otherwise), insurance
policies (including without limitation key man, property damage, and business
interruption insurance), payments of insurance and rights to payment of any
kind.


 


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


 


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


 


“Gross Profit”
means, as calculated on a consolidated basis for Borrower and its Subsidiaries for
any period as at any date of determination and as determined in accordance with
GAAP, the gross profit (or loss) of Borrower and its Subsidiaries for such
period taken as a single accounting period.


 


“Guarantor”  is any present or future guarantor of the Obligations,
including  Netlist Technology Texas LP, a Texas
limited partnership.


 


“Guarantor Security
Agreement”  is, with
respect to each Guarantor, a security agreement (in form and substance
satisfactory to Bank in its good faith business judgment) by such Guarantor in
favor of Bank.


 


“Guaranty”  is, with respect to each Guarantor, a continuing guaranty
(in form and substance satisfactory to Bank in its good faith business
judgment) by such Guarantor in favor of Bank, relative to Borrower.


 


28

















 


“Indebtedness”
is (a) indebtedness for borrowed money or the deferred price of property
or services, such as reimbursement and other obligations for surety bonds and
letters of credit, (b) obligations evidenced by notes, bonds, debentures
or similar instruments, (c) capital lease obligations, and (d) Contingent
Obligations.


 


“Indemnified Person”
is defined in Section 12.3.


 


“Initial Audit”
is Bank’s inspection of Borrower’s Accounts, the Collateral, and Borrower’s
Books, completed most recently prior to the Effective Date.


 


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


 


“Intellectual Property”
means, with respect to Borrower or a Guarantor, all of Borrower’s or such
Guarantor’s right, title, and interest in and to the following:


 


(a)                                  its Copyrights, Trademarks and Patents;


 


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


 


(c)                                  any and all source code;


 


(d)                                 any and all design rights which may be
available to Borrower or such Guarantor;


 


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


 


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


 


“Intercompany Subordination
Agreement” is defined in Section 6.12.


 


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


 


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


 


“IP Security Agreement”
is, individually and collectively, (a) any one or more Intellectual
Property security agreements (in form and substance satisfactory to Bank in its
good faith business judgment) now or hereafter executed and delivered by
Borrower to Bank, and (b) any one or more Intellectual Property security
agreements (in form and substance satisfactory to Bank in its good faith
business judgment) now or hereafter executed and delivered by Guarantor to
Bank.


 


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


 


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


 


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


 


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


 


29

















 


“Liquidity Condition” is the
condition that the sum of (1) the aggregate amount of Borrower’s
unencumbered (except for Bank’s security interest), unrestricted cash on
deposit at Bank, plus (2) the Availability Amount, is at least $8,500,000.


 


“Loan Documents”
are, collectively, this Agreement, the Perfection Certificate, the Intercompany
Subordination Agreement, the IP Security Agreements, any note, or notes or
guaranties (including the Guaranty) or security documents (including the
Guarantor Security Agreement), executed by Borrower or any Guarantor, and any
other present or future agreement by Borrower and/or any Guarantor with or for
the benefit of Bank in connection with this Agreement, all as amended,
restated, or otherwise modified.


 


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


 


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


 


“Maximum Revolver Amount”
is Five Million Dollars ($5,000,000).


 


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


 


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


 


“Overadvance” is
defined in Section 2.2.


 


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


 


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


 


“Perfection Certificate”
is defined in Section 5.1.


 


“Permitted Indebtedness”
is:


 


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


 


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


 


(c)                                  unsecured
Subordinated Debt;


 


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


 


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


 


30

















 


(f)                                    Indebtedness,
in an aggregate principal amount not to exceed Five Hundred Thousand Dollars
($500,000), secured by Permitted Liens described in clause (c) of the
definition of “Permitted Liens”;


 


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


 


“Permitted Investments”
are:


 


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


 


(b)                                 (i) Investments
consisting of Cash Equivalents, and (ii) any Investments permitted by
Borrower’s investment policy, as amended from time to time, provided that such
investment policy (and any such amendment thereto) has been approved in writing
by Bank;


 


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


 


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


 


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


 


(f)                                    Investments
(i) by Borrower in Subsidiaries not to exceed Seven Hundred Fifty Thousand
Dollars ($750,000) in the aggregate in any fiscal year and (ii) by
Subsidiaries in Borrower;


 


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


 


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


 


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


 


“Permitted Liens”
are:


 


(a)                                  (1) Liens
existing on the Effective Date and shown on the Perfection Certificate; (2) Liens
arising under this Agreement and the other Loan Documents;


 


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


 


(c)                                  purchase
money Liens (including the interests of lessors under capitalized leases): (i) on
Equipment (and related software) acquired or held by Borrower incurred for
financing the acquisition of the Equipment (and related software) securing no
more than Five Hundred Thousand Dollars ($500,000) in the aggregate amount
outstanding; or (ii) existing on Equipment (and related software) when
acquired; in each case, only if such Lien is confined to such Equipment
(and related software)  and related
improvements, related accessions, related replacements, and the proceeds
thereof;


 


31

















 


(d)                                 inchoate
Liens to secure payment of workers’ compensation, employment insurance, old-age
pensions, social security and other like obligations incurred in the ordinary
course of business (other than Liens imposed by ERISA) provided that they have
no priority over any of Bank’s Liens;


 


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


 


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


 


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


 


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


 


(i)                                     Liens
in favor of other financial institutions (not securing indebtedness for
borrowed money owing to such financial institutions) arising in connection with
Borrower’s deposit and/or securities accounts held at such institutions (if and
to the extent permitted under this Agreement), provided that Bank has a
perfected security interest in the amounts held in such deposit and/or
securities accounts.


 


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


 


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


 


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


 


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


 


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


 


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


 


“Restricted License”
is any material license or other agreement with respect to which Borrower is
the licensee (a) that prohibits or otherwise restricts Borrower from
granting a security interest in Borrower’s interest in such license or
agreement or any other property, or (b) for which a default under or
termination of could interfere with the Bank’s right to sell any Collateral.


 


32

















 


“Revolving Line”
is an Advance or Advances in an aggregate amount of up to the Maximum Revolver
Amount outstanding at any time.


 


“Revolving Line Maturity Date”
is the date 364 days following the Effective Date.


 


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


 


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


 


“Settlement Date”  is defined in Section 2.1.3.


 


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


 


“Streamline Requirements” are
all of the following:  (a) no
Default or Event of Default exists; and (b) Borrower meets the Liquidity
Condition.


 


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


 


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


 


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


 


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


 


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


 


“Transfer” is
defined in Section 7.1.


 


[Signature page follows.]


 


33
















 


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


 


	
  BORROWER:

  
	
   

  
	
  NETLIST,
  INC.

  
	
   

  
	
  By

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  
	
   

  
	
  BANK:

  
	
   

  
	
  SILICON
  VALLEY BANK

  
	
   

  
	
  By

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  



 


Signature Page


 

















 


EXHIBIT A


 


The Collateral consists
of all of Borrower’s right, title and interest in and to all personal property,
including without limitation the following:


 


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


 


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


 


{END OF EXHIBIT A}


 

















 


EXHIBIT B


 


COMPLIANCE CERTIFICATE


 


	
  TO:

  	
  SILICON VALLEY BANK

  	
  Date:

  	
   

  
	
  FROM:

  	
   

  	
   

  	
   

  



 


The undersigned authorized officer of NETLIST, INC. (“Borrower”)
certifies that under the terms and conditions of the Loan and Security
Agreement between Borrower and Bank (the “Agreement”), (1) Borrower is in
complete compliance for the period ending
                              
with all required covenants except as noted below, (2) there are no Events
of Default, (3) all representations and warranties in the Agreement are
true and correct in all material respects on this date except as noted below;
provided, however, that such materiality qualifier shall not be applicable to
any representations and warranties that already are qualified or modified by
materiality in the text thereof; and provided, further that those
representations and warranties expressly referring to a specific date shall be
true, accurate and complete in all material respects as of such date, (4) Borrower,
and each of its Subsidiaries, has timely filed all required tax returns and
reports, and Borrower has timely paid all foreign, federal, state and local
taxes, assessments, deposits and contributions owed by Borrower except as
otherwise permitted pursuant to the terms of Section 5.9 of the Agreement,
and (5) no Liens have been levied or claims made against Borrower or any
of its Subsidiaries relating to unpaid employee payroll or benefits of which
Borrower has not previously provided written notification to Bank.  Attached are the required documents
supporting the certification.  The
undersigned certifies that these are prepared in accordance with GAAP
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes.  The
undersigned acknowledges that no borrowings may be requested at any time or
date of determination that Borrower is not in compliance with any of the terms
of the Agreement, and that compliance is determined not just at the date this
certificate is delivered.  Capitalized
terms used but not otherwise defined herein shall have the meanings given them
in the Agreement.


 


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


 


	
  Reporting Covenant

  	
   

  	
  Required

  	
   

  	
  Complies

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Monthly
  financial statements with Compliance Certificate

  	
   

  	
  Monthly within 30
  days

  	
   

  	
  Yes  No

  
	
  Annual
  financial statement (CPA Audited)

  	
   

  	
  Concurrently
  with Form 10-K

  	
   

  	
  Yes  No

  
	
  10-Q,
  10-K and 8-K

  	
   

  	
  Within
  5 days after filing with SEC

  	
   

  	
  Yes  No

  
	
  A/R &
  A/P Agings; Deferred Revenue Report

  	
   

  	
  Monthly
  within 20 days

  	
   

  	
  Yes  No

  
	
  Transaction
  Reports

  	
   

  	
  (i) if
  Streamline Period is in effect, monthly (within twenty (20) days after the
  end of each month) and at the time of each request for an Advance; and
  (ii) if Streamline Period is not in effect, weekly and at the time of
  each request for an Advance

  	
   

  	
  Yes  No

  



 


The
following intellectual property was registered after the Effective Date (if no
registrations, state “None”)


                                                                                                                                                                                            


 


	
  Financial Covenant

  	
   

  	
  Required

  	
   

  	
  Actual

  	
   

  	
  Complies

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Maintain
  on a Monthly Basis:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Minimum
  Adjusted Quick Ratio

  	
   

  	
  1.25
  : 1.00

  	
   

  	
        :
  1.00

  	
   

  	
  Yes  No

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Maintain
  on a Quarterly Basis:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Minimum
  Gross Profit

  	
   

  	
  See
  Section 6.9(b)

  	
   

  	
  $      

  	
   

  	
  Yes  No

  



 

















 


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


 


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


 


 


	
  NETLIST,
  INC.

  	
  BANK USE ONLY

  
	
   

  	
   

  
	
   

  	
  Received
  by:

  	
   

  
	
  By:

  	
   

  	
   

  	
   

  	
   

  	
  AUTHORIZED
  SIGNER

  
	
  Name:

  	
   

  	
   

  	
  Date:

  	
   

  
	
  Title:

  	
   

  	
   

  	
   

  
	
   

  	
  Verified:

  	
   

  
	
   

  	
   

  	
   

  	
  AUTHORIZED
  SIGNER

  
	
   

  	
  Date:

  	
   

  
	
   

  	
   

  
	
   

  	
  Compliance
  Status:            Yes     No

  
									



 

















 


Schedule 1 to Compliance
Certificate


 


Financial Covenants of Borrower


 


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


 


	
  Dated:

  	
   

  	
   

  



 


Adjusted Quick Ratio [Section 6.9(a) of
Loan Agreement]


 


Actual:


 


	
  A.

  	
   

  	
  Borrower’s
  cash and Cash Equivalents that are unencumbered (except for Bank’s security
  interest) and unrestricted

  	
   

  	
  $

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  B.

  	
   

  	
  Aggregate
  net amount of Borrower’s Eligible Accounts

  	
   

  	
  $

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  C.

  	
   

  	
  Sum
  of line A plus line B

  	
   

  	
  $

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  D.

  	
   

  	
  Current
  Liabilities

  	
   

  	
  $

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  E.

  	
   

  	
  Adjusted
  Quick Ratio (line C divided by line D)

  	
   

  	
  : 1.00

  



 


Is
line F equal to or greater than 1.25 : 1.00 ?


 


	
   

  	
   

  	
  o  No, not in compliance

  	
  o  Yes, in compliance

  



 


[continued on next page]


 

















 


Minimum Gross Profit for any Fiscal Quarter [Section 6.9(b) of
Loan Agreement]


 


Actual
Gross Profit for the fiscal quarter most recently ended, i.e., on
                      ,
20    :


 


	
  A.

  	
   

  	
  Gross
  Profit of Borrower

  	
   

  	
  $

  



 


Is
line A equal to or greater than the amount required for such period under Section 6.9(b) of
the Loan Agreement?


 


	
   

  	
   

  	
  o  No, not in compliance

  	
  o  Yes, in compliance

  



 

















 


EXHIBIT C


 


Transaction
Report


 


[EXCEL
spreadsheet to be provided separately from lending officer.]