**Exhibit 10.19**

 

**SILICONVALLEY BANK**

 

**LOAN ANDSECURITY AGREEMENT**

 
| **Borrower:** | **TUT SYSTEMS, INC., a Delaware corporation**                   |
|---------------|-----------------------------------------------------------------|
|          |                                                            |
| **Address:**  | **6000 SW Meadows Drive, Suite 200  Lake Oswego, Oregon 97035** |
|          |                                                            |
| **Date:**     | **September 23, 2004**                                          |

 

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

 

Section 1                                               LOANS.

 

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

 

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

 

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

 

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

 

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

 

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

 

1.6                                 ***Letters of Credit.***  At the request of Borrower, Silicon may, inits good faith business judgment, issue or arrange for the issuance of lettersof credit for the account of Borrower, in each case in form and substancesatisfactory to Silicon in its sole discretion (collectively, “Letters ofCredit”).  The aggregate face amount ofall Letters of Credit outstanding from time to time (plus all Silicon exposureunder any foreign exchange contracts and Cash Management Services entered intowith Borrower or provided on behalf of Borrower under this Agreement) shall notexceed the amount shown on the Schedule (the “Letter of Credit Sublimit”), andshall be reserved against Loans which would otherwise be available hereunder inaccordance with the terms of Section 1 of the Schedule, and in the event at anytime the aggregate amount of Loans, Letters of Credit and any other financialaccommodations hereunder exceed the Credit Limit, Borrower shall deposit andmaintain with Silicon cash collateral in an amount at all times equal to suchexcess, which shall be held as Collateral for all purposes of thisAgreement.  Borrower shall pay allreasonable bank charges (including charges of Silicon) for the issuance ofLetters of Credit, together with such additional fee as Silicon’s letter ofcredit department shall charge in connection with the issuance of the Lettersof Credit.  Any payment by Silicon underor in connection with a Letter of Credit shall constitute a Loan hereunder (tothe extent that such payment amount exceeds any cash collateral provided forsuch Letter of Credit) on the date such payment is made.  Each Letter of Credit shall have an expirydate no later than thirty days prior to the Maturity Date unless such Letter ofCredit is fully secured by cash collateral to the extent and in the amountdescribed in Section 6.2 hereof. Borrower hereby agrees to indemnify, save, and hold Silicon harmlessfrom any loss, cost, expense, or liability, including payments made by Silicon,expenses, and reasonable attorneys’ fees incurred by Silicon arising out of orin connection with any Letters of Credit unless such loss, cost, expense, orliability is caused by Silicon’s gross negligence or willful misconduct.  Borrower agrees to be bound by theregulations and interpretations of the issuer of any Letters of Creditguaranteed by Silicon and opened for Borrower’s account or by Silicon’sinterpretations of any Letter of Credit issued by Silicon for Borrower’saccount, and Borrower understands and agrees that Silicon shall not be liablefor any error, negligence, or mistake, whether of omission or commission, infollowing Borrower’s instructions or those contained in the Letters of Creditor any modifications, amendments, or supplements thereto except to the extentthat such liabilities are caused by the gross negligence or willful misconductof Silicon.  Borrower understands thatLetters of Credit may require Silicon to indemnify the issuing bank for certaincosts or liabilities arising out of claims by Borrower against such issuingbank.  Borrower hereby agrees toindemnify and hold Silicon harmless with respect to any loss, cost, expense, orliability incurred by Silicon under any Letter of Credit as a result of Silicon’sindemnification of any such issuing bank unless such loss, cost, expense, orliability is caused by Silicon’s gross negligence or willful misconduct.  The provisions of this Agreement, as itpertains to Letters of Credit, and any other Loan Documents relating to Lettersof Credit are cumulative.

 

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

 

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

 

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

 

Section 2                                               SECURITYINTEREST.

 

2.1                                 ***Security Interest. ***To secure the payment andperformance of all of the Obligations when due, and the performance of each ofthe Borrower’s duties under this Agreement and all documents executed inconnection herewith,  Borrower herebygrants to Silicon a continuing security interest in all of Borrower’s interestin the following, whether now owned or hereafter acquired, and whereverlocated:  All Inventory, Equipment,Payment Intangibles, Letter-of-Credit Rights, Supporting Obligations, Accounts,and General Intangibles, including,without limitation, all of Borrower’s Intellectual Property, DepositAccounts, and all money, and all property now or at any time in the future inSilicon’s possession (including claims and credit balances), and all proceeds(including proceeds of any insurance policies, proceeds of proceeds and claimsagainst third parties), all products and all books and records related to anyof the foregoing (all of the foregoing, together with all other property inwhich Silicon may now or in the future be granted a lien or security interestby Borrower, is referred to herein, collectively, as the “Collateral”).  The security interest granted herein shall bea first priority security interest in the Collateral, subject to PermittedLiens.  Except as disclosed to Silicon inwriting, Borrower is not a party to, nor is bound by, any material license orother material agreement with respect to which the Borrower is the licenseethat prohibits or otherwise restricts Borrower from granting a securityinterest in Borrower’s interest in such license or agreement or any otherproperty.  Borrower will provide writtennotice to Silicon within thirty (30) days of entering or becoming bound by anysuch material license or material agreement which is reasonably likely to havea material impact on Borrower’s business or financial condition (other thanover-the-counter software that is commercially available to the public).  Borrower shall take such steps as Siliconreasonably requests to obtain the consent of, or waiver by, any person whoseconsent or waiver is necessary for all such licenses or contract rights to bedeemed “Collateral” and for Silicon to have a security interest in it thatmight otherwise be restricted or prohibited by law or by the terms of any suchlicense or agreement, whether now existing or entered into in the future.  Notwithstanding the foregoing, the securityinterest granted herein does not extend to, and the term “Collateral” does notinclude (i) any outstanding capital stock of a controlled foreign corporation(as defined in the Internal Revenue Code of 1986, as amended) in excess of 65%of the voting power of all classes of capital stock of such controlled foreigncorporation entitled to vote, or (ii) Equipment (and additions, accessions,parts, replacements, fixtures, improvements and accessions to, and proceeds of,such Equipment) secured by Permitted Liens described in clause (i) of thedefinition of Permitted Liens but only to the extent that Borrower isprohibited by any existing agreement related to such purchase money debt fromgranting  other liens, security interestsor encumbrances on such Equipment) and additions, accessions, parts,replacements, fixtures, improvements and accessions to, and proceeds of, suchEquipment) so long as such prohibition remains in effect.

 

Section 3                                               REPRESENTATIONS,WARRANTIES AND COVENANTS OF BORROWER.

 

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

 

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

 

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

 

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

 

3.3                                 ***Place of Business; Location ofCollateral.*** The addressset forth in the heading to this Agreement is Borrower’s chief executive officeas of the date of this Agreement.  Inaddition, as of the date hereof Borrower has places of business and Collateralis located only at the locations set forth on the Representations andWarranties Certificate.  Borrower willgive Silicon at least 30 days prior written notice before opening anyadditional place of business, changing its state of formation or moving any ofthe Collateral to a location other than Borrower’s Address or one of thelocations set forth on the Representations and Warranties Certificate, exceptthat Borrower may maintain sales offices in the ordinary course of business atwhich not more than a total of $75,000 fair market value of Equipment islocated.

 

3.4                                 ***Title to Collateral; Perfection;Permitted Liens.***

 

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

 

(b)                                 Borrowerhas set forth in the Representations and Warranties Certificate all of Borrower’sDeposit Accounts as of the date of this Agreement, and Borrower will giveSilicon five Business Days advance written notice before establishing any newDeposit Accounts and will cause the institution where any such new DepositAccount is maintained to execute and deliver to Silicon a control agreement inform sufficient to perfect Silicon’s security interest in the Deposit Accountand otherwise reasonably satisfactory to Silicon in its good faith businessjudgment.  Nothing herein limits anyrequirements which may be set forth in the Schedule as to where DepositAccounts will be maintained.

 

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(c)                                  Inthe event that Borrower shall at any time after the date hereof have anycommercial tort claims against others, which it is asserting or intends toassert, and in which the potential recovery could reasonably be expected toexceed $100,000, Borrower shall promptly notify Silicon thereof in writing andprovide Silicon with such information regarding the same as Silicon shallreasonably request (unless providing such information would waive the Borrower’sattorney-client privilege).  Suchnotification to Silicon shall constitute a grant of a security interest in thecommercial tort claim and all proceeds thereof to Silicon, and Borrower shallexecute and deliver all such documents and take all such actions as Siliconshall request in connection therewith.

 

(d)                                 Noneof the Collateral now is or will be affixed to any real property in such amanner, or with such intent, as to become a fixture.  Borrower is not and will not become a lesseeunder any real property lease pursuant to which the lessor may obtain anyrights in any of the Collateral other than any landlord’s lien available to alessor by statute or common law (provided, however, such lien shall be at alltimes junior and subordinate to the lien of Silicon) and no such lease nowprohibits, restrains, impairs or will prohibit, restrain or impair Borrower’sright to remove any Collateral from the leased premises.  Whenever any Collateral is located uponpremises in which any third party has an interest, Borrower shall, wheneverrequested by Silicon, use its reasonable efforts to cause such third party toexecute and deliver to Silicon, in form reasonably acceptable to Silicon, suchwaivers and subordinations as Silicon shall specify in its good faith businessjudgment.  Borrower will keep in fullforce and effect, and will comply with all material terms of, any materiallease of real property where any of the Collateral now or in the future may belocated, except to the extent that the failure to so comply could notreasonably be expected to result in a material adverse effect on Borrower.

 

(e)                                  Borrowerhereby authorizes Silicon to file financing statements, without notice toBorrower, with all appropriate jurisdictions in order to perfect or protectSilicon’s interest or rights hereunder, which financing statements may indicatethe Collateral as “all assets of the Debtor” or words of similar effect, or asbeing of an equal or lesser scope, or with greater detail, all in Silicon’sdiscretion.

 

3.5                                 ***Maintenance of Collateral.***  Borrower will maintain the Collateral in goodworking condition (ordinary wear and tear excepted), and Borrower will not usethe Collateral for any unlawful purpose. Borrower will promptly advise Silicon in writing of any material loss ordamage to the Collateral.

 

3.6                                 ***Books and Records.***  Borrower has maintained and will maintain atBorrower’s Address complete and accurate books and records, from whichfinancial statements prepared  inaccordance with GAAP may be prepared.

 

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

 

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

 

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and local taxes, assessments, deposits and contributions now or in thefuture owed by Borrower.  Borrower may,however, defer payment of any contested taxes, provided that Borrower (i) ingood faith contests Borrower’s obligation to pay the taxes by appropriateproceedings promptly and diligently instituted and conducted, (ii) notifiesSilicon in writing of the commencement of, and any material development in, theproceedings, and (iii) posts bonds or takes any other steps required to keepthe contested taxes from becoming a lien upon any of the Collateral.  Borrower is unaware of any claims oradjustments proposed for any of Borrower’s prior tax years which could resultin additional taxes becoming due and payable by Borrower.  Borrower has paid, and shall continue to payall amounts necessary to fund all present and future pension, profit sharingand deferred compensation plans in accordance with their terms, and Borrowerhas not and will not withdraw from participation in, permit partial or completetermination of, or permit the occurrence of any other event with respect to,any such plan which could reasonably be expected to result in a materialliability of Borrower, including any material liability to the Pension BenefitGuaranty Corporation or its successors or any other governmental agency.

 

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

 

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

 

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

 

Section 4                                               ACCOUNTS.

 

4.1                                 ***Representations Relating toAccounts.* **Borrowerrepresents and warrants to Silicon as follows: Each Account with respect to which Loans are requested by Borrowershall, on the date each Loan is requested and made, (i) represent an undisputedbona fide existing unconditional obligation of the Account Debtor created bythe sale, delivery, and acceptance of goods or the rendition of services, orthe non-exclusive licensing of Intellectual Property, in the ordinary course ofBorrower’s business, and (ii) meet the Minimum Eligibility Requirements setforth in  Section 8 below.

 

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

 

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other transactions underlying or giving rise to each Account shallfully comply in all material respects with all applicable laws and governmentalrules and regulations to the extent that such failure to comply wouldreasonably be expected to have a material adverse effect on Borrower.  To Borrower’s knowledge, all signatures andendorsements on all documents, instruments, and agreements relating to allAccounts are and shall be genuine, and all such documents, instruments andagreements are and shall be legally enforceable in accordance with their termsexcept as may be limited by equitable principles (whether considered in aproceeding at law or in equity), and by bankruptcy, insolvency, reorganization,moratorium, or similar laws relating to creditor’s rights generally.

 

4.3                                 ***Schedules and Documents relating toAccounts.* **Borrower shalldeliver to Silicon transaction reports and schedules of collections, asprovided in the Schedule, on Silicon’s standard forms or in such form generatedby Borrower and reasonably acceptable to Silicon; provided, however, thatBorrower’s failure to execute and deliver the same shall not affect or limitSilicon’s security interest and other rights in all of Borrower’s Accounts, norshall Silicon’s failure to advance or lend against a specific Account affect orlimit Silicon’s security interest and other rights therein. Loan requestsreceived after 12:00 Noon will not be considered by Silicon until the nextBusiness Day.  Together with each suchschedule, or later if requested by Silicon, Borrower shall furnish Silicon withcopies (or, at Silicon’s request, originals if reasonably deemed necessary bySilicon for perfection or collection) of all contracts, orders, invoices, andother similar documents, and all original shipping instructions, deliveryreceipts, bills of lading, and other evidence of delivery, for any goods thesale or disposition of which gave rise to such Accounts, and Borrower warrantsthe genuineness of all of the foregoing. Borrower shall also furnish to Silicon an aged accounts receivable trialbalance in such form and at such intervals as Silicon shall reasonably request.  In addition, Borrower shall deliver toSilicon, on its request, the originals of all instruments, chattel paper,security agreements, guarantees and other documents and property evidencing orsecuring any Accounts, in the same form as received, with all necessaryendorsements and copies of all credit memos.

 

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

 

4.5                                 ***Remittance of Proceeds. ***So long as this Agreement hasnot been terminated or any Obligations are outstanding, all proceeds arisingfrom the disposition of any Collateral shall not be commingled with any ofBorrower’s other funds or property and will be held separate and apart fromsuch other funds and property in an express trust for Silicon and shall bedelivered, in kind, by Borrower to Silicon in the original form in whichreceived by Borrower not later than the following Business Day after receipt byBorrower, to be applied to the Obligations in such order as Silicon shalldetermine; provided that, if no Default or Event of Default has occurred and iscontinuing, Borrower shall not be obligated to segregate and remit to Siliconthe proceeds of (i) the sale of worn out or obsolete Equipment disposed of byBorrower in good faith in an arm’s length transaction for an aggregate purchaseprice of $50,000 or less (for all such transactions in any fiscal year)  or (ii) the sale of worn out or obsoleteInventory disposed of by Borrower in good faith in an arm’s length transactionfor an aggregate purchase price of $250,000 or less (for all such transactionsin any fiscal year).  Nothing inthis  Section 4.5 limits the restrictionson disposition of Collateral set forth elsewhere in this Agreement.

 

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4.6                                 ***Disputes.*** Borrower shall notify Silicon promptly of allmaterial disputes or claims relating to Accounts in an amount of more than thelesser of (i) $50,000 or (ii) 10.0% of the subject Account for any individualdispute.  Borrower shall not forgive (completelyor partially), compromise or settle any Account for less than payment in full,or agree to do any of the foregoing, except that Borrower may do so, providedthat: (i) Borrower does so in good faith, in a commercially reasonable manner,in the ordinary course of business, and in arm’s length transactions, which arereported to Silicon on the regular reports provided to Silicon; (ii) no Defaultor Event of Default has occurred and is continuing; and (iii) taking intoaccount all such discounts settlements and forgiveness, the total outstandingLoans will not exceed the Credit Limit. Silicon may, at any time after the occurrence and during the continuanceof an Event of Default, settle or adjust disputes or claims directly withAccount Debtors for amounts and upon terms which Silicon considers advisable inits reasonable judgment and, in all cases, Silicon shall credit Borrower’s Loanaccount with only the net amounts received by Silicon in payment of anyAccounts.

 

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

 

4.8                                 ***Verification.***  Silicon may, from time to time, verifydirectly with the respective Account Debtors in a commercially reasonablemanner the validity, amount and other matters relating to the Accounts, bymeans of mail, telephone or otherwise, either in the name of Borrower orSilicon or such other name as Silicon may choose.

 

4.9                                 ***No Liability.***  IfSilicon complies with reasonable banking practices and Section 9-207 of theCode,****Silicon shall not beresponsible or liable for any shortage or discrepancy in, damage to, or loss ordestruction of, any goods, the sale or other disposition of which gives rise toan Account, or for any error, act, omission, or delay of any kind occurring inthe settlement, failure to settle, collection or failure to collect anyAccount, or for settling any Account in good faith for less than the fullamount thereof, nor shall Silicon be deemed to be responsible for any ofBorrower’s obligations under any contract or agreement giving rise to anAccount.  Nothing herein shall, however,relieve Silicon from liability for its own gross negligence or willfulmisconduct.

 

Section 5                                               ADDITIONALDUTIES OF THE BORROWER.

 

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

 

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

 

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released will be so used.  IfBorrower fails to provide or pay for any insurance, Silicon may, but is notobligated to, obtain the same at Borrower’s expense.  Borrower shall promptly deliver to Siliconcopies of all material reports made to insurance companies.

 

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

 

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

 

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

 

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(iii) which in the aggregate do not exceed $100,000 in any fiscal year;(iv) store any Inventory or other Collateral with any warehouseman or otherthird party, except for (A) as set forth on Representations and WarrantiesCertificate or (B) if Borrower provides Silicon with prior written notice ofnew location; (v) sell any Inventory on a sale-or-return, guaranteed sale,consignment, or other contingent basis; (vi) make any loans of any moneyor other assets except for (A) advances to employees in the ordinary course ofbusiness in an aggregate amount outstanding for all such advances to allemployees not to exceed $200,000 and employee draws in connection with theirsales commissions in the ordinary course of business, (B) other loans nototherwise permitted pursuant to this Agreement, in an amount not to exceed$100,000 in any fiscal year, and (C) extensions of credit in the nature ofaccounts receivable, prepaid royalties or expenses, or notes receivable arisingfrom the sale, lease, or license of goods or the provision of services in theordinary course of business, or performance or similar deposits arising in the ordinarycourse of business or evidences of indebtedness received in satisfaction orpartial satisfaction of amounts owed by financially troubled account debtors tothe extent necessary to prevent or limit loss; (vii) incur any Indebtednessother than Permitted Indebtedness; (viii) guarantee or otherwise become liablewith respect to the obligations of another Person, except for guarantees ofPermitted Indebtedness, endorsements of negotiable instruments for deposit orcollection in the ordinary course of business and indemnification obligationsarising in the ordinary course of business; (ix) pay or declare any dividendson Borrower’s stock (other than dividends or deemed dividends payable solely inshares of stock of Borrower); (x) redeem, retire, purchase or otherwiseacquire, directly or indirectly, any of Borrower’s stock; (xi) make any changein Borrower’s capital structure which would have a material adverse effect onBorrower or on the prospect of repayment of the Obligations (except thatBorrower may repurchase its capital stock (A) in an aggregate amount not toexceed $200,000 in any fiscal year pursuant to applicable stock repurchaseplans or agreements and other similar plans or agreements or by cancellation ofindebtedness from employees, officers, directors, and consultants, providedthat no Default or Event of Default exists immediately prior to or immediatelyafter giving effect to such repurchases, (B) with the proceeds of asubstantially concurrent sale of its capital stock provided that no Default orEvent of Default exists immediately prior to or immediately after giving effectto such repurchases, and (C) conversion of any of its convertible securitiesinto other securities pursuant to the terms of such convertible securities orotherwise in exchange therefor; (xii) engage, directly or indirectly, in anybusiness other than the businesses currently engaged in by Borrower orreasonably related thereto; or (xiii) dissolve or elect to dissolve.  Transactions permitted by the foregoingprovisions of this Section are only permitted if no Default or Event of Defaultwould occur as a result of such transaction.

 

5.6                                 ***Litigation Cooperation.***  Should any third-party suit or proceeding beinstituted by or against Silicon with respect to any Collateral or relating toBorrower, Borrower shall, without expense to Silicon, make available forreasonable periods of time Borrower and its officers, employees and agents andBorrower’s books and records, to the extent that Silicon may deem themreasonably necessary in order to prosecute or defend any such suit orproceeding; provided that Borrower shall not be required to make available anybooks, records, documents or information (i) that constitutes non-financialtrade secrets of non-financial proprietary information, (ii) in respect ofwhich disclosure to Silicon (or its representatives) is prohibited byapplicable law or any agreement binding on Borrower as of the date hereof whichhas been disclosed to Silicon in writing, or (iii) that is subject toattorney-client privilege.

 

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

 

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Section 6                                               TERM.

 

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

 

6.2                                 ***Payment of Obligations.***  On the Maturity Date or on any earliereffective due date, Borrower shall pay and perform in full all Obligations,whether evidenced by installment notes or otherwise, and whether or not all orany part of such Obligations are otherwise then due and payable.  Without limiting the generality of theforegoing, if on the Maturity Date, or on any earlier effective date oftermination, there are any outstanding Letters of Credit issued by Silicon orissued by another institution based upon an application, guarantee, indemnityor similar agreement on the part of Silicon, then on such date Borrower shallprovide to Silicon cash collateral in an amount equal to 105% of the faceamount of all such Letters of Credit plus all interest, fees and cost due or tobecome due in connection therewith (as estimated by Silicon in its good faith businessjudgment), to secure all of the Obligations relating to said Letters of Credit,pursuant to Silicon’s then standard form cash pledge agreement.  Notwithstanding any termination of thisAgreement, all of Silicon’s security interests in all of the Collateral and allof the terms and provisions of this Agreement shall continue in full force andeffect until all Obligations have been paid and performed in full; providedthat Silicon may, in its sole discretion, refuse to make any further Loansafter termination.  No termination shallin any way affect or impair any right or remedy of Silicon, nor shall any suchtermination relieve Borrower of any Obligation to Silicon, until all of theObligations have been paid and performed in full.  Upon payment and performance in full of allthe Obligations and written termination of this Agreement by Silicon,  Silicon shall promptly deliver to Borrowertermination statements, requests for reconveyances and such other documents asmay be required to fully terminate Silicon’s security interests.

 

Section 7                                               EVENTSOF DEFAULT AND REMEDIES.

 

7.1                                 ***Events of Default.***  The occurrence of any of the following events shall constitute an “Event ofDefault” under this Agreement, and Borrower shall give Silicon immediatewritten notice thereof: (a) Any warranty, representation, statement, report orcertificate made or delivered to Silicon by Borrower or any of Borrower’sofficers, employees or agents, shall be untrue or misleading in a materialrespect when made or deemed made; or (b) Borrower shall fail to pay whendue any Loan or any interest thereon or any other monetary Obligation; or(c) the total Loans and other Obligations outstanding at any time shallexceed the Credit Limit and Borrower shall have failed to pay the excess within2 Business Days; or (d) Borrower shall fail to comply with any of the financialcovenants set forth in the Schedule or shall fail to perform any othernon-monetary Obligation which by its nature cannot be cured, or shall fail topermit Silicon to conduct an inspection or audit as specified inSection 5.4 hereof; or (e) Borrower shall fail to perform any othernon-monetary Obligation, which failure is not cured within 10 Business Daysafter the date due; or (f) any levy, assessment, attachment, seizure, lien orencumbrance (other than a Permitted Lien) is made on all or any part of theCollateral which is not cured within 20 days after the occurrence of the same,or immediately upon the service of process upon Silicon seeking to attach bytrustee or other process, any of Borrower’s funds on deposit with, or assets ofthe Borrower in the possession of, Silicon; or (g) any default or event ofdefault occurs under any obligation in an amount in excess of $250,000 securedby a Permitted Lien, which is not cured within any applicable cure period orwaived in writing by the holder of the Permitted Lien; or (h) Borrower breachesany material contract or obligation, which has or may reasonably be expected tohave a material adverse effect on Borrower’s business or financial condition;or (i) Dissolution, termination of existence, insolvency or business failure ofBorrower; or appointment of a receiver, trustee or custodian, for all or anypart of the property of, assignment for the benefit of creditors by, or the commencementof any proceeding by Borrower under any reorganization, bankruptcy, insolvency,arrangement, readjustment of debt, dissolution or liquidation law or statute ofany jurisdiction, now or in the future in effect; or (j) the commencement ofany proceeding against Borrower or any guarantor of any of the Obligationsunder any reorganization, bankruptcy, insolvency, arrangement, readjustment ofdebt, dissolution or liquidation law or statute of any jurisdiction, now or inthe future in effect,

 

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which is not cured by the dismissal thereof within 30 days after thedate commenced; or (k) revocation or termination of, or limitation or denial ofliability upon, any pledge of any certificate of deposit, securities or otherproperty or asset of any kind pledged by any third party to secure any or allof the Obligations, or any attempt to do any of the foregoing, or commencementof proceedings by or against any such third party under any bankruptcy orinsolvency law; or (l) Borrower defaults under any agreement evidencing anyindebtedness to any third party in excess of $250,000; or (m) Borrowermakes any payment on account of any indebtedness or obligation in excess of$100,000 which has been subordinated to the Obligations other than as permittedin the applicable subordination agreement, or a default occurs under anyinstrument evidencing such subordinated indebtedness in excess of $100,000, orthe holder of any such subordinated indebtedness in excess of $100,000accelerates all or any portion of such subordinated indebtedness or if anyPerson who has subordinated such indebtedness or obligations terminates or inany way limits his subordination agreement; or (n) direct or indirectacquisition, in one or more transactions, by any person (as such term is usedin Section 13(d) and Section 14(d)(2) of the Exchange Act) of beneficialownership of the issued and outstanding shares of voting stock of Borrower, theresult of which acquisition is that such person or group possesses in excess of50% of the combined voting power of all then issued and outstanding stock ofBorrower; or (o) Borrower shall generally not pay its debts as they become due,or Borrower shall conceal, remove or transfer any part of its property, withintent to hinder, delay or defraud its creditors, or make or suffer anytransfer of any of its property which may be fraudulent under any bankruptcy,fraudulent conveyance or similar law; or (p) there shall be (i) a materialimpairment in the perfection or priority (subject to Permitted Liens) ofSilicon’s security interest in the Collateral or in the value of suchCollateral; (ii) a material adverse change in the business, operations  or condition (financial or otherwise) of theBorrower; or (iii) a material impairment of the prospect of repayment of anyportion of the Obligations; or (q) Borrower shall breach any material term ofthe IP Security Agreement.  Silicon maycease making any Loans hereunder during any of the above cure periods, andthereafter if an Event of Default has occurred and is continuing.

 

7.2                                 ***Remedies.***  Upon the occurrence and during thecontinuance of any Event of Default, Silicon, at its option, and without noticeor demand of any kind (all of which are hereby expressly waived by Borrower),may do any one or more of the following: (a) Cease making Loans or otherwiseextending credit to Borrower under this Agreement or any other document oragreement; (b) Accelerate and declare all or any part of the Obligations to beimmediately due, payable, and performable, notwithstanding any deferred orinstallment payments allowed by any instrument evidencing or relating to anyObligation; (c) Take possession of any or all of the Collateral wherever it maybe found, and for that purpose Borrower hereby authorizes Silicon withoutjudicial process to enter onto any of Borrower’s premises without interferenceto search for, take possession of, keep, store, or remove any of theCollateral, and remain on the premises or cause a custodian to remain on thepremises in exclusive control thereof, without charge for so long as Silicondeems it reasonably necessary in order to complete the enforcement of itsrights under this Agreement or any other agreement; provided, however, thatshould Silicon seek to take possession of any of the Collateral by courtprocess, Borrower hereby irrevocably waives to the extent permitted by law: (i)any bond and any surety or security relating thereto required by any statute,court rule or otherwise as an incident to such possession; (ii) any demand forpossession prior to the commencement of any suit or action to recoverpossession thereof; and (iii) any requirement that Silicon retain possessionof, and not dispose of, any such Collateral until after trial or final judgment;(d) Require Borrower to assemble any or all of the Collateral and make itavailable to Silicon at places designated by Silicon which are reasonablyconvenient to Silicon and Borrower, and to remove the Collateral to suchlocations as Silicon may deem advisable; (e) Complete the processing,manufacturing or repair of any Collateral prior to a disposition thereof and,for such purpose and for the purpose of removal, Silicon shall have the rightto use Borrower’s premises, vehicles, hoists, lifts, cranes, and otherEquipment and all other property without charge; (f) Sell, lease or otherwisedispose of any of the Collateral, in its condition at the time Silicon obtainspossession of it or after further manufacturing, processing or repair, at oneor more public and/or private sales, in lots or in bulk, for cash, exchange orother property, or on credit, and to adjourn any such sale from time to

 

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time without notice other than oral announcement at the time scheduledfor sale.  Silicon shall have the rightto conduct such disposition on Borrower’s premises without charge, for suchtime or times as Silicon deems reasonable, or on Silicon’s premises, orelsewhere and the Collateral need not be located at the place ofdisposition.  Silicon may directly orthrough any affiliated company purchase or lease any Collateral at any suchpublic disposition, and if permissible under applicable law, at any privatedisposition.  Any sale or otherdisposition of Collateral shall not relieve Borrower of any liability Borrowermay have if any Collateral is defective as to title or physical condition orotherwise at the time of sale; (g) Demand payment of, and collect any Accountsand General Intangibles comprising Collateral and, in connection therewith,Borrower irrevocably authorizes Silicon to endorse or sign Borrower’s name onall collections, receipts, instruments and other documents, to take possessionof and open mail addressed to Borrower and remove therefrom payments made withrespect to any item of the Collateral or proceeds thereof, and, in Silicon’ssole discretion, to grant extensions of time to pay, compromise claims andsettle Accounts and the like for less than face value; (h) Offset against anysums in any of Borrower’s general, special or other Deposit Accounts withSilicon against any or all the Obligations or place a “hold” on any accountmaintained with Silicon and/or deliver a notice of exclusive control, anyentitlement order, or other directions or instructions pursuant to any controlagreement or similar agreements providing control of any Collateral; and (i)Demand and receive possession of any of Borrower’s federal and state income taxreturns and the books and records utilized in the preparation thereof or referringthereto.  All reasonable attorneys’ fees,expenses, costs, liabilities and obligations incurred by Silicon with respectto the foregoing shall be added to and become part of the Obligations, shall bedue on demand, and shall bear interest at a rate equal to the highest interestrate applicable to any of the Obligations. Without limiting any of Silicon’s rights and remedies, from and afterthe occurrence and during the continuance of any Event of Default, the interestrate applicable to the Obligations shall be increased by an additional threepercent (3%) per annum (the “Default Rate”).

 

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

 

7.4                                 ***Power of Attorney.***  Upon the occurrence and during thecontinuance of any Event of Default, without limiting Silicon’s other rightsand remedies, Borrower grants to Silicon an irrevocable power of attorneycoupled with an interest, authorizing and permitting Silicon (acting throughany of its employees, attorneys or agents) at any time, at its option, butwithout obligation, with or without notice to Borrower, and at Borrower’sreasonable expense, to do any or all of the following, in Borrower’s name orotherwise, but Silicon agrees to exercise the following powers in a commerciallyreasonable manner:  (a) Execute on behalfof Borrower any documents that Silicon may, in its good faith businessjudgment, deem advisable in order to perfect and maintain Silicon’s securityinterest in the Collateral, or in order to exercise a right of Borrower orSilicon, or in order to fully consummate all the transactions contemplatedunder this Agreement, and all other present and future agreements; (b) Executeon behalf of Borrower any document exercising, transferring or assigning anyoption to purchase, sell or otherwise dispose of or to lease (as lessor orlessee) any real or personal property which is part of Silicon’s

 

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

 

7.5                                 ***Application of Proceeds.***  All proceeds realized as the result of anysale of the Collateral shall be applied by Silicon first to the reasonablecosts, expenses, liabilities, obligations and attorneys’ fees incurred bySilicon in the exercise of its rights under this Agreement, second to theinterest due upon any of the Obligations, and third to the principal of theObligations, in such order as Silicon shall determine in its solediscretion.  Any surplus shall be paid toBorrower or other persons legally entitled thereto; Borrower shall remainliable to Silicon for any deficiency. If, Silicon, in its good faith business judgment, directly or indirectlyenters into a deferred payment or other credit transaction with any purchaserat any sale of Collateral, Silicon shall have the option, exercisable at anytime, in its good faith business judgment, of either reducing the Obligationsby the principal amount of purchase price or deferring the reduction of theObligations until the actual receipt by Silicon of the cash therefor.

 

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

 

Section 8                                               DEFINITIONS.

 

Asused in this Agreement, the following terms have the following meanings:

 

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

 

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

 

“Account Debtor” means the obligor onan Account.

 

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

 

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

 

“Cash Management Services” meansSilicon’s cash management services, direct deposit of payroll, business creditcard, and check cashing services as may be further identified in the variouscash management services agreements related to such Cash Management Services.

 

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

 

“Collateral” has the meaning set forthin Section 2.1 above.

 

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

 

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

 

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

 

“Deferred Revenue” is all amountsreceived in advance of performance under contracts and not yet recognized asrevenue.

 

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

 

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

 

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limiting the fact that the determination of which Accounts are eligiblefor borrowing is a matter of Silicon’s discretion, the following (the “MinimumEligibility Requirements”) are the minimum requirements for an Account tobe  an Eligible Account:  (i) the Account must not be outstanding formore than 90 days from its invoice date, (ii) the Account must not representprogress billings, be due under a fulfillment or requirements contract  with the Account Debtor, (iii)  the Account must not be subject to anycontingencies (including Accounts arising from sales on consignment, guaranteedsale or other terms pursuant to which payment by the Account Debtor may beconditional, except as may otherwise be acceptable to Silicon in itsdiscretion), (iv) the Account must not be owing from an Account Debtor withwhom the Borrower has any dispute (whether or not relating to the particularAccount), (v) the Account must not be owing from an Affiliate of Borrower, (vi)the Account must not be owing from an Account Debtor which is subject to anyinsolvency or bankruptcy proceeding, or whose financial condition is notreasonably acceptable to Silicon, or which, fails or goes out of a materialportion of its business, (vii) the Account must not be owing from the United Statesor any department, agency or instrumentality thereof (unless there has beencompliance, to Silicon’s reasonable satisfaction, with the United StatesAssignment of Claims Act), (viii) the Account must not be owing from an AccountDebtor located outside the United States (unless pre-approved by Silicon in itsdiscretion in writing, or backed by a letter of credit satisfactory to Silicon,or FCIA insured satisfactory to Silicon), and (ix) the Account must not beowing from an Account Debtor to whom Borrower is or may be liable for goodspurchased from such Account Debtor or otherwise, and (x) the Account must nothave a credit balance over 90 days from invoice date.  Accounts owing from one Account Debtor willnot be deemed Eligible Accounts to the extent they exceed 25% of the totalAccounts outstanding.  In addition, ifmore than 50% of the Accounts owing from an Account Debtor are outstanding morethan 90 days from their invoice date (without regard to unapplied credits) orare otherwise not Eligible Accounts, then all Accounts owing from that AccountDebtor will be deemed ineligible for borrowing. Silicon may, from time to time, in its good faith business judgment,revise the Minimum Eligibility Requirements, upon 10 days’ prior written noticeto the Borrower.

 

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

 

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

 

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

 

“GAAP” means generally acceptedaccounting principles, consistently applied.

 

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

 

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

 

“Indebtedness” is (a) indebtedness forborrowed money or the deferred price of property or services, such asreimbursement 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.

 

“IntellectualProperty” is the Intellectual Property Collateral, as defined in the IPSecurity Agreement.

 

“IP Security Agreement” means thatcertain Intellectual Property Security Agreement of even date herewith by andbetween Borrower and Silicon.

 

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

 

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

 

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

 

“Loan Documents” means, collectively,this Agreement, the Representations and Warranties Certificate, the IP SecurityAgreement, and all other present and future documents, instruments andagreements between Silicon and Borrower, including, but not limited to thoserelating to this Agreement, and all amendments and modifications thereto andreplacements therefor.

 

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

 

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

 

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

 

“Payment Intangibles” means allpayment intangibles including, without limitation, “payment intangibles” asdefined in the Code and also any general intangible under which the AccountDebtor’s primary obligation is a monetary obligation.

 

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

 

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

 

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payment of worker’s compensation, unemployment insurance or othersocial security benefits or obligations, public or statutory obligations,surety or appeal bonds, bid or performance bonds, leases or other obligationsincurred in the ordinary course of business, (xiv) liens existing as of thedate hereof and listed on **Schedule 2**hereto, (xv) liens subordinated to the liens of Silicon (on terms acceptable toSilicon), (xvi) liens on insurance proceeds in favor of insurance companiesgranted solely as security for financed premiums, (xvii) leases or subleases grantedto others in the ordinary course of business, and (xviii) customary liensgranted in favor of trustees to secure fees and other amounts owing to suchtrustee under an indenture or other agreement pursuant to which PermittedIndebtedness is issued.  Silicon willhave the right to require, as a condition to its consent under subsection (iv)above, that the holder of the additional security interest or lien sign anintercreditor agreement on Silicon’s then standard form, acknowledge that thesecurity interest is subordinate to the security interest in favor of Silicon,and agree not to take any action to enforce its subordinate security interestso long as any Obligations remain outstanding, and that Borrower agree that anyuncured default in any obligation secured by the subordinate security interestshall also constitute an Event of Default under this Agreement.

 

“Person” means any individual, soleproprietorship, partnership, joint venture, trust, unincorporated organization,association, corporation, government, or any agency or political divisionthereof, or any other entity.

 

“Representations and WarrantiesCertificate” means that certain Representations and Warranties letteragreement dated                      ,2004 executed by Borrower in favor of Silicon.

 

“Reserves” means, as of any date ofdetermination, such amounts as Silicon may from time to time establish andrevise in good faith upon prior notice to Borrower reducing the amount ofLoans, Letters of Credit and other financial accommodations which wouldotherwise be available to Borrower under the lending formula(s) provided in theSchedule:  (a) to reflect specific eventsor conditions which, as reasonably determined by Silicon in good faith, wouldmaterially and adversely affect (i) the Collateral, or (ii) the securityinterests and other rights of Silicon in the Collateral (including theenforceability, perfection and priority thereof); or (b) to reflect Silicon’sgood faith and commercially reasonable belief that any Collateral report or financialinformation furnished by or on behalf of Borrower or any guarantor to Siliconis and remains after notice and opportunity to cure incomplete, inaccurate ormisleading in any material respect; or (c) in respect of any state of factswhich Silicon determines in good faith constitutes an Event of Default or isreasonably likely to, with notice or passage of time or both, constitute anEvent of Default.

 

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

 

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

 

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

 

Section 9                                               GENERALPROVISIONS.

 

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

 

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

 

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

 

9.4                                 ***Monthly Accountings.***  Silicon shall provide Borrower monthly withan account of advances, charges, expenses and payments made pursuant to thisAgreement.  Such account shall be deemedcorrect, accurate and binding on Borrower and an account stated (except forreverses and reapplications of payments made and corrections of errorsdiscovered by Silicon), unless Borrower notifies Silicon in writing to thecontrary within sixty (60) days after each account is rendered, describing thenature of any alleged errors or omissions.

 

9.5                                 ***Notices.***  All notices to be given under this Agreementshall be in writing and shall be given either personally or by reputableprivate delivery service or by regular first-class mail, or certified mailreturn receipt requested, addressed to Silicon or Borrower at the addressesshown in the preamble or heading, respectively, to this Agreement, or at anyother address designated in writing by one party to the other party.  Notices to Silicon shall be directed to theCommercial Finance Division, to the attention of the Division Manager or theDivision Credit Manager.  All noticesshall be deemed to have been given upon delivery in the case of noticespersonally delivered, or at the expiration of one Business Day following deliveryto the private delivery service, or two Business Days following the depositthereof in the United States mail, with postage prepaid.

 

9.6                                 ***Severability.***  Should any provision of this Agreement beheld by any court of competent jurisdiction to be void or unenforceable, suchdefect shall not affect the remainder of this Agreement, which shall continuein full force and effect.

 

9.7                                 ***Integration.***  This Agreement and such other writtenagreements, documents and instruments as may be executed in connection herewithare the final, entire and complete agreement between Borrower and Silicon andsupersede all prior and contemporaneous negotiations and oral representationsand agreements, all of which are

 

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

 

9.8                                 ***Waivers; Indemnity.***  The failure of Silicon at any time or timesto require Borrower to strictly comply with any of the provisions of thisAgreement or any other present or future agreement between Borrower and Siliconshall not waive or diminish any right of Silicon later to demand and receivestrict compliance therewith.  Any waiverof any default shall not waive or affect any other default, whether prior orsubsequent, and whether or not similar. None of the provisions of this Agreement or any other agreement now orin the future executed by Borrower and delivered to Silicon shall be deemed tohave been waived by any act or knowledge of Silicon or its agents or employees,but only by a specific written waiver signed by an authorized officer ofSilicon and delivered to Borrower.  Tothe extent permitted by law, Borrower waives the benefit of all statutes oflimitation relating to any of the Obligations or this Agreement or any documentrelated hereto, and to the extent permitted by law, Borrower waives demand,protest, notice of protest and notice of default or dishonor, notice of paymentand nonpayment, release, compromise, settlement, extension or renewal of anycommercial paper, instrument, account, General Intangible, document or guarantyat any time held by Silicon on which Borrower is or may in any way be liable,and notice of any action taken by Silicon, unless expressly required by thisAgreement.  Borrower hereby agrees toindemnify Silicon and its affiliates, subsidiaries, parent, directors,officers, employees, agents, and attorneys, and to hold them harmless from andagainst any and all claims, debts, liabilities, demands, obligations, actions,causes of action, penalties, costs and expenses (including reasonable attorneys’fees), of every kind, which they may sustain or incur based upon or arising outof any of the Obligations, or any relationship or agreement between Silicon andBorrower, or any other matter, relating to Borrower or the Obligations;provided, that this indemnity shall not extend to damages, claims, debts,liabilities, demands, obligations, actions, causes of action, penalties, costsand expenses proximately caused by the indemnitee’s own gross negligence orwillful misconduct.  Notwithstanding anyprovision in this Agreement to the contrary, the indemnity agreement set forthin this Section shall survive any termination of this Agreement and shall forall purposes continue in full force and effect.

 

9.9                                 ***No Liability for OrdinaryNegligence.***  NeitherSilicon, nor any of its directors, officers, employees, agents, attorneys orany other Person affiliated with or representing Silicon shall be liable forany claims, demands, losses or damages, of any kind whatsoever, made, claimed,incurred or suffered by Borrower or any other party through the ordinarynegligence of Silicon, or any of its directors, officers, employees, agents,attorneys or any other Person affiliated with or representing Silicon, butnothing herein shall relieve Silicon from liability for its own grossnegligence or willful misconduct.

 

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

 

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

 

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

 

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be relieved of the automatic stay in bankruptcy; file or prosecute anyprobate claim, bankruptcy claim, third-party claim, or other claim; examine,audit, copy, and inspect any of the Collateral or any of Borrower’s books andrecords; protect, obtain possession of, lease, dispose of, or otherwise enforceSilicon’s security interest in, the Collateral; and otherwise represent Siliconin any litigation relating to Borrower. In satisfying Borrower’s obligation hereunder to reimburse Silicon forattorneys fees, Borrower may, for convenience, issue checks directly to Silicon’sattorneys, Riemer & Braunstein, LLP, but Borrower acknowledges and agreesthat Riemer & Braunstein, LLP is representing only Silicon and not Borrowerin connection with this Agreement.  Ifeither Silicon or Borrower files any lawsuit against the other predicated on abreach of this Agreement, Silicon shall be entitled to recover its reasonablecosts and attorneys’ fees, including (but not limited to) reasonableattorneys’ fees and costs incurred in the enforcement of, execution upon ordefense of any order, decree, award or judgment.  All attorneys’ fees and costs to whichSilicon may be entitled pursuant to this Section 9.12 shall immediately becomepart of Borrower’s Obligations, shall be due on demand, and shall bear interestat a rate equal to the highest interest rate applicable to any of theObligations.

 

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

 

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

 

9.15                           ***Limitation of Actions.**** *Anyclaim or cause of action by Borrower against Silicon, its directors, officers,employees, agents, accountants or attorneys, based upon, arising from, orrelating to this Agreement or any Loan Document shall be barred unless assertedby Borrower by the commencement of an action or proceeding in a court ofcompetent jurisdiction by the filing of a complaint within the earlier to occurof (i) one year after the discovery of the act, occurrence or omission uponwhich such claim or cause of action is based, and the service of a summons andcomplaint on an officer of Silicon, or on any other person authorized to acceptservice on behalf of Silicon, within thirty (30) days thereafter, or (ii) threeyears from the date of this Agreement, or if later, one year from the MaturityDate of this Agreement if such Maturity Date is extended pursuant to anamendment or modification of this Agreement. Borrower agrees that such period is a reasonable and sufficient time forBorrower to investigate and act upon any such claim or cause of action.  The period provided herein shall not bewaived, tolled, or extended except by the written consent of Silicon in itssole discretion.  This provision shallsurvive any termination of this Agreement or any other present or futureagreement.

 

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

 

9.17                           ***Governing Law; Jurisdiction; Venue.***  This Agreement and all acts and transactionshereunder and all rights and obligations of Silicon and Borrower shall begoverned by the laws of the State of California.  As a

 

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material part of the consideration to Silicon to enter into thisAgreement, Borrower (i) agrees that all actions and proceedings relatingdirectly or indirectly to this Agreement shall, at Silicon’s option, belitigated in state or federal courts located within California; (ii) consentsto the jurisdiction and venue of any such court and consents to service ofprocess in any such action or proceeding by personal delivery or any othermethod permitted by law; and (iii) waives any and all rights Borrower may haveto object to the jurisdiction of any such court, or to transfer or change thevenue of any such action or proceeding.

 

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

 

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

 

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

 
|   | **BORROWER:**                  |
|--------|--------------------------------|
|   |                           |
|   | TUT SYSTEMS, INC.              |
|   |                           |
|   |                           |
|   | By                             |   | /s/ Randall K. Gausman |   |
|   | Name: Randall K. Gausman       |
|   | Title: Chief Financial Officer |
|   |                           |
|   |                           |
|   | **SILICON:**                   |
|   |                           |
|   | SILICON VALLEY BANK            |
|   |                           |
|   |                           |
|   | By                             |   | /s/ Bruce Helberg |   |
|   | Name: Bruce Helberg            |
|   | Title:                         |

 

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**SILICONVALLEY BANK**

 

**SCHEDULETO**

 

**LOAN ANDSECURITY AGREEMENT**

 
| Borrower: | TUT SYSTEMS, INC., a Delaware corporation                   |
|-----------|-------------------------------------------------------------|
|      |                                                        |
| Address:  | 6000 SW Meadows Drive, Suite 200  Lake Oswego, Oregon 97035 |
|      |                                                        |
| Date:     | September 23, 2004                                          |

 

This Schedule forms an integral part of the Loan andSecurity Agreement between Silicon Valley Bank and the above-borrower of evendate.

 

**Section 1**                                             **Credit Limit**

 

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

 

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

 

(ii)                                  the aggregate amounts then undrawn on alloutstanding letters of credit, foreign exchange contracts, or any otheraccommodations issued or incurred, or caused to be issued or incurred bySilicon for the account and/or benefit of the Borrower.

 

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

 

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

 

(iii)                               the aggregate amounts then undrawn on alloutstanding letters of credit, foreign exchange contracts, or any otheraccommodations issued or incurred, or caused to be issued or incurred by Siliconfor the account and/or benefit of the Borrower.

 

Siliconmay, from time to time, modify the advance rate(s) set forth herein in its goodfaith business judgment upon  10 dayprior written notice to Borrower based on changes in collection experience withrespect to the Accounts or other issues or factors relating to the Accounts orthe Collateral.

 

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

 

**$500,000.00**

 

Cash Management Services Sublimit  (Section 1.8):

 

**$500,000.00**

 

**Section 2****                                             INTEREST.**

 

**Interest Rate** (Section 1.2):

 

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

 

**Minimum Monthly Interest**(Section 1.2):   Not applicable.

 

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**Section 3****                                             FEES**

 

(Section 1.4):

 

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

 

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

 

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

 

Early Termination Fee:     Ifthis Agreement is voluntarily or involuntarily terminated prior to itsmaturity, the Borrower shall pay to Silicon a termination fee in the amountequal to $70,000.00, provided that no such termination fee shall be charged ifthe credit facility hereunder is replaced or transferred to another division ofSilicon.  The termination fee shall bedue and payable upon prepayment by the Borrower in the case of voluntaryprepayments or upon demand by Silicon in the event of  involuntary prepayment, and if not paidimmediately shall bear interest at a rate equal to the highest rate applicableto any of the Obligations.

 

**Section 4**                                             **MATURITY DATE**

 

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

 

**Section 5**                                             **FINANCIAL COVENANTS**

 

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

 

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

 

**a. Minimum Tangible Net Worth:**

 

Borrower shall maintain a Tangible Net Worth of notless $9,000,000.00 as of the end of any calendar month, from the date of thisAgreement until the Maturity Date.

 

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

 

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

 

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

 

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

 

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

 

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

 

**Section 6****                                             REPORTING.**

 

(Section 5.3):

 

Borrower shall provide Silicon with thefollowing:

 

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

 

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

 

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

 

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

 

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

 

(f)                                    Monthlyunaudited financial statements, as soon as available, and in any event withinthirty days after the end of each month.

 

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

 

(h)                                 Annualoperating budgets (including income statements, balance sheets and cash flowstatements, by month) for the upcoming fiscal year of Borrower withinforty-five days after the end of each fiscal year of Borrower.

 

(i)                                     Annualaudited****financial statements, assoon as available, and in any event within 120 days following the end ofBorrower’s fiscal year, prepared under GAAP, consistently applied, togetherwith an unqualified opinion****on thefinancial statements from an independent certified public accounting firmreasonably acceptable to Silicon. Borrower may satisfy this requirement by delivering by email anelectronic copy of documents filed with the SEC.

 

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

 

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

 

So long as (i) Borrower maintains an AdjustedQuick Ratio of greater than 1.75 to 1.0, (ii) no Default or Event of Defaulthas occurred and is continuing, and (iii) Borrower is not in breach of itsobligations under this Agreement, then the Borrower will be on “streamlinereporting status”.   In the event thatBorrower is unable to maintain an Adjusted Quick Ratio of greater than 1.75 to1.0, then Borrower will no longer be on “streamline reporting status” unlessand until such time as Borrower has thereafter maintained an Adjusted QuickRatio of greater than 1.75 to 1.0 for at least three consecutive months.

 

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

 

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

 

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

 

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

 

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

 

**Section 7****                                             OTHERCOVENANTS**

 

Borrower shall at all times comply with all of thefollowing additional covenants:

 

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

 

(b)                                 **Subordination of Inside Debt**.  All present and future indebtedness of theBorrower to its officers, directors and shareholders (“Inside Debt”) shall, atall times, be subordinated to the Obligations pursuant to a subordinationagreement on Silicon’s standard form. Borrower represents and warrants that there is no Inside Debt presentlyoutstanding.  Prior to incurring anyInside Debt in the future, Borrower

 

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shall cause the person to whom such InsideDebt will be owed to execute and deliver to Silicon a subordination agreementreasonably acceptable to Silicon.

 

(c)                                  **Intellectual Property Security Agreement.**  As a condition precedent to the effectivenessof this Agreement, Borrower shall have executed and delivered to Siliconan  Intellectual Property SecurityAgreement (the “IP Security Agreement”)**,**substantiallyin the form attached hereto as Exhibit B.

 

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IN WITNESS WHEREOF, the parties hereto have causedthis Schedule to Loan and Security Agreement to be executed as of the datefirst above written.

 
|   | **BORROWER:**                  |
|--------|--------------------------------|
|   |                           |
|   | TUT SYSTEMS, INC.              |
|   |                           |
|   |                           |
|   | By                             |   | /s/ Randall K. Gausman |   |
|   | Name: Randall K. Gausman       |
|   | Title: Chief Financial Officer |
|   |                           |
|   | **SILICON:**                   |
|   |                           |
|   | SILICON VALLEY BANK            |
|   |                           |
|   |                           |
|   | By                             |   | /s/ Bruce Helberg |   |
|   | Name:                          |
|   | Title:                         |

 

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