Exhibit 10.19


 


SILICON
VALLEY BANK


 


LOAN AND
SECURITY AGREEMENT


 


	
  Borrower:

  	
  TUT SYSTEMS, INC., a Delaware corporation

  
	
   

  	
   

  
	
  Address:

  	
  6000 SW Meadows Drive, Suite 200

  Lake Oswego, Oregon 97035

  
	
   

  	
   

  
	
  Date:

  	
  September 23, 2004

  



 


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


 


Section 1                                               LOANS.


 


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


 


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


 


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


 


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


 


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


 





















 


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


 


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


 


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


 


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


 


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


 


Section 2                                               SECURITY
INTEREST.


 


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


 


Section 3                                               REPRESENTATIONS,
WARRANTIES AND COVENANTS OF BORROWER.


 


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


 


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


 


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


 


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


 


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


 


3.4                                 Title to Collateral; Perfection;
Permitted Liens.


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


Section 4                                               ACCOUNTS.


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


Section 5                                               ADDITIONAL
DUTIES OF THE BORROWER.


 


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


 


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


 


8





















 


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


 


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


 


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


 


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


 


9





















 


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


 


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


 


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


 


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Section 6                                               TERM.


 


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


 


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


 


Section 7                                               EVENTS
OF DEFAULT AND REMEDIES.


 


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


 


11





















 


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


 


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


 


12





















 


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


 


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


 


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


 


13





















 


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


 


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


 


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


 


Section 8                                               DEFINITIONS.


 


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


 


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


 


14





















 


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


 


“Account Debtor” means the obligor on
an Account.


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


15





















 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


17





















 


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


 


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


 


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


 


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


 


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


 


18





















 


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


 


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


 


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


 


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


 


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


 


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


 


19





















 


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


 


Section 9                                               GENERAL
PROVISIONS.


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


20





















 


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


 


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


 


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


 


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


 


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


 


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


 


21





















 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


	
   

  	
  BORROWER:

  
	
   

  	
   

  
	
   

  	
  TUT SYSTEMS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By

  	
   

  	
  /s/ Randall K. Gausman

  	
   

  
	
   

  	
  Name: Randall K. Gausman

  
	
   

  	
  Title: Chief Financial Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  SILICON:

  
	
   

  	
   

  
	
   

  	
  SILICON VALLEY BANK

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By

  	
   

  	
  /s/ Bruce Helberg

  	
   

  
	
   

  	
  Name: Bruce Helberg

  
	
   

  	
  Title:

  



 


24





















 


SILICON
VALLEY BANK


 


SCHEDULE
TO


 


LOAN AND
SECURITY AGREEMENT


 


	
  Borrower:

  	
  TUT SYSTEMS, INC., a Delaware corporation

  
	
   

  	
   

  
	
  Address:

  	
  6000 SW Meadows Drive, Suite 200

  Lake Oswego, Oregon 97035

  
	
   

  	
   

  
	
  Date:

  	
  September 23, 2004

  



 


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


 


Section 1                                             Credit Limit


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


$500,000.00


 


Cash Management Services Sublimit  (Section 1.8):


 


$500,000.00


 


Section 2                                             INTEREST.


 


Interest Rate (Section 1.2):


 


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


 


Minimum Monthly Interest (Section 1.2):   Not applicable.


 


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Section 3                                             FEES


 


(Section 1.4):


 


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


 


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


 


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


 


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


 


Section 4                                             MATURITY DATE


 


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


 


Section 5                                             FINANCIAL COVENANTS


 


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


 


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


 


a. Minimum Tangible Net Worth:


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


Section 6                                             REPORTING.


 


(Section 5.3):


 


Borrower shall provide Silicon with the
following:


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


27





















 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


Section 7                                             OTHER
COVENANTS


 


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


 


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


 


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


 


28





















 


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


 


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


 


29





















 


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


 


	
   

  	
  BORROWER:

  
	
   

  	
   

  
	
   

  	
  TUT SYSTEMS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By

  	
   

  	
  /s/ Randall K. Gausman

  	
   

  
	
   

  	
  Name: Randall K. Gausman

  
	
   

  	
  Title: Chief Financial Officer

  
	
   

  	
   

  
	
   

  	
  SILICON:

  
	
   

  	
   

  
	
   

  	
  SILICON VALLEY BANK

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By

  	
   

  	
  /s/ Bruce Helberg

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  



 


30