Document:

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EXHIBIT 4.1

SYBASE, INC.

AMENDED AND RESTATED

2003 STOCK PLAN

 

SYBASE, INC.

AMENDED AND RESTATED

2003 STOCK PLAN

(Amended and Restated Effective April 14, 2009)

     SYBASE, INC., hereby amends and restates in its entirety the Sybase, Inc. 2003 Stock Plan,
effective as of April 14, 2009. The 2003 Stock Plan was initially amended and restated as of March
25, 2004 (“1st Amendment Date”),was amended and restated on May 25, 2005 (“2nd Amendment Date”),
was amended and restated on May 29, 2007 (“3rd Amendment Date”), and was amended and
restated on April 14, 2009 (the “4th Amendment Date”). The amended and restated 2003
Stock Plan shall hereinafter be referred to as the “Plan.” The Plan, as amended on the 1st
Amendment Date, became effective upon approval by the stockholders of Sybase, Inc. at the
Annual Meeting of Stockholders held on May 27, 2004 (“Plan Effective Date”). Unless otherwise
defined, terms with initial capital letters are defined in Section 2 below.

SECTION 1

BACKGROUND AND PURPOSE

1.1 Background The Plan permits the grant of Nonqualified Stock Options, Incentive Stock
Options, Stock Appreciation Rights (SARs), Performance Shares, Performance Units, Deferred Stock
Units, Restricted Stock Units and Restricted Stock.

1.2 Purpose of the Plan The Plan is intended to attract, motivate, and retain the
following individuals: (a) employees of the Company and its Affiliates; (b) consultants who
provide significant services to the Company and its Affiliates; and (c) directors of the Company
who are employees of neither the Company nor any Affiliate. The Plan also is designed to encourage
stock ownership by such individuals, thereby aligning their interests with those of the Company’s
stockholders.

SECTION 2

DEFINITIONS

The following words and phrases shall have the following meanings unless a different meaning is
plainly required by the context:

2.1 “1934 Act” means the Securities Exchange Act of 1934, as amended. Reference to a
specific section of the 1934 Act shall include such section, any valid rules or regulations
promulgated under such section, and any comparable provisions of any future legislation, rules or
regulations amending, supplementing or superseding any such section, rule or regulation.

2.2 “Administrator” means, collectively the Board, and/or one or more Committees, and/or
one or more executive officers of the Company designated by the Board to administer the Plan or
specific portions thereof.

2.3 “Affiliate” means any corporation or any other entity (including, but not limited to,
Subsidiaries, partnerships and joint ventures) controlling, controlled by, or under common control
with the Company.

2.4 “Applicable Law” means the legal requirements relating to the administration of
Options, SARs, Performance Shares, Performance Units, Deferred Stock Units, Restricted Stock Units

 

 

and Restricted Stock and similar incentive plans under applicable state corporate and securities
laws, the Code, and applicable rules and regulations promulgated by the NYSE or the requirements of
any other stock exchange or quotation system upon which the Shares may then be listed or quoted.

2.5 “Award” means, individually or collectively, a grant under the Plan of Nonqualified
Stock Options, Incentive Stock Options, SARs, Restricted Stock, Performance Shares, Performance
Units, Restricted Stock Units and/or Deferred Stock Units.

2.6 “Award Agreement” means the written agreement setting forth the terms and provisions
applicable to each Award granted under the Plan, including the Grant Date.

2.7 “Board” or “Board of Directors” means the Board of Directors of the Company.

2.8 “Change in Control” means the occurrence of any of the following events:

     (a) Any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act)
becomes the “beneficial owner” (as defined in Rule 13d-3 of the Exchange Act), directly or
indirectly, of securities of the Company representing fifty percent (50%) or more of the total
voting power represented by the Company’s then outstanding voting securities;

     (b) The consummation of the sale or disposition by the Company of all or substantially all of
the Company’s assets;

     (c) A change in the composition of the Board occurring within a two-year period, as a result
of which fewer than a majority of the directors are Incumbent Directors. “Incumbent Directors”
means directors who either (A) are Directors as of the Plan Effective Date, or (B) are elected, or
nominated for election, to the Board with the affirmative votes of at least a majority of the
Directors at the time of such election or nomination (but will not include an individual whose
election or nomination is in connection with an actual or threatened proxy contest relating to the
election of Directors); or

     (d) The consummation of a merger or consolidation of the Company with any other corporation,
other than a merger or consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by remaining outstanding or
by being converted into voting securities of the surviving entity or its parent) at least fifty
percent (50%) of the total voting power represented by the voting securities of the Company or such
surviving entity or its parent outstanding immediately after such merger or consolidation.

2.9 “Code” means the Internal Revenue Code of 1986, as amended. Reference to a specific
section of the Code or regulation thereunder shall include such section or regulation, any valid
regulation promulgated under such section, and any comparable provision of any future legislation
or regulation amending, supplementing or superseding such section or regulation.

2.10 “Committee” means any committee appointed by the Board of Directors to administer the
Plan or any portion thereof that (i) is composed entirely of Independent Directors, and (ii) has a
published committee charter as required under applicable NYSE rules.

 

 

2.11 “Company” means Sybase, Inc., a Delaware corporation, or any successor thereto. With
respect to the definitions of the Performance Goals, the Administrator may determine that “Company”
means Sybase and its consolidated Subsidiaries.

2.12 “Consultant” means any consultant, independent contractor, or other person who
provides significant services to the Company or its Affiliates, but who is neither an Employee nor
a Director.

2.13 “Continuous Status” as an Employee, Consultant or Director means that a Participant’s
employment or service relationship with the Company or any Affiliate is not interrupted or
terminated. Continuous Status as an Employee or Consultant shall not be considered
interrupted in the following cases: (i) any leave of absence approved by the Company, or (ii)
transfers between locations of the Company or between the Company and any Subsidiary, or any
successor. A leave of absence approved by the Company shall include sick leave, military leave, or
any other personal leave approved by an authorized representative of the Company. For purposes of
Incentive Stock Options, no leave of absence may exceed ninety (90) days, unless reemployment upon
expiration of such leave is guaranteed by statute or contract. If such reemployment is not so
guaranteed, then on the one hundred eighty-first (181st) day of such leave any Incentive Stock
Option held by the Participant shall cease to be treated as an Incentive Stock Option and shall be
treated for tax purposes as a Nonqualified Stock Option. Continuous Status as a Director
means the absence of any interruption or termination of service as a Director.

2.14 “Deferred Stock Units” means an Award granted to a Participant that is Restricted
Stock, Performance Shares or Performance Units and that is paid out on a deferred basis after such
Award has vested as described in Section 11.3.

2.15 “Director” means any individual who is a member of the Board of Directors of the
Company.

2.16 “Disability” means a permanent and total disability within the meaning of Section
22(e)(3) of the Code, provided that in the case of Awards other than Incentive Stock Options, the
Administrator in its discretion may determine whether a permanent and total disability exists in
accordance with uniform and non-discriminatory standards adopted by the Administrator from time to
time.

2.17 “Employee” means any employee of the Company or of an Affiliate.

2.18 “Exercise Price” means the price at which a Share may be purchased by a Participant
pursuant to the exercise of an Option.

2.19 “Fair Market Value” means the closing price of the Company’s Shares on the NYSE on the
relevant date. If the Shares are not trading on the NYSE on the relevant date, “Fair Market Value”
means the last quoted per share selling price for Shares on the relevant date, or if there were no
sales on such date, the closing bid on the relevant date; if there are neither bids nor sales on
the relevant date, then the Fair Market Value shall mean the arithmetic mean of the highest and
lowest quoted selling prices on the last market trading day before the relevant date, as determined
by the Administrator. Notwithstanding the preceding, for federal, state, and local income tax
reporting purposes, Fair Market Value shall be determined by the Administrator (or

 

 

its delegate) in
accordance with uniform and nondiscriminatory standards adopted by it from time to time.

2.20 “Fiscal Year” means a fiscal year of the Company.

2.21 “Freestanding SAR” means a SAR that is granted independently of any Option.

2.22 “Grant Date” means with respect to an Award, the effective date an Award is granted.

2.23 “Incentive Stock Option” means an Option to purchase Shares, which is designated as an
Incentive Stock Option and is intended to meet the requirements of Section 422 of the Code.

2.24 “Independent Director” means a Nonemployee Director who is (i) a “non-employee
director” within the meaning of Section 16b-3 of the 1934 Act, (ii) “independent” as determined
under the applicable rules of the NYSE, and (iii) an “outside director” under Treasury Regulation
Section 1.162-27(e)(3), as any of these definitions may be modified or supplemented from time to
time.

2.25 “Individual Objectives” means as to a Participant, the objective and measurable goals
set by a “management by objectives” process and approved by the Administrator in its discretion.

2.26 “Misconduct” shall include commission of any act in competition with any activity of
the Company (or any Affiliate) or any act contrary or harmful to the interests of the Company (or
any Affiliate) and shall include, without limitation: (a) conviction of a felony or crime
involving moral turpitude or dishonesty, (b) violation of Company (or any Affiliate) policies, with
or acting against the interests of the Company (or any Affiliate), including employing or
recruiting any present, former or future employee of the Company (or any Affiliate), (d) misuse of
any trade or business secrets or confidential, secret, privileged, or non-public information
relating to the Company’s (or any Affiliate’s) business or breach of the Company’s Nondisclosure
and Assignment of Inventions Agreement, or (e) participating in a hostile takeover attempt of the
Company or an Affiliate. The foregoing definition shall not be deemed to be inclusive of all acts
or omissions that the Company (or any Affiliate) may consider as Misconduct for purposes of the
Plan.

2.27 “NYSE” means New York Stock Exchange.

2.28 “Nonemployee Director” means a Director who is not employed by the Company or an
Affiliate.

2.29 “Nonqualified Stock Option” means an option to purchase Shares that is not intended to
be an Incentive Stock Option.

2.30 “Option” means an Incentive Stock Option or a Nonqualified Stock Option.

2.31 “Participant” means an Employee, Consultant, or Nonemployee Director who has an
outstanding Award.

2.32 “Performance Goals” means the goal(s) (or combined goal(s)) determined by the
Administrator (in its discretion) to be applicable to a Participant with respect to an Award. As
determined by the Administrator, the performance measures for any performance period will be

 

 

any one or more of the following objective performance criteria, applied to either the Company as a
whole or, except with respect to stockholder return metrics, to a region, business unit,
affiliate or business segment, and measured either on an absolute basis or relative to a
pre-established target, to a previous period’s results or to a designated comparison group, and,
with respect to financial metrics, which may be determined in accordance with United States
Generally Accepted Accounting Principles (“GAAP”), in accordance with accounting principles
established by the International Accounting Standards Board (“IASB Principles”) or which may be
adjusted when established to exclude any items otherwise includable under GAAP or under IASB
Principles: (i) cash flow (including operating cash flow or free cash flow), (ii) revenue (on an
absolute basis or adjusted for currency effects), (iii) gross margin, (iv) operating expenses or
operating expenses as a percentage of revenue, (v) earnings (which may include earnings before
interest and taxes, earnings before taxes and net earnings), (vi) earnings per share, (viii) stock
price, (ix) return on equity, (x) total stockholder return, (xi) growth in stockholder value
relative to the moving average of the S&P 500 Index or another index, (xii) return on capital,
(xiii) return on assets or net assets, (xiv) return on investment, (xv) economic value added, (xvi)
operating profit or net operating profit, (xvii) operating margin, (xix) market share, (xx)
contract awards or backlog, (xxi) overhead or other expense reduction, (xxii) credit rating, (xxvi)
objective customer indicators, (xxvii) new product invention or innovation, (xxviii) attainment of
research and development milestones, (xxix) improvements in productivity, (xxx) attainment of
objective operating goals, and (xxxi) objective employee metrics. The Performance Goals may differ
from Participant to Participant and from Award to Award.

2.33 “Performance Shares” mean an Award granted to a Participant pursuant to Section 10 of
the Plan that entitles the Participant to receive a prescribed number of Shares upon achievement of
performance objectives associated with such Award.

2.34 “Performance Unit” means an Award granted to Participant pursuant to Section 10 of the
Plan that entitles the Participant to receive a cash payment equal to the value of a prescribed
number of Shares upon achievement of performance objectives associated with such Award.

2.35 “Period of Restriction” means the period during which the transfer of Shares of
Restricted Stock are subject to restrictions that subject the Shares to a substantial risk of
forfeiture. As provided in Section 7, such restrictions may be based on the passage of time, the
achievement of Performance Goals, or the occurrence of other events as determined by the
Administrator, in its discretion.

2.36 “Plan” means this amended and restated Sybase, Inc. 2003 Stock Plan, as set forth in
this instrument and as hereafter amended from time to time.

2.37 “Restricted Stock” means an Award granted to a Participant pursuant to Section 7.

2.38 “Restricted Stock Unit” shall mean a bookkeeping entry representing an amount equal to
the Fair Market Value of one Share, granted pursuant to Section 9. Each Restricted Stock Unit
represents an unfunded and unsecured obligation of the Company.

2.39 “Retirement” means the termination of employment pursuant to the Company’s retirement
policies for an Employee who has attained the age of fifty-five (55) and whose Continuous Status as
an Employee was not interrupted during the previous five (5) years.

 

 

2.40 “Rule 16b-3” means Rule 16b-3 promulgated under the 1934 Act, and any future
regulation amending, supplementing or superseding such regulation.

2.41 “SEC” means the U.S. Securities and Exchange Commission.

2.42 “Section 16 Person” means a person who, with respect to the Shares, is subject to
Section 16 of the 1934 Act.

2.43 “Shares” means the shares of common stock of the Company.

2.44 “Stock Appreciation Right” or “SAR” means an Award, granted alone or in
connection with a related Option, that pursuant to Section 6 is designated as a SAR. A SAR gives a
Participant a right to receive an amount equal to the difference between the exercise price of the
Shares on the grant date and the Fair Market Value of the Shares on the exercise date. For
example, assume a Participant is granted 100 SARs at an exercise price of $20 (i.e., 100% of the
Fair Market Value of the underlying Shares on the grant date). When the SARs become exercisable,
the Fair Market Value of the underlying Shares is $30 per Share. Therefore, upon exercise of the
SAR the Participant is entitled to receive $1,000 (100 Shares x $10 per Share).

2.45 “Subsidiary” means any corporation in an unbroken chain of corporations beginning with
the Company if each of the corporations other than the last corporation in the unbroken chain then
owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes
of stock in one of the other corporations in such chain.

2.46 “Tandem SAR” means a SAR that is granted in connection with a related Option, the
exercise of which shall require forfeiture of the right to purchase an equal number of Shares under
the related Option (and when a Share is purchased under the Option, the SAR shall be canceled to
the same extent).

SECTION 3

ADMINISTRATION

3.1 The Administrator. The Administrator shall be appointed by the Board of Directors from
time to time.

3.2 Authority of the Administrator. It shall be the duty of the Administrator to
administer the Plan in accordance with the Plan’s provisions and in accordance with Applicable Law.
The Administrator shall have all powers and discretion necessary or appropriate to administer the
Plan and to control its operation, including, but not limited to, the power to make recommendations
to the Board regarding the following: (a) which Employees, Consultants and Directors shall be
granted Awards; (b) the terms and conditions of the Awards, (c) interpretation of the Plan, (d)
adoption of such procedures and sub-plans as are necessary or appropriate to permit participation
in the Plan by Employees and Directors who are foreign nationals or employed outside of the United
States, (e) adoption of rules for the administration, interpretation and application of the Plan as
are consistent therewith, and (f) interpretation, amendment or revocation of any such rules.

3.3 Delegation by the Administrator. The Administrator, in its discretion and on such
terms and conditions as it may provide, may delegate all or any part of its authority and powers
under the Plan to one or more Directors; provided, however, that the Administrator may not delegate

 

 

its authority and powers (a) with respect to Section 16 Persons, or (b) in any way which would
jeopardize the Plan’s qualification under Section 162(m) of the Code or Rule 16b-3.

3.4 Decisions Binding. All determinations and decisions made by the Administrator, the
Board, and any delegate of the Administrator pursuant to the provisions of the Plan shall be final,
conclusive, and binding on all persons, and shall be given the maximum deference permitted by
Applicable Law.

SECTION 4

SHARES SUBJECT TO THE PLAN

4.1 Number of Shares. Subject to adjustment as provided in Section 4.3, the total number
of Shares available for grant under the Plan shall be 14,500,000 (i.e., the existing 2003 Plan
share reserve plus 3,000,000 shares approved by the stockholders on the 2nd Amendment Date plus
4,000,000 shares approved by the stockholders on the 3rd Amendment Date plus 5,000,000
shares approved by the stockholders on the 4th Amendment Date), plus (i) the 1,004,213
shares available for grant under the Sybase, Inc. 1996 Stock Plan as of the Plan Effective Date;
plus (ii) the 55,250 shares available for grant under the 1999 Plan as of the Plan Effective Date,
plus (iii) any shares represented by awards granted under the 1996 Plan, the 1999 Plan, or the 1992
Director Plan or the 2001 Director Plan (collectively, the “Existing Plans”) as of the Plan
Effective Date that are forfeited or cancelled or expire without the delivery of Shares. As of the
1st Amendment Date, there were a total of 17,202,848 options and awards issued but unexercised
under the Existing Plans. After the Plan Effective Date, no further shares will be issued under
any Existing Plan. When any Award made under the Plan expires, or is forfeited or cancelled
without the delivery of Shares, such Shares will become available for future Awards under the Plan.
Shares granted under the Plan may be authorized but unissued Shares or reacquired Shares.

4.2 Fungible Limit on Discounted Awards. For Awards granted on or after the 4th
Amendment Date, any Shares subject to Options or SARs shall be counted against the numerical limits
of Section 4.1 as one share for every share subject thereto. For Awards granted on or after the
4th Amendment Date, any Shares subject to Performance Shares, Restricted Stock,
Restricted Stock Units or Deferred Stock Units with a per share or unit purchase price lower than
100% of Fair Market Value on the date of grant shall be counted against the numerical limits of
Section 4.1 as two and one-tenth shares for every one share subject thereto. To the extent that a
share that was subject to an Award that counted as two and one-tenth shares against the Plan
reserve pursuant to the preceding sentence is recycled back into the Plan under Section 4.3, the
Plan shall be credited with two and one-tenth Shares.

4.3 Lapsed Awards. If an Award is settled in cash, or is cancelled, terminates, expires,
or lapses for any reason (with the exception of the termination of a Tandem SAR upon exercise of
the related Option, or the termination of a related Option upon exercise of the corresponding
Tandem SAR), any Shares subject to such Award again shall be available to be the subject of an
Award.

4.4 Adjustments in Awards and Authorized Shares. Subject to the provisions of Section
11.6, in the event that any dividend or other distribution (whether in the form of cash, Shares,
other securities, or other property), recapitalization, stock split, reverse stock split,
reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of
Shares or other securities of the Company, or other change in the corporate structure of the

 

 

Company affecting the Shares occurs the Administrator shall proportionately adjust the number and
class of Shares which may be delivered under the Plan and, the number, class, and price of Shares
subject to outstanding Awards, and the numerical limits of Sections 8.1 and 11.6, in order to
prevent dilution or enlargement of the benefits or potential benefits under the Plan.
Notwithstanding the preceding, the number of Shares subject to any Award always shall be a whole
number.

4.5 Legal Compliance. Shares shall not be issued pursuant to the making or exercise of an
Award unless the exercise of Options and rights and the issuance and delivery of Shares shall
comply with the Securities Act of 1933, as amended, the 1934 Act and other Applicable Law, and
shall be further subject to the approval of counsel for the Company with respect to such
compliance.

4.6 Investment Representations. As a condition to the exercise of an Option or other
right, the Company may require the person exercising such Option or right to represent and warrant
at the time of exercise that the Shares are being acquired only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of counsel for the Company,
such a representation is required.

SECTION 5

EMPLOYEE AND CONSULTANT STOCK OPTIONS

     The provisions of this Section 5 are applicable only to Options granted to Employees
(including Directors who are also Employees), and Consultants. Such Participants shall also be
eligible to receive other types of Awards as set forth in the Plan.

5.1 Grant of Options. Subject to the terms and provisions of the Plan, Options may be
granted to Employees and Consultants at any time and from time to time as determined by the
Administrator in its discretion. The Administrator may grant Incentive Stock Options, Nonqualified
Stock Options, or a combination thereof, and the Administrator, in its discretion and subject to
Section11.6, shall determine the number of Shares subject to each Option.

5.2 Award Agreement. Each Option shall be evidenced by an Award Agreement that shall
specify the Exercise Price, the expiration date of the Option, the number of Shares to which the
Option pertains, any conditions to exercise the Option, and such other terms and conditions as the
Administrator, in its discretion, shall determine. The Award Agreement shall also specify whether
the Option is intended to be an Incentive Stock Option or a Nonqualified Stock Option.

5.3 Exercise Price. The Administrator shall determine the Exercise Price for each Option
subject to the provisions of this Section 5.3.

     5.3.1 Nonqualified Stock Options. In the case of a Nonqualified Stock Option, the
Exercise Price shall be determined by the Administrator, but in no case shall the per Share
exercise price be less than one hundred percent (100%) of the Fair Market Value of a Share on the
Grant Date.

     5.3.2 Incentive Stock Options. The grant of Incentive Stock Options shall be subject
to the following limitations:

 

 

          (a) The Exercise Price of an Incentive Stock Option shall be not less than one hundred percent
(100%) of the Fair Market Value of a Share on the Grant Date; provided, however, that if on the
Grant Date, the Employee (together with persons whose stock ownership is attributed to the Employee
pursuant to Section 424(d) of the Code) owns stock possessing more than 10% of the total combined
voting power of all classes of stock of the Company or any
of its Subsidiaries, the Exercise Price shall be not less than one hundred and ten percent
(110%) of the Fair Market Value of a Share on the Grant Date;

          (b) Incentive Stock Options may be granted only to persons who are, as of the Grant Date,
Employees of the Company or a Subsidiary, and may not be granted to Nonemployee Directors or
Consultants;

          (c) To the extent that the aggregate Fair Market Value of the Shares with respect to which
Incentive Stock Options are exercisable for the first time by the Participant during any calendar
year (under all plans of the Company and any parent or Subsidiary) exceeds $100,000, such Options
shall be treated as Nonstatutory Stock Options. For purposes of this Section 5.3.2(c), Incentive
Stock Options shall be taken into account in the order in which they were granted. The Fair Market
Value of the Shares shall be determined as of the time the Option with respect to such Shares is
granted; and

          (d) In the event of a Participant’s change of status from Employee to Consultant or Director,
an Incentive Stock Option held by the Participant shall cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option three (3) months and
one (1) day following such change of status.

     5.3.3 Substitute Options. Notwithstanding the provisions of Sections 5.3.1 and 5.3.2,
in the event that the Company or an Affiliate consummates a transaction described in Section 424(a)
of the Code (e.g., the acquisition of property or stock from an unrelated corporation), persons who
become Employees, Directors or Consultants on account of such transaction may be granted Options in
substitution for options granted by their former employer. If such substitute Options are granted,
the Administrator, in its discretion and consistent with Section 424(a) of the Code, may determine
that such substitute Options shall have an exercise price of no less than one hundred percent
(100%) of the Fair Market Value of the Shares on the Grant Date.

5.4 Expiration of Options

     5.4.1 Expiration Dates. Each Option shall terminate no later than the first to occur
of the following events:

          (a) Date in Award Agreement. The date for termination of the Option set forth in the
written Award Agreement; or

          (b) Termination of Continuous Status as Employee or Consultant. The last day of the
three (3)-month period following the date the Participant ceases his/her Continuous Status as an
Employee or Consultant (other than termination for a reason described in subsections (c), (d), (e),
(f) or (g) below); or

          (c) Misconduct. In the event a Participant’s Continuous Status as an Employee or
Consultant terminates because the Participant has performed an act of Misconduct as determined by
the Administrator, all unexercised Options held by such Participant shall expire five (5) business
days following written notice from the Company to the Participant;

 

 

          (d) Disability. In the event that a Participant’s Continuous Status as an Employee or
Consultant terminates as a result of the Participant’s Disability, the Participant may exercise his
or her Option at any time within twelve (12) months from the date of such termination, but only to
the extent that the Participant was entitled to exercise it at the date of
such termination (but in no event later than the expiration of the term of such Option as set
forth in the Award Agreement). If, at the date of termination, the Participant is not entitled to
exercise his or her entire Option, the Shares covered by the unexercisable portion of the Option
shall revert to the Plan. If, after termination, the Participant does not exercise his or her
Option within the time specified herein, the Option shall terminate, and the Shares covered by such
Option shall revert to the Plan; or

          (e) Death. In the event of the death of a Participant, the Option may be exercised at
any time within twenty-four (24) months following the date of death (but in no event later than the
expiration of the term of such Option as set forth in the Award Agreement), by the Participant’s
estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but
only to the extent that the Participant was entitled to exercise the Option at the date of death.
If, at the time of death, the Participant was not entitled to exercise his or her entire Option,
the Shares covered by the unexercisable portion of the Option shall immediately revert to the Plan.
If, after death, the Participant’s estate or a person who acquired the right to exercise the
Option by bequest or inheritance does not exercise the Option within the time specified herein, the
Option shall terminate, and the Shares covered by such Option shall revert to the Plan; or

          (f) Retirement. In the event that an Participant’s Continuous Status as an Employee
terminates as a result of the Participant’s Retirement, the Participant may exercise his or her
Option at any time subject to the limitations in the Plan and the Award Agreement, but only to the
extent that the Participant was entitled to exercise the Option at the time of such termination,
unless otherwise expressly provided in a written agreement between the Participant and the Company.
However, any Incentive Stock Options not exercised within three (3) months of the termination of
the Participant’s Continuous Status as an Employee shall be treated for tax purposes as
Nonstatutory Stock Options three (3) months and one (1) day following such Retirement; or

          (g) Expiration. Unless otherwise specified above, for Options granted from the Plan
Effective Date until the day preceding the 2nd Amendment Date, an Option shall expire no more than
ten (10) years from the Grant Date, and for Options granted on or after the 2nd Amendment Date, an
Option shall expire no more than seven (7) years from the Grant Date; provided, however, that if an
Incentive Stock Option is granted to an Employee who, together with persons whose stock ownership
is attributed to the Employee pursuant to Section 424(d) of the Code, owns stock possessing more
than 10% of the total combined voting power of all classes of the stock of the Company or any of
its Subsidiaries, such Incentive Stock Option may not be exercised after the expiration of five (5)
years from the Grant Date.

          (h) Change in Status. In the event a Participant’s status has changed from Consultant
to Employee, or vice versa, a Participant’s Continuous Status as an Employee or Consultant shall
not automatically terminate solely as a result of such change in status.

     5.4.2 Administrator Discretion. Subject to the limits of Section 5.4.1, the
Administrator, in its discretion, (a) shall provide in each Award Agreement when each Option
expires and becomes unexercisable, and (b) may, after an Option is granted, extend the maximum term
of the Option (subject to limitations applicable to Incentive Stock Options).

 

 

5.5 Exercisability of Options. Options granted under the Plan shall be exercisable at such
times and be subject to such restrictions and conditions as the Administrator shall determine in
its discretion. After an Option is granted, the Administrator, in its discretion, may accelerate
the exercisability of the Option.

5.6 Exercise and Payment. Options shall be exercised by the Participant’s delivery of a
written notice of exercise to the Secretary of the Company (or its designee), setting forth the
number of Shares with respect to which the Option is to be exercised, accompanied by full payment
for the Shares.

     5.6.1 Form of Consideration. Upon the exercise of any Option, the Exercise Price
shall be payable to the Company in full in cash or its equivalent. The Administrator, in its
discretion, also may permit the same-day exercise and sale of Options and related Shares, or
exercise by tendering previously acquired Shares having an aggregate Fair Market Value at the time
of exercise equal to the total Exercise Price, or by any other means which the Administrator, in
its discretion, determines to provide legal consideration for the Shares, and to be consistent with
the purposes of the Plan.

     5.6.2 Delivery of Shares. As soon as practicable after receipt of a written
notification of exercise and full payment for the Shares purchased, the Company shall deliver to
the Participant (or the Participant’s designated broker), Share certificates (which may be in book
entry form) representing such Shares.

SECTION 6

STOCK APPRECIATION RIGHTS

6.1 Grant of SARs. Subject to the terms of the Plan, a SAR may be granted to Employees,
Directors and Consultants at any time and from time to time as shall be determined by the
Administrator. The Administrator may grant, Freestanding SARs, Tandem SARs, or any combination
thereof.

     6.1.1 Number of Shares. The Administrator shall have complete discretion to determine
the number of SARs granted to any Participant, subject to the limitation in Section 11.6.

     6.1.2 Exercise Price and Other Terms. The Administrator, subject to the provisions of
the Plan, shall have discretion to determine the terms and conditions of SARs granted under the
Plan. However, the exercise price of a Freestanding SAR shall be not less than one hundred percent
(100%) of the Fair Market Value of a Share on the Grant Date. The exercise price of Tandem SARs
shall equal the Exercise Price of the related Option.

6.2 Exercise of Tandem SARs. Tandem SARs may be exercised for all or part of the Shares
subject to the related Option upon the surrender of the right to exercise the equivalent portion of
the related Option. A Tandem SAR may be exercised only with respect to the Shares for which its
related Option is then exercisable. With respect to a Tandem SAR granted in connection with an
Incentive Stock Option: (a) the Tandem SAR shall expire no later than the expiration of the
underlying Incentive Stock Option; (b) the value of the payout with respect to the Tandem SAR shall
be for no more than one hundred percent (100%) of the difference between the Exercise Price of the
underlying Incentive Stock Option and the Fair Market Value of the Shares subject

 

 

to the underlying
Incentive Stock Option at the time the Tandem SAR is exercised; and (c) the Tandem SAR shall be
exercisable only when the Fair Market Value of the Shares subject to the Incentive Stock Option
exceeds the Exercise Price of the Incentive Stock Option.

6.3 Exercise of Freestanding SARs. Freestanding SARs shall be exercisable on such terms
and conditions as the Administrator, in its discretion, shall determine.

6.4 SAR Agreement. Each SAR grant shall be evidenced by an Award Agreement that shall
specify the exercise price, the term of the SAR, the conditions of exercise, and such other terms
and conditions as the Administrator shall determine.

6.5 Expiration of SARs. A SAR granted under the Plan shall expire upon the date determined
by the Administrator in its discretion as set forth in the Award Agreement, or otherwise pursuant
to the provisions relating to the expiration of related Options as set forth in Sections 5.4.

6.6 Payment of SAR Amount. Upon exercise of a SAR, a Participant shall be entitled to
receive payment from the Company in an amount determined by multiplying: (a) the difference
between the Fair Market Value of a Share on the date of exercise over the Option Exercise Price,
times (b) the number of Shares with respect to which the SAR is exercised. At the discretion of
the Administrator, the payment upon SAR exercise may be in cash, in Shares of equivalent value, or
in some combination thereof.

6.7 Cancellation of Exercised and Unissued SAR Shares. Upon exercise of a stock settled
SAR, the number of Shares included in such exercise which are not issued to settle the SAR at the
time of such exercise shall be cancelled and shall not be available for grant again under the Plan.

SECTION 7

RESTRICTED STOCK

7.1 Grant of Restricted Stock. Subject to the terms and provisions of the Plan, the
Administrator, at any time and from time to time, may grant Shares of Restricted Stock to
Employees, Directors and Consultants in such amounts as the Administrator, in its discretion, shall
determine. The Administrator, in its discretion and subject to Section 11.6, shall determine the
number of Shares to be granted to each Participant.

7.2 Restricted Stock Agreement. Each Award of Restricted Stock shall be evidenced by an
Award Agreement that shall specify the Period of Restriction, the number of Shares granted, and
such other terms and conditions as the Administrator, in its discretion, shall determine. Unless
the Administrator determines otherwise, Shares of Restricted Stock shall be held by the Company as
escrow agent until the restrictions on such Shares have lapsed.

7.3 Transferability. Except as provided in this Section 7, Shares of Restricted Stock may
not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until
expiration of the applicable Period of Restriction.

7.4 Other Restrictions. The Administrator, in its discretion, may impose such other
restrictions on Shares of Restricted Stock as it may deem advisable or appropriate, in accordance
with this Section 7.4.

 

 

     7.4.1 General Restrictions. The Administrator may set restrictions based upon the
achievement of specific performance objectives (Company-wide, business unit, or individual), or any
other basis determined by the Administrator in its discretion.

     7.4.2 Section 162(m) Performance Restrictions. For purposes of qualifying grants of
Restricted Stock as “performance-based compensation” under Section 162(m) of the Code, the
Administrator, in its discretion, may set restrictions based upon the achievement of Performance
Goals. The Performance Goals shall be set by the Administrator on or before the latest date
permissible to enable the Restricted Stock to qualify as “performance-based compensation” under
Section 162(m) of the Code. In granting Restricted Stock which is intended to qualify under
Section 162(m) of the Code, the Administrator shall follow any procedures determined by it from
time to time to be necessary or appropriate to ensure qualification of the Restricted Stock under
Section 162(m) of the Code (e.g., in determining the Performance Goals).

     7.4.3 Legend on Certificates. The Administrator, in its discretion, may legend the
certificates representing Restricted Stock to give appropriate notice of such restrictions.

7.5 Removal of Restrictions. Except as otherwise provided in this Section 7, Shares of
Restricted Stock covered by each Restricted Stock grant made under the Plan shall be released from
escrow as soon as practicable after expiration of the Period of Restriction. The Administrator, in
its discretion, may accelerate the time at which any restrictions shall lapse or be removed. After
the restrictions have lapsed, the Participant shall be entitled to have any legend or legends under
Section 7.4.3 removed from his or her Share certificate and the Shares shall be freely transferable
by the Participant, subject to Applicable Law.

7.6 Voting Rights. During the Period of Restriction, Participants holding Shares of
Restricted Stock granted hereunder may exercise full voting rights with respect to those Shares,
unless the Administrator determines otherwise.

7.7 Dividends and Other Distributions. During the Period of Restriction, Participants
holding Shares of Restricted Stock shall be entitled to receive all dividends and other
distributions paid with respect to such Shares unless otherwise provided in the Award Agreement.
If any such dividends or distributions are paid in Shares, the Shares shall be subject to the same
restrictions on transferability and forfeitability as the Shares of Restricted Stock with respect
to which they were paid.

7.8 Return of Restricted Stock to Company. On the date set forth in the Award Agreement,
the Restricted Stock for which restrictions have not lapsed shall revert to the Company and again
shall become available for grant under the Plan.

SECTION 8

NONEMPLOYEE DIRECTOR AWARDS

     The provisions of this Section 8 are applicable only to Nonemployee Directors. Nonemployee
Directors shall be entitled to receive all types of Awards under this Plan.

8.1 Granting of Options

     8.1.1 Initial Grants. Each Nonemployee Director who first becomes a Nonemployee
Director on or after the Plan Amendment Date (excluding each Nonemployee Director whom, at

 

 

the time
he or she first becomes a Director, holds unvested options to purchase Shares or securities
convertible or exchangeable for Shares as a result of such Outside Director’s service as a director
of an Affiliate), shall be entitled to receive, as of the date that the individual first is
appointed or elected as a Nonemployee Director, an Award having an Imputed Value of up to $800,000
on the date of grant, or such lesser number of Shares as is allowed pursuant to Section
11.6. Such Award may consist of a single type or any combination of the types of Awards
permissible under this Plan, as determined from time to time by the Board as a whole.

     8.1.2 Ongoing Grants. On the last day of the first regularly scheduled Sybase, Inc.
Board of Directors meeting in each calendar year, each Non-Employee Director who has served as a
Nonemployee Director for at least five months on that date shall be granted an Award having an
Imputed Value of up to $400,000 on the date of grant, or such lesser amount of Shares as is allowed
pursuant to Section 11.6, provided that such Non-Employee Director is a member of the Board. Such
Award may consist of a single type or any combination of the types of Awards permissible under this
Plan, as determined from time to time by the Board as a whole.

     8.1.3 “Imputed Value.” For purposes of Sections 8.1.1, 8.1.2 and 8.3 (as such section
relates to Options), the “Imputed Value” of any Award shall mean the value on the applicable date
as determined in accordance with Financial Accounting Standards Board Statement No. 123 (revised
2004), “Accounting for Stock-Based Compensation,” as the same may be amended from time to time.

8.2 Terms of Options.

     8.2.1 Option Agreement. A written Award Agreement between the Participant and the
Company shall evidence each Option granted pursuant to this Section 8.

     8.2.2 Exercise Price. The Exercise Price for the Shares subject to each Option
granted pursuant to this Section 8 shall be 100% of the Fair Market Value of such Shares on the
Grant Date.

     8.2.3 Expiration of Options. Each Option granted pursuant to this Section 8 shall
terminate upon the first to occur of the following events:

          (a) The date for termination of the Option set forth in the written Award Agreement; or

          (b) For Options granted from the Plan Effective Date until the day preceding the 2nd Amendment
Date, an Option shall expire no more than ten (10) years from the Grant Date, and for Options
granted on or after the 2nd Amendment Date, an Option shall expire no more than seven (7) years
from the Grant Date; or

          (c) The expiration of twelve (12) months from the date the Participant ceases Continuous
Status as a Director for any reason other than the Participant’s death or Disability; or

          (d) In the event that a Participant’s Continuous Status as a Director terminates as a result
of the Participant’s death or Disability, the Participant’s Option shall terminate in accordance
with the provisions set forth in Section 5.4.1 (d) and (e), respectively.

 

 

     8.2.4 Nonqualified Stock Options Only. No Incentive Options may be granted pursuant
to this Section 8.

     8.2.5 Vesting and Other Terms. Except as provided in Sections 8.1.4 and 8.2.3,
Options granted pursuant to this Section 8 shall become exercisable on terms and conditions
determined by the Administrator in its sole discretion. All other provisions of the Plan not
inconsistent with this Section 8 shall also apply to Options granted to Nonemployee Directors.
In the event of any inconsistency between provisions set forth in Section 8 and those set forth
elsewhere in the Plan as they relate to Options, the provisions of Section 8 shall govern with
respect to Options granted to Nonemployee Directors.

     8.2.6 Substitute Options. In the event that the Company or an Affiliate consummates a
transaction described in section 424(a) of the Code (e.g., the acquisition of property or stock
from an unrelated corporation), an individual who becomes a Nonemployee Director as a result of
such transaction may be granted Options in substitution for options granted by the unrelated
corporation. If such substitute Options are granted, the Administrator, in its discretion and
consistent with section 424(a) of the Code, shall determine the exercise price of such substitute
Options, subject to Section 4.1.2.

     8.2.7 Elections by Nonemployee Directors. Pursuant to such procedures as the
Administrator (in its discretion) may adopt from time to time in accordance with Code Section 409A
and Internal Revenue Service rules relating to constructive receipt), each Nonemployee Director may
elect (no later than is required to comply with Code Section 409A and Internal Revenue Service
rules relating to constructive receipt) to forego receipt of all or a portion of the annual
retainer, committee fees and meeting fees otherwise due to the Nonemployee Director in exchange for
an Award under this Plan. The number of Shares subject to an Award received by any Nonemployee
Director shall equal the amount of foregone compensation divided by the Fair Market Value of a
Share on the date the compensation otherwise would have been paid to the Nonemployee Director,
rounded up to the nearest whole number of Shares. The number of Options granted shall be
determined by dividing the cash amount foregone by the Imputed Value of the Options (as defined in
Section 8.1.3), rounded up to the nearest whole number of Shares. The procedures adopted by the
Administrator for elections under this Section 8.2.7 shall be designed to ensure that any such
election by a Nonemployee Director will not disqualify him or her as a “non-employee director”
under Rule 16b-3.

SECTION 9

RESTRICTED STOCK UNITS

9.1 Grant of Restricted Stock Units. Subject to the terms and conditions of the Plan,
Restricted Stock Units may be granted to Employees, Directors and Consultants at any time and from
time to time, as shall be determined by the Administrator in its discretion.

9.2 Number of Restricted Stock Units. The Administrator will have complete discretion in
determining the number of Restricted Stock Units granted to any Participant, subject to the
limitations in Section 11.6.

9.3 Performance Objectives and Other Terms. The Administrator will set performance
objectives or other vesting provisions, including, without limitation, time-based vesting
provisions, in its discretion which, depending on the extent to which they are met, will determine
the number of Shares that will be paid out to Participants. The time period during which the

 

 

performance objectives or other vesting provisions must be met will be called the “Performance
Period.” Each Award of Restricted Stock Units will be evidenced by an Award Agreement that will
specify the Performance Period, and such other terms and conditions as the Administrator, in its
discretion, will determine. The Administrator may set performance objectives based upon the
achievement of Company-wide or individual goals or any other basis determined by the Administrator
in its discretion.

9.4 Earning of Restricted Stock Units. After the applicable Performance Period has ended,
the holder of Restricted Stock Units will be entitled to receive a payout of the number of
Restricted Stock Units earned by the Participant over the Performance Period, to be determined as a
function of the extent to which the corresponding performance objectives or other vesting
provisions have been achieved. After the grant of a Restricted Stock Unit, the Administrator, in
its discretion, may reduce or waive any performance objectives or other vesting provisions for such
Restricted Stock Unit.

9.5 Form and Timing of Payment of Restricted Stock Unit Units. Payment of earned
Restricted Stock Units will be made as soon as practicable after the expiration of the applicable
Performance Period. The Administrator shall settle earned Restricted Stock Units in Shares.

9.6 Cancellation of Restricted Stock Units. On the date set forth in the Award Agreement,
all unearned or unvested Restricted Stock Units will be forfeited to the Company, and again will be
available for grant under the Plan.

9.7 Section 162(m) Performance Restrictions. For purposes of qualifying grants of
Restricted Stock Units as “performance-based compensation” under Section 162(m) of the Code, the
Administrator, in its discretion, may set restrictions based upon the achievement of Performance
Goals. The Performance Goals shall be set by the Administrator on or before the latest date
permissible to enable the Restricted Stock Units to qualify as “performance-based compensation”
under Section 162(m) of the Code. In granting Restricted Stock Units which are intended to qualify
under Section 162(m) of the Code, the Administrator shall follow any procedures determined by it
from time to time to be necessary or appropriate to ensure qualification of the Restricted Stock
Units under Section 162(m) of the Code (e.g., in determining the Performance Goals).

SECTION 10

PERFORMANCE SHARES AND PERFORMANCE UNITS

9.1 Grant of Performance Shares/Units. Subject to the terms and conditions of the Plan,
Performance Shares and Performance Units may be granted to Employees, Directors and Consultants at
any time and from time to time, as shall be determined by the Administrator in its discretion.

     9.1.1 Number of Units or Shares. The Administrator will have complete discretion in
determining the number of Performance Shares and Performance Units granted to any Participant,
subject to the limitations in Section 11.6, provided that during any Fiscal Year, (a) no
Participant shall receive Performance Units or Performance Shares having an initial Imputed Value
(defined in Section 8.1.3) greater than $5,000,000, except that such Participant may receive
Performance Units or Performance Shares in a Fiscal Year in which his or her service as an Employee
first commences with an initial value no greater than $10,000,000.

 

 

     9.1.2 Value of Performance Shares/Units. Each Performance Unit will have an initial
Imputed Value that is established by the Administrator on or before the Grant Date in accordance
with Section 8.1.3. Each Performance Share will have an initial Imputed Value equal to the Fair
Market Value of a Share on the Grant Date.

9.2 Performance Objectives and Other Terms. The Administrator will set performance
objectives or other vesting provisions, including, without limitation, time-based vesting
provisions, in its discretion which, depending on the extent to which they are met, will determine
the number or value of Performance Shares/Units that will be paid out to Participants. The time
period during which the performance objectives or other vesting provisions must be met will be
called the “Performance Period.” Each Award of Performance Shares/Units will be evidenced by an
Award Agreement that will specify the Performance Period, and such other terms and conditions as
the Administrator, in its discretion, will determine. The Administrator may set performance
objectives based upon the achievement of Company-wide or individual goals or any other basis
determined by the Administrator in its discretion.

9.3 Earning of Performance Shares/Units. After the applicable Performance Period has
ended, the holder of Performance Units/Shares will be entitled to receive a payout of the number of
Performance Units/Shares earned by the Participant over the Performance Period, to be determined as
a function of the extent to which the corresponding performance objectives or other vesting
provisions have been achieved. After the grant of a Performance Unit/Share, the Administrator, in
its discretion, may reduce or waive any performance objectives or other vesting provisions for such
Performance Unit/Share.

9.4 Form and Timing of Payment of Performance Shares/Units. Payment of earned Performance
Shares/Units will be made as soon as practicable after the expiration of the applicable Performance
Period. The Administrator, in its discretion, may pay earned Performance Shares/Units in the form
of cash, in Shares (which have an aggregate Fair Market Value equal to the value of the earned
Performance Units/Shares at the close of the applicable Performance Period) or in a combination
thereof.

9.5 Cancellation of Performance Shares/Units. On the date set forth in the Award
Agreement, all unearned or unvested Performance Shares/Units will be forfeited to the Company, and
again will be available for grant under the Plan.

SECTION 11

MISCELLANEOUS

10.1 Change In Control

     10.1.1 Generally. In the event of a Change in Control, unless an Award is assumed or
substituted by the successor corporation, then (i) such Awards shall become fully exercisable as of
the date of the Change in Control, whether or not then exercisable; and (ii) all restrictions and
conditions on any Award then outstanding shall lapse as of the date of the Change in Control.

     10.1.2 Options and SARs. If the Administrator determines that Options and SARs will
be assumed or an equivalent option or right substituted by the successor corporation or a parent or
Subsidiary of the successor corporation, then

 

 

          (a) In the event that the successor corporation refuses to assume or substitute for the Option
or SAR, the Options and SARs held by such Participant shall immediately become one hundred percent
(100%) exercisable. In such event, the Company shall notify the Participant in writing or
electronically that the Options and SARs are fully exercisable (subject to the consummation of the
Change in Control) for a period of forty-five (45) days from the date of such notice, and the
Option or SAR shall terminate upon the expiration of such period.

          (b) For the purposes of this Section 11.1.2, the Option or SAR shall be considered assumed if,
following the Change in Control, the option or SAR confers the right to
purchase or receive, for each Share subject to the Option or SAR immediately prior to the
Change in Control, the consideration (whether stock, cash, or other securities or property)
received in the Change in Control event by holders of Shares for each Share held on the closing
date of the transaction (and if holders were offered a choice of consideration, the type of
consideration chosen by the holders of a majority of the outstanding Shares); provided, however,
that if such consideration received in the Change in Control is not solely common stock of the
successor corporation or its parent, the Administrator or the Board may, with the consent of the
successor corporation, provide for the consideration to be received upon the exercise of the Option
or SAR, for each Share subject to the Option or SAR, to be solely common stock of the successor
corporation or its parent equal in fair market value to the per share consideration received by
holders of Shares in the Change in Control, as determined on the date of the Change in Control.

     10.1.3 Restricted Stock. If the Administrator determines that any Company repurchase
or reacquisition right with respect to outstanding Shares of Restricted Stock held by the
Participant will be assigned to the successor corporation, then in the event that the successor
corporation refuses to accept the assignment of any such Company repurchase or reacquisition right,
such Company repurchase or reacquisition right will immediately lapse and the Participant will
become one hundred percent (100%) vested in such Shares of Restricted Stock prior to the closing of
the Change in Control event.

     10.1.4 Restricted Stock Units; Performance Shares/Units. If the Administrator
determines that Restricted Stock Units or Performance Shares/Units will be assumed or an equivalent
option or right substituted by the successor corporation or a parent or Subsidiary of the successor
corporation, then

          (a) in the event that the successor corporation refuses to assume or substitute for the
Restricted Stock Units or Performance Shares/Units, 100% of all vesting or performance objectives
will be deemed achieved and all other terms and conditions met immediately prior to the closing of
the Change in Control event.

          (b) For the purposes of this Section 11.1.4, the Restricted Stock Unit or Performance
Share/Unit shall be considered assumed if, following the Change in Control, the Restricted Stock
Unit or Performance Share/Unit confers the right to purchase or receive, for each Share subject to
the Restricted Stock Unit or Performance Share/Unit immediately prior to the Change in Control, the
consideration (whether stock, cash, or other securities or property) received in the Change in
Control by holders of Shares for each Share held on the effective date of the transaction (and if
holders were offered a choice of consideration, the type of consideration chosen by the holders of
a majority of the outstanding Shares); provided, however, that if such consideration received in
the Change in Control is not solely common stock of the successor corporation or its parent, the
Administrator or the Board may, with the consent of the successor corporation, provide for the
consideration to be received upon the payout of a

 

 

Restricted Stock Unit or Performance Share/Unit,
for each Share subject to such Award (or, in the case of Performance Units, the number of implied
Shares determined by dividing the value of the Performance Units by the per share consideration
received by holders of Shares), to be solely common stock of the successor corporation or its
parent equal in fair market value to the per share consideration received by holders of Shares in
the Change in Control, as determined on the date of the Change in Control. Notwithstanding
anything in this Section 11.1.4 to the contrary, an Award that vests, is earned or paid-out upon
the satisfaction of one or more performance goals will not be considered assumed if the Company or
its successor modifies any of such performance goals without the Participant’s consent; provided,
however, that a modification to
such performance goals only to reflect the successor corporation’s post Change in Control
corporate structure will not be deemed to invalidate an otherwise valid Award assumption.

10.2 Dissolution or Liquidation. In the event of the proposed dissolution or liquidation
of the Company, the Administrator shall notify each Participant as soon as practicable prior to the
effective date of such proposed transaction. The Administrator in its discretion may provide for a
Participant to have the right to exercise his or her Award until ten (10) days prior to such
transaction as to all of the Shares covered thereby, including Shares as to which the Award would
not otherwise be exercisable. In addition, the Administrator may provide that any Company
repurchase rights applicable to any Shares purchased upon exercise of an Award shall lapse as to
all such Shares, provided the proposed dissolution or liquidation takes place at the time and in
the manner contemplated. To the extent it has not been previously exercised, an Award will
terminate immediately prior to the consummation of such proposed action.

10.3 Deferrals. The Administrator, in its discretion, may permit a Participant to defer
receipt of the payment of cash or the delivery of Shares that would otherwise be due to such
Participant under an Award. Any such deferral elections shall be in accordance with Code Section
409A and subject to such rules and procedures as shall be determined by the Administrator in its
discretion.

10.4 No Effect on Employment or Service. Nothing in the Plan shall interfere with or limit
in any way the right of the Company or an Affiliate to terminate any Participant’s employment or
service at any time, with or without cause. Unless otherwise provided by written contract,
employment with the Company and its Affiliates is on an at-will basis only. Additionally, the Plan
shall not confer upon any Nonemployee Director any right with respect to continuation of service as
a Director or nomination to serve as a Director, nor shall it interfere in any way with any rights
which such Nonemployee Director or the Company may have to terminate his or her directorship at any
time.

10.5 Participation. No Employee or Consultant shall have the right to be selected to
receive an Award under this Plan, or, having been so selected, to be selected to receive a future
Award.

10.6 Limitations on Awards. No Participant shall be granted an Award in any Fiscal Year
for Shares representing more than the lesser of (i) one percent (1%) of the Company’s total number
of outstanding Shares immediately prior to the issuance of such Award, or (ii) two million
(2,000,000) Shares; provided, however, that such limitation shall be adjusted proportionately in
connection with any change in the Company’s capitalization as described in Section 4.4.

10.7 Successors. All obligations of the Company under the Plan, with respect to Awards
granted hereunder, shall be binding on any successor to the Company, whether the existence of

 

 

such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of
all or substantially all of the business or assets of the Company.

10.8 Beneficiary Designations. If permitted by the Administrator, a Participant under the
Plan may name a beneficiary or beneficiaries to whom any vested but unpaid Award shall be paid in
the event of the Participant’s death. Each such designation shall revoke all prior designations by
the Participant and shall be effective only if given in a form and manner acceptable to the
Administrator. In the absence of any such designation, any vested benefits remaining unpaid at the
Participant’s death shall be paid to the Participant’s estate and, subject to the terms of the Plan
and of the applicable Award Agreement, any unexercised vested Award may be exercised by the
administrator or executor of the Participant’s estate.

10.9 Limited Transferability of Awards. No Award granted under the Plan may be sold,
transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will, by the
laws of descent and distribution. All rights with respect to an Award granted to a Participant
shall be available during his or her lifetime only to the Participant. Notwithstanding the
foregoing, the Participant may, in a manner specified by the Administrator, (a) transfer a
Nonqualified Stock Option to a Participant’s spouse, former spouse or dependent pursuant to a
court-approved domestic relations order which relates to the provision of child support, alimony
payments or marital property rights, and (b) transfer a Nonqualified Stock Option by bona fide gift
and not for any consideration, to (i) a member or members of the Participant’s immediate family,
(ii) a trust established for the exclusive benefit of the Participant and/or member(s) of the
Participant’s immediate family, (iii) a partnership, limited liability company of other entity
whose only partners or members are the Participant and/or member(s) of the Participant’s immediate
family, or (iv) a foundation in which the Participant an/or member(s) of the Participant’s
immediate family control the management of the foundation’s assets. In no event may an Award
hereunder be transferred for value.

10.10 Restrictions on Share Transferability. The Administrator may impose such
restrictions on any Shares acquired pursuant to the exercise of an Award as it may deem advisable,
including, but not limited to, restrictions related to applicable federal securities laws, the
requirements of any national securities exchange or system upon which Shares are then listed or
traded, or any blue sky or state securities laws.

10.11 Buyout Provisions. The Administrator may at any time offer to buy out for a payment
in cash or Shares, an Award previously granted based on such terms and conditions as the
Administrator shall establish and communicate to the Participant at the time that such offer is
made, provided, however, that no offers may be made to buy out Awards of Options or SARs which have
Exercise Prices which exceed the Fair Market Value of the Company’s Common Stock at the time of
such buy out offer.

10.12 No Rights as Stockholder. Except to the limited extent provided in Sections 7.6 and
7.7, no Participant (nor any beneficiary) shall have any of the rights or privileges of a
stockholder of the Company with respect to any Shares issuable pursuant to an Award (or exercise
thereof), unless and until certificates representing such Shares shall have been issued, recorded
on the records of the Company or its transfer agents or registrars, and delivered to the
Participant (or beneficiary).

SECTION 12

AMENDMENT, TERMINATION, AND DURATION; RE-PRICING PROHIBITED

 

 

11.1 Amendment, Suspension, or Termination. Except as provided in Section 12.2, the Board,
in its sole discretion, may amend, suspend or terminate the Plan, or any part thereof, at any time
and for any reason. The amendment, suspension, or termination of the Plan shall not, without the
consent of the Participant, alter or impair any rights or obligations under any Award theretofore
granted to such Participant. No Award may be granted during any period of suspension or after
termination of the Plan.

11.2 No Amendment or Re-Pricing without Stockholder Approval. The Company shall obtain
stockholder approval of any material Plan amendment to the extent necessary or desirable to comply
with the rules of the NYSE, the Exchange Act, Section 422 of the Code, or other Applicable Law.
The Company shall not, without prior stockholder approval, reduce the exercise or purchase price of
any outstanding Options, SARs or other Awards (other than for
adjustments made pursuant Section 4.4), or cancel or re-grant Options, SARs for other Awards with a
lower exercise price.

11.3 Plan Effective Date and Duration of Awards. The Plan Effective Date shall be
May 27, 2004, subject to Sections 12.1 and 12.2 (regarding the Board’s right to amend or terminate
the Plan), and shall remain in effect thereafter. However, without further stockholder approval,
no Award may be granted under the Plan more than ten (10) years after the Plan Effective Date.

SECTION 13

TAX WITHHOLDING

13.1 Withholding Requirements. Prior to the delivery of any Shares or cash pursuant to an
Award (or exercise thereof), the Company shall have the power and the right to deduct or withhold,
or require a Participant to remit to the Company, an amount sufficient to satisfy federal, state,
and local taxes (including the Participant’s FICA obligation) required to be withheld with respect
to such Award (or exercise thereof).

13.2 Withholding Arrangements. The Administrator, in its discretion and pursuant to such
procedures as it may specify from time to time, may permit a Participant to satisfy such tax
withholding obligation, in whole or in part by (a) electing to have the Company withhold otherwise
deliverable Shares, or (b) delivering to the Company already-owned Shares having a Fair Market
Value equal to the minimum amount required to be withheld. The amount of the withholding
requirement shall be deemed to include any amount which the Administrator agrees may be withheld at
the time the election is made, not to exceed the amount determined by using the maximum federal,
state or local marginal income tax rates applicable to the Participant with respect to the Award on
the date that the amount of tax to be withheld is to be determined. The Fair Market Value of the
Shares to be withheld or delivered shall be determined as of the date taxes are required to be
withheld. The number of Shares withheld to satisfy minimum withholding requirements shall be
cancelled and shall not be available for grant again under the Plan.

SECTION 14

LEGAL CONSTRUCTION

14.1 Liability of Company. The inability of the Company to obtain authority from any
regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be
necessary to the lawful grant or any Award or the issuance and sale of any Shares hereunder, shall
relieve the Company, its officers, Directors and Employees of any liability in respect of the

 

 

failure to grant such Award or to issue or sell such Shares as to which such requisite authority
shall not have been obtained.

14.2 Grants Exceeding Allotted Shares. If the Shares covered by an Award exceed, as of the
date of grant, the number of Shares, which may be issued under the Plan without additional
stockholder approval, such Award shall be void with respect to such excess Shares, unless
stockholder approval of an amendment sufficiently increasing the number of Shares subject to the
Plan is timely obtained.

14.3 Gender and Number. Except where otherwise indicated by the context, any masculine
term used herein also shall include the feminine; the plural shall include the singular and the
singular shall include the plural.

14.4 Severability. In the event any provision of the Plan shall be held illegal or invalid
for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and
the Plan shall be construed and enforced as if the illegal or invalid provision had not been
included.

14.5 Requirements of Law. The granting of Awards and the issuance of Shares under the Plan
shall be subject to all applicable laws, rules, and regulations, and to such approvals by any
governmental agencies or national securities exchanges as may be required.

14.6 Securities Law Compliance. With respect to Section 16 individuals, transactions under
this Plan are intended to comply with all applicable conditions of Rule 16b-3. To the extent any
provision of the Plan, Award Agreement or action by the Administrator fails to so comply, it shall
be deemed null and void, to the extent permitted by law and deemed advisable by the Administrator.

14.7 Governing Law. The Plan and all Award Agreements shall be construed in accordance
with and governed by the laws of the State of California

14.8 Captions. Captions are provided herein for convenience only, and shall not serve as a
basis for interpretation or construction of the Plan.

SECTION 15

EXECUTION

     IN WITNESS WHEREOF, the Company, by its duly authorized officer, has executed this Plan on the
date indicated below.

	 	 	 	 	 
	 	SYBASE, INC.

 	 
	Dated:  April 14, 2009 	By:  	/s/ Daniel R. Carl
 	 
	 	 	Daniel R. Carl 	 
	 	 	Vice President,
General Counsel and Secretaryexv10w19

Exhibit 10.19

 

LOAN AND SECURITY AGREEMENT

dated as of January 7, 2009

between

ENERGY RECOVERY, INC.,

a Delaware corporation,

as Borrower,

and

CITIBANK, N.A., 

as Lender

$15,000,000

 

 

 

TABLE OF CONTENTS

	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Page	 
	SECTION 1	 	DEFINITIONS
	 	 	1	 
	 	1.1	 	 	Definitions
	 	 	1	 
	 	 	 	 	 
	 	 	 	 
	SECTION 2	 	LOAN; PAYMENT TERMS
	 	 	11	 
	 	2.1	 	 	Promise to Pay
	 	 	11	 
	 	2.2	 	 	Overadvances
	 	 	12	 
	 	2.3	 	 	Payment of Interest on the Loans
	 	 	12	 
	 	2.4	 	 	Fees
	 	 	13	 
	 	 	 	 	 
	 	 	 	 
	SECTION 3	 	CONDITIONS OF LOANS
	 	 	13	 
	 	3.1	 	 	Conditions Precedent to Initial Loan
	 	 	13	 
	 	3.2	 	 	Conditions Precedent to all Loans
	 	 	14	 
	 	3.3	 	 	Covenant to Deliver
	 	 	14	 
	 	3.4	 	 	Procedure for the Borrowing of Advances
	 	 	15	 
	 	3.5	 	 	Special Provisions Governing LIBOR Advances
	 	 	15	 
	 	3.6	 	 	Additional Requirements/Provisions Regarding LIBOR Advances
	 	 	16	 
	 	3.7	 	 	Conversion and Continuation Elections
	 	 	17	 
	 	 	 	 	 
	 	 	 	 
	SECTION 4	 	CREATION OF SECURITY INTEREST
	 	 	18	 
	 	4.1	 	 	Grant of Security Interest
	 	 	18	 
	 	4.2	 	 	Authorization to File Financing Statements
	 	 	19	 
	 	 	 	 	 
	 	 	 	 
	SECTION 5	 	REPRESENTATIONS AND WARRANTIES
	 	 	19	 
	 	5.1	 	 	Due Organization, Authorization; Power and Authority
	 	 	19	 
	 	5.2	 	 	Collateral
	 	 	19	 
	 	5.3	 	 	Litigation
	 	 	20	 
	 	5.4	 	 	No Material Deviation in Financial Statements
	 	 	20	 
	 	5.5	 	 	Solvency
	 	 	20	 
	 	5.6	 	 	Regulatory Compliance
	 	 	20	 
	 	5.7	 	 	Subsidiaries; Investments
	 	 	20	 
	 	5.8	 	 	Tax Returns and Payments; Pension Contributions
	 	 	20	 
	 	5.9	 	 	Use of Proceeds
	 	 	21	 
	 	5.10	 	 	Full Disclosure
	 	 	21	 
	 	 	 	 	 
	 	 	 	 
	SECTION 6	 	AFFIRMATIVE COVENANTS
	 	 	21	 
	 	6.1	 	 	Government Compliance
	 	 	21	 
	 	6.2	 	 	Financial Statements, Reports, Certificates
	 	 	21	 
	 	6.3	 	 	Taxes; Pensions
	 	 	22	 
	 	6.4	 	 	Insurance
	 	 	22	 
	 	6.5	 	 	Operating Accounts
	 	 	22	 
	 	6.6	 	 	Financial Covenants
	 	 	22	 
	 	6.7	 	 	Protection and Registration of Intellectual Property Rights
	 	 	23	 
	 	6.8	 	 	Litigation Cooperation
	 	 	23	 
	 	6.9	 	 	Additional Costs
	 	 	23	 
	 	6.10	 	 	Subsidiaries
	 	 	23	 
	 	6.11	 	 	Further Assurances
	 	 	23	 
	 	 	 	 	 
	 	 	 	 
	SECTION 7	 	NEGATIVE COVENANTS
	 	 	23	 
	 	7.1	 	 	Dispositions
	 	 	23	 

-i-

 

TABLE OF CONTENTS

(continued)

	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Page	 
	 	7.2	 	 	Changes in Business; Change in Control; Jurisdiction of Formation
	 	 	24	 
	 	7.3	 	 	Mergers or Acquisitions
	 	 	24	 
	 	7.4	 	 	Indebtedness
	 	 	24	 
	 	7.5	 	 	Encumbrance
	 	 	24	 
	 	7.6	 	 	Distributions; Investments
	 	 	24	 
	 	7.7	 	 	Transactions with Affiliates
	 	 	24	 
	 	7.8	 	 	Subordinated Debt
	 	 	24	 
	 	7.9	 	 	Compliance
	 	 	25	 
	 	 	 	 	 
	 	 	 	 
	SECTION 8	 	EVENTS OF DEFAULT
	 	 	25	 
	 	8.1	 	 	Payment Default
	 	 	25	 
	 	8.2	 	 	Covenant Default
	 	 	25	 
	 	8.3	 	 	Material Adverse Change
	 	 	25	 
	 	8.4	 	 	Attachment
	 	 	25	 
	 	8.5	 	 	Insolvency
	 	 	26	 
	 	8.6	 	 	Other Agreements
	 	 	26	 
	 	8.7	 	 	Judgments
	 	 	26	 
	 	8.8	 	 	Misrepresentations
	 	 	26	 
	 	8.9	 	 	Subordinated Debt
	 	 	26	 
	 	8.10	 	 	Guaranty
	 	 	26	 
	 	 	 	 	 
	 	 	 	 
	SECTION 9	 	LENDER’S RIGHTS AND REMEDIES
	 	 	26	 
	 	9.1	 	 	Rights and Remedies
	 	 	26	 
	 	9.2	 	 	Power of Attorney
	 	 	27	 
	 	9.3	 	 	Protective Payments
	 	 	27	 
	 	9.4	 	 	Application of Payments and Proceeds
	 	 	27	 
	 	9.5	 	 	Lender’s Liability for Collateral
	 	 	28	 
	 	9.6	 	 	No Waiver; Remedies Cumulative
	 	 	28	 
	 	9.7	 	 	Demand Waiver
	 	 	28	 
	 	 	 	 	 
	 	 	 	 
	SECTION 10	 	NOTICES
	 	 	28	 
	 	 	 	 	 
	 	 	 	 
	SECTION 11	 	CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER
	 	 	29	 
	 	 	 	 	 
	 	 	 	 
	SECTION 12	 	GENERAL PROVISIONS
	 	 	29	 
	 	12.1	 	 	Successors and Assigns
	 	 	29	 
	 	12.2	 	 	Indemnification
	 	 	29	 
	 	12.3	 	 	Time of Essence
	 	 	30	 
	 	12.4	 	 	Severability of Provisions
	 	 	30	 
	 	12.5	 	 	Amendments in Writing; Integration
	 	 	30	 
	 	12.6	 	 	Counterparts
	 	 	30	 
	 	12.7	 	 	Survival 
	 	 	30	 
	 	12.8	 	 	Confidentiality
	 	 	30	 
	 	12.9	 	 	Attorneys’ Fees, Costs and Expenses
	 	 	30	 

-ii-

 

LOAN AND SECURITY AGREEMENT

     This LOAN AND SECURITY AGREEMENT (this “Agreement”) dated as of January 7, 2009 between
Citibank, N.A. (“Lender”), and Energy Recovery, Inc., a Delaware corporation (“Borrower”),
provides the terms on which Lender shall lend to Borrower and Borrower shall repay Lender. The
parties agree as follows:

SECTION 1

DEFINITIONS

     Accounting terms not defined in this Agreement shall be construed following GAAP.
Calculations and determinations must be made following GAAP. Capitalized terms not otherwise
defined in this Agreement shall have the meanings set forth in Section 1.1. All other terms
contained in this Agreement, unless otherwise indicated, shall have the meaning provided by the
Code to the extent such terms are defined therein.

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

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

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

     “Advance” or “Advances” means an advance (or advances) under the Revolving Line of Credit,
including LIBOR Advances and Prime Rate Advances.

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

     “Agreement” is defined in the preamble hereof.

     “Alternative Dispute Resolution Agreements” means those certain Alternative Dispute
Resolution Agreements to be executed by Borrower and by each Guarantor.

     “Base LIBOR” means the rate per annum, determined by Lender in accordance with its customary
procedures and utilizing such electronic or other quotation sources as it considers appropriate
(rounded upwards, if necessary, to five decimal places where the sixth digit is five or more), at
which Dollar deposits are offered in the London interbank market shortly after 11:00 a.m. (London
time) two banking days prior to the commencement of the applicable Interest Period, for a term and
in amounts comparable to the Interest Period and amount of the LIBOR Advance. If the Base LIBOR
becomes unavailable during the term of this Agreement, Lender may designate a substitute index
after notifying Borrower.

     “Borrower” is defined in the preamble hereof.

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

     “Borrowing Resolutions” are, with respect to any Person, those resolutions adopted by such
Person’s Board of Directors and delivered by such Person to Lender approving the Loan Documents to
which such Person is a party and the transactions contemplated thereby, together with a
certificate executed by its secretary (or other authorized officer) on behalf of such Person
certifying that (a) such Person has the authority to execute, deliver, and perform its

1

 

obligations under each of the Loan Documents to which it is a party, (b) that attached as Exhibit
A to such certificate is a true, correct, and complete copy of the resolutions then in full force
and effect authorizing and ratifying the execution, delivery, and performance by such Person of
the Loan Documents to which it is a party, (c) the name(s) of the Person(s) authorized to execute
the Loan Documents on behalf of such Person, together with a sample of the true signature(s) of
such Person(s), and (d) that Lender may conclusively rely on such certificate unless and until
such Person shall have delivered to Lender a further certificate canceling or amending such prior
certificate.

     “Business Day” means any day that is not a Saturday, Sunday, or other day on which federally
chartered banks are authorized or required to close, except that, if a determination of a Business
Day shall relate to a LIBOR Advance, the term “Business Day” also shall exclude any day on which
banks are closed for dealings in Dollar deposits in the London interbank market.

     “Cash Equivalents” means (a) marketable direct obligations issued or unconditionally
guaranteed by the United States or any agency or any State thereof having maturities of not more
than one (1) year from the date of acquisition; (b) commercial paper maturing no more than one (1)
year after its creation and having the highest rating from either Standard & Poor’s Ratings Group
or Moody’s Investors Service, Inc.; (c) Lender’s certificates of deposit issued maturing no more
than one (1) year after issue; and (d) money market funds at least ninety-five percent (95%) of
the assets of which constitute Cash Equivalents of the kinds described in clauses (a) through (c)
of this definition.

     “Cash Secured Letters of Credit” means the aggregate face amount of the Permitted Comerica
Letters of Credit plus the aggregate face amount of any other cash-secured letters of credit with
Borrower or any of its Subsidiaries as the applicant.

     “Change
in Control” means any event, transaction, or occurrence as a result of which (a) any
“person” (as such term is defined in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act
of 1934, as an amended (the “Exchange Act”)), other than a trustee or other fiduciary holding
securities under an employee benefit plan of Borrower, is or becomes a beneficial owner (within
the meaning Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities
of Borrower, representing twenty-five percent (25%) or more of the combined voting power of
Borrower’s then outstanding securities; or (b) during any period of twelve consecutive calendar
months, individuals who at the beginning of such period constituted the Board of Directors of
Borrower (together with any new directors whose election by the Board of Directors of Borrower was
approved by a vote of at least two-thirds of the directors then still in office who either were
directors at the beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason other than death or disability to constitute a
majority of the directors then in office. Notwithstanding the foregoing, a “Change in Control”
will not be deemed to have occurred by reason of (x) the appointment of two additional members to
Borrower’s Board of Directors, consistent with Borrower’s bylaws as in effect on the date hereof,
or (y) the shareholders of Borrower as of the date hereof sell securities of Borrower that
collectively represent up to 50% of the combined voting power of Borrower’s then outstanding
securities, provided that no purchaser of such securities acquires beneficial ownership (as
broadly defined under Rule 13d-3 under the Exchange Act) of 25% or more of the combined voting
power of Borrower’s then outstanding securities.

     “Code” is the Uniform Commercial Code, as the same may, from time to time, be enacted and in
effect in the State of California; provided, that, to the extent that the Code is used to define
any term herein or in any Loan Document and such term is defined differently in different Articles
or Divisions of the Code, the definition of such term contained in Article or Division 9 shall
govern; provided further, that in the event that, by reason of mandatory provisions of law, any or
all of the attachment, perfection, or priority of, or remedies with respect to, Lender’s Lien on
any Collateral is governed by the Uniform Commercial Code in effect in a jurisdiction other than
the State of California, the term “Code” shall mean the Uniform Commercial Code as enacted and in
effect in such other jurisdiction solely for purposes on the provisions thereof relating to such
attachment, perfection, priority, or remedies and for purposes of definitions relating to such
provisions.

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

2

 

     “Comerica Control Agreement” means the Pledge and Security Agreement with respect to the
pledge of cash in an account at Comerica Bank to secure the Permitted Comerica Letters of Credit,
executed by Borrower in favor of Comerica Bank and acknowledged and approved by Comerica Bank and
Citibank, N.A.

     “Communication” is defined in Section 10.

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

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

     “Continuation Date” means any date on which Borrower elects or is deemed to have elected to
continue a LIBOR Advance into another Interest Period.

     “Control Agreement” is any control agreement entered into between the depository institution
at which Borrower maintains a Deposit Account, and between Borrower and Lender, pursuant to which
Lender obtains control (within the meaning of the Code) over such Deposit Account.

     “Conversion Date” means any date on which Borrower elects to convert a Prime Rate Advance to
a LIBOR Advance or a LIBOR Advance to a Prime Rate Advance.

     “Credit Party” means Borrower and each of Borrower’s Subsidiaries.

     “Current Assets” are amounts that under GAAP should be included on that date as current
assets on Borrower’s consolidated balance sheet, less (without duplication) the amount of
Borrower’s prepaid expenses.

     “Current Liabilities” are all obligations and liabilities of Borrower to Lender, plus,
without duplication, (i) the amount of all letters of credit outstanding at any one time with
Borrower or any of its Subsidiaries as the applicant, including Letters of Credit issued hereunder
(including the drawn and unreimbursed amounts of all such letters of credit) and (ii) the
aggregate amount of Borrower’s Total Liabilities that mature within one (1) year.

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

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

     “Designated
Deposit Account” is Borrower’s deposit account, account
number [***],
maintained with Lender.

     “Diligence Certificate” is defined in Section 5.1.

     “Diligence Review” is Lender’s inspection of Borrower’s current consolidated financial
statements and financial projections, accounts receivable agings and inventory report.

     “Dollar(s) or $” means United States dollars.

3

 

     “Effective Amount” means with respect to any Advances on any date, the aggregate outstanding
principal amount thereof after giving effect to any borrowing and prepayments or repayments
thereof occurring on such date.

     “Encumbered Cash” means cash and Cash Equivalents, if any, that have been pledged as
collateral to Comerica Bank under the Comerica Control Agreement.

     “Energy International” means Energy Recovery, Inc. International, a Delaware corporation and
a wholly-owned subsidiary of Borrower.

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

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

     “Event of Default” is defined in Section 8.

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

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

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

     “General Intangibles” is all “general intangibles” as defined in the Code in effect on the
date hereof with such additions to such term as may hereafter be made, and includes without
limitation, all copyright rights, copyright applications, copyright registrations and like
protections in each work of authorship and derivative work, whether published or unpublished, any
patents, trademarks, service marks and, to the extent permitted under applicable law, any
applications therefor, whether registered or not, any trade secret rights, including any rights to
unpatented inventions, payment intangibles, royalties, contract rights, goodwill, franchise
agreements, purchase orders, customer lists, route lists, telephone numbers, domain names, claims,
income and other tax refunds, security and other deposits, options to purchase or sell real or
personal property, rights in all litigation presently or hereafter pending (whether in contract,
tort or otherwise), insurance policies (including without limitation key man, property damage, and
business interruption insurance), payments of insurance and rights to payment of any kind.

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

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

     “Guarantor” is any present or future guarantor of the Obligations, including Osmotic Power
and Energy International.

     “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.

4

 

     “Index” means an interest rate which is subject to change from time to time based on changes
in an independent index, which is The Wall Street Journal Prime Rate. The Index is not necessarily
the lowest rate charged by Lender on its loans. If the Index becomes unavailable during the term
of this Agreement, Lender may designate a substitute index after notifying Borrower. Lender will
tell Borrower the current Index rate upon Borrower’s request. The interest rate change will not
occur more often than each day. Borrower understands that Lender may make loans based on other
rates as well. The Index currently is 3.25%. The interest rate to be applied to the unreimbursed
amount of drawn Letters of Credit will be at a rate of 3.00 percentage points over the Index,
resulting in an initial rate of 6.25%. NOTICE: Under no circumstances will the effective rate of
interest under this Agreement be more than the maximum rate allowed by applicable law.

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

     “Interest Expense” means for any fiscal period, interest expense (whether cash or non-cash)
determined in accordance with GAAP for the relevant period ending on such date, including, in any
event, interest expense with respect to any Loan and other Indebtedness of Borrower and its
Subsidiaries, including, without limitation or duplication, all commissions, discounts, or related
amortization and other fees and charges with respect to letters of credit and bankers’ acceptance
financing and the net costs associated with interest rate swap, cap, and similar arrangements, and
the interest portion of any deferred payment obligation (including leases of all types).

     “Interest Payment Date” means, with respect to any LIBOR Advance, the last day of each
Interest Period applicable to such LIBOR Advance and, with respect to Prime Rate Advances, the
first (1st) day of each month (or, if the first day of the month does not fall on a Business Day,
then on the first Business Day following such date), and each date a Prime Rate Advance is
converted into a LIBOR Advance to the extent of the amount converted to a LIBOR Advance.

     “Interest Period” means, with respect to each LIBOR Advance, a period commencing on the date
of the making of such LIBOR Advance and ending 1, 2, 3, or 6 months thereafter, in each case as
Borrower may elect in the applicable Notice of Borrowing or Notice of Conversion/Continuation or
as Borrower may be deemed to have elected; provided, however, that (a) if any Interest Period
would end on a day that is not a Business Day, such Interest Period shall be extended (subject to
clauses (c) and (d) below) to the next succeeding Business Day, (b) interest shall accrue at the
applicable rate based upon the LIBOR Rate from and including the first day of each Interest Period
to, but excluding, the day on which any Interest Period expires, (c) with respect to an Interest
Period that begins on the last Business Day of a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the end of such Interest Period), the
Interest Period shall end on the last Business Day of the calendar month that is 1, 2, 3 or 6
months after the date on which the Interest Period began, as applicable, and (d) Borrower may not
elect an Interest Period which will end after the Revolving Line Maturity Date.

     “Interest Rate Determination Date” means each date for calculating the LIBOR Rate for purposes
of determining the interest rate in respect of an Interest Period. The Interest Rate Determination
Date shall be the second Business Day prior to the first day of the related Interest Period for a
LIBOR Advance.

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

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

     “Lender” is defined in the preamble hereof.

5

 

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

     “Letter of Credit” means a standby letter of credit issued by Lender or another
institution based upon an application, guarantee, indemnity, warranty or similar
agreement on the part of Lender as set forth in Section 2.1.2, which definition
specifically excludes the Permitted Comerica Letters of Credit.

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

     “Letter of Credit Availability Amount” means (i) Fourteen Million Eight Hundred
Fifty Thousand Dollars ($14,850,000) minus (ii) the outstanding principal amount of
all Advances minus (iii) the face amount of all outstanding Letters of Credit (including
drawn but unreimbursed Letters of Credit).

     “LIBOR Rate” means, as of the date of determination thereof, the rate per annum determined as
the sum of:

          (a) the
quotient of (i) Base LIBOR for the relevant Interest Period,
divided by
(ii) the
number equal to one hundred percent (100%) minus the LIBOR Reserve Percentage as of
such date; plus

          (b) 1.3750 percentage points.

The LIBOR Rate shall be adjusted automatically on the effective date of any change in
the LIBOR Reserve Percentage, such adjustment to affect any LIBOR Advance outstanding on
such effective date. Each determination of a LIBOR Rate by Lender shall be conclusive
and final in the absence of manifest error. NOTICE: Under no circumstances will the
effective rate of interest under this Agreement be more than the maximum rate allowed by
applicable law.

     “LIBOR Advance” means each Advance that bears interest at the LIBOR Rate. The
initial LIBOR Advance must be for a minimum of $500,000 and in integral multiples of
One Hundred Thousand Dollars ($100,000) in excess thereof. Each subsequent LIBOR
Advance must be in a minimum amount of One Hundred Thousand Dollars ($100,000) and
in integral multiples of One Hundred Thousand Dollars ($100,000) in excess thereof.

     “LIBOR Reserve Percentage” means, on any day, the maximum percentage prescribed
by the Board of Governors of the Federal Reserve System (or any successor
governmental authority) for determining the reserve requirements (including any
basic, supplemental, marginal, or emergency reserves) that are in effect on such date
with respect to eurocurrency funding (currently referred to as “eurocurrency
liabilities”) of Lender, but so long as Lender is not required or directed under
applicable regulations to maintain such reserves, the LIBOR Reserve Percentage shall
be zero.

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

     “Loan” means each Advance, loan and financial accommodation from Lender to
Borrower, whether now existing or hereafter arising and however evidenced, including
those Advances, loans, Letters of Credit and financial accommodations described
herein or described on any exhibit or schedule attached to this Agreement from time
to time.

     “Loan Documents” are, collectively, this Agreement, the Comerica Control
Agreement, the Diligence Certificate, each Letter of Credit Application and Letter
of Credit, the Alternative Dispute Resolution Agreements, the Notice of Insurance
Requirements, Agreement to Provide Insurance, Authorized Signatories and MIFT
Agreement, any note, or notes or guaranties or security agreement executed by
Borrower or any Guarantor, and any other present or future agreement between
Borrower any Guarantor and/or for the benefit of Lender in connection with this
Agreement, all as amended, restated, or otherwise modified.

6

 

     “Material Adverse Change” is (a) a material impairment in the
perfection or priority of Lender’s Lien in the Collateral or in the value
of such Collateral; (b) a material adverse change in the business,
operations, or condition (financial or otherwise) of Borrower; or (c) a
material impairment of the prospect of repayment of any portion of the
Obligations.

     “Material Indebtedness” is any Indebtedness the principal amount of
which is equal to or greater than $1,000,000.

     “Net Income” means, as calculated on a consolidated basis for
Borrower and its Subsidiaries for any period as at any date of
determination, the net profit (or loss), after provision for taxes, of
Borrower and its Subsidiaries for such period taken as a single
accounting period.

     “Notice of Borrowing” means a notice given by Borrower to Lender in
accordance with Section 3.2(a), substantially in the form of Exhibit B,
with appropriate insertions.

     “Notice of Conversion/Continuation” means a notice given by Borrower
to Lender in accordance with Section 3.5, substantially in the form of
Exhibit C, with appropriate insertions.

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

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

     “Osmotic Power” means Osmotic Power, Inc., a Delaware corporation
and a wholly-owned subsidiary of Borrower.

     “Permitted Comerica Letters of Credit” means the standby letters of
credit issued by Comerica Bank described on Exhibit F hereto.

     “Permitted Distributions” means:

          (a) distributions or dividends consisting solely of Borrower’s capital
stock;

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

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

          (d) distributions or dividends from Borrower’s Subsidiaries to Borrower
or to any of
Borrower’s Subsidiaries;

7

 

          (e) purchases of capital stock of Borrower from officers, directors or employees of Borrower
and its Subsidiaries under the terms of applicable purchase agreements in an aggregate amount
of up to $250,000 per
year; and

          (f) other purchases of capital stock of Borrower in the aggregate amount of up to
$5,000,000.

     “Permitted Indebtedness” is:

          (a) Permitted Comerica Letters of Credit;

          (b) Borrower’s Indebtedness to Lender under this Agreement and any other Loan
Document;

          (c) Subordinated Debt;

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

          (e) guaranties of Permitted Indebtedness;

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

          (g) Indebtedness between Borrower and any Guarantor;

          (h) capitalized leases and purchase money Indebtedness not to exceed $1,000,000 in the
aggregate in any fiscal year secured by Permitted Liens;

          (i) Indebtedness specifically disclosed to, and specifically approved by, Lender in writing
on or prior to the date of this Agreement; and

          (j) refinanced Permitted Indebtedness, provided that the amount of such Indebtedness is not
increased except by an amount equal to a reasonable premium or other reasonable amount paid in
connection with such refinancing and by an amount equal to any existing, but unutilized,
commitment thereunder.

     “Permitted Investments” are:

          (a) Investments existing on the date hereof and specifically disclosed in writing to
Lender;

          (b) (i) marketable direct obligations issued or unconditionally guaranteed by the United
States or its agencies maturing within 3 years from its acquisition, (ii) commercial paper
maturing no more than 1
year after its creation and having the highest rating from either Standard & Poor’s
Corporation or Moody’s Investors Service, Inc., and
(iii) Lender’s certificates of deposit maturing no more
than 2 years after issue;

          (c) Investments in or to Borrower or any Guarantor;

          (d) Investments consisting of Deposit Accounts in the name of Borrower or any Guarantor so long as Lender has a first priority, perfected security interest in such Deposit Accounts;

          (e) Investments consisting of extensions of credit to Borrower’s or a Guarantor’s
customers in the nature of accounts receivable, prepaid royalties or notes receivable arising from the
sale or lease of goods,
provision of services or licensing activities of Borrower;

          (f) Investments acquired in exchange for any other Investments in connection with or as a
result of a bankruptcy, workout, reorganization or recapitalization;

8

 

          (g) Investments acquired as a result of a foreclosure with respect
to any secured Investment; and

          (h) other Investments, if, on the date of incurring any Investments
pursuant to this clause (h), the outstanding aggregate amount of all
Investments incurred pursuant to this clause (h) does not exceed
$3,000,000 (not including the value of consideration in transactions
under Section 7.3).

     “Permitted Liens” are:

          (a) the Lien arising from the pledge of cash pursuant to the Comerica
Control Agreement to
secure the Permitted Comerica Letters of Credit;

          (b) (i) Liens securing Permitted Indebtedness described under clauses
(b) and (i) of the
definition of “Permitted Indebtedness” or (ii) Liens arising under
this Agreement or other Loan Documents;

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

          (d) Liens (including with respect to capital leases) (i) on property
(including accessions,
additions, parts, replacements, fixtures, improvements and attachments
thereto, and the proceeds thereof) acquired
or held by Borrower or its Subsidiaries incurred for financing such
property (including accessions, additions, parts,
replacements, fixtures, improvements and attachments thereto, and the
proceeds thereof) other than Accounts, and
Inventory, or (ii) existing on property (and accessions, additions,
parts, replacements, fixtures, improvements and
attachments thereto, and the proceeds thereof) when acquired other
than Accounts and Inventory, if the Lien is
confined to such property (including accessions, additions, parts,
replacements, fixtures, improvements and
attachments thereto, and the proceeds thereof);

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

          (f) leases or subleases of real property granted in the ordinary
course of business, and leases,
subleases, non-exclusive licenses or sublicenses of property (other
than real property or intellectual property)
granted in the ordinary course of Borrower’s business, if the leases,
subleases, licenses and sublicenses do not
prohibit granting Lender a security interest;

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

          (h) leases or subleases granted in the ordinary course of Borrower’s
business, including in connection with Borrower’s leased premises or
leased property;

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

          (j) Liens in favor of other financial institutions arising in
connection with Borrower’s deposit or securities accounts held at such
institutions, provided that such accounts are permitted to be established
at such institutions under Section 6.5 hereof;

          (k) Liens of carriers, warehousemen, suppliers, or other Persons
that are possessory in nature arising in the ordinary course of business
so long as such Liens attach only to Inventory and which are not

9

 

delinquent or remain payable without penalty or which are being contested
in good faith and by appropriate proceedings which proceedings have the
effect of preventing the forfeiture or sale of the property subject
thereto;

          (l) Liens to secure payment of workers’ compensation, employment
insurance, old-age pensions, social security and other like obligations
incurred in the ordinary course of business (other than Liens imposed by
ERISA);

          (m) Liens not otherwise permitted, provided that (i) the amount of
all such Liens is not in excess of $250,000 (with any such Lien valued as
the amount of the obligation secured by such Lien), (ii) such Liens are
subordinate in priority to Lender’s Lien hereunder and (iii) no Event of
Default is otherwise caused thereby.

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

     “Prime Rate Advance” means an Advance that bears interest based on
the Index, The initial Prime Rate Advance must be for a minimum of
$500,000 and in integral multiples of One Hundred Thousand Dollars
($100,000) in excess thereof. Each subsequent Prime Rate Advance must be
in a minimum amount of One Hundred Thousand Dollars ($100,000) and in
integral multiples of One Hundred Thousand Dollars ($100,000) in excess
thereof.

     “Regulatory Change” means, with respect to Lender, any change on or
after the date of this Agreement in United States federal, state, or
foreign laws or regulations, including Regulation D, or the adoption or
making on or after such date of any interpretations, directives, or
requests applying to a class of lenders including Lender, of or under any
United States federal or state, or any foreign laws or regulations
(whether or not having the force of law) by any court or governmental or
monetary authority charged with the interpretation or administration
thereof.

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

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

     “Revolving Availability Amount” means Ten Million Dollars ($10,000,000).

     “Revolving Line of Credit” is defined in Section 2.1.1(a).

     “Revolving Line Maturity Date” is December 31, 2009.

     “Security Agreement” is that certain Security Agreement executed by Guarantors
in favor of Lender.

     “Subordinated Debt” is (a) Indebtedness incurred by Borrower
subordinated to Borrower’s Indebtedness owed to Lender and which is
reflected in a written agreement in a manner and form reasonably
acceptable to Lender and approved by Lender in writing, and (b) to the
extent the terms of subordination do not change adversely to Lender,
refinancings, refundings, renewals, amendments or extensions of any of
the foregoing.

     “Subsidiary” means, with respect to any Person, any Person of which
more than 50.0% of the voting stock or other equity interests (in the
case of Persons other than corporations) is owned or controlled directly
or indirectly by such Person or one or more of Affiliates of such Person.

10

 

     “Tangible Net Worth” is, on any date, the consolidated total assets
of Borrower and its Subsidiaries minus (a) any amounts
attributable to (i) goodwill, (ii) intangible items including unamortized
debt discount and expense, patents, trade and service marks and names,
copyrights and research and development expenses except prepaid expenses,
(iii) notes, accounts receivable and other obligations owing to Borrower
from its officers or other Affiliates, and (iv) reserves not already
deducted from assets, minus (b) Total Liabilities.

     “Total Availability Amount” is $15,000,000.

     “Total Liabilities” is on any day, obligations that should, under
GAAP, be classified as liabilities on Borrower’s consolidated balance
sheet, including all Indebtedness.

     “Transfer” is defined in Section 7.1.

SECTION 2

LOAN; PAYMENT TERMS

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

     2.1.1 Revolving Line of Credit.

          (a) Availability. Subject to the terms and conditions of this
Agreement, Lender shall make
Advances not exceeding the Revolving Availability Amount. Each
Advance will, at Borrower’s option in
accordance with the terms of this Agreement, be either in the form of a
Prime Rate Advance or a LIBOR Advance.
No more than six (6) LIBOR Advances may be outstanding at any time.
Amounts borrowed hereunder may be
repaid and, prior to the Revolving Line Maturity Date, reborrowed,
subject to the applicable terms and conditions
precedent herein. The credit facility described in this Section 2.1.1
is referred to as the “Revolving Line of Credit”.

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

     2.1.2 Letters of Credit Sublimit.

          (a) As part of the Revolving Line of Credit, Lender shall issue or
have issued Letters of Credit for Borrower’s account. Such aggregate
amounts utilized hereunder shall at all times reduce the amount otherwise
available for Advances under the Revolving Line of Credit. The amount of
the Letters of Credit outstanding at any one time (including the drawn
and unreimbursed amounts of the Letters of Credit) may not exceed the
Letter of Credit Availability Amount. If, on the Revolving Line Maturity
Date, there are any outstanding Letters of Credit, then on such date
Borrower shall provide to Lender cash collateral in an amount equal to
101% of the face amount of all such Letters of Credit plus all interest,
fees, and costs due or to become due in connection therewith (as
estimated by Lender in its good faith business judgment), to secure all
of the Obligations relating to said Letters of Credit. All Letters of
Credit shall be in form and substance acceptable to Lender in its sole
discretion and shall be subject to the terms and conditions of Lender’s
standard application and letter of credit agreement, the forms of which
may vary from time to time although a sample form is attached hereto as
Exhibit E (the “Letter of Credit Application”). Borrower agrees
to execute any further documentation in connection with the Letters of
Credit as Lender may reasonably request. Borrower further agrees to be
bound by the regulations and interpretations of the issuer of any Letters
of Credit guarantied by Lender and opened for Borrower’s account or by
Lender’s interpretations of any Letter of Credit issued by Lender for
Borrower’s account and Borrower understands and agrees that Lender 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.

11

 

          (b) Except as provided in the following sentence, all Letters of Credit will have an initial
maturity of no more than one year, renewable annually, if timely requested by Borrower and
permitted by Lender in
Lender’s sole discretion, for additional one-year periods up to a total maximum maturity of
five years. A Letter of
Credit that is not subject to annual renewal at Lender’s discretion may have a maturity longer
than one year and less
than or equal to five years, but the aggregate face amount of all such Letters of Credit
(including the accrued and
unreimbursed amounts of such Letters of Credit) may not exceed $5,000,000.

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

          (d) Borrower may request that Lender issue a Letter of Credit payable in a Foreign Currency.
If a demand for payment is made under any such Letter of Credit, Lender shall treat such
demand as an Advance to
Borrower of the equivalent of the amount thereof (plus fees and charges in connection
therewith such as wire, cable,
SWIFT or similar charges) in Dollars at the then-prevailing rate of exchange in New York, New
York, for sales of
the Foreign Currency for transfer to the country issuing such Foreign Currency.

          (e) Borrower agrees that (i) any sum drawn under a Letter of Credit that has not been
immediately repaid when due may, at the option of Lender, be deemed an Advance and added to
the principal
amount outstanding under this Agreement and (ii) that such Advance will bear interest at a
floating rate equal to
3.00 percentage points over the Index, which interest shall be payable monthly in accordance
with Section 2.3(f)
below.

     2.2 Overadvances. If at any time the Loans under Section 2.1.1 exceed the Revolving
Availability
Amount, then Borrower must immediately pay to Lender in cash such excess and Lender will apply
such cash
amount to repay outstanding Advances. If at any time the aggregate amount of all Loans
outstanding, including
drawn and undrawn Letters of Credit, exceeds the Letter of Credit Availability Amount,
Borrower must immediately
pay to Lender in cash such excess amount (the “Overadvance Amount”). Lender will then apply the
Overadvance
Amount to repay outstanding Advances so that the outstanding Advances are no more than the
Revolving
Availability Amount and deposit the remaining portion of the Overadvance Amount in a blocked,
segregated deposit
account as security for the Obligations, including Contingent Obligations. Borrower may apply,
no more often than
once per calendar month, for a return of the cash on deposit in the blocked account and Lender
must return the
portion of such cash amount that exceeds the Overadvance Amount, as the Overadvance Amount is
calculated by
Lender as of the time of Borrower’s application.

     2.3 Payment of Interest on the Loans.

          (a) Interest Rate. Subject to Section 2.3(b) and unless otherwise stated, each Advance shall
bear interest on the outstanding principal amount thereof from the date when made, continued
or converted until
paid in full at a rate per annum equal to the Index or the LIBOR Rate, as the case may be.
Pursuant to the terms
hereof, interest on each Advance shall be paid in arrears on each Interest Payment Date.
Interest shall also be paid
on the date of any prepayment of any Advance pursuant to this Agreement for the portion of any
Advance so
prepaid and upon payment (including prepayment) in full thereof. All accrued but unpaid
interest on the Advances
shall be due and payable on the Revolving Line Maturity Date.

          (b) Default Rate. If any Event of Default shall occur, including failure to pay upon final
maturity, Lender, at its option, may, if permitted under applicable law, increase the interest
rate otherwise payable
hereunder by 3.000 percentage points. Specifically and without limiting the previous
sentence, on and after the
expiration of any Interest Period applicable to any LIBOR Advance outstanding on the date of
occurrence of an
Event of Default or acceleration of the Obligations, the Effective Amount of such LIBOR
Advance shall, during the
continuance of such Event of Default or after acceleration, bear interest at a rate per annum
equal to the Index plus
5.000 percentage points. The interest rate will not exceed the maximum rate permitted by
applicable law (the
“Default Rate”). Payment or acceptance of the increased interest rate provided in this
Section 2.3(b) is not a
permitted alternative to timely payment and shall not constitute a waiver of any Event of
Default or otherwise
prejudice or limit any rights or remedies of Lender.

12

 

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

          (d) Interest Rate Basis. The annual interest rate under this Agreement is computed on a
365/360 basis; that is, by applying the ratio of the annual interest rate over a year of 360
days, multiplied by the
outstanding principal balance, multiplied by the actual number of days the principal balance
is outstanding.

          (e) Debit of Accounts. Lender may debit any of Borrower’s deposit accounts, including the
Designated Deposit Account, for principal and interest payments or any other amounts Borrower
owes Lender if not
paid in full when due, including interest, fees, and costs due or to become due in connection
with any Letter of
Credit. These debits shall not constitute a set-off.

          (f) Payments. Unless otherwise provided, interest is payable monthly on the first calendar
day of each month. Payments of principal and/or interest received after 12:00 p.m. Pacific
time are considered
received at the opening of business on the next Business Day. When a payment is due on a day
that is not a
Business Day, the payment is due the next Business Day and additional fees or interest, as
applicable, shall continue
to accrue.

     2.4 Fees. Borrower shall pay to Lender:

          (a) Commitment Fee. A fully earned, non-refundable commitment fee of $37,500 equal to
one quarter of one percent (0.25%) of the Total Availability Amount, on the date hereof; and

          (b) Letter of Credit Fee. Lender’s customary fees and expenses for the issuance or renewal
of Letters of Credit, including, without limitation, local issuance fees, a Letter of Credit
Fee of one percent (1.00%)
per annum of the face amount of each Letter of Credit issued, upon the issuance, each
anniversary of the issuance,
and the renewal of such Letter of Credit by Lender; and

          (c) Late Charge. If a payment is 15 days or more late, Borrower will be charged 5.000 % of
the regularly scheduled payment or $35.00, whichever is greater.

          (d) Dishonored Item Fee. Borrower will pay a fee to Lender of $35.00 if Borrower makes a
payment on any Loan and the check or preauthorized charge with which Borrower pays is later
dishonored.

          (e) Lender Expenses. All Lender Expenses (including reasonable attorneys’ fees and
expenses, plus expenses, for documentation and negotiation of this Agreement) incurred through
and after the date
hereof, when due.

SECTION 3

CONDITIONS OF LOANS

     3.1 Conditions Precedent to Initial Loan. Lender’s obligation to make the initial Loan is
subject to the condition precedent that Borrower shall, on or before January 9, 2009, consent to
or have delivered, in form and substance satisfactory to Lender, such documents, and completion of
such other matters, as Lender may reasonably deem necessary or appropriate, including, without
limitation:

          (a) duly executed original signatures to the Loan Documents to which it is a party;

          (b) duly executed original signatures to the Security Agreement and Alternative Dispute
Resolution Agreements;

          (c) its Organizational Documents and a good standing certificate of Borrower certified by the
Secretary of State of the State of Delaware as of a date no earlier than thirty (30) days
prior to the date hereof;

13

 

          (d) Organizational Documents and a good standing certificate for each Guarantor certified by
the Secretary of State of the State of Delaware as of a date no earlier than thirty (30) days
prior to the date hereof;

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

          (f) the Comerica Control Agreement duly executed by Borrower, Comerica Bank and
Lender;

          (g) evidence that (i) the Liens (other than the Liens evidenced or authorized by the Comerica
Control Agreement) securing Indebtedness owed by Borrower to Comerica Bank will be terminated
and (ii) the
documents and/or filings evidencing the perfection of such Liens, including without limitation
any financing
statements and/or control agreements, have or will, concurrently with the initial Loan, be
terminated.

          (h) certified copies, dated as of a recent date, of financing statement searches, as Lender
shall request, accompanied by written evidence (including any UCC termination statements) that the
Liens indicated in any such financing statements either constitute Permitted Liens or have been
or, in connection with the initial Loan, will be terminated or released;

          (i) the Diligence Certificate executed by Borrower;

          (j) the duly executed original signatures to the Guaranty, together with the completed
Borrowing Resolutions for each Guarantor;

          (k) evidence satisfactory to Lender that the insurance policies required by Section 6.4
hereof are in full force and effect, together with appropriate evidence showing loss payable
and/or additional insured clauses or endorsements in favor of Lender;

          (l) the completion of the Diligence Review with results satisfactory to Lender in its sole
and absolute discretion; and

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

     3.2 Conditions Precedent to all Loans. Lender’s obligations to make each Loan, including the
initial
Loan, is subject to the following:

          (a) except as otherwise provided in Section 3.4, timely receipt of an executed Notice of
Borrowing (in the case of an Advance) or a Letter of Credit Application (in the case of
Letters of Credit);

          (b) the representations and warranties in Section 5 shall be true in all material respects on
the
date of the Notice of Borrowing / Letter of Credit Application and on the Funding Date of each
Loan; provided,
however, that such materiality qualifier shall not be applicable to any representations and
warranties that already are
qualified or modified by materiality in the text thereof; and provided, further that those
representations and
warranties expressly referring to a specific date shall be true, accurate and complete in all
material respects as of
such date, and no Event of Default shall have occurred and be continuing or result from the
Loan. Each Loan is
Borrower’s representation and warranty on that date that the representations and warranties in
Section 5 remain true
in all material respects; provided, however, that such materiality qualifier shall not be
applicable to any
representations and warranties that already are qualified or modified by materiality in the
text thereof; and provided,
further that those representations and warranties expressly referring to a specific date shall
be true, accurate and
complete in all material respects as of such date; and

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

     3.3 Covenant to Deliver. Borrower agrees to deliver to Lender each item required to be
delivered to
Lender under this Agreement as a condition to any Loan. Borrower expressly agrees that the
extension of a Loan

14

 

prior to the receipt by Lender of any such item shall not constitute a waiver by Lender of
Borrower’s obligation to deliver such item, and any such extension in the absence of a required
item shall be in Lender’s sole discretion.

     3.4 Procedure for the Borrowing of Advances. Subject to the prior satisfaction of all other
applicable
conditions to the making of an Advance set forth in this Agreement, each Advance shall be made
upon Borrower’s
irrevocable written notice delivered to Lender in the form of a Notice of Borrowing, each
executed by a Responsible
Officer of Borrower or his or her designee or without instructions if the Advances are
necessary to meet Obligations
which have become due. Lender may rely on any telephone notice given by a person whom Lender
believes is a
Responsible Officer or designee. Borrower will indemnify Lender for any loss Lender suffers
due to such reliance.
Such Notice of Borrowing must be received by Lender prior to 11:00 a.m. Pacific time, (i) at
least three (3) Business
Days prior to the requested Funding Date, in the case of LIBOR Advances, and (ii) at least one
(1) Business Day
prior to the requested Funding Date, in the case of Prime Rate Advances, specifying:

          (a) whether the Advance is to be comprised of LIBOR Advances or Prime Rate Advances

          (b) the amount of the Advance, which, if such Advance is the initial LIBOR Advance or the
initial Prime Rate Advance, such Advance must be in an aggregate minimum principal amount of
$500,000 or in
any integral multiple of $100,000 in excess thereof; otherwise the minimum Advance amount is
$100,000 or in any
integral multiple of $100,000 in excess thereof;

          (c) the requested Funding Date; and

          (d) the duration of the Interest Period applicable to any such LIBOR Advances included in
such notice; provided that if the Notice of Borrowing shall fail to specify the duration of
the Interest Period for any Advance comprised of LIBOR Advances, such Interest Period shall be one (1) month.

The proceeds of all such Advances will then be made available to Borrower on the Funding Date by
Lender by transfer to the Designated Deposit Account and, subsequently, by wire transfer to such
other account as Borrower may instruct in the Notice of Borrowing. No Advances shall be deemed
made to Borrower, and no interest shall accrue on any such Advance, until the related funds have
been deposited in the Designated Deposit Account.

     3.5 Special Provisions Governing LIBOR Advances. Notwithstanding any other provision of this
Agreement to the contrary, the following provisions shall govern with respect to LIBOR
Advances as to the matters
covered:

          (a) Determination of Applicable Interest Rate. As soon as practicable on each Interest Rate
Determination Date, Lender shall determine (which determination shall, absent manifest error
in calculation, be
final, conclusive and binding upon all parties) the interest rate that shall apply to the
LIBOR Advances for which an
interest rate is then being determined for the applicable Interest Period and shall promptly
give notice thereof (in
writing or by telephone confirmed in writing) to Borrower.

          (b) Inability to Determine Applicable Interest Rate. In the event that Lender shall have
determined (which determination shall be final and conclusive and binding upon all parties
hereto), on any Interest
Rate Determination Date with respect to any LIBOR Advance, that by reason of circumstances
affecting the London
interbank market adequate and fair means do not exist for ascertaining the interest rate
applicable to such Advance
on the basis provided for in the definition of Base LIBOR, Lender shall on such date give
notice (by facsimile or by
telephone confirmed in writing) to Borrower of such determination, whereupon (i) no Advances
may be made as, or
converted to, LIBOR Advances until such time as Lender notifies Borrower that the
circumstances giving rise to
such notice no longer exist, and (ii) any Notice of Borrowing or Notice of
Conversion/Continuation given by
Borrower with respect to Advances in respect of which such determination was made shall be
deemed to be
rescinded by Borrower.

          (c) Compensation for Breakage or Non-Commencement of Interest Periods. Borrower shall
compensate Lender, upon written request by Lender (which request shall set forth the manner
and method of

15

 

computing such compensation), for all reasonable losses, expenses and liabilities, if any
(including any interest paid by Lender to lenders of funds borrowed by it to make or carry its
LIBOR Advances and any loss, expense or liability incurred by Lender in connection with the
liquidation or re-employment of such funds) such that Lender may incur: (i) if for any reason
(other than a default by Lender or due to any failure of Lender to fund LIBOR Advances due to
impracticability or illegality under Sections 3.6(d) and 3.6(e)) a borrowing or a conversion to or
continuation of any LIBOR Advance does not occur on a date specified in a Notice of Borrowing or
Notice of Conversion/Continuation, as the case may be, or (ii) if any principal payment of any of
its LIBOR Advances occurs on a date prior to the last day of an Interest Period applicable to that
Advance.

          (d) Assumptions Concerning Funding of LIBOR Advances. Calculation of all amounts
payable to Lender under this Section 3.5 and otherwise under this Agreement shall be made as
though Lender had
actually funded each of the relevant LIBOR Advances through the purchase of a Eurodollar
deposit bearing interest
at the rate obtained pursuant to the definition of LIBOR Rate in an amount equal to the amount
of such LIBOR
Advance and having a maturity comparable to the relevant Interest Period; provided, however,
that Lender may fund
each of its LIBOR Advances in any manner it sees fit and the foregoing assumptions shall be
utilized only for the
purposes of calculating amounts payable under this Section 3.5 and otherwise under this
Agreement.

          (e) LIBOR Advances After Default. After the occurrence and during the continuance of an
Event of Default, (i) Borrower will have no right to have an Advance be made or continued as,
or converted to, a
LIBOR Advance after the expiration of any Interest Period then in effect for such Advance and
(ii) subject to the
provisions of Section 3.5(c), any Notice of Conversion/Continuation given by Borrower with
respect to a requested
conversion/continuation that has not yet occurred shall be deemed to be rescinded by Borrower
and be deemed a
request to convert or continue Advances referred to therein as Prime Rate Advances.

     3.6 Additional Requirements/Provisions Regarding LIBOR Advances.

          (a) If for any reason (including voluntary or mandatory prepayment or acceleration), Lender
receives all or part of the principal amount of a LIBOR Advance prior to the last day of the
Interest Period for such
Advance, Borrower shall immediately notify Borrower’s account officer at Lender and, on demand
by Lender, pay
Lender the amount (if any) by which (i) the additional interest which would have been payable
on the amount so
received had it not been received until the last day of such Interest Period exceeds (ii) the
interest which would have
been recoverable by Lender by placing the amount so received on deposit in the certificate of
deposit markets, the
offshore currency markets, or United States Treasury investment products, as the case may be,
for a period starting
on the date on which it was so received and ending on the last day of such Interest Period at
the interest rate
determined by Lender in its reasonable discretion. Lender’s determination as to such amount
shall be conclusive
absent manifest error.

          (b) Borrower shall pay Lender, upon demand by Lender, from time to time such amounts as
Lender may determine to be necessary to compensate it for any costs incurred by Lender that
Lender determines are
attributable to its making or maintaining of any amount receivable by Lender hereunder in
respect of any Advances
relating thereto (such increases in costs and reductions in amounts receivable being herein
called “Additional
Costs”), in each case resulting from any Regulatory Change which:

               (i) changes the basis of taxation of any amounts payable to Lender
under this
Agreement in respect of any Advances (other than changes which affect taxes measured by or
imposed on the overall net income of Lender by the jurisdiction in which Lender has its
principal office);

               (ii) imposes or modifies any reserve, special deposit or similar requirements relating
to any extensions of credit or other assets of, or any deposits with, or other liabilities of
Lender (including any Advances or any deposits referred to in the definition of Base LIBOR); or

               (iii) imposes any other condition affecting this Agreement (or any of such extensions of
credit or liabilities).

16

 

     Lender will notify Borrower of any event occurring after the date of this Agreement which
will entitle Lender to compensation pursuant to this Section 3.6 as promptly as practicable after
it obtains knowledge thereof and determines to request such compensation. Lender will furnish
Borrower with a statement setting forth the basis and amount of each request by Lender for
compensation under this Section 3.6. Determinations and allocations by Lender for purposes of this
Section 3.6 of the effect of any Regulatory Change on its costs of maintaining its obligations to
make Advances, of making or maintaining Advances, or on amounts receivable by it in respect of
Advances, and of the additional amounts required to compensate Lender in respect of any Additional
Costs, shall be conclusive absent manifest error.

          (c) If Lender shall determine that the adoption or implementation of any applicable law, rule,
regulation, or treaty regarding capital adequacy, or any change therein, or any change in the
interpretation or
administration thereof by any governmental authority, central bank, or comparable agency
charged with the
interpretation or administration thereof, or compliance by Lender (or its applicable lending
office) with any respect
or directive regarding capital adequacy (whether or not having the force of law) of any such
authority, central bank,
or comparable agency, has or would have the effect of reducing the rate of return on capital
of Lender or any person
or entity controlling Lender (a “Parent”) as a consequence of its obligations hereunder to a
level below that which
Lender (or its Parent) could have achieved but for such adoption, change, or compliance
(taking into consideration
policies with respect to capital adequacy) by an amount deemed by Lender to be material, then
from time to time,
within fifteen (15) days after demand by Lender, Borrower shall pay to Lender such additional
amount or amounts
as will compensate Lender for such reduction. A statement of Lender claiming compensation
under this Section
3.6(c) and setting forth the additional amount or amounts to be paid to it hereunder shall be
conclusive absent
manifest error.

          (d) If, at any time, Lender, in its sole and absolute discretion, determines that (i) the
amount
of LIBOR Advances for periods equal to the corresponding Interest Periods are not available to
Lender in the
offshore currency interbank markets, or (ii) LIBOR Rate does not accurately reflect the cost
to Lender of lending the
LIBOR Advances, then Lender shall promptly give notice thereof to Borrower. Upon the giving of
such notice,
Lender’s obligation to make the LIBOR Advances shall terminate; provided, however, Advances
shall not terminate
if Lender and Borrower agree in writing to a different interest rate applicable to LIBOR
Advances.

          (e) If it shall become unlawful for Lender to continue to fund or maintain any LIBOR
Advances, or to perform its obligations hereunder, upon demand by Lender, Borrower shall
prepay the Advances in
full with accrued interest thereon and all other amounts payable by Borrower hereunder
(including, without
limitation, any amount payable in connection with such prepayment pursuant to Section 3.6(a)).

     3.7 Conversion and Continuation Elections.

          (a) So long as (i) no Event of Default exists; (ii) Borrower shall not have sent any notice of
termination of this Agreement; and (iii) Borrower shall have complied with such customary
procedures as Lender has established from time to time for Borrower’s requests for LIBOR Advances,
Borrower may, upon irrevocable written notice to Lender,

               (i) elect to convert on any Business Day, Prime Rate Advances in an amount equal to
$100,000 or any integral multiple of $100,000 in excess thereof into LIBOR Advances;

               (ii) elect to continue on any Interest Payment Date any LIBOR Advances maturing on such
Interest Payment Date (or any part thereof in an amount equal to $100,000 or any integral multiple
of $100,000 in excess thereof); provided, that if the aggregate amount of LIBOR Advances shall have
been reduced, by payment, prepayment, or conversion of part thereof, to be less than $100,000, such
LIBOR Advances shall automatically convert into Prime Rate Advances, and on and after such date the
right of Borrower to continue such Advances as, and convert such Advances into, LIBOR Advances
shall terminate; or

               (iii) elect to convert on any Interest Payment Date any LIBOR Advances maturing on such
Interest Payment Date (or any part thereof in an amount equal to $100,000 or any integral multiple
of $100,000 in excess thereof) into Prime Rate Advances.

17

 

          (b) Borrower shall deliver a Notice of Conversion/Continuation in accordance with
Section 10 to be received by Lender prior to 11:00 a.m. Pacific time at least (i) three (3)
Business Days in advance
of the Conversion Date or Continuation Date, if any Advances are to be converted into or
continued as LIBOR
Advances; and (ii) one (1) Business Day in advance of the Conversion Date, if any Advances are
to be converted
into Prime Rate Advances, in each case specifying the:

               (i) proposed Conversion Date or Continuation Date;

               (ii) aggregate amount of the Advances to be converted or continued
which, if any
Advances are to be converted into or continued as LIBOR Advances, shall be in an aggregate minimum
principal amount of $100,000 or in any integral multiple of $100,000 in excess thereof;

               (iii) nature of the proposed conversion or
continuation; and

               (iv) duration of the requested Interest Period.

          (c) If upon the expiration of any Interest Period applicable to any LIBOR Advances,
Borrower shall have timely failed to select a new Interest Period to be applicable to such
LIBOR Advances, then at
Lender’s option, (i) Borrower shall be deemed to have selected the same Interest Period or a
one-month Interest
Period to apply to those LIBOR Advances or (ii) Borrower shall be deemed to have elected to
convert such LIBOR
Advances into Prime Rate Advances.

          (d) Any LIBOR Advances shall, at Lender’s option, convert into Prime Rate Advances in the
event that (i) an Event of Default shall exist, or (ii) the aggregate principal amount of the
Prime Rate Advances
which have been previously converted to LIBOR Advances, or the aggregate principal amount of
existing Advances
continued, as the case may be, at the beginning of an Interest Period shall at any time during
such Interest Period
exceed the Revolving Availability Amount. Borrower agrees to pay Lender, upon demand by
Lender (or Lender
may, at its option, charge the Designated Deposit Account or any other account Borrower
maintains with Lender)
any amounts required to compensate Lender for any loss (including loss of anticipated
profits), cost, or expense
incurred by Lender, as a result of the conversion of LIBOR Advances to Prime Rate Advances.

          (e) Notwithstanding anything to the contrary contained herein, Lender shall not be required
to purchase United States Dollar deposits in the London interbank market or other applicable
LIBOR market to fund
any LIBOR Advances, but the provisions hereof shall be deemed to apply as if Lender had
purchased such deposits
to fund the LIBOR Advances.

SECTION 4

CREATION OF SECURITY INTEREST

     4.1 Grant of Security Interest. Borrower hereby grants Lender, to secure the payment and
performance in full of all of the Obligations, a continuing security interest in, and pledges to
Lender, the Collateral, wherever located, whether now owned or hereafter acquired or arising, and
all proceeds and products thereof. Borrower represents, warrants, and covenants that the security
interest granted herein is and shall at all times continue to be a first priority perfected
security interest in the Collateral (subject only to Permitted Liens that may have superior
priority to Lender’s Lien under this Agreement). If Borrower shall acquire a commercial tort
claim, Borrower shall promptly notify Lender in a writing signed by Borrower of the general
details thereof and grant to Lender in such writing a security interest therein and in the
proceeds thereof, all upon the terms of this Agreement, with such writing to be in form and
substance reasonably satisfactory to Lender.

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

18

 

     4.2 Authorization to File Financing Statements. Borrower hereby authorizes Lender to file
financing statements, without notice to Borrower, with all appropriate jurisdictions to perfect or
protect Lender’s interest or rights hereunder, including a notice that any disposition of the
Collateral, by either Borrower or any other Person, shall be deemed to violate the rights of
Lender under the Code.

SECTION 5

REPRESENTATIONS AND WARRANTIES

     Borrower represents and warrants as follows:

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

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

     5.2 Collateral. Borrower has good title to, has rights in, and the power to transfer each
item of the
Collateral upon which it purports to grant a Lien hereunder, free and clear of any and all
Liens except Permitted
Liens. Borrower has no deposit accounts other than the deposit accounts with Lender, the
deposit accounts, if any,
described in the Diligence Certificate delivered to Lender in connection herewith, or of which
Borrower has given
Lender notice and taken such actions as are necessary to give Lender a perfected security
interest therein. The
Accounts are bona fide, existing obligations of the Account Debtors.

     The Collateral is not in the possession of any third party bailee (such as a warehouse) except
as otherwise provided in the Diligence Certificate. None of the components of the Collateral shall
be maintained at locations other than as provided in the Diligence Certificate or as Borrower has
given Lender notice pursuant to Section 7.2. In the event that Borrower, after the date hereof,
intends to store or otherwise deliver any portion of the Collateral with a fair market value
greater than $250,000 to a bailee, then Borrower will first receive the written consent of Lender
and such bailee must execute and deliver a bailee agreement in form and substance satisfactory to
Lender in its sole discretion.

19

 

     Borrower is the sole owner of its intellectual property, except for non-exclusive licenses
granted to its customers in the ordinary course of business. Each patent is valid and enforceable,
and no part of the intellectual property has been judged invalid or unenforceable, in whole or in
part, and to the best of Borrower’s knowledge, no claim has been made that any part of the
intellectual property violates the rights of any third party except to the extent such claim could
not reasonably be expected to have a material adverse effect on Borrower’s business. Except as
noted on the Diligence Certificate, Borrower is not a party to, nor is bound by, any material
license or other agreement with respect to which Borrower is the licensee (a) that prohibits or
otherwise restricts Borrower from granting a security interest in Borrower’s interest in such
license or agreement or any other property, or (b) for which a default under or termination of
could interfere with the Lender’s right to sell any Collateral. Borrower shall provide written
notice to Lender within thirty (30) days of entering or becoming bound by any such license or
agreement (other than over-the-counter software that is commercially available to the public).
Borrower shall take such steps as Lender requests to obtain the consent of, or waiver by, any
person whose consent or waiver is necessary for Lender to have the ability in the event of a
liquidation of any Collateral to dispose of such Collateral in accordance with Lender’s rights and
remedies under this Agreement and the other Loan Documents.

     5.3 Litigation. There are no actions or proceedings pending or, to the knowledge of the
Responsible Officers, threatened in writing by or against Borrower or any of its Subsidiaries
involving more than Five Hundred Thousand Dollars ($500,000).

     5.4 No Material Deviation in Financial Statements. All consolidated financial statements
for Borrower and any of its Subsidiaries delivered to Lender fairly present in all material
respects Borrower’s consolidated financial condition and Borrower’s consolidated results of
operations. There has not been any material deterioration in Borrower’s consolidated financial
condition since the date of the most recent financial statements submitted to Lender.

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

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

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

     5.8 Tax Returns and Payments; Pension Contributions. Borrower has timely filed all required
tax returns and reports, and Borrower has timely paid all foreign, federal, state and local taxes,
assessments, deposits and contributions owed by Borrower. Borrower may defer payment of any
contested taxes, provided that Borrower (a) in good faith contests its obligation to pay the taxes
by appropriate proceedings promptly and diligently instituted and conducted, (b) notifies Lender in
writing of the commencement of, and any material development in, the proceedings, (c) posts bonds
or takes any other steps required to prevent the governmental authority levying such contested
taxes from obtaining a Lien upon any of the Collateral that is other than a “Permitted Lien”.
Borrower is unaware of any claims or adjustments proposed for any of Borrower’s prior tax years
which could result in additional taxes becoming due and payable by Borrower. Borrower has paid
all amounts necessary to fund all

20

 

present pension, profit sharing and deferred compensation plans in accordance with their terms,
and Borrower has not withdrawn from participation in, and has not permitted partial or complete
termination of, or permitted the occurrence of any other event with respect to, any such plan
which could reasonably be expected to result in any liability of Borrower, including any liability
to the Pension Benefit Guaranty Corporation or its successors or any other governmental agency.

     5.9 Use of Proceeds. Borrower shall use the proceeds of the Loans for purposes of issuing
standby letters of credit, working capital and funding of its general business requirements and not
for personal, family or household purposes.

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

SECTION 6

AFFIRMATIVE COVENANTS

     Borrower shall do all of the following:

     6.1 Government Compliance.

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

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

     6.2 Financial Statements, Reports, Certificates.

          (a) Deliver to Lender: (i) as soon as available, but no later than five (5) days after filing
with the Securities Exchange Commission, Borrower’s 10K, 10Q, and 8K reports; (ii) within 15 days
before the end of each fiscal year (except for fiscal year 2008, the forecast for which year may
be delivered by January 31, 2009), annual consolidated financial forecast for the following fiscal
year (on a quarterly basis) as approved by Borrower’s board of directors, together with any
related business forecasts used in the preparation of such annual financial forecasts; (iii) a
prompt report of any legal actions pending or threatened against Borrower or any Subsidiary that
could result in damages or costs to Borrower or any Subsidiary of $500,000 or more; and (iv)
budgets, sales projections, operating plans or other financial information Lender reasonably
requests.

     Borrower’s 10K, 10Q, and 8K reports required to be delivered pursuant to Section 6.2(a)(i)
shall be deemed to have been delivered on the date on which Borrower posts such report or provides
a link thereto on Borrower’s or another website on the Internet; provided, that Borrower
shall provide paper copies to Lender of the Compliance Certificates required by Sections 6.2(c) and
(d). Borrower need only deliver to Lender those 8K reports that are both relevant and material to
any Credit Party’s Obligations under this Agreement and/or any of the Loan Documents.

21

 

          (b) Within forty-five (45) days after the last day of each quarter, deliver to Lender an aged
listings of accounts receivable (by invoice date).

          (c) Within forty-five (45) days after the last day of each quarter, deliver to Lender its
quarterly financial statements together with a duly completed Compliance Certificate signed by a
Responsible Officer setting forth calculations showing compliance with the financial covenants set
forth in this Agreement.

          (d) Within ninety (90) days after Borrower’s fiscal year end, deliver to Lender its audited
financial statements together with a duly completed Compliance Certificate signed by a Responsible
Officer setting forth calculations showing compliance with the financial covenants set forth in
this Agreement.

          (e) Allow Lender to audit Borrower’s Books, including Borrower’s Inventory, at Borrower’s
expense.

          (f) Promptly notify Lender of the occurrence of any Event of Default and of any fact or
circumstance that does not yet constitute an Event of Default due to the applicability of a grace
or cure period.

     6.3 Taxes; Pensions. Make, and cause each of its Subsidiaries to make, timely payment of all
foreign, federal, state, and local taxes or assessments (other than taxes and assessments which
Borrower is contesting pursuant to the terms of Section 5.8 hereof) and shall deliver to Lender, on
demand, appropriate certificates attesting to such payments, and pay all amounts necessary to fund
all present pension, profit sharing and deferred compensation plans in accordance with their terms.

     6.4 Insurance. Keep its business and the Collateral insured for risks and in amounts standard
for companies in Borrower’s industry and location and as Lender may reasonably request. Insurance
policies shall be in a form, with companies, and in amounts that are satisfactory to Lender. All
property policies shall have a loss payable endorsement showing Lender as lender loss payee and
waive subrogation against Lender, and all liability policies shall show, or have endorsements
showing, Lender as an additional insured. All policies (or the loss payable and additional
insured endorsements) shall provide that the insurer shall endeavor to give Lender at least twenty
(20) days notice before canceling, amending, or declining to renew its policy. At Lender’s request,
Borrower shall deliver certified copies of policies and evidence of all premium payments. Proceeds
payable under any policy shall, at Lender’s option, be payable to Lender on account of the
Obligations. Notwithstanding the foregoing, (a) so long as no Event of Default has occurred and is
continuing, Borrower shall have the option of applying the proceeds of any casualty policy up to
Five Hundred Thousand Dollars ($500,000) with respect to any loss toward the replacement or repair
of destroyed or damaged property; provided that any such replaced or repaired property (i) shall be
of equal or like value as the replaced or repaired Collateral and (ii) shall be deemed Collateral
in which Lender has been granted a first priority security interest, and (b) after the occurrence
and during the continuance of an Event of Default, all proceeds payable under such casualty policy
shall, at the option of Lender, be payable to Lender on account of the Obligations. If Borrower
fails to obtain insurance as required under this Section 6.4 or to pay any amount or furnish any
required proof of payment to third persons and Lender, Lender may make all or part of such payment
or obtain such insurance policies required in this Section 6.4, and take any action under the
policies Lender deems prudent,

     6.5 Operating Accounts. Maintain its primary and its Subsidiaries’ primary operating and
other deposit accounts with Lender, which accounts shall represent at least 75% of the dollar value
of Borrower’s and such Subsidiaries’ deposit accounts at all financial institutions. Borrower is
not required to maintain its securities accounts, brokerage accounts or commodities accounts with
Lender.

     6.6 Financial Covenants.

     Borrower shall maintain at all times, to be tested as of the last day of each quarter, unless
otherwise noted, on a consolidated basis with respect to Borrower and its Subsidiaries:

22

 

          (a) Current Ratio. A ratio of (i) Current Assets less Encumbered Cash to (ii) Current
Liabilities less Cash Secured Letters of Credit of at least 2.50 to 1.0.

          (b) Debt/Tangible Net Worth Ratio. A ratio of Total Liabilities to Tangible Net Worth of not
more than 1.0 to 1.0.

          (c) Profitability. A minimum positive Net Income of $ 1 for each fiscal year, to be tested as
of the last day of each fiscal year.

     6.7 Protection and Registration of Intellectual Property Rights. Borrower shall: (a) protect,
defend and maintain the validity and enforceability of its intellectual property material to
Borrower’s business; (b) promptly advise Lender in writing of material infringements of its
intellectual property material to Borrower’s business; and (c) not allow any intellectual property
material to Borrower’s business to be abandoned, forfeited or dedicated to the public without
Lender’s written consent.

     6.8 Litigation Cooperation. From the date hereof and continuing through the termination of
this Agreement, make available to Lender, without expense to Lender, Borrower and its officers,
employees and agents and Borrower’s Books, to the extent that Lender may deem them reasonably
necessary to prosecute or defend any third-party suit or proceeding instituted by or against Lender
with respect to any Collateral or relating to Borrower.

     6.9 Additional Costs. The Borrower will pay Lender, on demand, for Lender’s costs or losses
arising from any statute or regulation or any request or requirement of a regulatory agency, which
is applicable to national banks. The costs and losses will be allocated to the Obligations in a
manner determined by Lender, using any reasonable method. The costs include the following: (i) any
reserve or deposit requirements; and (ii) any capital requirements relating to Lender’s assets and
commitments for credit.

     6.10 Subsidiaries. Borrower must cause each Subsidiary organized under the laws of the United
States or under the laws of any State thereof and each Subsidiary conducting business primarily
within the United States to execute and deliver to Lender either (i) a counterpart signature page
to this Agreement or (ii) an unlimited guaranty of the Obligations, which guaranty must be in form
and substance acceptable to Lender.

     6.11 Further Assurances. Execute any further instruments and take further action as Lender
reasonably requests to perfect or continue Lender’s Lien in the Collateral or to effect the
purposes of this Agreement.

SECTION 7

NEGATIVE COVENANTS

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

     7.1 Dispositions. Convey, sell, lease, transfer or otherwise dispose of (collectively
“Transfer”), or permit any of its Subsidiaries to Transfer, all or any part of its business or
property, except for the following Transfers, which Transfers (other than the Transfers permitted
under subsections (d) and (i) below) may not exceed $1,000,000, individually or in the aggregate:

          (a) Transfers in the ordinary course of business for reasonably equivalent
consideration;

          (b) Transfers to Borrower or a Guarantor from Borrower or any of its Subsidiaries;

          (c) Transfers of property in connection with sale-leaseback transactions;

          (d) Transfers of property with a aggregate value of up to $10,000,000 to the extent such
property is exchanged for credit against, or proceeds are promptly applied to, the purchase price
of other property used or useful in the business of Borrower or its Subsidiaries;

23

 

          (e) Transfers constituting non-exclusive licenses and similar arrangements for the use of the
property of Borrower or its Subsidiaries in the ordinary course of business and other non-perpetual
licenses that may be exclusive in some respects other than territory (and/or that may be exclusive
as to territory only in discreet geographical areas outside of the United States), but that could
not result in a legal transfer of Borrower’s title in the licensed property;

          (f) Transfers otherwise permitted by the Loan Documents;

          (g) sales or discounting of delinquent accounts in the ordinary course of
business;

          (h) Transfers associated with the disposition of a
Permitted Investment; and

          (i) Transfers with an aggregate value of up to $10,000,000 in connection with a
permitted
acquisition of a portion of the assets or rights acquired.

     7.2 Changes in Business; Change in Control; Jurisdiction of Formation. Engage in any material
line of business other than those lines of business conducted by Borrower and its Subsidiaries on
the date hereof and any businesses reasonably related, complementary or incidental thereto or
reasonable extensions thereof; permit or suffer any Change in Control. Borrower will not, without
prior written notice, change its jurisdiction of formation.

     7.3 Mergers or Acquisitions. Merge or consolidate, or permit any of its Subsidiaries to merge
or consolidate, with any Person other than with Borrower or any Subsidiary, or acquire, or permit
any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of a
Person other than Borrower or any Subsidiary, except where (a) no Event of Default has occurred and
is continuing or would result from such action during the term of this Agreement, (b) Borrower is
the surviving entity and (c) the total value of consideration in such transaction, including
assumption of debt, together with all other such transactions occurring after the date of this
agreement is less than $10,000,000.

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

     7.5 Encumbrance. Except for Permitted Liens, create, incur, allow, or suffer any Lien on any
of its property, including its intellectual property, or assign or convey any right to receive
income, including the sale of any Accounts, or permit any of its Subsidiaries to do so, or permit
any Collateral not to be subject to the first priority security interest granted herein, or enter
into any agreement, document, instrument or other arrangement (except with or in favor of Lender)
with any Person which directly or indirectly prohibits or has the effect of prohibiting Borrower or
any Subsidiary from assigning, mortgaging, pledging, granting a security interest in or upon, or
encumbering any of Borrower’s or any Subsidiary’s intellectual property, except as is otherwise
permitted in Section 7.1 hereof and the definition of “Permitted Lien” herein.

     7.6 Distributions; Investments. (a) Pay any dividends or make any distribution or payment or
redeem, retire or purchase any capital stock other than Permitted Distributions; or (b) directly or
indirectly acquire or own any Person, or make any Investment in any Person, other than Permitted
Investments, or permit any of its Subsidiaries to do so.

     7.7 Transactions with Affiliates. Directly or indirectly enter into or permit to exist any
material transaction with any Affiliate of Borrower except for (a) transactions that are in the
ordinary course of Borrower’s business, upon fair and reasonable terms (when viewed in the context
of any series of transactions of which it may be a part, if applicable); or (b) transactions among
Borrower and Guarantors and among Guarantors so long as no Event of Default exists or could result
therefrom.

     7.8 Subordinated Debt. Make or permit any payment on or amendments of any Subordinated Debt,
except (a) payments pursuant to the terms of the Subordinated Debt; (b) payments made with
Borrower’s capital stock or other Subordinated Debt; (c) amendments to Subordinated Debt so long as
such Subordinated Debt remains

24

 

subordinated in right of payment to this Agreement and any Liens securing such Subordinated Debt
remain subordinate in priority to Lender’s Lien hereunder; or (d) other purchases or payments of
Subordinated Debt.

     7.9 Compliance. Become an “investment company” or a company controlled by an “investment
company”, under the Investment Company Act of 1940 or undertake as one of its important activities
extending credit to purchase or carry margin stock (as defined in Regulation U of the Board of
Governors of the Federal Reserve System), or use the proceeds of any Loan for that purpose; fail
to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited
Transaction, as defined in ERISA, to occur; fail to comply with the Federal Fair Labor Standards
Act or violate any other law or regulation, if the violation could reasonably be expected to have
a material adverse effect on Borrower’s business, or permit any of its Subsidiaries to do so;
withdraw or permit any Subsidiary to withdraw from participation in, permit partial or complete
termination of, or permit the occurrence of any other event with respect to, any present pension,
profit sharing and deferred compensation plan which could reasonably be expected to result in any
liability of Borrower, including any liability to the Pension Benefit Guaranty Corporation or its
successors or any other governmental agency.

SECTION 8

EVENTS OF DEFAULT

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

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

     8.2 Covenant Default.

          (a) Borrower fails or neglects to perform any obligation in Section 6 (other than in Sections
6.1, 6.2, 6.3 and/or 6.4) or violates any covenant in Section 7 (other than in Section 7.9); or

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

     8.3 Material Adverse Change. A Material Adverse Change occurs;

     8.4 Attachment. (a) Any material portion of Borrower’s assets is attached, seized, levied on,
or comes into possession of a trustee or receiver; (b) the service of process seeking to attach, by
trustee or similar process, any funds of Borrower or of any entity under control of Borrower
(including a Subsidiary) on deposit with Lender or any Lender Affiliate; (c) Borrower is enjoined,
restrained, or prevented by court order from conducting any part of its business; or (d) a notice
of lien, levy, or assessment is filed against any of Borrower’s assets by any government agency,
and the same under clauses (a) through (d) hereof are not, within twenty (20) days after the
occurrence thereof, discharged or stayed (whether through the posting of a bond or otherwise) or
otherwise being contested in good faith (with adequate reserves) by Borrower; provided, however, no
Loans shall be made during any twenty (20) day cure period;

25

 

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

     8.6 Other Agreements. If Borrower fails to (a) make any payment that is due and payable with
respect to any Material Indebtedness and such failure continues after the applicable grace or
notice period, if any, specified in the agreement or instrument relating thereto, or (b) perform or
observe any other condition or covenant, or any other event shall occur or condition exist under
any agreement or instrument relating to any Material Indebtedness, and such failure continues after
the applicable grace or notice period, if any, specified in the agreement or instrument relating
thereto and the effect of such failure, event or condition is to cause the holder or holders of
such Material Indebtedness to accelerate the maturity of such Material Indebtedness or cause the
mandatory repurchase of any Material Indebtedness;

     8.7 Judgments. One or more judgments, orders, or decrees for the payment of money in an
amount, individually or in the aggregate, of at least Five Hundred Thousand Dollars ($500,000) (not
covered by independent third-party insurance as to which liability has been accepted by such
insurance carrier) shall be rendered against Borrower and shall remain unsatisfied, unvacated, or
unstayed for a period of ten (10) days after the entry thereof (provided that no Loans will be made
prior to the satisfaction, vacation, or stay of such judgment, order, or decree);

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

     8.9 Subordinated Debt. A default or breach occurs under any agreement between Borrower and any
creditor of Borrower that signed a subordination, intercreditor, or other similar agreement with
Lender, or any creditor that has signed such an agreement with Lender breaches any terms of such
agreement; or

     8.10 Guaranty. (a) Any guaranty of any Obligations terminates or ceases for any reason to be
in full force and effect; (b) any Guarantor does not perform any obligation or covenant under any
guaranty of the Obligations; (c) any circumstance described in Sections 8.3, 8.4, 8.5, 8.7, or 8.8
occurs with respect to any Guarantor, or (d) the liquidation, winding up, or termination of
existence of any Guarantor; or (e) (i) a material impairment in the perfection or priority of
Lender’s Lien in the collateral provided by Guarantor or in the value of such collateral or (ii) a
material adverse change in the general affairs, management, results of operation, condition
(financial or otherwise) or the prospect of repayment of the Obligations occurs with respect to any
Guarantor.

SECTION 9

LENDER’S RIGHTS AND REMEDIES

     9.1 Rights and Remedies. While an Event of Default occurs and continues Lender may,
without notice or demand, do any or all of the following:

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

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

          (c) demand that Borrower (i) deposit cash with Lender in an amount equal to the aggregate
amount of any Letters of Credit remaining undrawn, as collateral security for the repayment of any
future drawings under such Letters of Credit, and Borrower shall forthwith deposit and pay such
amounts, and (ii) pay in advance all Letter of Credit fees scheduled to be paid or payable over the
remaining term of any Letters of Credit;

26

 

          (d) settle or adjust disputes and claims directly with Account Debtors for amounts on
commercially reasonable terms and in any order that Lender considers advisable, notify any
Person owing Borrower
money of Lender’s security interest in such funds, and verify the amount of such account;

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

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

          (g) ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for
sale,
and sell the Collateral. Solely to the extent necessary in connection with its exercise of its
remedies hereunder and
without acquiring any other right, title or interest in or to the Borrower’s intellectual
property and related rights,
Lender is hereby granted a non-exclusive, royalty-free license or other right to use, without
charge, Borrower’s
labels, patents, copyrights, mask works, rights of use of any name, trade secrets, trade
names, trademarks, service
marks, and advertising matter, or any similar property as it pertains to the Collateral, in
completing production of,
advertising for sale, and selling any Collateral and, solely for purposes of Lender’s exercise
of its rights under this
Section, Borrower’s rights under all licenses and all franchise agreements inure to Lender’s
benefit;

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

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

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

     9.3 Protective Payments. If Borrower fails to obtain the insurance called for by Section 6.4
or fails to
pay any premium thereon or fails to pay any other amount which Borrower is obligated to pay
under this Agreement
or any other Loan Document, Lender may obtain such insurance or make such payment, and all
amounts so paid by
Lender are Lender Expenses and immediately due and payable, bearing interest at the then
highest applicable rate,
and secured by the Collateral. Lender will make reasonable efforts to provide Borrower with
notice of Lender
obtaining such insurance at the time it is obtained or within a reasonable time thereafter. No
payments by Lender
are deemed an agreement to make similar payments in the future or Lender’s waiver of any Event
of Default.

     9.4 Application of Payments and Proceeds. Borrower shall have no right to specify the order or
the
accounts to which Lender shall allocate or apply any payments required to be made by Borrower
to Lender or
otherwise received by Lender under this Agreement when any such allocation or application is
not specified

27

 

elsewhere in this Agreement. If an Event of Default has occurred and is continuing, Lender may
apply any funds in its possession, whether from Borrower account balances, payments, proceeds
realized as the result of any collection of Accounts or other disposition of the Collateral, or
otherwise, to the Obligations in such order as Lender shall determine in its sole discretion. Any
surplus shall be paid to Borrower or other Persons legally entitled thereto; Borrower shall remain
liable to Lender for any deficiency. If Lender, 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, Lender shall have the option, exercisable at any time, of either reducing the
Obligations by the principal amount of the purchase price or deferring the reduction of the
Obligations until the actual receipt by Lender of cash therefor.

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

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

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

SECTION 10

NOTICES

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

	 	 	 	 	 
	 

	 	If to Borrower:
	 	Energy Recovery, Inc.
	 

	 	 	 	1908 Doolittle Drive
	 

	 	 	 	San Leandro, CA 94577
	 

	 	 	 	Attn: Thomas Willardson, Chief Financial Officer
	 

	 	 	 	Fax: (510) 483-7371
	 

	 	 	 	Tel: (510) 746-7370
	 

	 	 	 	Email: twillardson@energy-recovery.com
	 
	 	 	 	 
	 

	 	If to Lender:
	 	Citibank, N.A.
	 

	 	 	 	3950 Regent Blvd.
	 

	 	 	 	Mailstop S2A-267
	 

	 	 	 	Irving, TX 75063

28

 

	 	 	 	 	 
	 

	 	and to:
	 	Robert Hurley
	 

	 	 	 	Citibank, N.A.
	 

	 	 	 	One Sansome Street, 21st Floor
	 

	 	 	 	San Francisco, CA 94104
	 

	 	 	 	Tel: (415) 658-4236
	 

	 	 	 	Fax: (415) 658-4555
	 
	 	 	 	 
	 

	 	and to:
	 	Citibank, N.A.
	 

	 	 	 	One Sansome Street, 21st Floor
	 

	 	 	 	San Francisco, CA 94104
	 

	 	 	 	Attn: Paula Turney
	 

	 	 	 	Fax: (415) 658-4555
	 

	 	 	 	Tel: (415) 658-4558

SECTION 11

CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER

     This Agreement and the Loan Documents will be governed by federal law applicable to Lender
and, to the extent not preempted by federal law, the laws of the State of California, without
regard to its conflicts of law provisions. Borrower and Lender each submit to the exclusive
jurisdiction of the State and Federal courts in San Francisco County, California; provided,
however, that nothing in this Agreement shall be deemed to operate to preclude Lender from
bringing suit or taking other legal action in any other jurisdiction to realize on the Collateral
or any other security for the Obligations, or to enforce a judgment or other court order in favor
of Lender. Borrower expressly submits and consents in advance to such jurisdiction in any action
or suit commenced in any such court, and Borrower hereby waives any objection that it may have
based upon lack of personal jurisdiction, improper venue, or forum non conveniens and hereby
consents to the granting of such legal or equitable relief as is deemed appropriate by such court.
Borrower hereby waives personal service of the summons, complaints, and other process issued in
such action or suit and agrees that service of such summons, complaints, and other process may be
made by registered or certified mail addressed to Borrower at the address set forth in Section 10
of this Agreement and that service so made shall be deemed completed upon the earlier to occur of
Borrower’s actual receipt thereof or three (3) days after deposit in the U.S. mails, proper
postage prepaid.

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

SECTION 12

GENERAL PROVISIONS

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

     12.2 Indemnification. Borrower agrees to indemnify, defend and hold Lender and its directors,
officers,
employees, agents, attorneys, or any other Person affiliated with or representing Lender
harmless against: (a) all
obligations, demands, claims, and liabilities (collectively, “Claims”) asserted by any other
party in connection with
the transactions contemplated by the Loan Documents; and (b) all losses or Lender Expenses
incurred, or paid by

29

 

Lender from, following, or arising from transactions between Lender and Borrower (including
reasonable attorneys’ fees and expenses), except for Claims and/or losses directly caused by
Lender’s gross negligence or willful misconduct or breach of any material obligation under this
Agreement or any other Loan Document.

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

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

     12.5 Amendments in Writing; Integration. All amendments to this Agreement must be in writing
and
signed by both Lender and Borrower. This Agreement and the Loan Documents represent the
entire agreement
about this subject matter and supersede prior negotiations or agreements. All prior
agreements, understandings,
representations, warranties, and negotiations between the parties about the subject matter of
this Agreement and the
Loan Documents merge into this Agreement and the Loan Documents.

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

     12.7 Survival. All covenants, representations and warranties made in this Agreement continue
in full
force until this Agreement has terminated pursuant to its terms and all Obligations (other
than inchoate indemnity
obligations and any other obligations which, by their terms, are to survive the termination of
this Agreement) have
been satisfied. The obligation of Borrower in Section 12.2 to indemnify Lender shall survive
until the statute of
limitations with respect to such claim or cause of action shall have run.

     12.8 Confidentiality. In handling any confidential information, Lender shall exercise the same
degree
of care that it exercises for its own proprietary information, but disclosure of information
may be made: (a) to
Lender’s Subsidiaries or Affiliates; (b) to prospective transferees or purchasers of any
interest in the Loans
(provided, however, Lender shall use commercially reasonable efforts to obtain such
prospective transferee’s or
purchaser’s agreement to the terms of this provision); (c) as required by law, regulation,
subpoena, or other order;
(d) to Lender’s regulators or as otherwise required in connection with Lender’s examination or
audit; and (e) as
Lender considers appropriate in exercising remedies under this Agreement. Confidential
information does not
include information that either: (i) is in the public domain or in Lender’s possession when
disclosed to Lender, or
becomes part of the public domain after disclosure to Lender; or (ii) is disclosed to Lender
by a third party, if Lender
does not know that the third party is prohibited from disclosing the information.

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

[Signature page follows.]

30

 

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the
date set forth on the first page hereof.

BORROWER:

Energy Recovery, Inc., a Delaware corporation

	 	 	 	 	 
	By

	 	/s/ Tom Willardson
 

	 	 
	Name: Thomas Willardson	 	 
	Title: Chief Financial Officer	 	 

LENDER:

CITIBANK, N.A.

	 	 	 	 	 
	By

	 	/s/ Robert Hurley
 

	 	 
	Name: Robert Hurley	 	 
	Title: Vice President	 	 

[Signature page to Loan and Security Agreement]

 

 

Exhibit A

[***]

 

 

Exhibit B

[ *** ]

 

 

Exhibit C

[ *** ]

 

 

Exhibit D

[ *** ]

 

 

Exhibit E

[ *** ]

 

 

Exhibit F

[ *** ]

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