Document:

Exhibit 10.1

 

AMENDMENT TO SECURED PROMISSORY NOTE

DUE DECEMBER 18, 2009

 

This
Amendment to Promissory Note (the “Amendment”) effective 18th December 2007,
is entered into this 25th day of June, by and between EBIX, INC., a Delaware
corporation with its principal place of business at 5 Concourse Parkway, Suite 3200,
Atlanta, Georgia 30328 (the “Company”) and WHITEBOX VSC, LTD., a limited
partnership organized under the laws of the British Virgin Islands (the “Holder”).

 

WHEREAS, on December 18, 2007, the Company executed
and delivered to the Holder a secured promissory (the “Promissory Note”), the
principal sum of which being Twenty Million and No/100 Million Dollars
($20,000,000); and

 

WHEREAS, the Promissory Note contains a “Change of Control”
provision by which the Holder might redeem the Promissory Note upon a Change of
Control Transaction of the Company for cash in the amount 110% of either the
value of the then current outstanding principal amount of plus accrued interest
on said Promissory Note or a conversion price ratio based on the Company’s common
stock trading average for the previous twenty (20) trading days prior to a
Change of Control Transaction; and

 

WHEREAS, the Change in Control Put provision in Promissory
Note’s “Change of Control” provision can result in unforeseen financial reporting
consequences to the Company; and

 

WHEREAS, neither the Company nor the Holder did foresee nor
intended such financial reporting as a result of the Change in Control Put
provision in the Promissory Note; and

 

WHEREAS, the Company and the Holder wish to amend the
Promissory Note to revise the contingency characteristics of the Change in
Control Put

 

NOW THEREFORE, in consideration of the promises, the
mutual covenants contained herein, and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the Company and
the Holder hereto agree as follows:

 

1.  Recitals.  The above recitals are true and correct.

 

2.  Redemption Upon a Change
of Control. Section 6 of the Promissory Note is hereby deleted
retroactively with effect from December 18, 2007.

 

3.  Other Provisions Not Affected.  Except as expressly amended herein, all of
the other terms and provisions of the Promissory Note shall not be affected
hereby and shall remain in full force and effect.

 

4.  Definitions.  The capitalized terms used in this Amendment,
unless expressly defined herein, shall have the meanings ascribed to such terms
in the Promissory Note.

 

 

5.
Counterparts.  This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same agreement.

 

IN
WITNESS WHEREOF, the Company and the Holder have duly executed this Amendment,
as the case may be, all as of the day and year first above written.

 

 

	
   

  	
  COMPANY:

  
	
   

  	
   

  
	
   

  	
  EBIX,
  INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  

  
	
   

  	
   

  	
  Robin
  Raina

  
	
   

  	
   

  	
  Chief
  Executive Officer

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  HOLDER:Exhibit 10.1

 

 

AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT

 

This AMENDED
AND RESTATED  LOAN AND SECURITY
AGREEMENT (this “Agreement”)
dated as of June 30, 2008, between SILICON VALLEY BANK,
a California chartered bank, with its principal place of business at
3003 Tasman Drive, Santa Clara, California 95054 (“Bank”)
and INTRUSION, INC., a Delaware corporation,
with offices at 1101 E. Arapaho Road, Suite 200, Richardson, Texas 75081 (“Borrower”), provides the terms on which Bank shall lend to
Borrower and Borrower shall repay Bank.

 

WHEREAS, Bank
and Borrower have entered into that certain Loan and Security Agreement dated March 29,
2006, as amended from time to time (the “Original Agreement”);
and

 

WHEREAS, Bank
and Borrower have agreed to amend and restate the Original Agreement, in its
entirety.

 

NOW, THEREFORE, the
parties agree as follows:

 

1              ACCOUNTING
AND OTHER TERMS

 

Accounting
terms not defined in this Agreement shall be construed following GAAP.  Calculations and determinations must be made
following GAAP.  The terms “including”
and “includes” always mean “including (or includes) without limitation,” in
this or any Loan Document.  Capitalized
terms in this Agreement shall have the meanings set forth in Section 13.  All other terms contained in this Agreement,
unless otherwise indicated, shall have the meanings provided by the Code, to
the extent such terms are defined therein.

 

2              LOAN AND TERMS OF PAYMENT

 

2.1          Promise to Pay.  Borrower hereby unconditionally promises to
pay Bank the unpaid principal amount of all Advances hereunder with all
interest, fees and finance charges due thereon as and when due in accordance
with this Agreement.

 

2.1.1       Financing of Accounts.

 

(a)           Availability.  Subject to the terms of this Agreement,
Borrower may request that Bank finance specific Eligible Accounts.  Bank may, in its sole discretion in each
instance shall finance such Eligible Accounts by extending credit to Borrower
in an amount equal to the result of the Advance Rate multiplied by the face
amount of the Eligible Account (the “Advance”).   Bank may, in its sole discretion, change the
percentage of the Advance Rate for a particular Eligible Account on a case by
case basis.  When Bank makes an Advance,
the Eligible Account becomes a “Financed Receivable.”

 

(b)           Maximum Advances.   The aggregate face amount of all Financed
Receivables outstanding at any time may not exceed the Facility Amount.

 

(c)           Borrowing Procedure.  Borrower will deliver an Invoice Transmittal
for each Eligible Account it offers. 
Bank may rely on information set forth in or provided with the Invoice
Transmittal.

 

(d)           Credit Quality;
Confirmations.  Bank may, at its
option, conduct a credit check of the Account Debtor for each Account requested
by Borrower for financing hereunder in order to approve any such Account Debtor’s
credit before agreeing to finance such Account. 
Bank may also verify directly with the respective 

 

1

 

Account Debtors
the validity, amount and other matters relating to the Accounts (including
confirmations of Borrower’s representations in Section 5.3) by means of
mail, telephone or otherwise, either in the name of Borrower or Bank from time
to time in its sole discretion.

 

(e)           Accounts
Notification/Collection.  Bank may
notify any Person owing Borrower money of Bank’s security interest in the funds
and verify and/or collect the amount of the Account.

 

(f)            Maturity.  This Agreement shall terminate and all
Obligations outstanding hereunder shall be immediately due and payable on the
Maturity Date.

 

(g)           Suspension of
Advances.  Borrower’s ability to
request that Bank finance Eligible Accounts hereunder will terminate if, in
Bank’s sole discretion, there has been a material adverse change in the general
affairs, management, results of operation, condition (financial or otherwise)
or the prospect of repayment of the Obligations, or there has been any material
adverse deviation by Borrower from the most recent business plan of Borrower
presented to and accepted by Bank prior to the execution of this Agreement.

 

(h)           Initial Advance. 
This Agreement amends and restates the Original
Agreement in its entirety.  The
outstanding balance of all advances made under the Original Agreement shall be,
and hereby are, refinanced by the initial Advance made hereunder and shall be
repaid as Advances pursuant to the terms hereof.

 

2.2          Collections, Finance Charges, Remittances and Fees.   The Obligations shall be subject to the
following fees and Finance Charges. 
Unpaid fees and Finance Charges may, in Bank’s discretion, accrue
interest and fees as described in Section 9.2 hereof.

 

2.2.1       Collections. Collections will be
credited to the Financed Receivable Balance for such Financed Receivable, but
if there is an Event of Default, Bank may apply Collections to the Obligations
in any order it chooses.   If Bank
receives a payment for both a Financed Receivable and a non-Financed
Receivable, the funds will first be applied to the Financed Receivable and, if
there is no Event of Default then existing, the excess will be remitted to
Borrower, subject to Section 2.2.7.

 

2.2.2       Facility Fee. A fully
earned, non-refundable facility fee of Seven Thousand Five Hundred Dollars ($7,500)
is due upon execution of this Agreement.

 

2.2.3       Finance Charges.  All Collections received by Bank shall be
deemed applied by Bank on account of the Obligations three (3) Business
Days after  receipt of the Collections.  Borrower will pay a finance charge (the “Finance Charge”) on each Financed Receivable which is equal
to the Applicable Rate divided by 360 multiplied by the number of
days each such Financed Receivable is outstanding multiplied by the
outstanding Financed Receivable Balance. 
The Finance Charge is payable when the Advance made based on such
Financed Receivable is payable in accordance with Section 2.3 hereof.  Bank will not compute
the interest in a manner that would cause Bank to contract for, charge or
receive interest that would exceed the Maximum Lawful Rate or the Maximum
Lawful Amount.   In the event that the aggregate amount of
Finance Charges earned by Bank in any Reconciliation Period is less than the
Minimum Finance Charge, Borrower shall pay to Bank an additional Finance Charge
equal to (i) the Minimum Finance Charge minus (ii) the aggregate
amount of all Finance Charges earned by Bank in such Reconciliation
Period.   Such additional Finance Charge
shall be payable on the first day of next Reconciliation Period.

 

2.2.4       Collateral Handling Fee. Borrower
will pay to Bank a monthly collateral handling fee for each Financed Receivable
outstanding (the “Collateral Handling Fee”)
as follows:  (a) if Borrower has an
Adjusted Quick Ratio greater than 2.00 to 1.00, the Collateral Handling Fee
shall equal 0.25% per month of the Financed Receivable Balance outstanding
during the applicable Reconciliation Period; or (b) if Borrower has an
Adjusted Quick Ratio less than or equal to 2.00 to 1.00, the Collateral
Handling Fee shall equal 0.50% per month of the Financed Receivable Balance
during the applicable Reconciliation Period.  The Collateral Handling Fee is payable when
the Advance made based on such Financed Receivable is payable in accordance
with Section 2.3 hereof.  In
computing Collateral Handling Fees under this Agreement, all Collections
received by Bank shall be deemed applied by Bank on account of Obligations
three (3) Business Days after receipt of the Collections.  After an Event 

 

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of Default, the Collateral Handling Fee will increase an additional
0.50% effective immediately upon such Event of Default.

 

2.2.5       Intentionally Omitted.

 

2.2.6       Accounting.  After each Reconciliation Period, Bank will
provide an accounting of the transactions for that Reconciliation Period,
including the amount of all Financed Receivables, all Collections, Adjustments,
Finance Charges, Collateral Handling Fee, Administrative Fee and the Facility
Fee.  If Borrower does not object to the
accounting in writing within thirty (30) days it shall be considered
accurate.  All Finance Charges and other
interest and fees are calculated on the basis of a 360 day year and actual days
elapsed.

 

2.2.7       Deductions.  Bank may deduct fees, Finance Charges,
Advances which become due pursuant to Section 2.3, and other amounts due
pursuant to this Agreement from any Advances made or Collections received by
Bank.

 

2.2.8       Lockbox; Account Collection Services.  As and when directed by Bank from time to
time, at Bank’s option and at the sole and exclusive discretion of Bank
(regardless of whether an Event of Default has occurred), Borrower shall direct
each Account Debtor (and each depository institution where proceeds of Accounts
are on deposit) to remit payments with respect to the Accounts to a lockbox
account established with Bank or to wire transfer payments to a cash collateral
account that Bank controls (collectively, the “Lockbox”).  It will be considered an immediate Event of
Default if the Lockbox is not set-up and operational within forty-five (45)
days from the date of such direction by Bank. 
Until such Lockbox is established, the proceeds of the Accounts shall be
paid by the Account Debtors to an address consented to by Bank.  Upon receipt by Borrower of such proceeds,
the Borrower shall immediately transfer and deliver same to Bank, along with a
detailed cash receipts journal.  Provided
no Event of Default exists or an event that with notice or lapse of time will
be an Event of Default, within three (3) days of receipt of such amounts
by Bank, Bank will turn over to Borrower the proceeds of the Accounts other
than Collections with respect to Financed Receivables and the amount of
Collections in excess of the amounts for which Bank has made an Advance to
Borrower, less any amounts due to Bank, such as the Finance Charge, the
Facility Fee, payments due to Bank, other fees and expenses, or otherwise;
provided, however, Bank may hold such excess amount with respect to Financed
Receivables as a reserve until the end of the applicable Reconciliation Period
if Bank, in its discretion, determines that other Financed Receivable(s) may
no longer qualify as an Eligible Account at any time prior to the end of the
subject Reconciliation Period.  This Section does
not impose any affirmative duty on Bank to perform any act other than as
specifically set forth herein.  All Accounts
and the proceeds thereof are Collateral and if an Event of Default occurs, Bank
may apply the proceeds of such Accounts to the Obligations.

 

2.2.9       Intentionally Omitted.

 

2.2.10     Spreading of Interest.  Due to irregular periodic balances of
principal, the variable nature of the interest rate, or prepayment, the total
interest that will accrue under this Agreement cannot be determined in
advance.  Bank does not intend to
contract for, charge or receive more than the Maximum Lawful Rate or Maximum
Lawful Amount permitted by applicable state or federal law, and to prevent such
an occurrence Bank and Borrower agree that all amounts of interest, whenever
contracted for, charged or received by Bank, with respect to the Obligations,
will be spread, prorated or allocated over the full period of time the
Obligations are unpaid, including the period of any renewal or extension
thereof.  If the maturity of the
Obligations is accelerated for any reason whether as a result of an Event of
Default or otherwise prior to the full stated term, the total amount of
interest contracted for, charged or received to the time of such demand shall
be spread, prorated or allocated along with any interest thereafter accruing
over the full period of time that the Obligations thereafter remain unpaid for
the purpose of determining if such interest exceeds the Maximum Lawful Amount.

 

2.2.11     Excess Interest.  At maturity (whether by acceleration or
otherwise) or on earlier final payment of the Obligations, Bank will compute
the total amount of interest that has been contracted for, charged or received
by Bank or payable by Borrower hereunder and compare such amount to the Maximum
Lawful Amount that could have been contracted for, charged or received by Bank.  If such computation reflects that the total
amount of interest that has been contracted for, charged or received by Bank or
payable by Borrower exceeds the Maximum Lawful Amount, then Bank shall apply
such excess to the reduction of the principal balance, such excess shall be
refunded to Borrower.  This provision
concerning the crediting or refund of excess interest shall control and take
precedence 

 

3

 

over all other agreements between Borrower and Bank so that under no
circumstances shall the total interest contracted for, charged or received by
Bank exceed the Maximum Lawful Amount.

 

2.3          Repayment of Obligations; Adjustments.

 

2.3.1       Repayment.  Borrower will repay each Advance on the
earliest of: (a) the date on which payment is received of the Financed
Receivable with respect to which the Advance was made, (b) the date on
which the Financed Receivable is no longer an Eligible Account, (c) the
date on which any Adjustment is asserted to the Financed Receivable (but only
to the extent of the Adjustment if the Financed Receivable remains otherwise an
Eligible Account), (d) the date on which there is a breach of any warranty
or representation set forth in Section 5.3, or (e) the Maturity Date
(including any early termination). Each payment will also include all accrued
Finance Charges, Collateral Handling Fees,  and Administrative
Fees  with respect to such Advance and all
other amounts then due and payable hereunder.

 

2.3.2       Repayment on Event of Default.  When there is an Event of Default, Borrower
will, if Bank demands (or, upon the occurrence of an Event of Default under Section 8.5,
immediately without notice or demand from Bank) repay all of the Advances.  The demand may, at Bank’s option, include the
Advance for each Financed Receivable then outstanding and all accrued Finance
Charges, the Early Termination Fee, 
Collateral Handling Fee,  Administrative Fee, attorneys and professional
fees, court costs and expenses, and any other Obligations.

 

2.3.3       Debit of Accounts.   Bank may debit any of Borrower’s deposit
accounts for payments or any amounts Borrower owes Bank hereunder.  Bank shall promptly notify Borrower when it
debits Borrower’s accounts.  These debits
shall not constitute a set-off.

 

2.3.4       Adjustments.  If at any time during the term of this
Agreement any Account Debtor asserts an Adjustment or if Borrower issues a
credit memorandum or if any of the representations, warranties or covenants set
forth in Section 5.3 are not longer true in all material respects,
Borrower will promptly advise Bank.

 

2.4          Power of Attorney.  Borrower irrevocably appoints Bank and its
successors and assigns as attorney-in-fact and authorizes Bank, to: (i) following
the occurrence of an Event of Default, 
sell, assign, transfer, pledge, compromise, or discharge all or any part
of the Financed Receivables; (ii) following the occurrence of an Event of
Default, demand, collect, sue, and give releases to any Account Debtor for
monies due and compromise, prosecute, or defend any action, claim, case or
proceeding about the Financed Receivables, including filing a claim or voting a
claim in any bankruptcy case in Bank’s or Borrower’s name, as Bank chooses; (iii) following
the occurrence of an Event of Default, prepare, file and sign Borrower’s name
on any notice, claim, assignment, demand, draft, or notice of or satisfaction
of lien or mechanics’ lien or similar document; (iv) regardless of whether
there has been an Event of Default, notify all Account Debtors to pay Bank
directly; (v) regardless of whether there has been an Event of Default,
receive, open, and dispose of mail addressed to Borrower; (vi) regardless
of whether there has been an Event of Default, 
endorse Borrower’s name on checks or other instruments (to the extent
necessary to pay amounts owed pursuant to this Agreement); and (vii) regardless
of whether there has been an Event of Default, execute on Borrower’s behalf any
instruments, documents, financing statements to perfect Bank’s interests in the
Financed Receivables and Collateral and do all acts and things necessary or
expedient, as determined solely and exclusively by Bank, to protect or preserve,
Bank’s rights and remedies under this Agreement, as directed by Bank.

 

3              CONDITIONS OF LOANS

 

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

 

(a)           a certificate of the
Secretary of Borrower with respect to articles, bylaws, incumbency and resolutions
authorizing the execution and delivery of this Agreement;

 

4

 

(b)           an Intellectual
Property Security Agreement;

 

(c)           Perfection
Certificate(s) by Borrower and Guarantor;

 

(d)           Account Control
Agreement/ Investment Account Control Agreement;

 

(e)           insurance
certificates;

 

(f)            payment of the fees
and Bank Expenses then due and payable;

 

(g)           its Operating
Documents and a Certificate of Existence and Good Standing 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 Effective Date;

 

(h)           a Certificate of
Existence and Authorization to Transact Business in Texas, each as certified by
the Secretary of State of the State of Texas, and a Certificate of Good
Standing, certified by the Comptroller of the State of Texas; and

 

(i)            such other
documents, and completion of such other matters, as Bank may reasonably deem
necessary or appropriate.

 

3.2          Conditions Precedent to all Advances.  Bank’s agreement to make each Advance,
including the initial Advance, is subject to the following:

 

(a)           receipt of the
Invoice Transmittal;

 

(b)           Bank shall have (at
its option) conducted the confirmations and verifications as described in Section 2.1.1
(d); and

 

(c)           each of the
representations and warranties in Section 5 shall be true on the date of
the Invoice Transmittal and on the effective date of each Advance and no Event
of Default shall have occurred and be continuing, or result from the
Advance.  Each Advance is Borrower’s
representation and warranty on that date that the representations and
warranties in Section 5 remain true.

 

4              CREATION OF SECURITY INTEREST

 

4.1          Grant of Security Interest.  Borrower hereby grants Bank, to secure the
payment and performance in full of all of the Obligations and the performance
of each of Borrower’s duties under the Loan Documents, a continuing security
interest in, and pledges and assigns to Bank, the Collateral, wherever located,
whether now owned or hereafter acquired or arising, and all proceeds and
products thereof.  Borrower warrants and
represents that the security interest granted herein shall be a first priority
security interest in the Collateral.

 

Except
as noted on the Perfection 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 that prohibits or otherwise restricts Borrower from
granting a security interest in Borrower’s interest in such license or
agreement or any other property. 
Borrower will provide written notice to Bank within 30 days of entering
or becoming bound by any such license or agreement which is reasonably likely
to have a material impact on Borrower’s business or financial condition (other
than over-the-counter software that is commercially available to the
public).  Borrower shall take such steps
as Bank requests to obtain the consent of, authorization by, or waiver by, any
person whose consent or waiver is necessary for all such licenses or contract
rights to be deemed “Collateral” and for Bank to have a security interest in it
that might otherwise be restricted or prohibited by law or by the terms of any
such license or agreement (such consent or authorization may include a licensor’s
agreement to a contingent assignment of the license to Bank if the Bank
determines that is necessary in its good faith judgment), whether now existing
or entered into in the future.

 

5

 

If the
Agreement is terminated, Bank’s lien and security interest in the Collateral
shall continue until Borrower fully satisfies its Obligations.  If Borrower shall at any time, acquire a
commercial tort claim, Borrower shall promptly notify Bank in a writing signed
by Borrower of the brief details thereof and grant to Bank in such writing a
security interest therein and in the proceeds thereof, all upon the terms of
this Agreement, with such writing to be in form and substance satisfactory to
Bank.

 

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

 

5              REPRESENTATIONS AND WARRANTIES

 

Borrower
represents and warrants as follows:

 

5.1          Due Organization and Authorization.  Borrower and each Subsidiary is duly existing
and in good standing in its state of formation and qualified and licensed to do
business in, and in good standing in, any state 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 cause a Material
Adverse Change.   Borrower represents and
warrants to Bank that: (a) Borrower’s exact legal name is that indicated
on the Perfection Certificate and on the signature page hereof; and (b) Borrower
is an organization of the type, and is organized in the jurisdiction, set forth
in the Perfection Certificate; and (c) the Perfection Certificate
accurately sets forth Borrower’s organizational identification number or
accurately states that Borrower has none; and (d) the Perfection
Certificate accurately sets forth Borrower’s place of business, or, if more
than one, its chief executive office as well as Borrower’s mailing address if
different, and (e) all other information set forth on the Perfection
Certificate pertaining to Borrower is accurate and complete.  If Borrower does not now have an
organizational identification number, but later obtains one, Borrower shall
forthwith notify Bank of such organizational identification number.

 

The
execution, delivery and performance of the Loan Documents have been duly
authorized, and do not conflict with Borrower’s organizational documents, nor
constitute an event of default under any material agreement by which Borrower
is bound.  Borrower is not in default
under any agreement to which or by which it is bound in which the default could
reasonably be expected to cause a Material Adverse Change.

 

5.2          Collateral.  Borrower has good title to the Collateral,
free of Liens except Permitted Liens. 
All inventory is in all material respects of good and marketable
quality, free from material defects. 
Borrower has no deposit account, other than the deposit accounts with
Bank and deposit accounts described in the Perfection Certificate delivered to
Bank in connection herewith.  The
Collateral is not in the possession of any third party bailee (such as a
warehouse).  Except as hereafter
disclosed to Bank in writing by Borrower, none of the components of the
Collateral shall be maintained at locations other than as provided in the
Perfection Certificate.  In the event
that Borrower, after the date hereof, intends to store or otherwise deliver any
portion of the Collateral to a bailee, then Borrower will first receive the
written consent of Bank and such bailee must acknowledge in writing that the
bailee is holding such Collateral for the benefit of Bank.

 

5.3          Financed Receivables.  Borrower represents and warrants for each
Financed Receivable:

 

(a)           Each Financed
Receivable is an Eligible Account;

 

(b)           Borrower is the
owner with legal right to sell, transfer, assign and encumber such Financed
Receivable;

 

(c)           The correct amount
is on the Invoice Transmittal and is not disputed;

 

(d)           Payment is not
contingent on any obligation or contract and Borrower has fulfilled all its
obligations as of the Invoice Transmittal date;

 

6

 

(e)           Each Financed
Receivable is based on an actual sale and delivery of goods and/or services
rendered, is due to Borrower, is not past due or in default, has not been
previously sold, assigned, transferred, or pledged and is free of any liens,
security interests and encumbrances other than Permitted Liens;

 

(f)            There are no
defenses, offsets, counterclaims or agreements for which the Account Debtor may
claim any deduction or discount;

 

(g)           Borrower reasonably
believes no Account Debtor is insolvent or subject to any Insolvency
Proceedings;

 

(h)           Borrower has not
filed or had filed against it Insolvency Proceedings and does not anticipate
any filing;

 

(i)            Bank has the right
to endorse and/ or require Borrower to endorse all payments received on
Financed Receivables and all proceeds of Collateral; and

 

(j)            No representation,
warranty or other statement of Borrower in any certificate or written statement
given to Bank contains any untrue statement of a material fact or omits to
state a material fact necessary to make the statement contained in the
certificates or statement not misleading.

 

5.4          Litigation.  There are no actions or proceedings pending
or, to the knowledge of Borrower’s Responsible Officers or legal counsel,
threatened by or against Borrower or any Subsidiary in which an adverse
decision could reasonably be expected to cause a Material Adverse Change.

 

5.5          No Material Deviation in Financial Statements.  All consolidated financial statements for
Borrower and any Subsidiary delivered to Bank 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 Bank.

 

5.6          Solvency.  Borrower is able to pay its debts (including
trade debts) as they mature.

 

5.7          Regulatory Compliance.  Borrower is not an “investment company” or a
company “controlled” by an “investment company” under the Investment Company
Act.  Borrower is not engaged as one of
its important activities in extending credit for margin stock (under
Regulations X, T and U of the Federal Reserve Board of Governors).  Borrower has complied in all material
respects with the Federal Fair Labor Standards Act.  Borrower has not violated any laws,
ordinances or rules, the violation of which could reasonably be expected to
cause a Material Adverse Change.  None of
Borrower’s or any Subsidiary’s 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 Subsidiary has timely filed all required tax returns and paid, or made
adequate provision to pay, all material taxes, except those being contested in
good faith with adequate reserves under GAAP. 
Borrower and each Subsidiary has 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 its business as
currently conducted except where the failure to obtain or make such consents,
declarations, notices or filings would not reasonably be expected to cause a
Material Adverse Change.

 

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

 

5.9          Full Disclosure.  No written representation, warranty or other
statement of Borrower in any certificate or written statement given to Bank
contains any untrue statement of a material fact or omits to state a material
fact necessary to make the statements contained in the certificates or
statements not misleading.

 

7

 

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

 

6              AFFIRMATIVE COVENANTS

 

Borrower
shall do all of the following:

 

6.1          Government Compliance.  Borrower shall maintain its and all
Subsidiaries’ legal existence and good standing in its jurisdiction of
formation and maintain qualification in each jurisdiction in which the failure
to so qualify would reasonably be expected to have a material adverse effect on
Borrower’s business or operations. 
Borrower shall comply, and have each Subsidiary comply, with all laws,
ordinances and regulations to which it is subject, noncompliance with which
could have a material adverse effect on Borrower’s business or operations or would
reasonably be expected to cause a Material Adverse Change.

 

6.2          Financial Statements, Reports, Certificates.

 

(a)           Borrower shall
deliver to Bank:  (i) as soon as
available, but no later than thirty (30) days after the last day of each month,
a company prepared consolidated balance sheet and income statement covering
Borrower’s consolidated operations during the period certified by a Responsible
Officer and in a form acceptable to Bank; (ii) as soon as available, but
no later than one hundred fifty (150) days after the last day of Borrower’s
fiscal year, audited consolidated financial statements prepared under GAAP,
consistently applied, together with an unqualified opinion on the financial
statements from an independent certified public accounting firm reasonably
acceptable to Bank; (iii) within five (5) days of filing, copies of
all statements, reports and notices made available to Borrower’s security
holders or to any holders of Subordinated Debt and all reports on Form 10-K,
10-Q and 8-K filed with the Securities and Exchange Commission; (iv) 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 Twenty-five Thousand Dollars ($25,000) or more; (v) prompt
notice of any material change in the composition of the intellectual property,
or the registration of any copyright, including any subsequent ownership right
of Borrower in or to any Copyright, Patent or Trademark not shown in the IP
Agreement or knowledge of an event that materially adversely affects the value
of the Intellectual Property Collateral; (vi) a prompt report of
any complaints filed with the Texas Workforce Commission (“TWC”) against Borrower in the aggregate of $25,000 or
more; and (vii) budgets, sales projections, operating plans or  other financial information reasonably requested by Bank.

 

(b)           Within thirty (30) days
after the last day of each month, Borrower shall deliver to Bank with the
monthly financial statements a Compliance Certificate signed by a Responsible
Officer in the form of Exhibit B.

 

(c)           Borrower will allow
Bank to audit Borrower’s Collateral, including, but not limited to, Borrower’s
Accounts and accounts receivable, at Borrower’s expense, upon reasonable notice
to Borrower; provided, however, prior to the occurrence of an Event of Default,
Borrower shall be obligated to pay for not more than one (1) audit per
year.  After the occurrence of an Event
of Default, Bank may audit Borrower’s Collateral, including, but not limited
to, Borrower’s Accounts and accounts receivable at Borrower’s expense and at
Bank’s sole and exclusive discretion and without notification and authorization
from Borrower.

 

(d)           Upon Bank’s request,
provide a written report respecting any Financed Receivable, if payment of any
Financed Receivable does not occur by its due date and include the reasons for
the delay.

 

(e)           Provide Bank with,
as soon as available, but no later than thirty (30) following each
Reconciliation Period, an aged listing of accounts receivable and accounts
payable by invoice date, in form acceptable to Bank.

 

(f)            Provide Bank with,
as soon as available, but no later than thirty (30) following each
Reconciliation Period, a Deferred Revenue report, in form acceptable to Bank.

 

8

 

6.3          Taxes.  Borrower shall make, and cause each
Subsidiary to make, timely payment of all material federal, state, and local
taxes or assessments (other than taxes and assessments which Borrower is
contesting in good faith, with adequate reserves maintained in accordance with
GAAP) and will deliver to Bank, on demand, appropriate certificates attesting
to such payments.

 

6.4          Insurance.  Borrower shall keep its business and the
Collateral insured for risks and in amounts,  
and as Bank may reasonably request. 
Insurance policies shall be in a form, with companies, and in amounts
that are satisfactory to Bank.  Unless
otherwise waived by Bank, all property policies shall have a lender’s loss
payable endorsement showing Bank as an additional loss payee and all liability
policies shall show Bank as an additional insured and all policies shall
provide that the insurer must give Bank at least twenty (20) days notice before
canceling its policy.  At Bank’s request,
Borrower shall deliver certified copies of policies and evidence of all premium
payments. Proceeds payable under any policy shall, at Bank’s option, be payable
to Bank on account of the Obligations. 
If Borrower fails to obtain insurance as required under this Section or
to pay any amount or furnish any required proof of payment to third persons and
Bank, Bank may make all or part of such payment or obtain such insurance
policies required in this Section and take any action under the policies
Bank deems prudent.

 

6.5          Accounts.

 

(a)           In order to permit
Bank to monitor Borrower’s financial performance and condition, Borrower, and
all Borrower’s Subsidiaries, shall maintain Borrower’s, and such Subsidiaries,
primary depository and operating accounts and securities accounts with Bank.

 

(b)           Borrower shall
identify to Bank, in writing, any bank or securities account opened by Borrower
with any institution other than Bank.  In
addition, for each such account that Borrower or Guarantor at any time opens or
maintains, Borrower shall, at Bank’s request and option, pursuant to an
agreement in form and substance acceptable to Bank, cause the depository bank
or securities intermediary to agree that such account is the collateral of Bank
pursuant to the terms hereunder.  The provisions
of the previous sentence shall not apply to deposit accounts exclusively used
for payroll, payroll taxes and other employee wage and benefit payments to or
for the benefit of Borrower’s employees.

 

6.6          Intentionally Omitted.

 

6.7          Further Assurances.  Borrower shall execute any further
instruments and take further action as Bank reasonably requests to perfect or
continue Bank’s security interest in the Collateral or to effect the purposes
of this Agreement.

 

7              NEGATIVE COVENANTS

 

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

 

7.1          Dispositions.  Convey, sell, lease, transfer or otherwise
dispose of (collectively a “Transfer”), or
permit any of its Subsidiaries to Transfer, all or any part of its business or
property, except for Transfers (i) of inventory in the ordinary course of
business; (ii) of non-exclusive licenses and similar arrangements for the
use of the property of Borrower or its Subsidiaries in the ordinary course of
business; or (iii) of worn-out or obsolete equipment.

 

7.2          Changes in Business, Ownership, Management or
Business Locations. 
Engage in or permit any of its Subsidiaries to engage in any business
other than the businesses currently engaged in by Borrower or reasonably
related thereto, or have a material change in its ownership (other than by the
sale of Borrower’s equity securities in a public offering or to venture capital
investors so long as Borrower identifies to Bank the venture capital investors
prior to the closing of the investment), or management.  Borrower shall not, without at least thirty
(30) days prior written notice to Bank: (i) relocate its chief executive
office, or add any new offices or business locations, including warehouses (unless
such new offices or business locations contain less than Ten Thousand Dollars
($10,000.00) in Borrower’s assets or property), or (ii) change its
jurisdiction of organization, or (iii) change 

 

9

 

its organizational structure or type, or (iv) change its legal
name, or (v) change any organizational number (if any) assigned by its
jurisdiction of organization.

 

7.3          Mergers or Acquisitions.  Merge or consolidate, or permit any of its
Subsidiaries to merge or consolidate, with any other Person, or acquire, or
permit any of its Subsidiaries to acquire, all or substantially all of the
capital stock or property of another Person. 
A Subsidiary may merge or consolidate into another Subsidiary or into
Borrower.

 

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.  Create, incur, or allow any Lien on any of
its property, including the 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, except for Permitted Liens, or permit any Collateral
not to be subject to the first priority security interest granted herein.  The Collateral may also be subject to Permitted
Liens.

 

7.6          Distributions; Investments.  (i) 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; or (ii) pay any
dividends or make any distribution or payment or redeem, retire or purchase any
capital stock.

 

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

 

7.8          Subordinated Debt.  Make or permit any payment on any Subordinated
Debt, except under the terms of the Subordinated Debt, or amend any provision
in any document relating to the Subordinated Debt, without Bank’s prior written
consent.

 

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, or use the proceeds of any Advance 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 operations or would reasonably be expected to cause a
Material Adverse Change, or permit any of its Subsidiaries to do so.

 

8              EVENTS OF DEFAULT

 

Any
one of the following is an Event of Default:

 

8.1          Payment Default.  Borrower fails to pay any of the Obligations
when due;

 

8.2          Covenant Default.

 

(a)           If Borrower fails to
perform any obligation under Sections 2.2.7 or 6.2 or violates any of the
covenants contained in Section 7 of this Agreement, or

 

(b)           If Borrower fails or
neglects to perform, keep, or observe any other material term, provision,
condition, covenant, or agreement contained in this Agreement, in any of the
Loan Documents, or in any other present or future agreement between Borrower
and Bank and as to any default under such other term, provision, condition,
covenant or agreement that can be cured, has failed to cure such 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 reasonable period (which shall 

 

10

 

not in any case
exceed thirty (30) days) to attempt to cure such default, and within such
reasonable time period the failure to have cured such default shall not be
deemed an Event of Default (provided that no Advances will be made during such
cure period);

 

8.3          Material Adverse Change.  A Material Adverse Change occurs;

 

8.4          Attachment.  (i) Any portion of Borrower’s assets is
attached, seized, levied on, or comes into possession of a trustee or receiver
and the attachment, seizure or levy is not removed in ten (10) days; (ii) the
service of process upon Borrower seeking to attach, by trustee or similar
process, any funds of Borrower on deposit with Bank, or any entity under the
control of Bank (including a subsidiary); (iii) Borrower is enjoined,
restrained, or prevented by court order from conducting any part of its
business; (iv) a judgment or other claim becomes a Lien on a portion of
Borrower’s assets; or (v) a notice of lien, levy, or assessment is filed against
any of Borrower’s assets by any government agency and not paid within ten (10) days
after Borrower receives notice;

 

8.5          Insolvency.  (i) Borrower is unable to pay its debts
(including trade debts) as they become due or otherwise becomes insolvent; (ii) Borrower
begins an Insolvency Proceeding; or (iii) an Insolvency Proceeding is
begun against Borrower and not dismissed or stayed within thirty (30) days (but
no Advances shall be made before any Insolvency Proceeding is dismissed);

 

8.6          Other Agreements.  If there is a default in any agreement to
which Borrower is a party with a third party or parties resulting in a right by
such third party or parties, whether or not exercised, to accelerate the
maturity of any Indebtedness in an amount in excess of One Hundred Thousand
Dollars ($100,000) or that could result in a Material Adverse Change;

 

8.7          Judgments.  If a judgment or judgments for the payment of
money in an amount, individually or in the aggregate, of at least One Hundred
Thousand Dollars ($100,000) shall be rendered against Borrower and shall remain
unsatisfied and unstayed for a period of ten (10) days (provided that no
Advances will be made prior to the satisfaction or stay of such judgment);

 

8.8          Misrepresentations.  If Borrower or any Person acting for Borrower
makes any material misrepresentation or material misstatement now or later in
any warranty or representation in this Agreement or in any writing delivered to
Bank or to induce Bank to enter this Agreement or any Loan Document;

 

8.9          Subordinated Debt. A default or
breach occurs under any agreement between Borrower and any creditor of Borrower
that signed a subordination agreement with Bank, or any creditor that has
signed a subordination agreement with Bank breaches any terms of the subordination
agreement.

 

8.10        Guaranty.  (i) Any guaranty of
any Obligations terminates or ceases for any reason to be in full force; or (ii) any
Guarantor does not perform any obligation under any guaranty of the
Obligations; or (iii) any material misrepresentation or material
misstatement exists now or later in any warranty or representation in any
guaranty of the Obligations or in any certificate delivered to Bank in
connection with the guaranty; or (iv) any circumstance described in Section 7,
or Sections 8.4, 8.5 or 8.7 occurs to any Guarantor, or (v) the death,
liquidation, winding up, termination of existence, or insolvency of any
Guarantor.

 

8.10        TWC. 
If a preliminary order is issued by the Texas Workforce Commission
against Borrower for an aggregate amount of at least $25,000.

 

9              BANK’S RIGHTS AND REMEDIES

 

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

 

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

 

11

 

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

 

(c)           Settle or adjust
disputes and claims directly with Account Debtors for amounts, on terms and in
any order that Bank considers advisable and notify any Person owing Borrower money
of Bank’s security interest in such funds and verify the amount of such
account.  Borrower shall collect all
payments in trust for Bank and, if requested by Bank, immediately deliver the
payments to Bank in the form received from the Account Debtor, with proper
endorsements for deposit;

 

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

 

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

 

(f)            Ship, reclaim,
recover, store, finish, maintain, repair, prepare for sale, advertise for sale,
and sell the Collateral.  Bank is hereby
granted a non-exclusive, royalty-free license or other right to use, without
charge, Borrower’s labels, patents, copyrights, mask works, rights of use of
any name, trade secrets, trade names, trademarks, 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, in connection with Bank’s exercise of its rights under this Section,
Borrower’s rights under all licenses and all franchise agreements inure to Bank’s
benefit;

 

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

 

(h)           Exercise all rights
and remedies and dispose of the Collateral according to the Code.

 

9.2          Bank Expenses; Unpaid Fees.  Any amounts paid by Bank as provided herein
shall constitute Bank Expenses and are immediately due and payable, and shall
bear interest at the Default Rate and be secured by the Collateral.  No payments by Bank shall be deemed an
agreement to make similar payments in the future or Bank’s waiver of any Event
of Default.  In addition, any amounts
advanced hereunder which are not based on Financed Receivables (including,
without limitation, unpaid fees and Finance Charges as described in Section 2.2)
shall accrue interest at the Default Rate and be secured by the Collateral.

 

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

 

9.4          Remedies Cumulative.  Bank’s rights and remedies under this
Agreement, the Loan Documents, and all other agreements are cumulative.  Bank has all rights and remedies provided
under the Code, by law, or in equity. Bank’s exercise of one right or remedy is
not an election, and Bank’s waiver of any Event of Default is not a continuing
waiver. Bank’s delay is not a waiver, election, or acquiescence. No waiver
hereunder shall be effective unless signed by Bank and then is only effective
for the specific instance and purpose for which it was given.

 

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

 

12

 

9.6          Default
Rate.  After the
occurrence of an Event of Default, all Obligations shall accrue interest at the
Applicable Rate plus four percent (4.0%) per annum; but in no event more than
the Maximum Lawful Rate (the “Default Rate”).

 

10           NOTICES.

 

Notices
or demands by either party about this Agreement must be in writing and
personally delivered or sent by an overnight delivery service, by certified
mail postage prepaid return receipt requested, or by fax to the addresses
listed at the beginning of this Agreement. 
A party may change notice address by written notice to the other party.

 

11           CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER

 

California
law governs the Loan Documents without regard to principles of conflicts of law.  Borrower and Bank each submit to the
exclusive jurisdiction of the State and Federal courts in California and
Borrower accepts jurisdiction of the courts and venue in Santa Clara County,
California.  NOTWITHSTANDING THE
FOREGOING,  BANK SHALL HAVE THE RIGHT TO
BRING ANY ACTION OR PROCEEDING AGAINST BORROWER OR ITS PROPERTY IN THE COURTS
OF ANY OTHER JURISDICTION WHICH BANK DEEMS NECESSARY OR APPROPRIATE IN ORDER TO
REALIZE ON THE COLLATERAL OR TO OTHERWISE ENFORCE BANK’S RIGHTS AGAINST
BORROWER OR ITS PROPERTY.

 

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

 

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 Bank’s prior written consent which may
be granted or withheld in Bank’s discretion. 
Bank has the right, without the consent of or notice to Borrower, to
sell, transfer, negotiate, or grant participation in all or any part of, or any
interest in, Bank’s obligations, rights and benefits under this Agreement, the
Loan Documents or any related agreement.

 

12.2        Indemnification.  Borrower hereby indemnifies, defends and
holds Bank and its officers, employees, directors and agents harmless
against:  (a) all obligations,
demands, claims, and liabilities asserted by any other party in connection with
the transactions contemplated by the Loan Documents; and (b) all losses or
Bank Expenses incurred, or paid by Bank from, following, or consequential to
transactions between Bank and Borrower (including reasonable attorneys’ fees
and expenses), except for losses caused by Bank’s gross negligence or willful
misconduct.

 

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

 

12.4        Severability of Provision.  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 signed by both Bank 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.

 

13

 

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 while any Obligations remain
outstanding.  The obligation of Borrower
in Section 12.2 to indemnify Bank 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,
Bank shall exercise the same degree of care that it exercises for its own proprietary
information, but disclosure of information may be made: (i) to Bank’s
subsidiaries or affiliates in connection with their business with Borrower; (ii) to
prospective transferees or purchasers of any interest in the Advances
(provided, however, Bank shall use commercially reasonable efforts in obtaining
such prospective transferee’s or purchaser’s agreement to the terms of this
provision); (iii) as required by law, regulation, subpoena, or other
order, (iv) as required in connection with Bank’s examination or audit;
and (v) as Bank considers appropriate in exercising remedies under this
Agreement.  Confidential information does
not include information that either: (a) is in the public domain or in
Bank’s possession when disclosed to Bank, or becomes part of the public domain
after disclosure to Bank; or (b) is disclosed to Bank by a third party, if
Bank 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 Bank arising out of the Loan Documents, the prevailing party will
be entitled to recover its reasonable attorneys’ fees and other reasonable
costs and expenses incurred, in addition to any other relief to which it may be
entitled.

 

13           DEFINITIONS

 

13.1        Definitions.  In this Agreement:

 

“Accounts” are all existing and later arising accounts,
contract rights, and other obligations owed Borrower in connection with its
sale or lease of goods (including licensing software and other technology) or
provision of services,  all credit
insurance, guaranties, other security and all merchandise returned or reclaimed
by Borrower and Borrower’s Books relating to any of the foregoing.

 

“Account Debtor” is as defined in the Code and shall include,
without limitation, any person liable on any Financed Receivable, such as, a
guarantor of the Financed Receivable and any issuer of a letter of credit or
banker’s acceptance.

 

“Adjusted Quick Ratio” is the ratio of (a) Quick Assets
to (b) Current Liabilities, minus Deferred Revenue and minus Subordinated
Debt.

 

 “Adjustments”
are all discounts, allowances, returns, disputes, counterclaims, offsets,
defenses, rights of recoupment, rights of return, warranty claims, or short
payments, asserted by or on behalf of any Account Debtor for any Financed
Receivable.

 

“Administrative Fee”  shall have the
meaning as set forth in Section 2.2.4 hereof.

 

“Advance” is defined in Section 2.1.1.

 

“Advance Rate”  eighty percent (80.0%), net of any
offsets related to each specific Account Debtor, or such other percentage as
Bank establishes under Section 2.1.1.

 

“Affiliate” 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.

 

14

 

“Applicable Rate” is a floating per annum rate equal to the
greater of (a) the Prime Rate, or (b) five and one quarter percent
(5.25%), plus: (x) at all times Borrower’s Adjusted Quick Ratio is greater
than 2.00 to 1.00, one and one half percent (1.5%); and (y) at all times
Borrower’s Adjusted Quick Ratio is less than or equal to 2.00 to 1.00, two
percent (2.0%).  Changes to the
Applicable Rate based on changes to the Prime Rate shall be effective on the
effective date of any change to the Prime Rate and to the extent of any such
change.

 

 “Bank Expenses”
are all audit fees and expenses and reasonable costs or expenses (including
reasonable attorneys’ fees and expenses) for preparing, negotiating,
administering, defending and enforcing the Loan Documents (including appeals or
Insolvency Proceedings).

 

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

 

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

 

“Closing Date” is the date of this Agreement.

 

“Code” is the Uniform Commercial Code as adopted in
California, as amended and as may be amended and in effect from time to time.

 

“Collateral” is any and all properties, rights and assets of
Borrower granted by Borrower to Bank or arising under the Code, now, or in the
future, in which Borrower obtains an interest, or the power to transfer rights,
as described on Exhibit A.

 

“Collateral Handling Fee”  is defined in Section 2.2.4.

 

“Collections”  are all funds
received by Bank from or on behalf of an Account Debtor for Financed
Receivables.

 

“Compliance Certificate” is attached as Exhibit B.

 

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

 

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

 

“Default Rate” is defined in Section 9.6.

 

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

 

“Eligible Accounts” are billed Accounts in the ordinary
course of Borrower’s business that meet all Borrower’s representations and
warranties in Section 5.3, have been, at the option of Bank, confirmed in
accordance with Section 2.1.1 (d), and are due and owing from Account
Debtors deemed creditworthy by Bank in its good faith 

 

15

 

business judgment. 
Without limiting the fact that the determination of which Accounts are
eligible hereunder is a matter of Bank discretion in each instance, Eligible
Accounts shall not include the following Accounts (which listing may be amended
or changed in Bank’s discretion with notice to Borrower):

 

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

 

(b)           Accounts for which
the Account Debtor does not have its principal place of business in the United
States, unless agreed to by Bank in writing, in its sole discretion, on a
case-by-case basis;

 

(c)           Accounts for which
the Account Debtor is a federal, state or local government entity or any
department, agency, or instrumentality thereof except for Accounts of the
United States if the payee has assigned its payment rights to Bank and the assignment
has been acknowledged under the Assignment of Claims Act of 1940 (31 U.S.C.
3727);

 

(d)           Accounts for which
Borrower owes the Account Debtor, but only up to the amount owed (sometimes
called “contra” accounts, accounts payable, customer deposits or credit
accounts);

 

(e)           Accounts for
demonstration or promotional equipment, or in which goods are consigned, sales
guaranteed, sale or return, sale on approval, bill and hold, or other terms if
Account Debtor’s payment may be conditional;

 

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

 

(g)           Accounts in which
the Account Debtor disputes liability or makes any claim and Bank believes
there may be a basis for dispute (but only up to the disputed or claimed amount),
or if the Account Debtor is subject to an Insolvency Proceeding, or becomes
insolvent, or goes out of business;

 

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

 

(h)           Accounts for which
Bank reasonably determines collection to be doubtful or any Accounts which are
unacceptable to Bank for any reason in its reasonable discretion.

 

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

 

“Events of Default” are set forth in Article 8.

 

“Facility Amount” is Two Million Five Hundred Thousand and
No/100 Dollars ($2,500,000).

 

“Facility Fee” is defined in Section 2.2.2.

 

“Finance Charges” is defined in Section 2.2.3.

 

“Financed Receivables” are all those Eligible Accounts,
including their proceeds which Bank finances and makes an Advance, as set forth
in Section 2.1.1.  A Financed
Receivable stops being a Financed Receivable (but remains Collateral) when the
Advance made for the Financed Receivable has been fully paid.

 

“Financed Receivable Balance”  is
the total outstanding gross face amount, at any time, of any Financed
Receivable.

 

“GAAP” is generally accepted accounting principles.

 

16

 

“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.

 

“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.

 

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

 

“Invoice Transmittal” shows Eligible Accounts which Bank may
finance and, for each such Account, includes the Account Debtor’s, name,
address, invoice amount, invoice date and invoice number.

 

“Intellectual Property Collateral”  is
a defined in the IP Agreement.

 

“IP Agreement” is a certain Intellectual Property Security
Agreement executed and delivered by Borrower to Bank.

 

 “Lockbox”  is defined in Section 2.2.8.

 

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

 

“Loan Documents” are, collectively, this Agreement, any note,
or notes or guaranties executed by Borrower or Guarantor,
and any other present or future agreement between Borrower and/or for the
benefit of Bank in connection with this Agreement, all as amended, extended or
restated.

 

“Maximum Lawful Rate” is the maximum rate of
interest and the term “Maximum Lawful Amount” means the maximum amount of
interest that is permissible under applicable state of federal laws for the
type of loan evidenced by the Loan Documents.  
If the Maximum Lawful Rate is increased by statute of other governmental
action after the Closing Date, then the new Maximum Lawful Rate will be
applicable to the payments from the date of the effective date of the rate
change, unless otherwise prohibited by law.

 

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

 

“Maturity
Date” is  364 days from
the date of this Agreement.

 

“Minimum Finance Charge” is  $1,500.

 

“Obligations” are all advances, liabilities, obligations,
covenants and duties owing, arising, due or payable by Borrower to Bank now or
later under this Agreement or any other document, instrument or agreement,
account (including those acquired by assignment) primary or secondary, such as
all Advances, Finance Charges, Facility Fee, Collateral Handling Fee,  Administrative Fee, interest, fees, expenses, professional
fees and attorneys’ fees, or other amounts now or hereafter owing by Borrower
to Bank.

 

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

 

17

 

partnership agreement (or similar agreement), each of
the foregoing with all current amendments or modifications thereto.

 

“Perfection Certificate” is a certain Perfection Certificate
completed and delivered by Borrower to Bank in connection with this Agreement.

 

“Permitted Indebtedness” is:

 

(a)           Borrower’s
indebtedness to Bank under this Agreement or the Loan Documents;

 

(b)           Subordinated Debt;

 

(c)           Indebtedness to trade
creditors incurred in the ordinary course of business; and

 

(d)           Indebtedness secured
by Permitted Liens.

 

“Permitted Investments” are: (i)  marketable direct
obligations issued or unconditionally guaranteed by the United States or its
agency or any state maturing within 1 year 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., (iii) Bank’s certificates of deposit issued maturing
no more than 1 year after issue, (iv) any other investments administered
through Bank.

 

“Permitted Liens” are:

 

(a)           Liens
arising under this Agreement or other Loan Documents;

 

(b)           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, if they have no priority over any of Bank’s security
interests;

 

(c)           Purchase money Liens
securing no more than $50,000 in the aggregate amount outstanding (i) on
equipment acquired or held by Borrower incurred for financing the acquisition
of the equipment, or (ii) existing on equipment when acquired, if the
Lien is confined to the property and improvements and the proceeds of the equipment;

 

(d)           Leases or subleases
and non-exclusive licenses or sublicenses granted in the ordinary course of
Borrower’s business, if the leases, subleases, licenses and sublicenses
permit granting Bank a security interest;

 

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

 

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

 

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

 

“Quick Assets”  is, on any
date, Borrower’s unrestricted cash and Cash Equivalents on deposit with Bank,
plus Borrower’s Accounts.

 

 “Reconciliation Day”
is the last calendar day of each month.

 

“Reconciliation Period” is each calendar month.

 

18

 

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

 

“Subordinated Debt” is debt incurred by Borrower subordinated
to Borrower’s debt to Bank (pursuant to a subordination agreement entered into
between Bank, Borrower and the subordinated creditor), on terms acceptable to
Bank.

 

“Subsidiary” is any Person, corporation, partnership, limited
liability company, joint venture, or any other business entity of which more
than 50% of the voting stock or other equity interests is owned or controlled,
directly or indirectly, by the Person or one or more Affiliates of the Person.

 

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

 

19

 

IN
WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as a sealed instrument under the laws of the State of California as of the date
first above written.

 

BORROWER:

 

INTRUSION INC.,

a Delaware corporation

 

	
  By

  	
              /s/
  Michael L. Paxton

  	
   

  
	
  Name:

  	
        Michael
  L. Paxton

  	
   

  
	
  Title:

  	
          Vice
  President & CFO

  	
   

  
						

 

BANK:

 

SILICON
VALLEY BANK

 

	
  By

  	
              /s/
  Krista Hall

  	
   

  
	
  Name:

  	
       Krista
  Hall

  	
   

  
	
  Title:

  	
           Relationship
  Manager

  	
   

  
					

 

	
  Effective
  Date:

  	
           June 30,
  2008

  	
   

  

 

20

 

EXHIBIT A

 

The
Collateral consists of all of Borrower’s right, title and interest in and to
the following:

 

All
goods, equipment, inventory, contract rights or rights to payment of money,
leases, license agreements, franchise agreements, general intangibles
(including payment intangibles) accounts (including health-care receivables),
documents, instruments (including any promissory notes), chattel paper (whether
tangible or electronic), cash, deposit accounts, fixtures, letters of credit
rights (whether or not the letter of credit is evidenced by a writing),
commercial tort claims, securities, and all other investment property,
supporting obligations, and financial assets, whether now owned or hereafter
acquired, wherever located; and and any copyright rights, copyright
applications, copyright registrations and like protections in each work of
authorship and derivative work, whether published or unpublished, now owned or
later acquired; any patents, trademarks, service marks and applications
therefor; trade styles, trade names, any trade secret rights, including any
rights to unpatented inventions, know-how, operating manuals, license rights
and agreements and confidential information, now owned or hereafter acquired;
or any claims for damages by way of any past, present and future infringement
of any of the foregoing; and

 

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

 

21

 

EXHIBIT B

 

 

SILICON VALLEY BANK

SPECIALTY FINANCE DIVISION

Compliance Certificate

 

I, as authorized officer of Intrusion, Inc.  (“Borrower”) certify under the Loan and
Security Agreement (the “Agreement”) between Borrower and Silicon Valley Bank (“Bank”)
as follows (all capitalized terms used herein shall have the meaning set forth
in the Agreement):

 

Borrower represents and warrants for each Financed Receivable:

 

Each Financed Receivable is an Eligible Account.

 

Borrower is the owner with legal right to sell, transfer, assign and
encumber such Financed Receivable;

 

The correct amount is on the Invoice Transmittal and is not disputed;

 

Payment is not contingent on any obligation or contract and Borrower
has fulfilled all its obligations as of the Invoice Transmittal date;

 

Each Financed Receivable is based on an actual sale and delivery of
goods and/or services rendered, is due to Borrower,  is not past due or in default, has not been
previously sold, assigned, transferred, or pledged and is free of any liens,
security interests and encumbrances other than Permitted Liens;

 

There are no defenses, offsets, counterclaims or agreements for which
the Account Debtor may claim any deduction or discount;

 

It reasonably believes no Account Debtor is insolvent or subject to any
Insolvency Proceedings;

 

It has not filed or had filed against it Insolvency Proceedings and
does not anticipate any filing;

 

Bank has the right to endorse and/ or require Borrower to endorse all
payments received on Financed Receivables and all proceeds of Collateral.

 

No representation, warranty or other statement of Borrower in any
certificate or written statement given to Bank contains any untrue statement of
a material fact or omits to state a material fact necessary to make the
statement contained in the certificates or statement not misleading.

 

Additionally, Borrower represents and warrants as follows:

 

Borrower and each Subsidiary is duly existing and in good standing in
its state of formation and qualified and licensed to do business in, and in
good standing in, any state 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 cause a Material Adverse Change.  The execution, delivery and performance of
the Loan Documents have been duly authorized, and do not conflict with Borrower’s
organizational documents, nor constitute an event of default under any material
agreement by which Borrower is bound. 
Borrower is not in default under any agreement to which or by which it
is bound in which the default could reasonably be expected to cause a Material
Adverse Change.

 

Borrower has good title to the Collateral, free of Liens except
Permitted Liens.  All inventory is in all
material respects of good and marketable quality, free from material defects.

 

22

 

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 X,
T and U of the Federal Reserve Board of Governors).  Borrower has complied in all material
respects with the Federal Fair Labor Standards Act.  Borrower has not violated any laws,
ordinances or rules, the violation of which could reasonably be expected to
cause a Material Adverse Change.  None of
Borrower’s or any Subsidiary’s 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 Subsidiary has timely filed all required tax returns and paid, or made
adequate provision to pay, all material taxes, except those being contested in
good faith with adequate reserves under GAAP. 
Borrower and each Subsidiary has 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 its business as
currently conducted except where the failure to obtain or make such consents,
declarations, notices or filings would not reasonably be expected to cause a
Material Adverse Change.

 

Borrower is in compliance with the Financial Covenant(s) set forth
in Section 6.6 of the Agreement.

 

All representations and warranties in the Agreement are true and
correct in all material respects on this date, and the Borrower represents that
there is no existing Event of Default.

 

Sincerely,

 

 

	
  Signature 

  	
  /s/ Michael L. Paxton

  	
   

  
	
  Name:

  	
    Michael L. Paxton

  	
   

  
	
  Title:

  	
      Vice President & CFO

  	
   

  
	
  Date:

  	
      June 27, 2008

  	
   

  
						

 

23

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