Exhibit 10.1

SECURED DEBTOR-IN-POSSESSION LOAN AGREEMENT

by and among

Distributed Energy Systems Corp. and

Northern Power Systems, Inc.

as Borrowers,

Proton Energy Systems, Inc., Technology Drive, LLC, Northern Power Systems Commercial Condominium Owners Association, DESC WTE Energy LLC and NP Canada, Inc.

as Guarantors

and

Perseus Partners VII, L.P.,

as Lender

June [      ], 2008,

 

 

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Table of Contents

 

				Page
ARTICLE I  — AMOUNT AND TERMS OF CREDIT				2
Section 1.1		DIP Facility		2
Section 1.2		Closing.		6
Section 1.3		Use of Proceeds		6
ARTICLE II  — CONDITIONS TO THE LOANS				7
Section 2.1		Conditions to the Advance of First Loan		7
Section 2.2		Conditions to the Making of Subsequent Loans		8
ARTICLE III  — REPRESENTATIONS AND WARRANTIES OF THE LOAN PARTIES				10
Section 3.1		Organization and Good Standing		10
Section 3.2		Subsidiaries		10
Section 3.3		Power, Authorization and Validity.		11
Section 3.4		Noncontravention		11
Section 3.5		Consents, Etc.		11
Section 3.6		Capitalization		11
Section 3.7		SEC Documents; Financial Information		12
Section 3.8		Financial Reporting		12
Section 3.9		Liabilities		13
Section 3.10		Judgments		13
Section 3.11		Proprietary Assets		13
Section 3.12		Changes		15
Section 3.13		Compliance with Company Instruments and Laws		16
Section 3.14		Litigation		16
Section 3.15		Taxes		16
Section 3.16		Environmental and Safety Laws		17
Section 3.17		Title to and Sufficiency and Condition of Assets		17
Section 3.18		Indebtedness and Existing Liens		18
Section 3.19		Insurance		18
Section 3.20		Priority of Security Interest.		18
Section 3.21		Prepetition Obligations		18
Section 3.22		No Brokers		18
Section 3.23		Defaults		18
Section 3.24		Real Estate		18
Section 3.25		Full Disclosure		19
ARTICLE IV  — REPRESENTATIONS AND WARRANTIES BY THE LENDER				19
Section 4.1		Authority		19
Section 4.2		Noncontravention		19
ARTICLE V  — COVENANTS				20
Section 5.1		Access		20
Section 5.2		Communication with Accountants		20
Section 5.3		Security and Pledge Agreements		20
Section 5.4		Market Regulations		20

 

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				Page
Section 5.5		Reporting Requirements		20
Section 5.6		Information		20
Section 5.7		Payment of Obligations		21
Section 5.8		Insurance		21
Section 5.9		Properties		21
Section 5.10		Fundamental Changes		21
Section 5.11		Preservation of Corporate Existence		22
Section 5.12		Compliance with Law		22
Section 5.13		Termination of Covenants		23
Section 5.14		Asset Sales		23
ARTICLE VI  — EVENTS OF DEFAULT				23
Section 6.1		Events of Default		23
Section 6.2		Remedies		24
ARTICLE VII  — INDEMNIFICATION				25
Section 7.1		Indemnity		25
Section 7.2		Procedures		25
ARTICLE VIII  — MISCELLANEOUS				27
Section 8.1		Waivers and Amendments		27
Section 8.2		Governing Law		27
Section 8.3		Exclusive Jurisdiction		27
Section 8.4		Jury Waiver		27
Section 8.5		Entire Agreement		27
Section 8.6		Fees and Expenses		27
Section 8.7		Notices		28
Section 8.8		Validity		29
Section 8.9		Counterparts		29
Section 8.10		Publicity.		29
Section 8.11		Succession and Assignment		30
Section 8.12		Termination		30
Section 8.13		Further Assurances		30
Section 8.14		No Strict Construction		30

 

SCHEDULES
Schedule I		List of Defined Terms
Schedule II		List of Promissory Notes Issued
Schedule 1.1(b)		Borrowers Wiring Instructions
Schedule 1.1(e)		Lender’s Wiring Instructions
Schedule 3.18		Existing Indebtedness and Liens

 

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EXHIBITS
EXHIBIT A		Form of Notice of Borrowing
EXHIBIT B		Form of Secured Promissory Note
EXHIBIT C		Form of Postpetition Security and Pledge Agreement
EXHIBIT D		Form of Interim Order
EXHIBIT E		Form of Budget

 

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SECURED DEBTOR-IN-POSSESSION LOAN AGREEMENT

SECURED DEBTOR-IN-POSSESSION LOAN AGREEMENT (this “ Agreement ”), dated as of June [      ], 2008, by and among Distributed Energy Systems Corp., a Delaware corporation (“ DESC ”), and Northern Power Systems, Inc., a Delaware corporation (“ Northern ,” and together with DESC, the “ Borrowers ,” and each individually, a “ Borrower ”), each Borrower being a debtor and debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code (the “ Chapter 11 Cases ”); Proton Energy Systems, Inc., a Delaware corporation (“ Proton ”), Technology Drive, LLC, a Connecticut limited liability company (“ Tech LLC ”), Northern Power Systems Commercial Condominium Owners Association, a Vermont condominium association (“ NPSCCOA ”), DESC WTE Energy LLC, a Delaware limited liability company (“ DESC WTE ”), and NP Canada, Inc., a Canadian corporation (“ NP Canada ,” and together with Proton, Tech LLC, NPSCCOA and DESC WTE, the “ Guarantors ,” and each individually, a “ Guarantor ”); and Perseus Partners VII, L.P., a Delaware limited partnership (the “ Lender ”). Each Borrower and each Guarantor are sometimes referred to in this Agreement, individually as a “ Loan Party ” and, collectively, as the “ Loan Parties .” Each Borrower, each Guarantor and the Lender are sometimes referred to in this Agreement, individually, as a “ Party ” and, collectively, as the “ Parties .” Certain capitalized terms used in this Agreement are defined in Schedule I hereto.

RECITALS

A. DESC and the Lender are parties to a Securities Purchase Agreement, dated as of May 10, 2007, and amended as of March 13, 2008 (the “ SPA ”), pursuant to which, as of the date hereof, the Lender has purchased or otherwise been issued senior secured convertible promissory notes with an aggregate principal amount of $17,666,210.39 (the “ Promissory Notes ”).

B. Northern, Proton and Tech LLC are guarantors of DESC’s obligations owed to the Lender, including all principal of and interest on the Promissory Notes and all amounts payable under the SPA and the other Prepetition Loan Documents (the “ Prepetition Obligations ”) and each is a party to a Subsidiary Security and Pledge Agreement with the Lender, dated as of May 10, 2007, and amended as of March 13, 2008 (the “ Subsidiary Security Agreement ”), and a Guaranty, dated as of May 10, 2007 (the “ Prepetition Guaranty ”).

C. On June 4, 2008 (the “ Petition Date ”), each of the Borrowers filed a voluntary petition with the Bankruptcy Court commencing the Chapter 11 Cases and subsequent to such filing, each Borrower has continued in the possession of its assets and in the management of its business pursuant to Sections 1107(a) and 1108 of the Bankruptcy Code.

D. The Borrowers have requested, and the Lender has agreed to provide, a secured debtor-in-possession credit facility in the aggregate principal amount not to exceed $2,000,000 in the aggregate (the “ DIP Facility ”) to provide the Borrowers with funds to assist each Borrower in meeting its working capital requirements and other expenses set forth in the Budget, to the extent that Cash Collateral and other cash assets of the Borrowers are insufficient to pay such expenses during the pendency of the Chapter 11 Cases and prior to an Event of Default.

E. To secure all obligations under the DIP Facility, the Borrowers will provide to the Lender, pursuant to Sections 364(c) and 364(d) of the Bankruptcy Code, valid, perfected and enforceable Liens as provided for herein senior in priority to all Liens on such property other than Permitted Liens (the “ Postpetition Security Interest ”).

 

 

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F. The Guarantors have agreed to guarantee the Postpetition Debt of the Borrowers and to provide to the Lender valid, perfected and enforceable Liens as provided for herein senior in priority to all Liens on such property other than the Permitted Liens.

AGREEMENT

NOW, THEREFORE, in consideration of the foregoing, and the representations, warranties, covenants and conditions set forth below, the Parties, intending to be legally bound by this Agreement, agree as follows:

ARTICLE I — AMOUNT AND TERMS OF CREDIT

Section 1.1 DIP Facility .

(a) Commitment . On the terms and subject to the conditions hereof, the Lender agrees to make term loans (collectively, the “ Loans ,” and each individually, a “ Loan ”) to the Borrowers with the aggregate principal amount of all Loans not to exceed $2,000,000, in four equal installments of $500,000 on each of June 20, June 27, July 7 and July 11, 2008 (each, a “ Borrowing Date ”), each of which may be modified only with the express written consent of the Lender. The Lender’s commitment to make the Loans shall expire on the earlier to occur of (i) the Termination Date and (ii) the close of business on August 1, 2008.

(b) Borrowing Procedure .

(i) Upon delivery of a notice of borrowing, substantially in the form attached as Exhibit A (a “ Notice of Borrowing ”) to the Lender at least three Business Days in advance of the Borrowing Date and in reliance upon the respective representations, warranties and covenants of the Parties contained in this Agreement, and subject to satisfaction of the applicable conditions set forth in Article II of this Agreement, the Lender shall make available to the Borrowers by wire transfer of immediately available funds to the account designated by the Borrowers on Schedule 1.1(b) of this Agreement. Each such Notice of Borrowing shall be irrevocable and shall be appropriately completed to specify the aggregate principal amount of the Loan to be incurred.

(ii) The Loans shall be evidenced by the Secured Promissory Note, substantially in the form of Exhibit B (the “ Secured Promissory Note ”). Each Loan shall bear interest in accordance with the appropriate provisions of this Agreement and be governed by the terms and conditions of this Agreement and the Secured Promissory Note.

(iii) The Secured Promissory Note and each Loan evidenced by it shall be the legal, valid and binding, joint and several obligation of the Borrowers and shall be enforceable against each Borrower in accordance with its terms. If the Secured Promissory Note is mutilated, lost, stolen or destroyed, then (i) upon receipt by the Borrowers of evidence reasonably satisfactory to them of the ownership of and the mutilation, loss, theft or destruction of the Secured Promissory Note and (ii)(A) in the case of loss, theft or destruction, receipt of indemnity reasonably satisfactory to it, or (B) in the case of mutilation, upon surrender and

 

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cancellation thereof, the Borrowers shall issue a new Secured Promissory Note of the same date, maturity and denomination as the Secured Promissory Note so mutilated, lost, stolen or destroyed, together with an officer’s certificate of each Borrower certifying and warranting as to the due authorization, execution and delivery of such new Secured Promissory Note.

(c) Joint and Several Obligation . Each Borrower shall be jointly and severally liable for the repayment, in cash, of the aggregate outstanding principal amount of each Loan on its respective Maturity Date together with interest as set forth in Section 1.1(f), and all other Postpetition Debt.

(d) Prepayments . At any time, the Borrowers shall have the right to prepay the Loans and any interest and other Postpetition Debt then outstanding, as a whole and not in part, without premium or penalty; provided , however , that the Borrowers shall notify the Lender in writing of such prepayment of the Loans, not later than noon, Washington, D.C. time, two Business Days before the date of such prepayment and shall specify the date that such prepayment will be made and the amount of such prepayment. Amounts prepaid may not be reborrowed.

(e) Payments . Upon the maturity (whether by acceleration or otherwise) of any of the Postpetition Debt under this Agreement or any of the other Postpetition Loan Documents, the Lender shall be entitled to immediate payment of such Postpetition Debt without further application to or order of the Bankruptcy Court. The Borrowers shall make each payment required to be made under this Agreement prior to 5:00 p.m., Washington, D.C. time to the account designated by the Lender on Schedule 1.1(e) of this Agreement. If any payment under this Agreement is due on a day that is not a Business Day, the date for payment shall be extended to the next succeeding Business Day, and, in the case of any payment accruing interest, interest thereon shall be payable for the period of such extension. All payments shall be made in the form of immediately available funds.

(f) Interest . Each Loan shall bear interest at the rate of 16.5% per annum. If any principal of or interest on any Loan or other Postpetition Debt under this Agreement is not paid when due, whether at the Maturity Date, upon acceleration or otherwise, such overdue amount shall bear interest for the period after the due date, after as well as before judgment, at the rate of 20% per annum. All interest shall be computed on the basis of a year consisting of 365 days and shall be calculated based on the daily weighted average principal amount outstanding for such period. Interest shall be payable (and if not paid when due, shall be compounded) monthly in arrears on the last Business Day of each month after the issuance date of the Secured Promissory Note.

(g) Priority and Liens .

(i) The Lender’s Liens on the Postpetition Collateral shall be senior in priority to all other Liens on such collateral, other than Permitted Liens, subject only to the Carve-Out Expenses. The Lender and the Borrowers acknowledge and agree that the priority set forth in the preceding sentence shall be applicable irrespective of (A) anything to the contrary contained in any other document, filing or agreement related to the creation, attachment, perfection or existence of any security interest, (B) the time, place, order or method of attachment or perfection of any security interest, (C) the time or order of filing or recording of financing statements, deeds of trust or other documents, filed or recorded to perfect security interests or (D) any statutes, rules of law, or judicial interpretations to the contrary.

 

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(ii) All Postpetition Debt shall constitute an allowed administrative expense of the Borrowers in the Chapter 11 Cases. Such administrative expense shall have Superpriority, subject only to the Carve-Out Expenses and shall at all times be senior to the rights of the Borrowers, the Borrowers’ estates, and any successor trustee or estate representative in the Chapter 11 Cases or any subsequent proceeding or case under the Bankruptcy Code.

(iii) Subject to entry of the Final Order, the Borrowers irrevocably waive any right they may have to surcharge any of the Lender’s collateral including Postpetition Collateral, pursuant to Section 506(c) of the Bankruptcy Code or otherwise. Except for Permitted Liens, and subject to the Carve-Out Expenses, no other claim having a priority superior to or pari passu with that granted to the Lender hereby and by the Interim Order and the Final Order shall be granted or approved or allowed while any obligations under this Agreement remain outstanding.

(h) No Discharge; Survival of Claims . The Borrowers agree that (i) the Postpetition Debt hereunder shall not be released or extinguished by the entry of an order (A) confirming a plan of reorganization in the Chapter 11 Cases (and the Borrowers pursuant to Section 1141(d)(4) of the Bankruptcy Code, hereby waive any such discharge), (B) converting either or both of the Chapter 11 Cases to a chapter 7 case or (C) dismissing either or both of the Chapter 11 Cases and (ii) the Superpriority of administrative claims granted to the Lender pursuant to the Interim Order and the Final Order and described in Section 1.1(g)(ii) and the Liens granted to the Lender pursuant to the Interim Order and the Final Order and described in Section 1.1(g) shall not be affected in any manner by the entry of an order confirming a plan of reorganization in either or both of the Chapter 11 Cases. The terms and provisions of this Agreement and the other Postpetition Loan Documents and the Liens in favor of the Lender, granted pursuant to the Postpetition Loan Documents shall continue in full force and effect notwithstanding the entry of any such order, and such claims and liens shall maintain their priority as provided by the Postpetition Loan Documents and to the maximum extent permitted by law until all of the Postpetition Debt is indefeasibly paid in full and discharged.

(i) Waiver of any Priming Rights . Upon the Effective Date, and on behalf of themselves and their estates, and for so long as any Postpetition Debt shall be outstanding, the Borrowers hereby irrevocably waive any right, pursuant to Section 364(c) and 364(d) of the Bankruptcy Code or otherwise, to grant any Lien of equal or greater priority than the Lien securing the Postpetition Debt, or to approve a claim of equal or greater priority than the Postpetition Debt except as provided in Section 1.1(g).

(j) Guaranty . Each Guarantor hereby, jointly and severally, unconditionally and irrevocably, guarantees (the “ Guaranty ”) to the Lender, as follows:

(i) (A) the full, complete and prompt payment of all amounts which may become due and owing under this Agreement, the Secured Promissory Note, the Postpetition Security and Pledge Agreement and the other Postpetition Loan Documents; and (B) the full and timely performance by the Borrowers of each Borrower’s obligations under this Agreement and the other Postpetition Loan Documents (items (A) and (B) are referred to collectively herein as the “ Guaranteed Obligations ”).

 

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(ii) The liability of each Guarantor pursuant to this Guaranty shall be primary, absolute and unconditional in accordance with its terms and shall remain in full force and effect without regard to, and shall not be released, suspended, discharged, terminated or otherwise affected by any circumstance whatsoever including, without limitation, the following (whether or not any Guarantor consents thereto or has notice thereof):

(A) any modification, supplement, extension, waiver or any provision or amendment of any contract or agreement between any Borrower and any Guarantor, whether now existing or hereafter arising, including, without limitation, any of the Postpetition Loan Documents,

(B) any modification, release, waiver of any provision or other alteration of any of the Guaranteed Obligations,

(C) any change in the time, place or manner of payment of all or any portion of the Postpetition Debt,

(D) any invalidity or non-perfection of any security interest or lien on, or any other impairment of, any collateral securing any of Postpetition Debt,

(E) any defect, limitation or insufficiency in the powers of any Borrower or any Guarantor to execute and deliver any Postpetition Loan Document or

(F) any other circumstance which might otherwise constitute a defense available to, or a discharge of, any Guarantor.

(iii) Each Guarantor’s liability hereunder shall apply to the Guaranteed Obligations as so altered, modified, supplemented, extended, waived or amended. No invalidity, irregularity, impossibility, illegality, lack of authority or unenforceability, of all or any part of the Guaranteed Obligations shall affect, impair or be a defense to any Guarantor’s obligations hereunder which are primary obligations of such Guarantor.

(iv) This Guaranty is a continuing, absolute and unconditional guaranty and shall remain in full force and effect until all Guaranteed Obligations (including any extensions or renewals thereof or substitutions therefor) have been paid and satisfied in full. For the purposes of making payments hereunder, each Guarantor hereby waives any right to assert any setoff, counterclaim or cross-claim. This Guaranty shall continue to be effective, or be reinstated, as the case may be, if at any time payment, or any part thereof, of any of the Guaranteed Obligations must be restored or returned upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of any Guarantor or any Borrower, or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee or similar officer for, any Guarantor or any Borrower or any substantial part of it or its property, or otherwise, all as though such payments had not been made.

(v) As consideration to the Lender for entering into the Postpetition Loan Documents, each Guarantor waives notice of the accrual of the Guaranteed Obligations and notice of or proof of reliance by the Lender upon this Guaranty or acceptance of this Guaranty. Each Guarantor waives presentment, protest, demand for payment and notice of default or nonpayment to or upon the Lender with respect to the Guaranteed Obligations. Each Guarantor understands and agrees that this Guaranty shall be construed as a continuing, absolute and

 

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unconditional guaranty of payment and performance and not of collection. Without limitation, each Guarantor waives (i) notice of acceptance of this Guaranty by the Lender, and any and all notices and demands of every kind that may be required to be given by any statute, rule, law or this Guaranty, (ii) any defense arising by reason of any disability or other defense of any Borrower, other than payment, (iii) any rights of subrogation that such Guarantor may have against any Borrower until all Guaranteed Obligations have been paid and satisfied in full and (iv) diligence in collection or protection of or realization upon the Guaranteed Obligations, or any portion thereof, any other obligation hereunder, or guaranty of any of the foregoing, and any and all formalities that otherwise might be legally required to charge such Guarantor with liability hereunder. When pursuing its rights and remedies hereunder against any Guarantor, the Lender may, but shall be under no obligation to, pursue such rights and remedies as they may have against any Borrower or any other person or entity, or against any collateral security or other guaranty. Each Guarantor acknowledges that all of the waivers in this Guaranty have been made willingly, with the advice of legal counsel and with a full understanding of the legal consequences thereof.

(vi) Each Guarantor shall grant to the Lender a perfected lien on and security interest, subject to Permitted Liens, in all of its assets and properties, whether now or hereafter existing, owned or acquired, all in accordance with the terms of the Postpetition Security and Pledge Agreement. Each Guarantor shall assist the Lender with any and all filings necessary or appropriate and reasonably requested by the Lender for the perfection of the security interest granted hereunder.

Section 1.2 Closing .

(a) The closing for the first Loan shall take place on the first Borrowing Date, at 10:00 a.m. at the offices of Arnold & Porter LLP , located at 1600 Tysons Boulevard, Suite 900, McLean, Virginia, or at such other times and places as shall be mutually agreed to by the Parties.

(b) At such closing, (i) the Borrowers shall issue and deliver to the Lender the Secured Promissory Note, (ii) Lender shall pay the principal amount requested by the Borrowers for the first Loan by wire transfer of immediately available funds to the account designated by the Borrowers on Schedule 1.1(b) hereto, (iii) the Borrowers shall pay all Transaction Expenses owed to the Lender and (iv) the Parties (and, as applicable, their Affiliates) shall execute and deliver all other documentation contemplated hereby to be executed and delivered at such closing.

Section 1.3 Use of Proceeds . The net proceeds to the Borrowers from the Loans shall be used for each Borrower’s working capital needs as set forth in the Budget in accordance with each line-item of the Budget, subject to the Allowed Variance, and only to the extent that Cash Collateral and any other funds of the Debtors are insufficient to pay such expenses as they come due.

 

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ARTICLE II — CONDITIONS TO THE LOANS

Section 2.1 Conditions to the Advance of First Loan . The obligation of the Lender to make the first Loan under this Agreement is subject to the satisfaction (or waiver by the Lender), at or before the first Borrowing Date, of the following conditions:

(a) Interim Order . The Bankruptcy Court shall have entered the Interim Order, in form and substance acceptable to the Lender in its sole and absolute discretion, and such Interim Order shall be in full force and effect, shall not have been modified and shall not be subject to any appeal, and the consummation of the transactions contemplated under this Agreement and the other Postpetition Loan Documents shall not be stayed by an order of any court.

(b) No Order Preventing Consummation . No temporary restraining order, preliminary or permanent injunction or other order or decree of the Bankruptcy Court or any other Governmental Entity that has the effect of preventing the consummation of the transactions contemplated in this Agreement and the other Postpetition Loan Documents shall have been issued.

(c) Representations and Warranties Correct . The representations and warranties of each Loan Party contained in this Agreement or in any other Postpetition Loan Document are true and correct, in each case as of the date of this Agreement and as of the first Borrowing Date, with the same effect as though made as of the date of this Agreement, except that the accuracy of representations and warranties that by their terms speak only as of a specified date will be determined as of such date.

(d) Performance of Obligations . Each Loan Party shall have performed or complied with all agreements and covenants required to be performed or complied with by it under this Agreement or any other Postpetition Loan Document at or prior to the first Borrowing Date.

(e) Budget . Each Borrower and the Lender shall have agreed upon the Budget in form and substance acceptable to the Lender in its sole and absolute discretion.

(f) Officer’s Certificate . Each Loan Party shall have delivered to the Lender a certificate, in form and substance acceptable to the Lender, executed by a duly authorized officer of such Loan Party, dated as of the first Borrowing Date certifying as to the authenticity and continued effectiveness of attached copies of its Certificate of Incorporation or Certificate of Formation, as applicable, and Bylaws or limited liability company agreement, as applicable, in each case as the same may be amended from time to time, and resolutions of its board of directors, stockholders or members, as applicable, approving the transactions entered into in connection with this Agreement and the other Postpetition Loan Documents, as applicable, and authorizing specific officers or other Persons to execute and deliver this Agreement and each of the other Postpetition Loan Documents, as applicable.

(g) Definitive Transaction Documents . A Notice of Borrowing and the Secured Promissory Note shall have been issued and delivered by each Borrower to the Lender. Each Loan Party shall have delivered to the Lender each of the other Postpetition Loan Documents, as applicable, in each case duly executed by an authorized signatory of such Loan Party.

 

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(h) Security Filings . Each Loan Party shall have executed and delivered to the Lender all UCC-1 Financing Statements to be filed and such other Postpetition Security Documents necessary or appropriate as may be requested by Lender for the perfection of the Postpetition Security Interest granted by this Agreement or any other Postpetition Loan Document, as applicable.

(i) Entry of Sale Procedure Order . The Bankruptcy Court shall have entered the Sale Procedure Order. Such Sale Procedure Order shall be in full force and effect and shall not have been modified, amended, stayed, vacated, or reversed as a whole or in part without the Lender’s prior written consent and no procedure, deadline or provision in the Sale Procedure Order shall have been modified, waived or not enforced by the Borrowers without the Lender’s prior written consent.

(j) Consents and Waivers . Each Loan Party shall have received all material consents, approvals, authorizations, permits and waivers of, and delivered all notices to, third parties, including Governmental Entities and the Bankruptcy Court, necessary for each Loan Party to consummate the transactions provided for under this Agreement and the other Postpetition Loan Documents, and all such consents, approvals, authorizations, permits and waivers shall be in full force and effect.

(k) Material Adverse Effect . Since the date of DESC’s most recent audited financial statements, no event shall have occurred or be reasonably likely to occur that would reasonably be expected to have a Material Adverse Effect.

(l) No Defaults . No Event of Default shall have occurred and be continuing.

(m) Transaction Expenses . The Loan Parties shall have paid all Transaction Expenses for which they have received an invoice.

(n) Other Documents . The Lender shall have received from the Loan Parties such other documents as it may reasonably request in form and substance acceptable to the Lender, including but not limited to a certificate of good standing issued by the Secretary of State of each Loan Party’s jurisdiction of incorporation or formation, as applicable, and each jurisdiction where a Loan Party is qualified to do business, and an incumbency certificate.

Section 2.2 Conditions to the Making of Subsequent Loans . The obligation of the Lender to make any Loan following the first Borrowing Date to the Borrowers is subject to the satisfaction (or waiver by the Lender), at or before each such Borrowing Date, of the following conditions:

(a) Representations and Warranties Correct . The representations and warranties of each Loan Party contained in this Agreement or in any other Postpetition Loan Document are true and correct, in each case with the same effect as though made as of the date of this Agreement and as of the date of the applicable Borrowing Date, except that the accuracy of representations and warranties that by their terms speak as of a specified date will be determined as of such date.

(b) Performance of Obligations . Each Loan Party shall have performed or complied with all agreements and covenants required to be performed or complied with by it under this Agreement and each other Postpetition Loan Document at or prior to the date of the applicable Borrowing Date.

 

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(c) Budget . Each Borrower shall have been operating its business in accordance with the Budget, and shall not have made any expenditures in excess of any line item in the Budget without the express written consent of the Lender; provided , that the Borrowers shall be permitted (i) to the extent that an expense provided for in the Budget in one week is not paid in that week, to pay such expense in a subsequent week and (ii) to make expenditures that exceed by up to five percent the amount provided for in any line item of the Budget during any week, so long as at no time shall the aggregate of all actual disbursements for all preceding weeks of the Budget exceed by more than five percent the aggregate of all budgeted disbursements for such period (the “ Allowed Variance ”); provided , however , that (x) to the extent the Budget includes professional fees and expenses, such fees and expenses may be paid, subject to the Carve-Out Expenses, when allowed by the Bankruptcy Court, but there shall be no Allowed Variance for professional fees and expenses, (y) by no later than the second Business Day of each week, the Borrowers shall provide to the Lender a variance report reflecting, on a line-item basis, the actual cash disbursements for the preceding week and the percentage variance of such actual disbursements from those reflected in the Budget for that period, and (z) no variance from the Budget shall increase the amounts that the Borrowers are authorized to borrow under this DIP Facility.

(d) Orders Entered by the Bankruptcy Court . The Sale Procedure Order shall be in full force and effect. Such Sale Procedure Order shall not have been modified, amended, stayed, vacated, or reversed as a whole or in part without the Lender’s prior written consent. No procedure, deadline or provision in the Sale Procedure Order shall have been modified, waived or not enforced by the Borrowers without the Lender’s prior written consent. Each Borrower shall have fully and timely complied with each and every one of its obligations thereunder. The Final Order shall have been entered and shall be in full force and effect and shall not have been amended, vacated, modified, stayed or reversed as a whole or in part, and each Borrower shall have fully and timely complied with each and every one of its obligations and with every deadline thereunder.

(e) Receipt of a Notice of Borrowing . A Notice of Borrowing shall have been issued and delivered by each Borrower, as appropriate, to the Lender.

(f) Effectiveness of Other Postpetition Loan Documents; No Default . Each of the Postpetition Loan Documents shall continue to be in full force and effect and no Event of Default (or event or circumstance that with notice or the lapse of time, or both, would constitute an Event of Default) shall have occurred and be continuing as of the applicable Borrowing Date, or would result from such Loan or from the application of the proceeds thereof.

(g) Consents and Waivers . Each Borrower shall have received all material consents, approvals, authorizations, permits and waivers of, and delivered all notices to, third parties, including Governmental Entities and the Bankruptcy Court, necessary for each Loan Party to consummate the transactions provided for under this Agreement and the other Postpetition Loan Documents, and all such consents, approvals, authorizations, permits and waivers shall be in full force and effect.

 

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(h) Material Adverse Effect . Since the Effective Date, no event shall have occurred that has had or would reasonably be expected to have a Material Adverse Effect.

(i) Transaction Expenses . The Loan Parties shall have paid all Transaction Expenses for which they have received an invoice.

(j) No Order Preventing Consummation . No temporary restraining order, preliminary or permanent injunction or other order or decree of the Bankruptcy Court or any other Governmental Entity that has the effect of preventing the consummation of the transactions contemplated in this Agreement and the other Postpetition Loan Documents shall have been issued.

(k) Other Documents . The Lender shall have received from each Loan Party such other documents as they may reasonably request in form and substance acceptable to the Lender.

ARTICLE III — REPRESENTATIONS AND WARRANTIES OF THE LOAN PARTIES

Each Loan Party represents and warrants to the Lender that, except as expressly disclosed in DESC’s most recent annual report on Form 10-K as filed with the SEC, excluding any exhibits thereto, or DESC’s reports on Form 10-Q as filed with the SEC subsequent to such annual report on Form 10-K, excluding any exhibits thereto, the statements contained in the following paragraphs of this Article III, as applicable to such Loan Party, are all true and correct.

Section 3.1 Organization and Good Standing . Each Loan Party and each of its Subsidiaries and Owned Entities (i) is a corporation or limited liability company duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and (ii) pursuant to Sections 1107 and 1108 of the Bankruptcy Code and the orders of the Bankruptcy Court, has all requisite corporate or limited liability company, as applicable, power and authority to carry on its business as now conducted and proposed to be conducted. Section 3.1 of the Disclosure Schedule lists all of the jurisdictions in which such Loan Party, any Subsidiary and any Owned Entity is duly qualified to conduct business as a foreign corporation or limited liability company, as applicable, and is in good standing as a foreign corporation or limited liability company, as applicable. There are no other jurisdictions where the character of the activities of any Loan Party, any Subsidiary or any Owned Entity, or the location of the properties and assets owned or leased by the foregoing requires such qualification, except where the failure to so qualify or be in good standing is not reasonably likely to have a Material Adverse Effect.

Section 3.2 Subsidiaries . Section 3.2 of the Disclosure Schedule sets forth a complete and accurate list of all Subsidiaries and Owned Entities, together with their respective jurisdictions of formation or organization, and the authorized and outstanding capital stock or other ownership interests of each such Subsidiary or Owned Entity, by class and number and percentage of each class owned by any Borrower, any Subsidiary or Owned Entity or any other Person. Except as set forth in Section 3.2 of the Disclosure Schedule, no Borrower or any of its Subsidiaries or Owned Entities owns, of record or beneficially, any shares of capital stock or other ownership interest in any other corporation, partnership, limited liability company or other Person.

 

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Section 3.3 Power, Authorization and Validity .

(a) Each Loan Party has all requisite legal and corporate power to enter into, execute, deliver and perform its obligations under this Agreement and the other Postpetition Loan Documents to which it is a party.

(b) All corporate or limited liability company, as applicable, and legal action on the part of each Loan Party, its officers, directors, managers, stockholders and members, as applicable, necessary for the execution, delivery and performance by such Loan Party of this Agreement and each other Postpetition Loan Document to which such Loan Party is a party, including without limitation the issuance of the Secured Promissory Note in accordance with the terms of this Agreement, has been taken.

(c) Assuming due execution and delivery by the Lender, this Agreement is, and upon their execution and delivery, each of the Postpetition Loan Documents to which any Loan Party is a party will be, subject to entry of the Initial Order, valid and binding obligations, enforceable in accordance with their terms, of such Loan Party.

Section 3.4 Noncontravention . None of the execution, delivery and performance of and compliance with this Agreement and the other Postpetition Loan Documents will result in or constitute any breach, default or violation of (i) the Certificate of Incorporation or Bylaws, or Certificate of Formation or limited liability company agreement, as applicable, of any Loan Party or the comparable organizational documents of any Subsidiary or Owned Entity, as in effect at that time, (ii) any agreement, contract, lease, license, instrument or commitment (oral or written) to which any Loan Party, any of its Subsidiaries or any Owned Entity is a party or is bound or (iii) any Law, rule, regulation, statute or order applicable to any Loan Party, its Subsidiaries, its Owned Entities, or their respective properties, or result in the creation of any Lien upon any of the properties or assets of any Loan Party or its Subsidiaries or Owned Entities (other than pursuant to the Postpetition Loan Documents).

Section 3.5 Consents, Etc . No consent, approval, order or authorization of, or designation, registration, declaration or filing with, any federal, state or local or other Governmental Entity except for entry of the Interim Order and any filings required in connection with the Postpetition Security Documents, or other Person on the part of any Loan Party or any Subsidiary is required in connection with the valid execution, delivery and performance of this Agreement and the other Postpetition Loan Documents. Upon entry of the Interim Order, the Lender (and its successors and assigns) shall have a valid, perfected Postpetition Security Interest in and to the Postpetition Collateral as provided for herein, subject only to the Permitted Liens.

Section 3.6 Capitalization .

(a) Section 3.6 of the Disclosure Schedule sets forth the authorized capitalization of each Loan Party as of the Effective Date, and the issued and outstanding capitalization of each Loan Party as of May 12, 2008, including all outstanding warrants and options. There have been no changes in the issued and outstanding capitalization of any Loan Party since May 12, 2008. All of the issued and outstanding shares of capital stock have been duly authorized and validly issued, and are fully paid and non assessable and have been offered, issued, sold and delivered by each Loan Party in compliance with all applicable federal and state securities laws.

 

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(b) Other than (i) shares reserved for issuance under any Loan Party’s equity incentive plans and (ii) shares that may be issued pursuant to the Prepetition Loan Documents, there are no outstanding options, warrants, rights (including conversion or preemptive rights and rights of first refusal), proxy or stockholder agreements, or arrangements or agreements of any kind for the purchase or acquisition from any Loan Party or any of its Subsidiaries of its shares of capital stock or any securities convertible into or ultimately exchangeable or exercisable for any shares of their capital stock. The consummation of any transaction pursuant to this Agreement will not result in a change in the exercise or conversion price or number of any securities of any Loan Party outstanding pursuant to anti-dilution or other similar provisions binding upon such Loan Party and contained in or affecting any such securities. No Loan Party or any of its Subsidiaries is obligated in any manner to issue any shares of its capital stock or any other securities.

(c) The rights, preferences, privileges and restrictions of the Common Shares are as stated in each Loan Party’s Certificate of Incorporation, Certificate of Formation, or other comparable organization document and as provided under applicable Law.

Section 3.7 SEC Documents; Financial Information . DESC has made all filings with the SEC required under the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”), or the Securities Act of 1933, as amended (the “ Securities Act ”), on a timely basis. DESC has previously made available to the Lender complete and accurate copies, as amended or supplemented through the date hereof, of the following forms filed with the SEC: (i) each Form 10-K report under the Exchange Act beginning with the fiscal year ended December 31, 2006 through the Effective Date, (ii) each Form 8-K report filed by DESC beginning with the fiscal year 2006 through the Effective Date, and (iii) each Form 10-Q report under the Exchange Act filed by DESC beginning with the fiscal year 2006 through the Effective Date, with the Effective Date in each case to include the effective date of the latest amendment to this Agreement (such reports are collectively referred to herein as the “ Company Reports ”). As of their respective dates, the Company Reports did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The audited financial statements and unaudited interim financial statements of DESC included in the Company Reports and the unaudited interim financial statements of DESC as of and for the quarter ended March 31, 2008 included in the report on Form 10-Q for the first quarter of 2008 (the “ March 31, 2008 Financial Statements ”), (i) comply as to form in all material respects with applicable accounting requirements and published rules and regulations of the SEC with respect thereto, (ii) were prepared in accordance with U.S. generally accepted accounting principles (“ GAAP ”) applied on a consistent basis throughout the periods covered thereby (except as may be indicated therein or in the notes thereto, and in the case of quarterly financial statements, as permitted by Form 10-Q under the Exchange Act), and (iii) fairly present in all material respects (subject, in the case of the unaudited interim financial statements, to normal, year-end audit adjustments, none of which were material) the consolidated financial condition, results of operations and cash flows of DESC as of the respective dates thereof and for the periods referred to therein.

Section 3.8 Financial Reporting . Each Loan Party and each of its Subsidiaries maintains accurate books and records reflecting its assets and liabilities and maintains proper and adequate internal accounting controls which provide reasonable assurance that (i) transactions are executed with management’s authorization, (ii) transactions are recorded as necessary to

 

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permit preparation of the consolidated financial statements of DESC included in the Company Reports and the March 31, 2008 Financial Statements, and to maintain accountability for DESC’s consolidated assets, (iii) access to each Loan Party’s assets is permitted only in accordance with management’s authorization, (iv) the reporting of each Loan Party’s assets is compared with existing assets as necessary to permit preparation of the consolidated financial statements of DESC in accordance with GAAP and to maintain accountability for each Loan Party’s consolidated assets, (v) accounts, notes and other receivables and inventory are recorded accurately, and procedures each Loan Party believes in good faith to be adequate under the circumstances are implemented to effect the collection thereof on a timely basis and (vi) there are procedures in place adequate to prevent, or timely detect, unauthorized acquisition, use or disposition of each Loan Party’s assets. As of the date of this Agreement, (x) there are no deficiencies in the design or operation of a Loan Party’s internal controls over financial reporting which could adversely affect in any material respect such Loan Party’s ability to record, process, summarize and report financial data or material weaknesses in internal controls over financial reporting and (y) to knowledge of any Loan Party, there has been no fraud relating to any Loan Party or any of its Subsidiaries, whether or not material, that involved management or other employees, whether current or former, of any Loan Party or any of its Subsidiaries who have, or had, a significant role in such Loan Party’s internal controls over financial reporting.

Section 3.9 Liabilities . Except as reflected in the balance sheet included in DESC’s most recent set of financial statements filed with the SEC (the “ Latest Balance Sheet ”), the Loan Parties, their Subsidiaries and their Owned Entities, taken together as a whole, do not have any Indebtedness, obligation or liability (contingent or otherwise) that, either alone or when combined with all similar obligations or liabilities, would be material to them, and to the knowledge of any Borrower, there does not exist a set of circumstances that would reasonably be expected to result in any such material Indebtedness, obligation or liability.

Section 3.10 Judgments . The performance of any action by the Loan Parties required by or provided for under this Agreement or any other Postpetition Loan Document is not restrained or enjoined by any order of the Bankruptcy Court or by any Governmental Entity (either temporarily, preliminarily or permanently).

Section 3.11 Proprietary Assets .

(a) Each Loan Party and each Subsidiary and Owned Entity (i) owns or has sufficient rights to all Proprietary Assets used in or necessary for its business as currently or proposed to be conducted, free and clear of all Liens, other than Permitted Liens; and (ii) has taken reasonable and customary measures and precautions necessary to protect and maintain the confidentiality and secrecy of its Proprietary Assets (except the Proprietary Assets the value of which would be unimpaired by public disclosure) and otherwise to maintain and protect the value of its Proprietary Assets. All necessary registration, maintenance and renewal fees previously due in connection with any registered Proprietary Assets have been paid and all necessary documents and certificates previously due in connection with such Proprietary Assets have been filed with the relevant patent, copyright, trademark or other authorities in the United States or foreign jurisdictions, as the case may be, for the purposes of maintaining such Proprietary Assets.

(b) Except where such infringement, misappropriation or unlawful use has not had or would not reasonably be expected to have, individually or in the aggregate, a Material

 

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Adverse Effect, the operation of the business of each Loan Party and each of its Subsidiaries or Owned Entities (i) has not infringed or misappropriated, does not infringe or misappropriate, and will not infringe or misappropriate as a result of the execution, delivery and performance of this Agreement and the other Postpetition Loan Documents, any Proprietary Asset of any Person, (ii) does not violate any right of any Person (including any right to privacy or publicity), and (iii) does not materially breach any contract related to any Proprietary Asset. No Loan Party or any Subsidiary or Owned Entity has received notice from any Person claiming that such operation or any act, any product, technology or service (including products, technology or services currently under development by any Loan Party, any Subsidiary or any Owned Entity) or Proprietary Assets infringes or misappropriates any rights related to or arising out of Proprietary Assets of any Person. No Loan Party or any Subsidiary or Owned Entity has received notice to the effect that Proprietary Assets held by any of them are invalid or not subsisting. No other Person is infringing, misappropriating or making any unlawful use of any Proprietary Asset used in or pertaining to the business of any Loan Party or any Subsidiary or Owned Entity.

(c) The Proprietary Assets used in or pertaining to the business of each Loan Party and its Subsidiaries, and the Proprietary Assets licensed to the Owned Entities, when taken together, are sufficient to enable such Loan Party and each of its Subsidiaries to conduct its business in the manner in which such business has been and is being conducted free from liabilities or valid claims of infringement or misappropriation by third parties. No Loan Party or any of its Subsidiaries or Owned Entities has licensed any of its Proprietary Assets to any Person on an exclusive basis and no Loan Party or any Subsidiary or Owned Entity has entered into any covenant not to compete or contract limiting its ability to sell its products in any market or geographical area or with any Person.

(d) All current and former employees of each Loan Party and its Subsidiaries providing technical services, or otherwise having access to confidential information, relating to any Loan Party’s Proprietary Assets have executed and delivered to such Loan Party or such Subsidiary an agreement (containing no material exceptions to or exclusions from the scope of its coverage relevant to such Loan Party’s business) that is substantially the same as to the forms of standard employee agreement previously delivered to the Lender, and all current and former consultants and independent contractors to each Loan Party or its Subsidiaries providing technical services relating to such Loan Party’s or its Subsidiaries’ Proprietary Assets have executed and delivered to such Loan Party or such Subsidiary, an agreement (containing no material exceptions to or exclusions from the scope of its coverage relevant to such Loan Party’s business), the material provisions of which are in substance as protective to such Loan Party as the terms of the forms of standard employee agreement previously delivered to the Lender.

(e) To the extent that any Proprietary Asset has been developed or created independently or jointly by any Person other than any Loan Party or any Subsidiary or Owned Entity for which any Loan Party or any Subsidiary or Owned Entity has directly or indirectly, provided consideration for such development or creation, each Loan Party or the relevant Subsidiary or Owned Entity has a written agreement with such Person with respect thereto, and the relevant Loan Party or relevant Subsidiary or Owned Entity thereby has obtained ownership of, and is the exclusive owner of, all such Proprietary Assets therein by operation of law or by valid assignment, and has required the waiver of all non-assignable rights.

 

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(f) Other than standard Proceedings involving applications pending before the U.S. Patent and Trademark office or foreign patent offices, no Proprietary Assets, product, technology, or service of any Loan Party or any Subsidiary or Owned Entity is subject to any Proceeding or outstanding decree, order, judgment or settlement agreement or stipulation that restricts in any manner the use, transfer or licensing thereof by any Loan Party or any Subsidiary or Owned Entity, or may affect the validity, use or enforceability of such Proprietary Asset, product technology or service.

(g) Section 3.11(g) of the Disclosure Schedule lists separately, by entity, all material Proprietary Assets owned by, or filed in the name of, each Loan Party, each of its Subsidiaries and each of its Owned Entities that have been registered in or with, issued by, or for which an application for registration has been filed in or with, a federal, state or other governmental office or agency of appropriate jurisdiction.

Section 3.12 Changes . Since the date of DESC’s most recent audited financial statements, there has not occurred or is reasonably be expected to occur any of the following:

(a) Any Material Adverse Effect;

(b) Any material change, except in the ordinary course of business, in the contingent obligations of any Loan Party, its Subsidiaries or any Owned Entity by way of guaranty, endorsement, indemnity, warranty or other contractual arrangement;

(c) Any waiver by any Loan Party, any Subsidiary or any Owned Entity of a material right or of a material debt owed to it;

(d) Any debt, obligation or liability incurred, assumed or guaranteed by any Loan Party, any Subsidiary or any Owned Entity, except for immaterial amounts and for current liabilities incurred in the ordinary course of business;

(e) Any sale, assignment or transfer of any Proprietary Asset, other than the nonexclusive license by any Loan Party, any Subsidiary or any Owned Entity of such Proprietary Assets to customers, suppliers or contract manufacturers in the ordinary course of business consistent with past practices;

(f) Any change in any Material Contract to whic