Exhibit 10.1
LOAN AND SECURITY
AGREEMENT
THIS LOAN AND SECURITY
AGREEMENT (this “ Agreement ”) dated
as of October 11, 2007 (the “ Effective Date ”)
among (a) SILICON VALLEY BANK , a California corporation
with a loan production office located at One Newton Executive Park,
Suite 200, 2221 Washington Street, Newton, Massachusetts 02462
(“ Bank ”), and (b) NETWORK ENGINES, INC.
, a Delaware corporation (“ Network ”), and
ALLIANCE SYSTEMS, INC. , a Texas corporation (“
Alliance ”) (Network and Alliance are individually and
collectively, jointly and severally, “ Borrower
”), provides the terms on which Bank shall lend to Borrower
and Borrower shall repay Bank. The parties agree as follows:
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ACCOUNTING AND OTHER TERMS
Accounting terms not defined in this Agreement
shall be construed following GAAP. Calculations and determinations
must be made following GAAP. Capitalized terms not otherwise
defined in this Agreement shall have the meanings set forth in
Section 13. All other terms contained in this Agreement, unless
otherwise indicated, shall have the meaning provided by the Code to
the extent such terms are defined therein.
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LOAN AND TERMS OF PAYMENT
2.1
Promise to Pay . Borrower hereby unconditionally promises to
pay Bank the outstanding principal amount of all Credit Extensions
and accrued and unpaid interest thereon as and when due in
accordance with this Agreement.
2.1.1
Revolving Advances .
(a)
Availability . Subject to the terms and conditions of this
Agreement, Bank shall make Advances not exceeding the Availability
Amount. Amounts borrowed under the Revolving Line may be repaid
and, prior to the Revolving Line Maturity Date, reborrowed, subject
to the applicable terms and conditions precedent herein.
(b)
Termination; Repayment . The Revolving Line terminates on
the Revolving Line Maturity Date, when the principal amount of all
Advances, the unpaid interest thereon, and all other Obligations
relating to the Revolving Line shall be immediately due and
payable.
2.1.2
Letters of Credit Sublimit .
(a)
As part of the Revolving Line, Bank shall issue or have issued
Letters of Credit for Borrower’s account. The face amount of
outstanding Letters of Credit (including drawn but unreimbursed
Letters of Credit and any Letter of Credit Reserve) may not exceed
Fifteen Million Dollars ($15,000,000.00), inclusive of Credit
Extensions relating to Sections 2.1.3 and 2.1.4. Such aggregate
amounts utilized hereunder shall at all times reduce the amount
otherwise available for Advances under the Revolving Line. If, on
the Revolving Line Maturity Date, there are any outstanding Letters
of Credit, then on such date Borrower shall provide to Bank cash
collateral in an amount equal to 105% of the face amount of all
such Letters of Credit plus all interest, fees, and costs due or to
become due in connection therewith (as estimated by Bank in its
good faith business judgment), to secure all of the Obligations
relating to said Letters of Credit. All Letters of Credit shall be
in form and substance acceptable to Bank in its sole discretion and
shall be subject to the terms and conditions of Bank’s
standard Application and Letter of Credit Agreement (the “
Letter of Credit Application ”). Borrower agrees to
execute any further documentation in connection with the Letters of
Credit as Bank may reasonably request. Borrower further agrees to
be bound by the regulations and interpretations of the issuer of
any Letters of Credit guarantied by Bank and opened for
Borrower’s account or by Bank’s interpretations of any
Letter of Credit issued by Bank for Borrower’s account, and
Borrower understands and agrees that Bank shall not be liable for
any error, negligence, or mistake, whether of omission or
commission, in following Borrower’s instructions or those
contained in the Letters of Credit or any modifications,
amendments, or supplements thereto, except for the Bank’s
gross negligence or willful misconduct.
(b)
The obligation of Borrower to immediately reimburse Bank for
drawings made under Letters of Credit shall be absolute,
unconditional, and irrevocable, and shall be performed strictly in
accordance with the terms of this Agreement, such Letters of
Credit, and the Letter of Credit Application.
(c)
Borrower may request that Bank issue a Letter of Credit payable in
a Foreign Currency. If a demand for payment is made under any such
Letter of Credit, Bank shall treat such demand as an Advance to
Borrower of the equivalent of the amount thereof (plus reasonable
fees and charges in connection therewith such as wire, cable, SWIFT
or similar charges) in Dollars at the then-prevailing rate of
exchange in San Francisco, California, for sales of the Foreign
Currency for transfer to the country issuing such Foreign
Currency.
(d)
To guard against fluctuations in currency exchange rates, upon the
issuance of any Letter of Credit payable in a Foreign Currency,
Bank shall create a reserve (the “ Letter of Credit
Reserve ”) under the Revolving Line in an amount equal to
ten percent (10%) of the face amount of such Letter of Credit. The
amount of the Letter of Credit Reserve may be adjusted by Bank from
time to time to account for fluctuations in the exchange rate. The
availability of funds under the Revolving Line shall be reduced by
the amount of such Letter of Credit Reserve for as long as such
Letter of Credit remains outstanding.
2.1.3
Foreign Exchange Sublimit . As part of the Revolving Line,
Borrower may enter into foreign exchange contracts with Bank under
which Borrower commits to purchase from or sell to Bank a specific
amount of Foreign Currency (each, a “ FX Forward
Contract ”) on a specified date (the “
Settlement Date ”). FX Forward Contracts shall have a
Settlement Date of at least one (1) FX Business Day after the
contract date and shall be subject to a reserve of ten percent
(10%) of each outstanding FX Forward Contract in a maximum
aggregate amount equal to One Million Five Hundred Thousand Dollars
($1,500,000.00) (the “ FX Reserve ”), inclusive
of Credit Extension relating to Sections 2.1.1, 2.1.2 and 2.1.4.
The aggregate amount of FX Forward Contracts at any one time may
not exceed ten (10) times the amount of the FX Reserve and the
aggregate amount of FX Forward Contracts may not exceed Fifteen
Million Dollars ($15,000,000.00), inclusive of Credit Extensions
relating to Sections 2.1.1, 2.1.2 and 2.1.4. The amount otherwise
available for Credit Extensions under the Revolving Line shall be
reduced by an amount equal to ten percent (10%) of each outstanding
FX Forward Contract. Any amounts needed to fully reimburse Bank
will be treated as Advances under the Revolving Line and will
accrue interest at the interest rate applicable to Advances.
2.1.4
Cash Management Services Sublimit . Borrower may use up to
Fifteen Million Dollars ($15,000,000.00), inclusive of Credit
Extensions relating to Sections 2.1.1, 2.1.2 and 2.1.3 of the
Revolving Line for Bank’s cash management services which may
include merchant services, direct deposit of payroll, business
credit card, and check cashing services identified in Bank’s
various cash management services agreements (collectively, the
“ Cash Management Services ”). The dollar amount
of any Cash Management Services provided under this sublimit will
reduce the amount otherwise available under the Revolving Line. Any
amounts used or reserved by Borrower for any Cash Management
Services will reduce the amount otherwise available for Credit
Extensions under the Revolving Line. Any amounts Bank pays on
behalf of Borrower for any Cash Management Services will be treated
as Advances under the Revolving Line and will accrue interest at
the interest rate applicable to Advances.
2.2
Overadvances . If, at any time, the Credit Extensions under
Sections 2.1.1, 2.1.2, 2.1.3 and 2.1.4 exceed the lesser of either
(a) the Revolving Line or (b) the Borrowing Base, Borrower shall
immediately pay to Bank in cash such excess.
2.3
Payment of Interest on the Credit Extensions .
(a)
Interest Rate . Subject to Section 2.3(b), the principal
amount outstanding under the Revolving Line shall accrue interest
at a floating per annum rate equal to one quarter of one percentage
point (0.25%) below the Prime Rate, which interest shall be payable
monthly in accordance with Section 2.3(f) below.
(b)
Default Rate . Immediately upon the occurrence and during
the continuance of an Event of Default, Obligations shall bear
interest at a rate per annum which is four percentage points above
the rate effective immediately before the Event of Default (the
“Default Rate”). Payment or acceptance of the increased
interest rate provided in this Section 2.3(b) is not a permitted
alternative to timely payment and shall not constitute a waiver of
any Event of Default or otherwise prejudice or limit any rights or
remedies of Bank.
(c)
Adjustment to Interest Rate . Changes to the interest rate
of any Credit Extension 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.
(d)
360-Day Year . Interest shall be computed on the basis of a
360-day year for the actual number of days elapsed.
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(e)
Debit of Accounts . Bank may debit any of Borrower’s
deposit accounts, including the Designated Deposit Account, for
principal and interest payments or any other amounts Borrower owes
Bank when due. These debits shall not constitute a set-off.
(f)
Payments . Unless otherwise provided, interest is payable
monthly on the first (1 st ) calendar day of each month.
Payments of principal and/or interest received after 12:00 noon
Eastern time are considered received at the opening of business on
the next Business Day. When a payment is due on a day that is not a
Business Day, the payment is due the next Business Day and
additional fees or interest, as applicable, shall continue to
accrue.
2.4
Early Termination . This Agreement may be terminated prior to
the Revolving Line Maturity Date as follows: (i) by Borrower,
effective three (3) Business Days after written notice of
termination is given to Bank; or (ii) by Bank at any time after the
occurrence of an Event of Default, without notice, effective
immediately. If this Agreement is terminated on or prior to the
date that is one (1) year from the Effective Date (A) by Bank in
accordance with clause (ii) in the foregoing sentence, or (B) by
Borrower for any reason, Borrower shall pay to Bank a termination
fee in an amount equal to Seventy-Five Thousand Dollars
($75,000.00) (the “Early Termination Fee”). The Early
Termination Fee shall be due and payable on the effective date of
such termination and thereafter shall bear interest at a rate equal
to the highest rate applicable to any of the Obligations.
2.5
Fees . Borrower shall pay to Bank:
(a)
Commitment Fee . A fully earned, non-refundable commitment
fee of Eighteen Thousand Seven Hundred Fifty Dollars ($18,750.00),
on the Effective Date;
(b)
Letter of Credit Fee . Bank’s customary fees and
expenses for the issuance or renewal of Letters of Credit, upon the
issuance, each anniversary of the issuance, and the renewal of such
Letter of Credit;
(c)
Early Termination Fee . The Early Termination Fee, when due
hereunder;
(d)
Unused Revolving Line Facility Fee . A fee (the “
Unused Revolving Line Facility Fee ”), payable
quarterly , in arrears, on a calendar year basis, in an amount
equal to one quarter of one percent (0.25%) per annum of the
average unused portion of the Revolving Line during such quarter,
as determined by Bank. The unused portion of the Revolving Line,
for the purposes of this calculation, shall include average amounts
reserved under the Cash Management Services Sublimit for products
provided and under the Foreign Exchange Sublimit for FX Forward
Contracts during such quarter. Borrower shall not be entitled to
any credit, rebate or repayment of any Unused Revolving Line
Facility Fee previously earned by Bank pursuant to this Section
notwithstanding any termination of the Agreement or the suspension
or termination of Bank’s obligation to make loans and
advances hereunder; and
(e)
Bank Expenses . All Bank Expenses (including reasonable
attorneys’ fees and expenses, plus expenses, for
documentation and negotiation of this Agreement) incurred through
and after the Effective Date, when due.
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CONDITIONS OF LOANS
3.1
Conditions Precedent to Initial Credit Extension . Bank’s
obligation to make the initial Credit Extension 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:
(a)
Duly executed original signatures to the Loan Documents to which it
is a party;
(b)
Network shall have delivered its Operating Documents and a good
standing certificate of Network certified by the Secretary of State
of the applicable state of formation as of a date no earlier than
thirty (30) days prior to the Effective Date;
(c)
Alliance shall have delivered its Operating Documents;
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(d)
Secretary’s Certificates attesting to the duly executed
Borrowing Resolutions for Borrower;
(e)
Bank shall have received certified copies, dated as of a recent
date, of financing statement searches, as Bank shall request,
accompanied by written evidence (including any Code termination
statements) that the Liens indicated in any such financing
statements either constitute Permitted Liens or have been or, in
connection with the initial Credit Extension, will be terminated or
released;
(f)
Borrower shall have delivered a legal opinion of Borrower’s
counsel dated as of the Effective Date together with the duly
executed original signatures thereto;
(g)
Borrower shall have delivered evidence satisfactory to Bank that
the insurance policies required by Section 6.5 hereof are in full
force and effect, together with appropriate evidence showing loss
payable and/or additional insured clauses or endorsements in favor
of; and
(h)
Borrower shall have paid the fees and Bank Expenses then due as
specified in Section 2.5 hereof.
3.2
Conditions Precedent to all Credit Extensions . Bank’s
obligations to make each Credit Extension, including the initial
Credit Extension, is subject to the following:
(a)
except as otherwise provided in Section 3.4, timely receipt of an
executed Payment/Advance Form;
(b)
the representations and warranties in Section 5 shall be true in
all material respects on the date of the Payment/Advance Form and
on the Funding Date of each Credit Extension; provided, however,
that such materiality qualifier shall not be applicable to any
representations and warranties that already are qualified or
modified by materiality in the text thereof; and provided, further
that those representations and warranties expressly referring to a
specific date shall be true, accurate and complete in all material
respects as of such date, and no Default or Event of Default shall
have occurred and be continuing or result from the Credit
Extension. Each Credit Extension is Borrower’s representation
and warranty on that date that the representations and warranties
in Section 5 remain true in all material respects; provided,
however, that such materiality qualifier shall not be applicable to
any representations and warranties that already are qualified or
modified by materiality in the text thereof; and provided, further
that those representations and warranties expressly referring to a
specific date shall be true, accurate and complete in all material
respects as of such date; and
(c)
in Bank’s sole discretion, there has not been any material
impairment in the general affairs, management, results of
operation, financial condition or the prospect of repayment of the
Obligations, nor has there been any material adverse deviation by
Borrower from the most recent business plan of Borrower presented
to and accepted by Bank.
3.3
Covenant to Deliver .
Borrower agrees to deliver to Bank each item
required to be delivered to Bank under this Agreement as a
condition to any Credit Extension. Borrower expressly agrees that
the extension of a Credit Extension prior to the receipt by Bank of
any such item shall not constitute a waiver by Bank of
Borrower’s obligation to deliver such item, and any such
extension in the absence of a required item shall be in
Bank’s sole discretion.
3.4
Procedures for Borrowing . Subject to the prior satisfaction of
all other applicable conditions to the making of an Advance set
forth in this Agreement, to obtain an Advance (other than Advances
under Sections 2.1.2 or 2.1.4), Borrower shall notify Bank (which
notice shall be irrevocable) by electronic mail, facsimile, or
telephone by 12:00 noon Eastern time on the Funding Date of the
Advance. Together with any such electronic or facsimile
notification, Borrower shall deliver to Bank by electronic mail or
facsimile a completed Payment/Advance Form executed by a
Responsible Officer or his or her designee. Bank may rely on any
telephone notice given by a person whom Bank reasonably believes is
a Responsible Officer or designee. Bank shall credit Advances to
the Designated Deposit Account. Bank may make Advances under this
Agreement based on instructions from a Responsible Officer or his
or her designee or without instructions if the Advances are
necessary to meet Obligations which have become due.
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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, a continuing security interest in, and pledges to
Bank, the Collateral, wherever located, whether now owned or
hereafter acquired or arising, and all proceeds and products
thereof. Borrower represents, warrants, and covenants that the
security interest granted herein is and shall at all times continue
to be a first priority perfected security interest in the
Collateral (subject only to Permitted Liens that may have superior
priority to Bank’s Lien under this Agreement). If Borrower
shall acquire a commercial tort claim with a value in excess of One
Hundred Thousand Dollars ($100,000.00), Borrower shall promptly
notify Bank in a writing signed by Borrower of the general details
thereof and, upon request of Bank, 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 reasonably satisfactory to Bank.
If
this Agreement is terminated, Bank’s Lien in the Collateral
shall continue until the Obligations (other than inchoate indemnity
obligations) are repaid in full in cash. Upon payment in full in
cash of the Obligations and at such time as Bank’s obligation
to make Credit Extensions has terminated, Bank shall, at
Borrower’s sole cost and expense, release its Liens in the
Collateral and all rights therein shall revert to
Borrower.
4.2
Authorization to File Financing Statements . Borrower hereby
authorizes Bank to file financing statements, without notice to
Borrower, with all appropriate jurisdictions to perfect or protect
Bank’s interest or rights hereunder, including a notice that
any disposition of the Collateral, by either Borrower or any other
Person, shall be deemed to violate the rights of Bank under the
Code.
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REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as
follows:
5.1
Due Organization and Authorization . Borrower and each of its
Subsidiaries, if any, are duly existing and in good standing, as
Registered Organizations in their respective jurisdictions of
formation and are qualified and licensed to do business and are in
good standing in any jurisdiction in which the conduct of their
business or their ownership of property requires that they be
qualified except where the failure to do so could not reasonably be
expected to have a material adverse effect on Borrower’s
business. In connection with this Agreement, Borrower has delivered
to Bank a completed perfection certificate signed by Borrower (the
“Perfection Certificate”). Borrower represents and
warrants to Bank that, as of the date hereof: (a) Borrower’s
exact legal name is that indicated on the Perfection Certificate
and on the signature page hereof; (b) Borrower is an
organization of the type and is organized in the jurisdiction set
forth in the Perfection Certificate; (c) the Perfection Certificate
accurately sets forth Borrower’s organizational
identification number or accurately states that Borrower has none;
(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 than its chief executive office); (e) except as set forth
on the Perfection Certificate, Borrower (and each of its
predecessors) has not, in the past five (5) years, changed its
jurisdiction of formation, organizational structure or type, or any
organizational number assigned by its jurisdiction; and (f) all
other information set forth on the Perfection Certificate
pertaining to Borrower and each of its Subsidiaries is accurate and
complete. If Borrower is not now a Registered Organization but
later becomes one, Borrower shall promptly notify Bank of such
occurrence and provide Bank with Borrower’s 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 it is a party or by which
it is bound in which the default would have a material adverse
effect on Borrower’s business.
5.2
Collateral . Borrower has good title to, has rights in, and the
power to transfer each item of the Collateral upon which it
purports to grant a Lien hereunder, free and clear of any and all
Liens except Permitted Liens. Borrower has no deposit accounts
other than the deposit accounts with Bank, the deposit accounts, if
any, described in the Perfection Certificate delivered to Bank in
connection herewith, or of which Borrower has given Bank notice and
taken such actions as are necessary to give Bank a perfected
security interest therein. The Accounts are bona fide, existing
obligations of the Account Debtors.
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The
Collateral is not in the possession of any third party bailee (such
as a warehouse) except as otherwise provided in the Perfection
Certificate; provided, however, that Borrower shall have the right
to deliver possession of completed products to its customers before
such customers have purchased such products, either for evaluation
purposes or pursuant to an advance-delivery “kan-ban”
arrangement. Borrower shall give Bank notice of all such kan-ban
arrangements and shall report on the amount of product held in such
arrangements in its monthly reports. Bank shall not require
Bailee’s Waivers from Borrower’s customers who are
party to kan-ban arrangements. None of the components of the
Collateral shall be maintained at locations other than as provided
in the Perfection Certificate or as Borrower has given Bank notice
pursuant to Section 7.2. In the event that Borrower, after the date
hereof, intends to store or otherwise deliver any portion of the
Collateral to a bailee (other than a kan-ban arrangement) with an
aggregate value in excess of One Hundred Thousand Dollars
($100,000.00), then Borrower will first receive a written
acknowledgement from such bailee in form and substance reasonably
satisfactory to Bank in its sole discretion.
All
Inventory is in all material respects of good and marketable
quality, free from material defects.
Except as noted on the Perfection Certificate,
Borrower is not a party to, nor is bound by, any license or other
agreement with respect to which Borrower is the licensee, other
than (i) licenses or agreements for software that Borrower
incorporates into products for distribution to its customers, (ii)
software licensed for internal use by Borrower and (iii)
shrink-wrap, freeware and open source software licenses
(collectively “Excluded Licenses”) 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 shall provide written notice to Bank
within ten (10) days of entering or becoming bound by any such
license or agreement, other than Excluded Licenses, 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, or
waiver by, any person whose consent or waiver is necessary for all
such licenses or contract rights, other than Excluded Licenses 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 Bank determines
that is necessary in its good faith judgment), whether now existing
or entered into in the future.
5.3
Accounts Receivable . For any Eligible Account in any Borrowing
Base Certificate, all statements made and all unpaid balances
appearing in all invoices, instruments and other documents
evidencing such Eligible Accounts are and shall be true and correct
and all such invoices, instruments and other documents, and all of
Borrower’s Books are genuine and in all material respects
what they purport to be. All sales and other transactions
underlying or giving rise to each Eligible Account shall comply in
all material respects with all applicable laws and governmental
rules and regulations. Borrower has no knowledge of any actual
Insolvency Proceeding of any Account Debtor whose accounts are an
Eligible Account in any Borrowing Base Certificate. To the best of
Borrower’s knowledge, all signatures and endorsements on all
documents, instruments, and agreements relating to all Eligible
Accounts are genuine, and all such documents, instruments and
agreements are legally enforceable in accordance with their
terms.
5.4
Litigation . There are no actions or proceedings pending or, to
the knowledge of the Responsible Officers, threatened in writing by
or against Borrower or any of its Subsidiaries which would be
reasonably likely to result in damages owed by the Borrower or any
of its Subsidiaries in excess of more than Two Hundred Fifty
Thousand Dollars ($250,000.00).
5.5
No Material Deterioration in Financial Statements . All
consolidated financial statements for Borrower and any of its
Subsidiaries 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 not left with unreasonably small capital
after the transactions in this Agreement; and Borrower is able to
pay its debts (including trade debts) as they mature.
5.7
Regulatory Compliance . Borrower is not an “investment
company” or a company “controlled” by an
“investment company” under the Investment Company Act
of 1940. Borrower is not engaged as one of its important activities
in extending credit for margin stock (under Regulations T and U of
the Federal Reserve Board of Governors). Borrower has complied in
all material respects with the Federal Fair Labor Standards
Act. Borrower
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has
not violated any laws, ordinances or rules, the violation of which
would reasonably be expected to have a material adverse effect on
its business. None of Borrower’s or any of its
Subsidiaries’ properties or assets has been used by Borrower
or any Subsidiary or, to the best of Borrower’s knowledge, by
previous Persons, in disposing, producing, storing, treating, or
transporting any hazardous substance other than legally. Borrower
and each of its Subsidiaries have obtained all consents, approvals
and authorizations of, made all declarations or filings with, and
given all notices to, all government authorities that are necessary
to continue its business as currently conducted.
5.8
Subsidiaries; Investments . Borrower does not own any stock,
partnership interest or other equity securities except for
Permitted Investments.
5.9
Tax Returns and Payments; Pension Contributions . Borrower has
timely filed all required tax returns and reports (or extensions
thereof), and Borrower and its Subsidiaries have timely paid all
foreign, federal, state and local taxes, assessments, deposits and
contributions owed by Borrower. Borrower may defer payment of any
contested taxes, provided that Borrower (a) in good faith contests
its obligation to pay the taxes by appropriate proceedings promptly
and diligently instituted and conducted, (b) notifies Bank in
writing of the commencement of, and any material development in,
the proceedings, (c) posts bonds or takes any other steps required
to prevent the governmental authority levying such contested taxes
from obtaining a Lien upon any of the Collateral that is other than
a “Permitted Lien”. Borrower is unaware of any claims
or adjustments proposed for any of Borrower’s prior tax years
which would reasonably be expected to result in additional taxes
becoming due and payable by Borrower. Borrower has paid all amounts
necessary to fund all present pension, profit sharing and deferred
compensation plans in accordance with their terms, and Borrower has
not withdrawn from participation in, and has not permitted partial
or complete termination of, or permitted the occurrence of any
other event with respect to, any such plan which would reasonably
be expected to result in any liability of Borrower, including any
liability to the Pension Benefit Guaranty Corporation or its
successors or any other governmental agency.
5.10
Use of Proceeds . Borrower shall use the proceeds of the Credit
Extensions solely as working capital and not for personal, family,
household or agricultural purposes.
5.11
Network Engines Securities Corporation . The aggregate amount
of all funds held by Network Engines Securities Corporation, a
wholly-owned Subsidiary of Network, does not exceed Two Million
Seven Hundred Thousand Dollars ($2,700,000.00).
5.12
Full Disclosure . No written representation, warranty or other
statement of Borrower in any certificate or written statement given
to Bank, as of the date such representations, warranties, or other
statements were made, taken together with all such written
certificates and written statements 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 (it being recognized by Bank that the
projections and forecasts provided by Borrower in good faith and
based upon reasonable assumptions are not viewed as facts and that
actual results during the period or periods covered by such
projections and forecasts may differ from the projected or
forecasted results).
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AFFIRMATIVE COVENANTS
Borrower shall do all of the
following:
6.1
Government Compliance . Maintain its and all its
Subsidiaries’ legal existence and good standing in their
respective jurisdictions of formation and maintain qualification in
each jurisdiction in which the failure to so qualify would
reasonably be expected to have a material adverse effect on
Borrower’s business or operations. Borrower shall comply, and
have each Subsidiary comply, with all laws, ordinances and
regulations to which it is subject, the noncompliance with which
could have a material adverse effect on Borrower’s
business.
6.2
Financial Statements, Reports, Certificates .
(a)
Deliver to Bank: (i) as soon as available, but no later than
thirty (30) days after the last day of each month (or, if no
Advance is outstanding as of the last day of such month, within
forty-five (45) days of the end of each fiscal quarter), 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) within five (5) days of delivery, copies of all
statements, reports and notices made available to Borrower’s
security holders or to any holders of Subordinated Debt; (iii)
within five (5) days of filing, all reports filed with the
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Securities and Exchange Commission (or other
regulatory body) or a link thereto on Borrower’s or another
website on the internet, including, without limitation, all reports
on a Form 10-Q on a quarterly basis and on a Form 10-K on an annual
basis; (iv) a prompt report of any legal actions pending or
threatened in writing against Borrower or any of its Subsidiaries
that would reasonably be expected to result in damages or costs to
Borrower or any of its Subsidiaries of Two Hundred Fifty Thousand
Dollars ($250,000.00) or more; (v) as soon as available, but no
later than forty-five (45) days after the last day of
Borrower’s fiscal year, and in connection with any
amendments, Borrower’s financial projections for such fiscal
year as approved by Borrower’s board of directors; and (vi)
budgets, sales projections, operating plans and other financial
information reasonably requested by Bank.
(b)
Within twenty (30) days after the last day of each month, if an
Advance is outstanding as of the last day of such month, deliver to
Bank a duly completed Borrowing Base Certificate signed by a
Responsible Officer, with aged listings of accounts receivable (by
invoice date).
(c)
Within thirty (30) days after the last day of each month (or, if no
Advance is outstanding as of the last day of such month, within
forty-five (45) days of the end of each fiscal quarter), deliver to
Bank with the monthly or quarterly financial statements, a duly
completed Compliance Certificate signed by a Responsible Officer
setting forth calculations showing compliance with the financial
covenants set forth in this Agreement.
(d)
Allow Bank to audit Borrower’s Collateral at Borrower’s
expense. Such audits shall be conducted no more often than once
every twelve (12) months unless a Default or an Event of Default
has occurred and is continuing. Borrower hereby acknowledges that
the first such audit will be conducted within ninety (90) days
after the execution of this Agreement.
6.3
Inventory; Returns . Keep all Inventory in good and marketable
condition, free from material defects. Returns and allowances
between Borrower and its Account Debtors shall follow
Borrower’s customary practices as they exist at the Effective
Date. Borrower must promptly notify Bank of all returns,
recoveries, disputes and claims that involve more than Two Hundred
Fifty Thousand Dollars ($250,000.00).
6.4
Taxes; Pensions . Make, and cause each of its Subsidiaries to
make, timely payment of all foreign, federal, state, and local
taxes or assessments (other than taxes and assessments which
Borrower is contesting pursuant to the terms of Section 5.9 hereof)
and shall deliver to Bank, on demand, appropriate certificates
attesting to such payments, and pay all amounts necessary to fund
all present pension, profit sharing and deferred compensation plans
in accordance with their terms.
6.5
Insurance . Keep its business and the Collateral insured for
risks and in amounts standard for companies in Borrower’s
industry and location and as Bank may reasonably request. Insurance
policies shall be in a form, with companies, and in amounts that
are reasonably satisfactory to Bank. All property policies shall
have a loss payable endorsement showing Bank as the sole loss payee
and waive subrogation against Bank, and all liability policies
shall show, or have endorsements showing, Bank as an additional
insured. All policies (or the loss payable and additional insured
endorsements) shall provide that the insurer must give Bank at
least twenty (20) days notice before canceling, amending, or
declining to renew 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. Notwithstanding the foregoing, (a) so long as no Event
of Default has occurred and is continuing, Borrower shall have the
option of applying the proceeds of any casualty policy up to One
Hundred Thousand Dollars ($100,000.00), in the aggregate, toward
the replacement or repair of destroyed or damaged property;
provided that any such replaced or repaired property (i) shall be
of equal or like value as the replaced or repaired Collateral and
(ii) shall be deemed Collateral in which Bank has been granted
a first priority security interest, and (b) after the occurrence
and during the continuance of an Event of Default, all proceeds
payable under such casualty policy shall, at the option of Bank, be
payable to Bank on account of the Obligations. If Borrower fails to
obtain insurance as required under this Section 6.5 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 6.5, and
take any action under the policies Bank deems prudent.
6.6
Operating Accounts .
(a)
Maintain its and its Subsidiaries’ primary operating accounts
with Bank and Bank’s affiliates; provided, however Alliance
shall have one hundred twenty (120) days from the Effective Date to
transfer such accounts to Bank and Bank’s affiliates. In
addition, Borrower shall maintain its and its Subsidiaries’
cash or securities in excess of that amount used for
Borrower’s or such Subsidiaries’ current operations
with Bank and
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Bank’s affiliates; provided, however
Alliance shall have one hundred twenty (120) days from the
Effective Date to transfer such cash or securities to Bank and
Bank’s affiliates.
(b)
Provide Bank five (5) days prior written notice before establishing
any Collateral Account at or with any bank or financial institution
other than Bank or its Affiliates. In addition, for each Collateral
Account that Borrower or Guarantor at any time maintains, Borrower
shall cause the applicable bank or financial institution (other
than Bank) at or with which any Collateral Account is maintained to
execute and deliver a Control Agreement or other appropriate
instrument with respect to such Collateral Account to perfect
Bank’s Lien in such Collateral Account in accordance with 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 and identified to Bank by
Borrower as such.
6.7
Financial Covenants .
Borrower shall maintain at all times, to be
tested as of the last day of each quarter, unless otherwise noted,
on a consolidated basis with respect to Borrower and its
Subsidiaries:
(a)
Adjusted Quick Ratio . An Adjusted Quick Ratio of at least
1.25 to 1.0.
(b)
Operating Cash Flow . Operating Cash Flow of at least (i)
One Million Five Hundred Thousand Dollars ($1,500,000.00) for the
quarter ending December 31, 2007, (ii) Five Hundred Thousand
Dollars ($500,000.00) for the quarter ending March 31, 2008, (iii)
One Million Five Hundred Thousand Dollars ($1,500,000.00) for the
quarter ending June 30, 2008, and (iv) Two Million Dollars
($2,000,000.00) for the quarter ending September 30, 2008 and as of
the last day of each quarter thereafter.
6.8
Protection of Intellectual Property Rights . Borrower shall use
commercially reasonable efforts to protect, defend and maintain the
validity and enforceability of its intellectual property.
6.9
Litigation Cooperation . From the date hereof and continuing
through the termination of this Agreement, make available to Bank,
without expense to Bank, Borrower and its officers, employees and
agents and Borrower’s books and records, to the extent that
Bank may deem them reasonably necessary to prosecute or defend any
third-party suit or proceeding instituted by or against Bank with
respect to any Collateral or relating to Borrower.
6.10
Landlord’s Waiver . Borrower shall deliver to Bank, on or
before ninety (90) days after the Effective Date, a fully-executed
landlord’s consent with respect to Alliance’s location
at 3501 E. Plano Parkway, Plano, Texas, in form and substance
acceptable to Bank in Bank’s sole and absolute
discretion.
6.11
Certificate of Good Standing - Alliance . Borrower shall
deliver to Bank, on or before thirty (30) days after the Effective
Date, a certificate of good standing for Alliance, certified by the
Secretary of State of Texas.
6.12
Further Assurances . Execute any further instruments and take
further action as Bank reasonably requests to perfect or continue
Bank’s Lien in the Collateral or to effect the purposes of
this Agreement.
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NEGATIVE COVENANTS
Borrower shall not do any of the following
without Bank’s prior written consent:
7.1
Dispositions . Convey, sell, lease, transfer, assign, or
otherwise dispose of (collectively “ Transfer
”), or permit any of its Subsidiaries to Transfer, all or any
part of its business or property, except for:
(a)
Transfers in the ordinary course of business for reasonably
equivalent consideration;
(b)
Transfers of property in connection with sale-leaseback
transactions;
(c)
Disposal of worn-out, excessive, or obsolete property;
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(d)
Transfers of property to the extent such property is exchanged for
credit against, or proceeds are promptly applied to, the purchase
price of other property used or useful in the business of Borrower
or its Subsidiaries;
(e)
Transfers constituting non-exclusive licenses and similar
arrangements for the use of the property of Borrower or its
Subsidiaries in the ordinary course of business and other
non-perpetual licenses that may be exclusive in some respects other
than territory (and/or that may be exclusive as to territory only
in discreet geographical areas outside of the United States), but
that could not result in a legal transfer of Borrower’s title
in the licensed property;
(f)
Transfers otherwise permitted by the Loan Documents;
(g)
sales or discounting of delinquent accounts in the ordinary course
of business;
(h)
Transfers associated with the making or disposition of a Permitted
Investment; and
(i)
Transfers in connection with a permitted acquisition of a portion
of the assets or rights acquired.
7.2
Changes in Business, Management, Ownership, or Business
Locations . (a) Engage in or permit any of its
Subsidiaries to engage in any business other than the businesses
currently engaged in by Borrower and such Subsidiary, as
applicable, or reasonably related thereto; (b) liquidate or
dissolve; or (c) (i) have a change in management such
that any Key Person resigns, is terminated, or is no longer
actively involved in the management of the Borrower in his/her
position held as of the Effective Date, and a replacement
reasonably satisfactory to Bank for such Key Person is not made
within ninety (90) days after departure from Borrower; or (ii)
enter into any transaction or series of related transactions in
which the stockholders of Borrower immediately prior to the first
such transaction own less than 60% of the voting stock of Borrower
immediately after giving effect to such transaction or related
series of such transactions (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
transaction). Borrower shall not, without at least thirty (30) days
prior written notice to Bank: (1) add any new offices or
business locations, including warehouses (unless such new offices
or business locations contain less than One Hundred Thousand
Dollars ($100,000) in Borrower’s assets or property), (2)
change its jurisdiction of organization, (3) change its
organizational structure or type, (4) change its legal name, or
(5) 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 Person other
than with Borrower or any Subsidiary (provided Borrower is the
surviving legal entity), or acquire, or permit any of its
Subsidiaries to acquire, all or substantially all of the capital
stock or property of a Person other than Borrower or any
Subsidiary, except where no Event of Default has occurred and is
continuing or would result from such action during the term of this
Agreement, and (a) Borrower is the surviving entity or (b) such
merger or consolidation is a Transfer otherwise permitted pursuant
to Section 7.1 hereof.
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, 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, or enter into any agreement, document,
instrument or other arrangement (except with or in favor of Bank)
with any Person which directly or indirectly prohibits or has the
effect of prohibiting Borrower or any Subsidiary from assigning,
mortgaging, pledging, granting a security interest in or upon, or
encumbering any of Borrower’s or any Subsidiary’s
intellectual property, except as is otherwise permitted in Section
7.1 hereof and the definition of “Permitted Liens”
herein.
7.6
Maintenance of Collateral Accounts . Maintain any Collateral
Account except pursuant to the terms of Section 6.6(b) hereof.
7.7
Distributions; Investments . (a) Pay any dividends or make
any distribution or payment or redeem, retire or purchase any
capital stock other than Permitted Distributions; or (b) directly
or indirectly acquire or own any Person, or make any Investment in
any Person, other than Permitted Investments, or permit any of its
Subsidiaries to do so.
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7.8
Transactions with Affiliates . Directly or indirectly enter
into or permit to exist any material transaction with any Affiliate
of Borrower except for (a) transactions that are in the ordinary
course of Borrower’s business, upon fair and reasonable terms
(when viewed in the context of any series of transactions of which
it may be a part, if applicable) that are no less favorable to
Borrower than would be obtained in an arm’s length
transaction with a non-affiliated Person; or (b) transactions
among Borrower and its Subsidiaries and among Borrower’s
Subsidiaries so long as no Event of Default exists or could result
therefrom.
7.9
Subordinated Debt . (a) Make or permit any payment on any
Subordinated Debt, except under the terms of the subordination,
intercreditor, or other similar agreement to which such
Subordinated Debt is subject, or (b) amend any provision in
any document relating to the Subordinated Debt which would increase
the amount thereof or adversely affect the subordination thereof to
Obligations owed to Bank.
7.10
Compliance . Become an “investment company” or a
company controlled by an “investment company”,
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