LOAN AND SECURITY
AGREEMENT
THIS LOAN AND
SECURITY AGREEMENT (this “ Agreement ”)
dated as of the Effective Date between SILICON VALLEY BANK ,
a California corporation (“ Bank ”), and DOT
HILL SYSTEMS CORP., a Delaware corporation (“ Borrower
”), provides the terms on which Bank shall lend to Borrower
and Borrower shall repay Bank. The parties agree as
follows:
1
ACCOUNTING AND OTHER TERMS
Accounting terms
not defined in this Agreement shall be construed following GAAP.
Calculations and determinations must be made following GAAP (except
for non-compliance with FAS 123R in monthly reporting). 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.
2 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 and, while Borrower’s Net Cash is less than
$20,000,000, to deduction of Reserves if reasonably required by
Bank, Bank shall make Advances not exceeding the Availability
Amount. Amounts borrowed hereunder 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.
(c)
Early Termination . This Agreement may be terminated prior
to the Revolving Line Maturity Date. If this Agreement is
terminated by Borrower for any reason (i) prior to the first
(1st) anniversary of the Effective Date, Borrower shall pay to Bank
a termination fee in an amount equal to eight tenths of one percent
(0.80%) of the Revolving Line, or (ii) after the first (1st)
anniversary of the Effective Date, but prior to the second (2nd)
anniversary of the Effective Date, Borrower shall pay to Bank a
termination fee in an amount equal to four tenths of one percent
(0.40%) of the Revolving Line; in either case, 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.
2.1.2 Letters
of Credit Sublimit.
(a) As
part of the Revolving Line, Bank shall issue or have issued Letters
of Credit for Borrower’s account. Such aggregate amounts
utilized hereunder shall at all times reduce the amount otherwise
available for Advances under the Revolving Line. The aggregate
amount available to be used for the issuance of Letters of Credit
may not exceed (i) the lesser of (A) Thirty Million
Dollars ($30,000,000) or (B) the Borrowing Base, minus
(ii) the outstanding principal amount of any Advances
(including the face amount of any outstanding Letters of Credit
(including drawn but unreimbursed Letters of Credit). 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 one hundred five percent (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.
(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. Such reimbursement obligations may be satisfied
in cash or, subject to availability hereunder, through an Advance
at Borrower’s option.
2.2
Overadvances . If, at any time, the sum of (a) the
outstanding principal amount of any Advances, plus (b) the
face amount of any outstanding Letters of Credit (including drawn
but unreimbursed Letters of Credit) (such sum being an “
Overadvance ”) exceeds the lesser of either the
Revolving Line or the Borrowing Base, Borrower shall immediately
pay to Bank in cash such Overadvance. Without limiting
Borrower’s obligation to repay Bank any amount of the
Overadvance, Borrower agrees to pay Bank interest on the
outstanding amount of any Overadvance, on demand, at the Default
Rate.
2.3 Payment of
Interest on the Credit Extensions .
(a)
Interest Rate ; Advances . Subject to
Section 2.3(b), the principal amount outstanding under the
Revolving Line shall accrue interest at a per annum rate equal to
(i) one percentage point (1.00%) above the Prime Rate while
Borrower’s Net Cash is less than Twenty Million Dollars
($20,000,000), or (ii) the Prime Rate at all other times;
which interest shall, in either case, be payable
monthly.
(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 three percentage points
(3.00%) above the rate that is otherwise applicable thereto (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.
(e)
Debit of Accounts . Bank may debit the Designated Deposit
Account (and any of Borrower’s other deposit accounts while
any Event of Default has occurred and is continuing), for principal
and interest payments or any other amounts Borrower owes Bank when
due. These debits shall not constitute a set-off.
(f)
Payment; Interest Computation; Float Charge . Interest is
payable monthly on the last calendar day of each month. In
computing interest on the Obligations, all payments received after
12:00 p.m. Pacific time on any day shall be deemed received on
the next Business Day. In addition, if Borrower’s Net Cash is
less than Twenty Million Dollars ($20,000,000) at any time, until
Borrower’s Net Cash is greater than Twenty Million Dollars
($20,000,000), Bank shall be entitled to charge Borrower a
“float” charge in an amount equal to two
(2) Business Days interest, at the interest rate applicable to
the Advances, on all payments received by Bank. The float charge
for each month shall be payable on the last day of the month. Bank
shall not, however, be required to credit Borrower’s account
for the amount of any item of payment which is unsatisfactory to
Bank in its good faith business judgment, and Bank may charge
Borrower’s Designated Deposit Account for the amount of any
item of payment which is returned to Bank unpaid.
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2.4 Fees .
Borrower shall pay to Bank:
(a)
Commitment Fee . A fully earned, non-refundable commitment
fee of (i) Sixty Thousand Dollars ($60,000), on the Effective
Date, (ii) Forty-Five Thousand Dollars ($45,000) on the first
anniversary of the Effective Date, and (iii) fifteen
hundredths of one percent (0.15%) of the Revolving Line on the
second anniversary of the Effective Date;
(b)
Letter of Credit Fee . Bank’s customary fees and
expenses for the issuance or renewal of Letters of Credit,
including, without limitation, a Letter of Credit Fee of one
percent (1.00%) per annum of the face amount of each Letter of
Credit issued, upon the issuance, each anniversary of the issuance,
and the renewal of such Letter of Credit by Bank;
(c)
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 three eighths of one percent (0.375%) per annum of the average
unused portion of the Revolving Line, as determined by Bank.
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 suspension or termination of Bank’s obligation
to make loans and advances hereunder; provided that such Unused
Revolving Line Facility Fee shall cease to accrue upon termination
of this Agreement;
(e)
Collateral Monitoring Fee . If Borrower’s Net Cash is
less than Twenty Million Dollars ($20,000,000) at any time, until
Borrower’s Net Cash is again greater than or equal to Twenty
Million Dollars ($20,000,000), a monthly collateral monitoring fee
of Two Thousand Dollars ($2,000), payable in arrears on the last
day of each month (prorated for any partial month in which such fee
shall be applicable); and
(d)
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.
2.5 Lockbox;
Account Collection Services . No later than sixty
(60) days after the Effective Date and at all time thereafter,
Borrower shall direct each Account Debtor (and each depository
institution where proceeds of Accounts are on deposit) to
thereafter remit payments with respect to the Accounts to a lockbox
account with Bank or to wire transfer payments to a cash collateral
account with Bank (collectively, the “Lockbox”
). Subject to the repayment provisions of Section 2.1.1(b), Bank
shall sweep all amounts from the Lockbox to the Designated Deposit
Account on a daily (or as soon thereafter as is practical) basis.
Provided however, if Borrower’s Net Cash is less than Twenty
Million Dollars ($20,000,000) at any time, until Borrower’s
Net Cash is again greater than or equal to Twenty Million Dollars
($20,000,000), Bank shall first apply all amounts from the Lockbox
to the outstanding Obligations and any excess shall be swept into
the Designated Deposit Account. This Section does not impose any
affirmative duty on Bank to perform any act other than as
specifically set forth herein. All Accounts and the proceeds
thereof are Collateral and upon the occurrence and during the
continuance of an Event of Default or if Borrower’s Net Cash
is less than Twenty Million Dollars ($20,000,000) at any time,
until Borrower’s Net Cash is again greater than or equal to
Twenty Million Dollars ($20,000,000), Bank may apply the proceeds
of such Accounts to the Obligations then due and owing.
2.6 Accordion
Feature . At any time after the first anniversary of the
Effective Date, Borrower may request an increase in the Revolving
Line to Fifty Million Dollars ($50,000,000), so long as
(i) Bank is able to find a participant lender acceptable to
Bank in its sole discretion to commit the additional Twenty Million
Dollar ($20,000,000) increase, (ii) Borrower demonstrates a
minimum Borrowing Base of Forty Million Dollars ($40,000,000) for
the ninety (90) day period preceding such request, and
(iii) Borrower pays to Bank for the benefit of Bank and any
such other lender a fee equal to two-tenths of one percent (0.20%)
of the resulting increase in the Revolving Line.
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3.1 Conditions
Precedent to Initial Credit Extension . Bank’s obligation
to make the initial Credit Extension is subject to the condition
precedent that Borrower shall consent to or have delivered, 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) duly
executed original signatures to the Control Agreements;
(c) its
Operating Documents and a good standing certificate of Borrower
certified by the Secretary of State of the State of Delaware as of
a date no earlier than thirty (30) days prior to the Effective
Date;
(d) duly
executed original signatures to the completed Borrowing Resolutions
for Borrower;
(e) certified
copies, dated as of a recent date, of financing statement searches,
as Bank shall request, accompanied by written evidence (including
any UCC termination statements) that the Liens indicated in any
such financing statements either constitute Permitted Liens or have
been or, in connection with the initial Credit Extension, will be
terminated or released;
(f) the
Perfection Certificate executed by Borrower;
(g) 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 lender loss payable and/or additional
insured clauses or endorsements in favor of Bank;
(h) the
completion of the Initial Audit with results satisfactory to Bank
in its sole and absolute discretion, which Initial Audit shall be
completed by Bank within sixty (60) days following the
Effective Date unless the Bank waives the right to complete the
Initial Audit prior to making the initial Credit Extension;
and
(i) payment
of the fees and Bank Expenses then due as specified in
Section 2.4 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 Transaction Report;
(b) the
representations and warranties in Section 5 shall be true in
all material respects on the date of the Transaction Report 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 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 reasonable discretion, there has not been a Material
Adverse Change.
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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 a Credit Extension made 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
Credit Extension in the absence of a required item shall be made 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 2.1.3), Borrower shall notify Bank (which
notice shall be irrevocable) by electronic mail, facsimile, or
telephone by 12:00 p.m. Pacific time on the Funding Date of
the Advance. 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. Bank may rely on any telephone
notice given by a person whom Bank believes is a Responsible
Officer or designee.
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 this Agreement
is terminated, Bank’s Lien in the Collateral shall continue
until the Obligations (other than inchoate indemnity obligations
and cash collateralized Letters of Credit) are repaid in full in
cash. Upon payment in full in cash of the Obligations (other than
inchoate indemnity obligations and cash collateralized Letters of
Credit) 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.
5
REPRESENTATIONS AND WARRANTIES
Borrower
represents and warrants as follows:
5.1 Due
Organization, Authorization; Power and Authority . Borrower is
duly existing and in good standing as a Registered Organization in
its jurisdiction of formation and is qualified and licensed to do
business and is in good standing in any jurisdiction in which the
conduct of its business or its ownership of property requires that
it be qualified except where the failure to do so could not
reasonably be expected to have a material adverse effect on
Borrower’s business. In connection with this Agreement,
Borrower has delivered to Bank a completed certificate signed by
Borrower, entitled “Perfection Certificate”. Borrower
represents and warrants to Bank that (a) Borrower’s exact
legal name is that indicated on the Perfection Certificate and on
the signature page hereof; (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) 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 (it being understood and agreed that Borrower
may from time to time update
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certain
information in the Perfection Certificate after the Effective Date
to the extent permitted by one or more specific provisions in this
Agreement). 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 by Borrower of the Loan Documents to which
it is a party have been duly authorized, and do not
(i) conflict with any of Borrower’s organizational
documents, (ii) contravene, conflict with, constitute a
default under or violate any material Requirement of Law,
(iii) contravene, conflict or violate any applicable order,
writ, judgment, injunction, decree, determination or award of any
Governmental Authority by which Borrower or any its Subsidiaries or
any of their property or assets may be bound or affected,
(iv) require any action by, filing, registration, or
qualification with, or Governmental Approval from, any Governmental
Authority (except such Governmental Approvals which have already
been obtained and are in full force and effect) or
(v) constitute an event of default under any material
agreement by which Borrower is bound. Borrower is not in default
under any agreement to which it is a party or by which it is bound
in which the default could reasonably be expected to have a
material adverse effect on Borrower’s business.
5.2
Collateral . Borrower has good title to, has rights in, and the
power to transfer each item of the Collateral upon which it
purports to grant a Lien hereunder, free and clear of any and all
Liens except Permitted Liens. Borrower has no deposit accounts
other than the deposit accounts with 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.
5.3 Accounts
Receivable; Inventory.
(a) For
each Account with respect to which Advances are requested, on the
date each Advance is requested and made, such Account shall be an
Eligible Account.
(b) All
statements made and all unpaid balances appearing in all invoices,
instruments and other documents evidencing the 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 respects what they purport to be. When an
Event of Default has occurred and is continuing or while
Borrower’s Net Cash is less than Twenty Million Dollars
($20,000,000), Bank may notify any Account Debtor owing Borrower
money of Bank’s security interest in such funds and verify
the amount of such Eligible Account. 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 or imminent Insolvency Proceeding of any Account Debtor
whose accounts are Eligible Accounts in any Transaction Report. To
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 involving more than
One Million Dollars ($1,000,000).
5.5 No
Material Deviation 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 . The fair salable value of Borrower’s assets
(including goodwill minus disposition costs) exceeds the fair value
of its liabilities; Borrower is not left with unreasonably small
capital after the transactions in this Agreement; and Borrower is
able to pay its debts (including trade debts) as they
mature.
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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, as amended. Borrower is not engaged as one of its
important activities in extending credit for margin stock (under
Regulations X, T and U of the Federal Reserve Board of Governors).
Borrower has complied in all material respects with the Federal
Fair Labor Standards Act. Neither Borrower nor any of its
Subsidiaries is a “holding company” or an
“affiliate” of a “holding company” or a
“subsidiary company” of a “holding company”
as each term is defined and used in the Public Utility Holding
Company Act of 2005. Borrower has not violated any laws, ordinances
or rules, the violation of which could reasonably be expected to
have a material adverse effect on its business. None of
Borrower’s or any of its Subsidiaries’ properties or
assets has been used by Borrower or any Subsidiary or, to the best
of Borrower’s knowledge, by previous Persons, in disposing,
producing, storing, treating, or transporting any hazardous
substance other than legally. Borrower and each of its Subsidiaries
have obtained all consents, approvals and authorizations of, made
all declarations or filings with, and given all notices to, all
Governmental Authorities that are necessary to continue their
respective businesses 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, and Borrower has
timely paid all foreign, federal, state and local taxes,
assessments, deposits and contributions owed by Borrower, except
that 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 could 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 could reasonably be expected to
result in any liability of Borrower, including any liability to the
Pension Benefit Guaranty Corporation or its successors or any other
governmental agency.
5.10 Use of
Proceeds . Borrower shall use the proceeds of the Credit
Extensions solely as working capital and to fund its general
business requirements and not for personal, family, household or
agricultural purposes.
5.11 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 representation, warranty, or other
statement was 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).
Borrower shall do
all of the following:
6.1 Government
Compliance .
(a) Maintain
its and all its Subsidiaries’ legal existence and good
standing in their respective jurisdictions of formation and
maintain qualification in each jurisdiction in which the failure to
so qualify would reasonably be expected to have a material adverse
effect on Borrower’s business or operations. Borrower shall
comply, and have each Subsidiary comply, with all laws, ordinances
and regulations to which it is subject, noncompliance with which
could reasonably be expected to have a material adverse effect on
Borrower’s business.
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(b) Obtain
all of the Governmental Approvals necessary for the performance by
Borrower of its obligations under the Loan Documents to which it is
a party and the grant of a security interest to Bank in all of the
Collateral. Borrower shall promptly provide copies of any such
obtained Governmental Approvals to Bank.
6.2 Financial
Statements, Reports, Certificates.
(a) Borrower
shall provide Bank with the following:
(i) within
twenty (20) days after the end of each month (and while
Borrower’s Net Cash is less than Twenty Million Dollars
($20,000,000), no less than weekly) and with each request for an
Advance, a Transaction Report (and any schedules related
thereto);
(ii) within
twenty (20) days after the end of each month, (A) monthly
accounts receivable agings, aged by invoice date, (B) monthly
accounts payable agings, aged by invoice date, and outstanding or
held check registers, if any, (C) monthly reconciliations of
accounts receivable agings (aged by invoice date), transaction
reports and general ledger, and (D) a report of
Borrower’s Cash balances; and
(iii) no
later than March 31 of each calendar year, (A) annual
operating budgets (including income statements, balance sheets and
cash flow statements, by month) for the upcoming fiscal year of
Borrower, and (B) annual financial projections for the
following fiscal year (on a quarterly basis) as approved by
Borrower’s board of directors, together with any related
business forecasts used in the preparation of such annual financial
projections.
(b) within
five (5) days after filing, all reports on Form 10-K, 10-Q and
8-K filed with the Securities and Exchange Commission or a link
thereto on Borrower’s or another website on the Internet,
along with a Compliance Certificate signed by a Responsible
Officer, certifying that as of the end of such quarter, Borrower
was in full compliance with all of the terms and conditions of this
Agreement, and setting forth calculations showing compliance with
the financial covenants set forth in this Agreement and such other
information as Bank shall reasonably request, including, without
limitation, a statement that at the end of such month there were no
held checks.
(c) In
accordance with Section 6.6, allow Bank to audit
Borrower’s Collateral at Borrower’s expense. Such
audits shall be conducted no more often than twice per year if
there are no Advances outstanding (or three times per year when
Advances outstanding) unless an Event of Default has occurred and
is continuing.
6.3 Accounts
Receivable .
(a)
Schedules and Documents Relating to Accounts .
Borrower shall deliver to Bank transaction reports and schedules of
collections, as provided in Section 6.2, on Bank’s
standard forms; provided, however, that Borrower’s failure to
execute and deliver the same shall not affect or limit Bank’s
Lien and other rights in all of Borrower’s Accounts, nor
shall Bank’s failure to advance or lend against a specific
Account affect or limit Bank’s Lien and other rights therein.
If requested by Bank, Borrower shall furnish Bank with copies (or,
at Bank’s request, originals) of all contracts, orders,
invoices, and other similar documents, and all shipping
instructions, delivery receipts, bills of lading, and other
evidence of delivery, for any goods the sale or disposition of
which gave rise to such Accounts. In addition, Borrower shall
deliver to Bank, on its request, the originals of all instruments,
chattel paper, security agreements, guarantees and other documents
and property evidencing or securing any Accounts, in the same form
as received, with all necessary indorsements, and copies of all
credit memos.
(b)
Disputes . Borrower shall promptly notify Bank of all
disputes or claims in excess of Three Hundred Thousand Dollars
($300,000) relating to Accounts. Borrower may forgive (completely
or partially), compromise, or settle any Account for less than
payment in full, or agree to do any of the foregoing so long as
(i) Borrower does so in good faith, in a commercially
reasonable manner, in the ordinary course of business, in
arm’s-length transactions, and reports the same to Bank in
the regular reports provided to Bank; (ii) no Default or Event
of Default has occurred and is continuing; and (iii) after
taking into account all such discounts, settlements
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and
forgiveness, the total outstanding Advances will not exceed the
lesser of the Revolving Line or the Borrowing Base.
(c)
Collection of Accounts . Borrower shall have the right to
collect all Accounts, unless and until a Default or an Event of
Default has occurred and is continuing. Whether or not an Event of
Default has occurred and is continuing, Borrower shall hold all
payments on, and proceeds of, Accounts in trust for Bank, and
Borrower shall immediately deliver all such payments and proceeds
to Bank in their original form, duly endorsed, to be applied to the
Obligations pursuant to the terms of Section 9.4 hereof. As
limited by Section 2.5 hereof, Bank may, in its good faith
business judgment, require that all proceeds of Accounts be
deposited by Borrower into a lockbox account, or such other
“blocked account” as Bank may specify, pursuant to a
blocked account agreement in such form as Bank may specify in its
good faith business judgment.
(d)
Returns . Provided no Event of Default has occurred
and is continuing, if any Account Debtor returns any Inventory in
excess of Three Hundred Thousand Dollars ($300,000) to Borrower,
Borrower shall promptly (i) determine the reason for such
return, (ii) issue a credit memorandum to the Account Debtor
in the appropriate amount, and (iii) provide a copy of such
credit memorandum to Bank, upon request from Bank. In the event any
attempted return occurs after the occurrence and during the
continuance of any Event of Default, Borrower shall promptly notify
Bank of the return of the Inventory.
(e)
Verification . While any Event of Default has
occurred and is continuing, while Borrower’s Net Cash is less
than Twenty Million Dollars ($20,000,000) or with the consent of
Borrower, Bank may, from time to time, verify directly with the
respective Account Debtors the validity, amount and other matters
relating to the Accounts, either in the name of Borrower or Bank or
such other name as Bank may choose.
(f)
No Liability . Bank shall not be responsible or
liable for any shortage or discrepancy in, damage to, or loss or
destruction of, any goods, the sale or other disposition of which
gives rise to an Account, or for any error, act, omission, or delay
of any kind occurring in the settlement, failure to settle,
collection or failure to collect any Account, or for settling any
Account in good faith for less than the full amount thereof, nor
shall Bank be deemed to be responsible for any of Borrower’s
obligations under any contract or agreement giving rise to an
Account. Nothing herein shall, however, relieve Bank from liability
for its own gross negligence or willful misconduct.
6.4 Remittance
of Proceeds . Except as otherwise provided or limited by
Section 6.3(c), deliver, in kind, all proceeds arising from
the disposition of any Collateral to Bank in the original form in
which received by Borrower not later than the following Business
Day after receipt by Borrower, to be applied to the Obligations
pursuant to the terms of Section 9.4 hereof. Except as
otherwise provided or limited by Section 6.3(c), Borrower
agrees that it will not commingle proceeds of Collateral with any
of Borrower’s other funds or property, but will hold such
proceeds separate and apart from such other funds and property and
in an express trust for Bank. Nothing in this Section limits the
restrictions on disposition of Collateral set forth elsewhere in
this Agreement.
6.5 Taxes;
Pensions . Timely file, and require each of its Subsidiaries to
timely file, all required tax returns and reports and timely pay,
and require each of its Subsidiaries to timely file, all foreign,
federal, state and local taxes, assessments, deposits and
contributions owed by Borrower and each of its Subsidiaries, except
for deferred payment of any taxes contested 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.
6.6 Access to
Collateral; Books and Records . At reasonable times (but no
more frequently than set forth in Section 6.1(c), on two
(2) Business Days’ notice (provided no notice is
required if an Event of Default has occurred and is continuing),
Bank, or its agents, shall have the right to inspect the Collateral
and the right to audit and copy Borrower’s Books. The
foregoing inspections and audits shall be at Borrower’s
expense, and the charge therefor shall be $750 per person per day
(or such higher amount as shall represent Bank’s then-current
standard charge for the same), plus reasonable out-of-pocket
expenses. In the event Borrower and Bank schedule an audit more
than five (5) Business Days in advance, and Borrower cancels
or seeks to reschedules the audit with less than five
(5) Business Days written notice to Bank, then (without
limiting any of Bank’s rights or remedies),
Borrower
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shall pay Bank
a fee of $1,000 plus any out-of-pocket expenses incurred by Bank to
compensate Bank for the anticipated costs and expenses of the
cancellation or rescheduling.
6.7
Insurance . Keep its business 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 satisfactory to
Bank. All policies shall provide that the insurer shall endeavor to
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. If Borrower fails to obtain
insurance as required under this Section 6.7 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 6.7, and take any
action under the policies Bank deems prudent.
(a) No
later than sixty (60) days after the Effective Date and at all
time thereafter, maintain its primary and its domestic
Subsidiaries’ primary operating and other deposit accounts
with Bank. No later than sixty (60) days after the Effective
Date and at all times thereafter, maintain at least one securities
account with Bank or its Affiliates, which securities account or
securities accounts shall represent at least twenty five percent
(25%) of the dollar value of Borrower’s and such Subsidiaries
securities accounts at all financial institutions.
(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 Bank’s Affiliates. For each Collateral
Account that Borrower 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.
6.9 Financial
Covenants .
Borrower
shall maintain at all times, to be tested as of the last day of
each quarter, unless otherwise noted:
(a)
Minimum Net Worth . A minimum Net Worth of at least Fifty
Five Million Dollars ($55,000,000), increasing by fifty percent
(50%) of Net Income, fifty percent (50%) of issuances of equity
after the Effective Date and fifty percent (50%) of the principal
amount of Subordinated Debt.
6.10
Protection of Intellectual Property Rights . Borrower shall:
(a) use commercially reasonable efforts to protect, defend and
maintain the validity and enforceability of its Intellectual
Property; (b) promptly advise Bank in writing of material
infringements of its Intellectual Property; and (c) not allow
any Intellectual Property material to Borrower’s business to
be abandoned, forfeited or dedicated to the public without
Bank’s written consent.
6.11
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.
6.12 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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Borrower shall not
do any of the following without Bank’s prior written
consent:
7.1
Dispositions . Convey, sell, lease, transfer or otherwise
dispose of (collectively, “ Transfer ”), or
permit any of its Subsidiaries to Transfer, all or any part of the
Collateral or the Inventory or Intellectual Property of Borrower or
its Subsidiaries, except for Transfers (a) of Inventory in the
ordinary course of business; (b) in connection with Permitted
Liens and Permitted Investments; (c) of non-exclusive licenses
for the use of the property of Borrower or its Subsidiaries in the
ordinary course of business, (d) exclusive licenses and
Transfers to NetApp in accordance with Borrower’s supply
agreement with NetApp provided such supply agreement has been
provided to Bank and (e) other exclusive licenses which are
limited by specified fields of use, specific geographic location,
or specific, limited periods of time.
7.2 Changes in
Business; Jurisdiction of Formation. Engage in any material
line of business other than those lines of business conducted by
Borrower and its Subsidiaries on the date hereof and any businesses
reasonably related, complementary or incidental thereto or
reasonable extensions thereof. Borrower will not, without prior
written notice, change its jurisdiction of formation.
7.3 Mergers or
Acquisitions . Merge or consolidate, or permit any of its
Subsidiaries to merge or consolidate, with any other Person, or
acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another
Person except where (a) total consideration including cash and
the value of any non-cash consideration, for all such transactions
does not in the aggregate exceed Fifteen Million Dollars
($15,000,000) in any three hundred sixty four (364) day
period; (b) no Event of Default has occurred and is continuing
or would exist after giving effect to the transactions; and
(c) Borrower is the surviving legal entity. A Subsidiary may
merge or consolidate into another Subsidiary or into
Borrower.
7.4
Indebtedness . Create, incur, assume, or be liable for any
Indebtedness, or permit any Subsidiary to do so, other than
Permitted Indebtedness.
7.5
Encumbrance . Create, incur, allow, or suffer any Lien on any
of the Collateral or any Inventory or Intellectual Property of
Borrower or its Subsidiaries, 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, 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
Inventory or Intellectual Property, except as is otherwise
permitted in Section 7.1 hereof and the definition of
“Permitted Lien” herein.
7.6
Maintenance of Collateral Accounts . Maintain any Collateral
Account except pursuant to the terms of Section 6.8.(b)
hereof.
7.7
Distributions; Investments . (a) Pay any dividends or make
any distribution or payment or redeem, retire or purchase any
capital stock in excess of One Million Dollars ($1,000,000) per
fiscal year; provided that (i)
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