LOAN AND SECURITY AGREEMENT

 

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 .  Subject to the Overall Sublimit in Section 2.1.5 below, 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 (the “ FX Reserve ”).  The aggregate amount of FX Forward Contracts at any one time may not exceed ten (10) times the amount of the FX Reserve.  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 (the “ FX Reduction Amount ”).  Unless paid on the Settlement Date, any amounts needed to fully reimburse Bank will be treated as Advances under the Revolving Line from and after the Settlement Date and will accrue interest at the interest rate applicable to Advances.

 

2.1.4                      Cash Management Services Sublimit .  Subject to the Overall Sublimit in Section 2.1.5 below, Borrower may use up to $2,500,000 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 ”).  Any amounts Bank pays on behalf of Borrower for any Cash Management Services as a result of Borrower’s failure to pay its obligations with respect thereto on a timely basis (as opposed to Borrower’s mere utilization of the Cash Management Services products) will be treated as Advances under the Revolving Line and will accrue interest at the interest rate applicable to Advances.

 

2.1.5                      Overall Aggregate Sublimit.   In no event shall the total amount of (i) all outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit and any Letter of Credit Reserve), plus (ii) the FX Reserve, plus (iii) the amount of the Revolving Line utilized for Cash Management Services, at any time exceed $2,500,000 in the aggregate (the “Overall Sublimit”).

 

2.2                                Overadvances.  If, at any time, the sum of (a) the outstanding principal amount of any Advances (including any amounts used for Cash Management Services), plus (b) the face amount of any outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit and any Letter of Credit Reserve), plus (c) the FX Reduction Amount (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 based on Borrower’s Quick Ratio (as defined below), as follows:

 

Quick Ratio as of the end of a quarter		Interest Rate
Greater than 1.00 to 1.00		Prime Rate plus 0.25%
Less than 1.00 to 1.00 but equal to or greater than 0.85 to 1.00		Prime Rate plus 0.75%
Less than 0.85 to 1.00		Prime Rate plus 1.25%

 

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The initial interest rate in effect on the date hereof shall be a rate equal to the Prime Rate plus 0.25%. Interest shall be payable monthly.  Changes in the interest rate based on Borrower’s Quick Ratio as provided above shall go into effect as of the first day of the month following the month in which Borrower’s quarterly financial statements are received, reviewed and approved by Bank.  If, based on the Quick Ratio as shown in Borrower’s financial statements there is to be an increase or decrease in the interest rate, the interest rate increase or decrease shall be put into effect by Bank as of the first day of the month following the date on which the quarterly financial statements are due, even if the delivery of the financial statements is delayed.  As used above, “Quick Ratio” shall mean the ratio of (A) the sum of Borrower’s consolidated unrestricted cash and unrestricted Cash Equivalents plus Borrower’s Accounts to (B) the sum of Borrower’s current liabilities determined in accordance with GAAP.

 

(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 five percentage points 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 shall 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)                                     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 any principal or interest with respect to any Credit Extension is outstanding, and Borrower has not met the Net Cash Test on the last day of the immediately preceding fiscal quarter, then Bank shall be entitled to charge Borrower a “float” charge in an amount equal to two 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.

 

2.4                                Fees .  Borrower shall pay to Bank:

 

(a)                                   Commitment Fee .  A fully earned, non-refundable commitment fee of $56,250 per year for the three-year term of this Agreement, payable in three annual installments of $56,250 each, commencing on the Effective Date and continuing on each anniversary of the Effective Date, or on any earlier termination of this Agreement; and

 

(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 two percent (2.00%) 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; and

 

(c)                                   Termination Fee .  Subject to the terms of Section 4.1, a termination fee as described in Section 12.1; and

 

(d)                                  Unused Revolving Line Facility Fee .  A fee (the “ Unused Revolving Line Facility Fee ”), payable monthly, in arrears, in an amount equal to 0.375% per annum of the average unused portion of the Revolving Line, as determined by Bank, subject to confirmation by Borrower (although such confirmation is not a condition precedent to the obligation to the payment of any such fee).  The unused portion of the Revolving Line, for the purposes of this calculation, shall include amounts reserved under the Cash Management Services Sublimit for products provided and under the Foreign Exchange Sublimit for FX Forward Contracts.  Borrower shall not be

 

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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; and

 

(e)                                   Collateral Monitoring Fee .  A monthly collateral monitoring fee of $2,500, payable in arrears on the last day of each month (prorated for any partial month at the beginning and upon termination of this Agreement), provided that for any month in which there were no Advances outstanding at any times, the monthly collateral monitoring fee shall be $500; and

 

(f)                                     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.

 

3                                          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 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)                                  its Operating Documents and a good standing certificate of Borrower certified by the Secretary of State of the State of Delaware and the Secretary of State of the State of California as of a date no earlier than thirty (30) days prior to the Effective Date;

 

(c)                                   duly executed original signature of the secretary or assistant secretary of Borrower with respect to a general certificate of Borrower as to, among other things, the Resolutions for Borrower;

 

(d)                                  duly executed guaranty agreement and security agreement by each entity identified on Exhibit D;

 

(e)                                   duly executed original signature of the secretary or assistant secretary of each Guarantor with respect to a general certificate of such Guarantor as to, among other things, the Resolutions for such Guarantor;

 

(f)                                     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;

 

(g)                                  the Perfection Certificate executed by Borrower;

 

(h)                                  a duly executed legal opinion of Borrower’s counsel dated as of the Effective Date;

 

(i)                                      evidence satisfactory to Bank that the insurance policies required by this Agreement 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; and

 

(j)                                      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

 

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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 sole discretion, there has not been a Material Adverse Change.

 

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, 2.1.3 or 2.1.4), 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.  Together with such notification, Borrower must promptly deliver to Bank by electronic mail or facsimile a completed Transaction Report executed by a Responsible Officer or his or her 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 repay Obligations that were not paid when 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 Borrower shall acquire a commercial tort claim, Borrower shall promptly notify Bank in a writing signed by Borrower of the general details thereof and grant to Bank in such writing a security interest therein and in the proceeds thereof, all upon the terms of this Agreement, with such writing to be in form and substance 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 and obligations for which cash collateral has been provided in a manner and in an amount deemed acceptable to Bank) 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 with all appropriate jurisdictions to perfect or protect Bank’s interest or rights hereunder, including a notice that certain dispositions of the Collateral, by either Borrower or any other Person, would be deemed to violate the rights of Bank under the Code.  Promptly after the filing thereof, Bank shall provide Borrower with a copy of any financing statement filed to protect Bank’s interest or rights hereunder.

 

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

 

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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) as of the Closing Date, all other information set forth on the Perfection Certificate pertaining to Borrower and each of Borrower’s Subsidiaries is accurate and complete in all material respects; provided , however , it is understood and agreed that Borrower may from time to time update the information described in clauses (a) through (e) above after the Effective Date to the extent otherwise permitted by this Agreement, and, as a result, the information in the Perfection Certificate shall be deemed modified by any such updates.  Further, Borrower hereby agrees to update the information set forth in the Perfection Certificate on an annual basis, if the Bank so requests, provided that Borrower shall not be required to provide a level of detail in connection therewith greater than that provided by Borrower in connection with the delivery of the original Perfection Certificate, unless Bank, in its reasonable, good faith business judgment, determines that certain specific information is necessary in order to further effectuate the purposes of this Agreement.

 

The execution, delivery and performance by Borrower of the Loan Documents to which it is a party have been duly authorized, and do not (i) conflict with any of Borrower’s organizational documents, (ii) contravene, conflict with, constitute a default under or violate any material Requirement of Law, (iii) contravene, conflict or violate any applicable order, writ, judgment, injunction, decree, determination or award of any Governmental Authority by which (A) Borrower or any Guarantor or any of their material property or material assets may be bound or affected, or (B) Subsidiaries of Borrower other than any Guarantor, or any of their property or assets may be bound or affected in a manner that would reasonably be expected to result in a material adverse effect on Borrower’s business, (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 beginning not later than the 91 st  day after the Effective Date (in accordance with the provisions set forth in Section 6.8(a) hereof), Borrower has 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.

 

As of the Closing Date, the Collateral is not in the possession of any third party bailee (such as a warehouse) except as otherwise provided in the Perfection Certificate and as set forth in the following sentence, provided that in connection with any such third party bailee locations Borrower shall, within 90 days of the date hereof, use all commercially reasonable efforts to obtain third party bailee letter agreements from the owners/operators of such locations, which shall be in form and substance acceptable to Bank.  Other than inventory located, in the ordinary course of business, at locations for the purpose of testing thereof, none of the Collateral shall be maintained at locations other than as provided in the Perfection Certificate and as otherwise permitted pursuant to this Agreement, including, without limitation, Section 7.2.  The provisions of this paragraph shall not apply to Inventory that has been shipped, but as to which title has not yet passed to the buyer thereof, but which is intended, in the ordinary course of business, to result in having title to such Inventory pass to such buyer.

 

All Inventory is in all material respects of good and marketable quality, free from material defects, taking into account all Inventory write-downs and reserves.

 

Borrower is the sole owner of its intellectual property, except for licenses granted to its customers in the ordinary course of business consistent with the past business practices of Borrower.  No part of the intellectual property has been judged invalid or unenforceable, in whole or in part, and, to Borrower’s knowledge, no claim has

 

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been made that any part of the intellectual property violates the rights of any third party, except to the extent such claim would not reasonably be expected to have a material adverse effect on Borrower’s business.

 

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.  Whether or not an Event of Default has occurred and is continuing, Bank may verify the amount of any 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 the most recent Transaction Report.  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 .  Except as previously disclosed to Bank in writing, 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 $500,000.

 

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 as of the dates and for the periods presented therein.  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 that is reasonably expected to result in Borrower breaching any of the financial covenants set forth in Section 6.9 as of the end of the current fiscal quarter, provided , however , it is the intention of the parties hereto that nothing in the foregoing representation as so stated is intended to, nor shall the foregoing in any manner derogate from whatsoever, the availability or enforceability of an Event of Default arising from any of the components of a Material Adverse Change Event of Default under Section 8.3 hereof, all of which components are hereby specifically affirmed by Borrower as enforceable and effective provisions.

 

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.

 

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 or as would not reasonably be expected to have a material adverse effect on Borrower’s or such Subsidiary’s business, respectively.  Borrower and each of its Subsidiaries have obtained all material consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all Government Authorities that are necessary to continue their respective businesses as currently conducted in all material respects.

 

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 (i) has timely filed all required income, payroll and sales tax returns and reports and timely paid all such taxes owed by Borrower; and (ii) subject to the following proviso, except as would relate to tax obligations not in the aggregate in excess of $250,000 (the

 

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“Exception Amount”), has timely filed all other tax returns and reports and timely paid all other foreign, federal, state and local taxes, assessments, deposits and contributions owed by Borrower, as long as the failure to pay the Exception Amount of taxes would not reasonably be expected to result in a Material Adverse Change.  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 excess of 250,000, (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 of $100,000 or more becoming due and payable by Borrower or that otherwise would reasonably be expected to result in a Material Adverse Change.  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 (including for the payment of interest on Subordinated Debt), to fund its general business requirements and to repay or repurchase 2009 Unsecured Senior Notes, 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).

 

5.12                         Existing Liens Relating to Shares .  Reference is made to the issued and outstanding shares of capital stock owned by Borrower of any Subsidiary which is organized under the laws of a jurisdiction other than the United States or any state or territory thereof or the District of Columbia (the “Foreign Shares”).  Borrower has informed Bank that a prior lienholder in such Foreign Shares has not completed all steps necessary to extinguish, of record, all evidence of such liens in all jurisdictions.  In connection therewith, however, Borrower hereby represents and warrants to Bank that there is, and shall remain, no obligations outstanding or otherwise owing to the holder of any lien in any of the Foreign Shares.

 

5.13                         Domestic Subsidiaries . The only domestic Subsidiaries of Borrower that have assets of at least $100,000 are the entities set forth on Exhibit D attached hereto, and such other entities that may arise after the Effective Date that become Guarantors by virtue of the operation of Section 6.12 hereof and that enter in to guaranties and security agreements in form and substance acceptable to Bank.

 

6                                          AFFIRMATIVE COVENANTS

 

Borrower shall do all of the following:

 

6.1                                Government Compliance .

 

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

 

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

 

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6.2                                Financial Statements, Reports, Certificates .

 

(a)                                   Borrower shall provide Bank with the following:

 

(i)              (A) Subject to clause (B) hereof, a Transaction Report (and any schedules related thereto), within fifteen (15) days after the end of each fiscal month and with each request for an Advance (collectively the “ Standard Transaction Reporting ”), provided , however , if Borrower has not met the Net Cash Test as of any fiscal quarter end date, a Transaction Report (and any schedules related thereto) shall be provided weekly and with each request for an Advance and any other Credit Extension until such time as Borrower has thereafter met the Net Cash Test, as of a fiscal quarter end date, whereupon only Standard Transaction Reporting shall be required;

 

                        (B)  If at any time, the sum of the aggregate principal amount of outstanding Credit Extensions hereunder minus the aggregate amount of unrestricted deposits of Borrower with Bank is greater than Zero Dollars ($0) (such an occurrence and condition being referred to herein as “Excess Credit Exposure”), then within three (3) Business Days of such date Borrower shall provide to Bank a Transaction Report (and any schedules related thereto), and Borrower shall thereafter provide to Bank such a Transaction Report on a weekly basis as well as with each request for an Advance and each request for any other Credit Extension until there is no longer any Excess Credit Exposure, at which time the reporting requirements of clause (A) above shall apply.

 

(ii) within fifteen (15) days after the end of each fiscal 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, and (C) monthly reconciliations of accounts receivable agings (aged by invoice date), transaction reports and general ledger,

 

(iii) as soon as available, and in any event within thirty (30) days after the end of each month, monthly unaudited financial statements;

 

(iv) within thirty (30) days after the end of each fiscal quarter a Compliance Certificate signed by a Responsible Officer, certifying that as of the end of such fiscal 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 payable to Borrower;

 

(v)  (A) within 90 days of the beginning of each fiscal year of Borrower annual financial projections for such fiscal year (on a quarterly basis) presented to, and not objected to by, Borrower’s board of directors, together with any related business forecasts used in the preparation of such annual financial projections; and (B) any updates to any such projections as Borrower may prepare from time to time and, if so prepared, as Bank then may request;

 

 (vii)  as soon as available, but no later than five (5) days after filing with the Securities Exchange Commission, Borrower’s 10K (to include an unqualified opinion of Borrower’s independent certified public accountants), 10Q, and 8K reports, provided that the same shall be deemed to have been delivered on the date on which Borrower posts such report or provides a link thereto on Borrower’s or another website on the Internet;

 

(viii)  such reports as Bank shall request from time to time to ensure Eligible Accounts which are foreign Accounts supported by foreign credit insurance are appropriately covered by such foreign credit insurance.

 

 (b)                               Prompt written notice of (i) the registration of any copyright, including any subsequent ownership right of Borrower in or to any copyright, or (iii) Borrower’s knowledge of an event that materially adversely affects the value of the intellectual property material to the business of Borrower.

 

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 after the occurrence and during the continuance of an Event of Default, Borrower shall furnish Bank with copies (or, at Bank’s request, originals) of all contracts,

 

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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 endorsements, and copies of all credit memos for $100,000 or more.

 

(b)                                  Disputes .  Borrower shall promptly notify Bank of such disputes or claims relating to Accounts that exceed at any time either $250,000 individually or $1,000,000 in the aggregate relating to all such disputes.  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 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, provided, further, Borrower shall ensure that after taking into account all such discounts, settlements and forgiveness, the total outstanding Advances will not exceed the lesser of the Revolving Line Maximum Dollar Amount or the Aggregate Borrowing Base by taking such actions, including, without limitation, the making of payments to reduce the Obligations.

 

(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 in such order as Bank shall determine in its sole discretion, provided that if the Net Cash Test was met on the last day of the preceding fiscal quarter of Borrower, and no Event of Default has occurred and is continuing, then such payments and proceeds of Accounts shall be deposited in the Designated Deposit Account.  Borrower shall cause all proceeds of Accounts to be deposited into the Designated Deposit Account, a cash collateral account (in the case of proceeds received by Borrower by wire transfer) or a lockbox account (in the case of proceeds received by check or other payment), as Bank may specify, pursuant to a blocked account agreement or similar 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 to Borrower, Borrower shall employ its usual and customary procedures in connection therewith, which include, without limitation, the following as applicable:  (i) determination of the reason for such return, (ii) issuance of a credit memorandum to the Account Debtor in the appropriate amount, and (iii) providing a copy of such credit memorandum to Bank for such returns in excess of $250,000, upon request from Bank.  In the event any attempted return occurs after the occurrence and during the continuance of any Event of Default, upon the written request of Bank, Borrower shall hold the returned Inventory in trust for Bank, and immediately notify Bank of the return of the Inventory with a value in excess of $250,000.

 

(e)                                   Verification .   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 in Section 6.3(c) or any other provision of this Agreement, 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; provided that, if no Default or Event of Default has occurred and is continuing, Borrower shall not be obligated to remit to Bank the net cash proceeds (with the computation of net cash proceeds taking into account any income and other taxes relating to such sale) of the sale of worn out or obsolete Equipment disposed of by Borrower in good faith in an arm’s length transaction for an aggregate purchase price of $1,000,000 or less (for all such transactions in any fiscal year).   Borrower agrees that it will not commingle proceeds of Collateral with any of Borrower’s other funds or property, but will hold such

 

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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 .  (i) Timely file, and require each of its Subsidiaries to timely file (taking into account all applicable extensions of time to file), all required tax returns and reports and (ii) subject to the following proviso, except as would relate to tax obligations not in the aggregate in excess of the Exception Amount, 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 as long as the failure to pay the Exception Amount of taxes would not reasonably be expected to result in a Material Adverse Change, 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, on five (5) Business Days’ notice (provided no notice is required if an Event of Default has occurred and is continuing and, absent an Event of Default, one (1) Business Day’s notice only shall be required under circumstances where Bank reasonably determines, based on the then-existing circumstances affecting Borrower or the integrity of the Collateral, that such access is needed), Bank, or its agents, shall have the right to inspect the Collateral and the right to audit and copy Borrower’s Books, provided that (i) such audits shall be conducted no more often than once every fiscal year, if at all times during such fiscal year no Credit Extensions were outstanding, (ii) if during a fiscal year any Credit Extensions were outstanding, such audits shall be conducted no more often than twice in such fiscal year, and (iii) no Credit Extensions shall be made if, at the date of such Credit Extension, an audit has not been completed within the prior six months.  Notwithstanding the foregoing, there shall be no restriction on the number of audits if, at the time of the proposed audit, an Event of Default has occurred and is continuing.  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 ten (10) days in advance, and Borrower cancels or reschedules the audit with less than ten (10) days written notice to Bank, then (without limiting any of Bank’s rights or remedies), Borrower 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 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 satisfactory to Bank.  All property policies shall have a lender’s loss payable endorsement showing Bank as an additional loss payee and waive subrogation against Bank, and Borrower’s general liability policy 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 shall endeavor to give Bank at least thirty (30) days notice before canceling its policy prior to the expiration thereof; and Borrower shall give Bank notice of any such intended cancellation or any material amendment to its policy or any knowledge by Borrower of a decision by the insurer to decline 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 property 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 $5,000,000 with respect to any loss, but not exceeding $10,000,000 in the aggregate for all losses under all casualty policies in any one year, 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 6.7 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.

 

6.8                                Operating Accounts .

 

(a)                           Maintain its primary and its Subsidiaries’ primary operating and other deposit accounts and securities accounts that are domiciled in the United States with Bank and Bank’s Affiliates which accounts shall at all times represent at least 85% of the dollar value of Borrower’s and such Subsidiaries accounts at all financial

 

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institutions that are located in the United States, provided , however , Borrower shall have ninety (90) days from the Effective Date in order to comply with this covenant.

 

(b)                                  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 on a consolidated basis with respect to Borrower and its Subsidiaries, a Tangible Net Worth of at least $12,500,000 (the “Minimum Tangible Net Worth”), to be tested as of the last day of each fiscal quarter, commencing with the fiscal quarter ending October 3, 2008, which Minimum Tangible Net Worth shall increase by:

 

 (i) by 50% of Net Income on a quarterly basis commencing with Net Income in the quarter ending after October 3, 2008 and continuing with respect to each fiscal quarter thereafter, and

 

(ii) by 50% of issuances of equity and 50% of the principal amount of Subordinated Debt, issued after October 3, 2008, effective on the date of such issuances, other than for issuances of Subordinated Debt the proceeds of which are used to refinance outstanding Subordinated Debt substantially concurrently with the issuance thereof, up to the amount of the original principal amount the Subordinated Debt being so replaced.

 

6.10                         Intellectual Property Rights; Proceeds Resulting in Collateral.   Borrower shall:  (a) 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, except in the case of clauses (a) and (c) above for any intellectual property that Borrower determines in its good faith business judgment is not necessary in the conduct of its business or otherwise is material to the conduct of its business. Except as set forth in the Perfection Certificate, as of the Closing Date, Borrower has no present maskworks, software, computer programs and other works of authorship registered with the United States Copyright Office, and Borrower shall not hereafter register any maskworks, software, computer programs or other works of authorship subject to United States copyright protection with the United States Copyright Office that result, as proceeds thereof or otherwise, in any Collateral hereunder (including Collateral consisting of license fees, royalties or accounts) without first complying with the following:  (i) providing Bank with at least 15 days prior written notice thereof, (ii) providing Bank with a copy of the application for any such registration and (iii) executing and filing such other instruments, and taking such further actions as Bank may reasonably request from time to time to perfect or continue the perfection of Bank’s interest in the Collateral.  With respect to any such registered copyrights, upon the request of Bank, Borrower shall enter into an agreement to be filed in the United States Copyright Office solely in order for the Bank to be able to perfect its Lien hereunder in the Collateral (including Collateral consisting of license fees, royalties or accounts) arising therefrom (but not the registered copyrights themselves), which agreement shall be in form reasonably satisfactory to the Bank.  In connection with the existing registered copyrighted materials as set forth in the Perfection Certificate, Borrower shall, within 30 days hereof, execute and deliver to Bank the agreement as referenced in the immediately preceding sentence with respect thereto.

 

6.11                         Litigation Cooperation .  From the date hereof and continuing through the termination of this Agreement, upon reasonable notice and during normal business hours, 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                         Covenant Regarding New Loan Parties .  Borrower hereby covenants and agrees to provide to Bank at least twenty (20) days’ prior written notice of the creation of any new domestic Subsidiary of Borrower or a new domestic Subsidiary of any domestic Subsidiary.  If Bank determines that any such new Subsidiary merits becoming a secured guarantor of the Obligations hereunder then Borrower shall cause such entity to enter into

 

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Bank’s standard guaranty agreement and security agreement and related documents and agreements (collectively, the “Guarantor Documents”) and take such other actions from time to time as Bank shall reasonably determine are necessary or advisable in order to effectuate the purposes thereof.

 

6.13                         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.  Deliver to Bank, within five (5) days after the same are sent or received, copies of all correspondence, reports, documents and other filings with any Governmental Authority regarding compliance with or maintenance of Governmental Approvals or Requirements of Law or that could reasonably be expected to have a material effect on any of the Governmental Approvals or otherwise on the operations of Borrower or any of its Subsidiaries.

 

6.14                                 International Cash, etc . Borrower hereby agrees to use its reasonable commercial efforts to assist Bank in Bank’s acquisition of agreements with foreign banking institutions in order for Bank to obtain direction and/or control with respect to the bank accounts of the foreign Subsidiaries of Borrower; provided that, no foreign subsidiary shall be required to enter into any such agreement that grants a security interest in favor of Bank or guaranties all or any portion of the Obligations, unless Borrower shall have determined that such agreement is not reasonably expected to have adverse tax consequences to Borrower.  Further, Borrower shall not cause or permit cash or Cash Equivalents to accumulate in any of the foreign Subsidiaries of Borrower, excluding cash and Cash Equivalents of, and in accounts owned by, Mindspeed Technologies K.K. (Japan) to the extent that such cash and Cash Equivalents are materially greater than those amounts needed for the operation of such entities in the ordinary course of business; provided that Bank will cooperate in good faith with Borrower to moderate, in a reasonable manner, without eliminating, the requirements of this sentence to ameliorate any material adverse tax consequences affecting Borrower as a result thereof.

 

7                                          NEGATIVE COVENANTS

 

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

 

7.1                                Dispositions .  Convey, sell, lease, license, transfer or otherwise dispose of (collectively “ Transfer ”), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, except for:

 

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

 

(b)                                  Transfers constituting Permitted Indebtedness, Permitted Investments or Permitted Liens;

 

(c)                                   Transfers constituting (i) 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 and (ii) exclusive licenses of certain intellectual property of Borrower that arise in the ordinary course of business consistent with the past business practices of Borrower;

 

(d)                                  Transfers otherwise permitted by the Loan Documents;

 

(e)                                   Transfers of assets (other than Accounts and Inventory unless such Transfer is in the ordinary course of Borrower’s business), provided, that the aggregate net book value of all such Transfers by Borrower and its Subsidiaries, together, shall not exceed in any fiscal year, exceed $1,000,000, provided that upon the occurrence and continuance of an Event of Default no such Transfers shall be permitted; and

 

(f)                                     Transfers consisting of patents of Borrower that are not material to the business of Borrower.

 

7.2                                        Changes in Business, Control, or Business Locations . (1) Engage in any material line of business other than those lines of business conducted by Borrower and its Subsidiaries on the date hereof (which lines of business include the telecommunications and semiconductor businesses) and any businesses reasonably related, complementary or incidental thereto or reasonable extensions thereof; (2) permit or suffer any Change in Control; (3) (A) change the chief executive location of Borrower or otherwise change the location of the central operating office of Borrower without at least thirty (30) days’ prior written notice to Bank), or (B) locate Collateral having a value in excess of $500,000 at a new location without (i) at least thirty (30) days’ prior written notice to

 

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Bank and (ii) with respect to Collateral located at domestic third party bailee locations having a value in excess of $500,000, at least thirty (30) days’ prior written notice to Bank and with Borrower using commercially reasonable efforts to obtain, within 60 days, third party bailee letter agreements from the owners/operators of any such location or locations; (4) change its jurisdiction of organization, (5) change its organizational entity status, (6) change its legal name, or (7) change any organizational number (if any) assigned by its jurisdiction of organization, provided that Borrower may make any of the changes described in clauses (4) through (7) as long as Borrower provides Bank with thirty (30) days prior written no