Exhibit 10.1


LOAN AND SECURITY AGREEMENT


 


THIS LOAN AND SECURITY AGREEMENT
(this “Agreement”) dated as of October
11, 2007 (the “Effective Date”)
among (a) SILICON VALLEY BANK, a
California corporation with a loan production office located at One Newton Executive
Park, Suite 200, 2221 Washington Street, Newton, Massachusetts 02462 (“Bank”), and (b) NETWORK ENGINES, INC., a Delaware corporation (“Network”), and ALLIANCE SYSTEMS, INC., a Texas corporation (“Alliance”) (Network and Alliance are individually
and collectively, jointly and severally, “Borrower”),
provides the terms on which Bank shall lend to Borrower and Borrower shall
repay Bank. The parties agree as follows:


 


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. 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, Bank shall make Advances
not exceeding the Availability Amount. Amounts borrowed under the Revolving
Line may be repaid and, prior to the Revolving Line Maturity Date, reborrowed, subject
to the applicable terms and conditions precedent herein.


 


(b)                                 Termination;
Repayment. The Revolving Line terminates on the Revolving Line Maturity
Date, when the principal amount of all Advances, the unpaid interest thereon,
and all other Obligations relating to the Revolving Line shall be immediately
due and payable.


 


2.1.2                     Letters of
Credit Sublimit.


 


(a)                                  As
part of the Revolving Line, Bank shall issue or have issued Letters of Credit
for Borrower’s account. The face amount of outstanding Letters of Credit
(including drawn but unreimbursed Letters of Credit and any Letter of Credit
Reserve) may not exceed Fifteen Million Dollars ($15,000,000.00), inclusive of
Credit Extensions relating to Sections 2.1.3 and 2.1.4. Such aggregate amounts
utilized hereunder shall at all times reduce the amount otherwise available for
Advances under the Revolving Line. If, on the Revolving Line Maturity Date,
there are any outstanding Letters of Credit, then on such date Borrower shall
provide to Bank cash collateral in an amount equal to 105% of the face amount
of all such Letters of Credit plus all interest, fees, and costs due or to
become due in connection therewith (as estimated by Bank in its good faith
business judgment), to secure all of the Obligations relating to said Letters
of Credit. All Letters of Credit shall be in form and substance acceptable to
Bank in its sole discretion and shall be subject to the terms and conditions of
Bank’s standard Application and Letter of Credit Agreement (the “Letter of Credit Application”). Borrower
agrees to execute any further documentation in connection with the Letters of
Credit as Bank may reasonably request. Borrower
further agrees to be bound by the regulations and interpretations of the issuer
of any Letters of Credit guarantied by Bank and opened for Borrower’s account
or by Bank’s interpretations of any Letter of Credit issued by Bank for
Borrower’s account, and Borrower understands and agrees that Bank shall not be
liable for any error, negligence, or mistake, whether of omission or
commission, in following Borrower’s instructions or those contained in the
Letters of Credit or any modifications, amendments, or supplements thereto,
except for the Bank’s gross negligence or willful misconduct.


 


(b)                                 The
obligation of Borrower to immediately reimburse Bank for drawings made under
Letters of Credit shall be absolute, unconditional, and irrevocable, and shall
be performed strictly in accordance with the terms of this Agreement, such
Letters of Credit, and the Letter of Credit Application.


 

















 


(c)                                  Borrower
may request that Bank issue a Letter of Credit payable in a Foreign Currency. If
a demand for payment is made under any such Letter of Credit, Bank shall treat
such demand as an Advance to Borrower of the equivalent of the amount thereof
(plus reasonable fees and charges in connection therewith such as wire, cable,
SWIFT or similar charges) in Dollars at the then-prevailing rate of exchange in
San Francisco, California, for sales of the Foreign Currency for transfer to
the country issuing such Foreign Currency.


 


(d)                                 To
guard against fluctuations in currency exchange rates, upon the issuance of any
Letter of Credit payable in a Foreign Currency, Bank shall create a reserve
(the “Letter of Credit Reserve”)
under the Revolving Line in an amount equal to ten percent (10%) of the face
amount of such Letter of Credit. The amount of the Letter of Credit Reserve may
be adjusted by Bank from time to time to account for fluctuations in the
exchange rate. The availability of funds under the Revolving Line shall be
reduced by the amount of such Letter of Credit Reserve for as long as such
Letter of Credit remains outstanding.


 


2.1.3                     Foreign
Exchange Sublimit. As part of the Revolving Line, Borrower may enter into
foreign exchange contracts with Bank under which Borrower commits to purchase
from or sell to Bank a specific amount of Foreign Currency (each, a “FX Forward Contract”) on a specified date
(the “Settlement Date”). FX
Forward Contracts shall have a Settlement Date of at least one (1) FX Business
Day after the contract date and shall be subject to a reserve of ten percent
(10%) of each outstanding FX Forward Contract in a maximum aggregate amount
equal to One Million Five Hundred Thousand Dollars ($1,500,000.00) (the “FX Reserve”), inclusive of Credit Extension
relating to Sections 2.1.1, 2.1.2 and 2.1.4. The aggregate amount of FX Forward
Contracts at any one time may not exceed ten (10) times the amount of the FX
Reserve and the aggregate amount of FX Forward Contracts may not exceed Fifteen
Million Dollars ($15,000,000.00), inclusive of Credit Extensions relating to
Sections 2.1.1, 2.1.2 and 2.1.4. The amount otherwise available for Credit
Extensions under the Revolving Line shall be reduced by an amount equal to ten
percent (10%) of each outstanding FX Forward Contract. Any amounts needed to
fully reimburse Bank will be treated as Advances under the Revolving Line and
will accrue interest at the interest rate applicable to Advances.


 


2.1.4                     Cash
Management Services Sublimit. Borrower may use up to Fifteen Million
Dollars ($15,000,000.00), inclusive of Credit Extensions relating to Sections
2.1.1, 2.1.2 and 2.1.3 of the Revolving Line for Bank’s cash management
services which may include merchant services, direct deposit of payroll,
business credit card, and check cashing services identified in Bank’s various
cash management services agreements (collectively, the “Cash Management Services”). The dollar
amount of any Cash Management Services provided under this sublimit will reduce
the amount otherwise available under the Revolving Line. Any amounts used or
reserved by Borrower for any Cash Management Services will reduce the amount
otherwise available for Credit Extensions under the Revolving Line. Any amounts
Bank pays on behalf of Borrower for any Cash Management Services will be
treated as Advances under the Revolving Line and will accrue interest at the
interest rate applicable to Advances.


 


2.2                               Overadvances.
If, at any time, the Credit Extensions under Sections 2.1.1, 2.1.2, 2.1.3 and
2.1.4 exceed the lesser of either (a) the Revolving Line or (b) the Borrowing
Base, Borrower shall immediately pay to Bank in cash such excess.


 


2.3                               Payment
of Interest on the Credit Extensions.


 


(a)                                  Interest
Rate. Subject to Section 2.3(b), the principal amount outstanding under the
Revolving Line shall accrue interest at a floating per annum rate equal to one
quarter of one percentage point (0.25%) below the Prime Rate, which interest
shall be payable monthly in accordance with Section 2.3(f) below.


 


(b)                                 Default
Rate. Immediately upon the occurrence and during the continuance of an
Event of Default, Obligations shall bear interest at a rate per annum which is four
percentage points above the rate effective immediately before the Event of
Default (the “Default Rate”). Payment or acceptance of the increased interest
rate provided in this Section 2.3(b) is not a permitted alternative to timely
payment and shall not constitute a waiver of any Event of Default or otherwise
prejudice or limit any rights or remedies of Bank.


 


(c)                                  Adjustment
to Interest Rate. Changes to the interest rate of any Credit Extension
based on changes to the Prime Rate shall be effective on the effective date of
any change to the Prime Rate and to the extent of any such change.


 


(d)                                 360-Day
Year. Interest shall be computed on the basis of a 360-day year for the
actual number of days elapsed.


 


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(e)                                  Debit
of Accounts. Bank may debit any of Borrower’s deposit accounts, including
the Designated Deposit Account, for principal and interest payments or any other
amounts Borrower owes Bank when due. These debits shall not constitute a
set-off.


 


(f)                                    Payments.
Unless otherwise provided, interest is payable monthly on the first (1st)
calendar day of each month. Payments of principal and/or interest received
after 12:00 noon Eastern time are considered received at the opening of business
on the next Business Day. When a payment is due on a day that is not a Business
Day, the payment is due the next Business Day and additional fees or interest,
as applicable, shall continue to accrue.


 


2.4                               Early
Termination. This Agreement may be terminated prior to the Revolving Line
Maturity Date as follows: (i) by Borrower, effective three (3) Business Days
after written notice of termination is given to Bank; or (ii) by Bank at any
time after the occurrence of an Event of Default, without notice, effective
immediately. If this Agreement is terminated on or prior to the date that is
one (1) year from the Effective Date (A) by Bank in accordance with clause (ii)
in the foregoing sentence, or (B) by Borrower for any reason, Borrower shall
pay to Bank a termination fee in an amount equal to Seventy-Five Thousand
Dollars ($75,000.00) (the “Early Termination Fee”). The Early Termination Fee
shall be due and payable on the effective date of such termination and
thereafter shall bear interest at a rate equal to the highest rate applicable
to any of the Obligations.


 


2.5                               Fees.
Borrower shall pay to Bank:


 


(a)                                  Commitment
Fee. A fully earned, non-refundable commitment fee of Eighteen Thousand
Seven Hundred Fifty Dollars ($18,750.00), on the Effective Date;


 


(b)                                 Letter
of Credit Fee. Bank’s customary fees and expenses for the issuance or
renewal of Letters of Credit, upon the issuance, each anniversary of the
issuance, and the renewal of such Letter of Credit;


 


(c)                                  Early
Termination Fee. The Early Termination Fee, when due hereunder;


 


(d)                                 Unused
Revolving Line Facility Fee. A fee (the “Unused
Revolving Line Facility Fee”), payable quarterly , in arrears, on a
calendar year basis, in an amount equal to one quarter of one percent (0.25%)
per annum of the average unused portion of the Revolving Line during such
quarter, as determined by Bank. The unused portion of the Revolving Line, for
the purposes of this calculation, shall include average amounts reserved under
the Cash Management Services Sublimit for products provided and under the
Foreign Exchange Sublimit for FX Forward Contracts during such quarter. Borrower
shall not be entitled to any credit, rebate or repayment of any Unused
Revolving Line Facility Fee previously earned by Bank pursuant to this Section
notwithstanding any termination of the Agreement or the suspension or
termination of Bank’s obligation to make loans and advances hereunder;  and


 


(e)                                  Bank
Expenses. All Bank Expenses (including reasonable attorneys’ fees and
expenses, plus expenses, for documentation and negotiation of this Agreement)
incurred through and after the Effective Date, when due.


 


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 Bank shall
have received, in form and substance satisfactory to Bank, such documents, and
completion of such other matters, as Bank may reasonably deem necessary or
appropriate, including, without limitation:


 


(a)                                  Duly
executed original signatures to the Loan Documents to which it is a party;


 


(b)                                 Network
shall have delivered its Operating Documents and a good standing certificate of
Network certified by the Secretary of State of the applicable state of
formation as of a date no earlier than thirty (30) days prior to the Effective
Date;


 


(c)                                  Alliance
shall have delivered its Operating Documents;


 


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(d)                                 Secretary’s
Certificates attesting to the duly executed Borrowing Resolutions for Borrower;


 


(e)                                  Bank
shall have received certified copies, dated as of a recent date, of financing
statement searches, as Bank shall request, accompanied by written evidence
(including any Code termination statements) that the Liens indicated in any
such financing statements either constitute Permitted Liens or have been or, in
connection with the initial Credit Extension, will be terminated or released;


 


(f)                                    Borrower
shall have delivered a legal opinion of Borrower’s counsel dated as of the
Effective Date together with the duly executed original signatures thereto;


 


(g)                                 Borrower
shall have delivered evidence satisfactory to Bank that the insurance policies
required by Section 6.5 hereof are in full force and effect, together with
appropriate evidence showing loss payable and/or additional insured clauses or
endorsements in favor of; and


 


(h)                                 Borrower
shall have paid the fees and Bank Expenses then due as specified in Section 2.5
hereof.


 


3.2                               Conditions
Precedent to all Credit Extensions. Bank’s obligations to make each Credit
Extension, including the initial Credit Extension, is subject to the following:


 


(a)                                  except
as otherwise provided in Section 3.4, timely receipt of an executed Payment/Advance
Form;


 


(b)                                 the
representations and warranties in Section 5 shall be true in all material respects
on the date of the Payment/Advance Form and on the Funding Date of each Credit
Extension; provided, however, that such materiality qualifier shall not be
applicable to any representations and warranties that already are qualified or
modified by materiality in the text thereof; and provided, further that those
representations and warranties expressly referring to a specific date shall be
true, accurate and complete in all material respects as of such date, and no Default
or Event of Default shall have occurred and be continuing or result from the
Credit Extension. Each Credit Extension is Borrower’s representation and
warranty on that date that the representations and warranties in Section 5
remain true in all material respects; provided, however, that such materiality
qualifier shall not be applicable to any representations and warranties that
already are qualified or modified by materiality in the text thereof; and
provided, further that those representations and warranties expressly referring
to a specific date shall be true, accurate and complete in all material respects
as of such date; and


 


(c)                                  in
Bank’s sole discretion, there has not been any material impairment in the
general affairs, management, results of operation, financial condition or the
prospect of repayment of the Obligations, nor has there been any material
adverse deviation by Borrower from the most recent business plan of Borrower
presented to and accepted by Bank.


 


3.3                               Covenant
to Deliver.


 


Borrower agrees to deliver to Bank each item required to be delivered
to Bank under this Agreement as a condition to any Credit Extension. Borrower
expressly agrees that the extension of a Credit Extension prior to the receipt
by Bank of any such item shall not constitute a waiver by Bank of Borrower’s
obligation to deliver such item, and any such extension in the absence of a
required item shall be in Bank’s sole discretion.


 


3.4                               Procedures
for Borrowing. Subject to the prior satisfaction of all other applicable
conditions to the making of an Advance set forth in this Agreement, to obtain
an Advance (other than Advances under Sections 2.1.2 or 2.1.4), Borrower shall
notify Bank (which notice shall be irrevocable) by electronic mail, facsimile,
or telephone by 12:00 noon Eastern time on the Funding Date of the Advance. Together
with any such electronic or facsimile notification, Borrower shall deliver to
Bank by electronic mail or facsimile a completed Payment/Advance Form executed
by a Responsible Officer or his or her designee. Bank may rely on any telephone
notice given by a person whom Bank reasonably believes is a Responsible Officer
or designee. Bank shall credit Advances to the Designated Deposit Account. Bank
may make Advances under this Agreement based on instructions from a Responsible
Officer or his or her designee or without instructions if the Advances are
necessary to meet Obligations which have become due.


 


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4                                         CREATION
OF SECURITY INTEREST


 


4.1                               Grant
of Security Interest. Borrower hereby grants Bank, to secure the payment
and performance in full of all of the Obligations, a continuing security
interest in, and pledges to Bank, the Collateral, wherever located, whether now
owned or hereafter acquired or arising, and all proceeds and products thereof. Borrower
represents, warrants, and covenants that the security interest granted herein
is and shall at all times continue to be a first priority perfected security
interest in the Collateral (subject only to Permitted Liens that may have
superior priority to Bank’s Lien under this Agreement). If Borrower shall
acquire a commercial tort claim with a value in excess of One Hundred Thousand
Dollars ($100,000.00), Borrower shall promptly notify Bank in a writing signed
by Borrower of the general details thereof and, upon request of Bank, grant to
Bank in such writing a security interest therein and in the proceeds thereof,
all upon the terms of this Agreement, with such writing to be in form and
substance reasonably satisfactory to Bank.


 


If this Agreement is
terminated, Bank’s Lien in the Collateral shall continue until the Obligations
(other than inchoate indemnity obligations) are repaid in full in cash. Upon
payment in full in cash of the Obligations and at such time
as Bank’s obligation to make Credit Extensions has terminated, Bank shall, at
Borrower’s sole cost and expense, release its Liens in the Collateral and all
rights therein shall revert to Borrower.


 


4.2                               Authorization
to File Financing Statements. Borrower hereby authorizes Bank to file
financing statements, without notice to Borrower, with all appropriate
jurisdictions to perfect or protect Bank’s interest or rights hereunder,
including a notice that any disposition of the Collateral, by either Borrower
or any other Person, shall be deemed to violate the rights of Bank under the
Code.


 


5                                         REPRESENTATIONS
AND WARRANTIES


 


Borrower represents and
warrants as follows:


 


5.1                               Due
Organization and Authorization. Borrower and each of its Subsidiaries, if
any, are duly existing and in good standing, as Registered Organizations in their
respective jurisdictions of formation and are qualified and licensed to do
business and are in good standing in any jurisdiction in which the conduct of their
business or their ownership of property requires that they be qualified except
where the failure to do so could not reasonably be expected to have a material
adverse effect on Borrower’s business. In connection with this Agreement,
Borrower has delivered to Bank a completed perfection certificate signed by
Borrower (the “Perfection Certificate”). Borrower represents and warrants to
Bank that, as of the date hereof: (a) Borrower’s exact legal name is that
indicated on the Perfection Certificate and on the signature page hereof;
(b) Borrower is an organization of the type and is organized in the
jurisdiction set forth in the Perfection Certificate; (c) the Perfection
Certificate accurately sets forth Borrower’s organizational identification
number or accurately states that Borrower has none; (d) the Perfection
Certificate accurately sets forth Borrower’s place of business, or, if more
than one, its chief executive office as well as Borrower’s mailing address (if
different than its chief executive office); (e) except as set forth on the
Perfection Certificate, Borrower (and each of its predecessors) has not, in the
past five (5) years, changed its jurisdiction of formation, organizational
structure or type, or any organizational number assigned by its jurisdiction; and
(f) all other information set forth on the Perfection Certificate pertaining to
Borrower and each of its Subsidiaries is accurate and complete. If Borrower is
not now a Registered Organization but later becomes one, Borrower shall
promptly notify Bank of such occurrence and provide Bank with Borrower’s organizational
identification number.


 


The execution, delivery and performance of the Loan
Documents have been duly authorized, and do not conflict with Borrower’s
organizational documents, nor constitute an event of default under any material
agreement by which Borrower is bound. Borrower is not in default under any
agreement to which it is a party or by which it is bound in which the default would
have a material adverse effect on Borrower’s business.


 


5.2                               Collateral.
Borrower has good title to, has rights in, and the power to transfer each item
of the Collateral upon which it purports to grant a Lien hereunder, free and
clear of any and all Liens except Permitted Liens. Borrower has no deposit
accounts other than the deposit accounts with Bank, the deposit accounts, if
any, described in the Perfection Certificate delivered to Bank in connection
herewith, or of which Borrower has given Bank notice and taken such actions as
are necessary to give Bank a perfected security interest therein. The Accounts
are bona fide, existing obligations of the Account Debtors.


 


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The Collateral is not in the possession of any third
party bailee (such as a warehouse) except as otherwise provided in the Perfection
Certificate; provided, however, that Borrower shall have the right to deliver
possession of completed products to its customers before such customers have
purchased such products, either for evaluation purposes or pursuant to an
advance-delivery “kan-ban” arrangement. Borrower shall give Bank notice of all
such kan-ban arrangements and shall report on the amount of product held in
such arrangements in its monthly reports. Bank shall not require Bailee’s
Waivers from Borrower’s customers who are party to kan-ban arrangements. None
of the components of the Collateral shall be maintained at locations other than
as provided in the Perfection Certificate or as Borrower has given Bank notice
pursuant to Section 7.2. In the event that Borrower, after the date hereof,
intends to store or otherwise deliver any portion of the Collateral to a bailee
(other than a kan-ban arrangement) with an aggregate value in excess of One
Hundred Thousand Dollars ($100,000.00), then Borrower will first receive a
written acknowledgement from such bailee in form and substance reasonably
satisfactory to Bank in its sole discretion.


 


All Inventory is in all material respects of good and
marketable quality, free from material defects.


 


Except as noted on the Perfection Certificate, Borrower
is not a party to, nor is bound by, any license or other agreement with respect
to which Borrower is the licensee, other than (i) licenses or agreements for
software that Borrower incorporates into products for distribution to its
customers, (ii) software licensed for internal use by Borrower and (iii)
shrink-wrap, freeware and open source software licenses (collectively “Excluded
Licenses”)  that prohibits or otherwise
restricts Borrower from granting a security interest in Borrower’s interest in
such license or agreement or any other property. Borrower shall provide written
notice to Bank within ten (10) days of entering or becoming bound by any such
license or agreement, other than Excluded Licenses, which is reasonably likely
to have a material impact on Borrower’s business or financial condition (other
than over-the-counter software that is commercially available to the public). Borrower
shall take such steps as Bank requests to obtain the consent of, or waiver by,
any person whose consent or waiver is necessary for all such licenses or
contract rights, other than Excluded Licenses to be deemed “Collateral” and for
Bank to have a security interest in it that might otherwise be restricted or
prohibited by law or by the terms of any such license or agreement (such
consent or authorization may include a licensor’s agreement to a contingent
assignment of the license to Bank if Bank determines that is necessary in its
good faith judgment), whether now existing or entered into in the future.


 


5.3                               Accounts
Receivable. For any Eligible Account in any Borrowing Base Certificate, all
statements made and all unpaid balances appearing in all invoices, instruments
and other documents evidencing such Eligible Accounts are and shall be true and
correct and all such invoices, instruments and other documents, and all of
Borrower’s Books are genuine and in all material respects what they purport to
be. All sales and other transactions underlying or giving rise to each Eligible
Account shall comply in all material respects with all applicable laws and
governmental rules and regulations. Borrower has no knowledge of any actual
Insolvency Proceeding of any Account Debtor whose accounts are an Eligible
Account in any Borrowing Base Certificate. To the best of Borrower’s knowledge,
all signatures and endorsements on all documents, instruments, and agreements
relating to all Eligible Accounts are genuine, and all such documents,
instruments and agreements are legally enforceable in accordance with their
terms.


 


5.4                               Litigation.
There are no actions or proceedings pending or, to the knowledge of the
Responsible Officers, threatened in writing by or against Borrower or any of
its Subsidiaries which would be reasonably likely to result in damages owed by
the Borrower or any of its Subsidiaries in excess of more than Two Hundred
Fifty Thousand Dollars ($250,000.00).


 


5.5                               No
Material Deterioration in Financial Statements. All consolidated financial
statements for Borrower and any of its Subsidiaries delivered to Bank fairly
present in all material respects Borrower’s consolidated financial condition
and Borrower’s consolidated results of operations. There has not been any
material deterioration in Borrower’s consolidated financial condition since the
date of the most recent financial statements submitted to Bank.


 


5.6                               Solvency.
Borrower is not left with unreasonably small capital after the transactions in
this Agreement; and Borrower is able to pay its debts (including trade debts)
as they mature.


 


5.7                               Regulatory
Compliance. Borrower is not an “investment company” or a company “controlled”
by an “investment company” under the Investment Company Act of 1940. Borrower
is not engaged as one of its important activities in extending credit for
margin stock (under Regulations T and U of the Federal Reserve Board of
Governors). Borrower has complied in all material respects with the Federal
Fair Labor Standards Act.  Borrower


 


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has not violated
any laws, ordinances or rules, the violation of which would reasonably be
expected to have a material adverse effect on its business. None of Borrower’s
or any of its Subsidiaries’ properties or assets has been used by Borrower or
any Subsidiary or, to the best of Borrower’s knowledge, by previous Persons, in
disposing, producing, storing, treating, or transporting any hazardous
substance other than legally. Borrower and each of its Subsidiaries have
obtained all consents, approvals and authorizations of, made all declarations
or filings with, and given all notices to, all government authorities that are
necessary to continue its business as currently conducted.


 


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


 


5.9                               Tax
Returns and Payments; Pension Contributions. Borrower has timely filed all
required tax returns and reports (or extensions thereof), and Borrower and its
Subsidiaries have timely paid all foreign, federal, state and local taxes,
assessments, deposits and contributions owed by Borrower. Borrower may defer
payment of any contested taxes, provided that Borrower (a) in good faith
contests its obligation to pay the taxes by appropriate proceedings promptly
and diligently instituted and conducted, (b) notifies Bank in writing of the
commencement of, and any material development in, the proceedings, (c) posts
bonds or takes any other steps required to prevent the governmental authority
levying such contested taxes from obtaining a Lien upon any of the Collateral
that is other than a “Permitted Lien”. Borrower is unaware of any claims or
adjustments proposed for any of Borrower’s prior tax years which would
reasonably be expected to result in additional taxes becoming due and payable
by Borrower. Borrower has paid all amounts necessary to fund all present
pension, profit sharing and deferred compensation plans in accordance with
their terms, and Borrower has not withdrawn from participation in, and has not permitted
partial or complete termination of, or permitted the occurrence of any other
event with respect to, any such plan which would reasonably be expected to
result in any liability of Borrower, including any liability to the Pension
Benefit Guaranty Corporation or its successors or any other governmental agency.


 


5.10                        Use of
Proceeds. Borrower shall use the proceeds of the Credit Extensions solely as
working capital and not for personal, family, household or agricultural
purposes.


 


5.11                        Network
Engines Securities Corporation. The aggregate amount of all funds held by
Network Engines Securities Corporation, a wholly-owned Subsidiary of Network,
does not exceed Two Million Seven Hundred Thousand Dollars ($2,700,000.00).


 


5.12                        Full
Disclosure. No written representation, warranty or other statement of
Borrower in any certificate or written statement given to Bank, as of the date
such representations, warranties, or other statements were made, taken together
with all such written certificates and written statements given to Bank,
contains any untrue statement of a material fact or omits to state a material
fact necessary to make the statements contained in the certificates or
statements not misleading (it being recognized by Bank that the projections and
forecasts provided by Borrower in good faith and based upon reasonable
assumptions are not viewed as facts and that actual results during the period
or periods covered by such projections and forecasts may differ from the
projected or forecasted results).


 


6                                         AFFIRMATIVE
COVENANTS


 


Borrower shall do all of the following:


 


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


 


6.2                               Financial
Statements, Reports, Certificates.


 


(a)                                  Deliver
to Bank:  (i) as soon as available, but
no later than thirty (30) days after the last day of each month (or, if no
Advance is outstanding as of the last day of such month, within forty-five (45)
days of the end of each fiscal quarter), a company prepared consolidated
balance sheet and income statement covering Borrower’s consolidated operations
during the period certified by a Responsible Officer and in a form acceptable
to Bank; (ii) within five (5) days of delivery, copies of all statements,
reports and notices made available to Borrower’s security holders or to any
holders of Subordinated Debt; (iii) within five (5) days of filing, all reports
filed with the


 


7

















 


Securities and Exchange Commission (or other
regulatory body) or a link thereto on Borrower’s or another website on the
internet, including, without limitation, all reports on a Form 10-Q on a
quarterly basis and on a Form 10-K on an annual basis; (iv) a prompt report of
any legal actions pending or threatened in writing against Borrower or any of
its Subsidiaries that would reasonably be expected to result in damages or
costs to Borrower or any of its Subsidiaries of Two Hundred Fifty Thousand
Dollars ($250,000.00) or more; (v) as soon as available, but no later than
forty-five (45) days after the last day of Borrower’s fiscal year, and in
connection with any amendments, Borrower’s financial projections for such
fiscal year as approved by Borrower’s board of directors; and (vi) budgets,
sales projections, operating plans and other financial information reasonably
requested by Bank.


 


(b)                                 Within
twenty (30) days after the last day of each month, if an Advance is outstanding
as of the last day of such month, deliver to Bank a duly completed Borrowing
Base Certificate signed by a Responsible Officer, with aged listings of
accounts receivable (by invoice date).


 


(c)                                  Within
thirty (30) days after the last day of each month (or, if no Advance is
outstanding as of the last day of such month, within forty-five (45) days of
the end of each fiscal quarter), deliver to Bank with the monthly or quarterly
financial statements, a duly completed Compliance Certificate signed by a
Responsible Officer setting forth calculations showing compliance with the
financial covenants set forth in this Agreement.


 


(d)                                 Allow
Bank to audit Borrower’s Collateral at Borrower’s expense. Such audits shall be
conducted no more often than once every twelve (12) months unless a Default or
an Event of Default has occurred and is continuing. Borrower hereby
acknowledges that the first such audit will be conducted within ninety (90)
days after the execution of this Agreement.


 


6.3                               Inventory;
Returns. Keep all Inventory in good and marketable condition, free from
material defects. Returns and allowances between Borrower and its Account
Debtors shall follow Borrower’s customary practices as they exist at the
Effective Date. Borrower must promptly notify Bank of all returns, recoveries,
disputes and claims that involve more than Two Hundred Fifty Thousand Dollars
($250,000.00).


 


6.4                               Taxes;
Pensions. Make, and cause each of its Subsidiaries to make, timely payment
of all foreign, federal, state, and local taxes or assessments (other than
taxes and assessments which Borrower is contesting pursuant to the terms of
Section 5.9 hereof) and shall deliver to Bank, on demand, appropriate
certificates attesting to such payments, and pay all amounts necessary to fund
all present pension, profit sharing and deferred compensation plans in
accordance with their terms.


 


6.5                               Insurance.
Keep its business and the Collateral insured for risks and in amounts standard
for companies in Borrower’s industry and location and as Bank may reasonably
request. Insurance policies shall be in a form, with companies, and in amounts
that are reasonably satisfactory to Bank. All property policies shall have a
loss payable endorsement showing Bank as the sole loss payee and waive
subrogation against Bank, and all liability policies shall show, or have
endorsements showing, Bank as an additional insured. All policies (or the loss
payable and additional insured endorsements) shall provide that the insurer
must give Bank at least twenty (20) days notice before canceling, amending, or
declining to renew its policy. At Bank’s request, Borrower shall deliver
certified copies of policies and evidence of all premium payments. Proceeds
payable under any policy shall, at Bank’s option, be payable to Bank on account
of the Obligations. Notwithstanding the foregoing, (a) so long as no Event of
Default has occurred and is continuing, Borrower shall have the option of
applying the proceeds of any casualty policy up to One Hundred Thousand Dollars
($100,000.00), in the aggregate, toward the replacement or repair of destroyed
or damaged property; provided that any such replaced or repaired property (i)
shall be of equal or like value as the replaced or repaired Collateral and
(ii) shall be deemed Collateral in which Bank has been granted a first
priority security interest, and (b) after the occurrence and during the
continuance of an Event of Default, all proceeds payable under such casualty
policy shall, at the option of Bank, be payable to Bank on account of the
Obligations. If Borrower fails to obtain insurance as required under this
Section 6.5 or to pay any amount or furnish any required proof of payment
to third persons and Bank, Bank may make all or part of such payment or obtain
such insurance policies required in this Section 6.5, and take any action under
the policies Bank deems prudent.


 


6.6                               Operating
Accounts.


 


(a)                                  Maintain
its and its Subsidiaries’ primary operating accounts with Bank and Bank’s
affiliates; provided, however Alliance shall have one hundred twenty (120) days
from the Effective Date to transfer such accounts to Bank and Bank’s affiliates.
In addition, Borrower shall maintain its and its Subsidiaries’ cash or
securities in excess of that amount used for Borrower’s or such Subsidiaries’
current operations with Bank and


 


8

















 


Bank’s affiliates;
provided, however Alliance shall have one hundred twenty (120) days from the
Effective Date to transfer such cash or securities to Bank and Bank’s affiliates.


 


(b)                                 Provide
Bank five (5) days prior written notice before establishing any Collateral
Account at or with any bank or financial institution other than Bank or its
Affiliates. In addition, for each Collateral Account that Borrower or Guarantor
at any time maintains, Borrower shall cause the applicable bank or financial
institution (other than Bank) at or with which any Collateral Account is
maintained to execute and deliver a Control Agreement or other appropriate
instrument with respect to such Collateral Account to perfect Bank’s Lien in
such Collateral Account in accordance with the terms hereunder. The provisions
of the previous sentence shall not apply to deposit accounts exclusively used
for payroll, payroll taxes and other employee wage and benefit payments to or
for the benefit of Borrower’s employees and identified to Bank by Borrower as
such.


 


6.7                               Financial
Covenants.


 


Borrower shall maintain
at all times, to be tested as of the last day of each quarter, unless otherwise
noted, on a consolidated basis with respect to Borrower and its Subsidiaries:


 


(a)                                  Adjusted
Quick Ratio. An Adjusted Quick Ratio of at least 1.25 to 1.0.


 


(b)                                 Operating
Cash Flow. Operating Cash Flow of at least (i) One Million Five Hundred
Thousand Dollars ($1,500,000.00) for the quarter ending December 31, 2007, (ii)
Five Hundred Thousand Dollars ($500,000.00) for the quarter ending March 31,
2008, (iii) One Million Five Hundred Thousand Dollars ($1,500,000.00) for the
quarter ending June 30, 2008, and (iv) Two Million Dollars ($2,000,000.00) for
the quarter ending September 30, 2008 and as of the last day of each quarter
thereafter.


 


6.8                               Protection
of Intellectual Property Rights. Borrower shall use commercially reasonable
efforts to protect, defend and maintain the validity and enforceability of its
intellectual property.


 


6.9                               Litigation
Cooperation. From the date hereof and continuing through the termination of
this Agreement, make available to Bank, without expense to Bank, Borrower and
its officers, employees and agents and Borrower’s books and records, to the
extent that Bank may deem them reasonably necessary to prosecute or defend any
third-party suit or proceeding instituted by or against Bank with respect to
any Collateral or relating to Borrower.


 


6.10                        Landlord’s
Waiver. Borrower shall deliver to Bank, on or before ninety (90) days after
the Effective Date, a fully-executed landlord’s consent with respect to
Alliance’s location at 3501 E. Plano Parkway, Plano, Texas, in form and
substance acceptable to Bank in Bank’s sole and absolute discretion.


 


6.11                        Certificate
of Good Standing - Alliance. Borrower shall deliver to Bank, on or before
thirty (30) days after the Effective Date, a certificate of good standing for
Alliance, certified by the Secretary of State of Texas.


 


6.12                        Further
Assurances. Execute any further instruments and take further action as Bank
reasonably requests to perfect or continue Bank’s Lien in the Collateral or to
effect the purposes of this Agreement.


 


7                                         NEGATIVE
COVENANTS


 


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


 


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


 


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


 


(b)                                 Transfers of property in connection with
sale-leaseback transactions;


 


(c)                                  Disposal of worn-out, excessive, or obsolete
property;


 


9

















 


(d)                                 Transfers of property to the extent such
property is exchanged for credit against, or proceeds are promptly applied to,
the purchase price of other property used or useful in the business of Borrower
or its Subsidiaries;


 


(e)                                  Transfers constituting non-exclusive licenses
and similar arrangements for the use of the property of Borrower or its
Subsidiaries in the ordinary course of business and other non-perpetual
licenses that may be exclusive in some respects other than territory (and/or
that may be exclusive as to territory only in discreet geographical areas
outside of the United States), but that could not result in a legal transfer of
Borrower’s title in the licensed property;


 


(f)                                    Transfers otherwise permitted by the Loan
Documents;


 


(g)                                 sales or discounting of delinquent accounts
in the ordinary course of business;


 


(h)                                 Transfers associated with the making or
disposition of a Permitted Investment; and


 


(i)                                     Transfers in connection with a permitted
acquisition of a portion of the assets or rights acquired.


 


7.2                               Changes
in Business, Management, Ownership, or Business Locations. (a) Engage
in or permit any of its Subsidiaries to engage in any business other than the
businesses currently engaged in by Borrower and such Subsidiary, as applicable,
or reasonably related thereto; (b) liquidate or dissolve; or (c) (i) 
have a change in management such that any Key Person resigns, is terminated, or
is no longer actively involved in the management of the Borrower in his/her
position held as of the Effective Date, and a replacement reasonably
satisfactory to Bank for such Key Person is not made within ninety (90) days
after departure from Borrower; or (ii) enter into any transaction or series of
related transactions in which the stockholders of Borrower immediately prior to
the first such transaction own less than 60% of the voting stock of Borrower
immediately after giving effect to such transaction or related series of such
transactions (other than by the sale of Borrower’s equity securities in a
public offering or to venture capital investors so long as Borrower identifies
to Bank the venture capital investors prior to the closing of the transaction).
Borrower shall not, without at least thirty (30) days prior written notice to
Bank: (1) add any new offices or business locations, including warehouses
(unless such new offices or business locations contain less than One Hundred
Thousand Dollars ($100,000) in Borrower’s assets or property), (2) change its
jurisdiction of organization, (3) change its organizational structure or
type, (4) change its legal name, or (5) change any organizational number
(if any) assigned by its jurisdiction of organization.


 


7.3                               Mergers
or Acquisitions. Merge or consolidate, or permit any of its Subsidiaries to
merge or consolidate, with any Person other than with Borrower or any
Subsidiary (provided Borrower is the surviving legal entity), or acquire, or
permit any of its Subsidiaries to acquire, all or substantially all of the
capital stock or property of a Person other than Borrower or any Subsidiary,
except where no Event of Default has occurred and is continuing or would result
from such action during the term of this Agreement, and (a) Borrower is the
surviving entity or (b) such merger or consolidation is a Transfer otherwise
permitted pursuant to Section 7.1 hereof.


 


7.4                               Indebtedness.
Create, incur, assume, or be liable for any Indebtedness, or permit any
Subsidiary to do so, other than Permitted Indebtedness.


 


7.5                               Encumbrance.
Create, incur, or allow any Lien on any of its property, or assign or convey
any right to receive income, including the sale of any Accounts, or permit any
of its Subsidiaries to do so, except for Permitted Liens, or permit any
Collateral not to be subject to the first priority security interest granted
herein, or enter into any agreement, document, instrument or other arrangement
(except with or in favor of Bank) with any Person which directly or indirectly
prohibits or has the effect of prohibiting Borrower or any Subsidiary from assigning,
mortgaging, pledging, granting a security interest in or upon, or encumbering
any of Borrower’s or any Subsidiary’s intellectual property, except as is
otherwise permitted in Section 7.1 hereof and the definition of “Permitted
Liens” herein.


 


7.6                               Maintenance
of Collateral Accounts. Maintain any Collateral Account except pursuant to
the terms of Section 6.6(b) hereof.


 


7.7                               Distributions;
Investments. (a) Pay any dividends or make any distribution or
payment or redeem, retire or purchase any capital stock other than Permitted
Distributions; or (b) directly or indirectly acquire or own any Person, or make
any Investment in any Person, other than Permitted Investments, or permit any
of its Subsidiaries to do so.


 


10

















 


7.8                               Transactions
with Affiliates. Directly or indirectly enter into or permit to exist any
material transaction with any Affiliate of Borrower except for (a) transactions
that are in the ordinary course of Borrower’s business, upon fair and reasonable
terms (when viewed in the context of any series of transactions of which it may
be a part, if applicable) that are no less favorable to Borrower than would be
obtained in an arm’s length transaction with a non-affiliated Person; or
(b) transactions among Borrower and its Subsidiaries and among Borrower’s
Subsidiaries so long as no Event of Default exists or could result therefrom.


 


7.9                               Subordinated
Debt. (a) Make or permit any payment on any Subordinated Debt, except under
the terms of the subordination, intercreditor, or other similar agreement to
which such Subordinated Debt is subject, or (b) amend any provision in any
document relating to the Subordinated Debt which would increase the amount
thereof or adversely affect the subordination thereof to Obligations owed to
Bank.


 


7.10                        Compliance.
Become an “investment company” or a company controlled by an “investment
company”, under the Investment Company Act of 1940 or undertake as one of its
important activities extending credit to purchase or carry margin stock (as
defined in Regulation U of the Board of Governors of the Federal Reserve
System), or use the proceeds of any Credit Extension for that purpose; fail to
meet the minimum funding requirements of ERISA, permit a Reportable Event or
Prohibited Transaction, as defined in ERISA, to occur; fail to comply with the
Federal Fair Labor Standards Act or violate any other law or regulation, if the
violation or failure to comply would reasonably be expected to have a material
adverse effect on Borrower’s business, or permit any of its Subsidiaries to do
so; withdraw or permit any Subsidiary to withdraw from participation in, permit
partial or complete termination of, or permit the occurrence of any other event
with respect to, any present pension, profit sharing and deferred compensation
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.


 


7.11                        Network
Engines Securities Corporation. Transfer or distribute any funds to, or
make any Investment in, Network Engines Securities Corporation, a wholly-owned
Subsidiary of Network.


 


8                                         EVENTS
OF DEFAULT


 


Any one of the following shall constitute an event of default
(an “Event of Default”) under this
Agreement:


 


8.1                               Payment
Default. Borrower fails to (a) make any payment of principal or
interest on any Credit Extension on its due date, or (b) pay any other
Obligations within three (3) Business Days after such Obligations are due and
payable (which three (3) Business Day grace period will not apply to payments
due on the Revolving Line Maturity Date). During the cure period, the failure
to cure the payment default is not an Event of Default (but no Credit Extension
will be made during the cure period);


 


8.2                               Covenant
Default.


 


(a) Borrower fails or
neglects to perform any obligation in Sections 6.2, 6.6, or 6.7, or violates
any covenant in Section 7; or


 


(b) Borrower fails or neglects to perform, keep, or
observe any other term, provision, condition, covenant or agreement contained
in this Agreement, any Loan Documents, and as to any default (other than those
specified in this Section 8) under such other term, provision, condition,
covenant or agreement that can be cured, has failed to cure the default within
ten (10) days after the occurrence thereof; provided, however, that if the
default cannot by its nature be cured within the ten (10) day period or cannot
after diligent attempts by Borrower be cured within such ten (10) day period,
and such default is likely to be cured within a reasonable time, then Borrower
shall have an additional period (which shall not in any case exceed thirty (30)
days) to attempt to cure such default, and within such reasonable time period
the failure to cure the default shall not be deemed an Event of Default (but no
Credit Extensions shall be made during such cure period). Grace periods
provided under this Section shall not apply, among other things, to financial
covenants or any other covenants set forth in subsection (a) above;


 


8.3                               Material
Adverse Change. A Material Adverse Change occurs;


 


11

















 


8.4                               Attachment.
(a) Any material portion of Borrower’s assets is attached, seized, levied on,
or comes into possession of a trustee or receiver and the attachment, seizure
or levy is not removed in ten (10) days; (b) the service of process
seeking to attach, by trustee or similar process, any funds of Borrower, or of
any entity under control of Borrower (including a Subsidiary), on deposit with
Bank or Bank’s Affiliate; (c) Borrower is enjoined, restrained, or prevented by
court order from conducting a material part of its business; (d) a judgment or
other claim in excess of Two Hundred Fifty Thousand Dollars ($250,000) becomes
a Lien on any of Borrower’s assets; or (e) a notice of lien, levy, or
assessment is filed against any of Borrower’s assets by any government agency
and not paid within ten (10) days after Borrower receives notice. These are not
Events of Default if stayed or if a bond is posted pending contest by Borrower
(but no Credit Extensions shall be made during the cure period);


 


8.5                               Insolvency
(a) Borrower is unable to pay its debts (including trade debts) as they become
due or otherwise becomes insolvent; (b) Borrower begins an Insolvency
Proceeding; or (c) an Insolvency Proceeding is begun against Borrower and not
dismissed or stayed within thirty (30) days (but no Credit Extensions shall be
made while of any of the conditions described in clause (a) exist and/or until
any Insolvency Proceeding is dismissed);


 


8.6                               Other
Agreements. If Borrower fails to (a) make any payment that is due and
payable with respect to any Material Indebtedness and such failure continues
after the applicable grace or notice period, if any, specified in the agreement
or instrument relating thereto, or (b) perform or observe any other
condition or covenant, or any other event shall occur or condition exist under
any agreement or instrument relating to any Material Indebtedness, and such
failure continues after the applicable grace or notice period, if any,
specified in the agreement or instrument relating thereto and the effect of
such failure, event or condition is to cause the holder or holders of such
Material Indebtedness to accelerate the maturity of such Material Indebtedness
or cause the mandatory repurchase of any Material Indebtedness;


 


8.7                               Judgments.
A judgment or judgments for the payment of money in an amount, individually or
in the aggregate, of at least Fifty Thousand Dollars ($50,000) (not covered by
independent third-party insurance) shall be rendered against Borrower and shall
remain unsatisfied and unstayed for a period of ten (10) days after the entry
thereof (provided that no Credit Extensions will be made prior to the
satisfaction or stay of such judgment);


 


8.8                               Misrepresentations.
Borrower or any Person acting for Borrower makes any representation, warranty,
or other statement now or later in this Agreement, any Loan Document or in any
writing delivered to Bank or to induce Bank to enter this Agreement or any Loan
Document, and such representation, warranty, or other statement is incorrect in
any material respect when made;


 


8.9                               Subordinated
Debt. A default or breach occurs (and all notice and grace periods have
expired) under any agreement between Borrower and any creditor of Borrower that
signed a subordination, intercreditor, or other similar agreement with Bank, or
any creditor that has signed such an agreement with Bank breaches any terms of
such agreement;


 


8.10                        Guaranty.
(a) Any guaranty of any Obligations terminates or ceases for any reason to be
in full force and effect; (b) any Guarantor does not perform any obligation or
covenant under any guaranty of the Obligations; (c) any circumstance described in
Sections 8.3, 8.4, 8.5, 8.7, or 8.8. occurs with respect to any Guarantor, (d)
the liquidation, winding up, or termination of existence of any Guarantor; or
(e) (i) a material impairment in the perfection or priority of Bank’s
Lien in the collateral provided by Guarantor or in the value of such collateral
or (ii) a material adverse change in the general affairs, management,
results of operation, condition (financial or otherwise) or the prospect of
repayment of the Obligations occurs with respect to any Guarantor; or


 


8.11                        Network
Engines Securities Corporation. The aggregate amount of all funds held by
Network Engines Securities Corporation, a wholly-owned Subsidiary of Network,
exceeds Two Million Seven Hundred Thousand Dollars ($2,700,000.00).


 


9                                         BANK’S
RIGHTS AND REMEDIES


 


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


 


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


 


12

















 


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


 


(c)                                  demand
that Borrower (i) deposits cash with Bank in an amount equal to the aggregate
amount of any Letters of Credit remaining undrawn, as collateral security for
the repayment of any future drawings under such Letters of Credit, and Borrower
shall forthwith deposit and pay such amounts, and (ii) pay in advance all
Letter of Credit fees scheduled to be paid or payable over the remaining term
of any Letters of Credit;


 


(d)                                 settle
or adjust disputes and claims directly with Account Debtors for amounts on
terms and in any order that Bank considers advisable, notify any Person owing
Borrower money of Bank’s security interest in such funds, and verify the amount
of such account;


 


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


 


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


 


(g)                                 ship,
reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise
for sale, and sell the Collateral. Subject to the rights of third parties to
the extent that such third parties’ rights are senior to Bank’s rights, Bank is
hereby granted a non-exclusive, royalty-free license or other right to use,
without charge, Borrower’s labels, patents, copyrights, mask works, rights of
use of any name, trade secrets, trade names, trademarks, service marks, and
advertising matter, or any similar property as it pertains to the Collateral,
in completing production of, advertising for sale, and selling any Collateral
and, in connection with Bank’s exercise of its rights under this Section,
Borrower’s rights under all licenses and all franchise agreements inure to Bank’s
benefit;


 


(h)                                 deliver
a notice of exclusive control, any entitlement order, or other directions or
instructions pursuant to any Control Agreement or similar agreements providing
control of any Collateral;


 


(i)                                     demand
and receive possession of Borrower’s Books; and


 


(j)                                     exercise
all rights and remedies available to Bank under the Loan Documents or at law or
equity, including all remedies provided under the Code (including disposal of
the Collateral pursuant to the terms thereof).


 


9.2                               Power
of Attorney. Borrower hereby irrevocably appoints Bank as its lawful
attorney-in-fact, exercisable upon the occurrence and during the continuance of
an Event of Default, to:  (a) endorse
Borrower’s name on any checks or other forms of payment or security; (b) sign
Borrower’s name on any invoice or bill of lading for any Account or drafts
against Account Debtors; (c) settle and adjust disputes and claims about the
Accounts directly with Account Debtors, for amounts and on terms Bank
determines reasonable; (d) make, settle, and adjust all claims under Borrower’s
insurance policies; (e) pay, contest or settle any Lien, charge, encumbrance,
security interest, and adverse claim in or to the Collateral, or any judgment
based thereon, or otherwise take any action to terminate or discharge the same;
and (f) transfer the Collateral into the name of Bank or a third party as the
Code permits. Borrower hereby appoints Bank as its lawful attorney-in-fact to
sign Borrower’s name on any documents necessary to perfect or continue the
perfection of Bank’s security interest in the Collateral regardless of whether
an Event of Default has occurred until all Obligations have been satisfied in
full and Bank is under no further obligation to make Credit Extensions hereunder.
Bank’s foregoing appointment as Borrower’s attorney in fact, and all of Bank’s
rights and powers, coupled with an interest, are irrevocable until all
Obligations have been fully repaid and performed and Bank’s obligation to
provide Credit Extensions terminates.


 


9.3                               Accounts
Verification; Collection. Whether or not an Event of Default has occurred
and is continuing, Bank may notify any Person owing Borrower money of Bank’s
security interest in such funds and verify the amount of such account. After
the occurrence and during the continuance of an Event of Default, any amounts


 


13

















 


received by
Borrower shall be held in trust by Borrower for Bank, and, if requested by
Bank, Borrower shall immediately deliver such receipts to Bank in the form
received from the Account Debtor, with proper endorsements for deposit.


 


9.4                               Protective
Payments. If Borrower fails to obtain the insurance called for by Section
6.5 or fails to pay any premium thereon or fails to pay any other amount which
Borrower is obligated to pay under this Agreement or any other Loan Document,
Bank may obtain such insurance or make such payment, and all amounts so paid by
Bank are Bank Expenses and immediately due and payable, bearing interest at the
then highest applicable rate charged by Bank, and secured by the Collateral. Bank
will make reasonable efforts to provide Borrower with notice of Bank obtaining
such insurance at the time it is obtained or within a reasonable time
thereafter. No payments by Bank are deemed an agreement to make similar
payments in the future or Bank’s waiver of any Event of Default.


 


9.5                               Application
of Payments and Proceeds. Unless an Event of Default has occurred and is
continuing, Bank shall apply any funds in its possession, whether from Borrower
account balances, payments, or proceeds realized as the result of any collection
of Accounts or other disposition of the Collateral, first, to Bank Expenses,
including without limitation, the reasonable costs, expenses, liabilities,
obligations and attorneys’ fees incurred by Bank in the exercise of its rights
under this Agreement; second, to the interest due upon any of the Obligations;
and third, to the principal of the Obligations and any applicable fees and
other charges, in such order as Bank shall determine in its sole discretion. Any
surplus shall be paid to Borrower or other Persons legally entitled thereto;
Borrower shall remain liable to Bank for any deficiency. If an Event of Default
has occurred and is continuing, Bank may apply any funds in its possession,
whether from Borrower account balances, payments, proceeds realized as the
result of any collection of Accounts or other disposition of the Collateral, or
otherwise, to the Obligations in such order as Bank shall determine in its sole
discretion. Any surplus shall be paid to Borrower or other Persons legally
entitled thereto; Borrower shall remain liable to Bank for any deficiency. If
Bank, in its good faith business judgment, directly or indirectly enters into a
deferred payment or other credit transaction with any purchaser at any sale of
Collateral, Bank shall have the option, exercisable at any time, of either
reducing the Obligations by the principal amount of the purchase price or
deferring the reduction of the Obligations until the actual receipt by Bank of
cash therefor.


 


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


 


9.7                               No
Waiver; Remedies Cumulative. Bank’s failure, at any time or times, to
require strict performance by Borrower of any provision of this Agreement or
any other Loan Document shall not waive, affect, or diminish any right of Bank
thereafter to demand strict performance and compliance herewith or therewith. No
waiver hereunder shall be effective unless signed by Bank and then is only
effective for the specific instance and purpose for which it is given. Bank’s
rights and remedies under this Agreement and the other Loan Documents are
cumulative. Bank has all rights and remedies provided under the Code, by law,
or in equity. Bank’s exercise of one right or remedy is not an election, and Bank’s
waiver of any Event of Default is not a continuing waiver. Bank’s delay in
exercising any remedy is not a waiver, election, or acquiescence.


 


9.8                               Demand
Waiver. Borrower waives demand, notice of default (unless required
hereunder or in the Loan Documents) or dishonor, notice of payment and
nonpayment, notice of any default, nonpayment at maturity, release, compromise,
settlement, extension, or renewal of accounts, documents, instruments, chattel
paper, and guarantees held by Bank on which Borrower is liable.


 


10                                  NOTICES


 


All notices, consents, requests, approvals, demands,
or other communication (collectively, “Communication”)
by any party to this Agreement or any other Loan Document must be in writing
and shall be deemed to have been validly served, given, or delivered: (a) upon
the earlier of actual receipt and three (3) Business Days after deposit in the
U.S. mail, first class, registered or certified mail return receipt requested,
with proper postage prepaid; (b) upon transmission, when sent by electronic
mail or facsimile transmission; (c) one (1) Business Day after deposit with a
reputable overnight courier with all charges prepaid; or (d) when delivered, if
hand-delivered by messenger, all of which shall be addressed to the party to be
notified and sent to the address, facsimile


 


14

















 


number, or email address indicated below. Bank or
Borrower may change its address or facsimile number by giving the other party
written notice thereof in accordance with the terms of this Section 10.


 


	
  If to Borrower:

  	
  Network Engines, Inc.

  
	
   

  	
  25 Dan Road

  
	
   

  	
  Canton, MA 02021

  
	
   

  	
  Attn: Vice President of
  Finance

  
	
   

  	
  Fax: 781-770-2000

  
	
   

  	
  Email: 
  Jim.Herlihy@networkengines.com

  
	
   

  	
   

  
	
  With a copy to:

  	
  Philip Rossetti

  
	
   

  	
  Wilmer Cutler Pickering
  Hale and Doar

  
	
   

  	
  60 State Street

  
	
   

  	
  Boston, Massachusetts
  02109

  
	
   

  	
  Fax: 617-526-5000

  
	
   

  	
  E-mail:
  philip.rossetti@wilmerhale.com

  
	
   

  	
   

  
	
  If to Bank:

  	
  Silicon Valley Bank

  
	
   

  	
  One Newton Executive Park,
  Suite 200

  
	
   

  	
  2221 Washington Street

  
	
   

  	
  Newton, Massachusetts
  02462

  
	
   

  	
  Attn: Mr. Michael Fell

  
	
   

  	
  Fax: (617) 969-4395

  
	
   

  	
  Email:  MFell@svb.com

  
	
   

  	
   

  
	
  with a copy to:

  	
  Riemer & Braunstein
  LLP

  
	
   

  	
  Three Center Plaza

  
	
   

  	
  Boston, Massachusetts
  02108

  
	
   

  	
  Attn: David A. Ephraim,
  Esquire

  
	
   

  	
  Fax: (617) 880-3456

  
	
   

  	
  Email:
  DEphraim@riemerlaw.com

  



 


15

















 


11           CHOICE OF LAW,
VENUE AND JURY TRIAL WAIVER


 


Massachusetts law governs the Loan Documents without
regard to principles of conflicts of law. Borrower and Bank each submit to the
exclusive jurisdiction of the State and Federal courts in Massachusetts;
provided, however, that if for any reason Bank cannot avail itself of such
courts in the Commonwealth of Massachusetts, Borrower accepts jurisdiction of
the courts and venue in Santa Clara County, California. NOTWITHSTANDING THE
FOREGOING, BANK SHALL HAVE THE RIGHT TO BRING ANY ACTION OR PROCEEDING AGAINST
BORROWER OR ITS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION WHICH BANK
DEEMS NECESSARY OR APPROPRIATE IN ORDER TO REALIZE ON THE COLLATERAL OR TO OTHERWISE
ENFORCE BANK’S RIGHTS AGAINST BORROWER OR ITS PROPERTY.


 


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


 


12                                  GENERAL
PROVISIONS


 


12.1                        Successors
and Assigns. This Agreement binds and is for the benefit of the successors
and permitted assigns of each party. Borrower may not assign this Agreement or
any rights or obligations under it without Bank’s prior written consent (which
may be granted or withheld in Bank’s discretion). Bank has the right, without
the consent of or notice to Borrower, to sell, transfer, assign, negotiate, or
grant participation in all or any part of, or any interest in, Bank’s
obligations, rights, and benefits under this Agreement and the other Loan
Documents.


 


12.2                        Indemnification.
Borrower agrees to indemnify, defend and hold Bank and its directors, officers,
employees, agents, attorneys, or any other Person affiliated with or
representing Bank harmless against: 
(a) all obligations, demands, claims, and liabilities
(collectively, “Claims”) asserted
by any other party in connection with the transactions contemplated by the Loan
Documents; and (b) all losses or Bank Expenses incurred, or paid by Bank from,
following, or arising from transactions between Bank and Borrower (including
reasonable attorneys’ fees and expenses), except for Claims and/or losses
and/or Bank Expenses directly caused by Bank’s gross negligence or willful
misconduct.


 


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


 


12.4                        Severability
of Provisions. Each provision of this Agreement is severable from every
other provision in determining the enforceability of any provision.


 


12.5                        Amendments
in Writing; Integration. All amendments to this Agreement must be in
writing signed by both Bank and Borrower. This Agreement and the Loan Documents
represent the entire agreement about this subject matter and supersede prior
negotiations or agreements. All prior agreements, understandings,
representations, warranties, and negotiations between the parties about the
subject matter of this Agreement and the Loan Documents merge into this
Agreement and the Loan Documents.


 


12.6                        Counterparts.
This Agreement may be executed in any number of counterparts and by different
parties on separate counterparts, each of which, when executed and delivered, is
an original, and all taken together, constitute one Agreement.


 


12.7                        Survival.
All covenants, representations and warranties made in this Agreement continue
in full force until this Agreement has terminated pursuant to its terms and all
Obligations (other than inchoate indemnity obligations and any other
obligations which, by their terms, are to survive the termination of this
Agreement) have been satisfied. The obligation of Borrower in Section 12.2 to
indemnify Bank shall survive until the statute of limitations with respect to
such claim or cause of action shall have run.


 


16

















 


12.8                        Confidentiality.
In handling any confidential information, Bank shall exercise the same degree
of care that it exercises for its own proprietary information, but disclosure
of information may be made: (a) to Bank’s Subsidiaries or Affiliates; (b) to
prospective transferees or purchasers of any interest in the Credit Extensions
(provided, however, Bank shall use commercially reasonable efforts to obtain
such prospective transferee’s or purchaser’s agreement to the terms of this
provision); (c) as required by law, regulation, subpoena, or other order;
(d) to Bank’s regulators or as otherwise required in connection with Bank’s
examination or audit; and (e) as Bank considers appropriate in exercising
remedies under this Agreement. Confidential information does not include
information that either: (i) is in the public domain or in Bank’s possession
when disclosed to Bank, or becomes part of the public domain after disclosure
to Bank; or (ii) is disclosed to Bank by a third party, if Bank does not know
that the third party is prohibited from disclosing the information.


 


12.9                        Borrower
Liability. Either Borrower may, acting singly, request Credit Extensions
hereunder. Each Borrower hereby appoints the other as agent for the other for
all purposes hereunder, including with respect to requesting Credit Extensions
hereunder. Each Borrower hereunder shall be obligated to repay all Credit
Extensions made hereunder, regardless of which Borrower actually receives said
Credit Extension, as if each Borrower hereunder directly received all
Credit Extensions. Each Borrower waives any suretyship defenses available to it
under the Code or any other applicable law. Each Borrower waives any right to
require Bank to: (i) proceed against any Borrower or any other person; (ii)
proceed against or exhaust any security; or (iii) pursue any other remedy. Bank
may exercise or not exercise any right or remedy it has against any Borrower or
any security it holds (including the right to foreclose by judicial or
non-judicial sale) without affecting any Borrower’s liability. Notwithstanding
any other provision of this Agreement or other related document, each Borrower
irrevocably waives all rights that it may have at law or in equity (including,
without limitation, any law subrogating Borrower to the rights of Bank under
this Agreement) to seek contribution, indemnification or any other form of
reimbursement from any other Borrower, or any other Person now or hereafter
primarily or secondarily liable for any of the Obligations, for any payment
made by Borrower with respect to the Obligations in connection with this
Agreement or otherwise and all rights that it might have to benefit from, or to
participate in, any security for the Obligations as a result of any payment
made by Borrower with respect to the Obligations in connection with this
Agreement or otherwise. Any agreement providing for indemnification,
reimbursement or any other arrangement prohibited under this Section shall be
null and void. If any payment is made to a Borrower in contravention of this
Section, such Borrower shall hold such payment in trust for Bank and such
payment shall be promptly delivered to Bank for application to the Obligations,
whether matured or unmatured.


 


12.10                 Right of Set Off.
Borrower hereby grants to Bank, a lien, security interest and right of set off
as security for all Obligations to Bank, whether now existing or hereafter
arising upon and against all deposits, credits, collateral and property, now or
hereafter in the possession, custody, safekeeping or control of Bank or any
entity under the control of Bank (including a Bank subsidiary) or in transit to
any of them. At any time after the occurrence and during the continuance of an
Event of Default, without demand or notice, Bank may set off the same or any
part thereof and apply the same to any liability or obligation of Borrower even
though unmatured and regardless of the adequacy of any other collateral
securing the Obligations. ANY AND ALL RIGHTS TO REQUIRE BANK TO EXERCISE ITS
RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE
OBLIGATIONS, PRIOR TO EXERCISING ITS RIGHT OF SETOFF WITH RESPECT TO SUCH
DEPOSITS, CREDITS OR OTHER PROPERTY OF BORROWER ARE HEREBY KNOWINGLY,
VOLUNTARILY AND IRREVOCABLY WAIVED.


 


13                                  DEFINITIONS


 


13.1                        Definitions.
As used in this Agreement, the following terms have the following meanings:


 


“Account”
is any “account” as defined in the Code with such additions to such term as may
hereafter be made, and includes, without limitation, all accounts receivable
and other sums owing to Borrower.


 


“Account Debtor”
is any “account debtor” as defined in the Code with such additions to such term
as may hereafter be made.


 


“Advance”
or “Advances” means an advance (or
advances) under the Revolving Line.


 


“Adjusted Quick
Ratio” is the ratio of Quick Assets to Current Liabilities minus
Deferred Revenue.


 


17

















 


“Affiliate”
of any Person is a Person that owns or controls directly or indirectly the
Person, any Person that controls or is controlled by or is under common control
with the Person, and each of that Person’s senior executive officers,
directors, partners and, for any Person that is a limited liability company,
that Person’s managers and members.


 


“Agreement”
is defined in the preamble hereof.


 


“Availability Amount”
is (a) the lesser of (i) the Revolving Line or (ii) the Borrowing Base minus
(b) the amount of all outstanding Letters of Credit (including drawn but
unreimbursed Letters of Credit) plus an amount equal to the Letter of Credit
Reserves, minus (c) the FX Reserve, and minus (d) the outstanding principal
balance of any Advances (including any amounts used for Cash Management
Services).


 


“Bank” is
defined in the preamble hereof.


 


“Bank Expenses”
are all audit fees and expenses, costs, and expenses (including reasonable
attorneys’ fees and expenses) for preparing, negotiating, administering,
defending and enforcing the Loan Documents (including, without limitation, those
incurred in connection with appeals or Insolvency Proceedings) or otherwise
incurred with respect to Borrower.


 


“Borrower”
is defined in the preamble hereof


 


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


 


“Borrowing Base”
is (a) Five Million Dollars, plus (b) eighty percent (80.0%) of Eligible Accounts,
as determined by Bank from Borrower’s most recent Borrowing Base Certificate;
provided, however, that Bank may decrease the foregoing percentages in its good
faith business judgment based on events, conditions, contingencies, or risks
which, as determined by Bank may adversely affect Collateral.


 


“Borrowing Base
Certificate” is that certain certificate in the form attached hereto
as Exhibit C.


 


“Borrowing
Resolutions” are, with respect to any Person, those resolutions
adopted by such Person’s Board of Directors and delivered by such Person to
Bank approving the Loan Documents to which such Person is a party and the
transactions contemplated thereby, together with a certificate executed by its
secretary or other authorized officer on behalf of such Person certifying that
(a) such Person has the authority to execute, deliver, and perform its
obligations under each of the Loan Documents to which it is a party,
(b) that attached as Exhibit A to such certificate is a true, correct, and
complete copy of the resolutions then in full force and effect authorizing and
ratifying the execution, delivery, and performance by such Person of the Loan
Documents to which it is a party, (c) the name(s) of the Person(s) authorized
to execute the Loan Documents on behalf of such Person, together with a sample
of the true signature(s) of such Person(s), and (d) that Bank may
conclusively rely on such certificate unless and until such Person shall have
delivered to Bank a further certificate canceling or amending such prior certificate.


 


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


 


“Cash Equivalents”
are (a) marketable direct obligations issued or unconditionally guaranteed
by the United States or any agency or any State thereof having maturities of
not more than one (1) year from the date of acquisition; (b) commercial
paper maturing no more than one (1) year after its creation and having the
highest rating from either Standard & Poor’s Ratings Group or Moody’s
Investors Service, Inc., (c) Bank’s certificates of deposit issued maturing no
more than one (1) year after issue; and (d) money market funds at least
ninety-five percent (95%) of the assets of which constitute Cash Equivalents of
the kinds described in clauses (a) through (c) of this definition.


 


“Cash Management Services” is
defined in Section 2.1.4.


 


“Cash Management Services Sublimit” is
defined in Section 2.1.4.


 


“Claims” are defined in Section 12.2.


 


18

















 


“Code” is the Uniform Commercial Code, as the same may, from time to time, be enacted and in effect in the Commonwealth of Massachusetts; provided, that, to the extent that the Code is used to define any term herein or in any Loan Document and such term is defined differently in different Articles or Divisions of the Code, the definition of such term contained in Article or Division 9 shall govern; provided further, that in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection, or priority of, or remedies with respect to, Bank’s Lien on any Collateral is governed by the Uniform Commercial Code in effect in a jurisdiction other than the Commonwealth of Massachusetts, the term “Code” shall mean the Uniform Commercial Code as enacted and in effect in such other jurisdiction solely for purposes on the provisions thereof relating to such attachment, perfection, priority, or remedies and for purposes of definitions relating to such provisions.
 


“Collateral”
is any and all properties, rights and assets of Borrower described on Exhibit
A.


 


“Collateral Account”
is any Deposit Account, Securities Account, or Commodity Account.


 


“Commodity Account”
is any “commodity account” as defined in the Code with such additions to such
term as may hereafter be made.


 


“Communication”
is defined in Section 10.


 


“Compliance
Certificate” is that certain certificate in the form attached hereto
as Exhibit D.


 


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


 


“Control Agreement”
is any control agreement entered into among the depository institution at which
Borrower maintains a Deposit Account or the securities intermediary or commodity
intermediary at which Borrower maintains a Securities Account or a Commodity Account,
Borrower, and Bank pursuant to which Bank obtains control (within the meaning
of the Code) over such Deposit Account, Securities Account, or Commodity
Account.


 


“Credit Extension”
is any Advance, Letter of Credit, FX Forward Contract, amount utilized for Cash
Management Services, or any other extension of credit by Bank for Borrower’s
benefit.


 


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


 


 “Default” is any event which with notice or
passage of time or both, would constitute an Event of Default.


 


“Default Rate”
is defined in Section 2.3(b).


 


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


 


“Deposit Account”
is any “deposit account” as defined in the Code with such additions to such
term as may hereafter be made.


 


“Designated Deposit
Account” is Borrower’s deposit account, account number                       ,
maintained with Bank.


 


“Dollars,”  “dollars” and “$” each mean lawful money of the United States.


 


19

















 


“Early Termination
Fee” is defined in Section 2.4.


 


“EBITDA”
shall mean (a) Net Income, plus (b) Interest Expense, plus (c) to the extent
deducted in the calculation of Net Income, depreciation expense and
amortization expense, plus (d) income tax expense.


 


“Effective Date”
is defined in the preamble of this Agreement.


 


“Eligible Accounts”
are Accounts which arise in the ordinary course of Borrower’s business that
meet all Borrower’s representations and warranties in Section 5.3. Bank reserves
the right, at any time and from time to time after the Effective Date, to
adjust any of the criteria set forth below and to establish new criteria in its
good faith business judgment. Unless Bank agrees otherwise in writing, Eligible
Accounts shall not include:


 


(a)                                  Accounts
for which the Account Debtor has not been invoiced;


 


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


 


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


 


(d)                                 Credit
balances over ninety (90) days from invoice date;


 


(e)           Accounts owing from an Account
Debtor, including Affiliates, whose total obligations to Borrower exceed
twenty-five percent (25%) of all Accounts (provided that such percentage shall
be fifty percent (50.0%) for Accounts for which the Account Debtor is EMC) for
the amounts that exceed that percentage, unless Bank approves in writing;


 


(f)            Accounts owing from an Account
Debtor which does not have its principal place of business in the United
States;


 


(g)           Accounts owing from an Account Debtor
which is a federal, state or local government entity or any department, agency,
or instrumentality thereof;


 


(h)           Accounts owing from an Account Debtor
to the extent that Borrower is indebted or obligated in any manner to the
Account Debtor (as creditor, lessor, supplier or otherwise - sometimes called
“contra” accounts, accounts payable, customer deposits or credit accounts),
with the exception of customary credits, adjustments and/or discounts given to
an Account Debtor by Borrower in the ordinary course of its business;


 


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


 


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


 


(k)           Accounts in which the Account Debtor
disputes liability or makes any claim (but only up to the disputed or claimed
amount), or if the Account Debtor is subject to an Insolvency Proceeding, or
becomes insolvent, or goes out of business;


 


(l)                                     Accounts
owing from an Account Debtor with respect to which Borrower has received deferred
revenue (but only to the extent of such deferred revenue);


 


(m)                               Accounts
owing from an Account Debtor with respect to which Borrower maintains a reserve
in connection with Borrower’s provision of a right of return to the Account
Debtor (but only to the extent of such reserve);


 


(n)                                 Accounts
for which Bank in its good faith business judgment determines collection to be
doubtful; and


 


(0)                                  other
Accounts Bank deems ineligible in the exercise of its good faith business
judgment.


 


20

















 


Equipment” is all “equipment”
as defined in the Code with such additions to such term as may hereafter be
made, and includes without limitation all machinery, fixtures, goods, vehicles
(including motor vehicles and trailers), and any interest in any of the
foregoing.


 


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


 


“Event of Default”
is defined in Section 8.


 


“Foreign Currency”
means lawful money of a country other than the United States.


 


“Funding Date”
is any date on which a Credit Extension is made to or on account of Borrower
which shall be a Business Day.


 


“FX Business Day”
is any day when (a) Bank’s Foreign Exchange Department is conducting its normal
business and (b) the Foreign Currency being purchased or sold by Borrower is
available to Bank from the entity from which Bank shall buy or sell such
Foreign Currency.


 


“FX Forward Contract”  is defined in Section 2.1.3.


 


“FX Reserve”  is defined in Section 2.1.3.


 


“GAAP” is
generally accepted accounting principles set forth in the opinions and
pronouncements of the Accounting Principles Board of the American Institute of
Certified Public Accountants and statements and pronouncements of the Financial
Accounting Standards Board or in such other statements by such other Person as
may be approved by a significant segment of the accounting profession, which
are applicable to the circumstances as of the date of determination.


 


“General Intangibles”
is all “general intangibles” as defined in the Code in effect on the date
hereof with such additions to such term as may hereafter be made, and includes
without limitation, all copyright rights, copyright applications, copyright
registrations and like protections in each work of authorship and derivative
work, whether published or unpublished, any patents, trademarks, service marks
and, to the extent permitted under applicable law, any applications therefor,
whether registered or not, any trade secret rights, including any rights to unpatented
inventions, payment intangibles, royalties, contract rights, goodwill,
franchise agreements, purchase orders, customer lists, route lists, telephone
numbers, domain names, claims, income and other tax refunds, security and other
deposits, options to purchase or sell real or personal property, rights in all
litigation presently or hereafter pending (whether in contract, tort or
otherwise), insurance policies (including without limitation key man, property
damage, and business interruption insurance), payments of insurance and rights
to payment of any kind.


 


“Guarantor”  is any present or future guarantor of the
Obligations.


 


“Indebtedness”
is (a) indebtedness for borrowed money or the deferred price of property or
services, such as reimbursement and other obligations for surety bonds and
letters of credit, (b) obligations evidenced by notes, bonds, debentures or
similar instruments, (c) capital lease obligations, and (d) Contingent
Obligations.


 


“Insolvency
Proceeding” is any proceeding by or against any Person under the
United States Bankruptcy Code, or any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, compositions, extensions
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.


 


“Interest Expense”
means for any fiscal period, interest expense (whether cash or non-cash)
determined in accordance with GAAP for the relevant period ending on such date,
including, in any event, interest expense with respect to any Credit Extension
and other Indebtedness of Borrower and its Subsidiaries, including, without
limitation or duplication, all commissions, discounts, or related amortization
and other fees and charges with respect to letters of credit and bankers’
acceptance financing and the net costs associated with interest rate swap, cap,
and similar arrangements, and the interest portion of any deferred payment
obligation (including leases of all types).


 


“Inventory”
is all “inventory” as defined in the Code in effect on the date hereof with
such additions to such term as may hereafter be made, and includes without
limitation all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products, including without
limitation such inventory


 


21

















 


as is temporarily out of Borrower’s custody or
possession or in transit and including any returned goods and any documents of
title representing any of the above.


 


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


 


“Key Person”
is any of Borrower’s Chief Executive Officer, Chief Operating Officer, or Chief
Financial Officer, who are as of the Effective Date, Gregory A. Shortell and Douglas
G. Bryant respectively.


 


 “Letter of Credit” means a standby letter of
credit issued by Bank or another institution based upon an application,
guarantee, indemnity or similar agreement on the part of Bank as set forth in
Section 2.1.2.


 


“Letter of Credit
Application” is defined in Section 2.1.2(a).


 


“Letter of Credit
Reserve” has the meaning set forth in Section 2.1.2(d).


 


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


 


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


 


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


 


“Material
Indebtedness” is any Indebtedness the principal amount of which is
equal to or greater than Two Hundred Thousand Dollars ($200,000.00).


 


“Net Income”
means, as calculated on a consolidated basis for Borrower and its Subsidiaries
for any period as at any date of determination, the net profit (or loss), after
provision for taxes, of Borrower and its Subsidiaries for such period taken as
a single accounting period.


 


 “Obligations” are Borrower’s obligation to
pay when due any debts, principal, interest, Bank Expenses and other amounts
Borrower owes Bank now or later, whether under this Agreement, the Loan
Documents, or otherwise, including, without limitation, all obligations
relating to letters of credit (including reimbursement obligations for drawn
and undrawn letters of credit), cash management services, and foreign exchange
contracts, if any, and including interest accruing after Insolvency Proceedings
begin and debts, liabilities, or obligations of Borrower assigned to Bank, and
the performance of Borrower’s duties under the Loan Documents.


 


“Operating Cash Flow”
is, for each quarter, (a) Borrower’s consolidated EBITDA, minus (b) Borrower’s
consolidated capital expenditures.


 


“Operating Documents”
are, for any Person, such Person’s formation documents, as certified with the
Secretary of State of such Person’s state of formation on a date that is no
earlier than thirty (30) days prior to the Effective Date, and, its bylaws in
current form, each of the foregoing with all current amendments or
modifications thereto.


 


“Payment/Advance
Form” is that certain form attached hereto as Exhibit B.


 


“Perfection
Certificate” is defined in Section 5.1.


 


“Permitted
Distributions” means:


 


22

















 


(a)                                  purchases of capital stock from former
employees, consultants and directors pursuant to repurchase agreements or other
similar agreements in an aggregate amount not to exceed Two Hundred Thousand
Dollars ($200,000.00) in any fiscal year provided that at the time of such
purchase no Default or Event of Default has occurred and is continuing;


 


(b)                                 distributions or dividends consisting solely
of Borrower’s capital stock;


 


(c)                                  purchases for value of any rights distributed
in connection with any stockholder rights plan;


 


(d)                                 purchases of fractional shares of capital
stock arising out of stock dividends, splits or combinations or business
combinations; and


 


(e)                                  the
settlement or performance of such Person’s obligations under any equity
derivative transaction, option contract or similar transaction or combination
of transactions.


 


“Permitted
Indebtedness” is:


 


(a)                                  Borrower’s
Indebtedness to Bank under this Agreement and the other Loan Documents;


 


(b)                                 Indebtedness
existing on the Effective Date and shown on the Perfection Certificate;


 


(c)                                  Subordinated
Debt;


 


(d)                                 unsecured
Indebtedness to trade creditors incurred in the
ordinary course of business;


 


(e)           Indebtedness secured by Permitted
Liens;


 


(f)            Indebtedness under any FX Forward
Contract or Letter of Credit;


 


(g)           Indebtedness to the Bank incurred in
connection with Cash Management Services;


 


(h)           Indebtedness, if any, arising under
any “swap agreement,” as such term is defined in Section 101 of the Bankruptcy
Code;


 


(i)            Indebtedness incurred as a result of
endorsing negotiable instruments received in the ordinary course of business;


 


(j)            Indebtedness solely among the
Borrower and any Subsidiary that is a Guarantor which has granted Bank a first
priority security interest in its assets;


 


(k)           Other Indebtedness in an amount not
exceeding One Hundred Thousand Dollars ($100,000.00) in the aggregate; and


 


(l)                                     extensions,
refinancings, modifications, amendments and restatements of any items of
Permitted Indebtedness (a) through (k) above, provided that the principal amount
thereof is not increased or the terms thereof are not modified to impose more
burdensome terms upon Borrower or its Subsidiary, as the case may be.


 


“Permitted
Investments” are:


 


(a)                                  Investments
shown on the Perfection Certificate and existing on the Effective Date;


 


(b)                                 Cash
Equivalents;


 


(c)           Investments not to exceed One Hundred
Thousand Dollars ($100,000.00) in the aggregate in any fiscal year consisting
of (x) travel advances, employee relocation loans and other employee loans and
advances in the ordinary course of business, and (y) loans to consultants,
employees, officers or directors relating to the purchase of equity securities
of Borrower or its Subsidiaries pursuant to employee stock purchase plan
agreements or other arrangements approved by Borrower’s Board of Directors;


 


23

















 


(d)           Investments (including debt
obligations) received in connection with the bankruptcy or reorganization of
customers or suppliers and in settlement of delinquent obligations of, and
other disputes with, customers or suppliers arising in the ordinary course of
Borrower’s business;


 


(e)           Investments consisting of notes
receivable of, or prepaid royalties and other credit extensions, to customers
and suppliers who are not Affiliates or Subsidiaries, in the ordinary course of
business, provided that this paragraph (e) shall not apply to Investments of
Borrower in any subsidiary;


 


(f)            Investments by any Borrower in any
other Borrower;


 


(g)           Investments to the extent they
constitute Permitted Indebtedness;


 


(h)           any Permitted Distribution; and


 


(i)            Other Investments in an amount not
exceeding One Hundred Thousand Dollars ($100,000.00) in the aggregate.


 


“Permitted Liens”
are:


 


(a)                                  Liens
existing on the Effective Date and shown on the Perfection Certificate or
arising under this Agreement and the other Loan Documents;


 


(b)                                 Liens
for taxes, fees, assessments or other government charges or levies, either not
delinquent or being contested in good faith and for which Borrower maintains
adequate reserves on Borrower’s Books, if they have no priority over any
of Bank’s Liens;


 


(c)                                  purchase
money Liens (i) on Equipment acquired or held by Borrower incurred for
financing the acquisition of the Equipment securing no more than One Hundred
Thousand Dollars ($100,000.00) in the aggregate amount outstanding, or (ii)
existing on Equipment when acquired, if the Lien is confined to the
property and improvements and the proceeds of the Equipment;


 


(d)           statutory Liens securing claims or
demands of materialmen, mechanics, carriers, warehousemen, landlords and other
Persons imposed without action of such parties, provided, they have no priority
over any of Bank’s Lien and the aggregate amount of such Liens does not at any
time exceed Fifty Thousand Dollars ($50,000.00);


 


(e)           Liens to secure payment of workers’
compensation, employment insurance, old-age pensions, social security and other
like obligations incurred in the ordinary course of business, provided, they
have no priority over any of Bank’s Liens and the aggregate amount of the
Indebtedness secured by such Liens does not at any time exceed One Hundred
Thousand Dollars ($100,000.00);


 


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


 


(g)           leases or subleases of real property
granted in the ordinary course of business, and leases, subleases,
non-exclusive licenses or sublicenses of property (other than real property or
intellectual property) granted in the ordinary course of Borrower’s business,
if the leases, subleases, licenses and sublicenses do not prohibit granting
Bank a security interest;


 


(h)           non-exclusive licenses of
intellectual property granted to third parties in the ordinary course of
business;


 


(i)            Liens arising from judgments,
decrees or attachments in circumstances not constituting an Event of Default
under Section 8.4 or 8.7;


 


(j)            Subject to Section 6.6, Liens in
favor of other financial institutions arising in connection with Borrower’s
deposit or other accounts held at such institutions to secure standard fees for
deposit or other services


 


24

















 


charged by, but not financing
made available by such institutions, provided that Bank has a first perfected
security interest in the amounts held in such deposit or other accounts;


 


(k)           Liens securing Subordinated Debt
provided that Bank has consented to such Lien in writing;


 


(l)            Liens securing Letters of Credit;


 


(m)          security deposits for the benefit of
landlords in the ordinary course of business, in an amount not to exceed One
Hundred Thousand Dollars ($100,000.00).


 


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


 


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


 


“Quick Assets”
is, on any date, Borrower’s consolidated unrestricted cash plus net billed
accounts receivable determined according to GAAP.


 


 “Registered Organization” is any “registered
organization” as defined in the Code with such additions to such term as may
hereafter be made


 


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


 


“Revolving Line”
is an Advance or Advances in an aggregate amount of up to Fifteen Million Dollars
($15,000,000.00) outstanding at any time.


 


“Revolving Line Maturity Date” is
October 9, 2008.


 


“Securities Account”
is any “securities account” as defined in the Code with such additions to such
term as may hereafter be made.


 


“Settlement Date”  is defined in Section 2.1.3.


 


“Subordinated Debt”
is indebtedness incurred by Borrower subordinated to all of Borrower’s now or
hereafter indebtedness to Bank (pursuant to a subordination, intercreditor, or
other similar agreement in form and substance satisfactory to Bank entered into
between Bank and the other creditor), on terms acceptable to Bank.


 


“Subsidiary”
is, with respect to any Person, any Person of which more than 50% of the voting
stock or other equity interests (in the case of Persons other than
corporations) is owned or controlled, directly or indirectly, by such Person or
one or more Affiliates of such Person.


 


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


 


 “Transfer” is defined in Section 7.1.


 


“Unused Revolving
Line Facility Fee” is defined in Section 2.5(d).


 


[Signature
page follows.]


 


25

















 


IN WITNESS WHEREOF,
the parties hereto have caused this Agreement to be executed as a sealed
instrument under the laws of the Commonwealth of Massachusetts as of the Effective
Date.


 


 


	
  BORROWER:

  
	
   

  
	
  NETWORK
  ENGINES, INC.

  
	
   

  
	
  By

  	
  /s/ Douglas
  G. Bryant

  	
   

  
	
  Name:

  	
  Douglas G.
  Bryant

  	
   

  
	
  Title:

  	
  CFO

  	
   

  
	
   

  
	
   

  
	
  ALLIANCE
  SYSTEMS, INC.

  
	
   

  
	
  By

  	
  /s/ Douglas
  G. Bryant

  	
   

  
	
  Name:

  	
  Douglas G.
  Bryant

  	
   

  
	
  Title:

  	
  CFO

  	
   

  
	
   

  
	
   

  
	
  BANK:

  
	
   

  
	
  SILICON
  VALLEY BANK

  
	
   

  
	
  By

  	
  /s/ Michael
  J. Fell

  	
   

  
	
  Name:

  	
  Michael J.
  Fell

  	
   

  
	
  Title:

  	
  Relationship
  Manager

  	
   

  
									



 


 


[Signature page to Loan and Security Agreement]


 


26
















 


EXHIBIT A


 


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


 


All goods, Accounts (including health-care
receivables), Equipment, Inventory, contract rights or rights to payment of
money, leases, license agreements, franchise agreements, General Intangibles
(except as provided below), commercial tort claims, documents, instruments
(including any promissory notes), chattel paper (whether tangible or
electronic), cash, deposit accounts, certificates of deposit, fixtures, letters
of credit rights (whether or not the letter of credit is evidenced by a
writing), securities, and all other investment property, supporting
obligations, and financial assets, whether now owned or hereafter acquired, wherever
located; and


 


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


 


Notwithstanding the
foregoing, the Collateral does not include any of the following, whether now
owned or hereafter acquired any copyright rights, copyright applications,
copyright registrations and like protections in each work of authorship and
derivative work, whether published or unpublished, any patents, patent
applications and like protections, including improvements, divisions,
continuations, renewals, reissues, extensions, and continuations-in-part of the
same, trademarks, service marks and, to the extent permitted under applicable
law, any applications therefor, whether registered or not, and the goodwill of
the business of Borrower connected with and symbolized thereby, know-how, operating
manuals, trade secret rights, rights to unpatented inventions, and any claims
for damage by way of any past, present, or future infringement of any of the
foregoing; provided, however, the Collateral shall include all Accounts,
license and royalty fees and other revenues, proceeds, or income arising out of
or relating to any of the foregoing.


 


Pursuant to the terms of
a certain negative pledge arrangement with Bank, Borrower has agreed not to
encumber any of its copyright rights, copyright applications, copyright
registrations and like protections in each work of authorship and derivative
work, whether published or unpublished, any patents, patent applications and
like protections, including improvements, divisions, continuations, renewals,
reissues, extensions, and continuations-in-part of the same, trademarks,
service marks and, to the extent permitted under applicable law, any
applications therefor, whether registered or not, and the goodwill of the
business of Borrower connected with and symbolized thereby, know-how, operating
manuals, trade secret rights, rights to unpatented inventions, and any claims
for damage by way of any past, present, or future infringement of any of the
foregoing, without Bank’s prior written consent.


 


1

















 


EXHIBIT B


 


Loan Payment/Advance Request Form


 


DEADLINE FOR SAME DAY PROCESSING IS NOON E.S.T.*


 


	
  Fax
  To:

  	
   

  	
  Date:

  	
   

  	
   

  



 


LOAN PAYMENT:


 


Network Engines, Inc.


Alliance Systems, Inc.


 


	
  From
  Account #

  	
   

  	
   

  	
  To
  Account #

  
	
  (Deposit Account #)

  	
   

  	
  (Loan Account #)

  
	
   

  	
   

  	
   

  
	
  Principal
  $

  	
   

  	
  and/or
  Interest $

  
	
   

  	
   

  	
   

  
	
  Authorized Signature:

  	
   

  	
   

  	
  Phone Number:

  
	
  Print
  Name/Title:

  	
   

  	
   

  	
   

  
						



 


LOAN ADVANCE:


 


Complete
Outgoing Wire Request section
below if all or a portion of the funds from this loan advance are for an
outgoing wire.


 


	
  From
  Account #

  	
   

  	
  To
  Account #

  
	
  (Loan Account #)

  	
   

  	
  (Deposit Account #)

  
	
   

  	
   

  	
   

  
	
  Amount
  of Advance $

  	
   

  	
   

  



 


All
Borrower’s representations and warranties in the Loan and Security Agreement
are true, correct and complete in all material respects on the date of the
request for an advance; 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:


 


	
  Authorized Signature:

  	
   

  	
   

  	
  Phone Number:

  
	
  Print
  Name/Title:

  	
   

  	
   

  	
   

  
					



 


OUTGOING WIRE REQUEST:


 


Complete only if all or a portion of funds from the loan
advance above is to be wired.


 


Deadline
for same day processing is noon, E.S.T.


 


	
  Beneficiary
  Name:

  	
   

  	
  Amount
  of Wire: $

  
	
  Beneficiary
  Bank:

  	
   

  	
  Account
  Number:

  
	
  City
  and State:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Beneficiary
  Bank Transit (ABA) #:

  	
   

  	
  Beneficiary
  Bank Code (Swift, Sort, Chip, etc.):

  
	
   

  	
   

  	
  (For International Wire Only)

  
	
   

  	
   

  	
   

  
	
  Intermediary
  Bank:

  	
   

  	
  Transit
  (ABA) #:

  
	
  For
  Further Credit to:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Special
  Instruction:

  	
   

  	
   

  
				



 


By signing below, I (we) acknowledge and agree that my (our)
funds transfer request shall be processed in accordance with and subject to the
terms and conditions set forth in the agreements(s) covering funds transfer
service(s), which agreements(s) were previously received and executed by me
(us).


 


	
  Authorized
  Signature:

  	
   

  	
   

  	
  2nd
  Signature (if required):

  	
   

  	
   

  
	
  Print
  Name/Title:

  	
   

  	
   

  	
  Print
  Name/Title:

  	
   

  	
   

  
	
  Telephone
  #:

  	
   

  	
   

  	
  Telephone
  #:

  	
   

  	
   

  
										



 


1

















 


EXHIBIT C


 


BORROWING BASE CERTIFICATE


 


Borrower: Network Engines, Inc. and Alliance Systems,
Inc.

Lender:   Silicon Valley Bank

Commitment Amount:         $15,000,000.00


 


	
  ACCOUNTS RECEIVABLE

  	
   

  
	
  1.

  	
  Accounts Receivable Book Value as of

  	
  $

  
	
  2.

  	
  Additions (please explain on reverse)

  	
  $

  
	
  3.

  	
  TOTAL ACCOUNTS RECEIVABLE

  	
  $

  
	
   

  	
   

  	
   

  
	
  ACCOUNTS
  RECEIVABLE DEDUCTIONS (without duplication)

  	
   

  
	
  4.

  	
  Amounts over 90 days due

  	
  $

  
	
  5.

  	
  Balance of 50% over 90 day accounts

  	
  $

  
	
  6.

  	
  Credit balances over 90 days

  	
  $

  
	
  7.

  	
  Concentration Limits

  	
  $

  
	
  8.

  	
  Foreign Accounts

  	
  $

  
	
  9.

  	
  Governmental Accounts

  	
  $

  
	
  10.

  	
  Contra Accounts

  	
  $

  
	
  11.

  	
  Promotion or Demo Accounts

  	
  $

  
	
  12.

  	
  Intercompany/Employee Accounts

  	
  $

  
	
  13.

  	
  Disputed Accounts

  	
  $

  
	
  14.

  	
  Deferred Revenue

  	
  $

  
	
  15.

  	
  Right of Return Reserve Offset

  	
  $

  
	
  16.

  	
  Other (please explain on reverse)

  	
  $

  
	
  17.

  	
  TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS

  	
  $

  
	
  18.

  	
  Eligible Accounts (#3 minus #17)

  	
  $

  
	
  19.

  	
  ELIGIBLE AMOUNT OF ACCOUNTS (80.0% of #18)

  	
  $

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  BALANCES

  	
   

  	
   

  	
   

  	
   

  
	
  20.

  	
  Maximum Loan Amount

  	
  $

  
	
  21.

  	
  Total Funds Available [Lesser of (a) #20 or (b) #19 plus $5,000,000]

  	
  $

  
	
  22.

  	
  Present balance owing on Line of Credit

  	
  $

  
	
  23.

  	
  Outstanding under Sublimits

  	
   

  	
   

  	
   

  	
   

  
	
  24.

  	
  RESERVE POSITION (#21 minus #22 and #23)

  	
  $

  



 


The undersigned represents and
warrants that this is true, complete and correct, and that the information in
this Borrowing Base Certificate complies with the representations and
warranties in the Loan and Security Agreement between the undersigned and
Silicon Valley Bank.


 


	
   

  	
   

  	
  BANK USE ONLY

  
	
  COMMENTS:

  	
   

  	
  Received
  by:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  AUTHORIZED SIGNER  

  	
   

  
	
   

  	
   

  	
  Date:

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
   

  	
  Verified:

  	
   

  	
   

  
	
   

  	
    Authorized Signer

  	
   

  	
   

  	
   

  	
  AUTHORIZED SIGNER  

  	
   

  
	
  Date:

  	
   

  	
   

  	
   

  	
  Date:

  	
   

  	
   

  
	
   

  	
   

  	
  Compliance
  Status:            Yes         No

  
													



 


1

















 


EXHIBIT D


 


COMPLIANCE CERTIFICATE


 


	
  TO:

  	
   

  	
  SILICON
  VALLEY BANK

  	
   

  	
  Date:

  



FROM:   NETWORK ENGINES, INC. and ALLIANCE SYSTEMS,
INC.


 


The undersigned authorized officer of Network Engines,
Inc. and Alliance Systems, Inc. (individually and collectively, jointly and
severally, “Borrower”) certifies that under the terms and conditions of the
Loan and Security Agreement between Borrower and Bank (the “Agreement”), (1)
Borrower is in complete compliance for the period ending                               
with all required covenants except as noted below, (2) there are no Events of
Default, (3) all representations and warranties in the Agreement are true
and correct in all material respects on this date except as noted below;
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, (4)
Borrower, and each of its Subsidiaries, 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 as otherwise permitted pursuant to the terms of Section 5.9 of the
Agreement, and (5) no Liens have been levied or claims made against Borrower or
any of its Subsidiaries relating to unpaid employee payroll or benefits of
which Borrower has not previously provided written notification to Bank.
Attached are the required documents supporting the certification. The
undersigned certifies that these are prepared in accordance with GAAP
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes. The undersigned acknowledges that no
borrowings may be requested at any time or date of determination that Borrower
is not in compliance with any of the terms of the Agreement, and that
compliance is determined not just at the date this certificate is delivered.
Capitalized terms used but not otherwise defined herein shall have the meanings
given them in the Agreement.


 


Please indicate compliance status by circling Yes/No under
“Complies” column.


 


	
  Reporting
  Covenant

  	
   

  	
  Required

  	
   

  	
  Complies

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Monthly
  financial statements with Compliance Certificate

  	
   

  	
  Monthly
  within 30 days*

  	
   

  	
  Yes No

  
	
  10-Q,
  10-K and 8-K

  	
   

  	
  Within
  5 days after filing with SEC

  	
   

  	
  Yes No

  
	
  Borrowing
  Base Certificate A/R Agings

  	
   

  	
  Monthly
  within 30 days*

  	
   

  	
  Yes No

  
	
  Board
  Projections

  	
   

  	
  Annually
  45 days after FYE

  	
   

  	
  Yes No

  



 






	
  *See
  Section 6.2 of the Loan and Security Agreement

  	
   

  	
   

  	
   

  	
   

  



 


	
  Financial
  Covenant

  	
   

  	
  Required

  	
   

  	
  Actual

  	
   

  	
  Complies

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Maintain
  on a Quarterly  Basis:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Adjusted
  Quick Ratio

  	
   

  	
     1.25:1.0

  	
   

  	
                :1.0

  	
   

  	
  Yes No

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Operating
  Cash Flow

  	
   

  	
     $                        *

  	
   

  	
    $               

  	
   

  	
  Yes No

  



 






*As
set forth in Section 6.7(b) of the Loan and Security Agreement


 


1

















 


The
following financial covenant analyses and information set forth in Schedule 1
attached hereto are true and accurate as of the date of this Certificate.


 


The
following are the exceptions with respect to the certification above:  (If no exceptions exist, state “No exceptions
to note.”)


 


 


 


 


 


	
  Network
  Engines, Inc.

  	
   

  	
  BANK USE ONLY

  	
   

  	
   

  
	
  Alliance
  Systems, Inc.

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Received
  by:

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  AUTHORIZED SIGNER

  	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  	
   

  	
  Date:

  	
   

  	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Verified:

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  AUTHORIZED SIGNER

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Date:

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Compliance Status:

  	
  Yes    No

  	
   

  	
   

  
																



 


2

















 


Schedule 1 to Compliance Certificate


 


Financial Covenants of Borrower


 


Dated:                                            


 


In the event of a
conflict between this Schedule and the Loan Agreement, the terms of the Loan
Agreement shall control.


 


I.              Adjusted  Quick Ratio (Section 6.7(a))


 


	
  Required:

  	
   

  	
  1.25:1.00

  
	
  Actual:

  	
   

  	
        :1.00

  



 


	
  A.

  	
   

  	
  Aggregate
  value of the unrestricted cash of Borrower

  	
   

  	
  $

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  B.

  	
   

  	
  Aggregate value of the
  net billed accounts receivable of Borrower

  	
   

  	
  $

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  C.

  	
   

  	
  Quick Assets (the sum
  of lines A through B)

  	
   

  	
  $

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  D.

  	
   

  	
  Aggregate value of
  Obligations to Bank

  	
   

  	
  $

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  E.

  	
   

  	
  Aggregate
  value of liabilities of Borrower (including all Indebtedness) that matures
  within one (1) year and current portion of Subordinated Debt permitted by
  Bank to be paid by Borrower

  	
   

  	
  $

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  F.

  	
   

  	
  Current
  Liabilities (the sum of lines D and E)

  	
   

  	
  $

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  G

  	
   

  	
  Deferred Revenue

  	
   

  	
  $

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  H

  	
   

  	
  Line F minus line G

  	
   

  	
  $

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  I.

  	
   

  	
  Adjusted Quick Ratio
  (line C divided by line H)

  	
   

  	
   

  



 


Is
line I equal to or greater than 1.25:1:00?


 


	
   

  	
  No, not in compliance

  	
  Yes, in compliance

  	
   

  



 


II.            Operating
Cash Flow (Section 6.7(b))


 


Required:               $                  
(as set forth in Section 6.7(b))


 


Actual:                   $                  


 


	
   

  	
  No, not in compliance

  	
  Yes, in compliance

  	
   

  



 


3