Document:

Exhibit 10.2

 

SECURITY AGREEMENT: SECURITIES ACCOUNT

 

1.             GRANT OF SECURITY
INTEREST.  For valuable consideration,
the undersigned DOT HILL SYSTEMS CORP., or any of them (“Debtor”), hereby
grants and transfers to WELLS FARGO BANK, NATIONAL ASSOCIATION (“Bank”) a
security interest in (a) Debtor’s account no. 10671901 (whether held in Debtor’s
name or as a Bank collateral account for the benefit of Debtor), and all
replacements or substitutions therefor, including any account resulting from a
renumbering or other administrative re-identification thereof (collectively,
the “Securities Account”) maintained with Wells Capital Management incorporated
(“Intermediary”), (b) all financial assets credited to the Securities
Account, (c) all security entitlements with respect to the financial
assets credited to the Securities Account, and (d) any and all other
investment property or assets maintained or recorded in the Securities Account
(with all the foregoing defined as “Collateral”), together with whatever is
receivable or received when any of the Collateral or proceeds thereof are sold,
collected, exchanged or otherwise disposed of, whether such disposition is
voluntary or involuntary, including without limitation, (i) all rights to
payment, including returned premiums, with respect to any insurance relating to
any of the foregoing, (ii) all rights to payment with respect to any claim or
cause of action affecting or relating to any of the foregoing, and
(iii) all stock rights, rights to subscribe, stock splits, liquidating
dividends, cash dividends, dividends paid in stock, new securities or other
property of any kind which Debtor is or may hereafter be entitled to receive on
account of any securities pledged hereunder, including without limitation,
stock received by Debtor due to stock splits or dividends paid in stock or sums
paid upon or in respect of any securities pledged hereunder upon the
liquidation or dissolution of the issuer thereof (hereinafter called “Proceeds”).  Except as otherwise expressly permitted herein
or in the Addendum to Security Agreement: Securities Account attached hereto
(the “Addendum”), in the event Debtor receives any such Proceeds, Debtor will
hold the same in trust on behalf of and for the benefit of Bank and will
immediately deliver all such Proceeds to Bank in the exact form received, with
the endorsement of Debtor if necessary and/or appropriate undated stock powers
duly executed in blank, to be held by Bank as part of the Collateral, subject
to all terms hereof.  As used herein, the
terms “security entitlement,” “financial asset” and “investment property” shall
have the respective meanings set forth in the California Uniform Commercial
Code.

 

2.             OBLIGATIONS
SECURED.  The obligations secured hereby
are the payment and performance of:  (a) all
present and future indebtedness of Debtor to Bank arising under or in
connection with that certain Credit Agreement between Debtor and Bank of even
date herewith (as amended or replaced from time to time, the “Credit Agreement”)
and all of the other Loan Documents (as defined in the Credit Agreement); and
(b) all obligations of Debtor and rights of Bank under this Agreement and the
other Loan Documents (collectively, the “Indebtedness”).  The word “indebtedness” is used herein in its
most comprehensive sense and includes any and all advances, debts, obligations
and liabilities of Debtor, or any of them, heretofore, now or hereafter made,
incurred or created, whether voluntary or involuntary and however arising,
whether due or not due, absolute or contingent, liquidated or unliquidated,
determined or undetermined, and whether Debtor may be liable individually or
jointly with others, or whether recovery upon such indebtedness may be or
hereafter becomes unenforceable.

 

3.             TERMINATION.  This Agreement will terminate upon the
performance of all obligations of Debtor to Bank, including without limitation,
the payment of all Indebtedness of Debtor to Bank, and the termination of all
commitments of Bank to extend credit to Debtor,

 

1

 

 existing at the time Bank
receives written notice from Debtor of the termination of this Agreement.

 

4.             OBLIGATIONS OF
BANK.  Bank shall have no duty to take
any steps necessary to preserve the rights of Debtor against prior parties, or
to initiate any action to protect against the possibility of a decline in the
market value of the Collateral or Proceeds. 
Bank shall not be obligated to take any action with respect to the
Collateral or Proceeds requested by Debtor unless such request is made in
writing and Bank determines, in its sole discretion, that the requested action
would not unreasonably jeopardize the value of the Collateral and Proceeds as
security for the Indebtedness.

 

5.             REPRESENTATIONS AND
WARRANTIES.  Debtor represents and
warrants to Bank that:  (a) Debtor’s
legal name is exactly as set forth on the first page of this Agreement, and all
of Debtor’s organizational documents or agreements delivered to Bank are
complete and accurate in every material respect; (b) Debtor is the owner
of the Collateral and Proceeds; (c) Debtor has the exclusive right to
grant a security interest in the Collateral and Proceeds; (d) all Collateral
and Proceeds are genuine, free from liens, adverse claims, setoffs, default,
prepayment, defenses and conditions precedent of any kind or character, except
the lien created hereby or as otherwise agreed to by Bank, or heretofore
disclosed by Debtor to Bank, in writing, or any lien in favor of the
Intermediary as described in the Securities Account Control Agreement among
Bank, Debtor and Intermediary of even date herewith (the “Control Agreement”);
(e) all statements contained herein and, where applicable, in the
Collateral, are true and complete in all material respects; (f) no
financing statement or control agreement covering any of the Collateral or
Proceeds, and naming any secured party other than Bank, exists or is on file in
any public office or remains in effect; (g) no person or entity, other
than Debtor, Bank and Intermediary, has any interest in or control over the
Collateral; and (h) specifically with respect to Collateral and Proceeds
consisting of investment securities, instruments, chattel paper, documents,
contracts, insurance policies or any like property, (i) all persons appearing
to be obligated thereon have authority and capacity to contract and are bound
as they appear to be, and (ii) the same comply with applicable laws concerning
form, content and manner of preparation and execution.

 

6.             COVENANTS OF
DEBTOR.

 

(a)           Debtor agrees in
general:  (i) to pay Indebtedness secured
hereby when due; (ii) to indemnify Bank against all losses, claims, demands,
liabilities and expenses of every kind caused by property subject hereto except
to the extent such losses, claims, demands, liabilities and expenses are caused
directly by Bank’s willful misconduct or gross negligence; (iii) to pay all
costs and expenses, including reasonable attorneys’ fees, incurred by Bank in
the perfection and preservation of the Collateral or Bank’s interest therein
and/or the realization, enforcement and exercise of Bank’s rights, powers and
remedies hereunder; (iv) to permit Bank to exercise its powers; (v) to execute
and deliver such documents as Bank deems necessary to create, perfect and
continue the security interests contemplated hereby; (vi) not to change its
name, and as applicable, its chief executive office, its principal residence or
the jurisdiction in which it is organized and/or registered without giving Bank
prior written notice thereof; (vii) not to change the places where Debtor
keeps any Collateral or Debtor’s records concerning the Collateral and Proceeds
without giving Bank prior written notice of the address to which Debtor is
moving same; and (viii) to cooperate with Bank in perfecting all security
interests granted herein and in obtaining such agreements from third parties as
Bank deems necessary, proper or convenient in connection with the preservation,
perfection or enforcement of any of its rights hereunder.

 

2

 

(b)           Debtor agrees with
regard to the Collateral and Proceeds, unless Bank agrees otherwise in
writing:  (i) that Bank is authorized to
file financing statements in the name of Debtor to perfect Bank’s security
interest in Collateral and Proceeds; (ii) not to permit any security
interest in or lien on the Collateral or Proceeds, except in favor of Bank and
except liens in favor of Intermediary to the extent expressly permitted in the
Control Agreement; (iii) not to hypothecate or permit the transfer by operation
of law of any of the Collateral or Proceeds or any interest therein; (iv) to
keep, in accordance with generally accepted accounting principles, complete and
accurate records regarding all Collateral and Proceeds, and to permit Bank to
inspect the same and make copies thereof at any reasonable time; (v) if
requested by Bank, and except as provided in the Addendum, to receive and use
reasonable diligence to collect Proceeds, in trust and as the property of Bank,
and to immediately endorse as appropriate and deliver such Proceeds to Bank
daily in the exact form in which they are received together with a collection
report in form satisfactory to Bank; (vi) in the event Bank elects to
receive payments of Proceeds hereunder, to pay all expenses incurred by Bank in
connection therewith, including expenses of accounting, correspondence,
collection efforts, filing, recording, record keeping and expenses incidental
thereto; and (vii) to provide any service and do any other acts which may be
necessary to keep all Collateral and Proceeds free and clear of all defenses,
rights of offset and counterclaims. If the Collateral or Proceeds consists of
securities and so long as no Event of Default exists, Debtor shall be entitled
to vote said securities and to give consents, waivers and ratifications with
respect thereto, provided that no vote shall be cast or consent, waiver or
ratification given or action taken which would impair Bank’s interests in the
Collateral and Proceeds or be inconsistent with or violate any provisions of
this Agreement.  Debtor further agrees
that any party now or at any time hereafter authorized by Debtor to advise or
otherwise act with respect to the Securities Account shall be subject to all
terms and conditions contained herein and in any control, custodial or other
similar agreement at any time in effect among Bank, Debtor and Intermediary
relating to the Collateral.

 

7.             POWERS OF
BANK.  Debtor appoints Bank its true
attorney in fact to perform any of the following powers, which are coupled with
an interest, are irrevocable until termination of this Agreement and may be
exercised from time to time by Bank’s officers and employees, or any of them,
whether or not Debtor is in default with respect to powers relating to the
preservation and perfection of the Collateral and Bank’s rights hereunder, but
only if an Event of Default has occurred and is continuing with respect to all
other powers:  (a) to perform any
obligation of Debtor hereunder in Debtor’s name or otherwise; (b) to notify any
person obligated on any security, instrument or other document subject to this
Agreement of Bank’s rights hereunder; (c) to collect by legal proceedings or
otherwise all dividends, interest, principal or other sums now or hereafter
payable upon or on account of the Collateral or Proceeds; (d) to enter into any
extension, modification, reorganization, deposit, merger or consolidation
agreement, or any other agreement relating to or affecting the Collateral or
Proceeds, and in connection therewith to deposit or surrender control of the
Collateral and Proceeds, to accept other property in exchange for the
Collateral and Proceeds, and to do and perform such acts and things as Bank may
deem proper, with any money or property received in exchange for the Collateral
or Proceeds, at Bank’s option, to be applied to the Indebtedness or held by
Bank under this Agreement; (e) to make any compromise or settlement Bank deems
desirable or proper in respect of the Collateral and Proceeds; (f) to insure,
process and preserve the Collateral and Proceeds; (g) to exercise all rights,
powers and remedies which Debtor would have, but for this Agreement, with
respect to all Collateral and Proceeds subject hereto; and (h) to do all acts
and things and execute all documents in the name of Debtor or otherwise, deemed
by Bank as necessary, proper and convenient in connection with the
preservation, perfection or enforcement of its rights hereunder.  To effect the purposes of this Agreement or
otherwise upon instructions of Debtor, or any of them, or if an Event of
Default has occurred and is 

 

3

 

continuing, Bank may cause any Collateral and/or Proceeds to be
transferred to Bank’s name or the name of Bank’s nominee.  If an Event of Default has occurred and is
continuing, any or all Collateral and/or Proceeds consisting of securities may
be registered, without notice, in the name of Bank or its nominee, and
thereafter Bank or its nominee may exercise, without notice, all voting and
corporate rights at any meeting of the shareholders of the issuer thereof, any
and all rights of conversion, exchange or subscription, or any other rights,
privileges or options pertaining to such Collateral and/or Proceeds, all as if
it were the absolute owner thereof.  The
foregoing shall include, without limitation, the right of Bank or its nominee
to exchange, at its discretion, any and all Collateral and/or Proceeds upon the
merger, consolidation, reorganization, recapitalization or other readjustment
of the issuer thereof, or upon the exercise by the issuer thereof or Bank of
any right, privilege or option pertaining to any shares of the Collateral
and/or Proceeds, and in connection therewith, the right to deposit and deliver
any and all of the Collateral and/or Proceeds with any committee, depository,
transfer agent, registrar or other designated agency upon such terms and
conditions as Bank may determine.  All of
the foregoing rights, privileges or options may be exercised without liability
on the part of Bank or its nominee except to account for property actually
received by Bank.  Bank shall have no
duty to exercise any of the foregoing, or any other rights, privileges or
options with respect to the Collateral or Proceeds and shall not be responsible
for any failure to do so or delay in so doing.

 

8.             PAYMENT OF
PREMIUMS, TAXES, CHARGES, LIENS AND ASSESSMENTS.  Debtor agrees to pay, prior to delinquency,
all insurance premiums, taxes, charges, liens and assessments against the
Collateral and Proceeds, and upon the failure of Debtor to do so, Bank at its
option may pay any of them and shall be the sole judge of the legality or
validity thereof and the amount necessary to discharge the same.  Any such payments made by Bank shall be
obligations of Debtor to Bank, due and payable immediately upon demand,
together with interest at a rate determined in accordance with the provisions
of this Agreement, and shall be secured by the Collateral and Proceeds, subject
to all terms and conditions of this Agreement.

 

9.             EVENTS OF DEFAULT.  The occurrence of any “Event of Default”
under the Credit Agreement shall constitute an “Event of Default” under this
Agreement.

 

10.           REMEDIES.  Upon the occurrence and during the
continuance of any Event of Default, Bank shall have the right to declare
immediately due and payable all or any Indebtedness secured hereby and to
terminate any commitments to make loans or otherwise extend credit to
Debtor.  Bank shall have all other
rights, powers, privileges and remedies granted to a secured party upon default
under the California Uniform Commercial Code or otherwise provided by law,
including without limitation, the right (a) to contact all persons obligated to
Debtor on any Collateral or Proceeds and to instruct such persons to deliver
all Collateral and/or Proceeds directly to Bank, and (b) to sell, lease,
license or otherwise dispose of any or all Collateral.  All rights, powers, privileges and remedies
of Bank shall be cumulative.  No delay,
failure or discontinuance of Bank in exercising any right, power, privilege or
remedy hereunder shall affect or operate as a waiver of such right, power,
privilege or remedy; nor shall any single or partial exercise of any such
right, power, privilege or remedy preclude, waive or otherwise affect any other
or further exercise thereof or the exercise of any other right, power,
privilege or remedy.  Any waiver, permit,
consent or approval of any kind by Bank of any default hereunder, or any such
waiver of any provisions or conditions hereof, must be in writing and shall be
effective only to the extent set forth in writing.  It is agreed that public or private sales or
other dispositions, for cash or on credit, to a wholesaler or retailer or
investor, or user of property of the types subject to this Agreement, or public
auctions, are all commercially reasonable since differences in the prices
generally realized in the different kinds of dispositions are ordinarily offset
by the differences in the costs and credit risks of such dispositions.  While 

 

4

 

an Event of Default exists:  (a)
Debtor will not dispose of any Collateral or Proceeds except on terms approved
by Bank; (b) Bank may appropriate the Collateral and apply all Proceeds toward
repayment of the Indebtedness in such order of application as Bank may from
time to time elect; (c) Bank may take any action with respect to the Collateral
contemplated by any control, custodial or other similar agreement then in
effect among Bank, Debtor and Intermediary; and (d) at Bank’s request, Debtor
will assemble and deliver all books and records pertaining to the Collateral or
Proceeds to Bank at a reasonably convenient place designated by Bank.  For any Collateral or Proceeds consisting of
securities, Bank shall have no obligation to delay a disposition of any portion
thereof for the period of time necessary to permit the issuer thereof to
register such securities for public sale under any applicable state or Federal
law, even if the issuer thereof would agree to do so.  Debtor further agrees that Bank shall have no
obligation to process or prepare any Collateral for sale or other disposition.

 

11.           DISPOSITION OF
COLLATERAL AND PROCEEDS; TRANSFER OF INDEBTEDNESS.  In disposing of Collateral hereunder, Bank
may disclaim all warranties of title, possession, quiet enjoyment and the
like.  Any proceeds of any disposition of
any Collateral or Proceeds, or any part thereof, may be applied by Bank to the
payment of expenses incurred by Bank in connection with the foregoing,
including reasonable attorneys’ fees, and the balance of such proceeds may be
applied by Bank toward the payment of the Indebtedness in such order of
application as Bank may from time to time elect.  Upon the transfer of all or any part of the
Indebtedness, Bank may transfer all or any part of the Collateral or Proceeds
and shall be fully discharged thereafter from all liability and responsibility
with respect to any of the foregoing so transferred, and the transferee shall
be vested with all rights and powers of Bank hereunder with respect to any of
the foregoing so transferred; but with respect to any Collateral or Proceeds
not so transferred, Bank shall retain all rights, powers, privileges and
remedies herein given.

 

12.           STATUTE OF
LIMITATIONS.  Until all Indebtedness shall
have been paid in full and all commitments by Bank to extend credit to Debtor
have been terminated, the power of sale or other disposition and all other
rights, powers, privileges and remedies granted to Bank hereunder shall
continue to exist and may be exercised by Bank at any time and from time to
time irrespective of the fact that the Indebtedness or any part thereof may
have become barred by any statute of limitations, or that the personal
liability of Debtor may have ceased, unless such liability shall have ceased
due to the payment in full of all Indebtedness secured hereunder.

 

13.           MISCELLANEOUS.  When
there is more than one Debtor named herein: 
(a) the word “Debtor” shall mean all or any one or more of them as the
context requires; (b) the obligations of each Debtor hereunder are joint and
several; and (c) until all Indebtedness shall have been paid in full, no Debtor
shall have any right of subrogation or contribution, and each Debtor hereby
waives any benefit of or right to participate in any of the Collateral or
Proceeds or any other security now or hereafter held by Bank.  Debtor hereby waives any right to require
Bank to (i) proceed against Debtor or any other person, (ii) proceed against or
exhaust any security from Debtor or any other person, (iii) perform any
obligation of Debtor with respect to any Collateral or Proceeds, and (d) make
any presentment or demand, or give any notice of nonpayment or nonperformance,
protest, notice of protest or notice of dishonor hereunder or in connection with
any Collateral or Proceeds.  Debtor
further waives any right to direct the application of payments or security for
any Indebtedness of Debtor or indebtedness of customers of Debtor.

 

5

 

14.           NOTICES.  All notices, requests and demands required
under this Agreement must be in writing, addressed to Bank at the address
specified in any other loan documents entered into between Debtor and Bank and
to Debtor at the address of its chief executive office (or principal residence,
if applicable) specified below or to such other address as any party may
designate by written notice to each other party, and shall be deemed to have
been given or made as follows: (a) if personally delivered, upon delivery; (b)
if sent by mail, upon the earlier of the date of receipt or three (3) days
after deposit in the U.S. mail, first class and postage prepaid; and (c) if
sent by telecopy, upon receipt.

 

15.           COSTS, EXPENSES AND
ATTORNEYS’ FEES.  Debtor shall pay to
Bank immediately upon demand the full amount of all payments, advances,
charges, costs and expenses, including reasonable attorneys’ fees (to include
outside counsel fees and all allocated costs of Bank’s in-house counsel),
expended or incurred by Bank in exercising any right, power, privilege or
remedy conferred by this Agreement or in the enforcement thereof, whether
incurred at the trial or appellate level, in an arbitration proceeding or
otherwise, and including any of the foregoing incurred in connection with any
bankruptcy proceeding (including without limitation, any adversary proceeding,
contested matter or motion brought by Bank or any other person) relating to
Debtor or in any way affecting any of the Collateral or Bank’s ability to
exercise any of its rights or remedies with respect thereto.  All of the foregoing shall be paid by Debtor
with interest from the date of demand until paid in full at a rate per annum
equal to the greater of ten percent (10%) or the Prime Rate in effect from time
to time.

 

16.           SUCCESSORS; ASSIGNS;
AMENDMENT.  This Agreement shall be
binding upon and inure to the benefit of the heirs, executors, administrators,
legal representatives, successors and assigns of the parties, and may be
amended or modified only in writing signed by Bank and Debtor.

 

17.           OBLIGATIONS OF
MARRIED PERSONS.  Any married person who
signs this Agreement as Debtor hereby expressly agrees that recourse may be had
against his or her separate property for all his or her Indebtedness to Bank
secured by the Collateral and Proceeds under this Agreement.

 

18.           SEVERABILITY OF
PROVISIONS.  If any provision of this
Agreement shall be held to be prohibited by or invalid under applicable law,
such provision shall be ineffective only to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or any
remaining provisions of this Agreement.

 

19.           GOVERNING LAW.  This Agreement shall be governed by and
construed in accordance with the laws of the State of California.

 

20.           ADDENDUM.  Additional terms and conditions relating to
the Securities Account are set forth in the Addendum attached hereto and
incorporated herein by this reference.

 

Debtor warrants that Debtor is an organization registered under the
laws of the State of Delaware.

 

Debtor warrants that its chief executive office (or principal
residence, if applicable) is located at the following address: 6305 El Camino
Real, Carlsbad, California 92009.

 

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IN WITNESS WHEREOF, this Agreement has been duly executed as of July 1,
2004.

 

	
  DOT HILL SYSTEMS CORP.

  
	
   

  
	
  By:

  	
   /s/ James L. Lambert

  	
   

  
	
   

  	
  James L. Lambert

  
	
   

  	
  President

  
	
   

  
	
   

  
	
  By:

  	
   /s/ Preston Romm

  	
   

  
	
   

  	
  Preston Romm

  
	
   

  	
  Chief Financial Officer

  

 

7

 

ADDENDUM TO SECURITY AGREEMENT: SECURITIES
ACCOUNT

 

THIS ADDENDUM is attached to and made a part of that certain Security
Agreement: Securities Account executed by DOT HILL SYSTEMS CORP. (“Debtor”) in
favor of WELLS FARGO BANK, NATIONAL ASSOCIATION (“Bank”), dated as of July 1,
2004 (the “Agreement”).

 

The following provisions are hereby incorporated into the Agreement:

 

1.             Securities
Account Activity.  So long as no
Event of Default exists, Debtor, or any party authorized by Debtor to act with
respect to the Securities Account, may (a) receive payments of interest and/or
cash dividends earned on financial assets maintained in the Securities Account,
(b) trade financial assets maintained in the Securities Account, and (c)
withdraw financial assets from the Securities Account; provided, however, that
no such payment, trade or withdrawal shall be made if the Collateral Value of
the Securities Account is or would be less than the amount required
hereunder.  Without Bank’s prior written
consent, except as permitted by the preceding sentence, neither Debtor nor any
party other than Bank may withdraw or receive any distribution of any
Collateral from the Securities Account. 
The Collateral Value of the Securities Account shall at all times be equal
to or greater than one hundred percent (100%) of the outstanding principal
balance of the Indebtedness, including the amount of all issued and outstanding
letters of credit, if any, secured hereby. 
In the event that the Collateral Value, for any reason and at any time,
is less than one hundred percent (100%) but more than ninety-one percent (91%)
of the required amount, Debtor shall within thirty (30) days make a principal
reduction on the Indebtedness or deposit additional assets of a nature
satisfactory to Bank into the Securities Account, in either case in amounts or
with values sufficient to achieve the required Collateral Value.  In the event that the Collateral Value, for
any reason and at any time, is less than ninety-one percent (91%) of the required
amount, Debtor shall within twenty-four (24) hours make a principal reduction
on the Indebtedness or deposit additional assets of a nature satisfactory to
Bank into the Securities Account, in either case in amounts or with values
sufficient to achieve the required Collateral Value.

 

2.             Notice of
Exclusive Control.  Notwithstanding
any other provision to the contrary in this Security Agreement or that certain
Securities Account Control Agreement (Wells Fargo Bank Intermediary) of even
date herewith by and among Customer, Bank and Wells Capital Management
Incorporated (“Intermediary”) (as amended or replaced from time to time, the “Control
Agreement”), Bank shall not deliver to Intermediary any Notice of Exclusive
Control (as such term is defined in Section 3(c) of the Control Agreement)
unless at the time of the giving of any such Notice, an Event of Default has
occurred and is continuing.

 

3.             “Collateral
Value” means the percentage set forth below of the lower of the face or
market value, or the lower of the face or redemption value, as appropriate, for
each type of investment property held in the Securities Account at the time of
computation, with such value and the classification of any particular
investment property in all instances determined by Bank in its sole discretion,
and excluding from such computation (a) all WF Securities and Collective
Investment Funds, (b) any stock with a market value of $10.00 or less, and (c)
all investment property from an issuer if Bank determines such issuer to be
ineligible.

 

1

 

	
  Type of Investment Property

  	
   

  	
  Percentage

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash and Cash Equivalents

  	
   

  	
  100%

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  U.S. Government Bills, Notes and U.S. Government Sponsored Agency
  Securities:

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (a) with maturities less than or equal to 5
  years

  	
   

  	
  90%

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (b) with maturities greater than 5 years
  but  less than or equal to 10 years

  	
   

  	
  85%

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (c) with maturities greater than 10 years

  	
   

  	
  80%

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Corporate and Municipal Bonds and Notes:

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (a) rated AAA/Aaa, AA/Aa or SP-1 by a
  nationally recognized rating agency with maturities less than or equal to 5
  years

  	
   

  	
  85%

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (b) rated AAA/Aaa, AA/Aa or SP-1 by a
  nationally recognized rating agency with maturities greater than 5 years but
  less than or equal to 10 years

  	
   

  	
  80%

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (c) rated AAA/Aaa, AA/Aa or SP-1 by a
  nationally recognized rating agency with maturities greater than 10 years

  	
   

  	
  75%

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (d) rated A, Baa, BBB or SP-2 by a
  nationally recognized rating agency with maturities less than or equal to 5
  years

  	
   

  	
  80%

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (e) rated A, Baa, BBB or SP-2 by a
  nationally recognized rating agency with maturities greater than 5 years but
  less than or equal to 10 years

  	
   

  	
  75%

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (f) rated A, Baa, BBB or SP-2 by a
  nationally recognized rating agency with maturities greater than 10 years

  	
   

  	
  70%

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Commercial Paper:

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (a) rated A1 or P1 by a nationally recognized rating agency

  	
   

  	
  80%

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (b) rated A2 or P2 by a nationally recognized rating agency

  	
   

  	
  70%

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Common and Preferred Stock:

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (a) traded on the New York Stock Exchange

  	
   

  	
  75%

  	
   

  	
   

  

 

2

 

	
  (b) traded on NASDAQ, the American Stock
  Exchange or a regional exchange:

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (i) with a
  market capitalization greater than $7.5B and

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ** rated A+, A or A- by a nationally recognized rating agency

  	
   

  	
  75%

  	
   

  	
   

  
	
  ** rated B+ by a nationally recognized rating agency

  	
   

  	
  60%

  	
   

  	
   

  
	
  ** rated B, B- or C by a nationally recognized rating agency

  	
   

  	
  50%

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (ii) with a market capitalization greater
  than $1B but less than or equal to $7.5B and

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ** rated A+, A or A- by a nationally recognized rating agency

  	
   

  	
  60%

  	
   

  	
   

  
	
  ** rated B+ by a nationally recognized rating agency

  	
   

  	
  50%

  	
   

  	
   

  
	
  ** rated B, B- or C by a nationally recognized rating agency

  	
   

  	
  40%

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (iii) with a market capitalization greater
  than or equal to $500MM but less than $1B and

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ** rated A+, A or A- by a nationally recognized rating agency

  	
   

  	
  50%

  	
   

  	
   

  
	
  ** rated B+ by a nationally recognized rating agency

  	
   

  	
  40%

  	
   

  	
   

  
	
  ** rated B, B- or C by a nationally recognized rating agency

  	
   

  	
  30%

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Mutual Funds:

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (a) Listed Money Market

  	
   

  	
  95%

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (b) Short Term Taxable or Tax Exempt Bonds

  	
   

  	
  90%

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (c) Intermediate Term Taxable or Tax Exempt Bonds

  	
   

  	
  85%

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (d) General Taxable Bonds

  	
   

  	
  80%

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (e) Municipal Bonds, Single State Bonds or Long
  Term Corporate Taxable Bonds

  	
   

  	
  75%

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (f) Balanced Stock and Bond Funds (includes flexible portfolio)

  	
   

  	
  75%

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (g) Domestic Large Cap Stock

  	
   

  	
  70%

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (h) Domestic Equity Income Stock

  	
   

  	
  70%

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (i) Domestic Mortgage Taxable Bonds

  	
   

  	
  70%

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (j) Multi Cap Growth, Value and Core Stock

  	
   

  	
  60%

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (k) Mid Cap Growth, Value and Core Stock

  	
   

  	
  60%

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (l) Small Cap Growth, Value and Core Stock

  	
   

  	
  50%

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (m) Specialty Equity Stock

  	
   

  	
  50%

  	
   

  	
   

  

 

3

 

	
  (n) Sector, International, High Yield
  Taxable and Tax Exempt Stocks and Bonds

  	
   

  	
  50%

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (o) Listed NASDAQ Mutual Funds

  	
   

  	
  50%

  	
   

  	
   

  

 

4.             Exclusion from
Collateral.  Notwithstanding anything
herein to the contrary, the terms “Collateral” and “Proceeds” do not include,
and Bank disclaims a security interest in all WF Securities and Collective
Investment Funds now or hereafter maintained in the Securities Account.

 

5.             “Collective
Investment Funds” means collective investment funds as described in 12 CFR
9.18 and includes, without limitation, common trust funds maintained by Bank
for the exclusive use of its fiduciary clients.

 

6.             “WF Securities”
means stock, securities or obligations of Wells Fargo & Company or of any
affiliate thereof (as the term affiliate is defined in Section 23A of the
Federal Reserve Act (12 USC 371(c), as amended from time to time).

 

IN WITNESS WHEREOF, this Addendum has been executed as of the same date
as the Agreement.

 

	
   

  	
   

  	
  WELLS FARGO BANK,

  	
   

  
	
  DOT HILL SYSTEMS CORP.

  	
   

  	
  NATIONAL
  ASSOCIATION

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  By:

  	
  /s/ James L. Lambert

  	
   

  	
  By:

  	
  /s/ Brian P. Chambers

  	
   

  
	
   

  	
  James L. Lambert

  	
   

  	
   

  	
  Brian P. Chambers

  	
   

  
	
   

  	
  President

  	
   

  	
   

  	
  Vice President

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  By: 

  	
  /s/ Preston Romm

  	
   

  	
   

  	
   

  
	
   

  	
  Preston Romm

  	
   

  	
   

  	
   

  
	
   

  	
  Chief Financial Officer

  	
   

  	
   

  	
   

  
							

 

4Exhibit 10.3

 

	
  WELLS
  FARGO

  	
   

  	
  REVOLVING LINE OF CREDIT NOTE

  
	
   

  	
   

  	
   

  
	
  $30,000,000.00

  	
   

  	
  San Diego, California

  
	
   

  	
   

  	
  July 1, 2004

  

 

FOR VALUE RECEIVED, the
undersigned Dot Hill Systems Corp. (“Borrower”)
promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION (“Bank”)
at its office at San Diego RCBO, 401 B Street, Suite #2201,
San Diego, CA 92101, or at such other place as the holder hereof may
designate, in lawful money of the United States of America and in immediately
available funds, the principal sum of $30,000,000.00,
or so much thereof as may be advanced and be outstanding, with interest
thereon, to be computed on each advance from the date of its disbursement as
set forth herein.

 

1.                                      DEFINITIONS:

 

As used herein, the following terms shall have the meanings
set forth after each, and any other term defined in this Note shall have the
meaning set forth at the place defined:

 

1.1                                 “Business
Day” means any day except a Saturday, Sunday or any other day on which
commercial banks in California are authorized or required by law to close.

 

1.2                                 “Fixed Rate
Term” means a period commencing on a Business Day and continuing for 1, 2, 3, 6 or 12 months,
as designated by Borrower, during which all or a portion of the outstanding
principal balance of this Note bears interest determined in relation to LIBOR;
provided however, that no Fixed Rate Term may be selected for a principal
amount less than $100,000.00; and provided further,
that no Fixed Rate Term shall extend beyond the scheduled maturity date hereof.
If any Fixed Rate Term would end on a day which is not a Business Day, then
such Fixed Rate Term shall be extended to the next succeeding Business Day.

 

1.3                                 “LIBOR”
means the rate per annum (rounded upward, if necessary, to the nearest whole
1/8 of 1%) determined by dividing Base LIBOR by a percentage equal to 100% less
any LIBOR Reserve Percentage.

 

(a)                                  “Base LIBOR”
means the rate per annum for United States dollar deposits quoted by Bank as
the Inter-Bank Market Offered Rate, with the understanding that such rate is
quoted by Bank for the purpose of calculating effective rates of interest for
loans making reference thereto, on the first day of a Fixed Rate Term for
delivery of funds on said date for a period of time approximately equal to the
number of days in such Fixed Rate Term and in an amount approximately equal to
the principal amount to which such Fixed Rate Term applies.  Borrower understands and agrees that Bank may
base its quotation of the Inter-Bank Market Offered Rate upon such offers or
other market indicators of the Inter-Bank Market as Bank in its discretion
deems appropriate including, but not limited to, the rate offered for U.S.
dollar deposits on the London Inter-Bank Market.

 

(b)                                 “LIBOR
Reserve Percentage” means the reserve percentage prescribed by the Board of
Governors of the Federal Reserve System (or any successor) for “Eurocurrency
Liabilities” (as defined in Regulation D of the Federal Reserve Board, as
amended), adjusted by Bank for expected changes in such reserve percentage
during the applicable Fixed Rate Term.

 

1.4                                 “Prime Rate”
means at any time the rate of interest most recently announced within Bank at
its principal office as its Prime Rate, with the understanding that the Prime
Rate is one of Bank’s base rates and serves as 
the basis upon which effective rates of interest are calculated for
those loans making reference thereto, and is evidenced by the recording thereof
after its announcement in such internal publication or publications as Bank may
designate.

 

2.                                      INTEREST:

 

2.1                                 Interest. The
outstanding principal balance of this Note shall bear interest (computed on the
basis of a 360-day year, actual days elapsed)
either (a) at a fluctuating rate per annum equal to the
Prime Rate in effect

 

1

 

from
time to time, or (b) at a fixed rate per annum determined by Bank to be .65000% above LIBOR in effect on the first day of the
applicable Fixed Rate Term. When interest is determined in relation to the
Prime Rate, each change in the rate of interest hereunder shall become
effective on the date each Prime Rate change is announced within Bank. With
respect to each LIBOR selection option selected hereunder, Bank is hereby
authorized to note the date, principal amount, interest rate and Fixed Rate
Term applicable thereto and any payments made thereon on Bank’s books and
records (either manually or by electronic entry) and/or on any schedule
attached to this Note, which notations shall be prima facie evidence of the
accuracy of the information noted.

 

2.2                                 Selection of
Interest Rate Options. At any time any portion of this Note
bears interest determined in relation to LIBOR, it may be continued by Borrower
at the end of the Fixed Rate Term applicable thereto so that all or a portion
thereof bears interest determined in relation to the Prime Rate or to LIBOR for
a new Fixed Rate Term designated by Borrower. At any time any portion of this
Note bears interest determined in relation to the Prime Rate, Borrower may
convert all or a portion thereof so that it bears interest determined in
relation to LIBOR for a Fixed Rate Term designated by Borrower. At such time as
Borrower requests an advance hereunder or wishes to select a LIBOR option for
all or a portion of the outstanding principal balance hereof, and at the end of
each Fixed Rate Term, Borrower shall give Bank notice specifying: (a) the
interest rate option selected by Borrower; (b) the principal amount subject
thereto; and (c) for each LIBOR selection, the length of the applicable Fixed
Rate Term. Any such notice may be given by telephone (or such other electronic
method as Bank may permit) so long as, with respect to each LIBOR selection,
(i) if requested by Bank, Borrower provides to Bank written confirmation
thereof not later than 3 Business Days after such notice is given, and (ii)
such notice is given to Bank prior to 10:00 a.m. on the first day of the Fixed
Rate Term, or at a later time during any Business Day if Bank, at it’s sole
option but without obligation to do so, accepts Borrower’s notice and quotes a
fixed rate to Borrower. If Borrower does not immediately accept a fixed rate
when quoted by Bank, the quoted rate shall expire and any subsequent LIBOR
request from Borrower shall be subject to a redetermination by Bank of the
applicable fixed rate. If no specific designation of interest is made at the
time any advance is requested hereunder or at the end of any Fixed Rate Term,
Borrower shall be deemed to have made a Prime Rate interest selection for such
advance or the principal amount to which such Fixed Rate Term applied.

 

2.3                                 Taxes and
Regulatory Costs. Borrower shall pay to Bank immediately
upon demand, in addition to any other amounts due or to become due hereunder,
any and all (a) withholdings, interest equalization taxes, stamp taxes or other
taxes (except income and franchise taxes) imposed by any domestic or foreign
governmental authority and related in any manner to LIBOR, and (b) future,
supplemental, emergency or other changes in the LIBOR Reserve Percentage,
assessment rates imposed by the Federal Deposit Insurance Corporation, or
similar requirements or costs imposed by any domestic or foreign governmental
authority or resulting from compliance by Bank with any request or directive
(whether or not having the force of law) from any central bank or other
governmental authority and related in any manner to LIBOR to the extent they
are not included in the calculation of LIBOR. In determining which of the
foregoing are attributable to any LIBOR option available to Borrower hereunder,
any reasonable allocation made by Bank among its operations shall be conclusive
and binding upon Borrower.

 

2.4                                 Payment of
Interest. Interest accrued on this Note shall be payable on the 1st day of each month,
commencing August 1, 2004.

 

2.5                                 Default
Interest. From and after the maturity date of this Note, or such
earlier date as all principal owing hereunder becomes due and payable by
acceleration or otherwise, the outstanding principal balance of this Note shall
bear interest until paid in full at an increased rate per annum (computed on
the basis of a 360-day year, actual days elapsed)
equal to 2% above the rate of interest from time to time applicable to this
Note.

 

3.                                      BORROWING AND REPAYMENT:

 

3.1                                 Borrowing
and Repayment. 
Borrower may from time to time during the term of this Note borrow,
partially or wholly repay its outstanding borrowings, and reborrow, subject to
all of the limitations, terms and conditions of this Note and of the Credit
Agreement between Borrower and Bank defined below; provided however, that the
total outstanding borrowings under this Note shall not at any time exceed the
principal amount stated above.  The
unpaid principal balance of this obligation at any time shall be the total
amounts advanced hereunder by the holder hereof less the amount of principal
payments made hereon by or for any Borrower, which balance may be

 

2

 

endorsed
hereon from time to time by the holder. The outstanding principal balance of
this Note shall be due and payable in full on July 1, 2006.

 

3.2                                 Advances. Advances
hereunder, to the total amount of the principal sum available hereunder, may be
made by the holder at the oral or written request of (a) James L.
Lambert, Preston Romm, Dana Kammersgard, Sonia Borden, Eileen Jonikas, any
one acting alone, who are authorized to request advances and direct the
disposition of any advances until written notice of the revocation of such
authority is received by the holder at the office designated above.

 

3.3                                 Application
of Payments. 
Each payment made on this Note shall be credited first, to any interest
then due and second, to the outstanding principal balance hereof. All payments
credited to principal shall be applied first, to the outstanding principal
balance of this Note which bears interest determined in relation to the Prime
Rate, if any, and second, to the outstanding principal balance of this Note
which bears interest determined in relation to LIBOR, with such payments
applied to the oldest Fixed Rate Term first.

 

4.                                      PREPAYMENT:

 

4.1                                 Prime Rate. Borrower
may prepay principal on any portion of this Note which bears interest
determined in relation to the Prime Rate at any time, in any amount and without
penalty.

 

4.2                                 LIBOR. Borrower
may prepay principal on any portion of this Note which bears interest
determined in relation to LIBOR at any time and in the minimum amount of $100,000.00; provided however, that if the outstanding
principal balance of such portion of this Note is less than said amount, the
minimum prepayment amount shall be the entire outstanding principal balance
thereof. In consideration of Bank providing this prepayment option to Borrower,
or if any such portion of this Note shall become due and payable at any time
prior to the last day of the Fixed Rate Term applicable thereto by acceleration
or otherwise, Borrower shall pay to Bank immediately upon demand a fee which is
the sum of the discounted monthly differences for each month from the month of
prepayment through the month in which such Fixed Rate Term matures, calculated
as follows for each such month:

 

(a)                                  Determine the amount
of interest which would have accrued each month on the amount prepaid at the
interest rate applicable to such amount had it remained outstanding until the
last day of the Fixed Rate Term applicable thereto.

 

(b)                                 Subtract from the
amount determined in (a) above the amount of interest which would have accrued
for the same month on the amount prepaid for the remaining term of such Fixed
Rate Term at LIBOR in effect on the date of prepayment for new loans made for
such term and in a principal amount equal to the amount prepaid.

 

(c)                                  If the
result obtained in (b) for any month is greater than zero, discount that
difference by LIBOR used in (b) above.

 

3

 

Each Borrower
acknowledges that prepayment of such amount may result in Bank incurring
additional costs, expenses and/or liabilities, and that it is difficult to
ascertain the full extent of such costs, expenses and/or liabilities. Each
Borrower, therefore, agrees to pay the above-described prepayment fee and
agrees that said amount represents a reasonable estimate of the prepayment
costs, expenses and/or liabilities of Bank. If Borrower fails to pay any
prepayment fee when due, the amount of such prepayment fee shall thereafter
bear interest until paid at a rate per annum 2.000%
above the Prime Rate in effect from time to time (computed on the basis of a 360-day year, actual days elapsed). Each change in the rate
of interest on any such past due prepayment fee shall become effective on the
date each Prime Rate change is announced within Bank.

 

5.                                      EVENTS OF DEFAULT

 

This Note is made pursuant to and is subject to the
terms and conditions of that certain Credit Agreement between Borrower and Bank
dated as of July 1, 2004, as amended from time
to time (the Credit Agreement”).  Any
defined event of default under the Credit Agreement, shall constitute an “Event
of Default” under this Note.

 

6.                                      MISCELLANEOUS:

 

6.1                                 Remedies. Upon the
occurrence of any Event of Default, the holder of this Note, at the holder’s
option, may declare all sums of principal and interest outstanding hereunder to
be immediately due and payable without presentment, demand, notice of
nonperformance, notice of protest, protest or notice of dishonor, all of which
are expressly waived by each Borrower, and the obligation, if any, of the
holder to extend any further credit hereunder shall immediately cease and
terminate. Each Borrower shall pay to the holder immediately upon demand the full
amount of all payments, advances, charges, costs and expenses, including
reasonable attorneys’ fees (to include outside counsel fees and all allocated
costs of the holder’s in-house counsel), expended or incurred by the holder in
connection with the enforcement of the holder’s rights and/or the collection of
any amounts which become due to the holder under this Note, and the prosecution
or defense of any action in any way related to this Note, including without
limitation, any action for declaratory relief, whether incurred at the trial or
appellate level, in an arbitration proceeding or otherwise, and including any
of the foregoing incurred in connection with any bankruptcy proceeding
(including without limitation, any adversary proceeding, contested matter or
motion brought by Bank or any other person) relating to any Borrower or any
other person or entity.

 

6.2                                 Obligations
Joint and Several. 
Should more than one person or entity sign this Note as a Borrower, the
obligations of each such Borrower shall be joint and several.

 

6.3                                 Governing
Law. This Note shall be governed by and construed in accordance
with the laws of the State of California.

 

IN WITNESS WHEREOF, the
undersigned has executed this Note as of the date first written above.

 

	
  Dot Hill Systems Corp.

  
	
   

  
	
  By:

  	
   

  	
  /s/ Preston Romm

  	
   

  
	
   

  
	
  Title:

  	
   

  	
  Chief Financial Officer

  	
   

  

 

4

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