EXHIBIT 10.21
 
TRADE FINANCE CREDIT AGREEMENT
 
This Trade Finance Credit Agreement (the “Agreement”) is made and entered into
as of March 31, 2002 , by and between UNITED CALIFORNIA BANK (the “Bank”) and
VARIFLEX, INC. (the “Borrower”).
 
SECTION 1
 
DEFINITIONS
 
1.1  Certain Defined Terms:    Unless elsewhere defined in this Agreement, the
following terms shall have the following meanings (such meanings to be generally
applicable to the singular and plural forms of the terms defined):
 
1.1.1  “Account”:    shall mean, individually and collectively as the context so
requires, any and all accounts, chattel paper and general intangibles owed or
owing to Borrower by Account Debtors, whether now owned or hereafter acquired by
Borrower, or in which the Borrower may now have or hereafter acquire any
interest.
 
1.1.2  “Account Debtor”:    shall mean the person or entity obligated to the
Borrower upon an Account.
 
1.1.3  “Advance”:    shall mean an advance to the Borrower under the credit
facility (ies) described in Section 2.
 
1.1.4  “Business Day”:    shall mean a day, other than a Saturday or Sunday, on
which commercial banks are open for business in California.
 
1.1.5  “Collateral”:    shall mean the property described in Section 3, together
with any other personal or real property in which the Bank may be granted a lien
or security interest to secure payment of the Obligations.
 
1.1.6  “Credit Limit”:    shall mean the lesser of $9,000,000.00 or the sum of
50% of the Borrower’s Accounts and 50% of the Borrower’s Liquid Assets.
 
1.1.7  “Effective Tangible Net Worth”:    shall mean the Borrower’s stated net
worth plus Subordinated Debt but less all intangible assets of the Borrower
(i.e., goodwill, trademarks, patents, copyrights, organization expense,
leasehold improvements and similar intangible items including, but not limited
to, investments in and all amounts due from affiliates, officers or employees).
 
1.1.8  “Environmental Claims”:    shall mean all claims, however asserted, by
any governmental authority or other person alleging potential liability or
responsibility for violation of any

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Environmental Law or for Discharge or injury to the environment or threat to
public health, personal injury (including sickness, disease or death), property
damage, natural resources damage, or otherwise alleging liability or
responsibility for damages (punitive or otherwise), cleanup, removal, remedial
or response costs, restitution, civil or criminal penalties, injunctive relief,
or other type of relief, resulting from or based upon (a) the presence,
placement, discharge, emission or release (including intentional and
unintentional, negligent and non-negligent, sudden or non-sudden, accidental or
non-accidental placement, spills, leaks, Discharges, emissions or releases) of
any Hazardous Material at, in, or from property, whether or not owned by the
Borrower, or (b) any other circumstances forming the basis of any violation, or
alleged violation, of any Environmental Law.
 
1.1.9  “Environmental Laws”:    shall mean all federal, state or local laws,
statutes, common law duties, rules, regulations, ordinances and codes, together
with all administrative orders, directed duties, requests, licenses,
authorizations and permits of, and agreements with, any governmental
authorities, in each case relating to environmental, health, safety and land use
matters; including the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 (“CERCLA”), the Clean Air Act, the Federal Water Pollution
Control Act of 1972, the Solid Waste Disposal Act, the Federal Resource
Conservation and Recovery Act, the Toxic Substances Control Act, the Emergency
Planning and Community Right-to-Know Act, the California Hazardous Waste Control
Law, the California Solid Waste Management, Resource, Recovery and Recycling
Act, the California Water Code and the California Health and Safety Code.
 
1.1.10  “Environmental Permits”:    shall have the meaning provided in Section
5.11 hereof.
 
1.1.11  “Equipment”:    shall mean equipment as defined in the California
Uniform Commercial Code.
 
1.1.12  “ERISA”:    shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time, including (unless the context otherwise
requires) any rules or regulations promulgated thereunder.
 
1.1.13  “Event of Default”:    shall have the meaning set forth in Section 7.
 
1.1.14  “Expiration Date”:    shall mean May 1, 2003, or the date of termination
of the Bank’s commitment to lend under this Agreement pursuant to Section 8,
whichever shall occur first.
 
1.1.15  “Extension of Credit”:    shall mean the Bank’s issuance of a Letter of
Credit, or making an Advance.
 
1.1.16  “Hazardous Materials”:    shall mean all those substances which are
regulated by, or which may form the basis of liability under, any Environmental
Law, including all substances identified under any Environmental Law as a
pollutant, contaminant, hazardous waste, hazardous constituent, special waste,
hazardous substance, hazardous material, or toxic substance, or petroleum or
petroleum derived substance or waste.
 
1.1.17  “Indebtedness”:    shall mean, with respect to the Borrower, (i) all
indebtedness for borrowed money or for the deferred purchase price of property
or services in respect of which the Borrower is liable, contingently or
otherwise, as obligor, guarantor or otherwise, or in respect of which the
Borrower otherwise assures a creditor against loss and (ii) obligations under
leases which shall have been or should be, in accordance with generally accepted
accounting principles, reported as capital leases in respect of which the
Borrower is liable, contingently or otherwise, or in respect of which the
Borrower otherwise assures a creditor against loss.

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1.1.18  “Inventory”:    shall mean the inventory described in Section 3.
 
1.1.19  “Letter of Credit”:    shall mean a letter of credit issued by Bank
pursuant to Section 2.
 
1.1.20  “Letter of Credit Obligations”:    shall mean, at any time, the
aggregate obligations of the Borrower then outstanding, or which may thereafter
arise in respect of Letters of Credit then issued by Bank, to reimburse the
amount paid by the Bank with respect to a past, present or future Drawing under
Letters of Credit.
 
1.1.21  “Liquid Assets”:    shall mean all of the Borrower’s cash and cash
equivalents, including but not limited to certificates of deposit, money market
funds, government bond funds and commercial paper rated A1/P1.
 
1.1.22  “Loan Document”:    means this Agreement, each Schedule and Exhibit
hereto, the Guarantee(s) and the Subordination Agreement(s) if any, and the
other security agreements, financing statements and other agreements between the
Borrower and the Bank relating to the Obligations.
 
1.1.23  “LIBOR Advance”:    shall have the respective meaning as it is defined
for each facility under Section 2, hereof.
 
1.1.24  “LIBOR Interest Period”:    shall have the respective meaning as it is
defined for each facility under Section 2, hereof.
 
1.1.25  “LIBOR Rate”:    shall have the respective meaning as it is defined for
each facility under Section 2, hereof.
 
1.1.26  “Obligations”:    shall mean all amounts owing by the Borrower to the
Bank pursuant to this Agreement including, but not limited to, the amount of all
outstanding Shipside Bonds and the Letter of Credit Obligations.
 
1.1.27  “Ordinary Course of Business”:    shall mean, with respect to any
transaction involving the Borrower or any of its subsidiaries or affiliates, the
ordinary course of the Borrower’s business, as conducted by the Borrower in
accordance with past practice and undertaken by the Borrower in good faith and
not for the purpose of evading any covenant or restriction in this Agreement or
in any other document, instrument or agreement executed in connection herewith.
 
1.1.28  “Permitted Liens”:    shall mean: (i) liens and security interests
securing indebtedness owed by the Borrower to the Bank; (ii) liens for taxes,
assessments or similar charges not yet due; (iii) liens of materialmen,
mechanics, warehousemen, or carriers or other like liens arising in the Ordinary
Course of Business and securing obligations which are not yet delinquent; (iv)
purchase money liens or purchase money security interests upon or in any
property acquired or held by the Borrower in the Ordinary Course of Business to
secure Indebtedness outstanding on the date hereof or permitted to be incurred
herein; (v) liens and security interests which, as of the date hereof, have been
disclosed to and approved by the Bank in writing; and (vi) those liens and
security interests which in the aggregate constitute an immaterial and
insignificant monetary amount with respect to the net value of the Borrower’s
assets.
 
1.1.29  “Reference Rate”:    shall mean an index for a variable interest rate
which is quoted, published or announced by Bank as its reference rate and as to
which loans may be made by Bank at, above or below such rate.

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1.1.30  “Shipside Bond”:    means an undertaking addressed to a carrier
indemnifying the carrier against losses that might be incurred by virtue of the
carrier’s delivery of goods to the Borrower without receipt of a document of
title and includes an air release.
 
1.1.31  “Sight Credit”:    means a Letter of Credit, the terms of which require
the Bank to make payment upon presentation of conforming documents.
 
1.1.32  “Standby Credit”:    means a Letter of Credit designed to be payable in
the event of default or other nonperformance by party obligated to the
beneficiary, such event to be evidenced by the presentation of documents.
 
1.1.33  “Subordinated Debt”:    shall mean such liabilities of the Borrower
which have been subordinated to those owed to the Bank in a manner acceptable to
the Bank.
 
1.1.34  “Trade Advance”:    means an Advance to pay for a Drawing under a Letter
of Credit or to pay a Documentary Collection, if any.
 
1.1.35  “Usance Credit”:    means a Letter of Credit, the terms of which require
the Bank to make payment at a specified date or time not more than 90 days after
presentation of conforming documents.
 
1.1.36  “Variable Rate Advance”:    shall have the respective meaning as it is
defined for each facility under Section 2, hereof.
 
1.1.37  “Variable Rate”:    shall have the respective meaning as it is defined
for each facility under Section 2, hereof.
 
1.1.38  “Working Capital Advance”:    shall mean an Advance under the Line of
Credit made for the purpose described in Section 2.
 
1.1.39  Accounting Terms:    All references to financial statements, assets,
liabilities, and similar accounting items not specifically defined herein shall
mean such financial statements or such items prepared or determined in
accordance with generally accepted accounting principles consistently applied
and, except where otherwise specified, all financial data submitted pursuant to
this Agreement shall be prepared in accordance with such principles.
 
1.2  Other Terms:    Other terms not otherwise defined shall have the meanings
attributed to such terms in the California Uniform Commercial Code as in effect
on July 1, 2001 and from time to time thereafter.

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SECTION 2
 
CREDIT FACILITIES
 
2.1  LETTERS OF CREDIT
 
2.1.1  Issuance of Credits.    Subject to Section 2.4, the Bank hereby agrees to
issue Sight Credits, Usance Credits and Standby Credits. Sight Credits, Usance
Credits and Standby Credits may be issued for the purpose of purchasing
inventory consisting of action sports products including in-line skates,
skateboards and scooters; outdoor products including instant canopies and
trampolines; and protective products including wrist guards, elbow/knee pads and
helmets.
 
2.1.2  Letter of Credit General Conditions.    As a condition precedent to
Bank’s obligation to issue any Letter of Credit hereunder, the Borrower shall
pay to the Bank issuance fees as described in the attached Exhibit “A” and shall
promptly pay, upon request, such other fees, commissions, costs and any
out-of-pocket expenses charged or incurred by the Bank with respect to any
Letter of Credit.
 
(i)  The commitment by the Bank to issue Letters of Credit under this Section 2
shall, unless earlier terminated in accordance with the terms of the Agreement,
automatically terminate on the Expiration Date and no Letter of Credit shall
expire, and no draft under a Letter of Credit shall be payable on a date which
is more than 120 days after the Expiration Date.
 
(ii)  Each Letter of Credit shall be in form and substance satisfactory to the
Bank, shall require as a condition of payment the presentment of non-negotiable
bills of lading in favor of the Bank if an airway bill or negotiable bills of
lading payable to the order of the Bank or to order of the Borrower if an ocean
bill or multimodal transport document, and shall be in favor of beneficiaries
satisfactory to the Bank, provided that the Bank may refuse to issue a Letter of
Credit (1) due to the nature of the transaction or its terms or in connection
with any transaction where the Bank, due to the beneficiary or the nationality
or residence of the beneficiary, would be prohibited by any applicable law,
regulation or order from issuing such Letter of Credit or (2) if the beneficiary
is an affiliate of the Borrower.
 
(iii)  Prior to the issuance of each Letter of Credit, but in no event later
than 10:00 a.m. (California time) on the day such Letter of Credit is to be
issued (which shall be a Business Day), the Borrower shall deliver to the Bank
the Bank’s standard form of application for issuance of a letter of credit with
proper insertions, duly executed by Borrower.
 
2.1.3  Drawings:    Upon receipt from any beneficiary under a Letter of Credit
of a demand for payment under such Letter of Credit (each a “Drawing”), the Bank
shall promptly notify the Borrower. Each Drawing shall be payable in full by the
borrower on the date thereof, without demand or notice of any kind. On the same
day as any drawing under any Letter of Credit, Borrower hereby instructs Bank to
pay such drawing by debiting account number 1067-16109 maintained with Bank’s
Newport Beach Branch. If the borrower desires to repay a Drawing from the
proceeds of an Advance, the Borrower may request an Advance in accordance with
the terms and conditions of this Agreement and, if disbursed or created on the
date of such Drawing, shall be applied in payment of such obligation by the
Borrower. If any Drawing shall not be paid when due in accordance with the terms
of this Agreement, the Borrower shall reimburse the Bank for each Drawing
together with interest thereon until paid at the rate set forth under Default
Interest Rate, below. The obligation of the Borrower to reimburse the Bank for
Drawings shall be absolute, irrevocable, and unconditional under any and all
circumstances whatsoever and irrespective of any set-off, counterclaim or
defense to payment which the Borrower may have or have had against the Bank
(except such as may arise out of the Bank’s gross negligence or willful
misconduct) or any other person, including, without limitation, and set-off,
counterclaim or defense based upon or arising out of:
 
(i)  any lack of validity or enforceability of this Agreement or any of the
other Loan Documents;
 
(ii)  any amendment or waiver of or consent to departure from the terms of any
Letter of Credit;
 
(iii)  the existence of any claim, set-off, defense or other right which the
Borrower or any

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other person may have at any time against any beneficiary or any transferee of
any Letter of Credit (or any person for whom any such beneficiary or any such
transferee may be acting); or
 
(iv)  any allegation that any demand, statement or any other document presented
under any Letter of Credit is forged, fraudulent, invalid or insufficient in any
respect, or any statement therein being untrue or inaccurate in any respect
whatsoever or any variations in punctuation, capitalization, spelling or format
of the drafts or any statements presented in connection with any Drawing.
 
2.2  THE LINE OF CREDIT
 
2.2.1  The Line of Credit:    On terms and conditions as set forth herein, the
Bank agrees to make Advances to the Borrower from time to time from the date
hereof to the Expiration Date. The Borrower may borrow, partially or wholly
prepay, and re-borrow under the Line of Credit.
 
2.2.2  Purpose/Payment:    Advances may be made only for and shall be repaid:
 
(i)  To pay for Drawings under Sight Credits providing such Advances shall be
repaid within 1 day from the date of such Advance.
 
(ii)  To pay for Drawings under Usance Credits providing such Advances shall be
repaid within 1 day from the date the documents accompanying the draft on the
respective Usance Credit were made available to the Borrower.
 
(iii)  For purposes other than described than described above (each a “Working
Capital Advance”) and provided all Working Capital Advances shall be repaid on
or before the Expiration Date.
 
2.2.3  Making Line Advances:    Each Advance shall be conclusively deemed to
have been made at the request of and for the benefit of the Borrower (i) when
credited to any deposit account of the Borrower maintained with the Bank or (ii)
when paid in accordance with the Borrower’s written instructions. Subject to the
requirements of Section 4 and provided such request is made in a timely manner
as provided in Section 2.2.5 below, Advances shall be made by the Bank under the
Line of Credit.
 
2.2.4  Interest on Advances:    Interest shall accrue from the date of each
Advance under the Line of Credit at one of the following rates, as quoted by the
Bank and as elected by the Borrower below:
 
(i)  Variable Rate Advances:    A variable rate per annum equivalent to the
Reference Rate (the “Variable Rate”). Interest shall be adjusted concurrently
with any change in the Reference Rate. An Advance based upon the Variable Rate
is hereinafter referred to as a “Variable Rate Advance”.
 
(ii)  LIBOR Advances:    A fixed rate quoted by the Bank for 1, 2, 3, 4, 5 or 6
months or for such other period of time that the Bank may quote and offer
(provided that any such period of time does not extend beyond the Expiration
Date (the “LIBOR Interest Period”) for Advances in the minimum amount of
$500,000.00. Such interest rate shall be a percentage approximately equivalent
to 2.00% in excess of the Bank’s LIBOR Rate which is that rate determined by the
Bank’s Treasury Desk as being the arithmetic mean (rounded upwards, if
necessary, to the nearest whole multiple of one-sixteenth of one percent
(1/16%)) of the U. S. dollar London Interbank Offered Rates for such period
appearing on page 3750 (or such other page as may replace page 3750) of the
Telerate screen at or about 11:00 a.m.

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(London time) on the second Business Day prior to the first days of such period
(adjusted for any and all assessments, surcharges and reserve requirements) (the
“LIBOR Rate”). An Advance based upon the LIBOR Rate is hereinafter referred to
as a “LIBOR Advance”.
 
Interest on any Advance shall be computed on the basis of 360 days per year, but
charged on the actual number of days elapsed.
 
The Borrower hereby promises and agrees to pay interest in arrears on Variable
Rate Advances and LIBOR Advances on the last day of each month commencing April
30, 2001.
 
If interest is not paid as and when it is due, it shall be added to the
principal, become and be treated as a part thereof, and shall thereafter bear
like interest.
 
2.2.5  Notice of Borrowing:    Upon written or telephonic notice which shall be
received by the Bank at or before 2:00 p.m. (California time) on a Business Day,
the Borrower may borrow under the Line of Credit by requesting:
 
(i)  A Variable Rate Advance.    A Variable Rate Advance may be made on the day
notice is received by the Bank; provided, however, that if the Bank shall not
have received notice at or before 2:00 p.m. on the day such Advance is requested
to be made, such Variable Rate Advance may, at the Bank’s option, be made on the
next Business Day.
 
(ii)  A LIBOR Advance.    Notice of any LIBOR Advance shall be received by the
Bank no later than two Business Days prior to the day (which shall be a Business
Day) on which the Borrower requests such LIBOR Advance to be made.
 
2.2.6  Notice of Election to Adjust Interest Rate:    The Borrower may elect:
 
(i)  That interest on a Variable Rate Advance shall be adjusted to accrue at the
LIBOR Rate; provided, however, that such notice shall be received by the Bank no
later than two Business Days prior to the day (which shall be a Business Day) on
which the Borrower requests that interest be adjusted to accrue at the LIBOR
Rate.
 
(ii)  That interest on a LIBOR Advance shall continue to accrue at a newly
quoted LIBOR Rate or shall be adjusted to commence to accrue at the Variable
Rate; provided, however, that such notice shall be received by the Bank no later
than two Business Days prior to the last day of the LIBOR Interest Period
pertaining to such LIBOR Advance. If the Bank shall not have received notice (as
prescribed herein) of the Borrower’s election that interest on any LIBOR Advance
shall continue to accrue at the newly quoted LIBOR Rate, the Borrower shall be
deemed to have elected that interest thereon shall be adjusted to accrue at the
Variable Rate upon the expiration of the LIBOR Interest Period pertaining to
such Advance.
 
2.2.7  Prepayment:    The Borrower may prepay any Advance in whole or in part,
at any time and without penalty, provided, however, that: (i) any partial
prepayment shall first be applied, at the Bank’s option, to accrued and unpaid
interest and next to the outstanding principal balance; and (ii) during any
period of time in which interest is accruing on any Advance on the basis of the
LIBOR Rate, no prepayment shall be made except on a day which is the last day of
the LIBOR Interest Period pertaining thereto. If the whole or any part of any
LIBOR Advance is prepaid by reason of acceleration or otherwise, the Borrower
shall, upon the Bank’s request, promptly pay to and indemnify the Bank for all
costs, expenses and any loss (including loss of future interest income) actually
incurred by the Bank and any loss

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(including loss of future interest income) actually incurred by the Bank and any
loss (including loss of profit resulting from the re-employment of funds) deemed
sustained by the Bank as a consequence of such prepayment.
 
The Bank shall be entitled to fund all or any portion of its Advances in any
manner it may determine in its sole discretion, but all calculations and
transactions hereunder shall be conducted as though the Bank actually funded all
Advances through the purchase of dollar deposits bearing interest at the same
rate as U.S. Treasury securities in the amount of the relevant Advance and in
maturities corresponding to the date of such purchase to the Expiration Date
hereunder.
 
2.2.8  Indemnification for LIBOR Rate Costs:    During any period of time in
which interest on any Advance is accruing on the basis of the LIBOR Rate, the
Borrower shall, upon the Bank’s request, promptly pay to and reimburse the Bank
for all costs incurred and payments made by the Bank by reason of any future
assessment, reserve, deposit or similar requirement or any surcharge, tax or fee
imposed upon the Bank or as a result of the Bank’s compliance with any directive
or requirement of any regulatory authority pertaining or relating to funds used
by the Bank in quoting and determining the LIBOR Rate.
 
2.2.9  Conversion from LIBOR Rate to Variable Rate:    In the event that the
Bank shall at any time determine that the accrual of interest on the basis of
the LIBOR Rate (i) is infeasible because the Bank is unable to determine the
LIBOR Rate due to the unavailability of U.S. dollar deposits, contracts or
certificates of deposit in an amount approximately equal to the amount of the
relevant Advance and for a period of time approximately equal to relevant LIBOR
Interest Period or (ii) is or has become unlawful or infeasible by reason of the
Bank’s compliance with any new law, rule, regulation, guideline or order, or any
new interpretation of any present law, rule, regulation, guideline or order,
then the Bank shall give telephonic notice thereof (confirmed in writing) to the
Borrower, in which event any Advance bearing interest at the LIBOR Rate shall be
deemed to be a Variable Rate Advance and interest shall thereupon immediately
accrue at the Variable Rate.
 
2.3  Line Account:    The Bank shall maintain on its books a record of account
in which the Bank shall make entries for each Advance and such other debits and
credits as shall be appropriate in connection with the Line of Credit (the “Line
Account”). The Bank shall provide the Borrower with a statement of the
Borrower’s Line Account, which statement shall be considered to be correct and
conclusively binding on the Borrower unless the Borrower notifies the Bank to
the contrary within 90 days after the Borrower’s receipt of any such statement
which it deems to be incorrect.
 
2.4  CREDIT AMOUNT
 
2.4.1  The Credit Amount.    The Bank shall not be obligated to make any
Extension of Credit hereunder if, after giving effect to such Extension of
Credit:
 
(i)  The aggregate amount of all Obligations would exceed the Credit Limit,
 
(ii)  The aggregate amount of the Letter of Credit Obligations would exceed the
Credit Limit.
 
(iii)  The aggregate amount of all Trade Advances would exceed the Credit Limit.
 
(iv)  The aggregate amount of Working Capital Advances would exceed
$2,000,000.00.
 
2.4.2  Mandatory Repayments:
 
(i)  If at any time the aggregate amount of the Obligations exceed the amount(s)
enumerated in Section 2.4 above, Borrower shall immediately upon written or
telephonic notice from the Bank, and hereby promises and agrees to, pay to the
Bank, first instance as a principal reduction in the amount of outstanding
Advances, and second, as an advance payment of expected Drawings or maturing
Acceptances, an amount equal to the Amount by which such Obligations exceed the
respective amount enumerated in Section 2.4.
 
(ii)  On the Expiration Date, the Borrower hereby promises and agrees to pay to
the Bank in full the aggregate unpaid principal amount of all Advances and
Acceptances then outstanding, together with all accrued and unpaid interest
thereon.
 
2.4.3  Shipside Bond.    The Bank may, from time to time, at the request of the
Borrower, issue one or more Shipside Bond(s). In such event, each such Shipside
Bond shall be considered an Obligation under this Agreement for purposes of
Section 2.4 and shall reduce the amount available to the Borrower for the
issuance of Letters of Credit by the amount of such Shipside Bonds. Nothing
contained in this Agreement nor any past or future action on the part of the
Bank shall be construed as creating any obligation on the part of the Bank to
issue a Shipside Bond.

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SECTION 3
 
COLLATERAL
 
3.1  The Collateral:    To secure payment and performance of all the Borrower’s
Obligations under this Agreement and all other liabilities, loans, guarantees,
covenants and duties owed by the Borrower to the Bank, whether or not evidenced
by this or by any other agreement, absolute or contingent, due or to become due,
now existing or hereafter and howsoever created, the Borrower hereby grants the
Bank a security interest in and to all of the following property (“Collateral”):
 
(i)  Equipment.    All goods now owned or hereafter acquired by the Borrower or
in which the Borrower now has or may hereafter acquire any interest, including,
but not limited to, all machinery, equipment, furniture, furnishings, fixtures,
tools, supplies and motor vehicles of every kind and description, and all
additions, accessions, improvements, replacements and substitutions thereto and
thereof (the “Equipment”).
 
(ii)  Inventory.    All inventory now owned or hereafter acquired by the
Borrower, including, but not limited to, all raw materials, work in process,
finished goods, inventory leased to others or held for lease, merchandise, parts
and supplies of every kind and description, including inventory temporarily out
of the Borrower’s custody or possession, together with all returns on accounts
(the “Inventory”).
 
(iii)  Accounts.    All accounts, letter of credit rights, commercial tort
claims, contract rights and general intangibles, including software and payment
intangibles, now owned or hereafter created or acquired by the Borrower,
including, but not limited to, all receivables, including as-extracted
receivables, credit card receivables, health care receivables, insurance
receivables, software receivables and license fees, goodwill, trademarks,
trademark applications, trade styles, trade names, patents, patent applications,
copyrights and copyright applications, customer lists, business records and
computer programs, tapes, disks and related data processing software that at any
time evidence or contain information relating to any of the Collateral.
 
(iv)  Documents.    All documents, instruments and chattel paper, whether
electronic or tangible, now owned or hereafter acquired by the Borrower,
including, but not limited to, warehouse and other receipts, bills of sale,
promissory notes and bills of lading.
 
(v)  Monies.    All monies, deposit accounts, certificates of deposit,
investment property and securities of the Borrower now or hereafter in the
Bank’s or its agents’ possession.
 
(vi)  Deposit Accounts.    Account No(s). 1062-16381 maintained with United
California Bank and all substitutions thereof, together with all interest
accruing thereunder and therefrom.
 
The Bank’s security interest in the Collateral shall be a continuing lien and
shall include the proceeds and products of the Collateral including, but not
limited to, the proceeds of any insurance thereon.
 
Borrower hereby consents to and instructs Bank to file financing statements in
all locations deemed appropriate by the Bank from time to time.
 
The security interest granted to Bank in the Collateral shall not secure or be
deemed to secure any Indebtedness of the Borrower to the Bank which is, at the
time of its creation, subject to the provisions of any state or federal consumer
credit or truth-in-lending disclosure statutes.

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SECTION 4
 
CONDITIONS PRECEDENT
 
4.1  Conditions Precedent to the Initial Extension of Credit:    The obligation
of the Bank to make the initial Advance or the first extension of credit to or
on account of the Borrower hereunder is subject to the conditions precedent that
the Bank shall have received before the date of such initial Advance or such
first extension of credit all of the following, in form and substance
satisfactory to the Bank:
 
(i)  Authority to Borrow.    Evidence that the execution, delivery and
performance by the Borrower of this Agreement and any document, instrument or
agreement required hereunder have been duly authorized.
 
(ii)  Financing Statements.     UCC-1 financing statement(s) describing the
Collateral, which have been filed with the Secretary of State or the county
recorder as a lien of first priority.
 
(iii)  Miscellaneous.    Such other evidence as the Bank may request to
establish the consummation of the transaction contemplated hereunder and
compliance with the conditions of this Agreement.
 
4.2  Conditions Precedent to All Extensions of Credit:    The obligation of the
Bank to make each Advance or each other extension of credit, as the case may be,
to or on account of the Borrower (including the initial Advance or the first
extension of credit) shall be subject to the further conditions precedent that,
on the date of each Advance or each extension of credit and after the making of
such Advance or extension of credit:
 
(i)  Reporting Requirements.    The Bank shall have received the documents set
forth in Section 6.1.
 
(ii)  Subsequent Approvals.    The Bank shall have received such supplemental
approvals, opinions or documents as the Bank may reasonably request.
 
(iii)  Representations and Warranties.    The representations contained in
Section 5 and in any other document, instrument or certificate delivered to the
Bank hereunder are true, correct and complete.
 
(iv)  Event of Default.    No event has occurred and is continuing which
constitutes, or with the lapse of time or giving of notice or both, would
constitute an Event of Default.
 
(v)  Collateral.    The security interest in the Collateral has been duly
authorized, created and perfected with first priority and is in full force and
effect.
 
The Borrower’s acceptance of the proceeds of any loan, Advance or extension of
credit, or the Borrower’s applying for any Letter of Credit, or the Borrower’s
execution of any document or instrument evidencing or creating any Obligation
hereunder shall be deemed to constitute the Borrower’s representation and
warranty that all of the above statements are true and correct.

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SECTION 5
 
REPRESENTATIONS AND WARRANTIES
 
The Borrower hereby makes the following representations and warranties to the
Bank, which representations and warranties are continuing:
 
5.1  Status:    The Borrower’s correct legal name is as stated in this Agreement
and the Borrower is a corporation duly organized and validly existing under the
laws of the state of Delaware and with its chief executive office in the state
of California and is properly licensed and is qualified to do business and in
good standing in, and, where necessary to maintain the Borrower’s rights and
privileges, has complied with the fictitious name statute of every jurisdiction
in which the Borrower is doing business.
 
5.2  Authority:    The execution, delivery and performance by the Borrower of
this Agreement and any instrument, document or agreement required hereunder have
been duly authorized and do not and will not: (i) violate any provision of any
law, rule, regulation, order, writ, judgment, injunction, decree, determination
or award presently in effect having application to the Borrower; (ii) result in
a breach of or constitute a default under any material indenture or loan or
credit agreement or other material agreement, lease or instrument to which the
Borrower is a party or by which it or its properties may be bound or affected;
or (iii) require any consent or approval of its stockholders or violate any
provision of its articles of incorporation or by-laws.
 
5.3  Legal Effect:    This Agreement constitutes, and any instrument, document
or agreement required hereunder when delivered hereunder will constitute, legal,
valid and binding obligations of the Borrower enforceable against the Borrower
in accordance with their respective terms.
 
5.3  Fictitious Trade Styles:    There are no fictitious trade styles used by
the Borrower in connection with its business operations. The Borrower shall
notify the Bank not less than 30 days prior to effecting any change in the
matters described herein or prior to using any other fictitious trade style at
any future date, indicating the trade style and state(s) of its use.
 
5.5  Financial Statements:    All financial statements, information and other
data which may have been or which may hereafter be submitted by the Borrower to
the Bank are true, accurate and correct and have been or will be prepared in
accordance with generally accepted accounting principles

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consistently applied and accurately represent the financial condition or, as
applicable, the other information disclosed therein. Since the most recent
submission of such financial information or data to the Bank, the Borrower
represents and warrants that no material adverse change in the Borrower’s
financial condition or operations has occurred which has not been fully
disclosed to the Bank in writing.
 
5.6  Litigation:    Except as have been disclosed to the Bank in writing, there
are no actions, suits or proceedings pending or, to the knowledge of the
Borrower, threatened against or affecting the Borrower or the Borrower’s
properties before any court or administrative agency which, if determined
adversely to the Borrower, would have a material adverse effect on the
Borrower’s financial condition or operations or on the Collateral.
 
5.7  Title to Assets:    The Borrower has good and marketable title to all of
its assets (including, but not limited to, the Collateral) and the same are not
subject to any security interest, encumbrance, lien or claim of any third person
except for Permitted Liens.
 
5.8  ERISA:    If the Borrower has a pension, profit sharing or retirement plan
subject to ERISA, such plan has been and will continue to be funded in
accordance with its terms and otherwise complies with and continues to comply
with the requirements of ERISA.
 
5.9  Taxes:    The Borrower has filed all tax returns required to be filed and
paid all taxes shown thereon to be due, including interest and penalties, other
than such taxes which are currently payable without penalty or interest or those
which are being duly contested in good faith.
 
5.10  Margin Stock.    The proceeds of any loan or advance hereunder will not be
used to purchase or carry margin stock as such term is defined under Regulation
U of the Board of Governors of the Federal Reserve System.
 
5.11  Environmental Compliance.    The operations of the Borrower comply, and
during the term of this Agreement will at all times comply, in all respects with
all Environmental Laws; the Borrower has obtained all licenses, permits,
authorizations and registrations required under any Environmental Law
(“Environmental Permits”) and necessary for its ordinary course operations, all
such Environmental Permits are in good standing, and the Borrower is in
compliance with all material terms and conditions of such Environmental Permits;
neither the Borrower nor any of its present property or operations is subject to
any outstanding written order from or agreement with any governmental authority
nor subject to any judicial or docketed administrative proceeding, respecting
any Environmental Law, Environmental Claim or Hazardous Material; there are no
Hazardous Materials or other conditions or circumstances existing, or arising
from operations prior to the date of this Agreement, with respect to any
property of the Borrower that would reasonably be expected to give rise to
Environmental Claims; provided, however, that with respect to property leased
from an unrelated third party, the foregoing representation is made to the best
knowledge of the Borrower. In addition, (i) the Borrower does not have any
underground storage tanks that are not properly registered or permitted under
applicable Environmental Laws, or that are leaking or disposing of Hazardous
Materials off-site, and (ii) the Borrower has notified all of their employees of
the existence, if any, of any health hazard arising from the conditions of their
employment and have met all notification requirements under Title III of CERCLA
and all other Environmental Laws.
 
5.12  Inventory:
 
(i)  The Borrower keeps correct and accurate records. (itemizing and describing
the kind, type, quality and quantity of inventory, the Borrower’s cost therefor
and selling price thereof, and the daily withdrawals therefrom and additions
thereto).
 
(ii)  All inventory is of good and merchantable quality, free from defects,
except inventory which in the aggregate constitutes an immaterial and
insignificant monetary amount.
 
(iii)  The inventory is not stored with a bailee, warehouseman or similar party.

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SECTION 6
 
COVENANTS
 
The Borrower covenants and agrees that, during the term of this Agreement, and
so long thereafter as the Borrower is indebted to the Bank under this Agreement,
the Borrower will, unless the Bank shall otherwise consent in writing:
 
6.1  Reporting and Certification Requirements:    Deliver or cause to be
delivered to the Bank in form and detail satisfactory to the Bank:
 
(i)  Not later than 90 days after the end of each of the Borrower’s fiscal
years, a copy of the annual audited consolidated financial report of the
Borrower for such year, prepared by a firm of certified public accountants
acceptable to Bank and accompanied by an unqualified opinion of such firm and a
copy of the annual consolidating financial report of the Borrower for such year.
 
(ii)  Not later than 30 days after filing with the appropriate Federal agency, a
copy of the Borrower’s federal income tax returns.
 
(iii)  Not later than 45 days after the end of each month, a copy of the
Borrower’s financial statement as of the end of such period.
 
(iv)  Concurrently with the delivery of the financial reports required
hereunder, a compliance certificate stating that the Borrower is in compliance
with all covenants contained herein and that no Event of Default or potential
Event of Default has occurred or is continuing, and certified to by the chief
financial officer of the Borrower.
 
(v)  Not later than 30 days after the end of each month, an aging of accounts
payable and accounts receivable.
 
(vi)  Not later than 15 days after filing with the Securities Exchange
Commission (“SEC”), a copy of the Borrower’s annual 10K report.
 
(vii)  Not later than 15 days after filing with the SEC, a copy of the
Borrower’s quarterly 10Q report.
 
(viii)  Not later than 30 days after the end of each month, a copy of the
Borrower’s brokerage and bank statements for the month, if Liquid Assets
maintained with the Bank are less than $7,000,000.00.
 
(ix)  Not later than 30 days after the end of each month, a borrowing base
certificate in the form attached hereto as Exhibit “B” (“Borrowing Base
Certificate”), executed by the Borrower and certifying the amount of the Credit
Limit available as of the last day of the preceding month.

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(x)  Promptly upon the Bank’s request, such other information pertaining to the
Borrower, the Collateral or any guarantor hereunder as the Bank may reasonably
request.
 
6.2  Financial Condition:    The Borrower promises and agrees, during the term
of this Agreement and until payment in full of all of the Borrower’s
Obligations, the Borrower will maintain at all times:
 
(i)  Liquid Assets of not less than $7,000,000.00
 
(ii)  A minimum Effective Tangible Net Worth of at least $25,000,000.00.
 
6.3  Preservation of Existence; Compliance with Applicable Laws:    Maintain and
preserve its existence and all rights and privileges now enjoyed; and conduct
its business and operations in accordance with all applicable laws, rules and
regulations.
 
6.4  Merge or Consolidate:    Not liquidate or dissolve, merge or consolidate
with or into, or acquire any other business organization.
 
6.5  Maintenance of Collateral and Other Properties:    Except for Permitted
Liens, keep and maintain the Collateral free and clear of all levies, liens,
encumbrances and security interests (including, but not limited to, any lien of
attachment, judgment or execution) and defend the Collateral against any such
levy, lien, encumbrance or security interest; comply with all laws, statutes and
regulations pertaining to the Collateral and its use and operation; execute,
file and record such statements, notices and agreements, take such actions and
obtain such certificates and other documents as necessary to perfect, evidence
and continue the Bank’s security interest in the Collateral and the priority
thereof; maintain accurate and complete records of the Collateral which show all
sales, claims and allowances; and properly care for, house, store and maintain
the Collateral in good condition, free of misuse, abuse and deterioration, other
than normal wear and tear. The Borrower shall also maintain and preserve all its
properties in good working order and condition in accordance with the general
practice of other businesses of similar character and size, ordinary wear and
tear excepted.
 
6.6  Payment of Obligations and Taxes:    Make timely payment of all assessments
and taxes and all of its liabilities and obligations including, but not limited
to, trade payables, unless the same are being contested in good faith by
appropriate proceedings with the appropriate court or regulatory agency. For
purposes hereof, the Borrower’s issuance of a check, draft or similar instrument
without delivery to the intended payee shall not constitute payment.
 
6.7  Depository Relationships:    Maintain its primary business depository
relationship with Bank, including general, operating and administrative deposit
accounts and cash management services.
 
6.8  Inspection Rights and Accounting Records:    The Borrower will maintain
adequate books and records in accordance with generally accepted accounting
principles consistently applied and in a manner otherwise acceptable to Bank,
and, at any reasonable time and from time to time, permit the Bank or any
representative thereof to examine and make copies of the records and visit the
properties of the Borrower and discuss the business and operations of the
Borrower with any employee or representative thereof. If the Borrower shall
maintain any records (including, but not limited to, computer generated records
or computer programs for the generation of such records) in the possession of a
third party, the Borrower hereby agrees to notify such third party to permit the
Bank free access to such records at all reasonable times and to provide the Bank
with copies of any records which it may request, all at the Borrower’s expense,
the amount of which shall be payable immediately upon demand.

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6.9  Transfer Assets:    Not, after the date hereof, sell, contract for sale,
convey, transfer, assign, lease or sublet, any of its assets (including, but not
limited to, the Collateral) except in the Ordinary Course of Business and, then,
only for full, fair and reasonable consideration.
 
6.10  Compensation of Employees:    Compensate its employees for services
rendered at an hourly rate at least equal to the minimum hourly rate prescribed
by any applicable federal or state law or regulation.
 
6.11  Notice:    Give the Bank prompt written notice of any and all (i) Events
of Default; (ii) litigation, arbitration or administrative proceedings to which
the Borrower is a party and in which the claim or liability exceeds $500,000.00
or which affects the Collateral; (iii) other matters which have resulted in, or
might result in a material adverse change in the Collateral or the financial
condition or business operations of the Borrower, and (iv) any enforcement,
cleanup, removal or other governmental or regulatory actions instituted,
completed or threatened against the Borrower or any of its properties.
 
6.12  Inventory:
 
(i)  Except as provided herein below and except inventory in transit, the
Borrower’s inventory shall, at all times, be in the Borrower’s physical
possession, shall not be held by others on consignment, sale on approval, or
sale or return and shall be kept only at: 5152 N. Commerce Ave., Moorpark, CA;
5156 N. Commerce Ave. and 2141 Eastman Ave. Oxnard, CA
 
(ii)  The Borrower shall keep correct and accurate records.
 
(iii)  All inventory shall be of good and merchantable quality, free from
defects.
 
(iv)  The inventory shall not at any time or times hereafter be stored with a
bailee, warehouseman or similar party without the Bank’s prior written consent
and, in such event, the Borrower will concurrently therewith cause any such
bailee, warehouseman or similar party to issue and deliver to the Bank, in form
acceptable to the Bank, warehouse receipts in the Bank’s name evidencing the
storage of inventory.
 
(v)  At any reasonable time and from time to time, allow Bank to have the right,
upon demand, to inspect and examine inventory and to check and test the same as
to quality, quantity, value and condition.
 
6.13  Location and Maintenance of Equipment:
 
(i)  The Equipment shall at all times be in the Borrower’s physical possession,
shall not be held for sale or lease, and shall be kept only at the following
location(s): 5152 N. Commerce Ave., Moorpark, CA; 5156 N. Commerce Ave. and 2141
Eastman Ave., Oxnard, CA.
 
The Borrower shall not secrete, abandon or remove, or permit the removal of, the
Equipment, or any part thereof, from the location(s) shown above or remove or
permit to be removed any accessories now or hereafter placed upon the Equipment.
 
(ii)  Upon the Bank’s demand, the Borrower shall immediately provide the Bank
with a complete and accurate description of the Equipment including, as
applicable, the make, model, identification number and serial number of each
item of Equipment. In addition, the Borrower shall immediately notify the Bank
of the acquisition of any new or additional Equipment or the replacement of any
existing Equipment and shall supply the Bank with a complete description of any
such additional or replacement Equipment.
 
(iii)  The Borrower shall, at the Borrower’s sole cost and expense, keep and
maintain the Equipment in a good state of repair and shall not destroy, misuse,
abuse, illegally use or be negligent in the care of the Equipment or any part
thereof. The Borrower shall not remove, destroy, obliterate, change, cover,
paint, deface or alter the name plates, serial numbers, labels or other
distinguishing numbers or identification marks placed upon the Equipment or any
part thereof by or on behalf of the manufacturer, any dealer or rebuilder
thereof, or the Bank. The Borrower shall not be released from any liability to
the Bank hereunder because of any injury to or loss or destruction of the
Equipment. The Borrower shall allow the Bank and its representatives free access
to and the right to inspect the Equipment at all times and shall comply with the
terms and conditions of any leases covering the real property on which the
Equipment is located and any orders, ordinances, laws, regulations or rules of
any federal, state or municipal agency or authority having jurisdiction of such
real property or the conduct of the business of the persons having control or
possession of the Equipment.
 
(iv)  The Equipment is not now and shall not at any time hereafter be so affixed
to the real property on which it is located as to become a fixture or a part
thereof. The Equipment is now and shall at all times hereafter be and remain
personal property of the Borrower.
 
            6.14  Value of Collateral:    The Borrower additionally covenants
and agrees that so long as all or any part of the indebtedness under this
Agreement shall remain outstanding, the value of the Collateral pledged in the
form of a Market Value Savings Account shall at all times not be less than
$2,000,000.00.

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SECTION 7
 
EVENTS OF DEFAULT
 
Any one or more of the following described events shall constitute an event of
default (an “Event of Default”) under this Agreement:
 
7.1  Non-Payment:    Any Borrower shall fail to pay the principal amount of any
Obligations when due or interest on the Obligations within 5 days of when due.
 
7.2  Performance Under This Agreement:    The Borrowers shall fail in any
material respect to perform or observe any term, covenant or agreement contained
in this Agreement or in any document, instrument or agreement relating to this
Agreement or any other document or agreement executed by the Borrowers with or
in favor of Bank and any such failure shall continue unremedied for more than 30
days after the occurrence thereof.
 
7.3  Representations and Warranties; Financial Statements:    Any representation
or warranty made by the Borrower under or in connection with this Agreement or
any financial statement given by the Borrower or any guarantor shall prove to
have been incorrect in any material respect when made or given or when deemed to
have been made or given.
 
7.4  Other Agreements:    If there is a default under any agreement to which
Borrower is a party with Bank or with a third party or parties resulting in a
right by the Bank or by such third party or parties, (excluding Borrower’s
accounts payable) whether or not exercised, to accelerate the maturity of any
Indebtedness.
 
7.5  Insolvency:    The Borrower or any guarantor shall: (i) become insolvent or
be unable to pay its debts as they mature; (ii) make an assignment for the
benefit of creditors or to an agent authorized to liquidate any substantial
amount of its properties and assets; (iii) file a voluntary petition in
bankruptcy or seeking reorganization or to effect a plan or other arrangement
with creditors; (iv) file an answer admitting the material allegations of an
involuntary petition relating to bankruptcy or reorganization or join in any
such petition; (v) become or be adjudicated a bankrupt; (vi) apply for or
consent to the appointment of, or consent that an order be made, appointing any
receiver, custodian or trustee, for itself or any of its properties, assets or
businesses; or (vii) in an involuntary proceeding, any receiver, custodian or
trustee shall have been appointed for all or substantial part of the Borrower’s
or guarantor’s properties, assets or businesses and shall not be discharged
within 30 days after the date of such appointment.
 
7.6  Execution:    Any writ of execution or attachment or any judgment lien
shall be issued against any property of the Borrower and shall not be discharged
or bonded against or released within 30 days after the issuance or attachment of
such writ or lien.
 
7.7  Suspension:    The Borrower shall voluntarily suspend the transaction of
business or allow to be suspended, terminated, revoked or expired any permit,
license or approval of any governmental body necessary to conduct the Borrower’s
business as now conducted.
 
7.8  Material Adverse Change:    If there occurs a material adverse change in
the Borrower’s business or financial condition, or if there is a material
impairment of the prospect of repayment of any portion of the Obligations or
there is a material impairment of the value or priority of the Bank’s security
interest in the Collateral, or if a Borrower who is a natural person shall die.
 
7.9  Impairment of Collateral:    There shall occur injury or damage to a
material part of the Collateral or a material part of the Collateral shall be
lost, stolen or destroyed.

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SECTION 8
 
REMEDIES ON DEFAULT
 
Upon the occurrence of any Event of Default, the Bank may, at its sole and
absolute election, without demand and only upon such notice as may be required
by law:
 
8.1  Acceleration:    Declare any or all of the Borrower’s indebtedness owing to
the Bank, whether under this Agreement or any other document, instrument or
agreement, immediately due and payable, whether or not otherwise due and
payable.
 
8.2  Cease Extending Credit:    Cease making Advances or otherwise extending
credit to or for the account of the Borrower under this Agreement or under any
other agreement now existing or hereafter entered into between the Borrower and
the Bank.
 
8.3  Termination:    Terminate this Agreement as to any future obligation of the
Bank without affecting the Borrower’s obligations to the Bank or the Bank’s
rights and remedies under this Agreement or under any other document, instrument
or agreement.
 
8.4  Letters of Credit:    Require the Borrower to pay immediately to the Bank,
for application against drawings under any outstanding Letters of Credit, the
outstanding principal amount of any such Letters of Credit which have not
expired. Any portion of the amount so paid to the Bank which is not

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applied to satisfy draws under any such Letters of Credit or any other
obligations of the Borrower to the Bank shall be repaid to the Borrower without
interest.
 
8.5  Protection of Security Interest:    Make such payments and do such acts as
the Bank, in its sole judgment, considers necessary and reasonable to protect
its security interest or lien in the Collateral. The Borrower hereby irrevocably
authorizes the Bank to pay, purchase, contest or compromise any encumbrance,
lien or claim which the Bank, in its sole judgment, deems to be prior or
superior to its security interest. Further, the Borrower hereby agrees to pay to
the Bank, upon demand therefor, all expenses and expenditures (including
attorneys’ fees) incurred in connection with the foregoing.
 
8.6  Foreclosure:    Enforce any security interest or lien given or provided for
under this Agreement or under any security agreement, mortgage, deed of trust or
other document, in such manner and such order, as to all or any part of the
properties subject to such security interest or lien, as the Bank, in its sole
judgment, deems to be necessary or appropriate and the Borrower hereby waives
any and all rights, obligations or defenses now or hereafter established by law
relating to the foregoing. In the enforcement of its security interest or lien,
the Bank is authorized to enter upon the premises where any Collateral is
located and take possession of the Collateral or any part thereof, together with
the Borrower’s records pertaining thereto, or the Bank may require the Borrower
to assemble the Collateral and records pertaining thereto and make such
Collateral and records available to the Bank at a place designated by the Bank.
The Bank may sell the Collateral or any portions thereof, together with all
additions, accessions and accessories thereto, giving only such notices and
following only such procedures as are required by law, at either a public or
private sale, or both, with or without having the Collateral present at the time
of the sale, which sale shall be on such terms and conditions and conducted in
such manner as the Bank determines in its sole judgment to be commercially
reasonable. The Collateral may be disposed of in its then condition without any
preparation or processing. In connection with any disposition of the Collateral,
the Bank may disclaim any warranty relating to title, possession or quiet
enjoyment. Any deficiency which exists after the disposition or liquidation of
the Collateral shall be a continuing liability of the Borrower to the Bank and
shall be immediately paid by the Borrower to the Bank.
 
8.7  Non-Exclusivity of Remedies:    Exercise one or more of the Bank’s rights
set forth herein or seek such other rights or pursue such other remedies as may
be provided by law, in equity or in any other agreement now existing or
hereafter entered into between the Borrower and the Bank, or otherwise.
 
8.8  Application of Proceeds:    All amounts received by the Bank as proceeds
from the disposition or liquidation of the Collateral shall be applied to the
Borrower’s indebtedness to the Bank as follows: first, to the costs and expenses
of collection, enforcement, protection and preservation of the Bank’s lien in
the Collateral, including court costs and reasonable attorneys’ fees, whether or
not suit is commenced by the Bank; next, to those costs and expenses incurred by
the Bank in protecting, preserving, enforcing, collecting, liquidating, selling
or disposing of the Collateral; next, to the payment of accrued and unpaid
interest on all of the Obligations; next, to the payment of the outstanding
principal balance of the Obligations; and last, to the payment of any other
indebtedness owed by the Borrower to the Bank. Any excess Collateral or excess
proceeds existing after the disposition or liquidation of the Collateral will be
returned or paid by the Bank to the Borrower.
 
If any non-cash proceeds are received in connection with any sale of Collateral,
the Bank shall not apply such non-cash proceeds to the Obligations unless and
until such proceeds are converted to such; provided, however, that if such
non-cash proceeds are not expected on the date of receipt thereof to be
converted to cash within one year after such date, the Bank shall use
commercially reasonable efforts to convert such non-cash proceeds to cash within
such one year period.

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SECTION 9
 
MISCELLANEOUS
 
9.1  Amounts Payable on Demand:    If the Borrower shall fail to pay on demand
any amount so payable under this Agreement, the Bank may, at its option and
without any obligation to do so and without waiving any default occasioned by
the Borrower having so failed to pay such amount, create an Advance under this
Agreement in an amount equal to the amount so payable, which Advance shall
thereafter bear interest as provided hereunder.
 
9.2  Default Interest Rate:    If an Event of Default, or an event which, with
notice or passage of time could become an Event of Default, has occurred or is
continuing, the Borrower shall pay to the Bank interest on any Indebtedness or
amount payable under this Agreement at a rate which is 3% in excess of the rate
or rates then in effect under this Agreement.
 
9.3  Reliance and Further Assurances:    Each warranty, representation,
covenant, obligation and agreement contained in this Agreement shall be
conclusively presumed to have been relied upon by the Bank regardless of any
investigation made or information possessed by the Bank and shall be cumulative
and in addition to any other warranties, representations, covenants and
agreements which the Borrower now or hereafter shall give, or cause to be given,
to the Bank. Borrower agrees to execute all documents and instruments and to
perform such acts as the Bank may reasonably deem necessary to confirm and
secure to the Bank all rights and remedies conferred upon the Bank by this
agreement and all other documents related thereto.
 
9.4  Costs:    Borrower shall, upon Bank’s request, promptly pay to and
reimburse the Bank for all costs incurred and payments made by the Bank by
reason of any future assessment, reserve, deposit or similar requirements or any
surcharge, tax or fee imposed upon the Bank or as a result of the Bank’s
compliance with any directive or requirement of any regulatory authority
pertaining or relating to any import Letter of Credit.
 
9.5  Nature and Place of Payments:    All payments made on account of the
Obligations shall be made without setoff or counterclaim in lawful money of the
United States of America in either immediately available or next day available
funds, free and clear of and without deduction for any taxes, fees or other
charges of any nature whatsoever imposed by any taxing authority (other than
California and United States income tax payable by the Bank), and must be
received by Bank by 2:00 p.m. (California time) on the day of payment, it being
expressly agreed and understood that if payment is received by the Bank after
2:00 p.m. (California time), such payment will be considered to have been made
been made on the next succeeding Business Day and interest thereon shall be
payable at the then applicable rate during such extension. If any payment
required to be made by the Borrower hereunder becomes due and payable on a day
other than a Business Day, the due date thereof shall be extended to the next
succeeding Business Day and interest thereon shall be payable at the then
applicable rate during such extension. All payments required to be made
hereunder shall be made to the office of the Bank designated for the receipt of
notices in Section 9.7 or such other office as Bank shall from time to time
designate.
 
9.6  Attorneys’ Fees:    Borrower shall pay to the Bank all costs and expenses,
including but not limited to reasonable attorneys fees, incurred by Bank in
connection with the administration, enforcement, including any bankruptcy,
appeal or the enforcement of any judgment or any refinancing or restructuring of
this Agreement or any document, instrument or agreement executed with respect
to, evidencing or securing the indebtedness hereunder.
 
9.7  Notices:    All notices, payments, requests, information and demands which
either party hereto may desire, or may be required to give or make to the other
party hereto, shall be given or made to such

19

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party by hand delivery or through deposit in the United States mail, postage
prepaid, or by facsimile delivery, or to such other address as may be specified
from time to time in writing by either party to the other.
 
To the Borrower:
 
To the Bank:
VARIFLEX, INC.
5152 N. Commerce Ave.
Moorpark, CA 93021
Attn:    Petar Katurich
            CFO
FAX: (805) 523-7384
 
UNITED CALIFORNIA BANK
Newport Beach Office (CBC)
4400 MacArthur Boulevard, Suite 150
Newport Beach, CA 92660
Attn:    Stephen Popovich
            Vice President
FAX: (949) 797-1959

 
9.8  Waiver:    Neither the failure nor delay by the Bank in exercising any
right hereunder or under any document, instrument or agreement mentioned herein
shall operate as a waiver thereof, nor shall any single or partial exercise of
any right hereunder or under any other document, instrument or agreement
mentioned herein preclude other or further exercise thereof or the exercise of
any other right; nor shall any waiver of any right or default hereunder, or
under any other document, instrument or agreement mentioned herein, constitute a
waiver of any other right or default or constitute a waiver of any other default
of the same or any other term or provision.
 
9.9  Conflicting Provisions:    To the extent the provisions contained in this
Agreement are inconsistent with those contained in any other document,
instrument or agreement executed pursuant hereto, the terms and provisions
contained herein shall control. Otherwise, such provisions shall be considered
cumulative.
 
9.10  Binding Effect; Assignment:    This Agreement shall be binding upon and
inure to the benefit of the Borrower and the Bank and their respective
successors and assigns, except that the Borrower shall not have the right to
assign its rights hereunder or any interest herein without the prior written
consent of the Bank. The Bank may sell, assign or grant participation in all or
any portion of its rights and benefits hereunder. The Borrower agrees that, in
connection with any such sale, grant or assignment, the Bank may deliver to the
prospective buyer, participant or assignee financial statements and other
relevant information relating to the Borrower and any guarantor.
 
9.11  Jurisdiction:    This Agreement, any notes issued hereunder, the rights of
the parties hereunder to and concerning the Collateral, and any documents,
instruments or agreements mentioned or referred to herein shall be governed by
and construed according to the laws of the State of California without regard to
conflict of law principles, to the jurisdiction of whose courts the parties
hereby submit.
 
9.12  Waiver of Jury Trial:    THE BORROWER AND THE BANK EACH WAIVE THEIR
RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON
OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE
TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER
LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR
PARTIES, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE
BORROWER AND THE BANK EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE
TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE
PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED
BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING
WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF
THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF.
THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS,

20

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SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS.
 
9.13  Counterparts:    This Agreement may be executed in any number of
counterparts and all such counterparts taken together shall be deemed to
constitute one and the same instrument.
 
9.14  Headings:    The headings herein set forth are solely for the purpose of
identification and have no legal significance.
 
9.15  Entire Agreement and Amendments:    This Agreement and all documents,
instruments and agreements mentioned herein constitute the entire and complete
understanding of the parties with respect to the transactions contemplated
hereunder. All previous conversations, memoranda and writings between the
parties pertaining to the transactions contemplated hereunder not incorporated
or referenced in this Agreement or in such documents, instruments and agreements
are superseded hereby. This Agreement may be amended only by an instrument in
writing signed by the Borrower and the Bank.
 
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the date first hereinabove written.
 
BANK:
 
UNITED CALIFORNIA BANK
     
BORROWER:
 
VARIFLEX, INC.
By:
 

--------------------------------------------------------------------------------

     
By:
 

--------------------------------------------------------------------------------

Name
 
Barbara Snyder, Vice President
     
Name
 
Petar Katurich/CFO

 
 

21

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EXHIBIT “A”
 
SCHEDULE OF ISSUANCE FEES
 
Pursuant to Section 2.1.2 of that certain TRADE FINANCE CREDIT AGREEMENT dated
as of March 31, 2002 between UNITED CALIFORNIA BANK (the “Bank”) and VARIFLEX,
INC. (“Borrower”) Borrower agrees to pay to Bank in connection with each Letter
of Credit, Documentary Collection, Shipside Bond and Air Release, including
Miscellaneous Fees, standard pricing based on the Bank published “International
Services – Schedule of Fees and Charges” (Form ID-1) as published from time to
time, with the following pricing “exceptions” as shown below:
 
IMPORT LETTERS OF CREDIT
 

    
Rate

--------------------------------------------------------------------------------

  
Flat Fee or Minimum

--------------------------------------------------------------------------------

Issuance Fee
  
1/12th
  
$
90
Amendment Fee: Increase Amount/Extension
  
1/12th
  
$
70
Document Examination/Payment Fee
  
N/A
  
$
80

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EXHIBIT “B”
 
COVENANT COMPLIANCE CERTIFICATE
VARIFLEX, INC.
 
FOR THE PERIOD ENDING:                         
 
To: UNITED CALIFORNIA BANK, as Lender under that certain Credit Agreement dated
as of March 31, 2002 (the “Credit Agreement”) and Amendments, if any, with
VARIFLEX, INC. (“Borrower”). All items used herein and not otherwise defined are
used with the same meaning as set forth in the Credit Agreement. Please refer to
the above-mentioned Credit Agreement for additional covenants, events of
default, representations and warranties not made a part hereof. The undersigned,
the Chief Financial Officer of the Borrower, hereby certifies on behalf of the
Borrower that, as of the date of this certificate:
 
1.  The financial statements of the Borrower for the          month period
ending                         , 200     delivered to the Lender concurrently
herewith have been prepared and are delivered in accordance with Section 6.1 of
the Credit Agreement.
 
2.  The Borrower has maintained liquid assets of
$                                 (as defined under Section 1.1.21). Covenant
requires not less than $7,000,000 at all times per Section 6.2 (i).
 
3.  The Borrower has an Effective Tangible Net Worth of
$                                 (as defined under Section 1.1.7). Covenant
requires not less than $25,000,000 per Section 6.2 (ii).
 
IN WITNESS WHEREOF, the undersigned has executed and delivered this COVENANT
COMPLIANCE CERTIFICATE to the Lender this          day of
                        , 200    .
 
VARIFLEX, INC.
By:
 

--------------------------------------------------------------------------------

   
Petar Katurich
Chief Financial Officer

23

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CERTIFIED CORPORATE RESOLUTION TO BORROW
 
WHEREAS, VARIFLEX, INC. (the “Corporation”) has made application to UNITED
CALIFORNIA BANK (the “Bank”) for credit accommodations which may consist of but
shall in no way be limited to the following: the renewal, continuation or
extension of an existing obligation; the extension of a new loan, line of credit
or commitment; the issuance of letters of credit or banker’s acceptances; or the
purchase or sale through Bank of foreign currencies.
 
RESOLVED, that: any one of the following officers: PETAR KATURICH, as the CHIEF
FINANCIAL OFFICER of the Corporation, or RAYMOND LOSI, II, as the CHIEF
EXECUTIVE OFFICER of the Corporation, are authorized, in the name of and on
behalf of the Corporation to:
 
(a)  Borrow money from the Bank in such amounts and upon such terms and
conditions as are agreed upon by the officers of the Corporation and the Bank;
and execute and deliver or endorse such evidences of indebtedness or renewals
thereof or agreements therefor as may be required by the Bank, all in such form
and content as the officers of the Corporation executing such documents shall
approve (which approval shall be evidenced by the execution and delivery of such
documents); provided, however, that the maximum amount of such indebtedness
shall not exceed the principal sum of $9,000,000.00 exclusive of any interest,
fees, attorneys’ fees and other costs and expenses related to the indebtedness.
 
(b)  Execute such evidences of indebtedness, agreements, security instruments
and other documents and to take such other actions as are herein authorized.
 
(c)  Sell to or discount or re-discount with the Bank any and all negotiable
instruments, contracts or instruments or evidences of indebtedness at any time
held by the Corporation; and endorse, transfer and deliver the same, together
with guaranties of payment or repurchase thereof, to the Bank (for which the
Bank is hereby authorized and directed to pay the proceeds of such sale,
discount or re-discount as directed by such endorsement without inquiring into
the circumstances of its issue or endorsement or the disposition of such
proceeds).
 
(d)  Withdraw, receive and execute receipts for deposits and withdrawals on
accounts of the Corporation maintained with the Bank.
 
(e)  Grant security interests and liens in any real, personal or other property
belonging to or under the control of the Corporation as security for any
indebtedness of the Corporation to the Bank; and execute and deliver to the Bank
any and all security agreements, pledges, mortgages, deeds of trust and other
security instruments and any other documents to effectuate the grant of such
security interests and liens, which security instruments and other documents
shall be in such form and content as the officers of the Corporation executing
such security instruments and other documents shall approve and which approval
shall be evidenced by the execution and delivery of such security instruments
and other documents.
 
(f)  Apply for letters of credit or seek the issuance of banker’s acceptances
under which the Corporation shall be liable to the Bank for repayment.
 
(g)  Purchase and sell foreign currencies, on behalf of the Corporation, whether
for immediate or future delivery, in such amounts and upon such terms and
conditions as the officer(s) authorized herein may deem appropriate, and give
any instructions for transfers or deposits of monies by check, drafts, cable,
letter or otherwise for any purpose incidental to the foregoing, and authorize
or direct charges to the depository account or accounts of the Corporation for
the cost of any foreign currencies so purchased through the Bank.

24

--------------------------------------------------------------------------------

 
(h)  To designate in writing to the Bank in accordance with the terms of any
agreement or other document executed by the above-named individuals one or more
individuals who shall have the authority to as provided herein, to:
 
(1)  request advances under lines of credit extended by the Bank to the
Corporation;
 
(2)  apply for letters of credit or seek the issuance of banker’s acceptances
under which the Corporation shall be liable to the Bank for repayment;
 
(3)  make deposits and receive and execute receipts for deposits on accounts of
the Corporation maintained with the Bank;
 
(4)  make withdrawals and receive and execute receipts for withdrawals on
account of the Corporation maintained with the Bank;
 
(5)  purchase and sell foreign currencies.
 
(i)  Enter into derivative transactions, including but not limited to, interest
rate swaps, caps, floors, collars, swaptions, and forwards.
 
(j)  Transact any other business with the Bank incidental to the powers
hereinabove stated.
 
RESOLVED FURTHER, that all such evidences of indebtedness, agreements, security
instruments and other documents executed in the name of and on behalf of the
Corporation and all such actions taken on behalf of the Corporation in
connection with the matters described herein are hereby ratified and approved.
 
RESOLVED FURTHER, that the Bank is authorized to act upon these resolutions
until written notice of their revocation is delivered to the Bank.
 
RESOLVED FURTHER, that any resolution set forth herein is in addition to and
does not supersede any resolutions previously given by the Corporation to the
Bank.
 
RESOLVED FURTHER, that the Secretary of the Corporation be, and hereby is,
authorized and directed to prepare, execute and deliver to the Bank a certified
copy of the foregoing resolutions.
 
I do hereby certify that I am Mark Siegel, the Secretary of VARIFLEX, INC., a
Delaware corporation, and I do hereby further certify that the foregoing is a
true copy of the resolutions of the Board of Directors of the Corporation
adopted and approved by unanimous written consent.
 
I hereby further certify that such resolutions are presently in full force and
effect and have not been amended or revoked. I do further certify that the
following persons have been duly elected and qualified as and, this day are,
officers of the Corporation, holding their respective offices appearing below
their names, and that the signatures appearing opposite their names are the
genuine signatures of such persons.
 
NAME OF OFFICER:  PETAR KATURICH
 

--------------------------------------------------------------------------------

(SIGNATURE)
TITLE:  CHIEF FINANCIAL OFFICER
   
NAME OF OFFICER:  RAYMOND LOSI, II
 

--------------------------------------------------------------------------------

(SIGNATURE)
TITLE:  CHIEF EXECUTIVE OFFICER
   

25

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IN WITNESS WHEREOF, this document is executed as of March 31, 2002.
 

   
NAME OF CORPORATION:
   
VARIFLEX, INC.
   
By:
 

--------------------------------------------------------------------------------

       
Mark Siegel
Secretary

 

26

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[GRAPHIC REMOVED HERE]
 
LOAN DISBURSEMENT INSTRUCTIONS
 
Line of Credit
 
Date:  March 31, 2002
 
The undersigned hereby instructs UNITED CALIFORNIA BANK to disburse the proceeds
of this loan as shown below:
 
DISBURSEMENT

--------------------------------------------------------------------------------

  
AMOUNT

--------------------------------------------------------------------------------

Credited to the following account:  Any and all Advances shall be deposited into
checking account #                             upon the request of the Borrower
  
$
                
    

--------------------------------------------------------------------------------

--------------------------------------------------------------------------------

TOTAL:
  
$
 
    

--------------------------------------------------------------------------------

--------------------------------------------------------------------------------

 
(Authorizing signatures appear on attached page entitled
“AUTHORIZING SIGNATURES FOR LOAN DISBURSEMENT INSTRUCTIONS”)

27

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AUTHORIZING SIGNATURES FOR LOAN DISBURSEMENT INSTRUCTIONS
 
The following signature(s) authorize disbursement of loan proceeds as set forth
in the preceding instructions consisting of 1
page(s).
 
BORROWER:
VARIFLEX, INC.
By:
 

--------------------------------------------------------------------------------

   
Petar Katurich
CFO

28