Exhibit 10.1

 

 

 

CREDIT AND SECURITY AGREEMENT

 

BY AND AMONG

 

SMTEK, INC.,

 

JOLT TECHNOLOGY, INC.,

 

SMTEK NEW ENGLAND, INC.,

 

SMTEK SANTA CLARA, INC.,

 

TECHNETICS, INC.,

 

AND

 

WELLS FARGO BUSINESS CREDIT, INC.

 

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September  19, 2003

 

 

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TABLE OF CONTENTS

 

ARTICLE I      DEFINITIONS

 

Section 1.1

Definitions

 

 

Section 1.2

Other Definitional Terms; Rules of Interpretation

 

 

ARTICLE II     AMOUNT AND TERMS OF THE CREDIT FACILITY

 

Section 2.1

Revolving Advances

 

 

Section 2.2

Procedures for Requesting Advances

 

 

Section 2.3

LIBO Rate Advances

 

 

Section 2.4

Increased Costs; Capital Adequacy; Funding Exceptions

 

 

Section 2.5

Letters of Credit

 

 

Section 2.6

Special Account

 

 

Section 2.7

Payment of Amounts Drawn Under Letters of Credit; Obligation of Reimbursement

 

 

Section 2.8

Obligations Absolute

 

 

Section 2.9

Term Advance

 

 

Section 2.10

Capex Advances

 

 

Section 2.11

Payment of Term Advance and CapEx Advances

 

 

Section 2.12

Inventory Appraisals

 

 

Section 2.13

Interest; Margin; Minimum Interest Charge; Default Interest; Participations;
Clearance Days; Usury

 

 

Section 2.14

Fees

 

 

Section 2.15

Time for Interest Payments; Payment on Non-Banking Days; Computation of Interest
and Fees

 

 

Section 2.16

Lockbox; Collateral Account; Application of Payments

 

 

Section 2.17

Voluntary Prepayment; Termination of the Credit Facility by the Borrower

 

 

Section 2.18

Mandatory Prepayment

 

 

Section 2.19

Revolving Advances to Pay Obligations

 

 

Section 2.20

Use of Proceeds

 

 

Section 2.21

Liability Records

 

 

ARTICLE III   SECURITY INTEREST; OCCUPANCY; SETOFF

 

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Section 3.1

Grant of Security Interest

 

 

Section 3.2

Notification of Account Debtors and Other Obligors

 

 

Section 3.3

Assignment of Insurance

 

 

Section 3.4

Occupancy

 

 

Section 3.5

License

 

 

Section 3.6

Financing Statement

 

 

Section 3.7

Setoff

 

 

Section 3.8

Collateral

 

 

ARTICLE IV      CONDITIONS OF LENDING

 

Section 4.1

Conditions Precedent to the Initial Advances and Letter of Credit

 

 

Section 4.2

Conditions Precedent to All Advances and Letters of Credit

 

 

ARTICLE V       REPRESENTATIONS AND WARRANTIES

 

 

Section 5.1

Existence and Power; Name; Chief Executive Office; Inventory and Equipment
Locations; Federal Employer Identification Number

 

 

Section 5.2

Capitalization

 

 

Section 5.3

Authorization of Borrowing; No Conflict as to Law or Agreements

 

 

Section 5.4

Legal Agreements

 

 

Section 5.5

Subsidiaries

 

 

Section 5.6

Financial Condition; No Adverse Change

 

 

Section 5.7

Litigation

 

 

Section 5.8

Regulation U

 

 

Section 5.9

Taxes

 

 

Section 5.10

Titles and Liens

 

 

Section 5.11

Intellectual Property Rights

 

 

Section 5.12

Plans

 

 

Section 5.13

Default

 

 

Section 5.14

Environmental Matters

 

 

 

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Section 5.15

Submissions to Lender

 

 

Section 5.16

Financing Statements

 

 

Section 5.17

Rights to Payment

 

 

Section 5.18

Financial Solvency

 

 

Section 5.19

Bank Accounts

 

 

ARTICLE VI      COVENANTS

 

Section 6.1

Reporting Requirements

 

 

Section 6.2

Financial Covenants

 

 

Section 6.3

Permitted Liens; Financing Statements

 

 

Section 6.4

Indebtedness

 

 

Section 6.5

Guaranties

 

 

Section 6.6

Investments and Subsidiaries

 

 

Section 6.7

Dividends and Distributions

 

 

Section 6.8

Intentionally Omitted

 

 

Section 6.9

Transactions with Afilliates

 

 

Section 6.10

Books and Records; Inspection and Examination

 

 

Section 6.11

Account Verification

 

 

Section 6.12

Compliance with Laws

 

 

Section 6.13

Payment of Taxes and Other Claims

 

 

Section 6.14

Maintenance of Properties

 

 

Section 6.15

Insurance

 

 

Section 6.16

Preservation of Existence

 

 

Section 6.17

Delivery of Instruments, etc

 

 

Section 6.18

Sale or Transfer of Assets; Suspension of Business Operations

 

 

Section 6.19

Consolidation and Merger; Asset Acquisitions

 

 

Section 6.20

Sale and Leaseback

 

 

Section 6.21

Restrictions on Nature of Business

 

 

Section 6.22

Accounting

 

 

Section 6.23

Discounts, etc

 

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Section 6.24

Plans

 

 

Section 6.25

Place of Business; Name

 

 

Section 6.26

Constituent Documents; S Corporation Status

 

 

Section 6.27

Additional Bank Accounts

 

 

Section 6.28

Distribution of Loan Proceeds Amongst Borrowers

 

 

Section 6.29

Performance by the Lender

 

 

ARTICLE VII      EVENTS OF DEFAULT, RIGHTS AND REMEDIES

 

Section 7.1

Events of Default

 

 

Section 7.2

Rights and Remedies

 

 

Section 7.3

Certain Notices

 

 

ARTICLE VIII     JOINT AND SEVERAL LIABILITY; SURETYSHIP WAIVERS

 

Section 8.1

Independent Obligations; Subrogation

 

 

Section 8.2

Authority to Modify Obligations and Security

 

 

Section 8.3

Waiver of Defenses

 

 

Section 8.4

Exercise of the Lender’s Rights

 

 

Section 8.5

Additional Waivers

 

 

Section 8.6

Additional Indebtedness

 

 

Section 8.7

Notices, Demands, Etc.

 

 

Section 8.8

Subordination

 

 

Section 8.9

Revival

 

 

Section 8.10

Understanding of Waivers

 

 

ARTICLE IX      MISCELLANEOUS

 

Section 9.1

No Waiver; Cumulative Remedies; Compliance with Laws

 

 

Section 9.2

Amendments, Etc

 

 

Section 9.3

Addresses for Notices; Requests for Accounting

 

 

Section 9.4

Intentionally Omitted

 

 

Section 9.5

Further Documents

 

 

Section 9.6

Costs and Expenses

 

 

Section 9.7

Indemnity

 

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Section 9.8

Participants

 

 

Section 9.9

Execution in Counterparts; Telefacsimile Execution

 

 

Section 9.10

Retention of Borrower’s Records

 

 

Section 9.11

Binding Effect; Assignment; Complete Agreement; Exchanging Information

 

 

Section 9.12

Severability of Provisions

 

 

Section 9.13

Headings

 

 

Section 9.14

Governing Law; Jurisdiction, Venue; Waiver of Jury Trial

 

 

Section 9.15

SI as Agent for Borrowers

 

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CREDIT AND SECURITY AGREEMENT

 

Dated as of September 19, 2003

 

This CREDIT AND SECURITY AGREEMENT (this “Agreement”), dated as of September 19,
2003, is entered into by and among SMTEK, INC., a California corporation (“SI”),
JOLT TECHNOLOGY, INC., a Delaware corporation (“Jolt”), SMTEK NEW ENGLAND, INC.,
a Massachusetts corporation (“SNEI”), SMTEK SANTA CLARA, INC., a California
corporation (“SSCI”), TECHNETICS, INC., a California corporation (“Technetics”)
(SI, Jolt, SNEI, SSCI, and Technetics are each referred to herein as a
“Borrower” and collectively as the “Borrowers”), and WELLS FARGO BUSINESS
CREDIT, INC., a Minnesota corporation (the “Lender”).

 

W I T N E S S E T H:

 

WHEREAS, the Borrowers have requested that the Lender enter into financing
arrangements with the Borrowers pursuant to which the Lender may make loans and
provide other financial accommodations to the Borrowers; and

 

WHEREAS, Borrowers are wholly-owned Subsidiaries of SMTEK International, Inc., a
Delaware corporation (“Parent”), and Borrowers are inter-related entities which,
collectively constitute an integrated business; and

 

WHEREAS, the directors of each Borrower view the entities as sufficiently
dependent upon each other and so inter-related that any advance made hereunder
to any Borrower would benefit all of the Borrowers as a result of their
consolidated operations and identity of interests; and

 

WHEREAS, each Borrower has requested that the Lender treat them as co-borrowers
hereunder, jointly and severally responsible for the obligations of each other
hereunder;

 

ARTICLE I

 

DEFINITIONS

 

Section 1.1                                      Definitions.  For all purposes
of this Agreement, except as otherwise expressly provided, the following terms
shall have the meanings assigned to them in this Section or in the Section
referenced after such term:

 

“Accounts” means all of each Borrower’s accounts, as such term is defined in the
UCC, including each and every right of the such Borrower to the payment of
money, whether such right to payment now exists or hereafter arises, whether
such right to payment arises out of a sale, lease or other disposition of goods
or other property, out of a rendering of services, out of a loan, out of the
overpayment of taxes or other liabilities, or otherwise arises under any
contract or agreement, whether such right to payment is

 

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created, generated or earned by the such Borrower or by some other person who
subsequently transfers such person’s interest to each Borrower, whether such
right to payment is or is not already earned by performance, and howsoever such
right to payment may be evidenced, together with all other rights and interests
(including all Liens) which each Borrower may at any time have by law or
agreement against any account debtor or other obligor obligated to make any such
payment or against any property of such account debtor or other obligor; all
including but not limited to all present and future accounts, contract rights,
loans and obligations receivable, chattel papers, bonds, notes and other debt
instruments, tax refunds and rights to payment in the nature of general
intangibles.

 

“Administrative Borrower” has the meaning specified in Section 9.15.

 

“Advance” means a Revolving Advance, a CapEx Advance, or a Term Advance.

 

“Affiliate” or “Affiliates” means the Guarantors, SMTEK Thailand Ltd., an entity
organized under the laws of Thailand, and any other Person controlled by,
controlling or under common control with any Borrower, including any Subsidiary
of any Borrower.  For purposes of this definition, “control,” when used with
respect to any specified Person, means the power to direct the management and
policies of such Person, directly or indirectly, whether through the ownership
of voting securities, by contract or otherwise.

 

“Aggregate Credit Limit” means Twelve Million Three Hundred Thousand Dollars
($12,000,000).

 

“Agreement” means this Credit and Security Agreement.

 

“Applicable Percent” means fifteen percent (15%), provided that such percentage
shall be reduced by one (1) percentage point on December 31, 2003 and on the
last day of each of Borrowers’ fiscal quarters thereafter until such percentage
equals ten percent (10%).

 

“Availability” means the difference of (i) the Borrowing Base and (ii) the sum
of (A) the outstanding principal balance of all Revolving Advances and (B) the
L/C Amount.

 

“Availability Reserve” means as of any date of determination, (a) the Dilution
Reserve, plus (b) such amount or amounts as Lender may from time to time
establish and revise in good faith reducing the amount of Revolving Advances
which would otherwise be available to Borrower under the lending formula(s)
provided for herein:  (i) to reflect events, conditions, contingencies or risks
which, as determined by Lender in good faith, do or may affect either (1) the
Collateral or its value, (2) the assets, business or prospects of Borrower, or
(3) the security interests and other rights of Lender in the Collateral
(including the enforceability, perfection and priority thereof), or (ii) to
reflect Lender’s good faith belief that any collateral report or financial
information furnished by or on

 

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behalf of Borrower to Lender is or may have been incomplete, inaccurate or
misleading in any material respect, or (iii) in respect of any state of facts
which Lender determines in good faith constitutes an Event of Default or may,
with notice or passage of time or both, constitute an Event of Default.

 

“Banking Day” means a day on which the Federal Reserve Bank of New York is open
for business and, if such day relates to a LIBO Rate Advance, a day on which
dealings are carried on in the London interbank eurodollar market.

 

“Base Rate” means the rate of interest publicly announced from time to time by
Wells Fargo Bank at its principal office in San Francisco as its “prime rate”,
with the understanding that the “prime rate” is one of Wells Fargo’s base rates
(not necessarily the lowest of such rates) and serves as the basis upon which
effective rates of interest are calculated for loans making reference thereto.

 

“Book Net Worth” means the aggregate of the common and preferred stockholders’
equity in Parent and its Subsidiaries, determined in accordance with GAAP.

 

“Borrowing Base” means at any time the lesser of:

 

(a)                                  the Maximum Line; or

 

(b)                                 subject to change from time to time in the
Lender’s sole discretion, the sum of:

 

(i)                                     85% of Eligible Accounts, plus

 

(ii)                                  the lesser of:

 

(A)                              $2,000,000, or

 

(B)                                the sum of:

 

(1)                                  the lesser of (X) $100,000 or (Y) the
Applicable Percent of Eligible Inventory located at 6801 NW 15th Avenue, Ft.
Lauderdale, Florida; plus

 

(2)                                  the Applicable Percent of Eligible
Inventory located at all other locations; plus

 

(3)                                  the Applicable Percent of Eligible Slow
Moving Inventory, less the Slow Moving Inventory Reserve, which amount shall not
be less than zero;

 

and minus

 

(iii)                               all Availability Reserves.

 

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“CapEx Advance” has the meaning specified in Section 2.10.

 

“CapEx Note” means the Borrowers’ promissory note, payable to the order of the
Lender in substantially the form of Exhibit C hereto and any note or notes
issued in substitution therefore or supplement thereto.

 

“Capital Expenditures” means for a period, any expenditure of money during such
period for the lease, purchases or other acquisition of any capital asset, or
the lease of any other asset, or the purchase or construction of assets, or
improvements or additions thereto, which are capitalized on the Parent and its
Subsidiaries’ balance sheet whether payable currently or in the future.

 

“Change of Control” means the occurrence of any of the following events:

 

(a)                      any Person or “group” (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934) is or becomes the
“beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Securities
Exchange Act of 1934, except that a Person will be deemed to have “beneficial
ownership” of all securities that such Person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time),
directly or indirectly, of more than fifty one percent (51%) of the voting power
of all classes of voting stock of Parent.

 

(b)                     During any consecutive two-year period, individuals, or
their successors reasonably acceptable to the Lender, who at the beginning of
such period constituted the board of Directors of each Borrower and Parent
(together with any new Directors whose election to such board of Directors, or
whose nomination for election by the owner of each Borrower and Parent, was
approved by a vote of 66-2/3% of the Directors then still in office who were
either Directors at the beginning of such period or whose election or nomination
for election was previously so approved) cease for any reason to constitute a
majority of the board of Directors of each Borrower and Parent then in office.

 

(c)                      Senior Management, or their successors reasonably
acceptable to the Lender, shall cease to actively manage the Borrowers’
day-to-day business activities, or the appointment of a Chapter 11 Trustee, and
Examiner with expanded powers or a Responsible Person not reasonably acceptable
to Lender.

 

(d)                     Any Borrower ceased to be owned one hundred percent
(100%) by Parent.

 

“Collateral” means (a) all of each Borrower’s current and hereafter acquired or
arising personal property and other assets, including, without limitation, the
following types or items of property: Accounts, chattel paper, deposit accounts,
documents,

 

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Equipment, General Intangibles, goods, instruments, Inventory, Investment
Property, letter-of-credit rights, letters of credit, sums on deposit in any
Collateral Account, and any items in any Lockbox; together with (i) all
substitutions and replacements for and products of any of the foregoing; (ii) in
the case of all goods, all accessions; (iii) all accessories, attachments,
parts, equipment and repairs now or hereafter attached or affixed to or used in
connection with any goods; (iv) all warehouse receipts, bills of lading and
other documents of title now or hereafter covering such goods; (v) all
collateral subject to the Lien of any Security Document; (vi) any money, or
other assets of each Borrower that now or hereafter come into the possession,
custody, or control of the Lender; (vii) all sums on deposit in the Special
Account; and (viii) proceeds of any and all of the foregoing; and (b) all
personal property or other assets of any Guarantor or other Person at any time
subject to a Lien in favor of Lender granted in connection with this Agreement.

 

“Collateral Account” means the “Lender Account” as defined in the Lockbox and
Collection Account Agreement.

 

“Commitment” means the Lender’s commitment to make Advances to, and to cause the
Issuer to issue Letters of Credit for the account of, the Borrower pursuant to
Article II.

 

“Constituent Documents” means with respect to any Person, as applicable, such
Person’s certificate of incorporation, articles of incorporation, by-laws,
certificate of formation, articles of organization, limited liability company
agreement, management agreement, operating agreement, shareholder agreement,
partnership agreement or similar document or agreement governing such Person’s
existence, organization or management or concerning disposition of ownership
interests of such Person or voting rights among such Person’s owners.

 

“Credit Facility” means the credit facility being made available to the
Borrowers by the Lender under Article II.

 

“Current Maturities of Long Term Debt” means as of a given date, the amount of
the Parent and its Subsidiaries’ long-term debt and capitalized leases which
will become due during the twelve (12) month period beginning on the designated
date.

 

“Debt” means of a Person as of a given date, all items of indebtedness or
liability which in accordance with GAAP would be included in determining total
liabilities as shown on the liabilities side of a balance sheet for such Person
and shall also include the aggregate payments required to be made by such Person
at any time under any lease that is considered a capitalized lease under GAAP.

 

“Debt Service Coverage Ratio” means the ratio of (i) the sum of (A) Funds from
Operations and (B) Interest Expense minus (C) unfinanced Capital Expenditures to
(ii) the sum of (A) Current Maturities of Long Term Debt and (B) Interest
Expense.

 

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“Default” means an event that, with giving of notice or passage of time or both,
would constitute an Event of Default.

 

“Default Period” means any period of time beginning on the first day of any
month during which a Default or Event of Default has occurred and ending on the
date the Lender notifies the Borrowers in writing that such Default or Event of
Default has been cured or waived.

 

“Default Rate” means an annual interest rate equal to three (3) percentage
points over the Floating Rate, which interest rate shall change when and as the
Floating Rate changes.

 

“Dilution” means, as of any date of determination, a percentage, based upon the
experience of the immediately prior three months, that is the result of dividing
the U.S. Dollar amount of (a) bad debt write-downs, discounts, advertising
allowances, credits, or other dilutive items with respect to the Accounts during
such period, by (b) the Borrowers’ gross billings with respect to the Accounts
during such period (excluding extraordinary items).

 

“Dilution Reserve” means, as of any date of determination, the product of (a)
the number of percentage points (or fraction thereof) by which Dilution with
respect to all Accounts is in excess of five percent (5%), by (b) the amount of
all Accounts.

 

“Director” means, with respect to any Person, a director if such Person is a
corporation, a governor if such Person is a limited liability company, or a
general partner if such Person is a partnership.

 

“ERISA” means the Employee Retirement Income Security Act of 1974.

 

“ERISA Affiliate” means any trade or business (whether or not incorporated) that
is a member of a group which includes the Borrowers and which is treated as a
single employer under Section 414 of the IRC.

 

“Earnings Before Taxes” means from operations but including extraordinary
losses.

 

“Eligible Accounts” means all unpaid Accounts arising from the sale or lease of
goods or the performance of services, net of any credits, but excluding any such
Accounts having any of the following characteristics:

 

(i)                                     Accounts unpaid ninety (90) days or more
after the invoice date;

 

(ii)                                  Accounts that are disputed (only to the
extent of the dispute) or subject to a claim of offset or a contra account
unless supported by a waiver of non-offset letter in form and substance
satisfactory to Lender in its sole discretion;

 

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(iii)                               Accounts not yet earned by the final
delivery of goods or rendition of services, as applicable, by a Borrower to the
customer, including progress billings, and that portion of Accounts for which an
invoice has not been sent to the applicable account debtor;

 

(iv)                              Accounts constituting (A) proceeds of
copyrightable material unless such copyrightable material shall have been
registered with the United States Copyright Office, or (B) proceeds of
patentable inventions unless such patentable inventions have been registered
with the United States Patent and Trademark Office;

 

(v)                                 Accounts owed by account debtors located in
any state that requires a creditor to file a business activity report or similar
document in order to bring suit or otherwise enforce its remedies against such
account debtor in the courts or through any judicial process of such state,
unless the Borrower to whom such Account is owed has qualified to do business in
such state, or has filed a notice of business activities report with the
applicable division of taxation, the department of revenue, or with such other
state offices, as appropriate, for the then-current year, or is exempt from such
filing requirement;

 

(vi)                              Accounts owed by any unit of government,
whether foreign or domestic (provided, however, that there shall be included in
Eligible Accounts that portion of Accounts owed by such units of government for
which the Borrowers have provided evidence satisfactory to the Lender that
(A) the Lender has a first priority perfected security interest and (B) such
Accounts may be enforced by the Lender directly against such unit of government
under all applicable laws);

 

(vii)                           Accounts owed by an account debtor located
outside the United States and Canada which are not (A) backed by a bank letter
of credit naming the Lender as beneficiary or assigned to the Lender, in the
Lender’s possession or control, and with respect to which a control agreement
concerning the letter-of-credit rights is in effect, and acceptable to the
Lender in all respects, in its sole discretion, or (B) covered by a foreign
receivables insurance policy acceptable to the Lender in its sole discretion;

 

(viii)                        Accounts owed by an account debtor that is
insolvent, the subject of bankruptcy proceedings or has gone out of business;

 

(ix)                                Accounts owed by an Owner, Subsidiary,
Affiliate, Officer or employee of any Borrower;

 

(x)                                   Accounts not subject to a duly perfected
security interest in the Lender’s favor or which are subject to any Lien in
favor of any Person other than the Lender;

 

(xi)                                Accounts that have been restructured,
extended, amended or modified if such restructure, extension, amendment, or
modification causes a reaging of such Account;

 

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(xii)                             Accounts that constitute advertising, finance
charges, service charges or sales or excise taxes;

 

(xiii)                          Accounts owed by an account debtor, regardless
of whether otherwise eligible, to the extent that the balance of such Accounts
exceeds 15% of the aggregate amount of all Eligible Accounts, provided, however,
with respect to Accounts owed by [Philips Electronics] and [Mykotronx, Inc.]
(including their respective affiliates), such percentage shall be twenty percent
(20%);

 

(xiv)                         Accounts owed by an account debtor, regardless of
whether otherwise eligible, if thirty-five percent (35%) or more of the total
amount due under Accounts from such debtor is ineligible under clauses (i), (ii)
or (xi) above; and

 

(xv)                            Accounts, or portions thereof, otherwise deemed
ineligible by the Lender in its sole discretion.

 

“Eligible Equipment” means all manufacturing machinery of any Borrower located
at any of the Permitted Equipment Locations, which has been appraised by an
appraiser selected by the Borrowers and satisfactory to Lender pursuant to an
appraisal upon which Lender is expressly permitted to rely; but excluding any
Equipment having any of the following characteristics:

 

(i)                                     Obsolete items or Equipment that is
damaged, defective, or destroyed;

 

(ii)                                  Equipment that is subject to a security
interest or lien in favor of any person other than Lender; and

 

(iii)                               Equipment which is purchased in anticipation
of a CapEx Advance.

 

“Eligible Inventory” means all Inventory of each Borrower, valued at the lower
of cost or market value as determined in accordance with GAAP; but excluding any
Inventory having any of the following characteristics:

 

(i)                                     Inventory that is: in-transit; located
at any warehouse, job site or other premises other than the Permitted Inventory
Locations; located outside of the states, or localities, as applicable, in which
the Lender has filed financing statements to perfect a first priority security
interest in such Inventory; covered by any negotiable or non-negotiable
warehouse receipt, bill of lading or other document of title; on consignment
from any Person; on consignment to any Person or subject to any bailment unless
such consignee or bailee has executed an agreement with the Lender in form and
substance satisfactory to the Lender;

 

(ii)                                  Supplies, packaging, maintenance parts,
fabricated parts or sample Inventory;

 

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(iii)                               Inventory that is damaged or not currently
saleable in the normal course of the Borrowers’ operations;

 

(iv)                              Inventory that any Borrower has returned, has
attempted to return, is in the process of returning or intends to return to the
vendor thereof;

 

(v)                                 Inventory that is perishable or live;

 

(vi)                              Inventory manufactured by any Borrower
pursuant to a license unless the applicable licensor has agreed in writing, on
terms satisfactory to Lender, to permit the Lender to exercise its rights and
remedies against such Inventory;

 

(vii)                           Inventory that is subject to a Lien in favor of
any Person other than the Lender;

 

(viii)                        Slow Moving Inventory; and

 

(ix)                                Inventory otherwise deemed ineligible by the
Lender in its sole discretion.

 

“Eligible Slow Moving Inventory” means Inventory which does not qualify as
Eligible Inventory solely because it is Slow Moving Inventory as determined by
the Lender in its commercially reasonable discretion.

 

“Environmental Law” means any federal, state, local or other governmental
statute, regulation, law or ordinance dealing with the protection of human
health and the environment.

 

“Equipment” means each Borrower’s equipment, as such term is defined in the UCC,
whether now owned or hereafter acquired, including but not limited to all
present and future machinery, vehicles, furniture, fixtures, manufacturing
equipment, shop equipment, office and recordkeeping equipment, parts, tools,
supplies, and including specifically the goods described in any equipment
schedule or list herewith or hereafter furnished to the Lender by the Borrowers.

 

“Event of Default” has the meaning specified in Section 7.1.

 

“Excess Availability” means the amount, as determined by Lender, calculated at
any time, equal to: Availability minus the sum of: (a) the aggregate amount of
all trade payables and other obligations of each Borrower which are more than
sixty (60) days past the due date as of such time, plus (b) the book overdraft
of each Borrower.

 

“Existing Lender” means Comerica Bank.

 

“Financial Covenants” means the covenants set forth in Section 6.2.

 

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“Floating Rate” means an annual interest rate equal to the sum of the Base Rate
plus the applicable Margin, which interest rate shall, in each case, change when
and as the Base Rate changes.

 

“Floating Rate Advance” means an Advance bearing interest at the Floating Rate.

 

“Funding Date” has the meaning given in Section 2.1.

 

“Funds From Operations” means for a given period, the sum of (i) Net Income less
taxes paid, (ii) depreciation and amortization, (iii) deferred income taxes, and
(iv) other non-cash items, each as determined for such period in accordance with
GAAP.

 

“GAAP” means generally accepted accounting principles, applied on a basis
consistent with the accounting practices applied in the financial statements
described in Section 5.6.

 

“General Intangibles” means each of the Borrower’s general intangibles, as such
term is defined in the UCC, whether now owned or hereafter acquired, including
all present and future Intellectual Property Rights, customer or supplier lists
and contracts, manuals, operating instructions, permits, franchises, the right
to use any Borrower’s name, and the goodwill of each Borrower’s business.

 

“Guarantor” means collectively, Parent and any other Person now or hereafter
guarantying the Obligations.

 

“Guaranties” means (a) that certain Guaranty and Security Agreement, of even
date herewith, by Parent in favor of the Lender, (b) that certain Guaranty and
Security Agreement, of even date herewith, by Technetics in favor of the Lender,
and (c) other guaranties or pledges of assets at any time made in favor of the
Lender with respect to the Obligations, as the same may be amended, modified,
supplemented or replaced from time to time.

 

“Hazardous Substances” means pollutants, contaminants, hazardous substances,
hazardous wastes, petroleum and fractions thereof, and all other chemicals,
wastes, substances and materials listed in, regulated by or identified in any
Environmental Law.

 

“IRC” means the Internal Revenue Code of 1986.

 

“Infringe” means when used with respect to Intellectual Property Rights means
any infringement or other violation of Intellectual Property Rights.

 

“Intangible Assets” means all intangible assets as determined in accordance with
GAAP and including Intellectual Property Rights, goodwill, accounts due from
Affiliates, Directors, Officers or employees, prepaid expenses, deposits,
deferred charges or treasury stock or any securities or Debt of any Borrower or
any other securities unless the same

 

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are readily marketable in the US or entitled to be used as a credit against
federal income tax liabilities, non-compete agreements and any other assets
designated from time to time by the Lender, in its sole discretion.

 

“Intellectual Property Rights” means all actual or prospective rights arising in
connection with any intellectual property or other proprietary rights, including
all rights arising in connection with copyrights, patents, service marks, trade
dress, trade secrets, trademarks, trade names or mask works.

 

“Interest Expense” means for a fiscal year-to-date period, Parent and its
Subsidiaries’ total gross interest expense during such period (excluding
interest income), and shall in any event include (i) interest expensed (whether
or not paid) on all Debt, (ii) the amortization of debt discounts, (iii) the
amortization of all fees payable in connection with the incurrence of Debt to
the extent included in interest expense, and (iv) the portion of any capitalized
lease obligation allocable to interest expense.

 

“Interest Period” means relative to any LIBO Rate Advance, the period beginning
on (and including) the date on which such LIBO Rate Advance is made, or
continued as, or converted into, a LIBO Rate Advance pursuant to Section 2.2(a),
Section 2.3(a) or Section 2.3(b) and shall end on (but exclude) the day which
numerically corresponds to such date one (1), three (3) or six (6) months
thereafter (or, if such month has no numerically corresponding day, on the last
Banking Day of such month), as the Borrowers may select in their relevant notice
pursuant to Section 2.2(a), Section 2.3(a) or Section 2.3(b); provided, however,
that:

 

(a)                      no more than three (3) different Interest Periods may
be outstanding at any one time;

 

(b)                     if an Interest Period would otherwise end on a day which
is not a Banking Day, such Interest Period shall end on the next following
Banking Day (unless such next following Banking Day is the first Banking Day of
a month, in which case such Interest Period shall end on the next preceding
Banking Day);

 

(c)                      no Interest Period applicable to an Advance may end
later than the Maturity Date; and

 

(d)                     in no event shall the Borrowers select Interest Periods
with respect to Advances which, in the aggregate, would require payment of
funding losses under Section 2.3(d) in order to make required principal
payments.

 

“Inventory” means all of each Borrower’s inventory, as such term is defined in
the UCC, whether now owned or hereafter acquired, whether consisting of whole
goods, spare parts or components, supplies or materials, whether acquired, held
or furnished for

 

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sale, for lease or under service contracts or for manufacture or processing, and
wherever located.

 

“Investment Property” means all of each Borrower’s investment property, as such
term is defined in the UCC, whether now owned or hereafter acquired, including
but not limited to all securities, security entitlements, securities accounts,
commodity contracts, commodity accounts, stocks, bonds, mutual fund shares,
money market shares and U.S. Government securities.

 

“Issuer” means the issuer of any Letter of Credit.

 

“L/C Amount” means the sum of (i) the aggregate face amount of any issued and
outstanding Letters of Credit and (ii) the unpaid amount of the Obligation of
Reimbursement.

 

“L/C Application” means an application and agreement for letters of credit in a
form acceptable to the Issuer and the Lender.

 

“LIBO Base Rate” means with respect to an Interest Period, the rate per annum
equal to the rate (rounded up to the nearest one eighth of one percent (1/8%))
determined by the Lender in accordance with Section 2.3(c) to be a rate at which
United States Dollar deposits are offered to major banks in the London interbank
eurodollar market for funds to be made available on the first day of such
Interest Period and maturing at the end of such Interest Period.

 

“LIBO Rate” means with respect to an Interest Period, the rate obtained by
adding (a) the applicable Margin to (b) the rate obtained by dividing (i) the
applicable LIBO Base Rate by (ii) a percentage equal to one (1.00) minus the
applicable percentage (expressed as a decimal) prescribed by the Board of
Governors of the Federal Reserve System (or any successor thereto) for
determining the maximum reserve requirements applicable to eurodollar fundings
(currently referred to as “Eurocurrency Liabilities” in Regulation D) or any
other maximum reserve requirements applicable to a member bank of the Federal
Reserve System with respect to LIBO Rate Advances.

 

“LIBO Rate Advance” means any Advance which bears interest at a rate determined
by reference to a LIBO Rate.

 

“Letter of Credit” has the meaning specified in Section 2.5.

 

“Licensed Intellectual Property” has the meaning given in Section 5.11(c).

 

“Lien” means any security interest, mortgage, deed of trust, pledge, lien,
charge, encumbrance, title retention agreement or analogous instrument or
device, including the interest of each lessor under any capitalized lease and
the interest of any bondsman under any payment or performance bond, in, of or on
any assets or properties of a Person,

 

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whether now owned or hereafter acquired and whether arising by agreement or
operation of law.

 

“Loan Documents” means this Agreement, the Notes, the Pay-Off Letter, the
Guaranty, the Security Documents, and any other documents relating to, or
entered into in connection with, the Credit Facility, as the same may be
amended, modified, supplemented or replaced from time to time.

 

“Lockbox” has the meaning given in the Lockbox and Collection Account Agreement.

 

“Lockbox and Collection Account Agreement” means the Lockbox and Collection
Account Agreements, each of even date herewith, by and between each Borrower,
Wells Fargo Bank and the Lender, as the same may be amended, modified,
supplemented or replaced from time to time.

 

“Margin” means an amount determined pursuant to Section 2.13(b) that is added to
other amounts to determine the Floating Rate and the LIBO Rate.

 

“Material Adverse Effect” means any of the following:

 

(i)                                     a material adverse effect on the
business, operations, results of operations, prospects, assets, liabilities or
financial condition of any Borrower;

 

(ii)                                  a material adverse effect on the ability
of any Borrower to perform its obligations under the Loan Documents;

 

(iii)                               a material adverse effect on the ability of
the Lender to enforce the Obligations or to realize the intended benefits of the
Security Documents, including a material adverse effect on the validity or
enforceability of any Loan Document or of any rights against any Guarantor, or
on the status, existence, perfection, priority (subject to Permitted Liens) or
enforceability of any Lien securing payment or performance of the Obligations;
or

 

(iv)                              any claim against any Borrower or imminent
threat of litigation which if determined adversely to such Borrower would cause
such Borrower to be liable to pay an amount exceeding $100,000 or would be an
event described in clauses (i), (ii) and (iii) above.

 

“Maturity Date” means September 19, 2006.

 

“Maximum Line” means Ten Million Dollars ($10,000,000).

 

“Minimum Interest Charge” has the meaning given in Section 2.13(c).

 

“Multiemployer Plan” means a multiemployer plan (as defined in Section
4001(a)(3) of ERISA) to which any Borrower or any ERISA Affiliate contributes or
is obligated to contribute.

 

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“Net Income” means fiscal year-to-date after-tax and/or dividend net income from
continuing operations (excluding extraordinary income and any income attribute
to forgiveness of debt) as determined in accordance with GAAP.

 

“Note” means the Revolving Note, the CapEx Note or the Term Note, and “Notes”
means the Revolving Note, the CapEx Note and the Term Note.

 

“Obligation of Reimbursement” has the meaning given in Section 2.7(a).

 

“Obligations” means all of the Advances, the Obligation of Reimbursement and
each and every other debt, liability and obligation of every type and
description which any Borrower may now or at any time hereafter owe to the
Lender, whether such debt, liability or obligation now exists or is hereafter
created or incurred, whether it arises in a transaction involving the Lender
alone or in a transaction involving other creditors of any Borrower, and whether
it is direct or indirect, due or to become due, absolute or contingent, primary
or secondary, liquidated or unliquidated, or sole, joint, several or joint and
several, and including all indebtedness of any Borrower arising under any Credit
Document or guaranty between any Borrower and the Lender, whether now in effect
or hereafter entered into.

 

“Officer” means with respect to any Person, an officer if such Person is a
corporation, a manager if such Person is a limited liability company, or a
partner if such Person is a partnership.

 

“Owned Intellectual Property” has the meaning given in Section 5.11(a).

 

“Owner” means with respect to a Borrower, each Person having legal or beneficial
title to an ownership interest in such Borrower or a right to acquire such an
interest.

 

“Parent” has the meaning specified in the Recitals to this Agreement.

 

“Patent and Trademark Security Agreement” means the Patent Security Agreement by
SI in favor of the Lender of even date herewith or by any other Borrower or
Guarantor in favor of Lender at any time executed in connection with this
Agreement.

 

“Pay-Off Letter” means a letter, in form and substance satisfactory to Lender,
from Existing Lender to the Borrowers and the Lender setting forth, among other
things, the amounts necessary to repay in full all of the obligations of the
Borrowers owing to Existing Lender (other than contingent obligations which by
their terms survive repayment of such obligations), and providing authorization
from Existing Lender to Lender to obtain a release of all of the Liens existing
in favor of Existing Lender in and to the assets of the Borrowers.

 

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“Pension Plan” means a pension plan (as defined in Section 3(2) of ERISA)
maintained for employees of any Borrower or any ERISA Affiliate and covered by
Title IV of ERISA.

 

“Permitted Equipment Locations” means 200 Science Drive, Moorpark, California,
3240 Scott Blvd., Santa Clara, California, and 274 Cedar Hill Road, Marlborough,
Massachusetts.

 

“Permitted Lien” has the meaning given in Section 6.3(a).

 

“Permitted Inventory Locations” means 200 Science Drive, Moorpark, California,
3240 Scott Blvd., Santa Clara, California, 274 Cedar Hill Road, Marlborough,
Massachusetts, and 6801 NW 15th Avenue, Ft. Lauderdale, Florida, or any other
location of a Borrower permitted to be established under the terms of this
Agreement and with respect to which the Lender has received a landlord or other
such agreement, in form and substance satisfactory to Lender.

 

“Permitted Operating Expenses” means any transfer of any funds from any or all
of the Borrowers to Parent for Parent to utilize to pay Parent’s administrative
costs and operating expenses incurred in the ordinary course of operations, and
in accordance with Parent’s past practices, including, without limitation, all
costs, fees and expenses incurred for Parent’s administrative overhead, the
actual cost of goods purchased and services rendered on behalf of Parent,
advertising, marketing, promotion, debt service payments, real and personal
property taxes and assessments, capital improvements or replacements, insurance
premiums, taxes, utilities, repairs and maintenance, legal, accounting,
bookkeeping, audit, equipment use, telephone expenses, salaries and consulting
fees, and direct expenses of employees and agents.

 

“Person” means any individual, corporation, partnership, joint venture, limited
liability company, association, joint-stock company, trust, unincorporated
organization or government or any agency or political subdivision thereof.

 

“Plan” means an employee benefit plan (as defined in Section 3(3) of ERISA)
maintained for employees of any Borrower or any ERISA Affiliate.

 

“Premises” means all premises where any Borrower conducts its business and has
any rights of possession, including the premises legally described in Exhibit E
attached hereto.

 

“Reportable Event” means a reportable event (as defined in Section 4043 of
ERISA), other than an event for which the 30-day notice requirement under ERISA
has been waived in regulations issued by the Pension Benefit Guaranty
Corporation.

 

“Revolving Advance” has the meaning given in Section 2.1.

 

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“Revolving Note” means the Borrowers’ revolving promissory note, payable to the
order of the Lender in substantially the form of Exhibit A hereto and any note
or notes issued in substitution therefore or supplement thereto.

 

“Security Documents” means this Agreement, the Lockbox and Collection Account
Agreement, the Patent and Trademark Security Agreement and the Stock Pledge
Agreement and any other document delivered to the Lender from time to time to
secure the Obligations.

 

“Security Interest” has the meaning given in Section 3.1.

 

“Senior Management” means Edward J. Smith, Kirk A. Waldron, and Richard E.
Fitzgerald.

 

“SI” has the meaning specified in the preamble to this Agreement.

 

“Slow Moving Inventory” means Inventory not sold by any Borrower to a customer
within a period of eighteen months from the date Borrowers take possession
thereof and which is not supported by a customer contract in form and substance
satisfactory to the Lender, in its sole discretion.

 

“Slow Moving Inventory Reserve” means an amount equal to Seventy-Five Thousand
Dollars ($75,000).

 

“Special Account” means a specified cash collateral account maintained by a
financial institution acceptable to the Lender in connection with Letters of
Credit, as contemplated by Section 2.6.

 

“Stock Pledge Agreement” means any Stock Pledge Agreement executed by any Person
in the Lender’s favor with respect to the Obligations, as the same may be
amended, modified, supplemented or replaced from time to time.

 

“Subordination Agreement” means any Subordination Agreement executed by any
Person in the Lender’s favor, acknowledged by the Borrowers and accepted by the
Lender from time to time.

 

“Subsidiary” means any corporation of which more than 50% of the outstanding
shares of capital stock having general voting power under ordinary circumstances
to elect a majority of the board of Directors of such corporation, irrespective
of whether or not at the time stock of any other class or classes shall have or
might have voting power by reason of the happening of any contingency, is at the
time directly or indirectly owned by any Borrower, by any Borrower and one or
more other Subsidiaries, or by one or more other Subsidiaries.

 

“Technetics” means Technetics, Inc., a California corporation.

 

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“Term Advance” has the meaning specified in Section 2.9.

 

“Term Note” means the Borrower’s promissory note, payable to the order of the
Lender in substantially the form of Exhibit B hereto and any note or notes
issued in substitution therefor.

 

“Termination Date” means the earliest of (i) the Maturity Date, (ii) the date
the Borrowers terminate the Credit Facility, or (iii) the date the Lender
demands payment of the Obligations after an Event of Default pursuant to Section
7.2.

 

“Thailand Ltd.” Means SMTEK Thailand Ltd., a corporation organized under the
laws of Thailand.

 

“UCC” means the Uniform Commercial Code as in effect in the state designated in
Section 9.14 as the state whose laws shall govern this Agreement, or in any
other state whose laws are held to govern this Agreement or any portion hereof.

 

“Wells Fargo Bank” means Wells Fargo Bank, National Association.

 

Section 1.2                                      Other Definitional Terms; Rules
of Interpretation.  The words “hereof”, “herein” and “hereunder” and words of
similar import when used in this Agreement shall refer to this Agreement as a
whole and not to any particular provision of this Agreement.  All accounting
terms not otherwise defined herein have the meanings assigned to them in
accordance with GAAP.  All terms defined in the UCC and not otherwise defined
herein have the meanings assigned to them in the UCC.  References to Articles,
Sections, subsections, Exhibits, Schedules and the like, are to Articles,
Sections and subsections of, or Exhibits or Schedules attached to, this
Agreement unless otherwise expressly provided.  The words “include”, “includes”
and “including” shall be deemed to be followed by the phrase “without
limitation”.  Unless the context in which used herein otherwise clearly
requires, “or” has the inclusive meaning represented by the phrase “and/or”. 
Defined terms include in the singular number the plural and in the plural number
the singular.  Reference to any agreement (including the Loan Documents),
document or instrument means such agreement, document or instrument as amended
or modified and in effect from time to time in accordance with the terms thereof
(and, if applicable, in accordance with the terms hereof and the other Loan
Documents), except where otherwise explicitly provided, and reference to any
promissory note includes any promissory note which is an extension or renewal
thereof or a substitute or replacement therefor.  Reference to any law, rule,
regulation, order, decree, requirement, policy, guideline, directive or
interpretation means as amended, modified, codified, replaced or reenacted, in
whole or in part, and in effect on the determination date, including rules and
regulations promulgated thereunder.

 

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ARTICLE II

 

AMOUNT AND TERMS OF THE CREDIT FACILITY

 

Section 2.1                                      Revolving Advances.  The Lender
agrees, on the terms and subject to the conditions herein set forth, to make
advances to the Borrowers from time to time from the date all of the conditions
set forth in Section 4.1 and Section 4.2 are satisfied (the “Funding Date”) to
the Termination Date (the “Revolving Advances”).  The Lender shall have no
obligation to make a Revolving Advance to the extent the amount of the requested
Revolving Advance exceeds Availability.  The Borrowers’ obligation to pay the
Revolving Advances shall be further evidenced by the Revolving Note and shall be
secured by the Collateral.  Within the limits set forth in this Section 2.1, the
Borrowers may borrow, prepay pursuant to Section 2.16 and reborrow.

 

Section 2.2                                      Procedures for Requesting
Advances.  The Borrowers shall comply with the following procedures in
requesting Revolving Advances:

 

(a)                                  Type of Advances.  Each Advance shall be
funded as either a Floating Rate Advance or a LIBO Rate Advance, as the
Administrative Borrower shall specify in the related notice of borrowing or
notice of conversion pursuant to this Subsection (a) or Section 2.3(a), provided
that during Default Periods, no LIBO Rate Advances shall be made.  Floating Rate
Advances and LIBO Rate Advances may be outstanding at the same time.  Each
request for a LIBO Rate Advance shall be in an amount equal to $500,000 or a
higher integral multiple of $100,000.

 

(b)                                 Time for Requests.  The Administrative
Borrower shall request each Advance not later than 11:00 a.m., Los Angeles,
California time on the Banking Day which, in the case of a Floating Rate
Advance, is the date the Advance is to be made, and in the case of a LIBO Rate
Advance, is at least three (3) Banking Days before the date the Advance is to be
made.  Each such request shall be effective upon receipt by the Lender, shall be
in writing or by telephone or telecopy transmission, to be confirmed in writing
by the Administrative Borrower if so requested by the Lender (in the form of
Exhibit F), shall be by (i) an Officer of the Administrative Borrower; or (ii) a
person designated as the Administrative Borrower’s agent by an Officer of the
Administrative Borrower in a writing delivered to the Lender; or (iii) a person
whom the Lender reasonably believes to be an Officer of the Administrative
Borrower or such a designated agent, and shall specify whether the Advance shall
be a Floating Rate Advance or a LIBO Rate Advance and in the case of a LIBO Rate
Advance, shall specify the Interest Period to be applicable thereto.  The
Borrowers shall repay all Advances even if the Lender does not receive such
confirmation and even if the person requesting an Advance was not in fact
authorized to do so.  Any request for an Advance, whether written or telephonic,
shall be deemed to be a representation by the Borrowers that the conditions set
forth in Section 4.2 have been satisfied as of the time of the request.

 

(c)                                  Disbursement.  Upon fulfillment of the
applicable conditions set forth in Article IV, the Lender shall disburse the
proceeds of the requested Advance by crediting the

 

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same to the Administrative Borrower’s demand deposit account maintained with
Wells Fargo Bank unless the Lender and the Administrative Borrower shall agree
in writing to another manner of disbursement.

 

Section 2.3                                      LIBO Rate Advances.

 

(a)                                  Converting Floating Rate Advances to LIBO
Rate Advances; Procedures.  So long as no Default Period exists, the
Administrative Borrower may convert all or any part of any outstanding Floating
Rate Advance into a LIBO Rate Advance by giving notice to the Lender of such
conversion not later than 11:00 a.m., Los Angeles, California time, on a Banking
Day which is at least three (3) Banking Days prior to the date of the requested
conversion.  Each such notice shall be effective upon receipt by the Lender,
shall be in writing or by telephone or telecopy transmission, to be confirmed in
writing by the Administrative Borrower if so requested by the Lender (in the
form of Exhibit G), shall specify the date and amount of such conversion, the
total amount of the Floating Rate Advance to be so converted and the applicable
Interest Period.  Each such conversion shall occur on a Banking Day, and the
aggregate amount of Floating Rate Advances converted to LIBO Rate Advances shall
equal $500,000 or a higher integral multiple of $100,000.

 

(b)                                 Procedures at End of an Interest Period. 
Unless the Administrative Borrower requests a new LIBO Rate Advance in
accordance with the procedures set forth below, or the Borrowers prepay the
principal of an outstanding LIBO Rate Advance at the expiration of an Interest
Period, the Lender shall automatically and without request of the Administrative
Borrower convert each LIBO Rate Advance to a Floating Rate Advance on the last
day of the relevant Interest Period.  So long as no Default Period exists, the
Administrative Borrower may cause all or any part of any outstanding LIBO Rate
Advance to continue to bear interest at a LIBO Rate after the end of the then
applicable Interest Period by notifying the Lender not later than 11:00 a.m.,
Los Angeles, California time, on a Banking Day which is at least three (3)
Banking Days prior to the first day of the new Interest Period.  Each such
notice shall be in writing (in the form of Exhibit H) or by telephone or
telecopy transmission, to be confirmed in writing by the Administrative Borrower
if the Lender so requests, shall be effective when received by the Lender, and
shall specify the first day of the applicable Interest Period, the amount of the
expiring LIBO Rate Advance to be continued and the applicable Interest Period. 
Each new Interest Period shall begin on a Banking Day and the amount of each
Advance bearing a new LIBO Rate shall be equal to $500,000 or a higher integral
multiple of $100,000.

 

(c)                                  Setting and Notice of Rates.  The Lender
shall determine applicable LIBO Rate for each Interest Period between the
opening of business and 12:00 Noon, Los Angeles, California time, on the second
Banking Day preceding the beginning of such Interest Period, and shall notify
the Administrative Borrower thereof by telephone or in writing.  Each such
determination of the applicable LIBO Rate shall be conclusive and binding upon
the parties hereto, in the absence of demonstrable error.  The Lender, upon
written request of the Administrative Borrower, shall deliver to the
Administrative Borrower a statement showing the computations used by the Lender
in determining the applicable LIBO Rate.

 

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(d)                                 Funding Losses.  The Borrowers shall, upon
demand by the Lender to the Administrative Borrower (which demand shall be
accompanied by a statement setting forth the basis for the calculations of the
amount being claimed), indemnify the Lender against any loss or expense which
the Lender may have sustained or incurred (including any net loss or expense
incurred by reason of the liquidation or reemployment of deposits or other funds
acquired by the Lender to fund or maintain LIBO Rate Advances) or which the
Lender may be deemed to have sustained or incurred, as reasonably determined by
the Lender, due to (i) the Borrowers’ failure to make when due any payment in
connection with any LIBO Rate Advances, (ii) the Administrative Borrower’s
failure to borrow or convert any LIBO Rate Advances on a date specified therefor
in a notice thereof or (iii) any payment or prepayment of any LIBO Rate Advance
on a date other than the last day of the applicable Interest Period.  For this
purpose, all notices under Sections 2.2(a), 2.3(a) or 2.3(b) shall be deemed to
be irrevocable.

 

(e)                                  Right of Lender to Fund through Other
Offices.  The Lender may fulfill its agreements hereunder with respect to any
LIBO Rate Advance by causing a foreign branch or affiliate of the Lender to make
such LIBO Rate Advance; provided, that in such event the obligation of the
Borrowers to repay such LIBO Rate Advance shall nevertheless be to the Lender
and such LIBO Rate Advance shall be deemed held by the Lender for the account of
such branch or affiliate.

 

(f)                                    Discretion of Lender as to Manner of
Funding.  Notwithstanding any provision of this Agreement to the contrary, the
Lender may fund and maintain all or any part of its LIBO Rate Advances in any
manner it deems fit, it being understood, however, that for the purposes of this
Agreement (specifically including Subsection (d)) all determinations hereunder
shall be made as if the Lender had actually funded and maintained each LIBO Rate
Advance during each Interest Period for such LIBO Rate Advance through the
purchase of deposits having a maturity corresponding to such Interest Period and
bearing an interest rate equal to the appropriate LIBO Rate for such Interest
Period.

 

Section 2.4                                      Increased Costs; Capital
Adequacy; Funding Exceptions.

 

(a)                                  Increased Costs; Capital Adequacy.  If the
Lender determines at any time that its Return has been reduced as a result of
any Rule Change, such Lender may so notify the Administrative Borrower and
require the Borrowers, beginning fifteen (15) days after such notice, to pay it
the amount necessary to restore its Return to what it would have been had there
been no Rule Change; provided, however, that if the Lender requires the
Borrowers to pay it the amount necessary to restore its Return based on a Rule
Change relating to a Capital Adequacy Rule, Borrowers shall have the election to
(1) pay such amount, or (2) pay, perform, and satisfy all Obligations and
terminate the Credit Facility as provided herein without paying the termination
and prepayment fees otherwise due under Section 2.14(d).  For purposes of this
Section 2.4:

 

(i)                                     “Capital Adequacy Rule” means any law,
rule, regulation, guideline, directive, requirement or request regarding capital
adequacy, or the interpretation or administration thereof by any governmental or
regulatory authority, central bank or comparable

 

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agency, whether or not having the force of law, that applies to any Related
Lender, including rules requiring financial institutions to maintain total
capital in amounts based upon percentages of outstanding loans, binding loan
commitments and letters of credit.

 

(ii)                                  “Eurodollar Rule” means Regulation D of
the Board of Governors of the Federal Reserve System and any law, rule,
regulation, guideline, directive, requirement or request regarding (A) taxes,
duties or other charges, exemptions with respect to LIBO Rate Advances or the
Lender’s obligation to make LIBO Rate Advances, and (B) reserves imposed by the
Board of Governors of the Federal Reserve System (but excluding any reserve
included in the determination of the LIBO Rate), special deposits or similar
requirements against assets of, deposits with or for the account of, or credit
extended by, any Related Lender, and any other condition affecting the Lender’s
making, maintaining or funding of LIBO Rate Advances or its obligation to make
LIBO Rate Advances, or the interpretation or administration thereof by any
governmental or regulatory authority, central bank or comparable agency, whether
or not having the force of law, that applies to any Related Lender.

 

(iii)                               “L/C Rule” means any law, rule, regulation,
guideline, directive, requirement or request regarding letters of credit, or the
interpretation or administration thereof by any governmental or regulatory
authority, central bank or comparable agency, whether or not having the force of
law, that applies to any Related Lender, including those that impose taxes,
duties or other similar charges, or mandate reserves, special deposits or
similar requirements against assets of, deposits with or for the account of, or
credit extended by any Related Lender, on letters of credit.

 

(iv)                              “Related Lender” includes (but is not limited
to) the Lender, any parent of the Lender, any assignee of any interest of the
Lender hereunder and any participant in the Credit Facility.

 

(v)                                 “Return”, for any period, means the
percentage determined by dividing (i) the sum of interest and ongoing fees
earned by the Lender under this Agreement during such period, by (ii) the
average capital such Lender is required to maintain during such period as a
result of its being a party to this Agreement, as determined by such Lender
based upon its total capital requirements and a reasonable attribution formula
that takes account of the Capital Adequacy Rules, Eurodollar Rules and L/C Rules
then in effect, costs of issuing or maintaining any Advance or Letter of Credit
and amounts received or receivable under this Agreement or the Notes with
respect to any Advance or Letter of Credit.  Return may be calculated for each
calendar quarter and for the shorter period between the end of a calendar
quarter and the date of termination in whole of this Agreement.

 

(iv)                              “Rule Change” means any change in any Capital
Adequacy Rule, Eurodollar Rule, or L/C Rule occurring after the date of this
Agreement, or any change in the interpretation or administration thereof by any
governmental or regulatory authority, but the term does not include any changes
that at the Funding Date are scheduled to take place under the existing Capital
Adequacy Rules, Eurodollar Rules, or L/C Rules or any increases in the capital

 

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that the Lender is required to maintain to the extent that the increases are
required due to a regulatory authority’s assessment of that Lender’s financial
condition.

 

The initial notice sent by the Lender shall be sent as promptly as practicable
after such Lender learns that its Return has been reduced, shall include a
demand for payment of the amount necessary to restore such Lender’s Return for
the quarter in which the notice is sent, and shall state in reasonable detail
the cause for the reduction in its Return and its calculation of the amount of
such reduction.  Thereafter, such Lender may send a new notice during each
calendar quarter setting forth the calculation of the reduced Return for that
quarter and including a demand for payment of the amount necessary to restore
its Return for that quarter.  The Lender’s calculation in any such notice shall
be conclusive and binding absent demonstrable error.

 

(b)                                 Basis for Determining Interest Rate
Inadequate or Unfair.  If with respect to any Interest Period:

 

(i)                                     the Lender in its commercially
reasonable, good-faith judgment, determines that deposits in US dollars (in the
applicable amounts) are not being offered in the London interbank eurodollar
market for such Interest Period; or

 

(ii)                                  the Lender in its commercially reasonable,
good-faith judgment, otherwise determines that by reason of circumstances
affecting the London interbank eurodollar market adequate and reasonable means
do not exist for ascertaining the applicable LIBO Rate; or

 

(iii)                               the Lender in its commercially reasonable,
good-faith judgment, determines that the LIBO Rate will not adequately and
fairly reflect the cost to the Lender of funding any LIBO Rate Advance for such
Interest Period, or that the funding of LIBO Rate Advances has become
impracticable as a result of an event occurring after the date of this Agreement
which in the opinion of the Lender materially affects such LIBO Rate Advances;

 

then the Lender shall promptly notify the Administrative Borrower and (A) in the
event of any occurrence described in the foregoing clauses (i) and (ii), the
Administrative Borrower shall enter into good faith negotiations with the Lender
in order to determine an alternate method to determine the LIBO Rate, and during
the pendency of such negotiations with the Lender, the Lender shall be under no
obligation to make any new LIBO Rate Advances and (B) in the event of any
occurrence described in the foregoing clause (iii), for so long as such
circumstances shall continue, the Lender shall be under no obligation to make
any new LIBO Rate Advances.

 

(c)                                  Illegality.  If any Rule Change should make
it or, in the good faith judgment of the Lender, shall raise a substantial
question as to whether it is unlawful for the Lender to make, create, maintain
or fund LIBO Rate Advances, then (i) the Lender shall promptly notify the
Administrative Borrower, (ii) the obligation of the Lender to make, maintain or
convert into LIBO Rate Advances shall, upon the effectiveness of such event, be
suspended for the duration of such unlawfulness, and (iii) for the duration of
such unlawfulness, any notice

 

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by an Administrative Borrower pursuant to Section 2.2(a), 2.3Section 2.3(a) or
Section 2.3(b) requesting the Lender to make, continue making or convert into
LIBO Rate Advances shall be construed as a request to make or to continue making
Floating Rate Advances.

 

Section 2.5                                      Letters of Credit.

 

(a)                                  The Lender agrees, on the terms and subject
to the conditions herein set forth, to cause an Issuer to issue, from the
Funding Date to the Termination Date, one or more irrevocable standby or
documentary letters of credit (each, a “Letter of Credit”) for the Borrowers’
account by guaranteeing payment of the Borrowers’ obligations or being a
co-applicant.  The Lender shall have no obligation to cause an Issuer to issue
any Letter of Credit if the face amount of the Letter of Credit to be issued
would exceed the lesser of:

 

(i)                                     $0.00 less the L/C Amount, or

 

(ii)                                  Availability.

 

Each Letter of Credit, if any, shall be issued pursuant to a separate L/C
Application entered into between the Borrowers and the Lender for the benefit of
the Issuer, completed in a manner satisfactory to the Lender and the Issuer. 
The terms and conditions set forth in each such L/C Application shall supplement
the terms and conditions hereof, but if the terms of any such L/C Application
and the terms of this Agreement are inconsistent, the terms hereof shall
control.

 

(b)                                 No Letter of Credit shall be issued with an
expiry date later than the Termination Date in effect as of the date of
issuance.

 

(c)                                  Any request to cause an Issuer to issue a
Letter of Credit shall be deemed to be a representation by the Borrowers that
the conditions set forth in Section 4.2 have been satisfied as of the date of
the request.

 

(d)                                 For clarification, no Letter of Credit
facility is currently contemplated to be available at this time, however Lender
and Borrowers may amend this Agreement to provide for such a facility in the
future.

 

Section 2.6                                      Special Account.  If the Credit
Facility is terminated for any reason while any Letter of Credit is outstanding,
the Borrowers shall thereupon pay the Lender in immediately available funds for
deposit in the Special Account an amount equal to the L/C Amount.  The Special
Account shall be an interest bearing account maintained for the Lender by any
financial institution acceptable to the Lender.  Any interest earned on amounts
deposited in the Special Account shall be credited to the Special Account.  The
Lender may apply amounts on deposit in the Special Account at any time or from
time to time to the Obligations in the Lender’s sole discretion.  The Borrowers
may not withdraw any amounts on deposit in the Special Account as long as the
Lender maintains a security interest therein.  The Lender agrees to

 

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transfer any balance in the Special Account to the Borrowers when the Lender is
required to release its security interest in the Special Account under
applicable law.

 

Section 2.7                                      Payment of Amounts Drawn Under
Letters of Credit; Obligation of Reimbursement.  The Borrowers acknowledge that
the Lender, as co-applicant, will be liable to the Issuer for reimbursement of
any and all draws under Letters of Credit and for all other amounts required to
be paid under the applicable L/C Application.  Accordingly, the Borrowers shall
pay to the Lender any and all amounts required to be paid under the applicable
L/C Application, when and as required to be paid thereby, and the amounts
designated below, when and as designated:

 

(a)                                  The Borrowers shall pay to the Lender on
the day a draft is honored under any Letter of Credit a sum equal to all amounts
drawn under such Letter of Credit plus any and all reasonable charges and
expenses that the Issuer or the Lender may pay or incur relative to such draw
and the applicable L/C Application, plus interest on all such amounts, charges
and expenses as set forth below (the Borrowers’ obligation to pay all such
amounts is herein referred to as the “Obligation of Reimbursement”).

 

(b)                                 Whenever a draft is submitted under a Letter
of Credit, the Borrowers authorize the Lender to make a Revolving Advance in the
amount of the Obligation of Reimbursement and to apply the proceeds of such
Revolving Advance thereto.  Such Revolving Advance shall be repayable in
accordance with and be treated in all other respects as a Revolving Advance
hereunder.

 

(c)                                  If a draft is submitted under a Letter of
Credit when the Borrowers are unable, because a Default Period exists or for any
other reason, to obtain a Revolving Advance to pay the Obligation of
Reimbursement, the Borrowers shall pay to the Lender on demand to the
Administrative Borrower and in immediately available funds, the amount of the
Obligation of Reimbursement together with interest, accrued from the date of the
draft until payment in full at the Default Rate.  Notwithstanding the Borrowers’
inability to obtain a Revolving Advance for any reason, the Lender is
irrevocably authorized, in its sole discretion, to make a Revolving Advance in
an amount sufficient to discharge the Obligation of Reimbursement and all
accrued but unpaid interest thereon.

 

(d)                                 The Borrowers’ obligation to pay any
Revolving Advance made under this Section 2.7, shall be evidenced by the
Revolving Note and shall bear interest as provided in Section 2.13.

 

Section 2.8                                      Obligations Absolute.  The
Borrowers’ obligations arising under Section 2.7 shall be absolute,
unconditional and irrevocable, and shall be paid strictly in accordance with the
terms of Section 2.7, under all circumstances whatsoever, including (without
limitation) the following circumstances:

 

(a)                                  any lack of validity or enforceability of
any Letter of Credit or any other agreement or instrument relating to any Letter
of Credit (collectively the “Related Documents”);

 

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(b)                                 any amendment or waiver of or any consent to
departure from all or any of the Related Documents;

 

(c)                                  the existence of any claim, setoff, defense
or other right which the Borrowers may have at any time, against any beneficiary
or any transferee of any Letter of Credit (or any persons or entities for whom
any such beneficiary or any such transferee may be acting), or other person or
entity, whether in connection with this Agreement, the transactions contemplated
herein or in the Related Documents or any unrelated transactions;

 

(d)                                 any statement or any other document
presented under any Letter of Credit proving to be forged, fraudulent, invalid
or insufficient in any respect or any statement therein being untrue or
inaccurate in any respect whatsoever;

 

(e)                                  payment by or on behalf of the Issuer under
any Letter of Credit against presentation of a draft or certificate which does
not strictly comply with the terms of such Letter of Credit; or

 

(f)                                    any other circumstance or happening
whatsoever, whether or not similar to any of the foregoing.

 

Section 2.9                                      Term Advance.

 

(a)                                  The Lender agrees, subject to the terms and
conditions of this Agreement, to make a single advance to the Borrowers on the
Funding Date (the “Term Advance”) in an amount not exceeding the lesser of One
Million Dollars ($1,000,000) or one hundred percent (100%) of the net forced
liquidation value (as determined by an appraiser acceptable to the Lender) of
the Borrowers’ Eligible Equipment.  The Borrowers’ obligation to pay the Term
Advance shall be further evidenced by the Term Note and shall be secured by the
Collateral as provided in Article III.

 

(b)                                 Upon fulfillment of the applicable
conditions set forth in Article IV, the Lender shall deposit the proceeds of the
requested Term Advance by crediting the same to the Administrative Borrower’s
demand deposit account specified in Section 2.2(c) unless the Lender and the
Administrative Borrower shall agree in writing to another manner of
disbursement.

 

Section 2.10                                Capex Advances.

 

(a)                                  The Lender agrees, subject to the terms and
conditions of this Agreement, to make advances to the Borrowers from time to
time from the Funding Date to the date of the first anniversary of the Funding
Date (each a “CapEx Advance”).  The Lender shall have no obligation to make a
CapEx Advance if, after giving effect to such requested CapEx Advance: (a) the
aggregate amount of all CapEx Advances made would exceed $1,000,000, (b) the
Debt Service Coverage Ratio would be less than 1.20 to 1, or (c) the amount of
the requested CapEx Advance would exceed 80% of the purchase price (excluding
tax, freight and installation charges) for the new Equipment purchased by
Borrowers in anticipation of such CapEx

 

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Advance.  Lender may in its discretion, confirm the purchase price values of
such new Equipment by any means deemed appropriate by Lender.  The Borrowers’
obligation to pay the CapEx Advances shall be further evidenced by the CapEx
Note and shall be secured by the Collateral as provided in Article III.

 

(b)                                 The Borrowers shall comply with the
following procedures in requesting CapEx Advances:

 

(1)                                  The Administrative Borrower shall make each
request for a CapEx Advance to the Lender before 11:00 a.m. Los Angeles,
California time two (2) Banking Days before the day of the requested CapEx
Advance is to be made.  Requests may be made in writing or by telephone,
specifying the date of the requested CapEx Advance and the amount thereof.

 

(2)                                  Each CapEx Advance shall be in a minimum
amount of Sixty Five Thousand Dollars ($65,000).

 

(3)                                  The Administrative Borrower may only
request and Lender shall only provide CapEx Advances within twelve (12) months
after the Funding Date and no more than six (6) CapEx Advances shall be provided
by Lender in such period.

 

(4)                                  Each request for a CapEx Advance shall be
by an individual authorized pursuant to Section 2.2.

 

(5)                                  Each request for a CapEx Advance shall be
accompanied with an invoice for the Equipment purchased and reasonably
acceptable evidence that such Equipment was delivered to Borrowers’ Premises.

 

(c)                                  Upon fulfillment of the applicable
conditions set forth in Article IV, the Lender shall deposit the proceeds of the
requested CapEx Advance by crediting the same to the Administrative Borrower’s
demand deposit account specified in Section 2.2(c) unless the Lender and the
Administrative Borrower shall agree in writing to another manner of
disbursement.  Upon the Lender’s request, the Administrative Borrower shall
promptly confirm each telephonic request for a CapEx Advance by executing and
delivering an appropriate confirmation certificate to the Lender.  The Borrowers
shall be obligated to repay all CapEx Advances notwithstanding the Lender’s
failure to receive such confirmation and notwithstanding the fact that the
person requesting the same was not in fact authorized to do so.  Any request for
a CapEx Advance, whether written or telephonic, shall be deemed to be a
representation by the Borrowers that the conditions set forth in Section 4.2
have been satisfied as of the time of the request.

 

Section 2.11                                Payment of Term Advance and CapEx
Advances.

 

(a)                                  Term Advance.  The outstanding principal
balance of the Term Advance shall be due and payable as follows:

 

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(i)                                     In equal monthly installments of Twenty
Seven Thousand Seven Hundred Seventy Seven and 78/100 Dollars ($27,777.78),
beginning on October 31, 2003, and on the last day of each month thereafter with
a final installment due on the Maturity Date in an amount equal to the remaining
principle balance thereof.

 

(ii)                                  In addition, the Lender may obtain
annually, at the Borrowers’ expense, an appraisal, by an appraiser acceptable to
Lender, of the Eligible Equipment, provided, however, that the Lender may obtain
semi-annually, at its own expense, such an appraisal of the Eligible Equipment;
provided further, that during any Default Period, the Lender may obtain such an
appraisal of the Eligible Equipment at the Borrowers’ expense.  If at any time
the aggregate outstanding principal balance of the Term Advance exceeds one
hundred percent (100%) of the forced liquidation value of the Eligible Equipment
as shown on any such appraisal, at Lenders option (A) the Borrowers shall
immediately prepay the Term Advance in the amount of such excess, or (B) the
amount of all remaining scheduled principal payments with respect to the Term
Advance shall be increased by an amount necessary to fully amortize such excess
prior to the Maturity Date.

 

(iii)                               Notwithstanding the foregoing, on the
Termination Date, the entire unpaid principal balance of the Term Advance, and
all unpaid interest accrued thereon, shall in any event be due and payable.

 

(b)                                 CapEx Note.  The outstanding principal
balance of the CapEx Advances shall be due and payable as follows:

 

(i)                                     Beginning on March 31, 2004, and on the
last day of each month thereafter, in substantially equal monthly installments
equal to an amount sufficient to fully amortize the principal balance of the
CapEx Advances made during the period beginning on the Funding Date and ending
on March 18, 2004, over an assumed term of thirty six (36) months; and beginning
on September 30, 2004, and on the last day of each month thereafter, in
substantially equal monthly installments equal to an amount sufficient to fully
amortize the principal balance of the CapEx Advances made during the period
beginning on March 19, 2004 and ending on the first anniversary of the Funding
Date, over an assumed term of thirty six (36) months.

 

(ii)                                  On the Termination Date, the entire unpaid
principal balance of the CapEx Advances, and all unpaid interest accrued
thereon, shall in any event be due and payable.

 

Section 2.12                                Inventory Appraisals.  The Lender
may from time to time obtain at its own expense an appraisal of Inventory by an
appraiser acceptable to the Lender in its sole discretion; provided, however,
that during any Default Period, the reasonable costs of such appraisals shall be
at the Borrowers’ expense.

 

Section 2.13                                Interest; Margin; Minimum Interest
Charge; Default Interest; Participations; Clearance Days; Usury.

 

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(a)                                  Notes.  Except as set forth in Subsections
(d) and (g), the outstanding principal balance of the Notes shall bear interest
at the Floating Rate.

 

(b)                                 Margins.  The Margins through and including
the first adjustment occurring as specified below shall be one (1.00) percentage
point for Advances that are Floating Rate Advances and three and three-quarters
of one (3.75) percentage points for Advances that are LIBO Rate Advances.  Upon
Lender’s timely receipt and satisfactory review of Borrowers’ financial
statements and compliance certificates required to be delivered under Section
6.1(a) hereof for its fiscal year end June 30, 2004, the Margins shall be
reduced (effective thirty (30) days after the receipt of such financial
statements and compliance certificates) by (i) one-quarter of one (0.25)
percentage point if Borrowers’ Net Income for such year equals or exceeds Two
Million Dollars ($2,000,000); and (ii) one-half of one (0.50) percentage point
if Borrowers’ Net Income for such year equals or exceeds Three Million Dollars
($3,000,000); provided however, that no reduction in the Margins shall take
place if at the time of such reduction, a Default exists or a Default Period is
in effect; provided, further, that if any financial statements of Borrowers are
at any time restated or corrected in such a way that a reduction in the Margins
would not have been made as set forth above, the Margins and the interest
payable under this Agreement shall immediately be re-calculated as if such
reduction had never taken effect.

 

(c)                                  Minimum Interest Charge.  Notwithstanding
the interest payable pursuant to Subsection (a), the Borrowers shall pay to the
Lender interest of not less than Fifty Thousand Dollars ($50,000) per quarter
(the “Minimum Interest Charge”) during the term of this Agreement, and the
Borrowers shall pay any deficiency between the Minimum Interest Charge and the
amount of interest paid or assessed under Subsection (a) during the prior
quarter on the first day of each quarter and on the Termination Date, provided,
however, that if the Termination Date falls on a date that is not on a quarter
end, the Minimum Interest Charge shall be prated from the most recent quarter
end.

 

(d)                                 Default Interest Rate.  At any time during
any Default Period, in the Lender’s sole discretion and without waiving any of
its other rights and remedies, the Lender from time to time, the principal of
the Advances outstanding from time to time shall bear interest at the Default
Rate, effective for periods designated by the Lender from time to time during
that Default Period.

 

(e)                                  Clearance Days.  Notwithstanding Section
2.16(b)(ii), interest at the interest rate applicable under this Section 2.13
shall accrue on the amount of all payments (even if in the form of immediately
available federal funds) for one (1) day for clearance.

 

(f)                                    Participations.  If any Person shall
acquire a participation in the Advances or the Obligation of Reimbursement, the
Borrowers shall be obligated to the Lender to pay the full amount of all
interest calculated under this Section 2.13, along with all other fees, charges
and other amounts due under this Agreement, regardless if such Person elects to
accept interest with respect to its participation at a lower rate than that
calculated under this Section 2.13, or otherwise elects to accept less than its
prorata share of such fees, charges and other amounts due under this Agreement.

 

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(g)                                 Usury.  In any event no rate change shall be
put into effect which would result in a rate greater than the highest rate
permitted by law.  Notwithstanding anything to the contrary contained in any
Loan Document, all agreements which either now are or which shall become
agreements between the Borrowers and the Lender are hereby limited so that in no
contingency or event whatsoever shall the total liability for payments in the
nature of interest, additional interest and other charges exceed the applicable
limits imposed by any applicable usury laws.  If any payments in the nature of
interest, additional interest and other charges made under any Loan Document are
held to be in excess of the limits imposed by any applicable usury laws, it is
agreed that any such amount held to be in excess shall be considered payment of
principal hereunder, and the indebtedness evidenced hereby shall be reduced by
such amount so that the total liability for payments in the nature of interest,
additional interest and other charges shall not exceed the applicable limits
imposed by any applicable usury laws, in compliance with the desires of the
Borrowers and the Lender.  This provision shall never be superseded or waived
and shall control every other provision of the Loan Documents and all agreements
between the Borrowers and the Lender, or their successors and assigns.

 

Section 2.14                                Fees.

 

(a)                                  Intentionally Omitted.

 

(b)                                 Unused Line Fee.  For the purposes of this
Section 2.14, “Unused Amount” means the Maximum Line reduced by outstanding
Revolving Advances.  The Borrowers agree to pay to the Lender an unused line fee
at the rate of one quarter of one percent (.25%) per annum on the average daily
Unused Amount from the date of this Agreement to and including the Termination
Date, due and payable quarterly in arrears on the first day of each calendar
quarter and on the Termination Date.

 

(c)                                  Audit Fees.  The Borrowers shall pay the
Lender, on demand, audit fees in connection with any audits or inspections
conducted by or on behalf of the Lender of any Collateral or the Borrowers’
operations or business at the rates established from time to time by the Lender
as its audit fees (which fees are currently $90.00 per hour per auditor),
together with all actual out-of-pocket costs and expenses incurred in conducting
any such audit or inspection provided, however, that except during Default
Periods, the Borrowers shall not have to reimburse the Lender for such fees,
costs and expenses to the extent that relate to more than one (1) such audit per
quarter.

 

(d)                                 Termination Fees.  If the Credit Facility is
terminated (i) by the Lender during a Default Period that begins before a
Maturity Date, (ii) by the Borrowers (A) as of a date other than a Maturity Date
or (B) as of a Maturity Date but without the Lender having received written
notice of such termination at least forty-five (45) days before such Maturity
Date, the Borrowers shall pay to the Lender a fee in an amount equal to a
percentage of the Aggregate Credit Limit as follows: (A) three percent (3.0%) if
the termination occurs on or before the first anniversary of the Funding Date;
(B) two percent (2.0%) if the termination occurs after the first anniversary of
the Funding Date but on or before the second anniversary of the Funding Date;

 

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and (C) one percent (1.0%) if the termination occurs after the second
anniversary of the Funding Date.

 

(e)                                  Waiver of Termination Fees.  The Borrowers
will not be required to pay the termination and prepayment fees otherwise due
under subsection (d) if such termination is made because of refinancing by Wells
Fargo Bank or any of its affiliates.

 

(f)                                    Other Fees.  The Lender may from time to
time, upon five (5) days prior notice to the Administrative Borrower during a
Default Period, charge additional fees for Revolving Advances made and Letters
of Credit issued in excess of Availability, for late delivery of reports, in
lieu of imposing interest at the Default Rate, and for other reasons.  The
Administrative Borrower’s request for a Revolving Advance or the issuance of a
Letter of Credit at any time after such notice is given and such five (5) day
period has elapsed shall constitute the Borrowers’ agreement to pay the fees
described in such notice.

 

Section 2.15                                Time for Interest Payments; Payment
on Non-Banking Days; Computation of Interest and Fees

 

(a)                                  Time For Interest Payments.  Interest
accruing on all Advances shall be due and payable in arrears on the last day of
each month and on the Termination Date.

 

(b)                                 Payment on Non-Banking Days.  Whenever any
payment to be made hereunder shall be stated to be due on a day which is not a
Banking Day, such payment may be made on the next succeeding Banking Day, and
such extension of time shall in such case be included in the computation of
interest on the Advances or the fees hereunder, as the case may be.

 

(c)                                  Computation of Interest and Fees.  Interest
accruing on the outstanding principal balance of the Advances and fees hereunder
outstanding from time to time shall be computed on the basis of actual number of
days elapsed in a year of three hundred sixty (360) days.

 

Section 2.16                                Lockbox; Collateral Account;
Application of Payments.

 

(a)                                  Lockbox and Collateral Account.

 

(i)                                     The Borrowers shall instruct all account
debtors to pay all Accounts directly to the Lockbox.  If, notwithstanding such
instructions, any Borrower receives any payments on Accounts, such Borrower
shall deposit such payments into the Collateral Account.  The Borrowers shall
also deposit all other cash proceeds of Collateral directly to the Collateral
Account.  Until so deposited, the Borrowers shall hold all such payments and
cash proceeds in trust for and as the property of the Lender and shall not
commingle such property with any of its other funds or property.  All deposits
in the Collateral Account shall constitute proceeds of Collateral and shall not
constitute payment of the Obligations.

 

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(ii)                                  All items deposited in the Collateral
Account shall be subject to final payment.  If any such item is returned
uncollected, the Borrowers will immediately pay the Lender, or, for items
deposited in the Collateral Account, the bank maintaining such account, the
amount of that item, or such bank at its discretion may charge any uncollected
item to the applicable Borrower’s commercial account or other account.  The
Borrowers shall be liable as an endorser on all items deposited in the
Collateral Account, whether or not in fact endorsed by any Borrower.

 

(b)                                 Application of Payments.

 

(i)                                     The Borrowers may, from time to time, in
accordance with the Lockbox and Collection Account Agreement, cause funds in the
Collateral Account to be transferred to the Lender’s general account for payment
of the Obligations.  Except as provided in the preceding sentence, amounts
deposited in the Collateral Account shall not be subject to withdrawal by the
Borrowers, except after full payment and discharge of all Obligations.

 

(ii)                                  All payments to the Lender shall be made
in immediately available funds and shall be applied to the Obligations upon
receipt by the Lender.  Funds received from the Collateral Account shall be
deemed to be immediately available.  The Lender may hold all payments not
constituting immediately available funds for three (3) additional days before
applying them to the Obligations.

 

Section 2.17                                Voluntary Prepayment; Termination of
the Credit Facility by the Borrower.  Except as otherwise provided herein, the
Borrowers may prepay the Advances in whole at any time or from time to time in
part.  The Borrowers may terminate the Credit Facility at any time if they
(i) gives the Lender at least 30 days’ prior written notice and (ii) pay the
termination fee in accordance with Section 2.14(d).  Subject to termination of
the Credit Facility and payment and performance of all Obligations, the Lender
shall, at the Borrowers’ expense, release or terminate the Security Interest and
the Security Documents to which the Borrowers are entitled by law.

 

Section 2.18                                Mandatory Prepayment.  Without
notice or demand, if the sum of the outstanding principal balance of the
Revolving Advances plus the L/C Amount shall at any time exceed the Borrowing
Base, the Borrower shall (i) first, immediately prepay the Revolving Advances to
the extent necessary to eliminate such excess; and (ii) if prepayment in full of
the Revolving Advances is insufficient to eliminate such excess, pay to the
Lender in immediately available funds for deposit in the Special Account an
amount equal to the remaining excess.  Any payment received by the Lender under
this Section 2.18 or under Section 2.17 may be applied to the Obligations, in
such order and in such amounts as the Lender, in its discretion, may from time
to time determine.

 

Section 2.19                                Revolving Advances to Pay
Obligations.  Notwithstanding anything in Section 2.1, the Lender may, in its
discretion at any time or from time to time, without the Borrowers’ request and
even if the conditions set forth in Section 4.2 would not be

 

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satisfied, make a Revolving Advance in an amount equal to the portion of the
Obligations from time to time due and payable.

 

Section 2.20                                Use of Proceeds.  The Borrowers
shall use the proceeds of Advances and each Letter of Credit to (i) repay, in
full, the outstanding principal, accrued interest, and accrued fees and expenses
owing to Existing Lender, (ii) pay all trade payable and other obligations of
each Borrower which are more than sixty (60) days past the due date as of such
time, (iv) eliminate the book overdraft of each Borrower, (iv) pay the
transactions costs and fees associated with this Credit Facility; and (v) for
ordinary working capital purposes.

 

Section 2.21                                Liability Records.  The Lender may
maintain from time to time, at its discretion, records as to the Obligations. 
All entries made on any such record shall be presumed correct until the
Borrowers establish the contrary.  Upon the Lender’s demand, the Borrowers will
admit and certify in writing the exact principal balance of the Obligations that
the Borrowers then assert to be outstanding.  Any billing statement or
accounting rendered by the Lender shall be conclusive and fully binding on the
Borrowers unless the Administrative Borrower gives the Lender specific written
notice of exception within 30 days after receipt.

 

ARTICLE III

 

SECURITY INTEREST; OCCUPANCY; SETOFF

 

Section 3.1                                      Grant of Security Interest. 
Each Borrower hereby pledges, assigns and grants to the Lender a lien and
security interest (collectively referred to as the “Security Interest”) in the
Collateral, as security for the payment and performance of the Obligations. 
Upon request by the Lender, each Borrower will grant the Lender a security
interest in all commercial tort claims it may have against any Person.

 

Section 3.2                                      Notification of Account Debtors
and Other Obligors.  If a Default Period exists, the Lender may at any time
(whether or not a Default Period then exists) notify any account debtor or other
Person obligated to pay the amount due that such right to payment has been
assigned or transferred to the Lender for security and shall be paid directly to
the Lender.  The applicable Borrower will join in giving such notice if the
Lender so requests.  At any time while such Default Period is ongoing, the
Lender may, but need not, in the Lender’s name or in any Borrower’s name,
(a) demand, sue for, collect or receive any money or property at any time
payable or receivable on account of, or securing, any such right to payment, or
grant any extension to, make any compromise or settlement with or otherwise
agree to waive, modify, amend or change the obligations (including collateral
obligations) of any such account debtor or other obligor; and (b) as each
Borrower’s agent and attorney-in-fact, notify the United States Postal Service
to change the address for delivery of the Borrowers’ mail to any address
designated by the Lender, otherwise intercept the Borrowers’ mail, and receive,
open and dispose of the Borrowers’ mail, applying all Collateral as permitted
under this Agreement and holding all other mail for the Borrower’s account or
forwarding such mail to the Borrower’s last known address.

 

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Section 3.3                                      Assignment of Insurance.  As
additional security for the payment and performance of the Obligations, each
Borrower hereby assigns to the Lender any and all monies (including proceeds of
insurance and refunds of unearned premiums) due or to become due under, and all
other rights of such Borrower with respect to, any and all policies of insurance
now or at any time hereafter covering the Collateral or any evidence thereof or
any business records or valuable papers pertaining thereto, and each Borrower
hereby directs the issuer of any such policy to pay all such monies resulting
from casualty to the Collateral directly to the Lender to the extent of the
outstanding Advances.  At any time, whether or not a Default Period then exists,
the Lender may (but need not), in the Lender’s name or in any Borrower’s name,
execute and deliver proof of claim, receive all such monies, endorse checks and
other instruments representing payment of such monies, and adjust, litigate,
compromise or release any claim against the issuer of any such policy.

 

Section 3.4                                      Occupancy.

 

(a)                                  Subject to the terms and conditions of any
leases or other occupancy agreements relating to the Premises, the Borrowers
hereby irrevocably grant to the Lender the right to take exclusive possession of
Borrowers’ right, title and interest to the Premises at any time during a
Default Period.

 

(b)                                 Subject to the terms and conditions of any
leases or other occupancy agreements relating to the Premises, the Lender may
use the Premises only to hold, process, manufacture, sell, use, store,
liquidate, realize upon or otherwise dispose of goods that are Collateral and
for other purposes that the Lender may in good faith deem to be related or
incidental purposes.

 

(c)                                  The Lender’s right to hold the Premises
shall cease and terminate upon the earlier of (i) payment in full and discharge
of all Obligations and termination of the Credit Facility, and (ii) final sale
or disposition of all goods constituting Collateral and delivery of all such
goods to purchasers.

 

(d)                                 The Lender shall not be obligated to pay or
account for any rent or other compensation for the possession, occupancy or use
of any of the Premises; provided, however, that if the Lender does pay or
account for any rent or other compensation for the possession, occupancy or use
of any of the Premises, the Borrowers shall reimburse the Lender promptly for
the full amount thereof.  In addition, the Borrowers will pay, or reimburse the
Lender for, all taxes, fees, duties, imposts, charges and expenses at any time
incurred by or imposed upon the Lender by reason of the execution, delivery,
existence, recordation, performance or enforcement of this Agreement or the
provisions of this Section 3.4.

 

Section 3.5                                      License.  Without limiting the
generality of any other Security Document, each Borrower hereby grants to the
Lender a non-exclusive, worldwide and royalty-free license to use or otherwise
exploit all Intellectual Property Rights of such Borrower for the purpose of:
(a) completing the manufacture of any in-process materials during any Default
Period so that such materials become saleable Inventory, all in accordance with
the same quality

 

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standards previously adopted by such Borrower for its own manufacturing and
subject to such Borrower’s reasonable exercise of quality control; and
(b) selling, leasing or otherwise disposing of any or all Collateral during any
Default Period.

 

Section 3.6                                      Financing Statement.  Each
Borrower authorizes the Lender to file from time to time where permitted by law,
such financing statements against collateral described as “all personal
property” as the Lender deems necessary or useful to perfect the Security
Interest.  A carbon, photographic or other reproduction of this Agreement or of
any financing statements signed by the Borrower is sufficient as a financing
statement and may be filed as a financing statement in any state to perfect the
security interests granted hereby.  For this purpose, the following information
is set forth:

 

Name and address of Debtors:

SMTEK, Inc.

200 Science Drive

Moorpark, California 93021-2003

Organizational Identification No.   C1370815

 

 

Jolt Technology, Inc.

200 Science Drive

Moorpark, California 93021-2003

Organizational Identification No.  2825509

 

 

SMTEK New England, Inc.

200 Science Drive

Moorpark, California 93021-2003

Organizational Identification No.  N/A

 

 

SMTEK Santa Clara, Inc.

200 Science Drive

Moorpark, California 93021-2003

Organizational Identification No.   C2360901

 

Name and address of Secured Party:

 

Wells Fargo Business Credit, Inc.

245 South Los Robles Avenue

Suite 700

Pasadena, California  91101

 

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Section 3.7                                      Setoff.  The Lender may at any
time or from time to time, at its sole discretion and without demand and without
notice to anyone, setoff any liability owed to any Borrower by the Lender,
whether or not due, against any Obligation, whether or not due.  In addition,
each other Person holding a participating interest in any Obligations shall have
the right to appropriate or setoff any deposit or other liability then owed by
such Person to any Borrower, whether or not due, and apply the same to the
payment of said participating interest, as fully as if such Person had lent
directly to such Borrower the amount of such participating interest.

 

Section 3.8                                      Collateral.  This Agreement
does not contemplate a sale of accounts, contract rights or chattel paper, and,
as provided by law, the Borrowers are entitled to any surplus and shall remain
liable for any deficiency.  The Lender’s duty of care with respect to Collateral
in its possession (as imposed by law) shall be deemed fulfilled if it exercises
reasonable care in physically keeping such Collateral, or in the case of
Collateral in the custody or possession of a bailee or other third person,
exercises reasonable care in the selection of the bailee or other third person,
and the Lender need not otherwise preserve, protect, insure or care for any
Collateral.  The Lender shall not be obligated to preserve any rights the
Borrower may have against prior parties, to realize on the Collateral at all or
in any particular manner or order or to apply any cash proceeds of the
Collateral in any particular order of application.  The Lender has no obligation
to clean-up or otherwise prepare the Collateral for sale.  Each Borrower waives
any right it may have to require the Lender to pursue any third person for any
of the Obligations.

 

ARTICLE IV

 

CONDITIONS OF LENDING

 

Section 4.1                                      Conditions Precedent to the
Initial Advances and Letter of Credit.  The Lender’s obligation to make the
initial Advances or to cause any Letters of Credit to be issued shall be subject
to the condition precedent that the Lender shall have received all of the
following, each in form and substance satisfactory to the Lender:

 

(a)                                  This Agreement, properly executed by the
Borrowers.

 

(b)                                 The Notes, properly executed by the
Borrowers.

 

(c)                                  A true and correct copy of any and all
leases pursuant to which any Borrower is leasing the Premises, together with a
landlord’s disclaimer and consent with respect to each such lease.

 

(d)                                 A true and correct copy of any and all
mortgages pursuant to which any Borrower has mortgaged the Premises, together
with a mortgagee’s disclaimer and consent with respect to each such mortgage.

 

(e)                                  A true and correct copy of any and all
agreements pursuant to which any Borrower’s property is in the possession of any
Person other than the Borrowers, together with, in the case of any goods held by
such Person for resale, (i) a consignee’s acknowledgment and

 

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waiver of Liens, (ii) UCC financing statements sufficient to protect the
Borrowers’ and the Lender’s interests in such goods, and (iii) UCC searches
showing that no other secured party has filed a financing statement against such
Person and covering property similar to the Borrowers’ other than the Borrowers,
or if there exists any such secured party, evidence that each such secured party
has received notice from the Borrowers and the Lender sufficient to protect the
Borrowers’ and the Lender’s interests in the Borrowers’ goods from any claim by
such secured party.

 

(f)                                    An acknowledgment and waiver of Liens
from each warehouse in which any Borrower are storing Inventory.

 

(g)                                 A true and correct copy of any and all
agreements pursuant to which any Borrower’s property is in the possession of any
Person other than the Borrowers, together with, (i) an acknowledgment and waiver
of Liens from each subcontractor who has possession of the Borrowers’ goods from
time to time, (ii) UCC financing statements sufficient to protect the Borrowers’
and the Lender’s interests in such goods, and (iii) UCC searches showing that no
other secured party has filed a financing statement covering such Person’s
property other than the Borrowers, or if there exists any such secured party,
evidence that each such secured party has received notice from the Borrowers and
the Lender sufficient to protect the Borrowers’ and the Lender’s interests in
the Borrowers’ goods from any claim by such secured party.

 

(h)                                 The Lockbox and Collection Account
Agreements, each properly executed by the respective Borrower party thereto and
Wells Fargo Bank.

 

(i)                                     Control agreements, properly executed by
the applicable Borrower and each bank at which such Borrower maintains deposit
accounts.

 

(j)                                     The Patent and Trademark Security
Agreement, properly executed by SI.

 

(k)                                  The Pay-Off Letter.

 

(l)                                     Current searches of appropriate filing
offices showing that (i) no Liens have been filed and remain in effect against
the Borrowers or Guarantor except Permitted Liens or Liens held by Persons who
have agreed in writing that upon receipt of proceeds of the initial Advances,
they will satisfy, release or terminate such Liens in a manner satisfactory to
the Lender, and (ii) the Lender has duly filed all financing statements
necessary to perfect the Security Interest, to the extent the Security Interest
is capable of being perfected by filing, and UCC-1 Fixture Filings with respect
to each of the Permitted Inventory Locations.

 

(m)                               A certificate of each Borrower’s and
Guarantor’s Secretary or Assistant Secretary certifying that attached to such
certificate are (i) the resolutions of such Borrower’s or Guarantor’s Directors
and, if required, Owners, authorizing the execution, delivery and performance of
the Loan Documents, (ii) true, correct and complete copies of such Borrower’s or
Guarantor’s Constituent Documents, and (iii) examples of the signatures of such
Borrower’s or Guarantor’s Officers or agents authorized to execute and deliver
the Loan Documents and other

 

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instruments, agreements and certificates, including Advance requests, on such
Borrower’s or Guarantor’s behalf.

 

(n)                                 A current certificate issued by the
Secretary of State of each Borrower’s and each Guarantor’s State of
organization, certifying that such Borrower or Guarantor is in compliance with
all applicable organizational requirements of such State.

 

(o)                                 Evidence that each Borrower and each
Guarantor is duly licensed or qualified to transact business in all
jurisdictions where the character of the property owned or leased or the nature
of the business transacted by it makes such licensing or qualification
necessary.

 

(p)                                 A certificate of an Officer of each Borrower
confirming, in his personal capacity, the representations and warranties set
forth in Article V.

 

(q)                                 An opinion of counsel to the Borrowers and
Guarantor, addressed to the Lender.

 

(r)                                    Certificates of the insurance required
hereunder, with all hazard insurance containing a lender’s loss payable
endorsement in the Lender’s favor and with all liability insurance naming the
Lender as an additional insured.

 

(s)                                  A Guaranty, properly executed by each
Guarantor, pursuant to which, among other things, each Guarantor unconditionally
guarantees the full and prompt payment of all Obligations.

 

(t)                                    Payment of the fees and commissions due
under Section 2.14 through the date of the initial Advance or Letter of Credit
and expenses incurred by the Lender through such date and required to be paid by
the Borrowers under Section 9.6, including all legal expenses incurred through
the date of this Agreement.

 

(u)                                 Evidence that after giving effect to the
initial Revolving Advance and Term Advance, and after satisfaction of all
closing costs in connection herewith, Borrowers’ Excess Availability shall not
be less than One Million Seven Hundred Fifty Thousand Dollars ($1,500,000).

 

(v)                                 Satisfactory review by the Lender and its
counsel of all documentation pertaining to the Borrowers’ $2,400,000 tax
reimbursement obligation to the United States Internal Revenue Service,
including a settlement agreement with monthly payments not to exceed Fifty
Thousand Dollars ($50,000), all in form and substance satisfactory to the Lender
in its sole discretion.

 

(w)                               Evidence that there has been no material
adverse change, as determined by the Lender, in the financial condition or
business of any Borrower or Guarantor, nor any material decline, as determined
by the Lender, in the market value of any Collateral or a substantial or

 

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material portion of the assets of any Borrower since the date of the latest
financial statements of the Borrowers delivered to the Lender prior to the
Funding Date.

 

(x)                                   Evidence that the Borrowers have opened
bank accounts of a type mutually acceptable to the Borrowers and the Lender,
including, without limitation, the Collateral Account and any other account
contemplated by the Collection Account Agreement or the Lockbox Agreement.

 

(y)                                 completion of background checks on Senior
Management, the results of which are satisfactory to the Lender.

 

(z)                                   Satisfactory review by Lender and its
counsel of all of each Borrower’s material contracts, including contracts with
supplies and customers.

 

(aa)                            Satisfactory review by Lender and its counsel of
all documents and issues related to the environmental reserve.

 

(bb)                          Satisfactory review by Lender’s counsel of the
Borrowers’ legal and corporate structure and the structure of the Credit
Facility.

 

(cc)                            the initial Advances shall have been made within
sixty (60) days of the completion by Lender of its audit of the Collateral.

 

(dd)                          Satisfactory review by Lender and its counsel of
any agreements between Borrowers and/or Guarantors and Avnet, Inc. and Arrow
Electronics, Inc..

 

(ee)                            Such other documents and conditions as the
Lender in its sole discretion may require.

 

Section 4.2                                      Conditions Precedent to All
Advances and Letters of Credit The Lender’s obligation to make each Advance and
to cause each Letter of Credit to be issued shall be subject to the further
conditions precedent that:

 

(a)                                  the representations and warranties
contained in Article V are correct on and as of the date of such Advance or
issuance of a Letter of Credit as though made on and as of such date, except to
the extent that such representations and warranties relate solely to an earlier
date;  no material adverse change, as determined by the Lender, shall have
occurred in the financial condition or business of any Borrower nor any material
decline, as determined by the Lender, in the market value of any Collateral or a
substantial or material portion of the assets of any Borrower since the date of
the latest financial statements delivered to the Lender prior to the Funding
Date; and

 

(b)                                 no event has occurred and is continuing, or
would result from such Advance or issuance of a Letter of Credit which
constitutes a Default or an Event of Default.

 

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ARTICLE V

 

REPRESENTATIONS AND WARRANTIES

 

The Borrowers represent and warrant to the Lender as follows:

 

Section 5.1                                      Existence and Power; Name;
Chief Executive Office; Inventory and Equipment Locations; Federal Employer
Identification Number.  Each Borrower is a corporation, duly organized, validly
existing and in good standing under the laws of the State of its incorporation
and is duly licensed or qualified to transact business in all jurisdictions
where the character of the property owned or leased or the nature of the
business transacted by it makes such licensing or qualification necessary.  Each
Borrower has all requisite power and authority to conduct its business, to own
its properties and to execute and deliver, and to perform all of its obligations
under, the Loan Documents.  During its existence, each Borrower has done
business solely under the names set forth in Schedule 5.1 and all of the
Borrowers’ records relating to their business or the Collateral are kept at that
location.  Each Borrower’s chief executive office and principal place of
business is located at the address set forth in Schedule 5.1.  All Inventory and
Equipment is located at that location or at one of the other locations listed in
Schedule 5.1.  Each Borrower’s federal employer identification number is
correctly set forth in Section 3.6.

 

Section 5.2                                      Capitalization.  Schedule 5.2
constitutes a correct and complete list of all ownership interests of each
Borrower and rights to acquire ownership interests including the record holder,
number of interests and percentage interests on a fully diluted basis, and an
organizational chart showing the ownership structure of Borrowers, Guarantor and
their respective Subsidiaries.

 

Section 5.3                                      Authorization of Borrowing; No
Conflict as to Law or Agreements.  To the best of each Borrower’s knowledge,
after reasonable inquiry, the execution, delivery and performance by the
Borrowers of the Loan Documents and the borrowings from time to time hereunder
have been duly authorized by all necessary corporate action and do not and will
not (i) require any consent or approval of any Borrower’s Owners; (ii) require
any authorization, consent or approval by, or registration, declaration or
filing with, or notice to, any governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, or any third party,
except such authorization, consent, approval, registration, declaration, filing
or notice as has been obtained, accomplished or given prior to the date hereof;
(iii) violate any provision of any law, rule or regulation (including
Regulation X of the Board of Governors of the Federal Reserve System) or of any
order, writ, injunction or decree presently in effect having applicability to
any Borrower or of any Borrower’s Constituent Documents; (iv) result in a breach
of or constitute a default under any indenture or loan or credit agreement or
any other material agreement, lease or instrument to which any Borrower is a
party or by which it or its properties may be bound or affected; or (v) result
in, or require, the creation or imposition of any Lien (other than the Security
Interest) upon or with respect to any of the properties now owned or hereafter
acquired by any Borrower.

 

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Section 5.4                                      Legal Agreements.  To the best
of each Borrower’s knowledge, after reasonable inquiry, this Agreement
constitutes and, upon due execution by each Borrower, the other Loan Documents
will constitute the legal, valid and binding obligations of such Borrower,
enforceable against such Borrower in accordance with their respective terms.

 

Section 5.5                                      Subsidiaries.  Except as set
forth in Schedule 5.5 hereto, no Borrower or Guarantor has any Subsidiaries.

 

Section 5.6                                      Financial Condition; No Adverse
Change.  Parent and the Borrowers have furnished to the Lender their audited
financial statements (on a consolidated and consolidating basis) for their
fiscal year ended June 30, 2002, unaudited financial statements for the fiscal
year ended June 30, 2003, and unaudited financial statements for the
fiscal-year-to-date period ended July 31, 2003, and those statements fairly
present the Borrowers’ financial condition on the dates thereof and the results
of its operations and cash flows for the periods then ended and were prepared in
accordance with GAAP.  Since the date of the most recent financial statements,
there has been no change in any Borrower’s business, properties or condition
(financial or otherwise) which has had a Material Adverse Effect.

 

Section 5.7                                      Litigation.  Except as set
forth on Schedule 5.6, there are no actions, suits or proceedings pending or, to
each Borrower’s knowledge, threatened against or affecting any Borrower or any
of its Affiliates or the properties of any Borrower or any of its Affiliates
before any court or governmental department, commission, board, bureau, agency
or instrumentality, domestic or foreign, which, if determined adversely to such
Borrower or any of its Affiliates, would have a Material Adverse Effect.

 

Section 5.8                                      Regulation U.  No Borrower is
engaged in the business of extending credit for the purpose of purchasing or
carrying margin stock (within the meaning of Regulation U of the Board of
Governors of the Federal Reserve System), and no part of the proceeds of any
Advance will be used to purchase or carry any margin stock or to extend credit
to others for the purpose of purchasing or carrying any margin stock.

 

Section 5.9                                      Taxes.  To the best of each
Borrower’s knowledge, after reasonable inquiry, the Borrowers and their
Affiliates have paid or caused to be paid to the proper authorities when due all
federal, state and local taxes required to be withheld by each of them.  The
Borrowers and their Affiliates have filed all federal, state and local tax
returns which to the knowledge of the Officers of each Borrower or any
Affiliate, as the case may be, are required to be filed, and each Borrower and
its Affiliates have paid or caused to be paid to the respective taxing
authorities all taxes as shown on said returns or on any assessment received by
any of them to the extent such taxes have become due.

 

Section 5.10                                Titles and Liens.  The Borrowers
have good and absolute title to all Collateral free and clear of all Liens other
than Permitted Liens.  No financing statement naming any Borrower as debtor is
on file in any office except to perfect only Permitted Liens.

 

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Section 5.11                                Intellectual Property Rights.

 

(a)                                  Owned Intellectual Property.  Schedule 5.11
is a complete list of all patents, applications for patents, trademarks,
applications for trademarks, service marks, applications for service marks, mask
works, trade dress and copyrights for which any Borrower is the registered owner
(the “Owned Intellectual Property”).  Except as disclosed on Schedule 5.11,
(i) the Borrowers own the Owned Intellectual Property free and clear of all
restrictions (including covenants not to sue a third party), court orders,
injunctions, decrees, writs or Liens, whether by written agreement or otherwise,
(ii) no Person other than the Borrowers own or have been granted any right in
the Owned Intellectual Property, (iii) all Owned Intellectual Property is valid,
subsisting and enforceable and (iv) the Borrowers have taken all commercially
reasonable action necessary to maintain and protect the Owned Intellectual
Property.

 

(b)                                 Agreements with Employees and Contractors. 
To the best of each Borrower’s knowledge, after reasonable inquiry, each
Borrower has entered into a legally enforceable agreement with each of its
employees and subcontractors obligating each such Person to assign to such
Borrower, without any additional compensation, any Intellectual Property Rights
created, discovered or invented by such Person in the course of such Person’s
employment or engagement with such Borrower (except to the extent prohibited by
law), and further requiring such Person to cooperate with such Borrower, without
any additional compensation, in connection with securing and enforcing any
Intellectual Property Rights therein; provided, however, that the foregoing
shall not apply with respect to employees and subcontractors whose job
descriptions are of the type such that no such assignments are reasonably
foreseeable.

 

(c)                                  Intellectual Property Rights Licensed from
Others.  Schedule 5.11 is a complete list of all agreements under which each
Borrower has licensed Intellectual Property Rights from another Person
(“Licensed Intellectual Property”) other than readily available, non-negotiated
licenses of computer software and other intellectual property used solely for
performing accounting, word processing and similar administrative tasks
(“Off-the-shelf Software”) and a summary of any ongoing payments such Borrower
is obligated to make with respect thereto.  Except as disclosed on Schedule 5.11
and in written agreements copies of which have been given to the Lender, the
Borrowers’ licenses to use the Licensed Intellectual Property are free and clear
of all restrictions, Liens, court orders, injunctions, decrees, or writs,
whether by written agreement or otherwise.  Except as disclosed on Schedule
5.11, the Borrowers are not obligated or under any liability whatsoever to make
any payments of a material nature by way of royalties, fees or otherwise to any
owner of, licensor of, or other claimant to, any Intellectual Property Rights.

 

(d)                                 Other Intellectual Property Needed for
Business.  Except for Off-the-shelf Software and as disclosed on Schedule 5.11,
the Owned Intellectual Property and the Licensed Intellectual Property
constitute all Intellectual Property Rights used or necessary to conduct the
Borrowers’ business as it is presently conducted or as the Borrowers reasonably
foresee conducting it.

 

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(e)                                  Infringement.  Except as disclosed on
Schedule 5.11, no Borrower has knowledge of, and has not received any written
claim or notice alleging, any Infringement of another Person’s Intellectual
Property Rights (including any written claim that the Borrowers must license or
refrain from using the Intellectual Property Rights of any third party) nor, to
any Borrower’s knowledge, is there any threatened claim or any reasonable basis
for any such claim.

 

Section 5.12                                Plans.  Except as disclosed to the
Lender in writing prior to the date hereof, no Borrower nor any ERISA Affiliate
(i) maintains or has maintained any Pension Plan, (ii) contributes or has
contributed to any Multiemployer Plan or (iii) provides or has provided
post-retirement medical or insurance benefits with respect to employees or
former employees (other than benefits required under Section 601 of ERISA,
Section 4980B of the IRC or applicable state law).  No Borrower nor any ERISA
Affiliate has received any notice or has any knowledge to the effect that it is
not in full compliance with any of the requirements of ERISA, the IRC or
applicable state law with respect to any Plan.  No Reportable Event exists in
connection with any Pension Plan.  Each Plan which is intended to qualify under
the IRC is so qualified, and no fact or circumstance exists which may have an
adverse effect on the Plan’s tax-qualified status.  No Borrower nor any ERISA
Affiliate has (i) any accumulated funding deficiency (as defined in Section 302
of ERISA and Section 412 of the IRC) under any Plan, whether or not waived,
(ii) any liability under Section 4201 or 4243 of ERISA for any withdrawal,
partial withdrawal, reorganization or other event under any Multiemployer Plan
or (iii) any liability or knowledge of any facts or circumstances which could
result in any liability to the Pension Benefit Guaranty Corporation, the
Internal Revenue Service, the Department of Labor or any participant in
connection with any Plan (other than routine claims for benefits under the
Plan).

 

Section 5.13                                Default.  Each Borrower is in
compliance with all provisions of all agreements, instruments, decrees and
orders to which it is a party or by which it or its property is bound or
affected, the breach or default of which could have a Material Adverse Effect.

 

Section 5.14                                Environmental Matters.  Except as
set forth on Schedule 5.14:

 

(a)                                  To each Borrower’s best knowledge, there
are not present in, on or under the Premises any Hazardous Substances in such
form or quantity as to create any material liability or obligation for either
the Borrowers or the Lender under common law of any jurisdiction or under any
Environmental Law, and no Hazardous Substances have ever been stored, buried,
spilled, leaked, discharged, emitted or released in, on or under the Premises in
such a way as to create any such material liability.

 

(b)                                 To each Borrower’s best knowledge, no
Borrower has disposed of Hazardous Substances in such a manner as to create any
material liability under any Environmental Law.

 

(c)                                  There are not and there never have been any
requests, claims, notices, investigations, demands, administrative proceedings,
hearings or litigation, relating in any way to the Premises or any Borrower,
alleging material liability under, violation of, or noncompliance

 

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with any Environmental Law or any license, permit or other authorization issued
pursuant thereto.  To each Borrower’s best knowledge, no such matter is
threatened or impending.

 

(d)                                 To each Borrower’s best knowledge, the
Borrowers’ businesses are and have in the past always been conducted in
accordance with all Environmental Laws and all licenses, permits and other
authorizations required pursuant to any Environmental Law and necessary for the
lawful and efficient operation of such businesses are in each Borrower’s
possession and are in full force and effect.  No permit required under any
Environmental Law is scheduled to expire within 12 months and there is no threat
that any such permit will be withdrawn, terminated, limited or materially
changed.

 

(e)                                  To each Borrower’s best knowledge, the
Premises are not and never have been listed on the National Priorities List, the
Comprehensive Environmental Response, Compensation and Liability Information
System or any similar federal, state or local list, schedule, log, inventory or
database.

 

(f)                                    The Borrowers have delivered to Lender
all environmental assessments, audits, reports, permits, licenses and other
documents describing or relating in any way to the Premises or Borrowers’
businesses.

 

Section 5.15                                Submissions to Lender.  All
financial and other information provided to the Lender by or on behalf of each
Borrower in connection with the Borrowers’ request for the credit facilities
contemplated hereby is (i) true and correct in all material respects, (ii) does
not omit any material fact necessary to make such information not misleading
and, (iii) as to projections, valuations or proforma financial statements,
present a good faith opinion as to such projections, valuations and proforma
condition and results.

 

Section 5.16                                Financing Statements.  Each Borrower
has authorized the filing of financing statements sufficient when filed to
perfect the Security Interest and the other security interests created by the
Security Documents.  When such financing statements are filed in the offices
noted therein, the Lender will have a valid and perfected security interest in
all Collateral which is capable of being perfected by filing financing
statements.  None of the Collateral is or will become a fixture on real estate,
unless a sufficient fixture filing is in effect with respect thereto.

 

Section 5.17                                Rights to Payment.  Each right to
payment and each instrument, document, chattel paper and other agreement
constituting or evidencing Collateral is (or, in the case of all future
Collateral, will be when arising or issued) the valid, genuine and legally
enforceable obligation, subject to no defense, setoff or counterclaim, of the
account debtor or other obligor named therein or in the Borrowers’ records
pertaining thereto as being obligated to pay such obligation.

 

Section 5.18                                Financial Solvency.  Both before and
after giving effect to all of the transactions contemplated in the Loan
Documents, no Borrower or any of its Affiliates:

 

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(a)                                  was or will be insolvent, as that term is
used and defined in Section 101(32) of the United States Bankruptcy Code and
Section 2 of the Uniform Fraudulent Transfer Act;

 

(b)                                 has unreasonably small capital or is engaged
or about to engage in a business or a transaction for which any remaining assets
of such Borrower or such Affiliate are unreasonably small;

 

(c)                                  by executing, delivering or performing its
obligations under the Loan Documents or other documents to which it is a party
or by taking any action with respect thereto, intends to, nor believes that it
will, incur debts beyond its ability to pay them as they mature;

 

(d)                                 by executing, delivering or performing its
obligations under the Loan Documents or other documents to which it is a party
or by taking any action with respect thereto, intends to hinder, delay or
defraud either its present or future creditors; and

 

(e)                                  at this time contemplates filing a petition
in bankruptcy or for an arrangement or reorganization or similar proceeding
under any law any jurisdiction, nor, to the best knowledge of such Borrower, is
the subject of any actual, pending or threatened bankruptcy, insolvency or
similar proceedings under any law of any jurisdiction.

 

Section 5.19                                Bank Accounts.  All of the deposit
accounts, investment accounts or other accounts in the name of or used by any
Borrower maintained at any bank or other financial institution are set forth on
Schedule 5.19 hereto.

 

ARTICLE VI

 

COVENANTS

 

So long as the Obligations shall remain unpaid, or the Credit Facility shall
remain outstanding, the Borrowers will comply with the following requirements,
unless the Lender shall otherwise consent in writing:

 

Section 6.1                                      Reporting Requirements.  The
Borrowers will deliver, or cause to be delivered, to the Lender each of the
following, which shall be in form and detail acceptable to the Lender:

 

(a)                                  Annual Financial Statements.  As soon as
available, and in any event within ninety (90) days after the end of each fiscal
year of the Borrowers, the Administrative Borrower will deliver, or cause to be
delivered, to the Lender, Parent’s audited financial statements with the
unqualified opinion of independent certified public accountants selected by the
Borrowers and acceptable to the Lender, which annual financial statements shall
include the Borrowers’ balance sheet as at the end of such fiscal year and the
related statements of the Borrowers’ income, retained earnings and cash flows
for the fiscal year then ended, prepared on a consolidating and consolidated
basis to include Parent and any Affiliates, all in reasonable

 

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detail and prepared in accordance with GAAP, together with (i) copies of all
management letters prepared by such accountants; (ii) a report signed by such
accountants stating that in making the investigations necessary for said opinion
they obtained no knowledge, except as specifically stated, of any Default or
Event of Default and all relevant facts in reasonable detail to evidence, and
the computations as to, whether or not the Borrowers are in compliance with the
Financial Covenants; and (iii) a certificate of each Borrower’s chief financial
officer stating that such financial statements have been prepared in accordance
with GAAP, fairly represent the such Borrower’s financial position and the
results of its operations, and whether or not such officer has knowledge of the
occurrence of any Default or Event of Default and, if so, stating in reasonable
detail the facts with respect thereto.

 

(b)                                 Monthly Financial Statements.  As soon as
available and in any event within twenty five (25) days after the end of each
month, the Administrative Borrower will deliver to the Lender an
unaudited/internal balance sheet and statements of income and retained earnings
of Parent as at the end of and for such month and for the year to date period
then ended, prepared on a consolidating and consolidated basis to include Parent
and any Affiliates, in reasonable detail and stating in comparative form the
figures for the corresponding date and periods in the previous year, all
prepared in accordance with GAAP, subject to year-end audit adjustments and
fairly represent such Persons’ financial position and the results of their
operations; and accompanied by a certificate of each Borrower’s chief financial
officer, substantially in the form of Exhibit D hereto stating (i) that such
financial statements have been prepared in accordance with GAAP, subject to
year-end audit adjustments, (ii) whether or not such officer has knowledge of
the occurrence of any Default or Event of Default not theretofore reported and
remedied and, if so, stating in reasonable detail the facts with respect
thereto, and (iii) all relevant facts in reasonable detail to evidence, and the
computations as to, whether or not the Borrowers are in compliance with the
Financial Covenants.

 

(c)                                  Collateral Reports.  (i) Within fifteen
(15) days after the end of each month or more frequently if the Lender so
requires, the Administrative Borrower will deliver to the Lender agings of the
Accounts and each Borrower’s accounts payable, an Inventory certification
report, and a calculation of the Accounts, Eligible Accounts, Inventory,
Eligible Inventory, Eligible Slow Moving Inventory and Eligible Equipment as at
the end of such month or shorter time period; (ii) weekly, by the third day of
each week (or more frequent), the Administrative Borrower will deliver to Lender
sales assignments and credit memos/adjustments; and (iii) every day the
Administrative Borrower will deliver to the Lender reports each Borrower’s cash
collections for the previous Business Day.

 

(d)                                 Projections.  At least thirty (30) days
before the beginning of each fiscal year of the Borrowers, the Administrative
Borrower will deliver to the Lender the projected balance sheets and income
statements for each month of such year, each in reasonable detail, representing
the Borrowers’ good faith projections and certified by each Borrower’s chief
financial officer as being the most accurate projections available and identical
to the projections used by the Borrowers for internal planning purposes,
together with a statement of underlying

 

45

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assumptions and such supporting schedules and information as the Lender may in
its discretion require.

 

(e)                                  Internal Revenue Service Payments.  Within
fifteen (15) days of each month end, Administrative Borrower will deliver to the
Lender confirmation satisfactory to the Lender, in its sole discretion, of
payment as scheduled pursuant to the Installment Agreement with the United
States Internal Revenue Service.

 

(f)                                    Litigation.  Immediately after the
commencement thereof, the Borrowers will deliver to the Lender notice in writing
of all litigation and of all proceedings before any governmental or regulatory
agency affecting any Borrower (i) of the type described in Section 5.14(c) or
(ii) which seek a monetary recovery against any Borrower in excess of One
Hundred Thousand Dollars ($100,000).

 

(g)                                 Defaults.  As promptly as practicable (but
in any event not later than five (5) business days) after an Officer of any
Borrower obtains knowledge of the occurrence of any Default or Event of Default,
the Borrowers will deliver to the Lender notice of such occurrence, together
with a detailed statement by a responsible Officer of any Borrower of the steps
being taken by the Borrowers to cure the effect thereof.

 

(h)                                 Plans.  As soon as possible, and in any
event within 30 days after any Borrower knows or has reason to know that any
Reportable Event with respect to any Pension Plan has occurred, the
Administrative Borrower will deliver to the Lender a statement of each
Borrower’s chief financial officer setting forth details as to such Reportable
Event and the action which the Borrowers propose to take with respect thereto,
together with a copy of the notice of such Reportable Event to the Pension
Benefit Guaranty Corporation.  As soon as possible, and in any event within ten
(10) days after any Borrower fails to make any quarterly contribution required
with respect to any Pension Plan under Section 412(m) of the IRC, the
Administrative Borrower will deliver to the Lender a statement of each
Borrower’s chief financial officer setting forth details as to such failure and
the action which the Borrowers propose to take with respect thereto, together
with a copy of any notice of such failure required to be provided to the Pension
Benefit Guaranty Corporation.  As soon as possible, and in any event within ten
(10) days after any Borrower knows or has reason to know that it has or is
reasonably expected to have any liability under Section 4201 or 4243 of ERISA
for any withdrawal, partial withdrawal, reorganization or other event under any
Multiemployer Plan, the Borrowers will deliver to the Lender a statement of each
Borrower’s chief financial officer setting forth details as to such liability
and the action which the Borrowers propose to take with respect thereto.

 

(i)                                     Disputes.  Promptly upon knowledge
thereof, the Borrowers will deliver to the Lender notice of (i) any disputes or
claims by any Borrower’s customers exceeding Fifty Thousand Dollars ($50,000)
individually or Two Hundred Fifty Thousand Dollars ($250,000) in the aggregate
during any fiscal year; (ii) credit memos; (iii) any goods returned to or
recovered by the Borrowers.

 

46

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(j)                                     Officers and Directors.  Promptly upon
knowledge thereof, the Borrowers will deliver to the Lender notice of any change
in the persons constituting any Borrower’s Officers and Directors.

 

(k)                                  Collateral.  Promptly upon knowledge
thereof, the Borrowers will deliver to the Lender notice of any loss of or
material damage to any Collateral or of any substantial adverse change in any
Collateral or the prospect of payment thereof.

 

(l)                                     Commercial Tort Claims.  Promptly upon
knowledge thereof, the Borrowers will deliver to the Lender notice of any
commercial tort claims it may bring against any Person, including the name and
address of each defendant, a summary of the facts, an estimate of the Borrowers’
damages, copies of any complaint or demand letter submitted by the Borrowers,
and such other information as the Lender may request.

 

(m)                               Intellectual Property.

 

(i)                                     The Borrowers will give the Lender
thirty (30) days prior written notice of its intent to acquire material
Intellectual Property Rights; except for transfers permitted under Section 6.18,
the Borrowers will give the Lender 30 days prior written notice of its intent to
dispose of material Intellectual Property Rights; and upon request, shall
provide the Lender with copies of all applicable documents and agreements.

 

(ii)                                  Promptly upon knowledge thereof, the
Borrowers will deliver to the Lender notice of (A) any Infringement of its
Intellectual Property Rights by others, (B) claims that any Borrower is
Infringing another Person’s Intellectual Property Rights and (C) any threatened
cancellation, termination or material limitation of its Intellectual Property
Rights.

 

(iii)                               Promptly upon receipt, the Borrowers will
give the Lender copies of all registrations and filings with respect to its
Intellectual Property Rights.

 

(n)                                 Reports to Owners.  Promptly upon their
distribution, the Borrowers will deliver to the Lender copies of all financial
statements, reports and proxy statements which the Borrowers shall have sent to
its Owners.

 

(o)                                 SEC Filings.  Promptly after the sending or
filing thereof, the Borrowers will deliver to the Lender copies of all regular
and periodic reports which the Borrowers shall file with the Securities and
Exchange Commission or any national securities exchange.

 

(p)                                 Violations of Law.  Promptly upon knowledge
thereof, the Borrowers will deliver to the Lender notice of any Borrower’s
violation of any law, rule or regulation, the non-compliance with which could
materially and adversely affect the Borrowers’ business or their financial
condition.

 

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(q)                                 Other Reports.  From time to time, with
reasonable promptness, the Borrowers will deliver to the Lender any and all
receivables schedules, collection reports, deposit records, equipment schedules,
copies of invoices to account debtors, shipment documents and delivery receipts
for goods sold, and such other material, reports, records or information as the
Lender may request.

 

Section 6.2                                      Financial Covenants.

 

(a)                                  Minimum Debt Service Coverage Ratio.  The
Borrowers will maintain, during each period described below, their Debt Service
Coverage Ratio, determined as at the end of each month, at not less than 1.20 to
1.00.

 

(b)                                 Minimum Book Net Worth.  The Borrowers will
maintain, during each month described below, their Book Net Worth, determined as
at the end of each month, at an amount not less than the amount set forth
opposite such period:

 

Period

 

Minimum Book Net Worth

 

July 2003

 

$

300,000

 

August 2003

 

$

400,000

 

September 2003

 

$

1,200,000

 

October 2003

 

$

1,050,000

 

November 2003

 

$

1,050,000

 

December 2003

 

$

1,350,000

 

January 2004

 

$

1,200,000

 

February 2004

 

$

1,200,000

 

March 2004

 

$

1,765,000

 

April 2004

 

$

1,615,000

 

May 2004

 

$

1,615,000

 

June 2004 and every month thereafter

 

$

2,255,000

 

 

(c)                                  Minimum Net Income.  The Borrowers will
achieve Net Income measured quarterly on a year-to-date basis, of not less than
the amount set forth opposite such period:

 

Quarter Ending

 

Minimum Net Income

 

September 2003

 

$

315,000

 

December 2003

 

$

150,000

 

March 2004

 

$

415,000

 

June 2004

 

$

490,000

 

September 2004, and every quarter thereafter

 

$

200,000

 

 

(d)                                 Capital Expenditures.  The Borrowers will
not incur or contract to incur financed or unfinanced Capital Expenditures of
more than Two Million Three Hundred

 

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Thousand Dollars ($2,300,000) in the aggregate for the fiscal year ending June
30, 2004, or more than such amounts as determined by the Lender in its sole
discretion during any subsequent fiscal year.

 

(e)                                  New Covenants.  On or after receipt of the
projections to be provided by Administrative Borrower each fiscal year pursuant
to Section 6.1(d), Lender shall set new covenant levels for Sections 6.2(a)
through 6.2(d) for periods after such date.  The new covenant levels will be
based on the Borrowers’ projections for such periods received by Lender pursuant
to Section 6.1(d) and shall be no less stringent than the present levels.

 

Section 6.3                                      Permitted Liens; Financing
Statements.

 

(a)                                  No Borrower will create, incur or suffer to
exist any Lien upon or of any of its assets, now owned or hereafter acquired, to
secure any indebtedness; excluding, however, from the operation of the
foregoing, the following (collectively, “Permitted Liens”):

 

(i)                                     in the case of any of the Borrowers’
property which is not Collateral, covenants, restrictions, rights, easements and
minor irregularities in title which do not materially interfere with the
Borrowers’ business or operations as presently conducted;

 

(ii)                                  Liens in existence on the date hereof and
listed in Schedule 6.3 hereto, securing indebtedness for borrowed money
permitted under Section 6.4;

 

(iii)                               the Security Interest and Liens created by
the Security Documents; and

 

(b)                                 No Borrower will amend any financing
statements in favor of the Lender except as permitted by law.  Any authorization
by the Lender to any Person to amend financing statements in favor of the Lender
shall be in writing.

 

Section 6.4                                      Indebtedness.  No Borrower will
incur, create, assume or permit to exist any indebtedness or liability on
account of deposits or advances or any indebtedness for borrowed money or
letters of credit issued on any Borrower’s behalf, or any other indebtedness or
liability evidenced by notes, bonds, debentures or similar obligations, except:

 

(a)                                  indebtedness arising hereunder;

 

(b)                                 indebtedness of the Borrowers in existence
on the date hereof and listed in Schedule 6.4 hereto; and

 

(c)                                  indebtedness relating to Permitted Liens..

 

Section 6.5                                      Guaranties.  No Borrower will
assume, guarantee, endorse or otherwise become directly or contingently liable
in connection with any obligations of any other Person, except:

 

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(a)                                  the endorsement of negotiable instruments
by the Borrowers for deposit or collection or similar transactions in the
ordinary course of business; and

 

(b)                                 guaranties, endorsements and other direct or
contingent liabilities in connection with the obligations of other Persons, in
existence on the date hereof and listed in Schedule 6.4 hereto.

 

Section 6.6                                      Investments and Subsidiaries. 
No Borrower will purchase or hold beneficially any stock or other securities or
evidences of indebtedness of, make or permit to exist any loans or advances to,
or make any investment or acquire any interest whatsoever in, any other Person,
including any partnership or joint venture, except:

 

(a)                                  investments in direct obligations of the
United States of America or any agency or instrumentality thereof whose
obligations constitute full faith and credit obligations of the United States of
America having a maturity of one year or less, commercial paper issued by U.S.
corporations rated “A-1” or “A-2” by Standard & Poors Corporation or “P-1” or
“P-2” by Moody’s Investors Service or certificates of deposit or bankers’
acceptances having a maturity of one year or less issued by members of the
Federal Reserve System having deposits in excess of $100,000,000 (which
certificates of deposit or bankers’ acceptances are fully insured by the Federal
Deposit Insurance Corporation);

 

(b)                                 travel advances or loans to any Borrower’s
Officers and employees not exceeding at any one time an aggregate of One Hundred
Thousand Dollars ($100,000);

 

(c)                                  advances in the form of progress payments,
prepaid rent not exceeding three (3) months or security deposits;

 

(d)                                 current investments in the Subsidiaries in
existence on the date hereof and listed in Schedule 5.5 hereto; and

 

(e)                                  Permitted Operating Expenses.

 

Section 6.7                                      Dividends and Distributions. 
No Borrower will declare or pay any dividends (other than dividends payable
solely in stock of the Borrowers) on any class of its stock or make any payment
on account of the purchase, redemption or other retirement of any shares of such
stock or make any distribution in respect thereof, either directly or
indirectly; provided, however, so long as no Default exists or would exist as a
result thereof, Borrowers may make dividends on each outstanding share of Series
A Preferred Stock of Parent held by The Gene Haas Trust DTD 3-3-99 at the rate
of 9% per annum of the price paid for such stock.

 

Section 6.8                                      Intentionally Omitted.

 

Section 6.9                                      Transactions with Affiliates. 
No Borrower shall, directly or indirectly, (a) purchase, acquire or lease any
property from, or sell, transfer or lease any property to, any officer,
director, agent or other person affiliated with such Borrower, except in the

 

50

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ordinary course of and pursuant to the reasonable requirements of such
Borrower’s business and upon fair and reasonable terms no less favorable to such
Borrower than such Borrower would obtain in a comparable arm’s length
transaction with an unaffiliated person or (b) make any payments of management,
consulting or other fees for management or similar services, or of any Debt
owing to any officer, employee, shareholder, director or other Affiliate of such
Borrower except reasonable compensation to officers, employees and directors for
services rendered to such Borrower in the ordinary course of business.

 

Section 6.10                                Books and Records; Inspection and
Examination.  Each Borrower will keep accurate books of record and account for
themselves pertaining to the Collateral and pertaining to the Borrowers’
business and financial condition and such other matters as the Lender may from
time to time request in which true and complete entries will be made in
accordance with GAAP and, upon the Lender’s request, will permit any officer,
employee, attorney or accountant for the Lender to audit, review, make extracts
from or copy any and all company and financial books and records of the
Borrowers at all times during ordinary business hours, to send and discuss with
account debtors and other obligors requests for verification of amounts owed to
the Borrowers, and to discuss the Borrowers’ affairs with any of their
Directors, Officers, employees or agents.  Each Borrower hereby irrevocably
authorizes all accountants and third parties to disclose and deliver to Lender,
at the Borrowers’ expense, all financial information, books and records, work
papers, management reports and other information in their possession regarding
the Borrowers.  Each Borrower will permit the Lender, or its employees,
accountants, attorneys or agents, to examine and inspect any Collateral or any
other property of the Borrowers at any time during ordinary business hours.

 

Section 6.11                                Account Verification.  The Lender
may at any time and from time to time send or require the Borrowers to send
requests for verification of accounts or notices of assignment to account
debtors and other obligors.  The Lender may also at any time and from time to
time telephone account debtors and other obligors to verify accounts.

 

Section 6.12                                Compliance with Laws.

 

(a)                                  Each Borrower will (i) comply with the
requirements of applicable laws and regulations, the non-compliance with which
would materially and adversely affect its business or its financial condition
and (ii) use and keep the Collateral, and require that others use and keep the
Collateral, only for lawful purposes, without violation of any federal, state or
local law, statute or ordinance.

 

(b)                                 Without limiting the foregoing undertakings,
each Borrower specifically agrees that it will comply with all applicable
Environmental Laws and obtain and comply with all permits, licenses and similar
approvals required by any Environmental Laws, and will not generate, use,
transport, treat, store or dispose of any Hazardous Substances in such a manner
as to create any material liability or obligation under the common law of any
jurisdiction or any Environmental Law.

 

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Section 6.13                                Payment of Taxes and Other Claims. 
Each Borrower will pay or discharge, when due, (a) all taxes, assessments and
governmental charges levied or imposed upon it or upon its income or profits,
upon any properties belonging to it (including the Collateral) or upon or
against the creation, perfection or continuance of the Security Interest, prior
to the date on which penalties attach thereto, (b) all federal, state and local
taxes required to be withheld by it, and (c) all lawful claims for labor,
materials and supplies which, if unpaid, might by law become a Lien upon any
properties of such Borrower; provided, that no Borrower shall not be required to
pay any such tax, assessment, charge or claim whose amount, applicability or
validity is being contested in good faith by appropriate proceedings and, if
deemed commercially reasonably necessary by the Lender, for which proper
reserves have been made.

 

Section 6.14                                Maintenance of Properties.

 

(a)                                  The Borrowers will keep and maintain the
Collateral and all of their other properties necessary or useful in its business
in good condition, repair and working order (normal wear and tear excepted) and
will from time to time replace or repair any worn, defective or broken parts;
provided, however, that nothing in this Section 6.14 shall prevent any Borrower
from discontinuing the operation and maintenance of any of its properties if
such discontinuance is, in the Borrowers’ judgment, desirable in the conduct of
the Borrowers’ business and not disadvantageous in any material respect to the
Lender.  The Borrowers will take all commercially reasonable steps necessary to
protect and maintain their Intellectual Property Rights.

 

(b)                                 The Borrowers will defend the Collateral
against all Liens, claims or demands of all Persons (other than the Lender)
claiming the Collateral or any interest therein.  The Borrowers will keep all
Collateral free and clear of all Liens except Permitted Liens.  The Borrowers
will take all commercially reasonable steps necessary to prosecute any Person
Infringing its Intellectual Property Rights and to defend itself against any
Person accusing it of Infringing any Person’s Intellectual Property Rights.

 

Section 6.15                                Insurance.  The Borrowers will
obtain and at all times maintain insurance with insurers believed by the
Borrowers to be responsible and reputable, in such amounts and against such
risks as may from time to time be required by the Lender, but in all events in
such amounts and against such risks as is usually carried by companies engaged
in similar business and owning similar properties in the same general areas in
which the Borrowers operate.  Without limiting the generality of the foregoing,
the Borrowers will at all times maintain business interruption insurance
including coverage for force majeure and keep all tangible Collateral insured
against risks of fire (including so-called extended coverage), theft, collision
(for Collateral consisting of motor vehicles) and such other risks and in such
amounts as the Lender may reasonably request, with any loss payable to the
Lender to the extent of its interest, and all policies of such insurance shall
contain a lender’s loss payable endorsement for the Lender’s benefit.  All
policies of liability insurance required hereunder shall name the Lender as an
additional insured.

 

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Section 6.16                                Preservation of Existence.  The
Borrowers will preserve and maintain their existence and all of their rights,
privileges and franchises necessary or desirable in the normal conduct of their
business and shall conduct their business in an orderly, efficient and regular
manner.

 

Section 6.17                                Delivery of Instruments, etc.  Upon
request by the Lender, the Borrowers will promptly deliver to the Lender in
pledge all instruments, documents and chattel paper constituting Collateral,
duly endorsed or assigned by the Borrowers.

 

Section 6.18                                Sale or Transfer of Assets;
Suspension of Business Operations.  The Borrowers will not sell, lease, assign,
transfer or otherwise dispose of (i) the stock of any Subsidiary, (ii) all or a
substantial part of their assets, or (iii) any Collateral or any interest
therein (whether in one transaction or in a series of transactions) to any other
Person other than the sale of Inventory in the ordinary course of business and
will not liquidate, dissolve or suspend business operations.  Notwithstanding
the prohibition contained herein, and without constituting a waiver of such an
Event of Default, if any Borrower sells, leases, assigns, transfers, or
otherwise disposes of any Collateral of any interest therein, other than the
sale of Inventory in the ordinary course of business, the Borrowers will pay
over the proceeds to the Lender for application to the Obligations.  The
Borrowers will not transfer any part of their ownership interest in any
Intellectual Property Rights and will not permit any agreement under which it
has licensed Licensed Intellectual Property to lapse, except that the Borrowers
may transfer such rights or permit such agreements to lapse if it shall have
reasonably determined that the applicable Intellectual Property Rights are no
longer useful in its business.  If the Borrowers transfer any Intellectual
Property Rights for value, the Borrowers will pay over the proceeds to the
Lender for application to the Obligations.  The Borrowers will not license any
other Person to use any of the Borrowers’ Intellectual Property Rights, except
that the Borrowers may grant licenses in the ordinary course of its business in
connection with sales of Inventory or provision of services to its customers.

 

Section 6.19                                Consolidation and Merger; Asset
Acquisitions.  No Borrower will consolidate with or merge into any Person, or
permit any other Person to merge into it, or acquire (in a transaction analogous
in purpose or effect to a consolidation or merger) all or substantially all the
assets of any other Person.

 

Section 6.20                                Sale and Leaseback.  No Borrower
will enter into any arrangement, directly or indirectly, with any other Person
whereby such Borrower shall sell or transfer any real or personal property,
whether now owned or hereafter acquired, and then or thereafter rent or lease as
lessee such property or any part thereof or any other property which such
Borrower intends to use for substantially the same purpose or purposes as the
property being sold or transferred.

 

Section 6.21                                Restrictions on Nature of Business. 
The Borrowers will not engage in any line of business materially different from
that presently engaged in by the Borrowers and will not purchase, lease or
otherwise acquire assets not related to its business.

 

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Section 6.22                                Accounting.  The Borrowers will not
adopt any material change in accounting principles other than as required by
GAAP.  The Borrowers will not adopt, permit or consent to any change in its
fiscal year.

 

Section 6.23                                Discounts, etc.  After notice from
the Lender, the Borrowers will not grant any discount, credit or allowance to
any customer of any Borrower or accept any return of goods sold.  The Borrowers
will not at any time modify, amend, subordinate, cancel or terminate the
obligation of any account debtor or other obligor of any Borrower.

 

Section 6.24                                Plans.  Unless disclosed to the
Lender pursuant to Section 5.12, no Borrower nor any ERISA Affiliate will (i)
adopt, create, assume or become a party to any Pension Plan, (ii) incur any
obligation to contribute to any Multiemployer Plan, (iii) incur any obligation
to provide post-retirement medical or insurance benefits with respect to
employees or former employees (other than benefits required by law) or (iv)
amend any Plan in a manner that would materially increase its funding
obligations.

 

Section 6.25                                Place of Business; Name.  No
Borrower will transfer its chief executive office or principal place of
business, or move, relocate, close or sell any business location.  The Borrowers
will not permit any tangible Collateral or any records pertaining to the
Collateral to be located in any state or area in which, in the event of such
location, a financing statement covering such Collateral would be required to
be, but has not in fact been, filed in order to perfect the Security Interest. 
No Borrower will change its name or jurisdiction of organization.

 

Section 6.26                                Constituent Documents; S Corporation
Status.  No Borrower will amend its Constituent Documents.  No Borrower will
become an S Corporation.

 

Section 6.27                                Additional Bank Accounts.  No
Borrower shall, directly or indirectly, open, establish or maintain any deposit
account, investment account or any other account with any bank or other
financial institution, other than the Collateral Account and the accounts set
forth in Schedule 5.19 hereto.

 

Section 6.28                                Distribution of Loan Proceeds
Amongst Borrowers.  With respect to each Advance made pursuant to the terms of
this Agreement, each Borrower shall receive the necessary minimum percentage of
the product of (a) the amount available to such Borrower based on its
contribution to the Borrowing Base divided by the amount available to all
Borrowers and (b) the amount of the Advance actually requested, such that after
giving effect to the transactions contemplated hereunder, this Agreement or any
Loan Document is not voidable under applicable law relating to fraudulent
conveyance or fraudulent transfer.

 

Section 6.29                                Performance by the Lender.  If any
Borrower at any time fails to perform or observe any of the foregoing covenants
contained in this Article VI or elsewhere herein, and if such failure shall
continue for a period of ten (10) calendar days after the Lender

 

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gives such Borrower written notice thereof (or in the case of the agreements
contained in Section 6.13 and Section 6.15, immediately upon the occurrence of
such failure, without notice or lapse of time), the Lender may, but need not,
perform or observe such covenant on behalf and in the name, place and stead of
such Borrower (or, at the Lender’s option, in the Lender’s name) and may, but
need not, take any and all other actions which the Lender may reasonably deem
necessary to cure or correct such failure (including the payment of taxes, the
satisfaction of Liens, the performance of obligations owed to account debtors or
other obligors, the procurement and maintenance of insurance, the execution of
assignments, security agreements and financing statements, and the endorsement
of instruments); and the Borrowers shall thereupon pay to the Lender on demand
the amount of all monies expended and all costs and expenses (including
reasonable attorneys’ fees and legal expenses) incurred by the Lender in
connection with or as a result of the performance or observance of such
agreements or the taking of such action by the Lender, together with interest
thereon from the date expended or incurred at the Default Rate.  To facilitate
the Lender’s performance or observance of such covenants of the Borrowers, the
Borrowers hereby irrevocably appoint the Lender, or the Lender’s delegate,
acting alone, as the Borrowers’ attorney in fact (which appointment is coupled
with an interest) with the right (but not the duty) from time to time to create,
prepare, complete, execute, deliver, endorse or file in the name and on behalf
of the Borrowers any and all instruments, documents, assignments, security
agreements, financing statements, applications for insurance and other
agreements and writings required to be obtained, executed, delivered or endorsed
by the Borrowers under this Section 6.29.

 

ARTICLE VII

 

EVENTS OF DEFAULT, RIGHTS AND REMEDIES

 

Section 7.1                                      Events of Default.  “Event of
Default”, wherever used herein, means any one of the following events:

 

(a)                                  Default in the payment of any Obligations
when they become due and payable;

 

(b)                                 Default in the performance, or breach, of
any covenant or agreement of (i) any Borrower contained in this Agreement or any
other Loan Document or (ii) any Guarantor contained in any Loan Document;

 

(c)                                  A Change of Control shall occur;

 

(d)                                 Any Financial Covenant shall become
inapplicable due to the lapse of time and the failure to amend any such covenant
to cover future periods;

 

(e)                                  Any Borrower or any Guarantor shall be or
become insolvent, or admit in writing its or his inability to pay its or his
debts as they mature, or make an assignment for the benefit of creditors; or any
Borrower or any Guarantor shall apply for or consent to the appointment of any
receiver, trustee, or similar officer for it or him or for all or any
substantial

 

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part of its or his property; or such receiver, trustee or similar officer shall
be appointed without the application or consent of such Borrower or such
Guarantor, as the case may be; or any Borrower or any Guarantor shall institute
(by petition, application, answer, consent or otherwise) any bankruptcy,
insolvency, reorganization, arrangement, readjustment of debt, dissolution,
liquidation or similar proceeding relating to it or him under the laws of any
jurisdiction; or any such proceeding shall be instituted (by petition,
application or otherwise) against any such Borrower or any such Guarantor; or
any judgment, writ, warrant of attachment or execution or similar process shall
be issued or levied against a substantial part of the property of any Borrower
or any Guarantor;

 

(f)                                    A petition shall be filed by or against
any Borrower or any Guarantor under the United States Bankruptcy Code naming
such Borrower or such Guarantor as debtor;

 

(g)                                 Any representation or warranty made by any
Borrower in this Agreement, by any Guarantor in any guaranty delivered to the
Lender, or by any Borrower (or any of its Officers) or any Guarantor in any
agreement, certificate, instrument or financial statement or other statement
contemplated by or made or delivered pursuant to or in connection with this
Agreement or any such guaranty shall prove to have been incorrect in any
material respect when deemed to be effective;

 

(h)                                 The rendering against any Borrower or any
Guarantor of an arbitration award, final judgment, decree or order for the
payment of money in excess of One Hundred Thousand Dollars ($100,000) and the
continuance of such arbitration award, judgment, decree or order unsatisfied and
in effect for any period of thirty (30) consecutive days without a stay of
execution;

 

(i)                                     A default under any bond, debenture,
note or other evidence of material indebtedness of any Borrower or any Guarantor
owed to any Person other than the Lender, or under any indenture or other
instrument under which any such evidence of indebtedness has been issued or by
which it is governed, or under any material lease or other contract, and the
expiration of the applicable period of grace, if any, specified in such evidence
of indebtedness, indenture, other instrument, lease or contract;

 

(j)                                     Any Reportable Event, which the Lender
determines in good faith might constitute grounds for the termination of any
Pension Plan or for the appointment by the appropriate United States District
Court of a trustee to administer any Pension Plan, shall have occurred and be
continuing thirty (30) days after written notice to such effect shall have been
given to any Borrower by the Lender; or a trustee shall have been appointed by
an appropriate United States District Court to administer any Pension Plan; or
the Pension Benefit Guaranty Corporation shall have instituted proceedings to
terminate any Pension Plan or to appoint a trustee to administer any Pension
Plan; or any Borrower or any ERISA Affiliate shall have filed for a distress
termination of any Pension Plan under Title IV of ERISA; or any Borrower or any
ERISA Affiliate shall have failed to make any quarterly contribution required
with respect to any Pension Plan under Section 412(m) of the IRC, which the
Lender determines in good faith may by itself, or in combination with any such
failures that the Lender may determine are likely to

 

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occur in the future, result in the imposition of a Lien on any Borrower’s assets
in favor of the Pension Plan; or any withdrawal, partial withdrawal,
reorganization or other event occurs with respect to a Multiemployer Plan which
results or could reasonably be expected to result in a material liability of any
Borrower to the Multiemployer Plan under Title IV of ERISA.

 

(k)                                  An event of default shall occur under any
Security Document;

 

(l)                                     Any Borrower or guarantor shall
liquidate, dissolve, terminate or suspend its business operations or otherwise
fail to operate its business in the ordinary course, or sell or attempt to sell
all or substantially all of its assets, without the Lender’s prior written
consent;

 

(m)                               Default in the payment of any amount owed by
any Borrower to the Lender other than any indebtedness arising hereunder;

 

(n)                                 Any Guarantor or person signing a support
agreement in favor of the Lender shall repudiate, purport to revoke or fail to
perform its obligations under its Guaranty or support agreement in favor of the
Lender, any individual Guarantor shall die or any other Guarantor shall cease to
exist;

 

(o)                                 Any Borrower shall take or participate in
any action which would be prohibited under the provisions of any Subordination
Agreement or make any payment on the Subordinated Indebtedness (as defined in
the Subordination Agreement) that any Person was not entitled to receive under
the provisions of the Subordination Agreement;

 

(p)                                 Any event or circumstance with respect to
any Borrower or Guarantor shall occur such that the Lender shall believe in good
faith that the prospect of payment of all or any part of the Obligations or the
performance by such Borrower or Guarantor under the Loan Documents is impaired
or any material adverse change in the business or financial condition of any
Borrower or Guarantor shall occur; or

 

(q)                                 Any breach, default or event of default by
or attributable to any Affiliate under any agreement between such Affiliate and
the Lender shall occur.

 

Section 7.2                                      Rights and Remedies.  During
any Default Period, the Lender may exercise any or all of the following rights
and remedies:

 

(a)                                  the Lender may, by notice to the
Administrative Borrower, declare the Commitment to be terminated, whereupon the
same shall forthwith terminate;

 

(b)                                 the Lender may, by notice to the
Administrative Borrower, declare the Obligations to be forthwith due and
payable, whereupon all Obligations shall become and be forthwith due and
payable, without presentment, notice of dishonor, protest or further notice of
any kind, all of which the Borrowers each hereby expressly waive;

 

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(c)                                  the Lender may, without notice to the
Borrowers and without further action, apply any and all money owing by the
Lender to the Borrowers to the payment of the Obligations;

 

(d)                                 the Lender may exercise and enforce any and
all rights and remedies available upon default to a secured party under the UCC,
including the right to take possession of Collateral, or any evidence thereof,
proceeding without judicial process or by judicial process (without a prior
hearing or notice thereof, which the Borrowers each hereby expressly waive) and
the right to sell, lease or otherwise dispose of any or all of the Collateral
(with or without giving any warranties as to the Collateral, title to the
Collateral or similar warranties), and, in connection therewith, the Borrowers
will on demand assemble the Collateral and make it available to the Lender at a
place to be designated by the Lender which is reasonably convenient to both
parties;

 

(e)                                  the Lender may make demand upon the
Borrowers (or any of them) and, forthwith upon such demand, such Borrower or
Borrowers will pay to the Lender in immediately available funds for deposit in
the Special Account pursuant to Section 2.18 an amount equal to the aggregate
maximum amount available to be drawn under all Letters of Credit then
outstanding, assuming compliance with all conditions for drawing thereunder;

 

(f)                                    the Lender may exercise and enforce its
rights and remedies under the Loan Documents; and

 

(g)                                 the Lender may exercise any other rights and
remedies available to it by law or agreement.

 

Notwithstanding the foregoing, upon the occurrence of an Event of Default
described in subsections (e) or (f) of Section 7.1, the Obligations shall be
immediately due and payable automatically without presentment, demand, protest
or notice of any kind.  If the Lender sells any of the Collateral on credit, the
Obligations will be reduced only to the extent of payments actually received. 
If the purchaser fails to pay for the Collateral, the Lender may resell the
Collateral and shall apply any proceeds actually received to the Obligations.

 

Section 7.3                                      Certain Notices.  If notice to
the Borrowers of any intended disposition of Collateral or any other intended
action is required by law in a particular instance, such notice shall be deemed
commercially reasonable if given (in the manner specified in Section 9.3) at
least ten (10) calendar days before the date of intended disposition or other
action.

 

ARTICLE VIII

 

JOINT AND SEVERAL LIABILITY; SURETYSHIP WAIVERS

 

Section 8.1                                      Independent Obligations;
Subrogation.  The Obligations of each Borrower hereunder are joint and several. 
To the maximum extent permitted by law, each Borrower hereby waives any claim,
right or remedy which such Borrower now has or hereafter

 

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acquires against any other Borrower that arises hereunder including, without
limitation, any claim, remedy or right of subrogation, reimbursement,
exoneration, contribution, indemnification, or participation in any claim, right
or remedy of the Lender against any Borrower or any Collateral which the Lender
now has or hereafter acquires, whether or not such claim, right or remedy arises
in equity, under contract, by statute, under common law or otherwise until the
Obligations are fully paid and finally discharged.  In addition, each Borrower
hereby waives any right to proceed against the other Borrowers, now or
hereafter, for contribution, indemnity, reimbursement, and any other suretyship
rights and claims, whether direct or indirect, liquidated or contingent, whether
arising under express or implied contract or by operation of law, which any
Borrower may now have or hereafter have as against the other Borrowers with
respect to the Obligations until the Obligations are fully paid and finally
discharged.  Each Borrower also hereby waives any rights of recourse to or with
respect to any asset of the other Borrowers until the Obligations are fully paid
and finally discharged.

 

Section 8.2                                      Authority to Modify Obligations
and Security.  Each Borrower authorizes the Lender, without notice or demand and
without affecting any Borrowers’ liability hereunder, from time to time, whether
before or after any notice of termination hereof or before or after any default
in respect of the Obligations, to: (a) renew, extend, accelerate, or otherwise
change the time for payment of, or otherwise change any other term or condition
of, any document or agreement evidencing or relating to any Obligations as such
Obligations relate to the other Borrowers, including, without limitation, to
increase or decrease the rate of interest thereon; (b) accept, substitute,
waive, defease, increase, release, exchange or otherwise alter any Collateral,
in whole or in part, securing the other Borrowers’ Obligations; (c) apply any
and all such Collateral and direct the order or manner of sale thereof as the
Lender, in its sole discretion, may determine; (d) deal with the other Borrowers
as the Lender may elect; (e) in the Lender’s sole discretion, settle, release on
terms satisfactory to them, or by operation of law or otherwise, compound,
compromise, collect or otherwise liquidate any of the other Borrowers’
Obligations and/or any of the Collateral in any manner, and bid and purchase any
of the collateral at any sale thereof; (vi) apply any and all payments or
recoveries from the other Borrowers as the Lender, in its sole discretion, may
determine, whether or not such indebtedness relates to the Obligations; all
whether such Obligations are secured or unsecured or guaranteed or not
guaranteed by others; and (vii) apply any sums realized from Collateral
furnished by the other Borrowers upon any of its indebtedness or obligations to
the Lender as it in its sole discretion, may determine, whether or not such
indebtedness relates to the Obligations; all without in any way diminishing,
releasing or discharging the liability of any Borrower hereunder.

 

Section 8.3                                      Waiver of Defenses.  Upon an
Event of Default by any Borrower in respect of any Obligations, the Lender may,
at its option and without notice to any Borrower, proceed directly against any
Borrower to collect and recover the full amount of the liability hereunder, or
any portion thereof, and each Borrower waives any right to require the Lender
to: (a) proceed against the other Borrowers or any other person whomsoever; (b)
proceed against or exhaust any Collateral given to or held by the Lender in
connection with the Obligations; (c) give notice of the terms, time and place of
any public or private sale of any of the Collateral except as otherwise provided
herein; or (d) pursue any other remedy in the Lender’s power whatsoever.  A

 

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separate action or actions may be brought and prosecuted against any Borrower
whether or not action is brought against the other Borrowers and whether the
other Borrowers be joined in any such action or actions; and each Borrower
waives the benefit of any statute of limitations affecting the liability
hereunder or the enforcement hereof, and agrees that any payment of any
Obligations or other act which shall toll any statute of limitations applicable
thereto shall similarly operate to toll such statute of limitations applicable
to the liability hereunder.

 

Section 8.4                                      Exercise of the Lender’s
Rights.  Each Borrower hereby authorizes and empowers the Lender in its sole
discretion, without any notice or demand to such Borrower whatsoever and without
affecting the liability of such Borrower hereunder, to exercise any right or
remedy which the Lender may have available to itself against the other
Borrowers.

 

Section 8.5                                      Additional Waivers.  Each
Borrower waives any defense arising by reason of any disability or other defense
of the other Borrowers or by reason of the cessation from any cause whatsoever
of the liability of the other Borrowers or by reason of any act or omission of
the Lender or others which directly or indirectly results in or aids the
discharge or release of the other Borrowers or any Obligations or any Collateral
by operation of law or otherwise.  The Obligations shall be enforceable against
each Borrower without regard to the validity, regularity or enforceability of
any of the Obligations with respect to any of the other Borrowers or any of the
documents related thereto or any collateral security documents securing any of
the Obligations.  No exercise by the Lender of, and no omission of the Lender to
exercise, any power or authority recognized herein and no impairment or
suspension of any right or remedy of the Lender against any Borrower or any
Collateral shall in any way suspend, discharge, release, exonerate or otherwise
affect any of the Obligations or any Collateral furnished by the Borrowers or
give to the Borrowers any right of recourse against the Lender.  Each Borrower
specifically agrees that the failure of the Lender: (a) to perfect any lien on
or security interest in any property heretofore or hereafter given any Borrower
to secure payment of the Obligations, or to record or file any document relating
thereto or (b) to file or enforce a claim against the estate (either in
administration, bankruptcy or other proceeding) of any Borrower shall not in any
manner whatsoever terminate, diminish, exonerate or otherwise affect the
liability of any Borrower hereunder.

 

Section 8.6                                      Additional Indebtedness . 
Additional Obligations may be created from time to time at the request of any
Borrower and without further authorization from or notice to any other Borrower
even though the borrowing Borrower’s financial condition may deteriorate since
the date hereof.  Each Borrower waives the right, if any, to require the Lender
to disclose to such Borrower any information it may now have or hereafter
acquire concerning the other Borrowers’ character, credit, Collateral, financial
condition or other matters.  Each Borrower has established adequate means to
obtain from the other Borrowers, on a continuing basis, financial and other
information pertaining to such Borrower’s business and affairs, and assumes the
responsibility for being and keeping informed of the financial and other
conditions of the other Borrowers and of all circumstances bearing upon the risk
of nonpayment of the Obligations which diligent inquiry would reveal.  The
Lender need not inquire into the powers of any Borrower or the authority of any
of their respective officers, directors, partners or agents acting

 

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or purporting to act in their behalf, and any Obligations created in reliance
upon the purported exercise of such power or authority is hereby guaranteed. 
All Obligations of each Borrower to the Lender heretofore, now or hereafter
created shall be deemed to have been granted at each Borrower’s special
insistence and request and in consideration of and in reliance upon this
Agreement.

 

Section 8.7                                      Notices, Demands, Etc.  Except
as expressly provided by this Agreement, the Lender shall not be under any
obligation whatsoever to make or give to any Borrower, and each Borrower hereby
waives diligence, all rights of setoff and counterclaim against the Lender, all
demands, presentments, protests, notices of protests, notices of protests,
notices of nonperformance, notices of dishonor, and all other notices of every
kind or nature, including notice of the existence, creation or incurring of any
new or additional Obligations.

 

Section 8.8                                      Subordination.  Except as
otherwise provided in this Section 8.8, any indebtedness of any Borrower now or
hereafter owing to any other Borrower is hereby subordinated to the Obligations,
whether heretofore, now or hereafter created, and whether before or after notice
of termination hereof, and, following the occurrence and during the continuation
of an Event of Default, no Borrower shall, without the prior consent of the
Lender, pay in whole or in part any of such indebtedness nor will any such
Borrower accept any payment of or on account of any such indebtedness at any
time while such Borrower remains liable hereunder.  At the request of the
Lender, after the occurrence and during the continuance of an Event of Default,
each Borrower shall pay to the Lender all or any part of such subordinated
indebtedness and any amount so paid to the Lender at its request shall be
applied to payment of the Obligations.  Each payment on the indebtedness of any
Borrower to the other Borrowers received in violation of any of the provisions
hereof shall be deemed to have been received by any other Borrower as trustee
for the Lender and shall be paid over to the Lender immediately on account of
the Obligations, but without otherwise affecting in any manner any such
Borrower’s liability under any of the provisions of this Agreement.  Each
Borrower agrees to file all claims against the other Borrowers in any bankruptcy
or other proceeding in which the filing of claims is required by law in respect
of any indebtedness of the other Borrowers to such Borrower, and the Lender
shall be entitled to all of any such Borrower’s rights thereunder.  If for any
reason any such Borrower fails to file such claim at least thirty (30) days
prior to the last date on which such claim should be filed, the Lender, as such
Borrower’s attorney-in-fact, is hereby authorized to do so in Borrowers’ name
or, in the Lender’s discretion, to assign such claim to, and cause a proof of
claim to be filed in the name of, the Lender’s nominee.  In all such cases,
whether in administration, bankruptcy or otherwise, the person or persons
authorized to pay such claim shall pay to the Lender the full amount payable on
the claim in the proceeding, and to the full extent necessary for that purpose
any such Borrower hereby assigns to the Lender all such Borrower’s rights to any
payments or distributions to which such Borrower otherwise would be entitled. 
If the amount so paid is greater than any such Borrower’s liability hereunder,
the Lender will pay the excess amount to the person entitled thereto.

 

Section 8.9                                      Revival.  If any payments of
money or transfers of property made to the Lender by any Borrower should for any
reason subsequently be declared to be, or in the

 

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Lender’s counsel’s good faith opinion be determined to be, fraudulent (within
the meaning of any state or federal law relating to fraudulent conveyances),
preferential or otherwise voidable or recoverable in whole or in part for any
reason (hereinafter collectively called “voidable transfers”) under the
Bankruptcy Code or any other federal or state law and the Lender is required to
repay or restore, or in the Lender’s counsel’s good faith opinion may be so
liable to repay or restore, any such voidable transfer, or the amount or any
portion thereof, then as to any such voidable transfer or the amount repaid or
restored and all reasonable costs and expenses (including reasonable attorneys’
fees) of the Lender related thereto, such Borrower’s liability hereunder shall
automatically be revived, reinstated and restored and shall exist as though such
voidable transfer had never been made to the Lender.

 

Section 8.10                                Understanding of Waivers.  Each
Borrower warrants and agrees that the waivers set forth in this Article 8 are
made with full knowledge of their significance and consequences.  If any of such
waivers are determined to be contrary to any applicable law or public policy,
such waivers shall be effective only to the maximum extent permitted by law.

 

ARTICLE IX

 

MISCELLANEOUS

 

Section 9.1                                      No Waiver; Cumulative Remedies;
Compliance with Laws.  No failure or delay by the Lender in exercising any
right, power or remedy under the Loan Documents shall operate as a waiver
thereof; nor shall any single or partial exercise of any such right, power or
remedy preclude any other or further exercise thereof or the exercise of any
other right, power or remedy under the Loan Documents.  The remedies provided in
the Loan Documents are cumulative and not exclusive of any remedies provided by
law.  The Lender may comply with any applicable state or federal law
requirements in connection with a disposition of the Collateral and such
compliance will not be considered adversely to affect the commercial
reasonableness of any sale of the Collateral.

 

Section 9.2                                      Amendments, Etc.  No amendment,
modification, termination or waiver of any provision of any Loan Document or
consent to any departure by the Borrowers therefrom or any release of a Security
Interest shall be effective unless the same shall be in writing and signed by
the Lender, and then such waiver or consent shall be effective only in the
specific instance and for the specific purpose for which given.  No notice to or
demand on the Borrowers in any case shall entitle the Borrowers to any other or
further notice or demand in similar or other circumstances.

 

Section 9.3                                      Addresses for Notices; Requests
for Accounting.  Except as otherwise expressly provided herein, all notices,
requests, demands and other communications provided for under the Loan Documents
shall be in writing and shall be (a) personally delivered, (b) sent by first
class United States mail, (c) sent by overnight courier of national reputation,
or (d) transmitted by telecopy, in each case addressed or telecopied to the
party to whom notice is being given at its address or telecopier number as set
forth below next to its signature or, as to each party, at such other address or
telecopier number as may hereafter be designated by such

 

62

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party in a written notice to the other party complying as to delivery with the
terms of this Section.  All such notices, requests, demands and other
communications shall be deemed to have been given on (a) the date received if
personally delivered, (b) when deposited in the mail if delivered by mail, (c)
the date sent if sent by overnight courier, or (d) the date of transmission if
delivered by telecopy, except that notices or requests to the Lender pursuant to
any of the provisions of Article II shall not be effective until received by the
Lender.  All requests under Section 9-210 of the UCC (i) shall be made in a
writing signed by a person authorized under Section 2.2(b), (ii) shall be
personally delivered, sent by registered or certified mail, return receipt
requested, or by overnight courier of national reputation (iii) shall be deemed
to be sent when received by the Lender and (iv) shall otherwise comply with the
requirements of Section 9-210.  The Borrowers request that the Lender respond to
all such requests which on their face appear to come from an authorized
individual and releases the Lender from any liability for so responding.  The
Borrowers shall pay Lender the maximum amount allowed by law for responding to
such requests.

 

Section 9.4                                      Intentionally Omitted.

 

Section 9.5                                      Further Documents.  The
Borrowers will from time to time execute and deliver or endorse any and all
instruments, documents, conveyances, assignments, security agreements, financing
statements, control agreements and other agreements and writings that the Lender
may reasonably request in order to secure, protect, perfect or enforce the
Security Interest or the Lender’s rights under the Loan Documents (but any
failure to request or assure that the Borrowers execute, deliver or endorse any
such item shall not affect or impair the validity, sufficiency or enforceability
of the Loan Documents and the Security Interest, regardless of whether any such
item was or was not executed, delivered or endorsed in a similar context or on a
prior occasion).

 

Section 9.6                                      Costs and Expenses.  Except for
such costs, expenses, claims and related losses resulting from the gross
negligence or intentional misconduct by the Lender or its employees, agents and
assigns, the Borrowers shall pay on demand all costs and expenses, including
reasonable attorneys’ fees, incurred by the Lender in connection with the
Obligations, this Agreement, the Loan Documents, any Letter of Credit and any
other document or agreement related hereto or thereto, and the transactions
contemplated hereby, including all such costs, expenses and fees incurred in
connection with the negotiation, preparation, execution, amendment,
administration, performance, collection and enforcement of the Obligations and
all such documents and agreements and the creation, perfection, protection,
satisfaction, foreclosure or enforcement of the Security Interest.

 

Section 9.7                                      Indemnity.  Except for such
costs, expenses, claims and related losses resulting from the gross negligence
or intentional misconduct by the Lender or its employees, agents and assigns, in
addition to the payment of expenses pursuant to Section 9.6, the Borrowers shall
indemnify, defend and hold harmless the Lender, and any of its participants,
parent corporations, subsidiary corporations, affiliated corporations, successor
corporations, and

 

63

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all present and future officers, directors, employees, attorneys and agents of
the foregoing (the “Indemnitees”) from and against any of the following
(collectively, “Indemnified Liabilities”):

 

(i)                                     any and all transfer taxes, documentary
taxes, assessments or charges made by any governmental authority by reason of
the execution and delivery of the Loan Documents or the making of the Advances;

 

(ii)                                  any claims, loss or damage to which any
Indemnitee may be subjected if any representation or warranty contained in
Section 5.14 proves to be incorrect in any respect or as a result of any
violation of the covenant contained in Section 6.12(b); and

 

(iii)                               any and all other liabilities, losses,
damages, penalties, judgments, suits, claims, costs and expenses of any kind or
nature whatsoever (including the reasonable fees and disbursements of counsel)
in connection with the foregoing and any other investigative, administrative or
judicial proceedings, whether or not such Indemnitee shall be designated a party
thereto, which may be imposed on, incurred by or asserted against any such
Indemnitee, in any manner related to or arising out of or in connection with the
making of the Advances and the Loan Documents or the use or intended use of the
proceeds of the Advances.

 

If any investigative, judicial or administrative proceeding arising from any of
the foregoing is brought against any Indemnitee, upon such Indemnitee’s request,
the Borrowers, or counsel designated by the Borrowers and satisfactory to the
Indemnitee, will resist and defend such action, suit or proceeding to the extent
and in the manner directed by the Indemnitee, at the Borrowers’ sole costs and
expense.  Each Indemnitee will use its best efforts to cooperate in the defense
of any such action, suit or proceeding.  If the foregoing undertaking to
indemnify, defend and hold harmless may be held to be unenforceable because it
violates any law or public policy, the Borrowers shall nevertheless make the
maximum contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law.  The Borrowers’
obligation under this Section 8.7 shall survive the termination of this
Agreement and the discharge of any Borrower’s other obligations hereunder.

 

Section 9.8                                      Participants.  The Lender and
its participants, if any, are not partners or joint venturers, and the Lender
shall not have any liability or responsibility for any obligation, act or
omission of any of its participants.  All rights and powers specifically
conferred upon the Lender may be transferred or delegated to any of the Lender’s
participants, successors or assigns.

 

Section 9.9                                      Execution in Counterparts;
Telefacsimile Execution.  This Agreement and other Loan Documents may be
executed in any number of counterparts, each of which when so executed and
delivered shall be deemed to be an original and all of which counterparts, taken
together, shall constitute but one and the same instrument.  Delivery of an
executed counterpart of this Agreement by telefacsimile shall be equally as
effective as delivery of an original executed counterpart of this Agreement. 
Any party delivering an executed counterpart of this Agreement by telefacsimile
also shall deliver an original executed counterpart

 

64

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

 

of this Agreement but the failure to deliver an original executed counterpart
shall not affect the validity, enforceability, and binding effect of this
Agreement.

 

Section 9.10                                Retention of Borrower’s Records. 
The Lender shall have no obligation to maintain any electronic records or any
documents, schedules, invoices, agings, or other papers delivered to the Lender
by any Borrower or in connection with the Loan Documents for more than four (4)
months after receipt by the Lender.

 

Section 9.11                                Binding Effect; Assignment; Complete
Agreement; Exchanging Information.  The Loan Documents shall be binding upon and
inure to the benefit of the Borrowers and the Lender and their respective
successors and assigns, except that no Borrower shall have the right to assign
its rights thereunder or any interest therein without the Lender’s prior written
consent.  To the extent permitted by law, each Borrower waives and will not
assert against any assignee any claims, defenses or set-offs which such Borrower
could assert against the Lender.  This Agreement shall also bind all Persons who
become a party to this Agreement as a borrower.  This Agreement, together with
the Loan Documents, comprises the complete and integrated agreement of the
parties on the subject matter hereof and supersedes all prior agreements,
written or oral, on the subject matter hereof.  Without limiting the Lender’s
right to share information regarding the Borrowers and their Affiliates with the
Lender’s participants, accountants, lawyers and other advisors, the Lender,
Wells Fargo & Company, and all direct and indirect subsidiaries of Wells Fargo &
Company, may exchange any and all information they may have in their possession
regarding the Borrowers and their Affiliates, and the Borrowers each waive any
right of confidentiality it may have with respect to such exchange of such
information.

 

Section 9.12                                Severability of Provisions.  Any
provision of this Agreement which is prohibited or unenforceable shall be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof.

 

Section 9.13                                Headings.  Article, Section and
subsection headings in this Agreement are included herein for convenience of
reference only and shall not constitute a part of this Agreement for any other
purpose.

 

Section 9.14                                Governing Law; Jurisdiction, Venue;
Waiver of Jury Trial.  The Loan Documents shall be governed by and construed in
accordance with the substantive laws (other than conflict laws) of the State of
California.  The parties hereto hereby (i) consent to the personal jurisdiction
of the state and federal courts located in the State of California in connection
with any controversy related to this Agreement; (ii) waive any argument that
venue in any such forum is not convenient, (iii) agree that any litigation
initiated by the Lender or any Borrower in connection with this Agreement or the
other Loan Documents may be venued in either the State or Federal courts located
in Los Angeles County, California; and (iv) agree that a final judgment in any
such suit, action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.

 

65

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

 

THE PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED
ON OR PERTAINING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT.

 

Section 9.15                                SI as Agent for Borrowers.  Each
Borrower hereby irrevocably appoints SI as the borrowing agent and
attorney-in-fact for all Borrowers (the “Administrative Borrower”) which
appointment shall remain in full force and effect unless and until the Lender
shall have received prior written notice signed by each Borrower that such
appointment has been revoked and that another Borrower has been appointed
Administrative Borrower.  Each Borrower hereby irrevocably appoints and
authorizes the Administrative Borrower (i) to provide the Lender with all
notices with respect to Advances and Letters of Credit obtained for the benefit
of any Borrower and all other notices and instructions under this Agreement and
(ii) to take such action as the Administrative Borrower deems appropriate on its
behalf to obtain Advances and Letters of Credit and to exercise such other
powers as are reasonably incidental thereto to carry out the purposes of this
Agreement.  It is understood that the handling of the Collateral of Borrowers in
a combined fashion, as more fully set forth herein, is done solely as an
accommodation to Borrowers in order to utilize the collective borrowing powers
of Borrowers in the most efficient and economical manner and at their request,
and that the Lender shall not incur liability to any Borrower as a result
hereof.  Each Borrower expects to derive benefit, directly or indirectly, from
the handling of the Collateral in a combined fashion since the successful
operation of each Borrower is dependent on the continued successful performance
of the integrated group.  To induce the Lender to do so, and in consideration
thereof, each Borrower hereby jointly and severally agrees to indemnify the
Lender harmless against any and all liability, expense, loss or claim of damage
or injury, made against the Lender by any Borrower or by any third party
whosoever, arising from or incurred by reason of (a) the handling of the
Collateral of Borrowers as herein provided, (b) Lender’s relying on any
instructions of the Administrative Borrower, or (c) any other action taken by
the Lender hereunder or under the other Loan Documents, except that Borrowers
will have no liability to the Lender or any of its Affiliates under this Section
9.15 with respect to any liability that has been finally determined by a court
of competent jurisdiction to have resulted solely from the gross negligence or
willful misconduct of such Lender or Affiliate.

 

66

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

 

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their respective officers thereunto duly authorized as of the date first
above written.

 

SMTEK, Inc.

SMTEK, INC.

200 Science Drive

 

Moorpark, California 93021-2003

By

 /s/ Kirk A. Waldron

Telecopier:

 

 

 

Name:  Kirk A. Waldron

Attention: Kirk Waldron

 

Title:  Senior VP and CFO

 

Jolt Technology, Inc.

JOLT TECHNOLOGY, INC.

200 Science Drive

 

Moorpark, California 93021-2003

By

 /s/ Kirk A. Waldron

Telecopier:

 

 

 

Name:  Kirk A. Waldron

Attention: Kirk Waldron

 

Title:  Senior VP and CFO

 

SMTEK New England, Inc.

SMTEK NEW ENGLAND, INC.

200 Science Drive

 

Moorpark, California 93021-2003

By

 /s/ Kirk A. Waldron

Telecopier:

 

 

 

Name:  Kirk A. Waldron

Attention: Kirk Waldron

 

Title:  Senior VP and CFO

 

 

SMTEK Santa Clara, Inc.

SMTEK SANTA CLARA, INC.

200 Science Drive

 

Moorpark, California 93021-2003

By

 /s/ Kirk A. Waldron

Telecopier:

 

 

 

Name:  Kirk A. Waldron

Attention: Kirk Waldron

 

Title:  Senior VP and CFO

 

Technetics, Inc.

TECNHETICS, INC.

200 Science Drive

 

Moorpark, California 93021-2003

By

 /s/ Kirk A. Waldron

Telecopier:

 

 

 

Name:  Kirk A. Waldron

Attention: Kirk Waldron

 

Title:  Senior VP and CFO

 

Wells Fargo Business Credit, Inc.

WELLS FARGO BUSINESS CREDIT, INC.

245 South Los Robles Avenue, Suite 700

 

Pasadena, California 91101

By

 /s/  Jeffrey A. Heisinger

Telecopier:  (626) 844-9063

 

Name:  Jeffrey A. Heisinger

Attention: Portfolio Manager

 

Title:  VP

 

67

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

 

Table of Exhibits and Schedules

 

Exhibit A

Form of Revolving Note

 

 

Exhibit B

Form of Term Note

 

 

Exhibit C

Form of CapEx Note

 

 

Exhibit D

Compliance Certificate

 

 

Exhibit E

Premises

 

 

Exhibit F

Form of Notice of Borrowing

 

 

Exhibit G

Form of Notice of Conversion of Advances

 

 

Exhibit H

Form of Notice to Continue LIBO Rate Advances

 

 

Schedule 5.1

Trade Names, Chief Executive Office, Principal Place of Business, and Locations
of Collateral

 

 

Schedule 5.2

Capitalization and Organizational Chart

 

 

Schedule 5.5

Subsidiaries

 

 

Schedule 5.7

Litigation

 

 

Schedule 5.11

Intellectual Property Disclosures

 

 

Schedule 5.14

Environmental Matters

 

 

Schedule 5.19

Bank Accounts

 

 

Schedule 6.3

Permitted Liens

 

 

Schedule 6.4

Permitted Indebtedness and Guaranties

 

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

 

Exhibit A to Credit and Security Agreement

 

REVOLVING NOTE

 

$10,000,000

 

Los Angeles, California

 

 

September 19, 2003

 

For value received, the undersigned, SMTEK, INC., a California corporation
(“SI”), JOLT TECHNOLOGY, INC., a Delaware corporation (“Jolt”), SMTEK NEW
ENGLAND, INC., a Massachusetts corporation (“SNEI”), SMTEK SANTA CLARA, INC., a
California corporation (“SSCI”), and TECHNETICS, INC., a California corporation
(“Technetics”) (SI, Jolt, SNEI, SSCI, and Technetics are each referred to herein
as a “Borrower” and collectively as the “Borrowers”), hereby jointly and
severally promise to pay on the Termination Date under the Credit Agreement
(defined below), to the order of WELLS FARGO BUSINESS CREDIT, INC., a Minnesota
corporation (the “Lender”), at its main office in Minneapolis, Minnesota, or at
any other place designated at any time by the holder hereof, in lawful money of
the United States of America and in immediately available funds, the principal
sum of Ten Million Dollars ($10,000,000) or, if less, the aggregate unpaid
principal amount of all Revolving Advances made by the Lender to the Borrowers
under the Credit Agreement (defined below) together with interest on the
principal amount hereunder remaining unpaid from time to time, computed on the
basis of the actual number of days elapsed and a 360-day year, from the date
hereof until this Revolving Note (this “Note”) is fully paid at the rate from
time to time in effect under the Credit and Security Agreement of even date
herewith (the “Credit Agreement”) by and between the Lender and the Borrowers. 
The principal hereof and interest accruing thereon shall be due and payable as
provided in the Credit Agreement.  This Note may be prepaid only in accordance
with the Credit Agreement.

 

This Note is issued pursuant, and is subject, to the Credit Agreement, which
provides, among other things, for acceleration hereof.  This Note is the
Revolving Note referred to in the Credit Agreement.  This Note is secured, among
other things, pursuant to the Credit Agreement and the Security Documents as
therein defined, and may now or hereafter be secured by one or more other
security agreements, mortgages, deeds of trust, assignments or other instruments
or agreements.

 

The Borrowers shall pay all costs of collection, including reasonable attorneys’
fees and legal expenses if this Note is not paid when due, whether or not legal
proceedings are commenced.

 

Presentment or other demand for payment, notice of dishonor and protest are
expressly waived.

 

 

SMTEK, INC.

 

 

 

Name:

 

 

Title:

 

 

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

 

 

JOLT TECHNOLOGY, INC.

 

 

 

Name:

 

 

Title:

 

 

 

 

SMTEK NEW ENGLAND, INC.

 

 

 

Name:

 

 

Title:

 

 

 

 

SMTEK SANTA CLARA, INC.

 

 

 

Name:

 

 

Title:

 

 

 

 

TECHNETICS, INC.

 

 

 

Name:

 

 

Title:

 

 

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

 

Exhibit B to Credit and Security Agreement

 

TERM NOTE

 

$1,000,000

 

Los Angeles, California

 

 

September 19, 2003

 

For value received, the undersigned, SMTEK, INC., a California corporation
(“SI”), JOLT TECHNOLOGY, INC., a Delaware corporation (“Jolt”), SMTEK NEW
ENGLAND, INC., a Massachusetts corporation (“SNEI”), SMTEK SANTA CLARA, INC., a
California corporation (“SSCI”), and TECHNETICS, INC., a California corporation
(“Technetics”) (SI, Jolt, SNEI, SSCI, and Technetics are each referred to herein
as a “Borrower” and collectively as the “Borrowers”), hereby jointly and
severally promise to pay on the Termination Date under the Credit Agreement
(defined below), to the order of Wells Fargo Business Credit, Inc., a Minnesota
corporation (the “Lender”), at its main office in Minneapolis, Minnesota, or at
any other place designated at any time by the holder hereof, in lawful money of
the United States of America and in immediately available funds, the principal
sum of One Million Dollars ($1,000,000) or, if less, the aggregate unpaid
principal amount of the Term Advance made by the Lender to the Borrowers under
the Credit Agreement (defined below) together with interest on the principal
amount hereunder remaining unpaid from time to time, computed on the basis of
the actual number of days elapsed and a 360-day year, from the date hereof until
this Term Note (this “Note”) is fully paid at the rate from time to time in
effect under the Credit and Security Agreement of even date herewith (as the
same may hereafter be amended, supplemented or restated from time to time, the
“Credit Agreement”) by and between the Lender and the Borrowers.  The principal
hereof and interest accruing thereon shall be due and payable as provided in the
Credit Agreement.  This Note may be prepaid only in accordance with the Credit
Agreement.

 

This Note is issued pursuant, and is subject, to the Credit Agreement, which
provides, among other things, for acceleration hereof.  This Note is the Term
Note referred to in the Credit Agreement.

 

This Note is secured, among other things, pursuant to the Credit Agreement and
the Security Documents as therein defined, and may now or hereafter be secured
by one or more other security agreements, mortgages, deeds of trust, assignments
or other instruments or agreements.

 

The Borrowers hereby agree to pay all costs of collection, including attorneys’
fees and legal expenses in the event this Note is not paid when due, whether or
not legal proceedings are commenced.

 

Presentment or other demand for payment, notice of dishonor and protest are
expressly waived.

 

 

SMTEK, INC.

 

 

 

Name:

 

 

Title:

 

 

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

 

 

JOLT TECHNOLOGY, INC.

 

 

 

Name:

 

 

Title:

 

 

 

 

SMTEK NEW ENGLAND, INC.

 

 

 

Name:

 

 

Title:

 

 

 

 

SMTEK SANTA CLARA, INC.

 

 

 

Name:

 

 

Title:

 

 

 

 

TECHNETICS, INC.

 

 

 

Name:

 

 

Title:

 

 

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

 

Exhibit C to Credit and Security Agreement

 

CAPEX NOTE

 

$1,000,000

 

Los Angeles, California

 

 

September 19, 2003

 

For value received, each of the undersigned, SMTEK, INC., a California
corporation (“SI”), JOLT TECHNOLOGY, INC., a Delaware corporation (“Jolt”),
SMTEK NEW ENGLAND, INC., a Massachusetts corporation (“SNEI”), SMTEK SANTA
CLARA, INC., a California corporation (“SSCI”), and TECHNETICS, INC., a
California corporation (“Technetics”) (SI, Jolt, SNEI, SSCI, and Technetics are
each referred to herein as a “Borrower” and collectively as the “Borrowers”),
hereby jointly and severally promise to pay on the Termination Date under the
Credit Agreement (defined below), to the order of WELLS FARGO BUSINESS CREDIT,
INC., a Minnesota corporation (the “Lender”), at its main office in Minneapolis,
Minnesota, or at any other place designated at any time by the holder hereof, in
lawful money of the United States of America and in immediately available funds,
the principal sum of One Million Dollars ($1,000,000) or, if less, the aggregate
unpaid principal amount of all CapEx Advances made by the Lender to the
Borrowers under the Credit Agreement (defined below) together with interest on
the principal amount hereunder remaining unpaid from time to time, computed on
the basis of the actual number of days elapsed and a 360-day year, from the date
hereof until this CapEx Note (this “Note”) is fully paid at the rate from time
to time in effect under the Credit and Security Agreement of even date herewith
(as the same may hereafter be amended, supplemented or restated from time to
time, the “Credit Agreement”) by and between the Lender and the Borrowers.  The
principal hereof and interest accruing thereon shall be due and payable as
provided in the Credit Agreement.  This Note may be prepaid only in accordance
with the Credit Agreement.

 

This Note is issued pursuant, and is subject, to the Credit Agreement, which
provides, among other things, for acceleration hereof.  This Note is the CapEx
Note referred to in the Credit Agreement.

 

This Note is secured, among other things, pursuant to the Credit Agreement and
the Security Documents as therein defined, and may now or hereafter be secured
by one or more other security agreements, mortgages, deeds of trust, assignments
or other instruments or agreements.

 

The Borrowers hereby agree to pay all costs of collection, including attorneys’
fees and legal expenses in the event this Note is not paid when due, whether or
not legal proceedings are commenced.

 

Presentment or other demand for payment, notice of dishonor and protest are
expressly waived.

 

 

SMTEK, INC.

 

 

 

Name:

 

 

Title:

 

 

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

 

 

JOLT TECHNOLOGY, INC.

 

 

 

Name:

 

 

Title:

 

 

 

 

SMTEK NEW ENGLAND, INC.

 

 

 

Name:

 

 

Title:

 

 

 

 

SMTEK SANTA CLARA, INC.

 

 

 

Name:

 

 

Title:

 

 

 

 

TECHNETICS, INC.

 

 

 

Name:

 

 

Title:

 

 

C-2

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

 

Exhibit D to Credit and Security Agreement

 

Compliance Certificate

 

To:

 

                                                                             

 

 

 

Wells Fargo Business Credit, Inc.

 

 

 

Date:

 

                                     , 200      

 

 

 

Subject:

 

                                                                             

 

 

Financial Statements

 

In accordance with our Credit and Security Agreement dated as of September 19,
2003 (the “Credit Agreement”), attached are the financial statements of SMTEK,
Inc (“SI”), Jolt Technology, Inc. (“Jolt”), SMTEK New England, Inc. (“SNEI”),
SMTEK Santa Clara, Inc. (“SSCI”), and Technetics, Inc. (“Technetics”) (SI, Jolt,
SNEI, SSCI, and Technetics are each referred to herein as a “Borrower” and
collectively as the “Borrowers”) as of and for                         ,
20        (the “Reporting Date”) and the year-to-date period then ended (the
“Current Financials”).  All terms used in this certificate have the meanings
given in the Credit Agreement.

 

I certify that the Current Financials have been prepared in accordance with
GAAP, subject to year-end audit adjustments, and fairly present the Borrowers’
financial condition as of the date thereof.

 

Events of Default.  (Check one):

 

o                                    The undersigned does not have knowledge of
the occurrence of a Default or Event of Default under the Credit Agreement
except as previously reported in writing to the Lender.

 

o                                    The undersigned has knowledge of the
occurrence of a Default or Event of Default under the Credit Agreement not
previously reported in writing to the Lender and attached hereto is a statement
of the facts with respect to thereto.  The Borrowers acknowledge that pursuant
to Section 2.13(d) of the Credit Agreement, the Lender may impose the Default
Rate at any time during the resulting Default Period.

 

Financial Covenants.  I further hereby certify as follows:

 

1.                                       Minimum Debt Service Coverage Ratio. 
Pursuant to Section 6.2(a) of the Credit Agreement, as of the Reporting Date,
the Borrower’s Debt Service Coverage Ratio was          to 1.00 which o
satisfies o does not satisfy the requirement that such ratio be no less than
1.20 to 1.00 on the Reporting Date.

 

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

 

2.                                       Minimum Book Net Worth.  Pursuant to
Section 6.2(b) of the Credit Agreement, as of the Reporting Date the Borrowers’
Book Net Worth was $                    which o satisfies o does not satisfy the
requirement that such amount be not less than $                     as set forth
in table below:

 

Period

 

Minimum Book Net Worth

 

July 2003

 

$

300,000

 

August 2003

 

$

400,000

 

September 2003

 

$

1,200,000

 

October 2003

 

$

1,050,000

 

November 2003

 

$

1,050,000

 

December 2003

 

$

1,350,000

 

January 2004

 

$

1,200,000

 

February 2004

 

$

1,200,000

 

March 2004

 

$

1,765,000

 

April 2004

 

$

1,615,000

 

May 2004

 

$

1,615,000

 

June 2004 and every month thereafter

 

$

2,255,000

 

 

3.                                       Minimum Net Income Before Taxes. 
Pursuant to Section 6.2(c) of the Credit Agreement, the Borrowers’ year-to-date
Net Income for the quarter ending on the Reporting Date, was
$                       , which o satisfies o does not satisfy the requirement
that such amount be not less than $                          during such period
as set forth in table below:

 

Period

 

Minimum Net Income

 

September 2003

 

$

315,000

 

December 2003

 

$

150,000

 

March 2004

 

$

415,000

 

June 2004

 

$

490,000

 

September 2004, and every quarter thereafter

 

$

200,000

 

 

4.                                       Capital Expenditures.  Pursuant to
Section 6.2(c) of the Credit Agreement, for the year-to-date period ending on
the Reporting Date, the Borrowers have expended or contracted to expend during
the fiscal year ended                      , 200    , for Capital Expenditures,
$                        in the aggregate, which o satisfies o does not satisfy
the requirement that such expenditures not exceed $                    in the
aggregate for such fiscal year.

 

C-2

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

 

Attached hereto are all relevant facts in reasonable detail to evidence, and the
computations of the financial covenants referred to above.  These computations
were made in accordance with GAAP.

 

 

SMTEK, INC.

 

 

 

Name:

 

 

Its Chief Financial Officer

 

 

 

JOLT TECHNOLOGY, INC.

 

 

 

Name:

 

 

Its Chief Financial Officer

 

 

 

SMTEK NEW ENGLAND, INC.

 

 

 

Name:

 

 

Its Chief Financial Officer

 

 

 

SMTEK SANTA CLARA, INC.

 

 

 

Name:

 

 

Its Chief Financial Officer

 

 

 

TECHNETICS, INC.

 

 

 

Name:

 

 

Its Chief Financial Officer

 

C-3

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

 

Exhibit E to Credit and Security Agreement

 

Premises

 

The Premises referred to in the Credit and Security Agreement are legally
described as follows:

 

 

200 Science Drive, Moorpark, CA  93021

 

PARCEL 8 OF PARCEL MAP NO. 3828, IN THE CITY OF MOORPARK, AS SHOWN ON A PARCEL
MAP FILE IN BOOK 38, PAGES 1 THROUGH 5, INCLUSIVE OF PARCEL MAPS, AND AS AMENDED
IN BOOK 38, PAGE 39 OF PARCEL MAPS, IN THE OFFICE OF THE COUNTY RECORDED OF SAID
COUNTY.

 

3240 Scott Blvd., Santa Clara, CA  95054

 

ALL OF PARCEL 1, as shown on that certain map entitled “Parcel Map Lands of
Envirotech Systems, Inc., being all of Pcl V as shown on Parcel Map Bk 331 of
Maps, page 120, Santa Clara County, California” which map was filed for record
in the Office of the Recorder of the County of Santa Clara, State of California
on May 22, 1980 in Book 463 of Maps, page 42.

 

6801 NW 15th Avenue, Fort Lauderdale, FL  33309

 

East one-half (1/2) of the building known as 6801 NW 15 Avenue, Ft. Lauderdale,
Florida.

 

274 Cedar Hill Road, Marlborough, MA  01752

 

PARCEL ONE

That certain parcel with the buildings thereon situated in Marlborough,
Middlesex County, Massachusetts, bounded and described as follows beginning at
the northwest corner of the premises on the southerly side of Cedar Hill Street
and at land of the Commonwealth of Massachusetts Metropolitan District
Commission, thence by the southerly side of said Cedar Hill Street.  Said
described lot contains 5.42 acres and is shown as Lot No. 1 on a plan entitled
“Plan of Land in Marlborough, Mass.” owned by: Mark S., Donald D. & Daniel
Mordecai & Melvin B. Clayton.  Scale 1” = 40’, Dated: November 2, 1970. 
Highland Land Surveyors, Inc., 29 Maple Street, Marlborough, Mass., filed with
said Deeds as Plan No. 164 of 1971 in Book 11960, Page 657.

PARCEL TWO

A certain parcel of land in Marlborough, Massachusetts being Lot No. 2 as shown
on a plan entitled “Plan of Land in Marlborough, Massachusetts owned by: Mark
S., Donald D. & Daniel Mordecai & Melvin B. Clayton.  Scale 1” = 40’, Dated:
November 2, 1970.  Highland Land Surveyors, Inc., 29 Maple Street, Marlborough,
Massachusetts” recorded with Middlesex Registry of said Deeds Book 11960, Page
657 said Lot #2. containing 199,024 square feet or 4.57 acres as shown on said
plan or however otherwise said plan may be bounded, measured or described.

 

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

 

2151 Anchor Court, Newbury Park, CA  91321

 

Tract No. 2963, as per the map thereof recorded in Book 79, Pages 61 and 62 of
Maps, in the office of the County Recorder of Ventura County, CA, and Parcel Map
No. 3395 as per Map filed in book 29, Pages 91 and 98 of Parcel maps in the
office of said County Recorder.

 

13200 Danielson Street, Poway, CA  92064

 

Lots 96/97 of City of Poway Tract No. 85-04, Unit II, in the City of Poway,
State of California, according to map therof no. 12572, filed in the office of
the County Recorder of San Diego County, February 28, 1990, as Instrument No.
90-107515.

 

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

 

Exhibit F to Credit and Security Agreement

 

NOTICE OF BORROWING

 

                  ,      

 

TO:

 

Wells Fargo Business Credit, Inc.

 

 

 

                                                                          

 

 

 

                                                                          

 

 

 

                                                                          

 

 

 

Telecopier:

                                                           

 

 

 

Attention:

                                                             

 

 

The undersigned refers to that certain Credit and Security Agreement dated as of
September 19, 2003 (as amended or modified to date, the “Credit Agreement”) by
and between SMTEK, Inc (“SI”), Jolt Technology, Inc. (“Jolt”), SMTEK New
England, Inc. (“SNEI”), SMTEK Santa Clara, Inc. (“SSCI”), Technetics, Inc.
(“Technetics”) (SI, Jolt, SNEI, SSCI, and Technetics are each referred to herein
as a “Borrower” and collectively as the “Borrowers”) and Wells Fargo Business
Credit, Inc.  Capitalized terms used herein but not otherwise defined shall have
the same meanings assigned to them in the Credit Agreement.

 

Pursuant to Section 2.2(b) of the Credit Agreement, the undersigned hereby
requests or confirms Borrowers’ request for an Advance on the date, of the
type(s) and in the amount(s) specified below.

 

 

Amount of Advance

 

Type of Advance

 

Date of Borrowing

 

Interest Period
(LIBO Rate
Advances Only)

 

 

 

 

 

 

 

 

 

$

 

 

 

 

 

 

 

 

 

 

SMTEK, INC.

 

 

 

Name:

 

 

 

Title:

 

 

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

 

Exhibit G to Credit and Security Agreement

 

NOTICE OF CONVERSION TO LIBO RATE ADVANCES

 

                   ,         

 

TO:

 

Wells Fargo Business Credit, Inc.

 

 

 

                                                                                   

 

 

 

                                                                                   

 

 

 

                                                                                   

 

 

 

Telecopier:

                                                               

 

 

 

Attention:

                                                                

 

 

The undersigned refers to that certain Credit and Security Agreement dated as of
September  19, 2003 (as amended or modified to date, the “Credit Agreement”) by
and between SMTEK, Inc (“SI”), Jolt Technology, Inc. (“Jolt”), SMTEK New
England, Inc. (“SNEI”), SMTEK Santa Clara, Inc. (“SSCI”), Technetics, Inc.
(“Technetics”) (SI, Jolt, SNEI, SSCI, and Technetics are each referred to herein
as a “Borrower” and collectively as the “Borrowers”) and Wells Fargo Business
Credit, Inc.  Capitalized terms used herein but not otherwise defined shall have
the same meanings assigned to them in the Credit Agreement.

 

Pursuant to Section 2.3(a) of the Credit Agreement, the undersigned hereby
requests or confirms Borrowers’ request that Floating Rate Advances in the
aggregate amounts specified below be converted to LIBO Rate Advances on the
date(s) and for the Interest Period(s) specified below.

 

Amount of Floating Rate
Advances To Be Converted

 

Date of Conversion

 

Interest Period

 

 

 

 

 

 

 

$

 

 

 

 

 

 

 

 

SMTEK, INC.

 

 

 

Name:

 

 

 

Title:

 

 

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

 

Exhibit H to Credit and Security Agreement

 

NOTICE TO CONTINUE LIBO RATE ADVANCE

 

               ,         

 

TO:

 

Wells Fargo Business Credit, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Telecopier:

 

 

 

 

Attention:

 

 

 

 

The undersigned refers to that certain Credit and Security Agreement dated as of
September 19, 2003 (as amended or modified to date, the “Credit Agreement”) by
and between SMTEK, Inc (“SI”), Jolt Technology, Inc. (“Jolt”), SMTEK New
England, Inc. (“SNEI”), SMTEK Santa Clara, Inc. (“SSCI”), Technetics, Inc.
(“Technetics”) (SI, Jolt, SNEI,  SSCI, and Technetics are each referred to
herein as a “Borrower” and collectively as the “Borrowers”) and Wells Fargo
Business Credit, Inc.  Capitalized terms used herein but not otherwise defined
shall have the same meanings assigned to them in the Credit Agreement.

 

Pursuant to Section 2.3(b) of the Credit Agreement, the undersigned hereby
requests or confirms Borrowers’ request that LIBO Rate Advances in the aggregate
amount(s) specified below be renewed on the date(s) and for the Interest
Period(s) specified below.

 

Amount of LIBO Rate
Advances to be Renewed

 

Date of
Expiring Interest Period

 

New Interest Period

 

 

 

 

 

 

 

$

 

 

 

 

 

 

 

SMTEK, INC.

 

 

 

Name:

 

 

 

Title:

 

 

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

 

Schedule 5.1 to Credit and Security Agreement

 

Trade Names, Chief Executive Office, Principal Place of Business,
and Locations of Collateral

 

Trade Names

 

SMTEK Moorpark, SMTEK San Diego, SMTEK Fort Lauderdale

 

 

Chief Executive Office/Principal Place of Business

 

200 Science Drive

 

Moorpark, California 93021-2003

 

Other Inventory and Equipment Locations

 

3240 Scott Blvd., Santa Clara, CA  95054

 

 

274 Cedar Hill Road, Marlborough, MA  01752

 

 

6801 NW 15th Avenue, Fort Lauderdale, FL  33309

 

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

 

Schedule 5.2 to Credit and Security Agreement

 

Capitalization and Organizational Chart

 

Holder

 

Type of Rights/Stock

 

No.  of shares (after
exercise of all rights
to acquire shares)

 

Percent interest on a
fully diluted basis

 

SMTEK International, Inc.

 

SMTEK, Inc.
Common Stock

 

250,000

 

100

%

SMTEK International, Inc.

 

Jolt Technology, Inc.
Common Stock

 

1,000

 

100

%

SMTEK International, Inc.

 

Technetics, Inc.
Common Stock

 

198,200

 

100

%

SMTEK International, Inc.

 

SMTEK Santa Clara,
Inc. Common Stock

 

100

 

100

%

SMTEK International, Inc.

 

SMTEK New
England, Inc. Common Stock

 

100

 

100

%

SMTEK International, Inc.

 

SMTEK International Thailand Ltd.
Common Stock

 

4,999,992

 

99.9

%

SMTEK International, Inc.

 

DDL Europe Ltd. Common Stock

 

 

 

100

%

 

 

Organizational chart showing the ownership structure of all Subsidiaries of the
Borrower is attached.

 

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

 

Schedule 5.5  to Credit and Security Agreement

 

Subsidiaries

 

SMTEK, Inc. (aka SMTEK Moorpark)

 

SMTEK Santa Clara, Inc.

 

SMTEK New England, Inc.

 

Jolt Technology, Inc. (aka SMTEK Fort Lauderdale)

 

SMTEK International Thailand Ltd.

 

DDL Europe Ltd.

 

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

 

Schedule 5.7 to Credit and Security Agreement

 

 

Litigation

 

 

None.

 

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

 

Schedule 5.11 to Credit and Security Agreement

 

Intellectual Property Disclosures

 

 

MARK

 

APP./REG.
NO.

 

SMTEK INTERNATIONAL

 

75-597,996

 

S and Design

 

2,394,814

 

SMTEK Stylized Letters

 

75-542,361

 

SMTEK SURFACE MOUNT TECHNOLOGY-SEMICUSTOM VLSI Stylized Letters

 

74-163,799

 

SMTEK Stylized Letters

 

74-163,798

 

SMTEK and Design

 

50,178

 

SMTEK Stylized Letters

 

31,008

 

 

TITLE of PATENT

 

APP./PAT.
NO.

 

METHOD OF MANUFACTURING DIODES; PRODUCE DIODES IN LARGE NUMBERS USING MACHINERY
SO THAT EACH DIODE IS THE SAME AND CAN BE SOLD CHEAPLY.

 

6159771

 

 

 

 

 

 

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

 

Schedule 5.14 to Credit and Security Agreement

 

Environmental Matters

 

Since the early 1990s, we continue to be involved in certain remediation and
investigative studies regarding soil and groundwater contamination at the site
of a former printed circuit board manufacturing plant in Anaheim, California. 
One of our former subsidiaries, Aeroscientific Corp., leased the Anaheim
facility.  Under the terms of a cost sharing agreement entered into several
years ago, the remaining remediation costs are currently being shared on a 50-50
basis with the landlord.  There is no environmental insurance coverage for this
remediation.  At June 30, 2003, we had a reserve of $422,000 for future
remediation costs.  Management, based in part on consultations with outside
environmental engineers and scientists, believes that this reserve is adequate
to cover its share of future remediation costs at this site.  However, the
future actual remediation costs could differ significantly from the estimates. 
Further, our portion could potentially exceed the amount of our reserve.  Our
liability for remediation in excess of our reserve could have a material adverse
impact on our business, financial condition and results of operations.

 

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

 

Schedule 5.19 to Credit and Security Agreement

 

Bank Accounts

 

Citizens Bank Comercial Checking Account number xxxxxx-xxx-x

 

Citizens Bank Commercial Checking Account number xxxxxx-xxx-x

 

Bank of America Business Checking Account number xxxx xxxx xxxx

 

Comerica Bank Account numbers

xxxx-xxxxx-x

xxxx-xxxxx-x

xxxx-xxxxx-x

xxxx-xxxxx-x

xxxx-xxxxx-x

xxxx-xxxxx-x

xxxx-xxxxx-x

xxxx-xxxxx-x

xxxx-xxxxx-x

xxxx-xxxxx-x

xxxx-xxxxx-x

xxxx-xxxxx-x

 

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

 

Schedule 6.3 to Credit and Security Agreement

 

Permitted Liens

 

OFFICE/AGENCY
SEARCHED

 

SECURED PARTY

 

FILE NO./
FILE DATE

 

COLLATERAL
DESCRIPTION

California Secretary of State

 

The CIT Group/Equipment Financing, Inc.

 

94066754
04/13/94 (UCC-1)

Continuation Statement filed 02/22/99

 

Specific property

 

 

 

 

 

 

 

California Secretary of State

 

The CIT Group/Equipment Financing, Inc.

 

94131225
06/28/94 (UCC-1)

Continuation Statement filed 04/23/99

 

Specific property

 

 

 

 

 

 

 

California Secretary of State

 

The CIT Group/Equipment Financing, Inc.

 

94144723
07/15/94 (UCC-1)

Continuation Statement filed 06/28/99

 

Specific property

 

 

 

 

 

 

 

California Secretary of State

 

General Electric Capital Corporation

 

9612960624
05/07/96 (UCC-1)

Continuation Statement filed 02/09/01

 

Specific property

 

 

 

 

 

 

 

California Secretary of State

 

SAFECO Credit Company, Inc.

 

9815960731
06/04/98 (UCC-1)

Continuation Statement filed 01/03/03

 

Specific property

 

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

 

OFFICE/AGENCY
SEARCHED

 

SECURED PARTY

 

FILE NO./
FILE DATE

 

COLLATERAL
DESCRIPTION

California Secretary of State

 

Copelco Capital, Inc.

 

9908860796
05/19/99 (UCC-1)

 

Leased property

 

 

 

 

 

 

 

California Secretary of State

 

Copelco Capital, Inc.

 

9924461065
08/20/99 (UCC-1)

 

Leased property

 

 

 

 

 

 

 

California Secretary of State

 

Copelco Capital, Inc.

 

9924560023
08/20/99 (UCC-1)

 

Leased property

 

 

 

 

 

 

 

California Secretary of State

 

Copelco Capital, Inc.

 

0028860047
10/03/00 (UCC-1)

 

Leased property

 

 

 

 

 

 

 

California Secretary of State

 

SAFECO Credit Company, Inc.

 

0105160466
02/13/01 (UCC-1)

 

Specific property

 

 

 

 

 

 

 

California Secretary of State

 

Citicorp Vendor Finance, Inc.

 

0108860152
03/23/01 (UCC-1)

 

Leased property

 

 

 

 

 

 

 

California Secretary of State

 

SAFECO Credit Company, Inc.

 

0120660317
07/23/01 (UCC-1)

 

Specific property

 

 

 

 

 

 

 

California Secretary of State

 

General Electric Capital Corporation as agent for SAGE Capital Corporation

 

0129060203
10/15/01 (UCC-1)

 

Specific property

 

 

 

 

 

 

 

Ventura County Clerk Recorder

 

General Electric Capital Corporation

 

96-066235
05/16/96 (UCC-1)
Continuation Statement filed 02/12/01

 

Fixture Filing (specific equipment)

 

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

 

OFFICE/AGENCY
SEARCHED

 

SECURED PARTY

 

FILE NO./
FILE DATE

 

COLLATERAL
DESCRIPTION

Ventura County Clerk Recorder

 

SAFECO Credit Company, Inc.

 

98-092983
06/10/98 (UCC-1)

Continuation Statement filed 01/06/03

 

Fixture Filing (specific equipment)

 

 

 

 

 

 

 

Ventura County Clerk Recorder

 

SAFECO Credit Company, Inc.

 

2001-0028472 02/15/01 (UCC-1)

 

Fixture Filing (specific equipment)

 

 

 

 

 

 

 

Ventura County Clerk Recorder

 

SAFECO Credit Company, Inc.

 

2001-0161017 08/15/01 (UCC-1)

 

Fixture Filing (specific equipment)

 

 

 

 

 

 

 

Ventura County Clerk Recorder

 

SAFECO Credit Company, Inc.

 

2001-0161018 08/15/01 (UCC-1)

 

Fixture Filing (specific equipment)

 

 

 

 

 

 

 

California Secretary of State

 

M&I First National Leasing Corp.

 

9526560041
09/15/95 (UCC-1)

Continuation Statement filed 05/30/00

 

Specific property

 

 

 

 

 

 

 

California Secretary of State

 

M&I First National Leasing Corp.

 

9530661259
10/31/95 (UCC-1)

Continuation Statement filed 06/22/00

 

Specific property

 

 

 

 

 

 

 

California Secretary of State

 

Copelco Capital, Inc.

 

0026660745
09/15/00 (UCC-1)

 

Leased property

 

 

 

 

 

 

 

California Secretary of State

 

Copelco Capital, Inc.

 

0028860051 10/03/00 (UCC-1)

 

Leased property

 

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

 

OFFICE/AGENCY
SEARCHED

 

SECURED PARTY

 

FILE NO./
FILE DATE

 

COLLATERAL
DESCRIPTION

California Secretary of State

 

SAFECO Credit Company, Inc.

 

0103360354
01/26/01 (UCC-1)

 

Specific property

 

 

 

 

 

 

 

California Secretary of State

 

General Electric Corporation as agent for SAGE Capital Corporation

 

0128860820
10/12/01 (UCC-1)

 

Specific property

 

 

 

 

 

 

 

San Diego County Recorder

 

M&I First National Leasing Corp.

 

1995-0410203 09/14/95
(UCC-1)

Continuation Statement filed 06/06/00

 

Fixture Filing (specific equipment)

 

 

 

 

 

 

 

San Diego County Recorder

 

SAFECO Credit Company, Inc.

 

2001-0088957 02/15/01
(UCC-1)

 

Fixture Filing (specific equipment)

 

 

 

 

 

 

 

Delaware Secretary of State

 

TEAC AMERICA, INC.

 

21350374
05/31/02 (UCC-1)

 

Specific listed property

 

 

 

 

 

 

 

Delaware Secretary of State

 

TTI, INC.

 

21660590
06/06/02 (UCC-1)

 

Specific listed property

 

 

 

 

 

 

 

Delaware Secretary of State

 

AVNET, INC.

 

30442502
09/26/01 (UCC-1)

 

All electronic components pursuant to those certain agreements between secured
party and debtor

 

 

 

 

 

 

 

Delaware Secretary of State

 

ARROW ELECTRONICS, INC.

 

30669849
03/18/03 (UCC-1)

 

Those products stored in the in-plant store facility and those products sold be
secured party to debtor pursuant to that in-plant store agreement dated March 1,
2003

 

 

 

 

 

 

 

California Secretary of State

 

III, Inc.

 

0215860127
06/06/02 (UCC-1)

 

Specific property

 

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

 

OFFICE/AGENCY
SEARCHED

 

SECURED PARTY

 

FILE NO./
FILE DATE

 

COLLATERAL
DESCRIPTION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

California Secretary of State

 

General Electric Capital Corporation

 

9612960624
05/07/97 (UCC-1)

Continuation Statement filed 02/09/01

 

Specific property

 

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

 

Schedule 6.4 to Credit and Security Agreement

 

Permitted Indebtedness and Guaranties

 

Permitted Indebtedness and Guaranties

 

Indebtedness

 

Creditor

 

Principal
Amount

 

Maturity
Date

 

Monthly
Payment

 

Collateral

 

 

 

 

 

 

 

 

 

 

 

Data-Design Laboratories, Inc. 8-1/2% Convertible Subordinated Debentures

 

$

1,060,000

 

August 1, 2008

 

N/A

 

N/A

 

 

 

 

 

 

 

 

 

 

 

Obligations to former employees, directors and officers

 

$

90,335

 

Immediately due

 

N/A

 

N/A

 

 

 

 

 

 

 

 

 

 

 

Internal Revenue Service

 

$

2,375,000

 

June 2008

 

$

44,697.69

 

N/A

 

 

 

 

 

 

 

 

 

 

 

Ford Motor Credit

 

 

 

February 2004

 

$

739.00

 

Truck

 

 

 

 

 

 

 

 

 

 

 

GMAC

 

 

 

April 2004

 

$

865.00

 

Chevy Van

 

 

All operating leases deemed not indebtedness pursuant to section 6.4 of the
Credit Agreement.

 

Guaranties

 

Primary Obligor

 

Amount and Description of
Obligation Guaranteed

 

Beneficiary of Guaranty

 

 

 

 

 

SMTEK International, Inc.

 

Rental payments aggregating approximately $3.7 million plus related lease
expenses under lease agreement on property at 13200 Danielson Street, Poway, CA

 

Pomerado Leasing No. 8 LP

 

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

 

SMTEK International, Inc.

 

Rental payments aggregating approximately $3.2 million plus related lease
expenses under lease agreement on property at 274 Cedar Hill Road, Marlborough,
MA

 

Cedar Marlboro Realty Corporation

 

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