Exhibit 10.3
 
FORBEARANCE AGREEMENT
 
THIS FORBEARANCE AGREEMENT (this “Agreement”) is executed and effective this __
day of February, 2014 (the “Effective Date”), by and among Partners for Growth
III, L.P., a Delaware limited partnership corporation (“PFG”) with its principal
place of business at 150 Pacific Avenue, San Francisco, California 94111, and
each of Advanced Photonix, Inc., a Delaware corporation and Picometrix, LLC, a
Delaware limited liability company, each with its principal place of business at
2925 Boardwalk, Ann Arbor, MI 48104 (individually and collectively, jointly and
severally, “Borrower”).
 
RECITALS
 
A.           PFG and Borrower have entered into that certain Loan and Security
Agreement, dated as of February 8, 2013 (as the same may from time to time be
amended, modified, supplemented or restated, the “Loan Agreement”), pursuant to
which PFG has made available to Borrower, among other credit accommodations, a
term loan in the original principal amount of Two Million Five Hundred Thousand
Dollars ($2,500,000) (the “Loan”).
 
B.           Borrower is currently in default of Section 5 of the Schedule to
the Loan Agreement for failing to comply with the minimum EBITDA financial
covenant for the month ending December 31, 2013 (the “Existing Event of
Default”).
 
C.           Borrower has requested that PFG forbear from exercising its rights
and remedies under the Loan Agreement as a result of the Existing Event of
Default during the Forbearance Period (as hereinafter defined).
 
NOW, THEREFORE, in consideration of the agreements and covenants contained
herein, and for good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
 
1.           Incorporation by Reference; Acknowledgement of Recitals.  Borrower
acknowledges the recitals set forth herein and the description of the Existing
Event of Default set forth above are true and correct statements of fact, are
incorporated herein, and form a substantive part of this Agreement.
 
2.           Definitions.  Capitalized terms used but not defined in this
Agreement, including its preamble and recitals, shall have the meanings given to
them in the Loan Agreement.
 
3.           Acknowledgment of Indebtedness.  Borrower hereby acknowledges and
agrees that as of January 31, 2014, the outstanding principal balance under the
Loan is: (a) One Million Eight Hundred Forty-Five Thousand Two Hundred
Thirty-Eight Dollars and Nine Cents ($1,845,238.09), excluding all accrued and
unpaid interest (of which $18,670.22 is due and payable February 1, 2014), fees
and PFG expenses, and that such sum is due and owing without offset or defense.
 
 
 

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4.           Ratification of Loan Documents; Further Assurances.
 
(a)           Borrower acknowledges and agrees that (i) each of the Loan
Documents remain in full force and effect in accordance with the original terms,
except as expressly modified hereby, (ii) the Liens granted by Borrower to PFG
under the Loan Documents shall remain in place, unimpaired by the transactions
contemplated by this Agreement, and PFG’s priority with respect thereto shall
not be affected hereby or thereby, and (iii) the Loan Agreement and the other
Loan Documents shall continue to secure all Obligations as stated therein except
as expressly amended and modified by this Agreement and the Forbearance
Documents (as hereinafter defined).
 
(b)           Borrower ratifies, reaffirms, restates and incorporates by
reference all of its representations, warranties, covenants, and agreements made
under the Loan Documents.
 
(c)           Borrower hereby ratifies, confirms, and reaffirms that the
Obligations include, without limitation, the Loans, and any future
modifications, amendments, substitutions or renewals thereof.
 
(d)           Borrower hereby agrees that this Agreement is the legal, valid and
binding obligation of Borrower, enforceable against Borrower.
 
(e)           Borrower and PFG acknowledge that the Existing Event of Default
are ongoing, existing and continuing Events of Default under the Loan Agreement.
 
(f)           Borrower and PFG confirm that neither party has heretofore waived
or modified, and has not agreed to waive or modify, any term of the Loan
Documents, and any actions that Borrower takes or fails to take (including the
expenditure of any funds) is voluntary, informed and taken at its own risk.
 
(g)           Borrower shall, from and after the execution of this Agreement,
execute and deliver to PFG whatever additional documents, instruments, and
agreements that PFG may reasonably require in order to perfect the Collateral
granted in the Loan Agreement more securely in PFG and to otherwise give effect
to the terms and conditions of this Agreement.
 
5.           Forbearance Period.  Subject to Borrower’s strict compliance and
performance with the terms of this Agreement and each Forbearance Document and
so long as no Event of Default (other than the Existing Event of Default) or
Termination Event occurs, PFG will forbear from enforcing its rights and
remedies under the Loan Documents through February 28, 2014 (the “Forbearance
Period”).  Except as expressly provided herein, this Agreement does not
constitute a waiver or release by PFG of any Obligations or of any Event of
Default which may arise in the future after the Effective Date.
 
6.           Termination.  The Forbearance Period shall terminate automatically
and without notice to Borrower upon the occurrence of a Termination Event.
 
 
 

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7.           Termination Events.  The occurrence of any one or more of the
following events shall constitute a termination event (hereinafter, a
“Termination Event”) under this Agreement:
 
(a)           The failure of Borrower to cause the PFG’s Obligations to be
repaid as and when required by the Loan Agreement, it being expressly
acknowledged and agreed that TIME IS OF THE ESSENCE.
 
(b)           The filing of a petition for relief by or against Borrower under
the United States Bankruptcy Code.
 
(c)           The failure of Borrower to promptly, punctually, or faithfully
perform any other term, condition, or covenant of this Agreement or any of the
other documents executed and delivered in connection with this Agreement (the
“Forbearance Documents”) as and when due, it being expressly acknowledged and
agreed that TIME IS OF THE ESSENCE.
 
(d)           The occurrence of any further default or Event of Default (other
than the Existing Event of Default) under the Loan Agreement, any other Loan
Document or any Forbearance Document.
 
(e)           any recital, representation or warranty made herein, in any
document Forbearance Document, or in any report, certificate, financial
statement or other instrument or document previously, now or hereafter furnished
by or on behalf of Borrower in connection with this Agreement or any Forbearance
Document, shall prove to have been false, incomplete or misleading in any
material respect on the date as of which it was made; and
 
(f)           a material impairment in the perfection or priority of PFG’s
security interest in the Collateral or in the value of such Collateral taken as
a whole occurs.
 
8.           Rights Upon Termination.  Upon the earlier of (i) the occurrence of
any Termination Event or (ii) the expiration of the Forbearance Period, all of
the Obligations shall, without notice or demand, become immediately due and
payable in full and at the sole discretion of PFG and PFG shall be entitled to
immediately pursue any and all remedies available under applicable law or
pursuant to the Loan Documents.
 
9.           Conditions Precedent.  The effectiveness of this Agreement and the
forbearance described herein is subject to the satisfaction of each of the
following conditions precedent:
 
(a)           This Agreement and any Forbearance Document shall be executed by
all parties and delivered to PFG; and
 
(b)           Borrower’s payment to PFG of a fully-earned and non-refundable
forbearance fee in an amount equal to Ten Thousand Dollars ($10,000) and all
legal fees and expenses of PFG shall have been paid in full, to the extent due
in connection with the Existing Event of Default and the preparation,
negotiation, execution and delivery of this Agreement and the Forbearance
Documents.  Borrower hereby authorizes PFG to debit the deposit account
maintained by Borrower with PFG for all such amounts.
 
 
 

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(c)           Borrower’s delivery of an update to the Representations, if
required to render the information set forth therein as delivered to PFG on the
date of the Loan Agreement true, correct, accurate and complete as of the
Effective Date of this Forbearance.
 
10.           Representations of Borrower.  Borrower warrants and represents to
PFG as follows:
 
(a)           Borrower has no defenses, affirmative or otherwise, rights of
setoff, rights of recoupment, claims, counterclaims, actions or causes of action
of any kind or nature whatsoever against PFG or any past, present or future
agent, attorney, legal representative, predecessor-in-interest, affiliate,
successor, assign, employee, director or officer of PFG, directly or indirectly,
arising out of, based upon, or in any manner connected with, any transaction,
event, circumstance, action, failure to act, or occurrence of any sort or type,
whether known or unknown, which occurred, existed, was taken, permitted, or
began prior to the execution of this Agreement and accrued, existed, was taken,
permitted or begun in accordance with, pursuant to, or by virtue of the terms or
conditions of the Loan Documents, or which directly or indirectly relate to or
arise out of or in any manner are connected with any of the Loan Documents; TO
THE EXTENT ANY SUCH DEFENSES, AFFIRMATIVE OR OTHERWISE, RIGHTS OF SETOFF, RIGHTS
OF RECOUPMENT, CLAIMS, COUNTERCLAIMS, ACTIONS OR CAUSES OF ACTION EXIST OR
EXTEND, SUCH DEFENSES, RIGHTS, CLAIMS, COUNTERCLAIMS, ACTIONS AND CAUSES OF
ACTION ARE HEREBY FOREVER WAIVED, DISCHARGED AND RELEASED.
 
(b)           Borrower has freely and voluntarily entered into this Agreement
after an adequate opportunity and sufficient period of time to review, analyze
and discuss all terms and conditions of this Agreement and all factual and legal
matters relevant hereto with counsel freely and independently chosen by
it.  Borrower further acknowledges that it has actively and with full
understanding participated in the negotiation of this Agreement after
consultation and review with its counsel and that this Agreement has been
negotiated, prepared and executed without fraud, duress, undue influence or
coercion of any kind or nature whatsoever having been exerted by or imposed upon
any party to this Agreement.
 
(c)           As of the Effective Date, except as disclosed in the
Representations, there are no actions or proceedings pending or, to the
knowledge of any Responsible Officer, threatened in writing by or against
Borrower or any of its Subsidiaries involving more than any single claim of
$50,000 or more, or involving $100,000 or more in the aggregate.
 
(d)           There is no statute, rule, regulation, order or judgment, no
charter, by-law or preference stock provision with respect Borrower, and no
provision of any material agreement binding on Borrower or any of its properties
which would prohibit or cause a default under or in any way prevent the
execution, delivery, performance, compliance or observance of any of the terms
or conditions of this Agreement.
 
(e)           Borrower has not voluntarily or involuntarily, granted any Liens
to any creditor not previously disclosed to PFG in writing on or before the
Effective Date or taken any action or failed to take any action which could or
would impair, change, jeopardize or otherwise adversely affect the priority,
perfection, validity or enforceability of any Liens securing all or any portion
of the Obligations or the priority or validity of PFG’s claims with respect to
the Obligations relative to any other creditor of Borrower, subject only to
Permitted Liens that are permitted pursuant to the terms of the Loan Agreement
to have superior priority to PFG’s Lien under the Loan Agreement.
 
 
 

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(f)           Borrower has the corporate power and authority to enter into and
perform its obligations under this Agreement and the Forbearance Documents, and
the execution and delivery of this Agreement and the other Forbearance Documents
by Borrower and the consummation by Borrower of the transactions contemplated
hereby and thereby and performance of their obligations hereunder and thereunder
have been duly authorized.
 
(g)           This Agreement and each of the Loan Documents to which Borrower is
a party constitutes the valid, binding and enforceable obligation of Borrower,
enforceable against Borrower in accordance with the terms thereof, except as
such enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium and similar laws affecting creditors’ rights generally and by general
principles of equity.
 
11.           Reimbursement of Costs and Expenses.  Borrower shall reimburse PFG
for any and all reasonable costs, expenses, and costs of collection (including
reasonable attorneys’ fees, expenses, audit fees, and appraisal fees) heretofore
or hereafter incurred by PFG in connection with this Agreement and with the
protection, preservation, and enforcement by PFG of its rights and
remedies.  Borrower hereby authorizes and directs PFG to debit Borrower’s
deposit account maintained at PFG for all such fees and expenses.
 
12.           Non-Interference.  From and after the expiration or termination of
the Forbearance Period, Borrower agrees not to interfere with the exercise by
PFG of any of its rights and remedies.  Borrower further agrees that it shall
not seek to distrain or otherwise hinder, delay, or impair PFG’s efforts to
realize upon the Collateral, or otherwise to enforce its rights and remedies
pursuant to the Loan Documents.  The provisions of this Section 12 shall be
specifically enforceable by PFG.
 
 
 

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13.           RELEASE OF CLAIMS.  FOR AND IN CONSIDERATION OF PFG’S AGREEMENTS
CONTAINED HEREIN, BORROWER, TOGETHER WITH ITS, SUCCESSORS AND ASSIGNS
(INDIVIDUALLY AND COLLECTIVELY, “RELEASORS”) HEREBY VOLUNTARILY AND KNOWINGLY
RELEASES AND FOREVER WAIVES AND DISCHARGES PFG AND EACH OF ITS RESPECTIVE
PARENTS, DIVISIONS, SUBSIDIARIES, AFFILIATES, MEMBERS, MANAGERS, PARTICIPANTS,
PREDECESSORS, SUCCESSORS, AND ASSIGNS, AND EACH OF THEIR RESPECTIVE CURRENT AND
FORMER DIRECTORS, OFFICERS, SHAREHOLDERS, MEMBERS, MANAGERS, PARTNERS, AGENTS,
AND EMPLOYEES, AND EACH OF THEIR RESPECTIVE PREDECESSORS, SUCCESSORS, HEIRS, AND
ASSIGNS (INDIVIDUALLY AND COLLECTIVELY, THE “RELEASED PARTIES”) FROM ALL
POSSIBLE CLAIMS, COUNTERCLAIMS, DEMANDS, ACTIONS, CAUSES OF ACTION, DAMAGES,
COSTS, EXPENSES AND LIABILITIES WHATSOEVER, WHETHER KNOWN OR UNKNOWN,
ANTICIPATED OR UNANTICIPATED, SUSPECTED OR UNSUSPECTED, FIXED, CONTINGENT OR
CONDITIONAL, OR AT LAW OR IN EQUITY, IN ANY CASE ORIGINATING IN WHOLE OR IN PART
ON OR BEFORE THE EFFECTIVE DATE THAT ANY OF THE RELEASORS MAY NOW OR HEREAFTER
HAVE AGAINST THE RELEASED PARTIES, IF ANY, IRRESPECTIVE OF WHETHER ANY SUCH
CLAIMS ARISE OUT OF CONTRACT, TORT, VIOLATION OF LAW OR REGULATIONS, OR
OTHERWISE, INCLUDING WITHOUT LIMITATION ARISING DIRECTLY OR INDIRECTLY FROM THE
LAWSUIT, ANY PRIOR OR EXISTING LOANS BETWEEN RELEASORS AND RELEASED PARTIES, ANY
OF THE LOAN DOCUMENTS, THE EXERCISE OF ANY RIGHTS AND REMEDIES UNDER ANY OF THE
LOAN DOCUMENTS, AND/OR NEGOTIATION FOR AND EXECUTION OF THIS AGREEMENT,
INCLUDING, WITHOUT LIMITATION, ANY CONTRACTING FOR, CHARGING, TAKING, RESERVING,
COLLECTING OR RECEIVING INTEREST IN EXCESS OF THE HIGHEST LAWFUL RATE
APPLICABLE.  EACH OF THE RELEASORS WAIVES THE BENEFITS OF ANY LAW INCLUDING
SECTION 1542 OF THE CALIFORNIA CIVIL CODE, WHICH MAY PROVIDE IN SUBSTANCE: “A
GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR
SUSPECT TO EXIST IN ITS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF
KNOWN BY IT MUST HAVE MATERIALLY AFFECTED ITS SETTLEMENT WITH THE DEBTOR.” EACH
OF THE RELEASORS UNDERSTANDS THAT THE FACTS WHICH IT BELIEVES TO BE TRUE AT THE
TIME OF MAKING THE RELEASE PROVIDED FOR HEREIN MAY LATER TURN OUT TO BE
DIFFERENT THAN IT NOW BELIEVES, AND THAT INFORMATION WHICH IS NOT NOW KNOWN OR
SUSPECTED MAY LATER BE DISCOVERED.  EACH OF THE RELEASORS ACCEPTS THIS
POSSIBILITY, AND EACH OF THEM ASSUMES THE RISK OF THE FACTS TURNING OUT TO BE
DIFFERENT AND NEW INFORMATION BEING DISCOVERED; AND EACH OF THEM FURTHER AGREES
THAT THE RELEASE PROVIDED FOR HEREIN SHALL IN ALL RESPECTS CONTINUE TO BE
EFFECTIVE AND NOT SUBJECT TO TERMINATION OR RESCISSION BECAUSE OF ANY DIFFERENCE
IN SUCH FACTS OR ANY NEW INFORMATION.
 
By entering into this release, Borrower recognizes that no facts or
representations are ever absolutely certain and it may hereafter discover facts
in addition to or different from those which it presently knows or believes to
be true, but that it is the intention of Borrower hereby to fully, finally and
forever settle and release all matters, disputes and differences, known or
unknown, suspected or unsuspected; accordingly, if Borrower should subsequently
discover that any fact that it relied upon in entering into this release was
untrue, or that any understanding of the facts was incorrect, Borrower shall not
be entitled to set aside this release by reason thereof, regardless of any claim
of mistake of fact or law or any other circumstances whatsoever.  Borrower
acknowledges that it is not relying upon and has not relied upon any
representation or statement made by PFG with respect to the facts underlying
this release or with regard to any of such party’s rights or asserted rights.
 
This release may be pleaded as a full and complete defense and/or as a
cross-complaint or counterclaim against any action, suit, or other proceeding
that may be instituted, prosecuted or attempted in breach of this
release.  Borrower acknowledges that the release contained herein constitutes a
material inducement to PFG to enter into this Agreement, and that PFG would not
have done so but for PFG’s expectation that such release is valid and
enforceable in all events.
 
 
 

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Borrower hereby represents and warrants to PFG, and PFG is relying thereon, as
follows:
 
(a)           Except as expressly stated in this Agreement, neither PFG nor any
agent, employee or representative of PFG has made any statement or
representation to Borrower regarding any fact relied upon by Borrower in
entering into this Agreement.
 
(b)           Borrower has made such investigation of the facts pertaining to
this Agreement and all of the matters appertaining thereto, as it deems
necessary.
 
(c)           The terms of this Agreement are contractual and not a mere
recital.
 
(d)           This Agreement has been carefully read by Borrower, the contents
hereof are known and understood by Borrower, and this Agreement is signed
freely, and without duress, by Borrower.
 
(e)           Borrower represents and warrants that it is the sole and lawful
owner of all right, title and interest in and to every claim and every other
matter which it releases herein, and that it has not heretofore assigned or
transferred, or purported to assign or transfer, to any person, firm or entity
any claims or other matters herein released.  Borrower shall indemnify PFG,
defend and hold it harmless from and against all claims based upon or arising in
connection with prior assignments or purported assignments or transfers of any
claims or matters released herein.
 
14.           Amendment of Loan Agreement. Section 8.21 of the Loan Agreement
shall be deemed amended by Section 15 hereof.
 
15.           JURY TRIAL.  BORROWER HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL
BY JURY OF ANY CLAIM OR CAUSE OF ACTION (I) ARISING UNDER THIS AGREEMENT OR ANY
OTHER LOAN DOCUMENT OR ANY RELATED AGREEMENT OR (II) IN ANY WAY RELATING TO THIS
AGREEMENT OR ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS EVIDENCED HEREBY OR
THEREBY, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND BORROWER
HEREBY AGREES THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE DECIDED BY COURT
TRIAL WITHOUT A JURY, AND THAT BORROWER OR PFG MAY FILE AN ORIGINAL COUNTERPART
OR A COPY OF THIS SECTION 15 WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT
OF BORROWER TO THE WAIVER OF ITS RIGHT TO TRIAL BY JURY. EACH PARTY HAS REVIEWED
THIS WAIVER WITH ITS COUNSEL.
 
 
 

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WITHOUT INTENDING IN ANY WAY TO LIMIT THE PARTIES’ AGREEMENT TO WAIVE THEIR
RESPECTIVE RIGHT TO A TRIAL BY JURY, if the above waiver of the right to a trial
by jury is not enforceable, the parties hereto agree that any and all disputes
or controversies of any nature between them arising at any time shall be decided
by a reference to a private judge, mutually selected by the parties (or, if they
cannot agree, by the Presiding Judge of the Santa Clara County, California
Superior Court) appointed in accordance with California Code of Civil Procedure
Section 638 (or pursuant to comparable provisions of federal law if the dispute
falls within the exclusive jurisdiction of the federal courts), sitting without
a jury, in Santa Clara County, California; and the parties hereby submit to the
jurisdiction of such court.  The reference proceedings shall be conducted
pursuant to and in accordance with the provisions of California Code of Civil
Procedure §§ 638 through 645.1, inclusive.  The private judge shall have the
power, among others, to grant provisional relief, including without limitation,
entering temporary restraining orders, issuing preliminary and permanent
injunctions and appointing receivers.  All such proceedings shall be closed to
the public and confidential and all records relating thereto shall be
permanently sealed.  If during the course of any dispute, a party desires to
seek provisional relief, but a judge has not been appointed at that point
pursuant to the judicial reference procedures, then such party may apply to the
Santa Clara County, California Superior Court for such relief.  The proceeding
before the private judge shall be conducted in the same manner as it would be
before a court under the rules of evidence applicable to judicial
proceedings.  The parties shall be entitled to discovery which shall be
conducted in the same manner as it would be before a court under the rules of
discovery applicable to judicial proceedings.  The private judge shall oversee
discovery and may enforce all discovery rules and orders applicable to judicial
proceedings in the same manner as a trial court judge.  The parties agree that
the selected or appointed private judge shall have the power to decide all
issues in the action or proceeding, whether of fact or of law, and shall report
a statement of decision thereon pursuant to California Code of Civil Procedure §
644(a).  Nothing in this paragraph shall limit the right of any party at any
time to exercise self-help remedies, foreclose against collateral, or obtain
provisional remedies.  The private judge shall also determine all issues
relating to the applicability, interpretation, and enforceability of this
paragraph.
 
16.           Power of Attorney.  Borrower irrevocably appoints PFG as its
lawful attorney to, after the expiration or termination of the Forbearance
Period, exercisable upon the occurrence and during the continuance of an Event
of Default:  (i) endorse Borrower’s name on any checks or other forms of payment
or security; (ii) sign Borrower’s name on any invoice or bill of lading for any
Accounts or drafts against Account Debtors, (iii) transfer the Collateral into
the name of PFG or a third party as the Code permits; and (iv) take such other
actions as PFG deems necessary to carry out the intent of this Agreement and the
Forbearance Documents.  PFG may exercise the power of attorney to sign
Borrower’s name on any documents necessary to perfect or continue the perfection
of any security interest regardless of whether a default has occurred under this
Agreement or any of the Loan Documents.  PFG’s appointment as Borrower’s
attorney in fact, and all of PFG’s rights and powers, coupled with an interest,
are irrevocable until the Obligations have been fully repaid and performed and
PFG’s obligation to provide any extension of credit to Borrower under the Loan
Documents have been  terminated.
 
17.           Entire Agreement.  This Agreement shall be binding upon Borrower
and its successors and assigns, and shall inure to the benefit of PFG and its
respective successors and assigns.  This Agreement and all documents,
instruments, and agreements executed in connection herewith incorporate all of
the discussions and negotiations between Borrower and PFG, either expressed or
implied, concerning the matters included herein and in such other documents,
instruments and agreements, any statute, custom, or usage to the contrary
notwithstanding.  No such discussions or negotiations shall limit, modify, or
otherwise affect the provisions hereof.  No modification, amendment, or waiver
of any provision of this Agreement, or any provision of any other document,
instrument, or agreement between Borrower and PFG shall be effective unless
executed in writing by the party to be charged with such modification,
amendment, or waiver, and if such party be PFG, then by a duly authorized
officer thereof.
 
 
 

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18.           Advice of Counsel.  The PFG and Borrower have prepared this
Agreement and all documents, instruments, and agreements incidental hereto with
the aid and assistance of their respective counsel.  Accordingly, all of them
shall be deemed to have been drafted by the PFG and Borrower and shall not be
construed against the PFG or Borrower.
 
19.           Illegality or Unenforceability.  Any determination that any
provision or application of this Agreement is invalid, illegal, or unenforceable
in any respect, or in any instance, shall not affect the validity, legality, or
enforceability of any such provision in any other instance, or the validity,
legality, or enforceability of any other provision of this Agreement.
 
20.           Consistent Changes; Conflicts.  The Loan Documents are hereby
amended wherever necessary to reflect the changes described above.  To the
extent any term or provision herein conflicts with any term or provision
contained in any of the Loan Documents, the term or provision provided for
herein shall control.
 
21.           Continuing Validity.  Borrower understands and agrees that in
entering into this Agreement, PFG is relying upon Borrower’s representations,
warranties, and agreements, as set forth in the Loan Documents.  Except as
expressly modified pursuant to this Agreement, the terms of the Loan Documents
remain unchanged and in full force and effect.  PFG’s agreement to modifications
to the existing Loan Agreement pursuant to this Agreement in no way shall
obligate PFG to make any future modifications to the Loan Agreement.  Nothing in
this Agreement shall constitute a satisfaction of the Obligations.  It is the
intention of PFG and Borrower to retain as liable parties all makers and
endorsers of Loan Documents, unless the party is expressly released by PFG in
writing.  No maker, endorser, or guarantor will be released by virtue of this
Agreement.  The terms of this Section 26 apply not only to this Agreement, but
also to all subsequent loan modification agreements.
 
22.           No Waiver.  This Agreement is not applicable to any Event of
Default under any Loan Document whether arising before or after the Effective
Date or as a result of the transactions contemplated hereby other than the
Existing Event of Default.
 
23.           Reservation of Rights.  PFG hereby reserves all rights and
remedies under the Loan Documents and Forbearance Documents, at law, in equity
or otherwise including, without limitation, the right upon a Termination Event
or the expiration of the Forbearance Period, to immediately (i) foreclose on any
Collateral securing the Loans and (ii) exercise any and all other remedies
available under the Loan Documents, the Forbearance Documents or applicable
law.  The failure of PFG to exercise all or any of its rights or remedies at any
time shall not constitute a waiver of any other right or remedy, nor shall this
Agreement constitute a waiver of the Existing Event of Default or any other
Event of Default under the Loan Documents or the Forbearance Documents.
 
24.           Successors and Assigns.  This Agreement shall inure to the benefit
of and be binding upon the heirs, successors, and permitted assigns of the
parties.
 
 
 

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25.           Governing Law and Jurisdiction.  This Agreement shall be construed
and enforced in accordance with the terms of the laws of the State of California
without regard to its conflicts of laws principles.  If any provision of this
Agreement is not enforceable, the remaining provisions of the Agreement shall be
enforced in accordance with their terms.  Borrower, and PFG represent and
warrant to each other that each is duly authorized to execute and deliver this
Agreement on their respective behalves.
 
26.           Counterparts.  This Agreement may be executed in two or more
counterparts each of which shall constitute an original and all of which shall,
when taken together, constitute one and the same agreement, notwithstanding that
all parties may not have signed all counterparts of this Agreement.
 
[Signatures Appear on the Following Page]
 
( )
 
 
 

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IN WITNESS WHEREOF, the parties hereto have executed, or caused this Forbearance
Agreement to be executed by the respective officer or authorized signatory
thereunto duly authorized, as of the date first written above.
 
Borrower:
ADVANCED PHOTONIX, INC.
 
By_______________________________
President or Vice President
 
By_______________________________
Secretary or Ass't Secretary
PFG:
PARTNERS FOR GROWTH III, L.P.
 
By_______________________________
 
Name:  ___________________________
 
Title: Manager, Partners for Growth III, LLC
Its General Partner
   
Borrower:
PICOMETRIX, LLC
 
By_______________________________
   President
 
Name ____________________________
 

Richard D. Kurtz