**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 CREDITAND 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 NEWENGLAND, INC., a Massachusetts corporation (“SNEI”), SMTEK SANTA CLARA,INC., a California corporation (“SSCI”), TECHNETICS, INC., a Californiacorporation (“Technetics”) (SI, Jolt, SNEI, SSCI, and Technetics areeach 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, theBorrowers have requested that the Lender enter into financing arrangements withthe Borrowers pursuant to which the Lender may make loans and provide otherfinancial accommodations to the Borrowers; and

 

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

 

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

 

WHEREAS, eachBorrower 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, exceptas otherwise expressly provided, the following terms shall have the meaningsassigned to them in this Section or in the Section referenced after such term:

 

“Accounts” means all of each Borrower’s accounts, as such termis defined in the UCC, including each and every right of the such Borrower tothe payment of money, whether such right to payment now exists or hereafterarises, whether such right to payment arises out of a sale, lease or otherdisposition of goods or other property, out of a rendering of services, out ofa loan, out of the overpayment of taxes or other liabilities, or otherwisearises 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 whosubsequently transfers such person’s interest to each Borrower, whether suchright to payment is or is not already earned by performance, and howsoever suchright 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 oragreement against any account debtor or other obligor obligated to make anysuch payment or against any property of such account debtor or other obligor;all including but not limited to all present and future accounts, contractrights, loans and obligations receivable, chattel papers, bonds, notes andother debt instruments, tax refunds and rights to payment in the nature ofgeneral intangibles.

 

“Administrative Borrower” has the meaning specified in Section9.15.

 

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

 

“Affiliate” or “Affiliates” means the Guarantors, SMTEKThailand Ltd., an entity organized under the laws of Thailand, and any otherPerson 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 toany specified Person, means the power to direct the management and policies ofsuch Person, directly or indirectly, whether through the ownership of votingsecurities, by contract or otherwise.

 

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

 

“Agreement” means this Credit and Security Agreement.

 

“Applicable Percent” means fifteen percent (15%), provided thatsuch 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 untilsuch percentage equals ten percent (10%).

 

“Availability” means the difference of (i) the Borrowing Baseand (ii) the sum of (A) the outstanding principal balance of all RevolvingAdvances 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 fromtime to time establish and revise in good faith reducing the amount ofRevolving Advances which would otherwise be available to Borrower under thelending formula(s) provided for herein: (i) to reflect events, conditions, contingencies or risks which, asdetermined by Lender in good faith, do or may affect either (1) the Collateralor its value, (2) the assets, business or prospects of Borrower, or (3) thesecurity interests and other rights of Lender in the Collateral (including theenforceability, perfection and priority thereof), or (ii) to reflect Lender’sgood faith belief that any collateral report or financial information furnishedby or on

 

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

 

“Banking Day” means a day on which the Federal Reserve Bank ofNew 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 eurodollarmarket.

 

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

 

“Book Net Worth” means the aggregate of the common and preferredstockholders’ equity in Parent and its Subsidiaries, determined in accordancewith GAAP.

 

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

 

(a)                                  theMaximum Line; or

 

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

 

(i)**                                    **85%of Eligible Accounts, plus

 

(ii)                                  thelesser of:

 

(A)                              $2,000,000,or

 

(B)                                thesum of:

 

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

 

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

 

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

 

and minus

 

(iii)                               allAvailability Reserves.

 

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

 

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

 

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

 

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

 

(a)                      any Person or “group” (as such term is used inSections 13(d) and 14(d) of the Securities Exchange Act of 1934) is or becomesthe “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under theSecurities Exchange Act of 1934, except that a Person will be deemed to have“beneficial ownership” of all securities that such Person has the right toacquire, whether such right is exercisable immediately or only after thepassage 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 atthe beginning of such period constituted the board of Directors of eachBorrower and Parent (together with any new Directors whose election to suchboard of Directors, or whose nomination for election by the owner of eachBorrower and Parent, was approved by a vote of 66-2/3% of the Directors thenstill in office who were either Directors at the beginning of such period orwhose election or nomination for election was previously so approved) cease forany reason to constitute a majority of the board of Directors of each Borrowerand Parent then in office.

 

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

 

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

 

“Collateral” means (a) all of each Borrower’s current andhereafter acquired or arising personal property and other assets, including,without limitation, the following types or items of property: Accounts, chattelpaper, 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 CollateralAccount, and any items in any Lockbox; together with (i) all substitutionsand replacements for and products of any of the foregoing; (ii) in thecase of all goods, all accessions; (iii) all accessories, attachments,parts, equipment and repairs now or hereafter attached or affixed to or used inconnection with any goods; (iv) all warehouse receipts, bills of ladingand other documents of title now or hereafter covering such goods; (v) allcollateral subject to the Lien of any Security Document; (vi) any money,or other assets of each Borrower that now or hereafter come into thepossession, custody, or control of the Lender; (vii) all sums on depositin the Special Account; and (viii) proceeds of any and all of theforegoing; and (b) all personal property or other assets of any Guarantor orother Person at any time subject to a Lien in favor of Lender granted inconnection with this Agreement.

 

“Collateral Account” means the “Lender Account” as defined inthe 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, theBorrower pursuant to Article II.

 

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

 

“Credit Facility” means the credit facility being made availableto 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 capitalizedleases which will become due during the twelve (12) month period beginning onthe designated date.

 

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

 

“Debt Service Coverage Ratio” means the ratio of (i) thesum 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 passageof time or both, would constitute an Event of Default.

 

“Default Period” means any period of time beginning on the firstday of any month during which a Default or Event of Default has occurred andending on the date the Lender notifies the Borrowers in writing that suchDefault 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 whenand 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 theresult of dividing the U.S. Dollar amount of (a) bad debt write-downs,discounts, advertising allowances, credits, or other dilutive items withrespect to the Accounts during such period, by (b) the Borrowers’ grossbillings with respect to the Accounts during such period (excludingextraordinary items).

 

“Dilution Reserve” means, as of any date of determination, theproduct of (a) the number of percentage points (or fraction thereof) by whichDilution 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 suchPerson is a corporation, a governor if such Person is a limited liabilitycompany, or a general partner if such Person is a partnership.

 

“ERISA” means the Employee Retirement Income Security Act of1974.

 

“ERISA Affiliate” means any trade or business (whether or notincorporated) that is a member of a group which includes the Borrowers andwhich is treated as a single employer under Section 414 of the IRC.

 

“Earnings Before Taxes” means from operations but includingextraordinary losses.

 

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

 

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

 

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

 

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

 

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

 

(v)                                 Accountsowed by account debtors located in any state that requires a creditor to file abusiness activity report or similar document in order to bring suit orotherwise enforce its remedies against such account debtor in the courts orthrough any judicial process of such state, unless the Borrower to whom suchAccount is owed has qualified to do business in such state, or has filed anotice 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)                              Accountsowed by any unit of government, whether foreign or domestic (provided, however,that there shall be included in Eligible Accounts that portion of Accounts owedby such units of government for which the Borrowers have provided evidencesatisfactory to the Lender that (A) the Lender has a first priorityperfected security interest and (B) such Accounts may be enforced by theLender directly against such unit of government under all applicable laws);

 

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

 

(viii)                        Accountsowed by an account debtor that is insolvent, the subject of bankruptcyproceedings or has gone out of business;

 

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

 

(x)                                   Accountsnot subject to a duly perfected security interest in the Lender’s favor orwhich are subject to any Lien in favor of any Person other than the Lender;

 

(xi)                                Accountsthat 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)                             Accountsthat constitute advertising, finance charges, service charges or sales orexcise taxes;

 

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

 

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

 

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

 

“Eligible Equipment” means all manufacturing machinery of anyBorrower located at any of the Permitted Equipment Locations, which has beenappraised by an appraiser selected by the Borrowers and satisfactory to Lenderpursuant to an appraisal upon which Lender is expressly permitted to rely; butexcluding any Equipment having any of the following characteristics:

 

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

 

(ii)                                  Equipmentthat is subject to a security interest or lien in favor of any person otherthan Lender; and

 

(iii)                               Equipmentwhich 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 withGAAP; but excluding any Inventory having any of the following characteristics:

 

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

 

(ii)                                  Supplies,packaging, maintenance****parts, fabricated parts or sampleInventory;

 

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(iii)                               Inventorythat is damaged or not currently saleable in the normal course of theBorrowers’ operations;

 

(iv)                              Inventorythat any Borrower has returned, has attempted to return, is in the process ofreturning or intends to return to the vendor thereof;

 

(v)                                 Inventorythat is perishable or live;

 

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

 

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

 

(viii)                        SlowMoving Inventory; and

 

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

 

“Eligible Slow Moving Inventory” means Inventory which does notqualify as Eligible Inventory solely because it is Slow Moving Inventory asdetermined by the Lender in its commercially reasonable discretion.

 

“Environmental Law” means any federal, state, local or othergovernmental statute, regulation, law or ordinance dealing with the protection ofhuman health and the environment.

 

“Equipment” means each Borrower’s equipment, as such term isdefined in the UCC, whether now owned or hereafter acquired, including but notlimited to all present and future machinery, vehicles, furniture, fixtures, manufacturingequipment, shop equipment, office and recordkeeping equipment, parts, tools,supplies, and including specifically the goods described in any equipmentschedule or list herewith or hereafter furnished to the Lender by theBorrowers.

 

“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) theaggregate amount of all trade payables and other obligations of each Borrowerwhich 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 Section6.2.

 

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

 

“Floating Rate Advance” means an Advance bearing interest at theFloating 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 asdetermined for such period in accordance with GAAP.

 

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

 

“General Intangibles” means each of the Borrower’s generalintangibles, as such term is defined in the UCC, whether now owned or hereafteracquired, 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 ofeach Borrower’s business.

 

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

 

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

 

“Hazardous Substances” means pollutants, contaminants, hazardoussubstances, hazardous wastes, petroleum and fractions thereof, and all otherchemicals, wastes, substances and materials listed in, regulated by oridentified in any Environmental Law.

 

“IRC” means the Internal Revenue Code of 1986.

 

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

 

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

 

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

 

“Intellectual Property Rights” means all actual or prospectiverights arising in connection with any intellectual property or otherproprietary rights, including all rights arising in connection with copyrights,patents, service marks, trade dress, trade secrets, trademarks, trade names ormask 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) interestexpensed (whether or not paid) on all Debt, (ii) the amortization of debtdiscounts, (iii) the amortization of all fees payable in connection withthe incurrence of Debt to the extent included in interest expense, and(iv) the portion of any capitalized lease obligation allocable to interestexpense.

 

“Interest Period” means relative to any LIBO Rate Advance, theperiod beginning on (and including) the date on which such LIBO Rate Advance ismade, or continued as, or converted into, a LIBO Rate Advance pursuant toSection 2.2(a), Section 2.3(a) or Section 2.3(b) and shall endon (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 numericallycorresponding day, on the last Banking Day of such month), as the Borrowers mayselect 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 outstandingat any one time;

 

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

 

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

 

(d)                     in no event shall the Borrowersselect Interest Periods with respect to Advances which, in the aggregate, wouldrequire payment of funding losses under Section 2.3(d) in order to makerequired principal payments.

 

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

 

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sale, forlease or under service contracts or for manufacture or processing, and whereverlocated.

 

“Investment Property” means all of each Borrower’s investmentproperty, as such term is defined in the UCC, whether now owned or hereafteracquired, 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 amountof any issued and outstanding Letters of Credit and (ii) the unpaid amountof the Obligation of Reimbursement.

 

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

 

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

 

“LIBO Rate” means with respect to an Interest Period, the rateobtained by adding (a) the applicable Margin to (b) the rate obtained bydividing (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 anysuccessor thereto) for determining the maximum reserve requirements applicableto eurodollar fundings (currently referred to as “Eurocurrency Liabilities” inRegulation D) or any other maximum reserve requirements applicable to a memberbank of the Federal Reserve System with respect to LIBO Rate Advances.

 

“LIBO Rate Advance” means any Advance which bears interest at arate 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 inSection 5.11(c).

 

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

 

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whether nowowned or hereafter acquired and whether arising by agreement or operation oflaw.

 

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

 

“Lockbox” has the meaning given in the Lockbox and CollectionAccount Agreement.

 

“Lockbox and Collection Account Agreement” means the Lockbox andCollection Account Agreements, each of even date herewith, by and between eachBorrower, 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 LIBORate.

 

“Material Adverse Effect” means any of the following:

 

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

 

(ii)                                  amaterial adverse effect on the ability of any Borrower to perform itsobligations under the Loan Documents;

 

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

 

(iv)                              anyclaim against any Borrower or imminent threat of litigation which if determinedadversely to such Borrower would cause such Borrower to be liable to pay anamount 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 Section2.13(c).

 

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

 

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

 

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

 

“Obligation of Reimbursement” has the meaning given in Section2.7(a).

 

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

 

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

 

“Owned Intellectual Property” has the meaning given in Section5.11(a).

 

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

 

“Parent” has the meaning specified in the Recitals to thisAgreement.

 

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

 

“Pay-Off Letter” means a letter, in form and substancesatisfactory to Lender, from Existing Lender to the Borrowers and the Lender settingforth, among other things, the amounts necessary to repay in full all of theobligations of the Borrowers owing to Existing Lender (other than contingentobligations which by their terms survive repayment of such obligations), andproviding authorization from Existing Lender to Lender to obtain a release ofall of the Liens existing in favor of Existing Lender in and to the assets ofthe 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 andcovered by Title IV of ERISA.

 

“Permitted Equipment Locations” means 200 Science Drive,Moorpark, California, 3240 Scott Blvd., Santa Clara, California, and 274 CedarHill 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 HillRoad, Marlborough, Massachusetts, and 6801 NW 15th Avenue, Ft.Lauderdale, Florida, or any other location of a Borrower permitted to beestablished under the terms of this Agreement and with respect to which theLender has received a landlord or other such agreement, in form and substancesatisfactory to Lender.

 

“Permitted Operating Expenses” means any transfer of any fundsfrom any or all of the Borrowers to Parent for Parent to utilize to payParent’s administrative costs and operating expenses incurred in the ordinary courseof operations, and in accordance with Parent’s past practices, including,without limitation, all costs, fees and expenses incurred for Parent’sadministrative overhead, the actual cost of goods purchased and servicesrendered on behalf of Parent, advertising, marketing, promotion, debt servicepayments, real and personal property taxes and assessments, capitalimprovements or replacements, insurance premiums, taxes, utilities, repairs andmaintenance, legal, accounting, bookkeeping, audit, equipment use, telephoneexpenses, salaries and consulting fees, and direct expenses of employees andagents.

 

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

 

“Plan” means an employee benefit plan (as defined in Section3(3) of ERISA) maintained for employees of any Borrower or any ERISA Affiliate.

 

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

 

“Reportable Event” means a reportable event (as defined inSection 4043 of ERISA), other than an event for which the 30-day noticerequirement under ERISA has been waived in regulations issued by the PensionBenefit 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 Ahereto and any note or notes issued in substitution therefore or supplementthereto.

 

“Security Documents” means this Agreement, the Lockbox andCollection Account Agreement, the Patent and Trademark Security Agreement andthe Stock Pledge Agreement and any other document delivered to the Lender fromtime 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, andRichard E. Fitzgerald.

 

“SI” has the meaning specified in the preamble to thisAgreement.

 

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

 

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

 

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

 

“Stock Pledge Agreement” means any Stock Pledge Agreementexecuted 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 totime.

 

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

 

“Subsidiary” means any corporation of which more than 50% of theoutstanding shares of capital stock having general voting power under ordinarycircumstances to elect a majority of the board of Directors of suchcorporation, irrespective of whether or not at the time stock of any otherclass or classes shall have or might have voting power by reason of thehappening of any contingency, is at the time directly or indirectly owned byany Borrower, by any Borrower and one or more other Subsidiaries, or by one ormore 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 theorder of the Lender in substantially the form of Exhibit B hereto and any noteor 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 datethe Lender demands payment of the Obligations after an Event of Defaultpursuant to Section 7.2.

 

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

 

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

 

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

 

Section 1.2                                      OtherDefinitional Terms; Rules of Interpretation.  The words “hereof”, “herein” and “hereunder” and words of similarimport when used in this Agreement shall refer to this Agreement as a whole andnot to any particular provision of this Agreement.  All accounting terms not otherwise defined herein have themeanings assigned to them in accordance with GAAP.  All terms defined in the UCC and not otherwise defined hereinhave the meanings assigned to them in the UCC. References to Articles, Sections, subsections, Exhibits, Schedules andthe like, are to Articles, Sections and subsections of, or Exhibits orSchedules attached to, this Agreement unless otherwise expressly provided.  The words “include”, “includes” and“including” shall be deemed to be followed by the phrase “withoutlimitation”.  Unless the context inwhich used herein otherwise clearly requires, “or” has the inclusive meaningrepresented by the phrase “and/or”. Defined terms include in the singular number the plural and in theplural number the singular.  Referenceto any agreement (including the Loan Documents), document or instrument meanssuch agreement, document or instrument as amended or modified and in effectfrom time to time in accordance with the terms thereof (and, if applicable, inaccordance with the terms hereof and the other Loan Documents), except whereotherwise explicitly provided, and reference to any promissory note includesany promissory note which is an extension or renewal thereof or a substitute orreplacement therefor.  Reference to anylaw, rule, regulation, order, decree, requirement, policy, guideline, directiveor interpretation means as amended, modified, codified, replaced or reenacted,in whole or in part, and in effect on the determination date, including rulesand 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 conditionsherein set forth, to make advances to the Borrowers from time to time from thedate all of the conditions set forth in Section 4.1 and Section 4.2 aresatisfied (the “Funding Date”) to the Termination Date (the “RevolvingAdvances”).  The Lender shall haveno obligation to make a Revolving Advance to the extent the amount of therequested Revolving Advance exceeds Availability.  The Borrowers’ obligation to pay the Revolving Advances shall befurther evidenced by the Revolving Note and shall be secured by theCollateral.  Within the limits set forthin this Section 2.1, the Borrowers may borrow, prepay pursuant to Section 2.16and reborrow.

 

Section 2.2                                      Proceduresfor Requesting Advances.  TheBorrowers shall comply with the following procedures in requesting RevolvingAdvances:

 

(a)***                                  Typeof Advances*. **Each Advance shallbe funded as either a Floating Rate Advance or a LIBO Rate Advance, as theAdministrative Borrower shall specify in the related notice of borrowing ornotice 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 RateAdvances 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 requesteach Advance not later than 11:00 a.m., Los Angeles, California time onthe Banking Day which, in the case of a Floating Rate Advance, is the date theAdvance is to be made, and in the case of a LIBO Rate Advance, is at leastthree (3) Banking Days before the date the Advance is to be made.  Each such request shall be effective uponreceipt by the Lender, shall be in writing or by telephone or telecopytransmission, to be confirmed in writing by the Administrative Borrower if sorequested by the Lender (in the form of Exhibit F), shall be by (i) anOfficer of the Administrative Borrower; or (ii) a person designated as theAdministrative Borrower’s agent by an Officer of the Administrative Borrower ina writing delivered to the Lender; or (iii) a person whom the Lender reasonablybelieves to be an Officer of the Administrative Borrower or such a designatedagent, and shall specify whether the Advance shall be a Floating Rate Advanceor a LIBO Rate Advance and in the case of a LIBO Rate Advance, shall specifythe Interest Period to be applicable thereto. The Borrowers shall repay all Advances even if the Lender does notreceive such confirmation and even if the person requesting an Advance was notin fact authorized to do so.  Anyrequest for an Advance, whether written or telephonic, shall be deemed to be arepresentation by the Borrowers that the conditions set forth in Section 4.2have been satisfied as of the time of the request.

 

(c)                                  ***Disbursement***.  Upon fulfillment of the applicableconditions set forth in Article IV, the Lender shall disburse the proceedsof the requested Advance by crediting the

 

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same to the Administrative Borrower’s demand deposit account maintainedwith Wells Fargo Bank unless the Lender and the Administrative Borrower shallagree in writing to another manner of disbursement.

 

Section 2.3**                                      LIBORate Advances.**

 

(a)                                  ***Converting Floating Rate Advances toLIBO Rate Advances; Procedures*. **So long as no Default Period exists, the Administrative Borrower mayconvert all or any part of any outstanding Floating Rate Advance into a LIBORate Advance by giving notice to the Lender of such conversion not later than11:00 a.m., Los Angeles, California time, on a Banking Day which is at leastthree (3) Banking Days prior to the date of the requested conversion.  Each such notice shall be effective uponreceipt by the Lender, shall be in writing or by telephone or telecopytransmission, to be confirmed in writing by the Administrative Borrower if sorequested by the Lender (in the form of Exhibit G), shall specify the date andamount of such conversion, the total amount of the Floating Rate Advance to beso converted and the applicable Interest Period.  Each such conversion shall occur on a Banking Day, and the aggregateamount 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 InterestPeriod*. **Unless theAdministrative Borrower requests a new LIBO Rate Advance in accordance with theprocedures set forth below, or the Borrowers prepay the principal of anoutstanding LIBO Rate Advance at the expiration of an Interest Period, theLender shall automatically and without request of the Administrative Borrowerconvert each LIBO Rate Advance to a Floating Rate Advance on the last day ofthe relevant Interest Period.  So longas no Default Period exists, the Administrative Borrower may cause all or anypart of any outstanding LIBO Rate Advance to continue to bear interest at a LIBORate after the end of the then applicable Interest Period by notifying theLender not later than 11:00 a.m., Los Angeles, California time, on a BankingDay which is at least three (3) Banking Days prior to the first day of the newInterest Period.  Each such notice shallbe in writing (in the form of Exhibit H) or by telephone or telecopytransmission, to be confirmed in writing by the Administrative Borrower if theLender so requests, shall be effective when received by the Lender, and shallspecify the first day of the applicable Interest Period, the amount of theexpiring LIBO Rate Advance to be continued and the applicable InterestPeriod.  Each new Interest Period shallbegin on a Banking Day and the amount of each Advance bearing a new LIBO Rateshall be equal to $500,000 or a higher integral multiple of $100,000.

 

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

 

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(d)                                 ***Funding Losses*. **The Borrowers shall, upon demand by theLender to the Administrative Borrower (which demand shall be accompanied by astatement setting forth the basis for the calculations of the amount beingclaimed), indemnify the Lender against any loss or expense which the Lender mayhave sustained or incurred (including any net loss or expense incurred byreason of the liquidation or reemployment of deposits or other funds acquiredby the Lender to fund or maintain LIBO Rate Advances) or which the Lender maybe deemed to have sustained or incurred, as reasonably determined by theLender, due to (i) the Borrowers’ failure to make when due any payment inconnection with any LIBO Rate Advances, (ii) the Administrative Borrower’sfailure to borrow or convert any LIBO Rate Advances on a date specifiedtherefor in a notice thereof or (iii) any payment or prepayment of anyLIBO Rate Advance on a date other than the last day of the applicable InterestPeriod.  For this purpose, all noticesunder Sections 2.2(a), 2.3(a) or 2.3(b) shall be deemed to be irrevocable.

 

(e)                                  ***Right of Lender to Fund throughOther Offices*. **TheLender may fulfill its agreements hereunder with respect to any LIBO RateAdvance by causing a foreign branch or affiliate of the Lender to make suchLIBO Rate Advance; provided, that in such event the obligation of theBorrowers to repay such LIBO Rate Advance shall nevertheless be to the Lenderand such LIBO Rate Advance shall be deemed held by the Lender for the accountof such branch or affiliate.

 

(f)                                    ***Discretion of Lender as to Manner ofFunding*. **Notwithstandingany provision of this Agreement to the contrary, the Lender may fund andmaintain 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 bemade as if the Lender had actually funded and maintained each LIBO Rate Advanceduring each Interest Period for such LIBO Rate Advance through the purchase ofdeposits having a maturity corresponding to such Interest Period and bearing aninterest rate equal to the appropriate LIBO Rate for such Interest Period.

 

Section 2.4                                      IncreasedCosts; Capital Adequacy; FundingExceptions.

 

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

 

(i)                                     “CapitalAdequacy Rule” means any law, rule, regulation, guideline, directive,requirement or request regarding capital adequacy, or the interpretation oradministration thereof by any governmental or regulatory authority, centralbank or comparable

 

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agency, whether or not havingthe force of law, that applies to any Related Lender, including rules requiringfinancial institutions to maintain total capital in amounts based uponpercentages of outstanding loans, binding loan commitments and letters ofcredit.

 

(ii)                                  “EurodollarRule” means Regulation D of the Board of Governors of the Federal ReserveSystem and any law, rule, regulation, guideline, directive, requirement orrequest regarding (A) taxes, duties or other charges, exemptions withrespect to LIBO Rate Advances or the Lender’s obligation to make LIBO RateAdvances, and (B) reserves imposed by the Board of Governors of theFederal Reserve System (but excluding any reserve included in the determinationof 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 fundingof LIBO Rate Advances or its obligation to make LIBO Rate Advances, or theinterpretation or administration thereof by any governmental or regulatory authority,central bank or comparable agency, whether or not having the force of law, thatapplies to any Related Lender.

 

(iii)                               “L/CRule” means any law, rule, regulation, guideline, directive, requirement orrequest regarding letters of credit, or the interpretation or administrationthereof by any governmental or regulatory authority, central bank or comparableagency, whether or not having the force of law, that applies to any RelatedLender, including those that impose taxes, duties or other similar charges, ormandate 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)                              “RelatedLender” includes (but is not limited to) the Lender, any parent of theLender, any assignee of any interest of the Lender hereunder and anyparticipant in the Credit Facility.

 

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

 

(iv)                              “RuleChange” means any change in any Capital Adequacy Rule, Eurodollar Rule, orL/C Rule occurring after the date of this Agreement, or any change in theinterpretation or administration thereof by any governmental or regulatoryauthority, but the term does not include any changes that at the Funding Dateare 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 tomaintain to the extent that the increases are required due to a regulatoryauthority’s assessment of that Lender’s financial condition.

 

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

 

(b)                                 ***Basis for Determining Interest RateInadequate or Unfair.* **Ifwith respect to any Interest Period:

 

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

 

(ii)                                  theLender in its commercially reasonable, good-faith judgment, otherwisedetermines that by reason of circumstances affecting the London interbankeurodollar market adequate and reasonable means do not exist for ascertainingthe applicable LIBO Rate; or

 

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

 

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

 

(c)***                                  Illegality*. **If any Rule Change should make it or, inthe good faith judgment of the Lender, shall raise a substantial question as towhether it is unlawful for the Lender to make, create, maintain or fund LIBORate Advances, then (i) the Lender shall promptly notify the AdministrativeBorrower, (ii) the obligation of the Lender to make, maintain or convertinto LIBO Rate Advances shall, upon the effectiveness of such event, besuspended for the duration of such unlawfulness, and (iii) for the duration ofsuch unlawfulness, any notice

 

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by an Administrative Borrowerpursuant to Section 2.2(a), 2.3Section 2.3(a) or Section 2.3(b) requesting theLender to make, continue making or convert into LIBO Rate Advances shall beconstrued as a request to make or to continue making Floating Rate Advances.

 

Section 2.5                                      Lettersof Credit.

 

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

 

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

 

(ii)                                  Availability.

 

Each Letter ofCredit, if any, shall be issued pursuant to a separate L/C Application enteredinto 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 eachsuch L/C Application shall supplement the terms and conditions hereof, but ifthe terms of any such L/C Application and the terms of this Agreement areinconsistent, the terms hereof shall control.

 

(b)                                 NoLetter of Credit shall be issued with an expiry date later than the TerminationDate in effect as of the date of issuance.

 

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

 

(d)                                 Forclarification, no Letter of Credit facility is currently contemplated to beavailable at this time, however Lender and Borrowers may amend this Agreementto provide for such a facility in the future.

 

Section 2.6                                      SpecialAccount.  If the Credit Facility isterminated for any reason while any Letter of Credit is outstanding, theBorrowers shall thereupon pay the Lender in immediately available funds fordeposit in the Special Account an amount equal to the L/C Amount.  The Special Account shall be an interestbearing account maintained for the Lender by any financial institutionacceptable to the Lender.  Any interestearned on amounts deposited in the Special Account shall be credited to theSpecial Account.  The Lender may applyamounts on deposit in the Special Account at any time or from time to time tothe Obligations in the Lender’s sole discretion.  The Borrowers may not withdraw any amounts on deposit in theSpecial Account as long as the Lender maintains a security interesttherein.  The Lender agrees to

 

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

 

Section 2.7                                      Paymentof 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 alldraws under Letters of Credit and for all other amounts required to be paidunder the applicable L/C Application. Accordingly, the Borrowers shall pay to the Lender any and all amountsrequired to be paid under the applicable L/C Application, when and as requiredto be paid thereby, and the amounts designated below, when and as designated:

 

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

 

(b)                                 Whenevera draft is submitted under a Letter of Credit, the Borrowers authorize theLender to make a Revolving Advance in the amount of the Obligation ofReimbursement and to apply the proceeds of such Revolving Advance thereto.  Such Revolving Advance shall be repayable inaccordance with and be treated in all other respects as a Revolving Advancehereunder.

 

(c)                                  Ifa 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 RevolvingAdvance to pay the Obligation of Reimbursement, the Borrowers shall pay to theLender on demand to the Administrative Borrower and in immediately availablefunds, the amount of the Obligation of Reimbursement together with interest,accrued from the date of the draft until payment in full at the DefaultRate.  Notwithstanding the Borrowers’inability to obtain a Revolving Advance for any reason, the Lender isirrevocably authorized, in its sole discretion, to make a Revolving Advance inan amount sufficient to discharge the Obligation of Reimbursement and allaccrued but unpaid interest thereon.

 

(d)                                 TheBorrowers’ 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 inSection 2.13.

 

Section 2.8                                      ObligationsAbsolute.  The Borrowers’obligations arising under Section 2.7 shall be absolute, unconditional andirrevocable, and shall be paid strictly in accordance with the terms of Section2.7, under all circumstances whatsoever, including (without limitation) thefollowing circumstances:

 

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

 

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(b)                                 anyamendment or waiver of or any consent to departure from all or any of theRelated Documents;

 

(c)**                                 **theexistence of any claim, setoff, defense or other right which the Borrowers mayhave at any time, against any beneficiary or any transferee of any Letter ofCredit (or any persons or entities for whom any such beneficiary or any suchtransferee may be acting), or other person or entity, whether in connectionwith this Agreement, the transactions contemplated herein or in the RelatedDocuments or any unrelated transactions;

 

(d)                                 anystatement or any other document presented under any Letter of Credit proving tobe forged, fraudulent, invalid or insufficient in any respect or any statementtherein being untrue or inaccurate in any respect whatsoever;

 

(e)                                  paymentby or on behalf of the Issuer under any Letter of Credit against presentationof a draft or certificate which does not strictly comply with the terms of suchLetter of Credit; or

 

(f)                                    anyother circumstance or happening whatsoever, whether or not similar to any ofthe foregoing.

 

Section 2.9                                      TermAdvance.

 

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

 

(b)                                 Uponfulfillment of the applicable conditions set forth in Article IV, theLender shall deposit the proceeds of the requested Term Advance by creditingthe same to the Administrative Borrower’s demand deposit account specified inSection 2.2(c) unless the Lender and the Administrative Borrower shall agree inwriting to another manner of disbursement.

 

Section 2.10                                CapexAdvances.

 

(a)                                  TheLender agrees, subject to the terms and conditions of this Agreement, to makeadvances to the Borrowers from time to time from the Funding Date to the dateof the first anniversary of the Funding Date (each a “CapEx Advance”).  The Lender shall have no obligation to makea 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 amountof the requested CapEx Advance would exceed 80% of the purchase price(excluding tax, freight and installation charges) for the new Equipmentpurchased by Borrowers in anticipation of such CapEx

 

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

 

(b)                                 TheBorrowers shall comply with the following procedures in requesting CapExAdvances:

 

(1)                                  TheAdministrative Borrower shall make each request for a CapEx Advance to theLender before 11:00 a.m. Los Angeles, California time two (2) Banking Daysbefore the day of the requested CapEx Advance is to be made.  Requests may be made in writing or bytelephone, specifying the date of the requested CapEx Advance and the amountthereof.

 

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

 

(3)                                  TheAdministrative Borrower may only request and Lender shall only provide CapExAdvances 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)                                  Eachrequest for a CapEx Advance shall be by an individual authorized pursuant toSection 2.2.

 

(5)                                  Eachrequest for a CapEx Advance shall be accompanied with an invoice for theEquipment purchased and reasonably acceptable evidence that such Equipment wasdelivered to Borrowers’ Premises.

 

(c)                                  Uponfulfillment of the applicable conditions set forth in Article IV, theLender shall deposit the proceeds of the requested CapEx Advance by creditingthe same to the Administrative Borrower’s demand deposit account specified inSection 2.2(c) unless the Lender and the Administrative Borrower shall agree inwriting to another manner of disbursement. Upon the Lender’s request, the Administrative Borrower shall promptlyconfirm each telephonic request for a CapEx Advance by executing and deliveringan appropriate confirmation certificate to the Lender.  The Borrowers shall be obligated to repayall CapEx Advances notwithstanding the Lender’s failure to receive suchconfirmation and notwithstanding the fact that the person requesting the samewas not in fact authorized to do so. Any request for a CapEx Advance, whether written or telephonic, shall bedeemed to be a representation by the Borrowers that the conditions set forth inSection 4.2 have been satisfied as of the time of the request.

 

Section 2.11                                Paymentof Term Advance and CapEx Advances.

 

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

 

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

 

(ii)                                  Inaddition, the Lender may obtain annually, at the Borrowers’ expense, anappraisal, 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; providedfurther,that during any Default Period, the Lender may obtain such an appraisal of theEligible Equipment at the Borrowers’ expense. If at any time the aggregate outstanding principal balance of the TermAdvance exceeds one hundred percent (100%) of the forced liquidation value ofthe Eligible Equipment as shown on any such appraisal, at Lenders option (A)the Borrowers shall immediately prepay the Term Advance in the amount of suchexcess, or (B) the amount of all remaining scheduled principal payments withrespect to the Term Advance shall be increased by an amount necessary to fullyamortize such excess prior to the Maturity Date.

 

(iii)                               Notwithstandingthe foregoing, on the Termination Date, the entire unpaid principal balance ofthe Term Advance, and all unpaid interest accrued thereon, shall in any eventbe due and payable.

 

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

 

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

 

(ii)                                  Onthe Termination Date, the entire unpaid principal balance of the CapExAdvances, and all unpaid interest accrued thereon, shall in any event be dueand payable.

 

Section 2.12                                InventoryAppraisals.  The Lender may fromtime to time obtain at its own expense an appraisal of Inventory by anappraiser acceptable to the Lender in its sole discretion; provided, however,that during any Default Period, the reasonable costs of such appraisals shallbe 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 atthe Floating Rate.

 

(b)                                 ***Margins*.**  The Margins through and including the firstadjustment occurring as specified below shall be one (1.00) percentage pointfor Advances that are Floating Rate Advances and three and three-quarters ofone (3.75) percentage points for Advances that are LIBO Rate Advances.  Upon Lender’s timely receipt andsatisfactory review of Borrowers’ financial statements and compliancecertificates required to be delivered under Section 6.1(a) hereof for itsfiscal year end June 30, 2004, the Margins shall be reduced (effective thirty(30) days after the receipt of such financial statements and compliancecertificates) 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 forsuch year equals or exceeds Three Million Dollars ($3,000,000); providedhowever, that no reduction in the Margins shall take place if at thetime 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 timerestated or corrected in such a way that a reduction in the Margins would nothave been made as set forth above, the Margins and the interest payable underthis Agreement shall immediately be re-calculated as if such reduction hadnever taken effect.

 

(c)                                  ***Minimum Interest Charge*.**  Notwithstanding the interest payablepursuant to Subsection (a), the Borrowers shall pay to the Lender interestof not less than Fifty Thousand Dollars ($50,000) per quarter (the “MinimumInterest Charge”) during the term of this Agreement, and the Borrowers shallpay any deficiency between the Minimum Interest Charge and the amount ofinterest paid or assessed under Subsection (a) during the prior quarter onthe 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, theMinimum 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 andremedies, the Lender from time to time, the principal of the Advancesoutstanding from time to time shall bear interest at the Default Rate,effective for periods designated by the Lender from time to time during thatDefault Period.

 

(e)**                                  *ClearanceDays***.  NotwithstandingSection 2.16(b)(ii), interest at the interest rate applicable under thisSection 2.13 shall accrue on the amount of all payments (even if in the form ofimmediately available federal funds) for one (1) day for clearance.

 

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

 

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(g)                                 ***Usury*. **In any event no rate change shall be putinto effect which would result in a rate greater than the highest ratepermitted by law.  Notwithstandinganything to the contrary contained in any Loan Document, all agreements whicheither now are or which shall become agreements between the Borrowers and theLender are hereby limited so that in no contingency or event whatsoever shallthe total liability for payments in the nature of interest, additional interestand other charges exceed the applicable limits imposed by any applicable usurylaws.  If any payments in the nature ofinterest, additional interest and other charges made under any Loan Documentare held to be in excess of the limits imposed by any applicable usury laws, itis agreed that any such amount held to be in excess shall be considered paymentof principal hereunder, and the indebtedness evidenced hereby shall be reducedby such amount so that the total liability for payments in the nature ofinterest, additional interest and other charges shall not exceed the applicablelimits imposed by any applicable usury laws, in compliance with the desires ofthe Borrowers and the Lender.  Thisprovision shall never be superseded or waived and shall control every otherprovision of the Loan Documents and all agreements between the Borrowers andthe 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, “UnusedAmount” means the Maximum Line reduced by outstanding RevolvingAdvances.  The Borrowers agree to pay tothe 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 toand including the Termination Date, due and payable quarterly in arrears on thefirst day of each calendar quarter and on the Termination Date.

 

(c)**                                  *Audit Fees*. **The Borrowers shall pay the Lender, ondemand, audit fees in connection with any audits or inspections conducted by oron behalf of the Lender of any Collateral or the Borrowers’ operations orbusiness at the rates established from time to time by the Lender as its auditfees (which fees are currently $90.00 per hour per auditor), together with allactual out-of-pocket costs and expenses incurred in conducting any such auditor inspection provided, however, that except during DefaultPeriods, 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 auditper quarter.

 

(d)                                 ***Termination******Fees. ***If the Credit Facility is terminated (i) bythe 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 writtennotice of such termination at least forty-five (45) days before such MaturityDate, the Borrowers shall pay to the Lender a fee in an amount equal to apercentage of the Aggregate Credit Limit****as follows: (A) three percent (3.0%)if the termination occurs on or before the first anniversary of the FundingDate; (B) two percent (2.0%) if the termination occurs after the firstanniversary of the Funding Date but on or before the second anniversary of theFunding 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 ofTermination Fees.**** *TheBorrowers will not be required to pay the termination and prepayment feesotherwise due under subsection (d) if such termination is made because ofrefinancing by Wells Fargo Bank or any of its affiliates.

 

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

 

Section 2.15                                Timefor Interest Payments; Payment on Non-Banking Days; Computation of Interest andFees

 

(a)                                  ***Time For Interest Payments*.**  Interest accruing on all Advances shall bedue and payable in arrears on the last day of each month and on the TerminationDate.

 

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

 

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

 

Section 2.16                                Lockbox;Collateral Account; Application of Payments.

 

(a)***                                  Lockboxand CollateralAccount.***

 

(i)                                     TheBorrowers shall instruct all account debtors to pay all Accounts directly tothe Lockbox.  If, notwithstanding suchinstructions, any Borrower receives any payments on Accounts, such Borrowershall deposit such payments into the Collateral Account.  The Borrowers shall also deposit all othercash proceeds of Collateral directly to the Collateral Account.  Until so deposited, the Borrowers shall holdall such payments and cash proceeds in trust for and as the property of theLender and shall not commingle such property with any of its other funds orproperty.  All deposits in theCollateral Account shall constitute proceeds of Collateral and shall notconstitute payment of the Obligations.

 

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(ii)                                  Allitems deposited in the Collateral Account shall be subject to finalpayment.  If any such item is returneduncollected, the Borrowers will immediately pay the Lender, or, for itemsdeposited in the Collateral Account, the bank maintaining such account, theamount of that item, or such bank at its discretion may charge any uncollecteditem to the applicable Borrower’s commercial account or other account.  The Borrowers shall be liable as an endorseron all items deposited in the Collateral Account, whether or not in factendorsed by any Borrower.

 

(b)***                                 Applicationof Payments.***

 

(i)                                     TheBorrowers may, from time to time, in accordance with the Lockbox and CollectionAccount Agreement, cause funds in the Collateral Account to be transferred tothe Lender’s general account for payment of the Obligations.  Except as provided in the precedingsentence, amounts deposited in the Collateral Account shall not be subject towithdrawal by the Borrowers, except after full payment and discharge of allObligations.

 

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

 

Section 2.17                                VoluntaryPrepayment; Termination of the Credit Facility by the Borrower.  Except as otherwise provided herein, theBorrowers may prepay the Advances in whole at any time or from time to time inpart.  The Borrowers may terminate theCredit 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 withSection 2.14(d).  Subject to terminationof the Credit Facility and payment and performance of all Obligations, the Lendershall, at the Borrowers’ expense, release or terminate the Security Interestand the Security Documents to which the Borrowers are entitled by law.

 

Section 2.18                                MandatoryPrepayment.  Without notice ordemand, if the sum of the outstanding principal balance of the RevolvingAdvances plus the L/C Amount shall at any time exceed the Borrowing Base, theBorrower shall (i) first, immediately prepay the Revolving Advances to theextent necessary to eliminate such excess; and (ii) if prepayment in fullof the Revolving Advances is insufficient to eliminate such excess, pay to theLender in immediately available funds for deposit in the Special Account anamount equal to the remaining excess. Any payment received by the Lender under this Section 2.18 or underSection 2.17 may be applied to the Obligations, in such order and in suchamounts as the Lender, in its discretion, may from time to time determine.

 

Section 2.19                                RevolvingAdvances to Pay Obligations. Notwithstanding anything in Section 2.1, the Lender may, in itsdiscretion at any time or from time to time, without the Borrowers’ request andeven if the conditions set forth in Section 4.2 would not be

 

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satisfied, make a RevolvingAdvance in an amount equal to the portion of the Obligations from time to timedue and payable.

 

Section 2.20                                Useof Proceeds.  The Borrowers shalluse the proceeds of Advances and each Letter of Credit to (i) repay, in full,the outstanding principal, accrued interest, and accrued fees and expensesowing to Existing Lender, (ii) pay all trade payable and other obligations ofeach Borrower which are more than sixty (60) days past the due date as of suchtime, (iv) eliminate the book overdraft of each Borrower, (iv) pay thetransactions costs and fees associated with this Credit Facility; and (v) forordinary working capital purposes.

 

Section 2.21                                LiabilityRecords.  The Lender may maintain from time totime, at its discretion, records as to the Obligations.  All entries made on any such record shall bepresumed correct until the Borrowers establish the contrary.  Upon the Lender’s demand, the Borrowers willadmit and certify in writing the exact principal balance of the Obligationsthat the Borrowers then assert to be outstanding.  Any billing statement or accounting rendered by the Lender shallbe conclusive and fully binding on the Borrowers unless the AdministrativeBorrower gives the Lender specific written notice of exception within 30 daysafter receipt.

 

ARTICLEIII

 

SECURITY INTEREST; OCCUPANCY; SETOFF

 

Section 3.1                                      Grantof Security Interest.  Each Borrowerhereby 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 Borrowerwill grant the Lender a security interest in all commercial tort claims it mayhave against any Person.

 

Section 3.2                                      Notificationof Account Debtorsand Other Obligors.  If a DefaultPeriod exists, the Lender may at any time (whether or not a Default Period thenexists) notify any account debtor or other Person obligated to pay the amountdue that such right to payment has been assigned or transferred to the Lenderfor security and shall be paid directly to the Lender.  The applicable Borrower will join in givingsuch notice if the Lender so requests. At any time while such Default Period is ongoing, the Lender may, butneed not, in the Lender’s name or in any Borrower’s name, (a) demand, suefor, collect or receive any money or property at any time payable or receivableon account of, or securing, any such right to payment, or grant any extensionto, make any compromise or settlement with or otherwise agree to waive, modify,amend or change the obligations (including collateral obligations) of any suchaccount debtor or other obligor; and (b) as each Borrower’s agent andattorney-in-fact, notify the United States Postal Service to change the addressfor delivery of the Borrowers’ mail to any address designated by the Lender,otherwise intercept the Borrowers’ mail, and receive, open and dispose of theBorrowers’ mail, applying all Collateral as permitted under this Agreement andholding all other mail for the Borrower’s account or forwarding such mail tothe Borrower’s last known address.

 

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Section 3.3                                      Assignmentof Insurance.  As additionalsecurity for the payment andperformance of the Obligations, each Borrower hereby assigns to the Lender anyand all monies (including proceeds of insurance and refunds of unearnedpremiums) due or to become due under, and all other rights of such Borrowerwith respect to, any and all policies of insurance now or at any time hereaftercovering the Collateral or any evidence thereof or any business records orvaluable papers pertaining thereto, and each Borrower hereby directs the issuerof any such policy to pay all such monies resulting from casualty to theCollateral directly to the Lender to the extent of the outstanding Advances.  At any time, whether or not a Default Periodthen exists, the Lender may (but need not), in the Lender’s name or in anyBorrower’s name, execute and deliver proof of claim, receive all such monies,endorse checks and other instruments representing payment of such monies, andadjust, litigate, compromise or release any claim against the issuer of anysuch policy.

 

Section 3.4                                      Occupancy.

 

(a)                                  Subjectto the terms and conditions of any leases or other occupancy agreementsrelating to the Premises, the Borrowers hereby irrevocably grant to the Lenderthe right to take exclusive possession of Borrowers’ right, title and interestto the Premises at any time during a Default Period.

 

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

 

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

 

(d)                                 TheLender shall not be obligated to pay or account for any rent or othercompensation 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 othercompensation for the possession, occupancy or use of any of the Premises, theBorrowers shall reimburse the Lender promptly for the full amount thereof.  In addition, the Borrowers will pay, or reimbursethe Lender for, all taxes, fees, duties, imposts, charges and expenses at anytime incurred by or imposed upon the Lender by reason of the execution,delivery, existence, recordation, performance or enforcement of this Agreementor the provisions of this Section 3.4.

 

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

 

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

 

Section 3.6                                      FinancingStatement.  Each Borrower authorizesthe Lender tofile from time to time where permitted by law, such financing statementsagainst collateral described as “all personal property” as the Lender deemsnecessary or useful to perfect the Security Interest.  A carbon, photographic or other reproduction of this Agreement orof any financing statements signed by the Borrower is sufficient as a financingstatement and may be filed as a financing statement in any state to perfect thesecurity interests granted hereby.  Forthis 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 totime, 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 anyObligations shall have the right to appropriate or setoff any deposit or otherliability then owed by such Person to any Borrower, whether or not due, andapply the same to the payment of said participating interest, as fully as ifsuch Person had lent directly to such Borrower the amount of such participatinginterest.

 

Section 3.8                                      Collateral.  This Agreement does not contemplate a sale ofaccounts, contract rights or chattel paper, and, as provided by law, theBorrowers are entitled to any surplus and shall remain liable for anydeficiency.  The Lender’s duty of carewith respect to Collateral in its possession (as imposed by law) shall bedeemed fulfilled if it exercises reasonable care in physically keeping suchCollateral, or in the case of Collateral in the custody or possession of abailee or other third person, exercises reasonable care in the selection of thebailee 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 Borrowermay have against prior parties, to realize on the Collateral at all or in anyparticular manner or order or to apply any cash proceeds of the Collateral inany particular order of application. The Lender has no obligation to clean-up or otherwise prepare theCollateral for sale.  Each Borrowerwaives any right it may have to require the Lender to pursue any third personfor any of the Obligations.

 

ARTICLE IV

 

CONDITIONS OFLENDING

 

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

 

(a)                                  ThisAgreement, properlyexecuted by the Borrowers.

 

(b)                                 TheNotes, properly executed by the Borrowers.

 

(c)                                  Atrue and correct copy of any and all leases pursuant to which any Borrower isleasing the Premises, together with a landlord’s disclaimer and consent withrespect to each such lease.

 

(d)                                 Atrue and correct copy of any and all mortgages pursuant to which any Borrowerhas mortgaged the Premises, together with a mortgagee’s disclaimer and consentwith respect to each such mortgage.

 

(e)                                  Atrue and correct copy of any and all agreements pursuant to which anyBorrower’s property is in the possession of any Person other than theBorrowers, together with, in the case of any goods held by such Person forresale, (i) a consignee’s acknowledgment and

 

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

 

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

 

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

 

(h)                                 TheLockbox and Collection Account Agreements, each properly executed by therespective Borrower party thereto and Wells Fargo Bank.

 

(i)                                     Controlagreements, properly executed by the applicable Borrower and each bank at whichsuch Borrower maintains deposit accounts.

 

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

 

(k)                                  ThePay-Off Letter.

 

(l)                                     Currentsearches of appropriate filing offices showing that (i) no Liens have beenfiled and remain in effect against the Borrowers or Guarantor except PermittedLiens or Liens held by Persons who have agreed in writing that upon receipt ofproceeds of the initial Advances, they will satisfy, release or terminate suchLiens in a manner satisfactory to the Lender, and (ii) the Lender has dulyfiled all financing statements necessary to perfect the Security Interest, tothe extent the Security Interest is capable of being perfected by filing, andUCC-1 Fixture Filings with respect to each of the Permitted InventoryLocations.

 

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

 

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instruments, agreements andcertificates, including Advance requests, on such Borrower’s or Guarantor’sbehalf.

 

(n)                                 Acurrent certificate issued by the Secretary of State of each Borrower’s andeach Guarantor’s State of organization, certifying that such Borrower orGuarantor is in compliance with all applicable organizational requirements ofsuch State.

 

(o)                                 Evidencethat each Borrower and each Guarantor is duly licensed or qualified to transactbusiness in all jurisdictions where the character of the property owned orleased or the nature of the business transacted by it makes such licensing orqualification necessary.

 

(p)**                                **Acertificate of an Officer of each Borrower confirming, in his personalcapacity, the representations and warranties set forth in Article V.

 

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

 

(r)                                    Certificatesof the insurance required hereunder, with all hazard insurance containing alender’s loss payable endorsement in the Lender’s favor and with all liabilityinsurance naming the Lender as an additional insured.

 

(s)                                  AGuaranty, properly executed by each Guarantor, pursuant to which, among otherthings, each Guarantor unconditionally guarantees the full and prompt paymentof all Obligations.

 

(t)                                    Paymentof the fees and commissions due under Section 2.14 through the date of theinitial Advance or Letter of Credit and expenses incurred by the Lender throughsuch date and required to be paid by the Borrowers under Section 9.6, includingall legal expenses incurred through the date of this Agreement.

 

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

 

(v)                                 Satisfactoryreview by the Lender and its counsel of all documentation pertaining to theBorrowers’ $2,400,000 tax reimbursement obligation to the United StatesInternal Revenue Service, including a settlement agreement with monthlypayments not to exceed Fifty Thousand Dollars ($50,000), all in form andsubstance satisfactory to the Lender in its sole discretion.

 

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

 

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

 

(x)**                                  **Evidencethat the Borrowers have opened bank accounts of a type mutually acceptable tothe Borrowers and the Lender, including, without limitation, the CollateralAccount and any other account contemplated by the Collection Account Agreementor the Lockbox Agreement.

 

(y)                                 completionof background checks on Senior Management, the results of which aresatisfactory to the Lender.

 

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

 

(aa)                            Satisfactoryreview by Lender and its counsel of all documents and issues related to theenvironmental reserve.

 

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

 

(cc)                            theinitial Advances shall have been made within sixty (60) days of the completionby Lender of its audit of the Collateral.

 

(dd)                          Satisfactoryreview by Lender and its counsel of any agreements between Borrowers and/orGuarantors and Avnet, Inc. and Arrow Electronics, Inc..

 

(ee)                            Suchother documents and conditions as the Lender in its sole discretion mayrequire.

 

Section 4.2                                      ConditionsPrecedent to All Advances and Letters of Credit The Lender’s obligation tomake each Advance and to cause each Letter of Credit to be issued shall besubject to the further conditions precedent that:

 

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

 

(b)                                 noevent has occurred and is continuing, or would result from such Advance orissuance of a Letter of Credit which constitutes a Default or an Event ofDefault.

 

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ARTICLE V

 

REPRESENTATIONSAND WARRANTIES

 

The Borrowersrepresent and warrant to the Lender as follows:

 

Section 5.1                                      Existenceand Power; Name; Chief Executive Office; Inventory and Equipment Locations;Federal Employer Identification Number. Each Borrower is a corporation, duly organized, validly existing and ingood standing under the laws of the State of its incorporation and is dulylicensed or qualified to transact business in all jurisdictions where thecharacter of the property owned or leased or the nature of the businesstransacted by it makes such licensing or qualification necessary.  Each Borrower has all requisite power andauthority to conduct its business, to own its properties and to execute anddeliver, and to perform all of its obligations under, the Loan Documents.  During its existence, each Borrower has donebusiness solely under the names set forth in Schedule 5.1 and all of theBorrowers’ records relating to their business or the Collateral are kept atthat location.  Each Borrower’s chiefexecutive office and principal place of business is located at the address setforth in Schedule 5.1.  All Inventoryand Equipment is located at that location or at one of the other locationslisted in Schedule 5.1.  Each Borrower’sfederal employer identification number is correctly set forth in Section 3.6.

 

Section 5.2                                      Capitalization.  Schedule 5.2 constitutes a correct andcomplete list of all ownership interests of each Borrower and rights to acquireownership interests including the record holder, number of interests andpercentage interests on a fully diluted basis, and an organizational chartshowing the ownership structure of Borrowers, Guarantor and their respectiveSubsidiaries.

 

Section 5.3                                      Authorizationof 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 theBorrowers of the Loan Documents and the borrowings from time to time hereunderhave been duly authorized by all necessary corporate action and do not and willnot (i) require any consent or approval of any Borrower’s Owners; (ii) requireany authorization, consent or approval by, or registration, declaration orfiling 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, filingor notice as has been obtained, accomplished or given prior to the date hereof;(iii) violate any provision of any law, rule or regulation (includingRegulation X of the Board of Governors of the Federal Reserve System) orof any order, writ, injunction or decree presently in effect havingapplicability to any Borrower or of any Borrower’s Constituent Documents;(iv) result in a breach of or constitute a default under any indenture orloan or credit agreement or any other material agreement, lease or instrumentto which any Borrower is a party or by which it or its properties may be boundor affected; or (v) result in, or require, the creation or imposition ofany Lien (other than the Security Interest) upon or with respect to any of theproperties now owned or hereafter acquired by any Borrower.

 

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Section 5.4                                      LegalAgreements.  To the best of eachBorrower’s knowledge, after reasonable inquiry, this Agreement constitutes and,upon due execution by each Borrower, the other Loan Documents will constitutethe legal, valid and binding obligations of such Borrower, enforceable againstsuch 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                                      FinancialCondition; No Adverse Change. Parent and the Borrowers have furnished to the Lender their auditedfinancial statements (on a consolidated and consolidating basis) for theirfiscal year ended June 30, 2002, unaudited financial statements for the fiscalyear ended June 30, 2003, and unaudited financial statements for thefiscal-year-to-date period ended July 31, 2003, and those statements fairlypresent the Borrowers’ financial condition on the dates thereof and the resultsof its operations and cash flows for the periods then ended and were preparedin accordance with GAAP.  Since the dateof the most recent financial statements, there has been no change in anyBorrower’s business, properties or condition (financial or otherwise) which hashad a Material Adverse Effect.

 

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

 

Section 5.8                                      Regulation U.  No Borrower is engaged in the business ofextending credit for the purpose of purchasing or carrying margin stock (withinthe meaning of Regulation U of the Board of Governors of the Federal ReserveSystem), and no part of the proceeds of any Advance will be used to purchase orcarry any margin stock or to extend credit to others for the purpose of purchasingor 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 orcaused to be paid to the proper authorities when due all federal, state andlocal taxes required to be withheld by each of them.  The Borrowers and their Affiliates have filed all federal, stateand local tax returns which to the knowledge of the Officers of each Borroweror any Affiliate, as the case may be, are required to be filed, and eachBorrower and its Affiliates have paid or caused to be paid to the respectivetaxing authorities all taxes as shown on said returns or on any assessmentreceived by any of them to the extent such taxes have become due.

 

Section 5.10                                Titlesand Liens.  The Borrowers have goodand absolute title to all Collateral free and clear of all Liens other thanPermitted Liens.  No financing statementnaming any Borrower as debtor is on file in any office except to perfect onlyPermitted Liens.

 

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Section 5.11                                IntellectualProperty Rights.

 

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

 

(b)                                 ***Agreements with Employees andContractors***.  To the bestof each Borrower’s knowledge, after reasonable inquiry, each Borrower hasentered into a legally enforceable agreement with each of its employees andsubcontractors obligating each such Person to assign to such Borrower, withoutany additional compensation, any Intellectual Property Rights created,discovered or invented by such Person in the course of such Person’s employmentor engagement with such Borrower (except to the extent prohibited by law), andfurther requiring such Person to cooperate with such Borrower, without anyadditional compensation, in connection with securing and enforcing anyIntellectual Property Rights therein; provided, however, that the foregoingshall not apply with respect to employees and subcontractors whose jobdescriptions are of the type such that no such assignments are reasonablyforeseeable.

 

(c)                                  ***Intellectual Property RightsLicensed from Others***. Schedule 5.11 is a complete list of all agreements under which eachBorrower has licensed Intellectual Property Rights from another Person(“Licensed Intellectual Property”) other than readily available, non-negotiatedlicenses of computer software and other intellectual property used solely forperforming accounting, word processing and similar administrative tasks(“Off-the-shelf Software”) and a summary of any ongoing payments such Borroweris obligated to make with respect thereto.  Except as disclosed on Schedule 5.11and 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 allrestrictions, Liens, court orders, injunctions, decrees, or writs, whether bywritten agreement or otherwise.  Exceptas disclosed on Schedule 5.11, the Borrowers are not obligated or under anyliability whatsoever to make any payments of a material nature by way ofroyalties, fees or otherwise to any owner of, licensor of, or other claimantto, any Intellectual Property Rights.

 

(d)                                 ***Other Intellectual Property Neededfor Business***.  Except forOff-the-shelf Software and as disclosed on Schedule 5.11, the OwnedIntellectual Property and the Licensed Intellectual Property constitute allIntellectual Property Rights used or necessary to conduct the Borrowers’business as it is presently conducted or as the Borrowers reasonably foreseeconducting it.

 

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(e)                                  ***Infringement***.  Except as disclosed on Schedule 5.11, noBorrower has knowledge of, and has not received any written claim or noticealleging, any Infringement of another Person’s Intellectual Property Rights(including any written claim that the Borrowers must license or refrain fromusing the Intellectual Property Rights of any third party) nor, to anyBorrower’s knowledge, is there any threatened claim or any reasonable basis forany such claim.

 

Section 5.12                                Plans.  Except as disclosed to the Lender in writingprior to the date hereof, no Borrower nor any ERISA Affiliate (i) maintains orhas maintained any Pension Plan, (ii) contributes or has contributed to anyMultiemployer Plan or (iii) provides or has provided post-retirement medical orinsurance benefits with respect to employees or former employees (other thanbenefits required under Section 601 of ERISA, Section 4980B of the IRC orapplicable state law).  No Borrower norany ERISA Affiliate has received any notice or has any knowledge to the effectthat it is not in full compliance with any of the requirements of ERISA, theIRC or applicable state law with respect to any Plan.  No Reportable Event exists in connection with any PensionPlan.  Each Plan which is intended toqualify under the IRC is so qualified, and no fact or circumstance exists whichmay 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 ERISAand 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 Planor (iii) any liability or knowledge of any facts or circumstances whichcould result in any liability to the Pension Benefit Guaranty Corporation, theInternal Revenue Service, the Department of Labor or any participant inconnection with any Plan (other than routine claims for benefits under thePlan).

 

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

 

Section 5.14                                EnvironmentalMatters.  Except as set forth onSchedule 5.14:

 

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

 

(b)                                 Toeach Borrower’s best knowledge, no Borrower has disposed of HazardousSubstances in such a manner as to create any material liability under anyEnvironmental Law.

 

(c)                                  Thereare 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 materialliability under, violation of, or noncompliance

 

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

 

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

 

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

 

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

 

Section 5.15                                Submissionsto Lender.  All financial and otherinformation provided to the Lender by or on behalf of each Borrower inconnection with the Borrowers’ request for the credit facilities contemplatedhereby is (i) true and correct in all material respects, (ii) doesnot 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 proformacondition and results.

 

Section 5.16                                FinancingStatements.  Each Borrower hasauthorized the filing of financing statements sufficient when filed to perfectthe Security Interest and the other security interests created by the SecurityDocuments.  When such financingstatements are filed in the offices noted therein, the Lender will have a validand perfected security interest in all Collateral which is capable of beingperfected 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                                Rightsto Payment.  Each right to paymentand each instrument, document, chattel paper and other agreement constitutingor evidencing Collateral is (or, in the case of all future Collateral, will bewhen arising or issued) the valid, genuine and legally enforceable obligation,subject to no defense, setoff or counterclaim, of the account debtor or otherobligor named therein or in the Borrowers’ records pertaining thereto as beingobligated to pay such obligation.

 

Section 5.18                                FinancialSolvency.  Both before and aftergiving effect to all of the transactions contemplated in the Loan Documents, noBorrower or any of its Affiliates:

 

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

 

(b)**                                **hasunreasonably small capital or is engaged or about to engage in a business or atransaction for which any remaining assets of such Borrower or such Affiliateare unreasonably small;

 

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

 

(d)**                                **byexecuting, delivering or performing its obligations under the Loan Documents orother documents to which it is a party or by taking any action with respectthereto, intends to hinder, delay or defraud either its present or futurecreditors; and

 

(e)                                  atthis time contemplates filing a petition in bankruptcy or for an arrangement orreorganization or similar proceeding under any law any jurisdiction, nor, tothe best knowledge of such Borrower, is the subject of any actual, pending orthreatened bankruptcy, insolvency or similar proceedings under any law of anyjurisdiction.

 

Section 5.19                                BankAccounts.  All of the depositaccounts, investment accounts or other accounts in the name of or used by anyBorrower maintained at any bank or other financial institution are set forth onSchedule 5.19 hereto.

 

ARTICLE VI

 

COVENANTS

 

So long as theObligations shall remain unpaid, or the Credit Facility shall remainoutstanding, the Borrowers will comply with the following requirements, unlessthe Lender shall otherwise consent in writing:

 

Section 6.1                                      ReportingRequirements.  The Borrowers willdeliver, or cause to be delivered, to the Lender each of the following, whichshall be in form and detail acceptable to the Lender:

 

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

 

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detail and prepared inaccordance with GAAP, together with (i) copies of all management lettersprepared by such accountants; (ii) a report signed by such accountantsstating that in making the investigations necessary for said opinion theyobtained no knowledge, except as specifically stated, of any Default or Eventof Default and all relevant facts in reasonable detail to evidence, and thecomputations as to, whether or not the Borrowers are in compliance with theFinancial Covenants; and (iii) a certificate of each Borrower’s chieffinancial officer stating that such financial statements have been prepared inaccordance with GAAP, fairly represent the such Borrower’s financial positionand the results of its operations, and whether or not such officer hasknowledge 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 withintwenty five (25) days after the end of each month, the AdministrativeBorrower will deliver to the Lender an unaudited/internal balance sheet andstatements of income and retained earnings of Parent as at the end of and forsuch month and for the year to date period then ended, prepared on aconsolidating and consolidated basis to include Parent and any Affiliates, inreasonable detail and stating in comparative form the figures for thecorresponding date and periods in the previous year, all prepared in accordancewith GAAP, subject to year-end audit adjustments and fairly represent suchPersons’ financial position and the results of their operations; andaccompanied by a certificate of each Borrower’s chief financial officer,substantially in the form of Exhibit D hereto stating (i) that suchfinancial statements have been prepared in accordance with GAAP, subject toyear-end audit adjustments, (ii) whether or not such officer has knowledgeof the occurrence of any Default or Event of Default not theretofore reportedand remedied and, if so, stating in reasonable detail the facts with respectthereto, and (iii) all relevant facts in reasonable detail to evidence,and the computations as to, whether or not the Borrowers are in compliance withthe Financial Covenants.

 

(c)                                  ***Collateral Reports***.  (i) Within fifteen (15) days after the endof each month or more frequently if the Lender so requires, the AdministrativeBorrower will deliver to the Lender agings of the Accounts and each Borrower’saccounts payable, an Inventory certification report, and a calculation of theAccounts, Eligible Accounts, Inventory, Eligible Inventory, Eligible SlowMoving Inventory and Eligible Equipment as at the end of such month or shortertime period; (ii) weekly, by the third day of each week (or more frequent), theAdministrative Borrower will deliver to Lender sales assignments and creditmemos/adjustments; and (iii) every day the Administrative Borrower will deliverto the Lender reports each Borrower’s cash collections for the previousBusiness Day.

 

(d)                                 ***Projections***.  At least thirty (30) days before thebeginning of each fiscal year of the Borrowers, the Administrative Borrowerwill deliver to the Lender the projected balance sheets and income statementsfor each month of such year, each in reasonable detail, representing theBorrowers’ good faith projections and certified by each Borrower’s chieffinancial officer as being the most accurate projections available andidentical to the projections used by the Borrowers for internal planningpurposes, together with a statement of underlying

 

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

 

(e)                                  ***Internal Revenue ServicePayments. ***Within fifteen(15) days of each month end, Administrative Borrower will deliver to the Lenderconfirmation satisfactory to the Lender, in its sole discretion, of payment asscheduled pursuant to the Installment Agreement with the United States InternalRevenue Service.

 

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

 

(g)                                 ***Defaults***.  As promptly as practicable (but in any eventnot later than five (5) business days) after an Officer of any Borrower obtainsknowledge of the occurrence of any Default or Event of Default, the Borrowerswill deliver to the Lender notice of such occurrence, together with a detailedstatement by a responsible Officer of any Borrower of the steps being taken bythe Borrowers to cure the effect thereof.

 

(h)                                 ***Plans***.  As soon as possible, and in any event within30 days after any Borrower knows or has reason to know that any ReportableEvent with respect to any Pension Plan has occurred, the Administrative Borrowerwill deliver to the Lender a statement of each Borrower’s chief financialofficer setting forth details as to such Reportable Event and the action whichthe Borrowers propose to take with respect thereto, together with a copy of thenotice of such Reportable Event to the Pension Benefit GuarantyCorporation.  As soon as possible, andin any event within ten (10) days after any Borrower fails to make anyquarterly contribution required with respect to any Pension Plan under Section412(m) of the IRC, the Administrative Borrower will deliver to the Lender astatement of each Borrower’s chief financial officer setting forth details asto such failure and the action which the Borrowers propose to take with respectthereto, together with a copy of any notice of such failure required to beprovided to the Pension Benefit Guaranty Corporation.  As soon as possible, and in any event within ten (10) days afterany Borrower knows or has reason to know that it has or is reasonably expectedto 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 chieffinancial officer setting forth details as to such liability and the actionwhich the Borrowers propose to take with respect thereto.

 

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

 

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

 

(k)                                  ***Collateral***.  Promptly upon knowledge thereof, theBorrowers will deliver to the Lender notice of any loss of or material damageto any Collateral or of any substantial adverse change in any Collateral or theprospect of payment thereof.

 

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

 

(m)***                               IntellectualProperty.***

 

(i)                                     TheBorrowers will give the Lender thirty (30) days prior written notice of itsintent to acquire material Intellectual Property Rights; except for transferspermitted under Section 6.18, the Borrowers will give the Lender 30 days priorwritten notice of its intent to dispose of material Intellectual PropertyRights; and upon request, shall provide the Lender with copies of all applicabledocuments and agreements.

 

(ii)                                  Promptlyupon 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 IntellectualProperty Rights and (C) any threatened cancellation, termination ormaterial limitation of its Intellectual Property Rights.

 

(iii)                               Promptlyupon receipt, the Borrowers will give the Lender copies of all registrationsand filings with respect to its Intellectual Property Rights.

 

(n)                                 ***Reports to Owners***.  Promptly upon their distribution, theBorrowers 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 filingthereof, the Borrowers will deliver to the Lender copies of all regular andperiodic reports which the Borrowers shall file with the Securities andExchange Commission or any national securities exchange.

 

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

 

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(q)                                 ***Other Reports***.  From time to time, with reasonablepromptness, the Borrowers will deliver to the Lender any and all receivablesschedules, collection reports, deposit records, equipment schedules, copies ofinvoices to account debtors, shipment documents and delivery receipts for goodssold, and such other material, reports, records or information as the Lendermay request.

 

Section 6.2                                      FinancialCovenants.

 

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

 

(b)                                 ***Minimum Book Net Worth***.  The Borrowers will maintain, during eachmonth described below, their Book Net Worth, determined as at the end of eachmonth, 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 NetIncome***.  The Borrowerswill achieve Net Income measured quarterly on a year-to-date basis, of not lessthan 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 toincur financed or unfinanced Capital Expenditures of more than Two MillionThree Hundred

 

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

 

(e)                                  ***New Covenants***.  On or after receipt of the projections to beprovided by Administrative Borrower each fiscal year pursuant to Section6.1(d), Lender shall set new covenant levels for Sections 6.2(a) through 6.2(d)for periods after such date.  The newcovenant levels will be based on the Borrowers’ projections for such periodsreceived by Lender pursuant to Section 6.1(d) and shall be no lessstringent than the present levels.

 

Section 6.3                                      PermittedLiens; Financing Statements.

 

(a)                                  NoBorrower will create, incur or suffer to exist any Lien upon or of any of itsassets, now owned or hereafter acquired, to secure any indebtedness; excluding,however, from the operation of the foregoing, the following(collectively, “Permitted Liens”):

 

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

 

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

 

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

 

(b)                                 NoBorrower will amend any financing statements in favor of the Lender except aspermitted by law.  Any authorization bythe Lender to any Person to amend financing statements in favor of the Lendershall be in writing.

 

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

 

(a)                                  indebtednessarising hereunder;

 

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

 

(c)                                  indebtednessrelating to Permitted Liens..

 

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

 

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

 

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

 

Section 6.6                                      Investmentsand Subsidiaries.  No Borrower willpurchase or hold beneficially any stock or other securities or evidences ofindebtedness of, make or permit to exist any loans or advances to, or make anyinvestment or acquire any interest whatsoever in, any other Person, includingany partnership or joint venture, except:

 

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

 

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

 

(c)                                  advancesin the form of progress payments, prepaid rent not exceeding three (3) monthsor security deposits;

 

(d)                                 currentinvestments in the Subsidiaries in existence on the date hereof and listed inSchedule 5.5 hereto; and

 

(e)                                  PermittedOperating Expenses.

 

Section 6.7**                                     **Dividendsand Distributions.  No Borrower willdeclare or pay any dividends (other than dividends payable solely in stock ofthe Borrowers) on any class of its stock or make any payment on account of thepurchase, redemption or other retirement of any shares of such stock or makeany distribution in respect thereof, either directly or indirectly; provided,however, so long as no Default exists or would exist as a resultthereof, Borrowers may make dividends on each outstanding share of Series APreferred Stock of Parent held by The Gene Haas Trust DTD 3-3-99 at the rate of9% per annum of the price paid for such stock.

 

Section 6.8**                                     **IntentionallyOmitted.

 

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

 

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

 

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

 

Section 6.11                                AccountVerification.  The Lender may at anytime and from time to time send or require the Borrowers to send requests forverification of accounts or notices of assignment to account debtors and otherobligors.  The Lender may also at anytime and from time to time telephone account debtors and other obligors toverify accounts.

 

Section 6.12                                Compliancewith Laws.

 

(a)                                  EachBorrower will (i) comply with the requirements of applicable laws andregulations, the non-compliance with which would materially and adverselyaffect 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)                                 Withoutlimiting the foregoing undertakings, each Borrower specifically agrees that itwill comply with all applicable Environmental Laws and obtain and comply withall permits, licenses and similar approvals required by any Environmental Laws,and will not generate, use, transport, treat, store or dispose of any HazardousSubstances in such a manner as to create any material liability or obligationunder the common law of any jurisdiction or any Environmental Law.

 

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

 

Section 6.14                                Maintenanceof Properties.

 

(a)                                  TheBorrowers will keep and maintain the Collateral and all of their otherproperties necessary or useful in its business in good condition, repair andworking order (normal wear and tear excepted) and will from time to timereplace or repair any worn, defective or broken parts; provided, however, thatnothing in this Section 6.14 shall prevent any Borrower from discontinuingthe operation and maintenance of any of its properties if such discontinuanceis, 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 commerciallyreasonable steps necessary to protect and maintain their Intellectual PropertyRights.

 

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

 

Section 6.15                                Insurance.  The Borrowers will obtain and at all timesmaintain insurance with insurers believed by the Borrowers to be responsibleand reputable, in such amounts and against such risks as may from time to timebe required by the Lender, but in all events in such amounts and against suchrisks as is usually carried by companies engaged in similar business and owningsimilar properties in the same general areas in which the Borrowersoperate.  Without limiting thegenerality of the foregoing, the Borrowers will at all times maintain businessinterruption insurance including coverage for force majeure and keep all tangibleCollateral insured against risks of fire (including so-called extendedcoverage), theft, collision (for Collateral consisting of motor vehicles) andsuch other risks and in such amounts as the Lender may reasonably request, withany loss payable to the Lender to the extent of its interest, and all policiesof such insurance shall contain a lender’s loss payable endorsement for theLender’s benefit.  All policies ofliability insurance required hereunder shall name the Lender as an additionalinsured.

 

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Section 6.16                                Preservationof Existence.  The Borrowers willpreserve and maintain their existence and all of their rights, privileges andfranchises necessary or desirable in the normal conduct of their business andshall conduct their business in an orderly, efficient and regular manner.

 

Section 6.17                                Deliveryof Instruments, etc.  Upon requestby the Lender, the Borrowers will promptly deliver to the Lender in pledge allinstruments, documents and chattel paper constituting Collateral, duly endorsedor assigned by the Borrowers.

 

Section 6.18                                Saleor 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) anyCollateral or any interest therein (whether in one transaction or in a seriesof transactions) to any other Person other than the sale of Inventory in theordinary course of business and will not liquidate, dissolve or suspendbusiness operations.  Notwithstandingthe prohibition contained herein, and without constituting a waiver of such anEvent of Default, if any Borrower sells, leases, assigns, transfers, orotherwise disposes of any Collateral of any interest therein, other than thesale of Inventory in the ordinary course of business, the Borrowers will payover the proceeds to the Lender for application to the Obligations.  The Borrowers will not transfer any part oftheir ownership interest in any Intellectual Property Rights and will notpermit any agreement under which it has licensed Licensed Intellectual Propertyto lapse, except that the Borrowers may transfer such rights or permit suchagreements to lapse if it shall have reasonably determined that the applicableIntellectual Property Rights are no longer useful in its business.  If the Borrowers transfer any IntellectualProperty Rights for value, the Borrowers will pay over the proceeds to theLender for application to the Obligations. The Borrowers will not license any other Person to use any of theBorrowers’ Intellectual Property Rights, except that the Borrowers may grantlicenses in the ordinary course of its business in connection with sales ofInventory or provision of services to its customers.

 

Section 6.19                                Consolidationand Merger; Asset Acquisitions.  NoBorrower will consolidate with or merge into any Person, or permit any otherPerson to merge into it, or acquire (in a transaction analogous in purpose oreffect to a consolidation or merger) all or substantially all the assets of anyother Person.

 

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

 

Section 6.21                                Restrictionson Nature of Business.  TheBorrowers will not engage in any line of business materially different fromthat presently engaged in by the Borrowers and will not purchase, lease orotherwise acquire assets not related to its business.

 

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Section 6.22                                Accounting.  The Borrowers will not adopt any materialchange in accounting principles other than as required by GAAP.  The Borrowers will not adopt, permit orconsent 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 customerof 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 ofany Borrower.

 

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

 

Section 6.25                                Placeof Business; Name.  No Borrower willtransfer 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 recordspertaining to the Collateral to be located in any state or area in which, inthe event of such location, a financing statement covering such Collateralwould be required to be, but has not in fact been, filed in order to perfectthe Security Interest.  No Borrower willchange its name or jurisdiction of organization.

 

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

 

Section 6.27                                AdditionalBank 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 financialinstitution, other than the Collateral Account and the accounts set forth in Schedule5.19 hereto.

 

Section 6.28                                Distributionof Loan Proceeds Amongst Borrowers.  With respect to each Advance made pursuant to the terms of thisAgreement, each Borrower shall receive the necessary minimum percentage of theproduct of (a) the amount available to such Borrower based on its contributionto 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 tothe transactions contemplated hereunder, this Agreement or any Loan Document isnot voidable under applicable law relating to fraudulent conveyance orfraudulent transfer.

 

Section 6.29                                Performanceby the Lender.  If any Borrower atany time fails to perform or observe any of the foregoing covenants containedin this Article VI or elsewhere herein, and if such failure shall continuefor a period of ten (10) calendar days after the Lender

 

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gives such Borrower writtennotice thereof (or in the case of the agreements contained in Section 6.13 andSection 6.15, immediately upon the occurrence of such failure, without noticeor lapse of time), the Lender may, but need not, perform or observe suchcovenant on behalf and in the name, place and stead of such Borrower (or, atthe Lender’s option, in the Lender’s name) and may, but need not, take any andall other actions which the Lender may reasonably deem necessary to cure orcorrect such failure (including the payment of taxes, the satisfaction ofLiens, the performance of obligations owed to account debtors or otherobligors, the procurement and maintenance of insurance, the execution ofassignments, security agreements and financing statements, and the endorsementof instruments); and the Borrowers shall thereupon pay to the Lender on demandthe amount of all monies expended and all costs and expenses (includingreasonable attorneys’ fees and legal expenses) incurred by the Lender inconnection with or as a result of the performance or observance of suchagreements or the taking of such action by the Lender, together with interestthereon from the date expended or incurred at the Default Rate.  To facilitate the Lender’s performance orobservance of such covenants of the Borrowers, the Borrowers hereby irrevocablyappoint 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 allinstruments, documents, assignments, security agreements, financing statements,applications for insurance and other agreements and writings required to beobtained, executed, delivered or endorsed by the Borrowers under thisSection 6.29.

 

ARTICLE VII

 

EVENTS OFDEFAULT, RIGHTS AND REMEDIES

 

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

 

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

 

(b)                                 Defaultin the performance, or breach, of any covenant or agreement of (i) any Borrowercontained in this Agreement or any other Loan Document or (ii) any Guarantorcontained in any Loan Document;

 

(c)                                  AChange of Control shall occur;

 

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

 

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

 

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part of its or his property; orsuch receiver, trustee or similar officer shall be appointed without theapplication 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 similarproceeding relating to it or him under the laws of any jurisdiction; or anysuch proceeding shall be instituted (by petition, application or otherwise)against any such Borrower or any such Guarantor; or any judgment, writ, warrantof attachment or execution or similar process shall be issued or levied againsta substantial part of the property of any Borrower or any Guarantor;

 

(f)**                                   **Apetition shall be filed by or against any Borrower or any Guarantor under theUnited States Bankruptcy Code naming such Borrower or such Guarantor as debtor;

 

(g)                                 Anyrepresentation or warranty made by any Borrower in this Agreement, by anyGuarantor in any guaranty delivered to the Lender, or by any Borrower (or anyof its Officers) or any Guarantor in any agreement, certificate, instrument orfinancial statement or other statement contemplated by or made or deliveredpursuant to or in connection with this Agreement or any such guaranty shallprove to have been incorrect in any material respect when deemed to beeffective;

 

(h)                                 Therendering against any Borrower or any Guarantor of an arbitration award, finaljudgment, decree or order for the payment of money in excess of One HundredThousand 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)                                     Adefault under any bond, debenture, note or other evidence of material indebtednessof any Borrower or any Guarantor owed to any Person other than the Lender, orunder any indenture or other instrument under which any such evidence ofindebtedness has been issued or by which it is governed, or under any materiallease or other contract, and the expiration of the applicable period of grace,if any, specified in such evidence of indebtedness, indenture, otherinstrument, lease or contract;

 

(j)                                     AnyReportable Event, which the Lender determines in good faith might constitutegrounds for the termination of any Pension Plan or for the appointment by theappropriate United States District Court of a trustee to administer any PensionPlan, shall have occurred and be continuing thirty (30) days after writtennotice to such effect shall have been given to any Borrower by the Lender; or atrustee shall have been appointed by an appropriate United States DistrictCourt to administer any Pension Plan; or the Pension Benefit GuarantyCorporation shall have instituted proceedings to terminate any Pension Plan orto appoint a trustee to administer any Pension Plan; or any Borrower or anyERISA Affiliate shall have filed for a distress termination of any Pension Planunder Title IV of ERISA; or any Borrower or any ERISA Affiliate shall have failedto make any quarterly contribution required with respect to any Pension Planunder Section 412(m) of the IRC, which the Lender determines in good faith mayby itself, or in combination with any such failures that the Lender maydetermine are likely to

 

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

 

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

 

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

 

(m)                               Defaultin the payment of any amount owed by any Borrower to the Lender other than anyindebtedness arising hereunder;

 

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

 

(o)                                 AnyBorrower shall take or participate in any action which would be prohibitedunder the provisions of any Subordination Agreement or make any payment on theSubordinated Indebtedness (as defined in the Subordination Agreement) that anyPerson was not entitled to receive under the provisions of the SubordinationAgreement;

 

(p)                                 Anyevent or circumstance with respect to any Borrower or Guarantor shall occursuch that the Lender shall believe in good faith that the prospect of paymentof all or any part of the Obligations or the performance by such Borrower orGuarantor under the Loan Documents is impaired or any material adverse changein the business or financial condition of any Borrower or Guarantor shalloccur; or

 

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

 

Section 7.2                                      Rightsand Remedies.  During any DefaultPeriod, the Lender may exercise any or all of the following rights andremedies:

 

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

 

(b)                                 theLender may, by notice to the Administrative Borrower, declare the Obligationsto be forthwith due and payable, whereupon all Obligations shall become and beforthwith due and payable, without presentment, notice of dishonor, protest orfurther notice of any kind, all of which the Borrowers each hereby expresslywaive;

 

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(c)                                  theLender may, without notice to the Borrowers and without further action, applyany and all money owing by the Lender to the Borrowers to the payment of theObligations;

 

(d)                                 theLender may exercise and enforce any and all rights and remedies available upondefault to a secured party under the UCC, including the right to takepossession of Collateral, or any evidence thereof, proceeding without judicialprocess or by judicial process (without a prior hearing or notice thereof,which the Borrowers each hereby expressly waive) and the right to sell, leaseor otherwise dispose of any or all of the Collateral (with or without givingany warranties as to the Collateral, title to the Collateral or similarwarranties), and, in connection therewith, the Borrowers will on demandassemble the Collateral and make it available to the Lender at a place to bedesignated by the Lender which is reasonably convenient to both parties;

 

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

 

(f)                                    theLender may exercise and enforce its rights and remedies under the LoanDocuments; and

 

(g)                                 theLender may exercise any other rights and remedies available to it by law oragreement.

 

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 andpayable automatically without presentment, demand, protest or notice of anykind.  If the Lender sells any of theCollateral on credit, the Obligations will be reduced only to the extent ofpayments actually received.  If thepurchaser fails to pay for the Collateral, the Lender may resell the Collateraland shall apply any proceeds actually received to the Obligations.

 

Section 7.3                                      CertainNotices.  If notice to the Borrowersof any intended disposition of Collateral or any other intended action isrequired by law in a particular instance, such notice shall be deemedcommercially reasonable if given (in the manner specified in Section 9.3) atleast ten (10) calendar days before the date of intended disposition or otheraction.

 

ARTICLE VIII

 

JOINT AND SEVERAL LIABILITY; SURETYSHIP WAIVERS 

 

Section 8.1                                      IndependentObligations; Subrogation.  The Obligations of each Borrower hereunder are joint andseveral.  To the maximum extentpermitted by law, each Borrower hereby waives any claim, right or remedy whichsuch Borrower now has or hereafter

 

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acquires against any otherBorrower that arises hereunder including, without limitation, any claim, remedyor right of subrogation, reimbursement, exoneration, contribution,indemnification, or participation in any claim, right or remedy of the Lenderagainst any Borrower or any Collateral which the Lender now has or hereafteracquires, whether or not such claim, right or remedy arises in equity, undercontract, by statute, under common law or otherwise until the Obligations arefully 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 othersuretyship rights and claims, whether direct or indirect, liquidated orcontingent, whether arising under express or implied contract or by operationof law, which any Borrower may now have or hereafter have as against the otherBorrowers with respect to the Obligations until the Obligations are fully paidand finally discharged.  Each Borroweralso hereby waives any rights of recourse to or with respect to any asset ofthe other Borrowers until the Obligations are fully paid and finallydischarged.

 

Section 8.2                                      Authorityto Modify Obligations and Security.  Each Borrower authorizes the Lender, without notice or demand andwithout affecting any Borrowers’ liability hereunder, from time to time,whether before or after any notice of termination hereof or before or after anydefault in respect of the Obligations, to: (a) renew, extend, accelerate, orotherwise change the time for payment of, or otherwise change any other term orcondition of, any document or agreement evidencing or relating to anyObligations 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 otherwisealter any Collateral, in whole or in part, securing the other Borrowers’Obligations; (c) apply any and all such Collateral and direct the order ormanner 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’ssole discretion, settle, release on terms satisfactory to them, or by operationof law or otherwise, compound, compromise, collect or otherwise liquidate anyof 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 anyand all payments or recoveries from the other Borrowers as the Lender, in itssole discretion, may determine, whether or not such indebtedness relates to theObligations; all whether such Obligations are secured or unsecured orguaranteed or not guaranteed by others; and (vii) apply any sums realized fromCollateral furnished by the other Borrowers upon any of its indebtedness orobligations to the Lender as it in its sole discretion, may determine, whetheror not such indebtedness relates to the Obligations; all without in any waydiminishing, releasing or discharging the liability of any Borrower hereunder.

 

Section 8.3                                      Waiverof Defenses.  Upon an Event ofDefault by any Borrower in respect of any Obligations, the Lender may, at itsoption and without notice to any Borrower, proceed directly against anyBorrower to collect and recover the full amount of the liability hereunder, orany portion thereof, and each Borrower waives any right to require the Lenderto: (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 inconnection with the Obligations; (c) give notice of the terms, time and placeof any public or private sale of any of the Collateral except as otherwiseprovided herein; or (d) pursue any other remedy in the Lender’s powerwhatsoever.  A

 

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

 

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

 

Section 8.5                                      AdditionalWaivers.  Each Borrower waives anydefense arising by reason of any disability or other defense of the otherBorrowers or by reason of the cessation from any cause whatsoever of theliability of the other Borrowers or by reason of any act or omission of theLender or others which directly or indirectly results in or aids the dischargeor release of the other Borrowers or any Obligations or any Collateral byoperation of law or otherwise.  TheObligations shall be enforceable against each Borrower without regard to thevalidity, regularity or enforceability of any of the Obligations with respectto any of the other Borrowers or any of the documents related thereto or anycollateral security documents securing any of the Obligations.  No exercise by the Lender of, and noomission of the Lender to exercise, any power or authority recognized hereinand no impairment or suspension of any right or remedy of the Lender againstany Borrower or any Collateral shall in any way suspend, discharge, release,exonerate or otherwise affect any of the Obligations or any Collateralfurnished by the Borrowers or give to the Borrowers any right of recourseagainst the Lender.  Each Borrowerspecifically agrees that the failure of the Lender: (a) to perfect any lien onor security interest in any property heretofore or hereafter given any Borrowerto secure payment of the Obligations, or to record or file any documentrelating thereto or (b) to file or enforce a claim against the estate (eitherin administration, bankruptcy or other proceeding) of any Borrower shall not inany manner whatsoever terminate, diminish, exonerate or otherwise affect theliability of any Borrower hereunder.

 

Section 8.6                                      AdditionalIndebtedness .  AdditionalObligations may be created from time to time at the request of any Borrower andwithout further authorization from or notice to any other Borrower even thoughthe borrowing Borrower’s financial condition may deteriorate since the datehereof.  Each Borrower waives the right,if any, to require the Lender to disclose to such Borrower any information itmay now have or hereafter acquire concerning the other Borrowers’ character,credit, Collateral, financial condition or other matters.  Each Borrower has established adequate meansto obtain from the other Borrowers, on a continuing basis, financial and otherinformation pertaining to such Borrower’s business and affairs, and assumes theresponsibility for being and keeping informed of the financial and otherconditions of the other Borrowers and of all circumstances bearing upon therisk of nonpayment of the Obligations which diligent inquiry would reveal.  The Lender need not inquire into the powersof 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 theirbehalf, and any Obligations created in reliance upon the purported exercise ofsuch power or authority is hereby guaranteed. All Obligations of each Borrower to the Lender heretofore, now orhereafter created shall be deemed to have been granted at each Borrower’sspecial insistence and request and in consideration of and in reliance uponthis Agreement.

 

Section 8.7                                      Notices,Demands, Etc.  Except as expresslyprovided by this Agreement, the Lender shall not be under any obligationwhatsoever to make or give to any Borrower, and each Borrower hereby waivesdiligence, all rights of setoff and counterclaim against the Lender, alldemands, presentments, protests, notices of protests, notices of protests,notices of nonperformance, notices of dishonor, and all other notices of everykind or nature, including notice of the existence, creation or incurring of anynew or additional Obligations.

 

Section 8.8                                      Subordination.  Except as otherwise provided in this Section8.8, any indebtedness of any Borrower now or hereafter owing to any otherBorrower is hereby subordinated to the Obligations, whether heretofore, now orhereafter created, and whether before or after notice of termination hereof,and, following the occurrence and during the continuation of an Event ofDefault, no Borrower shall, without the prior consent of the Lender, pay inwhole or in part any of such indebtedness nor will any such Borrower accept anypayment of or on account of any such indebtedness at any time while suchBorrower remains liable hereunder.  Atthe request of the Lender, after the occurrence and during the continuance ofan Event of Default, each Borrower shall pay to the Lender all or any part ofsuch subordinated indebtedness and any amount so paid to the Lender at itsrequest shall be applied to payment of the Obligations.  Each payment on the indebtedness of anyBorrower to the other Borrowers received in violation of any of the provisionshereof shall be deemed to have been received by any other Borrower as trusteefor the Lender and shall be paid over to the Lender immediately on account ofthe Obligations, but without otherwise affecting in any manner any suchBorrower’s liability under any of the provisions of this Agreement.  Each Borrower agrees to file all claimsagainst the other Borrowers in any bankruptcy or other proceeding in which thefiling of claims is required by law in respect of any indebtedness of the otherBorrowers to such Borrower, and the Lender shall be entitled to all of any suchBorrower’s rights thereunder.  If forany reason any such Borrower fails to file such claim at least thirty (30) daysprior to the last date on which such claim should be filed, the Lender, as suchBorrower’s attorney-in-fact, is hereby authorized to do so in Borrowers’ nameor, in the Lender’s discretion, to assign such claim to, and cause a proof ofclaim to be filed in the name of, the Lender’s nominee.  In all such cases, whether inadministration, bankruptcy or otherwise, the person or persons authorized topay such claim shall pay to the Lender the full amount payable on the claim inthe proceeding, and to the full extent necessary for that purpose any suchBorrower hereby assigns to the Lender all such Borrower’s rights to anypayments or distributions to which such Borrower otherwise would beentitled.  If the amount so paid isgreater than any such Borrower’s liability hereunder, the Lender will pay theexcess amount to the person entitled thereto.

 

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

 

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

 

Section 8.10                                Understandingof Waivers.  Each Borrower warrantsand agrees that the waivers set forth in this Article 8 are made with full knowledgeof their significance and consequences. If any of such waivers are determined to be contrary to any applicablelaw or public policy, such waivers shall be effective only to the maximumextent permitted by law.

 

ARTICLE IX

 

MISCELLANEOUS

 

Section 9.1                                      NoWaiver; Cumulative Remedies; Compliance with Laws.  No failure or delay by the Lender inexercising any right, power or remedy under the Loan Documents shall operate asa 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 exerciseof any other right, power or remedy under the Loan Documents.  The remedies provided in the Loan Documentsare cumulative and not exclusive of any remedies provided by law.  The Lender may comply with any applicablestate or federal law requirements in connection with a disposition of theCollateral and such compliance will not be considered adversely to affect thecommercial 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 anydeparture by the Borrowers therefrom or any release of a Security Interestshall be effective unless the same shall be in writing and signed by theLender, and then such waiver or consent shall be effective only in the specificinstance and for the specific purpose for which given.  No notice to or demand on the Borrowers inany case shall entitle the Borrowers to any other or further notice or demandin similar or other circumstances.

 

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

 

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party in a written notice to the other party complying as to deliverywith the terms of this Section.  Allsuch notices, requests, demands and other communications shall be deemed tohave been given on (a) the date received if personally delivered, (b) whendeposited in the mail if delivered by mail, (c) the date sent if sent byovernight courier, or (d) the date of transmission if delivered by telecopy,except that notices or requests to the Lender pursuant to any of the provisionsof 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 Section2.2(b), (ii) shall be personally delivered, sent by registered or certifiedmail, return receipt requested, or by overnight courier of national reputation(iii) shall be deemed to be sent when received by the Lender and (iv) shallotherwise comply with the requirements of Section 9-210.  The Borrowers request that the Lenderrespond to all such requests which on their face appear to come from anauthorized individual and releases the Lender from any liability for soresponding.  The Borrowers shall payLender the maximum amount allowed by law for responding to such requests.

 

Section 9.4                                      IntentionallyOmitted.

 

Section 9.5                                      FurtherDocuments.  The Borrowers will fromtime to time execute and deliver or endorse any and all instruments, documents,conveyances, assignments, security agreements, financing statements, controlagreements and other agreements and writings that the Lender may reasonablyrequest in order to secure, protect, perfect or enforce the Security Interestor the Lender’s rights under the Loan Documents (but any failure to request orassure that the Borrowers execute, deliver or endorse any such item shall notaffect or impair the validity, sufficiency or enforceability of the LoanDocuments and the Security Interest, regardless of whether any such item was orwas not executed, delivered or endorsed in a similar context or on a prioroccasion).

 

Section 9.6                                      Costsand Expenses.  Except for suchcosts, expenses, claims and related losses resulting from the gross negligenceor intentional misconduct by the Lender or its employees, agents and assigns,the Borrowers shall pay on demand all costs and expenses, including reasonableattorneys’ fees, incurred by the Lender in connection with the Obligations,this Agreement, the Loan Documents, any Letter of Credit and any other documentor agreement related hereto or thereto, and the transactions contemplatedhereby, including all such costs, expenses and fees incurred in connection withthe negotiation, preparation, execution, amendment, administration,performance, collection and enforcement of the Obligations and all suchdocuments 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 andrelated losses resulting from the gross negligence or intentional misconduct bythe Lender or its employees, agents and assigns, in addition to the payment ofexpenses pursuant to Section 9.6, the Borrowers shall indemnify, defend andhold harmless the Lender, and any of its participants, parent corporations,subsidiary corporations, affiliated corporations, successor corporations, and

 

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

 

(i)                                     anyand all transfer taxes, documentary taxes, assessments or charges made by anygovernmental authority by reason of the execution and delivery of the LoanDocuments or the making of the Advances;

 

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

 

(iii)                               anyand all other liabilities, losses, damages, penalties, judgments, suits,claims, costs and expenses of any kind or nature whatsoever (including thereasonable fees and disbursements of counsel) in connection with the foregoingand any other investigative, administrative or judicial proceedings, whether ornot such Indemnitee shall be designated a party thereto, which may be imposedon, incurred by or asserted against any such Indemnitee, in any manner relatedto or arising out of or in connection with the making of the Advances and theLoan Documents or the use or intended use of the proceeds of the Advances.

 

If anyinvestigative, judicial or administrative proceeding arising from any of theforegoing is brought against any Indemnitee, upon such Indemnitee’s request,the Borrowers, or counsel designated by the Borrowers and satisfactory to theIndemnitee, will resist and defend such action, suit or proceeding to theextent and in the manner directed by the Indemnitee, at the Borrowers’ solecosts and expense.  Each Indemnitee willuse its best efforts to cooperate in the defense of any such action, suit orproceeding.  If the foregoingundertaking to indemnify, defend and hold harmless may be held to beunenforceable because it violates any law or public policy, the Borrowers shallnevertheless make the maximum contribution to the payment and satisfaction ofeach of the Indemnified Liabilities which is permissible under applicablelaw.  The Borrowers’ obligation under thisSection 8.7 shall survive the termination of this Agreement and the dischargeof any Borrower’s other obligations hereunder.

 

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

 

Section 9.9                                      Executionin Counterparts; Telefacsimile Execution. This Agreement and other Loan Documents may be executed in any number ofcounterparts, each of which when so executed and delivered shall be deemed tobe an original and all of which counterparts, taken together, shall constitutebut one and the same instrument. Delivery of an executed counterpart of this Agreement by telefacsimileshall be equally as effective as delivery of an original executed counterpartof this Agreement.  Any party deliveringan executed counterpart of this Agreement by telefacsimile also shall deliveran original executed counterpart

 

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of thisAgreement but the failure to deliver an original executed counterpart shall notaffect the validity, enforceability, and binding effect of this Agreement.

 

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

 

Section 9.11                                BindingEffect; Assignment; Complete Agreement; Exchanging Information.  The Loan Documents shall be binding upon andinure to the benefit of the Borrowers and the Lender and their respectivesuccessors and assigns, except that no Borrower shall have the right to assignits rights thereunder or any interest therein without the Lender’s priorwritten consent.  To the extentpermitted by law, each Borrower waives and will not assert against any assigneeany claims, defenses or set-offs which such Borrower could assert against theLender.  This Agreement shall also bindall Persons who become a party to this Agreement as a borrower.  This Agreement, together with the LoanDocuments, comprises the complete and integrated agreement of the parties onthe subject matter hereof and supersedes all prior agreements, written or oral,on the subject matter hereof.  Withoutlimiting the Lender’s right to share information regarding the Borrowers andtheir Affiliates with the Lender’s participants, accountants, lawyers and otheradvisors, the Lender, Wells Fargo & Company, and all direct and indirectsubsidiaries of Wells Fargo & Company, may exchange any and all informationthey may have in their possession regarding the Borrowers and their Affiliates,and the Borrowers each waive any right of confidentiality it may have withrespect to such exchange of such information.

 

Section 9.12                                Severabilityof Provisions.  Any provision ofthis Agreement which is prohibited or unenforceable shall be ineffective to theextent of such prohibition or unenforceability without invalidating theremaining provisions hereof.

 

Section 9.13                                Headings.  Article, Section and subsection headings inthis Agreement are included herein for convenience of reference only and shallnot constitute a part of this Agreement for any other purpose.

 

Section 9.14                                GoverningLaw; Jurisdiction, Venue; Waiver of Jury Trial.  The Loan Documents shall be governed by and construed inaccordance with the substantive laws (other than conflict laws) of the State ofCalifornia.  The parties hereto hereby(i) consent to the personal jurisdiction of the state and federal courtslocated in the State of California in connection with any controversy relatedto this Agreement; (ii) waive any argument that venue in any such forum is notconvenient, (iii) agree that any litigation initiated by the Lender or anyBorrower in connection with this Agreement or the other Loan Documents may bevenued 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 orproceeding shall be conclusive and may be enforced in other jurisdictions bysuit on the judgment or in any other manner provided by law.

 

65

----

 

**THEPARTIES WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED ONOR PERTAINING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT.**

 

Section 9.15                                SIas Agent for Borrowers.  EachBorrower hereby irrevocably appoints SI as the borrowing agent andattorney-in-fact for all Borrowers (the “Administrative Borrower”) whichappointment shall remain in full force and effect unless and until the Lendershall have received prior written notice signed by each Borrower that suchappointment has been revoked and that another Borrower has been appointedAdministrative Borrower.  Each Borrowerhereby irrevocably appoints and authorizes the Administrative Borrower (i) toprovide the Lender with all notices with respect to Advances and Letters ofCredit obtained for the benefit of any Borrower and all other notices andinstructions under this Agreement and (ii) to take such action as theAdministrative Borrower deems appropriate on its behalf to obtain Advances andLetters of Credit and to exercise such other powers as are reasonablyincidental thereto to carry out the purposes of this Agreement.  It is understood that the handling of theCollateral of Borrowers in a combined fashion, as more fully set forth herein,is done solely as an accommodation to Borrowers in order to utilize thecollective borrowing powers of Borrowers in the most efficient and economicalmanner and at their request, and that the Lender shall not incur liability toany Borrower as a result hereof.  EachBorrower expects to derive benefit, directly or indirectly, from the handlingof the Collateral in a combined fashion since the successful operation of eachBorrower is dependent on the continued successful performance of the integratedgroup.  To induce the Lender to do so,and in consideration thereof, each Borrower hereby jointly and severally agreesto indemnify the Lender harmless against any and all liability, expense, loss orclaim of damage or injury, made against the Lender by any Borrower or by anythird party whosoever, arising from or incurred by reason of (a) the handlingof the Collateral of Borrowers as herein provided, (b) Lender’s relying on anyinstructions of the Administrative Borrower, or (c) any other action taken bythe Lender hereunder or under the other Loan Documents, except that Borrowerswill have no liability to the Lender or any of its Affiliates under thisSection 9.15 with respect to any liability that has been finally determined bya court of competent jurisdiction to have resulted solely from the grossnegligence or willful misconduct of such Lender or Affiliate.

 

66

----

 

IN WITNESSWHEREOF, the parties hereto have caused this Agreement to be executed by theirrespective officers thereunto duly authorized as of the date first abovewritten.

 
| 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 Creditand Security Agreement

 

**REVOLVING NOTE**

 
| $10,000,000 |   | Los Angeles, California |
|-------------|--------|-------------------------|
|        |   | September  19, 2003     |

 

For valuereceived, the undersigned, SMTEK, INC., a California corporation (“SI”),JOLT TECHNOLOGY, INC., a Delaware corporation (“Jolt”), SMTEK NEWENGLAND, INC., a Massachusetts corporation (“SNEI”), SMTEK SANTA CLARA,INC., a California corporation (“SSCI”), and TECHNETICS, INC., aCalifornia corporation (“Technetics”) (SI, Jolt, SNEI, SSCI, andTechnetics are each referred to herein as a “Borrower” and collectivelyas the “Borrowers”), hereby jointly and severally promise to pay on theTermination Date under the Credit Agreement (defined below), to the order ofWELLS FARGO BUSINESS CREDIT, INC., a Minnesota corporation (the “Lender”),at its main office in Minneapolis, Minnesota, or at any other place designatedat any time by the holder hereof, in lawful money of the United States ofAmerica and in immediately available funds, the principal sum of Ten MillionDollars ($10,000,000) or, if less, the aggregate unpaid principal amount of allRevolving Advances made by the Lender to the Borrowers under the CreditAgreement (defined below) together with interest on the principal amounthereunder remaining unpaid from time to time, computed on the basis of theactual number of days elapsed and a 360-day year, from the date hereof untilthis Revolving Note (this “Note”) is fully paid at the rate from time totime in effect under the Credit and Security Agreement of even date herewith(the “Credit Agreement”) by and between the Lender and theBorrowers.  The principal hereof andinterest accruing thereon shall be due and payable as provided in the CreditAgreement.  This Note may be prepaidonly in accordance with the Credit Agreement.

 

This Note isissued pursuant, and is subject, to the Credit Agreement, which provides, amongother things, for acceleration hereof. This Note is the Revolving Note referred to in the CreditAgreement.  This Note is secured, amongother things, pursuant to the Credit Agreement and the Security Documents astherein defined, and may now or hereafter be secured by one or more othersecurity agreements, mortgages, deeds of trust, assignments or otherinstruments or agreements.

 

The Borrowersshall pay all costs of collection, including reasonable attorneys’ fees andlegal expenses if this Note is not paid when due, whether or not legalproceedings are commenced.

 

Presentment orother 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 Creditand Security Agreement

 

**TERM NOTE**

 
| $1,000,000 |   | Los Angeles, California |
|------------|--------|-------------------------|
|       |   | September 19, 2003      |

 

For valuereceived, the undersigned, SMTEK, INC., a California corporation (“SI”),JOLT TECHNOLOGY, INC., a Delaware corporation (“Jolt”), SMTEK NEWENGLAND, INC., a Massachusetts corporation (“SNEI”), SMTEK SANTA CLARA,INC., a California corporation (“SSCI”), and TECHNETICS, INC., aCalifornia corporation (“Technetics”) (SI, Jolt, SNEI, SSCI, and Techneticsare each referred to herein as a “Borrower” and collectively as the “Borrowers”),hereby jointly and severally promise to pay on the Termination Date under theCredit Agreement (defined below), to the order of Wells Fargo Business Credit,Inc., a Minnesota corporation (the “Lender”), at its main office inMinneapolis, Minnesota, or at any other place designated at any time by theholder hereof, in lawful money of the United States of America and inimmediately available funds, the principal sum of One Million Dollars($1,000,000) or, if less, the aggregate unpaid principal amount of the TermAdvance made by the Lender to the Borrowers under the Credit Agreement (definedbelow) together with interest on the principal amount hereunder remainingunpaid from time to time, computed on the basis of the actual number of dayselapsed 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 andSecurity Agreement of even date herewith (as the same may hereafter be amended,supplemented or restated from time to time, the “Credit Agreement”) byand between the Lender and the Borrowers. The principal hereof and interest accruing thereon shall be due andpayable as provided in the Credit Agreement. This Note may be prepaid only in accordance with the Credit Agreement.

 

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

 

This Note issecured, among other things, pursuant to the Credit Agreement and the SecurityDocuments as therein defined, and may now or hereafter be secured by one ormore other security agreements, mortgages, deeds of trust, assignments or otherinstruments or agreements.

 

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

 

Presentment orother 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 Creditand Security Agreement

 

**CAPEX NOTE**

 
| $1,000,000 |   | Los  Angeles, California |
|------------|--------|--------------------------|
|       |   | September  19, 2003      |

 

For value received, each ofthe undersigned, SMTEK, INC., a California corporation (“SI”), JOLTTECHNOLOGY, INC., a Delaware corporation (“Jolt”), SMTEK NEW ENGLAND,INC., a Massachusetts corporation (“SNEI”), SMTEK SANTA CLARA, INC., aCalifornia corporation (“SSCI”), and TECHNETICS, INC., a Californiacorporation (“Technetics”) (SI, Jolt, SNEI, SSCI, and Technetics areeach referred to herein as a “Borrower” and collectively as the “Borrowers”),hereby jointly and severally promise to pay on the Termination Date under theCredit Agreement (defined below), to the order of WELLS FARGO BUSINESS CREDIT,INC., a Minnesota corporation (the “Lender”), at its main office inMinneapolis, Minnesota, or at any other place designated at any time by theholder hereof, in lawful money of the United States of America and inimmediately available funds, the principal sum of One Million Dollars($1,000,000) or, if less, the aggregate unpaid principal amount of all CapExAdvances made by the Lender to the Borrowers under the Credit Agreement(defined below) together with interest on the principal amount hereunderremaining unpaid from time to time, computed on the basis of the actual numberof 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 effectunder the Credit and Security Agreement of even date herewith (as the same mayhereafter be amended, supplemented or restated from time to time, the “CreditAgreement”) by and between the Lender and the Borrowers.  The principal hereof and interest accruingthereon shall be due and payable as provided in the Credit Agreement.  This Note may be prepaid only in accordancewith the Credit Agreement.

 

This Note is issuedpursuant, and is subject, to the Credit Agreement, which provides, among otherthings, for acceleration hereof.  ThisNote is the CapEx Note referred to in the Credit Agreement.

 

This Note is secured, amongother things, pursuant to the Credit Agreement and the Security Documents astherein defined, and may now or hereafter be secured by one or more othersecurity agreements, mortgages, deeds of trust, assignments or otherinstruments or agreements.

 

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

 

Presentment orother 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 Creditand Security Agreement

 

**Compliance Certificate**

 
| To:      |   |                                                                               |   |
|----------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|     |   | Wells Fargo  Business Credit, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| Date:    |   |                                      ,  200                                                                                                                                                                                                             |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| Subject: |   |                                                                               |   |

 

FinancialStatements

 

In accordancewith our Credit and Security Agreement dated as of September 19, 2003 (the “CreditAgreement”), 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”) andthe year-to-date period then ended (the “Current Financials”).  All terms used in this certificate have themeanings given in the Credit Agreement.

 

I certify thatthe Current Financials have been prepared in accordance with GAAP, subject toyear-end audit adjustments, and fairly present the Borrowers’ financialcondition as of the date thereof.

 

Events ofDefault. (Check one):

 

o                                    Theundersigned does not have knowledge of the occurrence of a Default or Event ofDefault under the Credit Agreement except as previously reported in writing tothe Lender.

 

o                                    Theundersigned has knowledge of the occurrence of a Default or Event of Defaultunder the Credit Agreement not previously reported in writing to the Lender andattached hereto is a statement of the facts with respect to thereto.  The Borrowers acknowledge that pursuant toSection 2.13(d) of the Credit Agreement, the Lender may impose the Default Rateat any time during the resulting Default Period.

 

FinancialCovenants.  Ifurther hereby certify as follows:

 

1.                                       Minimum DebtService Coverage Ratio.  Pursuant toSection 6.2(a) of the Credit Agreement, as of the Reporting Date, theBorrower’s Debt Service Coverage Ratio was         to 1.00 which osatisfies o does not satisfy the requirement that suchratio be no less than 1.20 to 1.00 on the Reporting Date.

 

----

 

2.                                       MinimumBook Net Worth.  Pursuant to Section6.2(b) of the Credit Agreement, as of the Reporting Date the Borrowers’ BookNet Worth was$                   which o satisfies odoes 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.                                       MinimumNet Income Before Taxes.  Pursuantto Section 6.2(c) of the Credit Agreement, the Borrowers’ year-to-date NetIncome for the quarter ending on the Reporting Date, was$                       ,which o satisfies odoes 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.                                       CapitalExpenditures.  Pursuant to Section6.2(c) of the Credit Agreement, for the year-to-date period ending on theReporting Date, the Borrowers have expended or contracted to expend during thefiscal year ended                      ,200    , for Capital Expenditures,$                       in the aggregate, which o satisfies odoes not satisfy the requirement that such expenditures not exceed$                   in the aggregate for such fiscal year.

 

C-2

----

 

Attachedhereto are all relevant facts in reasonable detail to evidence, and thecomputations of the financial covenants referred to above.  These computations were made in accordancewith 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 andSecurity Agreement

 

**Premises**

 

The Premisesreferred to in the Credit and Security Agreement are legally described asfollows:

 

 

**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, PAGES1 THROUGH 5, INCLUSIVE OF PARCEL MAPS, AND AS AMENDED IN BOOK 38, PAGE 39 OFPARCEL MAPS, IN THE OFFICE OF THE COUNTY RECORDED OF SAID COUNTY.

 

**3240 Scott Blvd., Santa Clara, CA  95054**

 

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

 

**6801 NW 15th Avenue, Fort Lauderdale, FL  33309**

 

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

 

**274 Cedar Hill Road, Marlborough, MA  01752**

 

PARCEL ONE 

That certain parcel with thebuildings thereon situated in Marlborough, Middlesex County, Massachusetts,bounded and described as follows beginning at the northwest corner of thepremises on the southerly side of Cedar Hill Street and at land of the Commonwealthof Massachusetts Metropolitan District Commission, thence by the southerly sideof said Cedar Hill Street.  Saiddescribed 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. & DanielMordecai & Melvin B. Clayton.  Scale1” = 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 inMarlborough, Massachusetts being Lot No. 2 as shown on a plan entitled “Plan ofLand in Marlborough, Massachusetts owned by: Mark S., Donald D. & DanielMordecai & Melvin B. Clayton.  Scale1” = 40’, Dated: November 2, 1970. Highland Land Surveyors, Inc., 29 Maple Street, Marlborough,Massachusetts” recorded with Middlesex Registry of said Deeds Book 11960, Page657 said Lot #2. containing 199,024 square feet or 4.57 acres as shown on saidplan or however otherwise said plan may be bounded, measured or described.

 

----

 

**2151 Anchor Court, Newbury Park, CA  91321**

 

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

 

**13200 Danielson Street, Poway, CA  92064**

 

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

 

----

 

Exhibit F to Creditand Security Agreement

 

**NOTICE OF BORROWING**

 

                  ,      

 
| TO:    |   | Wells Fargo  Business Credit, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                           |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                            |                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                            |                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                            |                                                                                                                                                                                                                                                                                                                                                                           |
|   |   | Telecopier:                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                         |   |
|   |   | Attention:                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                               |   |
|        |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                |  |  |

 

Theundersigned refers to that certain Credit and Security Agreement dated as ofSeptember 19, 2003 (as amended or modified to date, the “Credit Agreement”) byand 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 Techneticsare 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 thesame meanings assigned to them in the Credit Agreement.

 

Pursuant toSection 2.2(b) of the Credit Agreement, the undersigned hereby requests orconfirms Borrowers’ request for an Advance on the date, of the type(s) and inthe 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 Creditand Security Agreement

 

**NOTICE OF CONVERSION TO LIBO RATE ADVANCES**

 

                   ,         

 
| TO:    |   | Wells Fargo  Business Credit, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                             |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   | Telecopier:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                       |   |
|   |   | Attention:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                  |   |
|        |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                  |  |  |

 

Theundersigned refers to that certain Credit and Security Agreement dated as ofSeptember  19, 2003 (as amended ormodified 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 butnot otherwise defined shall have the same meanings assigned to them in theCredit Agreement.

 

Pursuant toSection 2.3(a) of the Credit Agreement, the undersigned hereby requests orconfirms Borrowers’ request that Floating Rate Advances in the aggregateamounts specified below be converted to LIBO Rate Advances on the date(s) andfor 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 Creditand Security Agreement

 

**NOTICE TO CONTINUE LIBO RATE ADVANCE**

 

               ,         

 
| TO:    |   | Wells Fargo  Business Credit, Inc. |   |
|--------|--------|------------------------------------|--------|
|   |   |                               |   |
|   |   |                               |   |
|   |   |                               |   |
|   |   | Telecopier:                        |   |   |
|   |   | Attention:                         |   |   |
|        |        |                                    |        |  |  |

 

 

Theundersigned refers to that certain Credit and Security Agreement dated as ofSeptember 19, 2003 (as amended or modified to date, the “Credit Agreement”) byand 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 toherein as a “Borrower” and collectively as the “Borrowers”) andWells Fargo Business Credit, Inc. Capitalized terms used herein but not otherwise defined shall have thesame meanings assigned to them in the Credit Agreement.

 

Pursuant toSection 2.3(b) of the Credit Agreement, the undersigned hereby requests orconfirms 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 toCredit 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 ofBusiness**

 

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 5.2to 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                                            | %      |

 

 

Organizationalchart showing the ownership structure of all Subsidiaries of the Borrower isattached.

 

----

 

Schedule 5.5  to Credit and Security Agreement

 

**Subsidiaries**

 

SMTEK, Inc. (aka SMTEK Moorpark)

 

SMTEKSanta Clara, Inc.

 

SMTEKNew England, Inc.

 

JoltTechnology, Inc. (aka SMTEK Fort Lauderdale)

 

SMTEK International Thailand Ltd.

 

DDLEurope Ltd.

 

----

 

Schedule 5.7 to Credit and Security Agreement

 

 

**Litigation**

 

 

**None.**

** **

----

 

Schedule 5.11to 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 5.14to Credit and Security Agreement

 

**Environmental Matters**

 

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

 

----

 

Schedule 5.19to Credit and Security Agreement

 

**Bank Accounts**

 

Citizens Bank ComercialChecking Account number xxxxxx-xxx-x

 

Citizens Bank CommercialChecking Account number xxxxxx-xxx-x

 

Bank of America BusinessChecking Account number xxxx xxxx xxxx

 

Comerica Bank Accountnumbers

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 6.3to 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 6.4to 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 |   |

** **

**Alloperating leases deemed not indebtedness pursuant to section 6.4 of the CreditAgreement.**

 

**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 |
|----------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|

 

----