Exhibit
10.20


 


 


LOAN AND SECURITY
AGREEMENT


 


 


by and between


 


 


TECHNOLOGY LENDING
PARTNERS, L.L.C.


(as the Lender)


 


 


and


 


 


ODETICS, INC.


(as the Borrower)


 


DATED AS OF


February 22,
2002


 

















 


LOAN AND SECURITY AGREEMENT


 


 


This LOAN AND SECURITY AGREEMENT, dated as of
February 22, 2002 (this “Agreement”), is entered into by and
between ODETICS, INC., a Delaware corporation (the “Borrower”), and
TECHNOLOGY LENDING PARTNERS, L.L.C., a California limited liability company
(the “Lender”).


 


RECITALS


 


WHEREAS, the Borrower has requested that the Lender
make available Advances (as hereinafter defined), in an aggregate principal
amount not to exceed $1,250,000 at any time outstanding, to allow the Borrower
to fund general working capital requirements; and


 


WHEREAS, the Lender is willing to make such Advances
available upon and subject to the terms and conditions hereinafter set forth;


 


NOW, THEREFORE, in consideration of the mutual
covenants and undertakings herein contained, the Borrower and the Lender hereby
agree as follows:


 


I.                                         DEFINITIONS.


 


1.1           Accounting Terms.  As used in this Agreement or any
certificate, report or other document made or delivered pursuant to this
Agreement, accounting terms not defined in Section 1.2 or elsewhere
in this Agreement and accounting terms partly defined in Section 1.2
to the extent not defined, shall have the respective meanings given to them
under GAAP.


 


1.2           General Terms.  For purposes of this Agreement the following
terms shall have the following meanings:


 


“Account Debtor”
means any Person who is or who may become obligated under, with respect to, or
on account of, an Account.


 


“Accounts” means
all of the Borrower’s now owned or hereafter acquired right, title, and
interest with respect to “accounts” (as that term is defined in the California
Uniform Commercial Code), and any and all supporting obligations in respect
thereof.  Without limiting the
generality of the foregoing, the term “Accounts” shall further include all
presently existing and hereafter arising accounts, contract rights, and all
other forms of obligations owing to Borrower arising out of the sale or lease
of goods (including, without limitation, the licensing of software and other
technology) or the rendering of services by 
Borrower, whether or not earned by performance.


 


“Additional Amounts”
shall have the meaning set forth in Section 3.6(a).


 


“Advances” shall
have the meaning set forth in Section 2.1.


 


“Affiliate” of any
Person shall mean any Person that owns or controls directly or indirectly such
Person, any Person that controls or is controlled by or is under common control
with such Person, and each of such Person’s senior executive officers,
directors, partners and, for any Person that is a limited liability company,
such Persons, managers and members.


 


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“Availability”
means, as of any date of determination, if such date is a Business Day, and
determined at the close of business on the immediately preceding Business Day,
if such date of determination is not a Business Day, the amount that Borrower
is entitled to borrow as Advances under Section 2.1, after giving effect
to all then outstanding Obligations.


 


“Borrower” is
defined in the Introduction hereto and shall extend to all permitted successors
and assigns.


 


“Borrower’s Account”
shall have the meaning set forth in Section 2.9.


 


“Borrower Parties”
means the Borrower and its Subsidiaries other than Iteris, Inc.


 


“Borrowing Base”
shall mean, as of any date of determination, 85% of the amount of Eligible Accounts.


 


“Borrower’s Books”
means all of Borrower’s books and records including without limitation:
ledgers, records concerning Borrower’s assets or liabilities, the Collateral,
business operations or financial condition; and all computer programs or tape
files, and the equipment containing such information.


 


“Borrowing Base
Certificate” shall have the meaning set forth in Section 8.2.


 


“Business Day”
shall mean any day other than Saturday or Sunday or a legal holiday on which
commercial banks are authorized or required by law to be closed for business in
California.


 


“Charges” shall
mean all taxes, charges, fees, imposts, levies or other assessments, including,
without limitation, all net income, gross income, gross receipts, sales, use,
ad valorem, value added, transfer, franchise, profits, inventory, capital
stock, license, withholding, payroll, employment, social security,
unemployment, excise, severance, stamp, occupation and property taxes, custom
duties, fees, assessments, liens, claims and charges of any kind whatsoever,
together with any interest and any penalties, additions to tax or additional
amounts, imposed by any taxing or other authority, domestic or foreign, upon
the Borrower or any of its Affiliates.


 


“Closing Date”
shall mean February 22, 2002, or such other date as may be agreed to by
the parties hereto.


 


“Code” shall mean
the Internal Revenue Code of 1986, as amended from time to time and the
regulations promulgated thereunder.


 


“Collateral” means
all of the Borrower’s property, other than the Real Property, whether now owned
or hereafter acquired or arising and wherever located, including, without
limitation, the following types or items of property:


 


(a)           Accounts;


 


(b)           Chattel Paper;


 


(c)           Contracts;


 


(d)           Investment Property;


 


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(e)           Inventory;


 


(f)            Equipment;


 


(g)           Inventory;


 


(h)           General Intangibles and Intellectual
Property Collateral;


 


(i)            Goods;


 


(j)            Instruments and letters of credit;


 


(k)           Deposit Accounts;


 


(l)            money, cash or cash equivalents;


 


(m)          money, cash, cash equivalents and
other assets of Borrower that now or hereafter come into the possession,
custody, or control of any member of the Lender;


 


(n)           the
Pledged Stock, and


 


(o)           to
the extent not otherwise included, all of the proceeds and products, whether
tangible or intangible, of any of the foregoing, including proceeds of
insurance covering any or all of the foregoing and all accessions to,
substitutions and replacements for, and rents and profits of each of the
foregoing, and any and all Accounts, Investment Property, Inventory, Equipment,
General Intangibles, money or other tangible or intangible property resulting
from the sale, exchange, collection, or other disposition of any of the
foregoing, or any portion thereof or interest therein, and the proceeds
thereof.


 


“Consents” shall
mean all filings and all licenses, permits, consents, approvals,
authorizations, qualifications and orders of Governmental Bodies and other
third parties, domestic or foreign, necessary to carry on the Borrower’s
business, including, without limitation, any Consents required under all
applicable federal, state or other applicable law.


 


“Copyrights” means
any and all copyright rights, copyright applications, copyright registrations
and like protections in each work or authorship and derivative work thereof,
whether published or unpublished and whether or not the same also constitutes a
trade secret, now or hereafter existing, created, acquired or held.


 


“Default” shall
mean an event which, with the giving of notice or passage of time or both,
would constitute an Event of Default.


 


“Default Rate”
shall mean the Interest Rate plus four percent (4%).


 


“Dollar” and the
sign “$” shall mean lawful money of the United States of America.


 


“Eligible Accounts”
means those Accounts created by the Borrower Parties in the ordinary course of
their businesses that arise out of the Borrower Parties’ sale of goods or
rendition of services, and that are not excluded as ineligible by virtue of one
or more of the criteria set forth below. 
In determining the amount to be included, Eligible Accounts shall be
calculated net of 


 


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customer deposits and
unapplied cash remitted to the Borrower Parties.  Eligible Accounts shall not include the following:


 


(a)                                  Accounts
that the Account Debtor has failed to pay within the later of (i) 90 days
of the original invoice date, or (ii) 90 days of installation of the
product described in an invoice, not to exceed 120 days of original invoice date;


 


(b)                                 Accounts
with respect to which the Account Debtor is a creditor of Borrower, has or has
asserted a right of setoff, has disputed its liability, or has made any claim
with respect to its obligation to pay the Account, to the extent of such claim,
right of setoff, or dispute;


 


(c)                                  Accounts
with respect to which the Account Debtor is subject to an Insolvency
Proceeding, is insolvent, has gone out of business, or as to which a Borrower
Party has received notice of an imminent insolvency proceeding or a material
impairment of the financial condition of such Account Debtor.


 


(d)                                 Accounts
with respect to an Account Debtor, including Affiliates, whose total
obligations to Borrower exceed twenty percent (20%) of all Accounts, to the
extent such obligations exceed the aforementioned percentage, except as
approved in writing by Lender;


 


(e)                                  Accounts
owed by any single Account Debtor on which over twenty five percent (25%) of
the aggregate account owing has not been paid for within the later of (i) 90
days of the original invoice date, or (ii) 90 days of installation of the
product described in an invoice, not to exceed 120 days from the date of the
invoice;


 


(f)                                    Accounts
with respect to which the Account Debtor does not have its principal place of
business in the United States except for Eligible Foreign Accounts;


 


(g)                                 Accounts
generated by demonstration or promotional equipment, or with respect to which
goods are placed on consignment, guaranteed sale, sale or return, sale on
approval, bill and hold, or other terms by reason of which the payment by the
Account Debtor may be conditional;


 


(h)                                 Accounts
with respect to which the Account Debtor is an Affiliate, officer, employee, or
agent of Borrower;


 


(i)                                     Accounts
with respect to which the Account Debtor disputes liability or makes any claim
with respect thereto as to which Lender believes, in its sole discretion, that
there may be a basis for dispute (but only to the extent of the amount subject
to such dispute or claim); and


 


(j)                                     Accounts
the collection of which Lender reasonably determines after reasonable inquiry
and reasonable consultation with Borrower to be doubtful.


 


“Eligible Foreign
Accounts” means Accounts with respect to which the Account Debtor does not
have its principal place of business in the United States and that are: (1)
covered by credit insurance in form and amount, and by an insurer satisfactory
to Lender less the amount of any deductible(s) which may be or become owing
thereon; or (2) supported by one or more letters of 


 


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credit either advised or
negotiated through Lender or in favor of Lender as beneficiary, in an amount
and of a tenor, and issued by a financial institution, acceptable to Lender; or
(3) that Lender approves on a case-by-case basis.


 


“ERISA” means the
Employment Retirement Income Security Act of 1974, as amended, and the
regulations thereunder.


 


“Event of Default”
shall mean the occurrence of any of the events set forth in Article IX
hereof.


 


“GAAP” shall mean
generally accepted accounting principles in the United States of America in
effect from time to time.


 


“Governmental Body”
shall mean any nation or government, any state, province or other political
subdivision thereof or any entity exercising the legislative, judicial, regulatory
or administrative functions of or pertaining to a government.


 


“Indebtedness” of
a Person at a particular date shall mean all obligations of such Person which
in accordance with GAAP would be classified upon a balance sheet as liabilities
(except capital stock and surplus earned or otherwise) and in any event,
without limitation by reason of enumeration, shall include all indebtedness,
debt and other similar monetary obligations of such Person whether direct or
guaranteed, and all premiums, if any, due at the required prepayment dates of
such indebtedness, and all indebtedness secured by a Lien on assets owned by
such Person, whether or not such indebtedness actually shall have been created,
assumed or incurred by such Person.  Any
indebtedness of such Person resulting from the acquisition by such Person of
any assets subject to any Lien shall be deemed, for the purposes hereof, to be
the equivalent of the creation, assumption and incurring of the indebtedness
secured thereby, whether or not actually so created, assumed or incurred.


 


“Interest Rate”
shall mean the Prime Rate plus four percent (4.0%).


 


“Insolvency
Proceeding” means any proceeding commenced by or against any person or
entity under any provision of the United States Bankruptcy Code, as amended, or
under any other bankruptcy or insolvency law, including assignments for the
benefit of creditors, formal or informal moratoria, compositions, extension
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.


 


“Intellectual Property
Collateral” means all of Borrower’s right, title and interest in and to the
following:


 


(a)          Copyrights,
Trademarks, Patents, and Mask Works;


(b)         Any
and all trade secrets, and any and all intellectual rights in computer software
and computer software products now or hereafter existing, created, acquired or
held;


(c)          Any
and all design rights which may be available to Borrower now or hereafter
existing, created, acquired or held;


(d)         Any
and all claims for damages by way of past, present and future infringement of
any of the rights included above, with the right, but not the obligation, to
sue for and collect 


 


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such damages for
said use or infringement of the intellectual property rights identified above;


(e)          All
licenses or other rights to use any of the Copyrights, Patents, Trademarks, or
Mask Works, and all license fees and royalties arising from such use to the
extent permitted by such license or rights;


(f)            All
amendments, renewals and extensions of any of the Copyrights, Trademarks,
Patents or Mask Works; and


(g)         All
proceeds and products of the foregoing, including without limitation all
payments under insurance or any indemnity or warranty payable in respect of any
of the foregoing.


 


“Investment” means
any beneficial ownership of (including stock, partnership interest or other
securities) any Person, or any loan, advance or capital contribution to any
Person.


 


“Lender”
is defined in the Introduction and shall include each Person which becomes a
transferee, successor or assign of any Lender.


 


“Lien” shall mean
any mortgage, deed of trust, pledge, hypothecation, assignment, security
interest, lien (whether statutory or otherwise), Charge, claim or encumbrance,
or preference, priority or other security agreement or preferential arrangement
held or asserted in respect of any asset of any kind or nature whatsoever
including, without limitation, any conditional sale or other title retention
agreement, any lease having substantially the same economic effect as any of
the foregoing, and the filing of, or agreement to give, any financing statement
under the Uniform Commercial Code or comparable law of any jurisdiction.


 


“Loan Documents”
means, collectively, this Agreement, any note or notes executed by Borrower,
and any Other Documents, all as amended, extended or restated from time to
time.


 


“Mask Works” means
all mask works or similar rights available for the protection of semiconductor
chips, now owned or hereafter acquired.


 


“Material Adverse
Effect” shall mean a material adverse effect on (a) the condition,
operations, assets or business of the Borrower and its Subsidiaries, taken as a
whole, (b) the Borrower’s ability to pay the Obligations in accordance
with the terms thereof, or (c) the practical realization of the benefits
of the Lender’s rights and remedies under this Agreement and the Other
Documents.


 


“Maximum Commitment”
shall mean $1,250,000; however, Lender, in its sole discretion may elect to
increase (the “Increase”) the Maximum Commitment from $1,250,000 to $3,000,000
subject to and conditioned upon the following: (a) the Increase shall be
effective only upon Lender’s written notice to Borrower and upon execution and
delivery by Borrower to Lender of an amendment to the Note in a form acceptable
to Lender; (b) receipt by Lender in a form acceptable to Lender of a written
consent from Castle Creek Technology Partners, LLC (“Castle Creek”) which
provides for Castle Creek’s consent to this Agreement including consent with
regard to a Maximum Commitment of $3,000,000; and (c) Lender shall not be
obligated under any circumstances to elect to make the Increase notwithstanding
receipt of the above described consent from Castle Creek.


 


“Note” shall mean
the promissory note attached hereto as Exhibit A.


 


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“Obligations”
shall mean and include any and all loans, advances, debts, liabilities,
obligations, covenants and duties owing by the Borrower to the Lender or to any
other direct or indirect subsidiary or affiliate of the Lender of any kind or
nature, present or future (including, without limitation, any interest accruing
thereon after maturity, or after the filing of any petition in bankruptcy, or
the commencement of any insolvency, reorganization or like proceeding relating
to the Borrower, whether or not a claim for post-filing or post-petition
interest is allowed in such proceeding), whether or not evidenced by any note,
guaranty or other instrument, whether arising under any agreement, instrument
or document, (including, without limitation, this Agreement and the Other
Documents) whether or not for the payment of money, whether arising by reason
of an extension of credit, opening of a letter of credit, loan, equipment lease
or guarantee, under any interest or currency swap, future, option or other
similar agreement, or in any other manner, whether arising out of overdrafts or
deposit or other accounts or electronic funds transfers (whether through
automated clearing houses or otherwise) or out of the Lender’s non-receipt of
or inability to collect funds or otherwise not being made whole in connection
with depository transfer check or other similar arrangements, whether direct or
indirect (including those acquired by assignment or participation), absolute or
contingent, joint or several, due or to become due, now existing or hereafter
arising, contractual or tortious, liquidated or unliquidated, regardless of how
such indebtedness or liabilities arise or by what agreement or instrument they
may be evidenced or whether evidenced by any agreement or instrument,
including, but not limited to, any and all of the Borrower’s Indebtedness
and/or liabilities under this Agreement, the Other Documents or under any other
agreement between the Lender and the Borrower and any amendments, extensions,
renewals or increases and all costs and expenses of the Lender incurred in the
documentation, negotiation, modification, enforcement, collection or otherwise
in connection with any of the foregoing, including but not limited to
reasonable attorneys’ fees and expenses and all obligations of the Borrower to
the Lender to perform acts or refrain from taking any action.


 


“Other Documents”
shall mean the Note and any and all other agreements, instruments and documents,
including, without limitation, guaranties, control agreements, pledgholder
agreements, pledges, powers of attorney, consents, and all other writings
heretofore, now or hereafter executed by the Borrower or the other Borrower
Parties and/or delivered to the Lender in respect of the transactions
contemplated by this Agreement.


 


“Patents” means
all patents, patent applications and like protections, including without
limitation improvements, divisions, continuations, renewals, reissues,
extensions and continuations-in-part of the same.


 


“Payment Office”
shall mean such office of the Lender which it may designate by notice to the
Borrower to be the Payment Office.


 


“Permitted
Encumbrances” shall mean (a) Liens in favor of the Lender;
(b) Liens for taxes, assessments or other governmental charges not
delinquent or being contested in good faith and by appropriate proceedings and
with respect to which proper reserves have been taken by the Borrower; provided,
that, the Lien shall have no effect on the priority of the Liens in
favor of the Lender or the value of the assets in which the Lender has such a
Lien and a stay of enforcement of any such Lien shall be in effect;
(c) Liens disclosed to the Lender in writing prior to the date hereof as
set forth in the Schedule; (d) deposits or pledges to secure obligations
under worker’s compensation, social security or similar laws, or under
unemployment insurance; (e) deposits or


 


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pledges to secure bids,
tenders, contracts (other than contracts for the payment of money), leases,
statutory obligations, surety and appeal bonds and other obligations of like
nature arising in the ordinary course of the Borrower’s business; and
(f) judgment Liens that have been stayed or bonded and mechanics’,
workers,’ materialmen’s or other like Liens arising in the ordinary course of
the Borrower’s business with respect to obligations which are not due or which
are being contested in good faith by the Borrower.


 


“Permitted
Indebtedness” means:


 


(a)          Indebtedness
of Borrower in favor of Lender arising under this Agreement or any other Loan
Document;


(b)         Indebtedness
existing on the Closing Date and disclosed in the Schedule;


(c)          Indebtedness
to trade creditors and with respect to surety bonds and similar obligations
incurred in the ordinary course of business;


(d)         Subordinated
Debt;


(e)          Indebtedness
of Borrower to any Subsidiary and contingent obligations of any Subsidiary with
respect to obligations of Borrower (provided that the primary obligations are
not prohibited  hereby), and
indebtedness of any Subsidiary to any other Subsidiary and Contingent
Obligations of any Subsidiary with respect to obligations of any other
Subsidiary (provided that the primary obligations are not prohibited hereby);


(f)            Indebtedness
secured by Permitted Encumbrances;


(g)         Capital
leases and indebtedness incurred solely to purchase equipment which is not in
excess of the lesser of the purchase price of such equipment or the fair market
value of such equipment on the date of acquisition provided that the Lien is
confined solely to the property so acquired and improvements thereon, and the
proceeds of such property; and provided that the total aggregate amount of such
capital leases and indebtedness  shall
not exceed $200,000 in any fiscal year;


(h)         Indebtedness
incurred in the ordinary course of business and not exceeding $200,000 in the
aggregate outstanding at any one time;


(i)             Indebtedness
owed to officers, employees and directors for compensation incurred in the ordinary
course of business; and


(j)             Extensions,
refinancings, modifications, amendments and restatements of any of items of
Permitted Indebtedness (a) through (g) above, provided that the principal
amount thereof is not increased or the terms thereof are not modified to impose
more burdensome terms upon Borrower or its Subsidiary, as the case may be.


 


“Permitted Investment”
shall mean:


 


(a)                                  Investments
existing on the Closing Date disclosed in the Schedule and Investments in
Subsidiaries;


(b)                                 (i)
marketable direct obligations issued or unconditionally guaranteed by the
United States of America or any agency or any State thereof maturing within one
(1) year from the date of acquisition thereof, (ii)commercial paper maturing no
more than one (1) year from the date of creation thereof and currently having
the highest rating obtainable from either Standard & Poor’s Corporation or
Moody’s Investors Service, Inc., and (iii) certificates of deposit maturing no
more than one (1) year from the date of investment therein issued by Lender,
and (iv) any Investments permitted by Borrower’s investment policy, as amended
from time to time, provided that such investment policy (and such amendments
thereto) has been approved by Lender;


 


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(c)                                  Investments
consisting of the endorsement of negotiable instruments for deposit or
collection or similar transaction in the ordinary course of business;


(d)                                 Investments
accepted in connection with Transfers permitted by Section 6.1;


(e)                                  Investments
consisting of (i) compensation of employees, officers and directors of Borrower
or its Subsidiaries so long as the Board of Directors of Borrower determines
that such compensation is in the best interests of Borrower, (ii) travel
advances, employee relocation loans and other employee loans and advances in
the ordinary course of business, and (iii) loans to employees, officers or
directors relating to the purchase of equity securities of Borrower or its
Subsidiaries pursuant to employee stock purchase plans or agreements approved
by Borrower’s Board of Directors;


(f)                                    Investments
(including debt obligations) received in connection with the bankruptcy or
reorganization of customers or suppliers and in settlement of delinquent
obligations of, and other disputes with, customers or suppliers arising in the
ordinary course of business;


(g)                                 Investments
pursuant to or arising under currency agreements or interest rate agreements
entered into in the ordinary course of business;


(h)                                 Investments
consisting of notes receivable of, or prepaid, royalties and other credit
extensions to, customers and suppliers who are not Affiliates, in the ordinary
course of business; provided that this paragraph (i) shall not apply to
investments by Borrower in any Subsidiary;


(i)                                     Investments
constituting acquisitions permitted under Section 6.2;


(j)                                     Deposit
accounts of Borrower in which Lender has a Lien prior to any other Lien;


(k)                                  Deposit
accounts of any Subsidiaries maintained in the ordinary course of business;


(l)                                     Investments
made in the ordinary course of business not exceeding $100,000 in the aggregate
in any fiscal year; and


(m)                               Other
Investments approved by Borrower’s board of directors not exceeding $200,000 in
the aggregate in any fiscal year.


 


“Person” shall
mean any individual, sole proprietorship, partnership, corporation, business
trust, joint stock company, trust, unincorporated organization, association,
limited liability company, institution, public benefit corporation, joint
venture, entity or Government Body.


 


“Pledged Stock”
means all of the issued and outstanding capital stock of Maxxess Systems,
Incorporated, a California corporation, Mariner Networks, Inc., a Delaware
corporation, Iteris, Inc., a Delaware corporation, Zyfer, Inc., a Delaware
corporation, and Broadcast, Inc., a Delaware corporation (collectively, the “Issuers”),
owned from time to time by the Borrower. 
Capital stock as referred to the preceding sentence shall include,
without limitation,  all outstanding
common stock, preferred stock, and warrants issued by the Issuers, and owned
from time to time by the Borrower.


 


“Prime Rate” shall
mean that rate of interest designated as such by Bank of America, or any
successor thereto, as the same may from time to time fluctuate, such rate to be
adjusted automatically, without notice, on the effective date of any change in
such rate.


 


“Real Property”
means the real property of the Borrower and related property described in the
Deed of Trust, Assignment of Rents and Leases, Security Agreement and Fixture
Filing made by Borrower for the benefit of Castle Creek Technology Partners,
LLC (“Beneficiary”), 


 


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dated May 29, 2001,
securing a loan made by Beneficiary to Borrower in the principal amount of
$16,000,000.


 


“Receiver” shall
have the meaning set forth in Section 10.1.


 


“Responsible Officer”
means the Chief Executive Officer of Borrower.


 


“Schedule”
means the schedule of exceptions attached hereto, if any.


 


“Subordinated Debt”
means any debt incurred by Borrower that is subordinated to the debt owing by
Borrower to Lender on terms acceptable to Lender (and identified as being such
by Borrower and Lender).


 


“Subsidiary” shall
mean a corporation or other entity of whose shares of stock or other ownership
interests having ordinary voting power (other than stock or other ownership
interests having such power only by reason of the happening of a contingency)
to elect a majority of the directors of such corporation, or other Persons
performing similar functions for such entity, are owned, directly or
indirectly, by such Person.


 


“Total
Liabilities” means, as of any applicable date, all
obligations that should, in accordance with GAAP, be classified as liabilities
on the consolidated balance sheet of Borrower, including in any event all
indebtedness, but specifically excluding Subordinated Debt.


 


“Tangible Net
Worth” means, as of any applicable date, the consolidated
total assets of Borrower and its Subsidiaries minus, without duplication, (i)
the sum of any amounts attributable to (a) goodwill, (b) intangible items such
as unamortized debt discount and expense, patents, trade and service marks and
names, copyrights and research and development expenses, except prepaid
expenses, and (c) all reserves not already deducted from assets, and (ii) Total
Liabilities.


 


“Taxes” shall mean
all taxes, surtaxes, duties, levies, imposts, rates, fees, assessments,
withholdings, dues and other charges of any nature imposed by any Governmental
Body (including income, capital (including large corporations), withholding,
consumption, sales, use, transfer, goods and services or other value-added,
excise, customs, anti-dumping, countervail, net worth, stamp, registration,
franchise, payroll, employment, health, education, business, school, property,
local improvement, development, education development and occupation taxes,
surtaxes, duties, levies, imposts, rates, fees, assessments, withholdings, dues
and charges) together with all fines, interest, penalties on or in respect of,
or in lieu of or for non-collection of, those taxes, surtaxes, duties, levies,
imposts, rates, fees, assessments, withholdings, dues and other charges
(excluding taxes imposed on the net income or capital of the Lender);
excluding, however, the following: 
taxes imposed on the net income or capital of the Lender by the
jurisdiction under the laws of which the Lender is organized or is resident or
carrying on business or any political subdivision thereof and taxes imposed on
its net income or capital by the jurisdiction the Lender’s applicable lending
office or any political subdivision thereof


 


“Term” shall have
the meaning set forth in Section 12.1 hereof.


 


“Trademarks” means
any trademark and servicemark rights, whether registered or not, applications
to register and registrations of the same and like protections and the entire
goodwill connected with and symbolized by such trademarks.


 


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1.3           Uniform Commercial Code Terms.  All terms used herein and defined in the
Uniform Commercial Code as in effect from time to time in the State of
California shall have the meaning given therein unless otherwise defined
herein.


 


1.4           Certain Matters of Construction.  In this Agreement and in the Other
Documents, unless otherwise indicated, (a) the term “or” shall not be
exclusive, (b) the term “including” shall mean “including, but not limited to,”
and (c) the terms “below,” “above,” “herein,” “hereof,” “hereto,” “hereunder”
and other terms similar to such terms shall refer to the subject document as a
whole and not merely to the specific section, subsection, paragraph or clause
where such terms may appear.  Any
pronoun used shall be deemed to cover all genders.  Wherever appropriate in the context, terms used herein in the
singular also include the plural and vice  versa.  All references to statutes and related
regulations shall include any amendments of same and any successor statutes and
regulations.  Unless otherwise provided,
all references to any instruments or agreements to which the Lender is a party,
including, without limitation, references to any of the Other Documents, shall
include any and all modifications or amendments thereto and any and all
extensions or renewals thereof.


 


II.            LOAN AND PAYMENT.


 


2.1           Advances.  Subject to the terms and conditions of this
Agreement, during the Term of this Agreement, and so long as an Event of
Default has not occurred and is continuing, the Lender agrees to make advances
(“Advances”) to the Borrower in an amount at any one time outstanding
not to exceed an amount equal to the lesser of (i) the Maximum Commitment, and
(ii) the Borrowing Base; provided, however, that Lender shall not be obligated
to make advances to the Borrower whenever the sum of all Obligations owed to
Lender exceeds either the Borrowing Base or the Maximum Commitment.  Further, Borrower promises to pay to the
order of Lender, in lawful money of the United States of America, the aggregate
unpaid principal amount of all Advances made by Lender to Borrower hereunder.
Borrower shall also pay interest on the unpaid principal amount of such
Advances at rates in accordance with the terms hereof.


 


2.2           Procedure for Borrowing Advances.  The Borrower may notify the Lender prior to
3:00 p.m. (California time) five Business Days in advance of the requested date
of the Advance of Borrower’s request to incur, on such day, an Advance
hereunder.  A form of request for the
initial Advance hereunder is attached hereto as Exhibit B.


 


2.3           Deemed Advances. Should any
amount required to be paid as interest hereunder, or as fees or other charges
under this Agreement or any other agreement with the Lender, or with respect to
any other Obligation, become due, same shall be deemed a request for an Advance
as of the date such payment is due, in the amount required to pay in full such
interest, fee, charge or Obligation under this Agreement or any other agreement
with the Lender, and such request shall be irrevocable.


 


2.4           Disbursement of Advance Proceeds.  All Advances shall be disbursed from
whichever office or other place the Lender may designate from time to time and,
together with any and all other Obligations of the Borrower to the Lender,
shall be charged to the Borrowers’ Account. 
The proceeds of each Advance requested by the Borrower under Section
2.2 hereof or deemed to have been requested by the Borrower under Section
2.3 hereof shall, with respect to requested Advances to the extent the
Lender makes such Advances, be made available to the Borrower on the day so
requested in immediately available funds or, with respect to Advances deemed to
have been 


 


11

















 


requested by the
Borrower, be disbursed to the Lender to be applied to the outstanding
Obligations giving rise to such deemed request.


 


2.5           Maximum Commitment.  The aggregate balance of Advances
outstanding at any time shall not exceed the Maximum Commitment.


 


2.6           Repayment of Advances.


 


(a)           The
Advances shall be due and payable in full on the last day of the Term subject
to earlier prepayment as herein provided.


 


(b)           All
payments of principal, interest and other amounts payable hereunder, or under
any of the Other Documents shall be made to the Lender at the Payment Office
not later than 1:00 P.M. (California time) on the due date therefor in lawful
money of the United States of America in funds immediately available to the
Lender.


 


(c)           The
Borrower shall pay principal, interest, and all other amounts payable
hereunder, or under any related agreement, without any deduction whatsoever,
including, but not limited to, any deduction for any setoff or counterclaim.


 


2.7           Repayment of Excess Advances.  The aggregate balance of Advances
outstanding at any time in excess of the Availability shall be immediately due
and payable without the necessity of any demand, at the Payment Office, whether
or not a Default or Event of Default has occurred.


 


2.8           Prepayment.


 


(a)           Voluntary
Prepayment.  The Borrower may not
prepay any Advance hereunder, whether in whole or in part, without the consent
of the Lender, which consent may be given or withheld in the Lender’s sole
discretion.


 


(b)           Mandatory
Prepayment.  If, at any time during
the term, the aggregate Advances outstanding hereunder exceed the Borrowing
Base (as evidenced by a Borrowing Base Certificate delivered to the Lender in
accordance with Section 8.2 below), the Borrower shall immediately
repay to the Lender an amount at least equal to such excess.  Amounts repaid in accordance with this
clause (b) shall be applied first to accrued interest and then to reduce
the principal balance of the Advances outstanding hereunder in reverse
chronological order (i.e., first to the last Advance taken by the Borrower,
then to the immediately preceding Advance, and so on until expended), and
interest thereafter shall only accrue against the principal balance of Advances
remaining outstanding after such mandatory prepayment expended).


 


2.9           Statement of Account.  The Borrower, on the Lender’s behalf, shall
maintain a loan account (“Borrower’s Account”) in the name of the
Borrower in which shall be recorded the date and amount of each Advance made by
the Lender and the date and amount of each payment in respect thereof; provided,
however, that the failure by the Borrower to record the date and amount
of any Advance or to accurately record such information shall not adversely
affect the Lender.  In accordance with Section 8.2,
the Borrower shall send to the Lender a monthly statement showing the
accounting for the Advances made, interest accruing thereon, payments made or
credited in respect thereof, and other transactions between the Lender and the
Borrower during the Term.  Such monthly 


 


12

















 


statements shall be
subject to Lender’s review and approval and deemed correct and binding upon the
Lender in the absence of manifest error unless the Borrower receives a written
statement of the Lender’s specific exceptions thereto within thirty (30) days
after such statement is received by the Lender; provided that the foregoing
shall not limit Lender’s ability to contest the calculation of the Borrowing
Base set forth in a Borrowing Base Certificate.


 


2.10         Additional Payments.  Any sums expended by the Lender due to the
Borrower’s failure to perform or comply with its obligations under this
Agreement or any Other Document may at Lender’s request be charged to
Borrower’s Account and added to the Obligations.


 


2.11         Manner of Payment.  All payments (including prepayments) to be
made by the Borrower on account of principal, interest and fees shall be made
without set off or counterclaim and shall be made to the Lender at the Payment
Office, in each case on or prior to 1:00 p.m., California time, in Dollars and
in immediately available funds.


 


2.12         Use of Proceeds.  The Borrower shall apply the proceeds of the
Advances to provide for its general working capital requirements; however,
Borrower shall not directly or indirectly apply any of the proceeds of the
Advances against any obligations owed to any of Borrower’s lenders from time to
time except for obligations owed to Lender. Notwithstanding any term in this
Agreement to the contrary, a breach of this Section 2.12 by Borrower shall be
deemed an Event of Default and shall not be subject to any cure rights.


 


2.13         Extended Credit Facility.  Upon the written agreement between Borrower
and Lender, the Availability under this Agreement and the Note may be increased
by such amount as is mutually agreed; provided that the Collateral is extended
to include the real property owned by Borrower described in Section 4.11(b) pursuant
to a first trust deed securing the additional Obligations.  In the event of any such extension, the
parties shall amend this Agreement, the Note and such other Loan Documents as
Borrower and Lender deem reasonably necessary to evidence such extension.


 


III.           INTEREST AND FEES.


 


3.1           Interest.  Interest on the outstanding principal
balance of each Advance shall accrue and be payable on the third day of each
month until the Obligations are satisfied in full.  Interest charges shall be computed at a rate per annum equal to
the Interest Rate.  Whenever, subsequent
to the date of this Agreement, the Prime Rate is increased or decreased, the
Interest Rate shall be similarly changed without notice or demand of any kind
by an amount equal to the amount of such change in the Prime Rate during the
time such change or changes remain in effect. 
Upon and after the occurrence of an Event of Default, and during the
continuation thereof, the Obligations shall bear interest at the Default Rate.


 


3.2           Computation of Interest and Fees.  Interest and fees hereunder shall be
computed on the basis of a year of 360 days and for the actual number of days
elapsed.  If any payment to be made
hereunder becomes due and payable on a day other than a Business Day, the due
date thereof shall be extended to the next succeeding Business Day and interest
thereon shall be payable at the Interest Rate during such extension.


 


3.3           Maximum Charges.  In no event whatsoever shall interest and
other charges charged hereunder exceed the highest rate permissible under
law.  In the event interest and other 


 


13

















 


charges as computed
hereunder would otherwise exceed the highest rate permitted under law, such
excess amount shall be first applied to any unpaid principal balance owed by
the Borrower, and if the then remaining excess amount is greater than the
previously unpaid principal balance, the Lender shall promptly refund such
excess amount to the Borrower and the provisions hereof shall be deemed amended
to provide for such permissible rate.


 


3.4           Increased Costs.  In the event that any applicable law, treaty
or governmental regulation, or any change therein or in the interpretation or
application thereof, or compliance by the Lender with any request or directive
(whether or not having the force of law) from any financial, monetary or other
authority, shall:


 


(a)           subject the Lender to any tax of any
kind whatsoever with respect to this Agreement or any Other Document or change
the basis of taxation of payments to the Lender of principal, fees, interest or
any other amount payable hereunder or under any Other Documents (except for
changes in the rate of tax on the overall net income the Lender by the
jurisdiction in which it maintains its principal office); or


 


(b)           impose, modify or hold applicable any
reserve, special deposit, assessment or similar requirement against assets held
by, or deposits in or for the account of, advances or loans by, or other credit
extended by, any office of the Lender;


 


and the result of any of
the foregoing is to increase the cost to the Lender of making, renewing or
maintaining its Advances hereunder by an amount that the Lender deems to be
material or to reduce the amount of any payment (whether of principal, interest
or otherwise) in respect of any of the Advances by an amount that the Lender
deems to be material, then, in any case the Borrower shall promptly pay the
Lender, upon its demand, such additional amount as will compensate the Lender
for such additional cost or such reduction, as the case may be.  The Lender shall certify the amount of such
additional cost or reduced amount to the Borrower, and such certification shall
be conclusive absent manifest error.


 


3.5           Fees.  The Borrower shall pay to the Lender the
following fees and charges, which fees and charges shall be non-refundable and
deemed earned when paid (irrespective of whether this Agreement is terminated
thereafter):


 


(a)           Commitment Fee.  A one-time fee equal to Thirty Thousand
Dollars ($30,000), payable in immediately available funds on the Closing Date;
and


 


(b)           Collateral Management Fee.  For the separate account of the Lender, a
Collateral management fee equal to Two Thousand Dollars ($2,000) per month
during the Term, payable in arrears no later than the third Business Day of the
following month.


 


(c)           Expenses. Upon demand from the
Lender,  including, without limitation,
upon the date hereof, all expenses to which Lender is entitled pursuant to
Section 13.9.


 


3.6           Taxes.


 


(a)           Any and all payments or reimbursements
made by the Borrower hereunder shall be made free and clear of and without
deduction for any and all present and future Taxes.  If the Borrower shall be required by law or by the interpretation
or administration thereof to 


 


14

















 


deduct or withhold any
such Taxes from or in respect of any sum payable hereunder or under this
Agreement or any Other Document to the Lender, then the Borrower will pay such
additional amounts (“Additional Amounts”) as may be necessary so that
every net payment under this Agreement (including Additional Amounts) after
withholding or deduction for or on account of such Taxes will not be less than
the amount the Lender would have received if such Taxes had not been withheld
or deducted .  The Borrower will also
(i) make such withholding or deduction and (ii) remit the full amount
deducted or withheld to the relevant authority in accordance with applicable
law.  The Borrower will furnish to the
Lender, within 15 days after the date the payment of any Taxes is due pursuant
to applicable law, certified copies of tax receipts evidencing such payment by
the Borrower.  The Borrower will
indemnify and hold the Lender harmless against and upon written request shall
reimburse the Lender for the amount of (i) any Taxes levied or imposed and
paid by the Lender as a result of payments in respect of any Obligations
(including any such Taxes imposed with respect to such reimbursement) and
(ii) any liability (including penalties, interest and expenses) arising
from or with respect to such Taxes described above.


 


(b)           In the event that, after the date
hereof, (i) any changes in any existing law, regulation, treaty or
directive or in the interpretation or application thereof, (ii) any new
law, regulation, treaty or directive enacted or any interpretation or
application thereof, or (iii) compliance by the Lender with any request or
directive (whether or not having the force of law) from any Governmental Body
does or shall subject the Lender to any tax of any kind whatsoever or causes
the withdrawal or termination of a previously granted tax exemption with
respect to this Agreement, the Other Documents or any Obligations, or change
the basis of taxation of payments to the Lender of principal, fees, interest or
any other amount payable hereunder (except for net income taxes or capital
taxes, or franchise taxes imposed in lieu of net income taxes or capital taxes,
or changes in the rate of tax on the overall net income or capital of the
Lender) and the result of any of the foregoing is to increase the cost to the
Lender of making the Advances or to reduce any amount receivable hereunder;
then, in any such case, the Borrower shall promptly pay to the Lender, upon its
demand, any additional amounts necessary to compensate the Lender, on an
after-tax basis, for such additional cost or reduced amount receivable, as
determined by the Lender with respect to this Agreement or the Other
Documents.  If the Lender becomes
entitled to claim any additional amounts pursuant to this subsection, it shall
promptly notify the Borrower of the event by reason of which the Lender has
become so entitled.  A certificate as to
any additional amounts payable pursuant to the foregoing sentence submitted by
the Lender to the Borrower shall, absent manifest error, be final, conclusive
and binding for all purposes.


 


(c)           Without prejudice to the survival of
any other provision of this Agreement or the Other Documents, the agreements
and obligations of the Borrower contained in this Section shall survive the
expiration of the Term.


 


IV.           SECURITY AGREEMENT.


 


4.1           Security Interest in the
Collateral.  To secure the prompt
payment and performance to the Lender of the Obligations, the Borrower hereby
assigns, pledges and grants to the Lender for its benefit a continuing security
interest in and to all of the Collateral, whether now owned or existing or
hereafter acquired or arising and wheresoever located.  The Borrower shall mark its books and
records as may be necessary or appropriate to evidence, protect and perfect the
Lender’s security interest and shall cause its financial statements to reflect
such security interest. Except as set forth in the Schedule, such security
interest constitutes a valid, first priority security interest in the presently
existing Collateral, and will constitute a valid, first priority security
interest in Collateral 


 


15

















 


acquired after the date
hereof, in each case, to the extent that a security interest in such Collateral
can be perfected by the filing of a financing statement or, in the case of
Collateral consisting of instruments, documents, chattel paper or certificated
securities, to the extent that Lender 
takes possession of such Collateral. Borrower acknowledges that Lender
may place a “hold” on any deposit account pledged as Collateral to secure the
Obligations. Notwithstanding termination of this Agreement, Lender’s Lien on
the Collateral shall remain in effect for so long as any Obligations are
outstanding.


 


4.2           Perfection of Security Interest.  The Borrower shall take all action that may
be necessary or desirable, or that the Lender may request, so as at all times
to maintain the validity, perfection, enforceability and priority of the
Lender’s security interest in the Collateral or to enable the Lender to
protect, exercise or enforce its rights hereunder and in the Collateral,
including, but not limited to, (i) delivering to the Lender, endorsed or
accompanied by such instruments of assignment as the Lender may specify, and
stamping or marking, in such manner as the Lender may specify, any and all
chattel paper, instruments, letters of credits and advices thereof and
documents evidencing or forming a part of the Collateral, (ii) entering
into warehousing, lockbox and other custodial arrangements satisfactory to the
Lender, and (iii) executing and delivering financing statements,
instruments of pledge, mortgages, hypothecs notices and assignments, in each
case in form and substance satisfactory to the Lender, relating to the
creation, validity, perfection, maintenance or continuation of the Lender’s
security interest under the Uniform Commercial Code or other applicable
law.  The Lender is hereby authorized to
file financing statements without the signature of Borrower in accordance with
the Uniform Commercial Code or any other applicable law.  All charges, expenses and fees the Lender
may incur in doing any of the foregoing, and any taxes relating thereto, shall,
at Lender’s request, be charged to Borrower’s Account and added to the
Obligations, or, at the Lender’s option, shall be paid to the Lender
immediately upon demand. Lender agrees to execute and deliver to Borrower from
time to time such subordination agreements as Borrower may request and as are
necessary to give to other lenders which finance equipment for Borrower a first
priority security interest in the equipment financed so long as the Liens and
the indebtedness incurred with respect to such equipment financing are
permitted under this Agreement.  Within
21 days after the Closing, Borrower shall cause execution and delivery of
control agreements with Borrower’s deposit accounts in forms reasonably
acceptable to Lender, subject to delays if caused by such banks, and take such
other action as is necessary to perfect Lender’s first lien security interest
in Borrower’s deposit accounts with all of its banks (collectively “Control
Account Perfection”), and Borrower further agrees to obtain Control
Account Perfection within 21 days after any new deposit accounts are
established with any of its banks from time to time. Borrower’s failure to
obtain the Control Account Perfection within 21 days after the Closing and,
with respect to new deposit accounts that are subsequently established, within
21 days after such account or accounts are established, shall in either event
constitute an Event of Default except to the extent delays are caused by or due
to the acts or delay of the applicable banks. Within 14 days of the Closing,
Borrower shall file all necessary filings with the U.S. Patent and Trademark
office, in forms reasonably acceptable to Lender, to evidence and effectuate
Lender’s first lien security interest in the Borrower’s registered Patents and
registered Trademarks.


 


4.3           Preservation of Collateral.  During the continuance of a Default or Event
of Default, in addition to the rights and remedies set forth in Section 10.1
hereof, the Lender may at any time take such steps as the Lender deems
necessary to protect its interest in and to preserve the Collateral and shall
have, and is hereby granted, a right of ingress and egress to the places where
the Collateral is located, and may proceed over and through any of Borrower’s
owned or leased property.  The Borrower
shall cooperate fully with all of the Lender’s efforts to preserve the
Collateral and will 


 


16

















 


take such actions to
preserve the Collateral as the Lender may direct.  All of the Lender’s expenses of preserving the Collateral shall,
at Lender’s request, be charged to Borrower’s Account and added to the
Obligations.


 


4.4           Ownership of Collateral.  With respect to the Collateral, at the time
the Collateral becomes subject to the Lender’s security interest:  (a) the Borrower shall be the sole
owner of and fully authorized and able to sell, transfer, pledge and/or grant a
first priority security interest in each and every item of the Collateral to
the Lender; (b) each document and agreement executed by the Borrower or
delivered to the Lender in connection with this Agreement shall be true and
correct in all respects; and (c) all signatures and endorsements of the
Borrower that appear on such documents and agreements shall be genuine and the
Borrower shall have full capacity to execute same.


 


4.5           Defense of Lenders’ Interests.  Until (a) payment and performance in
full of all of the Obligations and (b) termination of this Agreement, the
Lender’s interests in the Collateral shall continue in full force and effect.  During such period the Borrower shall not,
without the Lender’s prior written consent, pledge, sell, assign, transfer,
create or suffer to exist a Lien upon or encumber or allow or suffer to be
encumbered in any way, any part of the Collateral.  The Borrower shall defend the Lender’s interests in the Collateral
against any and all Persons whatsoever. 
At any time during the continuance of an Event of Default, the Lender
shall have the right to take possession of the indicia of the Collateral and
the Collateral in whatever physical form contained, including without
limitation, labels, stationery, documents, instruments and advertising
materials.  If the Lender exercises this
right to take possession of the Collateral, the Borrower shall, upon demand,
assemble it in the best manner possible and make it available to the Lender at
a place reasonably convenient to the Lender. 
In addition, with respect to all Collateral, the Lenders shall be
entitled to all of the rights and remedies set forth herein and further
provided by the Uniform Commercial Code or other applicable law.  The Borrower shall, and the Lender may, at
its option, instruct all suppliers, carriers, forwarders, warehousers or others
receiving or holding cash, checks, documents or instruments in which the Lender
holds a security interest to deliver same to the Lender and/or subject to the
Lender’s order and if they shall come into any Borrower Party’s possession,
they, and each of them, shall be held by such Borrower Party in trust as the
Lender’s trustee, and such Borrower Party will immediately deliver them to the
Lender in their original form together with any necessary endorsement.


 


4.6           Books and Records.  The 
Borrower shall keep proper books of record and account in which full,
true and correct entries will be made of all dealings or transactions of or in
relation to its business and affairs, and set up on its books accruals with
respect to all taxes, assessments, charges, levies and claims.  All determinations pursuant to this
subsection shall be made in accordance with, or as required by, GAAP consistently
applied in the opinion of such independent public accountant as shall then be
regularly engaged by the Borrower.


 


4.7           Compliance with Laws.  The Borrower shall comply with all acts,
rules, regulations and orders of any legislative, administrative or judicial
body or official applicable to the Collateral or any part thereof or to the
operation of the Borrower’s business the non-compliance with which could
reasonably be expected to have a Material Adverse Effect on the Borrower.  The Borrower may, however, contest or
dispute any acts, rules, regulations, orders and directions of those bodies or
officials in any reasonable manner, provided that any related Lien is inchoate
or stayed and sufficient reserves are established to the reasonable satisfaction
of the Lender to protect the Lender’s Lien on or security interest in the
Collateral.  The assets of the Borrower
at all times shall be 


 


17

















 


maintained in accordance
with the requirements of all insurance carriers which provide insurance with
respect to the assets of the Borrower so that such insurance shall remain in
full force and effect.


 


4.8           Inspection of Premises.  At all reasonable times the Lender shall
have full access to and the right to audit, check, inspect and make abstracts
and copies from the Borrower’s books, records, audits, correspondence and all
other papers relating to the Collateral and the operation of the Borrower’s
business.  The Lender and its agents may
enter upon any of the Borrower Parties’ premises at any time during business
hours and at any other reasonable time, and from time to time, for the purpose
of inspecting the Collateral and any and all records pertaining thereto and the
operation of such Borrower Party’s business.


 


4.9           Insurance.  The Borrower shall bear the full risk of any
loss of any nature whatsoever with respect to the Collateral.  At the Borrower’s own cost and expense in
amounts and with carriers acceptable to the Lender, the Borrower shall keep all
its insurable properties and properties in which each Borrower Party has an
interest insured against the hazards of fire, flood, sprinkler leakage, those
hazards covered by extended coverage insurance and such other hazards, and for
such amounts, as is customary in the case of companies engaged in businesses
similar to such Borrower Party’s including, without limitation, business
interruption insurance.  If the Borrower
fails to obtain insurance as hereinabove provided, or to keep the same in
force, the Lender may, if it so elects, obtain such insurance and pay the
premium therefor on behalf of the Borrower, and charge Borrower’s Account
therefor and such expenses so paid shall be part of the Obligations.  All such policies of insurance shall be in
such form, with such companies, and in such amounts as are reasonably
satisfactory to Lender.  So long as no
Event of Default has occurred and is continuing, Borrower shall have the option
of applying the proceeds of any casualty policy to the replacement or repair of
destroyed or damaged property; provided, that after the occurrence and during
the continuance of an Event of Default, all proceeds payable under any such
policy shall, at the option of Lender, be payable to Lender to be applied on
account of the Obligations.


 


4.10         Payment of Taxes.  The Borrower will pay, when due, (or, if
contested as set forth below, provide for payment of) all Taxes, assessments
and other Charges lawfully levied or assessed upon the Borrower or any of the
Collateral.  If any tax by any
Governmental Body is or may be imposed on or as a result of any transaction
between the Borrower and the Lender and the Lender may be required to withhold
or pay, or if any Taxes, assessments, or other Charges remain unpaid after the
date fixed for their payment, or if any claim shall be made which, in the
Lender’s opinion, may possibly create a valid Lien on the Collateral, the
Lender may, without notice to the Borrower, pay the Taxes, assessments or other
Charges and the Borrower hereby indemnifies and holds the Lender harmless in
respect thereof.  The Lender will not
pay any taxes, assessments or Charges to the extent that the Borrower has
contested or disputed those taxes, assessments or Charges in good faith, by
expeditious protest, administrative or judicial appeal or similar proceeding
provided that any related tax lien is stayed and sufficient reserves are
established to the reasonable satisfaction of the Lender to protect the
Lender’s security interest in or Lien on the Collateral.  The amount of any payment by the Lender
under this Section shall be charged to Borrowers’ Account and added to the
Obligations and, until the Borrower shall furnish the Lender with an indemnity
therefor (or supply the Lender with evidence satisfactory to the Lender that
due provision for the payment thereof has been made), the Lender may hold
without interest any balance standing to the Borrower’s credit and the Lender
shall retain its security interest in any and all Collateral held by the
Lender.


 


18

















 


4.11         Accounts.


 


(a)           Nature of Accounts.  Each of the Accounts shall be a bona fide
and valid account representing a bona fide indebtedness incurred by the
customer therein named, for a fixed sum as set forth in the invoice relating
thereto (provided immaterial or unintentional invoice errors shall not be
deemed to be a breach hereof) with respect to an absolute sale or lease and
delivery of goods upon stated terms, or work, labor or services theretofore
rendered by a Borrower Party as of the date each Account is created.  Same shall be due and owing in accordance
with the Borrower’s standard terms of sale.


 


(b)            Locations of Borrower.  The Borrower’s chief executive office is
located at 1515 S. Manchester Avenue. Anaheim, California.  Until written notice is given to the Lender
by the Borrower of any other office at which any Borrower Party keeps its
records pertaining to Accounts, all such records shall be kept at such
executive office.


 


(c)           Notification of Assignment of
Accounts.  At any time following the
occurrence and continuance of an Event of Default past any applicable cure
period, the Lender shall have the right to send notice of the assignment of,
and the Lender’s security interest in, the Accounts to any and all customers or
any third party holding or otherwise concerned with any of the Collateral.  Thereafter, the Lender shall have the sole
right to collect the Accounts, take possession of the Collateral, or both.  The Lender’s actual collection expenses,
including, but not limited to, stationery and postage, telephone and telegraph,
secretarial and clerical expenses and the salaries of any collection personnel
used for collection, may be charged to Borrower’s Account and added to the
Obligations.


 


(d)           Power of Lender to Act on Borrower’s
Behalf.  At any time following the
occurrence and continuance of an Event of Default past any applicable cure
period, the Lender shall have the right to receive, endorse, assign and/or
deliver in the name of the Lender or any Borrower Party any and all checks,
drafts and other instruments for the payment of money relating to the Accounts,
and the Borrower, on behalf of the Borrower Parties, hereby waives notice of
presentment, protest and non-payment of any instrument so endorsed.  At any time following the occurrence and
continuance of an Event of Default, the Borrower hereby constitutes the Lender
or its designee as the Borrower Parties’ attorney with power (i) to
endorse any Borrower Party’s name upon any notes, acceptances, checks, drafts,
money orders or other evidences of payment or Collateral; (ii) to sign any
Borrower Party’s name on any invoice or bill of lading relating to any of the
Accounts, drafts against customers, assignments and verifications of Accounts;
(iii) to send verifications of Accounts to any customer; (iv) to
demand payment of the Accounts; (v) to enforce payment of the Accounts by
legal proceedings or otherwise; (vi) to exercise all of the Borrower
Parties’ rights and remedies with respect to the collection of the Accounts and
any other Collateral; (vii) to settle, adjust, compromise, extend or renew
the Accounts; (viii) to settle, adjust or compromise any legal proceedings
brought to collect Accounts; (ix) to prepare, file and sign any Borrower
Party’s name on a proof of claim in bankruptcy or similar document against any
customer; (x) to prepare, file and sign any Borrower Party’s name on any notice
of Lien, assignment or satisfaction of Lien or similar document in connection
with the Accounts; (xi) to transfer the Intellectual Property Collateral into
the name of Lender; and (xii) to do all other acts and things necessary to
carry out this Agreement.  All acts of
said attorney or designee are hereby ratified and approved, and said attorney
or designee shall not be liable for any acts of omission or commission nor for
any error of judgment or mistake of fact or of law, unless done maliciously or
with gross (not mere) negligence; this power being coupled with an interest is
irrevocable while any of the Obligations remain unpaid.  The Lender shall have the right at any time
following the occurrence of an Event of Default or Default, to change the
address for delivery of mail addressed to any Borrower 


 


19

















 


Party to such address as
the Lender may designate and to receive, open and dispose of all mail addressed
to any Borrower Party.


 


(e)           No Liability.  The Lender shall not, under any
circumstances or in any event whatsoever, have any liability for any error or
omission or delay of any kind occurring in the settlement, collection or
payment of any of the Accounts or any instrument received in payment thereof,
or for any damage resulting therefrom. 
Following the occurrence of an Event of Default or Default, the Lender
may, without notice or consent from any Borrower Party, sue upon or otherwise
collect, extend the time of payment of, compromise or settle for cash, credit
or upon any terms any of the Accounts or any other securities, instruments or
insurance applicable thereto and/or release any obligor thereof.  The Lender is authorized and empowered to
accept following the occurrence of an Event of Default or Default the return of
the goods represented by any of the Accounts, without notice to or consent by
any Borrower Party, all without discharging or in any way affecting the
Borrower’s liability hereunder.


 


(f)            Lockbox Account.   Borrower agrees to amend its lockbox
service agreement with City National Bank or such other banks that Borrower may
utilize for lock box services (the “Bank”) to provide that upon written notice
from Lender the Bank will direct all lock box collections to Lender’s bank
account to be established at the Bank, to the extent of outstanding Obligations
then due.


 


4.12         Exculpation of Liability.  Nothing herein contained shall be construed
to constitute the Lender as any Borrower Party’s agent for any purpose
whatsoever, nor shall the Lender be responsible or liable for any shortage,
discrepancy, damage, loss or destruction of any part of the Collateral wherever
the same may be located and regardless of the cause thereof.  The Lender, whether by anything herein or in
any assignment or otherwise, shall not assume any of the Borrower Parties’
obligations under any contract or agreement assigned to the Lender, and the
Lender shall not be responsible in any way for the performance by any Borrower
Party of any of the terms and conditions thereof.


 


V.            REPRESENTATIONS AND WARRANTIES.


 


The Borrower represents and warrants as follows:


 


5.1           Authority; Conflict; Default.  The Borrower has full power, authority and
legal right to enter into this Agreement and the Other Documents and to perform
all its respective Obligations hereunder and thereunder.  This Agreement and the Other Documents constitute
the legal, valid and binding obligation of the Borrower enforceable in
accordance with their terms, except as such enforceability may be limited by
any applicable bankruptcy, insolvency, moratorium or similar laws affecting
creditors’ rights generally.  The
execution, delivery and performance of this Agreement and of the Other
Documents (a) are within the Borrower’s corporate powers, have been duly
authorized, are not in contravention of law or the terms of the Borrower’s
by-laws, certificate of incorporation or other applicable documents relating to
the Borrower’s formation or to the conduct of the Borrower’s business or of any
material agreement or undertaking to which the Borrower is a party or by which
the Borrower is bound, and (b) will not conflict with nor result in any
breach in any of the provisions of or constitute a default under or result in
the creation of any Lien upon any asset of the Borrower Parties under the
provisions of any agreement, charter document, constating documents,
instrument, by-law, or other instrument to which any Borrower Party is a party
or by which it or its property may be bound.


 


20

















 


5.2           Due Organization and Qualification.
Borrower and each Subsidiary is a corporation duly existing and in good
standing under the laws of its state of incorporation and qualified and
licensed to do business in, and is in good standing in, any state in which the
conduct of its business or its ownership of property requires that it be so
qualified, except for states as to which any failure to so qualify would not
have a Material Adverse Effect.


 


5.3           No Default.  Except as set forth in the Schedule,
Borrower is not in default under any agreement to which it is a party or by
which it is bound, which default could reasonably be expected to have a
Material Adverse Effect.


 


5.4           No Prior Encumbrances.
Borrower has good and marketable title to the Collateral, free and clear of
Liens, except for Permitted Encumbrances.


 


5.5           Bona Fide Eligible Accounts.
The Eligible Accounts are bona fide existing obligations. The service or
property giving rise to such Eligible Accounts has been performed or delivered
to the Account Debtor or to the Account Debtor’s agent for immediate shipment
to and unconditional acceptance by the Account Debtor. Borrower has not
received notice of actual or imminent Insolvency Proceeding of any Account
Debtor whose accounts are included in any Borrowing Base Certificate as an
Eligible Account.


 


5.6           Merchantable Inventory. All
inventory is in all material respects of good and marketable quality, free from
all material defects, except for damaged, obsolete or slow-moving inventory,
for which reserve accounts have been established.


 


5.7           Intellectual Property.
Borrower is the sole owner of the Intellectual Property Collateral owned by it,
except for nonexclusive licenses granted by Borrower to its customers in the
ordinary course of business and has valid and enforceable licenses to all
Intellectual Property Collateral licensed to Borrower.  Each of the Patents owned by Borrower is
valid and enforceable, and no part of the Intellectual Property Collateral has
been judged invalid or unenforceable, in whole or in part, and to the
Borrower’s knowledge, no claim has been made that any part of the Intellectual
Property Collateral violates the rights of any third party.


 


5.8           Name; Location of Chief Executive
Office. Except as disclosed in  the Schedule,
Borrower has not done business and will not without at least thirty (30) days
prior written notice to Lender, do business under any name other than that
specified on the signature page hereof. The chief executive office of Borrower
is located at the address indicated in Section 4.11(b) hereof.


 


5.9           Litigation. Except as set
forth in the Schedule, there are no actions or proceedings pending or, to
Borrower’s knowledge, threatened by or against Borrower or any Subsidiary
before any court or administrative agency in which an adverse decision could
reasonably be expected to have a Material Adverse Effect or a material adverse
effect on Borrower’s interest or Lender’s security interest in the Collateral.


 


5.10         No Material Adverse Change in
Financial Statements. All consolidated financial statements related to
Borrower and any Subsidiary that have been delivered by Borrower to Lender
fairly present in all material respects Borrower’s consolidated financial
condition as of the date thereof and Borrower’s consolidated results of
operations for the period then ended. There has not been a material adverse
change in the consolidated financial condition of Borrower since the date of
the most recent of such financial statements submitted to Lender on or about
the Closing Date.


 


21

















 


5.11         Solvency. The fair saleable
value of Borrower’s assets (including goodwill minus disposition costs) exceeds
the fair value of its liabilities; the Borrower is not left with unreasonably
small capital after the transactions contemplated by this Agreement; and
Borrower is able to pay its debts (including trade debts) as they mature.


 


5.12         Regulatory Compliance. Borrower
and each Subsidiary has met the minimum funding requirements of ERISA with
respect to any employee benefit plans subject to ERISA. No event has occurred
resulting from Borrower’s failure to comply with ERISA that is reasonably
likely to result in Borrower’s incurring any liability that could reasonably be
expected to have a Material Adverse Effect. Borrower is not an “investment
company” or a company “controlled” by an “investment company” within the
meaning of the Investment Company Act of 1940. Borrower is not engaged
principally, or as one of its important activities, in the business of
extending credit for the purpose of purchasing or carrying margin stock (within
the meaning of Regulation G, T and U of the Board of Governors of the Federal
Reserve System). Borrower has complied with all the provisions of the Federal
Fair Labor Standards Act. Borrower has not violated any statutes, laws,
ordinances or rules applicable to it, violation of which could have a Material
Adverse Effect.


 


5.13         Environmental Condition. None of
Borrower’s or any Subsidiary’s properties or assets has ever been used by
Borrower or any Subsidiary or, to the best of Borrower’s knowledge, by previous
owners or operators, in the  disposal
of, or to produce, store, handle, treat, release, or transport, any hazardous
waste or hazardous substance other than in accordance with applicable law; to
the best of Borrower’s knowledge, none of Borrower’s properties or assets has
ever been designated or identified in any manner pursuant to any environmental
protection statute as a hazardous waste or hazardous substance disposal site,
or a candidate for closure pursuant to any environmental protection statute; no
lien arising under any environmental protection statute has attached to any
revenues or to any real or personal property owned by Borrower or any
Subsidiary; and neither Borrower nor any Subsidiary has received a summons,
citation, notice, or directive from the Environmental Protection Agency, or any
other federal, state or other governmental agency concerning any action or
omission by Borrower or any Subsidiary resulting in the release or other
disposition of hazardous waste or hazardous substances into the environment.


 


5.14         Taxes.  Borrower and each Subsidiary has filed or caused to be filed all
tax returns required to be filed on timely basis, and has paid, or has made
adequate provision for the payment of, all taxes reflected therein, except
those being contested in good faith by proper proceedings with adequate
reserves under GAAP.


 


5.15         Subsidiaries. Borrower does not
own any stock, partnership interest or other equity securities of any Person,
except for Permitted Investments.


 


5.16         Government Consents. Borrower
and each Subsidiary has obtained all consents, approvals and authorizations of,
made all declarations or filings with and given all notices to all governmental
authorities that are necessary for the continued operation of Borrower’s
business as currently conducted except where the failure got obtain any such
consent, approval or authorization, to make any such declaration or filing, or
to be given any such notice could not reasonably be expected to have a Material
Adverse Effect.


 


5.17         Disclosure.  No representation or warranty made by the Borrower
in this Agreement or in any financial statement, report, certificate or any
other document furnished in connection herewith contains any untrue statement
of a material fact or omits to state any material 


 


22

















 


fact necessary to make
the statements herein or therein not misleading.  There is no fact known to the Borrower or which reasonably should
be known by the Borrower which the Borrower has not disclosed to the Lender in
writing which could reasonably be expected to have a Material Adverse Effect on
the Borrower and its Subsidiaries, taken as a whole.


 


VI.           COVENANTS.


 


6.1           Affirmative Covenants.  The Borrower shall, until payment in full of
the Obligations and termination of this Agreement:


 


(a)           Conduct of Business and
Maintenance of Existence and Assets. 
(i) Conduct continuously and operate actively its business
according to good business practices and maintain all of its properties useful
or necessary in its business in good working order and condition (reasonable
wear and tear excepted and except as may be disposed of in accordance with the
terms of this Agreement), including, without limitation, all licenses, patents,
copyrights, design rights, tradenames, trade secrets and trademarks and take all
actions necessary to enforce and protect the validity of any intellectual
property right or other right included in the Collateral; (b) keep in full
force and effect its existence and comply in all material respects with the
laws and regulations governing the conduct of its business where the failure to
do so could reasonably be expected to have a Material Adverse Effect on the
Borrower; and (c) make all such reports and pay all such franchise and
other taxes and license fees and do all such other acts and things as may be
lawfully required to maintain its rights, licenses, leases, powers and
franchises under the laws of the United States and Canada or any political
subdivision thereof where the failure to do so could reasonably be expected to
have a Material Adverse Effect on the Borrower.


 


(b)           Violations.  Promptly notify the Lender in writing of any
violation of any law, statute, regulation or ordinance of any Governmental
Body, or of any agency thereof, applicable to any Borrower which could
reasonably be expected to have a Material Adverse Effect on the Borrower and
its Subsidiaries, taken as a whole.


 


(c)           Execution of Supplemental
Instruments.  Execute and deliver to
the Lender from time to time, upon demand, such supplemental agreements,
statements, assignments and transfers, or instructions or documents relating to
the Collateral, and such other instruments as the Lender may request, in order
that the full intent of this Agreement may be carried into effect, including,
without limitation, control agreements with Borrower’s banks with respect to
perfecting Lender’s first lien security interest in Borrower’s deposit
accounts, sinking fund account, and other bank accounts.


 


(d)           Sinking Fund.  By no later than the six month anniversary
of the Note, the Borrower shall have established a segregated deposit account
with a federally insured financial institution (the “Sinking Fund Account”).  The Borrower shall thereafter commence
making monthly cash deposits into the Sinking Fund Account in an amount,
determined on the date of such deposit, sufficient so that the aggregate
deposits made through the expiration of the Term shall be at least equal to
two-thirds of the aggregate Advances outstanding at the expiration of the Term.


 


EXAMPLE: 
The initial Advance is $1,000,000. 
In July, the Borrower establishes the Sinking Fund Account.  In each of August and September, the
Borrower deposits $111,117 in the Sinking Fund Account (the amount which, if
aggregated on a straight line basis over the last six months of the Term would
result


 


23

















 


in $666,667, or two-thirds of the outstanding
Advances, being deposited in the Sinking Fund Account).  Later in September, the Lender makes another
Advance of $1,000,000.  In October, the
Borrower deposits $444,667 in the Sinking Fund Account ($222,233, or the amount
which, if aggregated on a straight line basis over the last six months of the
Term would result in $1,334,000, or two-thirds of the outstanding Advances,
being deposited in the Sinking Fund Account, plus another $222,233,
making whole the two earlier deposits based on the new total of the outstanding
Advances).


 


The funds on deposit in
the Sinking Fund Account shall be immediately available to the Lender upon the
expiration of the Term to pay off the unpaid balance of the Obligations.  The Borrower shall retain complete control
over the Sinking Fund Account, and all interest accruing therefrom shall belong
to the Borrower.  In the event the
amount on deposit in the Sinking Fund Account is less than the amount required
hereunder (an “Underfunded Event”), no Event of Default shall be deemed to
have occurred hereunder, but all outstanding Advances shall accrue interest at
the Default Rate during the period the Sinking Fund Account is underfunded.
Borrower agrees to provide monthly reports to Lender by no later than the first
day of each month during the occurrence of an Underfunded Event describing the
duration of such event, which report shall be subject to Lender’s review and
approval.


 


(e)           Good Standing. Borrower shall
maintain its and each of its Subsidiaries’ corporate existence and good
standing in its jurisdiction of incorporation and maintain qualification in
each jurisdiction in which the failure to so qualify could reasonably be
expected to have a Material Adverse Effect. Borrower shall maintain, and shall
cause each of its Subsidiaries to maintain, to the extent consistent with
prudent management of Borrower’s business, in force all  licenses, approvals and agreements, the loss
of which could reasonably be expected to have a Material Adverse Effect.


 


(f)            Government Compliance.
Borrower shall meet, and shall cause each Subsidiary to meet, the minimum
funding requirements of ERISA with respect to any employee benefit plans subject
to ERISA. Borrower shall comply, and shall cause each  Subsidiary to comply, with all statutes, laws, ordinances and
government rules and regulations to which it is subject, noncompliance with
which could reasonably be expected to have a Material Adverse Effect or a
material adverse effect on the Collateral or the priority of Lender’s Lien on
the Collateral.


 


(g)           Financial Covenants.  Borrower shall maintain the financial
covenants set forth on Exhibit D attached hereto, which covenants may be
amended from time to time as agreed between the Borrower and Lender.


 


24

















 


6.2           Negative Covenants. Borrower
covenants and agrees that, so long as any Advance or other amounts are owed to
Lender by Borrower hereunder and until payment in full of the outstanding
Obligations or for so long as Lender may have any commitment to make any
Advances, Borrower will not do any of the following:


 


(a)           Liens.  The Borrower shall not, until satisfaction
in full of the Obligations and termination of this Agreement, create or suffer
to exist any Lien or transfer upon or against any of the Collateral, whether
now owned or hereafter acquired, or on the Sinking Fund Account, except
Permitted Encumbrances.


 


(b)           Indebtedness.  The Borrower shall not incur any
Indebtedness (other than Permitted Indebtedness) without the Lender’s prior
written consent, which consent may be given or withheld at the Lender’s sole
discretion and which may be conditioned upon extending to the Lender additional
security for the Obligations.


 


(c)           Sinking Fund Account.  The Borrower shall not sell, transfer or
assign any interest in the Sinking Fund Account, and shall comply with all of
the terms of the account imposed by the financial institution holding such
account.


 


(d)           Dispositions. The Borrower
shall not dispose convey, sell, lease, transfer or otherwise dispose of
(collectively a “Transfer”), or permit any of its Subsidiaries to Transfer, all
or any part of its business or property, other than Transfers (i) of inventory
in the ordinary course of business, (ii) of non-exclusive licenses and similar
arrangements for the use of the property of Borrower or its Subsidiaries in the
ordinary course of business, (iii) Transfers of worn-out or obsolete Equipment
or Equipment financed by other vendors, (iv) Transfers which constitute
liquidation of Investments permitted under Section 6.2 herein, and (v) other
Transfers not otherwise permitted by this Section 6.2 not exceeding One Hundred
Thousand Dollars ($100,000) in the aggregate in any fiscal year.


 


(e)           Changes in Business, Ownership,
Management or Business Locations The Borrower shall not engage in any
business or permit any of its Subsidiaries to engage in any business, other
than the businesses currently engaged in by Borrower and any business
substantially similar or related thereto (or incidental thereto).  Borrower will not, without at least thirty
(30) days prior written notification to Lender, relocate its chief executive
office or add any new offices or business locations.


 


(f)            Mergers or Acquisitions.
Without prior consent of Lender which will not be unreasonably withheld, the
Borrower shall not merge or consolidate, or permit any of its Subsidiaries to
merge or consolidate, with or into any other business organization, or acquire,
or permit any of its Subsidiaries to acquire, all or substantially all of the
capital stock or property of another Person.


 


(g)           Distributions. The Borrower
shall not pay any dividends or make any other distribution or payment on
account of or in redemption, retirement or purchase of any capital stock,
provided that (i) Borrower may declare and make any dividend payment or other
distribution payable in its equity securities (ii) Borrower may convert any of
its convertible securities into other securities pursuant to the terms of such
convertible securities or otherwise in exchange therefor and (iii) for so long
as an Event of Default has not occurred, or if an Event of Default has
occurred, it has 


 


25

















 


been cured, Borrower may
repurchase stock from  former employees
of Borrower in accordance with the terms of repurchase or similar agreements
between Borrower and such employees.


 


(h)           Investments. The Borrower
shall not directly or indirectly acquire or own, or make any Investment in or
to any Person, or permit any of its Subsidiaries so to do, other than Permitted
Investments.


 


(i)            Transactions with Affiliates.
The Borrower shall not directly or indirectly enter into or permit to exist any
material transaction with any Affiliate of Borrower except for transactions
that are in the ordinary course of Borrower’s business, upon fair and
reasonable terms that are no less favorable to Borrower than would be obtained
in an arm’s length transaction with a non-affiliated Person and except for
transactions with a Subsidiary that are upon fair and reasonable terms and
transactions constituting Permitted Investments.


 


(j)            Intellectual Property Agreements.
The Borrower shall not permit the inclusion in any material contract to which
it becomes a party of any provisions that could or might in any way prevent the
creation of a security interest in Borrower’s rights and  interests in any property included within
the definition of the Intellectual Property Collateral acquired under such
contracts.


 


(k)           Subordinated Debt. The
Borrower shall not make any payment in respect of any Subordinated Debt, or
permit any of its Subsidiaries to make any such payment, except in compliance
with the terms of such Subordinated Debt, or amend any provision contained in
any documentation relating to the Subordinated Debt without Lender’s prior
written consent.


 


(l)            Inventory. The Borrower shall
not store the Inventory with a bailee, warehouseman, or similar party unless
Lender has received a pledge of any warehouse receipt covering such Inventory.
Except for Inventory sold in the ordinary course of business and except for
such other locations as Lender may approve in writing, Borrower shall keep the
Inventory only at the location set forth in Section 4.11 hereof or as provided
for in the Schedule hereof and such other locations of which Borrower
gives Lender prior written notice and as to which Borrower signs and files a
financing statement where needed to perfect Lender’s security interest.


 


(m)          Compliance.  The Borrower shall not become an “investment
company” or a company controlled by an “investment company,” within the meaning
of the Investment Company Act of 1940, or become principally engaged in, or
undertake as one of its important activities, the business of extending credit
for the purpose of purchasing or carrying margin stock, or use the proceeds of
any Advance for such purpose; fail to meet the minimum funding requirements of
ERISA, permit a Reportable Event or Prohibited Transaction, as defined in
ERISA, to occur; fail to comply with the Federal Fair Labor Standards Act or
violate any other law or regulation, which violation could have a Material
Adverse Effect or a material adverse effect on the Collateral or the priority of
Lender’s Lien on the Collateral, or permit any of its Subsidiaries to do any of
the foregoing.


 


VII.          CONDITIONS PRECEDENT.


 


7.1           Conditions to Initial Advance.  The agreement of the Lender to make the
initial Advance requested to be made on the Closing Date is subject to the
satisfaction, or waiver by 


 


26

















 


the Lender, immediately
prior to or concurrently with the making of such Advance, of the following
conditions precedent:


 


(a)           Note.  The Lender shall have received the Note and
this Agreement duly executed and delivered by an authorized officer of the
Borrower;


 


(b)           Filings, Registrations and
Recordings.  Each document
(including, without limitation, any Uniform Commercial Code financing
statement) required by this Agreement, any related agreement or under law or
reasonably requested by the Lender to be executed and delivered, filed,
registered or recorded, in a form acceptable to Lender,  including, without limitation, any filings
with the U.S. Patent and Trademark Office to evidence Lender’s security
interest in the Intellectual Property Collateral, in order to create, in favor
of the Lender, a perfected first priority security interest in or Lien upon the
Collateral shall have been executed and delivered, properly filed, registered
or recorded in each jurisdiction in which the filing, registration or
recordation thereof is so required or requested, and the Lender shall have
received an acknowledgment copy, or other evidence satisfactory to it, of each
such filing, registration or recordation and satisfactory evidence of the
payment of any necessary fee, tax or expense relating thereto;


 


(c)           Pledged Stock.  Stock certificates representing the Pledged
Stock, each accompanied by a stock power duly executed in blank, and a
pledgeholder agreement in a form acceptable to Lender;


 


(d)           Corporate Proceedings of Borrower.  The Board of Directors of the Borrower shall
have authorized: (i) the execution, delivery and performance of this Agreement,
and the Other Documents and (ii) the granting by the Borrower of the security
interests in and Liens upon the Collateral contemplated hereunder;


 


(e)           No Litigation.  (i) No litigation, investigation or
proceeding before or by any arbitrator or Governmental Body shall be continuing
or threatened against the Borrower or its officers or directors (A) in
connection with this Agreement or the Other Documents or any of the
transactions contemplated thereby and which, in the opinion of the Lender, is
deemed material or (B) which could, in the opinion of the Lender, have a
Material Adverse Effect; and (ii) no injunction, writ, restraining order or
other order of any nature materially adverse to the Borrower or the conduct of
its business or inconsistent with the due consummation of the transactions
contemplated hereby shall have been issued by any Governmental Body;


 


(f)            Payment Instructions.  The Lender shall have received written
instructions from the Borrower in the form attached hereto as Exhibit B
directing the application of proceeds of the initial Advance made pursuant to
this Agreement;


 


(g)           Consents.  The Lender shall have received any and all
Consents necessary to permit the effectuation of the transactions contemplated
by this Agreement and the Other Documents; and such Consents and waivers of
such third parties as might assert claims with respect to the Collateral as the
Lender shall deem necessary, including, without limitation, waivers executed by
landlords and mortgagees of any real property on which any Collateral is located;


 


(h)           Commitment Fee.  The Lender shall have received the
Commitment fee and Lender expenses then due as described in Section 3.5(a)
and 3.5(c); and


 


27

















 


(i)            Other.  All corporate and other proceedings, and all
documents, instruments and other legal matters in connection with the
transactions contemplated hereby shall be satisfactory in form and substance to
the Lender.


 


(j)            Legal Opinion. The
Lender shall have received a legal opinion from Borrower’s counsel in a form
acceptable to Lender.


 


7.2           Conditions to Each Advance.  The agreement of the Lender to make any
Advance requested to be made on any date (including, without limitation, the
initial Advance), is subject to the satisfaction of the following conditions
precedent as of the date such Advance is made:


 


(a)           Representations and Warranties.  Each of the representations and warranties
made by the Borrower in or pursuant to this Agreement and any related
agreements to which it is a party, and each of the representations and
warranties contained in any certificate, document or financial or other
statement furnished at any time under or in connection with this Agreement or
any related agreement shall be true and correct in all material respects on and
as of such date as if made on and as of such date;


 


(b)           No Default.  No Event of Default or Default shall have
occurred and be continuing on such date, or would exist after giving effect to
the Advances requested to be made, on such date; provided, however,
that the Lender, in its sole discretion, may continue to make Advances
notwithstanding the existence of an Event of Default or Default and that any
Advances so made shall not be deemed a waiver of any such Event of Default or
Default; and


 


(c)           Maximum Advances.  In the case of any Advances requested to be
made, after giving effect thereto, the aggregate Advances shall not exceed the
Maximum Commitment.


 


Each request for a Advance by the Borrower hereunder
shall constitute a representation and warranty by the Borrower as of the date
of such Advance that the conditions contained in this subsection shall have
been satisfied.


 


VIII.        INFORMATION AS TO BORROWER.


 


The Borrower shall, until satisfaction in full of the
Obligations and the termination of this Agreement:


 


8.1           Disclosure of Material Matters.  Immediately upon learning thereof, report to
the Borrower all matters materially affecting the value, enforceability or
collectibility of any portion of the Collateral including, without limitation,
any Borrower Party’s reclamation or repossession of, or the return to any
Borrower Party of, a material amount of goods or claims or disputes asserted by
any customer or other obligor.


 


8.2           Reporting Requirements.  The Borrower shall provide the Lender with
the following documents at the following times in form satisfactory to the
Lender and certified by an officer of the Borrower:


 


28

















 


	
  Monthly (not later than the 3rd day of the following
  month)

  	
  (a)

  	
  the statement of Borrower’s Account referenced in
  Section 2.9

  
	
   

  	
   

  	
   

  
	
  Monthly (not later than the 15th day of the
  following month)

  	
  (a)

  	
  a detailed calculation of the Borrowing Base
  (including detail regarding those Accounts that are not Eligible Accounts)
  substantially in the form of Exhibit C hereto (the “Borrowing
  Base Certificate”), and  

  
	
   

  	
   

  	
   

  
	
   

  	
  (b)

  	
  a detailed aging, by total, of the Accounts,
  together with a reconciliation to the detailed calculation of the Borrowing
  Base previously provided to Lender, plus a detailed aging of accounts payable.

  
	
   

  	
   

  	
   

  
	
  Monthly (not later than the 25th day of the
  following month)

  	
  (a)

  	
  financial statements as of and for the previous
  month, consisting of a balance sheet, and income statement and a cash flow
  statement, prepared in accordance with GAAP consistent with past practices

  
	
   

  	
   

  	
   

  
	
  Monthly (not later than the 3rd Business
  Day after receipt of the relevant account statement) after July
     , 2002

  	
  (a)

  	
  the Sinking Fund Account statement

  
	
   

  	
   

  	
   

  
	
  Annually (not later than the 90th day of
  following fiscal year)

  	
  (a)

  	
  the Borrower’s Annual Report on Form 10-K, as filed
  with the U.S. Securities and Exchange Commission, and 

  
	
   

  	
  (b)

  	
  audited financial statements as of and for the
  previous fiscal year, consisting of a balance sheet, and income statement and
  a cash flow statement, prepared in accordance with GAAP

  



 


In addition to the above, Borrower shall provide Lender: (a) within
five (5) days after request from the Lender, copies of all statements, reports
and notices sent or made available generally by Borrower to any holders of
Subordinated Debt and all reports on Form 10-Q and 8-K filed with the
Securities and Exchange Commission; (b) promptly upon receipt of notice
thereof, a report of any legal actions pending or threatened against Borrower
or any Subsidiary that would be reasonably likely to result in damages or costs
to Borrower or any Subsidiary of One Hundred Thousand Dollars ($100,000).


 


8.3           Material
Occurrences.  Promptly notify the
Lender in writing upon the occurrence of (a) any Event of Default or
Default; (b) any event, development or circumstance whereby any financial
statements or other reports furnished to the Lender fail in any material
respect to present fairly, in accordance with GAAP consistently applied, the
financial condition or operating results of the Borrower as of the date of such
statements; (c) each and every default by any Borrower


 


29

















 


Party which might
result in the acceleration of the maturity of any Indebtedness, including the
names and addresses of the holders of such Indebtedness with respect to which
there is a default existing or with respect to which the maturity has been or
could be accelerated, and the amount of such Indebtedness; and (d) any
other development in the business or affairs of any Borrower Party which could
reasonably be expected to have a Material Adverse Effect; in each case
describing the nature thereof and the action the Borrower propose to take with
respect thereto.


 


8.4           Additional
Information.  Furnish the Lender
with such additional information as the Lender shall reasonably request in
order to enable the Lender to determine whether the terms, covenants,
provisions and conditions of this Agreement have been complied with by the
Borrower.


 


8.5           Additional
Documents.  Execute and deliver to
the Lender, upon request, such documents and agreements as the Lender may, from
time to time, reasonably request to carry out the purposes, terms or conditions
of this Agreement.


 


IX.           EVENTS OF DEFAULT.


 


The occurrence of any one or more of the following events shall
constitute an “Event of Default”:


 


9.1           failure by the
Borrower to pay any principal on the Obligations within three days after the
due date, whether at maturity or by reason of acceleration pursuant to the
terms of this Agreement or by required prepayment;


 


9.2           failure by the
Borrower to pay any interest on the Obligations within three days after the due
date, or failure to pay any other liabilities or make any other payment, fee or
charge provided for herein or in any Other Document within three days after the
due date;


 


9.3           any representation
or warranty made or deemed made by the Borrower in this Agreement or any
related agreement or in any certificate, document or financial or other
statement furnished at any time in connection herewith or therewith shall prove
to have been incorrect, untrue, or misleading in any material respect on the
date when made or deemed to have been made; provided, however,
that the Borrower shall have ten Business Days from notice of default to cure
any such failure that is capable of cure before an Event of Default shall be
deemed to have occurred under this Section;


 


9.4           failure by the
Borrower to perform any of the covenants imposed by this Agreement or the Other
Documents (except for the covenants described in Section 9.1, 9.2, 9.3 herein,
and except as to the balance maintained in the Sinking Fund Account, which is
not an Event of Default and the remedy for which is contained in Section 6.1(d)
); provided, however, that the Borrower shall have three Business
Days from notice of the default to cure any such failure that is capable of
cure before an Event of Default shall be deemed to have occurred under this
Section;


 


9.5           the Borrower shall
(i) apply for, consent to or suffer the appointment of, or the taking of
possession by, a receiver, receiver-manager, custodian, trustee, liquidator or
similar fiduciary of itself or of all or a substantial part of its property,
(ii) make a general assignment for the benefit of creditors,
(iii) commence a voluntary case under any state, provincial or federal
bankruptcy, insolvency, reorganization or other similar law of any jurisdiction
(or any readjustment of debt, arrangement, moratorium, dissolution or
liquidation law or statute) (as now or hereafter in


 


30

















 


effect),
(iv) be adjudicated a bankrupt or insolvent, (v) file a petition
seeking to take advantage of any other law providing for the relief of debtors,
(vi) acquiesce to, or fail to have dismissed, within thirty (30) days, any
petition filed against it in any involuntary case under such bankruptcy laws,
or (vii) take any action for the purpose of effecting any of the
foregoing;


 


9.6           the Borrower shall
admit in writing its inability, or be generally unable, to pay its debts as
they become due or cease operations of its present business;


 


9.7           any Lien created
hereunder or provided for hereby or under any related agreement for any reason
ceases to be or is not a valid and perfected Lien having a first priority interest;
or


 


9.8           any material
provision of this Agreement or any of the Other Agreements shall, for any
reason, cease to be valid and binding on the Borrower, or the Borrower shall so
claim in writing to the Lender.


 


9.9           If there (i) occurs
a material adverse change in the business, operations, or condition (financial
or otherwise) of Borrower or (ii) is a material impairment of the prospect of
repayment of any portion of the Obligations or (iii) is a material impairment
of the value or priority of Lender’s security interests in the Collateral; provided,
however, that Borrower shall have ten Business Days from notice of
default to cure any such change or impairment that is capable of cure before an
Event of Default shall be deemed to have occurred under this Section.


 


9.10         If any material
portion of Borrower’s assets is attached, seized, subjected to a writ or
distress warrant, or is levied upon, or comes 
into the possession of any trustee, receiver or person acting in a
similar capacity and such attachment, seizure, writ or distress warrant or levy
has not been removed, discharged or rescinded within ten (10) days, or if
Borrower is enjoined, restrained, or in any way prevented by court order from
continuing to conduct all or any material part of its business affairs, or if a
judgement or other claim becomes a lien or encumbrance upon any material
portion of Borrower’s assets, or if a notice of lien, levy, or assessment is
filed of record with respect to any of Borrower’s assets by the United States
Government, or any department, agency, or instrumentality thereof, or by any
state, county, municipal, or governmental agency, and the same is not paid
within ten (10) days after Borrower receives notice thereof, provided that none
of the foregoing shall constitute an Event of 
Default where such action or event is stayed or an adequate bond has
been posted pending a good faith contest by Borrower (provided that no Advances
will be required to be made during such cure period) and the imposition of a
Permitted Lien shall not cause an Event of Default;


 


9.11         If there is a default
in any agreement to which Borrower is a party with a third party or parties
resulting in a right by such third party or parties, whether or not exercised,
to accelerate the maturity of any Indebtedness in an amount in excess of One
Hundred Thousand Dollars ($100,000) or that could reasonably be expect to have
a Material Adverse Effect;


 


9.12         If a judgment or
judgments for the payment of money in an amount, individually or in the
aggregate, of at least One Hundred Thousand Dollars ($100,000) shall be
rendered against Borrower and shall remain unsatisfied and unstayed for a
period of ten (10) days (provided that no Advances will be made prior to the
satisfaction or stay of such judgment).


 


31

















 


9.13         If any proceeding is
filed or commenced by or against Borrower or its Subsidiaries for Borrower’s or
any of its Subsidiaries dissolution or liquidation.


 


9.14         Notwithstanding any
term in this Agreement or any related disclosure schedule to the contrary, if
for any reason, including, without limitation, the consummation of the loan
contemplated by this Agreement, (i) there is a default under that certain
Senior Convertible Promissory Note Secured by Deed of Trust dated May 29, 2001
in the principal sum of $16 million held by Castle Creek Technology Partners
LLC (“Holder”), and/or any amendments thereto (collectively, the “Castle Creek
Loan”), resulting in a right by Holder or Holder’s assignee, transferee or successor
to accelerate the maturity of such Castle Creek Loan and (ii) such Holder or
successor notifies in writing Borrower of such default or accelerates the
obligations thereunder or commences foreclosure proceedings.


 


X.            LENDER’S RIGHTS
AND REMEDIES AFTER DEFAULT.


 


10.1         Rights and
Remedies.  Upon the occurrence and
continuance of  an Event of Default pursuant to Article IX, Lender may, at
is election, without notice of its election and without demand, do any one or
more of the following, all of which are authorized by Borrower:


 


(a)           Declare all
Obligations immediately due and payable (provided, however, that if Borrower is
insolvent or is the subject of an Insolvency Proceeding and such action is not
dismissed or stayed within thirty (30) days then all Obligations shall become
immediately due and payable without any action by Lender);


 


(b)           Terminate this
Agreement and the obligation of the Lender to make Advances shall be deemed
terminated;


 


(c)           Exercise any and all
other rights and remedies provided for herein, under the Uniform Commercial
Code and at law or equity generally (all without notice to or consent by the
Borrower except as such notice or consent as expressly provided for hereunder
or required by applicable law), including, without limitation, the right to
foreclose the security interests granted herein and to realize upon any
Collateral by any available judicial procedure and/or to take possession of and
sell any or all of the Collateral with or without judicial process;


 


(d)           Lender may enter any
of any Borrower Party’s premises or other premises without legal process and
without incurring liability to any Borrower Party therefor, and the Lender may
thereupon, or at any time thereafter, in its discretion without notice or
demand, take the Collateral and remove the same to such place as the Lender may
deem advisable and the Lender may require the Borrower to make the Collateral
available to the Lender at a convenient place;


 


(e)           With or without
having the Collateral at the time or place of sale, the Lender may sell the
Collateral, or any part thereof, at public or private sale, at any time or
place, in one or more sales, at such price or prices, and upon such terms,
either for cash, credit or future delivery, as the Lender may elect.  Except as to that part of the Collateral
which is perishable or threatens to decline speedily in value or is of a type
customarily sold on a recognized market, the Lender shall give the Borrower
reasonable notification of such sale or sales, it being agreed that in all events
written notice mailed to the Borrower at least five (5) days prior to such sale
or sales is reasonable notification.  At
any public sale, the Lender may credit bid for and become the purchaser,


 


32

















 


and the Lender or
any other purchaser at any such sale thereafter shall hold the Collateral sold
absolutely free from any claim or right of whatsoever kind, including any
equity of redemption and such right and equity are hereby expressly waived and
released by the Borrower.  The proceeds
realized from the sale of any Collateral shall be applied as follows: first, to
the reasonable costs, expenses and attorneys’ fees and expenses incurred by the
Lender for collection and for acquisition, completion, protection, removal,
storage, sale and delivery of the Collateral; second, to interest due upon any
of the Obligations and any fees payable under this Agreement; and, third, to
the principal of the Obligations.  If
any deficiency shall arise, the Borrower shall remain liable to the Lender
therefor and immediately pay such deficiency upon demand;


 


(f)            During the
continuance of an Event of Default, the Lender may appoint, remove and
reappoint any person or persons, including any employee or agent of the Lender
to be a receiver (the “Receiver”) which term shall include a receiver
and manager of, or agent for, all or any part of the Collateral.  Any such Receiver shall, as far as concerns
responsibility for his acts, be deemed to be the agent of the Borrower and not
of the Lender, and the Lender shall not in any way be responsible for any
misconduct, negligence or non-feasance of such Receiver, its employees or
agents.  Except as otherwise directed by
the Lender, all money received by such Receiver shall be received in trust for
and paid to the Lender.  Such Receiver
shall have all of the powers and rights of the Lender described in this
Section.  The Lender may, either
directly or through its agents or nominees, exercise any or all powers and
right of a Receiver; and


 


(g)           Lender shall have a
non-exclusive, royalty-free license to use the Intellectual Property Collateral
to the extent reasonably necessary to permit Lender to exercise its rights and
remedies upon the occurrence and continuance of an Event of Default.


 


10.2         Lender’s
Discretion.  The Lender shall have
the right in its sole discretion to determine which rights, Liens, security
interests or remedies the Lender may at any time pursue, relinquish,
subordinate, or modify or to take any other action with respect thereto and
such determination will not in any way modify or affect any of the Lender’s
rights hereunder.


 


10.3         Setoff.  In addition to any other rights which the
Lender may have under applicable law, upon the occurrence of an Event of
Default hereunder, the Lender shall have a right to apply any Borrower Party’s
property held by the Lender to reduce the Obligations.


 


10.4         Rights and
Remedies not Exclusive.  The
enumeration of the foregoing rights and remedies is not intended to be
exhaustive and the exercise of any right or remedy shall not preclude the
exercise of any other right or remedies provided for herein or otherwise
provided by law, all of which shall be cumulative and not alternative.


 


XI.           WAIVERS AND
JUDICIAL PROCEEDINGS.


 


11.1         Waiver of Notice.  The Borrower hereby waives notice of
non-payment of any of the Accounts, demand, presentment, protest and notice
thereof with respect to any and all instruments, notice of acceptance hereof,
notice of loans or advances made, credit extended, Collateral received or
delivered, or any other action taken in reliance hereon, and all other demands
and notices of any description, except such as are expressly provided for
herein.


 


33

















 


11.2         Delay.  No delay or omission on the Lender’s part in
exercising any right, remedy or option shall operate as a waiver of such or any
other right, remedy or option or of any default.


 


11.3         Jury Waiver.  EACH PARTY TO THIS AGREEMENT HEREBY
EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR
CAUSE OF ACTION (A) ARISING UNDER THIS AGREEMENT OR ANY OTHER INSTRUMENT,
DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR (B) IN
ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES
HERETO OR ANY OF THEM WITH RESPECT TO THIS AGREEMENT OR ANY OTHER INSTRUMENT,
DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR THE
TRANSACTIONS RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR
HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE AND
EACH PARTY HEREBY CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF
ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO
THIS AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH
ANY COURT AS WRITTEN EVIDENCE OF THE CONSENTS OF THE PARTIES HERETO TO THE
WAIVER OF THEIR RIGHT TO TRIAL BY JURY.


 


XII.         EFFECTIVE DATE AND
TERMINATION.


 


12.1         Term.  This Agreement shall become effective on the
date hereof and shall continue in full force and effect until February 22,
2003 (the “Term”), unless sooner terminated as herein provided.


 


12.2         Termination.  The termination of the Agreement shall not
affect the Borrower’s or the Lender’s rights, or any of the Obligations having
their inception prior to the effective date of such termination, and the
provisions hereof shall continue to be fully operative until all transactions
entered into, rights or interests created or Obligations have been fully
disposed of, concluded or liquidated. 
The security interests, Liens and rights granted to the Lenders
hereunder and the financing statements filed hereunder shall continue in full
force and effect until all of the Obligations have been paid or performed in
full after the termination of this Agreement or the Borrower has furnished the
Lender with an indemnification satisfactory to the Lenders with respect
thereto.  All representations,
warranties, covenants, waivers and agreements contained herein shall survive
termination hereof until all Obligations are paid or performed in full.


 


XIII.        MISCELLANEOUS.


 


13.1         Governing Law.  This Agreement shall be governed by and
construed in accordance with the laws of the State of California applied to
contracts to be performed wholly within the State of California.  Any judicial proceeding brought by or
against the Borrower with respect to any of the Obligations, this Agreement or
any related agreement may be brought in any court of competent jurisdiction in
the County of Orange in the State of California (unless otherwise specified in
any Other Document), and, by execution and delivery of this Agreement, the
Borrower accepts for itself and in connection with its properties, generally
and unconditionally, the non-exclusive jurisdiction of the aforesaid courts,
and irrevocably agrees to be bound by any judgment rendered thereby in
connection with this Agreement.  The
Borrower hereby waives personal service


 


34

















 


of any and all
process upon it and consents that all such service of process may be made by
registered mail (return receipt requested) directed to the Borrower at its
address set forth in Section 13.6 and service so made shall be
deemed completed five (5) days after the same shall have been so deposited in
the mails of the United States of America, or, at the Lender’s option, by
service upon the Borrower.  Nothing
herein shall affect the right to serve process in any manner permitted by law
or shall limit the right of the Lender to bring proceedings against the
Borrower in the courts of any other jurisdiction.  The Borrower waives any objection to jurisdiction and venue of
any action instituted hereunder and shall not assert any defense based on lack
of jurisdiction or venue or based upon forum non conveniens.  Any judicial proceeding by the Borrower
against the Lender involving, directly or indirectly, any matter or claim in
any way arising out of, related to or connected with this Agreement or any
related agreement, shall be brought only in a federal or state court located in
the County of Orange, State of California.


 


13.2         Entire
Understanding.  This Agreement and
the documents executed concurrently herewith contain the entire understanding
between the Borrower and the Lender and supersedes all prior agreements and
understandings, if any, relating to the subject matter hereof.  Any promises, representations, warranties or
guarantees not herein contained and hereinafter made shall have no force and
effect unless in writing, signed by the Borrower and the Lender.  Neither this Agreement nor any portion or
provisions hereof may be changed, modified, amended, waived, supplemented,
discharged, cancelled or terminated orally or by any course of dealing, or in
any manner other than by an agreement in writing, signed by the party to be
charged.  The Borrower acknowledges that
it has been advised by counsel in connection with the execution of this
Agreement and Other Documents and is not relying upon oral representations or
statements inconsistent with the terms and provisions of this Agreement.


 


13.3         Successors and
Assigns; Participation.


 


(a)           This Agreement shall
be binding upon and inure to the benefit of the Borrowers, the Lender, all
future holders of the Obligations and their respective successors and assigns,
except that the Borrower may not assign or transfer any of its rights or
obligations under this Agreement without the prior written consent of the
Lender. which consent may be granted or withheld in Lender’s sole discretion.


 


(b)           Lender shall have the
right without the consent of or notice to Borrower to sell, transfer,
negotiate, or grant participations in all or any part of, or any interest in,
Lender’s obligations, rights, and benefits hereunder, subject to the provisions
of this Section 13.3. Lender may sell, negotiate or grant participations to
other parties in all or part of the obligations of the Borrower outstanding
under the Loan Documents, without notice to or the approval of Borrower;
provided that any such sale, negotiation or participation shall be in
compliance with the applicable federal and state securities laws and the other
requirements of this Section 13.3. Notwithstanding the sale, negotiation or
grant of participations, Lender shall remain solely responsible for the
performance of its obligations under this Agreement, and Borrower shall
continue to deal solely and directly with Lender in connection with this
Agreement and the other Loan Documents. The grant of a participation interest
shall be on such terms as Lender determines are  appropriate, provided only that the holder of such a participation
interest shall not have any of the rights of Lender under this Agreement
except, if the participation agreement so provides, rights to demand the payment
of costs of the type described in Section 3.4, provided that the aggregate
amount that the Borrower shall be required to pay under Section 3.4 with
respect to any ratable share of the Maximum Commitment or


 


35

















 


any Advance
(including amounts paid to participants) shall not exceed the amount that
Borrower would have had to pay if no participation agreements had been entered
into.


 


13.4         Application of
Payments.  The Lender shall have the
continuing and exclusive right to apply or reverse and re-apply any payment and
any and all proceeds of Collateral to any portion of the Obligations.  To the extent that the Lender receives any
payment or proceeds of the Collateral for the Borrower’s benefit which are subsequently
invalidated, declared to be fraudulent or preferential, set aside or required
to be repaid to a trustee, debtor in possession, receiver, custodian or any
other party under any bankruptcy law, common law or equitable cause, then, to
such extent, the Obligations or part thereof intended to be satisfied shall be
revived and continue as if such payment or proceeds had not been received by
the Lender.


 


13.5         Indemnity.  The Borrower shall indemnify the Lender, and
each of its officers, directors, Affiliates, members, managers, employees and
agents, from and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses and disbursements of any
kind or nature whatsoever (including, without limitation, fees and
disbursements of counsel) which may be imposed on, incurred by, or asserted
against the Lender in any litigation, proceeding or investigation instituted or
conducted by any Governmental Body or any other Person with respect to any
aspect of, or any transaction contemplated by, or referred to in, or any matter
related to, this Agreement or the Other Documents, whether or not the Lender is
a party thereto, except to the extent that any of the foregoing arises out of
the willful misconduct of the party being indemnified.


 


13.6         Notice.  Any notice or request hereunder may be given
to the Borrower or to the Lender at their respective addresses set forth below
or at such other address as may hereafter be specified in a notice designated
as a notice of change of address under this Section.  Any notice or request hereunder shall be given by (a) hand
delivery, (b) overnight courier, (c) registered or certified mail,
return receipt requested, (d) telex or telegram, subsequently confirmed by
registered or certified mail, or (e) telecopy to the number set out below
(or such other number as may hereafter be specified in a notice designated as a
notice of change of address) with electronic confirmation of its receipt.  Any notice or other communication required
or permitted pursuant to this Agreement shall be deemed given (a) when
personally delivered to any officer of the party to whom it is addressed,
(b) on the earlier of actual receipt thereof or three (3) days following
posting thereof by certified or registered mail, postage prepaid, or (c) upon
actual receipt thereof when sent by a recognized overnight delivery service or
(d) upon actual receipt thereof when sent by telecopier to the number set
forth below with electronic confirmation of its receipt, in each case addressed
to each party at its address set forth below or at such other address as has
been furnished in writing by a party to the other by like notice:


 


	
   

  	
  (A)

  	
   

  	
  If to the Lender:

  	
   

  	
  Technology Lending
  Partners, L.L.C.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  424 Via Lido Nord

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Newport Beach, CA 
  92663

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Attention:

  	
  Joel Slutzky

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Telecopier:

  	
  (949) 673-5224

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  (B)

  	
   

  	
  If to Borrower:

  	
   

  	
  Odetics, Inc.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  1515 S. Manchester Avenue

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Anaheim, CA 92802

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Attention:

  	
  Chief Financial Officer

  



 


36

















 


	
   

  	
   

  	
   

  	
   

  	
   

  	
  Telecopier:

  	
  (714) 780-7857

  



 


13.7         Survival.  The obligations of Borrowers under
Sections 4.10, 4.12 and Articles X, XI, XII, and XIII shall
survive termination of this Agreement and the Other Documents and payment in
full of the Obligations.


 


13.8         Severability.  If any part of this Agreement is contrary
to, prohibited by, or deemed invalid under applicable laws or regulations, such
provision shall be inapplicable and deemed omitted to the extent so contrary,
prohibited or invalid, but the remainder hereof shall not be invalidated
thereby and shall be given effect so far as possible.


 


13.9         Expenses.  All costs and expenses including, without
limitation, reasonable legal or attorneys’ fees and disbursements incurred by
the Lender (a) in all efforts made to enforce payment of any Obligation or
effect collection of any Collateral, or (b) in connection with the
modification, amendment, administration and enforcement of this Agreement or
any consents or waivers hereunder and all related agreements, documents and
instruments, or (c) in instituting, maintaining, preserving, enforcing and
foreclosing on the Lender’s security interest in or Lien on any of the
Collateral, whether through judicial proceedings or otherwise, or (d) in
defending or prosecuting any actions or proceedings arising out of or relating
to the Lender’s transactions with any Borrower Party, or (e) in connection
with any advice given to the Lender with respect to its rights and obligations
under this Agreement and all related agreements, may be charged to Borrower’s
Account and shall be part of the Obligations.


 


13.10       Injunctive Relief.  The Borrower recognizes that, in the event
the Borrower fails to perform, observe or discharge any of its obligations or
liabilities under this Agreement, any remedy at law may prove to be inadequate
relief to the Lender; therefore, the Lender shall be entitled to temporary and
permanent injunctive relief in any such case without the necessity of proving
that actual damages are not an adequate remedy.


 


13.11       Consequential
Damages.  Neither the Lender nor its
agents or attorneys shall be liable to any Borrower Party for consequential
damages arising from any breach of contract, tort or other wrong relating to
the establishment, administration or collection of the Obligations.


 


13.12       Captions.  The captions at various places in this
Agreement are intended for convenience only and do not constitute and shall not
be interpreted as part of this Agreement.


 


13.13       Counterparts;
Telecopied Signatures.  This
Agreement may be executed in any number of and by different parties hereto on
separate counterparts, all of which, when so executed, shall be deemed an
original, but all such counterparts shall constitute one and the same
agreement.  Any signature delivered by a
party by facsimile transmission shall be deemed to be an original signature
hereto.


 


13.14       Construction.  The parties acknowledge that each party and
its counsel have reviewed this Agreement and that the normal rule of
construction to the effect that any ambiguities are to be resolved against the
drafting party shall not be employed in the interpretation of this Agreement or
any amendments, schedules or exhibits thereto.


 


13.15       Attachment.  The security interest created hereby is
intended to attach when this Agreement is executed by the Borrower and
delivered to the Lender.


 


37

















 


13.16       Representations
Regarding Usury.  Lender and
Borrower represent and warrant that the officers, directors, controlling
persons or managers of Lender and Borrower, respectively, have a preexisting
personal or business relationship with the officers, directors, controlling
persons or managers of the other party and that each has the capacity to
protect its own interests in connection with the Loan Documents.  Borrower further represents and warrants,
that the Obligations evidenced by this Agreement and the Note are not
guaranteed by an individual, a revocable trust having one or more individuals
as trustors, or partnership in which, at the time of issuance of the Note, one
or more individuals are general partners.


 


38

















 


Each of the parties has signed this Agreement as of the day and year
first above written.


 


	
   

  	
  ODETICS, INC.,

  	
   

  
	
   

  	
  a Delaware corporation

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
  /s/ GREG A.
  MINER

  	
   

  
	
   

  	
  Name:

  	
   

  	
  Greg A. Miner

  	
   

  
	
   

  	
  Title:

  	
   

  	
  CEO

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  TECHNOLOGY LENDING PARTNERS, L.L.C.

  
	
   

  	
  a California limited liability company

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
  /s/ JOEL SLUTZKY

  	
   

  
	
   

  	
  Name:

  	
   

  	
  Joel Slutzky

  	
   

  
	
   

  	
  Title:

  	
   

  	
  Manager

  	
   

  
													



 


39

















 


Exhibit A


 


 


ODETICS, INC.


 


SECURED PROMISSORY NOTE


 


	
  $1,250,000

  	
   

  	
  February 22, 2002

  



 


FOR VALUE RECEIVED, ODETICS, INC., a Delaware
corporation (the “Company”), promises to pay to the order of TECHNOLOGY LENDING
PARTNERS, L.L.C., a California limited liability company (the “LLC”), or holder
(either, the “Holder”), on the Maturity Date (as defined below), unless sooner
paid as provided in Section 4 hereof, the principal sum of One
Million Two Hundred and Fifty Thousand Dollars ($1,250,000.00), or such lesser
amount as shall equal the aggregate of the Advances made or deemed made by the
Holder to the Company hereunder, plus accrued unpaid interest thereon.  The outstanding principal balance of each
Advance made pursuant to this Note shall bear interest at the Interest Rate, as
set forth below, from the date of such Advance to the date the principal sum of
such Advance is paid in full. Payments of interest shall be due no later than
the third Business Day of each month that this Note is outstanding.  All payments under this Note shall be made
without right of offset, deduction or counterclaim, shall be made to the order
of the Holder at the Payment Office, or such other address as Holder may
designate in writing to the Company, and shall be applied first to late charges
and costs, then accrued unpaid interest, if any, and then to principal,


 


1.                                       Loan and Security Agreement. 
This Note is issued and secured pursuant to that certain Loan and
Security Agreement, dated February 22, 2002 (the “Loan Agreement”), by and
between the Company and the LLC, a copy of which may be obtained by the Holder
from the Company without charge.  Any
Holder, by taking possession hereof, shall be entitled to the benefits and
bound by the obligations set forth in the Loan Agreement.  Capitalized terms used herein without
definition shall have the meanings given them in the Loan Agreement. This Note
is secured by the security agreement provisions contained in the Loan
Agreement. In the event of any conflict between any provision of the Loan
Agreement and any provision of this Note, the provision of the Loan Agreement
shall control.


 


2.                                       Advances.  The Company may make draw-downs (“Advances”)
under this Note from time to time in an aggregate amount not to exceed the
lesser of the principal amount of this Note and the Borrowing Base.  Such Advances shall be recorded by the
Company on the Borrower’s Account as provided in the Loan and Security
Agreement.


 


3.                                       Maturity
Date.  The date that this Note shall
mature, and the principal amount outstanding hereunder, plus accrued unpaid
interest thereon and any charges pertaining thereto, shall become due and
payable (the “Maturity Date”) shall be February 22, 2003.


 


4.                                       Interest
Rate.  (a) The Interest Rate shall
accrue at a floating rate of four percent (4.0%) per annum in excess of the
prime rate of interest as designated as such by Bank of America, or any
successor thereto, as the same may from time to time fluctuate, such rate to be
adjusted automatically, without notice, on the effective date of any change in
such rate.  Such prime


 

















 


rate represents an index above, at, or below which the
interest rate to be charged on certain loans is determined.  Said Interest Rate is to be adjusted on the
day the prime rate changes and is to be computed on the basis of a 360-day
year, but accrued on the actual number of days elapsed.  In the event that Bank of America or its
successor ceases to publish its “prime rate”, then, for purposes of this Note,
the “prime rate” shall then be deemed to be the average prime interest rate (or
equivalent interest rate, however designated) for each calendar month of the
three largest (total assets) banking institutions in the continental United
States then publishing a prime interest rate (or equivalent interest rate, however
designated).


 


(b)           The
Interest Rate shall increase to the sum of the prime rate plus Eight Percent
(8%) upon and after the occurrence of an Event of Default, and during the
continuation thereof, and during the period of time that there is an Underfunded
Event, as defined in Section 6.1(d) of the Loan Agreement.


 


5.                                       Prepayments.  The Company may not voluntarily prepay this
Note, either in whole or in part.  Under
certain circumstances set forth in the Loan Agreement, the Borrower may have to
make mandatory prepayments of all or part of the Advances.  Such repayments shall be recorded by the
Borrower on the Borrower’s Account pursuant to the Loan Agreement.


 


6.                                       Waivers.  The Company hereby waives diligence,
presentment for payment, demand, protest, notice of non-payment, notice of
dishonor, notice of protest, and any and all other notices and demands
whatsoever.  The Company shall remain
bound under this Note until all principal and interest and any other amounts that
are payable hereunder have been paid in full, notwithstanding any extensions or
renewals granted with respect to this Note or the release of any party liable
hereunder.  The Company, and any and all
endorsers hereof, also waive the right to plead any and all statutes of
limitations as a defense to any demand on this Note or any and all obligations
or liabilities arising out of or in connection with this Note, to the fullest
extent permitted by law.


 


7.                                       Events
of Default.  Upon the occurrence of
any Event of Default, as defined in the Loan Agreement, at Holder’s option,
Holder may declare immediately due and payable, and on any such declaration
there shall become immediately due and payable, the entire unpaid principal
balance of this Note, together with all accrued and unpaid interest under this
Note and any other sums owing at the time of such declaration pursuant to this
Note, and Holder shall be entitled to exercise all rights and remedies
available to Holder hereunder and under applicable law, all of which rights and
remedies shall be cumulative.


 


8.                                       No
Waiver by Holder.  Any delay or
omission on the part of Holder to exercise any of Holder’s rights or remedies
hereunder or under applicable law, including, without limitation, the right to
accelerate amounts owing under this Note, shall not be deemed a waiver of that
right or remedy or of any other right or remedy of Holder in respect
thereof.  The acceptance by Holder of
any payment pursuant to the terms of this Note which is less than payment in
full of all amounts due and payable at the time of such payment shall not
constitute a waiver of the right to exercise any of the Holder’s rights or
remedies under this Note or under applicable law at that time or at any
subsequent time or nullify any prior exercise of any such rights or remedies without
the express written consent of Holder, except as and to the extent provided to
the contrary by applicable law.


 


2

















 


9.                                       Governing
Law.  This Note shall be governed by
and construed according to and enforced under the internal laws of the State of
California without giving effect to its choice of laws rules.


 


10.                                 Binding
Nature.  The provisions of this Note
shall be binding on the Company and shall inure to the benefit of the Holder.


 


11.                                 Usury
Savings Provisions.  In the event
Holder receives any sums under this Note which constitute interest in an amount
in excess of that permitted by any applicable law, then, all such sums
constituting interest in excess of that permitted to be paid under applicable
law shall, at Holder’s option, either be credited to the payment of principal
owing hereunder or returned to the Company.


 


12.                                 Severability.  If, but only to the extent that, any
provision of this Note shall be invalid or unenforceable, then, such offending
provision shall be deleted from this Note, but only to the extent necessary to
preserve the validity and effectiveness of this Note to the fullest extent
permitted by applicable law.


 


	
   

  	
  ODETICS, INC.

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Its:

  	
   

  



 


3

















 


REQUEST FOR ADVANCE


 


Date                   


 


TECHNOLOGY LENDING PARTNERS, LLC


424 Via Lido Nord


Newport Beach, CA. 92663


 


Ladies and Gentlemen:


 


The undersigned, Odetics, Inc., refers to that certain
Loan and Security Agreement, dated as of February 22, 2002 (as amended
from time to time, the “Loan Agreement,” the terms defined therein being used
herein as therein defined), by and between the undersigned and you, and hereby
gives you notice pursuant to Section 2.2 of the Loan Agreement, that the
undersigned hereby requests an Advance under the Loan Agreement, and in that
connection sets forth below the information relating to such Advance (the
“Proposed Advance”).


 


(i)            The
Business Day of the Proposed Advance is
                  ,
200  .


 


(ii)           The
aggregate principal amount of the Proposed Advance is
$                    .


 


The undersigned hereby certifies that the following
statements are true on the date hereof, and will be true on the date of the
Proposed Advance:


 


(A)          the
representations and warranties of the undersigned contained in the Loan
Agreement are correct as though made on and as of such date (except to the
extent that such representations and warranties are made as of a specified
earlier date); and


 


(B)           no
Default or Event of Default has occurred and is continuing, or would result
from such Proposed Advance or from the application of the proceeds thereof.


 


	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
  Odetics, Inc.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Title:

  



 

















 


Exhibit C


 


 


ODETICS, INC.


 


Borrowing Base
Certificate


 


 


Pursuant to that certain Loan and Security Agreement,
dated as of February 22, 2002 (the “Loan Agreement”), between ODETICS,
INC. a Delaware corporation (the “Borrower”), and TECHNOLOGY LENDING PARTNERS,
L.L.C., a California limited liability company, the undersigned does hereby
certify as follows (capitalized terms used herein without definition shall have
the meanings ascribed thereto in the Loan Agreement).


 


(a)                                  The
undersigned is the duly appointed and acting
                                                 
of the Borrower.


 


(b)                                 Attached
hereto as Schedule A is a true and complete copy of:


 


(i)                                     the
calculation of the Borrowing Base as at the close of business on the last
Business Day of
                                       ,
200  ,


 


(ii)                                  an
aged trial balance of all Accounts of Borrower as of such date, indicating
which Accounts are current, up to 90 days from the invoice date or installation
date, if later (not to exceed 120 days from invoice date), and 90 days or more
past the invoice date or installation date, if later (not to exceed 120 days
from invoice date), and


 


(iii)                               calculations
demonstrating that the aggregate outstanding principal amount of the Advances
does not exceed the Availability.


 


IN WITNESS WHEREOF, I have signed my name and executed
this Certificate on this         day of
                          ,
200 .


 


 


	
  ODETICS, INC.

  
	
   

  
	
   

  
	
   

  	
   

  
	
  By:

  
	
  Title:

  



 

















 


Exhibit D


 


Financial Covenants


 


Borrower shall maintain the financial covenants set
forth below:


 


(a) Debt to Equity Ratio.  Borrower shall maintain a ratio of Total Liabilities to
stockholder’s equity of (i) not more than 28 to 1 as of the last day of each
calendar month if the real property upon which Borrower maintains its chief
executive offices is not sold and the debt secured by such property is not
retired prior to the measurement date, or (ii) not more than 19 to 1 as of the
last day of each calendar month if the real property upon which Borrower
maintains its chief executive offices is sold and the debt secured by such
property is retired prior to the measurement date, measured on a consolidated
basis.


 


(b) Quarterly Tangible Net Worth.  Borrower shall maintain, as of the last day
of each calendar quarter, a Tangible Net Worth of (i) not less than negative
$1.3 million if the real property upon which Borrower maintains its chief
executive offices is sold and the debt secured by such property is retired
prior to the measurement date, or (ii) not less than negative $7.3 million if
the real property upon which Borrower maintains its chief executive offices is
not sold and the debt secured by such property is not retired prior to the
measurement date, measured on a consolidated basis.


 


(c) Monthly Tangible Net Worth.  Borrower shall maintain, as of the last day
of each calendar month, a Tangible Net Worth of (i) not less than negative $2.5
million if the real property upon which Borrower maintains its chief executive
offices is sold and the debt secured by such property is retired prior to the
measurement date, or (ii) not less than negative $8.5 million if the real
property upon which Borrower maintains its chief executive offices is not sold
and the debt secured by such property is not retired prior to the measurement
date, measured on a consolidated basis.


 

















 


Schedule A


 


 


Borrowing Base Certificate


 


Odetics, Inc.


Accounts Receivable Collateral:


Balance as of:


 


	
   

  	
   

  	
  TOTAL

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  A/R Aging
  Totals:

  	
   

  	
  $

  	
  (1)

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Less
  Ineligible Calculations:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  1.

  	
  Accounts Over 90 days from
  invoice date or installation date, if later, but not to exceed 120 days from
  invoice date:

  	
   

  	
   

  	
   

  
	
   

  	
  2.

  	
  Contra-accounts

  	
   

  	
   

  	
   

  
	
   

  	
  3.

  	
  Intercompany

  	
   

  	
   

  	
   

  
	
   

  	
  4.

  	
  Insolvency

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Total -
  Ineligible

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Eligible A/R
  Collateral

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Advance Rate

  	
   

  	
  85

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Borrowing
  Base

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  



 












(1) - Supported by fiscal month end Accounts
Receivable Aging