Document:

Exhibit 10.1

 

 

 

CREDIT AND SECURITY AGREEMENT

 

BY AND AMONG

 

SMTEK, INC.,

 

JOLT TECHNOLOGY, INC.,

 

SMTEK NEW ENGLAND, INC.,

 

SMTEK SANTA CLARA, INC.,

 

TECHNETICS, INC.,

 

AND

 

WELLS FARGO BUSINESS CREDIT, INC.

 

 

September 
19, 2003

 

 

 

TABLE OF CONTENTS

 

	
  ARTICLE
  I      DEFINITIONS

  
	
   

  
	
  Section 1.1

  	
  Definitions

  
	
   

  	
   

  
	
  Section 1.2

  	
  Other
  Definitional Terms; Rules of Interpretation

  
	
   

  	
   

  
	
  ARTICLE
  II     AMOUNT AND TERMS OF THE CREDIT FACILITY

  
	
   

  
	
  Section 2.1

  	
  Revolving Advances

  
	
   

  	
   

  
	
  Section 2.2

  	
  Procedures
  for Requesting Advances

  
	
   

  	
   

  
	
  Section 2.3

  	
  LIBO
  Rate Advances

  
	
   

  	
   

  
	
  Section 2.4

  	
  Increased
  Costs; Capital Adequacy; Funding Exceptions

  
	
   

  	
   

  
	
  Section 2.5

  	
  Letters
  of Credit

  
	
   

  	
   

  
	
  Section 2.6

  	
  Special
  Account

  
	
   

  	
   

  
	
  Section 2.7

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

  
	
   

  	
   

  
	
  Section 2.8

  	
  Obligations
  Absolute

  
	
   

  	
   

  
	
  Section 2.9

  	
  Term
  Advance

  
	
   

  	
   

  
	
  Section 2.10

  	
  Capex
  Advances

  
	
   

  	
   

  
	
  Section 2.11

  	
  Payment
  of Term Advance and CapEx Advances

  
	
   

  	
   

  
	
  Section 2.12

  	
  Inventory
  Appraisals

  
	
   

  	
   

  
	
  Section 2.13

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

  
	
   

  	
   

  
	
  Section 2.14

  	
  Fees

  
	
   

  	
   

  
	
  Section 2.15

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

  
	
   

  	
   

  
	
  Section 2.16

  	
  Lockbox;
  Collateral Account; Application of Payments

  
	
   

  	
   

  
	
  Section 2.17

  	
  Voluntary
  Prepayment; Termination of the Credit Facility by the Borrower

  
	
   

  	
   

  
	
  Section 2.18

  	
  Mandatory
  Prepayment

  
	
   

  	
   

  
	
  Section 2.19

  	
  Revolving
  Advances to Pay Obligations

  
	
   

  	
   

  
	
  Section 2.20

  	
  Use
  of Proceeds

  
	
   

  	
   

  
	
  Section 2.21

  	
  Liability
  Records

  
	
   

  	
   

  
	
  ARTICLE
  III   SECURITY INTEREST; OCCUPANCY; SETOFF

  

 

1

 

	
  Section 3.1

  	
  Grant
  of Security Interest

  
	
   

  	
   

  
	
  Section 3.2

  	
  Notification
  of Account Debtors and Other Obligors

  
	
   

  	
   

  
	
  Section 3.3

  	
  Assignment
  of Insurance

  
	
   

  	
   

  
	
  Section 3.4

  	
  Occupancy

  
	
   

  	
   

  
	
  Section 3.5

  	
  License

  
	
   

  	
   

  
	
  Section 3.6

  	
  Financing
  Statement

  
	
   

  	
   

  
	
  Section 3.7

  	
  Setoff

  
	
   

  	
   

  
	
  Section 3.8

  	
  Collateral

  
	
   

  	
   

  
	
  ARTICLE
  IV      CONDITIONS OF LENDING

  
	
   

  
	
  Section 4.1

  	
  Conditions
  Precedent to the Initial Advances and Letter of Credit

  
	
   

  	
   

  
	
  Section 4.2

  	
  Conditions
  Precedent to All Advances and Letters of Credit

  
	
   

  	
   

  
	
  ARTICLE V       REPRESENTATIONS
  AND WARRANTIES

  
	
   

  	
   

  
	
  Section 5.1

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

  
	
   

  	
   

  
	
  Section 5.2

  	
  Capitalization

  
	
   

  	
   

  
	
  Section 5.3

  	
  Authorization
  of Borrowing; No Conflict as to Law or Agreements

  
	
   

  	
   

  
	
  Section 5.4

  	
  Legal
  Agreements

  
	
   

  	
   

  
	
  Section 5.5

  	
  Subsidiaries

  
	
   

  	
   

  
	
  Section 5.6

  	
  Financial
  Condition; No Adverse Change

  
	
   

  	
   

  
	
  Section 5.7

  	
  Litigation

  
	
   

  	
   

  
	
  Section 5.8

  	
  Regulation U

  
	
   

  	
   

  
	
  Section 5.9

  	
  Taxes

  
	
   

  	
   

  
	
  Section 5.10

  	
  Titles
  and Liens

  
	
   

  	
   

  
	
  Section 5.11

  	
  Intellectual
  Property Rights

  
	
   

  	
   

  
	
  Section 5.12

  	
  Plans

  
	
   

  	
   

  
	
  Section 5.13

  	
  Default

  
	
   

  	
   

  
	
  Section 5.14

  	
  Environmental
  Matters

  
	
   

  	
   

  

 

2

 

	
  Section 5.15

  	
  Submissions
  to Lender

  
	
   

  	
   

  
	
  Section 5.16

  	
  Financing
  Statements

  
	
   

  	
   

  
	
  Section 5.17

  	
  Rights
  to Payment

  
	
   

  	
   

  
	
  Section 5.18

  	
  Financial
  Solvency

  
	
   

  	
   

  
	
  Section 5.19

  	
  Bank
  Accounts

  
	
   

  	
   

  
	
  ARTICLE
  VI      COVENANTS

  
	
   

  
	
  Section 6.1

  	
  Reporting
  Requirements

  
	
   

  	
   

  
	
  Section 6.2

  	
  Financial
  Covenants

  
	
   

  	
   

  
	
  Section 6.3

  	
  Permitted
  Liens; Financing Statements

  
	
   

  	
   

  
	
  Section 6.4

  	
  Indebtedness

  
	
   

  	
   

  
	
  Section 6.5

  	
  Guaranties

  
	
   

  	
   

  
	
  Section 6.6

  	
  Investments
  and Subsidiaries

  
	
   

  	
   

  
	
  Section 6.7

  	
  Dividends
  and Distributions

  
	
   

  	
   

  
	
  Section 6.8

  	
  Intentionally
  Omitted

  
	
   

  	
   

  
	
  Section 6.9

  	
  Transactions
  with Afilliates

  
	
   

  	
   

  
	
  Section 6.10

  	
  Books
  and Records; Inspection and Examination

  
	
   

  	
   

  
	
  Section 6.11

  	
  Account
  Verification

  
	
   

  	
   

  
	
  Section 6.12

  	
  Compliance
  with Laws

  
	
   

  	
   

  
	
  Section 6.13

  	
  Payment
  of Taxes and Other Claims

  
	
   

  	
   

  
	
  Section 6.14

  	
  Maintenance
  of Properties

  
	
   

  	
   

  
	
  Section 6.15

  	
  Insurance

  
	
   

  	
   

  
	
  Section 6.16

  	
  Preservation
  of Existence

  
	
   

  	
   

  
	
  Section 6.17

  	
  Delivery
  of Instruments, etc

  
	
   

  	
   

  
	
  Section 6.18

  	
  Sale
  or Transfer of Assets; Suspension of Business Operations

  
	
   

  	
   

  
	
  Section 6.19

  	
  Consolidation
  and Merger; Asset Acquisitions

  
	
   

  	
   

  
	
  Section 6.20

  	
  Sale
  and Leaseback

  
	
   

  	
   

  
	
  Section 6.21

  	
  Restrictions
  on Nature of Business

  
	
   

  	
   

  
	
  Section 6.22

  	
  Accounting

  
	
   

  	
   

  
	
  Section 6.23

  	
  Discounts,
  etc

  

 

3

 

	
  Section 6.24

  	
  Plans

  
	
   

  	
   

  
	
  Section 6.25

  	
  Place
  of Business; Name

  
	
   

  	
   

  
	
  Section 6.26

  	
  Constituent
  Documents; S Corporation Status

  
	
   

  	
   

  
	
  Section 6.27

  	
  Additional
  Bank Accounts

  
	
   

  	
   

  
	
  Section 6.28

  	
  Distribution
  of Loan Proceeds Amongst Borrowers

  
	
   

  	
   

  
	
  Section 6.29

  	
  Performance
  by the Lender

  
	
   

  	
   

  
	
  ARTICLE
  VII      EVENTS OF DEFAULT, RIGHTS AND REMEDIES

  
	
   

  
	
  Section 7.1

  	
  Events
  of Default

  
	
   

  	
   

  
	
  Section 7.2

  	
  Rights
  and Remedies

  
	
   

  	
   

  
	
  Section 7.3

  	
  Certain
  Notices

  
	
   

  	
   

  
	
  ARTICLE
  VIII     JOINT AND SEVERAL LIABILITY; SURETYSHIP
  WAIVERS

  
	
   

  
	
  Section 8.1

  	
  Independent
  Obligations; Subrogation

  
	
   

  	
   

  
	
  Section 8.2

  	
  Authority
  to Modify Obligations and Security

  
	
   

  	
   

  
	
  Section 8.3

  	
  Waiver
  of Defenses

  
	
   

  	
   

  
	
  Section 8.4

  	
  Exercise
  of the Lender’s Rights

  
	
   

  	
   

  
	
  Section 8.5

  	
  Additional
  Waivers

  
	
   

  	
   

  
	
  Section 8.6

  	
  Additional
  Indebtedness

  
	
   

  	
   

  
	
  Section 8.7

  	
  Notices,
  Demands, Etc.

  
	
   

  	
   

  
	
  Section 8.8

  	
  Subordination

  
	
   

  	
   

  
	
  Section 8.9

  	
  Revival

  
	
   

  	
   

  
	
  Section 8.10

  	
  Understanding
  of Waivers

  
	
   

  	
   

  
	
  ARTICLE
  IX      MISCELLANEOUS

  
	
   

  
	
  Section 9.1

  	
  No
  Waiver; Cumulative Remedies; Compliance with Laws

  
	
   

  	
   

  
	
  Section 9.2

  	
  Amendments,
  Etc

  
	
   

  	
   

  
	
  Section 9.3

  	
  Addresses
  for Notices; Requests for Accounting

  
	
   

  	
   

  
	
  Section 9.4

  	
  Intentionally
  Omitted

  
	
   

  	
   

  
	
  Section 9.5

  	
  Further
  Documents

  
	
   

  	
   

  
	
  Section 9.6

  	
  Costs
  and Expenses

  
	
   

  	
   

  
	
  Section 9.7

  	
  Indemnity

  

 

4

 

	
  Section 9.8

  	
  Participants

  
	
   

  	
   

  
	
  Section 9.9

  	
  Execution
  in Counterparts; Telefacsimile Execution

  
	
   

  	
   

  
	
  Section 9.10

  	
  Retention
  of Borrower’s Records

  
	
   

  	
   

  
	
  Section 9.11

  	
  Binding
  Effect; Assignment; Complete Agreement; Exchanging Information

  
	
   

  	
   

  
	
  Section 9.12

  	
  Severability
  of Provisions

  
	
   

  	
   

  
	
  Section 9.13

  	
  Headings

  
	
   

  	
   

  
	
  Section 9.14

  	
  Governing
  Law; Jurisdiction, Venue; Waiver of Jury Trial

  
	
   

  	
   

  
	
  Section 9.15

  	
  SI
  as Agent for Borrowers

  

 

5

 

CREDIT AND SECURITY AGREEMENT

 

Dated as of September 19, 2003

 

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

 

W I T N E S S E T H:

 

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

 

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

 

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

 

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

 

ARTICLE I

 

DEFINITIONS

 

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

 

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

 

 

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

 

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

 

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

 

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

 

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

 

“Agreement” means this Credit and Security Agreement.

 

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

 

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

 

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

 

2

 

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

 

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

 

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

 

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

 

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

 

(a)                                  the
Maximum Line; or

 

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

 

(i)                                     85%
of Eligible Accounts, plus

 

(ii)                                  the
lesser of:

 

(A)                              $2,000,000,
or

 

(B)                                the
sum of:

 

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

 

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

 

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

 

and minus

 

(iii)                               all
Availability Reserves.

 

3

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

4

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

5

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

6

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

7

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

8

 

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

 

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

 

(v)                                 Inventory
that is perishable or live;

 

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

 

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

 

(viii)                        Slow
Moving Inventory; and

 

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

 

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

 

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

 

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

 

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

 

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

 

“Existing Lender” means Comerica Bank.

 

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

 

9

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

“IRC” means the Internal Revenue Code of 1986.

 

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

 

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

 

10

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

11

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

12

 

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

 

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

 

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

 

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

 

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

 

“Material Adverse Effect” means any of the following:

 

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

 

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

 

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

 

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

 

“Maturity Date” means September 19, 2006.

 

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

 

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

 

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

 

13

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

14

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

15

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

16

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

17

 

ARTICLE II

 

AMOUNT AND TERMS OF THE CREDIT FACILITY

 

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

 

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

 

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

 

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

 

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

 

18

 

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

 

Section 2.3                                      LIBO
Rate Advances.

 

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

 

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

 

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

 

19

 

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

 

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

 

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

 

Section 2.4                                      Increased
Costs; Capital Adequacy; Funding
Exceptions.

 

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

 

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

 

20

 

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

 

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

 

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

 

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

 

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

 

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

 

21

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

22

 

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

 

Section 2.5                                      Letters
of Credit.

 

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

 

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

 

(ii)                                  Availability.

 

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

 

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

 

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

 

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

 

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

 

23

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

24

 

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

 

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

 

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

 

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

 

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

 

Section 2.9                                      Term
Advance.

 

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

 

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

 

Section 2.10                                Capex
Advances.

 

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

 

25

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Section 2.11                                Payment
of Term Advance and CapEx Advances.

 

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

 

26

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

27

 

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

 

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

 

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

 

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

 

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

 

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

 

28

 

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

 

Section 2.14                                Fees.

 

(a)                                  Intentionally Omitted.

 

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

 

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

 

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

 

29

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Section 2.16                                Lockbox;
Collateral Account; Application of Payments.

 

(a)                                  Lockbox
and Collateral
Account.

 

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

 

30

 

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

 

(b)                                 Application
of Payments.

 

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

 

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

 

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

 

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

 

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

 

31

 

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

 

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

 

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

 

ARTICLE
III

 

SECURITY INTEREST; OCCUPANCY; SETOFF

 

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

 

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

 

32

 

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

 

Section 3.4                                      Occupancy.

 

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

 

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

 

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

 

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

 

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

 

33

 

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

 

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

 

	
  Name and
  address of Debtors:

  
	
  SMTEK, Inc.

  
	
  200 Science
  Drive

  
	
  Moorpark,
  California 93021-2003

  
	
  Organizational
  Identification No.   C1370815

  
	
   

  
	
   

  
	
  Jolt
  Technology, Inc.

  
	
  200 Science
  Drive

  
	
  Moorpark,
  California 93021-2003

  
	
  Organizational
  Identification No.  2825509

  
	
   

  
	
   

  
	
  SMTEK New
  England, Inc.

  
	
  200 Science
  Drive

  
	
  Moorpark,
  California 93021-2003

  
	
  Organizational
  Identification No.  N/A

  
	
   

  
	
   

  
	
  SMTEK Santa
  Clara, Inc.

  
	
  200 Science
  Drive

  
	
  Moorpark,
  California 93021-2003

  
	
  Organizational
  Identification No.   C2360901

  
	
   

  
	
  Name and
  address of Secured Party:

  
	
   

  
	
  Wells Fargo
  Business Credit, Inc.

  
	
  245 South
  Los Robles Avenue

  
	
  Suite 700

  
	
  Pasadena,
  California  91101

  

 

34

 

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

 

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

 

ARTICLE IV

 

CONDITIONS OF
LENDING

 

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

 

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

 

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

 

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

 

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

 

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

 

35

 

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

 

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

 

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

 

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

 

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

 

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

 

(k)                                  The
Pay-Off Letter.

 

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

 

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

 

36

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

37

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

38

 

ARTICLE V

 

REPRESENTATIONS
AND WARRANTIES

 

The Borrowers
represent and warrant to the Lender as follows:

 

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

 

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

 

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

 

39

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

40

 

Section 5.11                                Intellectual
Property Rights.

 

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

 

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

 

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

 

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

 

41

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

42

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

43

 

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

 

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

 

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

 

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

 

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

 

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

 

ARTICLE VI

 

COVENANTS

 

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

 

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

 

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

 

44

 

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

 

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

 

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

 

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

 

45

 

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

 

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

 

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

 

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

 

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

 

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

 

46

 

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

 

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

 

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

 

(m)                               Intellectual
Property.

 

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

 

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

 

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

 

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

 

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

 

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

 

47

 

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

 

Section 6.2                                      Financial
Covenants.

 

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

 

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

 

	
  Period

  	
   

  	
  Minimum
  Book Net Worth

  	
   

  
	
  July 2003

  	
   

  	
  $

  	
  300,000

  	
   

  
	
  August 2003

  	
   

  	
  $

  	
  400,000

  	
   

  
	
  September
  2003

  	
   

  	
  $

  	
  1,200,000

  	
   

  
	
  October 2003

  	
   

  	
  $

  	
  1,050,000

  	
   

  
	
  November
  2003

  	
   

  	
  $

  	
  1,050,000

  	
   

  
	
  December
  2003

  	
   

  	
  $

  	
  1,350,000

  	
   

  
	
  January 2004

  	
   

  	
  $

  	
  1,200,000

  	
   

  
	
  February
  2004

  	
   

  	
  $

  	
  1,200,000

  	
   

  
	
  March 2004

  	
   

  	
  $

  	
  1,765,000

  	
   

  
	
  April 2004

  	
   

  	
  $

  	
  1,615,000

  	
   

  
	
  May 2004

  	
   

  	
  $

  	
  1,615,000

  	
   

  
	
  June 2004
  and every month thereafter

  	
   

  	
  $

  	
  2,255,000

  	
   

  

 

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

 

	
  Quarter Ending

  	
   

  	
  Minimum
  Net Income

  	
   

  
	
  September
  2003

  	
   

  	
  $

  	
  315,000

  	
   

  
	
  December
  2003

  	
   

  	
  $

  	
  150,000

  	
   

  
	
  March 2004

  	
   

  	
  $

  	
  415,000

  	
   

  
	
  June 2004

  	
   

  	
  $

  	
  490,000

  	
   

  
	
  September
  2004, and every quarter thereafter

  	
   

  	
  $

  	
  200,000

  	
   

  

 

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

 

48

 

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

 

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

 

Section 6.3                                      Permitted
Liens; Financing Statements.

 

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

 

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

 

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

 

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

 

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

 

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

 

(a)                                  indebtedness
arising hereunder;

 

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

 

(c)                                  indebtedness
relating to Permitted Liens..

 

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

 

49

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

(e)                                  Permitted
Operating Expenses.

 

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

 

Section 6.8                                      Intentionally
Omitted.

 

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

 

50

 

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

 

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

 

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

 

Section 6.12                                Compliance
with Laws.

 

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

 

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

 

51

 

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

 

Section 6.14                                Maintenance
of Properties.

 

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

 

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

 

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

 

52

 

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

 

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

 

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

 

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

 

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

 

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

 

53

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

54

 

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

 

ARTICLE VII

 

EVENTS OF
DEFAULT, RIGHTS AND REMEDIES

 

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

 

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

 

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

 

(c)                                  A
Change of Control shall occur;

 

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

 

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

 

55

 

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

 

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

 

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

 

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

 

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

 

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

 

56

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

57

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

ARTICLE VIII

 

JOINT AND SEVERAL LIABILITY; SURETYSHIP WAIVERS 

 

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

 

58

 

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

 

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

 

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

 

59

 

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

 

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

 

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

 

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

 

60

 

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

 

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

 

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

 

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

 

61

 

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

 

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

 

ARTICLE IX

 

MISCELLANEOUS

 

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

 

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

 

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

 

62

 

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

 

Section 9.4                                      Intentionally
Omitted.

 

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

 

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

 

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

 

63

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

64

 

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

 

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

 

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

 

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

 

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

 

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

 

65

 

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

 

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

 

66

 

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

 

	
  SMTEK, Inc.

  	
  SMTEK, INC.

  
	
  200 Science
  Drive

  	
   

  
	
  Moorpark,
  California 93021-2003

  	
  By

  	
   /s/ Kirk A. Waldron

  
	
  Telecopier:

  	
   

  	
   

  	
   

  	
  Name:  Kirk A. Waldron

  
	
  Attention:
  Kirk Waldron

  	
   

  	
  Title:  Senior VP and CFO

  
						

 

	
  Jolt
  Technology, Inc.

  	
  JOLT
  TECHNOLOGY, INC.

  
	
  200 Science
  Drive

  	
   

  
	
  Moorpark,
  California 93021-2003

  	
  By

  	
   /s/ Kirk A. Waldron

  
	
  Telecopier:

  	
   

  	
   

  	
   

  	
  Name:  Kirk A. Waldron

  
	
  Attention:
  Kirk Waldron

  	
   

  	
  Title:  Senior VP and CFO

  
						

 

	
  SMTEK New
  England, Inc.

  	
  SMTEK NEW
  ENGLAND, INC.

  
	
  200 Science
  Drive

  	
   

  
	
  Moorpark,
  California 93021-2003

  	
  By

  	
   /s/ Kirk A. Waldron

  
	
  Telecopier:

  	
   

  	
   

  	
   

  	
  Name:  Kirk A. Waldron

  
	
  Attention:
  Kirk Waldron

  	
   

  	
  Title:  Senior VP and CFO

  	 

							

 

	
  SMTEK Santa
  Clara, Inc.

  	
  SMTEK SANTA
  CLARA, INC.

  
	
  200 Science
  Drive

  	
   

  
	
  Moorpark,
  California 93021-2003

  	
  By

  	
   /s/ Kirk A. Waldron

  
	
  Telecopier:

  	
   

  	
   

  	
   

  	
  Name:  Kirk A. Waldron

  
	
  Attention:
  Kirk Waldron

  	
   

  	
  Title:  Senior VP and CFO

  
						

 

	
  Technetics,
  Inc.

  	
  TECNHETICS,
  INC.

  
	
  200 Science
  Drive

  	
   

  
	
  Moorpark,
  California 93021-2003

  	
  By

  	
   /s/ Kirk A. Waldron

  
	
  Telecopier:

  	
   

  	
   

  	
   

  	
  Name:  Kirk A. Waldron

  
	
  Attention:
  Kirk Waldron

  	
   

  	
  Title:  Senior VP and CFO

  
						

 

	
  Wells Fargo
  Business Credit, Inc.

  	
  WELLS FARGO
  BUSINESS CREDIT, INC.

  
	
  245 South
  Los Robles Avenue, Suite 700

  	
   

  
	
  Pasadena,
  California 91101

  	
  By

  	
   /s/ 
  Jeffrey A. Heisinger

  
	
  Telecopier:  (626) 844-9063

  	
   

  	
  Name:  Jeffrey A. Heisinger

  
	
  Attention:
  Portfolio Manager

  	
   

  	
  Title:  VP

  
				

 

67

 

Table of Exhibits and Schedules

 

	
  Exhibit A

  	
  Form of Revolving Note

  
	
   

  	
   

  
	
  Exhibit B

  	
  Form of Term Note

  
	
   

  	
   

  
	
  Exhibit C

  	
  Form of CapEx Note

  
	
   

  	
   

  
	
  Exhibit D

  	
  Compliance Certificate

  
	
   

  	
   

  
	
  Exhibit E

  	
  Premises

  
	
   

  	
   

  
	
  Exhibit F

  	
  Form of Notice of Borrowing

  
	
   

  	
   

  
	
  Exhibit G

  	
  Form of Notice of Conversion of Advances

  
	
   

  	
   

  
	
  Exhibit H

  	
  Form of Notice to Continue LIBO Rate
  Advances

  
	
   

  	
   

  
	
  Schedule
  5.1

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

  
	
   

  	
   

  
	
  Schedule
  5.2

  	
  Capitalization
  and Organizational Chart

  
	
   

  	
   

  
	
  Schedule
  5.5

  	
  Subsidiaries

  
	
   

  	
   

  
	
  Schedule
  5.7

  	
  Litigation

  
	
   

  	
   

  
	
  Schedule
  5.11

  	
  Intellectual
  Property Disclosures

  
	
   

  	
   

  
	
  Schedule
  5.14

  	
  Environmental
  Matters

  
	
   

  	
   

  
	
  Schedule
  5.19

  	
  Bank
  Accounts

  
	
   

  	
   

  
	
  Schedule
  6.3

  	
  Permitted
  Liens

  
	
   

  	
   

  
	
  Schedule
  6.4

  	
  Permitted
  Indebtedness and Guaranties

  

 

 

Exhibit A to Credit
and Security Agreement

 

REVOLVING NOTE

 

	
  $10,000,000

  	
   

  	
  Los Angeles, California

  
	
   

  	
   

  	
  September
  19, 2003

  

 

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

 

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

 

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

 

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

 

	
   

  	
  SMTEK, INC.

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
				

 

 

	
   

  	
  JOLT
  TECHNOLOGY, INC.

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
				

 

 

	
   

  	
  SMTEK NEW
  ENGLAND, INC.

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
				

 

 

	
   

  	
  SMTEK SANTA
  CLARA, INC.

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
				

 

 

	
   

  	
  TECHNETICS,
  INC.

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
				

 

 

Exhibit B to Credit
and Security Agreement

 

TERM NOTE

 

	
  $1,000,000

  	
   

  	
  Los Angeles, California

  
	
   

  	
   

  	
  September 19, 2003

  

 

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

 

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

 

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

 

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

 

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

 

	
   

  	
  SMTEK, INC.

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
				

 

 

	
   

  	
  JOLT
  TECHNOLOGY, INC.

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
				

 

 

	
   

  	
  SMTEK NEW
  ENGLAND, INC.

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
				

 

 

	
   

  	
  SMTEK SANTA
  CLARA, INC.

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
				

 

 

	
   

  	
  TECHNETICS,
  INC.

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
				

 

 

Exhibit C to Credit
and Security Agreement

 

CAPEX NOTE

 

	
  $1,000,000

  	
   

  	
  Los
  Angeles, California

  
	
   

  	
   

  	
  September
  19, 2003

  

 

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

 

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

 

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

 

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

 

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

 

	
   

  	
  SMTEK, INC.

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
				

 

 

	
   

  	
  JOLT
  TECHNOLOGY, INC.

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
				

 

 

	
   

  	
  SMTEK NEW
  ENGLAND, INC.

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
				

 

 

	
   

  	
  SMTEK SANTA
  CLARA, INC.

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
				

 

 

	
   

  	
  TECHNETICS,
  INC.

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
				

 

C-2

 

Exhibit D to Credit
and Security Agreement

 

Compliance Certificate

 

	
  To:

  	
   

  	
                                                                               

  	
   

  
	
   

  	
   

  	
  Wells Fargo
  Business Credit, Inc.

  
	
   

  	
   

  	
   

  
	
  Date:

  	
   

  	
                                       ,
  200      

  
	
   

  	
   

  	
   

  
	
  Subject:

  	
   

  	
                                                                               

  	
   

  

 

Financial
Statements

 

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

 

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

 

Events of
Default. 
(Check one):

 

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

 

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

 

Financial
Covenants.  I
further hereby certify as follows:

 

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

 

 

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

 

	
  Period

  	
   

  	
  Minimum Book Net Worth

  	
   

  
	
  July 2003

  	
   

  	
  $

  	
  300,000

  	
   

  
	
  August 2003

  	
   

  	
  $

  	
  400,000

  	
   

  
	
  September 2003

  	
   

  	
  $

  	
  1,200,000

  	
   

  
	
  October 2003

  	
   

  	
  $

  	
  1,050,000

  	
   

  
	
  November 2003

  	
   

  	
  $

  	
  1,050,000

  	
   

  
	
  December 2003

  	
   

  	
  $

  	
  1,350,000

  	
   

  
	
  January 2004

  	
   

  	
  $

  	
  1,200,000

  	
   

  
	
  February 2004

  	
   

  	
  $

  	
  1,200,000

  	
   

  
	
  March 2004

  	
   

  	
  $

  	
  1,765,000

  	
   

  
	
  April 2004

  	
   

  	
  $

  	
  1,615,000

  	
   

  
	
  May 2004

  	
   

  	
  $

  	
  1,615,000

  	
   

  
	
  June 2004 and every month
  thereafter

  	
   

  	
  $

  	
  2,255,000

  	
   

  

 

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

 

	
  Period

  	
   

  	
  Minimum Net Income

  	
   

  
	
  September 2003

  	
   

  	
  $

  	
  315,000

  	
   

  
	
  December 2003

  	
   

  	
  $

  	
  150,000

  	
   

  
	
  March 2004

  	
   

  	
  $

  	
  415,000

  	
   

  
	
  June 2004

  	
   

  	
  $

  	
  490,000

  	
   

  
	
  September 2004, and every
  quarter thereafter

  	
   

  	
  $

  	
  200,000

  	
   

  

 

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

 

C-2

 

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

 

	
   

  	
  SMTEK, INC.

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Its Chief
  Financial Officer

  

 

 

	
   

  	
  JOLT
  TECHNOLOGY, INC.

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Its Chief
  Financial Officer

  

 

 

	
   

  	
  SMTEK NEW
  ENGLAND, INC.

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Its Chief
  Financial Officer

  

 

 

	
   

  	
  SMTEK SANTA
  CLARA, INC.

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Its Chief
  Financial Officer

  

 

 

	
   

  	
  TECHNETICS,
  INC.

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Its Chief
  Financial Officer

  

 

C-3

 

Exhibit E to Credit and
Security Agreement

 

Premises

 

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

 

 

200 Science Drive, Moorpark, CA  93021

 

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

 

3240 Scott Blvd., Santa Clara, CA  95054

 

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

 

6801 NW 15th Avenue, Fort Lauderdale, FL  33309

 

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

 

274 Cedar Hill Road, Marlborough, MA  01752

 

PARCEL ONE 

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

PARCEL TWO

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

 

 

2151 Anchor Court, Newbury Park, CA  91321

 

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

 

13200 Danielson Street, Poway, CA  92064

 

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

 

 

Exhibit F to Credit
and Security Agreement

 

NOTICE OF BORROWING

 

                  ,      

 

	
  TO:

  	
   

  	
  Wells Fargo
  Business Credit, Inc.

  	
   

  
	
   

  	
   

  	
                                                                            

  	
   

  
	
   

  	
   

  	
                                                                            

  	
   

  
	
   

  	
   

  	
                                                                            

  	
   

  
	
   

  	
   

  	
  Telecopier:

  	
                                                             

  	
   

  
	
   

  	
   

  	
  Attention:

  	
                                                               

  	
   

  
						

 

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

 

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

 

 

	
  Amount of Advance

  	
   

  	
  Type of Advance

  	
   

  	
  Date of Borrowing

  	
   

  	
  Interest Period

  (LIBO Rate

  Advances Only)

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  $

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

 

	
   

  	
  SMTEK, INC.

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  
					

 

 

Exhibit G to Credit
and Security Agreement

 

NOTICE OF CONVERSION TO LIBO RATE ADVANCES

 

                   ,         

 

	
  TO:

  	
   

  	
  Wells Fargo
  Business Credit, Inc.

  	
   

  
	
   

  	
   

  	
                                                                                     

  	
   

  
	
   

  	
   

  	
                                                                                     

  	
   

  
	
   

  	
   

  	
                                                                                     

  	
   

  
	
   

  	
   

  	
  Telecopier:

  	
                                                                 

  	
   

  
	
   

  	
   

  	
  Attention:

  	
                                                                  

  	
   

  
						

 

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

 

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

 

	
  Amount of Floating Rate

  Advances To Be Converted

  	
   

  	
  Date of Conversion

  	
   

  	
  Interest Period

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  $

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

 

	
   

  	
  SMTEK, INC.

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  
					

 

 

Exhibit H to Credit
and Security Agreement

 

NOTICE TO CONTINUE LIBO RATE ADVANCE

 

               ,         

 

	
  TO:

  	
   

  	
  Wells Fargo
  Business Credit, Inc.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Telecopier:

  	
   

  	
   

  
	
   

  	
   

  	
  Attention:

  	
   

  	
   

  
						

 

 

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

 

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

 

	
  Amount of LIBO Rate

  Advances to be Renewed

  	
   

  	
  Date of

  Expiring Interest Period

  	
   

  	
  New Interest Period

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  $

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

	
   

  	
  SMTEK, INC.

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  
					

 

 

Schedule 5.1 to
Credit and Security Agreement

 

Trade Names, Chief Executive Office,
Principal Place of Business,

and Locations of Collateral

 

Trade Names

 

SMTEK Moorpark, SMTEK San Diego, SMTEK Fort Lauderdale

 

 

Chief Executive Office/Principal Place of
Business

 

200 Science Drive

 

Moorpark, California 93021-2003

 

Other Inventory and Equipment Locations

 

3240 Scott Blvd., Santa Clara, CA 
95054

 

 

274 Cedar Hill Road, Marlborough, MA 
01752

 

 

6801 NW 15th Avenue, Fort Lauderdale, FL  33309

 

 

Schedule 5.2
to Credit and Security Agreement

 

Capitalization and Organizational Chart

 

	
  Holder

  	
   

  	
  Type of Rights/Stock

  	
   

  	
  No.  of shares
  (after

  exercise of all rights

  to acquire shares)

  	
   

  	
  Percent interest on a

  fully diluted basis

  	
   

  
	
  SMTEK International, Inc.

  	
   

  	
  SMTEK, Inc.

  Common Stock

  	
   

  	
  250,000

  	
   

  	
  100

  	
  %

  
	
  SMTEK International, Inc.

  	
   

  	
  Jolt
  Technology, Inc.

  Common Stock

  	
   

  	
  1,000

  	
   

  	
  100

  	
  %

  
	
  SMTEK International, Inc.

  	
   

  	
  Technetics,
  Inc.

  Common Stock

  	
   

  	
  198,200

  	
   

  	
  100

  	
  %

  
	
  SMTEK International, Inc.

  	
   

  	
  SMTEK Santa
  Clara,

  Inc. Common Stock

  	
   

  	
  100

  	
   

  	
  100

  	
  %

  
	
  SMTEK International, Inc.

  	
   

  	
  SMTEK New

  England, Inc. Common Stock

  	
   

  	
  100

  	
   

  	
  100

  	
  %

  
	
  SMTEK International, Inc.

  	
   

  	
  SMTEK
  International Thailand Ltd.

  Common Stock

  	
   

  	
  4,999,992

  	
   

  	
  99.9

  	
  %

  
	
  SMTEK International, Inc.

  	
   

  	
  DDL Europe
  Ltd. Common Stock

  	
   

  	
   

  	
   

  	
  100

  	
  %

  

 

 

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

 

 

Schedule 5.5  to Credit and Security Agreement

 

Subsidiaries

 

SMTEK, Inc. (aka SMTEK Moorpark)

 

SMTEK
Santa Clara, Inc.

 

SMTEK
New England, Inc.

 

Jolt
Technology, Inc. (aka SMTEK Fort Lauderdale)

 

SMTEK International Thailand Ltd.

 

DDL
Europe Ltd.

 

 

Schedule 5.7 to Credit and Security Agreement

 

 

Litigation

 

 

None.

 

 

Schedule 5.11
to Credit and Security Agreement

 

Intellectual Property Disclosures

 

 

	
  MARK

  	
   

  	
  APP./REG.

  NO.

  	
   

  
	
  SMTEK INTERNATIONAL

  	
   

  	
  75-597,996

  	
   

  
	
  S and Design

  	
   

  	
  2,394,814

  	
   

  
	
  SMTEK Stylized
  Letters

  	
   

  	
  75-542,361

  	
   

  
	
  SMTEK SURFACE MOUNT TECHNOLOGY-SEMICUSTOM
  VLSI Stylized Letters

  	
   

  	
  74-163,799

  	
   

  
	
  SMTEK Stylized
  Letters

  	
   

  	
  74-163,798

  	
   

  
	
  SMTEK and Design

  	
   

  	
  50,178

  	
   

  
	
  SMTEK Stylized
  Letters

  	
   

  	
  31,008

  	
   

  

 

	
  TITLE of PATENT

  	
   

  	
  APP./PAT.

  NO.

  	
   

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

  	
   

  	
  6159771

  	
   

  
	
   

  	
   

  	
   

  	
   

  

 

 

Schedule 5.14
to Credit and Security Agreement

 

Environmental Matters

 

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

 

 

Schedule 5.19
to Credit and Security Agreement

 

Bank Accounts

 

Citizens Bank Comercial
Checking Account number xxxxxx-xxx-x

 

Citizens Bank Commercial
Checking Account number xxxxxx-xxx-x

 

Bank of America Business
Checking Account number xxxx xxxx xxxx

 

Comerica Bank Account
numbers

xxxx-xxxxx-x

xxxx-xxxxx-x

xxxx-xxxxx-x

xxxx-xxxxx-x

xxxx-xxxxx-x

xxxx-xxxxx-x

xxxx-xxxxx-x

xxxx-xxxxx-x

xxxx-xxxxx-x

xxxx-xxxxx-x

xxxx-xxxxx-x

xxxx-xxxxx-x

 

 

Schedule 6.3
to Credit and Security Agreement

 

Permitted Liens

 

	
  OFFICE/AGENCY

  SEARCHED

  	
   

  	
  SECURED
  PARTY

  	
   

  	
  FILE NO./

  FILE DATE

  	
   

  	
  COLLATERAL

  DESCRIPTION

  
	
  California
  Secretary of State

  	
   

  	
  The CIT
  Group/Equipment Financing, Inc.

  	
   

  	
  94066754

  04/13/94 (UCC-1)

  

  Continuation Statement filed 02/22/99

  	
   

  	
  Specific
  property

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  California
  Secretary of State

  	
   

  	
  The CIT
  Group/Equipment Financing, Inc.

  	
   

  	
  94131225

  06/28/94 (UCC-1)

  

  Continuation Statement filed 04/23/99

  	
   

  	
  Specific
  property

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  California
  Secretary of State

  	
   

  	
  The CIT
  Group/Equipment Financing, Inc.

  	
   

  	
  94144723

  07/15/94 (UCC-1)

  

  Continuation Statement filed 06/28/99

  	
   

  	
  Specific
  property

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  California
  Secretary of State

  	
   

  	
  General
  Electric Capital Corporation

  	
   

  	
  9612960624

  05/07/96 (UCC-1)

  

  Continuation Statement filed 02/09/01

  	
   

  	
  Specific property

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  California
  Secretary of State

  	
   

  	
  SAFECO
  Credit Company, Inc.

  	
   

  	
  9815960731

  06/04/98 (UCC-1)

  

  Continuation Statement filed 01/03/03

  	
   

  	
  Specific
  property

  

 

 

	
  OFFICE/AGENCY

  SEARCHED

  	
   

  	
  SECURED
  PARTY

  	
   

  	
  FILE NO./

  FILE DATE

  	
   

  	
  COLLATERAL

  DESCRIPTION

  
	
  California
  Secretary of State

  	
   

  	
  Copelco
  Capital, Inc.

  	
   

  	
  9908860796

  05/19/99 (UCC-1)

  	
   

  	
  Leased
  property

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  California
  Secretary of State

  	
   

  	
  Copelco
  Capital, Inc.

  	
   

  	
  9924461065

  08/20/99 (UCC-1)

  	
   

  	
  Leased
  property

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  California
  Secretary of State

  	
   

  	
  Copelco
  Capital, Inc.

  	
   

  	
  9924560023

  08/20/99 (UCC-1)

  	
   

  	
  Leased
  property

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  California
  Secretary of State

  	
   

  	
  Copelco
  Capital, Inc.

  	
   

  	
  0028860047

  10/03/00 (UCC-1)

  	
   

  	
  Leased
  property

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  California
  Secretary of State

  	
   

  	
  SAFECO
  Credit Company, Inc.

  	
   

  	
  0105160466

  02/13/01 (UCC-1)

  	
   

  	
  Specific
  property

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  California
  Secretary of State

  	
   

  	
  Citicorp
  Vendor Finance, Inc.

  	
   

  	
  0108860152

  03/23/01 (UCC-1)

  	
   

  	
  Leased
  property

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  California
  Secretary of State

  	
   

  	
  SAFECO
  Credit Company, Inc.

  	
   

  	
  0120660317

  07/23/01 (UCC-1)

  	
   

  	
  Specific
  property

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  California
  Secretary of State

  	
   

  	
  General
  Electric Capital Corporation as agent for SAGE Capital Corporation

  	
   

  	
  0129060203

  10/15/01 (UCC-1)

  	
   

  	
  Specific
  property

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Ventura
  County Clerk Recorder

  	
   

  	
  General
  Electric Capital Corporation

  	
   

  	
  96-066235

  05/16/96 (UCC-1)

  Continuation Statement filed 02/12/01

  	
   

  	
  Fixture
  Filing (specific equipment)

  

 

 

	
  OFFICE/AGENCY

  SEARCHED

  	
   

  	
  SECURED
  PARTY

  	
   

  	
  FILE NO./

  FILE DATE

  	
   

  	
  COLLATERAL

  DESCRIPTION

  
	
  Ventura
  County Clerk Recorder

  	
   

  	
  SAFECO
  Credit Company, Inc.

  	
   

  	
  98-092983

  06/10/98 (UCC-1)

  

  Continuation Statement filed 01/06/03

  	
   

  	
  Fixture
  Filing (specific equipment)

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Ventura
  County Clerk Recorder

  	
   

  	
  SAFECO
  Credit Company, Inc.

  	
   

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

  	
   

  	
  Fixture
  Filing (specific equipment)

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Ventura
  County Clerk Recorder

  	
   

  	
  SAFECO
  Credit Company, Inc.

  	
   

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

  	
   

  	
  Fixture
  Filing (specific equipment)

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Ventura
  County Clerk Recorder

  	
   

  	
  SAFECO
  Credit Company, Inc.

  	
   

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

  	
   

  	
  Fixture
  Filing (specific equipment)

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  California Secretary
  of State

  	
   

  	
  M&I
  First National Leasing Corp.

  	
   

  	
  9526560041

  09/15/95 (UCC-1)

  

  Continuation Statement filed 05/30/00

  	
   

  	
  Specific
  property

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  California
  Secretary of State

  	
   

  	
  M&I
  First National Leasing Corp.

  	
   

  	
  9530661259

  10/31/95 (UCC-1)

  

  Continuation Statement filed 06/22/00

  	
   

  	
  Specific
  property

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  California
  Secretary of State

  	
   

  	
  Copelco
  Capital, Inc.

  	
   

  	
  0026660745

  09/15/00 (UCC-1)

  	
   

  	
  Leased
  property

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  California
  Secretary of State

  	
   

  	
  Copelco
  Capital, Inc.

  	
   

  	
  0028860051
  10/03/00 (UCC-1)

  	
   

  	
  Leased
  property

  

 

 

	
  OFFICE/AGENCY

  SEARCHED

  	
   

  	
  SECURED
  PARTY

  	
   

  	
  FILE NO./

  FILE DATE

  	
   

  	
  COLLATERAL

  DESCRIPTION

  
	
  California
  Secretary of State

  	
   

  	
  SAFECO
  Credit Company, Inc.

  	
   

  	
  0103360354

  01/26/01 (UCC-1)

  	
   

  	
  Specific
  property

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  California
  Secretary of State

  	
   

  	
  General
  Electric Corporation as agent for SAGE Capital Corporation

  	
   

  	
  0128860820

  10/12/01 (UCC-1)

  	
   

  	
  Specific
  property

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  San Diego
  County Recorder

  	
   

  	
  M&I
  First National Leasing Corp.

  	
   

  	
  1995-0410203
  09/14/95

  (UCC-1)

  

  Continuation Statement filed 06/06/00

  	
   

  	
  Fixture
  Filing (specific equipment)

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  San Diego
  County Recorder

  	
   

  	
  SAFECO
  Credit Company, Inc.

  	
   

  	
  2001-0088957
  02/15/01

  (UCC-1)

  	
   

  	
  Fixture
  Filing (specific equipment)

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Delaware
  Secretary of State

  	
   

  	
  TEAC
  AMERICA, INC.

  	
   

  	
  21350374

  05/31/02 (UCC-1)

  	
   

  	
  Specific
  listed property

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Delaware
  Secretary of State

  	
   

  	
  TTI, INC.

  	
   

  	
  21660590

  06/06/02 (UCC-1)

  	
   

  	
  Specific
  listed property

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Delaware
  Secretary of State

  	
   

  	
  AVNET, INC.

  	
   

  	
  30442502

  09/26/01 (UCC-1)

  	
   

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

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Delaware
  Secretary of State

  	
   

  	
  ARROW
  ELECTRONICS, INC.

  	
   

  	
  30669849

  03/18/03 (UCC-1)

  	
   

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

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  California
  Secretary of State

  	
   

  	
  III, Inc.

  	
   

  	
  0215860127

  06/06/02 (UCC-1)

  	
   

  	
  Specific
  property

  

 

 

	
  OFFICE/AGENCY

  SEARCHED

  	
   

  	
  SECURED
  PARTY

  	
   

  	
  FILE NO./

  FILE DATE

  	
   

  	
  COLLATERAL

  DESCRIPTION

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  California
  Secretary of State

  	
   

  	
  General
  Electric Capital Corporation

  	
   

  	
  9612960624

  05/07/97 (UCC-1)

  

  Continuation Statement filed 02/09/01

  	
   

  	
  Specific
  property

  

 

 

Schedule 6.4
to Credit and Security Agreement

 

Permitted Indebtedness and Guaranties

 

Permitted Indebtedness and Guaranties

 

Indebtedness

 

	
  Creditor

  	
   

  	
  Principal

  Amount

  	
   

  	
  Maturity

  Date

  	
   

  	
  Monthly

  Payment

  	
   

  	
  Collateral

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

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

  	
   

  	
  $

  	
  1,060,000

  	
   

  	
  August 1,
  2008

  	
   

  	
  N/A

  	
   

  	
  N/A

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Obligations to former employees, directors and officers

  	
   

  	
  $

  	
  90,335

  	
   

  	
  Immediately
  due

  	
   

  	
  N/A

  	
   

  	
  N/A

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Internal Revenue Service

  	
   

  	
  $

  	
  2,375,000

  	
   

  	
  June 2008

  	
   

  	
  $

  	
  44,697.69

  	
   

  	
  N/A

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Ford Motor Credit

  	
   

  	
   

  	
   

  	
  February
  2004

  	
   

  	
  $

  	
  739.00

  	
   

  	
  Truck

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  GMAC

  	
   

  	
   

  	
   

  	
  April 2004

  	
   

  	
  $

  	
  865.00

  	
   

  	
  Chevy Van

  	
   

  

 

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

 

Guaranties

 

	
  Primary Obligor

  	
   

  	
  Amount and
  Description of

  Obligation Guaranteed

  	
   

  	
  Beneficiary
  of Guaranty

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SMTEK
  International, Inc.

  	
   

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

  	
   

  	
  Pomerado
  Leasing No. 8 LP

  

 

 

	
  SMTEK
  International, Inc.

  	
   

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

  	
   

  	
  Cedar
  Marlboro Realty CorporationExhibit 10.7

 

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

 

This Amended
and Restated Employment Agreement (the “Agreement”) is made and entered into
effective as of the 1st day of October 2003 by and between United Online, Inc.
a Delaware corporation (the “Company”), with principal corporate offices at
2555 Townsgate Road, Westlake Village, California 91361, and Mark Goldston,
whose address is 14139 Beresford Road, Beverly Hills, California 90210
(“Employee”).

 

WHEREAS, the
Employee had previously entered into an employment agreement (the “Prior
Agreement”) effective March 20, 1999, with NetZero, Inc., a wholly-owned
subsidiary of the Company; and

 

WHEREAS, the
Prior Agreement was amended in July 1999 and February 9, 2001 and, effective as
of the date hereof, the Employee and the Company desire to further amend the
Prior Agreement.

 

NOW THEREFORE,
the Employee and the Company hereby amend and restate the Prior Agreement as
follows.

 

1.                                       Employment.

 

1.1                                 The Company hereby agrees to employ
Employee, and Employee hereby accepts such employment, on the terms and
conditions set forth herein, commencing the date hereof and continuing through
February 9, 2005 (the “Term”), unless terminated earlier as provided in
Section 4 below.

 

2.                                       Duties
of Employee.

 

2.1                                 Employee shall serve as the Chief
Executive Officer and Chairman of the Company. 
In this capacity, Employee shall perform such customary, appropriate and
reasonable executive duties as are usually performed by the Chief Executive
Officer and Chairman, including such duties as are delegated to him from time
to time by the Board of Directors of the Company or a committee thereof  (the “Board”).  Employee shall report directly to the Company’s Board.

 

2.2                                 Employee
agrees to devote Employee’s good faith, full time, attention, skill and efforts
to the performance of his duties for the Company during the Term; provided,
however, that the Company acknowledges that Employee has certain
responsibilities to and involvement with other entities and agrees to allow
Employee to continue his involvement with such entities without in anyway
jeopardizing his employment with the Company. 
This Agreement shall not be interpreted to prohibit Employee from making
passive personal investments if those activities do not materially interfere
with the services required under this Agreement.

 

 

3.                                       Compensation
and Other Benefits.

 

3.1                                 Base
Salary.  During the Term, the
Company shall pay to Employee a base salary per fiscal year equal to Employee’s
current base salary (the “Base Salary”), with payments to be made in accordance
with the Company’s standard payment policy and subject to such withholding as
may be required by law.  Employee’s Base
Salary shall be increased to include any increases in Employee’s base salary as
approved by the Board.

 

3.2                                 Bonus.  During the Term, the Employee shall also be
eligible to receive an annual cash bonus of up to 125% of Employee’s base
salary for each fiscal year (the “Annual Bonus”), less withholding required by
law, based on performance criteria established by the Board.  Employee’s Annual Bonus shall be increased
to include any increases in Employee’s Annual Bonus as approved by the
Board.  Employee shall not be eligible
to receive any unpaid Annual Bonus if his employment hereunder is terminated
pursuant to either Section 4.1 or if Employee voluntarily resigns.

 

3.3                                 Vacation.  Employee shall be entitled to a minimum of
four (4) weeks paid vacation per year.

 

3.4                                 Other
Benefits.  During the Term, Employee
shall be entitled to participate in all group life, health, medical, dental or
disability insurance or other employee, health and welfare benefits made
available generally to other executives of the Company.   If Employee elects to participate in any of
such plans, Employee’s portion of the premium(s) will be deducted from
Employee’s paycheck.

 

3.5                                 Business
Expenses.  The Company shall
promptly reimburse Employee for all reasonable and necessary business expenses
incurred by Employee in connection with the business of the Company and the
performance of his duties under this Agreement, subject to Employee providing
the Company with reasonable documentation thereof.

 

3.6                                 Board
of Directors.  Employee shall be
Chairman of the Company and also a member of the Company’s Board of
Directors.  Employee’s appointments as
Chairman and as a member of the Board will automatically terminate upon the
termination of Employee’s employment with the Company for any reason.

 

4.                                       Termination.

 

4.1                                 Termination
for Cause.

 

(a)  Termination “for cause” is defined as
follows: (1) if Employee is convicted of a felony, including any act of
moral turpitude, or (2) if

 

2

 

Employee
materially breaches the Company’s Confidentiality and Proprietary Agreement.

 

(b) The
Company may terminate this Agreement immediately for any of the reasons stated
in Section 4.1(a) by giving written notice to Employee without prejudice
to any other remedy to which the Company may be entitled.  The notice of termination shall specify the
grounds for termination.  If Employee’s
employment hereunder is terminated “for cause” pursuant to this Section 4.1,
Employee shall be entitled to receive hereunder his accrued but unpaid Base
Salary and vacation pay through the date of termination, and reimbursement for
any expenses as set forth in Section 3.5, through the date of termination, but
shall not be entitled to receive any unpaid portion of the Annual Bonus or any
other amount.

 

4.2                                 Termination
Without Cause.  If Employee’s
employment is terminated without “cause” as defined in Section 4.1(a) or he is
Involuntarily Terminated, he will be eligible for the severance benefits set
forth in Section 4.3.

 

4.3                                 Severance
Payments and Other Benefits Upon Termination Without Cause or Involuntary
Termination.   If the Company terminates
Employee’s employment hereunder without cause, or if Employee is Involuntarily
Terminated, the Company (or its successor, as the case may be) shall pay to
Employee (i) any accrued but unpaid Base Salary and vacation through the date
of termination, (ii) reimbursement for any expenses as set forth in Section
3.5, through the date of termination, (iii) Employee’s Annual Bonus, prorated
through the date of termination, and (iv) a severance payment in an amount
equal to (A) three times Employee’s Base Salary and Annual Bonus in the event
of an Involuntary Termination or (B) four times Employee’s Base Salary and
Annual Bonus in the event Employee’s employment is terminated without cause,
payable in one lump sum on the date of termination, subject to withholding as
may be required by law.  For the
purposes of Section 4.3 (iv)(A) above, Annual Bonus shall mean the greater of
100% of Employee’s then current Base Salary or the Annual Bonus paid to
Employee for the preceding fiscal year. 
For the purposes of Section 4.3 (iv) (B) above, Annual Bonus shall mean
100% of Employee’s then current Base Salary. 
In addition, if Employee’s employment is terminated without cause
vesting of all options to purchase shares of the Company’s Common Stock and all
restricted stock grants (“Option Shares”) will be accelerated in full.   If Employee’s employment is terminated due
to death or permanent disability, Employee will be credited with an additional
twenty-four (24) months of service toward vesting in all Options Shares then
held by Employee in addition to the service he has accrued toward vesting
through the date of termination.  If
Employee is Involuntarily Terminated, vesting of all Option Shares will be
accelerated in full; and all such options shall remain in effect for a one (1)
year period following the date of termination.

 

3

 

As
used in this Section 4.3, “Involuntarily Terminated” shall mean (a) Employee’s
voluntary resignation following a Corporate Transaction in which Employee is
not offered a position of comparable pay and responsibilities in the greater
Los Angeles, California metropolitan area, or (b) where, in connection with or
following a Corporate Transaction, Employee voluntarily resigns following
either (X) a reduction of Employee’s salary or (Y) a material change of
Employee’s responsibilities.  As used in
this Section 4.3, “Corporate Transaction” shall mean (i) a merger or
consolidation or other reorganization or transaction in which securities
possessing more than fifty percent (50%) of the total combined voting power of
the Company’s outstanding securities are transferred or issued to a person or
persons different from the persons holding those securities immediately prior
to such transaction, or (ii) the sale, transfer or other disposition of all or
substantially all of the Company’s assets in complete liquidation or
dissolution of the Company.  As used in
this Section 4.3, a “material change” in Employee’s responsibilities includes
any decrease in Employee’s compensation or benefits or any material change in
Employee’s job duties, title, or location of employment (out of the greater Los
Angeles, California metropolitan area). A Change of Control or a Corporate
Transaction under the Company’s 1999 Stock Incentive Plan shall be deemed to be
a Corporate Transaction hereunder. 
Also, for purposes of clarification, it will be deemed to be a material
change in Employee’s responsibilities and Employee shall not be deemed to have
been offered a comparable position following a Corporate Transaction if
Employee is not offered the position of Chairman and Chief Executive Officer of
the Company or it’s successor as well as the entity acquiring the Company in a
Corporate Transaction.

 

5.                                       Noncompetition. 
For the eighteen (18) month period following the termination of
Employee’s employment with the Company (but only if Employee has received the
severance payments specified in Section 4.3 above) (the “Noncompetition
Period”), Employee shall not directly engage in, or manage or direct persons
engaged in, a Competitive Business Activity (as defined below) anywhere in the
Restricted Territory (as defined below); provided, that the Noncompetition
Period shall terminate if the Company terminates operations or if the Company
no longer engages in any Competitive Business Activity.  The term “Competitive Business Activity”
shall mean the business of providing consumers with dial-up Internet access
services (free or pay).  The term
“Restricted Territory” shall mean each and every county, city or other
political subdivision of the United States in which the Company is engaged in
business or providing its services.  The
Company agrees that providing services to a company or entity that is involved
in a Competitive Business Activity but which services are unrelated to the
Competitive Business Activity shall not be deemed a violation of this
Agreement.  For the purposes of damages
to the Company with respect to any breach of this Section 5, the value of
Employee’s obligations to the Company under this Section 5 equals 37.5% of the
cash severance payment in Section 4.3(iv) above.

 

6.                                       Gross-Up
Payment.  If the aggregate of all
payments or benefits made or

 

4

 

provided to
the Employee under this Agreement and under all other plans and programs of the
Company (the “Aggregate Payment”) is determined to constitute a “parachute
payment,” as such term is defined in Section 280G(b)(2) of the Internal Revenue
Code of 1986, as amended (the “Code”), the Company shall pay to the Employee,
prior to or coincident with the time any excise tax imposed by Section 4999 of
the Code (the “Excise Tax”) is payable with respect to such Aggregate Payment,
an additional amount that, after the imposition of all penalties, income,
excise and other federal, state and local taxes thereon, is equal to the sum of
the Excise Tax on the Aggregate Payment and interest and penalties imposed with
respect to the Excise Tax and such additional amount (the “Gross-Up Payment”).  For example, if the Excise Tax imposed with
respect to the Aggregate payment equals $1,000,000, and all penalties, income,
excise and other federal, state and local taxes on the Gross-Up Payment equal
$2,333,333, the Gross-Up Payment will be $3,333,333.  The determination of whether the Aggregate Payment constitutes a
parachute payment and, if so, the amount to be paid to the Employee and the
time of payment pursuant to this Section 6 shall be made by an independent
auditor (the “Auditor”) selected and paid by the Company and reasonably
acceptable to the Employee.  The Auditor
shall be a nationally recognized United States public accounting firm.  For purposes of determining the amount of
the Gross-Up Payment, the Employee shall be deemed to pay income tax at the highest
marginal rates of federal, state and local income taxation in the calendar year
in which the Gross-Up Payment is to be made, net of the maximum reduction in
federal income taxes which could be obtained from deduction of such state and
local taxes.

 

In the event
that the Excise Tax is finally determined to be less than the amount taken into
account hereunder in calculating the Gross-Up Payment, the Employee shall repay
to the Company, within five (5) business days following the time that the
amount of such reduction in the Excise Tax is finally determined, the portion
of the Gross-Up Payment attributable to such reduction plus that portion of the
Gross-Up Payment attributable to the Excise Tax and federal, state and local
income and employment taxes imposed on the Gross-Up Payment being repaid by the
Employee, to the extent that such repayment results in a reduction in the
Excise Tax and a dollar-for-dollar reduction in the Employee’s taxable income
and wages for purposes of federal, state and local income and employment taxes,
plus interest on the amount of such repayment at 120% of the rate provided in
section 1274(b)(2)(B) of the Code.  In
the event that the Excise Tax is determined to exceed the amount taken into
account hereunder in calculating the Gross-Up Payment (including by reason of
any payment the existence or amount of which cannot be determined at the time
of the payment of the Gross-Up Payment), the Company shall make an additional
Gross-Up Payment in respect of such excess (plus any interest, penalties or
additions payable by the Employee with respect to such excess) within five (5)
business days following the time that the amount of such excess is finally
determined.  The Employee and the
Company shall cooperate with each other in connection with any proceeding or
claim relating to the existence or amount of liability for Excise Tax, and all
expenses incurred by

 

5

 

the Employee
in connection therewith shall be paid by the Company promptly upon notice of
demand from the Employee.

 

7,                                       Assignment.   Neither the Company nor Employee may assign
this Agreement or any rights or obligations hereunder.   This Agreement will be binding upon the
Company and its successors and assigns. 
In the event of a Corporate Transaction, the Company shall cause this
Agreement to be assumed by the Company’s successor as well as any acquiring or
ultimate parent entity, if any, following any Corporate Transaction.

 

8.                                       Miscellaneous.

 

8.1                                 This
Agreement supersedes any and all other agreements, either oral or in writing,
between the parties hereto with respect to the employment of Employee by the
Company and constitutes the entire agreement between the Company and the
Employee with respect to its subject matter.

 

8.2                                 This
Agreement may not be amended, supplemented, modified or extended, except by
written agreement which expressly refers to this Agreement, which is signed by
of the parties hereto and which is authorized by the Company’s Board.

 

8.3                                 This
Agreement is made in and shall be governed by the laws of California, without
giving effect to its conflicts-of-law principles.

 

8.4                                 If
any provision of this Agreement is held by an arbitrator or a court of
competent jurisdiction to conflict with any federal, state or local law, or to
be otherwise invalid or  unenforceable,
such provision shall be construed in a manner so as to maximize its
enforceability while giving the greatest effect as possible to the parties’
intent.   To the extent any provision
cannot be construed to be enforceable, such provision shall be deemed to be
eliminated from this Agreement and of no force or effect and the remainder of
this Agreement shall otherwise remain in full force and effect and be construed
as if such portion had not been included in this Agreement.

 

8.5                                 Employee
represents and warrants to the Company that there is no restriction or
limitation, by reason of any agreement or otherwise, upon Employee’s right or
ability to enter into this Agreement and fulfill his obligations under this
Agreement.

 

8.6                                 All
notices and other communications required or permitted hereunder shall be in
writing and shall be mailed by first-class mail, postage prepaid, registered or
certified, or delivered either by hand, by messenger or by overnight courier
service, and addressed to the receiving party at the respective address set
forth in the heading of this Agreement, or at such other address as such party
shall have furnished to the other party in

 

6

 

accordance with
this Section 8.6 prior to the giving of such notice or other
communication.

 

IN WITNESS
WHEREOF, the parties hereto have executed this Agreement as of the first date
written above.

 

 

	
   

  	
  UNITED
  ONLINE, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/ Frederic
  A. Randall, Jr.

  	
   

  
	
   

  	
   

  	
  Frederic A.
  Randall, Jr.

  
	
   

  	
   

  	
  Executive
  Vice President and

  
	
   

  	
   

  	
  General
  Counsel

  
	
   

  	
   

  
	
   

  	
  /s/ Mark Goldston

  	
   

  
	
   

  	
  Mark
  Goldston

  

 

7

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